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

Today, 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 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 the 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 our company and for joining us today for our first half and second quarter 2020 results call. With me today is Frederico Moraes, Chief Financial Officer, who is also responsible for our Investor Relations activities. Before we start, we just want to express our hope that all of you and those close to you have managed to stay safe and well during these testing times. We continued to be amazed by the resourcefulness and determination not only of our people, but also our partners and customers to keep finding new ways to keep working safely in this unprecedented environment. Now turning back to our results. 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 both documents on the Investor Relations part of our website. Today, we shall briefly run through our highlights of the first half and second quarter and provide some 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 shall then conclude with our outlook for the rest of the year, together with a summary of our strategic priorities before opening the call for any questions you may have. At this point, we would like to caution you that today's conference call may contain forward-looking statements. In that regard, we are directed to the disclaimers about forward-looking statements in Slide #2. Now let us start with a look at the highlights for both financial periods under review on Slide #3. As we reported in the first quarter, Metalfrio took early and decisive actions to protect the health and safety of its employees, suppliers and partners whilst enabling operations to continue effectively. At the same time, we initiated cash consolidation and profit protection initiatives to help offset the near-term macro challenges. These actions, together with our compelling business model led to a first half of the year that demonstrated our resilience and exceptional market conditions with gross profit and adjusted EBITDA down modestly against a 10% fall in revenues with margin expansion of 120 basis points and 80 basis points, respectively. Clearly, the main effect of the lockdowns around the world was felt in the second quarter with revenues down 22%. This was driven by an abrupt and significant loss of traffic in immediate consumption and on-trade channels, leading to the deferral of orders by our customers. However, this was partly mitigated by our strong position in future consumption channels, which saw good conditions and continued growth in our excellent refrigeration asset management and rental businessmen. Our Services division presented significant resilience in this pandemic scenario and revenues increased by 36% in the first 6 months of the year and 33% in the second quarter. This in fact reinforces our strategy of business diversification. Net financial items for the first half of the year were impacted significantly by the devaluation of our operational currencies against the hard currencies, notably the U.S. dollar and the euro as well as the market-to-market adjustments in some of our financial assets. This mainly noncash and realized foreign exchange losses led to a net loss of BRL 120 million. For the second quarter, net losses were modest at BRL 12.6 million. And finally, let us mention a key strategic highlight of the second quarter. Metalfrio maintains a strong focus on being a disruptive player, bringing innovative technology-based solutions to the market. Consistent with this, we announced in July our intention to acquire assets365, which will further strengthen our leadership in harnessing the IoT potential in this segment. With Internet connectivity IP at the heart of our integrated consolation suite of products and services, we have created a truly disruptive technology-driven business model to help global consumer brands meet their commercial challenges. Now let's take a closer look at our regions, starting with South America on Slide #4 in the deck. Revenues fell 34% versus prior year second quarter as the region began to be impacted by the effects of COVID-19 lockdowns. This began later then in our Europe, Middle East and Africa region and led to a rapid decrease in immediate consumption and on-trade channel activity in the quarter with customers deferring unit orders. Services, however, continued to perform well, led by new and expanded scope in existing accounts with current market conditions, encouraging greater outsourcing activity. Furthermore, our new rental business, 3L, continued to contribute positively. Now turning to Slide #5. As with our South American region, lockdowns in our Central and North America region began in the middle of the second quarter with immediate consumption and on-trade channel significantly impacted. In addition, breweries in Mexico were subject to a period of mandated shutdowns during the quarter with unit order deferrals necessitating a brief suspension of our own manufacturing activities. As a result, we saw a 68.1% fall in revenues during the quarter with Services also reporting a decline. And finally, for our regional overviews, let's now look at Europe, Middle East and Africa on Slide #6. Revenues in this region were broadly stable in the second quarter. This was supported by favorable currency translation effects with the improved momentum versus the earlier part of the year, also reflecting an earlier impact from lockdowns during the first quarter compared to our Americas operation. By the end of the quarter, with the easing of the lockdown measures in some markets, we began to see early signs of resumed uptake of deferred orders as markets opened up. During the second quarter, Services performed extremely well, with revenues increasing by over 190%, owing to new contracts for upgrading beer units at a newly established refurbishment center in Turkey. Now moving to Slide #7. You will have noticed our emphasis on services over the past few quarters, and that reflects the great importance and focus of this business within our operations. In this slide, you can see that the product segments, which is, of course, more directly impacted by the effects of the lockdowns, so revenues decreased by 21% and as a consequence of an operational deleverage, gross profit margin decreased by 2.3%. For the full semester, revenues decreased 16% and gross profit margin slightly increased by 20 bps. The Service segment, however, has been far more resilient in this economic environment with revenues increasing by 33% in the second quarter and 36% for the full semester, and gross profit margins up by 3.6% in the second quarter and 6.7% in the first semester. Turning to Slide #8. We would like to highlight some key strengths of Metalfrio that have been vital for the performance in the past and will also support growth in the future. We are indeed proud of our history, which is anchored in delivering innovative and bespoke cooler aesthetics with high technical performance, able to perform in a variety of environmental conditions and across a number of different channels, although preferentially focused on the high-margin immediate consumption channel. Through this consistently proven confidence, we have grown close to our customers, many of whom will present the world's leading consumer brands as well as highly regarded regional and local companies. With the broadest geographic presence in the industry covering over 80 countries, we are able to deliver products from our world-class manufacturing hubs ensuring execution consistency, becoming a preferred supplier in most cases. As a consequence of this success and to meet the market need, we developed an aftersales capability seeking to deliver the most comprehensive asset management offered called LifeCycle. With strong year-on-year growth, not only does it offer an increasingly diversified income stream, but it also further strengthens our relationships with our customers. Metalfrio was very much focused on larger global players. However, the acquisition of 3L allowed us to enter a small to midsized market, delivering a much needed point-of-sale