Ladies and gentlemen, welcome to the Q3 2022 Results conference call and live webcast. I am Moira, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ingrid McMahon, Director of IR. Please go ahead, madam.
Thank you, and good morning, and thank you for joining us. I'm Ingrid McMahon, Director of Investor Relations. With me today, hosting the call are Samuel Sigrist, CEO, and Frank Herzog, 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. A full cautionary statement and disclaimer can be found on slide two of the presentation, which participants are encouraged to read carefully. With that, let me now hand you over to Samuel.
Thank you, Ingrid, and welcome to the call. Thank you all for joining us unusually on a Friday. This allowed us to meet customers around one of the important North American trade shows, which took place in Chicago earlier this year, this week. Starting now with the highlights of the third quarter. In a challenging environment, SIG's business is showing its resilience with strong overall revenue growth in the quarter. Organic growth for the aseptic carton business was in line with our full-year guidance of 7%-9%. This was the first full quarter of consolidation for Scholle IPN, and it was a great start. With, in particular, very strong bag-in-box sales in the U.S. With the first nine months of the year now behind us, we can report that we have successfully implemented our pricing strategy across all regions.
These price increases are enabling us to mitigate higher raw material, freight, and energy costs. Costs have continued to rise during the year. It is taking some time for pricing to catch up, but we are on the right course. Price increases in aseptic carton are above the initially guided range of 3%-4% of revenue. Further increases have already been initiated for 2023. At the same time, we have been signing multiple new filler contracts, demonstrating the ongoing attractiveness of our systems as our food and beverage customers continue to invest for the future. On the capital markets front, the financing of the Scholle IPN acquisition was completed in July through a five-year US dollar term loan. On the equity side, SIG shares were promoted to the MSCI Switzerland Mid Cap Index at the end of August.
Finally, I'm proud that we have announced a partnership with the World Wildlife Fund Switzerland, which will advance our forest positive ambition. Before we go into more detail on the quarter, let me say a few words about this latest step in demonstrating our sustainability leadership. SIG's focus on the forest goes back many years. We led the industry in obtaining Forest Stewardship Council certification in 2009. In 2021, we became the first beverage carton producer to purchase only FSC-certified paperboard, which sets high standards for sustainable forest management practices that support biodiversity and communities. I'm delighted that we have now been chosen as a WWF partner. This was achieved after a very strict due diligence process, and it is a real credit to our team.
The first flagship project is to improve forest management of 100,000 hectares and restoration of a further 750 hectares of forests in Mexico that serve a critical habitat for the jaguar. This is very much aligned with our forest positive ambition to support the creation or restoration of an additional 650,000 hectares of biodiverse forest area on top of what is required to make our cartons. Turning now to the numbers. In the third quarter, revenue at constant currency, including Scholle IPN, was up by 41.2%. Organic revenue growth was 7%. Adjusted EBITDA increased to EUR 179 million, with an adjusted EBITDA margin of 23.2%. This quarter saw the largest impact from raw material, freight, and energy costs. We expect cost increases to be less sizable in the fourth quarter.
In addition, the lower margin reflects consolidation of the Scholle IPN and Evergreen Asia acquisitions. As I just said, we are successfully implementing price increases to offset the inflationary pressures and will be above our indicated range for the year. This in itself has an impact on our margin, an impact which has been augmented by strong volume performance and pass-through clauses at Scholle IPN. Adjusted net income was ahead of Q3 2021 at EUR 68.7 million. Cash flow, while below the previous year, showed the usual seasonal improvement compared with the first half. For the first nine months of the year, revenue growth is within our target ranges of 22%-24% for total revenue and 7%-9% organic for the aseptic carton business, both at constant currency.
The adjusted EBITDA margin reflects the impact on margins, the dilutive effect of price increases and higher costs. The fourth quarter margin is expected to be higher than the first nine months due to the seasonality of the aseptic carton business, the benefit of the price increases, and some relief on costs. Adjusted net income reflects higher adjusted EBITDA and positive foreign exchange movements offset by higher depreciation and amortization. Cash flow was impacted primarily by higher working capital to ensure supply security. Turning now to our performance by region. Europe had an excellent third quarter with an increasing contribution from price. The aseptic carton business benefited from the ramp-up of household fillers, all of which are now operational. The resilience of our European carton business is underpinned by our strong presence across a wide range of non-discretionary products for daily consumption.
