SIG Group AG (SIGN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SIG Q1 2024 Results Conference Call and Live Webcast. I am Maureen, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [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 Investor Relations. Please go ahead, madam.

Good morning, ladies and gentlemen, 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; and Anne Erkens, CFO. 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. Starting with key business highlights in the quarter. We were pleased to see good volume growth in both aseptic and chilled carton. However, the bag-in-box and spouted pouch performance, while acknowledging strong prior year comps, came in below our own expectations. During the quarter, we commenced the planned transfer of our chilled carton manufacturing from Shanghai to alongside our aseptic facilities in the Suzhou Industrial Park. This new state-of-the-art facility allows us to accommodate the strong revenue growth and market share gains that we are seeing in chilled. We believe the business will benefit from the modern and efficient facilities that we have built in Suzhou as well as from shared infrastructure, existing R&D resources and our customer testing facility. We were delighted to launch our speed up kits in India during the quarter. This innovation allows us to increase the output on our installed single-serve fillers by 10%. This with a minimal associated CapEx for SIG or the customer. By accommodating 10% more sleeves per filling machine, we can achieve very nice returns on this innovation. Lastly, we have kicked off our refinancing program ahead of our '25 debt maturities. This got off a great start with an upgrade of our outlook by Moody's to BA positive. SIG is already rated investment grade with S&P. In March, we launched the Schuldschein offering, and we have seen strong demand. As we stated at our 2023 full year results back in February, we expect the overall business performance to be weighted towards the second half of the year as end market demand recovers. We did see encouraging signs of recovery in parts of the aseptic carton market, notably in Europe, Southeast Asia and Brazil. And we are continuing to see growth in chilled carton. Revenue at constant currency was in line with the prior year. While the resin escalator had a varying impact on regional revenues at the group level, there was no impact for Q1. Adjusted EBITDA was EUR 155 million, and the margin was 21.5%. Compared to Q1 '23, the margin reflects foreign currency headwinds, mix impacts and increased investments in growth. Free cash flow was negative EUR 101 million in the quarter, reflecting seasonal working capital outflows, including payment of volume rebates for performance in '23. It also reflects net capital expenditure of EUR 63 million, clearly below last year. CapEx is expected to reduce during the course of the year as we complete some key projects. Our new chilled facility in China will ramp up from Q2 onwards, while our new Indian sleeve plant is on track for completion by year-end. Capital expenditure also includes investment in filling machines given our solid order book. We continue to expect a large number of filler placements in '24, although not as high as in '22 and '23. Net leverage was slightly above year and '23 at 2.9x, but below a year ago when it was above 3x. Turning now to the performance by region. Europe delivered strong growth of 5.8% at constant currency. Performance was driven by good volume growth in aseptic carton partly due to a low base effect in Q1 '23. The region continues to win new filler contracts in liquid dairy and food. Revenue from bag-in-box and spouted pouch declined against the strong prior year comparison, which included equipment sales that were not repeated in Q1 of this year. As a reminder, the current structure of the bag-in-box and spouted pouch businesses include stand-alone equipment sales. This can lead to quarterly fluctuations in growth. We see it as a strategic opportunity to convert these sales into system solutions, and we have achieved good progress to date. We will continue to develop this over the short and medium term. In India, Middle East and Africa, quarter 1 revenue on a constant currency basis declined by 4.7%. India experienced strong aseptic carton growth. However, shipping disruptions in the Red Sea affected deliveries to customers in North Africa. These shipments will now take place in the second quarter, subject to no further escalation in the region. We are pleased, though, to have secured our first bag-in-box contract win in Saudi Arabia in food service. This is for a full aseptic system solution. Revenue in Asia Pacific on a constant currency basis increased 7.9%. Sales in China saw strong volume growth for both aseptic and chilled cartons following a decline in Q1 '23 due to the outbreak of COVID-19. Both categories are gaining market share, especially in 200-milliliter and 1-liter packaging formats for milk. Following a slower start to the year, Southeast Asia saw good volume growth in Indonesia, Thailand and Vietnam, especially in March. There was a strong demand for new filling lines during the quarter. Americas revenue declined on a constant currency basis by 10.5% in the first quarter. The decline in bag-in-box and spouted pouch revenue for the quarter reflects a strong prior year comparison and a temporary decline in out-of-home dining due to higher menu prices in response to increasing wage cost. We expect this to recover as quick service restaurants increased promotional activity. In Brazil, aseptic carton volumes saw good growth in March after a slower start to the year. The group continues its regional expansion in noncarbonated soft drinks and flavored milk. This brings me to the end of my part of the presentation, and I will shortly hand over to Anne. To summarize, the first quarter showed a robust revenue performance in aseptic and chilled cartons, offset by the impact of lower volumes for bag-in-box and spouted pouch. As previously stated, our full year results for the business as a whole, we expect volume growth to accelerate throughout the year as consumer confidence improves. I will now hand you over to Anne for a more detailed review of the financials.

