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Huhtamäki Oyj's Interim Report January 1-September 30, 2016: Profitability improvement continued

HUHTAMÄKI OYJ INTERIM REPORT 26.10.2016 AT 8:30

Huhtamäki Oyj's Interim Report January 1-September 30, 2016: Profitability improvement continued

Q3 2016 in brief

  • Net sales grew to EUR 719 million (EUR 692 million)
  • EBIT improved to EUR 67 million (EUR 62 million)
  • EPS improved to EUR 0.46 (EUR 0.43)
  • Comparable net sales growth was 2% in total and 7% in emerging markets
  • Currency movements had a negative impact of EUR -10 million on the Group's net sales and EUR -1 million on EBIT
  • Revised capital expenditure outlook for 2016 (published on October 24): Capital expenditure is expected to be higher than in 2015 with the majority of the investments directed to business expansion.

Q1-Q3 2016 in brief

  • Net sales grew to EUR 2,134 million (EUR 2,036 million)
  • Adjusted EBIT improved to EUR 202.5 million (EUR 181.8 million); EBIT EUR 202.3 million (EUR 159.2 million)
  • Adjusted EPS improved to EUR 1.39 (EUR 1.27); EPS EUR 1.39 (EUR 1.05)
  • Comparable net sales growth was 4% in total and 8% in emerging markets
  • Currency movements had a negative impact of EUR -49 million on the Group's net sales and EUR -5 million on EBIT
  • Free cash flow improved to EUR 79 million (EUR 38 million)

Key figures

EUR million Q3 2016 Q3 2015 Change Q1-Q3 2016 Q1-Q3 2015 Change FY 2015
Net sales 719.2 692.2   4% 2,133.5 2,035.9   5% 2,726.4
Adjusted EBITDA1 96.1 88.6   8% 286.6 259.6 10% 342.0
Margin1 13.4% 12.8%   13.4% 12.8%   12.5%
EBITDA 96.1 88.6   8% 286.4 237.0 21% 319.4
Adjusted EBIT1 66.9 62.4   7% 202.5 181.8 11% 237.5
Margin1 9.3% 9.0%   9.5% 8.9%   8.7%
EBIT 66.9 62.4   7% 202.3 159.2 27% 214.9
Adjusted EPS1, EUR 0.46 0.43   7% 1.39 1.27   9% 1.65
EPS, EUR 0.46 0.43   7% 1.39 1.05 32% 1.43
ROI1       14.7% 14.2%   14.7%
ROE1       18.0% 18.4%   18.1%
Capital expenditure 39.2 34.8  13% 95.2 96.4   -1% 146.9
Free cash flow 41.0 27.2   51% 78.6 38.2 106% 91.2

1 Excluding IAC of EUR -0.2 million in Q1-Q3 2016 and EUR -22.6 million in Q1-Q3 2015 and in FY 2015.

Unless otherwise stated, all figures presented in this report, including corresponding periods in 2015, cover continuing operations only. Continuing operations include the Foodservice Europe-Asia-Oceania, North America, Flexible Packaging and Molded Fiber business segments. Discontinued operations for 2015 include the Films business segment, which was sold at the end of December 2014. Unless otherwise stated, all comparisons in this report are compared to the corresponding period in 2015. ROI, ROE and RONA figures presented in this report are calculated on a 12-month rolling basis.

Jukka Moisio, CEO:

"During the third quarter, growth continued on a good level in the Foodservice Europe-Asia-Oceania and Molded Fiber segments. Net sales development was soft in the North America and Flexible Packaging segments, where we have initiated actions to accelerate top line growth. The Group's comparable net sales growth was 2% for the third quarter and 4% for the first 9 months. Emerging market growth at 7% for the third quarter was at a good level.

Our margins and returns improved against previous year. We achieved a 12-month rolling EBIT margin of 9.1% and ROI of 14.7% - both approximately at our mid-term ambitions set in March 2015. Similarly, cash generation from operations was strong meeting our mid-term expectations.

We announced several growth actions across our business segments during the quarter. The largest one is the USD 100 million investment to build a new manufacturing and distribution facility in Goodyear, Arizona. The unit is set to improve our future competitiveness and capability in serving the foodservice packaging and retail tableware customers in the west coast and southwest of the United States. Flexible Packaging segment is in the process of building three new plants in India and will also start to build a new Greenfield facility in Egypt. Foodservice Europe-Asia-Oceania segment is improving its profitability in China through portfolio optimization and modernization and expansion of its plant in Guangzhou. Molded Fiber segment inaugurated new lines in Russia and in Northern Ireland during the quarter. Following the recently announced growth investments, mainly the one in the U.S., we have updated our capital expenditure outlook for 2016.

We continue to see good long term growth opportunities in food packaging. With our broad geographic footprint and our ambition to continue developing new businesses and building new facilities, we are well placed to help our customers grow and serve consumers in a competitive way."

