Elopak A S

Good morning, everybody, and welcome to the second quarter 2024 results presentation for Elo Park. My name is Christian Hedde, and I'm the head of treasury and investor relations. Today's presentation will be held by our CEO, Thomas Kermendi, and our CFO, Bent Axelsen, and will last for around 30 minutes. After the presentation, we will have a Q&A session where the audience here in Oslo, as well as audience following us on webcast, will have the chance to ask questions. With that, I will hand over to our CEO, Tomas Kermendi.

Thank you, Christian. Good morning to everyone here in Oslo and on webcast, wherever you are listening from. First of all, let me just say it's a pleasure for us to present a Q2, again, consistently strong with the performances we've had now for a while. We are going to present a Q2 which is really fueled by core, by growth in our core. So let's get to it. And I will use this. And just to start off with a very, very quick glance of who we are. So for those of you who do not know us, we are actually the world's largest fresh liquid carton packaging company. We are selling around 14 billion packs a year, active in some 70 countries around the world, with 11 factories, and with a split in our business between EMEA, which in our case consists of, we also include India in EMEA. And on the other hand, we have Americas, which includes Canada, US, Central America. So we have a wide product portfolio in the fresh segment, but also an aseptic portfolio with our own aseptic unique system. So what is it actually we're doing? We are in the business of sustainable packaging. And for us, this means we are the only and only focusing on fiber packaging. We do that by protecting the essential commodities, and we all know about milk. But we not only do milk, we also do a host of other liquid products. And we do it actually around the world, as I said, somewhere around 70 countries, enabling world nutrition and all of these markets working on replacing plastics. So that's us. And let's go into now the quarter. How did the quarter go? And as I said initially, we are reporting a strong quarter. We are reporting a quarter of growth, both in our sales performance and also financial growth. First of all, if you look at the slide here, you will see that we are reporting a revenue growth of around 4%. We are reporting an EBITDA in the range of 44 million, which is up from Q2 of last year and is up now at EBITDA level of 15%. We come out of a quarter with a very strong dividend payout. We were in the range of 4% in the yield payout of dividend. Quite a lift versus previous year. We also came out of a quarter now where we introduced a bond and successfully introduced a bond of 2.5 billion NOC. And also... We are coming out of a quarter now where we see volume growth, as I initially said, in our core business, in our core markets, in North Europe, in Americas, and in our business in general. And finally, and importantly for continued growth as well, we are seeing a strong balance sheet, a leverage ratio in 1.9, even after the payout of the strong dividend and also of the investments that we are making. So that's us in a highlight. And then look a little bit on the financials. The actual growth for us, in the quarter is 6%, although we report here you will see 3%. And the reason being we have an IFRS 15 effect due to the build down of finished goods inventories, which in turn relates to an incident that we have had with one of our suppliers, which has caused us to reduce finished goods significantly. So underlying growth is around 6%. Which means that from an EBITDA point of view, the figure is a growth of around 5 million from 40 to 45 in the quarter. And if you look at it on a year-to-date level, we are moving from 77 million into 91 million year-to-date. underlying, so actually an EBITDA growth level of around 15% and also a strong quarterly development. Importantly, we have the development, as you will see, well balanced in strong development Americas, our European business is developing well, and our joint ventures are all actually doing very well. Let's turn to EMEA Europe, which is, as you know, in terms of size, the bulk of our business. And if you take the same IFRS underlying, the same argument and look at the underlying growth, we're looking at some 3%, despite we're reporting 1%. It's, again, the build-down of finished goods. But what we're seeing here is, and this is something very