Grupa Kety S.A. (KTY) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon. Welcome, everybody. I would like to welcome everybody who joined us here in the room, but also our online viewers who follow our meeting online. And the subject of today's meeting will be to discuss the preliminary achievements of 2019. This will be just a preliminary recap. We have a lot to share with you, good information, a lot of successes to share with you, but the Management Board, would like to comment on yesterday's message that related to the estimates for 2020. We will start with a recap of the achievements of 2019, which will be presented by Dariusz Mañko, President of the Board.

Good afternoon, ladies and gentlemen. I hope you can hear me well. I'd like to welcome everybody here in the room and the online viewers. It's a pleasure for me to meet with you today and communicate that 2019 is yet another historic record profit for Kety Group. It's been 10 years that we've been setting records -- well, it's been the past 8 years. I was too fast. I'm sorry. We still have 2 more years. Well, I was thinking that 2009, it was a crisis around the world. But yes, well, okay. Now PLN 3.2 billion, these are the revenues in 2019 and a 7% growth year-on-year with a low level of aluminum. So the volume helped us despite the fact that it was a difficult hard year, hard for many companies in our industry, especially in extrusion. It's our competition. And we know that today. We have the data today. Well -- and the data shows that there are big drops, falls in revenues. So we believe that we were helped with our strongly diversified portfolio and good revenues translated to high profits. On operational level, EBITDA, 13% growth and PLN 294 million net profit. Again, historic record profit, 10% higher than last year. We made a correction in the dividend and the results were even better than we thought. Why did it happen? First of all, the Flexible Packaging segment performed better than we expected, and that was connected with a new production line, manufacturing line for BOPP film. And I can safely say that this is operating 100%, and it is completely booked and we didn't expect that it will happen so fast and the results will be so good in December. And I need to remind you that we've actually launched the manufacturing line in autumn last year, but the orders came very fast. And again, extrusions, Extruded Products segment was another nice surprise. So initially, we had some falls in orders and we were getting ready. We were concerned about the recession and how the market will behave, where will be the bottom. And later on, we started to think how to actually end the year successfully so that December is not really bad. But it turned out that December was a month that showed us quite optimistic symptoms, and it was confirmed during the first quarter and the orders came. And according to our graphs, we know that the downturn is over for us. And that means that our group and the Extruded Products segment went quite well through the recession. Well, I -- it is connected strongly to automotive industry. So it is over, and it didn't cause us too many problems. In 2019, we also paid out a dividend, PLN 229 million. I believe this is a 7% return rate. And it is a satisfactory -- satisfying message, in my opinion. And this is quite reliable. This is quite a good message for the future pensioners. Ladies and gentlemen, what else happened in 2019? Well, export -- it's not a secret that we are a big company, PLN 3 billion trading, and we are very happy that we are able to work on our export position. This is 47% share in our revenues, in our income. And this is something that we worked for. And this is -- this continues to be consistent with the philosophy of our operations with our objectives. These are different markets, but the most important thing is that all 3 segments are doing quite successfully -- are quite successful there. So this is an optimistic message. Of course, the capacities utilization, 86%, 88%, 89%, well, that shows you one thing, that all the investments and the operations and the development of Kety was error-less. So we did not make any mistakes last year. How often we are asked, how do you make it to be so successful? Well, it's quite simple, actually. You have to have a cool head whenever you invest in anything, while the investments must be made according to your competencies. You need to have employees, technology, know-how, market and once you have all the competencies, you can buy a new tool, new machine and actually invest in something in the area, in the field that you know. So in such way, it's less difficult to make a mistake. Well, we have a new direction, polypropylene film. But 3 other businesses, we know quite well. But think how long we waited for the press for hard alloys. And we've been thinking about it for 10 years. This was a project that was postponed and postponed until we had those yellow cards. But we were waiting for a good moment to say, "Okay. Once we have this new press, we need to be sure that we have orders." We don't really want to invest millions of zlotys in something -- in a press that doesn't work. And this is similar with every single investment. It is also about good timing. There's a similar situation that applies to the laboratory with the painting shop for aluminum elements. And it is right now working 70% of capacities, and soon it will be 100% of capacities that will be booked. And the fact that we are so successful and we developed so well is because our investments are booked in ahead of time, in advance. So we are quite cautious in terms of our investment plans and returns on investments. So we are very happy about that. As you can see, 2019 closed down a certain investment field. And as you can see in our prognosis for 2020, we are planning less investments. And this is a moment for us to think through the new -- the coming 5 years. So we had -- you could read in the press about us saying about strategy, but we didn't really say anything about strategy. We will be thinking about the strategy during this year, and we will be communicating something after the holidays. We want to think it through peacefully, thoroughly, in order to offer you something reliable, in order to increase our profits that are so important. Well, I believe this is all from me about 2019. Well, everything that I wanted to tell you about 2019, I just told you. Let's move on to the Packaging segment. And here, we are presenting you a new slide because right now packaging are very popular. I mean it is popular to talk about packaging, that they are outdated, that they are not popular anymore and things like that. So there is a bad environment when it comes to packaging, but this is just a piece of information on the whole truth. With the help of packaging that are produced by our factory, you can actually store food longer. Without this packaging, well, the storing time, the shelf time, would be shorter. And the same goes for drinks, for liquids. Of course, it is popular right now to buy glass bottles, but well, they weigh more, for instance. And we understand the tendency and that we are not angry about it at all. For us, it was so much better when the world forgot about it and produced 12 colors, packagings with various laminates and multilayer packagings. And you could actually do nothing about it because there was no possibility for recycling this kind of packaging. Well, so we believe that the world cannot forget about the packagings. They cannot give it up. But we will be moving into homogeneous products into single layer -- actually, single-layer packagings. And they can be recycled and reused or they are not just stored as waste for hundreds of years. So we are not really afraid of that. But we are following the tendencies. Our teams are working on that. We have our own solutions. Our competitors are also working on that. And well, we were helped a lot by BOPP investment because this is a homogenous material, and on the basis of this material, of this film, all our packaging are made. And that's why the second production line is so successful. And as far as the packaging are regarded and the results thereof, well, with regard to the revenues, to the profits, well, that was a natural thing because we have had new investments. And we knew that the new investment will bring new profits. But 53%, please note that this is the growth of export. And we are very happy about it because this is actually the access to a bigger market, bigger than just the Polish market. And this is something that I keep telling you. This is about our employees and their competencies, their skills. And today, this factory is around 7% of European market -- responsible for 7% of the European market. So this is a big player on the European market. It is very rare for a company to be so successful so fast in the field that they weren't operating in before. And today, we are quite important company on the European market, and we continue -- we plan to continue the good situation. And we would like to have 5% higher EBITDA, PLN 255 million. So while naturally, the profitability will drop because BOPP comes at a lower margin than the other products and we will focus on optimization of the remaining production. And here, we need to focus on the fact that on the technology regime, on the continuous productions, this is how we achieve good margin. I need to tell you that we have good machines, good skills. The only problem are the roto machines that work in Kety. They are a little bit old. And the investment, as you can see, the PLN 30 million in packaging, well they will relate to a slow replacement of the roto printers into new flexo printers so that the field of our traditional packagings is not negatively impacting our results, our revenues. And that's all probably about the packaging sector. And if there are any questions, then please do not hesitate to ask them. And now I give the floor to my colleagues to discuss other sectors.

