Elopak ASA (9J7.F) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Second Quarter 2025 Results Presentation for Elopak. My name is Erica Honningsvåg, and I am the Investor Relations and Treasury Officer. Today's presentation will be held by our CEO, Thomas Kormendi; and our CFO, Bent Axelsen, and will last for about 30 minutes, followed by a Q&A session where the people here in the audience and the people watching online will be able to ask questions. So with that introduction, I will hand it over to you, Thomas.

Good morning. Thank you, Erica. Good morning to everyone here in Oslo and everywhere else you may be watching this webcast. We are presenting Q2, and we are happy actually to present yet another strong result for Elopak, both in terms of our development, strategic development, but also in terms of our profitability. So let's go through it. And just to set the scene, for those of you who are not so familiar with us, we are in the world of sustainable packaging. What we do is we produce packaging to protect essential commodities such as but not only milk. And with that, we also see it as our role to enable world nutrition while always on the road to reduce plastics. This is what we do and this is what we have been doing for many, many, many years, and this is the performance we are having for this quarter. So we are presenting a quarter with good growth and a very solid EBITDA result of 15.8%. The growth is around 2.4%, which is very much impacted by continued solid development in Americas, which is now also impacted by the opening of our brand-new plant in Little Rock, which we opened in April, so during the quarter and which is now ramping up and starting to produce in bigger numbers. During the quarter, we also announced that we changed the dividend policy to pay out twice a year. So we did the first installment already back in May. And we are now -- of EUR 21 million, we are now doing the second installment of the '24 dividend in October, together with the first half of 2025, which will also be in October and which the Board has decided, declared a dividend of EUR 0.03 to be paid then. All in all, of course, we are then paying all of '24 plus first half of '25 in October, and we will then continue in line with our policy to do semi-annuals also next year. So let's have a little -- let's have a look at the performance. And as you can see here, in revenue terms, when we correct for the impact of the dollar effect, we have 2.4% in revenue growth and that's why you have the 0.4% here. This revenue is mainly driven by the continued development we have on Pure-Pak. We see that in U.S., of course, where we are currently selling various sizes and formats in Pure-Pak. And we also see a revenue growth in India, but in that case, more so in the Roll Fed side. It's also clear for those of you who've been following us in Q1 that on a quarter-on-quarter basis, we have a deviation versus Q1. And that is really driven by a couple of factors. One is production of finished goods. From an accounting point of view, we -- that has an impact in the figures now. We have customers who were building stock back in Q1 because of the tariff risk, we can call it like that, at least uncertainty. And also, we have an impact in these figures of the weakening of the U.S. dollar. So overall, if you compare it from a business point of view, we are continuing the progress in business terms and are delivering pretty much in line with what we had hoped and planned. The margin level on for the group is, as you can see here, 15.4% without the correction of the U.S. plant cost. But 15.8% is the actual EBITDA level and that corresponds to around 15.4% if you correct it on a year-to-date basis as well. Overall, a good level and also a level that is in line with our midterm targets as we have declared them. Now just a little recap on the priorities we've set in the group and how we're delivering on our strategic goals. So back at the Capital Markets Day, we announced our Repackaging tomorrow strategy, which essentially consists of 3 areas. One is realizing global growth. Clearly, the Americas movement, the opening of the new factory, the development we see in Americas is a very, very significant part of that. The other one we had was strengthening