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Huhtamäki Oyj's Interim Report January 1-September 30, 2018: Good net sales development, margins impacted by increased costs

HUHTAMÄKI OYJ INTERIM REPORT 25.10.2018 AT 8.30

Huhtamäki Oyj's Interim Report January 1-September 30, 2018: Good net sales development, margins impacted by increased costs

Q3 2018 in brief

• Net sales were EUR 780 million (EUR 732 million) 
• Adjusted EBIT was EUR 56.5 million (EUR 64.3 million); EBIT EUR 56.4 million (EUR 64.3 million)
• Adjusted EPS was EUR 0.38 (EUR 0.44); EPS EUR 0.38 (EUR 0.44)
• Comparable net sales growth was 4% in total and 5% in emerging markets
• Currency movements had a negative impact of EUR 9 million on the Group's net sales but no significant impact on the Group's profitability

Q1-Q3 2018 in brief 

• Net sales were EUR 2,291 million (EUR 2,243 million) 
• Adjusted EBIT was EUR 186.7 million (EUR 202.7 million); EBIT EUR 196.1 million (EUR 202.7 million)
• Adjusted EPS was EUR 1.25 (EUR 1.39); EPS EUR 1.33 (EUR 1.39)
• Comparable net sales growth was 5% in total and 8% in emerging markets
• Currency movements had a negative impact of EUR 117 million on the Group's net sales and EUR 9 million on EBIT
• Capital expenditure decreased to EUR 127 million (EUR 144 million) and free cash flow was EUR 24 million (EUR 5 million)

Key figures

1 Excluding IAC of EUR -0.1 million in Q3 2018 and EUR 11.5 million Q1-Q3 2018. FY 2017 excluding IAC of EUR -3.4 million.
2 Excluding IAC of EUR -0.1 million in Q3 2018 and EUR 9.4 million Q1-Q3 2018. FY 2017 excluding IAC of EUR -3.4 million.
3 Excluding IAC of EUR -0.0 million in Q3 2018 and EUR 7.6 million Q1-Q3 2018. FY 2017 excluding IAC of EUR -4.8 million.

Unless otherwise stated, all comparisons in this report are compared to the corresponding period in 2017. Figures of return on investment (ROI), return on equity (ROE) and return on net assets (RONA) presented in this report are calculated on a 12-month rolling basis.

All figures in the tables have been rounded to the nearest whole number and consequently the sum of individual figures may deviate from the sum presented. Key figures have been calculated using exact figures. 

Jukka Moisio, CEO: 

"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."

Comparable growth by business segment

The Group's earnings declined. Earnings continued to develop favorably in the Foodservice Europe-Asia-Oceania business segment while earnings declined in other business segments. The earnings decline in the North America segment was due to higher distribution costs and costs related to the start-up of the Goodyear plant. The Group's Adjusted earnings before interests and taxes (EBIT) were EUR 56.5 million (EUR 64.3 million) and reported EBIT EUR 56.4 million (EUR 64.3 million). There was no significant foreign currency translation impact on the Group's profitability (EUR -2 million).

Adjusted EBIT by business segment

1 Excluding IAC of EUR 0.0 million in Q3 2018 (no IAC in Q3 2017).
2 Excluding IAC of EUR -0.1 million in Q3 2018 (no IAC in Q3 2017).

Adjusted EBIT and IAC

Net financial expenses increased to EUR 7 million (EUR 5 million). Tax expense was EUR 10 million (EUR 13 million).

Profit for the quarter was EUR 39 million (EUR 46 million). Earnings per share (EPS) were EUR 0.38 (EUR 0.44). 

Adjusted EPS and IAC 

Financial review Q1-Q3 2018

The Group's comparable net sales growth was 5% with a positive contribution from all business segments. Comparable growth in emerging markets was 8%. Growth was strongest in Africa, Russia, Brazil and India. The Group's net sales grew to EUR 2,291 million (EUR 2,243 million). Foreign currency translation impact on the Group's net sales was EUR  117 million (EUR 16 million). The majority of the negative impact came from the US dollar, Indian rupee and Russian ruble.

