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Edited Transcript of HART.CO earnings conference call or presentation 11-Mar-20 8:00am GMT

Gentofte Apr 1, 2020 (Thomson StreetEvents) — Edited Transcript of Broedrene Hartmann A/S earnings conference call or presentation Wednesday, March 11, 2020 at 8:00:00am GMT

Ladies and gentlemen, thank you for standing by, and welcome to the Hartmann Annual Report 2019 Conference Call. (Operator Instructions)

And I would now like to hand the conference over to your first speaker today, Torben Rosenkrantz-Theil. Thank you. Please go ahead, sir.

Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [2]

Thank you for listening in today as we present Hartmann’s 2019 results. My name is Torben Rosenkrantz-Theil, and I’m the CEO of Hartmann. And I’m joined on today’s call by our CFO, Flemming Steen. We’ll start off with some 2019 highlights before diving into an overview of segment performance and group financials. On that backdrop, I’ll briefly touch upon the key elements of our Think ahead strategy and provide an update on the initiatives we have been working on over the last year. We’ll close the presentation with our 2020 outlook before taking your questions.

Please turn to Slide 2 for the highlights of the year. 2019 was a good year for Hartmann as we grew revenue and improved profitability to reach the financial guidance set out a year ago. We delivered great sales performance and tapped into the strong market drivers across our business as we continued to see an increasing interest in molded fiber packaging as a sustainable and premier alternative to oil-based plastic products.

Our teams boosted volumes and ensured a solid 7% increase in revenue, which was further supported by our successful efforts to increase the proportion of premium products.

Our strong sales performance was the main driver behind 16% growth in earnings and the highest operating profit in Hartmann’s history. The positive development was also driven by our continued efforts to improve production efficiency and capacity utilization at the factories. At the same time, we brought the long-standing trend of strong price competition and succeeded in improving the selling price to counter the effects of higher raw material prices.

We increased CapEx by more than 50% as we invested in our manufacturing platform during the year and commissioned new production capacity in the European business and Argentina. We also decided to invest substantially in expansion across Europe, the U.S.A. and Brazil to add to our overall capacity this year. Furthermore, we were pleased to announce in early 2020 that we had reached an agreement to acquire Mohan Fibre and entered the large and attractive Indian market. We expect this deal to close by mid-2020 when we have obtained formal approval from the Indian authorities.

All in all, we will maintain a high investment level as part of the Think ahead strategy, and the Board of Directors, therefore, recommends a pause in dividend payments this year to give us the flexibility to seize any attractive expansion and/or M&A opportunities.

Flemming will now update you on segment performance and provide a general overview of the financials for the year. Let’s turn to Slide 3, please.

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Flemming Lorents Steen, Brødrene Hartmann A/S – CFO & Member of Executive Board [3]

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Thank you, Torben. We are pleased to say that we generated solid business performance and financial results across both segments in 2019. Our sales and production teams have been dedicated to ensuring strong sales growth and efficiency improvements to deliver on our guidance for the year. We intensified our customer dialogue and sales efforts in the Americas segment and reported double-digit growth based on strong volumes across our markets and improved selling prices in North America. We have invested in our sales and marketing efforts towards existing and new customers, and the hard work pays off. At the same time, we have improved production efficiency as we increased the output per employee and production line at our factories while reducing waste. All in all, our sales efforts and efficiency initiatives secured a solid 12.5% profit margin despite the negative impact of higher prices on raw materials and a negative currency effect in Argentina.

Turning to Europe. Our core business performed well and drove revenue growth of 5% for the segment despite a significantly lower contribution from machinery sales in 2019 compared to the prior year. We successfully shifted the balance of our product portfolio towards premium packaging, and a combination of volume growth and improved product mix was the main driver behind the improved profitability level of 12.1%.

We realized solid results in Europe despite a significant increase in expenses to raw material as well as higher freight costs. We will now take a look at the consolidated figures. Please turn to Slide 4.

All in all, the growth rate we generated in 2019 translated into group revenue of just below DKK 2.4 billion. This was in line with our guidance for the year, and the strong performance was driven by volume growth and a better product mix in the core business. Sales of machinery and technology were reduced by more than 45%, as expected, and our core business delivered revenue growth of 10% in the financial year. Based on the strong revenue growth, we boosted operating profit to DKK 262 million and lifted the profit margin to 11.1% before restatement for hyperinflation.

