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

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the Sarantis Group conference call to present and discuss the Sarantis Group first half 2020 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Kostas Rozakeas, Deputy CEO and CFO; and Mr. Eleni Pappa, Investor Relations and Corporate Communications Director. Mr. Rozakeas, you may now proceed.

Good evening, ladies and gentlemen. Thank you for your participation in this conference call. I'll pass the speech to Mrs. Pappa in order to comment the results for the first semester of 2020. Mrs. Pappa?

Thank you, Mr. Rozakeas. Ladies and gentlemen, good afternoon, and welcome to Sarantis First Half 2020 Financial Results Conference Call. COVID-19 outbreak prevailed throughout the first half of 2020. We have experienced new consumption trends, unprecedented fluctuations in demand and extraordinary business conditions across our current industry geography. Amidst this challenging operating environment, our financial performance during the first half of 2020 is a demonstration of our resilient business model, the quality of our brands and the relentless efforts of our team. From the beginning of the COVID-19 crisis, we have been guided by clear priorities: number one, to protect our people through remote working and other precautionary measures, adapting at the same time to the restrictive measures imposed by the government and the relevant authorities in our countries according to the development of the virus; number two, to maintain the continued supply of our products to our clients, responding to the increased consumption need; number three, to support our communities across our regions through product donations and financial support to hospital, NGOs and [ remains of hotels ]; and number four, to preserve our strong cash position in order to deliver further future profitable growth. And during this time, it is worth to note that we have stayed committed towards our long-term strategic growth, executing our investment plan with a view to generate further value to our shareholders. Group sales were up by 6.7%, reaching EUR 183.69 million from EUR 172.19 million in last year's first half. Top line growth was driven by continued strong demand, even though more normalized within the second quarter versus the first quarter, across our region in categories related to personal hygiene, health care and home care, which was partly offset by weaker demand for other categories as well as consumption disruptions caused by lockdowns and restrictions in specific retail channels. Throughout the first half of 2020, we presented significant growth in Greece and positive performance from our foreign countries. Specifically, Greek sales were up by 13.7%, amounting to EUR 67.64 million in the first half of 2020 compared to EUR 59.50 million in the same period of last year. The foreign countries contributed growth of 2.98%, reaching EUR 116.05 million in the first half of 2020 from EUR 112.69 million in the first half of 2019. The optimization of operating costs and particularly lower advertising and promotion expenses across our geographical regions on the back of the precautionary measures taken by the group, the adaptation of the business to the new consumption patterns and the operation status in the retail market resulted to a remarkable profitability growth and significant improvement in margins during the first half of 2010. Therefore, EBITDA was up by 35% to EUR 28.44 million in the first half of 2020 from EUR 21.04 million in the first half of last year, with an EBITDA margin of 15.48% from 12.22%. EBIT reached EUR 22.26 million during the first half of 2020 versus EUR 15.66 million in last year's first half, increased by 42.11%. And EBIT margin stood at 12.12% from 9.10% in the first half of 2019. EBT settled at EUR 19.63 million in the first half of 2020 from EUR 16.54 million in the first half of 2019, increased by 18.69%, with the EBT margin reaching 10.69% from 9.61% in last year's first half. Net profit reached EUR 15.62 million in the first half of 2020 from EUR 13.65 million in the previous year's first half, up by 14.39%, while net profit margin settled at 8.5% from 7.93% in the first half of 2019. Moving to the group balance sheet. Our financial robustness was reflected in the group's low net debt level, standing at a level of less than 0.5 of EBITDA as well as the strong cash flow generation provide the fuel for the implementation of our investment plan. Despite the challenges posed by the COVID-19 pandemic and with a view to further support our expanded business, we remain committed to our plan focusing, amongst others, on the projects, the active portfolio management and the new product development, which is already of critical importance for driving further top line growth. Within the first half of 2020, we made our entrance in the antibacterial hand-cleansing category, a promising segment that offers further future opportunities for the group across our geographical footprint. Following the approval from the Antimonopoly Committee at the end of February, we finalized the acquisition of the Polish personal care brand, LUKSJA, strengthening further our presence in the Polish personal care products market. Following the expansion of the group's production plant at Oinofota, Greece, which involves the expansion of the manufacturing and packaging equipment and the improvement in the production processes, we have started the gradual absorption in-house of the production of Indulona personal care products. Moreover, a new investment is under development in Polipak, the group's garbage bags production plant, that will lead to products improved in terms of ecological profile, durability and functionality. The improved -- the new plant will use robotized technology in its production, leading to higher capacity and increased efficiency. Apart from the implementation of our investment plan, we are committed to returning value to our shareholders. Within the first half of 2020, we paid a dividend for fiscal year 2019 of EUR 11.2 million, in line with our policy for a 30% dividend payout ratio. Going forward, and as the pandemic continues to evolve, we will continue to implement our investment plan while responding effectively to the challenging operating landscape and changing consumption pattern. Our priorities will, of course, remain to safeguard the health and safety of our employees and the society to ensure the uninterrupted business continuity across all our functions and the continued supply of high-demand products in the market as well as to maintain our strong financial position. Short term, for the rest of 2020, we will be focusing on preserving a positive sales growth momentum through activation plans, new product development initiatives and business expansion across the region as well as on maintaining a growing profitability. We will not provide financial guidance for the fiscal year of 2020 as we are not able to make accurate predictions at the time due to the continuing high uncertainty regarding the impact of COVID-19 on the economy, the consumption and the disposable income. We do, however, remain confident based on our capabilities and the group's resilient business model that we will navigate through this period, and we will continue to implement our strategic expansion plan, stimulating further profitable growth. Our strong capital base, low net debt and positive cash flow generation provides safety and the support necessary to mitigate any potential negative impact. At this point, we are at your disposal for any questions you may have.