Financial review Q3 2016

The Group's comparable net sales growth was 2% during the quarter. Good growth was achieved in the Foodservice Europe-Asia-Oceania and Molded Fiber business segments. Growth was more modest in the North America business segment against a strong third quarter in the previous year and high growth in the second quarter in 2016. In the Flexible Packaging business segment net sales declined. Comparable growth in emerging markets was 7% with big variation between the markets. Strong growth in Eastern Europe and South Asia, led by good momentum both in Russia and in India, continued. Net sales grew in China, but declined in South America. Export sales of flexible packaging to African countries declined. The Group's net sales grew to EUR 719 million (EUR 692 million). Foreign currency translation impact on the Group's net sales was EUR -10 million (EUR 40 million) compared to 2015 exchange rates with vast majority of the impact originating from the weakening of the pound sterling against euro.

Net sales by business segment

EUR million Q3 2016 Q3 2015 Change Of Group in
Q3 2016
Foodservice Europe-Asia-Oceania 195.2 169.5 15% 27%
North America 244.4 240.3   2% 34%
Flexible Packaging 216.5 223.6  -3% 30%
Molded Fiber 67.1 62.4   8%   9%
Elimination of internal sales -4.0 -3.6    
Group 719.2 692.2   4%  

Comparable growth by business segment

  Q3 2016 Q2 2016 Q1 2016 Q4 2015
Foodservice Europe-Asia-Oceania  5% 7%   7%  8%
North America  2% 8% 10%  5%
Flexible Packaging -3% 2%   1% -1%
Molded Fiber  6% 5%   4% 6%
Group  2% 6%   6% 4%

The Group's earnings grew driven by solid profitability improvement in the Foodservice Europe-Asia-Oceania and Flexible Packaging business segments. Good progress in the Molded Fiber business segment also contributed to the earnings growth, whereas in the North America business segment earnings remained at the good level achieved in the strong third quarter of the previous year. The Group's earnings before interests and taxes (EBIT) were EUR 67 million (EUR 62 million). Foreign currency translation impact on the Group's earnings was EUR -1 million (EUR 3 million).

EBIT by business segment

EUR million Q3 2016 Q3 2015 Change Of Group in
Q3 2016
Foodservice Europe-Asia-Oceania 18.3 13.8 33% 27%
North America 24.5 25.0  -2% 35%
Flexible Packaging 18.2 15.7 16% 26%
Molded Fiber   8.3   7.9   5% 12%
Other activities -2.4   0.0    
Group 66.9 62.4 7%  

Net financial expenses decreased to EUR 7 million (EUR 10 million). Tax expense increased to EUR 12 million (EUR 8 million).

Profit for the quarter was EUR 48 million (EUR 44 million). Earnings per share (EPS) were EUR 0.46 (EUR 0.43).

Financial review Q1-Q3 2016

The Group's comparable net sales growth was 4% during the reporting period. Growth was strong in the Foodservice Europe-Asia-Oceania and Molded Fiber business segments throughout the period, whereas it was more uneven between quarters in the North America and Flexible Packaging business segments. Comparable growth in emerging markets was 8%. Growth was strongest in Eastern Europe and South Asia. Net sales grew moderately in China. The Group's net sales grew to EUR 2,134 million (EUR 2,036 million). Foreign currency translation impact on the Group's net sales was EUR -49 million (EUR 160 million) compared to 2015 exchange rates. The majority of the negative currency impact came from the weakening of the pound sterling and certain emerging market currencies versus euro.

Net sales by business segment

EUR million Q1-Q3 2016 Q1-Q3 2015 Change Of Group in
Q1-Q3 2016
Foodservice Europe-Asia-Oceania 548.0 498.8 10% 25%
North America 745.3 703.5   6% 35%
Flexible Packaging 654.7 654.4   0% 31%
Molded Fiber 198.8 193.8   3%   9%
Elimination of internal sales -13.3 -14.6    
Group 2,133.5 2,035.9 5%  

The Group's earnings grew driven by the North America business segment's solid earnings improvement. The good development in the Flexible Packaging and Foodservice Europe-Asia-Oceania business segments further supported earnings growth. The Group's Adjusted EBIT were EUR 202.5 million (EUR 181.8 million) and reported EBIT EUR 202.3 million (EUR 159.2 million). Foreign currency translation impact on the Group's profitability was EUR -5 million (EUR 13 million).

Adjusted EBIT by business segment

EUR million Q1-Q3 2016 Q1-Q3 2015 Change Of Group in
Q1-Q3 2016
Foodservice Europe-Asia-Oceania1 47.9 42.1 14% 23%
North America 82.5 65.0 27% 39%
Flexible Packaging 56.2 50.5 11% 26%
Molded Fiber 24.7 25.5  -3% 12%
Other activities2 -8.8 -1.3    
Group1, 2 202.5 181.8 11%  

1 Excluding IACs of EUR -0.2 million in Q1-Q3 2016
2 Excluding IACs of EUR -22.6 million in Q1-Q3 2015

Adjusted EBIT includes EUR -0.2 million of IACs, which consist of restructuring costs of EUR -8.0 million and a gain of EUR 7.8 million relating to business combination. The restructuring costs include costs expected to incur from actions to improve the competitiveness of the foodservice business in China and New Zealand and a provision to cover potential environmental remediation actions at the former Huhtamaki manufacturing unit in Norway as announced on June 27, 2016. The gain relating to business combination derives from the increase of Huhtamaki's ownership in Arabian Paper Products Company as announced on March 22, 2016. IACs were booked for Q2 2016 in the Foodservice Europe-Asia-Oceania business segment.

