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 Sarantis Group's First Half 2021 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. Ms. Pappa, you may now proceed.

Thank you very much. Ladies and gentlemen, good afternoon, and welcome to Sarantis First Half 2021 Financial Results Conference Call. We will first make a commentary on the results and then we may proceed with your questions. Consumption patterns in the beginning of 2021 were similar to what we have experienced in 2020. The mass market retail channel where most of the group's sales is based was open. However, the occasional closures within the [indiscernible] market in our country affected consumer preferences and practices with certain categories combined higher consumer traffic than others, such as personal hygiene and home care. Within the second quarter of 2021, the reopening of the market, combined with higher consumer demand benefited categories that have in the past experienced weaker demand, such as the fragrances, deodorants and suncare product even though the consumption has not completely returned to pre-pandemic level. Therefore, following on a strong start of the year, group sales presented an accelerating performance in the second quarter of 2021 and thus the group delivered a 6.3% sales growth during the first half of 2021. At the same time, we managed to beat the previous 10-year record in EBITDA margin that reached 16% and present a 25% growth in net income at EUR 19.5 million. This performance reflects our resilient business model and its product and geographical diversification and the relentless efforts of our team. At the same time, our priorities since the beginning of the pandemic regarding the health and safety of the group's employees remain, as well as our focus on the uninterrupted business continuity, the continuous supply of high-demand products in the market and the maintenance of a strong financial position. Our significant financial performance is also giving us a drive to continue playing an active role towards supporting the local economies, the local communities, addressing emerging societal needs, particularly relating to COVID-19. We are also focused on intensifying our efforts in order to maximize the positive economic, social and environmental impact of our operations. Amongst the top priorities of the group's newly elected board of directors is to address the group's 4 main sustainability pillars: sustainable production and consumption, responsible governance, empowered employees and thriving communities. In terms of the group's main financial figures, group sales were up by 6.3%, reaching EUR 195.24 million in the first half of 2021 from EUR 183.69 million in last year's first half. Throughout the first half of 2021, sales were driven by all product categories related to home care and personal care, such as body and face care, body and wand wash, garbage bags, food packaging and cleaning items, while the gradual reopening of the market in combination with high consumer traffic benefited the categories of fragrances, deodorants and suncare. Both Greece and foreign countries presented strong sales growth within the first half of 2021, driven by the aforementioned product category. Specifically, Greek sales were up by 2.4%, reaching EUR 69.25 million in the first half of 2021 with the mass market channel driving the growth and the Luxury Cosmetics gaining momentum following a reopening of the market and the increased consumption in the respective channel. The foreign countries exhibited growth of 8.56% reaching EUR 126 million in the first half of 2021 from EUR 116 million in the first half of 2020. Excluding the FX devaluation impact, foreign countries posted a 12% growth year-on-year. The group's profitability in the first half of 2021 benefited by tight control of gross profit and balanced operating expenses, while controlled advertising and promotion expenses were reactivated and allocated behind strategic initiatives. Therefore, EBITDA was up by 10.13% to EUR 31.32 million in the first half of 2021 from EUR 28.44 million in the first half of 2020 with an EBITDA margin of 16.04% from 15.48% in the first half of 2020. EBIT reached EUR 24.90 million during the first half of 2021 versus EUR 22.26 million in last year's first half, increased by 11.88% and EBIT margin stood at 12.75% from 12.12% in the first half of 2020. EBT settled at EUR 24.71 million in the first half of 2021 from EUR 19.63 million in first half of 2020, increased by 25.89% with EBT margin reaching 12.66% from 10.69% in the previous year's first half. Net profit reached EUR 19.51 million in the first half of '21 from EUR 15.62 million in the previous year's first half, up by 24.90%, while net profit margin settled at 10% from 8.5% in the first half of 2020. Moving further. For us, investments are a prerequisite for our further future growth. our financial robustness and cash flow generation allow us to implement our investment plans despite the challenges caused by the COVID-19 pandemic. The group's net debt level over EBITDA stood at 0.54x as of the end of the first half of 2021 with a net debt position reaching EUR 35.38 million from EUR 10.91 million as of the end of 2020. The increase in net debt is a result of the dividend payment this year, which was increased by 34% versus last year, and investments that are largely related to the construction of Polipak’s new production facility and R&D, as well as machinery equipment at Oinofyta’s production plant. Amongst other focus areas this year include the following: investments relating to infrastructure, systems, processes and models that are aimed to increase further the group's efficiency and effectiveness and optimization of the group's product portfolio and targeted investments and innovation plans behind strategic product development initiatives in order to drive further organic growth across our territory. Going forward, as the pandemic continues to evolve and given that the environment still remains volatile, characterized by increase in COVID-19 cases and the rapid spread of the Delta variant, we will continue to have the health and safety, the successful support and our uninterrupted business continuity as our top priorities. And at the same time, we will continue to be focused behind our strategic goals, pursuing ultimately further top line growth and cash flow generation, so organic and acquisitive growth, further market development and penetration, cost efficiencies, economies of scale, benefits from synergies and operating leverage and also have later objectives that we bring otherwise to our business and our stakeholders. 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 was wondering if you could outline a bit the investment plan, the CapEx plan left to year-end in the numbers? And how much you've moved forward with your plans for the new plants? We actually saw them mostly in H1. Should we expect something more in the remaining of the year? My second question has to do if you could elaborate a bit if you have any active M&A deals or you're in talks with something and if there's something you could share with us in terms of your acquisitions and M&A deals? And I have also a question if you could update us on raw material impact on production and transportation costs. Should we expect any pressure in the gross margins there?

