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Edited Transcript of RFRG.AS earnings conference call or presentation 14-Nov-19 9:00am GMT

Q3 2019 Refresco Group NV Earnings Call

ROTTERDAM Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Refresco Group NV earnings conference call or presentation Thursday, November 14, 2019 at 9:00:00am 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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* Brian Giffney;Neuberger Berman;Research Analyst

* Dries De Craemer;Permira Debt Managers;Investment Professional

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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 Q3 2019 results. CEO of Refresco, Hans Roelofs, will elaborate upon the results. Afterwards, you will have an opportunity to ask questions. I would now like to hand the call over to Mr. Roelofs. Please go ahead, sir.

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

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Thank you. Good morning, everyone, and welcome to the Refresco Third Quarter 2019 Call with bondholders. My name is Hans Roelofs, and I'm 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 third quarter of this year. Then Aart will take you through our financial performance. After Aart's presentation, I will return briefly with a recap of the key messages that we tried to get across.

Refresco is the world's largest independent bottler for retailers and branded beverage companies, with leadership positions in Europe and North America. A quick reminder of some of our statistics. Refresco is active in 12 countries. We have 265 beverage bottling lines in 60 factories, providing customers access to a total nonalcoholic beverage portfolio. More than 9,500 people across 2 continents. Pro forma volume of 12 billion liters of product, and revenues also pro forma of EUR 3.7 billion.

As the 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. Strategically, we're shifting towards the provision of total beverage solutions to our customers, whereby our focus on added-value services, more complex products and a more sustainable use of materials is increasing the value which we can bring to the market.

And while the fundaments for growth remain, we need to be competitive, run our operations excellently and be cost price leader every day. We will increase and accelerate our focus on innovation and address industry sustainability themes, in line with our own ambitions and market demand for new products.

The transformation that has started and has started to become visible in our business model as well as, eventually, in our results.

Let's first take a look at the financial highlights. Group volume was 2.9 billion liters in Q3 2019, and actually down 3.8% compared to Q3, which actually is in line with the market developments. The summer of 2018 was exceptionally good, and so were the volumes. On top of that, we've been aborting some non-contributory contracts in the U.K. as well as in the U.S.

We recorded a solid step-up in gross profit margin, one of our key performance indicators. The increase of gross profit margin per liter from EUR 0.135 in this quarter last year to EUR 0.153 in Q3 2019 was a combined effect of 3 things: One, synergies from the acquisition of Cott's bottling businesses, I'll come back on that; shift to higher-margin products; as well as a continued shift in our customer offering towards smaller packaging and more complex and more innovative products.

The adjusted EBITDA was EUR 128 million compared to EUR 97 million in the same quarter last year, marking strong third quarter results.

Finally, working capital improved, actually in line with our expectations, by EUR 74 million compared to the second quarter of 2019.

Couple of words on the integration of Cott. The integration of Cott's bottling business remains firmly on track. We have achieved our synergy plan in overheads as well in the U.S. as in the U.K. in full. And we are outperforming our plan for procurement synergies.

Furthermore, our 2018 investments in production capabilities are starting to pay off, and we expect to see the full effect of footprint and operation synergies to kick in, in the coming 12 months.

As a summary, we confirm that we are on track to realize 100% of our synergy plan, which equals EUR 70 million run rate by mid next year.

Something on our growth strategy. In the recent months, we have continued to execute our buy-and-build strategy to further extend our manufacturing footprint in important growth markets and to grow our contract manufacturing business with our branded customers. We see a continued outsourcing trend by A-brands, who are reassessing their business models and increasing their focus on building their brands and market positions.

This tendency to go asset-light offers potential for focused and experienced manufacturers such as us that have the right scale and scope to provide the production flexibility required to meet customer needs in multiple markets.

The announcements of: One, the acquisition of CCEP's Milton Keynes site in the U.K.; two, a strategic partnership hand-to-hand

With the takeover of 2 sites with PepsiCo in Spain; three, a proposed acquisition of 3 Britvic bottling facilities in France; and last, but not least, this morning, number four, the acquisition of AZPACK in Tempe, Arizona, are all reassuring our growth strategy and our interest to expand our contract manufacturing business.

With the recent announcements and a well-filled pipeline of potential acquisition targets, we continue to see ample opportunities for further growth. Furthermore, to enable and accelerate our growth strategy and transformation from bottler to beverage solutions provider, we have decided to create a new position of Chief Commercial Officer in the Executive Committee. The CCO will be responsible for contract manufacturing accounts globally and coordination of top global retail accounts.

Furthermore, the CCO will be responsible for innovation strategy and steering category innovation. In line with our 2025 ambition, the CCO will also drive sustainability as a key growth strategy internally as well as externally. And I'm pleased to announce that Vincent Delozière, our former COO Europe, has assumed this position as this -- in the CCO role as of October 1. Vincent will be succeeded in the COO Europe position by Dieter Schulz, an Austrian national, as of January 13, 2020. Dieter is a seasoned FMCG executive with over 25 years of international experience and a track record of leading businesses across several consumer goods category -- categories. That's it for the time being. Aart, I hand over to you to do a little bit more details on the results.