Thank you, Samuel, and good morning, everyone. Let's start by looking at the Q1 adjusted EBITDA bridge. Adjusted EBITDA for the quarter was EUR 155 million compared to EUR 175 million a year ago. The performance was impacted by unfavorable currency movements, which reduced the margin by just over 110 basis points compared to the prior year. Raw material tailwinds from lower hedge prices for polymer and aluminum offset a negative mix effect, which reflected phasing of country and product sales. The production includes lower freight rates, net of a small impact from the Red Sea shipping disruptions and the nonrepeat of ramp-up costs for the new plant in Mexico, offset by wage inflation. SG&A reflects growth investment, R&D and wage inflation. Going forward, we expect the usual seasonality effect to reduce and the top line contribution to adjusted EBITDA to gain momentum. On the next slide, we have the EBITDA reconciliation. Compared with the adjusted number, reported EBITDA is lower by EUR 21 million and primarily reflects 2 impacts. Number one, the usual net movement in noncash unrealized commodity and foreign currency hedging positions. The movement in the quarter was a small positive compared to the prior year. And two, restructuring costs and impairment losses of EUR 19.1 million, mainly related to the closure of the chilled carton plant. The impairment was mostly due to the decline in the Chinese real estate market. On the next slide, we detail the reconciliation from profit for the period to adjusted net income. Other than the adjustments I just described to the EBITDA bridge, the largest adjustment to net income is, as usual, the Onex PPA depreciation and amortization. This arose from the acquisition accounting when the group was acquired by Onex in 2015. This amortization will cease after the first quarter of 2025. Turning to free cash flow. Free cash flow was negative EUR 101 million in the quarter, broadly in line with Q1 2023. As usual, cash flow in quarter 1 reflects the payment of volume rebates. Net CapEx as a percentage of revenue for the period was 8.7%. Overall, net CapEx decreased by EUR 25 million compared to Q1 '23. PP&E CapEx was EUR 37 million compared to EUR 51 million in the prior year. The lower CapEx reflects the completion or near completion of several of the group's projects to expand our global production network. PP&E CapEx for the year is weighted to the first half, and we expect a slowdown in spend in the second half of the year. Net CapEx for the construction of filling lines decreased by EUR 10 million compared to the prior year. This reflected both an increase in upfront cash payments and a slight decline in filling line expenditure. Payment of lease liabilities for right-of-use assets was EUR 15 million in the period. Turning to leverage and financing. Net leverage at the end of the quarter reflected the business seasonality, an increase compared to the 2023 year-end. It remains, however, lower than a year ago, and we expect it to further decrease to around 2.5x by year-end. We commenced the refinancing of our 2025 maturities during the quarter well ahead of the scheduled repayments, and we see very good progress here. Now let's turn to guidance. We are maintaining our full year guidance. We expect total revenue growth to be at the low end of the 4% to 6% medium-term guidance range. This is on a constant currency and constant resin basis. As a reminder, the resin escalator is for the bag-in-box and spouted pouch businesses, which passes on movements in resin costs directly to customers. As stated at our 2023 full year results, we expect the first half performance to be below the full year guidance and the second half performance to be above the guidance. For Q2, we expect the sequential improvement over Q1 for both revenue growth and adjusted EBITDA margins. The profitability in the second half will benefit from top line growth, and we expect an increase in the full year adjusted EBITDA margin to within the lower half of the 25% to 26% range. We aim to achieve this while continuing to invest in growth and in innovation. The guidance is, of course, subject to input costs and foreign currency volatility. That concludes our presentation, and we are now happy to take your questions.

