Vidrala, S.A. (VID) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and welcome to the conference call organized by Vidrala to present its 2020 first half results. Vidrala will be represented in the meeting by Rául Gómez, CFO; and Iñigo Mendieta, Head of Investor Relations. The presentation will be held in English. We remind you that questions will be taken both by telephone and via webcast. In the company website, www.vidrala.com, you will find available a presentation that will be used as a supporting material to cover this call as well as a link to access the webcast. Mr. Mendieta, you have now the floor.

Thank you. Good morning to everyone, and thank you for the time that you dedicate to attend this call. As announced, Vidrala has published this morning its 2020 first half results. Additionally, we have also published the results presentation that will be used as supporting material to this conference call. Following this document, we will dedicate the first part of our exposition to briefly explain the figures released today to devote afterwards as much time as necessary to discuss on the business performance in the Q&A session. We invite you to access the webcast through the link available in our web page. So starting with the main numbers. In the first half of 2020, we achieved as most relevant business figures, revenues of EUR 474 million, showing an organic year-on-year decline of 6.5%; an EBITDA of EUR 122.4 million, that represents a drop of 6.6% versus the same period in the prior year; a net income equivalent to an EPS of EUR 2.30, 7.2% below the previous year; and net debt at the end of June was after a reduction of 27% over the last year, EUR 294.5 million, which is equivalent to a leverage ratio of 1.2x the EBITDA for the last 12 months. Turning to slide 4. We look at the top line performance, analyzing the annual variation of revenue broken down by concepts to arrive at the reported figure of EUR 474.4 million. As it is shown in the graph, this figure is the result of an organic year-on-year decline of 6.5%, that was, obviously, as you can imagine, concentrated in the second quarter. Following the order of key business figures referred to at the beginning, we analyze with the same breakdown the variation of operating income. EBITDA for the 6 months period ended in June amounted to EUR 122.4 million, reflecting an organic drop of 6.6%. These operating figures resulted in an operating margin, EBITDA over sales, of 25.8%, pretty much similar, approximately 10 basis points below the margin registered in the same period of the previous year. Let's analyze now free cash flow generation in detail. We will do so with help of the chart on Slide 8, which reconstructs the cash conversion accumulated for the last 12 months in order to fully normalize our annual cash profile. So starting from an EBITDA margin of 27.2% for the last 12 months ended in June, we have dedicated 10.4% of sales to CapEx. And 1.2% to the aggregate uses of cash for working capital, financials and taxes. As a result, free cash generation in the year amounted to more than EUR 152 million, equivalent to a 57% conversion rate and more than 15% cash generation over sale. Finally, as a result of the before mentioned, net debt at the end of June closed at EUR 294 million, 27% below year-on-year. This figure is the consequence of the aforementioned cash generation which has been mainly allocated to debt reduction, 71%, the rest 29% to remunerate shareholders. As a result, leverage ratio stands at 1.1x last 12 months EBITDA. And now before turning to the Q&A session, I'll pass the word to Rául, so that he can extract the main conclusions or highlights and make additional comments that he considers appropriate.

