SIG Group AG (SIGN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 2023 Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication and broadcast. At this time, it's my pleasure to hand over to Ingrid McMahon, Director of IR. Please go ahead, madam.

Good morning, everyone, and thank you for joining us. I'm Ingrid McMahon, Head of Investor Relations. And with me today hosting the call is Samuel Sigrist, CEO; and Jess Spence and Dima Lebedev, our Interim CFOs. 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 those statements. A full cautionary statement 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, and welcome, everybody. I'm pleased to report a solid financial performance for the third quarter of this year. The aseptic carton business continued to successfully recover cost inflation through price increases. After a very strong start to the year for bag-in-box and spouted pouch, the business saw a slowdown in revenue growth in Q3. This was against the prior year growth rate in the low-teens. We remain pleased with the performance of the business. The chilled carton business in Asia continued to deliver excellent growth. Being part of SIG is enabling the business to build much stronger relationships with customers. We're also working on new innovations, such as one-stop opening spout, leveraging our knowledge from aseptic carton. Our improved cash generation was in line with the normal seasonality of the business and ahead of Q3 2022. It's always exciting to see the commercial introduction of our innovations, and we were delighted to launch SIG DomeMini, our single-serve carton that is shaped like a bottle with our first customer in China. We are also successfully rolling out our alu-free packaging in China with 2 of the region's largest customers. We see significant potential for alu-free China as these projects ramp up. I'm very pleased with the technology synergies being realized between our aseptic carton and spouted pouch business. We have launched the second-generation aseptic spouted pouch filling machine with the same sterilization process as we use in our aseptic cartons, and we are already working on the third generation. This ensures we continue to improve the total cost of ownership for our customers, which is key to ensure the successful adoption of our spouted pouches at scale. I'm delighted that SIG has received approval for our group-wide net 0 science-based target from the Science Based Targets initiative. We have committed to reach net 0 greenhouse gas emissions across our value chain by 2050. Of the 2,000-plus companies globally with a public net 0 pledge, SIG is among the first 325 companies to have its targets validated and approved by the Science Based Targets initiative. Group revenue at constant currency grew by 7.7%, while aseptic carton increased by 8.1%. Adjusted EBITDA was EUR 190 million, and the adjusted EBITDA margin was 24.8%, 160 basis points ahead of Q3 2022. Adjusted net income was in line with last year as higher adjusted EBITDA was offset by an increase in interest expense. Net capital investment of EUR 59 million was in line with Q3 2022 and reflected the normalization of CapEx spend following a higher rate of investment in the first half of the year to support our growth plans. Free cash flow generation was EUR 133 million for the quarter ended September 30, a 31% increase compared with Q3 2022. This strong turnaround compared with the outflow of EUR 213 million in the first half year is in line with our usual seasonality. Turning now to the key figures for the 9-month period. Revenue at constant currency grew by 24%. This includes the acquisitions, which together contributed EUR 569 million to revenue. Organic revenue growth of 7.1% at constant currency related to the aseptic carton business, which continues to perform well. Year-to-date, adjusted EBITDA is EUR 582 million. The adjusted EBITDA margin of 24.9% is just shy of 100 basis point improvement compared with the first 9 months of 2022, demonstrating our ability to recover cost inflation through price increases despite additional dilution from the acquisitions. Free cash flow was negative EUR 80 million as of September 30, which reflected an increase in net capital expenditure of EUR 162 million compared to the prior year. For the 9-month period, our net capital expenditure as a percentage of revenue was 9.8%. We expect this percentage to fall to the lower half of our 7% to 9% target range. Turning to the quarterly performance by region. Europe delivered strong revenue growth of 7.5% at constant currency for Q3, driven by aseptic carton performance with price increases to recover cost inflation. Europe's margin was the most impacted by higher raw material and energy costs in '22. The region continues to gain share in aseptic carton market due to new filler installations and a broader regional presence. This includes the system solution with our digital offering for a large dairy player in Finland, as well as further expansion in Romania, where we have gained share from both carton and PET. Middle East and Africa reported constant currency growth of 6.7%, reflecting a solid recovery after