Huhtamaki Oy Ser 1

Good morning all and welcome to Huhtumäki's investor call for the second quarter of 2024.

My name is Kristian Taimela, VP of IER. We have this morning released our results, and as again, we will start with presentations by our president and CEO, Shao-Elme, followed by our CFO, Thomas Gerst. And after that, we go to a Q&A session. Before that, I'd like to remind everyone of the upcoming site visit to our site near Chicago on September 4. If you are interested, please feel free to reach out to the IR team. And with that, let's get started and handing over to Charles.

Thank you, Christian. Good morning to all of you, and thank you to all for joining us for this release of our second quarter results and first semester. I will start with a quick summary on our results and the business context for the second quarter. I would say that in one word, I would summarize that Q2 was extremely consistent with Q1. However, slightly better, if I may say it like this, and I will give you a few insights before going into details. The first point is that we are continuing to see some signs of increasing demand. with however some differences between geographies and categories. We see particularly improvement in on-the-shelf categories, so the food and everyday necessities, and there we are seeing, like we said at the end of the first quarter, but even more positive, we see volume growth versus the same period of 2023, as mentioned already in the first quarter, but as said, even slightly better in the second quarter. At the same time, we see that the on-the-go categories are softer. We believe that this is a temporary arbitration from consumers as a result of the high inflation that we have seen in the hospitality sector, in the restaurants, in the quick service restaurants, in the coffee shops, and that drives inflation. the demand slightly down during the first semester of the year. The market environment in a nutshell is still impacted by the high inflation, which has been particularly high for food products and, as I said, even more for food service products. There are also impacts which we hope will be only temporary in the year 2024. That is coming from the volume decline due to the war between Israel and Hamas. and also the Red Sea crisis has impact on logistics and therefore on the international trade. From a financial performance point of view, that drives our sales slightly down, minus 1%. We will see exactly the components of it, volume being very close to last year's same period for the second quarter and for the first semester. At the same time, we continue, we actually increase the acceleration of our profit growth. The profit is growing 14% at adjusted EBIT level, and the margin, again, at adjusted EBIT margin level is reaching now Q2 10.2%. We will see first semester is 10%. A major contribution to this profitability increase is actually the savings that we are delivering, continuing to deliver in line with our boost savings program that we introduced in the end of 2023. And I'd like to give first a reminder about this program that we announced late 2023. It's a program that is targeting to save 100 million euros between 2024 and 2026, so in three years. on tackling costs on four areas, sourcing, material efficiency, so in other words, waste reduction in our manufacturing entities, labor productivity, and also footprint optimization, particularly the manufacturing footprint optimization. So after this reminder about the overall program, where are we? And that's the right-hand side on the slide that you can see online. Where are we at the end of the second quarter 2024? Well, the initiatives are in execution in all areas. That was the case already in Q1. Achieving... at the end of the first semester, savings which are above the linear trajectory that the $100 million would give over three years. So that's already a very positive sign, and that has contributed materially to the profit expansion that I will explain in a couple of minutes. And it has also compensated for the high inflation that we see, particularly on labor costs. So far, a program-related cost that we are accounting, and Thomas will come back to this in the IAC, that amounts for 15 million euros during the first semester, and that includes a positive impact from the divestment of our real estate in China. China being one of, if you remember, one of the manufacturing footprint optimizations that we announced during Q1. During Q2, we have actually continued all our activities in sourcing, in labor productivity, in waste reduction, but also we have initiated two other projects for manufacturing footprint optimization, consolidation. One announced on the 23rd of April, which has to do with the consolidation of our food service manufacturing in Klang, near Kuala Lumpur in Malaysia. And the project completion is done by the end of this second quarter. I have to say that the project in China and the project in Malaysia have been conducted perfectly according to plan and will deliver the savings plan. The second, on May 31st, we announced the consolidation of our three factories in UAE into two entities and that will happen during the second semester. So last time to conclude on this efficiency program that we are expecting to