Natalia, let's start with the CapEx. CapEx within the first half of 2021 reached EUR 16.7 million. That came largely from Polipak, so approximately EUR 12.5 million came from Polipak related to building construction, machinery equipment and approximately EUR 3.5 million came from Greece and that has to do with machinery equipment and infrastructure. Now for -- the biggest part of Polipak’s investment is on the way. At the end of this year, beginning of the next, we will be ready with a new production facility. We do have remaining some CapEx to do. Until year-end, we estimate another EUR 8 million, approximately EUR 4 million have to do with Polipak. And another EUR 3 million we expect through Greece. So the total this year is expected to reach close to EUR 25 million.

Sorry, just a quick one on this. Do we have a maintenance CapEx also on top of that? Or is this included in what we are expecting?

No, this is included. Now moving on M&A deals. We are active on this front. We do have discussions for M&A always. This is always an active pipeline. At the moment, we are in discussions with 2 targets in territory. But at the moment, we have no announcements to make as they are not final yet. However, I would like to say for both cases, that they are both totally in line with the group's strategy and behind acquisitions and both margin accretive. Now in terms of cost, whether we see any pressure, so far, in the first half of 2021, we have managed to protect the gross margin, as you have seen. As we have used -- we have managed to use an increase in inventories that we have built up to the full year of 2020. However, in the second half of 2021, we expect pressure on raw material prices and logistics, which we will largely offset -- we will try to offset by increasing our price in order not to have any impact on our bottom line.

Okay. Do you also expect OpEx rising in H2, as you usually do with the reopened markets and everything?

OpEx will be -- we'll try it to be balanced as it was in the first half. Advertising and promotion expense will be increased as it was in the first half of 2021. But advertising and promotion expenses, I'd have to say, in the last year were minimized. So we have reactivated some plans this year. But we plan besides advertising and promotional design very selective and strategic categories. We are very careful on investing. As I said, we are prioritizing this year, and we are focusing on optimizing our product portfolio. So investment -- advertising and promotion investments and innovation plans will be focused behind the strategic categories.

Okay. So if I understood correctly, it will be more or less advertising and promotion like in H1?

Correct, yes.

Correct. Okay. If I may, one more question. Could you give us, if you have, any update on current trend, if you're running at the same rate you were running up to H1? If you have these numbers, of course.

Yes. Look, it is, of course, very difficult to make any projections as I mentioned, with the continuous occasional lockdowns and restrictions. We do have a positive performance so far, which we expect will be continued until the year-end based on the fact that the basic distribution network, where we operate is mass market channel, the grocery market that has remained and will remain open. Therefore, we expect that the performance that we have so far will be continued until the year, and we are targeting for a 4% to 5% sales growth up to the year-end.

[Operator Instructions] The next question is from the line of Kalogeropoulos Ioannis with Beta Securities.