While the contribution from Hartmann technology declined significantly, group profitability was supported by license income resulting from settlement of a European patent infringement dispute concerning our imagic products. Even though our earnings were significantly higher in 2019, we are reporting lower free cash flows of DKK 100 million for the year. This development was driven by the sizable investment in production capacity mentioned by Torben before.

It is worth noting that invested capital was impacted by these investments and the implementation of IFRS 16, which added another DKK 75 million to our balance sheet. Invested capital, therefore, reached DKK 1.5 billion at the end of the year, but we still managed to report a strong and improved return on invested capital of 18.2% and before restatement for hyperinflation.

I will now give the floor to Torben, who will comment on the Think ahead strategy and the progress made in 2019. Please turn to Slide 5.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [4]

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Thank you, Flemming. In short, we launched the Think ahead strategy 1 year ago to accommodate the increasing demand in our market, which is driven by very positive macro trends that continues to be relevant for the coming years. One such trend is demographics, which will continue to play an important role driving the demand for food products and packaging. More people and a growing middle class consume more eggs and fruit. Furthermore, urbanization drives retail trade and an increased demand for retail packaging. With the prospects of 10 billion people living on earth in 2050, demand for our products seem to increase steadily decades from now.

The second major trend in our favor is sustainability, which has become an increasingly important market driver in recent years, as consumers and decision-makers are beginning to react against the use of single-use plastic packaging. Plastic pollution is a global problem today, and consumption is expected to quadruple by 2050. The need for change is driving conversion to molded fiber packaging, which is a well-proven alternative to plastics. We’re seeing a positive development across our markets as retail chains are embracing the change. Several large retailers have set out to ban or significantly reduce single-use plastic packing, and the EU supports the change with regulatory changes coming into effect over the coming years.

The third major trend in our favor is changes in consumer behavior. Increasing focus on health, nutrition, local production, recycling and animal welfare basically entails higher egg consumption and calls for more varied supply of eggs. As the supply of eggs is refined to accommodate consumer demand, we see an increasing interest in packaging products that contribute to a clear differentiation of specialty eggs on supermarket sales.

To leverage these attractive trends, we are putting Hartmann’s strength to work. Firstly, our expertise enables us to provide sound advice to customers based on years of experience and thorough consumer research that opens for a data-based approach to branding and marketing. Our solid footprint is based on strong market positions, with sales in more than 50 countries and a well-established and favorably located production network with 12 efficient factories today and 2 more to come this year. Our product portfolio is versatile and tailored to fit the specific demands across our markets. All products are based on renewable materials, and we offer FSC-certified and CO2-neutral products as well.

Finally, our technology competencies are second to none. They have been refined since 1936 and allow for continued development of our own manufacturing setup and external machinery sales in selected markets. These trends and strengths remains the cornerstone of the Think ahead strategy. On the next slide, I will highlight some of the efforts we have made to apply the strengths and leverage the trends during the year. Please turn to Slide 6.

Our key focus areas lie within capacity expansion, efficiency improvements and intensified marketing efforts. We are investing in our production platform and stepping up our marketing efforts to grow volumes and maintain and improve our utilization rate. Simultaneously, we are focused on enhancing efficiency through automation, process improvements and continued technological development at our factories. Finally, we continue to explore expansion opportunities in existing and new markets to meet the increasing demand for sustainable packaging.

In 2019, we commissioned new capacity in Europe and Argentina to meet the increasing demand for our products. During the year, we also announced plans to build a new factory in Brazil, invest in capacity expansion at our factory in the U.S.A. and further expand our production capacity at Hartmann’s European factories. Towards the end of January of this year, we announced the acquisition of Mohan Fibre, which is India’s largest and leading manufacturer of quality egg and fruit packaging. We aim to establish a solid platform for Hartmann in this large and attractive market, characterized by favorable demographics, increasing egg and fruit production and a growing demand for quality retail packaging. We expect to close the deal this summer.

Efforts to improve efficiency continued in 2019 as we invested in automation and implemented new technology at several production sites to reduce cost, remove bottlenecks and optimize the production process and flow at our factories. In addition, we reviewed and adjusted the organization across several production units to ensure a lean and efficient setup, allowing us to increase the output per employee and per production line.

