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

Good morning. Welcome, everyone, to Metalfrio's Fourth Quarter and Full Year of 2020 Earnings Conference Call. Today with us, we have Mr. Petros Diamantides, CEO; and Mr. Frederico Moraes, CFO and IRO. Today, 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 simultaneously 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 scenario, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Now I'll 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 fourth quarter 2020 and full year results call. With me, as always, is Frederico Moraes, our Chief Financial Officer, who is also responsible for our Investor Relations activities. 2020 has presented truly unprecedented challenges for our business and for our people. Yet against that backdrop, Metalfrio delivered a record high adjusted EBITDA result for the full year. This demonstrates the strength and robustness of our disruptive business model and testament to the extraordinary levels of commitment and engagement of our people. Our priority has been to deliver products and services to our customers in a way that which kept our employees, our suppliers and partners safe, and we are proud that we have done that. At the same time, our sales teams have continued to find new opportunities to grow new avenues to pursue. Now let's go through our results in detail. 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'll find both documents on the Investor Relations part of our website. Today, we shall briefly run through our highlights of the fourth quarter and the full year, touch on the shape and impact of COVID-19 throughout the year 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'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. As we start, we 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 of our forward-looking statements on Slide 2. Now let us start with a look at the highlights for both financial periods and the review on Slide 3. Q4 saw a rise in net revenues of 3.1% versus the prior year period, which had recorded a 16% increase, driven mainly by a continued recovery from COVID-19 restrictions in our South America region. For the full year, net revenues were down marginally within which Services continued to perform well, up 8.5% and now accounting for 16.7% of net revenues. In the previous year, Services represented about 15% of net revenues, which highlights the growing importance and success of this part of our business. Gross profit was down slightly in the quarter, owing to additional expenses being incurred to allow plants to meet rapidly recovering demand, but up for the full year as a result of adaptation of the manufacturing base to the emerging market realities. The development of operating profit in both periods under review reflect the one-off tax benefit received in 2019 as well as higher commercial expenses associated with the changes in the sales and channel mix during 2020. Adjusted EBITDA was down 12.2% in the quarter, reflecting higher input costs as well as the demand-related costs mentioned under gross profit. However, for the full year, Metalfrio delivered an all-time high adjusted EBITDA, which was almost 2% higher than prior year with a 50 basis point margin expansion to 10.5%, something that we are very proud of given the macro challenges of the year. And finally, we recorded a net profit of BRL 17.4 million in the fourth quarter. The loss for the full year reflects noncash foreign exchange variation losses owing to the strong movement of key hard currencies against our operating currencies. Now let us provide some context for the shape of the effects from the pandemic through the year. 2020 began strongly with the first signs of the COVID-19 impact surfacing in our EMEA region at the end of the first quarter. This effect accelerated into the second quarter, followed by a sharp deterioration in South America and Central and North America from the middle of the quarter. This led to the weakest quarter of the year whereas, typically, the second quarter is our strongest. In the third quarter, EMEA was the first region to begin to recover as government-led restrictions of the economy begun to ease with South America seeing an improvement towards the end of the quarter. Conditions in Central and North America remained highly challenging. In the fourth quarter, South America continued to see improving conditions with Central and North America showing early signs of improvement in December. EMEA saw a return to more normalized activity levels in the quarter, albeit with some effects from partial resumption of government-led COVID-19 restrictions. This slide highlights the variation of the conditions that we faced during the year and if you like, the reverse seasonality of the business. The V-shaped demand pattern in our accumulated sales from the strong first quarter to the drop in the second, followed by the recovery in the third and fourth quarter. In adjusted EBITDA, we recorded a good first quarter with a positive impact of the operating leverage whilst, in the second quarter, we rapidly implemented several cost-cutting measures to mitigate the impact of the significant decline in sales. Then for the second half of the year, we promptly ramped up our operations in an efficient way to reap the benefits of the market recovery. In terms of how this was reflected in net revenue development per region for the year, let's take a look at Slide #5. Overall, net revenues declined modestly in 2020 by BRL 36 million to BRL 1.4 billion. Both South America and EMEA, our 2 more significant regions, recorded gains, though these were more than offset by the decline in Central and North America. This resulted in South America and EMEA increasing their share of group net revenues to 51% and 39%, respectively with Central and North America declining to 11%. Now let's take a closer look at our regions, starting with South America on Slide #6. As mentioned earlier, market conditions began to improve at the end of the third quarter with this positive momentum continuing into the fourth. This