positive, that we are seeing growth in our core fresh business. We split the business in chilled versus ambient. And with our position in chilled, particularly in the northern European markets where we have a significant share of the market, we're seeing growth. And I'm going to exemplify that just in a little while, why and how we're seeing these growth elements. We also see in India very solid sales during Q2. In fact, we are up double versus same period a year ago. And we've talked about India a few times in this setting as well. The underlying growth, of course, is very, very strong in India. And the demand is huge. And we are now seeing that we have expanded the business into more categories from juice and also now into dairy. Also very important for this business is the continued placement of filling machines. Selling filling machines are a substantial driver and indicator for future growth. And here we see a good backlog and a good sales in and across the company, in EMEA specifically, during this period. On the southern part of our business, in what we call South Europe, we have seen also that there are some implications from the economic climate, consumption being somewhat dampened, particularly in the categories of the mid to premium products, and there's a down trading from consumers into the somewhat lower products. That's impacting us to a certain extent, and it certainly impacts our portfolio, how we use the portfolio as we can. Finally, we came out of MENA in Q1 at a very strong level. That, in turn, related partly to Ramadan. Now we have post-Ramadan, and there's some build-down on the stock levels in MENA. Americas, and we've talked about Americas many times in this setting, continues, as I mentioned, on a very solid level. In fact, the underlying growth in the quarter is 16%. And in America, this is where we had the supplier incident that has caused us to really frankly use and more or less empty our finished goods stock in order to supply our customers because of these problems on the supply side. That all means that actually in America we are having the all-time high pure pack volume in the quarter. And we are also seeing very positively that this is a mix of existing customers, And many of these will have different suppliers, so they will reallocate volumes from one to the other supplier. We're seeing that we are gaining more share of wallet with existing customers, but we're also gaining share of market given, you see, the growth rates we have thanks to onboarding of new customers and realizing some of the projects that we've talked about sometimes earlier. We did, and I'm just going to spend 30 seconds on the incident. So one of our suppliers in US had an issue in starting up the equipment after some maintenance, and that was the reason that has caused the impact that we see financially, but it's also impacting our operations as we speak and our ability to supply our customers. There are some impacts that we will be seeing even in the period to come related to this. Thankfully, the operations are fully back running. The supplier is up and back running. But due to our high level of production in Americas, it takes a while for us to compensate anything like this. Finally, and very positively, as many of you will know, we started the construction of our plant in Little Rock, Arkansas. That is progressing very well. And according to plan, we have now paid out around 23 million US dollar of the 77 that we have around 70 that we have planned for the project. So we are on timeline. We expect to be continue on timeline and are very, very enthusiastic about the opening of the plant during next year. Now, In order to give you, I'd very much like to give you some examples of how we are, where we are seeing the growth coming from, how we're seeing the business. And it's all part of the strategy plan that we set actually during the IPO and which consists of the five elements that you see on the screen. On one hand, it's the Americas. which we have now exemplified not only by our growth, but adding the capacity that we're adding. It's our Aseptic portfolio, which relates to the unique and proprietary system that we have in PurePak Aseptic and the filling platform we have that we call PureFill. We've also talked about the global or internet or globalization, the expansion, which we did through India and MENA. And of course, also when we talked about plastic to carton conversion as the last