Good morning, ladies and gentlemen, and thank you for joining us. I'm Ingrid McMahon of Investor Relations, and with me today hosting the call are Samuel Sigrist, CEO, and Ann Erkens, CFO. The slides for the call are available for download on our Investor website. This presentation may contain forward-looking statements involving risks and uncertainties that may cause results to differ materially from those statements. Cautionary statements and disclaimers can be found on slide two of the presentation, which participants are encouraged to read carefully. With that, let me hand you over to Samuel.
Thank you, Ingrid, and welcome, everybody. Starting with the business summary of the half-year, the performance of carton, both the aseptic and chilled, has been above our expectations. Growth accelerated strongly in the quarter, resulting in constant currency growth of 6.7% for the first half. Bag-in-box and spouted pouch performance has clearly been below our own expectations, although there was a lower rate of decline in quarter two compared to quarter one. Revenue for the first half of the year was down 12%. Bag-in-box has been mainly impacted by two factors: soft consumer demand in North America for out-of-home dining and production challenges due to a plant relocation from Canada to the U.S., which took longer to ramp up than expected. This led to capacity constraints, delayed shipments, and eventually lower profitability.
Remedial action is underway to resolve these challenges, and going forward, we expect performance in bag-in-box to improve on a quarter-by-quarter basis. Due to the performance of bag-in-box in the first half of the year, we have updated our guidance accordingly. Our expectation for revenue growth is now around 4%, broadly in line with our previous guidance, which was at the low end of the 4%-6% range. For the adjusted EBITDA margin, our updated guidance is at the lower end of a 24%-25% range compared with the lower half of a 25%-26% range previously. Aseptic carton continues to perform strongly, and its growth rate is clearly benefiting from the recent filler placements. We are seeing ongoing demand for new fillers spread across all geographies and categories and expect to place 75 or more fillers by the end of this year.
As you know, this is a positive leading indicator for future growth. Lastly, we have refinanced a significant portion of our debt in the first half of the year, extending our debt maturity profile to beyond 2030 at competitive rates. Turning now to the key figures of the first half, revenue at constant currency grew by 3%. The resin escalator for bag-in-box and spouted pouch did not have much impact at the group level, with revenue growth on a constant currency and constant resin basis up by 2.9%. Adjusted EBITDA was EUR 369 million. The decline compared to prior years was mainly attributable to foreign currency headwinds and under-absorption of production costs in the bag-in-box operations. These factors were partially mitigated by lower raw material costs and a positive top-line contribution in Q2, driven by accelerating volume growth.
The strong improvement in free cash flow compared with the first half of 2023 reflects lower working capital and lower capital expenditure. Working capital improvements were driven by better inventory management and a decrease in volume incentives paid to customers. As expected, capital expenditure has declined in line with the completion of key property, plant, and equipment projects, for example, our new plant in Mexico. At our Q1 results, we said that we expected a sequential improvement in the second quarter, and this was the case. Group revenue on a constant currency basis increased by 5.7% compared to a flat Q1. The adjusted EBITDA margin increased by 360 basis points quarter-on-quarter to 25.1%. Q2 adjusted EBITDA of EUR 214 million was significantly above Q1 and above prior year. Adjusted net income was in line with prior year, reflecting higher adjusted EBITDA offset by increased interest cost.
Q2 free cash flow improved significantly to + EUR 24 million compared to a -EUR 118 million in Q2 2023. As you know, free cash flow is structurally lower in the first half of the year, which is compensated for by cash generation in the second half in line with our normal seasonality. Turning now to the performance by region, Europe delivered strong second quarter growth of 7% at constant currency and 6.4% for the half-year. The performance was driven by aseptic carton volumes in the dairy sector, as previous filler placements ramped up, together with an increase in milk supply for aseptic processing due to favorable weather conditions. Europe continues to win new filler contracts and expects to place more fillers in 2024 than in 2023.
Revenue from bag-in-box and spouted pouch declined against the strong prior year comparison, which included one-off equipment sales that were not repeated in this half-year. Europe's adjusted EBITDA margin was in the first half 27.4%, 50 basis points below prior year due to foreign currency headwinds related to raw materials purchased by our Swiss franc entity. In India, Middle East, and Africa, the region delivered a strong performance in the second quarter with growth of over 25%, this following a 5% decline in Q1. This brought the half-year growth rate to 11%. Demand in India remained at a high level. The increase in the second quarter performance was driven by improvements in outbound logistics in the Red Sea, allowing for increased deliveries to North Africa. Given that the situation in the region remains uncertain, we believe that there was also an element of customer stock building in the quarter.
The group's first aseptic carton sleeves plant in India is on schedule to commence production by the end of 2024. This plant will have an initial production capacity of 4 billion sleeves. Overall, the region has secured a high number of new filler contracts during the first half-year, including six cross-selling wins for system solutions for bag-in-box and spouted pouch in the Middle East and Africa. The adjusted EBITDA margin declined by 50 basis points to 27.3%. This reflects higher freight costs driven by the Red Sea disruptions. Growth in Asia-Pacific was 2.7% for the first half. In quarter two, revenue decline of 1.2% reflected a strong second quarter last year and some current market softness in China. Chilled carton growth was ahead of aseptic. In both aseptic and chilled carton, SIG continues to gain market share.
In aseptic carton, we are utilizing our flexible filling technology to work with customers to reduce pack sizes. This enables them to offer consumers more affordable products. In chilled carton, growth is being driven by product innovation and enhanced customer service under our ownership. The volume recovery in Indonesia and Vietnam, which began in March, continued into the second quarter. Growth in Malaysia was driven by newly installed fillers. The region saw strong demand for new filling lines during the period. The Asia-Pacific margin was 27.8% for the period, compared with 29.6% in H1 2023. It was principally impacted by the devaluation of the Thai baht against the euro, as well as ramp-up costs from the new chilled plants in China. In the first half of the year, revenue for the Americas region declined by 4.1% on a constant currency basis.
