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

Good morning, everyone. Welcome to Metalfrio First Quarter of 2020 Earnings Conference Call. Today with us, we have Mr. 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 reform 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 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 scenarios, industries 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 Diamantides. Mr. Petros, you may begin your conference.

Good morning, everyone. Thank you for your ongoing interest in Metalfrio and for joining us today for our first quarter 2020 results call. With me today is Frederico Moraes, our Chief Financial Officer, who is also responsible for our Investor Relations activities. By now, you have looked through our press release, and hopefully, you have the presentation for this call in front of you. If not, you'll find those documents on the Investor Relations part of our website. Today, we shall briefly run through our highlights of the quarter and provide you some specific detail 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 the rest of the year, together with a summary of our strategic priorities before opening the call to any questions you may have. Before we begin, 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. Now let us start with a look at the highlights for the first quarter of 2020 on Slide #3. The good momentum from the end of 2019 carried on to the early part of this year for all regions. The COVID-19 pandemic did not affect our South, Central and North America results in the quarter, but our Europe, Middle East and Africa region began to see the effects of government-imposed lockdowns from around mid-March. As a priority, Metalfrio took decisive actions early in the quarter to protect the health and safety of its employees, suppliers, customers and partners whilst introducing comprehensive daily communication protocols to manage the dynamic environment. Additionally, plans were created and rolled out to conserve cash and protect profits from the end of March to the second quarter to offset near-term macro challenges. Against this backdrop, Metalfrio delivered a good set of operational results in the first quarter, especially when set against the very strong prior year comparable. Net revenues increased 4%, led by the Americas regions, and we are especially pleased to see our services deliver a strong performance, up nearly 38% to BRL 61.9 million, highlighting the increasing importance of this part of our business. Gross profit was up 29.1%, driven by higher sales and disciplined control of input costs, leading to a near 400 improvement basis points margins compared to the same period last year, whilst EBITDA was even better, up 34% with a margin improvement of 259 basis points. Net financial items were impacted significantly at the end of the quarter by the devaluation of our operational currencies against the hard currencies, notably the U.S. dollar and the euro, as well as the mark-to-market adjustments in some of our financial assets. These mainly noncash and realized foreign exchange losses led to a net loss for the quarter of BRL 107.3 million. Now let's take a closer look at our regions, starting with South America on Slide #4. Strong revenue performance, up 19.3% versus the same period last year, was led mainly by good progress in beer and soft drink business in key accounts. At the same time, Life Cycle continued its momentum, up 15.5%, owing to an expanded contract with a major brewer as well as the development of new competencies to serve new channels, highlighting the potential of this increasingly important business stream. In addition, our new rental business, 3L, contributed positively, reinforcing the unique market position of Metalfrio's disruptive business model. Moving on to Slide #5. The first quarter saw a very strong performance in Central and North America with revenues up almost 72% versus the prior year comparable period. Within these services delivered a growth rate even higher than that of the region, owing to the successful expansion of refurbishment in both beverage coolers and ice cream freezers. And finally, for the regional review, let's look at our EMEA region, Europe, Middle East and Africa on Slide #6. Here, sales declined 20.2% in the quarter compared to prior year. This was a result of the ramp-up of the Turkish plant and an extensive automation upgrade of one of our lines, together with the timing difference in Russian deliveries compared to last year. In addition, we began to see the start of order referrals from around mid-March as the effect of government-led lockdowns began to affect consumer demand, in contrast to the Americas regions which did not feel this impact until later. Kindly turn to Slide #7. As you know, Metalfrio has made significant progress over the last 6 years with double-digit compound annual sales growth in sales and EBITDA. The key component to this and our ongoing success is our commitment to our strategic principles, our initiatives that anchor everything that 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 customers to make sure we're 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 we will be very familiar with. The razor-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 has also allowed us to work more efficiently. It allow us to redesign our internal processes to ensure better and more efficient working practices. This has led to a significantly improved revenue performance as well as levering greater cost optimization. Further to the streamlining of working practices, we also continued to identify and drive through efficiency programs throughout the business. These programs will have long-term, sustainable, positive impacts 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, enabled 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, enable 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 customers is, of course, key to our ability to continue to win in the market. 