continue accumulating the savings during the three years, with most likely, as we see it, savings which are above the trajectory during the first semester, but should remain like this during the year 2024. Going now into some specifics on the second quarter and first semester first starting with the sales of the second quarter, the sales which decreased 1%, and that was very much in line with what I said before, linked to volume and pricing being the two components, but being very close to the previous year's level, while we still had, when we're talking about comparable net sales growth, we still had a minus 1%. From currency impact, Thomas will present further details on this. On the first semester, sales decreased 3%, so you get that the second quarter is actually a better trend in relative terms versus 2023 than Q1. In the first semester, altogether, comparable net sales growth minus 2% after deducting the currency impact negative minus 1%. And as said, the volumes, I'll come back again in more details by segment, but the volumes are close to last year, with differences between categories and geographies, where we see more impact is on the pricing, where the competitive pressure is there. We are holding well, but slightly negative on pricing. Looking at now the same sales, comparable net sales growth, but broken down by segment, we see clearly what I was suggesting in the introduction, meaning the food on the shelf is growing in terms of sales, but also even more in terms of volume. The food, sorry, the packaging for food on the go So basically food service is seeing a temporary decline, which is linked to a demand where all the market intelligence we have is showing that consumers are temporarily reducing their out-of-home consumption linked to the high inflation that this sector has seen altogether. So that means food service, Europe, Asia, Oceania, says minus 6% in Q2. Part of it is pricing. Part of it is also the one-time effect I was mentioning regarding the Gaza war that is driving boycott of the U.S. brands or Western brands in general. And that's an impact which is sizable. Also, the logistic from the Red Sea crisis. North America is minus 2%. North America is purely pricing. The volume is basically flat with some good news also in some categories in North America. So the performance is actually quite solid. The good news is on the packaging for food and everyday necessities on the shelf. There we see the flexible packaging. where we are growing the size 2%, and actually the volume is more than the 2%. So we have also pricing pressure in the flexible segment. And then fiber packaging is also a nice growth. Let's remember that in fiber packaging, which is the core is egg packaging, but we have also food service products into the fiber packaging, for instance the cup carriers, which are suffering the lower demand of food service. So the... let's say, underlying growth of the core business in fiber is really positive. I'll come back to that a bit later. This translates into the PML for those following with the presentation offline, slide 8, looking now at the PML. In the second quarter, with those sales which are flat to slightly negative minus 1%, we are delivering a profit growth of 14%, reaching in Q2 an adjusted EBIT margin of 10.2%. And that means year-to-date a 10.0% on the first six months of the year. And when you compare to the profitability a year ago, 8.8%, then this is a... a substantial material improvement, which is linked to all our cost reduction programs that we have initiated already in 2023 and accelerated in 2024. Good to mention also, and that's valid for the quarter two, like for the year to date, that the Adjusted EPS is following exactly the same improvement trend as the operational earning, which is good. We have slightly reduced our – well, slightly, maybe I should say substantially reduced our capex, but I'm saying slightly because there is a – a timing effect into it, so it's not like we are planning to reduce our capex on the full year by 37%, as you see, for the first semester, but still, capex will be lower. You may ask questions on this. Then, sustainability performance continues to progress in line with our targets. I should even say that We are above our linear trajectory to 2030 with our sustainability performance. I may comment a number that is not on this slide, but we have told you that we have introduced a global sustainability and safety index since 2013. Three years now, this global sustainability index, when we projected from 2020, the baseline, to 2030, our long-term target, starting with an index 100 to an index 200 in terms of target within 10 years, we are at the end of H1 2024 at an index 158. So this is really a solid performance. We are above the linear trajectory. that is linked to basically all the indicators, including safety, but on the specific environmental sustainability, we are As you see in the slide, we are improving in renewable electricity, for instance. Let's remember in 2019 we were at 0%. Last year we were at 36%. We are at 55%. It doesn't mean that in one year we will be at 75%, so it's not a linear progression. There are projects which justify this acceleration. Other indicator we are very proud of is the recycling of industrial