a weaker quarter 2. This included the ramp-up of new aseptic carton fillers in South Africa and Saudi Arabia, in line with our regional strategy to increase the share in the liquid dairy segment. There was also an increase in demand in Algeria. The region's growth reflected price increases to recover cost inflation. Asia reported Q3 revenue growth of 14.4% on a constant currency basis. Southeast Asia saw increasing aseptic carton volume growth throughout the quarter, particularly in India and Vietnam. In China, chilled carton delivered a strong underlying growth rate of high single-digit for the quarter. There was also solid demand for aseptic carton. The region is particularly benefiting from our strong R&D capabilities as we continue to innovate in terms of packaging shape and compound structures as demonstrated by the rollout of SIG DomeMini and alu-free packaging. The Americas delivered Q3 growth of 1.9% on a constant currency basis against the strong prior year comparison. In the aseptic carton, Brazil experienced softer demand in July and August. However, growth picked up in September with a recovery in liquid dairy demand. Mexico reported a strong performance in liquid dairy aseptic carton gaining share of wallet with its largest customer. In the U.S., there was a ramp-up of aseptic carton volumes with 2 new customers in the non-carbonated soft drink sector, which offset lower sales in [ brands ]. Revenue growth for bag-in-box and spouted pouch was above market growth as the business continued to gain market share, but lower than Q3 '22, growth in '22 was particularly strong due to market share gains and the elevated demand post the COVID-19 pandemic. We continue to realize cross-selling wins, including full system solutions for aseptic pouch and bag-in-box. An example during the quarter was, for spouted pouch, with an existing large aseptic carton customers in Brazil. Turning to the adjusted EBITDA bridges for Q3 and the 9 months. We continued to see positive developments in Q3, in line with the first half of the year. Growth in adjusted EBITDA was driven by a top line contribution of EUR 30 million, reflecting the strong organic growth of 8.1%. There was a positive contribution from raw material costs as we benefited from lower spot prices for our unhedged portion of polymer and aluminum. We also achieved a positive result on production costs due to a strong operational performance during the quarter and lower freight rates. SG&A reflected investment in growth, including higher R&D expenses and regional expansion, as well as wage inflation. Overall, the Q3 adjusted EBITDA margin was 24.8% compared to 23.2% for Q3 '22. For the 9-month period, adjusted EBITDA increased by 27% to EUR 582 million. The adjusted EBITDA margin was 24.9% compared with 24% for 9 months in '22, despite dilution from the acquisitions. Higher revenue contribution driven by price increases in the first 9 months more than offset higher SG&A, raw material and production costs. Turning to capital expenditure and free cash flow. Year-to-date, capital expenditure reflects investments in global capacity and an increase in filler CapEx given our strong win rate. As expected, our free cash flow generation is gaining momentum and was ahead of Q3 last year. Year-to-date, our cash generation is below our prior year largely due to the significant increase in capital expenditure in the first half of the year. Also, the proportion of upfront cash payments from customers has been relatively low with the majority of payments expected now in the fourth quarter of the year. Pro forma leverage was 3.2x as of September 30, an improvement compared to 3.4x as of June 30. A strong adjusted EBITDA performance over the last 12 months has positively contributed to the improvement in the ratio. We remain committed to reducing gross debt by year-end, and we expect net leverage to be clearly below 3x as of 31st of December this year. Turning now to the guidance for the full year. Year-to-date, SIG has demonstrated a very resilient financial performance with strong revenue growth and adjusted EBITDA margin performance. We maintain our full year guidance, which includes revenue growth at constant currency of 20% to 22% and organic revenue growth of 7% to 9%. The adjusted EBITDA margin is expected to increase by up to 150 basis points to 24% to 25%. Guidance on tax, CapEx and the dividend payout is also unchanged. Lastly, we reiterate our commitment to reduce gross debt by year-end and will remain on track to meet our target of 2.5x net leverage ratio by end of '24. We believe these results demonstrate the resilience of the business and our ability to grow. That concludes the formal part of our today's call, and we will be very happy to take your questions. Before doing so, I'd like to remind you that we are hosting our Capital Markets Day on the evening of the 21st of November with a dinner in Dusseldorf, together with our senior management team and a site visit, the following day at our operations in Linnich. A link to register for the event is in today's media release. We look forward to see you there. And with this, I would open up for questions.