Similarly, the Scholle business is well positioned in institutional bag-in-box where demands remain robust. Middle East and Africa has recovered fully from a weak second half in 2021. Drivers include strong market dynamics post-COVID, price increases, and new fillers in operation. In addition, we are well positioned to benefit from the growth in milk consumption following our strategic push to increase our liquid dairy presence. We are also leading the way in sustainability. In Egypt, we have just launched a recycling program which uses a mobile app to enable household and food service industry collection of used aseptic carton packs. In Asia Pacific, reported growth reflected the consolidation from the beginning of August of Evergreen Asia. Integration of the chilled business is progressing well, and we have already won new business with one of our existing aseptic carton customer in Asia.
The performance of the aseptic carton in the quarter was affected by customers in China drawing down stocks accumulated during the lockdowns earlier this year. There was also a reduction in gifting around national holidays. Moving on to Southeast Asia. Indonesia and Thailand were both affected by lower milk supply due to high feedstock costs. During the first nine months of the year, we have seen a high number of filler wins, both in India and in Southeast Asia in general, which will underpin growth in the months and years to come. The effect of the Scholle IPN acquisition is naturally most marked in the Americas numbers. In the U.S., strong bag-in-box sales were driven by price and by volume, with increased syrup supply to existing and new customers and sustained food service demand.
The aseptic carton business in Brazil was once again a major driver behind the 17% organic growth for the region in the quarter. This reflects market share gains in several categories, underpinned by our technology strengths and strong customer relationships with our large accounts. I'm delighted to report that we have recently won aseptic carton business with a large Scholle bag-in-box customer in the region too. Let me now hand you over to Frank for a deeper look into the financials. Frank.
Well, thank you, Samuel, and hello to everybody also from my side. Let me summarize on the following slides the solid performance we achieved in Q3, despite multiple headwinds that we, like many other businesses and companies, are facing. I'm going to start with the evolution of adjusted EBITDA for the quarter and for the first nine months. The positive impact from FX continued into the third quarter due to the weakness of the euro against major currencies. Top line growth, to which price increase made a substantial contribution, partially mitigated higher raw material, energy, and freight costs in aggregate. Price increases are progressing well, and for the year, they are expected above our guided range of 3%-4% of revenues.
As you're aware, these price increases are aimed at compensating for cost inflation in absolute terms, and therefore do not fully offset the impact on margin. This mathematical impact on margin was around 130 basis points in the third quarter for the aseptic carton business. Continuing negative impact from raw material costs of EUR 42 million in Q3 reflected higher hedge costs for aluminum and polymers. In addition, one of our European polymer suppliers imposed an energy surcharge during the quarter. As spot prices have come down from their peaks, we expect a lower impact from aluminum and polymer in the fourth quarter on the unhedged portion of our costs. Negative variance of EUR 90 million for production includes the effects of higher freight and energy costs.
Freight costs remained high in the quarter, affecting the Americas in particular, as we do not yet have the local production for Mexico and North America. Our new plant in Mexico is, however, in the final stages of construction and will open on schedule in the first quarter of 2023. Increased energy costs are mainly affecting the European business, and globally, we are less exposed to than other packaging substrates. In Europe, we're actively reducing our dependence on gas through the expansion of solar and wind energy. As Samuel said, we've initiated further price increases in 2023 in order to compensate for higher input costs as we continue to pass on absolute cost increases.
The positive contribution from SG&A reflects strong cost discipline, as well as the phasing of R&D costs and other expenditures. In Q3, acquisitions contribute EUR 31 million to adjusted EBITDA, with most of the contribution coming from Scholle IPN. While these acquired businesses are, as previously stated, dilutive at the margin level by approximately 200 basis points in Q3, they are already proving their value in terms of growth, resilience, and diversification. Turning now to cash flow and leverage. Net capital expenditure for the first nine months was slightly below previous year's level. Investment in property, plant, and equipment was higher due to the Mexico plant and due to the inclusion of the acquisitions. Although both have less CapEx-intensive business models without filler CapEx. New filler investment continued at a good pace, reflecting the placement of new fillers as the basis for future revenue growth.
