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

Good morning, everyone. This is Petros Diamantides, CEO of Metalfrio Solutions. Thank you very much for your ongoing interest in our company and for joining us today in our second quarter and first half webcast. With me today is our Group CFO, Frederico Moraes; and also Enzo Pierobom, our Investor Relations Officer, who joined Metalfrio earlier this year. The positive momentum observed in the first quarter following the rollout of vaccination programs and lower lockdown measures in some geographies continued through the second quarter of 2021 and together with the sales mix adaptation during the pandemic, Metalfrio delivered a strong quarter. Despite the adverse supply chain and the logistics conditions as commodities inflation and freight availability continued to be a challenge, overall performance was at record high levels. By now, you will have looked through our press release and hopefully have the presentation in front of you. If not, you shall find both documents on our Investor Relations section of our website. We shall briefly run through our highlights for the second quarter and first half update on the impact of COVID-19 and provide further details on our operating segments. Following that, we would like to highlight some key initiatives that will continue to help the business -- to drive the business forwards, 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 objectives. We need to caution you that we may refer to forward-looking statements and in that regard, kindly observe the disclaimers about forward-looking statements on Slide #2. Now let us start with a look at the highlights of the second quarter 2021 and first half 2021 on Slide #3. Our strategy of customer diversification under [ pindown ] capacity to recover sales and gain market share during the pandemic. The changes in our sales mix, together with the demand recovery from our core accounts in some geographies resulted in a strong recovery of net revenues increasing by 81% versus the second quarter of 2020 and 49% versus the first half. Even compared with the first half of 2019, the pre-pandemic period, we can know the growth of 35%. Sales in Services were more resilient during the pandemic with a continuing momentum of 15% increase in the second quarter. EBITDA at BRL 67 million in the second quarter and BRL 108 million in the first half of 2021 were 142% and 50% higher than the respective period of last year. It is worth mentioning that our EBITDA for the last 12 months is at BRL 167 million and adjusted EBITDA at BRL 180 million, both at historical high levels. Net profit at the second quarter of '21 stood at BRL 21 million compared with a net loss of BRL 13 million in the second quarter of 2020. For the first 6 months of the year, net profit of BRL 25 million versus a net loss of BRL 120 million in the first half of last year, highlighting the improvement both in our operational and financial results. Now on Slide #4, let us provide some context for the shape of the recovery of the market along the pandemic. After a decrease in revenues of 21.9% in the second quarter of 2020 when the economy was highly affected by the lockdown measures, which in turn affected demand from our core accounts, we delivered our fourth quarter of sequential sales increase. Of course, this is a result of the partial market recovery, but it's also a result of our strategy in adjusting our sales mix, including new customers, products and distribution channels, enlarging our customer portfolio. Focusing on further enhancement of our service offering, which has proved to be very resilient as fleet management contracts generate stable inflows and continuing to develop our successful full service rental business, which continued to gain traction in Brazil. Despite the recovery in sales, we're still experiencing the adversity of the pandemic impact on the global supply chain with demand and supply still in the process of rebalancing, leading prices of commodities at historical highs, material shortages in many regions and lower availability of freight. On Slide #5, you can find the breakdown by region of how sales increased by BRL 354 million in the first half of 2021 versus last year. South America increased by BRL 109 million, supported by sales to new customers developed along the pandemic and also the gradual improvement of market conditions in Brazil. Sales in Central and North America increased by BRL 17 million. Despite the improvement in the market conditions, our Mexican plan has been impacted by material shortage as a result of the force measure declared by chemical suppliers affected by the Texas weather event that resulted in a temporary production shutdown. In EMEA, we experienced high growth in sales during the period with an increase of BRL 229 million. We remained well positioned to capture the sizable share of the Turkish market recovery, as we promptly adjusted from our export-oriented focus to the domestic market, ramping up production and supply chain to meet delivery lead times. In parallel, we captured emerging demand in the Middle East and North Africa compensating for weak conditions in Europe and other African countries. The contribution of our EMEA operation increased further and in the first half of 2021 represented more than 56% of our consolidated sales. Now let's take a closer look at our regions, starting with South America on Slide #6. Our South American operation has been experiencing positive sales momentum since the third quarter of 2020, and sales in the second quarter of 2021 were 114% higher versus the second quarter of last year. For the full semester, sales were up 43% versus last year. It is important to mention that the Service segment, despite not having our refurbishment in Brazil, operating in full capacity yet, grew by 21% and 6% for the quarter and the semester, respectively, highlighting the quality and resilience of the influence, our ability to conclude new contracts and the continuing contribution from our full service rental. Since the pandemic start, this region focused in diversifying the customer base and made further market share gains in the middle market commercial refrigeration channel. Such strategy enabled us to continue to drive sales, compensating for key account customers, which are still below the pre-pandemic placement levels. Of course, the eventual recovery of placement levels will be additive to the current sales level. Now let's turn to Central and North America on Slide #7. Despite increasing 178% versus the second quarter of last year, sales in the region are still impacted by factors related to the pandemic. While last year, demand was weak due to lockdown