The region did, though, return to growth in the second quarter with an increase of 2.3%. This was led by aseptic carton volumes, which gained momentum after a slower start to the year. Bag-in-box showed a sequential improvement in the second quarter. However, growth remained negative as consumer demand has not yet recovered, particularly in food service. Quick service restaurants have recently introduced promotional activities aimed at attracting consumers back to the outlets. The situation was exacerbated by the capacity constraints at our U.S. bag-in-box facilities, as mentioned earlier. Remedial action to address these operational challenges is underway, and improvement is expected. The adjusted EBITDA margin for the first half-year period was impacted by the under-absorption of fixed costs due to these operational issues and the soft top-line performance. This brings me to the end of this part of the presentation, and I will shortly hand over to Ann.
To summarize, as expected, the second quarter showed a sequential improvement over the first quarter. In the second half, against the backdrop of muted end markets in some regions, we are focused on delivering a further acceleration in revenue growth and profitability. Now, Ann, please go ahead.
Thank you, Samuel, and good morning, everyone. Let's start by looking at the adjusted EBITDA bridge. Adjusted EBITDA for the first half was EUR 369 million compared to EUR 384 million a year ago. Performance was impacted by unfavorable currency effects, which reduced the margin by 60 basis points. The second quarter saw positive top-line contribution following a soft quarter one as revenue growth gained momentum and contributed to the EBITDA. Raw material costs continued to be a benefit for the half-year period due to lower hedge prices for polymers and aluminum. Production costs for the half-year reflected the under-absorption of fixed costs in the bag-in-box operations, while higher SG&A expenses reflected investments in growth, research and development, and wage inflation. The next slide details the reconciliation from EBITDA to adjusted EBITDA.
Compared with the adjusted number, reported EBITDA is higher by EUR 25 million and primarily reflects, number one, the usual net movement in non-cash unrealized commodity and foreign currency hedging positions. The movement in the half-year was a positive compared to prior year. Number two, restructuring costs and impairment losses of EUR 19 million pre-tax, mainly related to the closure of the chilled carton plant in Shanghai, as discussed in quarter one. The impairment was mostly due to the decline in the Chinese real estate market as we intend to sell the land. And thirdly, a decline in the fair value of the contingent consideration of EUR 38 million, reflecting the lower growth outlook for the bag-in-box and spouted pouch business. The next slide details the reconciliation from profit for the period to adjusted net income.
Other than the adjustments I just described on the EBITDA bridge, the largest adjustment to net income is, as usual, the Onex PPA depreciation and amortization. This arose from the acquisition accounting when the group was acquired by Onex in 2015, and this amortization will cease after the first quarter of 2025. Net capital expenditure decreased by EUR 69 million to EUR 103 million for the half-year period. PP&E capital expenditure included investments in the group's new aseptic carton plant in India and the chilled carton plant in China, while net filler CapEx reflected lower capital expenditure for new filling machines and higher upfront cash payments from customers. We have focused on optimizing the assembly cycle of filling machines, which has contributed to the lower net CapEx in the first half. We continue to see strong demand for fillers in 2024 and expect to place over 75 fillers for the year.
Net capital expenditure is forecasted to be within the lower half of the 7%-9% of revenues for the full year. The improvement in free cash flow generation in the first half of the year, compared with the first half of 2023, was primarily driven by lower working capital and lower capital expenditure. The reduction in working capital reflected better inventory management and decreased incentive payments to customers due to volume performance in 2023. During the period, there was a slight increase in payments to EUR 26 million due to the ramp-up of the group's tethered caps production in Europe and the new chilled plant in China. While CapEx as a percentage of revenue was at the lower end of our range in the second quarter, we expect a slightly higher outflow in the second half, driven by the finalization of the construction activities in India.
In 2024, the seasonality of our cash flow is expected to be in line with historic patterns, although slightly less pronounced than last year. As previously indicated, we expect free cash flow for the year to be above the 2023 level. Turning now to net leverage and financing. Our leverage at the end of June was 3.2x , below the 3.4x reported the year ago. Compared to the end of 2023, our leverage reflects the cash seasonality of the group. For the full year, we are targeting a reduction to around 2.5. We have successfully refinanced a significant portion of the business in the first half of the year. We placed a EUR 450 million Schuldschein, which attracted a high level of demand from a wide range of investors and agreed a new EUR 50 million term loan.
The proceeds from the Schuldschein and the new term loan, together with available cash, were used to prepay without premium or penalty the group's EUR 550 million term loan that was due in June 2025. We also agreed a new EUR 300 million revolving credit facility and an additional standby EUR 200 million RCF with our relationship banks. These transactions have extended our debt maturity profile and were closed with competitive prices well ahead of scheduled maturity dates. I will hand back to Samuel, who will go through the bag-in-box as well.
Thank you, Ann. I wanted to take a step back with a brief overview of the acquisitions SIG has made since 2019. The purpose of the acquisitions was to enable the group to expand its geographic, category, and channel presence. This includes acquiring a licensee in Australia and New Zealand, buying out our joint venture partner in the Middle East and Africa, acquiring the chilled carton operations in China, and, of course, the bag-in-box and spouted pouch acquisition located primarily in the US. You can see from the pie chart at the bottom of the slide that since 2019, our geographic exposure to Europe has reduced from 44%-30%, while our presence in Asia-Pacific, the Americas, and India, Middle East, and Africa has increased. This places the business in a much better position to weather any volatility in one particular region.
