Huhtamäki Oyj

Good morning all and welcome to Huhtamäki's investor call for the third quarter of 2024. My name is Kristian Tammela, VP of IR. Following our normal procedure, we will start with presentations by our president and CEO Charles Elmé and our CFO Tuomas Geust. And after that, we will have a Q&A session. With that, let's get started and handing over to Charles.

Thank you, Christian. Good morning to all of you, and thank you for joining our session today for the Q3 2024 result, where we are delivering a solid profitability in a gradually improved market. So I'll jump straight ahead on the summary for the quarter, starting with a few comments on the market trends. where we have seen market conditions improving, improving slightly. However, with differences between geographies and categories, we'll come, of course, back to this point. For instance, we have seen improvement in the categories on the shelves, while we have seen that the on-the-go categories for food packaging have remained relatively subdued with impact, remaining from the high inflation accumulated over the last year since the pandemic, but also the more longer-term perspective. Also on the go category, we have seen a continued impact from the indirect implications of the Middle East crisis with boycotts to the economy. international brands from a financial performance in the third quarter we see ourselves being comparably to last year flat with however this quarter slight volume growth which is a the good sign where we are seeing gradual improvement on the market And we continue to see the same pricing pressure, which is a lot linked to the environment of a lower volume or demand. From a profitability point of view, our adjusted EBIT is improving versus last year, plus 2%, reaching or actually remaining at the H1 level, so year-to-date September 10%. which is for the quarter, but also year-to-date after nine months. And this is a lot driven by the cost savings actions that we have implemented since the latter part of 2023. We have also reduced our investments compared to last year. We will come back to that point. And that supports a good cash flow, a solid cash flow delivery for the third quarter, but also obviously year to date. So as I said, the cost savings are significantly improving our economy. our result in 2023 and are so far above the linear trajectory of our program. So a couple of words on the third page about this efficiency program that is contributing to profitability improvement. You may remember that we announced that program for a savings or cost efficiency savings of 100 million euro over three years from 2024 to 2026. This program comes with a one-time cost also of 80 million. That's what we have announced at the end of 2023. And it covers basically all input costs aspect, particularly procurement, manufacturing practices through waste reduction, labor productivity, and also footprint optimization. So where are we in the delivery of that program at the end of the third quarter 2024? We can say that the program has generated savings significantly above the linear saving trajectory. So if we would take 100 million savings over three years, this linear trajectory, we are well above. And so far, the programme-related costs have accounted for €18 million. The savings are basically consistently delivered across all the different streams. And I would like to highlight, particularly on the bottom of the page, the footprint optimisation, where we have gradually announced a number of decisions. We have closed... and already completed the closure of two food service factories in China and one in Malaysia. We have also closed one factory in UAE, consolidating three factories into two facilities in UAE, and that project is still ongoing but will come to closure this year. Looking now at our business performance in more detail and starting with the sales, for the third quarter, our sales decreased, reported sales decreased by 1%. This is affected by a minus 1% of currency, meaning that the comparable sales are actually flat for the third quarter. with, as I said before, a negative pricing and a slight positive growth of our volume. This is, when we look at the year-to-date nine months, this is showing that Q3 is delivering a better trend than the first semester, because year-to-date our net sales reported decreased by 2%, with comparable net size decreasing 1%, with volume being relatively flat. So as I said, in Q3, the volume is delivering a positive growth. So this is showing a better trend. And we see the same currency impact year-to-date as in the third quarter. Next. On the breakdown of the sales by segment, we see that the food service packaging demand has remained soft during the third quarter and during all the quarters of the year. For the key reason of the inflation, we'll come back to a bit more explanation on this. In North America, the demand has improved in basically all categories, with the exception of ice cream consumption, therefore ice cream packaging. The demand for flexible packaging has also improved, but with significant differences between the different markets or