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

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Sarantis Group conference call and live webcast to present and discuss the Sarantis Group full year 2022 financial results. [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 and Corporate Communications Director. Mr. Rozakeas, you may now proceed.

Good evening, ladies and gentlemen. Welcome to Sarantis full year 2022 financial results conference call. I pass now the speech to Ms. Pappa in order to comment the performance of the company. Ms. Pappa?

Thank you, Mr. Rozakeas. Ladies and gentlemen, good afternoon, and welcome to Sarantis full year of 2022 financial results conference call. We are pleased to report that despite the challenging market environment characterized by record inflation, supply chain disruptions, energy crisis and war in Ukraine, we successfully navigated the situation leading to a strong sales growth of 9.6%. We are also proud to report a net cash position of EUR 15.3 million and a strong cash flow generation, which demonstrates the strength of our financial position. It is this strong financial position that allows us to continue investing behind the further growth of our business through investments targeted at automation, higher productivity and efficiency, product portfolio support and also returning the value created to our shareholders. As this year too, we will be proposing to the Annual General Shareholders meeting a dividend payment of EUR 10 million corresponding to a 38% of the group's net income. We are also very proud to have successfully implemented a product rationalization process, the HERO project, a project that took place within 2021 and 2022 and focuses on the group's high-value core brands within our strategic categories and can drive profitability and sustainable growth for our business. The group's HERO portfolio supported volume growth this year and strategically position that for further future growth. This year, we also succeeded in faster mitigating the inflationary pressures and supply chain disruptions through initiatives that aim to support topline growth as well as further optimizations and efficiencies across the business. Lastly, we remain committed to pushing forward our ESG agenda as we believe that sustainability is an essential element of our long-term success. And with that as an introduction, allow me to analyze further on the group's financial figures. The financial figures I will comment on present the continuing activities of the group for both 2021 and 2022, excluding ELCA cosmetics contribution since the group's participation was sold on June 15, 2022, and excluding HOZTORG, since the group decided permanently with the growth from financing market. You can find detailed information in the group's Annual Financial Report. During 2022, we managed to present significant service growth across the group, driven mainly by value and to a lesser extent, by volume. We took advantage of our diversified product portfolio, our focus on our serial portfolio, our ability to exploit opportunities in high-growth basis, therefore supporting our volume growth while we took pricing actions behind selected categories. Group sales were up by 9.55%, reaching EUR 445.07 million in 2022 from EUR 406.26 million in 2021. The largest contributors to service growth are the top categories of Skin Care, Hand Care, Body Wash and Deodorant within the personal category represented growth of 9.92% versus the previous year. The Home category -- the Home Care category also presents the sales growth of 3.57%, driven by strong growth in Garbage Bags and Food Packaging subcategories. In terms of geographies, Greece sales presented a growth of 3.82% in 2022 versus 2021, presenting significant growth behind the strategic Personal Care categories such as Skin Care, Hand Care, Deodorant, Fragrances [ Sun Care ] as well as behind the Home categories of Food Packaging and Garbage Bags. At the same time, Greece sales benefited considerably from growth opportunities within the health care and the export challenge, while strong growth was observed in the Luxury Cosmetics channel that benefited from higher consumer demand for Fragrances and Makeup products. The Affiliate exhibited significant sales growth of 12.66% across all strategic product categories, reaching EUR 296.83 million in 2022 from EUR 263.48 million last year. Excluding the FX currency impact on a currency-neutral basis, Affiliate sales represented a growth of 14.23%. In terms of Ergopack operation, Ergopack production facility, which is based in Kaniv and was temporarily closed following Russia's invasion in Ukraine, has been in full operation since the end of April of 2022. Since then, we have progressively restarted manufacturing in Ukraine and are currently distributing and selling under a strict credit control policy. Therefore, Ergopack now manages to cover the majority of its distribution channels in Ukraine as well as its export network. Despite the temporary suspension in Ergopack activity that lasted for 2 months, Ergopack sales during 2022 amounted to EUR 22.51 million compared to EUR 27.33 million last year, decreased by 17.6%. Ergopack EBIT within 2022 was steady at EUR 0.78 million, up from EUR 0.27 million last year, demonstrating its ability to rationalize costs. Ergopack territory remains a significant region for the group and constitutes an integral part for our strategy. With respect to our activity in Russia, we have taken the decision to withdraw permanently from the Russian market. Our presence in Russia was represented through a 100% indirect subsidiary, HOZTORG, a commercial business with immaterial participation in the group's total sales. The loss from the termination of its activity -- of our activity in Russia amounts to EUR 960,000. Regarding the group's profitability, throughout 2022, persisting cost inflation and supply chain disruptions put pressure on the group's profitability. Overall, we responded proactively to the challenges by implementing various initiatives to drive topline growth and control costs. We made a strategic decision to balance our value growth and volume in order to safeguard our competitive positioning in line with consumer demand. We play extra focus within the past 2 years behind our HERO portfolio. Our high-value products supported sales growth within this year, and we are confident that by having an optimized brand portfolio will bring us faster growth in the future behind our strategic categories and geographical region. At the same time, focusing on our HERO portfolio allows us to optimize other operating costs, optimize inventory levels and make targeted investments, which will drive profitability higher. In addition, we placed