Grupa Kety SA

WSE:KTY

Earnings Call Transcript 2019-Q1

[Unknown Executive]

[Interpreted] Ladies and gentlemen, welcome. It's noon exactly, so we are starting our meeting right now. Welcome, ladies and gentlemen, welcome. I'd like to welcome our online viewers. As you well know, yesterday, we have published results after the first quarter 2019. The Board would like to comment on those outcomes during the presentation and share with you the most important info concerning the situation on the market and the outlook for the second quarter, what may potentially happen.

So the presentation will be started by the Chairman of the Board, Dariusz Mañko.

[Dariusz Mañko, executive]

[Interpreted] Good afternoon, ladies and gentleman, welcome. I would also like to welcome our online followers, online viewers. The first quarter has ended. It was quite a good quarter for our group. I'll be speaking very shortly because our Board is now bigger, so I don't really want to take away their job. But in general, the situation in the company and the group is a very good situation. We remember that the first quarter -- that before the first quarter, we had some concerns about the behavior of the company -- of the market, of the economy, especially in the Western Europe, where we export our products. Well, those concerns turned out to be too early, we didn't have any drop in orders. There was not a lot of pressure in terms of prices. And of course, all the obligatory activities were continued during the first quarter. We continued our negotiations with our customers, and we realized that we started higher prices of energy this year. And we have new requirements from our staff, so we need to take into consideration growth of salaries. So it seems that we have done perfectly well during the past quarter when it comes to the invoices to those events that may have impacted the situation in the company.

Now with regard to macroeconomic elements, factors, where in general, we had a minimal impact of those factors. I'm thinking about aluminium here. Especially, the prices in Polish zloty, that is 3% lower. The input price is lower, therefore, the lower export price. But in general, well, we have made more in terms of sales, 15% more.

Now about the dynamics of sales. The highest dynamics we've recorded in the Aluminium Systems segment and the remaining segments, follow Flexible Packaging 12% and 10% Extruded Products segment, this is the growth. Well, we are very happy about the export. I have always said that the export made our group to expand and reach more recipients, more clients, and this is our response to the potential slowdown in the economy or recession that may happen in Polish economy or in specific industries.

So we keep diversifying and modifying our portfolio to give us the opportunity to balance whenever we come across any problems in the economy, so a lower sales on the markets, especially in the U.S. I may tell you that whatever we've been saying all the time, this is the market where we fight for bigger contracts. They happen or not. Sometimes, it takes take a year or 2 to work on 1 contract, which may be a high riser or something. So this is a competition that can be expected on this market for us. This is a normal situation that might have been forecasted.

So let me give the floor to Director Wysocki who will discuss the Extruded Products segment. I may only ensure you, ensure all our investors that the second quarter looks quite fine. So the investment that we have started are now coming to finalization. So they are finalized on time or earlier, which is quite rare today. So there are no concerns about the Kety Group, so our investors may rest assured.

So thank you so much, ladies and gentlemen. And now I give the mic to Director Wysocki to take over.

[Piotr Wysocki, executive]

[Interpreted] So a couple of words about Extruded Product segment shortly. Just a couple of slides. A record-setting sales on this difficult market, difficult because the first 2 months were just the months of waiting. I have to speak slower, I'm sorry. So the first 2 months -- during the first 2 months, the market was waiting what will happen, and a very good forecast was March. And our sales during that month was record-setting curtails. 7,400 tonnes, that was a record and also was helped by the investment that started during the last quarter 2018. The press actually showed the volume in March. So it is able to efficiently and quickly produce, manufacture 6% growth of sales.

And also our revenues increased despite the fact that, in general, aluminium, the price has dropped on the stock exchanges. It's about 12% in dollars. So we sold more. And that was also our success. It translated into higher revenues because we sold more aluminium. The biggest market that are observed by us, that is the German market, which is our main export market; Czech market and British market. Well, we observed a stabilization there whereas there are markets who go down, this is Italy and Hungary.

Well, it may seem that Hungarian market is a small market, but this market is actually exporting a lot of processed profiles. It is a very important market for us, and we can see that the situation is changing there. But this is all connected with the export that is dropping down on -- from the Hungarian market.

