Huhtamäki Oyj

Good morning all and welcome to Huhtamäki's investor call. My name is Kristian Tammela, VP of industry relations. We have this morning released the results for Q1 24 and have our AGM in a few hours from now. We will again, as usual, start with presentations by our president and CEO, Charles Elmé, followed by our CFO, Tuomas Geust. And after that, we have time for questions. But before that, I'd like to remind everyone of our upcoming site visit to our Hammond site near Chicago in the U.S. That will be arranged on September 4. We will send out invitations to that before the summer holidays. But if anyone have any questions about the event, please feel free to reach out already. And with that, let's get started. Handing over to Charles.

Thank you, Christian. Good morning to all of you and welcome to our presentation today. our results for the first quarter of 2024 I will immediately get through the business context for the first quarter and an executive summary of our performance business context is that we have been in a market around the world with a demand trend that we have seen slightly improving if we compare to the latter part of the year 2023 relatively flat versus the first quarter of 2023. There were, as usual, of course, variations by product category and geographies. We'll come back to this when we are talking about specifically about our different segments. One thing to remind, which we already highlighted in the release of our quarter four 2023 results, is the impact of the ongoing war between Israel and the Hamas. And then the Red Sea crisis also is impacting the logistics and the sales of the first quarter, particularly for our two segments, food service and And flexible packaging will come back to this in a few minutes. In this context, our financial performance is as follows. The sales have been comparable sales have been growing or declining by 2%. And that's after a negative impact of currencies. and mainly a negative impact of the pricing. The pricing pressure in the value chain has increased. Why? As I said before, volume is more flat towards the first quarter of 2023 and in an improving trend if we compare to the latter part of the year 23. On the other hand, our profitability has increased to the adjusted debit margin of 9.8%. It's a profit increase at adjusted EBIT level of 7% compared to the first quarter of last year. And let's remind that the first quarter of last year was with an adjusted EBIT margin of 8.8%. So it's a one percentage point increase of profitability versus a year ago. We will come back to segment by segment where it's coming from, but particularly, obviously, this is also coming from the efficiency measures that we have taken and that we announced back at the end of 2023. And for this, I'd like to give you a more thorough update on where we are with this efficiency program. I'm therefore moving to the slide three for the ones following with the presentation offline. This efficiency program is well underway at this point, and it's contributing to our first quarter profitability improvement. Let me remind everyone that it's a program that we have launched in the end of November 2023. We announced it in the end of November 2023, covering all input costs of the company with the aim to save 100 million euros during the three years 2024 to 2026. and covering, as I said, all input costs from sourcing, material efficiency in our manufacturing processes, labor productivity, as well as footprint optimization. Relating to the savings of 100 million, we said also when we announced this program that the cost attached to the program will be approximately 80 million euros. And I think it's good to remind that we have started acting already in 2023 for a reason of a context where the demand was lower in or even significantly lower in 2023, particularly affected by the inflation in the market. So reflecting, and that's On the left-hand side, if you follow on the presentation, on the left-hand side of the presentation, it says about a few actions which we have taken already in 2023, starting with accelerating our procurement process improvements with all input costs from direct material to indirect supplies and services. We have also accelerated our continuous improvement program on our manufacturing practices, focusing particularly on material waste reduction. Third, we had started in the end, in December 2022, actually, we had started to work more drastically on our labor productivity with a very positive impact in 2023 already with a reduction of our workforce when you compare to the end of Q3 2022 to the end of 2023, we had reduced our workforce by 8%. And that was including our own workforce as well as contracted workforce. Last, we had already in 2023 started to work on our footprint optimization. That was particularly the case in the flexible segment with the decision to close our manufacturing plant in Prague. which this consolidation has been completed during the first quarter, actually, of 2024. And then we have closed also the Hyderabad flexible factory in India. Now to the first quarter. So on the right-hand side of the slide... To the first quarter, what have we done in terms of execution of this efficiency program? Well, first of all, let's confirm that all the initiatives are in execution in the four areas that I mentioned, and this has allowed achieving in the first quarter savings which are above the linear trajectory of the program. groups profit expansion of 7 million euro during the first quarter including compensating for inflation and adverse currency impacts we often about inflation we often think that inflation is resolved there is one aspect of inflation which is still impacting all businesses that is the labor inflation which was seven percent last year so still in the first quarter And then it will go on with a further 5% during the year 2024. Subsequent to these savings, there are costs attached to some of the decisions we have taken during the first quarter. And these costs attached to the program are $16 million for the first quarter 2024. The key benefits and activities in the first quarter have been covering sourcing, obviously, labor