Finally, we continue to add to Hartmann’s marketing expertise by conducting surveys, providing us with relevant data and insights about current consumer trends and concerns. Our marketing efforts have intensified during the year, and we are working to support and assist our customers in converting from plastic packaging to eco-friendly molded fiber products across several of our key markets and a particular focus on North America, the U.K. and Southern Europe.

Now let’s turn to Slide 7 for a few comments on our guidance for 2020. We will continue to drive volume growth in 2020 and aim to generate revenue of DKK 2.4 billion to DKK 2.6 billion after restatement for hyperinflation, as demand is also seem to remain solid. New capacity was added in 2019 and will contribute positively to the development this year as well. In addition, we expect machinery sales to increase slightly in 2020. And finally, we are projecting a moderate contribution from the new Indian business, which is expected to become part of the group by mid-2020.

We will continue to focus on efficiency and leverage the expected revenue growth to reach a profit margin of 10% to 12% before restatement for hyperinflation. Investments are expected to be at around DKK 400 million in 2020, as we will expand capacity in Brazil, the U.S.A. and Europe to meet the increasing demand and to continue to win market share. It’s worth noting, though, that this investment level includes the agreed acquisition of Mohan Fibre in India at a price of DKK 119 million. Our guidance does not factor in any other potential acquisitions.

Our general financial ambitions have not changed. We still aim to grow volumes and revenue year-on-year to be able to reach a profit margin of at least 14%.

On that note, we look forward to taking your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Christian Reinholdt.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [2]

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I have a couple of questions here. First of all, maybe we should talk a bit about Argentina. It seems that this country once more is going to be broke. Can you explain a bit to us how it’s going to affect your business if become this situation again and they declare they’re not able to pay their bills?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [3]

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Yes. First of all, the situation that they’re going to be broke is a situation that relates to the public debt. Argentina as such has been in hyperinflation for a couple of years now, and they have seen inflation of more than 50% for a very long time. What we see in our business is that we are not that affected. We sell products that are less volatile, or actually not at all, to financial fluctuations, and our focus is to ensure that we get our payments from our clients and customers. I’m not saying that we’re not affected by all, but I’m saying that we still have a solid and attractive business in Argentina even today.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [4]

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Okay. And if the situation is worse from the country perspective, you still think you can run a decent business there?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [5]

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Yes, people will still eat eggs in Argentina. We have done a lot to optimize our factory network in Argentina. We have 3 plants there. We recently built a plant up in the Buenos Aires area, and we have a very, very good production platform in Argentina. And we are confident that the egg consumption will continue no matter what the Argentinians are going through. And we are the best in the country to provide packaging for those eggs and that provides the underlying foundation for everything.

Of course, if the economy tanks completely, it will affect us as well. But at the fundamental level, we firmly believe that there is a future for us and for our products in Argentina. But it’s a difficult place to operate, no doubt. And thankfully, we have a team who has proven very capable of running the business without incurring significant losses on debtors without coming considerably behind in terms of increasing prices relative to the timing of the increases of our incoming raw materials and so on. So we feel we are well equipped to deal with the situation. And needless to say, the situation at a country level is complicated, serious and very difficult.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [6]

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But are you making money in Argentina? Are you profitable at the current time?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [7]

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We can confirm we are profitable in Argentina.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [8]

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Okay. And another question regarding China and all this virus, of course, but do you get still a lot of your raw materials from China? How — do you have any concerns or problems with getting the raw materials you need for your production?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [9]

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At this moment in time, no. We do not depend a lot on China in our business. Except a few — very few parts bought occasionally by our technology team, we don’t depend on China for pieces to run our business. So from a Chinese standpoint, we’re not really very exposed. I would say, generally, when it comes to the coronavirus, we are following the situation very closely as any responsible company should. But our exposure to the virus, I would describe, as below average in that we don’t run an airline, we don’t run a movie theater and, if anything, the fact that people are staying at home may lead to a higher consumption of eggs, which is, of course, good for us. Having said that, if the — if one or more countries will shut down, as we have seen some examples of in Italy, we are, of course, exposed. We depend on people to show up in the morning at our plants to run them. And if they don’t do that, of course, we’re exposed.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [10]

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My last question before I jump back in the queue is regarding technology. You had a substantial decline here in ’19. Could you give us any indication what you expect the turnover will be for 2020 in this segment?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [11]

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Higher.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [12]

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Higher. Substantially higher or average? I think you have indicated earlier on average of DKK 60 million to DKK 80 million.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [13]

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The term that we used earlier in our call here is slightly higher, and this is as close as we will get in this call today, Christian.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [14]

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Okay. But higher than the DKK 61 million from ’19?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [15]

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Confirmed.