the core, which relates to our core business in Europe. It relates to the sustainability drive we have around this core business. And the third one was replacing plastics, the ongoing shift. And during these presentations, we tend to show different examples of where we -- how we are doing in the various parts of the strategy. Today, I'd like to focus on the second box, namely strengthening the core. And -- during the quarter, we have a couple of new innovations that we've announced and that is part of building our position as a sustainability frontrunner. The first one is on the left of the screen, and you will see we call it Natural White Board. And we have been talking for a while about the Natural Brown Board. This is the Natural White Board. And the main purpose of doing this is actually to help our customers to reduce their CO2 footprint. By introducing a board type, which has been developed together with our suppliers, we have the opportunity to reduce the CO2 footprint by around 14% which is, of course, very significant and is continuing to strengthen the position of carton versus plastics, which in itself already now would be around 70 -- 60% to 70% lower CO2 versus a plastic bottle. So adding another 14% by engineering the board and having a more sustainable board, of course, is a big, big, big advantage for our customers and also a part for us in reducing our CO2 footprint in line with our science-based target. The other one is also a development that we have targeted now what we call the non-food business. And non-food is the area we have with the D-PAK cartons targeting the household chemical areas, detergents, soaps, softeners, where we have now introduced a polymer, a recycled polymer in that kind of category. That means together with the board, the recycled polymer and the polymers made out of renewables, we have the opportunity of another 20% reduction in CO2. Again, comparing that to the classical plastic packaging used in that industry and it delivers yet a significant difference for our customers who want to reduce their CO2 footprint. This is now available. It's being used by Orkla here in Norway and in Scandinavia and we are rolling that out to more customers in the coming period. It's a system that is developed in close cooperation with our suppliers and it is also a system that is significant -- that is important because it's part of our commitment to deliver on the regulations that are coming, the PPWR, the Packaging and Packaging Waste Regulation, which requires that plastics being used have a higher level of recycled material. The next example I'm just going to highlight is our innovation around the machinery. So all -- as you know, what we do, we supply filling machines. We supply the technical services, the innovation around that. And of course, with that, the consumables, the packaging material. In our aseptic technology center in Mönchengladbach, we have developed the Pure-Fill filling machine, which is a modular filling machine. We have announced it a couple of years ago. But what we now see is that it's entering the market successfully. We are seeing that this filling machine is unique in the way it operates. It allows for high level of modularity at production, allowing it for different for extending into different capacities, different formats at a lower cost and at a higher speed versus a traditional way of building filling machines. And I'd just like to read the quote from one of our customers. This is the customer Pfanner. Pfanner is Europe's biggest ice tea manufacturer and a very significant big juice manufacturer. And I'm just quoting him, "Elopak's Pure-Fill has exceeded our expectations flexible, efficient, and built for the future. A game-changer for our production line". Thank you. But the very positive news we have is, of course, that the customers who have ordered and have installed the first lines are now several of them also ordering or installing more lines. So that is the best testament to success in our industry when you start with one and you move on to next ones. It is a system that is unique and we are actually very, very happy that it is the world's best-performing large-sized 2-liter carton filling machine. I think with this, I will hand over to Bent.

