HUHTAMÄKI OYJ FINANCIAL STATEMENT RELEASE 14.2.2018 AT 8:30

Huhtamäki Oyj's Results January 1-December 31, 2018: Strong net sales growth in the quarter, margins still impacted by high costs

Q4 2018 in brief

  • Net sales grew to EUR 813 million (EUR 745 million)
  • Adjusted EBIT was EUR 62 million (EUR 65 million); EBIT EUR 27 million (EUR 62 million)
  • Adjusted EPS was EUR 0.45 (EUR 0.51); EPS EUR 0.18 (EUR 0.47)
  • Comparable net sales growth was 6% in total and 5% in emerging markets
  • Currency movements had a negative impact of EUR 3 million on the Group's net sales and EUR 1 million on EBIT

FY 2018 in brief

  • Net sales grew to EUR 3,104 million (EUR 2,989 million)
  • Adjusted EBIT was EUR 248 million (EUR 268 million); EBIT EUR 223 million (EUR 264 million)
  • Adjusted EPS was EUR 1.70 (EUR 1.90); EPS EUR 1.50 (EUR 1.86)
  • Comparable net sales growth was 5% in total and 7% in emerging markets
  • Currency movements had a negative impact of EUR 120 million on the Group's net sales and EUR 9 million on EBIT
  • Capital expenditure was EUR 197 million (EUR 215 million)
  • Free cash flow was EUR 59 million (EUR 56 million)
  • The Board of Directors proposes a dividend of EUR 0.84 (0.80) per share

Key figures

EUR million Q4 2018 Q4 2017 Change FY 2018 FY 2017 Change
Net sales 812.8 745.4 9% 3,103.6 2,988.7 4%
Adjusted EBITDA 1 95.2 95.3 -0% 373.6 389.7 -4%
Margin 1 11.7% 12.8%   12.0% 13.0%  
EBITDA 75.3 91.9 -18% 365.2 386.3 -5%
Adjusted EBIT 2 61.6 65.0 -5% 248.4 267.7 -7%
Margin2 7.6% 8.7%   8.0% 9.0%  
EBIT 26.8 61.6 -57% 222.9 264.3 -16%
Adjusted EPS3, EUR 0.45 0.51 -13% 1.70 1.90 -11%
EPS, EUR 0.18 0.47 -62% 1.50 1.86 -19%
ROI2       11.9% 13.6%  
ROE3       14.6% 17.0%  
Capital expenditure 70.4 70.7 -0% 196.9 214.8 -8%
Free cash flow 35.4 50.3 -30% 58.9 55.5 6%

1 Excluding IAC of EUR -19.9 million in Q4 2018 (EUR -3.4 million in Q4 2017) and EUR -8.4 million in FY 2018 (EUR -3.4 million in FY 2017).
2
Excluding IAC of EUR -34.9 million in Q4 2018 (EUR -3.4 million in Q4 2017) and EUR -25.5 million in FY 2018 (EUR -3.4 million in FY 2017).
3
Excluding IAC of EUR -28.2 million in Q4 2018 (EUR -4.8 million in Q4 2017) and EUR -20.6 million in FY 2018 (EUR -4.8 million in FY 2017).

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.

The figures in the tables are exact figures and consequently the sum of individual figures may deviate from the sum presented. Key figures have been calculated using exact figures.

Jukka Moisio, CEO:

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.

Financial review Q4 2018

The Group's net sales growth was strong during the quarter, with all segments contributing. Growth was strongest in the North America and Foodservice Europe-Asia-Oceania business segments. Comparable net sales growth was 6% and in emerging markets 5%. The Group's net sales grew to EUR 813 million (EUR 745 million). Foreign currency translation impact on the Group's net sales was EUR -3 million (EUR -35 million) compared to 2017 exchange rates. The majority of the negative impact came from the Indian rupee and Russian ruble.

Net sales by business segment

EUR million Q4 2018 Q4 2017 Change Of Group in
Q4 2018
Foodservice Europe-Asia-Oceania 231.6 207.0 12% 28%
North America 276.6 243.5 14% 34%
Flexible Packaging 235.5 226.7 4% 29%
Fiber Packaging 72.9 72.4 1% 9%
Elimination of internal sales -3.8 -4.2    
Group 812.8 745.4 9%  

 Comparable growth by business segment

  Q4 2018 Q3 2018 Q2 2018 Q1 2018 FY 2018
Foodservice Europe-Asia-Oceania 3% 5% 5% 5% 4%
North America 11% 2% 2% 5% 5%
Flexible Packaging 4% 6% 11% 6% 7%
Fiber Packaging 5% 4% 3% 5% 4%
Group 6% 4% 6% 5% 5%

The Group's earnings declined despite the significant earnings improvement in the Fiber Packaging segment and the continued solid performance in the Foodservice Europe-Asia-Oceania business segment. The earnings decline in the North America segment was due to high distribution and input costs, and costs related to the start-up of the Goodyear plant. In addition, comparison in Q4 2017 was strong in the North America segment. The Group's adjusted earnings before interests and taxes (EBIT) were EUR 62 million (EUR 65 million) and reported EBIT EUR 27 million (EUR 62 million). Foreign currency translation impacted the Group's earnings by EUR -1 million (EUR -3 million).