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Operator [16]

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Your next question comes from the line of [Santiago Domingo].

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Unidentified Analyst, [17]

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Congrats for your results. The first question is related to raw materials. What I would like to understand is, first, the sources of your raw materials. Definitely, they are recycled paper. So I guess, they are from close places. I mean you don’t have to import any kind of paper or recycled paper from other countries. And what I’d like to know also is the evolution of these raw material prices over the last year.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [18]

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Well, to the first question, you’re right that the raw materials that we depend on is recycled newsprint mainly, and we try to draw those raw materials from sources as close to our factories as possible. And it is also correct that the vast majority of the raw materials used by any plant in our group would be sourced locally. There are a few examples that from time to time that the Danish plant would take in a bit of raw material from Northern Germany or plant in Hungary would take a bit from Austria and so on. So it’s not 100% local, but it’s mainly local.

On the prices of these raw materials, it fluctuates quite considerably, and we saw high at the beginning of ’19 moving towards low at the end of ’19. And we have seen quite considerable fluctuations during the course of a year. And of course, we are exposed to these fluctuations, and it should be mentioned as well that paper as a raw material is a product that we don’t hedge, that we cannot hedge. So from that standpoint, for good or bad, we are fully exposed to those fluctuations.

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Unidentified Analyst, [19]

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And those fluctuations are normally bigger than, for example, the virgin pulp or something like that or they are on quite modest move than those movements.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [20]

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I cannot speak to that because I don’t know enough about the correlation between the virgin and the recycled market. We never buy virgin pulp. It’s simply too expensive. So that’s a market we don’t keep our eye on.

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Unidentified Analyst, [21]

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I will do that question in another way. If you could say more or less how much the price of recycled paper decreased during the last year.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [22]

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Well, I think I would like to do that analysis not on the fly because it also depends on what region of the business your question pertains to because we have seen very low raw material prices in some areas, whereas in South America, for example, they still remain very, very high. So you will get 3 different answers depending on whether your question pertains to Europe, North America or South America.

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Unidentified Analyst, [23]

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Okay. Let’s move to the next question. So the next question is related during the last year. I would like to know how was the evolution of the penetration of the molded fiber solutions that you sell in the U.S. and Europe. Did you gain also market share?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [24]

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Yes, we gained market share in both Europe and North America. And as mentioned earlier, there are still a few countries in Europe where plastic plays a significant role and the molded fiber industry as a whole and Hartmann in particular are chipping away at those volumes step-by-step, and particularly Southern Europe and the U.K. in Europe has still considerable plastic volume. And we’re doing our best to increase our market share there, and it’s working. And for North America, we see similar trends, namely that the plastic — single-use plastic is becoming less and less popular and, of course, we are there to serve the needs of those people who want to make a conversion. And there’s still considerable volume left to convert in the U.S., which is, of course, good news for our industry, and that’s also why we are making a very significant expansion of our capacity base in the U.S. such that we shall leave no customers disappointed.

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Unidentified Analyst, [25]

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Okay. And my last question is related to the CapEx. What we see is that for the coming year, for this year, you expect CapEx around DKK 400 million, of which, as far as I know, more or less DKK 120 million will be from the investment that you did in India. So the rest of investment is DKK 280 million. This number is correct to assume that it’s going to be in that level over the coming years? I mean did you see enough opportunities to continue to invest as heavily as you did during the last year and during this year?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [26]

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Well, we provide guidance CapEx-wise 1 year at a time. Having said that, we have many ideas in Hartmann for ways to expand our business. And we have successfully provided a nice return on invested capital. So for that reason, we believe it’s well justified to continue investing strongly, and our strategy is about being ahead of the market development such that customers shall not wait for us to add capacity. We want to be ready. So from that standpoint, without providing a clear future guidance, it’s part of our strategy to be active in making investments and in assessing acquisitions.

