2022: Analysts Report

CONSUMER GOODS

QUADPACK

COMPANY CONTACT AFTER H1 2022/2023 RESULTS

RECOVERY CONFIRMED, FOCUS TURNS TO DELEVERAGING

The 2021/22 earnings were impacted by Covid and supply chain problems, but in H1 22/23, sales rebounded sharply (+50% lfl), with momentum accelerating even more than the booking in H2 21/22 implied. This was further proof of the wisdom of Quadpack's strategy including its strong emphasis on ESG (local production vs. sourcing from Asia, use of recycled materials or plastic alternatives…). With recovery underway, the management, strengthened in September by the appointment of A. Chauvigné as CEO (25 years of experience in the industry), will be able to turn its focus to margin recovery and debt reduction, with the aim of ending 202/24e with ND excl. IFRS 16 of less than €40m and 2.5x EBITDA. After making minor changes to our estimates and revising our TP to €29 (from €30), we remain BUYERS.

Maxime Dubreil [phone]

[e-mail]

Report completed on 11/22/2022 17:30

Report published on 11/23/2022 7:47

Sales rebound confirmed in H1 22/23

Quadpack yesterday reported results for the first half of its fiscal year ended July 31. Order intake in H2 21/22 (+45% to €65.5m) pointed to robust business growth in H1 22/23, and that was indeed the case, with sales ending the period at €73.9m (+58%; +50% lfl), beating our €65.0m estimate. This confirms the wisdom of the company's positioning and decision to make ESG the cornerstone of its strategy (local production vs. sourcing from Asia, use of recycled products or plastic alternatives, etc.).

Order intake was also robust in H1 22/23 (+23% to €78m), proof that the H2 21/22 rebound was not a one-off and that demand can be expected to remain buoyant over the coming years. Management indicated to us that the orders booked since September would serve to shore up sales not in H2 22/23 but in 2023/24.

Focus is now on profitability and debt reduction

Despite the solid H1 sales performance, profitability, while sharply improved (reported EBITDA margin +1.8pt to 9.3%), missed management's targets. Another source of dissatisfaction was the increase in Net Debt excluding IFRS 16 (+€5.6m to €49.8m), reflecting the rise in WCR (+€7.1m) driven by the robust sales rebound.

With a return to growth considered locked in, management will now turn its attention to increasing profitability and reducing debt, and expects its efforts to start producing results in H2 22/23. It believes that margin growth, combined with tight control of WCR and capex, will bring debt excluding IFRS 16 back below €40m and 2.5x EBITDA by the end of 2023/24e, which would take some pressure off the balance sheet.

Target price revised to €29 (vs. €30) - Still a BUY

We have revised our TP, which corresponds to the average of our DCF analysis and peer comparison, to €29 (from €30), mostly because of the decline in the valuations of Quadpack's comparables since the start of the year (including -36% for Groupe Guillin). Given the considerable upside potential remaining (+46%) and the good momentum the company has found, we remain BUYERS of the stock.

…/…

Invest Securities and the issuer have signed an analyst coverage agreement

in € / share	22/23e	23/24e	24/25e
Adjusted EPS	0,59	1,13	1,68
chg.	n.s.	+91,7%	+48,4%
estimates chg.	-7,2%-12,4%-9,8%
au 31/01	22/23e	23/24e	24/25e
PE	33,8x	17,6x	11,9x
EV/Sales	0,9x	0,8x	0,7x
EV/Adjusted EBITDA	11,5x	8,2x	6,2x
EV/Adjusted EBITA	26,3x	15,2x	10,0x
FCF yield*	3,9%	6,0%	8,6%
Div. yield (%)	n.s.	n.s.	n.s.

* After tax op. FCF before WCR

key points

Closing share price	22/11/2022	19,90
Number of Shares (m)		4,4
Market cap. (€m)			87
Free float (€m)			7
ISIN		ES0105118006
Ticker			ALQP-FR
DJ Sector	Producer Manufacturing
	1m	3m	Ytd
Absolute perf.	-11,2%	-14,2%	-16,4%
Relative perf.	-17,5%	-12,9%	-2,4%

Source : Factset, Invest Securities estimates

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CONSUMER GOODS

QUADPACK

Background: One of Europe's 10 leading cosmetics packaging suppliers

Founded in 2003, Quadpack specializes in cosmetics packaging. Operating in a €20bn market (10% of the global cosmetics market) that is dominated by companies like Albea, Aptargroup, Berry and RPC, this Spanish firm counts among Europe's ten leading players alongside Tupack, Groupe Pochet, Heinzglas, Verescence, Silgan and PSB Industries. While it works with cosmetics giants like L'Oréal, Estée Lauder, Shiseido and Beiersdorf, Quadpack's core market is mid-sized companies (€50m to €1bn of sales) including L'Occitane, Kiko Milano, Rituals and ISDIN - clients that allow it to optimize its profitability.