one. Finally, and as with all companies, we are continuously and relentlessly driving for the operational performance that can secure our financials and our growth than we are seeing in the figures that I just presented. This has to do with the low waste levels we see in the factories now, reduction of these, among other things. So let me just go to the examples. And these are three examples that we like very much, frankly, because I think they're a good example of how the portfolio can work in different parts of the world. and actually have different drivers depending on where you are. But where you also see there are also commonalities, whether you are in a very mature market or less mature market when it comes to the things that we're offering. The first one is Tolnate, and this is an example from Hungary. This is Hungary's second biggest milk brand. And by the way, we did not have any business with Tolnate until now. And this is an example where they decided after very, very careful reviews and study that they wanted a filling system. They wanted a carton system with an increased efficiency. They needed lower waste. They needed lower cost in their operations. And after that analysis, they ended up choosing our system, our Shikoku systems, and that actually means that they have increased their shelf life up to 33 days. They have launched a brand nationally. They have installed two machines now. And as you will see as well, they have then been validating that this is actually based on a lower TCO, lower total cost on ownership, not because of packaging, but because of all the other operational efficiencies that you gain through modern high quality equipment, such as the filling machines that we are supplying. So that's one example. We're very enthusiastic about this because it's a great brand in Hungary. And it's also a brand that company companies and surrounding countries will be looking at. And there's, of course, a lot of reference value when you get these kind of customers. The next one is. quite different and yet they also chose our PurePak system. So Hochwald is the dairy group, it's a cooperative in Germany and they are actually having the largest, one of the largest brands in milk in Germany called Bärenmarke. Hochwald built a UHT plant brand new a couple of years ago. And during that process, we were part of the tendering and got part of their UHT business on the Bärenmarke brand, which is the high quality and the branded volume they have. After the successful introduction of that, they realized that the value of really creating a standout solution for the German market, they have now also introduced the PurePak solution on the chilled volume. And for them, the key driver here actually is sustainability. They see a need to reduce their CO2. They see a need to get a packaging system that will minimize the use of packaging material versus the one they were using previously. And they used to have another carton packaging system. But with this one, they can reduce their packaging material by 50%, and hence also a very significant CO2 reduction. This is introduced. We're extremely happy about developments, how it's working in the market. And you will see here the quote from Hochwald as well, that they share the enthusiasm, thankfully, with us. The third example is quite different, but it's one of the indications that we use when we look at one of the mega trends that we all strongly believe in, which is the plastic to carton trend. And this is a customer in Lithuania. It's the leading brand in Lithuania, the strongest brand, very, very high brand recognition. And they were seeing that they were packing a very large part of their milk in plastic containers. And for them, with the commitments they made, with the market environment they're in, they needed to reduce the consumption of plastic. And to do that, they chose a PurePak solution, which actually would reduce their plastic consumption by more than 80%, simply just by moving from existing plastic packaging into our system. And hence, for Lithuanian dairy, they reduced their plastic consumption by 70 tons. through this move. So very, very, very significant in moving into a system that is not using overpackaging and is actually creating sustainability, sustainable advantages for companies like across, in this case, Europe, but we will see elsewhere as well. So these are the three cases I'd like to share with you now. And I'd like to hand over to you.