[Operator Instructions] The first question is from the line of Svyriadi, Natalia with Eurobank Equities.

I hope you can all hear me. I would like to ask a question, well, a couple of questions, starting with what is an indication of the current trends looking into your market? With the second wave of infection underway in many countries, do you see a slowdown in consumption? Or are some countries worse off than others? That's my first question. Another question is coming on the OpEx spend, operating expenses that you said have declined because of lower A&P and adaptation of the business to new consumption patterns. Do you believe this is sustainable looking forward into H2? And another question has to do with the new business, LUKSJA in Poland, where you said contributed since March, late February. How much was the contribution into foreign country sales and EBIT? And would it be safe to assume that the profitability from Poland, which looks very strong versus last year, is coming from there? Or what has changed in this profitability from the Polish market?

Ms. Pappa, can you comment?

Yes. Let me give you an update of the current trends so far what we have seen. We know that the lockdowns are easing in all our countries right now. And due to that, we are enabling again our activation plan and our visits to stores. Therefore, we are seeing a continuing strong demand for certain categories. We are seeing countries that were -- like Romania and Czech Republic that were weaker due to the closures of certain -- of certain networks recovering and getting stronger. We see, as I said, strong demand defines -- continuing strong demand defines categories related to personal care like hand and body care wash, face and body care, deodorants, [ the shelf ] and supplements and also the household product category which was, during the first half, very strong, remains very positive as well. On top of all of this, we are seeing very good acceptance from the antibacterial products that we have launched during the first half in Greece. And gradually, we are launching gradually in certain markets, wherever we get the license. So all in all, in July and in August, we have seen a very positive performance. So we do remain confident for the future. Okay. Now in terms of the OpEx, yes, it is true that during the first half, we have seen -- we have benefited a lot from the fact that we have managed to optimize and control a lot of operational expenses and also reduce advertisement and promotion expenses. This, of course, adds a cushion for our product profitability, but we might have to -- due to the fact that the lockdowns have eased so far and we have to enable again activation plans. We might have to do some advertisement promotion expenses again. Of course, our priority is to preserve the profitability going forward, and this is what we will look to do in the short term within 2020. And that's how we try to increase our margins year-over-year. Now in terms of LUKSJA, the sales of LUKSJA, I remind you that LUKSJA was finalized at the end of February. So we are only -- we only have the participation of LUKSJA for 4 months within the first half of 2020. The participation of LUKSJA within the first half was approximately EUR 5 million, and the profitability, the profits -- the profitability of the synergies relating to the LUKSJA business have supported a loss -- the Polish operation. One of the reasons that you have seen a very strong growth within Poland in the first half of 2020 is synergies created by the LUKSJA -- by this new business, combined with several other factors like, for instance, growth funding from a very strong household business, which is a very profitable business, and also lower advertising and promotion expense. Now what we target for LUKSJA, we stick to the initial -- we try -- we will try to achieve our initial estimate for EUR 16 million set of sales from LUKSJA plus EUR 6 million related to the distribution from brands that belongs to PZ Cussons in which we distribute in the region.

Okay. So is it safe to say here that the targeted EUR 16 million plus EUR 6 million, EUR 22 million, will be for 10 months -- for a 10-month period now for the full year? It won't be the total of it?

Correct. Annualized. This is annualized sales.

This is annualized. Okay.

The next question is from the line of Webb, Marc with Quaero Capital.

