Interim Report Q3 2020
The COVID-19 pandemic continued to dominate the news flow and everyday life in the third quarter of 2020. We remained focused on safeguarding the health and safety of our employees and business continuity throughout the organization. Whilst parts of our business, particularly foodservice, were still substantially impacted, we have seen a limited recovery during the third quarter. Demand for food on-the-go products has gradually improved, but it is still lower than in 2019. The significant gap in consumption in restaurant services is partly compensated by the fast-increasing trend in food delivery. On the other hand, demand for food on-the-shelf products has remained strong throughout the crisis. In North America, the increased in-home consumption continued to support retail tableware and consumer goods sales. Growth in the Fiber Packaging segment continued to be driven by high demand for eggs and continued substitution of plastics. In the Flexible Packaging segment, the supply chain disruptions suffered in India and UAE during the second quarter eased during the third quarter, although we did not see fully the recovery to a normal level of logistics and consumption.
Our resilient and diversified portfolio continued delivering solid performance in the third quarter, with a comparable net sales growth of 2%. On Group level, comparable net sales from the beginning of the year declined -1% compared to 2019. The adjusted EBIT margin in the third quarter increased to 10.1%, improving 1.6 percentage-points compared to the same period last year. Year to date it increased from 8.7% in 2019 to 9.2%. The improvement in profitability reflects favorable mix impact and our continued focus on costs and efficiency.
During the quarter, the Board of Directors decided to pay a dividend of EUR 0.89 per share for the fiscal year 2019. The dividend has increased every year since 2009, in line with Huhtamaki’s growth trajectory.
In March, we had introduced our 2030 strategy and laid out high ambitions for this decade. We are focused on delivering growth, improving competitiveness, developing talent, and embedding sustainability in everything we do. I am pleased to see that our work towards these ambitions is proceeding positively, albeit with some challenges and potential delays related to the current crisis. Our determination to strengthen and embed sustainability across products and operations has already yielded results. This is also visible in our stakeholders’ evaluation of Huhtamaki as a company with a strong commitment to sustainability.
President and CEO
The first half of 2020 has been marked by the COVID-19 outbreak. Throughout the crisis our primary focus has been to safeguard the health and safety of our employees and to maintain business continuity. We have taken necessary measures to carefully manage our financial situation, contain cost and prioritize investments, whilst planning ahead for a gradual recovery and a renewed growth trajectory.
Restrictions and lockdowns related to the pandemic negatively impacted the demand for food on-the-go products but conversely boosted consumption of food on-the-shelf products. Towards the end of the second quarter the demand for food on-the-go products improved as countries were easing restrictions. Demand however remained lower than 2019. As a result, for the first half of the year, we were able to deliver a solid performance in the face of the COVID-19 crisis.
The negative impact of COVID-19 is visible in our foodservice sales globally. In North America, where the lockdown period was shorter, sales of foodservice products decreased less and were partly compensated by growing food delivery and drive-thru channels. Increase in home consumption also supported retail tableware and consumer goods sales. In the Fiber Packaging segment comparable net sales growth was strong driven by high demand for eggs and continued plastic substitution. In Flexible Packaging, despite the strong demand for pre-packed food and hygiene products, growth was held back by supply chain disruptions in India and the United Arab Emirates. At Group level, after a first quarter of solid growth, net sales declined by 8% during the second quarter and overall, by 2% for the first half of the year. This is a solid performance reflecting the resilience of our diversified portfolio.
With on-going improvements and further measures implemented, we have delivered solid profitability. The adjusted EBIT margin reached 8.8% in the quarter and the first half of 2020. We also delivered a strong cash flow, ending the quarter with a stronger balance sheet, reflected in a net debt to adjusted EBITDA ratio of 2.0.
During the crisis, we leveraged our core capabilities to make a difference where it matters most. We used idle manufacturing capacity because of the COVID-19 crisis, to produce protective face shields for health care workers and launched a range of high-quality affordable and reusable consumer face masks for everyday use. 2020 also marks our 100-year anniversary and we have built a EUR 3 million donation plan giving back towards the future of life. We have responded to the immediate COVID-19 crisis needs with a donation to the International Red Cross and have launched three projects in partnership with several nonprofit organizations to have an impact on the circular economy at different levels: acting today, educating for tomorrow, innovating for the future. Whilst we are continuing to focus on our sustainability ambition and scaling up our capabilities, we have demonstrated through these unprecedented times our commitment to protecting people, food and the planet, offering well-being, convenience and a responsible lifestyle to billions of people everywhere.
