Elopak ASA (ELO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the third Quarter 2025 Results Presentation for Elopak. My name is Erica Honningsvag, and I'm 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 our CEO, Thomas Kormendi.

Thank you, Erica, and good morning to all of you here in Oslo. It's actually lovely to see such a filled room here today. And also, of course, a very warm welcome to everyone joining us on the webcast. Today, we are particularly happy actually to present the best ever financial result for the group to date. So it's a presentation with quite a few milestones, and we are very, very excited to present. Before we start on the quarter, of course, just for those of you who are not so familiar with Elopak, what we do is, we are in sustainable packaging. What we do is, we protect commodities, we enable nutrition around the world, and we do all of that with a mission of actually reducing the overall plastics consumption. So replacing more and more plastics with more and more carton packaging. But let's then look at the quarter, and it's been quite a unique quarter, as I said. First of all, we have seen a plus EUR 49 million EBITDA result with more than -- with 17% margin level. It's a very strong result in absolute terms, and it's also within organic revenue growth of 1.2%. Most of the revenue -- most of the result is driven by an incredible strong performance. Again, I have to say, in Americas with 18% growth, and also in a period where our plant in Little Rock, actually for the first quarter, started turning a profit, as we said that it would actually do after Q2 as well. It's also a quarter where we -- and I will address that more later in the presentation, have decided to increase the capacity ahead of time in U.S. with yet another line. So the third line to be installed and also now a quarter where we say that even though the EMEA business is meeting some consumption headwind generally, we are seeing that the business is resilient and doing well -- in spite of all of this. And finally and very importantly, I'm sure for many in this room here as well, this is a quarter where we have a solid cash generation. We've been able to pay back our net debt and are now facing a 2.1x leverage ratio, again, in line with -- almost in line with the midterm target. So overall, strong financial performance in the quarter and some very important milestones for the future growth of Elopak. Let's just think 2 minutes on the strategy that we presented back at the Capital Markets Day, and that we've been following up since and where you see that the quarterly result we have now is a direct result of the activities we have initiated throughout this period and on the back of the strategy. Our strategy consists of 3 elements: number 1 relates to the geographical, what we call global growth. For us, global growth for a very, very, very big part relates to America and the continued development in America. Needless to say, performance in America and what I've just shown is a testament that, that is actually paying off. The second one relates to the development around making our core stronger. And our core in Europe, where we have a significant part of our business, also relates to development, innovation around new materials in line with and meeting the regulations upcoming in EU such as the packaging and packaging waste regulation. A lot of the work in that field is directly transferable into the overall ambition we have in replacing plastics, what we call plastics to carton. This is a massive area way outside our current business but in adjacent areas, but also in the actual substrate shifts happening in our business, i.e., if you think of it, the milk currently packed in plastics moving into cartons, et cetera. But the potential, of course, is way, way, way beyond that. Now starting with number 1 and the geographical expansion, let's just turn and think about Americas, again, because it has been quite a journey for us. We -- as some of you remember and seen is, we decided back in '23 to establish a new plant in U.S. And that is on the back of a position we've had in U.S. for -- actually for 20 years. We came to North America in 2000, yes, and supplied North America with plants in Canada, our big Montreal plant and also the plants in Mexico and the Caribbean. In '23, we decided we need plant inside U.S. and then we established the plant -- decided to establish a plant in Arkansas, Little Rock. In