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

Okay, it's noon. So I believe that we can start right now. And as usual, we will start with our CEO, Dariusz Mañko. And then we will hear individual presentations dedicated to the segments, and the last part will focus on the financials and Director Warpechowski's presentation, but let's start with a short summary. I give the floor to our CEO.

Good afternoon, ladies and gentlemen. Thank you for joining us. Unfortunately, this is our second conference under those difficult circumstances. So we had to meet online, not in live because we prefer face-to-face meetings, especially the meetings that we have with you after the conference and the small talks that we have. Then, unfortunately, we have to continue this, but we are all here for you together with Mr. Lechowicz, the Head of the Alupol Packaging because we believe that you should have a firsthand information about the Flexible Packaging segment. Well, generally, what can we say? Well, very good second quarter. In general, we can say that it's a very strange reality for us because there are a lot of bad news that we get every day about COVID-19 new cases every day and some companies have to face problems also in our industry, but we look a little bit like a green island because our results are very good. The equipment is working at full speed and at full capacity. And maybe we look a little bit strange, but we are very happy about that. And of course, so far, some industries, some areas, some markets have been restricted, but following our results, the sales and the profits and the sales was higher year-on-year. We are able to find new areas, new industries, new markets to sell our products. What else happened in macro economy? Well, definitely raw materials are important and the foreign exchange, euro versus Polish zloty and that helps our export. So as I've said euro versus Polish helps our export. So that helps us to have quite a profitable situation. Well, the first quarter investments were stopped, put at a halt, but in the second one -- in the second quarter, we've started them again. So there are some investments continued in packaging. They are continuing. They will be wrapped up by the end of the year. Everything is under control. Luckily, we are able to move between the countries because some of the equipment are produced in Germany or Italy and we have specialists coming to Poland from those countries. And well, we are very lucky that they can come to Poland and work here. So the investments are under control. There is no risk there. Well, we have a very good outcome, PLN 187 million EBITDA. This is a great result. We're very happy about that. But a very important news for us is the fact that we were working very hard on the working capital. And so we were trying to have it under control as much as possible. So we still remember 2008, 2009, when all the operations, all the solutions that could have been implemented were implemented as regards to the working capital and it worked. And as a result, net debt and EBITDA ratio is 0.8, so very low. So we don't really have too many arguments in favor. We didn't have the -- because we were asked why did we recommend payment of 100% dividend? Well, let me give you an answer to this question. Why this recommendation? Well, first of all, we are a dividend company. This is our main message. We've been repeating that message since ever, and we are one of the probably 5 stock exchange companies who are paying this kind of high dividend this year, and we want to actually continue this path. This is a very concrete offer for our shareholders because once -- there was a time in the past when we asked -- that was 2009 that we asked our shareholders not to ask for the dividend. Our shareholders agreed not to receive the dividend. And at that time, it was PLN 60 and now this is PLN 475. So we promised our shareholders that it will actually help us to bounce up again and we worked on that. So it's not an emotional decision. This is just a macroeconomic calculation that 100% dividend will not negatively affect our financial situation and will let us continue our further development. So this is the situation. What will happen in the future? Well, we will be answering those questions. Also the Heads of individual segments will be giving you those answers. So I encourage you to ask questions. So we've already had some questions sent to us and we will be answering those questions and we are fine with the future with the second half of the year. We are not overoptimistic because well coronavirus is still with us and we can expect different kind of response from different countries and the governments, including the Polish government. So we are not overoptimistic, but we are doing our job and we expect that we will finish the year as promised according to our forecast. And now I'd like to give the floor to Rafal Lechowicz. He will tell you about the Flexible Packaging segment. So thank you so much, ladies and gentlemen.