Net sales by business segment

The Group's earnings declined due to weak profitability in the North America business segment. The Foodservice Europe-Asia-Oceania segment's earnings improved significantly as a result of volume growth and favorable product mix development. In constant currencies earnings grew moderately in the Flexible Packaging segment and were at previous year's level in the Fiber Packaging segment. The Group's Adjusted EBIT were EUR 186.7 million (EUR 202.7 million) and reported EBIT EUR 196.1 million (EUR 202.7 million). Foreign currency translation impacted the Group's profitability by EUR  9 million (EUR 2 million).

Adjusted EBIT by business segment

1 Excluding IAC of EUR -1.3 million in Q1-Q3 2018 (no IAC in Q1-Q3 2017).
2 Excluding IAC of EUR -1.5 million in Q1-Q3 2018 (no IAC in Q1-Q3 2017).
3 Excluding IAC of EUR -0.6 million in Q1-Q3 2018 (no IAC in Q1-Q3 2017).
4 Excluding IAC of EUR 12.8 million in Q1-Q3 2018 (no IAC in Q1-Q3 2017).

Adjusted EBIT excludes EUR 9.4 million of IAC, which consist of EUR 3.2 million restructuring costs including write-downs of related assets, EUR 1.6 million acquisition related costs and a gain of EUR 14.2 million. The restructuring costs are related to improvement actions in Foodservice Europe-Asia-Oceania, Flexible Packaging and Fiber Packaging segments, as well as in Other activities. The gain is related to the sale of the Group's confectionery trademark portfolio, as announced on April 30, 2018. Huhtamaki's confectionery business was divested in 1996.

Adjusted EBIT and IAC

Net financial expenses increased to EUR 20 million (EUR 16 million). Tax expense was EUR 37 million (EUR 41 million). The corresponding tax rate was 21% (22%).

Profit for the period was EUR 139 million (EUR 146 million). Adjusted EPS were EUR 1.25 (EUR 1.39) and reported EPS EUR 1.33 (EUR 1.39). Adjusted EPS is calculated based on Adjusted profit for the period, which excludes EUR 9.4 million of IAC and EUR -1.8 million of taxes relating to IAC items.

Adjusted EPS and IAC

Acquisitions and divestments

On March 23, 2018 Huhtamaki announced that it has entered into an agreement to acquire the Indian business and related assets of Ajanta Packaging, a privately-owned manufacturer of pressure sensitive labels. With the acquisition Huhtamaki strengthened its labeling business in India by adding new printing technologies into its offering as well as improving its innovation capability. The acquisition is complementary to Huhtamaki's existing labeling product portfolio. The annual net sales of the acquired business are approximately EUR 10 million. It employs altogether 170 people and has two state-of-the-art manufacturing facilities. The debt free purchase price was approximately EUR 13 million. The transaction was closed at the end of May 2018. The business has been reported as part of the Flexible Packaging business segment as of June 1, 2018.

On April 30, 2018 Huhtamaki announced the majority acquisition of Tailored Packaging, an Australian foodservice packaging distribution and wholesale group. With the acquisition Huhtamaki gained access to a national network of distribution centers across Australia, allowing it to serve its customers even better and with more agility. Tailored Packaging is one of the largest importers and distributors of foodservice packaging in Australia with annualized net sales of approximately EUR 85 million and approximately 130 employees. The debt free purchase price for 65% ownership of the joint venture was approximately EUR 35 million. As the majority shareholder Huhtamaki consolidates the joint venture company as a subsidiary in the Group's financial reporting. The business has been reported as part of the Foodservice Europe-Asia-Oceania business segment as of May 1, 2018.

On April 30, 2018 Huhtamaki announced the sale of its confectionery trademark portfolio to Highlander Partners, a US based investment firm. Related to the sale, an after taxes gain of approximately USD 16 million was booked as an item affecting comparability during the second quarter of 2018. The sold trademark portfolio was related to Huhtamaki's confectionery business divested in 1996.

On May 31, 2018 Huhtamaki announced the majority acquisition of Cup Print Unlimited Company, a privately-owned paper cup manufacturer based in the Republic of Ireland. With the acquisition Huhtamaki improved its access to the growing market of short run custom-printed cups and boosted its on-line commercial activity. The short run capability allows Huhtamaki to even better support its current customers' promotional activities. CupPrint's annual net sales are approximately EUR 14 million and it employs altogether approximately 110 people. The debt free purchase price for 70% ownership of CupPrint was approximately EUR 22 million. The business has been reported as part of the Foodservice Europe-Asia-Oceania business segment as of June 1, 2018.