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

The first question would be, please, on the guidance. I struggle a bit to follow it for the full year. Let's assume Q2 is improving somewhat on organic sales and margins, but remaining below the full year targets. This would imply in the second half, you need to have top line growth of 5% to 6% and then even EBITDA growth of 15%, which will drop through of around 60% above your gross profit margin. So can you share with us, is there anything coming on cost savings or lower input costs, which is helping the second half margin? This will be the first question, please.

Thanks for your question, Jörn. Let me just open the bracket, the operator just said 1 question, maximum. I mean, that's not instructed by us, so please ask as many questions that you have. So to your question, Jörn. Yes, I mean we expected and we said it also when we presented the '23 results, a year that is going to have a seasonality geared towards the second half. And that meant the top line as well as the margin, including also the free cash flow generation, that was specifically to the margin profile. Obviously, you saw the hit we took from FX now in Q1. We believe -- and that's not what we kind of -- where we bank on, but we believe that the FX impact is going to ease a bit. And we're going to also see it if you look to the raw material impact in Q1 where we still experienced hedged prices that we hedged quarter 1, '23 that were above spot rates, that the raw materials become more and more of a tailwind for the full year. And then obviously, operating leverage kicks in. SG&A is obviously a phasing topic. So all of these reasons in combination together is obviously an acceleration of growth make us support the guidance as we issued it at the beginning of the year.

And then maybe 2 quick questions and 1 would be, please. I mean, looking into Q2. Do you expect significant improvement versus Q1 organic sales and margins, I assume. But can you help us a bit to which corridors roughly that you have more confidence also for the full year outlook?

Yes, we definitely expect an improvement basically on all metrics for Q2, but I think it's going to be really gradual. When we talked about the full year guidance at the low end of the 4% and the lower end of the 25% to 26%, that's the full year guidance. So I expect H1 to be below this guidance and H2 to be above this guidance.

And the last question is, please, on aseptic carton. Very strong performance, mid-single-digit volume growth in Q1. Is this run rate something we should expect for the full year? And then can you also remind us on the comps for Scholle, going into Q2 and Q3, please?

No, we were very pleased with the start on the aseptic carton, which was indeed a bit stronger than we even have expected at the beginning of the year. That's a function of, obviously, Asia, especially China doing well. We also saw signs of recovery as I mentioned in the script, in Southeast Asia and to some degree, Brazil, especially in March, where volumes picked up. We obviously guide for the combined group at the low end of the 4% to 6%. We don't basically provide specific guidance for the substrates. But I think we had a good start into the year with aseptic carton. We expect also that it's going to be a key driver to support the guidance. In terms of comps from a bag-in-box and spouted pouch perspective, you recall, Q1 last year was the tough comp and that starts to ease now with Q3, Q4 -- Q3, Q3 -- Q2, Q3 and Q4.

The next question is from Charlie Muir-Sands from BNP Paribas Exane.

Firstly, on the currency impact that you called out on the margin on Q1. Can you just elaborate a bit on the mechanics of that? And you said you hoped it was going to be better from here. Is that based upon just assuming market spot rates hold or just trying to understand the sort of the upside and downside risks on that? That's question one. The -- and then the second question relates to the shipping delays due to the Red Sea congestion and risks. Can you just sort of give any kind of quantification as to how much that might have impacted your IMEA revenues in Q1 and for Q2, should we just assume it's sort of back to normal? Or is it back to normal plus that catch-up effect?

Charlie, let me take the first question on FX. So as you know, FX always includes translation and transactional impact, so transactional including remeasurements also. And if you take a look at last year's Q1 EBITDA bridge, you would also see a significant positive FX impact from a favorable remeasurement in the baseline, which basically didn't repeat in this year. And with this, also that's, of course, part of our confidence why we would see this effect easing over the next couple of quarters or going back to 0 and not having an impact anymore.