waste. It was 70% a couple of years ago. We are at 81%. Or on the bottom of the page, the waste to landfill was, if I remember well, 17%. In 2020, we are at 6%. Now, last year was 9%. So we are progressing consistently period after period, year after year. One indicator is in red. That's the one you see on the top left corner of the slide. That's the renewable or recycled material. You have to see it as indeed a reduction, which is not according to our target, but that's purely linked to the mix because of what I explained before. We are growing in flexible packaging in 2024. We are not growing in the food service, which is mainly or even solely renewable. paper-based products and therefore that has a mixed impact. It does not change our long-term ambition. Looking now at some details of the business and performance per business segment, starting with food service Europe, Asia, Oceania, where we've seen market softness in Q2 exactly according to Q1. So no change, but no change for the better, actually. So the demand for food service packaging has remained soft. affected by the high inflation on food products, but even more the inflation in quick service restaurants has been even higher. I would like to give maybe a small indication of light out of the tunnel is that we see our customers, the big brands, the food service players actually starting promotional activities in the beginning of Q3, which are there for them to comment upon it, but our interpretation is that they want to re-attract consumers and to mitigate, let's say, the impact from this inflation. Despite this challenge in the top line in the volume and sales overall in food service, we are maintaining our margin at 9.2%, adjusted EBIT margin, which is a good result in the context and that's also the result of our savings activities across the company. Moving on to North America, North America says, as I said before, a comparable net sales growth, minus 2%, very much pricing related. The demand remains basically unchanged versus previous years, with some... with some differences by categories. Basically what we see more and more in the U.S. to push the consumption is a lot of promotional activities by, for instance, retailers, and that is driving pricing pressure, of course, in the value chain for us, but also potentially better volume projection going forward. The remarkable achievement in North America, which is very much in line with Q1, is the continued improvement of our profitability, but it's not an incremental improvement. It's a substantial improvement from 12% to 14% adjusted EBIT margin, so two points improvement linked to a favorable cost environment, but also linked to our cost savings program. And then I should have mentioned also on the sales side that we are starting to see traction from our investments. For instance, in the egg packaging in the new almond factory in Indiana near Chicago, even though in the first semester it is still... how should I say, marginal value, therefore projecting for the next semester or even for 2025, then that's clearly a vehicle for growth for us. Second, you may remember that we are currently investing and installing a second factory or the expansion, the duplication of our factory in Paris, in Texas, in the U.S., in food service, and that factory will be ready in January 2025 with commercial production. That also gives a positive perspective to the sales growth, which will also, of course, support profit growth in North America. Flexible packaging, we know that this was our segment with the lowest performance until last year. We are seeing good signs of our strategy, of our innovation deployment. Our volume is positive, so volume growth is positive, sorry, in 2024, in the first semester, in the second quarter also. Actually, in the second quarter, in relative terms, a bit higher than the first, so that's positive. And there is also pricing pressure in flexible packaging, but all in all, we see that our strategy is starting to unfold positively, and that translates also in a slight margin increase from 5% to 6%. Early days, we are far from where we want to be, but that's good signs of better performance in that segment. Finally, on the fiber packaging that I started to suggest at the beginning, there we continue to see solid net size growth and profitability. I would like to mention that the 3% comparable growth, which is good, could be actually much more positive for the second quarter. And the reason is we are still suffering a few impacts in terms which are temporary in this segment. Number one, you may remember we had a fire on the production line in Australia in January. That line is still not operational, so that's a temporary impact. But structurally, this will be further growth going forward. Second, in Q1 there was avian flu in South Africa, apparently resolved by now, but in Q2 started avian flu in Australia, which is hampering also the growth of the second quarter, but still we have a solid growth and a solid profitability improvement, which is linked to not only this top-line growth, but also linked to the operational improvements that we have made in a number of factories. particularly in the Netherlands. With this, I hand over to Thomas for the financial review. Thank you, Charles.