Yes. A little bit of a continuation of the previous question. I'm trying to understand in your figures, what is the organic progression in Greece? And internationally, if we exclude the impact from the new WELLA profit from its distribution and LUKSJA, naturally, if you take out the EUR 5 million that you just mentioned, is there anything else that we should understand? That's the first question. Second question, just to understand, I heard you mention that the brands from PZ Cussons and I'm guessing that must be Imperial Leather and Carex. If you could just confirm how that deal is going to go ahead and from when? And also to update us on the current acquisition front in Poland or Romania, what's the news there?

Marc, yes, let me give you a full update on the new business because we -- apart from LUKSJA, which, as we said, accounts for EUR 5 million, of the sales within the first half of 2020. We also have Coty Luxury distribution new business in the first half of 2020 of approximately EUR 4 million of sales. So if we extract these new businesses, the level of the growth on a group basis is approximately 1.5%. But if you also extract because this -- within this half, we also have a devaluation in our country, FX devaluation, so if you take it on an FX-neutral basis, this is approximately 2% to 3% up like-for-like. Okay. Now in terms of the PZ Cussons portfolio, together with the signing of the acquisition, we have taken all this as part of the deal and because of the fact that PZ Cussons in Poland, they shut down their subsidiary, they have given to us the distribution of brands that still belong to PZ Cussons like Carex and Original Source. We are responsible for distributing -- we are distributors for this brand mainly in Poland. And also, we try to develop further exports of these brands across our territory. Is that okay?

Yes. So I heard it was Carex and Original Source. Are you doing Imperial Leather as well?

No. We don't have Imperial Leather in the region, in the particular region.

So who is doing Imperial Leather then?

I'm not sure Imperial Leather is active in Poland. We don't have it in the growth -- in the portfolio.

They just introduced recently Imperial Leather in Poland, and we expect to see the results of this launch.

Okay. So is that being launched with you or without you?

With us, of course. We are the distributors of PZ Cussons in Polish territory.

Okay. Okay. So that's good. And just -- so can you help us understand, I mean, I understand you've talked in the past about having further acquisitions, both in Poland and Romania. Can you just give us a bit of an impression of what is the environment for Sarantis at the moment? You've got a solid balance sheet. You've probably got competitors who are suffering a little bit. What is happening with COVID-19? Is it slowing down deals? Is it accelerating deals? And how are you progressing on that front?

Yes. The situation in the markets we operate has lots opportunities for acquisitions. We are in talks with a lot of targets. But this matter is, I would say, rather sensitive and has a lot of peculiarity. So I prefer that we can discuss it in one private call.

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

I have 2 questions actually. One, if you could provide us a figure or some color regarding your CapEx requirements for full year 2020, assuming that you have already spent around EUR 19.5 million, EUR 19 million in the first half. That's the first question. And the second one relates to your Southeastern Europe activities. You mentioned that LUKSJA's contribution was in the tune of EUR 5 million sales, which means that if we subtract that figure from total Southeastern Europe sales, the like-for-like growth in the whole region is something like mid-single-digit negative, if my calculations are correct. And then you also mentioned for Greece that Coty selective sales contribution in the first 6 months was roughly -- if I forget it, I wrote down the figure correctly, EUR 12 million. But if I can remember, during the initial announcement of the acquisition last September, that's 2019, you have mentioned something like annual sales contribution from Coty in the tune of EUR 15 million to EUR 18 million. So providing that it has already registered -- contributed EUR 12 million, is it fair enough to say that last year's estimation of EUR 15 million to EUR 18 million now is closer to EUR 20 million or something like that or something more?

Let me give you first an update on the CapEx. First of all, you have to deduct the CapEx. It is not CapEx, it's investment for LUKSJA of approximately EUR 11 million. It's the acquisition cost of LUKSJA. So excluding that, the CapEx for the group is approximately EUR 7 million. Approximately EUR 3 million has to do with Polipak, and it has to do with equipment, machinery. And this is done in the context of the projects that we have mentioned. And the rest has to do with maintenance staff. Now for your estimate, for the full year of 2020, you have to take into account that we will have, relating to the Polipak project, we will have a CapEx of approximately EUR 12 million and approximately -- and another EUR 12 million for 2021. This is the total cost for the project of the Polipak's new production plant in total.

So including LUKSJA's EUR 11 million, full year in '20 will be something like EUR 22 million, EUR 23 million?

Correct. On top of the EUR 3 million that you have for Polipak, you need to add approximately EUR 9 million for this specific project. But in our cash flow calculations, we do not consider the acquisition cost as CapEx. Now regarding LUKSJA, LUKSJA is EUR 5 million of sales within the first half. So excluding that, foreign countries were down by approximately 1.5%. But if you extract, if you take it on a currency-neutral basis, this is -- because, as I said, we had a serious devaluation this year, this turns into slightly positive percentage points.