Well, the biggest dynamics was noticed in the construction industry and also automotive industry, but this is also the effect of the fact that despite we are -- we have been operating in this industry for 10 years, we are still just the beginners. Well, the wholesales industry has decreased a little bit, but that was the long-term policy and strategy because our margin is low there. So we are reducing our deliveries for the wholesale industry in machines. And this is just one signal that comes from Europe and says that, that are -- some parameters, signals that the economy may slow down. So the machine industry is an industry which delivers machines for the investors. So that means that the investments have slowed down, and that means that the market may slow down, become weaker. So we estimated that the revenues will grow by 5% to 10% during the next quarter. And despite the slowdown, downturn, we can see that there is -- there are some signals for downturn on European markets.

So a couple of words about the automotive industry. So we are delivering the element that we -- delivering is done by us. This is a profile. It is manufactured by our factories, facilities in Slovenia, all seals, screws are made by our -- us. This is for Mercedes G Series, and the growth is really high because we sold over 14,000 pieces during the first quarter 2019. This is a big and important contract for us also for the marketing reasons because we may actually be proud that we are delivering parts for Mercedes G Series.

And another interesting project includes a new Land Rover Defender. This is still being tested. This is a prototyping phase. So this is Defender 2019 that will be introduced this year. And right now, we are prototyping our elements, and these elements are really value-added elements. This is a profile that is packed and delivered to the manufacturer.

And then now about investments. So we started the counter-rotating price for hard alloys. So that is actually press for hard alloys has been launched. And we are producing the profiles, and we will be delivering them to the market in April. We are actually working extending -- expanding our anodizing line. This is also according to the plan. We have received a positive environmental permit. And it was a very important unit, and it was a very important factor for us to receive this environmental permit. And right now, we have signed the contracts for delivery of machines, equipment, and we are starting construction works, and everything is according to the plan and schedule.

And the third investment project is the cogeneration project, which is a very interesting project. We will be generating heat and energy, electric energy out of gas. Now we've been doing that. And we are able to produce the electricity, but the by-product is the heat, which you have to manage. And during the winter, this is not a problem. This is a problem during the summer time. And now this is part actually of our anodizing line project, which needs a lot of heat. So this heat will be sent to the anodizing line, and the electricity that we will generate will help us to decrease the cost.

And that's all from me.

[Tomasz Grela, executive]

[Interpreted] Welcome, ladies and gentlemen. Aluminium Systems Segment, yet another record-setting quarter for our segment, 24% growth as compared to the previous year. We are very happy about it. We have a very good situation on the domestic market and also on the exporting market. And the second quarter looks as good. We are expecting around 20% growth. And the symptom was March where we had 30% growth of sales. That means that all our promotional and marketing operations and investment operations come -- bring us the good results. So the future looks bright in terms of the development of our segment.

Now with regards to the EBITDA and net profit, as you can see, this is -- we are talking about 18% and 29% growth as compared to the previous year. We need to highlight that the export sales to all countries in Europe grew by approximately 20%, 30%, and the one exclusion is the German market that was -- that came back with a decrease, that was the first time in the history. This similar situation is in the U.S. market, but this is actually part of our strategy. This is the cycle. This is the cycle of contracts, and this is how it is actually included in our strategy.

What else would you like to -- what else -- we said that we would like to be a leader in terms of the fire protection systems. And well, we are on the good path to become the most well-known company in this segment in most of the European countries. We had completed or nearly completed certification of our product. So we have also sold the first project to Africa, Senegal, a ready product that had been sent to our customers -- customer.

There is an interesting project of cooperation with our Scandinavian partner, so fireproof products dedicated for the vessels, ships. We are now running laboratory tests in Belfast, which -- and after that, we will be able to deliver ready products for ships and vessels.

And now with regard to investment projects. Well, the first one is connected with our fireproof products -- projects. Well, we've completed the R&D center building. Right now, we are working on assembly of the fireproof products testing furnace, and we hope to wrap it up by end of June, all tests. And starting holidays, we will be able to use this R&D center to test -- to laboratory test our fireproof products in our own center.

