Huhtamäki Oyj (HOYFF) Q4 2022 Earnings Call Transcript

Huhtamäki Oyj (OTCPK:HOYFF) Q4 2022 Earnings Conference Call February 9, 2023 2:30 AM ET

Company Participants

Kristian Tammela – Vice President of Investor Relations

Charles Heaulme – President & Chief Executive Officer

Thomas Geust – Chief Financial Officer

Conference Call Participants

Robin Santavirta – Carnegie

Jutta Rahikainen – SEB

Calle Loikkanen – Danske Bank

Kristian Tammela

Good morning, ladies and gentlemen and welcome to the presentation for Huhtamaki’s Results for Full Year 2022. My name is Kristian Tammela, VP of Investor Relations.

As usual, we will kick off with a presentation by our President and CEO, Charles Heaulme, followed by our CFO, Thomas Geust. And at the end, we will wrap up with a Q&A session, and leave enough time for that.

Before we start, I will remind you that we have an upcoming Capital Markets Day here in Espoo on March 28, and more details on that will be made available bit late.

But with that, I’ll hand over to Charles.

Charles Heaulme

Thank you, Kristian. Good morning to all of you and thank you for joining this session about our results for the fourth quarter 2022 and the full year of 2022. I will as usual start with on our second page on an executive summary, giving you a few highlights of the year, and particularly of the quarter four, where we have delivered a strong performance in a continued volatile environment.

Volatility continues, what we mean with this is that we have seen variations in input cost development. And it’s at the same time softening of the demand in many categories and geographies.

In this context, our financial performance has been strong and continuously strong in line with the rest of the year, with a comparable sales growth in the fourth quarter of 9% and 15% for the full year 2022. Our adjusted EBIT is growing 14% in the fourth quarter and 25% overall in 2022. Third point, our Board of Directors is proposing a dividend of €1 per share for the year 2022, and that represents a growth of 6%.

I would continue about our strategy execution. We’re in line with the rest of the year, we are continuing to invest for growth and we’re continuing to invest for growth in two streams, as we explained in the previous quarters.

One is about increasing capacity in line with the projected demand in our core categories. And at the same time, we are developing our technological capabilities in order to deliver more innovation. And our delivery of innovation, I’ll come back to that more precisely – has been illustrated with the highlight of the announcement of Nespresso paper-based compostable coffee capsule that was back in November, I’m coming back to this point specifically.

And then last point about the fourth quarter in the end of November or November 30th last year, the EU was announcing the proposal for the PPWR, the Packaging and Packaging Waste Regulation. This is a project, and as well I would like to give you a few more highlights on understanding.

In the following page, as I suggested a couple of words on our investments in the next-generation innovation. And again, this has been very much illustrated. This is the big highlight of 2022 with the development of paper-based coffee capsules. This is an exclusive partnership with Nespresso, and it is based on our proprietary, high-precision technology derived from the molded fiber technology that we own since decades.

But where we have developed over the last couple of years a very high-precision new technology that enables us to enter into completely new categories and this product is the best proof of it, launch is planned in the market as of the spring of this year.

There has been as well in 2022, other what we call next-generation innovations, which have to do all with putting in the market more sustainable solutions and across geographies, so one was the so-called ICON. It’s a recyclable paper, ice cream packaging that’s in, particularly in the US market. And then under the brand name blueloop, which stands for all our sustainable innovation, we have the new paper lead that has been as well developed and announced during the year.

The Push Tab blister lid which is dedicated to the pharmaceutical industry, and lastly, the OmniLock ultra paper flexible packaging solution, which is a new innovative solution, a high barrier based on paper, which brings a buyer up to the quality and specification that we would have with Alufoil, so that’s as well breakthrough innovation for our future.

Now, as I said before a couple of words on the evolution of the EU regulations when it comes to sustainability and particularly with the PPWR, the Packaging and Packaging Waste Regulation, which has been proposed at the end of November 2022. And what I would like to highlight is if you aspect maybe not going into many details, unless you want to that we discuss details then we can take it during the Q&A session.