Good afternoon. Rafal Lechowicz, I represent the Flexible Packaging segment. Ladies and gentlemen, it was yet again a record-setting quarter. We had a dynamic growth in sales and profits. And significant growths were generated by both segments, packaging and films. In total, the sales grew by 32% year-on-year. Packaging grew by 7% and films nearly 90%. And as a result, we've doubled our production capacities. The profits were growing even faster than last year. Operational profit grew 50% in packaging, PLN 36 million in films. It grew by 400% to over PLN 27 million. And the margin was over 25% and was comparable in both segments. In EBITDA, EBITDA was over PLN 70 million -- PLN 71 million, Packaging was responsible for PLN 42 million. It was 40% higher than last year, where the EBITDA in films grew by 300% to nearly PLN 30 million. In the second quarter, the EBITDA margin was over 28%. In packaging, it was 29%, in films, 27%.

[Operator Instructions]

Ladies and gentlemen, let me tell you that in the second quarter, we had a one-off. So deferred tax assets, PLN 7,200,000. And this one-off event affected the net profit. So without it, it would be over PLN 49 million as compared to PLN 23 million that were recorded in the second quarter. It's 100% growth. And in the lower part of the slide, because we have -- we've been working at full capacity in the second line of the films, so BOPP films are responsible for 40% of total sales, fresh food packaging 10%. And the rest 29% are other industries. So the export is growing. In the second quarter, we came to 51%. So Germany, a 28% growth year-on-year. This is our biggest business partner. Italy, over 300% growth; the Netherlands, 20%; U.K., 65% and Belgium nearly 40% growth year-on-year. And this high dynamics of sales and good investments help us to use the whole production capacity. You can see that in our slide. It's possible because the equipment that we have has been composed in such a way that we are actually able to shift between different segments of the market as regards as our production capacities. This is a very important one. Some of the industry go through a crisis. For instance, this happened in some certain industries, for instance, Horeca. And because of the equipment and marketing activities that we are continuing, we were actually able to tackle the problems with Horeca sector. So we are targeting other products, other industries. For instance, baby products, pet food and so on. So that was a very good quarter for us, and we are cautiously optimistic about the third quarter. And the second part of our slide is dedicated to this investment. So we've spent PLN 14 million so far this year. This is nearly half of the investment spendings for 2020. These are mostly replacement of the worn-out equipment. Well, ladies and gentlemen, that's all from me about the Flexible Packaging segment. Well, if you have any questions, I'll be happy to answer those. Thank you so much. Now Piotr Wysocki.

Good afternoon. So Extruded Products segment. Well, we are especially happy about the sales outcome, the growth by 6%, it's less when we talk about the money, but well, it was a 10% lower price of aluminum in Polish zloty. Last year, it was PLN 1,800 and the first half of this year, the average price was below PLN 1,600. So this 6% is very good for us. And two more things. So the growth of tonnes happened on the COVID market. So as compared to our competitors, it's a great job. So the biggest company, aluminum company in the world, well, they've recorded a drop by 36% in the extruded products during the first 6 months of the year. So given better for us, so we have a great outcome. Also EBITDA grew year-on-year. And now the sales breakdown. I don't know if this is comparable to what happened in the situation on the market. Well, definitely, the automotive industry dropped, transport 50% drop of orders and that affects our sales for automotive industry. So wholesale. Well, this is the effect. Well, this is the trend that is completely reversed as compared to our objectives. So for us, it was a good idea to make a lot of money in sales for wholesalers. So we had Italy and Spain. They were closed down, and we've contracted them for a long-term sales and good profitability. Well, Poland, a little bit less. And the market was not doing as good. We had to actually use our experience, our work on the German market, and the growth was very nice. And export worked very well during the first 6 months. Now about the production capabilities. When we translate a big growth in percentage into tonnes, then we sold 2,600 tonnes more. It means that we could have had new press working, and we didn't. It is actually because of the production. We focused on the production during the first 6 months of this year, knowing that we will not be investing right away. So we focus on improving the quality of the production. Now talking about the investments. Growth in the production tools, we sell more tonnes, we need more production towards and other investments matched the pandemic situation that we faced -- we have been facing. And now our foreign companies. In Ukraine after the better first quarter, we can see the situation improvement despite the growth of COVID cases. We are fully using the Croatian company -- trading companies. Italian, German and Czech companies are operating as usual, of course, taking into account the situation that we are facing right now, so COVID-related situation with all the restrictions as regards to the meetings and so on. What were the unexpected effects of pandemic? For instance, automotive industry. Well, we came back to normal. And so we are fully booked right now, but for instance, the bike elements production grew by 30%, and it's very difficult right now to buy it in Poland, just as it was very difficult to buy toilet paper in Poland in the time of communism. So definitely, we are using all our capacities here. In other industries, the situation is again connected with the restrictions of restricted movement, restricted flights and so on. So the tourist industry such as bikes, interior design. Some of the people didn't go for holiday. They are actually remodeling their houses and apartments. So they are buying elements that contain aluminum. Tourism -- for instance chairs, aluminum chairs, bikes I've mentioned. Bikes are -- the sales of bikes is doing very, very well, and we are a good supplier as well. And now Tomasz Grela and Aluprof.

