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

I believe we can start right now because it's 3 minutes past noon and all participants invited have joined us. In any case, you can always listen to the recording because our conference is being recorded and it will be -- the recording will be published on our website. As usual, the presentation will be started by Dariusz Mañko, Chairman of the Board. And then we will have members of the Board responsible for the segments discussing the key issues, key activities. And in the end, Rafal Warpechowski, the CFO, will discuss the financial part. I believe we can start right now. President, please go ahead.

Good afternoon, ladies and gentlemen. This is not a typical conference for us. This is the first time it is happening in my career. But I hope -- because there are so many of us, I also invited Mr. Lechowicz, President of Alupol Packaging, I just wanted to -- you to have all the people who work on the first line because this is not a typical situation. We were expecting a lot of questions, also detailed questions, and we've received them. And Rafal will be presenting the Flexible Packaging segment. But ladies and gentlemen, what can I tell you? As the Chairman of the whole group, well, I have to praise my team, thank my team. So everyone that you will be hearing today as well as the whole team, our employees, because we have to say that we passed the test in this difficult moment. All procedures worked. We had those procedures in our company, maybe frozen a little bit, including the Risk Management Committee, which commenced working right away when the pandemic started. So we were able to isolate our employees, introduce home office and avoid all the disturbances in our production, logistics, deliveries or transport. Everything worked as it should have. Of course, we weren't able to avoid infections at all. We had some cases in our company, but still the procedures worked. Those people were isolated. All procedures worked. We have risk management committee and reports. They are dealing with the situation very well. I need to emphasize it that I am greatly impressed with the involvement of our employees. I'd like to thank them. But business-wise, ladies and gentlemen, well, this is what happens when something nontypical takes place. There are macroeconomic changes happening, and this is connected with the environment in which the company operates. And we have to mention the dropping prices of raw materials and the growing prices of foreign currencies. These are 2 factors that are favorable for us because cheaper raw materials means EBITDA situation for us. They're also connected with export, higher prices of U.S. dollar and euro is favorable for us as well. So these are the factors that help us in this difficult situation. Of course, there were some disturbances in some countries. These are not really big unit facilities. I'm talking about Belgium that was closed down or Slovenia on lockdown for 2 weeks or U.K., I mean, our facilities. But the level of our results of the whole group, it didn't translate to the general level of our results. And those facilities are being reopened, and they are back into operation. So we've managed the situation, and you can see it in our results. After the first quarter, they are quite good. I can only apologize to you because we are so brave and we still provided you with our preliminary forecast. That was a secure kind of forecast as compared to what we are actually showing you right now. But mid-March, we had more question marks. We don't know how the economy will behave, what decisions will be taken by the government. So we weren't over optimistic. And therefore, our preliminary forecast was quite secure. And the results, the actual results are so much better. And we're very happy about those results because we have a surplus as compared to our plans for the first quarter, and that's a good message. And that's a good situation when it comes to cash flows, for instance. And we feel quite comfortable in this difficult situation, difficult for many companies that we see on every day that operate around our group. And we are a big company, big entity in this region. I mean, Kety, Tychy, Bielsko-Biala of Poland. So we take responsibility for the community for the health care system. We continue supporting them. And whenever we can, we provide support to those entities who function around us. And we feel responsible as a big company for our community to function well so that we go through the whole situation and we can resume normal life as soon as possible. So I mean, here, small companies, smaller entities, some of them are in such difficult situation that without our small support and understanding, they may have problems with pulling through. So this is our mission right now. This is how we function right now. And we're very happy that in this difficult time, we are a pillar and hope for the whole environmental companies that cooperate with us, but also our employees who are so happy and appreciate that we continue operation, we continue having orders and nothing serious happened to us. And now ladies and gentlemen, let's move on to the segments. Now President Lechowicz will tell you more, will give you more details about segment.

