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Edited Transcript of FRIGO.AT earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Frigoglass SA Earnings Call

Kifissia May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Frigoglass SA earnings conference call or presentation Thursday, April 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emmanouil Fafalios

Frigoglass S.A.I.C. - CFO

* John Stamatakos

* Nikolaos Mamoulis

Frigoglass S.A.I.C. - CEO and Executive Director

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Frigoglass Fourth Quarter 2016 Financial Results Conference Call. I will now hand you over to your host, John Stamatakos. Please, the floor is yours.

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John Stamatakos, [2]

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Thank you. Good afternoon, and thank you for joining us on this conference call to discuss Frigoglass 2016 fourth quarter results.

Today, I'm joined by our Chief Executive Officer, Nikos Mamoulis; and our group Chief Financial Officer, Manolis Fafalios.

Following prepared remarks, 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 contains various forward-looking statements. This would be considered in conjunction with the cautionary statements set out in our press release and which also applies to our discussion today.

Let me now turn the call over to Nikos.

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

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Thank you, John. Hello, everyone, and thank you for joining our call.

Before we start discussing 2016 fourth quarter results, I would like to spend a few minutes of the announcement issued on April 13 concerning the company's capital restructuring, which you can see in Slide 2 of our presentation. I'm pleased we concluded discussions with our key stakeholders and signed a lockup agreement on the key terms of the restructuring of the group's indebtedness and capital structure. This transaction is the result of long-lasting discussions amongst all stakeholders, resulting to a consensual agreement.

The key terms of the transaction are the following. First, substantial deleveraging of the company. Our gross debt will be reduced by up to EUR 142 million. The transaction includes the equitization of the EUR 30 million term loan provided by our main shareholder last year and the repayment or equitization of part of the outstanding principal amount of senior notes and bank debt provided by our core lending banks.

Second, additional liquidity of EUR 70 million from our main shareholder, noteholders and participating banks to fund the company's working capital needs and restructuring expenses. Of that, EUR 30 million will be contributed by Boval through a rights issue and EUR 40 million by the core banks and the holders of the senior notes.

Third, significant reduction of the company's annual interest cost to approximately EUR 13 million, driven by the lower debt and margins of the group's remaining indebtedness.

Another important element of the transaction is that most of our debt will mature in 2022, implying a 5-year extension. We are pleased with the continued trust of Frigoglass main shareholders to the group's capital restructurings by contributing EUR 60 million in equity as well as the support of core lenders and the ad hoc committee.

Finally, we expect the implementation of the transaction to take 3 to 4 months.

Let me now move to the next slide and the highlights of the fourth quarter. The higher year-on-year Cool business sales were driven by the continued recovery in Russia and service operations due to our new offering. This is the fourth consecutive quarter of sales growth in Western Europe, which reflects the continuous demand for ICOOL. The devaluation of Nigeria's currency resulted in lower Glass business sales in the quarter. This adverse currency impact more than offset our pricing initiatives and the solid volume growth in the Nigerian Glass business. Our EBITDA in the quarter was significantly impacted by the devaluation of the Naira, the low cost absorption of fixed costs and an additional provision related to the recoverability of certain receivables.

Finally, disciplined capital spending and working capital reduction following improved receivable collections in the quarter contributed to cash flow generation.

Turning to Slide 4. The increase in sales of our Cool business is mainly coming from the Eastern European region. The EUR 5 million incremental sales reflects the continued recovery in Russia. Soft drink customers increased the cooler investments in the market, following signs of macroeconomic improvement. Increased service business sales due to the expansion of the integrated service offering to more regions in Russia also contributed to this solid performance. Sales in Western Europe were up 4%. This growth reflects increased sales from the Coca-Cola bottler in Norway, Belgium and France. Our strategic customer-focused initiatives, particular with the Coca-Cola bottler in these markets resulted in 4 consecutive quarters of growth. The different phasing of orders in Nigeria compared to last year had increased customer cooler investments in South Africa, resulted in the 3% sales growth in Africa. This performance was achieved despite the lower sales in East Africa. Overall, incremental sales in Europe and Africa, partially offset by a EUR 2 million decline in Asia, mostly driven by lower sales to Southeast Asia and its continuation of production in China, which have impacted our sales.

Moving to the next slides. Our sales by key customer group. The increase in Cool business was driven mostly by breweries. Following 4 quarters of sales decline, sales to brewery customers increased by 21% in the quarter, driven by higher cooler investments in South Africa. Sales to Coca-Cola bottlers were broadly unchanged versus last year. Service business' solid performance and increased cooler sales in Russia, South Africa, India and Norway were offset by lower sales in Romania, China and Southeast Asia. Finally, sales to other customers were up 10% in the quarter, mainly driven by increased cooler placements by soft drink customers in Poland and U.K.