The increase was more than offset by higher levels of upfront cash. Free cash flow was impacted by unfavorable working capital movements, primarily due to higher inventories, reflecting higher raw material prices and the need to constitute safety stocks given the current supply chain challenges. Free cash flow was also impacted by one-off acquisition-related costs. Pro forma leverage of 3.2x reflects the financing of the acquisitions, which has been successfully completed in July with the signing of a term loan for $270 million, on which the interest rates are fixed. This follows from the issue of the new shares and the placement of a Sustainability-Linked Schuldschein in the first half. Following the completion of all financings, our average cost of debt is around 2% for 2022, and our maturity profile is extended to 2029.
Our midterm guidance remains to reduce leverage to 2x with a milestone of approximately 2.5x at the end of 2024. We now turn to our guidance for the full year. The numbers we've announced today reinforce our confidence in our revenue growth, and we now expect to achieve growth above our guided range of 22%-24%, supported by higher volumes and pricing, including a strong performance of the acquired businesses. In the second half, we continue to see higher costs compared with the same period in 2021. Although we expect some of these pressures to abate in the fourth quarter. While price increases are staged and therefore offset cost inflation with a lag, their contribution continues to accelerate.
The realization of price increases both in the aseptic carton business and the Scholle IPN is protecting our absolute adjusted EBITDA rather than the margin, which we now expect to be around 25% rather than around 26%. This is a strong outcome in the current market context, and the extent to which we've been able to offset inflationary pressures demonstrates the resilience of our business model and the essential nature of the products filled by our customers. In addition, we've initiated further price increases in order to protect and drive the profits of our business. We confirm our guidance for our effective tax rate between 26% and 28% and for net CapEx as a percentage of revenue between 7% and 9% for 2022.
Our dividend policy remains unchanged with progressive growth of our absolute dividend per share in the payout ratio of at least 50%-60% of adjusted net income. That concludes our presentation today. Samuel and I are now happy to take your questions.
We will now begin the Q&A session. Anyone who wishes to ask a question or make a comment may press star and one on their touch-tone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and one at this time. The first question is from Lars Kjellberg from Credit Suisse. Please go ahead.
Good morning. Just a couple of questions, starting off with volumes versus price. I mean, you're obviously putting through price increases. You talked about the 3%-4% totally. Can you walk us through the volume component in the aseptic business through the, you know, the core divisions that you have? Also on the cost component, you talk about freight cost, of course, that has been high and fully appreciate that you don't have a Mexico plant up and running as of yet. What sort of benefit should we expect from that plant in terms of your freight cost improvement into the Americas as it ramps up? And then just on the interest rate side, you talked about 2% now.
Can you share with us the fixed variable component of that and what you kind of would expect that interest rate to rise into in 2023? Those were my questions. Thank you.
Thanks for your question, Lars. Good morning. To start off with your first one, volume versus price. Indeed, we did guide at the beginning of the year, 3%-4% for the full year as an expected price impact on the aseptic carton business. We talk now about the fact that we expect the year to close now above 4%. We were able to execute more than what we initially anticipated. That also means in hindsight, the remainder up to the growth that we report in the aseptic carton business between 7%-9% is the combination of volume and mix. We do see a solid volume demand across all markets.
Q3 in Asia a bit softer, but I wouldn't read too much into that. I think it's not the start of a trend, but just one quarter now as customers indicate to us that they wanna hit their volume targets for the full year, and we expect a stronger Q4. But that's really the split between volume and price mix. A bit more than 4% on price, and the remainder goes into volume mix. Now, your second question on freight cost. I think you framed it exactly, absolutely right. The Mexican plant will take some of this cost out of the system for us, as it will help us to serve North American customers in a better way.
The North American plant is gonna be first and foremost, facilitator to growth, as it's gonna improve the service levels for our customers in North America by shortening lead times. Yet there's definitely also a component of reducing cost to serve for the North American region, and that will all be embedded then in the guidance for the year 2023. The third question, Frank.
