SIG Group AG (SIGN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q2 2023 results conference call and live webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ingrid McMahon, Director of IR. Please go ahead, madam.

Good morning, and thank you for joining us. I'm Ingrid McMahon, Director of Investor Relations. And with me today hosting the call is Samuel Sigrist, CEO. The slides for the call are available for download on our investor website. This presentation may contain forward-looking statements involving risks and uncertainties that may cause results to differ materially from these statements. The full cautionary statements and disclaimer can be found on Slide 2 of the presentation, which participants are encouraged to read carefully. And with that, let me hand you over to Samuel.

Thank you, Ingrid. Welcome, everybody. I'm pleased to report the solid financial performance for the first half of the year. Good organic top line growth driven by price increases enabled us to recover cost inflation, leading to continued margin improvement. The acquisitions are meeting our performance expectations, and we continue to identify and to realize cross-selling opportunities between our different substrates. At the same time, we continue to launch exciting innovations, which will further support future growth. We are also investing into our strong filler pipeline and production footprint in order to maximize the many growth opportunities across the business. Turning now to the key figures for the first half. Revenue at constant currency grew by 35%. This includes the acquisitions, which together contributed EUR 377 million to revenue. We are on track to achieve our full year growth guidance of 20% to 22% at constant currency. As the acquisitions were consolidated from June and August '22, respectively, the second half comparison will be largely on a like-for-like basis. Organic revenue growth of 6.6% at constant currency relates to the aseptic carton business, which continues to perform well, with price increase and mix benefits driving growth. This demonstrates that even when high inflation is affecting consumer behavior in many markets, our business remains resilient. We delivered strong adjusted EBITDA of EUR 384 million. The adjusted EBITDA margin of 24.9% was slightly above H1 '22 and included the dilution from acquisitions. The margin was also 140 basis points above the full year '22 level, demonstrating the positive impact of price increases. Adjusted net income and adjusted earnings per share increased notwithstanding higher interest and tax expenses. Free cash flow, which is structurally low in the first half, reflected an increase in net capital expenditure of EUR 156 million as we invest in the business. We expect the group to be highly cash generative in the second half of the year, in line with our normal seasonal pattern. Q2 organic sales grew by 6.4% at constant currency with a recovery in China and strong growth in all regions, except for Middle East and Africa. Group revenue at constant currency grew by 27.6%, reflecting the contributions from the acquisitions. Adjusted EBITDA was EUR 209 million, up 29%, and the adjusted EBITDA margin of 25.7% was ahead of Q2 last year. Adjusted net income was in line with last year as higher adjusted EBITDA was offset by higher tax and interest expense. Free cash flow was an outflow of EUR 118 million, which included a higher semiannual interest payment and EUR 84 million of capital expenditure. As I mentioned in my introduction, we continue to innovate with a key focus on sustainability. We are pleased to announce that by 2025, we are targeting cartons with more than 85% fiber content, which will make them eligible to enter the paper recycling stream in many markets. We have already initiated discussions with various recycles regarding pilot projects. This is an advance towards our longer-term target of a 90% fiber structure by 2030. Together with our existing beverage carton recycling infrastructure, this development will enable a significant increase in collection and recycling rates. This is especially true for regional markets, which have varying or little established infrastructure for recycling. We're also tremendously excited to launch to [ DomeMini ], a carton with the convenience of a bottle, but all the benefits of a carton. [ DomeMini ] was developed by our European and Chinese R&D teams, and in June, we commenced commercial production. We have a lot of interest from customers around the world for this product. Through collaboration between our spouted pouch and carton engineers, we are now introducing in-line sterilization to the aseptic spouted pouch process. This will result in a lower total cost of ownership for the customer and increased food safety. We are completing testing for one of the largest banana puree producers in the world, and we see significant scope for expanding this solution globally. Turning now to the performance by region. Europe delivered strong organic revenue growth of 10.5%, driven by price increases to recover cost inflation. As you recall, Europe's margin was most impacted in '22 by higher raw material and energy costs. The SIG Terra portfolio of Alu-free and biopolymer-based products has continued to perform well and has increased its share of revenue in the region. This demonstrates the pull effect from customers for low CO2 packaging products, even in an inflationary environment. The revenue contribution from bag-in-box and spouted pouch added EUR 90 million to the regional revenue. And Europe continues to win new business, including in countries such as Hungary, Romania and the Czech Republic. Middle East and Africa reported constant currency growth of 4.2%. This reflected temporary foreign currency restrictions for customers in Egypt and a strong prior