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 our solutions include sub-zero, 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 our business approach. Life Cycle is proving to be a real success, and we are excited about the potential of our recent acquisition of 3L, which delivers multi-retail format equipment solutions. But perhaps most exciting of all is a proprietary Internet of Things, IoT technology, which has delivered invaluable, data-driven insights into asset tracking, equipment help, 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 have been chosen by many of our global key accounts as the #1 supplier, and increasingly being recognized as the preferred partner in helping to deliver solutions across their business. Through focusing all these elements, we believe that we will continue to generate significant value creation for shareholders whilst providing an ideal environment to retain and attract the best people in the industry. With this, let us return to financial performance and, in particular, cash flow. Kindly turn to Slide #8. Adjusted EBITDA was strong in the first quarter, up around 34%, owing to higher sales and operational efficiencies. Higher sales increased working capital requirements, resulting in a lower operational cash flow for the period. CapEx was up 55.9% compared to the prior year, reflecting the purchase of an additional land parcel adjacent to our Turkish plant to facilitate future expansion. Operational cash cycle was 24 days higher at 47 days compared to the same period in the prior year, owing to the first cluster of postponement of orders as a result of the COVID-19-related lockdowns. Turning now to Slide #9. Let us take a quick look at our capital structure and liquidity. Net debt increased to BRL 742.9 million compared to BRL 413.4 million at the same time last year due to foreign exchange translation impacts on our hard currency-denominated debt as well as noncash mark-to-market losses in some financial instruments. In addition, we had a higher working capital requirement to meet higher sales. Owing to a long position in hard currencies and a significant part of our sales being in U.S. dollar and euros, we expect to balance out the foreign exchange impact over the course of the year. So what do we see for 2020? Kindly turn to Slide #10. 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 IoT technology, we have become a partner of choice to many leading consumer brands. Covering over 80 countries, we believe we are well placed to continue our strong momentum across our markets and therefore believe we are well placed to continue making further progress in 2020 despite ongoing global macroeconomic volatility linked to the pandemic. Indeed, in recent weeks, we have seen early signs of the resumption of orders, especially in EMEA, and we expect to see gradual improvement in trading in the second half of the year. During the rest of 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 shall maintain our strong financial discipline to drive continued improvement in cash flow and liquidity and strengthen the balance sheet further, aiming to achieve a net debt-to-EBITDA ratio of 2.5x in the near future. Finally, before we open this call to questions, let us remind you of our key strategic priorities on Slide 11. You will have heard us talk about this before, so we shall not go into too much detail. However, it is important to understand that these priorities are the essential building blocks for our path towards continued value creation. We have significantly strengthened our customer relationships over the past 6 years, which we are delighted to say is evidenced by the consistent and strong underlying momentum and financial results that Metalfrio is delivering. We have the infrastructure and superior industry know-how and are now working hard every day to 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 well as 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, exciting markets such as Africa and the near and 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 offering. And it is in this that we have built a truly disruptive business model with the success of our Life Cycle, together with our equipment rental option through 3L and the tremendous excitement that our proprietary technology in IoT brings to Metalfrio and its customers. At the same time, we shall continue to focus on further strengthening our capital structure to help us achieve a net debt-to-EBITDA target of 2.5x in the near term, 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. We shall also continue to be robust in capital allocation, ensuring that the growth and 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 global consumer brands, creating superior levels of economic profit over the medium and long term, benefiting all our stakeholders. We truly thank you for your attention, and now we look forward to receiving any questions that you may have.

[Operator Instructions] This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Petros Diamantides for any closing marks.

Thank you very much for investing your time in the Metalfrio first quarter call. Frederico and the IR team [indiscernible].

Thank you. This concludes today's Metalfrio First Quarter 2020 Earnings Conference Call. You may disconnect your lines at this time.