September of the same year, we announced that we are going to put in another line in that plant because we saw increasing demand around our supply, our services, our packaging offerings and generally an opportunity in the market. In April of this year, we had the inauguration of the plant. The plant, I can happily say was built, constructed and made in time and on budget and has been up and running ever since and we are ramping up. And as you have heard earlier, we are now seeing the fruits with the plant turning a profitable business already here in Q3. So the demand actually in America is very clear. And if you think of it, we have been growing since 2020 on an average 15% a year. That's a 76% actually the growth in the Americas business in a market, in a stable, mature category such as milk and juice. So we have seen that there is a demand for what our services and for that reason, we have also taken the step now to announce the decision that we are going to build, extend our capacity with the third line in Little Rock, allowing us to drive our market share, continue to -- on the growth pattern we've been on, allowing us to establish a much broader portfolio than we had before, simply given that as equipment gets to the manufacturing plant, gets more and more full with existing orders, we need to have a broader setup to be able to offer a broader portfolio. And that is what we're going to do with the third line. So what is very fundamental is that with this third line that we're actually putting in place somewhere a year ahead of what we had originally thought. But with this, we confirm again that we will reach our targets as presented on the CMD back in '24, the midterm target as well as the long-term target. This will enable us to drive as I said, increase our value share -- our share of wallet with a number of our customers as well as increasing our market share in general in America. Because of the product mix, though, in America, which is in the third line, will be primarily focusing on smaller size packs, including anywhere from school milk size and upwards. For our large customers in the U.S., they always have a mixed portfolio in their sales, i.e., from very small ones to the larger half gallon sizes. For us, establishing a third line, enables us to get a higher share of wallet with them, supplying them the full portfolio and hence become a better and more valuable supplier to the industry and to our customers in general. So although we have a run rate because of the product mix on the third line, which is different than what we have announced on the first line. We're also going to see that with this, it's accretive to the group, and it's certainly very, very strongly supporting the group's industrial presence in America. It would also mean that we will have a higher level of flexibility in how we run operations in America. We will have a higher level of operations with line 2 and 3, which will allow us to ramp up line 2 at a faster pace because of line 3 than without line 3. And that has to do with product mix and how you move products and sizes, et cetera. Very important is, we are building line 3 because we have the commitment, full commitment on that line from customers in U.S. So the line 3 acts both as an industrial strategic investment, it has the full backing of customers, and it is definitely accretive to the group, and will strengthen our overall position in U.S. Now back to our results. And as you will see, we have a revenue that is down, but on -- due to the currency effect in U.S., on an organic level, we are up by 1.2% and up by around 2% for the full year. EBITDA wise, we have a strong performance, which is both in the quarter and of course, in the year, but in the quarter very strongly driven by the development in U.S. And remember, we have a negative currency effect that we'll address later in this period. All in all, we are heading now at 17%. And for those of you who recall our Capital Markets Day targets, we did say 15% to 17% midterm target. So it's -- it's a very healthy level for us to be at in this period here. There is a one-off though, which has to be set in EMEA of around EUR 1.5 million, which is also part of why we get a positive one-off -- of EUR 1.5 million. With this, as I said, this is actually the highest EBITDA we've had to date, and we are very excited with what that brings to the future. So with this, I think I'm going to hand over to you, Bent, on the financials.