Adjusted EBIT by business segment

EUR million Q4 2018 Q4 2017 Change Of Group in
Q4 2018
Foodservice Europe-Asia-Oceania 1 17.6 17.9 -2% 28%
North America2 19.3 28.8 -33% 31%
Flexible Packaging3 16.8 19.1 -12% 27%
Fiber Packaging4 8.6 5.5 56% 14%
Other activities5 -0.7 -6.3    
Group 61.6 65.0 -5%  

1 Excluding IAC of EUR -12.0 million in Q4 2018 (EUR -3.4 million in Q4 2017).
2
Excluding IAC of EUR -10.7 million in Q4 2018 (no IAC in Q4 2017).
3
Excluding IAC of EUR -8.2 million in Q4 2018 (no IAC in Q4 2017).
4
Excluding IAC of EUR -1.5 million in Q4 2018 (no IAC in Q4 2017).
5
Excluding IAC of EUR -2.5 million in Q4 2018 (no IAC in Q4 2017).

Adjusted EBIT excludes EUR -35 million of items affecting comparability (IAC), which consist of restructuring costs of EUR 33 million, including write-downs of related assets, and acquisition related costs of EUR 2 million. The restructuring costs are primarily related to a program to improve efficiency and profitability as announced on October 2, 2018. The planned actions are estimated to result in annual improvements of approximately EUR 15-18 million with full impact in 2020. IAC were booked in all business segments.

Adjusted EBIT and IAC

EUR million Q4 2018 Q4 2017
Adjusted EBIT 61.6 65.0
Restructuring costs including write-downs of related assets -33.0 -16.7
Acquisition related costs -1.9 -
Gains and losses relating to business combinations and disposals - 13.3
EBIT 26.8 61.6

Net financial expenses increased to EUR 7 million (EUR 2 million). Tax expense was EUR 1 million (EUR 9 million).

Profit for the quarter was EUR 19 million (EUR 51 million). Adjusted EPS were EUR 0.45 (EUR 0.51) and reported EPS EUR 0.18 (EUR 0.47). Adjusted EPS is calculated based on adjusted profit for the quarter, which excludes EUR -35 million of IAC and EUR 7 million of related taxes.

Adjusted EPS and IAC

EUR million Q4 2018 Q4 2017
Adjusted profit for the quarter 47.3 55.6
IAC excluded from adjusted EBIT -34.9 -3.4
Taxes related to IAC 6.6 -1.4
Profit for the quarter 19.0 50.8

Financial review FY 2018

The Group's comparable net sales growth was 5% with a positive contribution from all business segments. Comparable growth in emerging markets was 7%. Growth was strongest in Eastern Europe, Africa, Middle East and India. The Group's net sales grew to EUR 3,104 million (EUR 2,989 million). Foreign currency translation impact on the Group's net sales was EUR -120 million (EUR -19 million). The majority of the negative impact came from the US dollar, Indian rupee and Russian ruble.

Net sales by business segment

EUR million FY 2018 FY 2017 Change Of Group in
FY 2018
Foodservice Europe-Asia-Oceania 881.7 807.5 9% 28%
North America 1,002.7 1,000.4 0% 32%
Flexible Packaging 952.3 912.7 4% 31%
Fiber Packaging 283.0 285.1 -1% 9%
Elimination of internal sales -16.1 -17.0    
Group 3,103.6 2,988.7 4%  

The Group's earnings declined due to weaker profitability in the North America business segment. Earnings improved significantly in the Foodservice Europe-Asia-Oceania and the Fiber Packaging segments. Reported earnings declined in the Flexible Packaging segment, but in constant currencies the Flexible Packaging segment's earnings were in line with prior year. The Group's adjusted EBIT was EUR 248 million (EUR 268 million). Foreign currency translation impacted the Group's earnings by EUR -9 million (EUR -1 million). Reported EBIT was EUR 223 million (EUR 264 million).

Adjusted EBIT by business segment

EUR million FY 2018 FY 2017 Change Of Group in
 FY 2018
Foodservice Europe-Asia-Oceania 1 75.8 70.1 8% 31%
North America2 72.7 104.1 -30% 29%
Flexible Packaging3 67.2 69.7 -4% 27%
Fiber Packaging4 30.9 28.2 9% 13%
Other activities5 1.8 -4.4    
Group 248.4 267.7 -7%  

1 Excluding IAC of EUR -13.3 million in FY 2018 (EUR -3.4 million in FY 2017).
2 Excluding IAC of EUR -10.7 million in FY 2018 (no IAC in FY 2017).
3
Excluding IAC of EUR -9.7 million in FY 2018 (no IAC in FY 2017).
4 Excluding IAC of EUR -2.1 million in FY 2018 (no IAC in FY 2017)
5
Excluding IAC of EUR 10.3 million in FY 2018 (no IAC in FY 2017).