Turning now to Slide #6. The continued devaluation of Nigeria's currency had a significant impact on our Glass sales in the quarter. Nigerian operation's top line decreased by 2% in the quarter. However, in local currency terms, our sales increased by high double-digit rate versus last year. Strong demand from pharmaceutical companies, brewery customers and selected distillers, coupled with pricing initiatives, were the main drivers of this performance. The scarcity of foreign exchange in Nigeria led certain pharmaceutical invested customers to shift to local produced glass containers rather than imported. The performance of our metal crowns operation was solid and follows the increased demand from Coca-Cola Nigeria.

Moving to the Dubai-based operations. Sales declined double-digits due to lower demand from soft drink customers in Asia as well as the late introduction of new products for our customers.

Let me now hand you over to Manolis for the financial review of the fourth quarter and the year.

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Emmanouil Fafalios, Frigoglass S.A.I.C. - CFO [4]

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Thank you, Nikos. Turning now to Slide 8. I will take you through our fourth quarter and full year financial results. Fourth quarter sales were broadly unchanged at EUR 90 million compared to the same period last year as Cool business improved year-on-year performance was offset by lower sales in the Glass operations. For the full year, sales declined by 9% at EUR 413 million, driven by lower sales in both Cool and Glass operations. EBITDA declined to EUR 4 million in the quarter. The EBITDA reduction reflects the cost inflation following the significant devaluation of the Naira despite the partial recovery through pricing in the Nigerian Glass business as well as the cost underabsorption due to the volume decline in Dubai-based operations. EBITDA was also impacted by an additional EUR 3 million provision related to the recoverability of certain receivables. Finally, the reduction in EBITDA also reflects one-off items that positively affected last year's figure.

In the full year, our EBITDA decreased to EUR 40 million compared to EUR 51 million in the prior year, with the respective margin declining by 190 basis points to actual 9.7%. On top of the margin reduction, factors outlined for the fourth quarter, the low cost absorption in the Cool business also impacted our EBITDA for the year. Net finance cost was EUR 6 million below last year's figure, settling at EUR 7 million. The lower net finance cost reflects the adverse impact of foreign currency losses in the fourth quarter of 2015. In the quarter, our bottom line was also adversely impacted by EUR 5 million in nonrecurring expenses related to the capital structure review process and Cool business restructuring initiatives. On a reported basis, net losses reached EUR 19 million in the quarter. While excluding nonrecurring expenses, net losses were EUR 14 million compared to losses of EUR 16 million last year. For the full year, adjusted for nonrecurring expenses, net losses reached EUR 35 million versus EUR 36 million a year ago.

Moving now to Slide 9. Let's take a closer look on the performance by business segment. In the Cool business, sales were increased by 6% compared to last year. The sustained recovery in Russia, the solid service business performance and the continued growth in Western Europe more than offset the reduction of customers cooler investments in Asia. The lower volume in Asia and the resulting underabsorption of fixed cost as well as additional provisions of EUR 3 million related to the recoverability of a certain customer in North Africa resulted in a negative EBITDA of EUR 2 million in the quarter compared to EUR 1 million EBITDA last year. The volume decline more than offset the favorable geographic sales mix, the higher sales in the service business, lower input cost and our operating expenses reduction initiatives.

Turning to Glass. The devaluation of the Naira and the lower demand in Jebel Ali resulted in a 7.6% sales decline in the Glass business. Sales in the Nigerian operations decreased by 2% whereas on a currency-neutral basis, sales were up in double digits. This growth reflects the solid volume growth in glass container and metal crowns performance. Price adjustment across all our businesses also had a positive impact on our top line for the quarter. Sales in Jebel Ali declined in double digits, reflecting lower demand from soft drinks. Glass EBITDA declined to EUR 6 million from EUR 12 million last year. This is resulted in an EBITDA margin of 18.6% versus 31.7% in the period. The margin reduction mainly reflects the cost inflation caused by the devaluation of the Naira and the reduced absorption of fixed cost due to the volume decline in Dubai. The year-on-year comparison also reflects one-off items that is positively impacting last year other income.

Turning to the next slide and the full year results. Cool business sales declined by 8.4% to EUR 290 million, mainly driven by the tough market condition in Russia. These difficult macroeconomic conditions and the ongoing challenges in Russia's beer market impacted our sales in the period. Cool EBITDA reached EUR 15 million with the respective margin down 150 basis points to 5.2% due to the same reasons outlined before for the fourth quarter. In Glass, sales declined by 10.2% to EUR 123 million, reflecting the adverse currency translation impact and lower sales in Dubai operations. EBITDA declined to EUR 25 million versus EUR 32 million last year. This decline reflects the same reasons outlined before for the fourth quarter.