Thank you, Thomas. So the financials for second quarter, I think we can say it's categorized by a stable development in the EMEA segment and continued growth in America. Let's then start with EMEA. Here, we see a stable revenue development both for the quarter and for the first half year. And it is characterized by steady performance despite continued observed consumption decline, both for dairy and juice and also an intense competition in Roll Fed. So Pure-Pak is only impacted by the consumption because we are strengthening our relative positions. We are increasing our market share by winning new customers and increasing share of wallet among existing one. On Roll Fed, we are losing volumes because of the intense competition in Europe. In India, we are continuing to grow, albeit at a lower pace compared to first quarter, 9%, and this is linked to a softer juice season in the market. The equipment sales is up around EUR 9 million and we are continuing to commissioning the same amount of machines as last year, but more of these projects are sold instead of rented out and that is inflating our revenues. If we move to the EBITDA, we are delivering EUR 34 million for the quarter and EUR 71 million year-to-date. Building on what I started on is that the equipment sales, which is EUR 9 million growth in revenues, they have limited margins. The Roll Fed growth in India has traditionally lower margins than Pure-Pak. So the impact of equipment in India is diluting the EBITDA measured in percentage. The R&D activity is increasing in line with the strategy. On a good note, the Pure-Pak margins in Europe are strengthening and that is mainly a result of our price increases and also attractive product mix. If we move to Americas, we see a growth supported by closures, carton pricing and also the beginning of the ramp-up of our U.S. plant. The growth is 7.4% as reported. But if we adjust for the euro-dollar, the organic growth is 14%. If we move to the EBITDA, we are reporting EUR 17 million. That is up 6% compared to same quarter last year. And Thomas pointed out the impact of the ramp-up. And if you look at the America figures, 22% becomes 23.6% if we adjust for that ramp-up effect. And as Thomas mentioned, the plant was close to breakeven in the quarter. If we look at the year-to-date figures, the EBITDA margin is 21%. So if you adjust for the ramp-up for the first half year, then the EBITDA margin is 23.2%. What we also report is a lower net income from our joint ventures. So that is driven by 2 effects. One thing is the softening of local currencies for the sales in the local markets. And we also have some softer volumes in Mexico because of increased competition. And the way we report joint ventures in our EBITDA is the share of net income. So when you get the result -- when we get a profitability loss of the joint ventures, you don't have any revenue loss. So percentage-wise, it also has a great impact on the EBITDA margin. So that is just one thing to note, which is more technical. Let's take the group perspective, where we go from 44% to 45% -- 44.7% and then 45.1%. I think if you start with the big pictures, this is a story of the improved quality of earnings that more than compensates for increased costs. Net revenue mix is 44.4% combined with positive raw materials impact. So what is happening? We have our price increases in Europe. We do have some price increases in America. We are growing with high margins in America, as you know, and that contributes to the positive mix. We are -- as we report, we are reducing some in Roll Fed and Roll Fed has a lower margin than Pure-Pak. So the average margin for our carton and closure is then also increasing because of that impact. The operating costs are up EUR 1.7 million and we already mentioned the wanted R&D increase and then we have other cost increases driven by FTE increases and inflation. I think interesting to note that the inflation of the cost base is around EUR 2 million in this quarter, which means that we are beating the inflation. When it comes to joint venture and FX, we already mentioned the joint ventures, which are down EUR 1.6 million, but we also have the translation effects between -- mainly between U.S. and dollar, which is EUR 1 million. Then we have taken one more bridge element, and that is just to illustrate the impact of the ramp-up of U.S. plant. So without that, the margin is then 15.8%. So a solid result in the second quarter. Let's move to the cash flow. So we are generating cash flow from operations that enables us to reinvest in both our new plant and to pay the dividends in the quarter. So if we start with the left-hand side with an EBITDA of EUR 45 million, we have a slight improvement on working capital that is mainly improvement of inventory and account receivables. We have some reduction in AP, but that is a quite volatile number in our balance sheet and that will go up and down according to the payment schedule of the raw materials. We pay our taxes. And if we move to cash flow from investments, we have a CapEx of EUR 21 million. That is mainly driven by the investment in the second -- sorry, the investment in the second plant and it's also the investment program to replace converters in Europe. Maintenance is at normal level. Filling machine investments are slightly lower because we are selling more machines than renting out machines and that has a positive impact on the CapEx. We have other of EUR 1 million and that is because we have received EUR 1.2 million for the sales of Russia in this quarter. So that was the sales that we did back in 2022. And so EUR 1 million in the quarter. We're very pleased to get that. If we look at the cash flow from financing activities, that is minus EUR 34 million. That consists of normal lease payments, interest, but also the first installment of the dividends. Let's move to our balance sheet and ROCE. So what we can say is that our leverage ratio remains stable. So there's no change of the leverage ratio between first and the second quarter. The net interest-bearing debt is only up EUR 4 million despite the heavy investment program and the dividends paid. And combined with a stable last 12 months on EBITDA, that gives us the steady leverage ratio development. On the Return On Capital Employed side, we are obviously getting ready for the ramp-up and look forward to a more ROCE by the end of the year. And we look forward to see an upward trend in the years to come. Maybe it's good to add a little few words on the U.S. plant. We -- for the whole project, we have invested $80 million and we have around $18 million left for the second line. The amount is slightly higher because we expect the tariffs to give us an additional $2 million to $3 million in CapEx because we are using equipment from the EU. That concludes the financial section. So I will bring it back to you, Thomas.

