Huhtamaki India Limited (509820) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Huhtamaki India Limited Q2 CY '23 Earnings Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities Limited. Thank you, and over to you, sir.

Thanks, Yusuf. Good afternoon, everyone. Thank you for joining on Huhtamaki India Q2 CY '23 Results Conference. We have management on the call represented by Mr. Dhananjay Salunkhe, Managing Director; Mr. Jagdish Agarwal, Executive Director and CFO. I would like to invite Mr. Dhananjay to initiate with opening remarks, post which we will have a Q&A session. Over to you, sir.

Yes. Thank you. Good afternoon, everyone joining on this call. So before we start our discussions and the presentation on the company's performance, let [Technical Difficulty] safe harbor segment that this information is basically what we are talking about represents the current situation on the business and [Technical Difficulty] future. So coming to the last quarter's performance, we continue to face the challenging environment externally in terms of [Technical Difficulty], the unseasonal rains and a certain downturn in terms of consumption pattern. What we have [Technical Difficulty] challenges remain there or from a volume point of view. At the same time, we continue to work towards creating a sustainable long-term and profitable growth prospect for Huhtamaki India. So in line with the challenges in the market, our second quarter sales, net sales, it was lower than the previous year same quarter as well as the consequent [ cluster ] of January to March. However, there is a marked improvement in the bottom line in terms of EBIT, PBT as well as earnings per share, improved the year-on-year basis. However, as compared to the quarter 1, there is a slight decline. At the same time, overall, the focus currently is to invest in the technology and the innovation which will help us to be a player who wanted to be a #1 choice in terms of sustainable packaging. Clearly, looking at blueloop as one of the offering in the marketplace which we will discuss during the call. At the end, continue to drive the business transformation, decide clearly on where to play in terms of our key segment products and categories and how do we play to create a sustainable growth for Huhtamaki India. So this is what is our overall business situation. I would now hand it over to Mr. Jagdish Agarwal, our CFO and Executive Director, to take us through to our financial review.

Thank you, Dhananjay. Good afternoon, everyone. We start with -- I would like to say that it really gives us a -- Huhtamaki great sense of satisfaction on continuing this call for the second quarter in a row after a long lag in the past and this reflects upon the commitment of the company to engage into a continuous dialogue with all the stakeholders ending with the community. As regards to the second quarter of the half year performance, while the volumes continue to remain under pressure in Q2, impacting the top line, the bottom line has shown remarkable improvement for both second quarter and H1 Y-o-Y basis. This is a result of continued focus on operating efficiency and mix and partially due to stabilization in the input prices. In spite of the top line contraction by around 22% Y-o-Y coming to INR 6.06 billion in Q2, the EBITDA has actually increased by 4.4% in the second quarter, and the EBITDA for Q2 was INR 421 million. For first half '23, the top line has contracted by 16% year-over-year to INR 12.5 billion. The EBITDA is [indiscernible] decreasing their sales. The EBITDA decrease by 3.8% and the EBITDA for H1 was INR 996 million. However, EBITDA as a percentage of sales has increased by 1%. So overall, the quality of business has improved in H1 and in the second quarter. During the second quarter, the Huhtamaki, we are relocating some of its smaller sites to a larger site. This has been done in the objective of achieving economies of the scale, optimize production processes and reduce overall operating costs. The expenses pertaining to the relocation is around INR 21.6 million have been disclosed in financials as the excessive expenses for the second quarter 2023. EBIT for the quarter was INR 305 million. And for first half, INR 725 million is significantly higher on Y-o-Y basis. Similarly, PBT for the quarter at INR 206 million and for the first half was INR 558 million is substantially better on Y-o-Y basis. The improvement in EBIT and PBT is majorly driven by lower depreciation due to [ review ] useful life of the fixed assets effective Jan 2023. Net profit after expenses and after tax for the quarter at INR 145 million has improved to 2.4% of sales for the first half of the year. Net profit has improved [ INR 500 million ] so driven by one-off reversals of accruals for tax provision in first quarter. EPS for the quarter stands at INR 2.19 per share, again, substantially higher on Y-o-Y basis. For the half year, EPS stand INR 6.89 per share. Again, this is significantly higher on Y-o-Y basis. Now moving on debt and liquidity position. Net debt has reduced by almost INR 1.64 billion Y-o-Y basis and this direction has helped improve overall liquidity of the company. Debt equity ratio of 0.4 is almost consistent with the previous few quarters and moving this range only. Debt-to-EBITDA ratio has increased to 7.6. Certain borrowings and marginally reduced on account of repayments. Our liquidity is strong as we have a sizable credit lines which were mostly utilized at end of the quarter. We talk about our overall cash position has improved marginally. [indiscernible] position from operating activity as well as substantial improvement. This has been achieved by improvement in the working capital, majorly on account of decrease in receivables, though partially offset by increasing inventories or decreasing payables. However, on account of higher capital expenditure, free cash flow has been impacted to some extent. To sum up, I can say that financial position has stabilized in the last 1 years. Operating working capital improved marginally due to decrease in receivable and overall health of their business is improving. The company has always remained committed to stakeholders focused on technology-enabled innovation and operating performance and realization of value for its products by engaging constantly with our customers. We believe this will help our company remain competitive in the long term to drive responsible and profitable growth while upholding highest risk standard of corporate governance. With that, I'll hand over to Dhananjay.

