Metalfrio Solutions S.A. (FRIO3) Earnings Call Transcript & Summary

Good morning. Welcome, everyone, to Metalfrio Third (sic) [ Fourth ] Quarter of 2019 Earnings Conference Call. Today with us, we have Petros Diamantides, CEO; and Mr. Frederico Moraes, CFO and IRO. Today's live webcast and earnings release may be accessed through Metalfrio website at www.metalfrio.com.br/ir. We would like to inform you that this event is recorded. [Operator Instructions] We have simultaneous webcast that may be accessed through the company's website. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. Before proceeding, let me mention that forward-looking statements are based on beliefs and assumptions of Metalfrio's management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that conditions related to the macroeconomic scenario, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Petros. Mr. Petros, you may proceed.

Good morning, everyone. Thank you for your ongoing interest in Metalfrio and for joining us today for our fourth quarter and full year 2019 results call. With me today is Frederico Moraes, our Chief Financial Officer, who is also responsible for our Investor Relations activities. By now, you will have looked through our press release and hopefully have the presentation for this call in front of you. If not, you will find both documents on the Investor Relations part of our website. Today, we shall briefly run through our highlights of the quarter and the full year and provide specific details on our operating segments. Following that, we would like to highlight some key initiatives that will continue to help drive the business forward, and then we shall discuss cash flow and capital structure. We'll then conclude with our outlook for 2020, together with a summary of our strategic priorities before opening the call to any questions you may have. Before we begin, however, I need to caution you that today's conference call may contain forward-looking statements. In that regard, I would like to direct you to the disclaimers about forward-looking statements on Slide #2. With that, let's start with the highlights of the fourth quarter and indeed the full year 2019 on Slide #3. We're delighted to report yet another record year for Metalfrio in terms of top line and earnings with continued strong momentum in the fourth quarter, demonstrating the ongoing success of our unique and disruptive business model. Full year revenues increased 23.7% to a new record level of just under BRL 1.5 billion with the fourth quarter also up strongly by 16%. This was especially pleasing given the tough comparables with the full year and fourth quarter cycling prior year growth rates of 21.4% and 25.1%, respectively. Revenue growth was delivered across all our geographies with Central and North America, in particular, recovering strongly from a challenging 2018. Additionally, our growth benefited from ongoing investments in our manufacturing capacity and reflects our journey towards becoming the only fully integrated cold solutions provider to leading global brands in the world. A strong top line also translated into a new record full year adjusted EBITDA result of BRL 148.5 million up 22.9% on prior year, with the fourth quarter posting an identical rate of growth. Our cost discipline is also reflected in our EBITDA with SG&A as a percentage of sales improving 50 basis points for the full year and 83 basis points in the quarter. Operating profit was also up strongly in both periods under review, boosted by roughly BRL 27 million gain related to a tax over payment in prior years, with net profit further impacted by a favorable development in net foreign exchange costs. Our achievements in 2019 highlight the consistent and significant progress we have made over the past 6 years with a compound annual growth rate of double digits in sales and over 30% in EBITDA with a relentless improvement in our net-debt-to-EBITDA ratio, which now stands just above our mid-term target. Now let's take a closer look at our regions, starting with South America on Slide #4. Revenues for the full year increased by 6%, driven almost entirely by the near 40% growth in services. Life Cycle, our comprehensive service offer, continuing its rollout of an expanded contract with a major brewer whilst at the same time, we continue to develop new competencies to serve new channels and invest in state-of-the-art systems and infrastructure. In addition, the second half saw the first contribution from our 3L acquisition, our all-inclusive rental business. This acquisition complements our disruptive business model, delivering a fast access point-of-sales penetration for small- and medium-sized players across multiple channel formats. Now let's turn to Central and North America on Slide #5. This region rebounded strongly from a challenging trading condition in the prior year with revenues up over 76% for the full year with both unit sales and services showing strong growth. In terms of unit sales, which increased over 60% for the full year, we increased our market share in the ice cream sector in Central America through an expanded relationship with a key global account, culminating in an exclusive local collaboration. In addition, we also increased our market share in the beverage sector, delivering advanced brand aesthetics for a major brewer at point of sales, helping to drive a success -- successful successful upturn in brand sales. In North America, we've continued to see increased collaboration with a major beverage bottling system player, delivering specific products for targeted outlet formats together with a point-of-sale innovation with differentiated aesthetics and rebranding capability on site. Our comprehensive sales offer also delivered strong results in this region with sales up 54% for the full year, driven by an upgrade program of existing products, incorporating energy efficiency improvements