[Operator Instructions] Our first question comes from the line of Charlie Muir-Sands with BNP Paribas Exane.

I have several to ask, [ limited ] to 3 maximum. Firstly, just on the Scholle IPN business, I realize it's obviously been only for more than 12 months, but not within your organic growth disclosure yet. Could you just give us what the organic performance was for that business in Q3 and give us some insight as to whether the resin escalators were a positive contributor to that or whether they are now flat or even down? Secondly, on the filler installations, are you still expecting to install around 90 this year? And do you have any kind of early visibility on next year? And lastly, just wanted to clarify, did you say that you expected this year your net CapEx to be at the lower half of 7% to 9% of sales? Or is that more progressing into 2024?

Charlie, thanks for your question. Scholle IPN growth, the organic year-to-date growth for the bag-in-box and spouted pouch business is just shy of 6%. So I think that's a growth that is largely driven by volume growth, and it's kind of coming from the global basis. Obviously, the U.S. business still being the largest business. The Q3 growth rate was rather flat. And this is a function Europe which had a significant start into the year with very strong growth in the first half, saw a weak quarter 3. The same was true for South America, where I would say, to some degree, similar like our aseptic carton business, but also then I think tomato season shifting a bit into Q4 as the drivers for that. So rather a flat Q3 and the business is now tracking just slightly shy of 6%. And with that, obviously, also keeping in mind strong comps for the last year, Q3 last year in the low-teens where we saw growth rates, that's obviously a function of share gains, but also the rebound after COVID-19. And this is a business that obviously historically has tracked rather growth rates of mature markets around the 2%. So I think we are very pleased and in line with expectations with the performance there. The filler installation, yes, we still look at a similarly -- a similar number, a we said earlier, this year compared to last year, if I look to the gross number of fillers placed. And I think that is a testimony to the continued demand for SIG technology, but also for the beverage carton, there's a substrate in general. I mean, our filler pipelines, they still look solid into next year. We haven't yet kind of contracted the full year demand, but we're positive on the outlook into next year. And we will update there also then on the full year numbers with the outlook for next year. The net CapEx, just to clarify, indeed, that the guidance for this year, where we said we year-to-date track now the upper end of the corridor or above 9% even, and we said we're going to bring that into the lower half of the 7% to 9%. That's indeed this year.

Our next question comes from the line of Yuyang Zhang with Bank of America.

I think I've got 2 questions. First one on organic revenue growth. By region, it seems like a good growth in Europe and EMEA. APAC was particularly quite strong, whereas American seems a little bit light because of the kind of comparison year-on-year. If you could give a little bit color around these 2 regions and also like how should we think about the gross momentum into Q4, that will be really helpful. And my second question is, how should we think about the upfront cash payments in Q4? If you could help us understand why did that come through in Q3? Are customers kind of pushing back or under the high rate environment that kind of impacts the ability to push cash a little bit forward, that would be helpful.

