Interim Report Q3 2019
Our growth continued to be strong in the third quarter of 2019. Net sales increased 10 percent to EUR 855 million with the comparable net sales growth at 7 percent. In the emerging markets our growth continued strong at 8 percent. We had some tailwinds from currencies during the quarter as the translation impact on net sales was 3 percent.
During the quarter, we continued to improve our profitability. Our adjusted EBIT increased 26 percent to EUR 72 million, and the corresponding margin improved to 8.5 percent. Adjusted EBIT increased significantly in the North America segment and strongly in the Flexible Packaging and Foodservice Europe-Asia-Oceania segments. Overall, the improvement in profitability is a result of the actions we took in late 2018 to improve pricing and efficiency.
We continue to develop and deploy our portfolio of sustainable packaging. Fresh, the fiber-based ready meal tray, has been well received. The pilots that have taken place in Waitrose stores in the UK have showed that there is a strong customer and consumer interest for Fresh and the product performs well through the supply chain. Huhtamaki’s first industrial-scale Fresh manufacturing line will start operations during the fourth quarter of 2019, in Lurgan, Northern Ireland. Our two other recent new launches, the Huhtamaki blueloop concept for recyclable flexible packaging and our paper straws, also progressed well during the quarter.
At the end of the quarter we announced two acquisitions that support our growth in the developing markets. One of the flexible packaging manufacturers is located in South Africa and the other in India. Following the acquisitions, we expand our flexible packaging manufacturing footprint into South Africa and are able to speed up our growth in India by improving our capability to serve the customers in the southern parts of the country.
President and CEO
In the second quarter of 2019 we achieved a strong growth of 10%, reporting net sales of EUR 867 million. Comparable growth was 6% and in emerging markets 7%. We also continued good progress with our global key accounts. Positive currency translation impact was 3%. The acquisitions completed during the last 12 months accounted for 2% of the total growth, adding EUR 13 million to the net sales.
Our adjusted EBIT for the quarter grew by 11% to EUR 78 million. All segments report an improved adjusted EBIT. The strong net sales growth, led by the North America segment, combined with the efficiency improvement actions and price increases we implemented last year, translated to higher adjusted earnings. Our tight focus on portfolio and margin management, particularly in Flexible Packaging India, drove profitability improvement.
It is good to see that the heavy investments of the last few years are paying off. The North America segment delivered a particularly strong quarter. In the Foodservice Europe-Asia-Oceania segment the investments to expand our product offering with folded carton, bags, wraps and paper straws are delivering good growth in the fast food segment. Capacity additions within the Fiber Packaging segment are consistently resulting in volume growth. In addition, during Q2 2019 we inaugurated a new manufacturing facility in Egypt to facilitate growth in Flexible Packaging in Africa and in Europe.
In addition, we continued our work to further improve the environmental performance of our products. With the launch of our Huhtamaki blueloop -concept we began commercial deliveries of recyclable flexible packaging. Waitrose in the UK chose our Fresh tray for the relaunch of their Italian ready meal range and we have invested in more capacity to meet the demand. We also opened a new paper straw manufacturing facility in Northern Ireland and expect to begin paper straw manufacturing in further units in Europe. We also published the results of an LCA study on coffee-to-go cups. The study confirmed that our Future Smart range, which is 100% made of renewable resources, is the best currently available solution for coffee-to-go.
During my first 100 days at Huhtamaki, meeting our customers and our employees, I am impressed with our business model, our operating structure and the competence of our people. Looking at our industry and the market, powerful trends are strengthening and changing the way forward for packaging. These include evolving consumer preferences that encourage us to accelerate our innovation work; rapid advancements in digitalization and analytics; strong growth of food delivery and grocery e-commerce; and focus on the impact packaging has on the environment. We are well positioned to deliver on these challenges, and we will further invest in the required strategic capabilities and resources to transform those trends into opportunities.
President and CEO
Our first quarter net sales grew 11% to EUR 802 million. The Group’s comparable net sales growth was 5% and in emerging markets 7%. Also, net sales to global key accounts developed well. Positive currency translation impact was 3%, mostly from the stronger US Dollar. The acquisitions completed in Q2 2018 brought the Group 3% growth and added EUR 25 million to the quarterly net sales.
Our EBIT grew by 12% to EUR 68 million. Good net sales growth combined with price and mix improvements and enhanced cost efficiency contributed to higher earnings. Foodservice Europe-Asia-Oceania, North America, and Flexible Packaging segments all increased their net sales and improved EBIT while Fiber Packaging EBIT declined mainly due to investments related to the ongoing Fresh innovation project.
