September, 1, 2017
Huhtamaki H1 2017: Net sales grew and profitability was on a good level
We published our H1 and Q2 2017 results on July 21. In the second quarter, our net sales grew to EUR 772 million (EUR 742 million in Q2 16), while comparable growth was at 1% in total and -1% in emerging markets. Our EBIT was EUR 76 million (EUR 78 million), making Q2 17 the second best quarter in Huhtamaki’s history in profitability terms – the record was achieved in Q2 16. Our EPS was EUR 0.52 (EUR 0.53). During the first six months our capital expenditure increased to EUR 95 million (EUR 56 million) as we focused on strengthening and expanding our manufacturing capability. Consequently, the free cash flow declined to EUR -12 million (EUR 38 million).
Related to H1 and Q2 results, the following topics have been frequently discussed with investors:
Q: Comparable growth in Q2 17 was 1% in total and -1% in emerging markets. What were the main reasons for the low growth rates?
A: In Q2 17 our business grew well in Europe, driven by healthy demand. Quarterly growth in North America was modest due to capacity constraints, which we are addressing with on-going growth investments. The Flexible Packaging segment’s net sales development was negative due to significant net sales decline in India, where the Goods and Services Tax (GST) reform weakened demand temporarily. Due to net sales decline in India, the Group’s comparable growth in emerging markets turned negative. Without the Indian impact it would have been approx. 5%.
Q: How is consumer demand expected to develop in India after the GST reform in the beginning of July?
A: The Indian government announced the GST reform in late May 2017 with an effect from the beginning of July. The announcement led to significant destocking among our customers and the retailers in June, followed by plans for new products and new packaging to be launched post the GST implementation. New product and packaging launches require certain redesign and printing cylinder gravure, which starts to build our pipeline and increases trading activity.
Q: For the North America business segment, growth in Q2 was at 1% vs. 8% in Q2 16. Why was that?
A: First of all, growth was somewhat uneven between businesses during the quarter, but as an aggregate on a lower level against the strong Q2 16. In Q2 17, the retail business grew well driven by healthy volume development in private label tableware. However, the segment’s comparable growth was moderate mainly for 3 reasons: capacity constraints in certain key product categories, subdued foodservice packaging volumes due to lower promotional activity among QSRs, and net sales decline in the frozen dessert packaging. We are currently addressing the capacity constraints by investing in a new manufacturing unit in Arizona, and in additional capacity in some of our existing units.
Q: In H1 17, your capital expenditure was about 70% higher than in H1 16. What are the largest investments in 2017?
A: Largest investments for business expansion in H1 17 were made in the U.S. and China. In the U.S., our project in building a new manufacturing unit in Arizona is proceeding as planned. We will start to ramp up manufacturing of a full range of paper packaging products targeted to the southwest and west coast markets towards the end of 2017. In China, we invest in expansion and modernization of our foodservice packaging operations in South China. This investment is be complemented by the acquisition of two foodservice packaging units in Shanghai and Tianjin from International Paper (*.
Q: How do you see the capital expenditure develop in H2 17?
A: In connection to our 2016 results release in February, we have guided that we expect capital expenditure for 2017 to be approximately at the same level as in 2016 with the majority of the investments directed to business expansion.
(* Deal was disclosed on June 29, 2017. Finalization of the deal is subject to completing applicable registration obligations with authorities in China. Money spent on acquisitions is not included in capital expenditure.