And then a piece of interesting information from the American market that I've mentioned before that it is a sort of a wave-like market because we based on the construction contract. So we've completed the first phase of testing standard systems. Well, I've announced that during the previous meeting that in addition to the contracts, in order to make our sales to the U.S. more systematic, we have to also produce standard products and systems, and we can't do that without a proper test. So we've completed the first phase of phases. We have 3 phases to go through depending on the products. So we've decided to go to the institutes to do the permits for the U.S. and Canadian market because the Canadian market turns out to be very interested in our projects -- products. And I hope that during the coming 4 months, we will wrap up all 3 phases, and we will receive our permits and we will be able to sell our standard products on the U.S. and Canadian market.

I am showing you the pictures of the projects that had been completed last year. It has been -- well, the building has been completed. So the outer wall has been completed. This is 300 meters high, a building in New York.

And next slide shows you -- next picture shows you the new project that has been won during the previous project, and we will start doing that during the third quarter of this year.

And now a couple of pictures showing you the contracts that we will be doing, and we've won them during the previous quarter. So this is in Poland. As you can see, this -- the first slide are showing you some selected projects in Poland. We just wanted to show you the scale of our production and the variability of the buildings that are done by us. Three buildings in Warsaw and 1 in Kraków. Maybe you know some of those, maybe you can recognize them on the pictures.

And then we go to the Western Europe, and we are very happy that we are winning bigger and bigger projects in Western Europe. Before, they were -- we weren't able to do those, but now we are progressing really fast. So these are the buildings in the U.K., in Germany, also in Central Europe, also in Czechia.

And the next slide shows you the Eastern Europe, mainly in Ukraine. This market has revived, and they have quite a big demand for our products, and they actually complete bigger and bigger buildings. As you can see, 3 pictures show you Ukrainian buildings and 1 from Lithuania. And we will, altogether with a Polish company contract, that we will be completing a contract in Ukraine. We don't have a picture for it, but this will be done for Gazprom. This will be an office building. And this will be done by together by us and Unibet Company.

That's all about our contracts and about our achievements.

[Rafal Lechowicz, executive]

[Interpreted] Good afternoon, ladies and gentlemen. Flexible Packaging Segment. I'd like to show you some results after the first quarter of 2019. Again, a record-setting quarter but truly record setting. We've seen quite dynamic growths in terms of sales and profit parameters.

For the first time, our sales went above PLN 200 million, and it's by 12% higher than the first quarter of 2018. And how does that work? When we look at the segment, Poland is growing around PLN 108 million, and the export has grown from PLN 78 million up to over PLN 90 million, and this is a 18% growth.

Ladies and gentlemen, we are very happy to tell you that EBITDA is growing even faster than our sales. It grew from PLN 30 million to PLN 36 million. This is nearly 20% growth. And the margin is also growing, EBITDA margin is growing from 17% to 18% in 2019.

And a bit of analysis, let me go into that. So Alupol Group is operating in 2 segments on the market. One is the foil segment that is responsible for 27% of our revenues. So it generates around PLN 54 million of revenues during the quarter. And the margin is 11.1% on the level of EBITDA. So this is the Films market -- segment. Now whereas the leading segment, Packaging segment is responsible for 3/4 of our operation. So we are talking about PLN 146 million, and the margins are higher. So EBITDA margin in this segment is 20.5%, and it was by 1.3 percentage point higher than during the Q1 2018.

Ladies and gentlemen, the net profit is growing even faster than EBITDA. It grew from PLN 23 million to PLN 29 million, that is by 25%. While net profit has grew from PLN 16.6 million to PLN 23.4 million, and this is plus 41%.

Where are we growing? Where is the growth? Well, to put it simple, everywhere. But let me show you the slide. We have 4 main segments on the market. So traditionally number one is the instant food segment. This is responsible for 41% of total sales, and that includes instant food packaging, thick sauces but also tea, coffee or herbs. And this segment is growing by 12% year-by-year -- year-on-year.

And the next segment that is responsible for 6% of total sale. This is fresh food segment that actually basis on the polyethylene foils, and it grew by 21%. And the third segment, confectionery and breakfast cereals, and the growth of -- 3% growth. And the fourth segment, BOPP films, it is 27% of total sales, and it is growing by 11% year-on-year. Let me add that this segment has grown by 11%, whereas the Packaging Segment had grew by 13% year-on-year.