Good afternoon, ladies and gentlemen. My name is Tomasz Grela and the summary of the second quarter, yet another great quarter in terms of sales. So as regards to the quarter and the first 6 months, we need to emphasize that the growth happened despite lack of sales under large contracts that were happening last year. So we were able to actually sell architecture link elements, and they helped us to deliver a very good EBITDA, higher by 19% and 25% higher after the first 6 months. Interesting development of sales in 2 segments. So rollers, shutters and architecture in details. As you can see in the slide, we have a drop on the level of other sales. So the ready product and construction contracts, so the least profitable segment. And we'd like to emphasize that the sales grew in every market to which we export. For instance, the U.K. is actually has been hit hard by the pandemic. So they are not doing as well, but again, we have arrived at the same level as last year, already now. Sales in Poland, we've been observing that there is some investment uncertainty and that regards to the hotel, for instance, sector, but on the other hand, after the second quarter, we seen our investors, developers being more optimistic. So we are showing actually some facilities, some buildings that we will be working on. So hotels and office buildings. So from our perspective, other quarters will be as good except the hotels and shopping malls. There are more doubts and concerns there at the decisions on starting new investments are put on hold. We have also noticed a positive aspect in unblocking global economies. In many countries, the support from the government helped. Some customers had to restrict their operations in order to be able to use the governmental aid and support. So we believe that when we compare our operations and our competitors' in Poland and abroad, our situation is quite good. We believe that we've dealt with the situation much better than our competitors and that translates to our stronger position and better margins. Luckily, our portfolio helps us to be active in different areas in Poland and outside of Poland. So we serve big customers and small customers as well. Hence, our results -- good results and good profitability. We didn't record a drop in -- significant drop of our profitability. So we can safely say that this situation makes our partners to seek for a strong, dependable partner. So we have new customers, mostly from Germany, from Benelux. And for years, we weren't been able to reach them, but now with the situation that is much more difficult in other countries than in Poland, we've started a new cooperation with new customers from Western Europe. And in the future, that will that will surely translate into the growth of sales. Now for instance -- situation outside of Poland. Well, only the U.K. recorded drop, but it's been revealed, and we're very happy about the development in Scandinavia, more and more new projects, interesting projects. Also east is doing very well, especially Ukraine, Lithuania and Latvia. And now our export to the U.S. Right now, we are completing 4 projects. And despite the restriction there, no construction site was put on hold. And it's worth to emphasize that last quarter, we won a contract, a big project, USD 540 million worth. We will be cooperated with the general contractor. It's a very complex project requiring a lot of technical expertise and involvement. So we're very happy that a big American company trusted us. That's all about sales, and now we're very short recap of our investments. The only big investment this year connected with the hall in Opole has been started. It's been launched. We've signed a contract, and the construction site was opened to the contractor. It will be 13,000 square meters tall, and we are renting almost 10,000 square meters outside of our company. So this hall is very important. We really need that. And I hope that before we start the season next year, we will be able to actually accept it and start building it. So that's all for me. Thank you so much.

Thank you so much. And another part, the financial part will be presented by Rafal Warpechowski, the Financial Director.