Competitive universe for Quadpack

Source: Quadpack

Quadpack has historically focused on packaging for skincare products (67% of H1 22/23 sales), but it has expanded its offering to include makeup (19%) and perfume (9%). This allows it to better address the needs of clients who are active in all three markets. It thus has a broad product range that includes airless containers (prevents any contact between the product and the outside air to protect it from oxidation), plastic jars made through injection molding, glass jars and bottles, wood packaging… In addition to making containers, Quadpack also offers decorating and finishing services (serigraphy, laser etching, hot stamping) to deliver finished products to its clients and keep most of the value-added in the packaging for itself.

In terms of business model, Quadpack has profoundly modified its strategy over the years. When it was founded in 2003, the company specialized in sourcing from Eastern Europe and Asia and reselling its products almost exclusively to small- and mid-sized European companies active in the skincare mass market. Its 2013 takeover of Technotraf Wood Packaging (wood-based packaging) allowed it to adopt an industrial strategy. Quadpack has since made five more acquisitions (Kamprak in 2014, Rinaplast in 2016, Louvrette and Inotech in 2019 and Wicklein in 2021) to bolster its production capacity in Europe (notably in Germany) and reduce its dependence on Asian suppliers. The Sourcing business accounted for almost 100% of sales in 2013/14, but its share was just 55% in 2021/22, with Manufacturing contributing the other 45%. And this shift is bound to continue over the coming years fueled by the COVID crisis (and its impacts on the supply chain) and consumers' increasing demand for local and more responsible production, confirming the wisdom of the company's strategy.

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CONSUMER GOODS

QUADPACK

Governance strengthened by the hiring of a new CEO

On September 13th of this year, Quadpack named Alexandra Chauvigné as its new Chief Executive Officer effective September 1. She succeeded co-founder Tim Eaves, who remains chairman of the board. The change was in keeping with good governance practices, which call for a separation of the CEO and board chair positions in order to improve transparency and accountability. It also allows Eaves to devote more time to social and environmental responsibility initiatives in the newly created role of Chief Impact Officer.

Chauvigné has considerable leadership experience in the packaging industry after a 25- year career. She previously served as General Manager of the Consumer Packaging division of DS Smith, a global supplier of sustainable cardboard (2021/22 sales of £7.24bn). Between 2011 and 2020, she held various executive positions at Aptar, a global leader in dispensing packaging solutions: Vice President and General Manager for skincare and color cosmetics from 2018 to 2020 and, prior to that (2011-17), President, global market development for the beauty business. Her expertise in product strategy and production optimization will be great assets to Quadpack with its current focus on these two areas.

ESG: Pursuing a strategy that is paying dividends

For several years now, Quadpack has made ESG a cornerstone of its strategy, notably setting targets for the recyclability of its products and the carbon footprint of its industrial facilities. Additionally, its efforts to manufacture more of its own products (45% of 2021/22 sales) at its sites in Europe and the US (six facilities of which three in Spain, two in Germany and one in the US), rather than source them from Asia, is proving quite popular with clients that are also being pressured by consumers. Likewise, the use of plastic alternatives for cosmetics packaging (wood, metal, bio-sourced polymers) is perfectly in keeping with the times and will do a great deal to set the company apart.

As proof of its commitment to ESG, and as we mentioned in our previous report, Quadpack has achieved B Corp status with an overall score of 81.2, well above the industry average of 50.9. Importantly, it is the first cosmetics packaging company to earn this certification. Beyond social and governance criteria, the company has mostly stood out for its environmental practices, thanks to the initiatives taken to reduce energy use (inauguration of a biomass plant in Spain), consume less water, and reduce and recycle waste, among other efforts.

In H1 22/23, Quadpack took different actions to support this strategy, for instance launching a stick for solid formulas with a PCR content of up to 42% and a refillable lipstick in a container that Quadpack makes with wood from sustainably-managed forests.

In sum, Quadpack is continuing to step up its ESG initiatives, believing that this will be a key differentiating factor in its industry and give it an increasingly large competitive edge going forward. Considering the commitments cosmetics giants have made on this front (e.g. L'Oréal's 2030 Plan and Beiersdorf's targets for 2025-30), we find this strategy smart, and see it as a source of opportunities.

Business rebounded sharply in H1 22/23…

The H1 2022/23 earnings (February-July) reported on November 22th showed a sharp uptick in sales growth that surpassed our expectation and what H2 21/22 order intake had suggested. It should be recalled that the FY 2021/22 results had been impacted by Covid and supply chain disruptions that prevented Quadpack from fulfilling all of its orders.

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CONSUMER GOODS

QUADPACK

H1 22/23 sales came in at €73.9m (+58%; +50% lfl), topping our €65.0m estimate. Beyond the contribution from Wicklein, which added 8pts (consolidation scope effect), sales momentum was impressive and much stronger than what order intake pointed to in H2 21/22 (€65.5m). Gains were especially noteworthy at the Sourcing division (+68% LfL to €43.2m); sales at the Manufacturing business "only" rose by 29% LfL to €30.8m. Note that this growth was driven almost exclusively by volumes; prices were only hiked moderately to offset cost inflation, and the impact of those increases will likely only be felt from H2 22/23. In terms of products, while growth was strong across the board, the rebound in Makeup was particularly impressive (+222% to €13.9m) and lifted that segment's share of total sales to 19% (from 9% in H1 21/22).