Yeah, I think the third question related to interest. We have policy of at least 50% fixed interest. We're actually with the hedging that we've done are above that. We're about 55% of our debt. You know, we fixed the interest rates so that, you know, gives us a good basis and a good mix for that. With regards to 2023, obviously, you know, can't give guidance now, but you obviously see what is the interest, you know, that has been fixed on the variable portion that will be subject to the movement of interest rates as they progress. You may have a better view than we do where they move. We obviously see where they are at the moment.
Also, we will have a refinancing kind of in the summer of the bond, which we'll then refinance it at current rates.
Got it. Thank you.
Thank you.
The next question is from Joern Iffert from UBS. Please go ahead.
Hi, Samuel. Hi, Frank. Thanks for taking my questions. The first question would be please, on Scholle IPN. Can you give us some more details why Scholle IPN is gaining market share? Have you changed anything in the go-to-market strategy? And also, how confident are you for their pipeline for the next, 12 months? And the second question would be please, on the cost curve. When do we expect to be not behind the cost curve, but on top of the cost curve or even ahead of the cost curve? For the first nine months, you had organic growth of around 7%. Your organic EBITDA, if you exclude, FX, would be down. So it's even not total EBITDA protection right now. You explained this, that you have some time lag.
Do we expect to close this time lag, organic growth versus, organic EBITDA growth now in Q4 and Q1 next year? An update here would be appreciated. Thanks a lot.
Thanks for your question, Joern. Now on Scholle, we see a number of drivers that give them momentum in the market. I think it's not up to us to take credit for that. I think the team at Scholle did a good job throughout the year when they kind of worked on new account wins, which they have. There is a market share gain as a function of that because people wanna have Scholle bags, especially in U.S., as they stand for quality. The other factor I would say is that especially in food service, especially in quick service, there is an opportunity for bag-in-box in general that we see in the mature markets, especially when it comes to all these dispensing systems.
When they use maybe rigid containers today, where you pour it manually into whatever drink you mix in a Starbucks or in a quick service restaurant, where now we see a trend more and more towards dispensing units that make sure that you push once on the dispense and you have absolutely the quantity you need. It is especially important because the consumer wants a consistent experience of the drinks that they get in no matter what Starbucks outlet they go into. Also in light of labor shortage and also lack of trained labor, it's important that it's as simple as possible to mix these drinks. That all speaks to the dispensing systems you remember that we also featured at the Capital Markets Day.
I think these two reasons, share gains and just a further adoption of bag and box, helps Scholle in the mature markets, in the markets where they're present. Then obviously we're working on bringing their substrates on our emerging markets platform, where we have talked about the early wins that we were able to bring home in Asia, but also in the South American region. Now, your question number two on the cost curve. Indeed, we are behind the cost curve this year. As said earlier, we already announced and are executing right now as we speak the 2023 price increases. They have embedded in them the input cost changes that we expect into next year.
That also includes obviously wage inflation that we expect to see in the markets where we operate. It is our ambition now, as we always said, to use price increase in order to pass on the inflationary pressure and the absolute input cost changes. That remains our policy, and that's why we are currently in the market with substantial price increases.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Alessandro Foletti from Octavian. Please go ahead.
Yes, good morning. Thank you for taking my questions. Maybe a bit more detail on price and volumes. When I look at the growth rates of Scholle, I mean, my calculations is about 40% higher than last year, at least on a trend wise. Am I wrong in assuming that you increased prices more than 4% at Scholle, and that hence also there, so to speak, the drag on the margin has been maybe stronger than we would have expected. Then finally, also in Scholle, how do you expect to get ahead of the curve there as well? Thank you.
Thanks for your question, Alessandro. I mean, at Scholle, I'm not sure whether I understood you right. You recited 40%. That's not the growth rate. I mean, it's a double-digit growth, and it's a solid growth, but not 40%. Yes, you're absolutely right. The price increase is higher than the 4% at Scholle. You remember they operate with these pass-through clauses, which is a function of obviously where polymer or input costs or resin costs for them move. They are higher than what we expected at the beginning of the year, but that's an automatic that protects obviously margins at Scholle. When I say protect margins, we need to keep in mind the mathematical impact that price increases have on margin.