Good afternoon. Thank you so much. Consolidated P&L. This is Slide #13. The second quarter this year, means that the results are higher than the last year despite the pandemic. So sales grew by 7%. So this is around PLN 60 million. And the biggest part contribution was from the Flexible Packaging. That is the effect of doubled production in films, but we need to stress that the situation into other segment was really good, and the sales volumes were higher. And the lower incomes were because of the stock exchange prices of aluminum. We've used the production capabilities very well, and EBITDA grew, and it was PLN 187 million last year -- last quarter. And this is 140% year-on-year. All segments contributed. In Flexible Packaging, we were also able to introduce better margins, PLN 152 million profit, nearly 50% higher year-on-year net profit. In the second quarter, the tax was 15%. This is because of the assets mentioned by Mr. Lechowicz. So that was the third tax asset, and that result directly from the better result of the segment. And next slide. It's dedicated to cash flows and operating cash flow. So reached PLN 209 million, and below you can see that this is mostly due to high EBITDA, and we have dedicated PLN 30 million on investment. It's lower year-on-year, and this amounted, but it's because the fact that our biggest investments have been completed last year. And at that time, we have prepared an optimization program for CapEx and some of the investments have been moved. That was our response to the pandemic as well. And cash flows were over PLN 180 million. So this is how much we were able to decrease our debt. And then Slide 15, this is the data that confirms our good situation. As you can see, at the bottom, net debt change is at a very good level. And so EBITDA is 0.8 and the leverage below 30%. So these are good and safe indicators and make us feel safe and feel good about the future, the second half of the year. As the CEO has said, as regards to the current situation and our forecast, well, based on that, we've recommended a dividend, full net profit, and this is implementation delivery of one of our strategy objectives. So this is our recommendation. So at the end of August, we will have a general meeting of shareholders, and we will have a decision on that. And now a couple of words about the future, the third quarter. As Mr. Wysocki has said, we can see the reverse trends in the raw materials. This is happening in aluminum or petrochemical products that we're using in Flexible Packaging. That is mostly connected to with a stronger Polish zloty versus foreign currencies, for instance, dollar -- U.S. dollar but the prices are higher anyways. We are also observing an improvement of the situation in foreign markets, those that were hit by the pandemic harder than Poland, but there are still some concerns and uncertainties on the markets. So still less orders, the more pressure on margins. So the situation is harder. It's very hard to make any forecast right now. We are fully concentrated on our availability, on our production capabilities, on operational efficiency, and this will be happening only if we strictly follow our procedures prepared for the time of pandemic. And this is how -- and we want to actually prevent the negative effect of the second wave of pandemic. Well, our spendings will be lower, but we are moving the money actually from the first and the second quarter to the other 2 quarters. And for instance, we have launched construction of the hall in Opole. So this is what we have started. And again, very good results after the second quarter. It's definitely better than what we've expected in April. But at the same time, as we've said in April, we believe that it is possible for us to have some temporary changes in profitability and so on. And that's why we are cautious about annual forecast, but well, at this point of time, we have to say that the shifts are not larger than 10%. So we stick to our forecast. We stand by our forecast. And so that's all from me, and now I actually give the floor to Michal.

Thank you so much. Now we are moving on to our Q&A session. We have many questions but they are mostly addressed at the Flexible Packaging. So this is our celebrity, the star of today's Q&A session. So this is the first question. Let me read it. It concerns dynamic growth of EBITDA in this segment and the margins recorded by the Flexible Packaging segment. We are talking about the margins in films versus the forecasted 12%, 13%. The margin in the second quarter is close to the packaging margin. Why? Is it caused by the raw materials or maybe other factors? And the second question, how -- what do we think how persistent the margins are? Can we stand by, keep the growth? What is the perspective here? I understand that the question is for Rafal Lechowicz?