Thank you, Thomas. So, as Thomas explained, we are continuing with a solid profitability also in the second quarter. If we take, again, repeat the famous IFRS 15 effect, the EBITDA is 45 million euro when we adjust for the IFRS impact. What we have reported is the 44 million euro. Another technical remark is that both for 2023 and 2024, there are no adjustments of non-recurring items in our adjusted EBITDA. So let's look at our operating segments, starting with EMEA. In EMEA, we have an EBITDA of 36 million euro or a margin of 16.4%. This is in line with last year. What is driving the profitability in EMEA is, as Thomas pointed out, is the volume growth in northern part and central part of Europe. It's both onboarding new customers, but also growing our share of wallet with existing customers as we do not observe consumption growth in the region. It's also supported by improved input costs on primarily PE and utilities. If you look at, say, the southern part of Europe, this is where we see and notice the biggest impact of the inflationary pressure, where we see downtrading to lower cost packaging. And in MENA, Thomas pointed out the impact of Ramadan, which came early this year, that supported the Q1 pandemic. results earlier this year with an opposite negative impact in the second quarter, and customers are destocking as well. We see also an increase in fixed costs in EMEA. This is mainly driven by inflation, but we also do have an FTE ramp-up. This is connected to our strategic initiatives and the increased R&D spend. If we move to Americas, the EBITDA is 17 million euro, or 23.5% from 22.4% last year. This is then driven by the strong growth in CURPAC and closures. In addition to that, we also have an attractive seismics impact, improving the average margin. So Thomas pointed out the board supply issues, and this has then given a negative IFRS impact on the EBITDA, a level of around, say, 1 million for the quarter. So adjusted for IFRS 15, the EBITDA in America is 18 million euro. Now, the production in Canada is very close to full capacity. So while this was a short-term board supply issue, given the fact that we are running at close to full capacity, it's challenging to catch up on the backlog of this business. So we expect to have some financial impacts of this situation in the second half of If you look at our joint ventures, it's going very well. The growth into the school milk segments continues and we have a share of net profit of 2.6 million euro compared to 1.2 million last year. The final point I'd like to mention, also for America, we see a fixed cost increase driven by inflation, but we also have project costs related to our successful SAP implementation in the second quarter. If you just look at the EBITDA in a bridge perspective, we go from around €42 million last year to €44 million this year. If we then look at IFRS impact, the underlying growth, as Thomas pointed out, is 5 million euros. So what is this about? So in this quarter, we reduced the finished goods inventory during the period. In the same quarter last year, we increased inventory. the inventory of finished goods. Hence, that's why we see the difference between the reported figures and when we normalize for this inventory impact. If we then look at the bridge element, the net revenue mix is 1.3 for the reasons that we have explained. I think if I want to repeat something, I think it's just interesting that this year, this improvement comes from primarily volume growth and volume growth in the core business. We do not have the same price increases as we had last year. year. This bridge element also includes the negative impact of IFRS 15 as 3.5 if you compare the two quarters. If you look at the raw materials, there's a positive impact of close to 2 million euro. So this was the utilities, it was the PE prices. But it's important to remember that the raw materials, they are still at their historically high level because we have not seen any price reduction on our liquid paperboard, which is the biggest raw material component in our business. Operations costs are up 2 million euro. We have talked about inflation, FTE ramp up linked to the strategic initiatives and these strategic initiatives we will talk more about in our Capital Markets Day, 4th of September. So looking forward to that. Also in that figure, we also have positive impact on improved waste performance in our plants, both in EMEA and in America. If you look at the other, that is basically the improvement of the share of net profit from our joint ventures, then giving us to the 44 million euros. So steady as we go, continued solid EBITDA performance. So with that, let's move to the cash flow. Here we are looking at the cash flow from operation of 83 million euro. This is 20 million more than the same period last year, and it's actually the all-time high cash generation in the first half in Ellabock's history. So we start with an EBITDA of 90 million euro for the first half. Then we have 15 million improvement of the working capital despite having a revenue growth of 20 million euro during the six months. So this can be explained by a very systematic effort to work with our working capital in the group. The biggest improvement is in inventory but also in receivables and payables. On top of that the supply incident in America is also reducing the inventory and unwanted effect which is a part of the 15 million euro. What is going in not a good direction is the I would say a higher inventory level of filling machine than what we would like to see. We are doing mitigating actions, signing machines, commissioning machines. We think that the impact of these mitigating actions will help us in 2025. So for working capital, we expect a slight worsening compared to this picture in the second half. The taxes paid is 17 million euro. The biggest part of this chunk was paid in first quarter related to the strong profitability in Canada. If we move to the cash flow from investing activities, it's 34 million. So that is one, the investment in a US plant that is 21 million euro. And it's also 17 million in maintenance investments and filling machine leases, which is at an average level. We received 4 millions of dividends from our joint ventures also in the period. If we look at the cash flow from financing activities, we have increased the debt by 9 million. We have paid 34 million in dividends and then we have a lease and interest paid bringing us to a cash level of 18 million euro. That brings us to the financial position, and we report a leverage ratio of 1.9 compared to 2.61 a year ago, and 1.9 by the end of the year. So the net debt is then 339. That is up 26 million for the quarter. If you look at the bank debt of 230, that is only up €22 million, despite the fact that we have paid the €34 million in dividends, and we also invested the €22 million in US plants. Lease liabilities are up €3 million related to the 30 caps. So that brings us to the 1.9. So in conclusion, Continuous strong development of profitability. Cash flow, which gives a solid balance sheet that enables the growth and investment in the US. So with that, I give it back to you, Thomas.

