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

Welcome, ladies and gentlemen, [Operator Instructions]. And please send all your questions to me, to mmalina@grupakety.com. After the presentation is completed, I will read the questions and then the members of the Board will answer those questions. And the presentation, that has already been published on our website, will be started by the Chairman of the Board, Dariusz Mañko. President, over to you.

Welcome, ladies and gentlemen. My name is Dariusz Mañko. I'm the Chairman of the Board. And I have the pleasure of presenting you the results after the third quarter of 2020. A little bit of background. Well, this time is an absolutely crazy time in every part of our lives, including the business. As you remember, we had a lockdown in spring, and this lockdown has disturbed the functioning of every industry, including our industry. So first and foremost, we had a lockdown first in the Western Europe, well, ended positively affected our activity because, well, the factories that were closed in Italy and other Western European countries gave us a chance to have more orders, for instance, for extruded products and so on. A similar situation was in packaging sector. We have to say that we had an unbelievable margins for our foils, for instance. So e-commerce worked wonderfully. Well, I can hear somebody using your mic. Well, I have to tell you, ladies and gentlemen, that we were greatly supported by the logistical problems with the import of foil from India and China. So we used this opportunity. We actually had around PLN 50 million of our EBITDA was the direct benefit of it. Why do I mention that? Because I need to refer to this moment when the situation -- market situation has changed in the third quarter. So imports came back. So BOPP foil is imported right now from China or India and factories and plants in the Western Europe are operating right now. But well, all our segments or all the trading department in Grupa Kety should be praised because they had this feeling in March and April in the second quarter of 2020 and they used this opportunity to do the maximum. And as you can see, in -- by other results -- based on other results, well, the situation is really good. And October is really fine as well, when it comes to orders, number of orders. So that was just the beginning of my presentation, and I'd like to praise and congratulate our trading departments and selling departments as well. What was also a positive impulse? So well, strong euro against the zloty because we are exporting a lot of our products, and the cost is calculated based on the zloty, which means that we benefit from it. And the transport or automotive industry after the lockdown are actually gaining momentum. They are recovering, and there are some contracts being signed. But Director Wysocki will mention that as well. We are coming back, returning to our investment very slowly. Investments planned for 2020. I'm talking about the hall in Opole. Well, we are missing this place and shutters selling because, well, our citizens stayed at home. So they focused on their homes more, and they are actually doing some renovations in their homes. So we are working at full capacity, and we need more storing space. That's why we started building -- constructing this hall in order to increase our operational capacities. As I've said, our sales grew in all segments without any disturbances. Our operational activity. Well, office is mostly home office. Our employees, well, the situation in Poland is well known. And the only thing that we can say right now is that some or quite a big part of the citizens or our employees are actually going through coronavirus very lightly, only around 8 or 10 employees are quarantined and the new people come back from their quarantine, they keep working. They feel well. And this is a light in the tunnel for us. So we are able to be secured and to continue operations as far as our employees are regarded. What else? Our activities, we use external companies with employees, and those employees have worked in our company already. They know the machines and so on, they have been trained. So this is our backup as far as the employees are regarded. Now financials. We are very happy about the profit on the operational level and net level as well. But most satisfactory is, we are most satisfied with our activities in the area of obtaining the money back using the cash and so on. Well, we've started this work. So whenever a crisis comes up, difficulties such as the March difficulties, so the first thing you do is to focus on the cash, how to release the cash, how we can get rid of the debt that's the most important thing for every company right now. And this is actually the responsibility also of those who are responsible for purchases and so on. So our debt is actually quite low, and this is a great result, and we are quite optimistic about the end of the year. And one more thing because this question has been asked already, yes, we are working on our strategy. Yesterday, we had our general meeting, Supervisory Board meeting. So we are working. We are preparing it. We are actually focusing on the soft part of the strategy. So environmental protection, HR and so on. And our neutrality, our -- and this is not just a fashion, this is a requirement. And we are always trying to be responsible company. That's why we include those elements. The next meeting of the Supervisory Board is planned to take place on the 2nd of December. And we hope to finalize all the details of the strategy, and we hope to be able to present it to you in December or maybe in January. We take that into account as well, where we provide our strategy, including our forecast. Maybe that could be a good date for all of us to start the year this way. Well, we wanted to do it by meeting with you. We wanted to hire a big conference room, but this was the plan before the second wave of coronavirus came. And right now, we are going to follow the situation, but we are afraid that we will have to present our strategy and forecast online, unfortunately. But maybe we will actually use cameras in order to make it more official, make it better than just normal quarterly meetings. And now I give the floor to my colleagues to present the situation in the segments, and there is a lot of things to be said and praised.

