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Edited Transcript of FRIGO.AT earnings conference call or presentation 19-Mar-20 2:00pm GMT

Q4 2019 Frigoglass SA Earnings Call

Kifissia Apr 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Frigoglass SA earnings conference call or presentation Thursday, March 19, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charalampos Goritsas

Frigoglass S.A.I.C. - Group CFO

* Ioannis Stamatakos

Frigoglass S.A.I.C. - IR Manager

* Nikolaos Mamoulis

Frigoglass S.A.I.C. - CEO, MD & Executive Director

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Conference Call Participants

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* Hari Thirumalai

Eaton Vance Management - VP of Global High Yield & Credit Analyst

* Osman Memisoglu

Ambrosia Capital Ltd, Research Division - Research Analyst

* Patrick Kersting;Morgan Stanley;Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Frigoglass Fourth Quarter 2019 Results Conference Call. (Operator Instructions) Just to remind you, this conference call is being recorded today, Thursday, March 19, 2020. I now pass the floor to one of your speakers, Mr. John Stamatakos. Sir, please go ahead.

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Ioannis Stamatakos, Frigoglass S.A.I.C. - IR Manager [2]

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Good afternoon, and thank you for joining us on this conference call to discuss Frigoglass 2019 full year and fourth quarter results. Today, I'm joined by our Chief Executive Officer, Nikos Mamoulis; and our Chief Financial Officer, Harris Goritsas. After the presentation, we will turn the call over for your questions. For those of you who do not already have the slide presentation, it is available on our website, frigoglass.com.

Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements. This will be considered in conjunction with the cautionary statements set out in our press release and which also apply our discussion today. (Operator Instructions)

Let me now turn the call over to Nikos.

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [3]

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Thank you, John. Hello, everyone, and thank you for calling -- for joining our call today. Let me start by giving an overview of the year and the fourth quarter. Harris will then take you through the financial performance before I discuss the outlook for 2020.

Before we begin, I would like to highlight that during this volatile and uncertain market environment, we are closely monitoring the active circumstances and the potential impact of COVID-19 outbreak on our business, which I will discuss in more detail later in the call.

Moving to Slide 3 of the presentation, I will share the highlights of the year. We are pleased to report another year with a solid performance and strong progress against our strategic initiatives. In 2019, we continued to build on the operational improvements we have rooted across our business, elevate innovation and remain strongly focused on our commercial and cost-out initiatives. Overall, we delivered sales growth of 15.6%. We are pleased to see our commercial refrigeration business reporting growth of 16.8% following sustained growth momentum in Europe and Asia.

The performance of our Glass business was also solid. Sales were up by almost 12% in 2019. This outcome was achieved following increased demand for glass containers and pricing initiatives. Growth was also supported by a stronger naira. The good progress on top line, coupled with our persistent cost reduction efforts and efficiency measures generated strong operating leverage.

Group comparable EBITDA grew by 27%, EUR 71.6 million. The comparable EBITDA margin expanded by 130 basis points to 14.9%.

We are also pleased to report a net profit of EUR 5.6 million, a significant improvement compared to 2018 where we reported a loss of EUR 8.7 million. I think it is important to highlight that this year's profit had a direct positive [read] through our equity position.

Of course, the operating profitability improvement was translated into cash flow generation. We closed the year with EUR 19.5 million of comparable adjusted free cash flow, representing a 55% growth versus 2018.

Cash generation contributed to the net debt-to-EBITDA improvement at 3.1x. This is in line with our plans to further deleverage.

Finally, given the current market environment and the challenges ahead, we are pleased with the successful completion of the issuance of the EUR 260 million senior secured notes earlier in the year, which represents the bulk of our total borrowings. Securing our funding for a 5-year period was a priority and will allow us to focus on our operations.

