Gr. Sarantis S.A. (SAR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Gari, the Chorus Call operator. Welcome, and thank you for joining the Sarantis Group conference call to present and discuss the Sarantis Group's full year 2019 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Konstantinos Rozakeas, Deputy CEO and CFO; and Ms. Eleni Pappa, Investor Relations Manager. Mr. Rozakeas, you may now proceed.

Ladies and gentlemen, good afternoon. Welcome to Sarantis financial results conference call. I pass to speak now to Mrs. Pappa, who is here for us to comment the results, and then I will follow with the Q&A session. Ms. Pappa?

Thank you, Mr. Rozakeas, and hello to everyone. We will first comment on the full year 2019 results. And in the end, we will give an update on our results towards the COVID-19 pandemic. In 2019, the group delivered significant profitable growth, achieving a 10-year record in net income margin that reached 10.3%. Group sales were up by 7.6%, reaching EUR 370.07 million from EUR 344 million last year. Top line growth was supported by successful product launches as well as new businesses added, which were combined with effective activation plans across our distribution channel. The growth was driven by an accelerating sales trend in Greek throughout the year and the positive performance by foreign countries. Specifically, Greek sales were up by 8.14%, amounting to EUR 126.21 million in full year 2019 compared to EUR 116.71 million last year. The foreign countries have contributed 66% in the group's turnover, exhibited growth of 7.3%, reaching EUR 243.86 million in 2019 from EUR 227.29 million in 2018. During 2019, balanced costs and positive financial supported profitability. The operating leverage persist this half during the second half of this year, plus the dominance by the normalization of the advertising and promotion investments are leading to further profitability growth and margin improvement. Therefore, including the IFRS impact, the EBITDA was up by 16.50% to EUR 54.75 million from EUR 46.99 million in 2018 with an EBITDA margin of 14.79% from 13.66% in the full year of 2018. EBIT reached EUR 43.84 million, increased by 8.05% versus EUR 40.57 million, and EBIT margin stood at 11.85% from 11.79% in fiscal year of 2018. The EBT settled at EUR 45.46 million from EUR 38.78 million increased by 17.21% with the EBT margin reaching 12.28% from 11.27% last year. Net profit was -- reached EUR 38.01 million from EUR 32.54 million in the previous year, up by 16.81%, while net profit margins settled at 10.27%, the highest in the last decade. Moving to the group's balance sheet. Our financial robustness is reflecting the group's low net debt level, EUR 8.45 million in 2019 versus a net debt position of EUR 11.53 million in 2018, as well as a strong cash flow generation provides the cure for the implementation of our investment plan. With a view to further support our expanded business, our investments within 2019 were focused on the following: active portfolio management and new product development; optimization and modernization of the supply chain and production processes across the group, which involves, amongst others, the expansion of the group's production plant at Oinofyta and further upgrade in equipment and processes in Ergopack and Polipak; further strengthening of our presence in the Polish cosmetics market through the acquisition of the Polish cosmetics brand, LUKSJA, which was finalized at the end of February of 2020 with the approval from the Antimonopoly Committee. Apart from the implementation of the investment plan, the group is committed to returning value to its shareholders. Within 2019, the group paid a dividend for the full year of 2018 of approximately EUR 10 million. Moreover, for the fiscal year of 2019, the BoD will propose at the Annual Shareholders Meeting a dividend payment of EUR 11.2 million, which corresponds to EUR 0.16048 per share. Regarding the group's actions with respect to the COVID-19 impact, we highlight the following. Our clear priority is to ensure the protection and the safety of the group's employees and society, the uninterrupted business continuity across all our functions as well as the maintenance of our financial strength. To this end, a specific coronavirus action plan and precautionary measures were prepared in line with the Sarantis government and in accordance with the official World Health Organization guidelines. This involves remote working, suspension of both professional and personal travels, cancellation of both internal and external events, the headquarter decontamination and special health guidance. In all the countries of our operations, the group is prepared for further specific protection measures in line with each country's specific rules. Regarding our supply chain, the group has ensured inventory that we meet increased orders even in categories presenting high consumption. Further measures are in place to ensure that there's an uninterrupted supply of our products to our clients. Sales within March had substantial increase in our key distribution network, which is a supermarket channel within our key categories of cosmetics and household products. Even though visibility is low at the moment, the management estimates that after this period of disturbance, consumption will return to normal levels. In addition, the group's strong capital base, with a low net debt and strong cash flows provide safety and the support necessary to mitigate any potential negative effect. However, our estimates for the full year of 2020 will be presented at a later date when we have a clearer view of the coronavirus impact on the consumption and the economy. We are confident in our ability to overcome the challenges, and having as a main priority to ensure our business continuity and the safety of our employees and the society, we will follow consistently the group's strategic expansion plans, which involves new product development, further geographical expansion, further supply, sale and production of trades as well as acquisitions. At this point, we are at your disposal for any questions you may have.