Thank you. Thank you, Jagdish. I think this is a good summary. So those who are on the call, if you are referring to the investor presentation, which is uploaded on the site. And I'm referring to that presentation to get you through a very exciting information about our upcoming projects or upcoming innovation, which we have globally branded, and this is called blueloop. And blueloop is our enterprise-wide sustainability brand, which is aligned with our 2030 strategy which is basically to become a first choice supplier in the sustainable packaging solutions, which will be basically driven by technology and our ambition in operational excellence. So if you are able to refer those slides, I think I would be requesting everyone to refer slides, and I'm on Slide 11 because I would also would like to everyone of you to see as what we are talking about. So what the Huhtamaki Global as well as India ambition is to move from our packaging core or as a packaging converter to a solution provider. Basically, from a packaging converter, we want to add a capability in the phased way in terms of improving our offering in our packaging technology innovation and then to a packaging solution provider and that thereby increasing our value proposition where we were today and we want to be in 2030. And in line with that, we have invested in the technology and innovation and the project is coming up well in our site located in Silvassa. And what are we offering? We are offering through that project, the 3 different product streams and which are basically developed around 4 work streams. So from a very complex and nonrecyclable packaging solutions -- flexible packaging solutions, but we are trying to develop is basically a mono material laminate, which are basically designed to recycle. So there are 4 streams or 4 products or which we are offering to, which is one we call mono PP which is like a single material. Second is mono PE, again a single material and then mono paper solutions and then PET. So the product projects which are basically driven from India are basically based on PP, based on PE and based on PET, whereas any solution required paper base will be resource from our overseas plant from Germany. So with these propositions, what we are offering to our esteemed customers are basically simple but effective mono material solutions, which also enables weight reduction, the carbon footprint reduction and enhancing the recyclability of the laminate. And those laminates have a clearly, a unique combination of features, which we call Power of 3, which is their ability to provide required protection, ability to get recycled and then affordability because the affordability is very much important in the price-sensitive market -- competitive market like India. So keeping those in mind, our products coming out of this innovation guaranteed protection and the shelf life. So there will be no compromise on the shelf life where customers start using it and it keeps the content, which will be backed by our end customers hygienically safe and safe to use. Recyclability, which will be an important parameter for our customers to achieve even their sustainability agendas of 2025 and 2030 because if you see what many of our customers as well as consumer packaging good companies have taken a pledge to move to the recyclable packaging by year 2025 to year 2030, as well as regulation also is making the changes in line with recyclability agenda. So this is what we are offering, and we are really exciting that project is coming up very well the trialing, which are happening in the customer place is also progressing in a good pace. So this is one on the offering on the innovation. The second part is on our business transformation and in that, we made a good progress in last quarter. So as Jagdish indicated in his commentary that these 3 sites, smaller sites on our PS label portfolio were kind of consolidated or moved to the larger site within India. And now we have an agile and a very focused approach in terms of servicing our customer which has changed a bit in the last few years. And considering that in mind, we have initiated these optimization initiatives in terms of improving our customer relevance, cost effectiveness to the end customers. So -- and this will definitely start giving us some improvement in terms of our competitive offering to our end customers. So this is what we had to update. And now with this, we kind of can close our presentation part of it, and then we can open this up for a question and answer. Thank you.