led to a 28% increase in net revenues compared to the prior year comparable period, helped by marketing share gains in the middle market commercial refrigeration segment, highlighting our multichannel strength. Services as a contribution of revenues in the region for the year were above 25% despite the transfer of the refurbishment facility in the second half of 2020 from a customer side to our own premises as we target expanding this operation further with the addition of new contracts. Overall, net revenues in the region increased 2.1% for the year. Now let's turn to Central and North America on Slide 7. Revenues declined 31.4% in the fourth quarter versus the prior year as the region saw a continuation of the highly challenging conditions owing to lockdown measures in both Mexico and the U.S. Within these, Services saw a 51% fall in revenues affected by the activity-based contracts, which were impacted by lower cooler orders and related activities in the previous 2 quarters. For the full year, net revenues here were down by 25.6%. Turning to EMEA on Slide #8. This region was the first to feel the full impact of COVID-19 in Q1, and was also the first to begin to recover at the end of the second quarter. For Q4, EMEA saw a return to more normal activity levels with the 8.3% decline in net revenues to the strong prior year quarter as well as the effect from the return of lockdown measures in some parts of the region. Within these, Services performed well, increasing 31.8% in the quarter and 79% for the full year with a business doubling its contribution to full year net revenues from 5.9% in 2019 to 10.5% in 2020. This was mainly driven by upgrading projects for beer units at our new refurbishment facility in Turkey. Kindly turn to Slide #9. You will have seen the rapid transformation of Metalfrio over the past few years into a disruptive fully integrated technology-based cold solutions provider with the accelerated expansion of our Services operations. We are delighted at how this proposition has proved popular with our customers with the quality, depth and breadth of this offering giving Metalfrio a significant competitive advantage in the sector. In addition, this has helped the quality of our profits through diversification and visibility of forward earnings and now accounts for almost 17% of group sales, up from 15% in 2019. This strategic shift can be seen in the full year results with the 8.5% increase in net revenue in Services helping to offset the impact of the 4.3% decline in Products. Furthermore, the contribution of Services continues to diversify geographically with the strong EMEA performance offsetting the loss of revenue in South America in the second half of the year due to the relocation of that refurbishment facility in Brazil. Gross profit rose slightly in Services and was broadly stable in Products, though both businesses achieved higher margins, up 30 basis points in Services and up 70 basis points in Products. Now on Slide 10, I would like to highlight some key initiatives we took in 2020, which supported our business in this challenging year while positioning us well for the future. An absolute market necessity is the ability to keep innovating with new products that allow our customers to win consumers at the point of sale. This means delivering innovative and bespoke cooler and freezer aesthetics with high technical performance able to perform across a variety of environmental conditions and across different channels. Whilst typically, we are focused on the high-margin immediate consumption channel, we are also able to develop new products for channels that gained importance during the pandemic, such as supermarket, condominiums, gyms and health segment-related applications. In Brazil, we have also revamped our domestic range with the launch of a new range of Beer Maxx Subzero home beer coolers. Through this consistently proven competence, we have grown close to our customers, many of whom represents the world's leading beverage and ice cream brands as well as highly regarded regional and local companies. With the broadest geographical presence in the industry, covering over 100 countries, we're 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 market need, we developed an after-sales service 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 has successfully delivered service solutions to larger global players. 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 rapidly a cooler base without the need for outright ownership in an asset-light framework. This continues to be popular and is contributing positively to our earnings. Another development for us providing exciting potential for future growth is our unique position in the industry in IoT, Internet of Things, through the acquisition of the U.K.-based assets365, which was concluded in November of last year. 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 at the point of sale. Integrating this into our service infrastructure to deliver appropriate follow-up in market actions provides significant opportunities. These developments combine to make Metalfrio a truly disruptive market leader in its field. And as it continues to move closer to the end consumer, and therefore, more aligned with a positive long-term growth trends of its blue-chip customers, the quality of our earning streams will continue to increase. Turning to Slide #11. Underpinning our success has been our disciplined approach to operational efficiency and capital structure. In such an adverse environment, our operations managed to generate more than BRL 151 million of adjusted EBITDA. Even taking in consideration the extraordinary expenses, BRL 130 million of EBITDA was generated along the year. Working capital was broadly flat. And in CapEx, we maintained the level that would facilitate future growth. The adverse element in our net debt came mainly from the immediate impact of foreign exchange losses in our financial results. Despite the significance of this FX result, the impact in cash was limited. And as most of our sales are denominated in hard currencies