First point is about understanding the implications, what is going to require into our businesses, into our core businesses. Three main aspect. First of all the requirement for recyclability at scale, which I would say is very much in line with our strategy. I would like to remind that in our strategy and commitment to 2030, we say that we want to design all our products, 100% of our products for recyclability, reusability or compostability by 2030, so that is very much in line.

Second point has to do in this, PPWR has to do with the amount of recyclable content or you should say recyclable plastic content for plastic packaging there will be requirements on how much needs to be recyclable content into the packaging.

And then the third one is about the reusable systems that need to be implemented in the HoReCa channel. There has been some interpretation about how much could be the impact on our core business and we would like to offer some light on it and trying to be relatively precise, so that as to gauge the direct impact on particularly on the reuse system in the HoReCa business.

Our estimation is that by 2030 if the legislation is going through and I come back later now in a few seconds to the regulation that is process if it comes through by 2030 that would mean a potential impact in the worse case scenario of 2% of our current net sales and by 2040 of 5%. So that’s really on the long run. Some products are outside of scope.

Now, I would like to step back a little bit and third point, offer maybe a little bit more of a holistic view on our business from a long-term perspective, I’m talking about the foodservice business that is the one directly in focus of this regulation to say that we see on the long run a net positive impact. And the reason for being relatively positive on the long-term is that number one, this QSR or HoReCa business is a market that is growing in a relatively fast growing market in Europe, in the world, but in Europe in specific.

Second, there is a strong plastic substitution that is continuing to go on in Europe and that is favoring our portfolio, which is two-thirds paper based, fiber and paper based. So that’s the second point, which is positive.

Third point, there are aspects in this legislation, which as well play in favor of our portfolio and I will take one example the legislation still not being finalized as it is a proposal was proposing end of November that non-compostable coffee capsules would be banned within two years after implementation of the law, which is planned in 2024. So that together at the time of our innovation in fiber based, paper based compostable coffee capsules is actually a very positive impact to us. So net-net when we add the negatives and the positives, we believe it will be a net positive long-term development for our foodservice business.

A few words without going too much into detail into the regulation process, there has been this project on the 30th of November 2022. In practice, it takes usually 18 to 24 month in the EU for such a project to come as a regulation. The deadline for — in the mandate of the current EU commission is by end of April 2024 in order to have certainty about this regulation to come through the legislative currently that is mandate.

Last point, which is important to note is that, there is a requirement — a Quorum requirement in the EU in order to pass the legislation which is a 65% support for the legislation in order to pass. This 65% is not as number of countries, but as population countries — population, representing 65% of the entire EU. So, I believe those couple of words were important to clarify a few aspects on regulations, but of course, open to more questions if you have in the next session of Q&A.

Now jumping to slide six on our business performance for the fourth quarter and starting with the sales. The sales have been increasing 10% in the fourth quarter, and that’s a comparable net sales growth of 9%. You may recall that, the 10% compares to previous quarter’s reported net sales growth of 31% year-to-date end of September, a major difference being that we have — we don’t have acquisitive impact anymore, since we integrated the Elif company, as of end of September 2021. That’s a major impact.

And second, major impact is the divestment of our Russian operations end of September 2022. So that’s why we have — in Q4 a minus 3% from divestment and then a plus 5% from continued positive currency impact, particularly USD.

When we look at the same sales performance, but on the full-year basis, we are increasing our sales by 25% in reported terms 2022. This is comparable net sales growth of 15%, 5% from the Elif acquisition, minus 1% from the divestment of the Russian operations and 6% from the currency impact, reaching €4.479 billion close to €4.5 billion.

Looking on the next slide now, how this sales growth is broken down by our different business segment. We see that we have a growth that remains strong in most segments to the exception in Q4 of flexible packaging. The foodservice packaging is growing 15% in comparable terms in Q4, 18% in the full-year 2022. The demand has slightly softened during the quarter four, in line with other categories as well. North America growing comparable terms 14% full-year, but 10% in Q4, where we have seen increasing variations in the demand across the different categories in North America.