and refreshing unit aesthetics. Now please turn to Middle East, Europe and Africa on Slide #6. Sales increased by 28.6% for the full year, driven mainly by growth in units, supplemented by strong growth in services. Central to this performance is the recent investment in our Turkish plant. This upgrade allows faster response to market demand and facilitates and improve the ability to produce [indiscernible] innovative coolers, enabling us to serve an increasing number of new customers across more countries. In penetrating new and exciting areas such as West and South Africa, we have been to expand our relationships with global key accounts and so further diversify our sales away from Turkey. As a result of this success, we acquired in the third quarter land adjacent to our Turkish facility for further future expansion. During the year, Russia also grew strongly as a result of further gains in global key accounts and domestic ice cream producers. Now kindly turn to Slide #7. As we mentioned earlier, Metalfrio has made significant progress over the past 6 years with double-digit compounded annual growth in sales and EBITDA, together with a dramatic strengthening of our balance sheet. A key component to this and our ongoing success is our commitment to our strategic principles, our initiatives that anchor everything we do, enabling us to continue evolving our disruptive business model. The most important element has been an absolute commitment to driving the top line. Our sales teams continue to focus on developing ever closer relationships with our customers to make sure we are providing highly tailored solutions to their challenges. We're very proud of the relationship we have with our customers. Many of whom represent some of the very biggest and most respected consumer brands in the world. Some of these brands are represented on this slide, and there will be brands that you are familiar with. The laser-like focus has meant that our sales product development and manufacturing teams work and communicate more effectively across geographies. Not only has this combined the most powerful asset that we have, our people, it also allowed us to work more efficiently. It allowed us to redesign our internal practices to ensure better and more efficient working practices. This has led to significantly improved revenue performance as well as delivering greater cost optimization. Further to the streamlining of working practices, we also continue to identify and drive through efficiency programs throughout the business. These programs will have long-term sustainable positive impact on our financial performance and enable us to drive results in any economic environment. In addition, we have also continued to invest to ensure that our manufacturing facilities are best-in-class and able to increasingly serve more countries. We have also continued to leverage our strong customer base to sell-through our compelling Life Cycle offer, which provides vital maintenance cover for our customers' coolers and freezers. This important after-sales-service has seen very strong growth, enabling us to keep close to our customers whilst diversifying our income stream. In addition, our recent 3L acquisition has given us another competitive advantage in being able to deliver equipment rental options, which is particularly attractive to small- and medium-sized entities, wishing to quickly expand point of sales presence. Keeping close to our customer is, of course, key to our ability to continue to win in the marketplace. Our customers are faced with an increasingly competitive landscape together with various external challenges such as meeting environmental targets. This requires significant expertise and ability in terms of innovation for us to help our customers meet tomorrow's challenges today. Some of the solutions include subzero, energy-efficient models and bespoke solutions to differentiate our customers' products and drive point of sale, particularly in the higher-margin immediate consumption channel. Of course, it is not only products in which we can be innovative, but also in our business approach. Life Cycle is proving to be a real success, and we are truly excited about the potential of our recent acquisition of 3L, which delivers multi-retail for equipment rental solutions. But perhaps most exciting of all is our proprietary Internet of Things technology, which will deliver in valuable data-driven insights into asset tracking, equipment's health, environmental impact as well as consumer trends. We pride ourselves on innovation leadership, but of course, nothing is better than being recognized by our customers. Therefore, we are so proud to be chosen by many of our key global accounts as their #1 supplier and increasingly being recognized as a preferred partner in helping to deliver solutions across their business. Through focusing on all these elements, we believe we shall continue to generate significant value creation for our shareholders whilst providing an ideal environment to retain and attract the best people in the industry. Now let us return to financial performance and in particular, cash flow on Slide #8. As you have already seen, adjusted EBITDA rose strongly during 2019, up 22.9% to BRL 148.5 million, driven by sales growth across all of our geographies and businesses. As a result of the strong top line, working capital requirements increased, leading to a lower operational cash flow. CapEx was also up compared to the previous year, reflecting the purchase of land adjacent to our Turkish plant to facilitate future expansion. Operational cash cycle was 1 day higher at 23 days compared to the same period in the prior year. Turning to Slide 9. Let's take a quick look at our capital structure and liquidity. Net debt increased to BRL 493.8 million compared to BRL 334.2 million at the same time last year, mainly due to higher sales during the second half of the