H1 22/23 results

in m€ (ended 31/07)	S1 21/22		S1 22/23
published figures	published	published	IS Estimates	diff.
Revenue	46,7	73,9	65,0	+14%
lfl change	-14%	+50%	+32%
change	-15%	+58%	+39%
Published EBITDA	3,5	6,9	6,5	+6%
change	-12%	+96%	+85%
EBITDA margin	7,5%	9,3%	10,0%
EBIT	-0,3	2,8	2,3	+23%
Net Profit	-0,9	1,5	1,1	+37%
		Source : Quadpack, IS estimates
in m€ (ended 31/01)	S1 21/22		S1 22/23
Adjusted figures	published	published	IS Estimates	diff.
Revenue	46,7	73,9	65,0	+14%
lfl change	-14%	+50%	+32%
change	-15%	+58%	+39%
Adjusted EBITDA	2,5	6,2	5,8	+7%
change	-17%	+152%	+136%
Adj. EBITDA margin	5,3%	8,4%	9,0%
Adjusted EBIT	-0,3	3,2	2,6	+25%
Adjusted Net Profit	-1,0	1,9	1,3	+46%

Source : Quadpack, IS estimates

Robust sales translated into earnings growth as well, though profitability just missed our expectations due to the sales mix (Sourcing vs. Manufacturing) and the limited margin growth recorded in Manufacturing. Reported EBITDA jumped 96% to €6.9m, beating our €6.5m estimate and lifting EBITDA margin to 9.3% (+1.8pt) whereas we were looking for 10.0%. EBIT reached €2.8m (vs. -€0.3m in H1 21/22), topping our €2.3m estimate, and net attributable income came in at €1.5m (vs. -€0.9m in H1 21/22), again exceeding our expectation (€1.1m). Restating for IFRS 16, adjusted EBITDA came in at €6.2m (+152%) vs. our €5.8m estimate, adjusted EBITDA margin was 8.4% (+3.1pts) vs. our 9.0% expectation, and adjusted net income was €1.9m (vs. -€1.0m in H1 21/22), whereas our estimate was for €1.3m.

Looking at the individual divisions, Sourcing posted an impressive EBITDA margin of 9.7% (+4.3pts), beating our 7.0% estimate, as a favorable product mix and very strong volume growth allowed the company to leverage its fixed cost structure and move the business toward normative profitability (10-11% margin). On the other hand, EBITDA margin at the Manufacturing activity disappointed at 8.8% (-1.3pt), missing our 12.0% estimate, due to the lag between cost inflation and selling price increases, and the fact that the industrial facilities were not operating at full capacity over the full six-month period following the addition of new capacity (+40% at the Louvrette facility for instance). The startup of the Decorations activities (€1m investment) and the price increases passed will in theory drive EBITDA margin above 10% starting in H2 22/23.

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CONSUMER GOODS

QUADPACK

… and momentum is likely to remain strong in H2 22/23 and beyond

We expect sales growth to remain robust beyond H1, though the comparison basis will gradually become less favorable. Order intake reached €78m in H1 22/23 (+20% from H2 21/22), which could imply H2 sales of the same order of magnitude and FY 2022/23 sales of more than €150m. Nonetheless, management told us that sales would likely be less buoyant in the second half of 2022/23 since some of the orders booked in H1 are only expected to be fulfilled in 2023/24.

		Quadpack: Trend in sales and order intake
90,0
							78,0
80,0
							73,9
70,6						65,5
70,0					63,4
58,3				59,3
54,6
60,0		45,147,3	46,7
50,0		46,1
40,0
30,0
20,0
10,0
0,0
H2 19/20	H1 20/21		H2 20/21		H1 21/22	H2 21/22	S1 22/23
				Order intake		Revenue		Source : Quadpack

Be that as it may, problems stemming from the health crisis and supply chain disruptions clearly appear to be resolved, and visibility on Quadpack's sales is improving, confirming the wisdom of its positioning.

Margin growth and debt reduction now the top priorities

With concerns about whether business would pick up behind it, management is now focusing on three priorities: (i) improve profitability, (ii) optimize WCR and (iii) reduce debt. The latter will in our view be the biggest challenge.

Indeed, while the company's results improved sharply in H1 22/23, with adjusted EBITDA reaching €6.2m, net debt rose as working capital requirements increased (-€7.1m) to support sales growth and cover the last of the investments required to add more production capacity (H1 22/23 capex of €3.7m). Excluding IFRS 16 adjustments, net debt ended July at €49.8m, up from €44.2m at the end of January. Factoring in lease liabilities, net debt ended the period at €53.6m (+€5.6m), or 3.9x reported EBITDA. While this situation is not cause for alarm, especially as a good portion of the debt is being used to finance working capital (€24m at end-July), management is aware that debt reduction is a necessity.

Trend in Net Debt (excluding IFRS 16)

0,2

7,1

6,2 0,8 3,7

49,8

44,2

		Net Debt	Adjusted Cost of debt Capex WCT change Others Net Debt H1
	21/22	EBITDA H1	22/23
			22/23
				Source : Quadpack
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