Ladies and gentlemen, and now let me show you some geography. Poland is still #1. We are selling 54% of our products, PLN 108 million, whereas -- and flat 8% growth. But Western Europe is right behind, 27% of total sales. We cooperate with international companies, for instance, Unilever and other companies. As you can see, the dynamics is really high, plus 16%, this is the growth.

And another segment is the Central Europe, and we are talking about the Hungary and Czechia mainly, and this market is responsible for 10% of total sales and a very dynamic growth quarter-on-quarter, plus 20%. And the last market, this is the Eastern Europe and talking about Russia, we are talking about the international companies, Belarus, Ukraine and Baltic states. These are the local companies. I'd like to

[Audio Gap]

and now we will be speeding up because we have started the process of assembly of the equipment in Oswiecim facility. That's all from me. Thank you so much for your attention and...

[Adam Piela, executive]

[Interpreted] Hello, ladies and gentlemen. Let's move to the results. We had a very good quarter, that was a 23rd quarter in a row, during which we improved our sales. And it's 22nd quarter in a row in -- during which we've improved our EBITDA results. And now our revenues. We had nearly 44% revenues from export sales. This is a little bit less than we had during the first quarter of 2018 because we had almost 45% of the export sales.

And now as far as the revenues are regarded. Well, they come mainly from our sales of new products and product mix. Well, the impact of the aluminium itself in Polish zloty quarter-on-quarter, of course, when we are talking about stock prices and average prices of Polish zloty versus U.S. dollars, that dropped down by 3%. Well, it translated to the sales of the group to PLN 3 million less sales.

Well, it would be PLN 3 million more if the price of aluminium and Polish zloty and U.S. dollar were the same as last year. Well, the interest are growing because the debt is growing, this is the connection there. And below the tax, we have an interesting thing because of the discount rate we had, we had -- we were able to actually create approximately PLN 1.3 million for tax asset.

And now the cost situation. The main 3 items for the past couple of years are growing, without a change. Well, raw materials and energy and external services and employee benefits. Of course, raw materials increase of sales, this is the main factor that benefit the growth of this item. And we have also one more item there. Also the energy cost, including the gas cost, and they are growing quite dynamically. And as you know, we are unable to make our customers pay for that, so we are -- in between, it was promised that the companies will be compensated for that, but so far, it wasn't done.

We were

[Audio Gap]

Now it's 30%, and it's really good and 16% will be achieved, and it is connected with the completion of construction contracts here in Warsaw, that is completed by the Aluminium Systems Segment in cooperation with other companies. So well, it will grow. So employee benefits, in addition to the growth of employment by 4% and a 6% of quantity growth.

Well, we had to spend more money on the employee benefits during the first quarter because the employees of the new equipment have been already hired, whereas the efficiency of the new equipment has not reached any certain level yet.

And now operations. Well, that was a very good quarter. I believe it was the first quarter in history where we had PLN 123 million positive flows. And the operating working capital, the rotation has decreased by 4 days as compared to the first quarter of 2018, so the turnover ratio in days has decreased. So it is because of the growth of sales, and we have more inventory.

Now the time structure in terms of our receivables. Well, they decreased. Our delayed ones have decreased. But the signals from the construction, operating and partially from the Extruded Products segments, from the transport industry, well, we need to remind our customers to pay the invoices on time or just slightly after the deadline.

Now financing situation, no changes there. We are trying to extend some of the long-term loan, like we have on our balance sheet by 30% long-term debt and the total debt of the group. New investment projects will be done with the help of the loans that we've already -- we already have. This is mainly dedicated to the Extruded Products segment. And the loan that will be signed soon, I hope, maybe not this month, but next month, this is for the Aluminium System segment. And it will help us to improve this structure towards 40% of long-term debt as compared to the total debt.

Investment outlays are higher as compared to the previous year, but you need to remember that we still have around PLN 25 million of liabilities, investment liabilities on our balance sheet as well as contracts that have been signed. And they are dedicated to the delivery of equipment of PLN 92 million worth. This is around PLN 172 million out of over PLN 290 million. So we have reached almost 60% after the first quarter of this year.