In particular, the demand in retail was good. However, we’ve seen consumer goods particularly on the ice cream consumption suffering during the fourth quarter. The demand for flexible packaging softened in our key markets and particularly in emerging markets, explaining why Q4 is at a much lower growth pace than the rest of the year which is full year 14%. And then, Fiber Packaging being consistent over all the quarters of the year, with 17% growth in Q4 ’15, comparable growth full-year. The demand for fiber-based egg packaging and food on-the-go product remains stable in most markets.

Moving on to now the P&L items, key items with an improved adjusted EBIT despite the inflation underlying that, we have managed the pricing extremely well again in quarter four, overall, I would say during the full year 2022. We have improved the adjusted EBIT through sales growth and as well operational efficiency. We see that the EPS is actually growing faster than the EBIT. The EPS in Q4 is growing 20% and it’s the same 20% on full year basis, reaching 2.49 compared to 2.07 in 2021. And that’s despite or including the 2.49 including the fact that we have divested in Russia end of September.

And then final maybe important comment is the growth of our CapEx by 19% in Q4, 23% in the full-year, in line with our comments given during the previous quarters investing for as I said before, two streams growth on our core business capacity and then innovation in new sustainable product solutions.

Moving on to Page 10 on our sustainability dashboard, I may not go through all the different KPIs but highlighting that we have an overall good performance, which is in line with the trajectory that we have defined for ourselves with our 2030 commitments. Highlighting maybe three important and significant improvements.

Number one, renewable electricity, which is almost at 25% in the end of 2022 and I would like to compare it to two things. First to where we were in 2021, 18%. So that’s almost a 7% – seven points improvement. And that compares to a zero base in 2019, when we set our targets for 2030.

So that’s a really very good performance, which will continue because that doesn’t account for the VPPA contracts that we have signed in both in US and in Europe to buy renewable electricity going forward those VPPA starting in 2023. So a very strong highlight on this.

Second is the industrial waste recycled is as well jumping three points from last year from 72% to 75%. So we are on our trajectory to 90%, which is our commitment for 2030. And maybe last point, which is of high importance is the waste to landfill. We are committed to zero by 2030 and we have increased that waste of – we have reduced our waste to landfill sorry by five points from 2021 to 2022 to a level of 12%, 12.4% at the end of 2022. That’s for the sustainability highlights.

Now by business segments, a couple of words one page summary for each business segment, starting with Foodservice, where we see in the sales that the demand for foodservice packaging has softened during the last quarter of the year. The sales are increasing in our key markets, driven particularly by pricing. However, China remains the main negative deviation in 2022 both in quarter four and the full year.

The raw material prices continued to increase in the fourth quarter. Our adjusted EBIT improved driven by pricing and an improved mix, particularly with the innovation product. And then our investments in the Foodservice segment are mostly directed to what I mentioned at the beginning new innovative solutions, particularly for smooth molded fiber applications dedicated to FMCG channel. That’s for the Foodservice segment, where our margin for the full-year is at 9.5% 9.1% in Q4.

North America now where the growth has softened as well in the last quarter of the year ending with a comparable net sales growth of 14% for the full year with a margin for the full year close to 12%. We sustained the 11.7% for the full year with a strong quarter four. The net sales growth has been in varying in the different categories as I mentioned before. There has been a continued broad-based cost inflation. And therefore, our sales growth is as well driven by pricing management. The volumes particularly in Q4 have been declining and that’s particularly due to stock management. So it’s not so much market-driven even though in some categories like consumer goods for ice cream, it is market-driven but a lot has been about across the value chain, cash flow management and therefore, reduction of stocks, which has had an impact on the demand of Q4 likely to be recovered soon. So that was a very important point for December.

Our adjusted EBIT improved. We see a positive impact from the net sales growth through pricing, but as well the operational efficiency that has increased. However, at the same time, the sales mix was relatively unfavorable. So that’s for North America where, again, our margin remains strong, at close to 12%.

Flexible Packaging, page 14, has seen very challenging market conditions and then a one-off item that is impacting the Q4 profitability. Overall, the demand for the flexible packaging in our key markets has declined during the fourth quarter, particularly in Turkey, in Eastern Europe and in UAE. On the other hand, we have seen, in Southeast Asia, a growing demand.