[Operator Instructions] First question is from the line of [ Kush Gorani ] from [ InCred ] Asset Management.

Sir, I wanted to understand that over the last 1.5 years, have we lost market share to our competitors? Or have we vacated the market because it was at the lower end of the margin or and we wanted to move towards our new sustainable product offering?

I think this is a good question. So this is a -- we -- 3 things are happening. One, of course, the -- there are changes in the segment offtakes, as indicated earlier that we service primarily to the food, beverages, personal care businesses. And so there, what we saw was there is challenges in largely in a personal care and beverages because of the market conditions. So that is one aspect. Second, as you indicated rightly, yes, we reviewed our -- we are in the process of reviewing our portfolio and the lower strata of the business, yes, we are taking a view on it. And that is what you would see that the quality of business is improved over a period of time because we definitely are optimizing our portfolio which will help us in concentrating on the specific targeted markets and push for the competitive offering and then gain the share.

Sure, sir. So how much of the contention would be coming from the blueloop products and by 2030, what are your [indiscernible] from Blue Loop?

So today, month-on-month, it varies. But at the same time, we are on an average around 22% to 25% blueloop products are serviced from currently. And you asked the time line is 2030. So 2030, we are targeting around 60% to 65% from the blueloop.

In terms of margin differential between the current packaging and blueloop, what would be the differential roughly?

Yes. So it won't be right in terms of putting a number. But yes, this is a very much innovative offering, and it will be -- it would be, I would say, competitive in the marketplace from a customer point of view. At the same time, because it has been invested very well. And if you see there are 3 or 4 features of this. They are simpler, they are giving the same effectiveness at the same time, weight reduction. So overall, from a customer point of view, it will be still a competitive offering, while it will be a premium offering.

Got it, sir. And final question, any time lines that internally have been discussed for the land sale roughly, [indiscernible] with the buyer, you have a definitive buyer in place at this press for the exchange lease. Any time line as to when things can get finalized?

So as you know, we work in a landscaper on -- in March itself, we have already informed stock exchange, and our teams are working on the things. So we have a definitive party identified and the due diligence is in progress. And it's just like -- considering everything which need to be covered, can't put a time line to it.

The next question is from the line of [ Maan Lal Jain ] from Individual Investor.

Hello. [Foreign Language] Thank you, sir.

[Foreign Language] India is a country which will grow and that is where we want to invest our money. So that is where you can see that. [Foreign Language]. So at the same time [Foreign Language] how do we improve on the all aspects of our business, be it a top line, be it a cost, be it a bottom line and at the end of the day, the value to the shareholders. [Foreign Language]

Dhananjay, I think you covered everything. I guess one thing I can add one. I think for the same thing, what you say on India. The quality of business, model, if you look at like EBITDA margin, if you talk about the first half of this year, we are trading around 8% EBITDA margin. I agree if you go fast, we used to had a good EBITDA margin and all. But again, if you look at 2021, and there were a lot of dips in 2021 and we are trying to conclude from 2021. So the performance of 2022 were the better in 2021 and then look at the performance of 2023 is better than 2022. So we are in that trajectory. And whatever the things which is happening to the company when we talk about a sustainable innovations product or [indiscernible] locations of smaller units are going to drive a long-term sustainable growth and competitiveness.

[Foreign Language]

[Foreign Language]

The next question is from the line of [ Saket Kapoor ] from Kapoor & Company.

Yes. [Foreign Language] That's my first question was the -- so when we look at the other operating revenue, that does constitute a majority part of the PBT number. So what does the other operating revenue contributor? And when I was looking at the cash flow part, sir, we find there an inventory provision of INR 116 million, that is around closer to [indiscernible] So if you could explain the reason of the same, what is the major of it. And sir, lastly, sir [Foreign Language] That means you are facing more hurdles in the business. So if you could address whether this understanding is correct, how things are shaping up? What are the key points? The key areas of concern areas, which needs to be addressed so that this segment can start reporting customable profitable numbers. And lastly, [Foreign Language] 2030 is a long period, so 7 years down the line. So if you could give us some more color on the same.

Sure. You want to start?

Okay. So maybe I can answer part of the question. So first point, you've asked, Kapoor g, is about what do we include into other operating revenue. So in other operating revenues, that majorly is [ scrap ] which is a by-product when we do our production. And it includes export benefits as well. Second point you had asked about inventory provision that there's increase in the inventory provision and if we talk about inventory provisions, which is roughly 2% to 3% of my inventory, and we grew up on sort of policies where we do a aging-based providence into the inventory so that's the process we follow as a good governance. So inventory problem what we are talking about is that aging-based provision. So these are the 2 questions you had from financial point of view, if I remember correctly. So apart from the...

Sorry, inventory parts, come again, sir. I missed your last point.

Inventory aging these provisions and our policies that, okay, certain materials are having aging of like more than 3 months, 6 months, 9 months. So every company, you have a policy on making a provision for that. This provision or a contact in the hedging policy.

Okay. So thanks, Jagdish for this. So you also touched base on the hurdles and the technology toward and [ invite ] 2030. So let me start with the hurdle. Yes, we are in the process of innovating the products which are first to the market and this mono material or recyclable project, which are basically the barrier properties, which we are introducing in our laminates are definitely first with the market through a mono material solution. So yes, customers are also taking time to evaluate those products because they also pack their -- I would say packaging, which is very sensitive, like, for example, food contact. So there is a packaging which goes for a food. It goes -- undergoes a very long shelf life testing and so on. Similarly for personal care and so on. So the one of the hurdle -- it is not hurdle, but it's a requirement for many customers is that they would like to test this product under severe situations, shelf life testing and so on. So that is one thing which we kind of see that is important to kind of hurdle, other requirement to pass. The second one is, of course, if you see in India, regulatory environmental is also changing. So that is also changing at a pace, right? So there are certain changes in the regulation, but also there are provisions given. So our end customers also are using that as one of the important aspect of pushing our blueloop for this recyclable solution. So more and more regulatory clarity comes in, I think customers also will push towards that direction. And lastly, our ambition is to achieve 65% to 70% -- 65% of our sales through this innovation but if you might miss that. Already, we are selling around 25% -- 22% to 25% product through this technology and it will be kind of improved over a period of years. So already we are doing. So it is not 2030, we are already right now doing and it will be increased the share of business from this innovative products will be increased now year-on-year going forward.

Sir, a small point on it and then I'll join the queue. First is on the pricing front. What are the key differences? And since you are telling that it's a very hypercompetitive market and even there are smaller players who are strategically competing with you and are not into that regulatory framework as has been the case with agencies like you. So how do we position ourselves with this blueloop product in terms of the pricing part and in acceptance. And does the ESG norms also give an extra edge to us going ahead where the acceptance and the percentage, from 25% to 65% would be on a faster later.

So from a pricing point of view, I think explained in the previous questions, that see our innovative -- these products are going to be simpler with mono material and most of the time will be also coming up with a weight reduction. So it will be from a customer point of view, they will be competitive. At the same time, we'll be able to justify our investments. So that's the [indiscernible]. On ESG, see, we are a company which is into manufacturing and servicing the packaging products. So more and more, our customers use these materials. For them, it will be a beneficial, no doubt from a sustainability index. For us, of course, as a company, we also have our sustainability targets. So there are 2 things. One is the sustainability and sustainable packaging products. So we are into manufacturing and supplying of sustainable packaging product and how do we do it? By sustainable way. And that is what we also have on all our sites, we have agenda to improve our energy consumption, reduce our wastages, sourcing our energy from renewable resources, water conservation and reducing the transit times and then [ wet waste ]. so these are the 2 different. But yes, we are -- whatever work we are doing will be helping the ESG for our customers, and we are also improving our operations to improve our sustainability index.

In your notes, you mentioned about 3 plants...

Sorry to interrupt Mr. [indiscernible]. Please, I request you to please join the queue. We have our next question from the line of Mr. [ Bharat ] from Quest Investment Advisors Private Limited.

Thank you for your elaborate answer to the previous question. My question is that this blueloop was launch about a couple of years back, and we have been able to scale up to 20% to 25% of our business, whereas in the remaining 6, 7 years, we are just looking for 60% to 65%. So that -- why there is a slow pace? And what is the balance that 40% to 35% will be a normal flexible packaging? Or if you can give a little more color.

So yes, so I mean you said probably the blueloop launch happened in May of '23. So the products which are there were in the market in 2 years, were produced through the existing processes, which are part of a blueloop project. So the significant investments are being done in this year. So that is why there will be acceleration in the progress. So when you say this 20%, 22% the product constructions were different, so which were easy to convert. The simpler structures, which don't need very high barrier properties, we were able to convert them to these blueloop structures, whereas now what we are looking at to introduce the structures, which are require high barrier, which is basically most likely will happen from the removal of the foil layers and so on. So that is what we are investing heavily. And that is our proprietary technology, formulations and innovation and which will have a slow rate of adaptation in the market. And that is why if you see right now, we are at 22% to 25%. And in next 3 to 6 years -- 5 to 6 years [Audio Gap] because the complexity of the product, which we are going to convert is going to increase, and that's why this time line.

So how much CapEx are we really making for this to achieve this 60% to 65% of -- so -- and these are one of the plant which we are talking on Silvassa which is the [indiscernible] when it's likely to commence? And second question, does this cover all the products that we globally parent has into Indian market or still there will be a more product may come up later on?

I think when you talk about investments, I think we are making a significant investment. And when we talk about India at this point of time, we are making big investments in the Silvassa plant. When you talk about a product India [indiscernible] all products like and state that paper is at one probably we are not moving that immediately with is. But yes, we do have sources to get supplied at retail as well. So in a nutshell yes, we are going to win all the product of blueloop parts group is going.

Even pharmaceutical product also is there for parent company. So have that we launch or we are still, I mean, work in progress?

So that is a very exciting innovation happened in the parent company, and we have started -- this has been started adopted by a couple of pharma companies in India. And this is basically right now will be imported from our parent company and service from India. That's a very important innovation, which is patented at this moment.

So in your initial remarks, you said that we will import from Germany. So you are talking of that pharma product?

Yes. Right.

Okay. And sir, overall, how much investment we really need to make in CapEx or to reach the 60 to 65 over a time. And this CapEx, which we are doing at Silvassa, when the plant is likely to commission?

The plant is going to open most likely end of third quarter or either in the fourth quarter. Investors when we talk about we are going to stages. And as I said that we are making a significant investment in Silvassa at this point of time, and I think will evolve. Things will change. So I would when we talk about 60%, 65%. Definitely, that is going to need more investments, so we are able to work out. And once we'll have a better perspective, we'll come back on that.

Ladies and gentlemen, in order to ensure that management is able to address questions from all the participants in the conference, please limit your questions to 2 per participant. Next question is from the line of [ Sara Patua ] from Quest Investment Advisors Private Limited.

And just wanted to have your thoughts on what's happening as you highlighted in the beginning, have we been able to improve our gross margins. But at the same time, since the fall in volumes and realization is so sharp, there is -- it appears that your fiscal absorption is getting impacted, and that is why your improvement in gross margins is not getting reflected in EBITDA. And as we move ahead, and like as you mentioned, like you think third quarter or fourth quarter, your depreciation, et cetera, will start increasing. So how do we plan to take the growth in gross margin to bottom line?

Yes. This is a good question. And let me -- so essentially, what we did in last few quarters is us taking a very strong view in terms of where we want to play and how do we want to play. And so now we are in process of identifying clear categories where we want to play and really deep -- dive deeper create excellence in what categories we want to focus on then product focus and then certain key account focus. So these all 3 put together will help us to kind of revert the tragic. As you rightly mentioned, yes, we definitely voluntarily cut down certain, I would say, unprofitable businesses which definitely has now availability of some free capacity which we would definitely would like to use for our strategic intended products. So we don't want to boil the ocean. We don't want to do everything everywhere and that's where we have taken that smaller, fewer, bigger but larger accounts, and that's where we will drive. And we are confident that this strategy will help us to be very sharp in our -- with our customer centricity, which will help us to also improve the customer relevance, their experiences and by the way, creating a long-term partnership. So whatever has to be done, we have done now so far. And then we have on the categories which we want to play, and that is where we will also keep on investing our resourcing in terms of account management, in terms of innovation, in terms of customer service and so on.

Is it fair to assume, let's say, your target to reach like 6%, 7% kind of around 7%, 7.5% kind of EBIT margin on, like, say, maybe 2 years? Which was a very normal thing prior to COVID for you.

Yes. So if you talk about our aspirations, we have stated in that we are targeting by 2030, 10% of EBIT margins. And definitely, that's a journey. And if you look at the margins which we have as of today and which give us a concern that, yes, we are going all nice things that should improve our margins. I'll -- don't quote the number, but yes, we are moving in the right direction. That's when I can say that.