Now summarizing. Very good financial results after the first quarter. We are expecting that the next quarter will be quite stable. We will -- we should see growth of sales in individual segments, but I also hope that the margins will improve as well, which is connected with the better spread of the stable costs, fixed costs, so we stand by our forecast.

So thank you so much for your attention.

[Unknown Executive]

[Interpreted] Thank you so much. Ladies and gentlemen, now it's time for your questions. Would you like to -- does anybody have any question concerning the presentation or maybe some other issues that are -- there are some other issues that need to be explained, so please go ahead.

[Pawel Wieprzowski, analyst]

[Interpreted] Pawel Wieprzowski, Wood & Company. Three companies -- three questions for Extruded Products. Now the first quarter, we've seen the 4 percentage point of drop of margins year-on-year. And in March, you've mentioned that the cost will be -- should be moved to the customers, but it's slowed.

And the second question is how does that work in this segment. The operation, is it shorter or longer? And now Flexible Packaging, so the improvement of the margins was because of the part -- the production of high-margin products were growing faster than the BOPP that is lower margin. So how about the dynamics in the coming quarters? So what is the chance of further improvements for EBITDA margin in this segment?

[Unknown Executive]

[Interpreted] Let me start with the second question, concerning the press efficiency. Well, the signals from the market that we should expect some slow down. Well, they dawned to really translate to the press efficiency capacity. But the biggest press that we have that produces the biggest volume, the first free date is the end of July, still several months ahead. We are booked up. So the automatic press is -- that are booked till autumn. There are some equipment that have -- that are booked till June. And so we don't see any threats, any concerns here, unless, well, if something happens and the clients decide to withdraw. So we are booked, and all has been confirmed by the customers.

Now talking about the drop of the margin. So the first 2 months are not really a good time to judge on -- upon. So let's take a look at March. So if we are showing the whole quarter, and we don't play it by months. So the costs were connected with the fact that we had to hire the employees, but the equipment, the machines weren't working at full speed and capacity. You can see that in March, when the peak is happening, but we had to pay the cost of people ahead to train them. For instance, energy surely is still quite a pressure for us. And transferring the energy price to the customer, there is no discussion about it.

Well, everybody says that it was announced by the government that it will be returned. So well -- in generally, we have to pay this on the market, and everybody says that there will not be a rise of energy prices, there will be some refunds. It was said clearly that energy prices will grow up then we would actually increase our prices. That would be a clear situation. But well, nobody knows what will happen. But what will happen in the future, we don't know. So we expect that the margin will be better in the second quarter because of the machines that will catch up and work at full capacity.

Now talking about the Flexible Packaging Segment, it was very important question because we tried to present you more analytical results, so that you can actually understand how this Alupol Packaging business is operating. So the margin on the BOPP foils and Packaging, in both cases, it is much higher than the average margin in those industries on the market. So foils average margin of our competitors is 5% to 7%. We have achieved 11%, over 11%, and there will not be more. The target margin was 11%. It may happen that we will reach 1% more when we launch the twin line next year by the end of the year because we are expecting some synergies. But if the -- I don't know, if they are going to -- maybe they will be consumed by the growth of the production cost because this is this kind of industry. I can't really answer this question because I don't know what will be the energy prices in the future because the foil segment locates the products outside of Poland. Well, this is an important aspect of the whole operation.

Once more, let me tell you about the business and the difference between those. So the foils are the business that we have the granules and additives. Polypropylene granules and at the speed of 4 to 5 pounds per hour, we are actually dissolving those granules and expanding them, and then we create a foil. So the margin around 12%, and this business is located in a special economic zone where the EBIT is about 8% and 7.5% net. Well, these are really perfect results when it comes to this sort of product, whereas the Packaging segment offers a long chain of added value. And we can hope for higher margins. But here in the foil segment, the margin is really excellent, but in both cases -- in both segments, the margin is really excellent.