[Operator Instructions] The first question comes from the line of Draziotis Stamatios with Eurobank Equities.

Yes, I hope you are all safe and healthy. May I start with one regarding the recent trading, please? Could you just tell us what you've been seeing in the last few weeks, mainly how consumers have been behaving since the number of coronavirus cases started to swell in early March and how their behavior changed as the situation escalated into a full lockdown, mainly in Greece, but also in your other territories? So that was the first question. Secondly, could you just provide some granularity on your portfolio across the main subsegment? Mainly, have you been seeing sort of pharmacies talking for your household product guidance? And on the other hand, to what extent has your cosmetics portfolio being affected? And thirdly, if you could give us an idea as to potential cost mitigating actions that you might be considering to spend the fallout from decreased consumption across your territories due to this falling disposable income?

I'll take the opportunity for this question to have a general feel on the whole situation and to present, not only the macro environment as we know it, but the performance of the company as well. So as you probably know, the Greek government took measures early, early in March. And for that reason, we have great results against the impact of coronavirus in the society. So we have a low rate impact and low rate initiatives. However, the -- if results were severe and I would say that the whole economy is locked down. And I would say that fortunately for us, the only channels that are open are the supermarkets and the pharma, where we traditionally generate around 95% of our sales. The consumer behaves as we see with high consumption rate in this specific channel for obvious reasons. And I would say that in my life in the company, 26 years in my life in the company, I have never seen so strong Q1 or anyway -- anything. So the performance of the market of these specific channels and the performance of the company is on the high double digit, and I will say that either from the first 3 months year-on-year by more than 25% sales growth. And this performance is across all the countries that we operate because in our specific territory, all the measures have been taken earlier than the other countries like U.K. or America or Europe. So in our territory, all the measures and the lockdown came earlier, and the only channels that are open now are supermarkets and pharma. So we enjoy -- I would say, we enjoy high sales, especially in March Ergopack and Oinofyta. The average performance, as I said -- we have said before, is 25% for the 3 months. So this will go to -- in more specific aspects of the situation and especially for the company. The shift workers are working remotely. The supply chain is housed in the factory, is working everywhere in all the countries. And the supply in the warehouses are working -- are open in all the countries. So we feed the market. We feed the market properly. And due to a very good rate in inventory, we feel secure that we can hit the market. We can continue the next month with no problem. And in some cases -- frankly speaking, in some cases, we are sold out in some products like gloves, vitamins, other things. We are sold out, and we expect to receive the replenishment by this month. So all in all, the company will still work. The company performed great in terms of sales and performed greater in terms of expense because we have minimized the expenses. As you understand, the day-to-day expenses are minimum now. And the only expense that we follow is the logistic centers, that's abnormal because we supply the market, and of course the salaries of the people. All the other expenses are minimized. So despite -- I don't have a clear idea about the EBITDA results of the 3 months because I will share this clear idea in template. I'm pretty sure that in terms of profitability, the company will make that effort again. So this is the situation. There is no problem in the operation of the company, and I expect to see the situation to be normalized by the end of this month. Again, the visibility is very low, and we cannot have a clear idea what will be the behavior of the consumer after the withdrawal of the agreement. But we believe that life will come back to normalcy, and the whole thing will be forgiven. I don't know if I covered your...

Yes, yes. May I just follow-up very quickly too? Just to make sure I understood. So you said that group sales in Q1 are up 25%. Is that correct?

Correct.

Okay. And could you -- may I ask how this performance-wise across your subcategories?