emphasis on cost-saving initiatives relating to supply chain optimization, such as diversifying our sourcing channels, reviewing and renegotiating supplier contracts, keeping safety stock where possible, increasing efficiency and productivity, such as investments on automation, systems, processes, business analytics and balanced advertising and promotion expenses. Therefore, EBITDA was down by 4.85% to EUR 45.53 million in 2022 from EUR 47.86 million in 2021 with an EBITDA margin of 10.23% from 11.78% in 2021. EBIT reached EUR 32.24 million during 2022 versus EUR 34.99 million in 2021, reduced by 7.86% and EBIT margin stood at 7.24% from 8.61% in 2021. Earnings before tax settled at EUR 31.76 million in 2022 from EUR 37.72 million in 2021, reduced by 15.81% with an EBITDA margin reaching 7.14% from 9.29% last year. Net profit reached EUR 26.27 million in 2022 from EUR 31.01 million in 2021, down by 15.29%, while net profit margin settled at 5.90% from 7.63% in 2022. As mentioned earlier, these figures represent the group's continuing activities that is the activities excluding HOZTORG. And excluding ELCA Cosmetics contribution since the group's participation was sold on June 15, 2022. Previously, I remind you that ELCA Cosmetics was consolidated as an affiliate company through the equity merger. On June 15, 2022, the group proceeded to the sale of its 49% participation in the JV with the ESTEE LAUDER company, ELCA Cosmetics in the context of a win-win decision for both sides. The aggregate purchase price amounted to EUR 55.2 million. The amount of EUR 14 million was paid on 16th of June 2022, and the balance will be paid in 2 equal installments of EUR 20.6 million in January of 2025 and in January of 2028. After the group's plan, we are already in the process of replacing the profitability of the joint venture by executing a specific strategy that focuses, on the one hand, on intensifying the group's acquisition plan, and on the other hand, on concluding new distribution agreements. To this end, we have already announced the acquisition of Stella Pack, a Polish consumer Household products company, a successful business of approximately EUR 73 million of sales and EUR 8.5 million of EBITDA [indiscernible]. At the moment, we are waiting for the approval of the Antimonopoly authorities that is estimated to be finalized shortly. This acquisition, due to its homogeneity with our core business, will add significant synergies at all business levels from sales, administrative services, warehouses and factories, covering fully the joint venture's profitability. Moving further, the management focus has always been on maintaining a healthy balance sheet and strong financial position in order to be able to implement its strategic growth agenda, despite any challenges in the external environment and make investments defined organic and acquisitive growth. 2022 is yet again another year that shows our commitment. Net debt reached EUR 16.35 million at the end of 2022, mainly supported by the proceeds from the sale of ELCA Cosmetics participation and lower CapEx needs in '22 due to the completion of Polipak project. We are returning value to our shareholders. The Board of Directors, we are -- we propose to the Annual General Shareholders meeting a dividend payment of EUR 10 million corresponding to 38% of the group's net income. We are investing behind our organic growth. We focus on the product portfolio rationalization through our HERO portfolio and on targeted advertising promotion investments and innovation plans. We are continuously working behind improving operational efficiencies and effectiveness. We focus on streamlining processes in the supply chain, investing in automation, infrastructure and systems. The construction of Polipak's new production facility is a significant investment to defend. The new 24,000 square meter technologically advanced production plan is a path with modernized machineries, upgraded R&D and the demands of automatic production processes towards the production of more environmentally friendly products and decreased energy efficiency. Finally, as mentioned, we also remain active behind our agenda for acquisitive growth. The acquisition of Stella Pack is of strategic importance and will bring significant added value to the group through operational synergies and will also contribute to the group's ambitions towards circular economy. Our financial stability allows us to also consistently support our social and environmental ambitions while maintaining a balance between economic performance and responsible practices. Throughout 2022, we made significant progress towards our ESG ambitions, focusing on sustainable production and consumption, driving communities and empowered employees, all while driving growth and delivering value. Amongst others, we focused on obtaining environmental management system, anticipation of health and safety management system at the group's production plan, installing photovoltaic systems at our facility at Oinofyta, covering almost half of the plant energy needs, while we aim to increase the use of renewable energy sources in the future, developing plant with higher ecological profile, using sustain ingredients, recycled and recyclable materials and cyclical economy practices, empowering our people through systematic learning and upskilling, establishing a hybrid working policy across the whole group, maintaining an inclusive environment with the 5% of the female employees equal to 54% and finally, supporting our communities. In 2022, we offered through multidimensional dimensions more than EUR 2.5 million in order to provide relief against natural disaster and humanitarian prices, support and raise awareness towards environmental protection, support valuable population groups and support awareness on health and safety issues. As we move to 2023, we do expect further challenges in a volatile operating environment. However, we remain focused on sustaining our growth momentum and competitiveness while protecting our profitability margin. We will review continuously our action plan to activate further mitigating actions and deliver improved margins. At the same time, we expect that our strategic focus on our high-value HERO portfolio will have a significant positive impact on our future growth prospects. We will continue to pursue our strategic agenda emphasizing the group's growth pillars, market development, economies of scale and synergies, aiming to continue creating long-term value for our stakeholders. Finally, I would like to mention that on Tuesday, April 11, 2023, we will present the group's financial guidance both fiscal year 2023 at the Hellenic Fund and Asset Management Association. 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.