Thanks for your questions. So let's start with the organic growth. I mean, walking through the regions, Europe, obviously, as we said in earlier calls, benefits most from the price increase. And that also explains a large part of this growth rate. That said, we are very pleased also with the underlying share gains. And I think we're doing very well in Europe on the aseptic carton business. Middle East and Africa, we all talked about Q2 and the expected slowdown there. And we are pleased to see now that we are back on a decent growth rate for the third quarter. Also, we have seen those markets that reflect the [ carton ] initiatives to how currency have eased and rebound this quarter. In Asia Pacific, in line with expectations after a very, very soft start in China in Q1, we said we see for the remainder of the year, a solid demand. And I think that's what also is reflected in the growth rate now of the third quarter, and it was also the second quarter. The Americas, and I think you characterized that well, obviously, of a slowdown, especially South America started very strong into the year, but now we really see there strong comps for last year. And we have seen in Latin or maybe South America a bit of a weaker demand in July and August. I mean, in general, I would say, if you ask for the outlook for the remainder of the year, we obviously maintain our guidance of 7% to 9%. I mean, at this stage, I wouldn't expect a significant acceleration versus the year-to-date growth. I mean, we said it on earlier calls also in our category, which is the entry level of processed and packaged food category that is characterized through resilient demand. But with food prices and the inflation for food products on shelf, we do see that also consumers of our products need to kind of think twice before they spend the money and there is a bit of an elasticity element in there, which led to a slow down demand. And that's also what we see in our numbers. But the 7% to 9%, obviously, maintained and, I would say, from a today's perspective, probably not a significant acceleration into Q4. So your second question is a good one. And I think we should elaborate that. Why is the upfront cash back loaded this year? So it's not related to customers pushing back. What triggers the upfront cash collection for us is really bringing the fillers online, means up and running. And that's just how kind of this year's fillers deployments are underway. So they are also back-end loaded. And we have a number of fillers that now in the third quarter were installed and need to be commissioned in the fourth quarter, and that will trigger the upfront cash and that's going to happen.

That's very helpful. If I can squeeze one more question relating to GLP-1. Do you think about in the longer term or in the near term, have any impact on the business in terms of kind of revenue growth and volume?

I'm sorry, I didn't catch your question, but what was the first part of the question? What has an impact from...

Relating to GLP-1, the anti-obesity drugs that kind of reduce people's consumption on high calorie consumption.

Got you. I mean, we operate in many markets where we saw similar regulation kicking in earlier, sugar tax that did trim demand where customers had to change recipe. And the reference point where we saw that, that was in the Middle East, that was in the Nordics, that hasn't impacted the demand for our products because customers, obviously, they find ways to adopt that. That's what we see. And I think the same also goes on the soft drinks side, if there are substitutes that obviously are conformed with those regulations.

The next question comes from the line of Alessandro Foletti with Octavian.

I wanted to ask a couple as well. Maybe on the Q4, let's say, when I look at the run rate today and your targets for Q4, can you maybe be more precise on the free cash flow? Is it all coming from, so to speak, these upfront payments that you will receive? Or what is the contribution, say, of the margin and then the working capital?

I think it's all of above. But definitely, Alessandro, the upfront cash plays an important role. I mean, we said on earlier calls, we're comfortable with the consensus for the free cash flow, and that means there is a significant contribution now coming out of the fourth quarter, which is in line with our seasonality. And as it is normally a very strong quarter for sales. That also leads to the reduction of inventory. So we're going to see the same this year. We're going to see the upfront cash collection, which you're going to see kind of obviously, the EBITDA translating into cash contribution. So I would say it's all of above, but definitely more pronounced is the element of the upfront cash this year.

So if I understand correctly, this year, really, the only outlier or exceptional fact is this upfront cash payments? You're not banking in specifically strong year-end like early or anything like that, right?

No, I think it's a fair way to put it.

All right. My second question was on what you mentioned on the aseptic, spouted pouch machines. If you can give a little bit more details on that, what are the capabilities of these machines? What kind of business model are you pursuing there? And is this product still sort of a beta test version? Or is it commercial, meaning at some point, you really start to roll it out and offer it to all your clients?