The Scholle IPN acquisition has given SIG access to food service channels and the spouted pouch markets and significantly expanded our business in the US. It has enhanced our reach with customers through new packaging substrates, all while maintaining our credentials as a low CO2 packaging alternative. Bag-in-box and spouted pouch enhance SIG's position as a leader in sustainable packaging, and we continue to confirm our hypotheses for future value creation. Bag-in-box is the preferred substrate for solutions in food service, which is projected to grow faster than retail. Bag-in-box is well established in mature markets with exciting potential for expansion into emerging markets. Spouted pouch is well positioned to consolidate its offering into a system solutions model comprising equipment and associated packaging. It is a relatively new substrate with scope for expansion in both mature and emerging markets.
Importantly, we have the opportunity to further develop its environmental profile by introducing monomaterial pouches, which are fully recyclable. This is already underway. Ultimately, we aim to introduce a fiber into the structure of the pouch as part of the shift from plastic to paper. Since the completion of the acquisition, we have been focused on transforming the business in line with SIG's business model. Historically, bag-in-box and spouted pouch have grown at the low single-digit rate per annum. Over the last two years, growth has been somewhat volatile. Following the end of COVID restrictions, we saw growth in the high teens. It subsequently normalized and was then further impacted by soft consumer demand in the US. Innovation and geographic expansion are key to ensuring resilient and consistent growth going forward.
We are encouraged by our pipeline of cross-selling wins, which is gaining momentum as we develop our innovative offering and grow geographically. Expansion of bag-in-box and spouted pouch onto our emerging markets platform is progressing, and emerging markets currently represent over 40% of the pipeline. We aim to broaden the revenue base by developing a geographic footprint comparable to the aseptic carton, although North America will likely remain the largest region. When we acquired the business, a clear objective was to move it away from transactional sales to a value-based system solution. To date, all cross-selling wins have been on this basis. Currently, two-thirds of our global pipeline represents system sales, while a growing portion is for aseptic technology. This is possible because we are delivering on our innovation roadmap.
For example, in spouted pouch, our aseptic technology know-how and our filling capabilities mean we can develop the market with the next generation of high-speed aseptic lines. Our second-generation machine has already been launched, benefiting from cartons in-line aseptic sterilization technology. The third generation with faster output is underway and is expected to significantly lower the total cost of ownership for our customers. We remain convinced that bag-in-box and spouted pouch will accelerate our growth in the midterm and enable the group to deliver growth in the upper half of our midterm guidance. For 2025, we expect the substrates to return to positive growth on an annual basis. Now, I would like to hand back to Ann for the guidance update.
Thank you, Samuel. Although the rate of decline in bag-in-box slowed in the second quarter and growth for carton picked up considerably, we have updated our full-year guidance to reflect the first half performance of bag-in-box. We are updating our revenue growth outlook to around 4% ±50 basis points from the low end of 4%-6%. We have revised guidance for adjusted EBITDA margin from the lower half of 25%-26% to the lower end of 24%-25%. Net capital expenditure is expected to be within the lower half of 7%-9% of revenues for the full year. The rest of the group's 2024 guidance remains unchanged. The guidance is, of course, subject to input costs and forex volatility. We have confirmed our midterm guidance.
This includes revenue growth in the upper half of our 4%-6% range and an adjusted EBITDA margin above 27%. Net capital expenditure is forecast to be within the range of 7%-9% of revenue, and the dividend payout ratio is expected to be 50%-60% of adjusted net income. That concludes our presentation, and we are now happy to take your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press Star and 1 on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press Star and 2. Participants are requested to use only handsets while asking a question. Anyone with a question may press Star and 1 at this time. Our first question comes from Jörn Iffert from UBS. Please go ahead.
Good morning. Thanks for taking my questions. I will take them one by one if it's okay. The first one would be please on the drop-through. For example, in the first half, you had around EUR 37 million more sales, but as you show in the EBITDA bridge, it's a EUR 6 million contribution to EBITDA, which is a drop-through of around 15%. Your group margin, of course, is much higher. We would expect that incremental margins are even above group margins. So can you help us to understand? Is it only the volatile utilization at Scholle or anything happening in mix? This would be the first question, please.
Good morning, Jörn , and thanks for your question. I think that that's what it is mainly, what you just mentioned. There is obviously the under-absorption element, and the mix comes on top of that. You also recall that the margin in Q2 last year was very strong, so that's a strong component margin from a mix perspective. The mix last year was very strong in Q2, so that's also a strong basis into the Q2 this year. But other than that, it's the under-absorption topic also from the bag-in-box and spouted pouch. There's no change or change in trend of margin mix.
Okay, thanks. And the second question would be, please, related also to margins going to the second half. Raw materials recently came down again. You never hedged 100%, but do you see this as an incremental support? You have baked in your margin guidance already for the second half that aluminum, for example, polymers were coming down recently. Or would this be something which would be incremental for your thoughts for the margins for the second half? Can I ask this?
I would say we have built our model now that led to this update to guidance on the information that is available now. We also saw, for example, on aluminum, there was a shorter drop, but let's see what's really going to happen with that over time. We have made our assumptions around that. We always said we expect 2024 to be a year probably rather back-end loaded with consumer demand accelerating into the second half. We also said after the soft or weak start into the year after the Q1 that we need to see half year where we stand. We do see now we have more visibility also on the second half. We do see that the end markets are not as strongly coming back as we expected them. We also have more clarity on the turnaround required for bag-in-box and spouted pouch.