year base of comparison. Our broad presence in over 30 countries ensures temporary fluctuations in one country are offset over the longer term through a portfolio effect. Sub-Sahara and West Africa led growth during the period, driven by liquid dairy. The region's strong margin expansion of over 400 basis points to 30% reflected price increases and lower freight costs. In Asia Pacific, we saw a recovery of growth in the second quarter, particularly in China, following the high levels of COVID-19 infections and low business activity in Q1. In Southeast Asia, our unique offering of filling solutions for a range of carton sizes is helping customers tackle high levels of inflation. We expect this to increasingly underpin volumes going forward. I'm pleased to report that the integration of the chilled carton acquisitions is progressing well. The business is achieving revenue growth ahead of the market due to product improvements and enhanced customer service, in line with SIG's operating model. The margin for the region was impacted by dilution from the acquisitions. The revenue contribution from chilled cartons, spouted pouch and bag-in-box was EUR 102 million for the period. The particularly high level of filler placements that we have seen in the region continued throughout the first half. The Americas continued to report strong constant currency growth -- organic growth, with an increase of 14% for the half year. Deployment of new filling lines for portion packs contributed to growth in South America, while foodservice in beverage carton and bag-in-box continued to perform well in North America. The revenue contribution from bag-in-box and spouted pouch was EUR 186 million for the half year period. Price increases and mix benefits as well as currency tailwinds more than offset margin dilution from acquisitions. We continue to realize cross-selling wins, including full system solutions for aseptic, spouted pouch and bag-in-box. The most recent win was with our largest carton customer in the U.S. for plant-based sour cream in spouted pouch. Turning to the adjusted EBITDA bridge. The growth in the adjusted EBITDA was driven by a top line contribution of EUR 96 million, reflecting price and mix improvements. Price increases were implemented to offset cost inflation occurring in '22 and '23. Both raw material and production costs were higher in the first half. Raw materials include hedge contracts from the previous year. An increase in SG&A expenses reflected investments to support growth, including R&D and regional expansion and wage inflation. Overall, the margin increased slightly to 24.9% compared with 24.6% for the first half year last year. Capital expenditure reflected investment into growth markets and a high level of filler orders. This resulted in an increase of EUR 135 million in gross capital expenditure compared to the first half of '22. The increase included the ramp-up of our first site in Mexico to serve the North American market and the start of construction of our site in India, both for our production of aseptic cartons sleeves. There was also an investment in capacity expansion for bag-in-box and spouted pouch in North America as well as expansion for these substrates into emerging markets. In addition, investments in digital printing in Germany will bring new benefits to customers. A high level of activity at filling machine assembly plants reflected strong customer demand for SIG systems. Upfront cash fulfillers received from customers decreased by EUR 20 million in the first half to EUR 51 million. As a result, net CapEx was EUR 156 million higher than the first half of 2022. In the second half of the year, gross capital expenditure is expected to be lower than in the first half. And upfront payments from customers are expected to increase due to the phasing of filling line projects. We reiterate our guidance that for the full year, net capital expenditure is expected to remain within the range of 7% to 9% of revenue. In the first half of this year, free cash flow was negative EUR 230 million. This was primarily driven by the increase in capital expenditure of EUR 156 million. Net working capital outflows reflected the seasonality of our cash flow generation, while a higher interest rate environment increased the amount of interest paid. Net working capital as a percentage of revenue has increased compared with the 30th of June, 2022. This is mainly due to the addition of the chilled carton acquisition. The bag-in-box, spouted pouch and chilled carton acquisitions have higher net working capital requirements than the aseptic carton business, and measures to reduce this have been identified and are being implemented. The increase in net debt reflected the payment of the '22 dividend, capital investments and the cash seasonality of the business. Strong adjusted EBITDA performance over the last 12 months positively contributed to the net leverage ratio, which was 3.4x as of June 30, 2023. In the first half of '23, the company repaid EUR 450 million of unsecured notes funded by a bridge loan facility of EUR 350 million and other available credit lines. We remain committed to reducing gross debt by the year-end. This was a solid financial performance for the first half of the year, and we maintain our full year guidance. Our adjusted EBITDA growth and seasonal cash generation in the second half will enable us to progress towards our year-end '24 net leverage target of 2.5x. The strong growth in the acquired companies and the rapid progress we have made on the integration, together with the ongoing strength of the aseptic carton business, all reinforce our confidence for the full year and the future. With this, we will open up the floor for your questions. And I have here Jess and team in the room from the finance team to help me on the Q&A.

