Huhtamäki Oyj (HUH1V) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Huhtamaki Quarter Three Results Presentation. My name is Ilja Orre. I'm the VP of Investor Relations. Today's presentation will be a management discussion followed by a Q&A session. With that, I will hand it over to our President and CEO, Ralf Wunderlich.

Thank you, Ilja. And look, great to have you on board with us. For those who don't know Ilja yet, Ilja is with Huhtamaki 5 years now, Ilja, started in strategy, then went to North America and worked in our business segment in North America, first also in strategy and then followed in a business role there. So again, great to have you. Welcome, Ilja. From a quarter 3 perspective, I'd like to report that we are very pleased with another quarter of comparable net sales growth at 4% in the quarter, and that's in a very soft demand environment. We also delivered a very strong EBIT with a 10.9% margin. That's supported by solid performance in Flexible Packaging and Fiber Packaging. Additionally, the quarter was impacted positively by EUR 23 million revenue recognition from a commercial contract, which was concluded in foodservice packaging in our smooth molded fiber operations. North America and Foodservice Packaging were negatively impacted by weak demand, operational challenges and inflation-driven cost increases. However, we have taken actions to address those issues to support our profitable growth agenda. Now how are we going to address those challenges? And as I said, specifically in North America and Foodservice. We'll do that with exactly the same playbook, which we introduced 1.5 years ago in flexible packaging. That playbook is focusing on 3 main areas: number one, commercial excellence; secondly, procurement and last but not least, cost-out initiatives. Primary objective is to secure our long-term 10% to 12% adjusted EBIT ambition. Let me give you some more details around those activities and actions. Let me start with commercial excellence first. First, it's important for us to fill our growth pipeline and to have the resources to support that growth pipeline delivery. And secondly, we're going to take even more pricing actions to preserve the leakage, which we are seeing from cost inflation, especially in freight and distribution. We have to make sure we pass those on. Secondly, procurement. We have had a year we have had significant direct and indirect input cost increases. Those are accelerating, and we need to push against those and mitigate those inflationary impacts. And those are stemming largely from the Middle East crisis, which we have seen since end of February this year. And then last but not least, cost out. All cost levers will need to be addressed. Potential restructurings and productivity need to occur. All those levers are important to us. Let me just give you a couple of examples of what we have done now already. We have suspended our production in smooth molded fiber in our Sacramento facility in the U.S. We're doing a lot of work, as you know, in our start-ups. And here, I'm really pleased to report that especially in Hammond, we are seeing great progress on that start-up at the end of the quarter already. So there's a lot going on. And hence, I'm very confident that we will execute these actions with the playbook, which we have introduced 1.5 years ago, and we continue to fine-tune. Let's move over to the business performance, first in the quarter. It is the second quarter in a row with comparable growth. In the quarter itself, we see 4% comparable growth. Year-to-date, we are seeing 2% comparable growth, especially pleasing to see that both our flexibles and our fiber businesses continue to show good volume growth. It's also a quarter where we see first time that currency FX has started to turn positive. However, year-to-date, you still see a 67% negative currency impact on the top line. Let's have a look at the P&L in a bit more detail. Strong EBIT margin, as I reported in on the first slide of 10.9% and EUR 110.5 million in absolute euro terms, respectively. EPS did grow 10% to EUR 0.68 per share. CapEx is in line with last year in the quarter. Our disciplined capital allocation continues. It's really important, and it's the sixth quarter in a row where we are showing and posting positive cash flow. Year-to-date, it's a