Categories? Yes. All of the categories are better off. Of course, the household business, which is the biggest part of our sales in the pharmacy, sales are better than the fragrance and cosmetics. They have proven a very good performance this year. Yes, and please note, please note that some sales that are going to the selected channels like producing LUKSJA or Sephora internationally are now locked down. I mean this channel is closed. And whatever concessions in the plan on cosmetics can be done through supermarket channel. So cosmetics are doing well -- are doing very well -- very good business these days.

Great. And just another question that came on my mind, I'm sorry, about the available liquidity. Could you just give us a rough idea about your cash management in recent days, what maturity do you have this year and whether you've moved to secured credit lines by the month?

We are not concerned about the credit lines against the bank -- due to the bank's performance because we have benefited from the recent situation as well in terms of the debt and the cash flow. And that's all because according to the rule imposed by the state, all our obligations to the state, to the government or to the broad suppliers have been postponed for 75 to 120 days. And on the other hand, all our sales are collected immediately from the store to the market channel and new partner. So there is no problem in the cash flow. Instead, the cash flow is better more and more every day.

Your next question is from the line of Tzioukalia Fani with Wood & Co.

Konstan, Eleni, hope everyone is keeping safe. One question from my side, which was actually partially answered. So I was wondering how do you view the supply chain with respect to your sourcing materials and suppliers. So if this coronavirus breakout is not contained soon enough, how do you see your supply chain in the near future?

If we exclude specific items, like gloves and vitamins?

No. I mean overall -- in the overall production sourcing materials.

Yes, yes, yes. If we exclude these specific items, there is no problem in the supply chain or in the sourcing of raw materials and packaged material there for us to continue the production and to continue the first delivery -- the replacement in the market. So apart from this specific group categories are very, very small contribution in our turnover, less than 1%. In the rest of our business, there is no problem on the supply chain.

[Operator Instructions] The next question is from the line of Kourtesis Iakovos with Piraeus Securities.

Yes. And my first question is if you could -- how confident are you that you are well secured or safe in terms of -- if you have any incident of COVID-19 in your production line or your distribution centers? Do you have any specific measures that you've taken to cope with such a development? Second question has to do with your customer base. Would you feel that your customers are very protected against this pandemia? And what are the measures you've taken just in case something happens to one of your major customers and your largest customer? What part of your sales accounts for? And third question, you've mentioned that first quarter, you are up plus 25%. This includes your whole product portfolio, even the selective -- the larger cosmetics, which is closed at the moment, as far as I understand. And in terms of EBIT margin, you've closed last year with an EBIT margin of 11.85%. Obviously, if you could let us know, because you minimized expenses at least in first quarter, what part of EBIT margin expansion are we talking about? Could you give us a range? And last, the CapEx for 2020, if you have a number for us?

In terms of the coronavirus situation, we have not any incident so far in our premises, including the factories, the warehouses and the headquarters, not only here in Greece, but everywhere. We have taken measures to avoid any incident, and we are very pleased about that. So don't worry. We worry so much about that, and we have taken all the measures not to have any incident in our premises. As regards to the consumer, to our clients, I believe that there is no threat because our clients are joining this place at the moment. So there is no risk for them. And they collect all the sales that, all of this is allowed in terms of cash. So there is no stress for this specific channel, which is the supermarket and the pharma. We are not selling to hotels or to airline companies. We are selling to supermarkets, and in supermarkets, there is no stress. So we have no concern about that. As regards to selective set, let me disclose out lockdown, but it is included in this 25%. Despite that, a specific part of the business is closed. We present this 25% as a performance in case of our sales. But again, this selective part of the business is 6%, 7% of our turnover. So it's very good. In terms of EBITDA or EBIT, I know the results of the customer that closed this month of the year and who have better margin than the previous year. But I believe, my sense is that in -- because of the fixed date of March and the close, we expect to have good sales in April as well. I believe that in the Q1, the margin will be specifically high, something that I will know in the next 10 days. But I'm very confident, that we're very optimistic about that.

Mr. Kourtesis, have you finished with your questions?

Yes. Just to repeat, you've said that you are optimistic that margin for first quarter will be quite high? And in terms of CapEx, you don't have any update for us?

Ah, excuse me, for this year, we are going to devote around EUR 10 million in order to expand our capacity, especially in Polipak. The main part of the investment will go to Polipak in order to expand the capacity in Ergopack. Then we are going to spend some EUR 10 million for Ergopack.

We have a follow-up question from the line of Tzioukalia Fani with Wood & Co.

