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

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the Sarantis Group conference call to present and discuss the Sarantis Group Full Year 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 Ms. Eleni Pappa, Investor Relations and Corporate Communications Director. Mr. Rozakeas, you may now proceed.

Ladies and gentlemen, good afternoon. Welcome to our conference call in order to discuss the results of 2020. At this moment, I'm passing the microphone to Mrs. Eleni Pappa in order to comment and to present the comments of the management. Ms. Pappa?

Thank you, Mr. Rozakeas. Ladies and gentlemen, good afternoon. The COVID-19 outbreak prevailed throughout 2020. Throughout the year, we have experienced changes in consumer behavior and family dynamics, unprecedent fluctuations in demand and extraordinary business conditions across our channels and large geographies. Amidst this challenging operating environment, our financial performance during 2020 is the demonstration of our resilient business model, our product and geographical diversification, our ability to respond quickly into the new consumption and business patterns and the relentless efforts of our team. From the beginning of the COVID-19 crisis, we have set out our key priorities. Our first priority to protect and safeguard our employees, customers, partners and consumers health as well as to provide an ongoing support to social groups in need, especially those at the forefront of the pandemic. On top of the authority's guidelines in each country, special coronavirus protecting policy was in active, including remote working, decontamination, suspension of traveling, cancellations internal and external events in closed space meetings, strict health and safety protocols in our facilities and production plants. In addition, the group's contribution to the society was intensified during the pandemic, focusing on strengthening the health sector and supporting those in need in the Group's countries through product and monetary donations as well as donations provided to hospitals, nursing homes, NGOs and other socially vulnerable groups. Our second priority, implementing contingency and business continuity plans in order to safeguard our production plants and enable the group's supply chain to remain fully operational in order to ensure an interactive business continuity and the continued supply of high demand product to the market. As the needs of the consumers turned to specific product categories, we ensured our ability to respond to increased demand for specific product category, such as home care and personal hygiene products as well as food supplements. In addition, the group entered into the production of antibacterial products in the hand cleansing category in order to meet the high demand for this product. Our third priority was to maintain our financial resilience and strong cash flow generation, implementing at the same time the group's strategic plan in order to support the group's further growth and create additional value to our shareholders. Focused behind this commitment, the company's Board of Directors, we proposed a 34% increase in dividend payment for this year at EUR 15 million from EUR 11.2 million last year. This year's dividend payment amount corresponds to 39% dividend payout ratio over the group's net income versus 30% last year. In terms of the group's main financial figures, group brands were up by 6.3%, reaching EUR 393.4 million in 2020 from EUR 370.07 million last year. Throughout the year, and across the group's region, growth was driven by product categories related to home care, personal care and hygiene and healthcare. Weak demand was evident in the product category, resulting from the continuous lockdowns and restrictions in the related retail channel. Both Greece and foreign countries presented strong growth days within 2020, driven by the aforementioned product category. Specifically, Greek sales were up by 7.8%, amounting to EUR 136.05 million in 2020 compared to EUR 126.21 million last year. The foreign countries exhibited growth of 5.52%, reaching EUR 257.33 million in 2020 from EUR 243.86 million in 2019. Excluding the FX devaluation impact, foreign countries posted 8.7% growth year-on-year. The group's profitability in 2020 benefited by the optimization of operating costs and lower advertisement promotion expenses across our geographical regions, although a part of the marketing investment that was controlled during the first half of this year was reactivated during the second half of the year, in order to support selective product initiatives. Therefore, EBITDA was up by 14.52% to EUR 62.70 million in 2020 from EUR 54.75 million in 2019 with an EBITDA margin of 15.94% from 14.79% in 2019. EBIT reached EUR 50.06 million during 2020 versus EUR 43.84 million last year, increased by 14.2%, and EBIT margin stood at 12.73% from 11.85% in 2019. EBT settled at EUR 47.43 million in 2020 from EUR 45.46 million in 2019, increased by 4.34% with the EBT margin reaching 12.06% from 12.28% in the previous year. Net profit reached EUR 38.73 million in 2020 from EUR 38.01 million in the previous year, up by 1.9%, while net profit margin settled at 9.84% from 10.3% in 2019. Moving further, for us, investments are a prerequisite for further future growth. Our financial robustness, which is reflected in the group's low net debt level, standing at EUR 10.9 million in 2020 as well as the strong cash flow regeneration allowed us to implement our investment plans despite the challenges posed by the COVID-19 pandemic. This year, we focused amongst others on the following: the active portfolio management and the new product development, which is always of critical importance for driving further top line growth. Amongst various product launches in our strategic category this year, we highlight our entrance within 2020 in the antibacterial hand cleansing categories, starting in Greece and moving to the rest of our region, capitalizing on the strong brand equities of our personal care brands across our region. 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 product market. Following the expansion of the group's production plant at Oinofyta in Greece, which involves the expansion of the manufacturing and packaging equipment and the efficiency improvement in the production processes, the group has finalized the absorption of the production of Indulona skin care products, allowing for better control behind its production and cost efficiencies. Moreover, since the beginning of 2020, a new investment is under development in Polipak, the group's garbage bag production plant that will lead to products improved in terms of ecological profile, durability and functionablity. The new plant will use robotized technology in its production, leading to higher capacity and increased efficiency. Going forward, and as the pandemic continues to evolve, we will continue to have the health and safety of society and support uninterrupted business continuity as our top priority. And at the same time, we will continue to be focused behind our strategic goals, ultimately pursuing further profitable growth and cash flow generation, organic and acquisitive growth, further market development and penetration, cost efficiencies, economies of scale, benefits from synergies and operating leverage are as always our objectives that will bring added value to our business and our shareholders. 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. Ms. Svyriadi, can you hear us?