Well, this is our target industry. I can't hear because the -- BOPP work 7 days a week, 24 hours. But once we launch a twin line, you may count that this one generates PLN 54 million revenues. The twin line will be generating PLN 54 million revenues, but this is after 2 years. So if the twin line starts working in the fourth quarter of this year, then in the fourth quarter 2021, if nothing really bad happens then it will generate around PLN 54 million revenues, but if -- well, it may happen that both lines will bring us 12% margin. Well, we can't really hope for the packaging sector. We can't hope for more because we are quite booked there. It will be really good if we reach this consensuses by the end of the year.

[Unknown Executive]

Thank you so much. Are there other questions?

[Unknown Analyst]

Well, the improvement of margins -- of margin in Packaging by 3.5 percent point is connected with the booked -- with the fact that you're booked or maybe the raw materials are cheaper, so your -- you booked your raw materials at cheaper prices.

[Unknown Executive]

Well, we've changed our sales portfolio. I have been informing you for the past year that we are working on optimizing our orders portfolio. Unfortunately, we had to part our ways with some customers. With some customers, we came to an agreement, but it's not a secret that our margin is higher in export sales. And the export is growing very dynamically. Here, in Poland, we grew by 8%. And around the world, this is 16% growth. This is where we export in Western Europe and to international companies. So we are reducing our domestic sales. And in exchange, we are selling more on the Western European market.

[Dariusz Mañko, executive]

Thank you so much. Are there any further questions? I don't see any further questions. There are no online questions.

Let me tell you one more thing. Ladies and gentlemen, now working on the strategic options for the group, I need to actually change my answer that was not proper. When I was asked if there are any offers for the Kety Group, I just automatically said no because -- of course, we had some offers, and they have been actually coming to our company for the whole time. And we have not been informing about you that. And our lawyers believe that you shouldn't talk about that because that may give rise to unnecessary speculations. And well, the Board is not really thinking about and -- there is discussing any offers. Well, the Board is following this strategy, and this was our contention. So we are not taking into account those kind of offers.

But I, as Dariusz Mañko, don't really feel that well with it because it was closed question. So I didn't say the truth. So the offers do come our way. So I wanted to clarify that so Kety Group that has been managed by me for the past years, I've always wanted it to be a transparent company. And if somebody buys shares and it is a group, a company or financial institution -- so this was not as bad as when our shares are bought by our employee or a lady that buys 100 shares for the future. And we here at the Board are responsible for this person to be able to use the money in the future. So we are responsible for it.

So I'd like to thank the author of the articles in pocket journal that Grupa Kety is an example among companies in terms of shareholders relations. So thank you so much. We're trying to be an exemplary company. We work very hard for it. So this is a sort of -- so we take this burden, and we try to improve our results year-by-year, but this is what we're paid for. And as a stock company, we are responsible for communication with the market. So I need to promise you that we will definitely continue this transparent communication with you. We want to be this sort of transparent and good company.

And now about the future of the group. Well, why so early, as I said, the strategy has been already completed. This is a third in the row that has been completed before the deadline. And this is how I like to do with. I'd like to see the horizon for the coming 10 years because this helps you to rationally spend the money on the investment projects that will increase the value of the company. Well, the short horizon is not really -- doesn't really make sense because these are 2 big projects to think about 2, 3 years. So we need to know, what we want to do in the future. And if you don't know then you have to give up this kind of work, this is what we believe in. So we are looking around. We are using all measures at hand to know more and to learn more so that we can present you our position. I said that by the end of the second quarter, this will be aligned. And I really hope that this will happen that we will present our position up until the end of the second quarter.

But please see the strategic options review just as a normal work, there are no speculations. There is -- nothing is happening under the table. We are a clear transparent company, people. We just come here every quarter and present whatever was done and completed. And I really hope that we will continue our meetings under this formula and that we will see you after the second quarter and communicate good results.

So this is all from me in terms of my explanation. So thank you so much.

[Unknown Executive]

I can see there are no questions. Are there any further questions? Well, if not, thank you so much. Thank you for coming today. And now it's time for the lunch. And I'd like to invite you to the next meeting that will be organized after the results after the second quarter are published. Of course, the gentlemen will be still here with us. So should you have any further questions, please go ahead and ask them. Thank you so much and see you next time.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]