similar picture. Strong margin over 10%, landing at 10.4%, EPS is up 3%. And on the free cash flow, as I said, we are having 6 quarters in a row positive. We are setting us up for a strong finish to the end of the year as well. Let me move to Foodservice Packaging. Demand is again very weak and it's below last year's level. That's not a great starting point. However, the business continues to take significant cost out so that the underlying are performing still at the around 8% margin. And that is, of course, taking out the revenue recognition from a commercial contract, which was concluded in the quarter. So I'm taking that out when I talk about the 8% for the year-to-date margin of the segment. Actions to support the commercial excellence, procurement and cost out, which I talked about before, are being implemented also in Foodservice. Track record shows that the segment is able to take cost out. Now we have to start being much more successful on the top line and find areas to grow and fill our pipeline in foodservice as well. Let me move over to North America. Clearly, the performance in the quarter is disappointing. We have had challenges. They are really focused on 2 areas. First one is a weak top line. Second one is that cost inflation, mainly in freight and distribution did hit us even more than we thought it would. Now on the top line side, we see particularly weak in foodservice and in the quarter itself in retail. Good progress though in Hammond, as I mentioned before, and I mentioned before that we suspended Sacramento. There are now also actions in place to attack the cost inflation, which I talked about in freight and distribution that we will make sure that we pass those on to our customers swiftly. Year-to-date, top line is also negative, but it's 3% negative versus the significant decrease in the quarter itself. Of course, that is having a strong impact on the EBIT reduction in North America, coupled with the inflationary pressure, which we are seeing, again, mainly on freight and distribution, we come to a year-to-date performance of 8.2% margin. In the quarter, we delivered better operating cash flow, and that is translating then also in better operating cash flow for the year-to-date in our North American business. Now look, the playbook is in place. The playbook is proven. We have done it before in Flexibles. We will do this again here in North America. There's no doubt that we will get this business back to where it needs to be, which is above 10% EBIT margin. And I feel very confident that our North American team will get there. It's an attractive market. We have a strong team there. So we'll get this back on track. Let me move to Flexible Packaging. Flexible sustained its good momentum. I'm really proud of the segment's performance here. Healthy volume growth, also good on passing on the raw material price increase, which we have seen in -- sorry, in Flexible Packaging, and we have had also a very positive mix effect. Continuous focus in the segment on their cost management and the turnaround activities. They were the ones where we implemented the playbook, which we are now using in North America and in Foodservice. That's, of course, supporting their performance again. All their regions are up both in top line and in EBIT. So again, really proud of the performance there. Also proud of what they are doing on cash flow. For the year-to-date, they are ahead of last year. You see the impact of the raw material price increases in the quarter itself, but they are defending the year-to-date performance on cash as well. Last but not least, our Fiber Packaging segment. Steady growth with a good profitability continues here. It is another very strong quarter for our Fiber segment with improved profitability again. Comparable growth in the quarter was 3%. Year-to-date, it's even 5% with volume growth, again, all over the regions which we are playing in, in our Fiber segment. Stable and improving demand in our ag and food markets. Our foodservice markets, which we are serving with the cup carrier was weaker, but it's the smallest of the 3 segments we are serving within fiber. We will continue to invest in this business, and we are looking forward to hopefully another strong finish to the year with our fiber. Let me pass on and hand over to our CFO, Thomas Geust.