regions. And then, last but not least, fiber, particularly for egg packaging. Fiber packaging sees the volume improving, growing quarter after quarter. And this is, however, slightly offset, this very solid growth on the egg packaging. It is slightly offset by the stable food-on-the-go products like the cup carriers delivered to the food service sector. Going to the P&L, with the net size at minus 1%, we see the adjusted EBIT at plus 2%, reaching €102 million for the quarter 3, and a margin of 10.0 points at the adjusted EBIT margin level. Also, the EPS conversion is pretty solid, 9% growth versus last year. And we see also Q3 in line with the first semester where we are reducing the capex, the investments, by roughly 30% in the quarter and year-to-date. And this is obviously supporting the cash flow. Thomas will come back to that in a few minutes. Looking now on the slide 10 at the more granularity by segments, and I'm starting with the food service, Europe, Asia, Oceania, where I said before the consumption remained soft in the third quarter in line with the first semester. The demand remains tough, particularly very affected by the high inflation. The inflation in that sector has reached, on average, year-over-year 10% over the last, basically, five years, but also, when we look more long-term, 10 years in many areas of that sector. We're talking about a 10 percent inflation year over year. So this has started to impact the demand. And we see that most of the brands are conscious of this and taking action on the market with a reduction of prices, but also promotional activities in order to push further the consumption. There is also something that we said since the beginning of the year, the impact of the war in the Middle East that is causing boycotts of a number of large international brands. and that means also an impact on our sales. The net sales decreased particularly in the Middle East and Africa, but overall across the board in all the markets. I'll come in a minute to North America, to the exception of North America, where we are seeing a revamp of the consumption growth, which is maybe a good sign for overall that sector. From a P&M point of view, we are supported by paper bond prices, which have decreased if we compare Q3 2024 to Q3 2023. And that has supported, together with our savings, our adjusted EBIT profitability. However, this profitability is, of course, subdued by the lack of volume in the year. Moving on to North America in the next page, North America, where we see that the demand has improved in the third quarter. And that's basically in all categories, particularly in food service. That's really good news. Not in all the brands, but in basically more the local brands in the market and the markets. That is supporting good results in this North America segment for the third quarter, with reported sales growth of 3%, comparable growth also of 3%, so no major impact from currency in the quarter. And we have only the exception of ice cream packaging that is still relatively stable and not yet growing. The pricing continues to be a headwind. However, thanks to all the actions for cost efficiency that we have across all the segments, but also in North America, we are able to continue delivering a very solid profitability for the quarter at 13.8%, adjusted EBIT margin, and year-to-date a very healthy 14%. Moving on to flexible packaging on the next slide. Flexible packaging has seen also better news with an overall demand improved in the segment in the third quarter. However, with significant variations by market, so a better situation in Europe and Asia than in Europe. for instance, Middle East or in Turkey and in India. The adjusted EBIT margin has also increased slightly, not probably to the level we would like it to be, but gradually also within the quarter. So September was within the quarter a stronger month. So this is showing to us that the actions that we are taking are starting to unfold into a better situation. And overall, the margin of the quarter was 7.3%, adjusted EBIT margin 7.3%, compared to 7.2% a year ago. And fiber packaging, as I said, better situation from a volume point of view. We've seen the overall demand for fiber-based egg packaging improving across all regions, basically. And also, this is the result of the additional capacity that we have put in the market and that we continue to put in the market with, for instance, two new lines under installation in South Africa that will provide further growth. We have seen higher prices also, but the pricing has not in the quarter been yet adjusted according to the raw material price increases. The recycled fiber has increased in the market very recently during the third quarter significantly, and that explains why the profitability is temporarily reduced. subdued in the fiber packaging, as we see, 9%, 9 plus percent, which is not to the level of our expectation, and that will come back to a much better, much more healthy margin level, with, in short, just a time lag due to the pass-through pricing of these higher raw material costs. With this, moving on to the financial review is Thomas.