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Unidentified Analyst, [27]

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Okay. And one last question, just the last. These expansions or these investments are going to be more related to new countries, are going to be more related to a strength in the position in your current countries or a mix?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [28]

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A mix, for sure.

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Operator [29]

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Your next question comes from the line of [Priti Grunn].

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Unidentified Analyst, [30]

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Yes. I would like to ask a bit about the margin progress that you delivered in 2019. In your accounts, you mentioned a higher degree of optimization and introduction of new technology. I would like to ask if there is a sort of a full year impact expected for 2020 on this account or whether we saw the full 12 months impact already in your 2019 results.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [31]

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Well, certainly, our improved results were very much a function of higher utilization driven by higher volume, price improvements and better efficiency at the plants. It’s difficult to predict with accuracy how 2020 will unfold given that the volatility and the raw material prices may hit us either for good or bad during the course of the year. So therefore, one needs to be very careful just taking, for example, Q4 and assuming the profitability for that quarter, for example, to apply broadly across all 4 quarters of 2020. And that’s also why in providing guidance, we know that we exited 2019 with a full year result of 11%, and we provided a guidance ranging from 10% to 12% and see that as a reflection that some things may pull our results up beyond 11% and certainly there is also a risk particularly connected to the price of raw materials and utilization as well that it could grow a little bit below. So I think it’s very hard to answer your question with any degree of precision.

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Unidentified Analyst, [32]

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So just coming back to the mentioning of automization and technology, which was highlighted as a driver for 2019. I mean you mentioned all these other factors, which, of course, day-to-day business, your utilization and sales prices, et cetera. But the automization and the production efficiency as such, is there any sort of driver or momentum that you embarked on in 2019 that will sort of give a higher contribution into 2020? That was sort of my main focus.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [33]

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Okay. Yes, but we have successfully developed a few things that we have implemented at a couple of plants in 2019 and, of course, we will try to roll some of these ideas out to other plants. And I will also say that we have been quite active in coming up with smart ideas to produce our products cheaper, faster with lower waste and this helps. And I think we have a responsibility to try to every year make the plants more efficient. And one of the key measures here is the cartons produced per man-hour we put into it. And here, we can see a positive trend across all of our major areas of operations. And some of it is driven by new technical solutions, and some of it is driven by non-CapEx initiatives. And this is an arena where we need to be very active continually.

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Operator [34]

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Your next question comes from the line of Christian Reinholdt.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [35]

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I’d like to go back a bit to CapEx again. You have a big program right now. And as far as I understand, we can see it continuing at a high level for the coming years also. But when you decide where to expand your business or production capacity, what about the required return when we look, for instance, at Argentina or Brazil, where you plan a new factory? Are they higher? Or how do you — the risk is definitely higher in these countries. Do you require higher return on this investment compared to, for instance, expansion of the production in the U.S.?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [36]

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Of course, we try to take a balanced decision considering all aspects. And no doubt, if we look to your comment pertaining to South America, the situation in Argentina is of such nature that further investments in Argentina will be considered, maybe you can say, based on a much more thorough and broad analysis than making a line investment in Denmark or in Hungary. And from that standpoint, we have some interesting discussions ahead of us, for example, pertaining to Argentina. So yes, we do take the macro risk at a much different risk level into consideration when making these decisions. But having said that, we are not paralyzed by the fear of uncertainty in South America. But we must take the situation very seriously.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [37]

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But if you look — if you convert it to Danish kroner, do you then require substantially higher return on these investments? Because the currency is so volatile and declining — still declining.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [38]

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Well, the answer is yes. The short answer is yes. And the long answer is that these investment decisions are not only considered on financial parameters, but certainly the answer to your question is yes.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [39]

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Okay. Then some other questions. Your tax rate is very low in 2019 because of this extraordinary income. Can you indicate to us what the tax rate is going to be in 2020 and maybe also going forward from there?

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Flemming Lorents Steen, Brødrene Hartmann A/S – CFO & Member of Executive Board [40]

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Well, we don’t really guide on tax rate, but I think the general tax rate will be slightly higher in 2020, but not much.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [41]

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Not much because if you look back for the ’17 and ’18, you had 30% and 39%, substantially higher than 22% because of this, I assume, not taxable income from this agreement you made. So is it 25%? Or is — or what should we expect?