Thanks, Iñigo. And thank you all for attending us today. Hope you all are fine, safe and behaving as good consumers. Sincerely, we do really appreciate your time. Well, we have completed an unforgettable first half of 2020, extremely volatile, a period where we all have been forced to live and probably manage the unexpected. For a heavy industry like glass manufacturing, you can believe it hasn't been easy. Luckily, glass manufacturing, we were soon identified as an essential activity part of the food chain. Additionally, in Vidrala, our efforts to prioritize the health of our people through specific measures, help us to secure manufacturing and logistic operations, and now we can say that all our now 8 sites across the group have always remained continuously active even during the most complex days at the start of April, the end of May -- of March, sorry. Now we can say that Vidrala entered into this new complex macro environment under a healthy business positioning. This is now being verified by our results published today. Our sales are performing, let's say, not worse than expected, proving an evident resilience under the pandemic. This is probably the result of our strong relations with the strategic customers and also of our market and geographical diversification after years of successful M&A activity. Operating margins were kept under similar levels to last year for the first 6 months, something that can only be possible through a solid internal manufacturing performance. As you all can imagine, the operating deleverage that we are suffering as a result of our much less-than-optimal utilization rates to protect inventories is something relevant. And finally, our financial position is still strong as reflected in our year-on-year debt reduction that Iñigo explained before and in our financial leverage ratios. This is -- please consider this, this is basically the payback or the credentials of our financial discipline after years of using as a priority a major portion of our cash for debt reduction. How you say that? In a new effort of transparency and in the understanding that predictability of our business history is probably more valuable now than ever under the current uncertain context, we decided our -- at our Annual General Meeting held a couple of weeks ago, 4 weeks ago, to make public a full package of business outlook and guidance. Our numbers reported today make us nothing but reiterate this guidance, but with all the needed prudency. As the context is still volatile and trading conditions are pretty changing, I'm sure you will arise on questions on this point during the Q&A session. Please consider these details as our effort to give you some color, but please also keep in mind that we all have reasons to be -- probably an extensive number of reasons to be conservative or prudent for the next months ahead. So despite, we are happy to show that things in the short term are pretty much under control. We all need time to understand what the future will be. Anyway, we now reiterate our guidance for the full year 2020. So we still expect full year sales to drop in the range of minus 5% to minus 10% in comparison with the prior year 2019. We also do expect margins to consolidate in a level of 25% EBITDA over sales for the full year. We do expect earnings to consequently drop by about 15%. And more relevant, we reiterate that we will execute an ambitious investment plan for the remaining -- the remainder of the year where we are going to invest approximately double the average normal CapEx in a year through a number of, let me say, extremely selective projects that were carefully identified, proving for us that the optimal allocation of capital is critical and essential part of our business strategy. Anyway, after -- to give you some comfort after this CapEx plan, we still expect to generate some positive free cash for the remaining of the year, and more -- much more relevant. We look at the current strange, complex business context with our eyes in the future, with our view in our long-term industrial future as demonstrated in our CapEx plan this year. Our strategic actions, we won't forget this will, in any case, firmly committed to our long-term business pillars: the customer, the cost and the capital.

Okay. This completes our exposition. We now give way to the Q&A session.

[Foreign Language] [Operator Instructions] The first question comes from Francisco Ruiz from Exane.

[Foreign Language] I have three questions. The first one is quite simple. If you could give us what happened with the factoring during Q2? And how it affected the working capital? The second one is, if you could give us some more light by market. I mean Spain, France, Italy, if you have seen a very different performance in the different markets and how you've seen already July? And the third question, although you have already highlighted, Rául, on -- be cautious on the second half. But with a margin of 25.8% in H1 with sales dropping already 6% and on H2 next year -- sorry, in H2 of this year, what are the reasons to think that is going to be worse? Why don't you expect a much higher margin than this 25.8% or a better performance in terms of sales and the one you have done in H1?

Okay. Thank you very much, Paco, for your questions. I will take the first one regarding factoring and the effect on working capital. As you may remember, at the end of March, with the end of the quarter, we had around EUR 20 million, EUR 25 million in factoring. All this -- at the end of June, we don't have any more, any factoring, okay? So it's not affecting the working capital movement for the 6 months.