We see better what the input cost is going to do on the second half, and all of that led to this adjustment of the guidance where we stay broadly in line on the top line with the 4% and give or take 100 basis points lower on the margin reflecting just the lower absorption or the under-absorption that we have seen in the first half and all the other factors.
Thanks. The last question, if I may, deflation. Deflation, I mean, we saw a couple of stable companies recently showing lower pricing contributions. How do you think about your average selling prices for the sleeves for the next 12-18 months? So not for the next 3-4 months, but really for the next 12-18 months. How do you think about it?
Yeah. I mean, we always said we were trailing behind on the way up, and we're going to take our time on the way down. I would say to some degree, the way down may already be on the way, but this year, as we discussed earlier, we see that our prices are broadly flat. And what our growth line reflects is basically volume growth. It's too early to tell what's going to happen in 2025, but I think there's going to be maybe slight pressure on pricing, but we're going to see. But I think the other aspect that comes to mind with deflation is we saw that with shrinkflation, deflation is the other way around. There is an opportunity for our system flexibility because we can now scale up the volume again on the filling formats, and some customers already started to do that.
Okay. Thanks a lot.
Thank you, Jörn .
The next question comes from Charlie Muir- Sands from BNP Paribas. Please go ahead.
Thanks very much. Yeah, I'll also ask one by one. Firstly, I wondered if you could give us any indication about whether the run rates in Q2 have been continuing into Q3 so far in July, or whether the, I mean, in particular, maybe in IMEA, there was a bit of a one-time catch-up. Any color on current trading you could give?
Sure. Thanks for your question, Charlie. I mean, we managed a year to deliver performance over the full year and over time, and we said it also in earlier quarter calls. We don't manage the business for quarterly performance. We have a couple of hundred customers and then maybe a couple of thousand shipments in a given region and month and quarter. And so that's why the cut-off date for one vessel that leaves the harbor or not can make a difference in a certain quarter. Now, for IMEA specifically, we have seen that that is a region that is a bit more volatile. It comes at very decent margins, but it is a bit more volatile, and that's why I wouldn't be surprised if you see now a bit more muted growth in the third quarter.
But I'm sure on the full-year basis, we're going to see a very nice growth rate for the full region and the full year. Does that answer your question?
Yes, thanks. The second question, just related to the reduction in margin guidance, you mentioned that's about the absorption of the fixed costs, but you haven't really significantly changed the full-year group-level organic guidance. I just wondered how much of that lowering of margin expectations we should be thinking about carrying forward into next year as opposed to whether it's any particular one-off remediation costs you've been incurring this year that you would expect to reverse back out?
No, I look at these costs that we now carry throughout this year or rather as a one-off for 2024. Obviously, we have remediation on the way, as I said earlier, and those are going to kick in now in Q3, Q4. Now, that said, obviously, the 2025 guidance is something we have time to think about. There are going to be many more factors than only this under-absorption or the cost of production. We're going to see where raw materials lie. We're going to see where pricing lies, where the overall consumer sentiment lies. But our aspiration to continue to deliver margin improvement hasn't changed. And.
Yeah. Thank you. And just finally, on the interest costs, I think previously you anticipated them flat, but they have risen. What's your view on the full year? Hello?
Ladies and gentlemen, please hold the line. The conference will resume shortly. Thank you.
No, they've got her.
The connection with the speaker has been resumed. Please, you may proceed. Thank you.
Excellent. Thanks, Operator. I assume it was only us that got kicked out and everyone else stayed here. So, Charlie, I don't know where I lost you on your question. You were asking about the margin outlook for 2025. And I said, you know, I looked, maybe I'll repeat briefly, and you interrupt if you have heard everything before, but I said, you know, I look at this under-absorption cost more as a one-time event for 2024 and don't expect it to repeat for next year. But I mean, it's a bit too early to discuss 2025 margin guidance. We have time to form an opinion there. It's going to be a function also where raw material is, what pricing is going to do, how strongly growth is going to come back, which delivers operating leverage. And obviously, we still have wage inflation and effects that we need to consider.
All of that will lead to a more informed view that we're going to share with all of you early 2025. But what I can say, I still have the ambition, and we have a clear mandate also with our midterm guidance to continuously improve our margin. And so we're clearly also going to put that in our ambition for next year.
Fantastic. One final brief question. Just on the interest costs, I think previously you had the aspiration to sort of hold those stable on the refinancing, but they've actually risen a bit year on year. Do you think that H1 is indicative of the run rate costs of your servicing your debt now?
Yeah. Charlie, let me take that one. So first, let's take a step back. Gross debt is below or has decreased by EUR 20 million and net debt by EUR 100 million. And as indicated earlier, the current refinancing exercise got us really attractive terms. However, what needs to be taken into consideration is that the finance expenses in H1 2024 compared to a baseline, which reflected more favorable terms for notes that were due and also repaid in June 2023. So obviously, that's why we see an increase now in the half year compared to previous year. And when we think about the second half of the year, probably I wouldn't be as pessimistic to just extrapolate the half year, but considering the cash flow generation towards second half, that's probably slightly going to be a bit less.
Thank you.
The next question comes from.
Good morning.
Ephrem from Citigroup, please. Go ahead.
Thank you. I'll also take questions one by one. Firstly, in terms of your guidance for the full year, can you give some color on the implied growth rate in cartons versus bag-in-box and spouted pouches? This is in context of the first-half revenue for cartons being down nearly 6% and being up 6% and bag-in-box and spouted pouches being down 13%.