year. Shareholders' equity kept an important growth along the whole year, reaching BRL 127 million at the end of the year as the contribution coming from the bottom line. The short-term component of our debt was 7% higher than at the same period of last year, and we plan to normalize this percentage to be lower than 60% along 2020. Turning to Slide #10. So what do we see for 2020. Metalfrio has evolved into the world's leading technology-based cold solutions provider to the global consumer brands. With a fully integrated offer, from design to manufacture, from asset management to equipment rental together with proprietary Internet of Things technology, we have become partner of choice to many leading consumer brands. Covering over 80 countries, we believe we're well placed to continue a strong momentum across our markets and therefore believe we're well placed to continue making further strategic and financial progress in 2020 despite ongoing global macroeconomic volatility. During the year, we shall continue to prioritize customer value creation in order to deliver the best, most innovative market solutions. Furthermore, embracing our disruptive business credentials, we shall continue to deliver growth in Life Cycle, increasingly embedding our technological leadership in Internet of Things to drive value for our customers whilst continuing to roll out our equipment rental offer. At the same time, we will maintain our strong financial discipline to drive continued improvement in cash flow and liquidity and strengthen the balance sheet further as we move towards our mid-term net-debt-to-EBITDA ratio of 2.5x. We also have to refer to the recent outbreak of COVID-19, which has triggered significant decisions by governments and the private sector, which added to the potential impact through volatility and increased uncertainty. As a result, we promptly initiated strict protocols throughout our business for sanitation and safety within our facilities to protect the well-being of our employees and partners. At this moment, the global financial, social and economic consequences of this pandemic remain uncertain. And despite the fact that we have not yet experienced significant loss of momentum, Metalfrio is taking prompt and decisive action to be in a position to best adjust to the evolving market conditions. We do expect to be operating under reduced visibility and volatile market conditions as the effects of the pandemic cycles through our operating regions. On Slide #11. Before we open this call to questions. Let us remind you of our key strategic priorities. You will have heard us talk about this before. So we will not go through into too much detail. However, it is important to understand that these priorities are the essential building blocks of our path towards continued value creation. We have significantly strengthened our customer relationships over the past 6 years, which we're delighted to say is evidenced by the consistent and strong underlying momentum and financial results that Metalfrio has been delivering. We have the infrastructure and superior industry know-how and are now working hard every day continue to get closer to our customers. By creating great products and services in active collaboration with our key global accounts and our new customers, so we enhance our ability to be seen as an important partner in continuing to deliver the right solutions for their current and future needs. Success here will, of course, drive the top line, which together with the benefits of operating leverage, improved product mix as we sell more value-added products and the delivery of further operational efficiencies will further improve our profit margins. Another key strategic priority is the development of our future platforms for growth. In addition to improving performances from our more mature operations, we are excited about expanding into new and exciting markets such as South Africa and then near in Middle East, whilst continuing to develop new technologies to help our customers meet their future challenges. Indeed, it is not just innovation in design and aesthetics of our coolers, but equally so, innovation in our wider product offering. And it is in this that we have built a truly disruptive business model with the success of our Life Cycle product together with our equipment rental options through 3L and the tremendous excitement at our proprietary technology in Internet of Things brings to Metalfrio and its customers. At the same time, we shall continue to focus to further strengthen our capital structure to help move us towards our mid-term net-debt-to-EBITDA target of 2.5x together with initiatives to further improve our liquidity. This will be driven by the benefits of operating leverage, focus on working capital and further cost optimization, also shall continue to be robust in capital allocation, ensuring that growth in maintenance CapEx plans are applied against the strictest of risk and returns criteria. In pursuing all these objectives, we believe we shall strengthen our position as the world's leading technology-based cold solutions provider to the global consumer brands, creating superior levels of economic profit over the medium and long term, benefiting our stakeholders. We truly appreciate your attention. And now we would like to open the call to any questions that you may have.

[Operator Instructions] This concludes the question-and-answer section. At this time, I would like to turn the floor over back to Frederico Moraes for any closing remarks.

I would like to thank everyone for participating in our conference call for the results of the fourth quarter '19. If you have any questions, feel free to contact us at our Investor Relations department. Thank you very much, and have a nice day.

Thank you. This concludes today's Metalfrio's Fourth Quarter 2019 Earnings Conference Call. You may disconnect your lines at this time.