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

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Thanks, Hans. Now let's indeed -- let's look at some of the key financials. As you are aware, 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 key performance indicators, our volume was 2.9 billion liters. Hans already mentioned a decline of 3.8% compared to the same quarter last year. By the way, the organic like-for-like growth last year was over 5%. Like Hans already explained, the decrease in this quarter is broadly in line with the market.

Additionally, the volumes were impacted by the decision to end several low-margin contracts in the U.K. and the U.S., which were part of the Cott transaction. This also had a positive effect on the margins per liter. The volume for the first 9 months was up 1.9% on a reported basis. The results of the Cott's bottling business were consolidated in the results as of completion of the acquisition on January 30 for both North America and the U.K.

The organic like-for-like volumes decreased by 1.2%, mainly in the third quarter. From now on, we will focus more on the gross profit margin in absolute value as well as on the gross profit margin per liter as opposed to revenue and revenue per liter.

In the quarter, the gross profit margin increased to EUR 446 million, up 9.2% compared to the same period last year, and I will come back on this in a minute. With EUR 128 million, the adjusted EBITDA in Q3 was 32% up versus the same quarter of last year. The main reasons for the increase being the acquisition of Cott, the realization of synergies and the implementation of IFRS 16.

Now more on the gross profit margin per liter, which is one of our most important financial indicators. We 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 in line with our strategy.

For this quarter, the gross profit margin per liter was EUR 0.153 compared to EUR 0.135 in the same quarter last year. The increase is related to the synergies from the Cott acquisition, recovering input price increases, we had some headwind last year, mix improvements and ForEx.

We also see our customer offering moving towards smaller packaging formats and more complex and innovative products and packaging solutions. And furthermore, we see added-value services such as warehousing and procurement to third parties steadily increasing, in line with our strategy to transform the company to a beverage solutions provider.

If we 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 EBITDA reported increased from EUR 84 million to EUR 126 million, and the adjusted EBITDA increased from EUR 97 million to EUR 128 million. The total one-off costs in this quarter were fairly limited and mainly related to some integration and transaction costs.

It's good to remind you that as a result of the acquisition of Cott and the take private by PAI and BCI, part of 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 per year.

The implementation of IFRS 16 increased the amount of debt on the balance sheet by approximately EUR 340 million at the end of the quarter. And on an annual basis, it increases the EBITDA with approximately EUR 74 million.

Now looking at the working capital. In the quarter, the working capital decreased with 94 -- EUR 294 million compared with EUR 168 million at the end of the second quarter. In the same quarter last year, the working capital level was EUR 103 million.

As you can see, now that the impact of the Cott acquisition is fully reflected in the working capital figures, a more normal seasonal pattern starts to appear. The working capital is still slightly higher than we would want it to be, but we are moving in the right direction, and we expect to be able to continue the downward trend in the fourth quarter of this year.

Now over to the balance sheet and the total assets. The balance sheet total or total assets at the end of the third quarter increased from EUR 4.5 billion to EUR 5 billion. Total equity now amounts to EUR 835 million. The changes in the balance sheet in this quarter compared to the same quarter last year are mainly related to the implementation of IFRS 16.

Equity represents over 16% of the total assets, and liquidity remains extremely strong with cash and cash equivalents amounting to EUR 293 million.

As mentioned with our second quarter results in July, we completed a EUR 150 million add-on to our existing Term Loan B. The proceeds were used to free the RCF. As Hans mentioned, we see ample opportunities to continue our buy-and-build strategy. We have done or announced 4 acquisitions in the past couple of weeks and identified a handful of potential bolt-on targets to be assessed across North America and Europe to help further diversify our contract manufacturing exposure.

Hans, now back to you for the key takeaways.

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

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Thank you, Aart. Just a small summary of the key takeaways in the Q3 2019 results. Solid overall Q3 results reported by Refresco. The key indicator, gross profit or gross profit margin, goes up nicely. We have continued synergies from the Cott acquisition, in line with plan and in line with the expected performance. And the buy-and-build strategy in full force after 18 months of relative silence because we focused fully on the integration of Cott, the pipeline starts to deliver. And last but not least, an increased focus on more innovative and sustainable products as we move from bottler to beverage solutions provider. These are the key elements that we bring forward in the message of today, and I would like to hand back to the operator and open the floor for questions. Thank you very much for listening in.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Dries De Craemer from Permira Debt Managers.

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Dries De Craemer;Permira Debt Managers;Investment Professional, [2]

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Just a couple, if I may. First off, the acquisitions you mentioned, would it be possible just to provide a little bit of detail on roughly what we should expect in terms of cost for those? And what would you expect to -- them to contribute for the full year next year?

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

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Sorry, did you also have a second or third question?

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Dries De Craemer;Permira Debt Managers;Investment Professional, [4]

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Sorry, I was going to take in some return. And secondly, on the gross margin per liter improvement, you mentioned that some of that was due to FX and raw material price recovery. Could you just give us a steer on what you consider the portion -- what portion of that you consider coming from FX or raw material -- favorable raw material pricing? And just give us a steer on what we could expect going forward.

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [5]

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Okay. Let me take that last question. The first question will be addressed by Aart. Hans, here. When we look at the gross margin per liter, indeed, there was a little bit of a ForEx impact, but that's very small. Because effectively, dollar helps us a little bit and the pound sterling works a little bit against us. So all in all, that's pretty neutral. When we look at the raw materials and synergies, the biggest part of the increase of this -- of the gross margin liter comes out as synergies, especially on the procurement part of our business. And there is a little bit of tailwind on the raw materials, but that's relatively small. The biggest part really is the synergies. And on top of that, as I already mentioned in the presentation, we did abort some of the real noncontributing contracts, which, of course, on average, also help us a bit on the gross margin. Aart, back to you for the first question.

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A. C. Duijzer, Refresco Group N.V. - Co-Founder, CFO & Member of Executive Board [6]

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Yes. So if we look at the 4 acquisitions that we have either closed or announced, overall, when we issued the EUR 150 million Term Loan B in July, we basically said that, that was more or less necessary to cover the pipeline of acquisitions. And so the ballpark figure is that EUR 150 million is going to be used for that.

We also said historically, and actually these 4 transactions are in line with what we have said, that we have to acquire companies at market rate, which is more or less, say, 7.5x, but hopefully, after realization of synergies in the next 12 to 18 months, we should be able to bring the multiple down significantly, say, to about 5x. So that just gives you a ballpark indication. We have also made the promise and agreement, actually, with the sellers not to indicate individual figures for the 4 targets.

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Operator [7]

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(Operator Instructions) Our next question comes from Brian Giffney from Neuberger Berman.

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Brian Giffney;Neuberger Berman;Research Analyst, [8]

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It's sort of similar to your last question, actually. Can you just expand -- you've made 4 acquisitions. Don't need to know the purchase price of the individual acquisitions, but it would be helpful to know the combined cost and the combined EBITDA that will be generated? And then in terms of 2020, can you maybe give us a feel for, if you're looking at larger acquisitions because, obviously, the current acquisitions are consistent with what you said in July, but is there larger acquisitions that you're looking at?

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [9]

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Thank you for the question. I'll pick the second question, and I'll hand back to Aart for the first question. Looking at 2020, I think the message that we give you is that after 18 months of focus on integration of Cott, which actually was a very large acquisition, we've done 4 nice -- or we're now doing 4 nice -- very nice infills, which is good. They're not the largest ones, but very helpful in our model. We still have a very healthy pipeline. And the pipeline is a nice combination of bigger projects and smaller projects.

It will be difficult to predict which one are going to -- which ones are going to come out of the pipeline, but 2020 will again show further growth on the acquisitions side, for sure. I cannot tell you if it's going to be more bigger projects or more smaller projects, but it will be there. Aart, back to you for the first question.

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A. C. Duijzer, Refresco Group N.V. - Co-Founder, CFO & Member of Executive Board [10]

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Yes. So just repeating what I have said, ballpark, the acquisition price and the costs for the 4 acquisitions is EUR 150 million. And the contribution of EBITDA should approach close to EUR 30 million, I think, in 18 to 12 months' time. And the backward-looking EBITDA, so without synergies and the benefits of the integration, is probably closer to EUR 20 million.

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Brian Giffney;Neuberger Berman;Research Analyst, [11]

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Just want to ask a very quick follow-up. Just on CapEx, can you just maybe quantify what your thoughts are for this year and next?

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A. C. Duijzer, Refresco Group N.V. - Co-Founder, CFO & Member of Executive Board [12]

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Yes. This is -- it's a good question. I think in earlier calls, we have indicated that the CapEx would be just south of EUR 200 million. If we look at where we are today and also where we expect it to be in the coming months, then we'll probably be south of that figure. And I think we will be just above EUR 150 million, somewhere between EUR 150 million and EUR 160 million at end of the year. That is related to some projects, which are moving into 2020, but it's also related to the fact that some of the acquisitions give us additional capacity that otherwise we would have invested for, for especially the can facility in the U.K., for example. So that's the indication for 2019.

As far as 2020 is concerned, we already indicated earlier that we would be closer to the EUR 150 million than to the EUR 200 million, and I think I would leave it at that.

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Operator [13]

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(Operator Instructions) There are no more questions. Mr. Roelofs, would you like to do a final conclusion?

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J. H. W. Roelofs, Refresco Group N.V. - CEO & Member of Executive Board [14]

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Yes. Thank you very much, operator. Thank you for listening in. Let me just get back to our 5 key messages that we have tried to get across to you today. We think to bring very solid results over the Q3 period. Gross margins are nicely up. We continue to see good synergies from the Cott acquisition, fully in line with our plan. The buy-and-build strategy, actually, with 4 acquisitions in the last 2 months in full force. And we have an increased focus on more innovative and sustainable products as we move from bottler to beverage solutions provider. These are the messages that we've tried to get across this morning. Thank you very much for listening in. And hear or see you back in the next 3 months. Thank you, operator.

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Operator [15]

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