Sure. Good morning, Ravi. Thanks for your question. Obviously, you're familiar with the fact that we don't guide by sub-segments, but I think obviously in the current environment, I understand the question. No, we were very pleased to see the carton, aseptic carton, and chilled carton growing at these rates, which clearly means that we outgrow the market. It is that we are rewarded for the fillers placed in earlier years. So I don't expect that necessarily to change materially in the second half. Yet, I probably also don't expect an acceleration there. So really, I think what needs to come back to a growth is on a quarter-by-quarter basis is the bag-in-box and spouted pouch business. And that's what we work on. So we're going to see where we close the year for bag-in-box and spouted pouch.
Obviously, all hands on deck, and the team is very focused to remediate the operational issues. But I mean, to some degree, we also hinge on the consumer sentiment in the U.S., and that's difficult to predict at this stage. So I would say for the second half, not necessarily an acceleration in the aseptic carton, but an improvement in bag-in-box and spouted pouch.
Thank you. I'll try my luck again on the style of getting a split out of you. On the 75 fillers that you're looking to place this year, again, can you give a split of carton and bag-in-box and spouted pouches? You mentioned 6 in the Middle East. And since you're calling out India for a very strong placement, can you give a sense as to how many of those 75 are in India?
That's a good question, sir, Ravi. I mean, the 75 only refers to an aseptic carton line. You're right. I also refer to a number of systems placed or which we did win for bag-in-box and spouted pouches, system sales and cross-sale wins. But the 75+ that I refer to is for the aseptic carton only. Now, the good thing is it is really across the globe. I wouldn't single out one specific market. Other than maybe that I would say in China, we place right now a bit less capacity as the market has sufficient capacity given the muted growth. But other than that, we're placing fillers, and we are winning fillers across the globe, and that is very encouraging.
Thank you. And one last one. I mean, I was looking at the chart of your transition in bag-in-box and spouted pouch, and if you look at the geographic expansion prior to acquisition in 2027 and 40% of the pipeline deals from emerging markets, I mean, the big changes in APAC, would it be fair to say that almost all the change or the new projects are predominantly in APAC for that kind of geographic shift to happen?
I'm not sure that I fully understand the question. So you're asking what geographies, emerging markets geographies are going to deliver most growth for bag-in-box and spouted pouch going forward? Or can you rephrase your question?
Yes. So if I look at page 21 of the presentation, the chart. Yeah. So from the left to the right, the big changes in APAC being almost a quarter of the mix in 2027 from non-net prior to the acquisition. So what I was wondering is, is the pipeline predominant when you say 40% of the pipeline deals from emerging markets, is it predominantly APAC emerging markets?
Yeah. You know, I mean, first, the fact why we chose to show quarters here, we wanted to show that this is more indicatively, right? So we haven't disclosed with this quarter there is the exact forecast, right? That's number one. Number two, I think your conclusion is still the right one because if you just simply look at the market size in the emerging markets, Asia-Pacific is the biggest market, followed by Latin America, followed by Middle East, Africa. And I think from that perspective, yes, we expect that Asia-Pacific is going to contribute most to the growth also for these new substrates when we move them to the emerging markets platform.
Thank you.
Thank you.
The next question comes from Patrick Mann from Bank of America. Please go ahead.
Good morning. Thank you very much for the presentation. I know you said you're not keen to guide by substrates, but just thinking about it sort of strategically or longer term with the 4%-6% revenue growth target, how should we think about sort of aseptic versus bag-in-box and spouted pouch? Are they broadly similar, or is it obviously from this set of results, it looks like aseptic growing much quicker? And I know bag-in-box is a more developed market at the moment, substrates. So should we think about it as a sort of lower growth aspect to the business, or generally speaking, should we expect both substrates or all of the substrates to grow at a similar level over time? And this is your midterm guidance.
No, I understand. It's a good question. Obviously, we stick to what we always said since the acquisition that we believe that moving those substrates to the emerging markets platform will allow us to grow in the upper half of our guidance range of 4%-6%. And I mean, let's start with the end market. The end market for growth for aseptic carton, if you look into a five-year CAGR, and for the aseptic carton is, let's say, 3% on a five-year CAGR view, obviously not taking into account the current softness. So bag-in-box simply because it relates to food service. Food service is going to outgrow retail basically in all geographies where we operate.
Then if you put on top the end market growth for spouted pouch, assuming that we deliver an aseptic solution that will open up completely new applications, that can grow in the high single digit as a market. And I think that is a good proxy also of how we're going to see the composition of our growth rate going forward. Obviously, aseptic carton grows from the stronger space, and you're going to see rates as we have seen them in the past. Bag-in-box, maybe there's a bit of a push by us moving it to the emerging markets platform, but as a substrate, it's more established. So it's a good proxy also if you look at maybe the 4% end market growth as we disclosed them earlier.
Spouted pouch is probably then once we come with the third generation, faster output machine has the opportunity to grow fastest, but obviously on the smallest basis. Does that answer the question?
Thank you very much. Yeah, that's really interesting and helpful. Thank you. And then maybe just one more, if I may. How much of an impact does the ramp of the new sleeves plant in India have? I mean, how should we think about it? Does it unlock further volume growth by putting it kind of closer to your customers, or is it more of a kind of cost benefit in that you're not shipping sleeves that far? It's a bit of both. I mean, I'm just trying to think how impactful the ramp of this facility is going to be on the results.
Yeah, I would say on a shorter-term view, last year we had the ramp-up cost of Mexico, which we don't have this year. This year we have the ramp-up cost of India, which we will not have next year. But more, and that's, I think, the character of your question, more strategically, I think India for us is per se a growth investment because the market offers fantastic growth rates. But naturally, it comes along with localizing production that you have also an opportunity to optimize cost to serve. So it's part of our India business case that we bring production locally in order to deliver the returns that we aim for. And that also includes at one point also fully local production, including extrusion, which is then allowing us to source also the raw materials locally.