It leads to a dilution, and that is a bit higher than what we anticipated at the beginning, simply because this pass-through yielding higher price impacts.
Right. You think the margin there will start progressing as soon as the prices can move down, basically, then?
I mean, that would be the reversal from a mathematical.
Right.
-perspective. You know, obviously, I think more important is what we do operationally. I think this pass-through, they pass on the absolute change in the input cost change, yes. We always talked about that we do see also into the medium-term, margin improvement potential, where we start working on right away for a number of reasons, whether it's operational improvements, that we have projects on the way, whether that's how we bring, the products of Scholle into the emerging markets, how we position the pricing, the value-based pricing. All those measures will help us to continue to work on prices and ultimately margin also in the Scholle side of the business.
Right. At Scholle, we are sort of working with an initial assumption of about 20% EBITDA, 19% EBITDA. That has probably come down. It's gonna come back up, like, sort of mathematically, as we said there. Then the next step is to raise it towards the 26%-27% of the group. How will that happen?
Yeah, I mean, we never said that the Scholle business has the potential to get to, obviously, the margin levels that we see in the aseptic carton business. We always said, and we still confirm that view also into mid-term, that there is a path for the combined business to margins above 27%, right? That is a number of factors, but it also includes a continuation of the margin expansion that we have demonstrated in the aseptic carton business, as we continue to see levers there, and it includes the levers that I just mentioned before for the Scholle IPN business.
Okay. Maybe my final question, did I understand correctly that you expect a good finish in Asia particularly, or the finish will be well distributed across the region for the fourth quarter, I mean?
Yeah, that's right. I mean, you know, that is mainly also against the backdrop that everyone looks now at economic data that come out of Asia. They wanna make sure that people understand our Q3 performance is not, in our eyes now, the start of a trend, but it's just one quarter. That's why I wanted to point out that we look more positive into Q4, as also customers, especially China, indicate to us that they wanna hit their volume targets. What also is an effect this year that we expect to materialize in Q4 is that Chinese New Year is early in 2023, end of January already.
All right. Okay, thank you.
Thank you.
The next question is from James Rose from Barclays. Please go ahead.
Hi there. Good morning. I've got three, please. Firstly, I think in a sort of consumer-based recession, you typically expect consumers to trade down to lower value items. How would that impact the aseptic business sort of across the group? Secondly, when you talk to customers, are you seeing any signs of delays to new product innovations or new product launches, any sort of follow-through to delay new filler placements you're seeing there? And then lastly, could you talk, sort of pull through the EBITDA adjustments in a bit more detail, particularly the sort of big moves in operating derivatives we see and also the inventory adjustments? Thank you.
Sure. Good morning, James. Why don't I cover the first two, and Frank covers the third. Now, what means consumer recession for the aseptic carton and especially for SIG? I think there are a number of aspects. First, keep in mind that we operate at this entry level of this processed and packaged food products, which means these are products of daily demand, non-discretionary products. Yet that said, we do see that, the cost pressure on input costs for all the different, products that our customers produce, starting with raw milk but also further ingredients, they currently go up and went up throughout this year, right? We do see that our customers, especially in emerging markets, they counter to that with shrinkflation.
You know, they need to meet and maintain the price point, but they have to, in one or the other way, deal with the higher cost. What they do is that they downsize, and that brings SG&A strength into play, the volume flexibility. I think that's one of the reasons why we see continued very strong filler sales. I think our pipeline at this stage of the year, with signed orders that are right now in our assembly plants in execution, is at a very high point if you compare it with prior periods. Also the pipeline in terms of deals for us to win that are out there is very solid, and this across all regions. We're very positive on the outlook there.
In the mature markets, back to the consumerization, I think, you know, a liter of milk, there it's less of a topic of shrinkflation. That still is such a stable product that it's really the non-discretionary element that helps us there. I think I also covered with that your second question, the outlook on the filler placement. As I said, strong in all the regions where we operate.