And with regard to the Red Sea shipping disruption, yes, we expect the catch-up of the Q1 effect into Q2, Q3. I think I wouldn't highlight now Q2 as we expect it to be a very outstanding one. I think also last year was a good one. So from that perspective, we expect just the next 3 quarters to be good quarters in the IMEA region.

Great. And just one follow-up question, if I may. Are you able now, presumably will the negotiations are complete to give us a rough indication at the group level around the price contribution you're expecting for the group for the year, excluding the resin escalator?

We still guide for kind of a flat impact on the top line from pricing. In some instances, pricing go up, but then we see volume growth, and that's offset by volume rebates. So overall, there is no impact from pricing on the top line.

The next question is from Pallav Mittal from Barclays.

Firstly, if you could talk about the impact of liquid paperboard cost on margins in Q1? And then how do you expect that to change in the remaining 3 quarters? And then secondly, if you are saying that the aseptic carton and chilled carton business has grown well, around mid-single-digit volumes, so that is 80% of the business. And if total group volumes are flattish, it would imply volume in Scholle are down 20%. Is that the case?

Yes. So let me take the first question on liquid paperboard. So basically, we can absolutely confirm what we have said before that we have a multiyear contract in place, which also won't surprise us a lot, and the development is very much in line with this. And I think you have seen the total composition -- the total bucket of sourcing, which was favorable to the quarter.

With regard to your second question, absolutely. I mean, mid-single digits for both chilled and aseptic. That means if you recall, we talked last year of bag-in-box and spouted pouch revenue growth for Q1 in the high teens. And we have seen a partial reversal of that now in Q1, not the full reversal but to a large degree. So I think the magnitude that gets us to the flat top line that we see for the combined business.

The next question is from Patrick Mann from Bank of America.

Thank you very much for the presentation. The first one is just a little bit around the growth outlook. So I mean you've been deploying a high number of filler machines relative to your history and you've done sort of 2 M&A deals, but we're still at the lower end of the growth outlook. I mean, is this a case of you've grown your footprint, but maybe consumption per machine is lower, and when we see a return of more robust economic activity, that growth could accelerate or do you think this is kind of the level of investment we need to run at to hit your 4% to 6% medium-term target? That's the first question.

Yes, I think that's exactly the way we think about it. I think we had these acquisitions in '22 full year consolidated in '23. We did see in the acquired business that they delivered volume growth against declining markets. The aseptic carton business last year was flat in volume against declining markets. And the filler wins that we did in place in '22, '23, they helped us to get to a flat volume. And I think exactly like you described it going forward, we believe in an environment where end market growth resumes, and we know what the fundamental drivers are of that population growth, disposable income growth that this will help us to accelerate growth. And we always say we are comfortable to grow the business within the 4% to 6% and have CapEx at the low end of the 7% to 9%, and that hasn't changed.

Okay. It kind of feels like it's hard to tell what the sort of growth impact is of the new filler machines when the overall market is declining. So I suppose it's one is going one way and one is going the other way. The other question is just around the leverage, the 2.5x by year-end. Can you just remind us, is that mainly driven by EBITDA growth into the second half of the year? Or I mean, I know free cash flow is seasonal, so we should see positive free cash flow in the second half. But just to what extent the net debt to EBITDA coming down is sort of driven by the denominator and the numerator, if that makes sense?

Yes. Thanks for the question. Also here, no news. As we have stated several times, our deleveraging is very much driven by the expansion of the EBITDA. And this is also what we expect for this year.

The next question is from Alessandro Foletti from Octavian.

I would like to ask you on Combibloc in Europe. When I sort of see the 5.8% organic or maybe even 6.2% without resins and Scholle being negative. I believe Combibloc must have been plus 10% or something like that. Is this sustainable for the rest of the year?

I think we were very pleased. Thanks for your question, Alessandro. We were very pleased with the start in Europe for aseptic. I don't think that necessarily that is going to set the pace for the full year. And obviously, we also expect bag-in-box and spouted pouch to contribute, obviously, over the quarters to come in a different way. Now what I would say, if you step back, though, I mean, purely looking at milk consumption, milk consumption of the world, experienced it ourselves during COVID, it increased at home consumption went up versus baseline year 2019. And while we're obviously clearly out of COVID, we do see that at home milk consumption has for now at least, kind of flattened out at the higher level than 2019. So that gives us a positive perspective in Europe also for the remainder of the year.