Thank you Charles and jumping immediately into the more detailed P&L. I would highlight maybe though it's still disappointing to see the net sales declining all in all. Charles highlighted that we have a slight uptick in volumes and then a negative on pricing and then obviously what you see here is a a all-in-all movement of minus 1%, which is then currency driven mainly. The disappointment comes mainly from food service. I would highlight that one where the customers are still struggling with finding the medicine to recover the volumes after the steep price increases over the last years. campaigns and other are expected to at one point start helping them to recover to get back into growth and then we hope also to see our volumes in food service recovering. If you look at the profitability development that's obviously well supported now by the cost out initiatives although it's not fully visible as a net impact in the results. That's obviously partly driven by the still lack of volume growth and then also due to continued high inflation in, for instance, labor. Still a good managed profitability in this still, I would say, partly subdued top line environment. It is also clear that we in the quarter are having tailwind on a comparison level when it comes to other activities. I think we have roughly seven million lower costs on that level or lower impact on that row in our results. That's mainly driven by timing of incentive accruals, but also partly driven by a very high level of accrual base in 2023. So in 2023, we increased accruals already in Q3. When it comes to the tax rates, you will find that the tax rate is roughly on the previous year's level when it comes to the adjusted tax rate. And then obviously on reported tax rates, we have this comparison rate with regards to high inflation countries. And then if I would take the adjusted EBIT margin, the adjusted EBIT margin has roughly 0.3% point impact from the IACs. So if I would take out the IAC, it's roughly 0.3% lower. It's on the same level as we had IAC impact in previous year. And then the financial items, you see that they are starting to trend more positively now in Q3. as the net debt is improving and as also we haven't seen any negative impacts of the high inflation countries when it comes to the currency side. If you look at the currency all in all, it is continuing to trend negatively, starting with the USD. As you see in the closing rates, we have a negative minus six. Fortunately, I would say from our point of view, from a translation point of view, the latest USD Euro rate is roughly 108. So again, trending more favorably when it comes to translation. Indian Rupee, as you see, is worsening, while then the Brazilian Real is also strongly worsening versus the average rate. And then other currencies to always keep an eye on is the development of the Turkish lira and the Egyptian pound. On the net debt to EBITDA, you can see that we are now at two. It's the same level as in previous quarter. I would use more decimals, we would be slightly improving. Maybe a few comments out of this one. We have roughly 112 million of lease liabilities in the number. Sorry, we are deleveraging roughly 112 million from previous year, and our lease liabilities are up roughly 10 million, up to 163 So, deleveraging roughly 8.5% in total net debt, and if I take out the lease liability, roughly 10% versus previous year. Yearly improving, so all in all, we are continuing on the positive trend when it comes to deleveraging. On the loan maturity side, we have extended our 125 million term loan to May 26, so therefore moving into long-term debt, and then we actually repaid the 100 million bond visible in the column for 2024 here in October. Maybe also to point out that the second and final installment of the dividend has been paid now in early October. Looking at the cash flow graph, it's clear that we are still seeing positive development out of the EBITDA development. The change in working capital looks quite dramatic. That's more looking at how the how the working capital was at the end of the year, you will find that we are actually improving in working capital versus Q3 previous year. And we are also improving in days of working capital by roughly 10% versus previous year. So this is more how a timing related working capital impact for the company. And then, as you can see, the capital expenditure is on a significantly lower level versus previous year. We predict that we will be on a significantly lower level also with regards to CapEx this year versus previous year on full year numbers. Jumping into the financial positions, so here you can see what I just mentioned on the working capital down from previous year. Net debt also, as mentioned, down from previous year. On the equity and non-controlling interest, we have a negative impact of currency of roughly 20 million in the 1952, which you see on this page. Otherwise, the numbers trending favorably and then if we look at the long-term ambition we have now as you recall in previous quarter we had already a 10% adjusted EBIT margin that one converted now to a also year-to-date 10% adjusted EBIT margin so we are currently in the lower corridor of our profitability ambition on the compatible net sales as highlighted trending trending far below our ambition level, and then the return on investments are slowly, slowly trending towards the lower corridor of our ambition. Net debt EBITDA is at 2, so really on the low end of what we have stated as an ambition level for that one. And then, as mentioned, the dividend was paid out We have no changes to our outlook, neither to the short term risks. And with that one, we would be ready to open up for Q&A.