measures in the second quarter of '21, we have experienced supply chain disruptions that forced us to shut down the plant for a few days. This is the only region that is still below the second quarter 2019 sales level. Services in the region increased by 46% in the quarter as refurbishment activities returned during the quarter. But for the full semester decreased by 10%, impacted by the reduction in the activity-based service offering. Let's conclude the region's analysis by looking at EMEA on Slide #8. EMEA was the main contributor to the increase in the consolidated revenues both in the second quarter of '21 and the first half of '21 with a significant increase of more than 60% in sales in the full semester. The region added BRL 229 million, reaching sales of BRL 606 million. Reaping the benefit of the recovery of the Turkish market, we rapidly switched the focus from exports to the domestic market and probably adjusted production throughput levels. Such movement is a testament to the impressive flexibility of our operation, our broad geographical reach and ability to deliver innovative products. Despite the local currency devaluation, our transaction prices have long been established in hard currencies, even for the domestic market supported the average realization price and consequently sales. Beyond flexibility, the investments in this manufacturing plan along the years also facilitated higher capacity that accommodated both the surging demand in Turkey and also the Middle East and of course, North Africa. The Service segment also presented growth of 10% in the period of 6 months, highlighting our proposition to offer solutions in the global refrigeration industry beyond Products. Now on Slide #9, we have the split between Products and Services. Over the last few years, you will have seen the transformation of Metalfrio into a disruptive fully integrated technology-based cold solutions provider with accelerated expansion of our services operations. We are delighted at how this proposition is proving popular with our customers, giving Metalfrio a significant competitive advantage in the sector. In addition, this helped the quality of our earnings through diversification and visibility of forward earnings. This acceptance is a result of Metalfrio's investment on its digital transformation, supporting a more complete and integrated package of Service. In Products, revenues increased by 59% as customers resume placement programs in some regions and as we continue to tap on mid-market accounts across our geographies. Gross profit here has been impacted by the commodity super cycle as the speed of the increase of raw material prices outpaced the price increases to our customers. The gross profit of Products decreased from 17.8% in the first half of last year to 14.8% this year. Important to mention that gross profit margin increased from 13.9% in the first quarter of 2021 and to 15.5% in the second quarter of 2021, resulting in 14.8% for the full semester of 2021. The rebalancing of the supply chain and our commercial policy adjustments shall continue to recover the gross profit in the next months. Net revenues in Services increased by 6% during the first half of 2021 as a result of our diverse portfolio and ability to generate growth. Gross profit here has been more resilient as it is less impacted by the global supply chain headwinds at gross profit, which improved by 2.3%. Now let's turn to our outlook for the business on Slide 10. 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 economy with volatile demand and commodity cost escalation. For us at Metalfrio, the strategic path we continued to pursue last year has left us in a good position. We were ready for 2021. The investments we made in our Turkish plant has made it truly market-leading and competitive facility, well positioned to make the most of the many growth opportunities that are 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 their strong contribution within the group reinforced by the impressive development of 3L, the full service rental business and the acquisition of assets365, which strengthens our leadership in IoT in the long term, all of which, of course, has positioned Metalfrio globally as the unrivaled fully integrated technology-led cold solutions provider. This unique ability to provide smart solutions utilizing IoT to help provide remote management solutions to meet future demand, such as new points of sales in new traditional channels will be important drivers of growth. Utilizing our comprehensive global reach and wide product and service portfolio, we're also increasingly providing solutions beyond coolers and freezers, catering for broader service needs and compassing coffee machines, draft beer and post-mix machine and 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 the 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 customer growth trends, the quality of its growing earnings stream is expected to continue increasing. As always, we would like to remind you of our key strategic priorities on Slide #11. It is important to understand that these priorities are the essential bidding blocks for 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 peers. 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 or after sales proposition and has provided the blueprint for how this is rolled out across our geographies. The addition of full service rental options through the development of 3L enables us to access a different type of customer and different channels and our leadership in connectivity reinforced by the acquisition late last year of assets365 provides a fully integrated technology-led approach to meeting the future needs of our clients. To support the bigger company focused on customers' experience, Metalfrio is designing its strategy through 2 main pillars: technology and governance in order to provide efficiency and high level of management. Success here will, of course, drive the top line. And together with the benefits of operating leverage, improved product mix as we sell more value-added products and the delivery of further operational efficiencies shall improve our profit margins and returns on capital. At the same time, we will continue to focus on strengthening our capital structure together with initiatives to improve our liquidity. This will be driven by focus on working capital and 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 will 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 shareholders. Please feel free to contact us through our Investor Relations desk. And Enzo will be looking forward to receive your questions and provide further clarifications. We truly thank you for following our progress.