productivity, but as well, again, further optimization of our footprint. Two things to remind or inform about is, first of all, in March, we initiated the consolidation of the production footprint in China, where our segment is fiber food service. where we close the Shanghai and Tianjin sites by the end of the second quarter of 2024. So we'll see the full saving impact of it in the second semester. Transferring production to the Guangzhou site, it's our main site in China. I just remind that we have four sites, we are closing two, and we keep the Shushu and then the Guangzhou site, Guangzhou being the biggest one. This decision was affecting or is affecting 152 employees. Second, and this was announced two days ago on April 23rd, we are consolidating further the fiber food service segment manufacturing footprint by closing the Klang factory in Malaysia. by the end also of the second quarter of 2024, and this decision is going to affect 96 employees. Just to remind that our forecast is that the program will continue progressively to unfold the savings according to the announcement made of 100 million over the next three years, including 2024. Moving on now to our business performance for the first quarter more in detail, and starting with the sales, I'm on slide five. The sales for the first quarter reported with a decrease of 4%, as I said, a negative currency impact of 2%, and then comparable net sales decreased by 2%, which is particularly linked to the pricing pressure in the value chain. If we look in the next slide into how this unfolds by our different business segments, in the food service, Europe, Asia, Oceania, the demand has been relatively soft in the first quarter still. with a minus 5%, we'll see that it's coming particularly from geographies, in Asia particularly, but Middle East also linked to the Gaza war. In North America, The demand was more remaining flat at the level of 2023, first quarter, but with pressure from the pricing at minus 3%. Flexible packaging was starting to show signs of improving demand. And we have in the first quarter, with the pricing impact, a net size of minus 1%. And fiber packaging is where we have seen the volume already showing very good signs of a recovery of the demand with almost single-digit volume growth and at the same time some pricing pressure. So a growth, a comparable growth of 1% in the fiber segment. Translating this into the consolidated P&L on the slide 7, From the net sales minus 4%, reported minus 4%, we are reporting an increase of the adjusted EBIT of 7%. That's 7 million increase. And the margin, the adjusted EBIT margin is increasing 1% each point, as I said in the introduction, from 8.8% last year to 9.8%. in 2024, very much in line with the improvement that we were showing in the fourth quarter of 2023. The EPS as well is improving 7% in line with the EBIT, and then the CAPEX have been lower than in the first quarter of last year. Part of it is linked to timing of investments. I will take now you through some more granularity by business segment, starting with food service Europe, Asia, Oceania, where we see an increased margin despite the geopolitical headwinds. I mentioned earlier that the reported growth is minus 6%, the comparable growth minus 5%, most of it. is a part of a pricing pressure in the value chain, is linked to external factors, particularly with the Israel-Hamas war, which has the impact of boycotts into large customers from U.S. origin. And that, of course, in the food service segment is extremely impactful when the main brands are U.S. brands. The net sales decreased in most markets, but as I said before, mostly actually in China, Middle East, and Africa, and Southeast Asia overall as well impacted by this war. Prices of the raw materials have been decreasing compared to the first quarter of 2023, which is partly helping the margin improvement. and also the efficiency measures that we have been taking, as I mentioned earlier with the presentation of our efficiency program. Moving on to North America, North America where we have seen a demand remaining unchanged compared to previous year's level, and that has meant a minus 4% on sales, Reported sales comparable minus three because of the pricing, but also because of the currency impact with the difference of conversion of the U.S. dollar. At the same time, we have significantly improved our margin by two points from 11.9% adjusted EBIT margin end of Q1 2023 to 13.9% in the first quarter of this year. Also, slightly lower capital capex investments compared to the first quarter of last year and a strong cash flow in North America. Flexible packaging. Overall, the demand has started to show some signs of improvement, but with significant variations between markets. We may come back to that in the discussion later on. The good thing is Europe is clearly showing some signs of better demand level. The net sales still decreased comparable terms by 1%, mainly impacted by the pricing in the value chain. And the raw material prices decreased compared to the first quarter of last year. and the adjusted EBIT margin remain at the same previous year's level. I'd like to make a disclaimer on this, is that we have a one-time impact from the macroeconomy in Egypt in the margin of the first quarter 2024 linked to the devaluation of the Egyptian pound by 60% during the month of March, and obviously that added So the operational comparable profitability of flexibles is actually higher than the 6.4%. And finally, on the fiber packaging segment, so rough molded fiber for egg packaging as well as for the food service rough molded fiber products. The sales volume turned positive in the first quarter and and by a almost a mid single digit. So that's a positive trend. We are still. suffering a few operational issues which are under resolution, which have to do with, first of all, the lack of capacity in Australia due to a fire in the beginning of the first quarter, but also in European factories, some lack of workforce, which has meant additional costs during the first quarter. and that is under resolution. So that's for the more granularity by segment, and then I hand over to Thomas for the financial review.