Gentlemen, Rafal Lechowicz. I am the President of Alupol Packaging S.A., the biggest entity in Kety Group. So Flexible Packaging, we are talking about 3 entities operating in Dekret Centrum and Alupol Films in Oswiecim. Tychy and Katowice manufacture flexible packaging. And in Oswiecim, we started to produce the BOPP films in 2016, 2017. Very successfully because we cover 7% of European demand. Ladies and gentlemen, we just ended the first quarter, the best so far. The sales amounted to PLN 245 million. And the sales grew by 22% as compared to the first quarter in 2019. Whereas the growth in packaging was 3% and in BOPP films, 75%. The key factor behind the growth was the launching of the second manufacturing line for BOPP films in Oswiecim, which happened 6 months before the planned launching date. As I've said, during the first quarter, the sales grew by 22%, whereas the profits were growing twice as fast. Operational profit grew up to PLN 41 million. Packaging grew from PLN 24 million to PLN 31 million. BOPP films grew from more than 100% from PLN 4.6 million to PLN 10 million. EBITDA grew by 39% from the PLN 36 million to over PLN 50 million, which was a record-setting achievement in the history of the group. EBITDA in the packaging grew to PLN 38 million and in films -- foils from PLN 6 million to PLN 12 million. And right now, I need to emphasize that the EBITDA in the films is on the growing path in March this year. The EBITDA profit was over PLN 5 million as compared to PLN 2 million in March 2019. And the margin in -- on the level of EBITDA across the whole group was record-setting, it was 20.4%. So this is 2.4 percentage point higher than in the first quarter of 2019. Whereas the packaging operated with 20% margin and foils 30% margin. In the foil business -- film business, the margin was nearly 15%. And in April, it will be over 20%. And thereby, the planned profit in the film business should be around PLN 7 million in April. And such high margin in Alupol Films is a result of the optimization of prices according to the situation as well as the synergy. So that was the optimized production processes, but we were also using the capacity effect, scale effect because of the capacities that were increased. So the operational profit was around PLN 31 million. And it was higher by 1/3 as compared to the result in the first quarter of 2019. The structure of sales in Alupol is optimum -- optimal in the context of the market and the product. 52% is exported and 48% is sold in the country domestically. 60% of our products are highly processed packaging and 40% are the BOPP films. Ladies and gentlemen, we had a question about the forecast -- for the coming forecast. But in this situation, well, it is a very big risk to have a forecast in this situation. I can actually tell you about the April. As of today, it seems that April will be the first month in the history where the margins in both segments, films and Flexible Packaging, the margins will be higher than 20%. The segment is using around 99% of the production capacities. And despite of disturbances on the market and the slowdown that is actually affecting our main customers, especially those who are delivering to the hotels, restaurants and catering business, well, here, still the Alupol company is standing by its forecast, initial forecast. So I am at your disposal if you have any other questions. So thank you so much, ladies and gentlemen.

Thank you so much. And now, Extruded Products segment and Piotr Wysocki.