Okay. And thank you, Paco. Taking your second question, if we understood well, the different performance of our sales by regions, it's all a matter of demand fundamentals. In Southern Europe where -- we see more exposure to the on-trade market. In the U.K. and Ireland, we see more consumption at home. Less tourism is bad news for Spain, France and Portugal; good news for more British and Irish consumers traveling less, consuming more at home. And finally, do not forget our unique case of our site in Elton, England, where we are attracting more and more bottling activities from more wining bulk entering into the market, okay, coming from a newer wine. So that basically explains the real differences of our sales performance month by month, first quarter in comparison with the second quarter, considering that the month of April was particularly bad all across our regions of activity. It is also true that in some cases, in some regions, we are seeing some different supply dynamics that is affecting some dynamics of sales, but the more relevant, the most relevant factor to understand the differences by regions is the factors that we explained in terms of demand fundamentals. We are performing better in the U.K., but we are seeing a gradual recovery in Southern Europe, okay? That's all. With regards to the last question, our reasons to be prudent. We -- it's our obligation. We just need to open the newspapers to be prudent, okay? And I think that is a good opportunity for us to maintain a reasonable level of conservativeness because it is also true that our business position, hopefully, you agree with us, is solid. And the gradual recovery that we are seeing in the second quarter gives us opportunity to maintain this level of cautiousness, conservativeness without affecting your opinion about our business -- long-term business profile, okay? I said the message that we have fall past the critical period of the year, that is the second quarter. I clarify that from the very abnormal lows in sales seen in April, our sales dropped by as much as 30%. We have seen some gradual recovery during the month of May, more in June, something that is good news, something that helps us gain some comfort for the full year guidance. But the context is still very uncertain, and we have for little reasons to be extensively optimistic. Globally speaking, this is nothing particular for our business profile. It is true, we have probably passed the worst, but -- and we are now fully focused on the next year, okay? That's all the explanation we can give you to help you understand our level of prudency.

Can I do a follow-up? Because even if we look at the margins, correct me if I'm wrong, but you have made almost EUR 7 million of generic provisions this semester, okay? So mainly, the cash provision is already included in this level of margin. So could we expect that these provisions to continue in second half? Or just like this?

Well, there are some extraordinary provisions in the first half, totally detailed in our management report. There are some other extraordinary income. So I do really consider that the results and margins that we are recording in the first 6 months of the year are basically recurrent or reflecting what is our real operational performance. So we do not see our margins unsustainable for the second half of the year. We do not see our margins not sustainable for 2021. Probably it's time to speak about that. But we are forced to feel -- to be prudent, to be conservative on the future of the world under the pandemic during the summer and after the summer. So that's the only reason for us to be cautious, conservative. But please keep in mind our message, we do consider our current margins sustainable for the remainder of the year and for the next years ahead.

The next question comes from Jose Maria Canovas from JB Capital Markets.

I only got one question, and it's regarding the competitive landscape. And just wondering if your main competitors should also prove a similar resilience as yours? Or would you expect any of them to be significantly affected by this pandemic? And in this regard, have you heard anything? Or would you expect any potential shutdown of industrial capacity, mainly across Europe and maybe also at other regions?

Well, in terms of our competitors, it's nothing much more we can add. This is a very competitive industry. We will try to fight hard for volumes under this context, more than ever, as you can imagine, okay? Our aim -- our obligation is to try to offer a competitive long-term supply to customers that we consider strategic, okay? This is -- these are the real dynamics that are dominating the marketplace. Giving you a little bit more detail because you will force me to give you more detail. We can see that some of our competitors are more indebted than us. So they will probably suffer more if things get worse. While at the same time, the industry has still attractive investments and doing projects in some particular regions, something that nothing but explains the long-term attractiveness of this industry, okay? Looking at the future with a long-term perspective, I do not see reasons to see that this industry -- any player of the -- in this industry is going to dangerously affect its own balance sheet, assuming dangerous in levels of inventories. And that won't be the case of Vidrala, this is everything I can assure. We will take care of our capacity utilization rates to protect inventories and to try to align as quick as possible our supply with our real demand context. Hopefully, the rest of the industry is going to behave the same, we don't know. But apparently, this is happening in the current market conditions.

[Foreign Language] [Operator Instructions] The next question comes from Iñigo Egusquiza from Kepler Cheuvreux.