solution for those companies wanting to build out a rapid cooler base without the need of outright ownership. This is proving very popular and is already contributing positively to our earnings. With such an extensive geographic footprint, together with a compelling and complementary range of business activities, Metalfrio has created an increasingly diverse set of value drivers contributing to our resilient results. But probably the most exciting development for us, providing exciting potential for future growth is our unique intellectual property position in the industry of Internet of Things. This capability enables us to generate invaluable data-driven insights in areas such as asset tracking, equipment health, environmental impact as well as consumer behavior trends. Integrating this into a service infrastructure to deliver appropriate follow-up actions at the point of sale is providing significant opportunities. These developments combined to make Metalfrio a truly disruptive market leader in its field. We have also enabled Metalfrio to deliver consistently resilient financial performance through the years. And as it continues to move closer to the end customer and therefore, more aligned with a positive long-term growth trends of its future customers, the quality of returning stream will continue to increase. Please now turn to Slide #9. As you know, Metalfrio has made significant progress in the past 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 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 are providing highly tailored solutions to their challenges. We are very proud of the relationships 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 they will be brands that you are very familiar with. A key component to driving our strong consistent growth over this period of time has been the organization of strong lines of communication and collaboration between and across our global sales, product development and manufacturing teams. Not only has this combined the most powerful asset that we have, our people, but it also allowed us to work more efficiently. It allowed us to redesign our internal practices to ensure better and more efficient working practices. [Technical Difficulty] improved revenue performance as well as delivering greater cost optimization. Further to streamline our working practices, we also continued to identify and drive through efficiency progress of the business. These programs will have long-term sustainable positive impacts on our financial performance and provides resilience in challenging economic environments. In addition, we have also continued to invest to ensure that our manufacturing facilities are best in class and are able to increasingly server 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-sale 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 in being able to deliver equipment rental options, which is particularly attractive to small and midsized entities wishing to quickly expand point of sales presence. But perhaps most exciting of all is our emerging and exciting proprietary Internet of Things technology, which delivers invaluable data-driven insights in trust, attracting equipment sales, environmental impact as well as consumer trends. 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 extended 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 that we have developed include sub-zero energy-efficient models and bespoke solutions to differentiate our customers' products and right point of sales, particularly in the higher-margin immediate consumption channels. Let us provide you with a few other specific examples of our innovation. In North America, we're proud to have developed the Arctic model, which delivers ice crystal formation inside the bottle delivering a new and exciting performance for a sophisticated and demanding consumer, driving immediate consumption. In Africa, our Hybrid model is extremely popular as it provides sales continually during intermittent power shortages through battery packs and special insulation. We have also developed a universal solution within interchangeable brand aesthetics that provides a cost-effective multiple branding possibilities. We pride ourselves on innovation leadership, but of course, nothing is better than being recognized by our customers. Therefore, we're 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, which deliver a unique and compelling business proposition, we believe that 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 #10. Operating cash flow reversed from a positive BRL 10.1 million at the same period last year to an outflow of BRL 224.8 million, owing mainly to the disruption of our usual seasonal purchasing patterns of the customers as a result of the abrupt and significant impact from the government imposed lockdowns across our markets. However, we do expect this position to unwind during the rest of the year, an uptick of some previously postponed customer orders as lockdown measures are gradually relaxed around the world. Operational cash cycle was 70 days higher at 94 days compared to the same period in the prior year, owing to the short-term factors we just mentioned. Turning to Slide #11. Let's take a quick look at our capital structure and liquidity. Net debt increased to BRL 880.2 million compared to BRL 456.4 million at the same time last year due to foreign exchange translation impacts on our hard currency denominated debt, mark-to-market losses in some financial instruments and the near-term impact of COVID-19 on our financial results and working capital in the quarter, owing to the fact that 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. Slide 12. So what we see for the rest of the year? Metalfrio has evolved into the world's leading technology-based cold solutions provider to the global consumer brands, becoming a partner of choice in helping them achieve their sales and sustainability objectives with a disruptive fully integrated offer from design to manufacture from asset management to equipment rental together with emerging and exciting proprietary Internet of Things technology, we have continued to get closer to our customers. Covering over 80 markets, we believe that 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 COVID-19 pandemic. Indeed, in recent weeks, we have seen early signs of the resumption of orders, especially in EMEA and expect to see gradual improvement in trading in the second half 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 LifeCycle, 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 our balance sheet. Finally, before we open this call to questions, let us remind you of our key strategic priorities on Slide #13. 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 I'm 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 that 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, of course, will 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 the 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 product offer. And it is in this that we have built a truly disruptive business model with the success of our LifeCycle product together with our equipment rental options through 3L and the tremendous excitement that our proprietary technology in IoT that Metalfrio brings to its customers. At the same time, we shall continue to focus on further strengthening our capital structure 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 we shall continue to be robust in capital allocation, ensuring that 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 appreciate and thank you for your attention, and we now look forward to receiving any questions you may have.

[Operator Instructions] This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Petros Diamantides for any closing remarks. Please, sir, you may proceed.

Thank you. Our IR desk here in Metalfrio remains open for any questions or clarifications you may have. And with this, we would like to thank you for your interest in our Q2 and H1 2020 results and of course, Metalfrio. Thank you so much.

Thank you. This concludes today's Metalfrio's Second Quarter 2020 Earnings Conference Call. You may disconnect your lines at this time, and have a nice day.