Yes. Hello. Can you hear me?

We can hear you. You can proceed with your question, please.

Okay. Thank you very much for the results and the very good performance. I was wondering if you could share with us any thoughts you may have on 2021. I know it is a bit tough to make projections. But should we be expecting another year of positive growth? And maybe give us an update on current trading trends in Greece and the foreign countries as therefore may be in the past like 3 months we've already seen in 2021? That's my first question.

Okay. Let us start 1 by 1, beginning with the current trend and the bucket 2021 estimates. The trends so far are similar to what we have seen in 2020. The grocery market that is the supermarket channel and the pharmacies are performing better than the rest of the market. We continue to see increased demand behind categories relating to home care, personal hygiene and health supplements. On the contrary, what we also see with beauty shops closed, there is still weak demand for fragrances. So similar trends to 2020, and from what we can see so far, according to the numbers that we have available so far, we see a flat performance versus last year. Now with continued lockdowns and the restrictions across our region, it is not very easy to make accurate projections for the future, neither in terms of the macro recovery nor in terms of the consumers' disposable income. Of course, we know that the grocery market, the supermarket channel and the pharmacies, where the majority of the Group's [indiscernible] will continue to perform. Therefore, we are cautiously optimistic for 2021. But to give you a further color is difficult at this time.

Yes, that sounds quite good. Could you -- I don't know if you could tell us or give us a bit more color on the cost optimization you have actually done through 2020. Do you think that this will be also there for 2021 once reopening starts, and you will have -- you already said that in the later part of 2020, you had to do some A&P costs higher than the first part. So do you think that this will be also the case in 2021, so we should gradually see the costs coming back up again?

Of course, we will continue to control some operating expenses going forward. But you understand that there's some advertisement promotion expenses that were reactivated towards the second half of 2020, will be reactivated again in order to support the business. However, there are a lot of other cost-saving initiatives that we can do across the Group that have to do more with commercial -- the commercial areas as well as supply chain areas, warehousing, logistics, forecasting. Therefore, we expect to work on various other areas to offset any pressure that we might see in certain businesses.

