Interim Report Q1 2019
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.
Our second quarter comparable net sales growth was good at 6%. In the emerging markets growth was 10%. All segments contributed to positive development and Flexible Packaging and Foodservice Europe-Asia-Oceania segments reported highest growth. In reported sales, which includes the contribution from the three acquisitions made during the quarter (Ajanta Packaging, Tailored Packaging and Cup Print Unlimited), negative currency conversion reduced net sales by EUR 48 million (6%) resulting in 2% growth.
Our profitability remained solid despite a decline compared to 2017. Currency conversion weakened our EBIT by EUR 4 million. Foodservice Europe-Asia-Oceania and Flexible Packaging segments improved their profitability while North America segment had negative margin development due to higher distribution costs and start-up costs of the newly-invested Goodyear, Arizona, facility. While we are pleased with the growth we will take additional actions to improve profitability.
Our net sales with global key accounts have progressed well with growth rates above our average growth. Organic investments and the three acquisitions made in the second quarter are expected to deliver continued strong net sales momentum in the coming quarters.
The Single Use Plastics (SUP) proposal was published by the European Commission at the end of May. It proposes to ban single use plastics cutlery, plates, stirrers and straws and introduce labelling requirements, to help reduce marine pollution. The adoption of the proposal will follow the EU Ordinary Legislative Procedure and will be the subject of negotiations between the Council of Ministers, the European Parliament and the European Commission.
As the legislation stands, the products that are proposed to be banned make less than 2% of our Foodservice business in Europe and can for the most part be replaced with alternative paper-based products. As a converter with innovations capabilities in many packaging materials and with the growing interest in replacing plastic with alternative materials, we are well placed to continue to work with our customers and their consumers to respond to their demands. Already now, the majority of our products are fiber-based.
We achieved a solid 5% comparable net sales growth in the first quarter. In emerging markets our comparable net sales grew by 8% with Eastern Europe and India growing strongest. The North America segment started to benefit from the Goodyear plant start-up and reported 5% comparable growth while other segments continued with good momentum that was already visible in 2017. Currency headwinds were strong and they had a significant negative impact on reported net sales. The main impact came from the weakening of the U.S. dollar versus euro, but all key currencies weakened versus euro.
In constant currencies our profitability was slightly ahead of previous year while reported EBIT declined. The Foodservice Europe-Asia-Oceania segment reported an improved EBIT and Fiber Packaging also progressed well. The North America segment reported weaker profitability due to currency conversion, higher distribution costs, and start-up of the Goodyear facility. The Flexible Packaging segment reported slightly weaker profitability due to tight pricing and competitive situation in Europe, while in India sales and profitability developed well.
During the quarter we were ramping up the new capacity of the Goodyear plant in North America. The project is progressing according to our plan and has met the first quarter technical and operational targets. Later in the year we will commission new lines and machines that have been part of our capital expenditure in 2017 and in the early part of 2018. The additional capacity allows us to capture further growth opportunities.
During the quarter we announced an acquisition of a labeling company Ajanta Packaging in India to expand our product offer and improve our competitive position in this key market for us. We also established a joint venture with Smith Anderson Group to manufacture and sell foodservice paper bags in Eastern Europe, strengthening our position as a one-stop-shop to foodservice customers.
Our high season is starting and we are confident about the growth momentum in our business.