Good afternoon, ladies and gentlemen. The Extruded Products segment. A couple of words about the first quarter. It was a very good first quarter. We can say that it was like a record-setting quarter sales. Let us look at the sales. And this is a higher sales -- smaller sales. But this is connected with the fact that we went from $1,800 to $1,700. And this is going further, now it's $1,500 right now. But we are very happy about the EBITDA. As compared to the last year, the growth is 26% as well as the margin that grew by 2 percentage points. So higher EBITDA is connected with a higher volumes -- with higher volumes. Now taking a look at the industries, transport and automotive, we could see the effect of pandemic coronavirus, smaller orders and really big growth in wholesalers. And we've been leading this industry several times before. But in March and February, we've actually used the opportunity. And we actually sent our products to the wholesalers, mostly to the Western Europe and to Germany. Geographically. Markets by geographically, well, Germany is growing. Italy is growing, which is quite strange because Italy was actually flat. But Germany needed our profiles, and Italians are the biggest supplier of profiles to Germany, and they couldn't really do that during pandemic time, so we used this opportunity. And now sales in terms of amounts growth by 1,400 tonnes in the first quarter. So we had a record-setting month when we sold 7,800 tonnes. This is what we sold. That was a record-setting achievement. Growth, 8% as compared to the previous quarter. The manufacturing production capacities after the first quarter, we were looking about 90% of capacities used, so we still have 10% spare. And if the situation continues like that, we still can add it to our production. An interesting fact is the implementation of a new robot. So the automation, robotization, that was the direction that we took on. Another robot was launched. And it was slightly different because before we were buying the devices and we were buying the integration as well, the so-called integration. And today, we've changed our approach. We are not buying integration, we are doing the integration ourselves. Our engineers are doing that. They are now quite capable. They got the expertise and are able to do that themselves. And therefore, the implementation of the robot is now 40% less. Well, we've spent several million zloty, PLN 21 million, mostly on matrix and so on. As today, we know what is the situation in terms of the virus. I will not be dwelling onto that. But let's look at the investments. We focus on the most necessary investments. And that's also for the overhauls, for the repairs. We are focusing on the most important repairs if we can see that a device may be in trouble. Now foreign companies. We only stopped the production in Slovenia, in our company. This is -- this happened on the 19th of April. That was actually connected with the break of our customers in Slovenia, in Austria, because some of the production is sent to Austria. But as of today, we are operating. We are manufacturing and selling. Now with regard to Ukraine, the first quarter wasn't so much affected by the coronavirus there. Our production continued normally according to the orders from the market. But what we did, we actually introduced the same thing as in Poland. That was the home office. And let me emphasize that our sales model in Europe, through the agents that we have, representatives that we have, as at today, with the situation that we have, closed borders, no flights, this model works fantastically. We have a dedicated company in Italy, Grupa Kety Italia, where we have Italians working. The same situation is in Czech Republic. Those people are there, and they could continue active operation as far as possible in the situation that they were in. But this model worked very well during that time. And we will be focusing on this model in the future as well. That's all from me. Now I give the floor to my colleague.

Thank you so much. And now we are moving on to the Aluminum Systems segment.

Hello, ladies and gentlemen. Tomasz Grela, Aluminum Systems segment again. Just like with my colleagues, I have to report a record-setting sales in all areas despite the fact that during the first quarter we didn't record the sales under contracts. I am talking about Mennica and POSEJDON projects. But we were actually able to catch up with sales in the segments. Also very good EBITDA and net profit. EBITDA, again, a record-setting achievement, PLN 61 million, so 34% growth as compared to the previous quarter. What was the reason for a very good result? Well, the change in the product structure, as I've mentioned. Sales, no sales in the facilities, projects, so no low-margin sales. But we had more product sales. But also a better prices point of the foreign currencies, so more money for export and lower prices of aluminum. And now with regard to the product structure, we stand by the growth -- growing sales in architect joinery (sic) [ aluminum joinery ] and roller shutters segment. And the restriction is in the ready product sales, and that's connected with what I've mentioned. Now already, these are the projects that are continued. And in this difficult time, we were able to continue sales and deliveries to all markets. And we have no problems with our deliveries. And the situation that we have made us reorganize the model with our customers, sales and marketing and technical support. And we also had to introduce new tools. But I will talk about those tools later on during my presentation. Well, anyways, as compared to our competitors in Europe, we do very well. We didn't limit our operations on any market. And, well, every kilogram of the profile that we deliver in Poland, Europe and abroad comes from our companies, production companies in Poland. So we don't have production companies in any other countries. Therefore, no limitations there. And that translated to a continued customer support. So we also observed a lot of interest in our products during the first quarter. And we were able to win many interesting projects. And they will be implemented this and next year. And I don't know if you can see that in my presentation, but we wanted to show you the new contracts that we have. So this is one of the buildings in Warsaw, 155 meters tall. This will be another skyscraper in Warsaw for us. Also, foreign projects were very popular. We are particularly happy about the markets that are still new for us, for instance, Lithuania or Scandinavia. We are also very happy to report that the Ukrainian market is growing and developing very well. We are also observing signals that some of the projects will be stopped, their implementation will be stopped. We are talking about trading and hotel projects. And there is a lot of hesitation with starting new projects. That may have consequences next year as far as sales is regarded. We can't really talk about the scale. It's very hard to talk about that right now. A couple of words about American market. As of today, we are implementing 5 projects there. They are continue -- they are implemented according to the schedule. One is 95% done. And the rest of them are on different stages, preparatory stages. And we haven't heard about closing down any of the construction sites even if our contract is only on production and delivery, not the assembly. So even if the construction is closed down, still our schedule -- our contract continues without any disturbances. That was the U.S. Let me just give you one more comment about the U.S. that concerns one of the questions that were asked last time during the previous conference. Well, we've actually checked the customs and the -- and actually, the duties do not apply to any products that we send to U.S. About the investments. We've actually spent PLN 13 million during the first quarter. And similarly to the previous segment, we are focusing on the necessary investments only. And so the repairs are just the necessary repairs. So the construction of the production hall in Opole will also be postponed. And now the companies abroad during pandemic, will they function? Of course. United Kingdom and Belgium, well, they are doing not as good because the closedowns of companies there affected also our customers. We are using the assistance of Belgium and British government according to all the legal requirements. And Czech and Germany, Ukraine, Hungary and the Netherlands, well, this -- we are working -- operating there without any disturbances. And in the end, I'd like to share with you what I've mentioned before, so the change that we had to do with regards to the customer support. Our representatives, our agents or technical support agents are not contacting the customer directly as before. But we've launched a webinar series, and have several customers taking part in this webinar. These are webinars dedicated to our customers, architects, and we have already trained around 1,000 customers. We have similar trainings for the employees, for our employees. And the contact before the employee and customer is just via video conferences. And we've bought special tools for that, and our customers, our partners appreciate that a lot. And just a short comment. Despite all the problems in the last quarter, we've won 2 awards, top builder for 2 products: the segment wall cement well that was done in the Mennica project and Styroterm system. And the leader of quality, consumer leader of quality award that we received from our customers. So that was in the category of profiles and aluminum. So that's all from me. Thank you so much.