And let's start with a slightly recap of what Charles just said. I would say that overall... We were hampered by the growth in convenience, however, of course, supported by then the, I would say, improving trend in the on-the-shelf products. So with that in mind, I would ask you to pay attention to the two change columns. If you are looking at those ones, you will actually conclude that looking at the full year performance to date, H1, we are better trending better in Q2 on basically all the parameters, except for on the tax row. So from that perspective, I would say the trend is right. I admit that it is supported by slightly the wrong things, but they are all important, so the cost-out activities are definitely helping us with the profit development, which is, as said, good. It is also tail-winding from the commodities still here. So with that in mind, when we would see the recovery in sales, we would have the additional benefit of leveraged growth coming into the P&L. With that said, obviously we also see some stabilization in the commodities and in some commodities even uptrending efforts currently going on. On the tax rate, we are roughly on previous year's level. I think we had 23.5% last year, now roughly 24%, so more or less the same level. And then you see that the hit we got on the interest, on the finance cost in the first quarter, we didn't get a similar hit in the second quarter, so stabilization also there. which is a good bridge into the next slide where we have the currencies. So you can see that all in all, on average, the currencies are moderating, so moderating from a negative impact point of view for us. We had only, may I say, 6 million on top line in the quarter, while the year-to-date number was 23. Especially if you look on the closing rates, you will see that the negative signs start to diminish, so if you compare that to the average rates on the left, many of the currencies are now starting to trend more favorably for us, or have trended, you never know where the currencies will be going, but have been trending now more favorably for us. Net debt levels and all-in-all balance sheet strength, we are basically on the low end of our corridor, so at 2 when it comes to net debt EBITDA, so the continued deleveraging has been continuing here, also taking our gearing to a more favorable level. We have a strong cash equivalent position in our balance sheet, which is actually now slightly supporting our finance cost as well, as we get some benefit out of the cash we have on the balance sheet. And then, all in all, the absolute net debt level at 1.255, which is... significantly down from after the acquisition of ELIF. Loans and maturities. The majority of our loan structure is today fixed. We have clearly reduced the amount of commercial papers. especially so that part of floating rate-based papers have come out. The loan maturity is roughly on the same level as previous year, same period, and as usual, we are continuously looking into various activities around financing, and especially when it comes to maturity. On the free cash flow side, here we have two elements strongly supporting. One, the capital expenditures being lower year-to-date. We actually project the capexes to be on a lower level compared to previous year, so a lower capex level in 2024 versus 2023, I would say we would be below 300 million. Then when it comes to the other elements here, we have support also from asset sales. Charles already referred to some of the sales in connection to China. We are also when you compare that to our IACs, one can conclude that With our ISEs, which were roughly 22 million on EBIT level, we are on ISE EBIT impact basically half, close to half of previous year's same period, and most of the ISEs are non-cash, so cash contribution from sale of assets in this case. When you look at the financial positions, you see that we are improving on our balance sheet KPIs. slowly but surely on return on investments and return on equity. You see the working capital being down versus previous year, so our relative performance when it comes to days of working capital is improving. On the other hand, if you carefully analyze the balance sheet, you will realize that our inventory is up versus year-end, and that's mainly on the finished goods side. allowing for delivery of products in the second half. And with that one, we come to the long-term ambition. In the long-term ambition, we conclude that we are dragging behind on sales. However, if you look versus the previous year, Charts there, it's basically on the same levels of minus two, the same we had in previous year, full year. Then if you take the adjusted EBIT, that's, of course, a good... Good thing to be able to say that we've now reached the lower level of our ambition. So we have reached the 10% EBIT margin for the first half of the year. The return on investments, as you see, are continuously improving since basically 2021. And then we have the net debt EBITDA at the low end of our corridor. And dividend payments were carried out the first part in May this year and the second part still to come in the autumn. Outlook and short-term risks. We have done no changes to our statements, so with that one I would conclude. open up for Q&As and maybe also from my side remind you of the event we would have in Hammond. As Charles said, it's a factory which is being ramped up, so it's a good time to see how an industrial scale-up happens in reality.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from FM Ravi from Citigroup. Please go ahead.

