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

Good morning. Welcome, everyone, to Metalfrio's Third 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 inform you that this event is recorded. [Operator Instructions] We have simultaneous webcast that may access 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's management on information currently available to the company. They involve risks, uncertainties because they relate to future events and, therefore, depend on a circumstance that may not occur. Investors should understand that conditions related to 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 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 third quarter and 9-month results call. With me today is Frederico Moraes, our Chief Financial Officer, who is also responsible for our investor relations activities. 2020 has been a truly unprecedented year so far, and hope this call finds you and your families safe and healthy. During this time, our priority has been to deliver products and services to our customers in a way that has kept our employees, our suppliers and our partners safe. In successfully managing to do this, we have been truly amazed by the resourcefulness and determination of our people and our partners. During these times, our commercial teams have continued to find new opportunities to grow, new avenues to pursue to keep driving our business forward. Our operations teams have been able to quickly adapt shift patterns to the emerging market realities, whilst modulating supply chain fluctuations. Words cannot express my immense thanks for and pride in the incredible teamwork I have witnessed this year. Now turning to our results. 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 for the third quarter and 9 months and provide 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 shall then continue 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, however, I need to caution you that today's conference call may contain forward-looking statements. In that regard, we 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 both financial periods under review on Slide #3. The third quarter saw a return to revenue growth, up over 10% compared to the same period last year, led by a partial resumption of previously deferred orders together with success in penetrating new channels, segments and geographies. This marked a strong improvement from a very tough second quarter and was ahead of the 9-month figure. Sales from Services was down 10.9% versus the third quarter of last year, but we had a strong year today, up 16.4% to BRL 185.4 million. The 9-month figure represents 17.5% of group sales, which when compared to the 14.4% of group sales for the same period last year, it shows the increasing financial and strategic importance of this business stream. Gross profit increased 25.5% in Q3, significantly ahead of the 9-month increase of 3.5%. Operating leverage drove the 200 basis points improvement in the third quarter margin with a strong focus on costs during the entire 9-month period, leading to a 130 basis points increase despite the lower revenues. Adjusted EBITDA rose 46.8% in Q3 benefiting from higher sales and a more efficient structure reshaped during the pandemic, resulting in a 250 basis points margin expansion. This strong quarter helped drive a 9-month advance of 7.5% in EBITDA with strong cost discipline through the period helping margins increase 120 basis points to 10.8%. Net financial items were adversely impacted by the volatility in the financial markets owing to the COVID-19 pandemic during the first 9 months. This resulted in the devaluation of our operational currencies against hard currencies, notably the U.S. dollar and the euro as well as the devaluation of the U.S. dollar against our main partner currencies. Together with mark-to-market adjustments in some of our financial assets, these mainly noncash unrealized foreign exchange losses with the greatest impact in Q1 led to a net loss of BRL 157.5 million in the period. For the third quarter, the net losses were BRL 37.5 million. Now let's take a closer look at our regions, starting with South America on Slide #4 in the deck. Revenues in Q3 showed a clear sequential improvement with a sales decline of only 6.9% compared to the decline of 34.3% in Q2, with early signs of a broader market recovery at the end of the quarter. During the quarter, our sales teams were successful in leveraging our strong nationwide distribution network to capture demand in local areas. The third quarter was also affected by the transition of refurbishment operations from an in-plant customer facility into our own premises. This led to a 22.1% decline in the Service revenues, with the transition continuing into the fourth quarter. Once complete, however, this move will have strong operational, strategic benefits for Services, which accounts for 28.5% of total sales in the region, enabling us to take advantage of greater market opportunities. And with this, let's turn to Slide #5. Revenues declined 38.5% in Q3 versus the prior year comparable period as the region saw a continuation of the highly challenging conditions since -- seen in the second quarter owing to strict lockdown measures. Within these, Services saw a 44.2% fall in revenues affected by activity-level-linked contracts. The third quarter performance was below that of the 9-month figure, but marked a sequential improvement relative to the second quarter. And finally, for the regional overviews, let's look at Europe, Middle East and Africa on Slide #6. The region experienced the effects of