Okay. That sounds nice. On your CapEx plan, could you give us an update on -- we finished with Oinofyta and now Polipak still is an ongoing procedure if I remember?

Yes, correct.

How much should we be expecting that this will cost in the current year? And maybe -- you have -- you know of?

Yes. Polipak, as I mentioned, we started the project in the beginning of '20, and already within 2020, we have seen EUR 12 million of CapEx behind this project. The total CapEx for Polipak's development will be EUR 24 million. Therefore, you will see another EUR 12 million in 2021. In Oinofyta [indiscernible] project, we have had some minor CapEx within 2020 already. This is included in the CapEx that we have seen in 2020 figures. So this process is already -- this project is already finalized. So in 2021, we will have the maintenance CapEx -- normal maintenance CapEx that we usually have plus Polipak, what I mentioned.

In addition to that, I would like to add that the CapEx related to the Greek expansion of the factory, the Greek factory is already supported. We received last week the approval from the Ministry of Development that this plant is supported by a tax relief of 25%. So this is a good development that's going to decrease the tax rate, the effective tax rate in the next 3 years.

The next question is from the line of Giannoulis, Dimitris with ResearchGreece.

Yes. I have several questions. I will just outline them and then if you're kind enough to go through them one by one. First of all, can you remind us, LUKSJA in Poland for how many months was it included in sales in 2020? Second is, can you also provide an update in Q1 about the trends on your cost of goods? Because if I'm not mistaken, we have seen some increases in raw materials, in plastic, I think. Third one would be, is there any particular reason why the dividend coming from Estee Lauder was lower this year, almost half versus 2019? Number four, can you please confirm what if Estee Lauder decides to buy the stake from you going forward, do we have a buyout price that, if I'm not mistaken, it's the one that -- its recurring value right now, we see on your balance sheet? And the last question would be, again, do you have any back-of-the-envelope calculations? How many acquisitions and what size would it take for you to replace the EBIT and the dividend, the cash flow coming from Estee Lauder in the future, also assuming if they decide to exit -- to buy you out, I mean?

Okay. Let me first start with the LUKSJA question. LUKSJA acquisition was finalized at the end of February of 2020. So we started selling -- we started to include consolidating sales from beginning of March of 2020. LUKSJA is a personal care business. So it is included in the personal care category space. And for 2020, its contribution in sales amounted to EUR 15 million.

Okay.

Now the second question has to do with pressure in the cost of goods, if we see any pressures coming from plastic price increases. Yes, we do see some pressure. It has no -- we can see that -- we see that it's going to be that we will have a pressure in 2021. We have already started examining -- transferring and offsetting this price increase through pricing. It is something we have already examined, and we have identified areas where we can implement it. So it will be transferred. Estee Lauder has a typical dividend payout ratio of 75% to 80%. If you see it across the years, this is the average that the BoD of Estee Lauder decides to pay. So it may vary across years -- on a year-by-year basis, but the ratio is fixed to 75% to 80%. Now in terms of Estee Lauder buyout, well, yes, it is the book value. If this is exercised, then the price paid will be the book value in our books. This is what they are going to pay. Now when we announced the extension of our shareholding agreement with Estee Lauder about ELCA, the strategy from our side had 2 actions. The first was in order to replace the potentially lost profitability. The 1 pillar had to do with strategics -- with adding strategic partnerships. This is partly done through the new distribution agreement that we added last year with Coty, Coty distribution agreement. And we can in the future add more. And as you know, the distribution business is for us a profitable business. And the other pillar for us has to do with the acquisitions. As you know, the acquisitions for that are done at a very -- at very good multiples. We have an average of 5 EV over EBITDA multiple. So if we decide to utilize all the proceeds that we can get from Estee Lauder from the buyout of their auction, then we can replace by more than 100% the Estee Lauder's profitability.