[Operator Instructions] The first question comes from Jörn Iffert from UBS.

Three questions, if I may, and I will take them one by one. The first one would be on organic sales growth. What gives you the confidence that second half will be somewhat better versus the first half? You already see it in Q3, you get customer indications. So some more color would be appreciated. This will be the first question, please.

Thanks for the question, Jörn. I mean, there are a couple of reasons why we see growth also for the second half year positive in maintaining guidance. First, I mean, the China impact that we had in Q1 obviously is going to wash out with every quarter that we have. That's going to help the growth. Then we also have good visibility of filler deployments that will come on stream in the second half year and help us to deliver growth. And the Middle East and Africa region, which had a bit of a softer Q2, is also expected to do better in the second half of the year. So all reasons together give us good visibility for the second half of 2023.

The second question would be, please, some of your key suppliers for liquid paperboards seem to lock in into less favorable contracts with customers like SIG. At some point in time, I mean, we would expect that they are significantly increasing the average selling prices. Are you starting to anticipate this or discuss this with your customers to pass it through? Or how do you see the situation here right now, if I may ask?

You're familiar with the fact that we have multiyear supply agreement with our key suppliers of liquid packaging board. And I think we also explained that overall, these years, we have seen price adjustments, but those price adjustments, they rather follow kind of an underlying logic to try to recover European inflation at the point where it was a lower inflation in the low single-digit level, and that's what we continue to expect. So it's a market that is somewhat disconnected from the pulp price fluctuations that you can see in the market. There are multiple reasons for that. I think also in this year, we proved that obviously, we have -- we provide also them a good visibility on the offtake of the material. And I think that's something that they value.

Okay. So no surcharges or any significant price increases you also would expect for 2024, given the contracts you have locked in?

I mean we got to view 2023 -- 2024 pricing obviously in the end of this year. And early next year, we're going to take into account all input cost changes. We're going to look at the value that we provide for our customers. And that will, as you're familiar, did lead to the price adjustments for 2024, But that's going to be something that we're going to look at once we get closer to it, but we don't expect a significant step change.

Okay. And the last question, please, on your innovations with 85% plus of the packaging being fiber-based of some packages by 2024. You have some examples by hand where you can put then the aseptic carton in the paper recycling circle, in which regions this can happen? Because it seems like a big breakthrough innovation at the end of the day.

No, we are super excited about that. And it's 2025, the 85% target. And it will be the pack without the closure, so the straw packs, the single-serve mainly. 85% will allow us already to move to the paper recycling stream in some of the European markets, and there are other markets also globally where we can use that. But that's going to be first step into this direction ultimately and you're familiar with that, we want to drive it to 90%. And that will then also include the fitment, where we need also a fiber-based solution for the fitment for closure.

The next question comes from Lars Kjellberg, Crédit Suisse.