comprehensive government-led lockdown measures ahead of the Americas. As a consequence, many of these markets began to open up earlier than in the Americas, leading to a partial resumption of the deferred orders in Q3. Together with a good level of new market penetration and increased sales in the distributor channel, Q3 saw strong recovery in sales, which rose 47.6%, enabling a return to positive territory for the year-to-date sales growth. Services continued to perform well, growing 28.6% in Q3 versus the same period of last year. For the 9 months, Services increased 92.8%, albeit from a smaller pace, owing to the strong activity in upgrading beer units at our new refurbishment facility. Slide #7. You will have seen in recent months and indeed today, greater disclosure on Services in our communications. We're delighted at how this proposition has proved popular with our customers with the quality, depth and breadth of our offering. Metalfrio offers a significant competitive advantage in this area. In addition, this has helped to increase the quality of our profits through diversification and visibility of forward earnings and now accounts for 17.5% of group sales. For the third quarter, Products saw an increase of sales of 15.8% compared to a 10.9% decrease in Services, largely as a recovery of unit sales across our geographies, together with the loss of revenue in Services due to the relocation of our refurbishment facility in Brazil. In the 9 months, with a 16.4% increase in Services, helping to partly offset the 7.8% decline in Products, highlighting, as we have said before, the increasing importance of this revenue stream. Gross profit in both periods under review and both segments increased during the year, with the exception of a small decline in Products for the 9 months, with gross profit margin improving across the board, especially in the faster-growing Services business. Service is a vital part of Metalfrio's truly unique disruptive business model that is emerging. And we'd like to ask you to turn now to Slide #8 and allow us to explain what we mean by this. We're 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, albeit preferentially focused in the high-margin immediate consumption channel. Through this consistently proven competence, we have grown close -- very close to our customers, many of whom represent 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 and becoming a preferred supplier in most cases. As a consequence of this success and to meet market needs, we developed an after-sales capability seeking to deliver the most comprehensive asset management offer called LifeCycle. With strong year-on-year growth, not only does this offer an increasingly diversified income stream, 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 the 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 for outright ownership and the associated large cash outflow. This is proving very popular and is already contributing positively to our earnings. But probably the most exciting development for us providing amazing potential for future growth is our unique intellectual property position in the industry of Internet of Things through the acquisition of assets365, which was concluded earlier this month. This capability will enable us to generate invaluable data-driven insights in areas such as asset tracking, equipment health, environmental impact as well as consumer behavior trends. Integrating all of these into a service infrastructure will allow us to deliver appropriate follow-up actions at the POS. And this will provide significant opportunities. These developments combine to make Metalfrio a truly disruptive market leader in its field. And as we continue to move closer to the end consumer and, therefore, more aligned with the positive long-term growth trends of our blue-chip customers, the quality of our earnings streams will continue to improve. Now turning to Slide #9. As you know, Metalfrio has made significant progress over 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 our 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 they will be brands that you are familiar with. A key component 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 has 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 a significantly improved revenue performance as well as delivering 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 provide resilience in challenging economic conditions. 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 also continued to leverage our strong customer base to sell through our compelling LifeCycle offer, which provides vital maintenance cover for the 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. But perhaps most exciting of all is our emerging and exciting proprietary Internet of Things technology, which delivers invaluable data-driven insights into asset tracking, equipment health, environmental impact as well as consumer trends. Just recently, in November, we further consolidated our leadership in this exciting field through the completion of the acquisition of the U.K.-based assets365. Keeping close to our customer is, of course, key to our ability to continue winning 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 these solutions include sub-zero, energy-efficient models and bespoke solutions to differentiate our customers' products and drive point-of-sale sales, particularly in the higher-margin immediate consumption channel. Let us go through some specific examples of innovation. In North America, we're proud to have developed the Arctic cooler, which delivers ice crystal formation inside the bottle, delivering a new and exciting experience for a sophisticated and demanding consumer, driving immediate consumption. In Africa, our hybrid model is extremely popular as it provides sales continuity during intermediate power shortages through battery packs and enhanced insulation. We have also developed a universal solution with interchangeable brand aesthetics, providing cost-effective multiple branding capabilities. 