Maybe to put some context around that. That's a good question. So generation 1 is, let's call it a slow speed filler, which is in line, I would say, with what the filling speed is today in the market. But against our ambition to deliver fast speed, I would call it our slow speed. That is a pre-manufactured spouted pouch that needs to go for sterilization purposes off-line. That means a lot of players where it's going to gamma-related when it comes to the customer filling. So that has higher total cost of ownership, but it works for applications where even the end product has decent margins. That's the first generation, which is already out there. The second generation I referred to that hits now the market, and that's a prototype that we're going to launch with the largest banana producer in the world. That is a machine that is not yet faster in speed, but that does and it still comes with pre-manufactured spouted pouch, but it does in line sterilization with the same technology that we use on our aseptic carton line. So that's a big step forward because you cut out the whole transportation and external radiation for sterilization purposes. And then the third generation, which is underway, it's going to move from pre-manufactured to spouted pouch that are produced on customer side, as well as a higher speed. And that is going to help us then to bring total cost of ownership down further. Does that answer your question?

Yes, it does. Maybe if you can tell me when you plan this Gen 3 will really be fully commercial and then offered globally?

Yes. We aim to have a prototype in the market in late '25.

Okay. Great. That answers my question. And then maybe the last one in the Middle East, I see the organic growth was solid. Are there foreign exchange issues that you had flagged at the beginning of the year now resolved in that area or with certain countries forbidding conversion?

Yes, at least for now, Alessandro. I mean, we saw them come and go, right? And we did see now that, especially North Africa, 2 countries, East [ accepted ] foreign currency again. And also it depends what kind of products they kind of limit for importation. I think that's where we saw in the past, this fluctuation, you're familiar with that, and I wouldn't exclude that also going forward. But for now, we see them resolved, but let's see how that's evolving.

The next question comes from the line of Joern Iffert with UBS.

The first one would be please on the margins. And sorry, when I missed something, I was disconnected. Just to double-check this is the significantly higher volumes in Q4, there should be nice operating leverage. And I was asking if margins in Q4 can come back to the good Q2 levels. This would be the first question, please. The second question is on the first views on pricing for 2024. What are you hearing? What you are seeing on the customer side and across your peers? What is your best guess regarding pricing for 2024 on group average? And this would be the first 2 questions, please.

Thanks for your questions, Joern. So, I mean, Q4 margin, we talked about the Q2 margin back then and said it was influenced by positive mix effect. And we talked about that in earlier calls, too, mix can vary from quarter-to-quarter. And in Q2, it just happened to be that the set of customers we did more revenue with was more positive than in all quarters. And that normalized now in Q3. Absolutely, I think in Q4, we normally see a bit of operating leverage. We need to see where raw materials are. That's always a function of spot price and what we have hedged already. I don't expect so much positive there for Q4. But I would also say, at this stage, where we stand, I mean, we maintain guidance, and I think I expect us for the full year to come in at the top end. And, I guess, that gives you a bit an indication for what we expect Q4 without now giving specific guidance on Q4. Then '24 pricing. I would say, in any year, it's difficult on the Q3 call to already talk about pricing because that's exactly the period of the year where we all put out -- puts and takes together and we do the budget, get kind of a view on our cost structure. But I think in the current environment, maybe even a little bit more difficult. Now, we're going to obviously come with an indication with the guidance for next year. But as everyone recalls, we were late in following the cost increase. And I always say, we're also going to be slower on the way down. I mean, that's the principle that hasn't changed. Now, for next year, we already know there are a number of input cost factors that continue to go up, first and foremost, wages. And then I think the other input cost is going to be a bit of a function of where the -- how the world economy looks like. But I think that's too early to tell. And also from kind of competition, we haven't had a kind of full on representative indication yet. But what also I want to remind everyone, I mean, pricing for us definitely a function of input cost changes, but also of FX, but also very important for us on the value-based side. What is the value we create for the customers, to what degree do they use our USPs. And I think that all comes together. So stay tuned, but we definitely don't expect significant price increases into next year, but it needs to be mapped out now what the [indiscernible].

And the last question, if I may ask also a topic discussed in the Capital Markets. Can you tell us what roughly is the margin benefit in 2023 coming from R&D capitalization and inventory provision releases?

In '23, you are asking?

Yes. Roughly a ballpark.