I just have a couple of questions left. Starting with where we ended in the prior questions. The Terra Alu-free and forest-based polymers, et cetera, you talked about that as being a strong growth contributor in Europe specifically, which is good, of course. Could you share with us in terms of revenue benefits and margin benefits in that, if you could, as this business growth, would that be margin accretive? That's essentially the question. Second question I have is about you've refinanced now, of course, right? But could you share with us what sort of average interest rate we should be looking at heading into H2 and if that should be broadly stable where we sit today? And the final point then, coming back to China, which, of course, had been weak. China seems to be stop and start all the time. But do you actually have visibility in that market now? And how much did India finally contribute to your performance in the APAC region? And what do you expect for the balance of the year? Those were my questions.

Thanks for your questions, Lars. I mean the SIG Terra portfolio, the SIG Terra portfolio encompasses a number of solutions. It's the yellow-free compound structures, it's also the ones where we replace polymers from finite sources, the biomass-based polymers. So it's basically what you could label the part of the portfolio of our offering, which is even more environmentally friendly and comes with an even lower CO2 footprint as the beverage carton, per se. It's the best-performing substrate already when it comes to the CO2 footprint. Now we do see decent growth rates, the growth rates that are above what we report for Europe. I mean, for us, in general, innovation and we consider all our products that also bring environmental benefits as innovations. Innovations come at higher price points, yield better margins. And then over time, obviously, we're scaling them up, we also are prepared to adjust prices. Because ultimately, we can only make an impact as a business. If we offer those even more sustainable solutions also at scale and also at price points that allow customers to adopt them. And that's where we are committed to do that, but in introduction as normally general comes, innovation comes at a higher price. That's also the case for those solutions. Indeed, we have retired our unsecured notes and have put a bridge loan in place for EUR 350 million. We have talked about that already in Q1. Average cost of debt for H1, around 4%. And I think there is no major change expected now for the second half. China, yes, I mean, we did see -- in our industry, obviously, and we serve this kind of entry level of process and packaged fruit. I mean, we did see this Q1 impact. You recall because of the high COVID infections post kind of the opening basically of China. But customers continue to indicate to us that they want to hit the volume targets and that obviously does provide us some visibility, from that perspective, remain positive from China also for second half year. The India contribution, obviously, as it lies in the nature of a market ramping up, has significant growth rates on a relative basis. We gave an indication already that by end of '18, we had 3 filling machines in the market. By end of this year, we're going to have 40. They are all not yet fully loaded. By the end, they're going to go through a ramp-up curve, but it becomes more and more relevant as a market to our growth.

And does that momentum continue into '24 with new potential filler lines being placed?

We are very pleased with the filler pipeline that we see. And we had a record number, if I may say so, of placements last year. We already said early this year that we expect a similar number for the current year and also we see really good demand for our solutions, yes.

The next question comes from Christian Arnold from Stifel.

I have 3 questions. First, on the restriction of foreign currency availability in Egypt. You mentioned temporarily restriction. Have you already seen an easing of the situation? Can we expect growth again already in the EMEA region in Q3?

Christian, thanks for your question. Yes, I mean, we also have a bit of a history with this kind of restrictions. You recall they were, at times, similar problems in Libya, which is a larger market. There were, at times, similar topics also in Algeria. And they come and go. That's difficult to predict. But normally, they stay in place or not longer than a quarter, then they may come back again. And they are also -- those restrictions, they are often limited to a subset of products, and that can change from one to another quarter. But normally, we see these impacts for a quarter and then it goes back to the growth that we normally expect from this region. The same is true also for this year for Middle East and Africa.

Okay. And at the moment, it's just Egypt, which makes a little bit of a headache.

Yes.

Okay. Second question would be on your search for a new CFO. You must be quite satisfied with the current situation. You haven't announced a new CFO. Can you give us an update here?