Thank you. Two questions. Firstly, can you give a quantification of color as to how much has been the impact of the boycott of the global brands in certain markets like Middle East has been on the top line? And is it fair to say that the impact started in mid-4Q last year and hence it will be first quarter 2025 till the comparison base for the prior year fully reflects that kind of impact? And secondly, Does the slowdown in demand, especially in North America, also push out the growth investment programs over there? This is especially in the context of the decrease in CapEx, and would it also be fair to say that the CapEx rates will not pick up till you see the top-line growth in the order of magnitude of your long-term ambitions, or will you accelerate it if you feel there is sufficient visibility on growth? Thank you.

Thank you for your question. I'll maybe start answering and then, Thomas, you can, of course, complement as usual. First of all, the impact of the Gaza war on the... of U.S. brands particularly. I mean, it's impacting basically only one segment, which is the fiber food service segment, not North America, obviously. And that impact, you asked, you know, when did it start? It really started to materialize indeed at the end, I would say, At the end of the fourth quarter last year, I mean, the one starting on the 7th of October, it really started, I believe, or it was visible to our customers and to us in the end of the fourth quarter. So you're right in your assumption. It's only – and it's there to stay, we believe, because – Because once consumers change their consumption habit for a strong belief like this, then there is no reason it's going to change back in the short term. I'm not saying forever, but in the short term. So from a comparison point of view, Q1 2025 will be the first time where we are not speaking about it anymore. At group level, the impact is not material, but it is a small, a very low single-digit impact still on the overall volume of the food service segment. The second question, which has to do, or maybe you want to complement on the first one?

No, I think that's a complete answer, yeah.

So the second question, I understood your question was specifically directed to U.S. and to the slow demand in the U.S., whether it is pushing away our investments and whether that was compromising our long-term growth. I would like to say... Not at all. Okay. So, on the U.S., U.S., as you've seen, is our most profitable market. So, market and also segment. That's number one. So, therefore, investing... When we're saying in our strategic priorities that the number one priority is to scale our profitable core business, well, that's one of the directions. We want to scale our business in the U.S. Therefore, we have invested in smooth molded fiber to grow the tableware where we have a brand which is our most profitable category. Second, we have invested in this famous Hammond factory. which we are inviting you to visit on the 4th of September for egg packaging where we were not present, now we are present and this is a growing market. Third, we're investing in the folate carton in a demanded food service category in the U.S. So there is absolutely no reduction of investments for us in the U.S. On the contrary, we are strong believers of the need to invest there. Our lower investments are more to be seen in other categories like in food service or in flexibles where we want to have proof of the market, but also that our innovation is really being successful in order to further invest. So it's kind of being slightly prudent for further deployment and therefore pushing a little bit further away some of our investments. It's not our investments that are compromising the long-term ambition on growth. However, this year... 2024 is very clearly not in line with our long-term ambition of growth, and that's market-related. It's not investment-related. It is market-related because of what we explained, the demand is low. Thank you.

The next question comes from Robin Santiverto from Carnegie. Please go ahead.

Yes, good morning and hello everyone. First question I have is related to the volume outlook in Q2. Apparently your underlying volumes were flat year on year. What is the outlook for H2? Should we expect a small increase in the volumes with the information you have today?

Okay, thanks. Good morning, Robin. Thanks for the question. The volume... So first of all, before talking about volume outlook, I'd like to remind that on H1, if you compare to... Where we're coming from in Q3, Q4 2023, we have seen market conditions slightly improving. Are the market conditions improving according to our expectation and our plan? Absolutely not. So this is very clearly the recovery of the consumption is much slower than we were expecting or hoping. That's number one. However, the numbers in Q1 are showing signs of better demand, and Q2 even more, but it is slightly. What do we see in H2? We see that the recovery of the consumption for us is not a question of if, it's more a question of when, and we had hoped and expected and I should say that it would be in 2024, it may be 2025, but it may be also starting in the second semester. In some markets, take the U.S., for instance, it's very clear consumption depends, of course, on inflation, but depends even... as much on the interest rate because consumers use a lot the credit facilities, and when there is high interest rate, it is reducing the consumption. So as soon as the interest rates will go down from the central banks, then we are expecting to see consumption growing, progressively growing again. Second, let's remember always that we are ramping up with a number, and Thomas mentioned it, we are ramping up in a number of additional capacity that we have put in place in food service in Nules in Spain, in our Leeds production. in Germany, and we have further investments ongoing in the UK, where our customers have clearly asked us to invest in order to supply their demand. In egg packaging in North America, in smooth-molded fiber in North America, again, in folded carton in North America, again, so profitable growth. So we have a mechanical impact that are going to come and that will sustain a better performance. So therefore, I would not say to you today that we are bullish about the Outlook H2, but we are reasonably optimistic.