The net sales increase has been driven by pricing, but partly offset during the fourth quarter by the decrease in the volume. And then, most importantly, the adjusted EBIT that decreased during the last quarter of the year. This profitability was weighed on by unfavorable currency impact in local operations. And when I say local operations, I mean particularly Turkey and even more particularly Egypt, with the strong devaluation of the Egyptian pound during the fourth quarter.

Additionally, we have had, of course, as I said before, the unfavorable volume development that has an impact, of course, on our capacity utilization and therefore, profitability. And then, there has been a one-off inventory adjustment, which had a negative impact that was in our Czech Republic unit, where we had to make a one-off inventory devaluation in Q4, but that doesn’t have an impact as such on the full year, because that was an overvaluation of that inventory in up to Q3 of the year. That’s for Flexible Packaging.

And then, lastly, page 15, Fiber Packaging, where the overall demand, as I mentioned before, has remained stable in most markets and where pricing has been sustaining as well on sales growth and we have an adjusted EBIT that increased in line with the sales during the full-year. So we see comparable net sales growth of 15%, adjusted EBIT growth of 10% and ending at 11% for the full year on an EBIT margin level. That’s for the fiber.

And now some more details with Thomas on the financials.

Thomas Geust

Thank you, Charles. I will move into the detailed profit and loss, a lot of these items, as usual, addressed already by Charles, so I will try to focus on some items which might not have been mentioned so far.

So, first of all, you recall that we had a strong year-to-date growth of 31% roughly on net sales and adjusted EBIT by the quarter three. Now, it’s 25% on both the items, but you can also see here that we have a slight acceleration in the adjusted EBIT growth following really the operational performances and then, of course, the activities we have had around pricing, slightly negatively offset by the Russian divestment, so that impacting the earnings slightly negatively.

On the top line I would highlight that in Q4, we do not anymore have in — from a comparable point of view, the Elif acquisition. So we had Elif in already in Q4 and then the Russia business is out. So that’s also a negative impact in Q4 on the comparison year-on-year.

If we move on to the net financials, you can see that the net financials are heavily up. That’s mainly driven, of course, by the higher net debt levels we have. The full-year numbers also keep in some offsetting items related to Russia and then some smaller — some losses again also related to the Egyptian pound devaluation.

On a run rate basis, we are not on the level where we see the quarter, it will be slightly lower. The tax rate is now on 19% ETR versus 23% previous year. That was further — the ETR rate was further improved if we say that way from a legislation change in Turkey allowing for the decrease of deferred tax liabilities in Q4. So, that one basically taking down the tax rate to 19%. And then as we already reported in Q3, we also have the positive outcome of the divestment of Russia where which is considered — is considered a tax-free gain.

Then you also see that our adjusted numbers are slightly below the reported numbers on full-year level which means that we have more benefits in our ISC than negatives in the items affecting comparability.

On the currency, the currency continues to trend positively, but if you look on the column to the right, you can see that already some of the currencies start to trend negatively and especially they start to trend negatively if you compare to the average rate year-to-date.

So, the tailwind from currency is with current exchange rates expected to not be as favorable in 2023. Take US dollar as an example, we have an average rate of 105 closing rate of 106 and currently, I think the euro-USD is trending at 107. So, from that perspective, some of the tailwind from currency currently at least is gone.

But if you look then on the EBIT to net sales here then I stick behind my earlier statements that what we see in the currency net sales EBIT is mainly translational impact.

Net debt here we are down roughly €50 million compared to previous years at net debt levels. And from that perspective, the main contribution comes from the — comes from the sale of Russia, which contributed strongly to our cash not cash flow not free cash flow, but on reduction of net debt. And then in the last quarter, we also had a positive cash flow, which I will come back to later.

The loan maturities are at 3.2 years. Currently, fixed rates 63% roughly of the overall outstanding debt and there is a increase in the interest rate currently clearly versus previous year.

On the cash flow, we have an acceleration as I said in Q4 in cash flow. If you take quarter-by-quarter, we had a negative of €46 million in the first quarter €20 million in the second quarter and then a positive €6 million in the third quarter. So, €71 million now continuing the positive trajectory and that main contribution comes from the operating working capital so release mainly of inventory.