Adjusted EBIT and IACs

EUR million Q1-Q3 2016 Q1-Q3 2015
Adjusted EBIT 202.5 181.8
Restructuring costs -8.0  
Gains and losses relating to business combinations and disposals 7.8 -4.3
Fines and penalties imposed by authorities   -18.3
EBIT 202.3 159.2

Net financial expenses decreased to EUR 20 million (EUR 27 million). Tax expense increased and was EUR 35 million (EUR 21 million). The corresponding tax rate was 19% (16%).

Profit for the period was EUR 148 million (EUR 111 million). Adjusted EPS were EUR 1.39 (EUR 1.27) and reported EPS EUR 1.39 (EUR 1.05).  

Significant events during the reporting period

On March 22, 2016 Huhtamaki signed a EUR 150 million freely transferable loan agreement (Schuldschein). The loan is targeted to institutional investors and is divided into two floating rate and two fixed rate tranches with maturities of 5 and 7 years. Huhtamaki will use the funds for refinancing and general corporate purposes of the Group.

On June 27, 2016 Huhtamaki announced actions to improve the competitiveness of its foodservice business in Asia and Oceania. The foodservice packaging manufacturing operations in South China will be consolidated into one efficient, modernized unit. In addition, manufacturing will be focused on a defined core foodservice packaging product range. The actions are expected to have an impact on approx. 350 employees across functions. At the foodservice packaging unit in Henderson, New Zealand, manufacturing operations are reorganized to improve efficiency of the unit. The reorganization is expected to have an impact on approx. 15 employees.

On September 16, 2016 Huhtamaki announced that it will invest in the expansion and modernization of its manufacturing unit in Guangzhou, South China. The total investment including site expansion, improvements in plant layout and new high-speed machinery is expected to be approx. EUR 15 million. The investment follows the earlier announced actions to improve the competitiveness of the foodservice business in China and consolidate the South China manufacturing operations. Majority of the investment will take place in the latter part of 2016 and early 2017, and the modernization is expected to be completed by the end of 2017. The Guangzhou manufacturing unit is part of the Foodservice Europe-Asia-Oceania business segment.

On September 19, 2016 Huhtamaki announced that it will purchase a manufacturing facility in Goodyear, Arizona, U.S. to set up a new world class manufacturing and distribution unit. The facility is set to service the southwest and west coast foodservice packaging and retail tableware markets. The total investment including the site purchase and modifications, improvements in infrastructure, and machinery investments and installations is expected to exceed USD 100 million (approx. EUR 90 million). Majority of the investment will take place in 2016-2017 and manufacturing is scheduled to begin in late 2017. When fully operational, the unit is expected to employ approx. 300 employees and it will become part of the North America business segment.

Outlook for 2016 (revised on October 24)

The Group's trading conditions are expected to remain relatively stable during 2016. The good financial position and ability to generate a positive cash flow will enable the Group to address profitable growth opportunities. Capital expenditure is expected to be higher than in 2015 with the majority of the investments directed to business expansion.

Financial reporting in 2017

In 2017, Huhtamaki will publish financial information as follows:

Results 2016                                                                 February 15
Interim Report, January 1-March 31, 2017                   April 27
Half-yearly Report, January 1-June 30, 2017               July 21
Interim Report, January 1-September 30, 2017            October 26

Annual Accounts 2016 will be published on week 8.

Huhtamäki Oyj's Annual General Meeting is planned to be held on Thursday, April 27, 2017.

This is a summary of Huhtamäki Oyj's Interim Report January 1 - September 30, 2016. The complete report is attached to this release and is also available at the company website at www.huhtamaki.com.

For further information, please contact:
Jukka Moisio, CEO, tel. +358 10 686 7801
Thomas Geust, CFO, tel. +358 10 686 7880

HUHTAMÄKI OYJ
Group Communications

Huhtamaki is a global specialist in packaging for food and drink. With our network of 75 manufacturing units and 23 sales offices in 34 countries, we're well placed to support our customers' growth wherever they operate. Mastering three distinctive packaging technologies, approximately 17,000 employees develop and make packaging that helps great products reach more people, more easily. In 2015 our net sales totaled EUR 2.7 billion. The Group has its head office in Espoo, Finland and the parent company Huhtamäki Oyj is listed on Nasdaq Helsinki Ltd. Additional information is available at www.huhtamaki.com.