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Edited Transcript of FRIGO.AT earnings conference call or presentation 7-Aug-19 1:00pm GMT

Q2 2019 Frigoglass SA Earnings Call

Kifissia Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Frigoglass SA earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00pm 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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* Nina Chen

Avenue Capital Group - SVP

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Frigoglass Second Quarter 2019 Results Conference Call. (Operator Instructions) Just to remind you, this conference call is being recorded today, Wednesday, August 7, 2019. I will now pass the floor to our 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 second 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, which should be considered in conjunction with the cautionary statements set out in our press release and which also apply to 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 joining our call. I will start the presentation by providing an overview of the second quarter. Harris will take you through our financial performance, and then, I will discuss the outlook of the year.

Moving to Slide 3 of the presentation, I will share the highlights of the quarter. Our results in the second quarter were again strong. We delivered double-digit sales growth and EBITDA margin expansion. This demonstrates our commitment to support our customers with innovative, market-relevant and top-quality products. We are now even more confident that we will deliver a solid performance with all-important second post capital restructuring year.

Our group's top line was up 14%, driven by double-digit growth across both our business segments. The commercial refrigeration business continued to perform well, following an acceleration of cooler placements from key customers coupled with market share gains with breweries in Europe. We are also pleased with our glass business performance. Glass containers demand continue to grow, primarily in the bev segment, while we were also benefited from pricing initiatives.

Group's comparable EBITDA margin improved by 140 basis points to 17.8%, driven by volume, input cost savings and several productivity improvement projects. As a final point, the strong cash flow generation in the quarter contributed to the net debt to last 12 months EBITDA improvement at 3.1x.

Turning to Slide 4. Overall, sales in the commercial refrigeration business increased by 14%, driven by double-digit growth in Europe and Brazil. Starting with East Europe, growth momentum accelerated in the quarter with sales increasing by 25%. This performance reflects our strong focus to increase market share with breweries in the region as well as incremental cooler placements from key soft-drink customers. Frigoserve had a positive contribution on sales growth, driven by the recent expansion in Hungary and the broadening of our offering in Poland to include refurbishment activity.

In Western Europe, sales were up by 17%. Growth was mainly driven by continued demand in France, Germany and Spain. Sales in Africa and the Middle East declined by 22%, cycling last year's strong orders in the quarter.

On the positive side, we increased sales in Western South Africa following higher demand from soft-drink customers and breweries. Our Asia business continued to perform well with sales increasing by 14%. Growth was driven by higher demand in India.

Moving to the next slide. Glass continued to perform strongly in the quarter and in line with our expectations. Sales grew 14% on volume growth and pricing. Currency translation also supported sales growth. We continued enjoying high orders from key breweries following new product launches and incremental, big capacity in the marketplace.

Sales also improved in our metal crowns business assisted by the expansion of our customer base. I will now hand you 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 on the call. I will take you through our financial results for the period. As a note, I will make reference to comparable EBITDA, which excludes the impact of IFRS 16.

Let's turn to Slide 7 and the financial overview of the second quarter of 2019. Looking at group sales of EUR 163 million. Growth was 14% with double-digit increases across both our commercial refrigeration in Glass segments. Positive momentum was sustained in the commercial refrigeration business in Europe and Asia, while Glass continued performing strongly on solid market fundamentals. Comparable EBITDA grew 24%, well ahead of sales growth, resulting in an EBITDA margin enhancement of 140 basis points to 17.8%. In addition to the higher sales, this margin uplift also reflects input cost savings and our focus on cost-reduction measures.

We reported net profit of EUR 9 million compared to net losses of EUR 1 million last year. We have to note that last year's bottom line was impacted from discontinued operations. Even excluding gross discontinued operations, our net profit significantly improved compared to last year as a result of the strong performance in the current quarter.

This outcome was achieved despite the negative impact of EUR 3.8 million restructuring charges related to the discontinuation of production operations in our Kato Achaia plant in Greece. And the higher taxes as a result of the pretax profit country mix being skewed to what's Russia and Nigeria.