Konstan, just if you could provide some color on the Ukrainian footprint prior to coronavirus, of course, and with the Ergopack restructuring and the introduction of cosmetics to the market?

Ergopack is a pure strapping business presented in the first 3 months a 40%, 4-0, growth year-on-year. All the investments that we have done there in 2019 proved very effective and supported. And these investments, these started to, support future huge demand as we have in Ukraine as well. So Ergopack is doing very well, at 40% growth year-on-year.

Okay. And on the cosmetics front, have you introduced -- could you help me understand?

Yes. Yes, Fani, we have started the introduction of cosmetics in the market from January, and we are now in the pipeline. We have not started the advertising and the support of the product, because we are aiming to have a significant part of the distribution in our hands and then to start the advertising. So we are now in the beginning. We are in the beginning.

The next question is from the line of Kalogeropoulos John with Beta Securities.

I have 3 questions regarding your performance for 2020. Can you quantify the impact of ESTEE LAUDER's contribution in your closed, as you said, selective channel sales? That's my first question. The second question regards the weakness presented in Poland and Bulgaria. Where is that attributed? And how do you see it evolving in 2020? And if you could quantify us, what would be the positive impact of LUKSJA's integration and inclusion since last month, since February, in 2020 results? And the third question has to do with your expansion in similar or relative categories to the supermarket channel like, let's say, antibacterials, how -- if it is possible. And how are you treating that option?

Yes, ESTEE LAUDER is a part of the selective business, and it was a significant piece on each operation. And we believe that in ESTEE LAUDER, we probably have a slowdown around 20% on EBITDA versus last year, but it remains to be true. If the lockdown continues for April and May, we probably have a -- this loss of 15% to 20% of our EBITDA, around EUR 1 million or EUR 2 million less EBITDA than in the previous year. With regard to Poland and Bulgaria, I would say that, yes, there is a slow performance, and we have taken measures now to react on this. We sustained the management, and we took the opportunity, especially in Poland, to replace the general manager there by a very capable person that came from LUKSJA acquisition. And we believe that together with LUKSJA, which is a very powerful business that is double through this situation that we live as we speak, and we create the costs in March because, as you know, we took LUKSJA -- we took the approval at the end of February. So March was great behind LUKSJA. And the third month, the 3 months, the performance of the 3 months in Poland is around 40%, 4-0. So we believe that we can restore the performance in Poland, and we can present -- we can forget the minus performance, and we will go for a significant growth in the country by plenty of demand. With regards to the expansion, if you understand that we took immediately the opportunity because now the permission to produce this very distant category is automatically given to the cosmetic company, and we started already to implement the formulation. And having a direct access to packaging materials and to raw materials, we are ready to present this new category of antibacterial and that we'll start this in general in our market by the end of this month. So we are entering in a very talented category. Greek, in the past, had, let's say, significant off schedule, this is a bureaucracy strengthened. If somebody wasn't in the past to enter in this demanding category, we needed some 2 years in order to get the approval. Now the approval due to the situation is given automatically to factories like Sarantis. And of course, we are going to exploit this opportunity and to present qualitative products with a very good market demand in a month from now. So it is very promising, and I believe, very profitable for the business, for the company in the month.

The margin in this new business is similar to the EBIT margin presented in your 2019 results in the cosmetics division or higher?

I believe it's higher. It is higher due to the technology that it is different.

[Operator Instructions] We have a follow-up question from Kourtesis Iakovos with Piraeus Securities.

Just a follow-up on ESTEE LAUDER to clarify, if I understood correctly. You've guided us for a 20% hit in ESTEE LAUDER's EBIT contribution for 2020, if I understood correctly. Is this correct?

Correct. It's something -- it's not more than EUR 2 million in comparison with the last year's results.

Yes, but this refers to a closing period of what?

Of 2020.

Yes, 2020, but for how long would you expect -- you quantified this amount for 2 months period suspension of operations? So...

I assume that the suspension will be not only for April but for May as well.

So for April and May, it will be around EUR 2 million, correct?

Yes, yes, yes. Before we open -- Kourtesis , if we open -- if the government funds this selected channel earlier, the loss will be less, as we understand.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Rozakeas for any closing comments. Thank you.

Thank you very much for your participation in today's conference call of Sarantis Financial Results for the Year 2019. Take care and keep safe.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.