Thank you, Bent. And in terms of summary, see this beautiful picture here, highlighting where we are going. We Look at a quarter of 15.8%, strong EBITDA quarter. We look at it as a continued development of the strategic focus we've had on Americas for years with the 14% growth. We are looking at a plant now that is in operation that is very close to breakeven and where we are now saying we are going to ramp up and we are looking at a year-end with a fully ramp-up plant in Little Rock. Secondly, we also -- the Board declared a dividend payout for the first half of EUR 0.03 to be paid out together with the remainder of the dividends from '24 here in coming October. All of that in line with the dividend policy that we announced during Q1. And moreover, we expect that the strong performance we've had during first half will continue during second half of the year. And hence, we expect to deliver in line with our midterm targets, which you recall is on a revenue level, 4% to 6% and EBITDA 15% to 17%, in line with what we announced in -- during the Capital Markets Day. So this concludes this quarter. Thank you very much for your attention, and I'm going to hand over again to Erica.

Thank you, Thomas. Thank you, Bent, for your presentation. And we will now move on with the Q&A session, starting with the audience here first. So please raise your hand, and I will bring you the microphone. And please state your name and the company that you represent. Okay. No questions from the audience? Okay. Then I think we'll move on with the questions that we have received online. This first one about the Pure-Fill machine. Can you please elaborate more on the features and improvements, speed increase and cost decrease?

The improvements in the machine and the cost increase -- cost decrease, I assume on the machine.

Yes.

I can do it in a little bit more general term. I cannot give you exactly what is going to happen. But the Pure-Fill machine is built on a set of modules. We started out doing this with 2 targets and 2 specific changes in how you build filling machines. From a target point of view, it was about reducing cost for a new filling machine per individual machine, but also cost reduction in how you bring a new format to the market, so the development cost of machines. That was number one. The second target related to time-to-market. The existing or then existing way of producing filling machines resulted in a rather slow time-to-market. And by introducing this new technology, we could reduce that to a significant faster one. So the technologies that allow this is, on one hand, modularity. So you construct the machine in such a way that you can change modules and do -- reuse the same modules depending on both capacity and size. And that -- to do that, it's the structure of the machine, the heart of the machine has to be a transport system that is not based on the traditional chain-based system, but is based on a different magnetic system that allows for much, much more flexibility. That's the structure and that's the beginning of the machine. We have then, when we started developing this back in '19, actually experienced issues, not the least related to COVID, which did actually delay our development and our way of testing it and suppliers and all the rest that we all know of and think of, thankfully, is now years ago, but we, I think, recall it as well. That did have a delay. And for that reason, all of the value engineering activities that are needed to drive down the cost of this and ensure that we can build on the key drivers, i.e., the modularity, the -- using the modules produced in different places, that is something that we are embarking on now. It's a long answer, but I think it's more or less accurate.

Thank you. And we have received a couple of questions from Charlie in BNP Paribas. I will take them one by one. Can you elaborate on the delays to ramping up new customers in the U.S. mentioned in the report?

Yes. So this -- to give you a little background on how this works. When you have new customers, they typically will have or actually almost always will have, particularly when they're very big customers, a number of manufacturing plants. These manufacturing plants will have different equipment types, some of them older, some of them newer. And for that reason, you need to qualify the plants to ensure that the material will work on that specific plant, not only on something else. That takes a little while. Together with the planning and production of designs needed for the various SKUs that the customer would have. And in some cases, the transition in actually ensuring that you move in our case from another supplier into Elopak and secures that it works on the various plants takes longer than, in this case, some of our customers anticipated themselves. So that is the background. In fact, from an operational manufacturing point of view, our performance in Little Rock is good. We do not see today that there are significant delays in how we are performing the factory, but we -- there is this time issue of getting things ready in time.