SIG Combibloc: Strong Q1 performance - full year outlook maintained

With effect from the end of February, revenues of the former Middle East & Africa joint ventures are fully consolidated and presented in a new segment, Middle East and Africa (MEA). On a like-for-like basis, the combined Europe and MEA segments registered growth of 4.4% in the quarter. The Europe, Middle East and Africa (EMEA) segment relates to the Group’s reporting structure prior to acquisition of the MEA business, which was in place for the first two months of the year.

In the first two months of the year, Europe saw good growth compared with the first two months of 2020, reflecting a continuing high level of at-home consumption due to COVID-19 restrictions. Relative performance in March was weaker due to the high base of comparison, as March 2020 marked the start of lockdowns in Europe.

The MEA business saw strong constant currency sales growth in March with a recovery in consumption, particularly of non-carbonated soft drinks.

In Asia Pacific (APAC), both China and South East Asia registered double digit growth at constant currency. In China, the market operated at more normal levels compared with the first quarter of 2020, when the country was in full lockdown. In South East Asia, many countries continue to be affected by COVID-19 restrictions and the resulting economic impact. However, after a period of de-stocking in the second half of 2020, customers rebuilt safety stocks in the first quarter of 2021, resulting in a spike in demand for cartons which is expected to be temporary.

The Americas saw exceptional growth reflecting the contribution of fillers deployed in the course of 2020. There was also a positive effect from re-stocking as many customers did not enter into the customary year-end rally in the fourth quarter of 2020. At-home consumption continued to drive demand across the region.

EBITDA and adjusted EBITDA
Adjusted EBITDA increased to €117.9 million in the first quarter of 2021 and the adjusted EBITDA margin was significantly higher at 26.1%. The margin benefited from lower raw material costs due to hedge contracts entered into during 2020. There was also a benefit from the non-recurrence of a currency revaluation impact on the balance sheet at the end of the first quarter of 2020, arising from the sharp depreciation of emerging market currencies at that time. The inclusion of adjusted EBITDA from the MEA business for one month was, as previously communicated, partly offset by the fact that no dividend was received from the former joint ventures in the first quarter of 2021.

Reported EBITDA increased to €93.1 million from €67.2 million in the first quarter of 2020. Higher restructuring costs in Q1 2021 reflected decommissioning and redundancy costs relating to the announced closure of the Whakatane paper mill in New Zealand.

Net income and adjusted net income
Adjusted net income increased to €52.0 million from €12.9 million in Q1 2020. The increase primarily reflects the improvement in adjusted EBITDA and lower foreign exchange impacts.

Net income was €2.9 million compared with a loss of €25.5 million in Q1 2020. The increase in net income in 2021 reflected the non-recurrence of foreign exchange losses in 2020 and a positive contribution from the revaluation of commodity derivatives. These were offset by costs related to the closure of the mill in New Zealand.

Due to the short time since the acquisition of the remaining shares in the former Middle East joint ventures, net income and adjusted net income in the first quarter of 2021 do not include any impacts from the acquisition accounting relating to the MEA business or any potential gain on the previously held interest in the acquired joint ventures.

Dividend
The Annual General Meeting held on Wednesday 21 April 2021 approved a dividend distribution out of the capital contribution reserve of CHF 0.42 per share for the year 2020 (2019: CHF 0.38 per share). This increased dividend was paid on a higher number of shares (337.5 million) following the issue of 17.5 million new shares to the former joint venture partner Obeikan Investment Group (OIG) relating to SIG’s acquisition of the Middle East joint ventures. The total dividend, paid out on 28 April, was €128 million. The payout ratio at 55% was within the targeted range of 50-60% of full year adjusted net income.

Free cash flow
Net cash from operating activities was lower as favourable working capital movements registered in the first quarter of 2020 did not recur. Lease liability payments were higher following the opening of a new production plant in the APAC region.

The Group’s cash generation is weighted towards the second half of the year due to the seasonality of the business. The fourth quarter has historically been the largest quarter in terms of revenue and profit. In the first quarter cash flow is reduced as volume rebates accrued in the previous year are paid out.

Leverage
At the end of February, SIG paid €167 million to OIG, representing the cash component of the consideration for OIG’s 50% share in the Middle East joint ventures. The Company also assumed €36 million of net indebtedness (excluding lease liabilities) from the Middle East joint ventures. Notwithstanding these movements, net leverage at end-March 2021 was unchanged compared with end-December 2020.

Production plants
In April the Company announced that it will construct a new plant in Queretaro, Mexico to serve North American markets. The plant will further expand SIG’s global production network and will enable the Company to build on its strong track record of growth in North America. SIG will invest around €40 million in the new plant over the period 2021–2023, with the land and buildings financed through a long-term lease with a net present value currently estimated at approximately €20 million. The investment will cover state-of-the-art production capacity for the printing, cutting and finishing of carton packs.

The Company has reviewed its APAC production assets in the light of the recent opening of its new plant in China. The decision has been taken to close the production plant in Melbourne, Australia which was part of the Visy Cartons acquisition in 2019. A consultation process with employees regarding the proposed closure has commenced. The Australia and New Zealand markets can be efficiently supplied from the plants in China and Thailand. Production is expected to finish by the end of 2021 with the site vacated during 2022.

Full year outlook
The factors driving strong revenue growth in the first quarter of 2021, notably re-stocking in APAC and the Americas, are not expected to continue for the rest of the year. In Europe and the Americas, where the business has benefited from high at-home consumption, performance from the second quarter onwards will be measured against a high base in 2020. COVID-19 restrictions and economic uncertainty in South East Asia continue to affect on-the-go consumption in this region.

Full year guidance is therefore unchanged. On a like-for-like basis the combined business, including the MEA business from March onwards, is expected to achieve core revenue growth at constant currency in the lower half of the 4-6% range. Assuming no major deterioration in exchange rates, the adjusted EBITDA margin is expected to be in the 27-28% range. Net capital expenditure is forecast to be within the targeted 8-10% of revenue range in 2020 and mid-term.