So can I please follow up on that. Because Estee Lauder, if I'm not mistaken, is adding -- is contributing EUR 11 million to EUR 12 million of EBIT and EUR 8 million to -- almost EUR 8 million of dividend. That's actually excluding last year, which it was almost 5. So it seems that the payout was not flat year-on-year at 70% to 80%, I think. So are you confident that you will be replacing EUR 11 million to EUR 12 million of EBIT going forward through acquisitions?

We estimate that we will be receiving 80 -- on a very conservative scenario, EUR 80 million if it is exercised by 100%. The EUR 80 million, if you apply the 5x EV over EBITDA multiple is more than -- replaces more than 100% Estee Lauder's profitability.

Okay. If I may add on top of that, that especially after the year of 2024, when Estee Lauder has the right to call the 25%, and the remaining is 15%, then we are very free to examine possible cooperations with other brand names. And you know where all these brand names are hosted as we speak. I don't like to mention the entity that is hosting the brand names. And it is easily -- it is easy for us to come with an agreement because there is no meaning for Estee Lauder to have a [indiscernible]. So those -- the proceeds of the buyout formula from Estee Lauder together with the possible cooperation with other brand names, which are competitors at the time, it makes us capable to replace not only the 100%, but a lot more of the profitability of Estee Lauder.

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

Two questions from my side. So the first 1 is essentially, I was looking at the revenues of the joint venture, and they seem to be rather, I would say, defensive versus the sales of other retailers that were also closed for a period of almost 100 days. And correct me if I'm wrong. So I was trying to figure out how -- what were the main strategies implemented to deliver only a 5% decline in revenues and less in the net profit? And the second question would be how -- it's more of a broader, let's say, question. How do you think COVID-19 and the pandemic has affected your M&A strategies? Have you identified any new opportunities? I mean, your net debt-to-EBITDA remains quite low. As you said, you have to gradually replenish the revenues and the EBITDA loss from the joint venture. So I was wondering how your M&A strategy is evolving through the world of a pandemic world at the moment?

Fani, can you please repeat Estee Lauder question? We have witnessed a 5% growth on its income. And approximately, we have recorded 5% growth of sales. What is your question?

No, my question is versus other retailers, for example, that their stores were open, and they, let's say, for example, had online stores operating. They saw double-digit declines. So I was wondering how well you managed. I mean you managed well the [indiscernible] closure. Yes, it's a very good number, let's say, very good performance versus other retailers. This is what I'm saying.

Okay. Okay. Sorry, I didn't get it. It has to do with -- even though some stores were shut, Estee Lauder has an online shop that has performed really well. So they have managed to make sales over the online shop and take advantage of the very few days that the stores were left open. I remind you also Estee Lauder has a really very high market trend in the market. So they have consumers that are very fond of their products, and this remains.

Yes. But I understand that this was the sales from the online channels was also coming with the pricing strategy, let's say, maybe decreased prices et cetera, et cetera. So this is why I'm quite surprised on the result. But yes, okay, makes sense. And I was wondering on the second question regarding the M&As. How the group sees the environment now? And as I said, you managed to maintain a very healthy balance sheet. So this wouldn't be a problem for -- to identify let's say new opportunities and be even more aggressive since 2020 wasn't a year of -- was a year of absorption, let's say, rather than new additions to the portfolio?

Yes. We usually had at least 1 target every year, and this is going to be happening this year. The life didn't stop. And we have several targets in the market, in the geography other than Greek market, of course, so in the rest of the territory. We discussed with a lot of competitors because we are focused on the present categories we operate in the present markets. So the targets are directly our competitors, big or small despite that. So we have open discussions. In some cases we are hedging, in some other cases we just started. But I am pretty sure that by the end of the year, the last Q, you will hear some news. I think that the situation will mature then in order to present more concrete outcomes from these discussions.

Okay. Okay. Again 1 last question from my side. I was wondering if you could give us an update on where do we stand with Ukraine and expansion of your own products as well as the cosmetics, et cetera, et cetera?