Moving to Slide 8 now. I will comment the performance by business segment for the second quarter. We saw sales momentum continuing in our commercial refrigeration business. Sales growth accelerated in Europe, driven by increased placements from soft drink customers, and our commercial initiatives that resulted in gaining market shares with breweries in the region.

Asia also had a good performance with sales increasing by double digits, following the strong execution of our commercial strategy. All in all, sales in the commercial refrigeration business were up 14% to EUR 133 million. Comparable EBITDA grew significantly ahead of sales, reaching EUR 20 million. This resulted in a margin enhancement of 160 basis points to 15.1%, following the better cost absorption, the benefits of lower input costs and the productivity savings due to the efficiency improvements and lean manufacturing initiatives we have executed.

Turning to Glass. Demand for our Glass containers and our pricing initiatives resulted in a double-digit sales growth. We reached sales of EUR 29 million, 14% up year-on-year. Comparable EBITDA increased by 17% to EUR 9 million with a respective margin increasing by 90 basis points to 30% reflecting the operating leverage in the business.

Moving to Slide 9 and the performance made business segment for the first half of the year. Trends are the same with the second quarter, with both segments delivering double-digit sales and comparable EBITDA growth, alongside EBITDA margin expansion. This performance had a positive impact on our group's equity as well.

To Slide 10 now, I will comment our cash flow for the first half. Adjusted free cash flow reached EUR 21 million at the end of June 2019, which is EUR 2.5 million higher than the first half of 2018. This is the outcome of our strong second quarter, where we generated approximately EUR 34 million of cash. CapEx was pretty much in line with last year, while net working capital was impacted by the higher inventory levels in order to fulfill anticipated demand over the next couple of months and the increased trade receivables due to the sales growth in the second quarter. The free cash flow improvement comes entirely from the increased year-on-year operating profitability and the lower cash taxes.

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, Harry. Looking now at Slide 12, and our outlook for 2019. Following the first half performance, we confirm our confidence in reaching top line growth and comparable EBITDA margin improvement in the full year, although we expect sales growth to moderate in the second half. The anticipated top line growth deceleration in the commercial refrigeration business reflects the CapEx shift from key customers to the first half of the year. Frigoserve will also grow in the year following its geographical and product offering expansion.

On Glass, we expect sales growth momentum to continue throughout the year. We also maintain our expectation for continuing cost efficiencies to deliver profit margin expansion in the year. The discontinuation of production in our Greek plant will also have a positive impact on margins as of this year. This will be achieved through operating cost reduction and better capacity utilization.

Finally, capital expenditure for 2019 is expected to remain at the range of EUR 25 million to EUR 30 million.

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)

Our first question is from Nina Chen, Avenue.

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Nina Chen, Avenue Capital Group - SVP [2]

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Nikos and Harris. The first one is, can you just remind us of your progress with the SAP implementation and where you are with that?

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

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Thank you. As we have communicated, it is not simply a system implementation. Yes, we are using the platform of SAP, which is a global leader in ARPs. However, in our case, it is a much broader program, which is a business transformation and a change management program. We are developing end-to-end processes that will be embedded across the group. And this program will last at least 2 to 3 years. We are pleased that just 1 month and 1.5 months half ago, we have concluded with our blueprint, it was a very, very thorough process. The complexity of that group is quite big. We have, through this blueprint developed end-to-end processes that will start being embedding into the system. We have some pilot operations to start, and we will have the first RCL go live January 1 as it was anticipated.

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Nina Chen, Avenue Capital Group - SVP [4]

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Great. So that will complete by the end of the year. Okay. And how will you...

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

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It will not complete. So let me make it clear. It is -- that program that will last in the next 2 to 3 years. The first pilot will complete at the end of the year, and then we will have rollout to the rest of the remaining operations.

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Nina Chen, Avenue Capital Group - SVP [6]

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Okay. That's clear. The other one is, you've got Q1, the glass furnace rebuild. So I think you mentioned, it'll be shut down temporarily. Are you -- how are you preparing for that? Just want to make sure we understand that there is a plan to prevent any disruption to the business.