That is the same playbook that we have followed in all other parts of the world as well.
Thank you.
Thank you.
The next question comes from Pallav Mittal from Barclays, please. Go ahead.
Good morning. So firstly, you have mentioned this pipeline of cross-selling wins, especially in emerging markets benefiting the bag-in-box and spouted pouch business. Can you please quantify the impact on volumes in the longer term?
Yes. And we have done that since basically acquisition because it was important to us, and we also felt to all of you that we talk about it and that we provide that as a proof of concept that there is indeed top-line synergy. And the top-line synergy of this acquisition is on the one hand side, obviously these cross-sell wins, but then also to drive the share of aseptic up, bring through innovation, the system-based solutions forward, and bring it to the emerging markets platform, which offers attractive price points. So there are a number of top-line synergies, for the lack of a better word, that will not only deliver value on the top line in form of growth, but also our margin enhancing. We have abstained from disclosing a number on that.
The only thing what we're going to do going forward on a half-year basis, we're going to show the growth by substrate. Already in the current 12% down, there is obviously positive contribution from earlier closed deals and fillers that are placed. So it's kicking in. As I said earlier also on the call, we aim to deliver growth on a full-year basis for bag-in-box and spouted pouch for 2025. Also that is going to include the benefits of the lines that we placed this year. So from that perspective, the cross-sell wins are materializing.
Sure. Just to follow up on the new filler addition, so earlier you were expecting 60-80 fillers, so say 70 at the midpoint, and now you are expecting 75 fillers. Where is this incremental growth coming from?
Yeah, you're right. I mean, we went through two years of elevated filler placements with over 90 fillers, and we always said, "Don't get used to that level." That's really now an expansion that we see also on the back of people really moving to the aseptic carton and then in particular to the SIG system. And I said, "Normally, I would be happy with any number between 60-80 that can fluctuate a bit." We do see that we expect now a number with 75+ fillers that is close to the upper end of that range. I think that's a very positive one. I don't think there is one specific case to single out where that comes from. As I said earlier, we really enjoy that we get rewarded for filler wins across the geographies and across the categories.
Thank you.
Thank you.
The next question comes from Christian Arnold from Stifel Schweiz. Please go ahead.
Yes. Good morning, all. I have two questions. First, you have adjusted your production footprint with some negative impact on the results this year, be it the chilled carton production in China or the relocation of Scholle IPN operations from Canada to the USA. Are there more production sites adjustments to be expected going forward, or have you reached now the production footprint you want to have, of course, excluding expansion investments?
Yeah, thanks for your question, Christian. Indeed. I mean, we have done now two rationalization projects, and the one in Asia, I would say, is absolutely going in line with plan. That's very well executed. You have normally in such a transition a bit of extra cost, but they are in line with plan. Now, in the US and Canada, we need to self-critically say that was not that well executed. So as we didn't ramp up the equipment that we moved from Canada to the US up in the speed that we wanted. But yet, the US was also a further expansion of capacity. So I think that's where we need to do a better job. Now, going forward, we have at this stage no initiated projects to further rationalize our footprint.
But as in any business, there is a continuum that we look into that also, especially in more established markets. And from that perspective, I wouldn't exclude it, but at this stage, there's nothing that we have planned that is material.
Okay. Thank you. And the second question would be on the EBITDA reconciliation. The change in fair value of contingent consideration. I mean, is it fair to assume that with this EUR 37 million in first half that you actually have wiped out any earnouts for the current year? So no additional change in fair value to be expected for the rest of the year. And am I right that there's now one year left, right, with a potential earnout?
Yeah, Christian, let me take that one. So with the -12% that we have now for the first half, I think it's pretty logical to think about 2024 earnout probably not reaching the +6% threshold anymore. So absolutely correct conclusion from your side. And then for 2025, as Samuel has said, of course, we target to bring the business back to growth. But the current assumption is really at the borderline whether that would pay an earnout for 2025 or not. But of course, we will see how that develops going forward.
It is correct that it's the last year.
Yeah, exactly. 2025 is the last year. Yeah.
How much provisions are left for next year?
Just say it loud.
17.5.
17.5.
17.5, Christian.
70. 7.
17.5.
17.5.
17.5. Thank you.
Thank you.
The next question comes from Ben Thielmann from Berenberg. Please go ahead.
Yeah. Hey, good morning, everyone. A couple of questions from my side, if I may, we can do them one by one. First question would be on America sales, particularly on the bag-in-box business. So it seems like bag-in-box was doing slightly better in Q2 year-over-year than it did in Q1. Is this a trend you expect to continue in Q3 and Q4? This would be my first question. Thank you.
Thanks for your question, Ben. And I think yes and yes. It did improve into Q2, and we can expect it to continue to improve into Q3 and Q4. This is because we're going to address these operational challenges and can obviously catch up achievements. And that's why we believe there's an improvement. There's going to be an improvement. And also, you remember last year Q1 still had strong comps, or H1 had strong comps. Also, the basis is going to be changing there.
Okay. In terms of margin, due to higher freight rates, how much of your margin did you actually lose by higher transportation costs?
I mean, we saw it, and I think we had the question also in Q1 because it was very topical back then on Red Sea. We said we also feel it, but it's not on a level for the group margin that we would say would single it out as an impact. I think we single it out also when we walked through the margin bridge for Middle East before, but on a group level, we felt it's not something to single out.