Thank you. On the question about some of the EBITDA adjustments, I think you're referring to the EUR 48.2 million of unrealized losses on operating derivatives. That is predominantly related to our raw material hedging. We obviously built up that portfolio of hedges, and every month when we actually are using this material in the P&L, then it becomes a realized gain or loss. But until that time, the movements in that portfolio of hedges is unrealized, and we're obviously adjusting that when we look at our adjusted EBITDA to see what the real underlying operating performance is. And same thing with fair value adjustment on inventories. I assume you're. It's, you know, EUR 20.4 million that you're referring to.
We had a fair value adjustment on inventories when we did the initial consolidation for the acquisitions. That obviously is booked and goes through EBITDA and on the IFRS rules, but obviously it's not operational. Therefore, again, we're adjusting that when we look at our adjusted EBITDA. Okay. Thank you both very much.
Thank you.
We have a follow-up question from Joern Iffert from UBS. Please go ahead.
Yeah, thanks. I think I was cut by the operator. Just I wanted to quickly follow up, Samuel, to your answer on the cost curve. When costs remain where they are right now on the current spot rates, when do you expect this year pricing to be on top of the cost curve? Is it something you expect already for Q4, or is it possible that the organic EBITDA growth remains negative in absolute terms, even in the first half, 2023? Thanks a lot.
I mean, the price increases that we are currently executing, they are effective, most of them, for first of January next year. That means we remain behind the curve in passing on input cost changes in the year 2022. That's why we factored that into the equation for the price increases currently underway for next year, including our assumption of input cost changes for the next year. I think that's how I would look at it. The Q4 is not the quarter where we kind of make up for the full year. We need next year in order to pass the full year impact on and to absorb what we expect for next year.
Okay, thank you.
Thank you.
The next question is from Daniel Koenig from Mirabaud Securities. Please go ahead.
Yes. Good morning. I have two questions. First, a question on personnel costs. I was wondering how much is it going up this year, and what do you expect for next year, approximately? Then I have a more philosophical question, because on your financial policy, you're aiming for a net debt to EBITDA of around two. I'm wondering if with higher interest rates, if your thinking has changed and maybe eventually you should go even below that or even significantly below that. I'm just wondering because rating agencies, they also look at interest rate cover, and that is probably increasing with higher interest rate, interest costs. I'm just wondering philosophically, how do you see that? Thanks.
Thanks, Daniel. Maybe I kick it off on number one. I mean, we are a bit reluctant to share numbers now on personnel cost changes because we are in many regions in the world involved in collective bargaining agreements. Please bear with us for next year once that all is through. But as I said, we do expect in many of the almost all of the areas where we operate a change in wage and wage cost or wage inflation. It's really right now a function of currently ongoing negotiations.
Mm-hmm. Okay.
[crosstalk]
Yes. How much is it going up this year, the personnel cost?
I think, you know, this year it is in a level that we compensated with our efficiency gains that we have in our operations. That is normally our ambition, and that's why we on all our calls in previous periods were never really vocal on wage inflation because our ambition has always been, and we also demonstrate that we can do that, to offset it with efficiency gains. Now, given obviously consumer pricing indexes in many markets where we operate, they obviously point to higher levels, and that is one of the leading indicators to also inform the wage discussion. That's why for next year, we have factored it also, not only in our improvements on the efficiency side but also in our price discussions with customers that are currently ongoing.
Okay, thanks.
On your question about, you know, capital structure and net debt levels, I think we're very comfortable with our capital structure that we have and also with the plans that we have to deliver towards the 2x in medium-term and also the clear milestone that we've set with 2.5x at the end of 2024. We're obviously in discussion with the rating agencies, and they're comfortable with their ratings as well. I don't really see that interest cover would be of any, you know, driver for the agencies to look at us differently. I think they really appreciate the resilience and the cash flow generation of our business. That's where we're looking at our capital structure from the strength and sustainability of our business.
Okay, thanks a lot.
For any further questions, please press star and one on your telephone. There are no more questions at this time.
In this case, we appreciate your time this morning. Thanks for joining us for the call, and we look forward to further interactions. Have a good day and also a good weekend, everybody. Thank you very much.
Ladies and gentlemen, the conference is now over. Thank you for choosing this conference call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.