2022 has proven quite a tough year, but I think it's managed very well. We see very, very good growth in sales. I was wondering if you have any outlook on your 2023 sales growth like on an organic basis. On the current trend, how are they are running now? And maybe how we could see these things running through to our 2023 revenue focus? And if you have any indications on pressure of the cost, should we expect an improvement in the margin, especially in the Household segment, where we saw a pretty good drop there, pretty good pressure? That was one question on basically the output. And maybe if you have anything, any new opportunities you may have identified, if you could give us a view on that?

When you ask for opportunities, you mean in the field of M&A?

Yes, in the field of M&A. Apart from Stella Pack because it's quite a big deal. Do you have anything else you're looking at also that might be of interest?

Yes. So for -- replying to the first question, I would say that as we speak, almost after 3 months of operation in 2023, we have experienced a huge growth in sales amounting to a 24% increase in sales. Of course, we have to admit that the Easter now is relatively earlier, and for this reason, some seasonal sales came earlier than the previous year. But extracting the seasonal sales, the like-for-like growth for the rest business is 18%. So the nominal is 24%, but the like-for-like is 18% due to the Easter. The cost structure in relation to the raw materials, I can say, that is stabilized some months ago. So now that we have better sales and a very good and decent growth in sales. Keeping in mind that in the past, we've had some price increases in our products, and having in mind that nowadays, the cost is more or less stabilizing. The EBIT margin is much better, not only because of the leverage, the growth of the sales, but because of the other reasons I mentioned before. So this is the performance and you will have a trading update in April.

Yes, of course. In this sales growth, you said...

And excuse me, and you will have, on March 11, a guidance for 2023. You will see the trend there, which is -- yes, which is in line with what I mentioned before.

I was wondering only if you could give us an indication, is it like plus 18% volume or price-driven or both?

It is mostly volume growth. This multiple...

Multiple in growth.

Yes. Because the price increases now are much less in comparison with the [indiscernible].

You have already taken price increases.

Yes. We have already done that. So it is mostly volume growth. As regards to the opportunities, yes, we have one more case that was frozen due to the Stella Pack project in Romania, and now we have revised this and rediscuss. It is in the same field like Stella's product portfolio. But we should start the discussions and take the feel of the whole situation because our focus was in Stella, and we didn't want to confuse, specially where the Antimonopoly Committee in Romania. Now that we have finished with Romania, and we have to -- we have taken the Antimonopoly Committee's approval in Romania, now we'll start again the discussions for this project in Romania. This is something new, and I hope that by autumn, we'll finalize this in 4 to 6 months.

Okay. How -- when are you expecting the Stella Pack starting to come in the numbers, like finalization come in?

The current stage is that the committee have sent questionnaire to the third parties, to the retailers and to the competitors in order to crosscheck the file. And we expect to -- they expect to receive the last answers next week. After this, if they feel comfortable, then we'll start discussing internally in order to issue the decision. When do we expect to have it? In 1 or 1.5 months from now.