Rául and Iñigo, four questions, if I may. The first one on the trading update. Rául, I don't know if you can elaborate a bit how is July sales performing? I guess June was positive to see how is July. This is the first question. The second question on the CapEx. I mean we have seen CapEx over sales, I think, below 10% in H1. We are going to see higher CapEx, I guess, in H2 with the new projects? I don't know if you can elaborate a bit on the CapEx that you expect in the second part of 2020. The third question, I don't know if it's soon or not, but can we speak a bit on 2021? Where do you see pricing moving for 2021? I guess it's still soon and negotiation will take place in the last part of 2020, but if you can elaborate a bit on that? And a final question on M&A. I don't know if the situation that we are -- the industry is facing, if this could or not accelerate M&A in the industry or not?

Okay. Thank you very much, Iñigo. Well, your first question with regard to the business performance in July, nothing much more we can add now. July is performing pretty much in line with our guidance, pretty much in line with the gradual recovery that we have seen in the second quarter from the very abnormal lows we suffered in April, but that means that -- performing in line, July, that means that July is still negative in comparison with the same month last year, something that is fully unavoidable as you can imagine, okay? Just to conclude, July is nothing but helping us reiterate our full year guidance on sales and margins.

Regarding, Iñigo, your second question that was about CapEx. You're right, for the first 6 months of 2020, we are investing CapEx of slightly above EUR 45 million. This is equivalent to a CapEx figure for the last 12 months of around EUR 100 million, and we are guiding -- we are expecting to have a CapEx between EUR 130 million to EUR 140 million for the full year, which, as you were saying, this means that our CapEx schedule is more concentrated in the second part of the year.

Okay. For the relevant question of how we see 2021. It's true it's still too soon to give you clarity about the next year. But it is also true that it is our obligation to try to give you some predictability of our business performance because, okay, the year 2020 is going to be in any way such an estranged and comparable year that we need to focus more and more in the year 2021 that is expected to be, at least, more normal year, okay? First, for 2021, we still don't know, it's full of uncertainties, macro uncertainties that you understand even better than us. But we should think or we should start thinking that 2021 won't be as difficult as 2020, okay? So there are not many reasons to be particularly optimistic about the recovery, the global economic recovery in 2021. But at minimum, we do see and we work under the idea that 2021 will be modestly better than 2020, okay? Internally -- more internally, for 2021, we do not see inflationary pressures, neither we -- do we see significant deflations. So our cost savings in the next months and in 2021 are to be grounded on internal actions and on the benefits of our investments. Pricing dynamics across the marketplace will surely reflect the real demand context, the global supply, the macro environment, the level of recovery after the extremely complex 2020. We will, for sure, keep on focus offering a competitive alternatives to our customers with our view of securing long-term relations. And we always see that our margins are the result of prices and costs. So finally, in conclusion, even under the many uncertainties we all share for the year ahead, we feel comfortable with regards to the long-term sustainability of our current margins, something that I am forced to express with, obviously, all needed prudency. And your last question with regards to M&A. It's -- our official messages remains basically the same. We have completed in 2019 a transformational journey, a very relevant cycle in terms of corporate M&A. We acquired -- over the last 5 years, we acquired the leader in the U.K. We acquired our toughest competitor in Portugal, something that is giving us particularly positive results under the pandemic. And not less relevant, we divested our less competitive asset at the end of 2019. It's all about a proper capital allocation. And in this sense, under this strategy, it's probably now time for us to take time to maintain a prudent approach, a wait-and-see approach in terms of M&A to invest more and more selectively in our capacities. We are going to use more CapEx -- cash, sorry, for expansionary CapEx, but in the short term, will be internal expansionary CapEx, probably not M&A. In any case, Vidrala is a natural consolidator in this industry, hopefully. This is our natural role, and we will always be -- always structurally -- even after having understood the unlikeliness of us making any movement in the short, mid-term, we will always analyze any potential opportunities that could arise in the marketplace with interest.