Good afternoon. The Extruded Products segment. And we have a slide to present to you. And as the CEO has said already, well, we've improved when it comes to the orders. During the first quarter, as you can see on the graph below, you can see the leading producers, also the Extruded Products Segment and the change in Q3 in extrusion volume shipments. Well, there are different scenarios: one says plus 2% and the other one says minus 2%. And we stick by -- we stand by the positive scenario, and we believe the global market will grow by 2% in 2020. This will be a challenge -- competition will be a challenge, competition with those who recorded some losses. And again, another challenge will be the import from China and Turkey. These are countries who traditionally offer low prices, and they start coming to our markets. And we expect that the revenues will grow by 5%, the sales will grow by 5%, and that is all connected -- all the revenues are connected with the price of aluminum. In 2019, we started with over $1,000 per tonne. So for us, the income is a result of the price of aluminum, so 2% lower. So -- but with regard to tonnes, we are growing by 5%, and this is a good message. So we are still a leading company on the Polish market. And this is our biggest challenge. We were the leading company, and we will continue to be the leader for a long, long, long time in the future. And we are using a higher potential of the export, and this is our advantage. And so far, we've been applying same policy on all markets, regardless whether it was a Czech market, Italian market or German market. And we have now different companies working on different markets, so in Czech Republic, in Italy, in Germany. And now we are actually coming to the Benelux market and French market, and we have a Belgium expert who will be working for us on Benelux and French market for -- actually in order to win new contracts there. What can I tell you about the investment? Well, there is one item that doesn't appear anywhere else: production tools, PLN 25 million. Investment is lower, and they actually focus on improving capabilities. We will not be investing in a new press or any -- we are not focusing on improving -- increasing capacity, but we are actually focusing on the machines that we have. And we want to focus on increasing the effectiveness, and we would like to achieve 1,700 tonnes of additional production capacities. Of course, we continue automation process. So this is mostly in the facility that processes aluminum elements and mostly for automotive industry. This is where the robots can be used, and we have been doing that successfully so far and we'll continue this. New projects. Well, we strengthen our position in automotive industry. Well, we had a sort of slowdown in automotive industry, but this is actually a direction that will be continued in automotive industry. The cars will have more and more aluminum, and so this is something that will be continued. It is not reversible situation. And we have new contracts, and these are really long-term contracts, up to 5 years. And one of the contracts that we've signed, this is with Daimler. And whenever I look at cars, I can see the elements that we produce. There are brands and models of -- car models that use only our elements. These are cars. What else? So what will happen in the future? We are telling you that aluminum, as the CEO mentioned, BOPP, well, aluminum is an unlimited lifespan material. It can be recycled unlimited time -- a number of times. And we have actually, this project, we focus on our internal processes, that we would like to actually increase the share of scrap in the most popular 6xxx alloys to -- right now this is at 30%, 40%. We would like to increase it to 85%. We know how to do it, know how to use more recycled aluminum. We are one of the very -- the one company in Europe to have the factory, the right facility to do it. Well, we can use the scrap. But not every scrap can be used. These are special kind of scraps. So plastic ones, flexible ones, the highest quality scrap. So replacement of the aluminum and using more scrap aluminum will help us to increase the capabilities. Aluminum segment, Aluminum Systems Segment. Well, 2019 was a historic record year. And in our segment, we need to highlight sales improvement, the sales, but also improvement of margins. And this is something we focused on and worked on. And in 2019, we were able to improve it a lot. And now the market situation, well, I've signaled this to you during our last meeting, and now we have specific data covering 2018. And the graphs, as you can see, the production structure in Europe on the left and in Poland on the right, well, it's different. As you can see, only 9% of window productions are aluminum windows, where Europe on average is 27%. And that shows actually the situation, how much Polish market needs to do to catch up with Europe. And these are just the value indicators. And with regard to quantity, just 5% of windows manufactured in Poland are aluminum windows. So well, that shows you even a longer way to go. And well, as you can see on the graph below, you can