Thank you so much. And now the presentation will be started by Rafal Lechowicz, Chairman of Alupol Packaging Company. Over to you.

Thank you. My name is Rafal Lechowicz. I represent the Flexible Packaging segment. We have just completed the third quarter. It was a very good quarter despite very aggressive activities of our competitors. Alupol increased the sale by more than 20%, we reached PLN 231 million, 6% more in profit, PLN 144 million and 56% in foil. And the sale was PLN 87 million. In the third quarter, the operational profit was PLN 56 million. In packaging, it was PLN 36 million and in films, it was PLN 20 million. And similar speed applies to EBITDA, and it reached PLN 64 million, PLN 32 million for packaging and PLN 22 million foil. No one-offs, and net profit nearly doubled. And it was over PLN 45 million, reaching over PLN 132 million. It was over PLN 62 million more as compared to the previous year. As you remember, in September 2019, we doubled our production capacities in foil segment. In the fourth quarter, we used that to 100% well. Dynamic growth in the Flexible Packaging segment is over, the rapid growth over already. And the sales structure is stable, and it's similar to the previous periods. We focus on export to Dutch and German markets. And the share here is 21%, and this is growing actually. And now investments. As regards to the investments, we stick to the plan. We used PLN 17 million out of PLN 32 million that were planned to be used. Now a couple of words about the situation on the market. Really high-pressure on prices. Our competition can feel the crisis, especially in Horeca segment, and they try to keep up with this situation. Well, packaging are quite important here. And we -- as the leading supplier in the industry in Europe, we can feel the pressure. But the cycles in our industry is, naturally in the past, we had this kind of situation. And we always came out of the difficult situations well. October looks very well right now, and we are quite optimistic about the fourth quarter. And of course, this is with the belief that pandemic will not affect us or our customers too much. And that's all from me. I am still at your disposal during the rest of the conference. Thank you for your attention.

Thank you, ladies and gentlemen, and now over to Piotr Wysocki and his presentation. Go ahead, please.