I have a couple of questions. First of all, regarding your performance in Greece on the EBIT front, is there a particular reason for your EBIT margin increase in the Greek business, if we exclude the contribution of the Estee Lauder stake that you have incorporated in the H1, the EUR 6.3 million? That's my first question. I mean, does that relate to operating leverage, or you have already proceeded to price increases as well on the Greek front? And then in the international front, is there, again, a particular reason on your EBIT margin pressure in your Southeastern Europe activities? And I'm referring particularly to the EBIT margin of your private label business of Polipak in Poland, where we saw a deceleration on the EBIT margin. Does that relate to the transfer of the production from Poland to your new facilities in Greece and Oinofyta? And then what about the deceleration of both sales and the EBIT margin on your Ukraine business on Ergopack?

Let me start with the foreign countries. The foreign countries they were positive in terms of EBIT. You mentioned Polipak, right?

Yes, I mentioned Polipak, the private label business in Poland, where we see a deceleration on the EBIT margin in H1 of this year compared to H1 2020.

Yes. Okay. Polipak is obviously affected by increasing raw material prices. This is the situation. So we see the impact on the EBIT margin. This together with increased advertising and promotion expenses have also affected the EBIT of the foreign country versus what you -- used to seeing, the growth we used to see.

Should we expect something similar for H2 as well regarding Polipak, the private label business?

Polipak, as I said, we will do our best in the second half of 2021 to preserve our profitability by offsetting the pressures that we are seeing by increasing our prices in order to continue showing growth in our group's EBIT.

If I may add. The particular [ EBIT ] of Polipak is that the price increases of raw materials cannot be transferred immediately to the prices, to the selling prices due to the contract that we have behind the private label business. So it is not like the mass market business, where we have opened organizations with the key accounts and the clients in order to respond and to react over the costs, the increase of costs. In Polipak, we have, let's say, contracts behind the business. So we cannot react immediately. So we do expect this problem to be continued next half, the second half. But this will be corrected next year when we renew the relationships with the clients.

Okay. Will the new facilities at Oinofyta where the production will be moved also assist and help the decline, the EBIT margin?

Yes, of course. This is connected with various business and especially in Greece. Regarding your question of -- related to Greece, I would say that it's both. Better performance behind unit cost in our factory together with the operational leverage of the business in Greece.

And regarding Ukraine [Technical Difficulty] in Ergopack?

Look, if you see there is -- in terms of [ Europe, ] of course, if you see we have a [indiscernible] devaluation this year, so it is a translation problem. But if you extract this, the local performance of the company, we did very well. I mean it's up, okay?

And the pressure on the margin relates to the same reasons that you mentioned for Polipak regarding...

Yes, yes. Because -- yes, because we have both reasons. On one hand, there is a devaluation of the currency. And the rest problem is the global situation behind the raw materials and transportation.

Okay. That's very clear. And what about the EBIT margin of -- the Greek EBIT margin excluding the Estee Lauder contribution? [indiscernible] showing [ investment ] of around 1.5% on your remaining...

I said previously that it's a combination of the better productivity in our factory behind the unit cost of the products, the produced products and the original leverage of the business in Greece.

[Operator Instructions] The next question is from the line of de Figueiredo Emmanuel with LBV Asset Management.

I just have 2 or 3, please. And could you perhaps help us by letting us know more or less how much prices need to increase in the second half to offset the cost pressures in Greece? That would be my first question. The second question, can -- do you think related to that, that you can maintain your EBITDA margin at 16% in H2? And my last question is more a curiosity. Can you tell us how the alcohol gel business is going, which I think you started with the pandemic? How important is it? Does it give you a decent margin?

Regarding the pressure on the pricing -- the pressure on the cost prices and raw materials and transportation especially and the price increases is a task that is attributable to the second half. In the first half, we did nothing regarding the price increases because by accident, to be frank, we had built -- due to pandemic and in order to secure the operation, we had built extra inventory in our warehouses, at -- of course, at low cost. So we manage by that to protect the gross profit margin of the main business in the first half. However, in the second half, we faced this pressure, and we are in an agreement, and we are negotiating with our clients, the timing and the total price increase of our products. But this is not an increase across the board, okay? It is an increase in special categories that are affected by raw materials price increase, especially in meaningful -- in some parts of transportation. It's not the whole business affected. So there is not an average price increase, that I can say. What I can say is that we will do the proper increases in order to protect the margin. Now regarding the alcohol, [indiscernible] because of some comments. I don't know. Probably I can investigate the situation, and I can get back to you shortly [indiscernible] for you.

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

Ladies and gentlemen, thank you for participating in today's conference call. I and Mr. Rozakeas are available to any further questions you may have. Thank you very much.

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