Thank you so much. And now we are moving on to the financial part. And Mr. Warpechowski, the CFO, will be presenting.

Good afternoon, ladies and gentlemen. Slide 16. This is the summary of the consolidated P&L of the company, a lot of good news. Sales was higher by 6% as the previous -- as compared to the previous year, around PLN 50 million growth. As you could see in the previous presentations, this is mostly the Flexible Packaging and Aluminum area. The decrease of -- decrease there was compensated in the higher sales of the aluminum products. While the profit, PLN 146 million, that was recorded by the group growth by -- have a typical one-off events this year. And from the perspective of results, we closed down the whole quarter without negative effect of the pandemic. Especially good month was March, and that was the reason why the actual achievements were so much higher than the forecast: PLN 8 million growth in Extruded Products, PLN 15 million higher EBITDA in the Aluminum segment, and the biggest dynamics in the Flexible Packaging segment were very successfully the second manufacturing film line was working. In operations, we have PLN 108 million, PLN 31 million more year-on-year. We also had the FX below 1%. So as an effect, the group delivered PLN 83 million net profit, PLN 25 million more as compared to the same time last year. Next slide. This is the comment of our cash flow situation. This EBITDA helped us to finance the working capital, cover the taxes and cover PLN 41 million of investments and to decrease the debt by PLN 62 million, starting in the -- starting as at the end of last year. Slide 18. This is the proof of our stable situation. In the end of the first quarter, net debt/EBITDA was around 1.2%, and the leverage is 32%. And this is a good basis for the coming quarters and actually proves the good financial situation of the company. And almost 1/3 of our debt are short-term products. Maturity date is between third and fourth quarter. So we still have around 6 months until the maturity date. But we are in contact with the banks. We are preparing for the all processes. At the moment, we don't have any better signals in this area. And now a couple of words about the future, the nearest future. Of course, it is very difficult to give you any forecast because the whole situation is changing very fast. But generally, we believe that the raw materials, the dropping trend will stop at some point. And there are signals that the prices of raw materials will be growing. So now, stable situation. Operations. Our forecast in the end of March moved to new months. So the second and third quarters may be the quarters with the pressure, pressure on the volume and margin. We are talking about limiting by several percent. We are talking about Aluminum area. We also believe that the Flexible Packaging -- we believe with the Flexible Packaging, we believe that our operation there will remain the same according to the plan. And we are focusing on our operations. We are introducing new plans, optimization plans. In March, we prepared investment optimization plan, and we implemented. Of course, we respond very fast to what is happening on the market. And now if the scenario -- if our scenario works out, so a temporary change of the scale of our operation, it seems that a very good first quarter, some limits in the second and third quarter, and in the fourth quarter, we will come back to normality. And that would help us to maintain -- stand by our yearly forecast. So those deviations, we believe -- we believe that with the deviations that we are seeing right now we shouldn't be changing the forecast as now. So we are still standing before the decision. On the 4th of June, we will have a meeting and we will be presenting a recommendation for 2019 profit distribution. So we will be presenting in the near future. So thank you so much.