Thank you, Ralf. In the quarter, the currency turned positive, as Ralf already alluded to here earlier. We had roughly EUR 11 million positive translation in the net sales and EUR 2 million -- EUR 1.6 million on EBIT. However, when you look at the year-to-date numbers, you see the significant negative still of roughly EUR 67 million negative impact on net sales, while the impact on EBIT was still negative EUR 4.7 million. Of the currency translation, a big part alludes to the USD currency. And when you look at the development of the USD, you can see that we have an average rate still of 1.16 in the quarter and 1.14 at the end of the quarter, so the closing rate. If you look at the currency yesterday, it was at 1.11. So the trend has continued positive throughout the quarter. Maybe highlighting a few of the other currencies also on that slide, we have British pound, Chinese renminbi and Australian dollar also trending positively. Turning over to the profit and loss. Here, we see that the growth of 5% on top line is nicely converting into EBIT growth of 10%, and that then delivering an EBIT margin of 10.9% in adjusted terms. The strongest operational improvement we see in our Flexibles and Fiber Packaging segments, while then the conclusion of commercial contract in Foodservice provide additional support to the top line and adjusted EBIT. Looking at the finance cost of roughly EUR 70 million in the quarter. That is slightly elevated. But here, I consider that the year-to-date numbers represent a good assumption for our run rate. That, combined with the efficient tax rates delivers adjusted EPS of $0.68, which is up 10% to prior and also the year-to-date EPS of EUR 1.88 is improving versus prior year. In the cash flow, as said by Ralf, we have now 6 consecutive positive cash flow quarters coming in with year-to-date free cash flow of EUR 79 million, down versus previous year. However, I would conclude this more on timing as well as some of the elements, which I will allude to when going through the bridge. On the EBITDA, the main reason for the decline is a positive IAC booked in 2025. So the comparability being impacted by that one. Our working capital is inflated mainly related to the inflated raw material coming out of the Middle East crisis. That one is obviously stabilizing as time goes along. And then we have our capital expenditures, which is roughly EUR 20 million lower than previous year and really reflecting the disciplined capital allocation that we have been applying while at the same time, allowing for investments in the growing businesses. When looking at the net debt leverage and liquidity, I would conclude that with EUR 1.2 billion of net debt, we continue to deleverage. Our net debt-to-EBITDA ratio is now 1.9x, which is below our ambition corridor of 2 to 3. We also improved our gearing, which is now 0.58. And looking at the liquidity position at the end of the quarter, we had EUR 364 million of cash equivalents and EUR 450 million available of unused committed credit facilities. So we conclude that our balance sheet remains strong. Also on the debt structure, you can see our continuous work on maintaining a healthy loan maturity, and that combined then with efficient financing terms. Our average maturity has now been extended to 3.9 years versus 3.6 end of Q3 '25. And we have also continued with refinance throughout 2026 with the extension of the RCF as the latest example. Continuing to the more detailed balance sheet. As already mentioned earlier, our balance sheet remains strong with equity roughly EUR 2 billion. Beyond the already highlighted topics, I would also like to highlight the improved adjusted return on investments, which is now 12.3% versus 11.9% prior year as well as the adjusted return on equity of 13.8%. Additionally, I would like to highlight that the balance sheet is impacted by currency movements alone on the equity, roughly EUR 186 million of negative currency translation differences. Looking at the progress towards our long-term ambitions, I would conclude that we are currently meeting our ambition for 3 of the parameters, adjusted EBIT margin, net debt to EBITDA as well as dividend payout. For the adjusted return on investments and comparable growth, we are still trailing behind, however, seeing some positive development in that one lately. Looking forward, we have no changes to our outlook nor to our short-term risks and uncertainties. So with that one, I would actually hand back to Ralf for his concluding remarks.