The CapEx is — are on a high level €318 million, reflecting our strategic intentions of organically building capabilities in sustainable packaging solutions. So, expected high CapEx level and which is also expected to continue on a high level next year.

On the asset side, the main movements are from the divestment of Russia currency impacts and then the CapExes and operating working capital. So nothing as such dramatic on the balance sheet side. The operating working capital here we have a strong improvement in Q4, although as you can see the operating working capital on a full year basis significantly increased by €144 million. But if we take only Q3, we released I think roughly €150 million of inventories in the quarter alone.

Charles already highlighted that the dividend proposal by the Board is €1 per share that’s 6% up to previous year with adjusted EPS up 20%. The €1 per share is equal to a payout ratio of 40% so on the lower bracket of our payout ratio corridor. The share price at the year-end was €32. So with the proposed dividend, the dividend yield would be 3.1%. And with this one, Huhtamaki would continue as a year-on-year increasing dividend payer. So it would be the 14th consecutive year and I think with that we are the stock listed company in Finland with the longest consecutive increased payout.

So moving towards the long-term ambition and as Kristian already highlighted, there will be a CMD where we will be discussing both our strategic intent, but also obviously the ambitions. But if you look at our development towards the ambitions on the organic growth, we are clearly above here of course supported by the pricing side in order to offset the inflation. But also on the margin side, we have a dilution from the pricing. And the net debt to EBITDA you can see we are spot on in the middle of the ambition corridor with then also the dividend payout continuing to match the bracket of 40% to 50% payout.

So with that one, we are handing over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The next question comes from Robin Santavirta from Carnegie. Please go ahead.

Robin Santavirta

Good morning, everybody. Thanks for taking my questions. I have three questions please. First of all, I was wondering about Q4, whether you saw customer inventory destocking and in what segments what markets? We have seen many similar companies to you being burning quite significantly in Q4 from customer inventory destocking. Can you just comment a bit and give some color on that and what should we expect? Is that continuing now in the start of 2023?

Then second question I have is related to 2023 outlook in North America. Saw a very strong performance again in 2022 much better than I think was expected by investors and analysts. Are there any reason why the performance should became weaker when it comes to margin and absolute level of earnings when we go into 2023 or is it quite worse and the momentum you’re bringing from 2022 will continue in this year?

And then final question I have is, if I look at the group this is a bit of a holistic question, I think a lot of people wonder I mean your EBIT is up 25% year-on-year, probably all-time high, in a year when we have quite significant input cost inflation, which normally is negative at least temporarily for a packaging converter like you. What is the reason that you have been able to perform so well in 2022? And are there any sort of things that then would not be sort of there in 2023 that we should understand, when input cost starts to go down? So, those three questions. Thanks.

Charles Heaulme

Thank you, Robin. Good morning. So, I suggest, I start on the question by question and then Thomas, you can complement if you like. So on your first question, Q4 whether we have seen a destocking from customers and what impact on 2023. Yes, we have seen some destocking. So it’s not been across the board, but this has been — if one statement can be made about market/customers on Q4, is markets have been softening in terms of demand, so consumers have been softening.

Consequence customers have been reducing their order pattern. In addition, there has been a destocking, because the entire value chain in the different channels, has been suffering low cash flows during the first part of the year, and this has been an important aspect in Q4.

Where have we seen it particularly? I can say, we’ve seen it particularly in the US, and specifically in December, which will have likely an impact early 2023; which month is January February, but in the first quarter. We have seen it in other segments, but it has been particularly in the US. Thomas, anything you would like to add?

Thomas Geust

No, I think the story of managing stock is something, we all we included are focusing a lot on. With the disrupted value chain or supply chain in the start of the year, many companies stocked up. And I think, it’s more a category management now going on, so people are very focused on which categories will be growing and which are assumed to be more flat.

Charles Heaulme

Thank you. So Robin, to your second question on North America specifically, strong performance. Yes, we are very happy with the performance in North America, and this is as well a reason why, we have decided in — you have seen our CapEx is relatively high in 2022. Part of it is because we have decided to focus some investments, a significant part of investments on the core business in North America to scale that business, because we see the US market growing particularly in the categories, where we are very present whether it’s tableware, retail tableware or food service as well as folding cartons.