We continued to make good progress on several innovation projects, most notably paper straws, fiber-based ready meal tray Fresh, and the recently launched Huhtamaki blueloop concept of recyclable flexible packaging. All of these are good examples of our solutions to pack and serve food safely and conveniently with less negative impact on the environment.
The year has started well with record net sales and EBIT for the first quarter. Significant organic growth investments made in the past couple of years are expected to deliver continued good growth. The most recent official facility opening was held early April in Egypt where the new flexible packaging plant is ramping up its production.
Huhtamaki had a challenging year in 2018 as our growth and profitability were impacted by an inflationary cost environment and negative currency fluctuations. However, our full-year comparable net sales growth was 5% with three acquisitions completed in Q2 adding another 3% to our annual net sales growth. Q4 comparable growth was 6% and the quarterly net sales of EUR 813 million are an all-time high for Huhtamaki.
Profit declined, impacted by negative currency movements, higher costs, which price increases did not fully offset during the year, and the start-up costs of new facilities. We took actions to reduce costs and improve our selling prices during the year with these measures starting to have a positive impact in Q4 2018. Most of the cost reduction and restructuring actions were completed by the end of 2018, the full benefit of which will be reflected in 2019 and 2020. We will continue to drive productivity and price/mix improvement actions with the aim to offset increases in raw material, distribution, and other operating costs.
In 2018, Goodyear, our Arizona plant and the main project of our 2016 investment cycle, came on stream. The ramp-up of another investment commissioned in 2016, a new flexible packaging plant in Egypt, began in Q4 2018. The investments strengthen the Group’s positions in North America and Africa allowing it to capture new growth opportunities. All our segments had a good net sales development in 2018. The 5% full year organic growth achieved in the North America segment helped Huhtamaki to meet its long-term organic growth ambition both in the fourth quarter as well as for the financial year.
The North America segment had the highest negative profit impact, with earnings declining by EUR 30 million. This was primarily driven by significantly higher distribution costs, the Goodyear plant start-up costs and the negative impact from currency translation. The improvement achieved by Foodservice Europe-Asia-Oceania and Fiber Packaging, as well as the Group’s overall cost efficiency, were not enough to offset the headwinds in the North America segment.
With major investments and the completed acquisitions totaling EUR 256 million, our net debt/EBITDA ratio is 2.2. This maintains a good acquisition firepower and allows continued implementation of both acquired and organic growth. The recent capital expenditures will have a positive impact on 2019. In addition, we will look for value-adding acquisition targets and invest in new packaging solutions.
Innovation work focused on developing more sustainable packaging products for food. Our experience in using renewable raw materials like paper and fiber, and our know-how in plastics, gives us a very strong knowledge base to meet the customer and consumer expectations and address changing demand. The most interesting innovation projects revolve around replacing plastic with paper and fiber solutions and in making plastic food packaging easier to recycle. Our compostable ready meal tray, Fresh, that seeks to replace black plastic has attracted the highest attention. Several similar substitution projects, such as paper straws, are either in development phase or already in implementation.
Headwinds brought by the 2018 business environment did not slow down our growth but had a negative impact on our profitability. Now early into the new year we can confirm the actions to improve Huhtamaki’s profitability are impacting and we expect to be back on a positive profitability development track in 2019. Underlying demand for high-quality, sustainable, and safe food packaging is growing and Huhtamaki is in an excellent position to contribute to that trend. Our customers see positive development for 2019 and so do we.
Our reported third quarter net sales grew 7% including a minor currency headwind impact of -1%. Comparable growth for the Group was 4% and in emerging markets 5%. Acquisitions added EUR 30 million to reported net sales accounting for 4% growth. During the quarter a number of important emerging market currencies devalued significantly.
Our profitability weakened because price and mix improvement actions were not enough to offset the increase in input costs. We will continue the price and mix improvement actions. In addition, we announced in early October plans to close down non-competitive production lines and invest further in automation to improve our productivity and efficiency. Executing the plan would generate an item affecting comparability (IAC) of EUR -30 million, to be recognized in Q4, and it is expected to improve our profitability by EUR 15-18 million annually, with full impact in 2020.
Net sales with global key accounts developed well and we made good progress on many innovation projects. I am pleased to see the project Fresh progressing to a second, larger consumer test phase in the UK. This compostable ready meal tray is made from renewable fibers and it can replace black plastic trays. Fresh is a good example of the work we do in developing solutions to pack and serve food safely and conveniently with less negative impact on the environment.
The ramp-up of our new facility in Arizona, the U.S., is on track supporting the sales growth of paperboard-based products. The building of the new flexible packaging manufacturing unit in Egypt is also progressing as planned and we expect to start early trials towards the end of 2018 and commercial deliveries in early 2019. Both units will help us address the growth opportunities we continue to see in food and drink packaging.