Thank you. Thank you, Bent. And as I hope you could see, We are very happy about the positive momentum we have. It continues in line with what we have seen now for many quarters. And moreover, we also believe that this momentum we had in the first half will continue also during the second half of the year. That, I think, is actually the end of how we look at it. And I'm handing over to you, Christian.

Thank you, Thomas and Bent, for your presentations. We will now move into the Q&A session, starting to take questions from the people here in the audience in Oslo before we move to the questions that we have received online. I would please ask that you state your full name and the company that you represent, and please use the microphone.

Jepa, Arctic Securities. How did aseptic business develop in second quarter?

So the aseptic business, we split that into milk, UHT, and juice. And if you look at the juice market as such, and this is a more market perspective, then juice is seeing some difficulties in terms of consumption. We see that across Europe, to some extent as well in U.S., but definitely across Europe in all packaging formats, actually. Also in our system. So we do not actually register growth when it comes to juice. On the other hand, our milk sales, which is a mix of North Europe, South Europe, South Europe is doing much better. So it's a mix of which category you're looking at.

And in terms of your investment in Little Rock, what's the long-term capacity expectations here?

So I think that is the cliffhanger for Capital and Markets Day. So we will talk about the potential and the ambition level on America on 4th of September. I think that is a very nice opportunity to talk about this growth story.

Thank you.

Or you want to say something?

No, I think that we keep the cliffhanger.

Hi, Mille, Danske Bank. I was just wondering if you could quantify anything regarding that incident that you saw during the quarter, because you say that you have now fewer going out because you have less material coming in. Do you have any numbers that you can share, how much this is going to impact second quarter?

So I can probably add some color. So in the... second quarter we have this impact of one million euro which in our view is more of an accounting effect because your finished goods is reduced. So that doesn't mean that we have invoiced any less in the second quarter, but our finished goods are reduced. According to IFRS 15, you need to take that into account and pretend that you have sold less. It's a little bit technical. So in second quarter, no underlying impact of the incident. So we expect the incident to start to influence us in this quarter. we are working with our forecast, but we don't have a very clear number and we're not say at this stage, we don't feel that estimate is so accurate that we are comfortable sharing with that. But I think what we can say is that what you look at the screen in the outlook statement is taking that uncertainty into consideration. So that's the best way I can answer at this stage.

Any more questions from the audience before we move to the questions that we have received online? No. So then I have two questions from Amiri Abari related to the Hochwald case. And the question goes, claiming 10% higher renewable raw material for Hochwald, lower than what? Other cartons? What are we comparing against? And also what are the lower cost packaging in South EU putting pressure on? Plastic bottles? I didn't really get the last part. So he's, Samir is asking basically what are the lower cost packaging solutions that the customers are down trading to? Got it. What are they trading to?

Okay, so if I take the first part, compared to what? So in the case of Hochwald, They did have another carton packaging system with a different composition, a different format than we have now and what they have. And that's the comparison. So it's not versus a plastic bottle. It's versus alternative carton solution. In the terms of down trading, what you see is... in markets, and this is particularly visible in South Europe, where downtrading means simpler packaging formats. This could be role-set based packaging formats. It's typically driven by more and more private label versus branded products. And that's the down trading you see. And also simply less trading, less volume, as was the case in juice, where you simply end up buying less.

Thank you. And then we have a question from Fredrik Windrup in Boldhaven. Hi, Thomas and Bent. Two questions from me, please, both on Americas. The board supply issue in Q2 highlights the sensitivity to supply chain in the US. Given the significant ramp up in the US production capacity you will have in 2025, how can you add more resilience in your supply chains in the US? The second question, could you share some insight into how you are planning for the purchasing of the startup of the US plant in 2025? How long do you expect it to take to reach full capacity once you have started up the plant? And what are the main challenges for that plant to reach full output?