Thank you. Extruded Products segment, the third quarter was very good, very successful in Extruded Products. Now looking at the money, well, sales, is comparable to 2019, it's a little bit lower, but tonnes are important here. Of course, aluminum on the stock exchange, and our position on the market has been strengthened. EBITDA is doing very well in terms of percentages. We used a lot of production capacities and that helped us to reach a really good EBITDA, but also prices, also the situation on the COVID market, COVID-affected market, we had a little bit better prices and our profitability and EBITDA is growing. Well, the most affected sector stand out to be construction. It is growing very nicely. So automotive and transport and the restriction that we've seen during the first and second quarter, well, it's not existing right now. We had -- we can see some growth here. So there are orders for our department that produces details for automotive industry. Also, our Slovenian plant is growing in terms of automotive industry. So comparing the second and the third quarter, well, the growth for a detail like that -- a detail that is used by new Mercedes E-Class, we are talking about 3% growth. And the sales structure is not changing. Germany, we are stronger there. And these are our biggest market, 14% growth year-on-year. But I need to emphasize that in terms of tonnes, we have more of the German cake in our portfolio. We used our capacities to 97%. We were able to go through the situation without much disturbances connected with quarantines. We are doing quite fine here. The situation is tough. We are doing more than recommended. We have our additional recommendations. So we had our -- we -- in February, we already introduced first regulations concerning what to do when coronavirus appears, that helped us to go through the COVID situation nicely. And we hope that all those regulations, all those restrictions, all the solutions that we've introduced will help us to go through the last quarter without major problems. And now investments. Well, this is a result of the situation that -- in the beginning of the year, we've stopped. We withheld some of the investments because the situation was unknown. So some investments were stopped. And now we can see that they can be postponed until the next year. So they will be presented. They will be included in our new strategy as well. And now foreign markets. The third quarter, Ukraine was doing very well, a record-setting sale on the internal market, and now our company in Slovenia, again a recovery, our biggest customers came back, automotive industry, home appliances came back, Gorenje, for instance. And automotive that I am mentioning, well, the automotive is becoming more and more important for us in Slovenia. Well, this segment is growing. We have new contracts. We have new models. Maybe it's too early to mention that. But we have new companies that start operating in this industry. We are talking about electric cars as well. So we are a well-grounded supplier there. And now about our foreign companies, Aluminum Kety Deutschland Company. Well, our successes during the second and the third quarter, well, after that, we've decided to be more engaged in this market. Well, this is the biggest market in Europe. This is a 30% of the European market. Well, we are working on our position, on our trading relations. And I believe that this is also a good direction for coming years. Another interesting element in the third quarter was the fact that we've joined Aluminum Stewardship Initiative. This is the organization that creates standards for environmental protection, for it certifies -- it offers certifications for the aluminum industry. This organization has been launched by the biggest companies in the industry. And one of the member -- the certifications have been given out to one of our biggest competitors. But we've joined the organization, and we started the process of certification, and we hope that this will be a very efficient process. And during the next meeting, we will be able to tell you that we have ASI Performance standard certificate already.

Thank you so much. [Operator Instructions]. The next part of the presentation will be presented by Mr. Tomasz Grela, Aluminum Systems segment.

Welcome, ladies and gentlemen, Tomasz Grela, I am the Head of the Aluminum Systems segment. It's a pleasure for me to present the third quarter results. It's a pleasure because they are great results again. And now the sales, we've reached nearly PLN 440 million. It's 9% more than in the third quarter 2019. This high sales is because our optimization, operational optimization and the sales actually ended up -- resulted in a good EBITDA, over 13% more. And the high-volume of sales generates really high margin as well, and we are very happy about that as well. And now sales breakdown by markets. Well, we've noticed good growth in all segments in Aluminum Systems and in roller shutters as well, especially the second segment was really doing good, 25% -- 30% growth month-on-month. That's very good for us when we look into the future. And now export markets. As of today, most of the markets is growing right now. We are very happy about the situation in the U.K. In September, was a record-setting month after 8 worse months affected greatly by coronavirus virus. Well, the U.K. looks very promising right now, finally. It seems that October will be also a record-setting month. This will be probably the highest sales in the history of the company. It seems that the whole fourth quarter is looking quite promising as well. Now about the forecast for 2021. Well, it's a little bit too early still to present any forecasts. I believe that we will be presenting it in our December or January strategy. Now domestic sales, well, orders are growing, especially from customers who focus on export. And with this high euro rate we can see that our customers who are exporting to Europe, Western Europe, they are 60%, 70% of our customers. Well, right now, the sales is quite -- looking quite promising. This is all thanks to euro exchange rate. Of course, everything is happening with a strong pressure on the prices. And we deal with it, especially when we compete for big projects. And those projects are presented to you, of course, but we are doing much, much more. What we present here, we just present the most interesting projects. We are very happy about the first big project in France. This is the second biggest building, aluminum building in Europe. Today, this is out of our reach a little bit, but I hope we will be showing it in our strategy that we will focus more on French market. Other export markets. Well, our sales is doing quite well in Baltic countries, in Scandinavia, in Norway. We have a good level of orders in Czech Republic, Slovakia, these are our biggest export markets. We are very active in fire protection, fire protection equipment. And this will be shown in our strategy. And we are focusing on our biggest projects across Europe. It seems not very easy when we take into account the whole situation connected with COVID, but I believe we have the tools and experience and expertise, and that translates into very good effect, overall effect. And now investment. As the Chairman mentioned, the delays that were caused by the uncertainty connected with COVID, well, we've started construction of the hall in Opole. If everything goes according to the plan, in June, we will move to the new storage. Other investments connected with machines purchases and equipment purchases are consistent with our plan. Well, I just wanted to mention our TV advertising campaign. Maybe you've seen it in September and -- or October. So we've been Polsat, TVN, Domo Plus and so on. Well, that was a campaign addressed at the individual private customer. Well, this customer is our -- has been our focus on the domestic market. So additional marketing activities, promotions. And we've been focusing on this segment of the market, of the private housing market because we believe it is actually developing quite fast. And we just want to be their supplier. And that's all from me. And if there are any questions, I'll be happy to answer those.

