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Edited Transcript of RFRG.AS earnings conference call or presentation 15-Aug-19 8:00am GMT

Q2 2019 Refresco Group NV Earnings Call

ROTTERDAM Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Refresco Group NV earnings conference call or presentation Thursday, August 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* A. C. Duijzer

Refresco Group N.V. - Co-Founder, CFO & Member of Executive Board

* J. H. W. Roelofs

Refresco Group N.V. - CEO & Member of Executive Board

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Conference Call Participants

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* Maria Gallotta

Sound Point Capital Management UK LLP - Credit Analyst

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Presentation

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Operator [1]

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Welcome to the conference call and webcast of the Refresco's Q2 2019 Results. CEO of Refresco, Hans Roelofs, will elaborate upon the results. Afterwards, you will have the opportunity to ask questions.

I would now like to hand over to Mr. Roelofs. Please go ahead.

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [2]

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Good morning, everyone, and welcome to Refresco's Second Quarter and Half Year 2019 Earnings Call with our bondholders. My name is Hans Roelofs, and I am the CEO of the company. With me today is Aart Duijzer, Refresco's CFO.

I'll start today's presentation with a brief introduction to Refresco, followed by the highlights of the second quarter of 2019, then Aart will walk you through our financial performance. After Aart's presentation, I will return briefly with a recap of our key messages.

Refresco is today the world's largest independent bottler for retailers and branded beverage companies, with leadership positions in Europe and North America. A quick reminder of our headline statistics.

Refresco is active in 12 countries. We have 265 beverage bottling lines in 58 factories, providing customers access to a total nonalcoholic beverage portfolio. We employ 9,500 people across 2 continents and produce a pro forma volume of approximately 12 billion liters.

Revenue equals EUR 3.7 billion or $4 billion. As a leading player in North America and Europe, we are well positioned to address industry opportunities and challenges and to drive exciting developments across our product and packaging portfolio with full focus on sustainable solutions. In fact, we have embarked on a new journey to transform Refresco from being a bottler into a unique beverage solutions provider. And while the fundaments for growth remain, we need to be competitive, run our operations excellently and be cost price leaders. We will increase and accelerate our focus on innovation and address industry sustainability themes in line with our own ambition and market demand for new products.

Let's first take a look at the second quarter highlights. Group volume is 3 billion liters in the second quarter of 2019, down 1.2% compared to the same quarter in the year before. The volume decline is attributable to unfavorable weather conditions across our key markets in the month of May and June.

Volume for the half year increased by 5.1% on a reported basis and 0.2% on a like-for-like basis. In line with our strategy, contract manufacturing continues to grow faster than retailer brands across all markets, and is up 3% versus the same quarter last year.

July volumes, and July is another big month, have been in line with expectations. We record a positive development in gross profit margin per liter, one of our key performance indicators. The increase from EUR 0.141 in Q2 2018 to EUR 0.156 in Q2 2019 is a combined effect of various things: synergies from the acquisition of Cott's bottling business; a positive currency effect, primarily related to the U.S. dollar, and partly offset by the weakening of the pound sterling; some tailwind and input costs; and a higher share of value-added products as services to our customers.

The adjusted EBITDA is EUR 134 million compared to EUR 99 million in Q2 2018, marking a solid step-up in the second quarter results.

Turning to the integration process of Cott's bottling business. Following roughly 18 months of integration of Cott's bottling business in North America and the U.K., we're very pleased to see the synergies flowing into our results. With EUR 32 million run rate synergies achieved through procurement and overheads, we're outperforming our plan.

Furthermore, working capital and cross-selling provides still tangible upside. We have adjusted our run rate synergy target upwards from EUR 67 million to EUR 70 million to be achieved by mid-2020, based on the current performance.

Last but not least, we see many opportunities to continue to execute our buy-and-build strategy in our existing markets. I would now like to hand over to Aart, who will take you through the financial performance in more detail.