Thank you, Thomas, from financials to more financials, which is fun today. Let's jump straight to it with EMEA. What we can see here is that we are delivering a revenue of EUR 206 million, which is 5% down compared to last year. But if we analyze the performance, the underlying performance, we can say that we do have a resilient performance despite continued soft consumption. Now why is that? If we look at our Pure-Pak revenues, they are stable year-over-year. So what we are seeing despite the soft consumption, we are continuing to increase market share. Specifically for this quarter, we are regaining our business in MENA as fresh dairy is strengthening in that region. And in the -- for the aseptic business, we are growing by taking market share and basically growing with our customers. If you look at the key contributor to the revenue decline, it's actually related to filling machines. We are commissioning around the same number of machines this quarter compared to last year, but the machines are smaller. So we have a negative mix effect. That actually explains around 60% of the revenue decline. So if you move on, we -- as we have reported before, we still observe a competition in the Roll Fed segment, and that is happening both in Europe and in India. In Europe, it plays out through lower volumes, albeit at -- the pace has slowed down. So we see a positive development in the Roll Fed area because we see that the trend is slowing down. In India, it plays out with a margin squeeze because it's a crowded place. We are growing organically 19% in India with our Roll Fed business. When it comes to profitability, we are reporting 36.7%, that is up 2% compared to last year. That comes from improved pricing and improved mix in Pure-Pak. And we also have this switch from Pure-Pak to Roll Fed, which is also contributing to the positive mix. And Thomas already mentioned the one-off, which is in Europe, which has also impacted these results by -- positively by EUR 1.5 million. So in conclusion for EMEA, resilient performance despite continued soft consumption. Over to America, the growth journey continues with a revenue growth of 11% or 18% on a fixed currency basis. So we are still seeing the interest and the demand in our products. So the growth is in revenue, is volume, carton and closures, and it's enabled by two things. Obviously, we have the ramp-up in the U.S., but we're also seeing improved productivity in the assets in Canada and in combination that is then enabling this growth. Also in America, we have a negative revenue impact in regards to filling machine. So it's the same explanation here. We have a mix effect. In this quarter, we have commissioned school milk machines, and they are smaller in size and also then smaller in revenues. If we move to the EBITDA, we see a very strong growth of the EBITDA, 21% growth of the EBITDA up to EUR 21 million with a margin of 24%. In addition to the top line growth itself, we have positive mix effects but we also do see the benefit of improved asset utilization, and we are leveraging our fixed cost base. It's also -- of course, as Thomas mentioned, very proud that this is the first quarter with positive EBITDA in Little Rock, a milestone for us. We are very, very pleased with that. The ramp-up continues, and it's obviously better than last quarter. But we obviously would have liked to see even faster ramp-up than what we have seen. When it comes to the joint ventures, we have an EBITDA or a share of net income of EUR 1.4 million. That is actually a decline from EUR 2.1 million and the explanation for that is a softer demand and a change in consumption habits. But overall, the key message is that we do have improved that utilization that enables growth in America. Let's take the group perspective and start with the net revenue mix. So this is EUR 7.4 million, and that is mainly driven by: one, the growth in America and the positive mix and pricing effects in EMEA. When it comes to raw material, this is again where we have the one-off, which is positive. And then we have a negative effect of EUR 0.6 million for the underlying raw materials. That comes from board price increases, [ all the ] price increases, even though the PE has softened year-over-year. Our operating costs are mainly explained by salary inflation of 3%. And also the ramp-up in Little Rock, which also is affecting the operating cost level somewhat naturally. The rest of the fixed cost base in the company remains rather stable. The last bridge element, we have already mentioned joint ventures and the FX, which also Thomas talked about, that is the result of the 6% weakening of the dollar versus the euro on an average year-over-year basis, leading to the 70%, which is on par with the best we have done. Let's move to the cash flow. It's probably the most exciting part of the financial this time because we also are not only reporting record profitability, but we are also reporting record cash flow generations -- sorry, cash flow generation from operations. The cash flow from operation is EUR 55 million. It's not only driven by the profitability but also driven by the improvement in working capital. This element is, to a large extent, driven by timing of accounts payables, that can go up and down between quarters. It was quite low last quarter, and then it's higher. So this could vary a little bit up and down, important to notice, but we also have an underlying improvement of our inventory in Europe from our working capital project. Also here, we are seeing the ramp-up effect of Little Rock. We are also building working capital, obviously, as a part of growing the top line in the U.S. Our cash flow from invested -- investing activities is EUR 11.5 million. We are still having EUR 2.4 million in investment in Little Rock in this quarter. The rest is our replacement program in Europe. While filling machine investments are lower than last year because most of the projects are sales rather than lease and then it doesn't impact the investment line. Cash flow from financing activities is also EUR 11.5 million, nothing special there, which brings us to a net debt of EUR 272 million, so which means that the cash bank debt has reduced EUR 31 million quarter-over-quarter, which we regard as a rather solid. With this cash flow generation, we are deleveraging the company. As Thomas said, we are bringing the leverage ratio very close to our midterm target of 2x. This comes from not only the payment of the debt, but we also have improved the LTM EBITDA by EUR 3 million. And the good thing with that, it enables future investment in our strategic initiatives and it allows us to continue to pay healthy dividends. And if you check your bank accounts, yesterday, you received dividends in total, EUR 21.5 million. This comes from the second installment of 2024 and also from the first half result of 2025 as we are in this transition year from annual dividend payments to semi -- to 2 payments per year. If you look at the right-hand side, it's a little bit difficult to see, but the curve is going upwards on ROCE. So we finally are seeing improvement of our return on capital employed, as we have talked about in earlier quarters. And that is coming from the fact that we are finally making profit from our Little Rock investments with the capital that we already have installed there. We have so far invested $86 million in Little Rock. We have $42 million to go, and we expect that around $6 million of those will come this year in Q4. So in summary, the financial position is really strong. And we are continuing to leverage the company despite the investment program. So this concludes the financial section, which was actually quite great to present.