Thomas, would you like to comment? I'll comment there and highlight that exactly as you said. We are pretty confident around the committed customer contracts that we have got the new products which will be available from Hammond and so on. So that's in a way bringing growth. The biggest uncertainty is obviously the recovery in the food service market how quick is it and which sort of customer segments will be the winning segments. So that's the question mark for second half.

But all in all, growth. Actually, the food service, when you look at our results overall, and I hope I was clear in presenting, when you look at our results overall, there is a tree hiding the forest, if I may say. So the food service, temporary, e-cup is hiding the growth that we have in other segments, and we should not forget that. So the question, the concern we have today, the main one, is how long will it take for consumers to return to their normal convenience habit to dine out and less at home and therefore sustain the growth, the long-term growth of the food service segment. That's

brands have been gaining traction in the market, which is evidence of people looking for cheaper products.

I understand. Thank you very much. The second question I have is related to the gross margin. Gross margin seems to be on a quite elevated, good level for you guys. How much of the gross margin improvement comes from the cost cutting or rationalization measures, the $100 million program? And then related to gross margin going forward, if we... If we disregard input costs and only think about volume and continued rationalization measures, should we expect, if we disregard input costs, that the gross margin could even go up from these levels? I understand input cost can change the setup, but that we understand, but what you know better than us is the company specific measures and the potential leverage from volume on gross margin. So if you could sort of comment and give a bit more detail on that.

Yeah, so my first comment would be that we basically see no leverage from growth, obviously, in the first half. So from that perspective, It's partly a mixed thing, but majorly the cost out that you referred to. When you talk about gross margin, I would highlight the first fact that one of the bigger contributions we have is actually on value-add level. But the value-add level is not completely a market-driven value-add improvement. So in the value-add improvement, I would say a big part of that one comes from the activities we have had around the sourcing on that level. So, to conclude, the majority of the gross margin improvement comes from cost-out activities. We have more than offset, I would say, the headwinds we have had from volume and from lowish volumes and from labor cost increases.

I think it's really important what you highlight, Thomas, at the end. We're talking about input costs. We should not forget that, yes, the cost environment is positive right now with raw materials, for instance, but we have a major inflation on labor. This is a big impact, and that is neutralizing some of the effect from this favorable cost environment.

Gross margin, so explaining partly why value-add is improving more than gross margin.

And in an environment where input costs would remain stable, I know there's some pressure and some cut, but in an environment where they would remain stable, if we get volumes, would the gross margin remain at least at this level or even improve?

Yes. From a leverage point of view, you can basically assume we have a slight negative impact from the depreciation coming on stream, so you would get benefits from that one when you see volumes. And we don't believe we need to add that much production overhead in order to carry growth. So with other words, you should assume that the part we need to Slightly add this is labor. So we will get close to contribution margin type of profits delivered to gross margin. Thank you very much. Mental part, just to be clear, not from everything.

The next question comes from Paul of Mittal from Barclays. Please go ahead.

Yes, on behalf of God of Gel, I have two questions. Firstly, on the fiber packaging segment, you highlighted the impact from fire in a line in Australia and the impact from flu in Africa. Can you please quantify that impact on the fiber packaging segment? And secondly, now leverages... which is towards the bottom end of your 2 to 3x ambition. So when we think about capital allocation, will it be directed more towards Bolton M&A or should we also think about some share repurchases?

So I didn't quite get your other questions. Could you repeat that? It was difficult to hear it. Could you repeat that one?