Thank you, Charles. And as usual, I'll try to tie up the financial numbers on the elements not necessarily yet covered by Charles, but also some repetition as usual. So first of all, I would like to highlight that the strong... absolute profit development of 7% and the strong margin of 1% point improvement versus previous year getting close to 10% is driven partly by the tailwind obviously which we have in the commodity market currently but I would like to remind you that at the same time we do have significant headwinds also in other cost areas with a slight uptick in both transport and in especially the personnel cost compared to first quarter previous year. So with other words, the strong margin development is not a single raw material tailwind. It's definitely also the cost out programs and better operational efficiencies in the system. Other items to highlight on this slide is the IACs. We have roughly 17 million of IACs into EBIT levels, where a big part are tied to the savings program. Actually, I think roughly 16 million out of 17 is tied to the efficiency program. So as we communicated, we will be taking one-time costs most of them actually being non-cash through the program, and in that, by doing so, we will be improving our competitiveness going forward. The tax rate, the reported tax rate is above 30%, 31.5%. However, if you look at the adjusted tax rates, it's on the normal level, roughly 24%, slightly below. So the restructuring elements, as they are non-deductible, has an impact on the year-to-date reported tax rate. But as Charles already indicated, the good thing is now that the 7% adjusted EBIT flows all the way down to improvement also on EPS. Looking at the currency rates, I would say, as usual, it's been the story for quite some time now, most currencies are trending negative, except for the British pound and Brazilian real. However, maybe the things to really pinpoint on this slide are the two last rows, the Turkish lira and Egyptian pound. If I start with the Turkish lira, you see that it has had a strong devaluation compared to Q1 previous year. But on the positive side, when you are looking at the closing rate numbers, there has been moderation on the devaluation, I would say, starting from Q2 2023. So more stability in that market, but still high personal inflation levels and then also a slightly subdued market due to the ability to spend. And if you look at the Egyptian pound here, the very strong devaluation happening in Q4 2023 is obvious from, sorry, in Q1 2024 is obvious in these numbers. So all in all, although we have those two currencies, which to some part also have transactional impact over profitability the majority of the 17 net sales negative impact and EBIT 2 million is as usual translational currency impacts. So coming to one of the most important slides how we manage our balance sheet the story continues of deleveraging so having been on on Up at three, we are now down to 2.1, so strong deleveraging throughout last year, and now at 2.1 when it comes to net debt EBITDA, obviously also improving on the gearing and maintaining a good cash position, so liquidity position also in the company. The average interest rate on gross debt is slightly below 4%, so a decent level in this more heavy interest rate environment where we are. Net debt all in all down to 1.2 billion, roughly, 1249. Low maturities. We have some maturities coming up in... in 2025, some also this year. I would say we have a good plan on how to deal with all of the maturities. I would also comment on in this structure that we have the majority in fixed rates. In the floating rates, we would have mainly commercial papers and some term loans. and of course the RCF as well. Looking at the free cash flow, the free cash flow is positive at 38 million with roughly the same reported EBITDA in the base. Improvement comes from lower capital expenditure as highlighted by Charles to some extent due to timing. Working capital looks pretty dramatic in this slide. I would say there are two elements to it. One is some building of stock ahead of season, mainly in North America, and then another element coming from other receivables and liabilities, so not from the normal working capital. Looking at this slide, I will continue immediately from the working capital. So you can see that we are, despite the negative trend versus year-end, significantly down, 150 million down versus same period last year on working capital. Net debt, as said, strongly down. Total assets at 4.8 billion roughly, 1 billion of that roughly goodwill. And then we have the adjusted return on investments going up versus previous year, which is, of course, in line with our ambition to continuously improve on also the returns of our balance sheet. And that one you can see on this one, which discloses our long-term trends here. So if you look at the return on investment, it's been continuously now improving since 2022. You have the adjusted EBIT, which is also trending upwards, and you see the net debt decreasing very much towards the lower end of the corridor of our net debt EBITDA ambition. The dividend payment proposed is in line with our dividend policy. So therefore, I would say absolutely the right direction on all parameters. The one where we are still trailing behind is on the net sales growth, and currently it's more the volume side. Although the volume in the quarter, I would say, started already to look more positive, so a flattish volume development in the quarter. On the outlook, we have done no changes to the outlook or short-term risks and uncertainties compared to what we communicated in connection with the Q4 results. And thereby, I conclude my part, and I think Christian already highlighted the upcoming visit in Hammond.