Thank you so much. This is the end of the presentation. And let's start the questions.

We really have a lot of questions. So let me start with the first question. What is the drop of demand that you forecast per product in individual months of the second quarter? And now the Chairman, please go ahead and answer the question.

Ladies and gentlemen, we've been observing, basing on the conversations with customers and orders, we can expect several or a dozen percent of drop, decreased orders in Aluminum and Extruded Products. But in Flexible Packaging, no drops so far. If any, then, just a couple of percent. So we are quite optimistic about the second quarter. So if so, then a dozen-or-so percent of decrease.

Another question. In the context of this situation, current situation, are you planning to limit the investment that were planned to be done this year?

Let me remind that the plan was to spend PLN 213 million. Rafal Warpechowski will answer the question.

Yes. In fact, PLN 213 million were planned to be spent. The PLN 32 million was for the Flexible Packaging. And this CapEx is really advanced and necessary. So we are talking about PLN 180 million asset today. We have a plan of reducing our spending by PLN 60 million, up to PLN 80 million. These are 2 variants that we have right now. But of course, this will be analyzed as well. As Chairman Grela has said, a huge task is the production hall in Poland, and we are taking into account postponing this project.

Thank you so much. And another question. Are you planning to limit -- to restrict employment? And the Chairman.

Right now, no. Now referring to the previous answer, if the decrease is just by dozen-or-so percent, well, that affects some of the divisions where we work on 4 shifts, and we can actually always move to 3 shifts as well. In Extruded Products, we have 300 -- 230 people outsourced, and we had to say goodbye with them. And if the situation continues, then we will have to -- we will be forced not to prolong the contract for another 130 people. And -- but right now, we are not planning to have any cuts as far as employment is concerned.

Thank you so much. Another question also for the Chairman, will you be willing to use this crisis time for some attractive mergers and acquisitions?

This is a very interesting question. Well, yes, if the opportunity presents itself, yes. We have to pay attention to this kind of opportunities and observe the situation, especially that we have a very good financial situation. But let's talk about September. We shall see how people deal with the pandemic, what will be their situation after the pandemic, how effective they will be. There is always -- if there's always a -- if there's a good opportunity, we are always interested in it. But it's too early to talk about that right now. And I believe that everyone on the market are looking around because the situation will change, definitely, and the power structure will change as well after this period. Well, we were quite lucky and quite wise to be in the process of big investments or after a merger or acquisition. We weren't in this situation that we had to introduce new procedures and manage the companies remotely, for instance, if we bought the company far away. Well, we were lucky enough that we were in a tight group. We knew each other well and we feel quite strong in this group. And if somebody actually overinvested and have problems right now, then if there are good opportunities presenting itself, then we will be interested.

Another question for Chairman, when can we expect a new strategy from the company?

Well, I promised you a new strategy, but I didn't expect that we will have the coronavirus. So we just wanted to stay in touch with you. And I assure you that we will be working on the material, working on the strategic directions, which we've already discussed. But as far as the details are concerned, we had to sit down. We had a brainstorm. We have to have some advisers look at some areas of the market. And there are no good conditions to do so. Not mentioning that the Board is not really sitting together in one room at one table. We are working remotely. So this is quite difficult to have that kind of conversation. But I believe that the situation will be better, will be improved. And we will be presenting the strategy this year. Let me be diplomatic. In the second half of the year, we will be presenting the strategy. I hope we will be presenting the strategy.

Thank you so much. Another question. How would any company in Poland or abroad -- will any of the companies ask for financial support? We've heard the answer partially, but let me ask Mr. Warpechowski to talk about the scale of the whole group.