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

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Yes. That's a good question. We, of course, are taking actions on this. This is a very thorough plan. This is the biggest investment, as I said in the previous call, in the history of the group. Demand is growing in Nigeria, and we have approved this investment last year in September. We started getting prepared, placing order, selecting suppliers’ materials. This involves some civil works in the plant as the furnace we are building, it's 50% bigger in terms of space and capacity from the one that we will demolish. So you can understand that this is a very important project. We have opted Q1 next year to do this because it is the start of the low season in Nigeria. So the demand will not be as high as the other parts of the year. And also, we are in very close collaboration with our key customers in Nigeria, in order to give us their demand for this period and manage and allocate capacity according to their needs. So we do not anticipate any disruption. Definitely next year, we will see some growth in the total volume of the year compared to this year, which will be recovered fully by 2021.

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Nina Chen, Avenue Capital Group - SVP [8]

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I see. And in terms of the shutdown timing, how long would that take?

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

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It is scheduled for 4 months. And from the day that we shut down the old furnace up until we have the second -- the new furnace up and running.

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Nina Chen, Avenue Capital Group - SVP [10]

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Understood. And -- okay. And in terms of just building off the stock, presumably, some of it will then be shifted towards the Q2 onwards? Is that how we should think about it? So I guess, I'm just thinking about working capital?

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [11]

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Excuse me, can you please repeat?

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Nina Chen, Avenue Capital Group - SVP [12]

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I'm just thinking about working capital because obviously, you are talking to the customers who will then get -- either get a delivery earlier or later? Or is the pattern going to remain the same because you're going to prepare for it in advance? But again, that has a working capital impact.

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [13]

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We are -- as I said before, we are trying to get the demand from our customers, and we will try to the best of our capacity, build some stock at the end of this year before we demolish. So we do not expect any material working capital disruption.

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

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This is Harris. I can add something on that one. As Nikos said, this is a plan to build the stocks towards the end of this year to support the demand of the first 4 months. Also important to note is that when the new furnace will be up and running, it will be a 50% more capacity of that new furnace. So we anticipate also to catch up some of the sales that we will miss on the first 4 months, so what's the second part of the 2020 year. So overall, as Nikos said, we do not anticipate 2020 to be significantly impacted by this shutdown.

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Nina Chen, Avenue Capital Group - SVP [15]

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Okay. That's clear. The last thing I have is just because of the various cost initiatives, obviously, the margin continues to expand which is good news. I just want to get a sense of how it could look like in second half? Because obviously, I think last time you said 60% of your sales and majority of the profits made in the first half of the year. So some of that cost takeout is permanent. And therefore, the margin expansion should also remain permanent. Just trying to get a sense of is the 140 basis points something we should expect for the full year? Or is that going to come down slightly because second half will be slightly weaker?

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

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Yes. That's a valid point, indeed. Let me just reassure you that all the initiatives that we are doing in order to reduce cost are permanent initiatives. So costs are going down. Nevertheless, what we experienced here as first half results and margins are impacted by the seasonality that also Nikos mentioned. Typically, our business is low season on the second half, which will have an impact on the margins, not because of cost-out initiatives, as I said this will continue, but because of the phase of our sales. Thus IB costs will impact a little bit the margin. Nevertheless, the overall margin for the full year is not anticipated to be impacted significantly. Therefore, the margin, as Nikos said, again, on the outlook, we anticipate this to be better than full year last year.

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Nina Chen, Avenue Capital Group - SVP [17]

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Can you give us a sense of how much better? Is that possible?

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

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No. Unfortunately, no. We cannot give that guidance.

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Nina Chen, Avenue Capital Group - SVP [19]

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But I'm assuming it won't be the same, kind of, expansion that we've seen in the first half. That takes...

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [20]

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It will not be, no. But you can assure it will be better than full year next year.

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Operator [21]

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(Operator Instructions) We have no other question at this moment. Dear speakers, back to you for any -- for conclusion.

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Nikolaos Mamoulis, Frigoglass S.A.I.C. - CEO, MD & Executive Director [22]

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Thank you. We are pleased with our year-to-date performance and anticipate delivering sustainable growth for the second post capital restructuring year. I would like to thank you for joining our call today and look forward speaking with you again, soon.

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Operator [23]

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Ladies and gentlemen, this concludes today's conference call. Thanks for participating. You may now disconnect.