Moving now to Slide 11. Our gross margin deteriorated in both years under review. The margin reduction was driven by the impact caused by the devaluation of the Naira and the cost underabsorption due to the volume decline in Dubai. These factors more than offset Cool business margin improvement due to the better geographic sales mix, the increased contribution of higher-margin service business and the benefit from the lower raw material prices. Operating expenses as percentage of sales increased in both periods, mainly impacted by the higher provisions against the recognition of certain receivables as being uncollectible. Excluding this provision, operating expenses over sales would have been better than last year for both periods.

Moving to the next slide. We remain focused on our working capital optimization initiatives. At the end of December 2016, working capital reached EUR 104 million, EUR 15 million below last year's level. This reduction primarily reflects strong receivables collection. Trade receivables improved by EUR 21 million to EUR 78 million at December end 2016. Capital expenditures reached EUR 14 million in 2016, EUR 23 million lower than a year ago. This reduction reflects the tight characterization of our investment this year and a step up of spending last year, following affirmed weakness in Glass business. I will now hand over back to Nikos for the business outlook and concluding remarks.

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

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Let's look now at Slide 14 and our outlook for 2017. The new capital structure will provide additional liquidity and enable us to focus more on the implementation of a number of strategic initiatives. On top of our new commercial strategy and leading innovation, we will also drive efficiencies across our business, which will improve our performance going forward.

The normal priorities for the Cool business this year is to gain market share within the Coca-Cola bottlers in Europe by capitalizing on ICOOL's success. We're also investing in the service business, both infrastructure and capabilities to support and benefit from future growth. The add for the hybrid cooler and the expansion of our new service offering in Nigeria will add to Africa's performance this year. In Asia, new product development in the midmarket segment will help us mitigate the adverse impact from the discontinuation of China's manufacturing operations.

Turning to Glass. Nigeria is facing a challenging economic environment after the sharp devaluation of the local currency. We focus on absorbing the cost inflation through pricing in Nigeria. Our copper pipe business -- we focus on expanding our customer base with new accounts in Asia, Australia and other markets. Thank you for your attention. I would like now to open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from [Rob Coyle], PT International.

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Unidentified Analyst, [2]

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Just wondering if you could lay out a little bit of a time line for the restructuring process. When are you starting to start the English scheme? And how long that process import would take? And how long does the whole process will take to complete? And is your base case right now do a rights offering at the end of the process or U.K. listing? So if you could just explain the process a bit for us, please?

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

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The duration of the implementation will take approximately 3 to 4 months. And steps that we need to follow is, first, is the consent solicitation to amend (inaudible) and facilitate a U.K. scheme of arrangements. Then the scheme to be implemented, existing notes restructuring and contractual arrangements to implement restructuring of core bank facilities. We'll have the right issues to provide existing shareholders the opportunity to participate in the restructuring. And finally, the private liquidization of existing notes and core bank facilities.

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Unidentified Analyst, [4]

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And in terms of your cash coupons, I mean, are you going to pay cash coupons either on the bonds or the banks going forward, or not? And if you're not paying the coupons, from what date would they be capitalizing? Would they be paid as part of the restructuring?

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Emmanouil Fafalios, Frigoglass S.A.I.C. - CFO [5]

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So no. As part of the scheme, holders of the notes will be asked to waive the default of payment of interest in such date. Interest ARPU will be paid upon closing of restructuring. And any interest posted in March, 2017 will be accrued as the transactions are taking place in such date.

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Unidentified Analyst, [6]

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Sorry. What does that mean, that the transaction could have taken place? Does that mean that from March, there would not be any interest accrued? It would only be accrued until March? Or till March, it would paid, and after that, it would be accrued?

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Emmanouil Fafalios, Frigoglass S.A.I.C. - CFO [7]

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Let me answer this question. As we said, what we have agreed with all our stakeholders is that the effective date of the transaction, it is considered that it is 15th of March. So the coupon on this specific question will accrue with the current rate up until 15th of March. And after that, it will be accrued with an average of 3.65%. And of course, it will be paid after completion of the transaction, which as we announced, it will take 3 to 4 months.

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Operator [8]

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(Operator Instructions) As we have no other questions, please speakers, back to you for the conclusion.

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

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Thank you, operator. I would like to thank all our stakeholders, customers, suppliers, shareholders, core lenders and especially our employees for their support in a challenging 2016, and looking forward to deliver our strategic initiatives post implementation of our capital restructuring.

Thank you all for participating in our call today.

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Operator [10]

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