Next question is from the line of Webb Marc with Quaero Capital.

I was looking for a bit more color on trading this year. I'm very impressed by this figure of 18% growth in Greece, considering it's excluding the Easter impact and mostly volume. Can you give us a bit more color on what's happening there? 18% is extraordinarily strong growth. And then afterwards, I wonder whether you can go through your other markets in Eastern Europe and help us understand. I mean, we've already seen that sort of Ukraine seems to be getting back quite well. But in the other Eastern European markets, if you can give us sort of main market by main market, the big trends in demand at the moment, that would be great.

Thank you, Marc. But what I mentioned before regarding the 18% and 24% nominal growth of the company in 2023 is the group's performance, this is not only in Greece. The whole group grew by that, yes. So all the markets have been -- presented a very good growth around this because this is the average. The best market in our group, Greece market, Romanian market, Polish market, Czech Republic is doing very well. So everyone is doing very well. Even Ukraine is doing very well. So this average is connected with the group's performance.

Okay. And just to make sure I didn't miss something, is any of that growth due to consolidation of a previous acquisition that wasn't where sales weren't consolidated in the first quarter? Is this all real organic growth?

It is all organic growth. It is like-for-like, nothing new happened. So everything is comparable.

And just to give us a little bit more color in terms of -- you've told us the geographies where things are doing well. Is there any particular product range that is driving this growth?

Both Cosmetics and Household business, which too represent the 90% approximately of the total sales are going in the same path. I mean they are doing the same performance.

That's fantastic. And just also getting to help us understand, I don't have my statistics for last year, but I'm just trying to understand, are we here bouncing off a low base for your sales in the first quarter of last year, which will wear off as we get in? Or is there real reignition of demand across your markets for your products and Sarantis doing well?

We had a break. We had a break last year because they were -- if you remember, started at the end of February 24 last year. So the half of the first Q had the harm, the kind Ukraine business, the Ukraine operation was frozen at the time and the rest markets are a little bit done. So yes, there is an effect connected to the first quarter of 2022.

Okay. Another 2 questions, if I may. In Ukraine, when hopefully things settle down, hopefully, will you -- I mean you considering you've stayed there whilst things are tough. You're going to obviously stay there when things are going to open up again. Have you already identified potential big acquisitions in Ukraine because it's a very populous country, when things sort of reopen?

No. We don't have any appetite to expand the business by acquisitions in Ukraine.

Okay. Understood. And just last question. I was interested to see, in your communication, you said now that the ESTEE LAUDER joint venture, you've sold it back your share. You said that there were now possibilities for you to sort of develop on that market. Can you give us a little bit more understanding what you mean by that? Does that mean that your -- through your sort of distribution network, you are now going to be capable of selling things to those who were previously buying ESTEE LAUDER? What are the rules of the game with ESTEE LAUDER? And what do you hope to be able to do?

The real opportunity depends is that in the packaging, we didn't allow to have any new product. We're following now Sarantis operation because all these products were competitors of ESTEE LAUDER in a way. So now that we are out of this joint venture, we are free to cooperate with competitive brand names in the field. So this is the opportunity, and we have started the talks with the principles in order to form cooperations, and you may have our news in the future.

The next question is from the line of Carlos [indiscernible] with Europe Securities.

Three questions. One, if you can provide some information regarding the CapEx for 2023, excluding acquisitions? Two, if it is possible to disclose the acquisition cost of Stella Pack? And third question, why the ELCA deal, the remainder of the sale proceeds are so deep in the future allocated 2025 and 2028?

The CapEx for 2023 is a CapEx of maintenance. I mean, not more than EUR 3 million to EUR 4 million for maintenance. The Stella cost is not -- I cannot reveal the Stella cost because, as I mentioned before, I'm in talks with our competitor in Romania. So I don't like to mention that. And regarding ELCA, if you remember, the agreement that we had until the end of the joint venture was that they had a smooth right to call ourselves in 3 installments. One in 2021, one in 2025 and one in 2028. So when we reach to an agreement in order to sell the whole of the entire state that we had and closing the deal at EUR 55.2 million, we received another from Stella and from ELCA, from ESTEE LAUDER in order to take the money all at once. But the discount rate applied was not enough benefit -- is on great benefit. So having in mind that Sarantis has no problem regarding the cash flow because we generate every year a huge amount of cash flow [indiscernible] accept these, and we follow the initial plan. So that's why we take our money in 2025 and 2028.

[Operator Instructions] The next question is from the line of [indiscernible].