And so we are investing because we see that we are very confident, that the profitability level is sustainable, going up from where we are will be a challenge. Of course, we want to improve permanently, continuously, but that will be a challenge. Now to your question, which was more should we worry and maybe your question is in line with the ambition, that had been given three years ago, about North America being between 9% and 10% EBIT margin.

Now that we have climbed to 11% to 12%, we want to sustain this at least. And we see 2023, as a tight year, it’s going to be another very challenging year particularly if volumes would be softening. But otherwise, we are confident and we will come back of course — Kristian and Thomas mentioned the CMD, on the 28th of March. We will come back of course, on this and particularly on our ambition in North America. Thomas, anything you want to add on this one?

Thomas Geust

No, I think that’s fine.

Charles Heaulme

Then your last question. I did not answer your third question Robin, on the EBIT improvement of 25% in 2022 where you said, somewhat beyond expectations. So you had two questions, so basically, how did we manage the inflation, but as well is there anything — if I understood your question, is there anything special in 2022, that we should be worrying that it’s not there next year?

The answer to that part is no. There is nothing exceptional that should affect that will not be present in the following period.

Two things. There is something that is in 2022 that hopefully we will not see anymore and that’s the huge disruption that we’ve seen in emerging markets; particularly Turkey, Egypt; that has been affecting particularly our flexible packaging margin. So when you consider this margin that is much below what it should be and what we believe it will be then actually this is a positive aspect looking forward to our company margin.

Now to your question about the inflation. The inflation has been a two-year story. It didn’t start in 2022. It started basically in January 2021 with at that time the recycled fiber. The thing that we have done very well are two things. Number one, being very early at I will not say anticipating, but reacting to the first signs of inflation that was back in January 2021 as a company. But being very early that has enabled us to be in full swing in the pricing management in 2022. The second aspect is to reinforce our pricing processes resources in order not to get any deviation in our margin during this inflationary environment.

Robin Santavirta

Thank you guys.

Charles Heaulme

Thanks Robin.

Operator

The next question comes from Jutta Rahikainen from SEB. Please go ahead.

Jutta Rahikainen

Hi. Good morning all. A few more questions I mean to the flexible part. We covered it already, but now Q4 was many times mentioned soft and you also discussed the reasons. But how should we think about the coming few quarters in flexibles, I mean, it’s probably going to continue weak in the first half of 2023 or is there some reason why it could or should all of a sudden bounce back to the good levels at a fast pace? That’s the first one.

Charles Heaulme

Good morning. Jutta. Thanks for the question. So flexibles, yes, indeed in Q4 is definitely disappointing as well for us. But the 4% or the 4.2% EBIT margin that we are reporting is not reflecting the business performance and the reason is two things. One is the one-off issue that is relatively significant during Q4 about this inventory devaluation we had to make on our Czech Republic operations. That is a one-off, we won’t see it in the coming periods of course.

Second, there has been this strong devaluation of the Egyptian pound in Q4, which as well has a strong impact. There may be more devaluations in some emerging markets, we don’t know. We can’t project what will be the development in Egypt and a few other countries.

But if you exclude those two items our Q4 profitability in flexible would have been 7%. 7% is not our ambition. It’s far below our 9% to 10% EBIT margin ambition for flexibles, and we believe we will get there over next couple of years. We’ll come back to that by the way in the CMD obviously.

So long story short, we believe that one variable is going to be, of course, extremely important in the first quarter and the coming quarter is the volume development in the market. So volume demand is going to be determining our profitability. Second this weak level will not remain because there is this two one-offs which shall not appear again in Q1 2023.

Jutta Rahikainen

Okay. Very clear. And my next question would have been that if you want to quantify the inventory effect, but then I guess you probably did it is at 7% excluding those two items.

Charles Heaulme

Yes.

Jutta Rahikainen

Good. And then India still sticking with flexibles so what’s happening there?