Thank you so much. And another part of our presentation will be presented by the Financial Director, Rafal Warpechowski. Rafal, over to you.

Good afternoon, ladies and gentlemen. Welcome. Let's move on to the consolidated financials. As my colleagues have already said, the most important information is that we continued our operations, and we used our capacities very well. Therefore, our outcomes are record-setting, better than before. Sales grew by 10%. And the growth was spread evenly between the Flexible and Extruded Product segments. But we are also very happy about sales in the other segments as well. Now EBITDA, it's over PLN 200 million, growth by PLN 37 million year-on-year. As you can see, all segments are doing very well. But the most benefit came from the Flexible Packaging segment, which is a proof of the chance that was used by us this year. Now in the third quarter, the group had a result on financial operations, PLN 162 million on operations. This is higher than the last year. Financial costs, mainly interest on loans, PLN 1 million positive exchange rate differences and the profit -- net profit, PLN 129 million, and 1 to 3 quarter, it's PLN 333 million. And the next slide shows you the situation in cash flows. In the left upper corner, you can see that there are quite good operating cash flows comparable year-on-year. But we have to remember that last year, we increased the -- we decreased our need for cash. And this year, we are increasing. So in March this year, we've introduced a program, optimization program for investment expenditures, that was our preparation for possible risks connected with the pandemic. So in Q1, Q2, you can see that, but in the third quarter, that continued, but we also started releasing our projects. And as it was already said in the fourth quarter, we will have higher expenditures than in the previous quarters. In the bottom graph, you can see that our EBITDA is very good, also connected with a relatively lower CapEx. And we've actually had a net debt change by PLN 138 million. Well, Slide 16, you can see the situation, that our level of financial indicators is safe, the level of financial indicators is very safe. And this is the effect of good EBITDA and high cash flows on operations, PLN 485 million, with the investment expenditures that were optimized. Unfortunately, we can't hear anything. The end of the third quarter is very safe, very satisfactory. So when we compare net debt to EBITDA, it's 0.5%, and our financial leverage is around 20%. So 18% net financial gearing. Well, we continue to stay on a safe level. In October, we stopped -- we finished the process of short-term operating financing and in this area, our situation also safe as well. And now a few words about the coming months. Of course, as it was already said, the speed at which the pandemic spreads will be crucial here. Well, we have some plans for the beginning of the year. We want to improve the safety of our employees. But of course, well, the safety is growing because the threat is growing as well, that's why the horizon of orders mentioned by the previous speakers continues to stay with us. In October, up until today, the situation has been stable. Operations. Of course, we want to support and secure our employees and ensure that our operations are continued. We will be continuing implementation of our investment plan expenditures should be higher than in previous quarters. Well, forecast. Let me remind you that in August, we believed that there is actually a possibility that in this quarter, we can restrict our activity. If this scenario becomes true, well, we will be able to deliver the annual forecast. But we will be observing the situation, and it seems that it is quite promising, but there is a lot of uncertainty. And dividend as last year, well, we had the general meeting. Well, the dividend will be -- has been paid out in October, PLN 231 million. This is another tranche. It will be paid in November, and we have the money to pay our dividend to our shareholders. Thank you so much, ladies and gentlemen, that was all from me, and I give the floor back to our host.