Turning to the next slide and the highlights of the fourth quarter. In line with our expectations, sales grew by almost 10%. Growth momentum was sustained in the Commercial Refrigeration business, demonstrating continued demand from key customers in Europe and Asia. Sales in Glass were up 5% due to pricing and the favorable currency translation effect. Overall, EBITDA in the quarter increased by 9.1% to EUR 8.8 million. The sales-driven operating leverage was offset by increased operating expenses, resulting in a stable year-on-year margin at 9%.

Moving to Slide 5. Commercial Refrigeration sales grew by 11.8% in the quarter, driven by double-digit growth in Europe and Asia. Growth momentum in East Europe accelerated in the quarter with sales increasing by 59%. This performance reflects strong placements from key customers, mostly in Russia and Romania. During the course of 2019, we gained market share in East Europe, primarily in the Brewery segment. Sales growth was also assisted by increased demand for Frigoserve's offering, mainly due to performance and territory expansion. In Western Europe, sales declined by 21.6%, reflecting orders phasing by key customers. Sales in Africa and the Middle East were down 34.4%, also reflecting order phasing from key customers in Nigeria and South Africa, more than offsetting increased placement from breweries and soft-drink customers in East Africa. Our Asia business continued to perform well with sales growing by 29%. Demand in India and Southeast Asia continue to be strong.

Moving to the next slide. Pricing initiatives in our glass container business and a stronger naira resulted in a 5% sales growth in our Glass business in the quarter. Overall, demand for glass containers remained solid, demonstrating the strong market fundamentals and the high beverage consumption trend. With our investment to increase capacity, we are well positioned to capture Nigeria's long-term growth opportunity. Glass will remain the predominant packaging material, mainly due to the growing environmental awareness. Growth momentum also continued in the complementary metal crown business, with sales increasing by 31% driven by higher year-on-year demand.

With that, I will turn the call over to Harris for the financial review.

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [4]

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Thank you, Nikos, and hello to everyone. As in all our calls, I will take you through the financial results of the group. As a note, I will make reference to comparable EBITDA, which excludes the impact of IFRS 16.

So let's turn to Slide 8. Looking at the performance by business segment, for the fourth quarter of the year, Commercial Refrigeration sales increased by 11.8%, following sustained growth in Europe and Asia, as Nikos mentioned. Comparable EBITDA was negative at minus EUR 1.5 million compared to a negative EBITDA of minus EUR 0.5 million in the fourth quarter of 2018. The improved cost absorption, product mix benefits and productivity gains were more than offset by higher operating expenses due to provisions and the related sales discounts.

Turning to Glass. Sales were up 5%, led by our pricing initiatives and a positive currency translation effect. Comparable EBITDA increased over-proportionally by a strong 20.3%, leading to an EBITDA margin expansion of 450 basis points to 35.4%. The margin improvement was a result of pricing and lower production cost due to the efficiency improvements. As a result, our group sales grew by 9.7% to EUR 97.5 million for the quarter. EBITDA increased by 9.1% to EUR 8.8 million while the margin remained stable year-on-year. In the full year, group sales were up 15.6% to EUR 482.3 million, with both segments delivering double-digit growth. Comparable EBITDA reached EUR 71.7 million, 27% higher than last year, with the respective margin improving by 130 basis points.

Turning to Slide 9. I will comment our cash flow for the full year. We generated free cash flow of EUR 19.5 million, up 55% from the prior year. Strong operating profitability, lower CapEx and tax benefits related to last year's investments allowed us to deliver this cash flow for the year. CapEx reached EUR 30.5 million, below last year's level. This decline reflects investments in material and equipment related to a furnace cold repair with the fund in 2018. Net working capital was impacted by the higher trade receivables due to the sales growth in the fourth quarter. Comparable net debt closed lower than last year at EUR 224.5 million. The improvement reflects free cash flow generation, which was partly offset by higher interest payments. Overall, our net debt-to-EBITDA ratio was improved to 3.1x, consistent with our ongoing target for further developing the group, as Nikos said.