Yes. Thanks, Thomas. And look, you have seen the slide before from Thomas, where he was showing the trend towards our ambition. And I'm specifically proud to say that after years of negative or no growth, which we have seen, we are seeing this year over the first 3 quarters, positive growth of 2%. So really proud of the team to deliver in a very soft market that growth. Also really proud to continue -- or to see continuing over 10% EBIT margin. In the quarter, 10.9%, clearly supported by flexible fiber and the commercial conclusion of a contract, but still it is clearly above the 10% for the year-to-date numbers, which is, of course, very, very good news for us. And it's great that in the segments where we have work to do, we have a playbook in place, which will help us to turn those into the right direction. So with that, I'd like to hand over to all of you for your questions. So please go ahead.

[Operator Instructions] The next question comes from Hai Huynh from UBS.

I guess, first of all, in North America, the 9% comparable sales decline, how much is that is due to end market weakness? And in terms of pricing, are you not able to pass on prices anymore from raw material costs? And where are you seeing changes in market share over the past quarter?

Yes. Thanks for your questions. So let me go one by one. So the market, really the market in foodservice specifically was very weak in North America in the quarter. We did not lose market share in -- with any of our customers during the quarter compared to the same quarter last year at all. Retail was weak as well, but retail in Q3 is normally weak. So it's the softest quarter which retail has. So it was specifically weak this year. Again, we did not lose any market or any customer in any of the markets, but we are seeing a very weak -- unexpectedly weak market with consumer confidence in North America at a low point. So hopefully, that helps a bit to question 1 and 3. Question 2 in the middle was with regards to passing on cost increases. And here, I would like to highlight, this is mainly due for freight and distribution. So that's really what we are talking about. The strong increases in fuel prices, the availability of truck drivers in the North American market is really the issue here for us. We are negotiating typically freight and distribution prices in the beginning of the year. And then it's during the year, very difficult to pass them on. We are doing it now in an exercise which is very tough, but I'm really proud of the North American team that they are going to customer by customer to have those discussions earlier than January where it typically happens to make sure that we get those hopefully passed on and see the benefit already in the next quarter.

Yes, sorry, just a follow-up on that. In North America, so I realize that the demand is weak, but how much of the underperformance is also the existing issue of ramping up the factories at the sites. Do you expect utilization or site efficiency to get to a good level by Q4? Or is that going to be more of a half 1 '27 story?

We have seen at the end of the quarter, significant progress in Hammond. So that's 1 of the 2 start-ups, if you remember, and that's frankly, the larger of the 2. So very, very pleased with the end of the quarter performance in Hammond. That's, of course, only really 6 weeks, but we are expecting this to continue. And then, of course, in the half 1, it will get stronger and stronger. But pleased with the progress. And we are -- as I said a couple of quarters ago, we have implemented a task force specifically to address the start-ups in North America. We see the progress in the quarter. We will see more in the next quarter and then more in H1. So looking forward to those achievements.

And my last one is on the contract for foodservice. So when -- so now that you have terminated that smooth motor fiber contract, how should we think about the kind of normalized or going forward type of EBIT for the segment? Has this traditionally added anything in terms of the EBIT or it's actually dilutive to the margins for the segment itself?

No, it has added EBIT to the segment. So you could think on a 2026 year-to-date, you would think about anywhere between maybe EUR 4 million to EUR 6 or so million EBIT impact on that one, which, of course, we will not see going forward.

The next question comes from Maria Wikstrom from SEB.

I have 3 questions. I will take them one by one. So first, I wanted to get a feeling for the volume growth across different segments. I mean you had 4% organic growth for the group level. But if you could talk about it on a volume terms across the different segments, please?

Yes. Maria, you know we are not disclosing specific volume numbers, but I can -- I'm very happy to give you a feel around how we are doing. So you would have in Flexibles and Fiber positive volume in a year-to-date perspective. And you would have specifically in Flexibles very good volume growth year-to-date and in the quarter as well. But you know that we don't report on specific volume numbers, Maria. But hopefully, the flavor helps.

Then I wanted to get a bit of the bridge for the North American EBIT trend as you are EUR 21 million below the last year level. So if you could provide a bridge that how much is in Paris, Texas, I mean, how much is this distribution cost to get a little bit of a flavor, I mean, how this -- what is behind this EUR 21 million drop?

So the 9%, which we are down on top line, I would help you by saying this comes at a healthy margin. So call it, more than half of the shortfall in the quarter would be due to that. And to help you with the P&L and distribution and freight costs are 2% of the P&L, up this year versus last year. So it's a significant 2% on a year-to-date. So if you think just on the freight one, if you see our 8.2% year-to-date, it's a 2% on freight and distribution. And then the rest would be top line. The start-ups have an impact. But as I mentioned already in the quarter, we are seeing a positive development in Hammond and then the other start-up in Paris, Texas, we will also get right over the next couple of quarters.

And then my final question is on the discontinued food service, I don't know, should I call it, project or the client contract. And just to get a flavor, I mean, if this is a kind of saying as well that this plastic to paper trend is -- I mean, it is taking either in the current economic situation? Or what would be the reason behind for the discontinuation?