Charles Heaulme

So India has improved actually during the fourth quarter. I would not tell you that we are where we want to be. But you understood in the previous quarters that we had a cycle down linked to which just started basically in March 2020 with this COVID crisis that has impacted tremendously this market.

We are now starting — we have been in Q4 starting, what I would call, the ramp-up to this turnaround, so we are pleased actually with our fourth quarter. We still need to improve to get to the ambition EBIT margin that we have and the growth as well, but the development is encouraging. We have very good management in place now, since — in different functions, the first part of the year and then since August with our new GM.

We are equipped. There is strong support from the group for Indian operations. And to give you one indication, the India EBIT year-over-year in the quarter four, has been doubling, which is a sign versus 2021 that we are on the right path. We’re not there yet, but it has been a relatively positive quarter.

Jutta Rahikainen

Okay. Thank you. That’s good to hear. Then your volumes, a two-fold question. First of all now, I really note that you did not have any volume growth in Q4, but you probably had a solid volume decline. So what percentage you would suggest we apply for that?

And then the second part of the question is that, what’s your volume estimate for 2023, either on a divisional or geographic level or even a group level number, just to get a feeling? I mean do you expect volumes to decrease probably past or perhaps even grow? Thank you.

Charles Heaulme

Thank you, Jutta. So, on the volume indeed, as I said, our reported sales growth, look much lower than in the previous quarters. But again, we have to account for all the non-comparable items and acquisitions and divestments are there to explain the most part of it. But in the comparable net sales growth, the Q4 is fully pricing. The volume was actually a mid single-digit negative, okay?

So, when you read basically across the value chain of our different channels of customers, this is very much in line, meaning we do not have any analysis showing that we would be losing market share. That’s one very important aspect. Second, however, because of stock management but as well because of the looming recession in many different geographies, volumes have been negative in the quarter four of 2022.

If we put that back into the perspective of the full year, remember that we had a relatively positive first half of the year then quarter three in volume was kind of starting to slide down without being negative, now it’s negative in Q4. So overall, we’re talking about flat volumes for 2023 — 2022, sorry.

Your question about 2023, I mean this is a very complex one. If you want our expectations, what we are building upon our capacity as well is we believe that we will see growth in 2023. However, relatively modest and it’s not going to be a consistent evolution across the year, meaning that we are considering that Q1, eventually Q2 could be difficult but then the second half more positive and more positive from two perspectives.

One, we would believe that this looming recession would ease in the second part of the year. Second, we will have some of our capacity investments coming into play where we have excellent projection, because if I take for instance investments in the US with our egg packaging additional factory that we are installing, we know that the legislation is very timely for us for this investment since with the ban of EPS in — of polystyrene packaging in one-third of the state. So, just to say that in the second semester, it’s not only the macro economy we’re counting with, it’s our capacity.

Thomas Geust

I would add a few things both to 2022 and maybe also for the 2023, and that’s a general statement on — when looking at what report are out there. It seems like the food related businesses, including also QSR are doing quite well in this recession environment. The discretionary spend so to some extent is lower, especially in the emerging markets nothing new with that one as such.

But then, maybe one element also to throw into the game would be the opening/closing of some market Q4 2022 all-in-all we should consider China to have been a closed market as an example. So from that perspective, that’s maybe one of the markets where we will see some activity going up.

Jutta Rahikainen

Okay. That’s helpful. Thanks. And then, I think my last question for now. On the pricing side, I assume that you still see some cost inflation although some items are down maybe you could talk us through that. And then, on the pricing side, that links to that one do you think you will start lowering prices during 2023 and are your clients asking for that already and how do those talks go? Thanks.

Charles Heaulme

So this question is complex because, compared to 2022, where basically the year started with inflation across the board, across all input costs, 2023 is starting in a very diverse situation where we are. I’ll start with a lower item.

Transportation distribution costs are going down to relatively low-level, in line with the demand that is going down obviously. Raw materials there are many variations. Some raw materials have already started to go down — are still at a high-level, but have started to go down; all the resins and polymers as well as recycled fiber for instance.

Some are still going up paperboard for instance. And then, energy prices are potentially starting to decline, but at a very high-level. So all-in-all we are still considering a net plus inflation in 2023.