Thank you so much for the presentation. Now we are moving on to the part that is connected with the questions that were sent by the users, by our viewers. The first question, how is it possible that the SOG margin is so high, yet another quarter in a row? I believe that this is the question for Rafal Lechowicz.

Yes. Rafal Lechowicz is speaking. This is the inertion effect, new lower prices adjusted to market will become -- affect the situation slower. We still have some orders from the U.S., high-margin and produced from very cheap resource. And we are still working on a portfolio with very profitable orders. That's all for me.

In the fourth quarter, I believe that everybody has spoken about the fourth quarter and the Director Warpechowski provided us with a recapitulation, he mentioned the possible changes in the forecast for 2020. So let me move to another question. In the second quarter, this's a question for Mr. Wysocki. In the second quarter, we -- you found new clients in Western Europe because the plants in Italy were closed. How about the third quarter? Did you find any new customers in Western Europe?

Yes. We had this -- cases like that. It keeps happening. Of course, the fact that Northern Italy or Spain were closed. And it helped us to win new customers. That was the same for the German company as well. Well, that showed us good direction. So we win new customers. We increased our sales to the customers that we already have. So this is how we actually do. And now Extruded Product segment question, how your competitors are doing? Are there any signals connected with the increasing first or second wave of COVID? Are there any signals that any production can be restricted in your competitors? That may be -- they may be closed down. Now looking at the third quarter, well, everything -- everybody started to recover, more orders, new capacities introduced. Well, maybe that wasn't the same level as in our company, but it was recovering. But right now, we can see that our competitors are coming to a halt a little bit. So the most closed down companies, countries, Italy, Spain, well, we've seen that they are facing problems, and they continue to face problems.

Yes. Another question to the Extruded Product segment. What is the current level of orders? Did this level change, increase, decrease? What's the situation right now?

Well, the level of orders. So the -- okay. Let me tell you this. We are still working on a very short horizon of orders, 4 weeks ahead. It differs, of course, among customers. But step-by-step, we can see. In the third quarter, we are talking about October. This horizon is extending. We have more and more orders. So the machines are more booked.

Thank you so much. And now Flexible Packaging segment. Capacities in your segment in the third quarter was around 88%. So it is less by 8 percentage points. How about the fourth quarter? Do you see that there is a pressure, price pressure from the suppliers from Asia? And why now? Is it possible that increased competition from Asia will become a long-term tendency.

Rafal Lechowicz. Let me give you the answer to this question. Yes, ladies and gentlemen, it's 8% decrease of the use of production capacities. This applies mostly to BOPP foil that is connected with the import from Asia, cheap foil from Asia, but this is not just because of that. Right now, we will be unfortunately witnessing launching new production capacities in Europe, Asian producer, but it will be around 50 tonnes. So this foil market becomes particularly difficult. But well, I've said it many times, but this industry also deals with overproduction. Every industry deals with it. Maybe pharmaceuticals don't have this problem, but we have to deal with the situation, just like every other industry. So despite additional production capacities in BOPP films, well, the films business generated around PLN 22 million EBITDA versus nearly PLN 7 million last year. So this is over 300% growth of EBITDA. It means that we don't have to pick up everything. There are orders that we want to do because they are profitable. And there are orders that we don't want to do, for instance. So please do not focus on the production capacities only. 88% of capacities is nothing bad. We can reach 100%. It's just about profitability. So we optimize our sales in such a way that it is profitable for the users, for the owners. So we just -- we don't just want to use the machines just for using it, we just want to reach optimum profits. And let me recapitulate, that over 300% growth of EBITDA year-on-year. So I believe that everything is fine. So please do not care about the capacities, whether it is 88% or 96% and so on.