see that Poland is the biggest producer of windows in Europe. But still, because we are quite successful in selling wooden and PCV (sic) [ PVC ] windows in Europe, well, the same will happen to Poland, and we will actually improve our situation. Well, in the future, on Polish market and on the European market, when it comes to aluminum windows, well, the situation can only improve. Other estimates. Now about the crisis about the downturn or slowdown, well, we are not being affected by this kind of slowdown directly. Well, the only signals we actually get from our customers who export their products to the European markets, that there is a slight slowdown, but it doesn't translate directly to our sales and revenues. As you could see, we had a record revenues, record sales, and there are no changes as of the beginning of the year. Well, the only problem is the low fluidity -- liquidity of the construction market. So this is the only problem, the flows in the construction market. But well, it's not the first year with this kind of problem, so we've learned how to deal with it. And now the budget estimates in 2020. Well, our estimates, our objectives include a plan. Well, with the good margin that we have, we would like to have PLN 120 million worth sales higher than this year. And we've completed 2 big contracts, Mennica and POSEJDON. This is the sales that will not be recorded this year, and we will have to catch up. And we estimate that the growth of sales of Aluminum Systems in Poland and abroad will be worth PLN 120 million more. And now operational profit. On EBITDA level, we would like to maintain the record EBITDA from last year, 16.2% higher, so 3% growth change. Where do we want to go? What are the directions that we would like to focus on developers market: apartments and condominiums? Well, that -- it doesn't really produce based only on PCV (sic) [ PVC ] windows or wood. We are cooperating with the developer's association. So we offer training, so we have lectures, inform everyone. And so we believe that in the future, the developers will change and switch on to the aluminum windows. So this is where we are. And now with regards to the products, well, I will show you some numbers on the next slide. We are not showing the tonne -- sales by tonnes because we don't run this kind of data. But we plan to do the powder coating in our coating rooms. And this will be 94.5 kilometers. So yearly, we powder coat 6 -- the area that is 6x -- that is equivalent to 6 Warsaw. So this is -- when it comes to kilometers, and the length of these are twice the [earth]. And now the profiles that we produce: 3.3 million pieces. And the -- according to meters, it means that every EU citizen could receive 1.5 meter of profile from us. So that shows you the scale of what we do, and therefore, the numbers, PLN 1.5 billion. New markets. Well, on this slide, you can see our new focuses, so Kenya, Italy, Spain and Portugal. Well, these -- we mentioned them today since they've been mentioned by us before. And well, we would like to focus on them, and we would like to focus on improving our presence there. And after several years of monitoring the market, of actually checking up the market, well, we can say that these are quite promising markets for us. Now with regards to investments and new products. Well, we plan to have more investments than in 2019, but this is only connected with the construction of the production hall in Opole. So it has been moved from 2019, PLN 28 million. And we have the construction permit already, so we plan that this investment will be completed, finalized by the end of the year. New products. I am showing you the things that I've mentioned already, so roller shooters, new elements that will be produced in the second and third quarter. We are also showing you the hurricane-proof roller shutters, and these are specialized products mainly for American market and specialized European markets. And we are also showing you solutions for interiors, but this is a new idea for walls. And this product should help the general contractor to bypass the specialized companies. So the general contractor, basing on simple solutions and education that we offer, will actually have the opportunity to install this kind of wall in different ways, and they will not have to use the help of specialized companies. And this is a new solution. We've seen it on the American market and we just wanted to bring it to Poland and Europe. And in the end, I'd like to mention a few things about our approach to the sustainable development. And several years ago, our customer, mostly from Western Europe, forced us to focus on that. And this is what we do. And it's not just our company, not just our products are given certificates, but as you can see, there are several kind of certificates that are given in different countries. Well, these are similar certificates with ISO. So the difference is just that ISO, you can have or not have it. But we are talking here about different levels including the highest levels, and well, this is because we offer the highest-quality solutions. So thank you so much for your attention.