Thank you so much. So far, these are small amounts for our foreign companies. This support model is quite similar to the solutions used in Poland, introduced in Poland by the government and financial support for our employees if the time, work time is reduced. We are talking about PLN 200,000 monthly for 2 companies in Aluminum Systems in Belgium and the U.K. Maybe we will be able to receive a one-off amount connected with the facility in Slovenia. This will be less than PLN 1 million. As of today, we could use the support that was connected with the tax payments. We could postpone it in the group. We are talking about 2 months' postponement. Well, that actually helps us with the cash flows, with fluidity. And now we have to observe the situation because the bigger support packages connected with the working time with financial support. This is connected with the requirement of the dropping profits, dropping revenues by 20% year-on-year or month-on-month. And so far, as of today, our scenarios, our forecast don't show this kind of decreases of revenues. So around PLN 20 million asset today. But this is the postponed tax payment. But direct payments, this is about PLN 200,000, PLN 1 million in Slovenia.

Then for the dividend, Mr. Warpechowski said that the Board is preparing the recommendation, working on the recommendation according to the deadlines that were accepted by the annual meeting. So that obliges us that within the next 2 weeks, the Board must take a decision and announce the recommendation. This is what we can tell you right now as far as the dividend is regarded.

Next question in the report, you presented your forecast about the dynamics of revenues. Now I need to hear about the margins in the second quarter, how will that work for the segments in your group? I believe that Mr. Rafal Warpechowski will tell us more about that.

Ladies and gentlemen, of course, well, the pressure on volumes will result in pressure on margins. So I believe that it will be difficult to stick -- to continue the margins that we had in the first quarter. But we expect that Aluminum and Extruded Products will be pressured the most. It's very hard to say because the market will verify that. But the margin and volume effects should the not cause a deviation by the end of the year higher than 10% more than our forecast. This is this scenario that we believe will help us to go through this period safely.

There is another question, more detailed question. And that goes for BOPP film because Director Lechowicz said than the margin on the films, films margin was the record-setting margin. And the question is about this record-setting margin will be kept on a long-term perspective, in a long-term perspective. Because so far, the company presented information that the margin in the BOPP film should not be higher than 12%, 13%. So this record-setting current margin in BOPP films, can this be maintained in the longer run?

Of course, that depends on the basis. So if we refer to the first quarter of 2020 where the margin was about 13%, close to 13% on the level of EBITDA, well, the margin, I believe, this year, according to my best knowledge, this margin is not at risk. But if we are talking about March, 15%; and April, over 20%, I don't believe that we are able to keep those high margins in the long term. But I believe that we can have a forecast of around 13%. I believe that we can actually have this kind of margin.

Thank you so much. Another question. Have you heard that any of your direct competitors in Extruded Products? So this is a question for Piotr Wysocki. Have you heard about any problems there? Is there any chance to renew customers in this area, to have new clients? Piotr Wysocki, please go ahead.

Yes. I can hear you. I could also -- I also heard about the problems of our competitors. Now looking at the situation by region. So metal, aluminum market, most of those production facilities are in Northern Italy where the coronavirus actually started. And those facilities were stopped. They were on lockdown. Officially, according to the report of the companies that are our biggest competitors, the Hydro company, on 30th of March, Hydro worked normally only in 45% of facility, 20% was completely closed and the rest was limited -- was having a limited operation. We are talking only about the Hydro company. There's no info about other companies. These are some hard data, we've read the report, so this is what we are providing you with. This is the kind of hard data we are providing you with.

Thank you so much. Next question is about the financial issues. Have you been observing any problems with payments in Extruded Aluminum products? What -- which part of the payments have been insured in domestically and abroad? So Mr. Warpechowski, please answer the question now.

With the outdated payments, as at the end of March until today, no essential changes. These changes are connected with good March, the scale of operation. So these are -- when we are talking about overdue payments, serious amounts, we are looking about 30 days. And we are not really observing any significant changes in terms of the value of the overdue payments as well as of the term. 80% to 90% in both Extruded and Aluminum products. And on prepayments, these are the rare situations. So the situation is under control and there are no changes as of the end of March.

Thank you so much for your answer. Another question goes for Chairman Grela. Have you seen the decision about starting new commercial projects that have not started the implementation phase, so design, general constructor?