Yes. Ladies and gentlemen, we had several factors here in the second quarter helps the results. Of course, the whole situation connected with pandemic. It caused lockdown in different places around the globe, so in the Far and Middle East. And these are very important places for us in terms of film sales. So India and Middle East, factories were closed down, and the customers were a little bit scared. So they were looking for new suppliers closer to their homes. And luckily, we were able to offer them additional production capabilities. So this -- and we were able to serve the new orders, new market. At the same time, raw material prices went down, and we are selling films in euro. And the situation in foreign exchange was good for us. Hence, a very good second quarter as regards to the films. But also packaging business was doing quite fine, and the growth were quite dynamic. So it's all about the factors that helped us to deliver good results. Now future, I can only stand by what I've said already. Our objective is to continue the growth to reach 15% EBITDA. And if nothing happens -- nothing that happens, well, we will be able to deliver this margin. So I can only stand by my position that I vocalized during the past conference. So the presses that we had during the second quarter, our results was over 20% of margin in BOPP business. So the first half of the year, 20%, the second one, our objective was 15% EBITDA, and we believe that this target can be delivered. Thank you.

Another question, again, Flexible Packaging segment. So if under new strategy that you are working on, you decide to add the third BOPP line, is there any possibility for further synergies and higher EBITDA in the segment? Are there any potential synergies in this business? And if the margin can be higher, then how much?

Well, Rafal Lechowicz again. We haven't decided about the third line. And I don't want to pressure our owners, especially publicly. Please be patient because the 5-year long strategy, I will give you a clear information whether we continue this investment. Well, of course, synergies would be there, but I can't really tell you anything about the values. We continue to analyze the market and new production capabilities in Europe BOPP. This is what I'm talking about. In 2021, there will be a new line in 2020 to another line launched. So we have to actually take into account all those factors before we decide to buy a new line.

Thank you so much. Another general question. Since today, business seems to be so much more predictable than after the first quarter, when are you planning to present your new strategy?

Ladies and gentlemen, as we communicated, we are working on our strategy. Well, generally, the suit is ready, but we need to check a few elements. We have been actually surprised by the second wave of coronavirus. We need to wait until the end of the year to see what is the fundamental, whether it is good or not. And because of pandemic, the general meeting has been moved because usually, we do that in May, but this year because of pandemic, we have moved it to August, 20th of August, and we have another element because we will be electing members of the Supervisory Board during the meeting. So we believe that it is not good -- it wouldn't be good to actually have a new member of Supervisory Board that is -- who is reviewing a new strategy in September. Well, they actually need to familiarize with the situation, with the operations, with the company and so on. So the new member needs to feel the company well, so that they are able to vote on the document. So they need time to prepare for the decision. So we expect that the strategy will be ready by the end of the year or at the beginning of the new year. So this is our objective right now. In fact, we will have to discuss this with the new Supervisory Board, because this will be a key question. The question is what will be the composition with the Supervisory Board. If the composition doesn't change much, well, the work will be continued, but if we have many new members, then we will have to get to know each other.

Thank you so much. Aluminum Systems now question. How about the developers. After actually putting new investments on hold in March and April, are they coming back to their plants and their new project?

Ladies and gentlemen, Tomasz Grela. We are not using the word developers, but investors because developer is associated with the construction of buildings, including apartment buildings, but we are dealing with investors who are investing money in constructions in different sectors. For instance, shopping malls, office buildings or hotels now. When we talk about this kind of investor, then firstly, the construction process connected with launching investment takes many years. And quite often, on different stages of this process, the decisions were made about putting on hold, withdrawing and so on. Hence, today, we are observing slightly lower level of investment launching than as compared to previous years. So the investors decide to launch to start the investment. And the exclusion here is just a segment that is connected with construction of shopping malls and hotels. Here, there's more uncertainty, more concerns and investors are more cautious about starting new construction. That's all.

Thank you so much. But once again, Aluminum Systems, what is the size of sales of systems for apartment construction? And what is your share in this market segment taking into account a low share in Poland? In Poland, the joinery-- aluminum joinery, but this is a very good market for you.