Okay. And then maybe third question would be on margins in Asia-Pacific. So margins were a little bit down than last year, roughly 28%. Last year, we were slightly short of 30%. And you mentioned that you're offering reduced pack sizes. Does those products actually come at lower margin? I guess their margin impact by offering those reduced pack sizes or was the margin in Asia-Pacific solely driven by transactional FX and the ramp-up costs for the new chilled plant in China?
These are the two factors really that matter: the transactional FX and the chilled plant ramp-up cost. I mean, smaller pack sizes may yield a lower absolute contribution, but can very well deliver a better margin because pricing power is different on those formats.
Okay. Very clear. Okay. Thank you. That's it. Going back into the queue.
Thank you.
The next question comes from James Perry from Citi, please. Go ahead.
Hi. Thanks for the presentation. I'd just like to ask about pricing. We've heard peers mention pricing pressure in food service packaging in particular. I know your prices mostly reset at the beginning of the year, but what are you hearing from your customers? Are you seeing much disparity in the pricing dynamics between carton and bag-in-box and spouted pouches?
I would say also our customers do see that some substrates, packaging substrates, see prices slightly coming down. But I think especially for the aseptic carton, as I said it before, we were behind on the way up, and we are slightly behind maybe on the way down, but we always said that. And I think also customers understand how the mechanism works. Yet that said, while maybe the input costs on the raw material side are a bit lower, I mean, wage inflation is still a reality, and that also affects our costing delivery so on. I wouldn't say there is a big difference now between bag-in-box and aseptic carton in terms of pricing dynamics, other than the resin escalator, which is just simply the pass-through.
We're going to look next year how the overall input cost situation is going to evolve, and then we're going to form an opinion what right pricing is. This year, pricing for the group is probably a net zero to the growth rate.
Okay. Thanks. And secondly, just about the new India plant starting up at the end of the year. I know you said 4 billion sleeves, but what kind of contribution would that add to the group? And also, how long is the ramp-up period?
What kind of contribution? I mean, that is embedded in our business plans when we go into a certain country. We always follow the same playbook. We start to put a bit of service infrastructure in place and sales infrastructure, put the first pillars in place, and then we start with an import model. Sometimes that carries some import duties, sometimes not. In our instance, we can ship a big part out of our Thailand factory, which ensures that it comes into the country without the import duty, but some products still have their import duties. So naturally, if you localize a plant and bring more value-add locally, that kind of makes you more competitive. And from that perspective, I also expect over time a positive margin contribution from localizing manufacturing in India. So the 4 billion sleeves, they're going to help us to grow.
It's not yet fully loaded from day one on, but we would, if we continue, and that's the aim to grow at these rates, we need an expansion. The next expansion is then also going to include the extruder that allows us to source raw material locally, which is the next impact to further deliver on the margin improvement. That's all embedded in our midterm margin guidance.
Okay. Thank you very much.
Thank you.
The next question comes from Manuel Lang from Vontobel, please. Go ahead.
Yeah. Hello. So I have two questions, if I may. And the first one would be on growth in Europe. So we've heard that also some other players, or rather say customers in the FMCG sector, are reporting weaker growth there, primarily due to lower away-from-home dining spendings. And now it would be interesting to hear if you experience the same, and if yes, how that compares to the softness we've seen in the US. That's the first one, please.
Yeah. Thanks for your question, Manuel. We see the same when it comes to out-of-home dining, and that's also why we say bag-in-box, spouted pouch. Also for other factors that I mentioned down. But really in Europe, what carries the growth rate is the aseptic carton in dairy. And you may have heard me say that before. Maybe it sounded counterintuitive, but the weather conditions did support the overall raw milk production in Europe that had to be processed. And there are a couple of ways how you can process milk. Either you convert it into powder. You can do all the yogurts and cheeses. But the aseptic is a very effective way to obviously enhance the shelf life of milk and have then the option to export it or have it ready for consumption in Europe.
This, I think, combined with healthy consumption rates for dairy also because the milk price came down a bit, did help to deliver these growth rates. Plus, maybe if I add that the filler that we placed, so there's really also a share component in there.
Okay. Thank you. And then the second one would be on bag-in-box and spouted pouches. So we would be helpful to get some numbers also there on revenue contribution and growth per region. And when we think about the rest of the year, how do you see this business evolving, especially bearing in mind the impact of the production issues in Canada and the U.S.? So is this going on to Q3, or does this fade now?
Yeah. No, I mean, we report our business and the growth of the business along geographies. These are our main segments. In the half year and full year, we provide a growth rate by carton versus bag-in-box and spouted pouch. And that's what we have just done today. Now, for the second half, as you saw, the bag-in-box, spouted pouch down 12%. Our ambition is to come back to growth on a quarterly basis into the second half. Let's see where we close the year. And then really the tipping point probably into next year to deliver on a full year basis growth again for bag-in-box and spouted pouch.
Okay. Thanks.
Thank you.
The next question comes from Sun Mekxian from Deutsche Bank, please. Go ahead.
Hi. Thank you very much for taking my questions. So also two questions regarding to the bag-in-box. So the first one is, can you help us to understand your operational challenges a little bit better? So what is the exact issue that you're having in a bag-in-box production site in the United States? And what kind of actions are you going to take to resolve the issue? And how confident are you that you can lift these issues in the next quarters? And the second question is that you expect the bag-in-box and spouted pouch segment to perform better in the second half of the year. Are they solely a function of the issues that you're going to lift it on your production side?
Or are there any visible evidence that coming from the end market demand you have seen, for example, like customers saying that they will increase their orders in the second half of the year? Thank you very much.