Just a bit of colors on the volume growth you've seen at the beginning of the year. Just to get a sense of, is that purely on the Sarantis side or are the competitors seeing the same thing? Are you seeing that gaining market share on that one?

Yes, this is the situation. We get some market churn, and of course, we have some small price increases, but not more than 4% this year in order to fine-tune the price increases. But as we understand, the like-for-like growth of 18% is a market share growth.

Okay. You said the EBIT margin was going to be substantially better, obviously, with the scale effect pricing leverage. Could you give us a bit more color on the raw material price deceleration, cost deceleration you're seeing? And if I understood right, you're planning a further 4% price increase. Is that already in the January numbers?

The 4% is already implemented. Regarding the EBIT margin, I'm not sure the growth of the aging plants mentioned, is behind 2 reasons. The first is the real growth of gross profit meaning sales minus cost of goods. Because of what I mentioned before, the prices on the sales are those prices after the year increases and the cost of goods are now better. So we have an increase of the gross profit margin, and then we have a leverage coming from the huge growth of sales, keeping the rest operational expenses stable. So all in all, the EBIT margin is much better.

Okay. Should we expect 2023 to be a year in terms of margin as good as 2021? Or is there a still some lag you still need that the prices of raw materials go down?

Be patient and please wait until April 11 in order to see our guidance. You will see what we will do there and what's going on, okay?

Okay. Last question on my side is regarding Stella Pack. From my understanding, you're expecting that for the end of the first half now, you always said that you expect almost kind of like 1/3 of the synergies to be in the first year. Should we expect any synergies in 2023 from the acquisition?

Yes, of course. Some synergies would come in 2023. Of course, as you probably know, the matter we have discussed that we expect synergies on top of the existing EBITDA is EUR 3.5 million, but keep in mind that there is the delay of the closing. And even if it has the full year, the 30%, 40% of this EUR 3.5 million will be realized. Now it is less than that. I mean it is 20% due to the time. This 20% will be realized out of this EUR 3.5 million will be realized in 2023. And we will speed up in order to realize the rest in 2024.

The next question is from the line of Kourtesis Iakovos from Piraeus Securities.

As far as I understand the -- during the last fourth quarter, there was deceleration for decreased sales in Greece due to the loss of the distribution agreement for WELLA's product. And you mentioned that as far as I understand, you have a strong double-digit growth in Greece during the first Q 2023, first of all, do you have any plans for new distribution agreements in Greece to replace the loss of WELLA? And second, this growth you mentioned, do you exclude WELLA from previous year?

No, there are no plants other than the plants in a selective channel. As I mentioned before, we are now free to cooperate with competitive banks against ESTEE LAUDER. Only there. You remember that WELLA operation in mass market. So in mass market, I don't have any plans yet to replace WELLA. And regarding the comparison, we compare the last year's [ divestiture ] including WELLA. So the base is high.

So you still have a strong double-digit growth?

Yes.

The markets are driven?

Correct. And you're right, and you're right. If I exclude WELLA from the previous year, then the growth is much better.

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

And second, just give some quick color on the dynamics of Slide 9 and Slide 12. Why did Home Care perform so poorly in terms of profitability versus personnel? And in Slide 12, the geographies, so Greece is responsible for the decline in profitability?

The specific category is -- was in a deep ship. I mean the whole increases of raw materials are not only in packaging, which was the issue in Personal Care, but the whole raw material price increases affected the whole package of the product. The raw material, packaging material, everything. In the Personal Care, we don't have so much pressure from the raw material indices because only some parts of the packaging were affected in the past. In the Household products, we had bigger volumes because everything from aluminum to plastics or whatever it is included in the product was affected a lot. So the second problem regarding the margin is that you cannot absorb the 100% pressure of the raw materials price increases. In your sales price and especially in Household products where we have -- you have to compete with private label, it is a lower price. So you must be very careful in price increases, and you cannot absorb the total pressure of the price pressure in the cost structure. So that's why in Household products whether you have to admit that too there is a commodity sense behind and the competitor is the private label, it is very difficult to offset the cost pressure. And this is the main issue. Now that the cost is stabilizing, you will see in our trading update that both categories, Personal Care and the Household business, are doing very well in terms of growth and in terms of stability.

Okay. And in terms of Greece, does Greece have a higher weight of Household products? Is that the reason why Greece has done less well than outside Greece?

Yes, you can say that. You can say that. The competition in private label is harder.

[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.

Ladies and gentlemen, thank you for your participation on today's conference call. We are at your disposal for any further queries you may have. Thank you very much.

Thank you. Good afternoon.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling. Have a good afternoon.