Good afternoon, ladies and gentlemen. If I may, I'd like to add a couple of words about consolidated results after 2019. They've been commented by my predecessors, but this year was a historic record year on every level, over PLN 200 million more in sales. And that happened in the reality where aluminum, according to Polish zloty, was cheaper, and this is because of higher volumes that were sold. And all segments contributed to that operational activity and translated to PLN 524 million EBITDA, record setting, again. And the biggest contribution came from the Aluminum Systems, over PLN 40 million; and Flexible Packaging Segment, but over EUR 30 million more in profit as compared to the previous year. And this is because of the new production line. Financial activity, no surprises here. Mostly good information. Tax rate, on a good level, 19%. There were not really changes in terms of taxes. And the 200 -- and also higher profit, again, record-setting. About our objectives for the estimates for 2020. Well, we know that the situation continues to be unsure on the market, but we don't really know how the situation will change. Therefore, our objectives are neutral, or partially, they reflect on some market tendencies. So they may be more difficult for us because we start with a lower aluminum price and it will affect the final price of our products at some point. But we don't believe that there will be a big change, negative or positive, on the market. And we will continue to being operationally successful. And now moving on to results that are planned for 2020, starting with just a small comment. We remember that in 2019, we've received PLN 9 million of return or -- for the energy paid. So in order to compare the same conditions, so we needed to actually deduct this PLN 9 million from our results and plans for 2020. We would like to increase our sales, our revenues, and this will be mostly because of the Flexible Packaging because of the second year of the new manufacturing line. We will also have more revenues in Aluminum Systems segments and the stable sales revenues in the Extruded Products, and that will be actually connected with the prices of resources and foreign exchange. And in this situation, our results will be again higher than 2019, PLN 20 million more EBITDA. This is our plan. And the contribution will be from Aluminum Systems, PLN 9 million; PLN 11 million from [ SOP ] segment; and the rest, the [ SGB and GW ]. Also interest rates, that will come from the negative FX. Again, taxes, we don't really expect any changes there, including the deferred tax changes. And right now, well, we have higher amortization, therefore, our operational results and the EBITDA is a little bit lower. And on the situation about the cost. They actually grow by PLN 100 million. We have 2 important items here, so materials that we use and energy. And this growth increase is due to the fact that we increase our offer and volumes and also salaries. They are responsible for 9% growth year-on-year. So we have 3 elements: so technical or regulatory zone because we know that 2019 fund -- increase fund -- salary increase fund will be functioning in 2020. We also have the employee capital plans. And because of that, the salaries will be higher. We will also use the money to increase the employment, and we plan to employ 100 new people because of the new fields that we will be operating in. And we will be also investing in, for instance, painting shop so -- or the BOPP film line. And we also plan a special fund for salary increases, but this is just a small percentage. And now our financial standing, so cash flows and our cash situation. Above in the graph, you can see the debt, PLN 700 million (sic) [ PLN 703 million ]. In the end of the year, we plan to have a sound cash flows, and this is because of very good EBITDA as compared to 2019. In 2020, we estimate that the tendency will be reversed with regard to the working capital because last year, we released the capital. And in 2020, because the scale of our operations will be bigger, we will have to release more working capital. But definitely, we will be able to cover the investment plan. It is smaller this year at PLN 200 million -- slightly over PLN 200 million. And we want to achieve a high dividend, so matching 2019. 2018 was a record year. In 2019, it was also a record year. But there's one reservation, that the recommendation will be prepared by the Management Board by the end of March. And so we would like to have more time to better evaluate the situation on the market. But at the end of 2020, we will have the debt reaching the level of nearly PLN 750 million. This will be still safe. The indicator, debt-to-EBITDA, will be 1.5, so a safe indicator. And we'll be able to deliver all our plans, all our estimates. And well, this is a good start for planning our operations in the coming 5 years. And the last slide, this is just a recapitulation. So shortly, if we are able to deliver the budget, and that must be actually called an ambitious budget because of the situation on the market, we will be able to exceed all the parameters that we've set forth in our strategy 2015, 2020. And well, we stand by this. So thank you so much, ladies and gentlemen.