Thank you, Bent. Good, you liked it. So finally, as you can sense, we are really happy to report you the highest -- and I would change that into the best financials yet for the company. It's EBITDA, as you saw, but it's also the cash generation that we have succeeded within the period. And it's also a period where we are reaffirming our strategy. We are confirming the strategy we are now putting in and deciding on the third line, really it's putting a strong footprint in the U.S. and in the Americas in general, North Americas. We are also seeing EMEA despite these headwinds that we have talked about that we're actually seeing very solid developments in big parts of EMEA, not the least in South, not the least in MENA that gives us the confidence that we're also here on the right track, and we'll continue to develop the business in line with the plans we've outlined in the Capital Markets Day. So all in all, what we are now saying is we expect to deliver within our mid-term targets as you know, which is 4% to 6% organic growth and 15% to 17% on the margin side for the year. And with this, I think we're going to hand over to questions.

Thank you, Thomas. Thank you, Bent, for the presentation. So we will now open up the floor for questions, starting with the audience here first. [Operator Instructions]

Marcus Gavelli, Pareto. So you have previously said that line 2 will be fully ramped up in H1, '26. At the presentation today, you said that line 3 will coincide with line 2. Could you try to provide some color on what you really meant by that because I assume that line 2 is still on track, and line 3 will come a bit later.

I just want to clarify that we will open line 2 in H1, '26, not ramp up.

Yes, we would ramp -- what we said then was we are going to ramp up during '26, right? It's not that in -- that we are fully done. As we have said, we're going to install line 2 and start ramping up during next year. Thank you. So why are we saying that the two actually help each other? Well, it is like this, right? If you look at the industry and the -- I don't think in a way, the dairy industry is way different than many other industries, our big customers have a variety of sizes, formats, and evidently, we look at their supply -- suppliers, one of which is us to say, can you supply us with a broad set of formats in order for us to essentially become -- in order just to close a partnership with you. And the close partnership in our industry is really, really important because you know we have very long tenures generally in the industry. The closer we work with someone, the better we can develop it and the longer performance we can actually secure for our customers. So with this move, we ensure that we can use our line 2. On some formats, that would not have been possible had we not had line 3 to complement that. And from a customer point of view, they would then have said, it's difficult for us to move volume into you unless you can also do some other formats. That is the simple -- so it's a little bit opaque when I put it like this, but it is actually what it is.

That's perfect. And then also with what you said in MENA with the volume growth commencing again, could you again try to provide some color on -- is that more of a one-off? Are you seeing some sea change over there? And then also how you think about, I guess, growth into Europe with price increases and so on.

I think sea change is probably overdoing it. But I'm very optimistic around MENA, honestly. And it is what it is. It's a sensitive economy, right? So consumption is impacted by ups and downs, clearly, but the underlying business for us is the strategic direction we have is add more value to our customers in MENA by adding ESL, longer shelf lives, which drives down their cost, improves the performance of the products in shelf, have a better product with a better looking product on shelf, et cetera. And that is actually why we are seeing that we can gain business and are gaining business. Now the business we are gaining is not necessarily the business you see right now in this quarter because, as I say, there are ups and downs. But why I'm saying I'm positive is because underlyingly, we are moving in the right direction. And then what we have seen in previous quarters, a little bit how Ramadan falls and inventory builds up, et cetera. So in a way, I wouldn't put too much focus just on a quarter when it comes to MENA, much more is the underlying business moving in the right direction, and it is.

And also technically speaking, I think the quarter last year was relatively soft. So part of that is also a rebound, but it's really, as I must say, we need to look into a longer perspective to really get insight from the development.

Okay. So then we will move forward with the questions that we have received online. Starting with a couple of ones from Jeppe, in Arctic. I will take them one by one. It's regarding the line 3. What are the expected revenue levels and EBITDA margin for the third line?

So what we are saying is run rate is going to be lower than when we talked about line 1. It's a different product mix than what we talked about 1, which was really a very, very -- I wouldn't say simple because that would offend the people of Little Rock, but a different mix than saying actually 1 product versus different products, smaller formats. So it's going to be lower. We're not complete -- we are not explicit about it because we are looking at the plant in combination of the 3 lines, right? It's not this line, that line, this line. The combination of the lines will generate the result. And in fact, what we're even doing more is we are more occupied with looking at the Americas result than single lines and single factories. And on the Americas result, we can just reaffirm we are going to deliver the midterm targets and the long-term targets. And then we will fix the mixing between the various production lines.