Once again, yes, as compared to other European countries, Poland is not doing that well when we talk about the share of aluminum products used for the construction of houses, and that hasn't changed. But it's been quite some time that we've been observing growth in this segment. We're talking about 15%, up to 20% year-on-year. That means that more and more investors decide to use aluminum elements in their buildings. What that means for us? For us, it means a potential growth of sales in this segment. We can use our position in the market to over 40%, 45% of share in Poland, Polish market. So we are preparing for that on an ongoing basis, and we are working on our systems as well. We are developing them. On the 1st of January, we will launch a new system. It will respond to the market expectations, and it will help us to meet the requirements, new requirements in force as of 1st of January, and that will be a great time -- place to start. And then half of the growth will be for the Aluprof. What is the share of sales to the construction segment? That was the question. 100% of sales from us goes to the construction -- apartment building construction. We are not able to say that we are not really able to track how our elements are being used in the processed product that is sold by our customers. We don't know how much of that goes to the house and apartment buildings. Now taking into account that we've got customers who export their products to other countries, the potential is for 60%, 70% of our sales. Thank you so much.

Another question and the result of -- in which result you believe the most? And where do you see the biggest risk? So this is a general question. So the CEO.

Well, I have to say that I count on all 3 segments and the results that they are able to deliver. So we hope that the results will be really good after the end of 2020. So there are -- it's not possible for us to say right now that we are expecting a bigger lockdown in any of the segments. So if we take a look at the first 6 months of this year, we can clearly see that all segments dealt with the situation very well. So we don't see a risk area right now.

And another question connected with a lockdown right now. How does the lockdown affect individual segments? And should the lockdown be reintroduced, should we expect same effects good effects for the company?

Well, it turned out that the lockdown resulted in no import. I'm talking about India and China. This lockdown opened new possibilities for us -- laid down new possibilities for us because we are reliable supplier. And as an effect, some of our foreign companies have restricted sales, for instance, Slovenia or decrease -- just Romania or the U.K. Can it affect us negatively? No. After the first 6 months, we can safely say that this is a positive effect. So we are not wishing for that, but we are not afraid of lockdown. Thank you so much.

Did anything change since our last conference, as regards to the governmental support? At that time, this was a negligible effect. For instance, Slovenia, U.K., has anything changed?

No, we can confirm. I don't really want to say that these are trace -- there are just traces, but this is mostly financial support for our employees, EUR 0.6 million versus our company in Slovenia. So we've received around PLN 3 million. And as we've reported it, PLN 2.5 million, we believe that this is the cost of COVID in the company. In addition, we also had some donation grant mostly for medical sector. Additional support that we've received was around several million zloty connected with the tax. So we had -- we are able to postpone payment of tax, but that was just postponing, and that's it. So that's it about the support. Thank you so much.

And now the question for Flexible Packaging. And the recently discussed EU tax for products that are not recyclable, is that a threat for it -- for you or maybe a chance? How about your competitors. Maybe Mr. Rafal Lechowicz, if I may, Rafal Lechowicz, of course.

Ladies and gentlemen, now while they actually announce the final form of the potential new law, so I'm unable to tell you more about it. In July, a recommendation of the European Council was published, but they are not legally binding. We are talking about certain amounts of nonrecyclable products. Every product -- every packaging should be recyclable. We are only talking about the production capacities, capabilities of the companies that are responsible for processing it. Well, if everyone actually has to pay for it in Europe, then it may turn out that it's not so difficult for us. It's not such a burden for us. We are actually producing plastic packaging that are easy to be recyclable -- to recycle, but we don't know how that will be reflected by law. We are all waiting for the trust law and then we will be able to familiarize with it and to discuss it. Now it's very difficult for me to discuss something that is not there yet. Thank you. Michal, are you there?

I'm sorry. I switched off my mic. And now about the dividend -- 100% dividend. This was discussed already by the CEO and Director Warpechowski. But the next question. Automotive and transport industry, will they able to revive their market? And how this will be reflected in your income?

Well, as I've said, we can see the revival of those segments as well for capacity -- production capabilities in our facility manufacturing for those sectors.