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A. C. Duijzer, Refresco Group N.V. - Co-Founder, CFO & Member of Executive Board [3]

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Thank you, Hans, and also welcome from my side. Now let's look at some of the key financials. And just as a reminder, the results are reported on the level of Sunshine Top B.V., an entity owning 100% of the shares of Refresco Holding B.V. To start with the main financial KPIs, our volume was 3.0 billion liters in the second quarter, which is a decline of 1.2% compared to the same quarter of last year. And like Hans already explained, this decrease is mostly related to less favorable weather conditions in June in our key markets.

The volume for the full half year was up 5.1% on a reported basis. The volumes and results of Cott's bottling business were consolidated in the group results as from the 30th of January 2018, both in North America and the U.K. The organic like-for-like growth was 0.2%, basically flat, notwithstanding the poor weather in June.

Starting this year, and I think you have seen that we have put more focus on the gross profit margin per liter as opposed to revenue and revenue per liter. It is very much related to the increasing share of contract manufacturing business.

In the quarter, the gross profit margin per liter increased to EUR 0.156 from EUR 0.141 in the second quarter of last year, and I will come back on this in a minute. And like Hans already indicated, was EUR 134 million, the adjusted EBITDA in Q2 was 35.3% higher compared to the same quarter last year.

The main reason for the increase being the synergies from the acquisition of Cott and the implementation of IFRS 16.

Now a little bit more on the gross profit margin per liter which is, in addition to volume, one of our most important financial KPIs. We already have seen a continued positive trend in the gross profit margin per liter over time, reflecting a shift towards contract manufacturing and higher-margin products and services, which is very much in line with our strategy.

For the second quarter 2019, our gross profit margin per liter was EUR 0.156 compared to EUR 0.141 in Q2 2018, a significant improvement. The increase is related to the synergies from the Cott acquisition, recovering input price increases encountered in 2018, mix improvements and ForEx.

As far as the mix improvement is concerned, we see our customers offering -- we see our customer offering moving towards smaller packaging formats and more complex and innovative products and packagings. And furthermore, we see an increase of added-value services such as warehousing, procurement and innovation, in line with our strategy to beverage solution provider.

The acquisition of the Columbus concentrate and R&D plant is part of this strategy. As far as Forex is concerned, the dollar remains strong versus the euro, but the pound sterling significantly weakened just after the end of the second quarter.

If you look at the profitability development, we are pleased to report a solid step-up in EBITDA, both on a reported and on an adjusted basis. The reported EBITDA increased from EUR 44 million to EUR 130 million, and the adjusted EBITDA increased from EUR 99 million to EUR 134 million of the second quarter. The total one-off cost in the quarter in 2019 were fairly limited and mainly related to some integration and transaction costs.

As a result of the acquisition of Cott and the take-private by PAI, part from the purchase price was allocated to customer contracts and other intangible assets. These are amortized over a 10- to 20-year period, leading to an annual noncash charge of approximately EUR 48 million. You can also see that in the table.

The implementation of IFRS 16 increased the amount of debt on the balance sheet by EUR 327 million at the end of the quarter. And on an annual basis, it increases the EBITDA with approximately 74 million.

Now let's have a look at the working capital. In the quarter, working capital decreased marginally to EUR 160 million compared with EUR 172 million at the end of the first quarter. In the same quarter last year, the working capital level was EUR 156 million. The acquisition of Columbus and Brexit combined led to an increase of working capital year-over-year of approximately EUR 15 million. The Q2 working capital level, as such, reflects a normal seasonal pattern, meaning that at the end of the first and the second quarter, working capital is at its peak. And in Q3, it starts to decrease. And in Q4, it will decrease further.

Apart from the impact of acquisitions, we expect only a modest increase year-over-year. If you look at the balance sheet, the balance sheet total or our total assets at the end of Q3 -- Q2 increased from EUR 4.5 billion to EUR 5 billion. The total equity amounts now to EUR 827 million. The changes in balance sheet in the second quarter 2019, compared to the end of the same quarter last year, are mainly related to the implementation of IFRS 16. Equity now represents over 16% of total assets. The liquidity remains very strong. Cash and cash equivalents amounted to EUR 160 million.

