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

Good morning, everyone. This is Petros Diamantides, CEO and IRO of Metalfrio Solutions, together with Frederico Moraes, our Group CFO. We thank you for your ongoing interest in our company and for joining us today in our third quarter and 9 months webcast. The positive momentum observed in the first half following the rollout of vaccination programs and lower lockdown measures in some geographies continued into the third quarter of 2021. Despite the adverse supply chain and logistics conditions as commodities inflation and freight availability continued to be a challenge. Overall, performance was kept in a positive trend. 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 the Investor Relations section of our website. We shall briefly run through our highlights of the third quarter and 9 months of 2021, 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 shall continue to help drive the business forward. And then we shall discuss cash flow and capital structure. We will then conclude with our outlook for the last quarter of the year, together with a summary of our strategic priorities. 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 third quarter and 9 months on Slide #3. Top line continued with a positive momentum with a 22% increase in the quarter and 40% for the 9 months of 2021. Such increase in revenues was underpinned by the successful customer-based diversification. Sales and services also increased during the third quarter, reaching BRL 69 million, a growth of 18% when compared with the third quarter of last year. EBITDA stood at BRL 32 million in the third quarter and BRL 140 million for the 9 months, which translates to 19% and 42% higher than the respective period of last year. It is worth mentioning that our EBITDA for the last 12 months is at BRL 172 million and adjusted EBITDA at BRL 179 million. During the third quarter, we experienced a net loss of BRL 38 million taking our bottom line result to negative BRL 13 million for the 9 months compared with a net loss of BRL 157 million for the same period of 2020. Despite reporting a net loss in the third quarter, which normally is seasonally weak, we observed important improvements in 2020, both in the operational and financial results when comparing with the previous year. Now let us provide some context for the shape of the recovery of the market along the pandemic on Slide #4. After the 22% increase in our revenues in the second quarter of 2020 when the economy was highly impacted by the lockdown measures, which in turn affected demand from our core accounts. We have delivered our fifth 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 a, adjusting our sales mix, including new customers, products and distribution channels enlarging our customer portfolio; b, focusing on further enhancement of our service offering, which has proved to be very resilient as fleet management contracts generates stable inflows; and c, continuing to develop our successful full-service rental business, which continued to gain traction in the Brazilian market. Despite the recovery in sales, we are still experiencing the adversity of the global supply chain disruption with demand and supply still in progress of rebalancing across several categories, 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 and how sales increased by BRL 428 million in the 9 months versus a year ago. South America increased by BRL 193 million, supported by sales to new customers developed along the pandemic and also increased contribution from the Service segment. Sales in Central and North America increased by BRL 29 million. Our Mexican operation also developed a broader customer base to mitigate lower purchases from domestic key accounts. This operation is still below pre-pandemic levels, also affected by the supply chain disruptions, which for this facility also included the force majeure declared by chemical suppliers affected by the Texas weather event that led to production stoppage earlier in the year. Europe, Middle East and Africa experienced the highest growth in sales during the period, increasing by BRL 207 million. We remain well positioned and capture a 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 regions. The contribution of our South American operation increased in 2021 to 37.5% as a result of the growth of more than 75% in sales in this region during the third quarter of '21. 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 third quarter of '21 was 75% higher versus last year. For the 9 months, sales were up 53% higher than the previous year. Important to mention that the Service segment, despite not having a refurbishment in Brazil operating at full capacity yet, grew by 33% and 40% for the quarter and 9 months, respectively, highlighting the quality and resilience of the inflows, our ability to conclude new contracts and the continued 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. Due to the mounting inflationary pressure, we have been reflecting the escalating cost structure to our pricing. And since June, the same has applied to service supporting the reestablishment of margins. Now let's turn to Central and North America on Slide #7. We have also been experiencing further developments in the middle market and distribution channel in this region, paid at a lower level. Such effort enabled us to grow by 34% in the third quarter and 23% for the 9 months. Important to mention that for the 9 months, sales are still impacted by the manufacturing stoppage of 2 weeks in the first half of 2021 due to the material shortage. Despite the activity of Mexican key accounts still being well below pre-pandemic levels, we observed the resumption of key accounts in some countries of the region, mainly in North America towards the end of the third quarter. Now to conclude with the regions review, let's look at EMEA on Slide #8. In EMEA, we observed a decrease in sales in the third quarter of 12% versus the recovering quarter of last year. This was mainly due to different seasonality pattern in 2020, when considerable part of the second quarter sales were pushed back to the third quarter as a result of the pandemic. For the 9 months, sales in EMEA were 36% higher than last year. The already established strategy of customer-based diversification was even more reinforced during the third quarter of '21, when 75% of sales was to nonkey accounts. During the third quarter of '21, the region also shifted its product mix to horizontal line and standard products. For the 9 months of '21, it's also important to consider the increase in the average realization, mostly due to product innovation, sales in hard currencies and growth in Services. In fact, on Slide #9, we have the split between products and services. Over the last few years, you have seen the transformation of Metalfrio into disruptive fully integrated technology-based cold solutions provider with the accelerated expansion of Services operations. We're 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 market acceptance is a result of Metalfrio's investment in its digital transformation, supporting a more complete and integrated package of services. Net revenues in Services increased by 9.5% for the 9 months due to 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 and gross profit improved by 5.5%. In product revenues, we have seen an increase of 47.1% for the 9 months as customers resume placement programs in some regions and as we continue to tap on mid-market accounts across our global geographies. The gross profit here was impacted by the commodity super cycle as the spread of the increase of raw material prices outpaced the passing on of the cost to customers' price. The gross profit of products decreased from 17.7% in the 9 months of last year to 14% this year. The rebalancing of the supply chain and our commercial policy adjustments shall continue the recovery of the gross profit margin in the next months. Now let's turn to our outlook for the business. 2020 was undoubtedly a very 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 continue to pursue last year has left us in good position. The investments we made in our Turkish facility has made it a truly market-leading and competitive facility well positioned to make the most of the many growth opportunities that our strong market presence continues to generate. Services continued their strong contribution within the group reinforced by the impressive development of 3L, the full-service rental business and 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 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 coolers and freezers catering for broader service needs encompassing coffee machines, draft beer and post-mix machines 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 to the end consumer and therefore, more aligned with the positive trend of consumers growth trend. The quality of our earnings stream is expected to continue increasing. And on Slide #11, this is where, as always, we're reminding you of our key strategic priorities. It is important to understand that these priorities are the essential building blocks of our path towards continued value creation. Over the past 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 of this approach through LifeCycle, our 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 contribution of assets365 provides a fully integrated tech-led approach to meeting the future needs of our clients. To support the greater company, focus on customer 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, which together with the benefits of operating leverage, provided product mix as -- improved product mix as we sell more value-added products and the delivery of further operational efficiencies will, of course, improve our profit margins and return on capital. At the same time, we shall continue to focus on further 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 and maintenance CapEx plans are applied against the strictest of risk and return criteria. In pursuing all these objectives, we believe we shall strengthen our position as the world's leading technology-based cold solution provider to global consumer brands, creating superior levels of economic profit over the medium and long term, benefiting all of our shareholders. We'd like to thank you for attending our third quarter webcast. And we would like to remind that you are welcome to contact us through our Investor Relations desk for further clarifications and questions. Thank you very much.