I will now hand over back to Nikos for the business outlook and the concluding remarks.

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [5]

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Thank you, Harris. Looking now at Slide 11 and our outlook for 2020. Given the current situation, the COVID-19 outbreak obviously is getting daily, even hourly attention. Looking into 2020, we expect our results to be challenged by the volatile market environment, emphasized by the COVID-19 virus. Despite the fact that we are currently seeing our first quarter evolving in line with expectations, with only minor headwinds in the supply chain area, we remain watchful on the potential impact of the ongoing COVID-19 outbreak.

The COVID-19 outbreak is complex and rapidly evolving, and therefore, we are not yet aimed to fully assess its potential impact on our results. Even now, we have not seen any impact on our customers' orders. Based on this fact, the primary impact on our Commercial Refrigeration business might come from increased lead time of imported raw materials from China, Italy and other parts of Europe as well as from increased logistic costs. The last couple of weeks, we have taken measures to secure raw materials availability in our main production hubs.

In Glass, this situation has affected traveling of skilled engineers to Nigeria to perform the upcoming furnace rebuild and shipments of related material. This has caused delays in the plant shutdown. We are currently anticipating the furnace to be operational towards the end of the third quarter of 2020. Overall, this assessment is based on facts as we understand them to date. In this environment, we are closely following up the developments and proactively develop precautionary measures, including the additional cost reduction initiatives, the prioritization of capital expenditure and measures to preserve financial flexibility.

With that, I will hand over to the operator to take any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Hari Thirumalai from Eaton Vance.

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [2]

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I do understand that the situation is fairly fluid now, but given that you normally have the past received orders 4 to 6 weeks prior to delivery in terms of -- that's the lead time that you normally have, what's the order book situation looking for Q2, please?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [3]

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Thanks for the question. The order book for the second quarter of the year is almost full. We have more than 80% of the book already received orders.

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [4]

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So in turn, are these orders like cancelable or are they firm orders?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [5]

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It's a tough question, but when you have -- when you are working with customers like our blue-chip customers and you have long-lasting cooperation, you are -- theoretically, the orders are not cancelable. And if we start discussing with customers, our big effort is -- will be not to have any order cancellation and maybe phase them a little bit over the months given how the situation will evolve. In the worst-case scenario that the orders -- a customer asks for an order cancellation, we will review it separately, depending on the customer and the relationship we have, and we will assess the situation as it comes. So far, there are no order cancellations on the table, not even discussions about that.

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [6]

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Excellent. That is great to hear. One little final question for me. You said that you are going to be reviewing CapEx for 2020, could you just refresh us as to where you stand for CapEx for your refrigerations operations, please? I think you had mentioned something like EUR 20 million during the roadshow, if I'm not mistaken. Is that going to come down this year? What's the plan?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [7]

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Our guidance is for EUR 25 million. Again, this is part of our measures to preserve liquidity. The EUR 25 million is for the group. The -- let's say, for this year, it will be approximately 50-50. What we have is around 12% on our table today for ICM, which we are reviewing as we speak, and we'll see how things are evolving. And also keep in mind that most of our CapEx is -- especially in ICM is skewed towards the second half of the year. And we are spending the money towards the second half of the year because the first half is our high seasonality and we cannot do a lot in the plants in order not to interrupt their production flow.

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [8]

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Okay. Sorry. Just to reconfirm, you said EUR 25 million for the entire group. What would be the split for the refrigeration business?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [9]

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EUR 25 million is for the entire group. EUR 12 million is for the refrigeration business.

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Operator [10]

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(Operator Instructions)

The next question comes from Patrick Kersting from Morgan Stanley.