All right. But my calculation was approximately correct?

I mean, Europe had a very good start, as I said, and obviously, bag-in-box against the background, the tough comps, obviously was a bit of a drag to the group to the European growth rate. So I think directionally, absolutely right.

All right. Okay. Well, I still have a question for the U.S., but the other way around. But first, you mentioned the machine business. When I look at your machine business on group level, even including service, is 12% of your whole top line, and that includes also the leasing machines. So I tell only the sold machines, it's almost irrelevant to the group. So why does it have, as you mentioned, now such a big impact for Scholle specifically?

You're right. Obviously, it's a number of different things, right, on the bag-in-box and spouted pouch sales. I mean, I've talked before about that, we saw a partial reversal of the very strong growth rate we saw in Q1 '23. So let's remind ourselves what drove the Q1 '23. It was on the one hand side that we saw a bounce back from COVID, which was a very strong one. We saw share gains in the U.S. And we had one-off equipment sales, as you rightfully said, these are the ones that are outright sales for equipment. There, maybe not relevant for the total group, but they are definitely relevant for bag-in-box and spouted pouch in a single quarter. And those 3 things came together. That's where we saw the reversal now. And as you know, our strategy, especially by moving these systems to aseptic by making it an assistance business, by selling consumables and machines. We also want to move it to a systems business that we have in the aseptic side, which also comes with more smoothened out equipment sales.

Okay. All right. Thirdly, then maybe on the net interest, if I may. It was EUR 36 million for the quarter. Is it really just the interest expenses there? Or is there some other effect and i.e., do we have to multiply that by 4 for the full year or for the full year, the expected interest expenses may be lower than EUR 120 million?

Yes. So thank you very much for the question on the interest. I mean there's always, of course, a question, so it's not perfectly equal to -- in all quarters, those payments, that is for sure. And we still believe that for this year, we're going to be pretty close to last year's levels on interest overall.

And you mentioned the refinance is, hopefully, it will have a positive impact on your interest expenses. Can you sort of quantify once you have concluded the refinancing?

Yes. So I would ask you to wait until we really have financed everything. We are on the last meters with the Schuldschein. So that has progressed very well. We saw really very good demand. And then the other components will follow. And I think we would give an update when everything is finalized.

Right. And then if I may, one last one on the filler CapEx. Can you give an indication for the rest of the year, how that might get out?

So we have full year guidance out, and we always said we are comfortable at the low end of the 7% to 9%.

Okay. So including everything, basically. But are both components going down, i.e., PPE and filling line? Or is it like filling line going back up again and PPE going down?

No. I mean we said we expect a good number of fillers to be placed, but not as high as in the prior 2 years. So I would say, without providing a specific guidance and the different components, I wouldn't be surprised if both components go down.

The next question is from Jain Gaurav from Barclays.

This is Gaurav Jain. So 2 questions from me. So one is when you -- last year and even so far this year, a lot of packaging companies have talked about destocking and now probably some restocking is happening. So when you are looking at volume growth, is it possible to aggregate into end demand growth versus any potential restocking that might be happening?

Yes. I follow these discussions too. And already last year, we said what fundamentally drives our end market demand and hence, also our volume is kind of consumption of the end consumer. And there is also a bit of a stocking effect in between, but I think it is not as material as it seems to be for all the businesses that we need to spell it out. So for us, it comes down to the end market demand.

Okay. And second is on leverage. So clearly, let's assume your financial projections are met, and you are -- will be in a very healthy leverage position by the end of the year. So then what would be the objective of the group, to do more M&A or to look at maybe additional shareholder returns like share repurchases as we go into 2025?

Yes. I mean, first, we have a leverage target for this year, but you also recall, we have 1 for the midterm, which is towards 2x, and we are committed to get there. And that also means that we continue to grow the business organically. We have expanded our platform. We have cemented our leadership position as the leader in sustainable packaging for liquid food and beverages. And from that perspective, we are comfortable to grow the business organically.