Adjusted EBIT excludes EUR -25 million of IAC, which consist of EUR 36 million restructuring costs, including write-downs of related assets, acquisition related costs of EUR 3 million and a gain of EUR 14 million. The restructuring costs are primarily related to a program to improve efficiency and profitability as announced on October 2, 2018. The planned actions are estimated to result in annual improvements of approximately EUR 15-18 million with full impact in 2020. IAC were booked in all business segments. 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

EUR million FY 2018 FY 2017
Adjusted EBIT 248.4 267.7
Restructuring costs including write-downs of related assets -36.2 -16.7
Acquisition related costs -3.4 -
Gains relating to sale of trademark portfolio 14.2 -
Gains and losses relating to business combinations and disposals - 13.3
EBIT 222.9 264.3

Net financial expenses increased to EUR 27 million (EUR 18 million) due to higher net debt. Tax expense was EUR 38 million (EUR 50 million). The corresponding tax rate was 19% (20%).

Profit for the period was EUR 158 million (EUR 197 million). Adjusted earnings per share (EPS) were EUR 1.70 (EUR 1.90), and reported EPS EUR 1.50 (EUR 1.86). Adjusted EPS is calculated based on adjusted profit for the period, which excludes EUR -25 million of IAC and EUR 5 million of related taxes.

Adjusted EPS and IAC

EUR million FY 2018 FY 2017
Adjusted profit for the period 178.7 201.3
IAC excluded from Adjusted EBIT -25.5 -3.4
Taxes related to IAC 4.9 -1.4
Profit for the period 158.1 196.5

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 online 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.

Significant events during the reporting period

On May 28, 2018, the European Commission published a proposal for a directive of the European Parliament and of the Council on the reduction of the impact of certain plastic products on the environment, known as the Single Use Plastics Directive or the SUP Directive. The SUP Directive targets items that have been identified as contributing to marine pollution and is expected to enter into force at the EU level in mid-2019. The Member States must then transpose it into national law by mid-2021. The SUP Directive covers a number of single use products made entirely or in part of plastics. The SUP Directive is applicable to a part of Huhtamaki's product range and contains a number of different measures such as banning certain plastic products within the EU, introducing consumption reduction obligations, widening the Extended Producer Responsibility (EPR) schemes and introducing labelling requirements. Currently the majority of Huhtamaki's products are fiber-based and the share of products affected by the mandatory bans is less than 0.4% of the Group's net sales. Huhtamaki supports activities to reduce marine littering and develop the circular economy. The Group will continue to focus on innovation, the use of renewable and recyclable materials, and to work with policymakers, industry associations and others to ensure that the Directive achieves its objectives without compromising food safety and hygiene.

On October 2, 2018, Huhtamaki announced that it is considering to close and write-off non-competitive production lines and planning to speed-up actions to improve productivity by investing further in automation. The total effect of write-offs and other actions was estimated to amount to EUR -30 million, which would be reported as items affecting comparability (IAC) in the fourth quarter 2018. The planned actions are estimated to result in annual profit improvement of approximately EUR 15-18 million with full impact in 2020.

Significant events after the reporting period

On January 7, 2019, the Board of Directors announced that it had been preparing for CEO succession. Charles Héaulmé was appointed President and CEO of Huhtamäki Oyj as of April 26, 2019, following the Annual General Meeting. Jukka Moisio continues as CEO until April 25, 2019.

Outlook for 2019

The Group's trading conditions are expected to remain relatively stable during 2019. 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 approximately at the same level as in 2018 with the majority of the investments directed to business expansion.

Dividend proposal

On December 31, 2018 Huhtamäki Oyj's non-restricted equity was EUR 654 million (EUR 666 million). The Board of Directors will propose to the Annual General Meeting that a dividend of EUR 0.84 (EUR 0.80) per share be paid.

Annual General Meeting 2019

The Annual General Meeting of Shareholders will be held on Thursday, April 25, 2019 at 11.00 (EET) at Messukeskus Helsinki, Expo and Convention Centre, Messuaukio 1, 00520 Helsinki, Finland.

Financial reporting in 2019

In 2019, Huhtamaki will publish financial information as follows:

Interim Report, January 1-March 31, 2019                              April 25
Half-yearly Report, January 1-June 30, 2019                           July 19
Interim Report, January 1-September 30, 2019                     October 23

Annual Accounts 2018 will be published on week 8 on Huhtamaki's website at www.huhtamaki.com.

This is a summary of Huhtamäki Oyj's Results January 1 - December 31, 2018. 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
Global Communications

Huhtamaki is a global specialist in packaging for food and drink. With our network of 77 manufacturing units and additional 24 sales only offices in altogether 34 countries, we're well placed to support our customers' growth wherever they operate. Mastering three distinctive packaging technologies, approximately 17,700 employees develop and make packaging that helps great products reach more people, more easily. In 2018, our net sales totaled EUR 3.1 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.

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