Okay, I take the first one, and then you can maybe take the second. So when it comes to suppliers in our industry, and in the U.S. as well, we are currently supplying U.S. with two suppliers. And clearly, as we pointed out, There is a certain risk in doing that. We've seen that this year. We also saw it last year, actually, when we had a fire in one of the suppliers. So what we have worked on since last year as well is to qualify more bought suppliers in order to have more supply. This is a process that is done not very easily and it's a long process. There is a reason why you have relatively few suppliers in the industry. It's because it's a very specialized product to produce liquid paperboard and requires quite a lot of skills and competence and equipment and standards in the paper mills that are doing it. But we have been very transparent with our suppliers now that we need to secure contingencies, essentially. And it's the contingency planning that we are working on.

Maybe also to complement part of that is that typically in our business we have flexibility in our supply chain. So when something happens like this, which is a very short-term one-off situation, you have the production flexibility to catch up. With a U.S. plant, you will have more capacity, which means that we will have more idle capacity. So with such an incident, it will be much, much quicker to catch up and catch up on the backlog. So I think actually having more production capacity, you can argue that that is also improving the resilience of our business in America. Do you want the second question on the ramp up?

You go ahead, I will maybe add.

So I think, first of all, I think the first line of the US plant is sold out, so it's not lack of demand that will be a limiting factor for the US plant. I think what it boils down to is the ability to ramp up the plant technically. It's also our ability to recruit people fast enough, and we already started with that in Little Rock. How much time it will take to get the full utilization is a little bit difficult to give a super clear answer on. But I think what we typically say is it will take minimum six months.

That would be expected, yes. So we expect to be at full utilization. capacity on that line during next year. Sometime at the end of next year, more likely.

Thank you, Thomas and Bent. And then we have a question from Håkon Fuglu in SEB. Can you quantify the negative effect, the negative Ramadan effect in Q2?

Maybe I can answer that. I think it's a little bit difficult to have, say, a fact-based, say, what exactly that Ramadan affects, so we don't have any quantitative number of that one.

And then we have a question from Louis Merrick in BNP Exam. Morning, both. Can you please share any quantification of the potential EBITDA impact from Americas?

And I think we've already... We covered that. I think that we would like to refer to the outlook statement that is incorporating our best estimate of that impact.

And then there is a second question from Louis. Can you give a bit more color on where you have seen build up in filling machines inventory? Is this just a site in delay in placement?

Yeah. Thank you, Thomas. So I think if you need to rewind a few years in order to cover the whole story. So in the middle of the pandemic, the supply chains were really stressed. So the lead times doubled up to two years lead time for filling equipment in order to make sure that we can supply our customers with supplies. filling machines in due time, we ordered more machines than what we typically would do in a normal year. During 2023, our customers have had their supply chain issues. So even though our supply chain was improving, maybe the building was not done, maybe the rest of the equipment was done. So that has also caused some delay. So that is the root cause of the situation. And once you start building these filling machines, it's not so easy just to stop it in the middle of of the production process. So we will manage this process in a good way, and we will adjust the supply pattern accordingly so we can get working capital to a normalized level. I think the question was also whether it's different between regions. I think it's evenly spread between Europe and America.

Thank you, Bent. That concludes the questions that we received online.

Maybe before you then conclude completely, I would just like to highlight, and because we've talked about it, we have referred to it numerous times, and actually now it is for real. So we are inviting every one of you to join us on the 4th of September for the Capital Markets Day, which will take place here in Oslo. will, of course, also be broadcast on the web. We will be covering many, many of the topics that you're also asking about relating to strategy, relating to initiatives, et cetera, how we are going to address the targets in the period to come. So we are very excited about this. And hence, I'm very happy to say that we are now once again now we are very clear on time and place and please join us

Thank you, Thomas. And then I would like to thank everyone for joining us for the second quarter 2020 for results presentation for ELOPAC. We look forward to seeing more of you on our Capital Markets Day on the 4th of September. For any journalists here, we will set aside time for questions that you might have after the session now. So with that, everyone have a continued nice day.

Thank you very much.