And from that perspective, pricing in average shall not go down. But the work for the teams together with the customer is going to be sophisticated in considering these variations, as opposed to a period where everything was going up significantly.

Jutta Rahikainen

Okay. Thanks clear. I leave it there for the next person. Thank you.

Operator

The next question comes from Calle Loikkanen from Danske Bank. Please go ahead.

Calle Loikkanen

Yes. Good morning and thank you for taking my question. I love that the perhaps more important questions were already asked and answered, but still have a couple left. If I look at for Q4 the items affecting comparability, you have something there called environmental case €8.4 million and then also settlement and legal fees this is $1.5 million. Can you help us to understand what these are and what this relate to and also that are these now kind of done and dusted or is there more to come?

Thomas Geust

Yeah. So yeah I will comment only on the environmental case as such, because the legal fees and other are more I would say stuff that you will see across the company every now and then. So nothing dramatic around the legal fees as such.

The environmental case is related to an old site not anymore with us where the negotiations and discussions with authorities have advanced to a state where we feel confident in taking in a provision and the provision is reflecting our view of potential upcoming cost.

Calle Loikkanen

Okay. That’s very clear. And then perhaps on the sustainability side. You showed the sustainability dashboard on page 10 of the presentation and I was just wondering about the renewable or recycled materials. It’s been, kind of, sliding down now for several years. If I compare now the 2022 figure to 2019, it’s down more than two percentage points. So is this, kind of, just related to some sales mix type of things or why is it kind of going down when it should be going up?

Charles Heaulme

Yes. This performance item that indeed goes the reverse direction to our commitment to 2030 is purely portfolio related and when I say portfolio it has to do not with the fact that we grow faster in flexible packaging where most of the raw material is recycled or renewable. It’s not the growth. It has to do with the acquisition of Elif in 2021, which of course has been integrated only one quarter in 2021 three more quarters in 2022.

So when you — if I understand that you looked at two years’ gap when you compare to 2020 baseline obviously technically it’s driving us down. This is a ratio that unless other changes in the portfolio in 2023 you will see going up thanks to all our investments, which are mainly in capacity for paper-based and fiber products. Namely to give you illustration so that we speak concretely; the egg packaging in the U.S., folding carton in the U.S, the smooth molded fiber investments in Europe for instance in the fiber leads or that replace plastic or coffee capsules as well. So all these should be over time increasing or reverting to a positive trend.

Kristian Tammela

Maybe to add also now for the last quarter so the Russian divestment also I’ll place into this.

Charles Heaulme

Very good point.

Calle Loikkanen

Okay. Good. Thank you. And then perhaps you mentioned there in one of the questions that you have new capacity coming on during 2023 from investments. Is there any way to kind of quantify the impact in terms of sales for example from this additional capacity coming on during the year so that we would have a better sense of how much the capacity actually is that’s coming on.

Thomas Geust

Yes. So not guiding from the capacity point of view. You know the investments we have been communicating around first statement. All the investments we do are in order to allow us to grow in accordance with our ambition. So the type of investments we have in very rare cases bring on at one time a significant uptick so that you could all of a sudden calculate in a 10% increase, sort of, coming in from a single investment. It’s incremental year-on-year.

But the investments we have coming onstream in 2023 are related to a lot of the things we have been discussing here already. So smooth molded fiber the FMCG related investments both with regards to coffee pods and to folded carton and then the first volumes out of the Hammond factory in North America, but for sure not full scope. And then obviously on top of that we still also have markets where we will be getting some better asset utilization on already existing machinery. So it’s a very mixed picture in 2023 from that perspective.

Calle Loikkanen

Okay. Thank you. And then lastly on CapEx for 2023. Is there any, sort of, ndication that you would like to give out on what level the CapEx could potentially be in ’23?

Thomas Geust

So I would say this year’s level or above.

Calle Loikkanen

Okay. That’s helpful. That’s – Thank you. That’s all from me.

Kristian Tammela

Thank you all for your interest. We are now running out of time. If you still have any questions please feel free to reach out to us. But with that we like to thank you for your interest and wish you a very good day. Thank you.

Thomas Geust

Thank you.