So what will we allocate the money to? You'll tell us if I understood correctly your question. The second one is that our leverage is much better and your question is about our capital allocation. Are we going to use it for Bolton acquisitions or for share repurchase? That's what I understood. Yes, that's correct. The first one was about the impact on fiber from the fire and the flu, the avian flu. The impact basically is that we would have had a positive growth in, so we had very good positive growth when you see the sales growth of 3% in Fiverr, it was basically twice as much in Europe and basically flat in the rest of the world. So you can get an understanding that the impact, of course, of those accumulated three events. So one line out of... We have lines, when we say rest of the world, we have lines in Brazil, we have lines... In South Africa, we have lines in Australia. that has a fairly significant impact in our growth, this fire. And the flu is a severe impact. In South Africa, I think in Q1, 30% of the cells were affected because basically the birth population has been taken away. In Australia, my understanding is that it's a bit less severe of a magnitude but the problem is that it continues so it was just kind of at the beginning starting as a small event limited event it looks like it carries on so difficult to say at this point if it will have an impact also on Q3 but that's a sizable impact I can take the other one so first of all I would say in the current continued

relatively unpredicted environment, so with a lot of things going on everywhere, I would say we are more than happy to be more on the lower end of the leverage, and I could even be okay with going below the corridor of two. So that's my first statement. Then, when it comes to priority of capital, that still remains. So, with other words, the 2-3 corridor is a relevant corridor in any case, and when it comes to the priorities, I would say, first priority CAPEX, second priority M&A, and shared repurchases, we don't have it up for consideration, for sure not at this time. When it comes to M&A, CAPEX was already discussed, so that we are careful about timing. We are not foreseeing that we will become a significantly lower capex company, but it's more about the timing on an average, let's say, short-term basis. But then on M&A, the priority currently, I would say, is, due to these market uncertainties, to look, in that case, for companies in places which have stability.

And also for the right valuation. So it's not like because we don't announce anything, we are inactive, but we're looking for the right valuations. And there isn't always coherence between the buyer and the seller in terms of valuation. But we're not inactive. Thank you.

The next question comes from Kaio Loikanen from Danske Bank. Please go ahead.

Good morning, gentlemen, and thank you for taking my questions. A couple of questions regarding the margin. If we look at the adjusted EBIT margin, it has improved year over year for the past four quarters, one to two percentage points, so quite sizable improvements. Now looking at H2, Do you think you can continue to improve the margins at that kind of rate, or will the change in margin be smaller or even flat in H2?

I think, so again, you know, Thomas, you may compliment after, but good morning, Kelly, sorry. In H2, absolutely, our aim is to maintain our 10% EBIT margin. I think we have, and particularly Thomas in his previous comments mentioned that if we are relatively optimistic about the volume development, during H2 and going forward, that will support a further improvement of the profitability. Plus, we foresee a continued delivery of our savings program, which is front-loaded, as we see. We have good savings in 2024, and those savings are structural, so they are not temporary, and therefore we are relatively confident to continue in that trajectory.

Yeah, I will compliment on that one. First of all, I would say the first question should be, will we continue to deliver profitable growth? And with profitable growth, I would always refer to growing in absolute terms to profit. The indications we had here earlier was that we believe the on-the-shelf is the one which has more traction. Obviously one element which will slightly have an impact then on margins is although we believe also flexibles to improve but you will have the mixed picture of of one segment with a lower margin profile, hopefully growing quicker than some of the other segments. So that element, I would say the mixed element as such might have an impact on the relative margin, but still we are more than happy to see a contribution to the absolute margin.

Yeah, thank you. Thank you. That's very helpful and a good point with the sales mix as well. And then perhaps secondly, on North America margins, the margin target you have for this segment is 11% to 12%, but North America has been going kind of further and further above that range. So... What should we expect from the margins in North America going forward? Should the margins be coming down or would you need to hike the target for this segment?