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Flemming Lorents Steen, Brødrene Hartmann A/S – CFO & Member of Executive Board [42]

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We don’t really guide on the tax rate. So — and I don’t understand you said — what did you mean by you’re not taxable by this income?

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [43]

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Yes, I don’t know, the 22%, it’s more or less half of what you had in 2018. That’s why I assume you have not been willing to disclose how big this extraordinary gain has been. So you leave us a bit in the dark here.

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Flemming Lorents Steen, Brødrene Hartmann A/S – CFO & Member of Executive Board [44]

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Okay. Well, if you — when you — if you talk about the license income that we mentioned…

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [45]

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Yes.

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Flemming Lorents Steen, Brødrene Hartmann A/S – CFO & Member of Executive Board [46]

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That’s taxable.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [47]

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So the 22% is the run rate. Or what should — how should we interpret this?

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Flemming Lorents Steen, Brødrene Hartmann A/S – CFO & Member of Executive Board [48]

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I think you should interpret, say, a higher run rate than 22% for your model.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [49]

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Okay. And then regarding your dividend policy, where you have decided suddenly to — not to pay dividend. Should we look at this as a — is this a new policy or — I think a lot of people have been taken by surprise with this. And if I look at your gearing, financial gearing, it’s not substantial. You are still below 2x. And as far as I can see, you will not surpass 2x also in 2020.

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Flemming Lorents Steen, Brødrene Hartmann A/S – CFO & Member of Executive Board [50]

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First of all, the policy is exactly the same as it has always been. This is a decision that is taken 1 year at a time, which means that we, right now, recommend not to pay dividend. Of course, it’s the Board that recommends this. And given that that goes to the general assembly, that’s how it is. According to Danish rules, you can lower the amount that the Board recommends, but you cannot increase it.

Secondly, we do this because we want to have financial flexibility. It is true that our current equity ratio and our current gearing looks fine, but we want to have the flexibility and the muscles to grab opportunities. We see some strong drivers in the market that goes our way, and we don’t want to be financially constrained not to be able to take those, but it’s a 1-year decision.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [51]

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Yes, I know that, but it sounds to me that maybe there is some M&A coming up because what you have published right now, I can’t really see a very good argument for totally giving up paying dividend.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [52]

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Well, I think we will have to take your comment down as speculation.

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Christian Reinholdt, Small Cap Danmark A/S – MD, CEO & Director [53]

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Actually, I have been through a lot of annual general meetings in Hartmann, and I think the Chairman has several occasions said that the dividend policy would not be changed, that you are going to pay dividend each year. But…

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [54]

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And the dividend policy hasn’t changed with this recommendation from the Board to the AGM. As Flemming said, it’s a 1-year decision, and I think with the ROIC at 18-plus percent, Hartmann is not the worst place to leave your funds.

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Operator [55]

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Next question comes from the line of [Priti Grunn].

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Unidentified Analyst, [56]

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This is probably a follow-up to questions regarding your entry into India. Should we see this first acquisition as one of several? Does the acquisition as such play a meaningful role in your setup with the size or the presence that, that provides you? Or would you need, in fact, to consolidate more before it has a meaningful importance to your overall setup?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [57]

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Well, we entered India to build up a substantial business that shall remain there for the next several hundred years. And to do so, we felt we needed an entry. We needed a platform. We needed some people. We needed to get our hands dirty. We needed to get going. And that’s what the acquisition of Mohan Fibre provides. And as we have said also when we announced the acquisition that we see this as a platform. It’s a starting point and, certainly, yes, we want to do more than that in India. India is a very, very significant country, very large. The plant that we have acquired is located up in the northern part. And while that’s all very good, it doesn’t really provide us great access to the significant egg production areas, which are further south in the country. So if we want to become a major player in India, which we are not with this acquisition, we have to do more, and we will do more.

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Unidentified Analyst, [58]

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And that will be an acquisitive trail rather than growing organically?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [59]

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Well, it will be a mix, for sure.

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Operator [60]

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There are no further questions at this time. Please continue.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S – CEO & Member of the Executive Board [61]

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Okay. Thanks a lot. Thanks to all for participating. Thanks for the questions. Have a good day, everyone.

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Operator [62]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.

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