President and CEO
During the first quarter of 2020, our net sales increased by 5% with a comparable sales growth of 3% and improved profitability. This represents solid performance in a quarter that was marked by contrast – while good demand for food packaging continued, the outbreak of COVID-19 quickly transformed the overall business context. The lockdown in China and consequent drop in demand was followed in March by further impact in the rest of the world as the COVID-19 crisis proceeded to spread globally. This change was visible in our Foodservice segment, while demand in our other segments increased.
The safety and health of our employees and stakeholders remain our number one focus and priority during the COVID-19 pandemic. We are following the guidelines from governments and international and local health authorities and have taken actions to safeguard the continuity of our business. We have also taken all relevant measures to secure our cash position and reprioritize our costs and investments.
Despite serious turbulence in parts of our business, I am confident that together with our customers and other stakeholders we will successfully navigate through this crisis and come out of it even stronger than before. We have a diversified portfolio and a healthy balance sheet, and we are carrying on in our planned investments and efficiency activities, which are vital to our future success.
To maintain our growth trajectory and anticipate key transformative trends, we have renewed our long-term strategy for 2030. We will continue on our path as a growth company, and will further focus on competitiveness, talent, and sustainability. We are taking a leading role in addressing the global challenges of circularity and climate change within the food packaging industry. We will embed sustainability in everything we do – and for this reason, we have set high ambitions for the future.
I would like to extend a “Thank you!” to all Huhtamaki employees for demonstrating their commitment to our values during these unforeseen and unprecedented times. I am impressed by the agility of our organization to adapt and collaborate so well under these new work conditions. This has enabled us, for example, to use machines made idle by the crisis and launch, in record time, a new product line of certified Personal Protective Equipment (PPE) devoted to healthcare workers. I am convinced that the spirit and the engagement will help us get through this challenging period.
President and CEO
We maintained our growth trend during the last quarter of the year in an economic environment challenged by the trade war between the USA and China, the announced Brexit and the amplified concerns around sustainability of the planet. Despite the uncertainty in the global economy, demand for foodservice and pre-packed food packaging was good in 2019. Our net sales reached EUR 3.4 billion for the year 2019, increasing by 10 percent with the comparable growth at 6 percent. All our business segments contributed, especially North America. Net sales increased as a result of positive volume development and pricing management. Currencies movements had a positive impact on net sales during the year.
Our profitability improved in the last quarter as well as during the full year, particularly driven by pricing and operational improvement in all businesses. Our adjusted EBIT margin increased to 8.5 percent in the fourth quarter and to 8.6 percent in 2019.
Good progress on many fronts continued during 2019. The ramp-up of Goodyear, our new plant in Arizona, United States, progressed well. In April, our new, state-of-the-art flexible packaging unit in Egypt was inaugurated and in October, our newest fiber packaging line was launched in Russia. In addition to investments in new units and packaging lines, we also announced three acquisitions during 2019: Everest Flexibles in South Africa, Mohan Mutha Polytech in India, and full ownership of our joint venture company Laminor in Brazil. All three acquisitions support our growth in developing markets.
In 2019, critical society matters have amplified particularly around sustainability, digitalization of the value chain and consumption shifts. Their implication on our industry are key variables considered in our ongoing strategy development. To address the demand for more sustainable packaging solutions, we continued in 2019 to invest into both fiber-based alternatives and recyclable packaging. Good examples are our investments into paper straws, fiber trays and recyclable mono-material flexible packaging under our blueloop™ concept.
Following our investments into both existing and new units, in new products and innovations, as well as the announced acquisitions, our balance sheet is healthy. With a net debt/EBITDA ratio of 2.0, we are well placed to invest in future growth. We continue our strategy of looking for both organic and acquired growth.
President and CEO
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