Yeah. Thank you for your questions. So to start with the operations topic in the U.S., what has happened is that we have shut a plant in Canada, moved this equipment into two locations in the U.S. At the same time, we had one location in the U.S. going through a significant capacity expansion. In that context, the whole move kind of got second priority. The ramp-up of the lines that we moved from Canada to the U.S. just didn't get the attention that it needed. That's when the machines were supposed to produce. The output and the productivity was just not there. The remedial action was that we have put, obviously, our global team on top of it. We have changed also a plant manager.
We have brought in some interim support, and we have put just the rigor behind that we have in all our other plants. And from that perspective, there's a good confidence level that we can get the output up. But that's what has happened in the operations. I think that is also for the second half year, the key factor why we say we expect that to be better than the first half, that we don't decline with the 12%, but come back to a growth on a quarterly basis. And that is not hinging now on expectations that the end market's going to be much stronger than in the first half. It's also not the expectation that they're much weaker, but it's not the expectation that they should come back strongly for us to deliver growth.
Thank you. That's very clear.
Thank you.
The next question comes from Jain Gaurav from Barclays. Please go ahead.
Hi. Good morning. 3 questions from me. One is that you have split the revenues between aseptic carton and bag-in-box. Would it be fair to say that in terms of the margin split, the aseptic carton business would be like a 27%-28% margin business, and the bag-in-box would be more of a mid-teens kind of margin business?
We run the business on a regional basis where we have one fully integrated organization that goes to market with different packaging solutions. But I mean, it's no secret that the aseptic margin is significantly higher at this stage than the bag-in-box. You recall at the acquisition where we disclosed margins where we were around 18%-19%. And we have done margin improvement measures. We talked about cost synergies that came through. Some of that is now temporarily offset through this under-absorption. So I mean, I don't want to confirm your numbers or talk about your numbers, but I mean, it's not a secret that the aseptic business is right now carrying the group margin. But we continue to see the margin improvement opportunities that we have referred to also earlier.
Sure. Then the second question is on the goodwill associated with the acquisitions. Do you think you will have to write them down given the underperformance in the bag-in-box business?
No. Clearly no, because our CGU structure, of course, follows our reporting units, which is the regions. And so we don't see any risk at all on the goodwill impact.
Sure. And the third question, and this is broadly on your M&A philosophy and how you think about the returns from M&A. So look, the balance sheet will de-lever in two years, and then you will again have balance sheet capacity for further M&A. So based on your experience with these M&A, which a lot of investors think were quite expensive deals, how will that frame your future sort of IRR calculations on future M&A?
Yeah. I understand your question, although our mind is right now not on future M&A, but on current M&A. I think that's also the expectation. We are committed to hit our midterm leverage targets towards 2. I think for us, we feel that there's so much organic growth opportunity also for this expanded platform that we have. That's where our priorities lie. I think also once we get closer to our leverage target, I think there's also a dialogue with our investor required in terms of what's the right capital allocation policy, what we're going to do on the payout ratios. So there's time to figure all of that out.
Thank you so much.
Thank you.
We have a follow-up question from Charlie Muir- Sands from BNP Paribas. Please go ahead.
Yeah. Thank you. Just following up on one of your earlier answers, I just wanted to get some clarity. You're talking about targeting midterm growth in the upper half of the 4%-6% range. You then talked about aseptic being around a 3% per annum business, bag-in-box perhaps 4%, and spouted pouch being higher. But that latter part is quite a small part of your business today. So I just wonder that it would seem to blend out at a number towards the lower end of the range. Is that because you'd add on top of that market share gains, or is that just volumes and you'd add on pricing? I just wanted to kind of understand what the gap was.
Yeah. I think that's a very good question. It's the market share gains. That's what you always saw in the past couple of years where we consistently outgrew the market. That's also the ambition going forward.
Thank you.
So the numbers you just mentioned, Charlie, that's the market growth numbers. Exactly. Yeah.
Right. Yes.
Yeah. Yeah. Thank you.
Also, the next question is a follow-up from Ben Thielmann from Berenberg, please. Go ahead.
Yeah. Hey. Good morning. It's me again. Just two quick questions. Could we maybe speak a little bit about growth for chilled cartons? If I look at Asia-Pacific revenues in Q2 compared to Q1, of course, there was some strong comparison base. But is it fair to assume that chilled carton volume growth is roughly in line with aseptic carton growth?
No. So chilled carton is doing better and really better. And we're very pleased to see that because also the chilled market is more muted in China. But I think that's where we really see significant share gains also just simply by the fact, driven by the fact that now SIG stands for the quality that we provide. You can imagine that with the new plant in Suzhou, we're going to set the new industry standard in terms of quality of chilled cartons. And I think that really helps us now and fuels the growth.
This is only volume growth, or were you also including pricing growth?
No. This is, at this stage, predominantly volume growth.
Okay. Second question would be on CapEx. We have seen in this semester so far compared to last year, it seems like CapEx was down roughly EUR 60 million compared to last year. Was there something like a CapEx one of last year due to some machine replacement, or did you lower expansionary CapEx on H1 2024 compared to last year?
No. Remember, last year included lots of growth investments, especially, for example, into the new aseptic plant in Mexico and also capacity extensions as just discussed in the acquired businesses. Some of those projects are now completed. We returned to, let's say, a more normal level of CapEx overall.
Okay. Right. Okay. Perfect. Thank you, guys.
Thank you, Ben.
For any further question, please press star followed by one. Star followed by one. Madam, gentlemen, so far there are no further questions. Back over to you for any closing remarks.
Thank you so much. In this case, thanks for attending our call this morning. We will be on the road early September, and we would be very happy to meet you either physically or virtually to continue our dialogue here. We're going to be focused on the execution of what we just discussed. We also wish all of you a great summer and happy to catch up soon. Thank you so much for your time today.