And finally, after the end of the quarter, so as a subsequent event, we completed a EUR 150 million add-on to our existing term loan B after the review period in July. The proceeds were used to free up the RCF. We see ample opportunities to continue our buy-and-build strategy. We've identified a handful of potential bolt-on targets to be assessed both in North America and Europe to help further diversify our higher growth and higher-margin content manufacturing exposure.

On to synergies. As Hans already stated, the integration of Cott's bottling business is well on track after 17 months of integration. Our objective is to realize full run rate synergies, approximately 24 months after the acquisition, like always. And thanks to the good progress, we have adjusted the total target up to EUR 70 million from a previously communicated target of EUR 67 million to be achieved in 2020. So we're nicely on track to realize our synergy plan.

And finally, about the reference adjusted EBITDA discussed in earlier quarters, excluding the impact of IFRS 16. Taking into account the contribution of the 2 small add-on acquisitions in North America and 18 months forward-looking run rate synergies, the reference adjusted EBITDA increased from EUR 374 million communicated earlier to EUR 383 million today. And we are pleased to report that, thanks to the good progress in synergies and some tailwind in input costs that we are close to the EUR 392 million to be achieved by the end of 2019.

Gradually, we see synergies moving into the actual last 12 months results.

Now I will hand back over to Hans, who will present the key takeaways of today.

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [4]

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And what are the key takeaways for the second quarter of 2019? Weather conditions affected, especially June volumes negatively. The integration of the Cott business delivers above plan. We see very good development of gross profit margin and adjusted EBITDA levels.

Good market dynamics had given us the opportunity for further organic growth and buy-and-build. And we tweak our strategy from being a bottler to creating a unique beverage solution provider.

That was our story on the second quarter 2019 results. Thank you for listening in. I'll hand back to the operator to open Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are currently no calls -- no questions on the telephone.

Well, we actually have a few questions actually coming through. We will take our first question from Maria Gallotta from Sound Point Capital.

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Maria Gallotta, Sound Point Capital Management UK LLP - Credit Analyst [2]

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Could you please elaborate a bit more on your volume weakening that you saw in the quarter? Because if I recall correctly, last year, your like-for-like volume development was negative as well in the same quarter because of some, like bad weather conditions. So I would expect that the effect to be similar.

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [3]

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Yes. I think if you look at the quarter, it's highly affected negatively by the month of June. If we look at the seasonality of our business, June is a very big month, very much related to the sun coming out and temperatures rising. We can't complain about the sun because the sun has been there, but temperatures have been relatively low in a couple of our key markets, leading to a very negative comparable on the June volume, specifically the June volume within the quarter.

Why do we think it's fully related to the weather conditions? One is we have not lost or gained considerable contracts. So there is not a big delta to be expected. And secondly, that's also why I made a small reference to July. In July, whether weather was okay, we see volumes coming back.

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Operator [4]

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(Operator Instructions) We will now take our next question from [Rhims Travastra] from [TIFC].

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Unidentified Analyst, [5]

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I had a couple of questions. The first one is on the gross profit margin per liter. Would it be possible to split the FX impact on the increase this quarter? So what part of increase was caused by the favorable FX?

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [6]

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Yes. So if you look at the gross profit margin per liter, which jumped up significantly, as you have seen in the results published, I think it's probably between EUR 0.001 and EUR 0.002 which are related to ForEx, and that relates both to the dollar and a little bit less to the pound sterling, which has weakened in the course of the second quarter, but even more so after the end of the second quarter.

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Unidentified Analyst, [7]

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Okay. And my last question was on the CapEx. Can you give any guidance on your CapEx for the full year?

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [8]

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Yes, for sure. We expect that the CapEx for the full year will be close to EUR 200 million, just on the low side of the EUR 200 million. It's a little bit dependent on a couple of sizable projects, which we are executing at the moment and whether or not these will be in full swing just before or just after the end of the year, but we expect it to be just south of EUR 200 million.

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Operator [9]

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We have no further questions at this time.

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [10]

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Okay. If there are no further questions, thank you, all, for listening in, and hear you back somewhere in 3 months from now to take you through the Q3 results. Have a good day.

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Operator [11]

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This concludes today's call, ladies and gentlemen. Thank you for your participation. You may all now disconnect.