in EMEA, the operational positive effect of the FX movement shall contribute positively in the midterm. Nevertheless, our short-term liquidity remains robust with our cash and equivalents more than covering our near-term debt, having secured a longer debt maturity profile. Slide 12 shows this progression in more detail with positive momentum in cash and equivalents since the second quarter as well as the improvement of our debt maturity profile. Short term, as a percentage of total debt, has improved from 65% at the start of 2020 to 41.5% at the end of the year. At the same time, cash and equivalents to short-term debt has improved markedly from 0.5x at the start of the year to 1.1x at year-end. In the fourth quarter, we also achieved a reduction in gross debt of over BRL 100 million compared to Q3. It is important to note that our absolute level of debt has been adversely impacted during the year by foreign exchange translation effects on our hard currency-denominated debt, noncash mark-to-market losses in some of our financial instruments. Owing to a locked position in hard currencies and a significant part of our sales being in U.S. dollars and euros, we may benefit from FX movements in the next month. Now let's turn to our outlook for the business on Slide 13. 2020 was undoubtedly a tough year for society and the global economy, but it was a challenge that Metalfrio and its people met resolutely. 2021 has continued to see the lasting impact of COVID-19 on the global economy with volatile demand and commodity cost escalation. But there is light at the end of the tunnel. For us, at Metalfrio, the strategic part we continued to pursue last year has left us in good position. We are ready for 2021. The investments we made in our Turkish plant has made it a truly market-leading and competitive facility, well positioned to take the most of many new growth opportunities that our strong market presence continues to generate. Similarly, the relocation of our refurbishment facility to within our own premises in Brazil during the year facilitates customer base expansion opportunity in our strong aftersales proposition, LifeCycle. Indeed, Services continued its strong growth within the group reinforced by the acquisition of 3L, the full-service rental business, and assets365, which strengthens our leadership in IoT. All of which, of course, has positioned Metalfrio globally as the unrivaled, fully integrated, technology-led cooling solutions provider. The unique ability to provide smart solutions utilizing IoT to help provide remote management solutions to help future demand, such as new points of sale in nontraditional channels, will be important drivers of growth. Utilizing our comprehensive global reach and wide Product and Service portfolio, we are also increasingly providing solutions beyond our coolers and freezers, catering for broader service needs and encompassing coffee machines, draft beer and post-mix machines and many, many more. Our growing ecosystem is providing multiple avenues for growth. In combining our extensive geographical reach and our multichannel approach, as well as our deep relationships with global consumer brands and local leaders, our integrated solutions offering is truly differentiating us in the marketplace and ensures that we are best placed to meet evolving challenges of our customers. All of this, of course, is underpinned by strong industry fundamentals. As Metalfrio continues to move closer towards the end consumer, and therefore, more aligned with the positive long-term consumers growth trends, the quality of our growing earnings stream is expected to continue to increase. Finally, 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 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. Over the past few years, we have significantly strengthened and expanded our customer relationships, primarily through our innovative approach to cooler solutions and our truly multichannel presence. We have also established an unrivaled geographical footprint, working across over 100 countries with key manufacturing and service hubs in most continents keeping us firmly in front of our competitors catering to global consumer brands and regions and local leaders. But perhaps the most exciting strategic development has been the ongoing growth and success of our Services business. Brazil has proven the strong appetite for this approach through LifeCycle, our aftersales proposition, and has provided the blueprint for how this is rolled out across our geographies. The strong growth in EMEA during 2020 actually evidences this. The addition of full service rental options through the acquisition of 3L enables us to access a different type of customer and different channels. And our leadership in connectivity, reinforced by the acquisition in late 2020 of assets365, provides a fully integrated tech-led approach to meeting the future needs of our clients. Success here will, of course, drive the top line, which together with the benefits of operating leverage, improve product mix as we sell more value-added products and the delivery of further operational efficiencies will further improve our profit margin and retention capital. 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 shall continue to be robust in capital allocation, ensure 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 global consumer brands, creating superior levels of economic profit over the medium- and long-term benefit to all our stakeholders. We'd like to thank you for your attention, and we look forward to receiving any questions you may have.

[Operator Instructions] This concludes the Q&A session. At this time, I would like to turn the floor over to Mr. Petros Diamantides for any closing remarks.

We would like to thank you for attending the results call of Metalfrio for 2020 and your interest in our company. As always, Frederico and the IRO desk remain at your disposal for any questions or clarification you require. Thank you so much, and continue to take care. Thank you.

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