Thank you so much. Now we are moving on to the Q&A session. Are there any questions?

Lukasz Rudnik, Trigon Dom Maklerski. I'd like to congratulate you. Good results. Piotr, Norsk Hydro, what is the situation? You have been restructuring the business in the third quarter in the Extruded Products Segment. Does that positively affect the volumes or margin because the player with 20% share in the market, with your small share on the market, well, this is a good chance for you, a great opportunity for you?

Well, with the competition, any problem that the competition will affect us positively because the customers can notice that something is happening. Well, this is not the first time because when overtaking Hydro ASA, well, we've used our chance there. And right now, any kind of disturbances work for us.

And scrap, you use aluminum scraps. So moving from 30%, 40% in 6xxx scraps to 85%, how will that translate to the results?

Well, we've started this project and we will be telling you in detail. This is about 60% difference, so when it comes to the prices of the scrap and the aluminum -- original aluminum, well, we've got some calculations, but I can't tell you that right now. I would like to refrain from telling you that now. Well, there is just a project. It is co-funded.

Are you going to have like a yearly, annual production? And what about the numbers?

This is about 70% of what we use because this is a basic alloy for extruded aluminum. So this is the basic alloy.

And for the CEO, co-generation project?

Well, co-generation works for Extruded Products. Well, we filed our documents. We are applying for funding, and we will have the message around June. If we win, we will be doing co-generation. Can be only completed, can be only delivered if co-funded.

About gas and cost of energy, this is the main cost element in Extruded Products. Is there any annual contracting policy?

Yes. So contracts from last year, it affects today's price of gas and energy. Well, we are contracting gas and energy on annual basis. We still follow the prices from the last year, but the price in 2020 will be better than in the past year.

And with regard to the scrap and aluminum?

Well, it is also about the availability of aluminum. It's not that we are able to buy the clean scrap just like that. But that is also connected with the furnace capacities, for instance. We have 2 furnaces. And the capabilities on the market -- there are a lot of factors that need to be included in this project. We can't say that the 90,000 tonnes that we produce can be replaced with scrap, everything.

[Margisia] [indiscernible]. I have a question about higher customs rates for a ready aluminum element for USA. Will that stop your expansion in any way? Or maybe the custom rates do not affect your situation?

Let me tell you this, that our American broker is analyzing the situation, and we know for sure that the customs rate will be increased when it comes to aluminum profiles. But we don't have a specific message about the ready product, whether it will be covered by the increased rate or not. But we are competing with the ready products on the American market with the suppliers from outside of the U.S., so it will affect all of them. So we don't really expect that there will be many changes here. So we are talking about the ready products, glass product because this is what we sell to the U.S.