Thank you so much. Again, Flexible Packaging segment. In the third quarter, we've seen a growing prices of aluminum. How about main raw resources? What are the prices there, raw materials?

Ladies and gentlemen, I'm very happy to talk about a myth, a certain myth. So Flexible Packaging, maybe it's not about the direct effect of the aluminum prices. Well, aluminum as a raw material to produce packaging, in flexible packaging, it is responsible for 8% of the total cost of purchases. So for us, aluminum is relatively not important. We base on plastic mostly. And the prices are growing as compared to the very high levels in the second quarter of 2020. Well, the market was panicking, and we used this opportunity. So we bought a lot of raw materials, and we used it up until today. And right now, we do not see any panic in raw materials. Situation on this market seems to be stable. Everybody is actually dealing with the customers, who are a little bit afraid. Right now, everybody is buying as much as they need until tomorrow, not month or 2 or a year. So that affects the prices of the raw materials, and those prices are not growing, but they are significantly higher than the second quarter of 2020.

And now in terms of education, can you tell us what raw materials, polyethylenes and polypropylenes, but also glues, paints and so on. Polypropylene and polyethylene, what is the growth?

It is around one-digit scale in percentages.

And now the question for Director Warpechowski. How the aluminum prices growth will add to the profitability in the segments, when the exchange rate will remain the same as it is right now? Which segment will use this as an opportunity and which will be negatively affected?

It's very difficult to be precise. With the Extruded Products segment, higher aluminum prices should not affect the segment because naturally we translate the aluminum prices into our products whenever there are time expansions and so on. If we need a hedging, we apply a hedging. So in theory, it should not affect us. Of course, aluminum prices may actually affect the situation anyway, but this is a completely different problem. Well, we've -- I have to say, well, aluminum is not as important in this segment. Well, the aluminum prices are growing. Well, they affect the pressure on the prices. But if there is a demand for product, well, the prices can be updated as well. But we also have a hedging in order to be prepared for potential growth of prices. Because percentage growth cannot be determined today. When we compare the growth, compare the situation with the previous year, well, it's around 4% growth. So it's not a very high growth.

Thank you so much. One more question on the financial matters. That's about the forecast outlook. Because of the 3 quarters, we have 95% on net profit. And now taking into account the plans for the fourth quarter, we can expect around PLN 50 million, PLN 60 million. And the company is still not increasing the forecast. That means that we may expect a very weak quarter in terms of the net profit. And now Director Warpechowski, would you like to comment on that?

Yes, I've said it a little bit. Well, firstly, if we look at the fourth quarter, on the budget level, we should expect certain values. Well, that's true. But presenting our forecast in August, we knew that the fourth quarter may be a little bit worse. So we wanted to have this safety buffer connected with the uncertainty connected with the second wave. And the uncertainty level is growing and right now, we are on the safe side when it comes to the forecast delivery. But you have to remember that this has to be -- the variation less than 10%. But the situation right now means that we can exceed the prognosis, the forecast by around 10%. In December, we plan to inform you about the forecast for the fourth quarter. Right now, we believe that this is a good time to update it because we will see what happened in October and what happened in November. And you know very well that in the third quarter -- in the fourth quarter, that the December is the very important month, so in the context of our customers or potential restrictions right now. So this is going to be a very important month for us. And the update will be presented to you. This will be a forecast for the fourth quarter. And if our calculations are fine, then we will present you with the update.

Thank you so much. And now the question for Aluminum Systems. So the investment in the production hall in Opole will increase the production capacities in this segment or maybe this is not the situation? And when will you start the production?