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Patrick Kersting;Morgan Stanley;Analyst, [11]

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I've got a couple of questions from myself as well. First of all, you're talking about the delayed furnace rebuild. Does that mean the furnace is still running or has it already ramped down? How should we look at the glass business kind of Q2 into Q3? It's just everything shifted right now and you're still running it? Or have you shut it down but can't get it back up?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [12]

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Thanks for the question. The furnace is still up and running, and it will be up and running until we have it -- until we demolish it, meaning that, just to give some more color, the initial plan was to shut down and demolish the furnace end of February, last day of February, and start the rebuild first of March. For the reasons that I have mentioned before, where engineers may need to fly from everywhere, mostly India, China, Germany, Italy, in Nigeria, in order to start the rebuild process. We decided to postpone this for May 1.

The furnace is still in good condition. Of course, we have taken measures in order to make sure that we don't have an accident even if we are not able to do the rebuild, to start the rebuild May 1. So the furnace is still in good health.

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Patrick Kersting;Morgan Stanley;Analyst, [13]

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Perfect. That is very helpful. And then maybe a second question, if I may. You talked about your CapEx plans and the last one you pointed preserving financial flexibility. Could you just quickly remind me what exactly you have available when it comes to financing? I know the cash on balance sheet and I think the bond funded a bit on that. You have some bilateral lines. What else do you have in case you need to dip into?

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [14]

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Yes. Thanks. This is Harris. I can take that question. But you're right. We said -- yes. You can hear me?

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Patrick Kersting;Morgan Stanley;Analyst, [15]

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Yes, I can. Yes.

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [16]

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Okay. Yes. This is Harris. As you said, we have just refinanced the group. We have received the funds. We have repaid the old debt and have kept some cash, around EUR 14 million in the balance sheet. This adds to the EUR 54 million closing balance of cash from December 2019. So there is a strong cash pooling, we think, the group to utilize. On top, we do have some local lines in our key countries where we operate. And I'm talking right now, focusing more on ICM. We all need to remember that glass in Nigeria is a cash-generating division that we have there. So for ICM, we do have local lines in Romania and Russia. We're now currently in discussions with our banks to either extend the local lines, both in terms of timing and in terms of credit lines, or even discussing with new banks to increase the ability of this group to raise funds, something that the new bond is allowing us to do. So we are taking all measures to preserve the cash that we have, as Nikos mentioned, about the cost-cutting initiatives and CapEx, and we are also generating new lines.

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Patrick Kersting;Morgan Stanley;Analyst, [17]

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And could you give an indications of what lines you've got available right now, just a ballpark amount on top of what you have on your hands?

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [18]

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Currently, the lines' ballpark is EUR 30 million in Russia and another EUR 5 million that we have in India.

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Patrick Kersting;Morgan Stanley;Analyst, [19]

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And that is undrawn?

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [20]

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I'm talking about drawn lines now, correct.

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Patrick Kersting;Morgan Stanley;Analyst, [21]

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Those are drawn lines. No, I was asking whether there is anything undrawn that you've got.

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [22]

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Small amounts, around sort of EUR 2 million to EUR 3 million.

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Patrick Kersting;Morgan Stanley;Analyst, [23]

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Okay. And then maybe one other question. Usually, the first quarter, I think, is a negative working capital as you're ramping up sales again. It looks like there was some working capital outflows anticipated in Q4. Can you just talk us through the seasonality as to how your working capital should, at the moment, kind of affect first quarter, second quarter to get an idea of what your cash flow is on a normal business would be?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [24]

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The seasonality of our business requires working capital, more working capital in the first half of the year. Where we are producing, we are purchasing materials, and we are selling. Our accounts receivables are increasing in the first half. And we are -- in the second half, we are collecting most of our first half sales, and this is how our working capital seasonality works under normal circumstances.

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Operator [25]

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(Operator Instructions) The next question comes from Osman Memisoglu from Ambrosia Capital.

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Osman Memisoglu, Ambrosia Capital Ltd, Research Division - Research Analyst [26]

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Are you seeing any cost advantages? Maybe it's a bit early but just wanted to get some color if there is anything on the metal side or energy side.