Absolutely. I wouldn't say we are satisfied, but I think we have a very capable team here, But we also look forward to our new CFO to join. So the status is that we have signed a contract with someone who has resigned at their current employer, and we were in contact with the current employer to agree on an aligned transition in terms of also communication. And it's going to take the current employee of our future CFO another couple of weeks. But I'm confident that by mid-August, we're going to come out with the press release and talk about that first and can also share a name. But what we also agreed is, is the start date. We expect this person to start on the 1st of November this year. So that means in due time for year-end and then also year-end announcement.

Okay. Very good. Last question, on the guidance margin. I mean, assuming normal seasonality this year, usually, you have higher margins in the second half than in the first half. Now you're already at 24.9% for the first 6 months. So one could actually assume that margin could go higher than the 24% to 25% range you are guiding for. Any thoughts on that?

Yes, I'm glad you're asking that because I think, as already discussed in the Q1 call, we don't expect the margin profile to be the same as what we saw prior to the acquisition. We already talked about that we expect a more evenly distributed margin, in other words, less fluctuation or not this kind of peak towards the second half. If you compare H1 and H2, we don't expect to have the similar delta between the 2 margins as we had then prior to acquisition. This is a function of the acquisition that we did and maybe also a bit of how our business expanded. Seasons in the different markets are different. For example, India has now a season that is rather geared towards H1. Now I think the margin you saw for Q2 was an exceptionally strong one as we experienced very positive mix impacts. I don't think you should assume that to be the normal for the remainder of the year. I would agree that, obviously, by guiding now for the range of 24% to 25%, it is fair to assume that we were going to land in the upper half. But I think we should not get carried away by now.

The next question comes from Alessandro Foletti from Octavian.

Yes. Can I ask you a few -- maybe 3 or 4, just one by one. Very quickly, can you give an indication of the split price versus volume in your growth rates, if possible, in the different regions?

Alessandro, thanks for your question. No, we're going to see in our growth rate, the organic growth rate, that is largely driven by price and mix. And you recall, prior to the inflationary environment we went through, especially last year, we haven't broken down and dissected our growth rate for many reasons. And we already said at the beginning of the year, we're going to move back to this past practice as we wanted to reassure people last year that also in our industry, price is going to move. So -- but you can assume to give you a bit of qualitative color, they are largely driven by price and mix. I think maybe you are on mute, Alessandro.

Yes, I am on mute. Sorry. On the cash flow, if possible, the -- you already mentioned that you expect good free cash flow delivery in the second half of the year. But now the starting point in H1 is really very low. And I spot the working capital, you say it's seasonal kind of normal, et cetera. But this payable outflow was enormous. Can you give more indication there and really what sort of expectation can we have? Are you able to catch it up completely?

Yes, I think it's a good question. But I mean, you are familiar, you follow our cash flow development since 2018 since the IPO. I mean, what we had now in the first half year, apart from the seasonal pattern, which is also, to a large degree, the outflows of the volume bonuses and they were increased also in last year. We also had a bit of elevated stock levels for 2 reasons. Our plant in [ Rheinfall ] operates at capacity limit for the second half of the year. So they pulled a bit forward production into the first half. And the other one, that we have this plant in Mexico ramping up, where you normally have a bit of a safety stock to build up. So these are 2 reasons why we look at elevated stock levels. Also, as in all the other years, we are confident for cash generation in the second half. And I would say we're comfortable with basically the consensus expectation, but free cash flow is concerned also for the full year. And also, as I said, around CapEx, we expect higher upfront cash inflow for the filling line project, which is a bit of a phasing thing. We saw that also in earlier quarters. And CapEx also is going to be lower than in the first half. It was a front-loaded year with the outflow, but we are confident to generate the cash in the second half. And again, also comfortable with the consensus expectation.

All right. If I may, 1 question -- or 2 questions that I pack into one is related with the acquisitions. You mentioned both cross-selling and the launch of the in-line sterilization for the spouted pouches. Can you give more indication with that as to what have you acquired the business? And with this launch, what does it represent? Is it just still the first prototype? Or are we really going towards industrial, an industrial product that you will be able to scale up and give some more color on timing and volumes is possible?