Okay. And if I could just sneak in one last one on PPWR. Like how do you think that impacts your business as this final regulation is getting drafted? Or it has passed already, so how do you think it impacts the business?

We're pretty neutral and I think we can live very well with the outcome. And from that perspective, we look at also in general, regulation more as kind of creating a level playing field. Obviously, what will be a super tailwind for us would be something like a carbon tax, but that's not at the horizon. With the PPW R&D outcome we can live very well with. We have now one more year of further detailing and specifications. And obviously, we continue to watch that. But from today's perspective, we're very comfortable.

[Operator Instructions] The next question is from Sun Mengxian from Deutsche Bank.

So 3 questions from my side. The first one is on the short-term growth outlook. So you indicated that the H2 growth should accelerate compared to H1. I'm just trying to understand here on which ground is the confidence coming from on the volume recovery? Is that the customer indicating that they will hit the volume threshold and how much visibility do you have -- actually have at the current stage? And the second question is a follow-up question on the FX impact on the margin. Can you give us more color on the accounting mechanism, how does the remeasurement impacting the transaction effect? And the last question is on the first bag-in-box order win that you got in the IMEA region in the food service. Can you quantify that order, please?

Thanks for your questions. Yes, we expect, as I said before, an acceleration of top line growth over the quarters to come. And I also said before that while we look at the full year guidance at the low end of the 4% to 6%, I think H1 is going to be low and H2 is going to be above this guidance. Definitely in the aseptic carton side where we have these volume commitments from our customers, that gives us visibility, and that's also factored into this guidance as are also kind of signs of recovery that we see in the end market demand. We know that in many markets, prices for food products or inflation has slowed down. And we also know that wage inflation in many markets is underway. And we believe that's going to bring the disposable income more back into sync, as what we have seen prior to this inflationary period. So these 2 factors kind of support our view for the quarters to come. Anne, on the FX?

Yes. So how do the remeasurement mechanics work? So basically, that is a reassessment of the balance sheet positions in foreign currencies. So where you would, for example, when you think about net working capital and revalue your inventories and receivables or pay this accordingly. And the 2 major currencies that played a role here, especially in last year's baseline were Thai baht as well as the Mexican peso, if that helps.

And your last question was on the system sales in Saudi, which we're excited because it goes into food service. It's aseptic. It's an all-encompassing offering with the machine, the consumables and the service. We haven't quantified that, though, as we didn't do it in the past. But for me, it's a continuation of the synergies that we were able to bring home in the last year that confirmed the industrial logic of the combination. The customers see a value in having this expanded offering. And so we will continue to report on that. And it was especially a breakthrough as historically, the Scholle business has no physical presence in Middle East, a bit of export out of Europe. So we're really now building that up. That's why we're very excited about that win.

We have a follow-up question from Alessandro Foletti from Octavian.

Just on the impairment in China, I imagine you mentioned the real estate market and the valuation there. So I imagine you are probably selling the plant that -- where you were doing the Evergreen business. And I wonder if the selling process is -- how far you are, i.e., there are further potential risk of impairment or if this new value now already reflects, I don't know, your agreements or whatever?

I mean, that's going to be a transition. I think you're spot on with what you described. We indeed intend to sell the site, the building in Shanghai. It's going to be a bit of a layover now as we need to move some equipment. So the process is going to -- the sale process for the land is going to take place in parallel of now us moving equipment out and basically bringing operations in Shanghai to a stop. Obviously, we looked at the market and also did some more work around valuations, and we felt that with the current impairment, we took a realistic view of what is -- what we can expect for the sale of this land.

And timing-wise? I mean, I don't know, by the end of this year?

By end of this year, we want to be done with producing there, everything moved. And then obviously, it's going to be a function of when we find the right buyer. But it's a land which is placed in a very attractive zone because it's mainly residential also around it, but obviously, there is a bit of an impact on the overall market.

There are no more questions from the phone.

And we appreciate your time this morning. Thank you for joining us, and we look forward to see you in either one of these investor engagements that are scheduled here, all and latest in the H1 call later this year. Thank you very much, everybody, and have a very good day.

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