This question is coming back consistently. We don't mind further improving beyond our target. It's always better to under-promise and over-deliver. We're not planning to change our target short-term for the long-term, but obviously now that we have reached the EBIT margin of 14%, then we want to stay in that area with some fluctuation depending on the cost environment also, of course. But I would like to go back to what Thomas was saying. We are not managing the company just for the margin. Now, number one priority is profitable growth. So, if we can accelerate the growth with a category that would be only 11%, and therefore, as a mixed impact, it's negative on the profitability, then we would do it, because that's good for the value to shareholders. But, of course, the more we will scale, for instance, North America, the better it will be to maintain 14 or 13 to 15%, let's say. That would be on the long run what I would say. That's why we want to scale that segment.

All right. Thank you. That's helpful. And that's all for me. Thank you.

The next question comes from Maria Wickstrom from SEB. Please go ahead.

Yes, thank you. This is Maria Victor from SCB. I still have a few questions. Firstly, I would like to touch about the Indian market, which represents quite a large share of your sales. So if you could describe currently what is happening in the consumer demand in India, please.

Good morning, Maria. Yeah, India, so we are seeing a relatively positive development of the market, at least favorable to us. We have a good growth. Our net sales are growing 3%, but with some pricing pressure, meaning that we have a higher single-digit growth in terms of volume. The domestic market is improving. You may remember that in India, basically half of our sales is domestic sales. Half of our sales is exports to other markets, Middle East and Africa, particularly U.S. also. And this is on the export business that we are suffering more because of the Red Sea crisis, because of the overall... inflationary environment which has driven the exports to be lower and the export business is structurally of a slightly higher margin. So from a mixed point of view that's not favorable. But it's again, it's not something that is structurally a problem. We are happy Actually, what would be more structural problem is if we would not grow in the market and we grow in the domestic market. So the exports will come back and that will be really positive for India.

Thank you. And then I'd like to hear your comments about the current price pressure from lower raw materials. So if you would describe how do you expect the pricing pressure in the second half of the year compared to the first half of the year?

So the price pressure has been high in H1. You can read through our profitability that we've been actually, when you compare to overall the market, we've been resilient in our pricing strategy. What do we expect for the coming month? First of all, The raw materials are not decreasing. The prices of raw materials are not decreasing anymore. They are stabilizing and in some categories they have started to increase. So it's almost impossible to give a one-size-fits-all answer to this question because... If I take recycled fiber, for instance, the prices have increased, not dramatically, but very substantially in Q2. We have immediately, of course, activated with the agility that we have gained over the last years. We have activated price increases. The feedstock is overall lower this year. But we see now resins and polymers increasing again, not increasing to the level where they were in 2022, but increasing. Therefore, the cost environment is not going to... further, how should I say, sustain a pricing pressure, but the price, let's put it like this, the pricing impact that we've seen in H1 will be there in our P&L in H2, okay, as a relative comparison. But the pressure from the market, is not going to increase further because labor inflation is further increasing. So that's also something that comes into the picture. And then the last point. extremely important, is why is there pricing pressure? Because there is no demand, and therefore there is basically overcapacity across the categories and geographies. Once the demand restarts, then the pricing pressure will ease. So this is not a simple equation, but it's the trends that we will see going forward.

adjustments done so far were very natural in the sense also that we adjusted for the annual contracts in a way so those changes were done and we don't expect that to happen again this year when you start again negotiations for next year that's a different story but the other element I would say that as a counter argument we are for sure not out of the woods when it comes to our second biggest cost item which is personal cost So from that perspective, one has to look at the overall cost environment when pricing is being done.

Thank you. And then I had one more, which is a very detailed question, but just curiosity. You write in the report that you see plastic raw materials still, I guess, up in North America versus you see them down in the flexible segment. So why do geographical trends in plastic raw materials are so different in the U.S. compared to the rest of the world?

So, first of all, when you look at that one, we have different type of plastics that you need to remember in various places. In flexibles, a lot of the things we are buying is also films, which is in a way not a pure commodity as such. So, I would say that's the core explanation for the deviation. And then, as we have so many times earlier said also, there is a geographic difference when it comes to the pricing of even polymers despite them being perceived as a global trade.

Thank you for attending the talk. Thank you for attending the call. This is all the time we have for today, but if you have any other questions, please feel free to reach out to us. With that, we'd like to thank you for participating. Thank you.