I think the key here is the midterm target. And I also want to note that typically, the way we follow up the American business is in dollars. We did convert that to a euro top-down target in the Capital Markets Day. And back then, the currency was 1.08. So obviously, things have happened to the currency as well. So that could also be good to remember when you are calculating.

Okay. When do you expect production to start? And what's the planned ramp-up of line 3?

We expect production of line 3 in '27, which means that with these lines, there's a certain lead time when you order them and then installing them, et cetera. And that's why we're doing it now to be able to actually produce in '27.

So does the addition of this line affect the ramp up of line 2?

It does affect the ramp-up because it gives us flexibility to move products around. To the point of saying with the line 3, we can get more customers in who have a mix of products, more customers in will allow us to move products between the lines in a faster pace. And hence, we think it's going to be very beneficial for Line 2 as well.

And last one from Jeppe. Will this dilutive school milk production form the joint venture?

That is not the intent, no.

Okay. A couple of questions from Lewis in BNP. Can you give some extra color on what the EUR 1.5 million one-off is related to?

I can do that. So basically, over the last couple of years, we paid too much in utility costs in one of our factories. And we got that money back. So we paid the amount. So it's nothing more dramatic than that. So it's basically a retroactive correction.

Is Roll Fed production integrated with Pure-Pak sleeve production or can otherwise repurpose activity?

Can you just take it again, please?

So is Roll Fed production integrated with Pure-Pak sleeve production or can otherwise repurpose activity?

I assume this refers to -- if you -- okay, let me put it like this. If you look at our plants now, it's integrated as much as in the same plant, we will do both. But it doesn't mean necessarily it's all the same machines, of course, because you have -- in Pure-Pak, you have sealing machines, you don't use for Roll Fed, and you typically have different converters as well where possible. We are doing Pure-Pak and Roll Fed in Åhus, we will be doing Pure-Pak and Roll Fed in India as well. So you will have mixed factories, and you will have factories that are not mixed.

Last one from Lewis, what is your competitive advantage in aseptic since you mentioned MENA customers are moving that way?

Right. So that -- I think that's a very interesting actually question and something I could probably give a longer answer to it, but I will make it reasonably short. I think from a -- if you are in the aseptic business, right, you are going to look for something that I mean, let's go one step back. In the aseptic business, clearly, you need performance, technical performance, you need the performance on the packaging systems, et cetera. So that is the fundament for anyone who goes into this business. In the case of Pure-Pak, we have a technology that allows us to keep a low waste with our filling machines. That is because it is blank-fed versus roll-fed, and that actually means that the amount of waste during the production is much, much, much lower in those systems. That's number one. That's a more technical operational issue. Our machines, our system is running at a high technical efficiency, which is important, of course. But the market point is -- it is a system that is unique. It is the iconic system for carton packaging, milk packaging and it is actually the consumer preferred system as well from a handling and consumer point of view. This is, I think, evidenced by the development we have, for instance, in South, where we're seeing solid growth in the UHT long-life milk areas and also in other markets where it is. It is a system with a solid technical performance and a very -- and a high consumer approval. In short, we can do it much, much longer, if you like. You want to buy a machine, let me know.

We can also lease it.

Then we have a question from Ole Petter in SpareBank 1. This quarter saw smaller machines both in EMEA and U.S., should we expect an increased share of smaller filling machines also for Q4 and into '26? Or was this a special for the third quarter?

I think this timing has proven to be very difficult to predict. So generally speaking, I would say that Q3 was usually -- was unusual from a size perspective. I think we haven't done an explicit forecast on that, but our hope is, of course, to get back to the big machines. So we can generate more blank sales and also improve our working capital position. But it will be -- this will be always going a little bit up and down between the quarters.

Then we have a question from [ Amir Jabbari ]. How does the cost pressure in raw materials impact your pricing directions in '26?

Right. So this is, of course, early days to be specific around pricing. But what we do see is that there are raw materials, including board, which will go up in the coming period. And for us, of course, it will mean that we will also increase our prices for '26. I cannot evidently explain the amount, but we will be increasing prices, yes.

Okay. We have a last one, but I think you covered it during the last question, was regarding board price changes for '26. All right. If there's no further questions from the audience here, I think we will round off today's Q&A session and also the results presentation.

Thank you very much. Thank you.