Yes. The expansion in Ergopack, it wasn't that, that the personal care product expansion in fragrances in Ukraine was not very easy. It was scheduled for 2021. But due to the lockdowns, it wasn't very easy to handle because the shops were shut and we could not negotiate the listing of our products. So it is something that we are behind it. We are working on the strategy behind the penetration of not only Ukraine, but the neighboring CIS countries. But the growth that you see so far in -- from the Ukraine and from Ergopack is coming from the household products business, which is its traditional business. And I have to say that it was a very good performance in 2020 of 8% growth in local currency.

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

I have a question regarding your like-for-like performance, both in Greece and in Southeastern Europe. If we exclude the acquisition, that is the Coty business in Greece, and the Coty and LUKSJA businesses abroad. Could you give us the like-for-like figures for Greece and Southeastern Europe? And the second question has to do with the maintenance CapEx you mentioned. Can you Remind me the actual figure of the annual maintenance CapEx?

In terms of like-for-like figures, in Greece, if we exclude the EUR 8 million of Coty additional business, we have a like-for-like growth of 3% in Greece. The LUKSJA contributed EUR 15 million in 2020. So if we exclude that, we have as in -- a flat performance from a foreign country, excluding the guarantee impact, however, that if we take it on an FX-neutral basis that corresponds to a 3% growth in our foreign currency. For the total of the Group, excluding both businesses, both Coty and LUKSJA, we have on a currency-neutral basis, a 5% like-for-like growth.

Okay. That's clear. And can you give maintenance CapEx?

Yes. The maintenance CapEx is EUR 2 million to EUR 3 million every year.

The next question is from the line of de Figueiredo, Emmanuel from LBV Asset Management.

I have 2 clarifications, if I may, and 2 questions. On the clarification to the first question in the call, I believe you said that consolidated sales for Q1 were flat. I just wanted to confirm that I understood that correctly. And the second clarification also from the first set of questions is whether you're aiming for stable EBITDA margin for 2021. And then my 2 questions are, on the dividend, I'm very happy that you've increased the dividend. But if you can just give some explanation of why you increased it so much? Should I -- does it imply you have less M&A opportunities or the Board thinks that the balance sheet is too conservative? And then my last question is on the ESG credentials of Sarantis. If you could explain a little bit what you do in terms of reducing plastic consumption and whether you have any production of paper bags?

Could you repeat the last question?

The last question is if you can just give us some highlights on your ESG credentials and whether you have any paper production in bags, or you just do plastic bags.

So the performance is flat. If you remember, the first Q of 2020 was very robust. So we repeat the same thing, taking into consideration that this Q of 2021 we had the market closed versus the previous year where the first Q was the market was open. So we believe that we hold our position in the market. And talking about the EBIT margin, we believe that this year we could have an improvement of EBIT margin at least 0.5 points. As regards to the dividends, we decided to follow the strategy that we're saying that we delivered 1/3 of the net profitability. So in order to achieve the average, because the last years we were behind the salaries, we decided to give something more in order to balance the progression.

Correct. In terms of your ESG questions behind the plastic garbage bags, what we are working as we speak on our strategy towards becoming more ecofriendly, we have set internally, and we will soon publish our target behind this, but we have already started developing an ecofriendly line of garbage bags, producing 90% to 100% recycled plastic. So you will hear in the future more development behind -- and more ESG friendly approach from us. And I also have to say that apart from the plastic garbage bags, we have also replaced the single use plastic products that we have had in our portfolio like cups, plates and straws using alternative -- using sustainable alternatives like [indiscernible]. So there are a lot of things that we do, and we keep on doing. Also the new investment in [indiscernible] is moving in this direction because the final product apart from the fact that it will use recycled plastic, it will use also less plastic resulting to an equally durable garbage bags. We use a production method that we patented that we have developed through the cooperation that we have with the university. So there are a lot of things that we do behind this area.

[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.

Ladies and gentlemen, on behalf of myself and Mrs. Pappa, I would like to thank you for your participation in the present conference call. Have a nice evening.

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