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 global accounts as their #1 supplier and increasingly being recognized as their 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 will be able to continue to generate significant value creation for our shareholders whilst providing an ideal environment to retain, develop and attract the best people in the industry. Now let us return to financial performance and in particular, cash flow. Adjusted EBITDA increased 46.7% to BRL 33.3 million driven by signs of recovery. This recovery also had the effect of normalizing inventory levels and account payables from prior quarters befitting working capital. However, the higher level of sales in Q3 led to the higher account receivables. Putting all these together, working capital was much improved versus Q2 sequentially, but higher when compared to the same period of last year. And we expect to see a continued normalization into the last quarter. Operational cash cycle was 6 days higher at 69 days compared to the same period of last year, reflecting the above near-term factors. Now turning to Slide 11. Let us take a quick look at our capital structure and liquidity. Net debt increased to BRL 819.1 million compared to BRL 589.1 million at the same time last year due to foreign exchange translation impacts on our hard currency-denominated debt, noncash mark-to-market losses in some financial instruments and the near-term impact of COVID-19 on our financial results in the quarter. Comparing the net debt level to the prior quarter, the second quarter at BRL 880.2 million, there was a reduction of BRL 61.2 million during this quarter as a result of positive operational result and working capital decrease. On Slide #12, let's now turn on our outlook for the balance of 2020. Although we are witnessing a resurgence of COVID-19 cases around the world, Metalfrio expects to see a continuation of the third quarter momentum into the fourth quarter. We're confident that our strong market position and focus on cost optimization will ensure that we'll make further progress during the rest of 2020. Our confidence is underpinned by the highly focused sales teams that work closely with our customers to deliver fully integrated, customized cold solutions in over 80 countries with products being created by best-in-class manufacturing sites and innovative design teams and our unique asset management service offerings, delivered by our committed and talented people. We continue to help global consumer companies optimize their sales objectives and sustainability goals. We shall continue to prioritize customer value creation in order to deliver the best, most innovative market solutions. Furthermore, our disruptive business credentials will continue to be enhanced as we're working to deliver growth in LifeCycle, increasingly embedding our technological leadership in IoT 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. Finally, before we open the 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 will 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 7 years, which we're 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 now we're 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 we sell through 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're also excited about expanding into new markets in Africa and the Middle East, whilst continuing to develop new technologies to help our customers with 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 that, that we have built a truly disruptive business model with the success of our LifeCycle offering 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, together with the initiative to further improve liquidity. This will be driven by the benefits of operating leverage, relentless focus on working capital and further cost optimization. Also, we 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 thank you for your attention. And now we would like to open the call for any questions you may have.

[Operator Instructions] Our first question is from [ Rodrigo ], an investor. He asks, "I would like to know what is the forecast productivity level until the end of the year and also an update regarding the process of the loans extension?"

Thank you so much for the question, [ Rodrigo ]. Yes, we are in the seasonally relevant fourth quarter, and we are operating in a double-shift pattern here in Brazil, as it is the normal schedule for this part of the year. And additionally, we are having a robust order book well into the first quarter of next year. Regarding the progress on the loan extension, I would like to hand over to Frederico. Frederico?

[ Rodrigo ], thank you for the question. Yes, in October, we started the process of loan extension, and we have already concluded part of them since then, with maturity above 360 days.

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

We would like to thank you for attending the Metalfrio third quarter and 9 months call. And as always, we're available at the Investors Relation desk for any further questions or clarifications you may have. Thank you very much, and keep safe.

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