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [27]

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It's a little bit early. The world is a little bit confused. We saw oil, how it went down. I will say that we are focusing on our key supplies. Steel is one of them. So far, we don't see any change on the price of the materials. On the other side, we see some increase in the logistic part of the -- to transfer in Europe in our plants because we are supplying from -- mostly from Italy and Poland in our Romania plant. And as you can imagine, there are some freight increases for the road transportation.

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Operator [28]

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Your next question comes from [Archit Gupta] Gupta from Goldman Sachs.

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Unidentified Analyst, [29]

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I'm sorry if I missed, but could you just repeat your ballpark figures on the drawn and undrawn lines, please?

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [30]

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Yes. Drawn lines, it's around currently EUR 35 million on top of what we have in our cash and on our new high-yield bond. And undrawn lines, in the range of EUR 2 million to EUR 3 million.

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Operator [31]

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The next question comes from Hari Thirumalai from Eaton Vance.

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [32]

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Thanks for the follow-up question. Basically, in relation to your previous answer when I asked about Q2 visibility in the order book, you said 80% for Q2 had been achieved. Could you just elaborate on what the context was? Is it 80% of capacity utilization or 80% in the context of what you achieved last year? Or could you just provide some more color, please?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [33]

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Thanks for the clarifying question. The 80% to 85% is on our plan on how -- what we were expecting versus our budget for 2020 (inaudible).

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [34]

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Understood. That's very helpful. Okay. And in terms of -- I have a couple of other questions. In terms of the cash that you talked about, I just want to confirm if I got that right. You said you had EUR 54 million plus EUR 14 million of cash?

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [35]

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Correct.

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [36]

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Correct.

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [37]

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And how much of this is sitting at the holdco? And how much of this is sitting in the African business?

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [38]

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Yes. First of all, the EUR 54 million, this is the bad -- in the financials of 2019, it's split 50-50. 50% of that is in Nigeria and 50% of the rest is outside of Nigeria. The EUR 14 million that we talked about as the new cash out of the high-yield bond is all outside of Nigeria, obviously. What we need also to mention is the Nigeria cash, around 65% is in [hard] currency. Out of this 50% that sit in Nigeria is in dollars.

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [39]

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Okay. And how much is actually sitting at the holdco? Because you have EUR 27 million sitting in Nigeria, then you have operations all over the world. And presumably, there'll be some jurisdictions from where it's not easy to pull out cash if you need to. So how much of cash is sitting at HQ level or in Luxembourg or a jurisdiction from where you can easily access cash?

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Charalampos Goritsas, Frigoglass S.A.I.C. - Group CFO [40]

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Yes. First of all, what we need to note is that we have full flexibility of moving around cash, so we don't have any restrictions. So we are operating here treasury centrally from Athens head office, and we are moving, on a daily basis, the cash around the world. So this is a very volatile picture. What I can tell you is that throughout the precautionary measures that we have taken, currently, the majority of our cash is free -- it's available to move around, so it's at a holding company level. And I'm talking about the ICM business.

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Hari Thirumalai, Eaton Vance Management - VP of Global High Yield & Credit Analyst [41]

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Understood. Okay. That's helpful. One last question, if I may. Just coming back to the Q2 because that's one of the most important quarters for your business. I understand that the 80% that you mentioned was in the context of a budget, which is heartening. That's really good to know. But how does that sort of compare to the usual status of the order book at this point in time? Last year, would it have been around the same 80% of your budget that you had for 2019? Or was it 90% last year? And are you seeing any slippages vis-à-vis previous years or is the trend line pretty positive?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [42]

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Our budget compared to previous year in terms of rents, it has a very, very similar average, and the split is very similar quarter-by-quarter.

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Operator [43]

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(Operator Instructions) There are no further questions in the conference call. I now give back the floor to the company.

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [44]

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Thank you. Thank you, operator. I would like to thank you all for joining our call today and the questions. We look forward speaking with you again soon.

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Operator [45]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines.