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Edited Transcript of VID.MC earnings conference call or presentation 27-Feb-20 9:00am GMT

Full Year 2019 Vidrala SA Earnings Call

LLodio (ALAVA) Mar 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Vidrala SA earnings conference call or presentation Thursday, February 27, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Iñigo Mendieta de la Rica

Vidrala, S.A. - Financial Planning & IR Officer

* Rául Gómez Merino

Vidrala, S.A. - Financial Economic Director

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Conference Call Participants

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* Bruno Filipe Bessa

Banco Português de Investimento, S.A., Research Division - Analyst

* Francisco Ruiz

Exane BNP Paribas, Research Division - Research Analyst

* Jose Maria Canovas Garcia de Blanes

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst

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Presentation

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Operator [1]

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(foreign language) Good morning, and welcome to the conference call organized by Vidrala to present its 2019 full year results. Vidrala will be represented in this meeting by Rául Gómez, CFO; and Iñigo Mendieta, Head of IR. The presentation will be held in English. In the Q&A session, questions will be also answered in Spanish. Nevertheless, it is strongly recommended to post questions in English in order to facilitate understanding of everyone. We remind you that questions will be taken both by telephone and via webcast. In the company's website, www.vidrala.com, you will find available a presentation that will be used as a supporting material to cover this call as well as a link to access the webcast.

Mr. Mendieta, you have the floor.

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Iñigo Mendieta de la Rica, Vidrala, S.A. - Financial Planning & IR Officer [2]

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Good morning to everyone, and thank you for the time that you dedicate to attend this call. As announced, Vidrala has published this morning its 2019 full year results. Additionally, we have also published the results presentation that will be used as supporting material to this conference call. Following the documents, we will dedicate the first part of our exposition to briefly explain the figures released today to devote afterwards as much time as necessary to discuss on the business performance in the Q&A session. We invite you to access the webcast through the link available in our web page.

So starting with the main magnitudes. In the full year 2019, we achieved as more relevant business figures revenues of more than EUR 1 billion, an EBITDA of EUR 274.6 million and a net income equivalent to an EPS of EUR 5.27, an increase of 24% versus the previous year. Net debt at the end of the year was below EUR 335 million, which is equivalent to a leverage ratio of 1.2x the reported EBITDA.

Turning to Slide 4. We look at the top line performance, analyzing the annual variation of revenue broken down by concepts to arrive at the reported figure of EUR 1.01 billion. As it is shown in the graph, this figure is the result of an organic growth of 5.5%. And incorporating the effect of the currency, the reported variation amounts to 5.8%. Following the order of key business figures referred to at the beginning, we analyze with the same breakdown the variation of operating income. 2019 full year EBITDA amounted to EUR 274.6 million, reflecting an organic growth of 14.5%. In reported terms, EBITDA increased by 14.7% in the period. These operating figures resulted in an organic -- in an operating margin EBITDA over sales of 27.2%, which represents an expansion of approximately 210 basis points compared to 25.1% registered in the previous year.

Going down through the income statement. Net profit obtained in the year 2019 amounted to 100 -- EUR 143.3 million, equivalent to EUR 5.27 per share, which reflects an increase of 24% over the previous year.

Let's analyze now the free cash flow generation in detail. We will be so with the help of the chart on Slide 8, which reconstructs the cash conversion starting from the operating margin recorded in the full year 2019. So starting from an EBITDA margin of 27.2%, we have dedicated 10.6% of sales to investments and the remaining 4.6% to the aggregate of working capital, financials and taxes. As a result, free cash generation in the year amounted to more than EUR 120 million, equivalent to a 44% conversion rate and a 12% cash generation over sales. Finally, net debt at the end of the reported period closed at EUR 334.9 million, and this figure is the consequence of the just mentioned cash generation, which has been mainly allocated to debt reduction and the rest to remunerate shareholders. As a result, the leverage ratio stands at 1.2x EBITDA.

And now before turning to the Q&A session, I pass the word to Rául so that he can extract the main conclusions or highlights and make additional comments that he considers appropriate.

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Rául Gómez Merino, Vidrala, S.A. - Financial Economic Director [3]

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Thanks, Iñigo, and thank you all for your time in this, we know, very busy day. Well, we have concluded a solid year 2019. Let's say that under a supportive market environment, we increased our sales volumes in every regional market. We improved the average value of our product through efficient pricing initiatives. We, let's say, maintained an overall good level of -- on our customer service. We managed well our cost and our manufacturing operations and as a result, consequently, we've reached margins of more than 27% that modestly exceeded our initial expectations and had a real conversion in our cash flow.

And it's time now to move ahead and to look at the year 2020 and beyond, a period that we consider aimed to consolidate the strengths achieved by our business structure. With that purpose in mind, in 2020, we will invest more, and we will pursue continuous improvements to secure cost competitiveness and obtain profitabilities under any market and/or competitive scenario or environment.

In that sense, let me remark that it has been particularly remarkable, the recent strategic action to divest our operations in Belgium and the subsequent increase announced in our investment efforts on a selective number of projects. It's finally all about a right allocation of CapEx, a proper capital allocation strategy. That said, the first effects from our mentioned ambitious investment plan, the benefits from our recent footprint realignment and the operating actions on plan should further support our operating margins in the year ahead.

I mean, we expect our margins to modestly improve in 2020 albeit, as you can particularly understand in days -- as today, this is still pending on circumstances, external factors that are now particularly difficult to predict. Simultaneously, and this is not less important, the more intense period of CapEx ahead will temporarily reduce our cash generation. In any case, looking at the future, please don't have any doubt that we will invest to protect better our cost business all the while maintaining the strict capital discipline of recent years and our focus on long-term returns.

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Iñigo Mendieta de la Rica, Vidrala, S.A. - Financial Planning & IR Officer [4]

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Okay. So this completes our exposition. We now give way to the Q&A session.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) The first question comes from Francisco Ruiz from Exane.

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Francisco Ruiz, Exane BNP Paribas, Research Division - Research Analyst [2]

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(foreign language) The first question is mainly regarding top line, both Q4 and full year 2020. On Q4, we have seen an organic growth of more than 9%, so I imagine that there has been a big contribution of volume. Could you give us an idea of if this is something that will impact in following quarters? I mean, the beverage company or your clients are stockpiling because of, I don't know, the coronavirus or something like that? And regarding this, have you seen any weakness in the recent weeks on that sense? Namely, some beverages companies has already guided to lower end of the previous expectations.

And also related to the top line growth, is regarding the level of stocks. So taking into account that you are not going to have, I don't know how many, 50,000, 60,000 tons this year because of the Belgium plant and also that your stocks at a lower level. I think it's the lowest in many, many years. How you're going to tackle with the possible expansion on demand in 2020?

And then I have two more simple question. The first one is if you could give us an idea of what is this impairment of EUR 11 million coming from? It's something from the Belgium plant? And the second one is that your recycling rate has decreased this -- or the use of recycling glass has decreased by around 2 percentage points. Is this something that we expect further decline in the future?

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Rául Gómez Merino, Vidrala, S.A. - Financial Economic Director [3]

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Okay, thank you. Thank you, Paco. The first question with regards with the top line or sales performance, particularly in the fourth quarter, I think you say that the solid volume growth we saw in the last quarter should be understood, in my opinion, at a full year level to avoid any distortion on any quarter-by-quarter data analysis, okay? It's true that we perform particularly better than usual this last quarter, but this is only a quarter and this was particularly due to the cases of some particular customer to build up inventories after a good summer sales season. And overall, positive or any consumption context in Continental Europe -- particularly in Continental Europe. And more than that, the comparison basis of the previous last quarter, the previous year, the last quarter 2018, that was particularly modest quarter, as you probably remember. There is nothing more behind that. And what we have seen at the start of the year is basically a continuity on our sales performance without any significant change to mention positively or negatively, okay?

Second, with regards to your point on our stock levels, that I consider -- that is more a question on our stock levels, a question on our production capacity expected in 2020. Okay, the important fact on that is that we are running at full capacity all across our sites without any exception. And additionally to that, our production levels in 2020 are to be temporarily curtailed or affected because of the concentration of stoppages for maintenance, something that is part of the reasons of our CapEx concentration expected in 2020 that I consider sufficiently anticipated or clarified. This fact will obviously limit our capacity to capture market growth but will also protect us better under any negative scenario. That said, the key points we have in our expected operating profit in 2020 will be the first effects from our ambitious investment plan, the benefits from our recent footprint realignment after the exit from Belgium and the operating actions -- action plans on track. That will help improve our competitiveness and has impact in our operating margins. It is -- finally, it is true that our top line growth is -- capacity in 2020 is limited, but this is totally deliberate and this is part of our strategic plan on track.

Your final question is regarding to recycling rates. It's true. We are fully aware that our recycling -- the use of recycling in 2019 has been modestly reduced in comparison with 2018 with the year before. We expect to recover levels above 50% at a group level in 2020. We are fully focused on this priority, but this is not totally on our hands. And as the world becomes more environmentally focused around consumption, and packaging is part of this, we consider that glass represent that perfect alternative. The glass containers is an infinitely recyclable solution, is an efficient choice for packages, brand owners and consumers, and we like the idea of our customers liking more and more glass as a packaging material. But the challenge for us, the challenge for all glassmakers, and in my opinion, the challenge for the society, is to work more to help us motivate and boost recycling rates as these are -- current recycle rates, particularly low in Southern Europe, are perhaps preventing a quicker conversion from glass into plastic. Feel sure -- you all that we are putting all our effort to try to improve recycling rates that are currently limiting our capacity to improve the use of recycling glass in our manufacturing operations.

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Francisco Ruiz, Exane BNP Paribas, Research Division - Research Analyst [4]

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And regarding impairment?

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Rául Gómez Merino, Vidrala, S.A. - Financial Economic Director [5]

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Regarding impairment, you mean the impact of the divestment from Belgium?

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Francisco Ruiz, Exane BNP Paribas, Research Division - Research Analyst [6]

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Well, I mean, in EBITDA, there is an impairment of around EUR 11 million, but I don't know if it's coming from Belgium or from, I don't know, other place?

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Rául Gómez Merino, Vidrala, S.A. - Financial Economic Director [7]

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Yes, you are right. This is totally, totally reflected -- reflecting the divestment of our Belgian entities. So you should consider this as a nonrecurrent, one-off effect. It's totally due to the exit from Belgium.

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Operator [8]

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The next question comes from Jose Maria Canovas from JB Capital Markets.

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Jose Maria Canovas Garcia de Blanes, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [9]

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Congratulations on the strong results. Just a few on my side. First of all, could you give us some light on the trends between the different geographies, especially as regards profitability? We have seen a very sound profitability at Continental Europe. I don't know if you could give us some maybe a qualitative comments on how Santos Barosa evolving? And what happened in -- at Encirc?

And secondly regarding the tax rate, could you also provide some detail here of the very low tax rates in -- during the fourth quarter?

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Rául Gómez Merino, Vidrala, S.A. - Financial Economic Director [10]

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Okay, thank you. Well, first, I will say that organic demand dynamics that we are seeing have been -- are being very similar all across our regions of activity. Maybe we are seeing a more flattish organic demand performance in the U.K., but please remind that there, we are helping create new demand for glass containers and bottling activities through our growing imports of wine in bulk into the region. And maybe on the other hand, we are seeing a more powerful demand performance in Southern Europe and Italy, but keep in mind that the comparison basis on these regions for the years ahead are more demanding. There is nothing particularly relevant to mention in our different sales and profitability performance by region.

With regards to the tax rate, the tax rate that we have experienced -- we have enjoyed in 2019, has been particularly affected by nonrecurrent items, and we consider some of them are related to the divestment of our Belgian entities, and some of them are related to other nonrecurrent effects. I should say that we still consider that our long-term tax rates will convert to the -- without any change to the 20% rate.

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Operator [11]

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(Operator Instructions) The next question comes from Bruno Bessa from CaixaBank BPI.

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Bruno Filipe Bessa, Banco Português de Investimento, S.A., Research Division - Analyst [12]

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So some questions from my side. First, if you could elaborate a little bit more on your volumes expectations for 2020, particularly considering the disposal of the Belgium plant? How could this affect your ability to grow in terms of volumes during the year? This will be my first question.

The second question. If you could provide some color on your expected price and cash cost inflation for 2020, it will also be appreciated.

Third question related with Santos Barosa and the potential synergies that you called, yet extract from this integration over the coming years?

And the last question regarding CapEx. You've already mentioned that it should be more intense year in terms of CapEx. But if you could provide the guidance for CapEx as a percentage of sales or something like that, it will also be appreciated.

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Iñigo Mendieta de la Rica, Vidrala, S.A. - Financial Planning & IR Officer [13]

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Okay, Bruno. Thank you very much for your questions. I will take the first and the last question regarding the outlook 2020 and the guidance in terms of CapEx.

For 2020, we are expecting a moderate growth in top line. This means that volumes and also taking the comments of Rául regarding that we are operating near the full capacity utilization rates. We are expecting volumes to increase between 0.5% to 1%. And prices should also moderate in 2020. And we're expecting also a positive contribution of no more than between 0.5% to 1%, okay?

Anyway, this should make us expand margins between 50 to 100 basis points, although it is too early to speak about these figures, and we will probably update or give an official guidance at the time of the AGM that will be this year, on the 23rd of April, okay?

Regarding the CapEx figure. As previously mentioned, 2020 will be a special year in terms of CapEx concentration because we are facing more concentrated, already planned CapEx calendar. This is mainly due to the refurbishment or the maintenance of old furnaces and also the expansionary project that we already announced last year regarding the expansion in the U.K., okay?

So this means that CapEx will represent around 13%, 14% of our sales in 2020, which compares to the structural average that we reiterate that will be in the long-term at levels of 8%. In any case, free cash flow generation should be in the range of 9% to 11% of sales, as this concentration of CapEx should be partially offset by improvement in operational margins already stated.

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Rául Gómez Merino, Vidrala, S.A. - Financial Economic Director [14]

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In conclusion, Bruno, in terms of the business context, demand is still growing all across our regions but there are also evident growing uncertainties all across the world, particularly in places like today. Inflationary pressures are moderate or loss in the packaging industry, but there is some inflation. And consequently, our prices in 2020 should change modestly but positive, particularly to recover general manufacturing inflation.

Having said that, the reasons for our expected margin expansion, should that finally happens, are to be grounded in internal actions: the footprint realignment; the divestment of Belgium; the first effects of our investment plan or the action plans on track to improve -- to even improve our cost base. But please, at the end, please keep in mind that this is only the start of the year and we will make our best to update more carefully with more detail our guidance for the full year at the date of the Annual General Meeting, as Iñigo said before, okay?

Part of your question was also, if I remember well, referred to the case of the acquisition we made in Portugal at the end of 2017, Santos Barosa. And with regards to all the synergies created after this acquisition and how we are on these synergies capture.

Okay. We have acquired Santos Barosa at margin levels of about 25%. On an analytical accounting base, we consider that this business unit is running at margins of approximately 1,000 basis points above this level, so the process of executing synergies are -- is running well. We exceeded our initial -- initially announced synergies. And the remaining synergies, that there are some, are to be probably expressed or are to be finally captured by the Vidrala Group at a group level. I mean, by our business in Iberia that is part of a global division, okay? I mean, that Santos Barosa is no more an individual business unit is part of our more powerful, more competitive. We are the leaders in this region, Iberian business unit.

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Operator [15]

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(Operator Instructions) Ladies and gentlemen, there are no further questions in the conference call. I will now return the floor to Mr. Gómez and Mr. Mendieta.

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Iñigo Mendieta de la Rica, Vidrala, S.A. - Financial Planning & IR Officer [16]

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Okay. So now we will -- we would have answered all the questions received both by telephone and via webcast. So once again, thank you for your time. Just to remind you that we remain at your complete disposal for any further questions that may arise. And remember that glass is fully recyclable, safer and healthier. So better for environment, better for you.

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Rául Gómez Merino, Vidrala, S.A. - Financial Economic Director [17]

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Thank you very much to all. Take care.

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Operator [18]

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(foreign language) Ladies and gentlemen, thank you for your participation. You may now disconnect your lines.