Grupa Kety SA

WSE:KTY

Earnings Call Transcript 2019-Q3

[Michal Malina, executive]

Good afternoon, ladies and gentlemen. Welcome to the meeting with the management Board of Kety Group. Well, the subject of today's meeting is the discussion on the third quarter earnings report for the third quarter 2019, which is connected with the report -- periodical report that has been published yesterday. As you can see, we have the management board with us. We have a new member Rafal Warpechowski, who is the CFO, Financial Director, and he will be responsible for presenting financial segment today. And as usual, Dariusz Mañko will start the presentation.

[Dariusz Mañko, executive]

Good afternoon, ladies and gentlemen. It's a pleasure for me to see you again, especially that the earnings after 20 -- third quarter 2019 are good. So we are very happy. Well, we can say that the third quarter wasn't a surprise for us. Well, the main factors were the lower prices of raw materials and also the slowdown -- economic slowdown. This has been noticed. There has been -- there have been a lot of discussions, meetings with customers, talks about it. Everybody thinks how deep the recession will be, how much it can affect the companies, what else can happen in the future. And as you can -- as I told you several months ago, this is not a bad situation, the things that are happening in business. Sometimes this is time to change approach, look for new solutions. And I believe that this is always a good situation for Polish enterprises from the rising market because if the European market is not a concrete market. If the doors are slightly open to us, it is always easier for companies such as Kety Group to search for new customers, for new channels to reach new clients in Europe. So for us, this situation has been expected by us because we had 10 years of growing markets. So we have to settle in the situation. And well, we are coping with it. And as I've always said, the emerging markets' currencies are always cheaper. So the growth of euro price for companies such as ours, and we are an exporting company. Well, the growth -- we make more profits in Polish zloty, of course.

But first of all, the volumes -- sales volumes are important during the third quarter. And we sold more than we could expect and more as compared to the third quarter in 2017 -- 2018, excuse me. So this is something good. And this is the situation that proves that we are settling in, in this environment, and we have good contacts, good relations with our clients. And this is also a proof that we can attract new clients, new orders. So our position is quite good, and we are convinced or we may safely say that we've strengthened our leading position in Poland. And we've increased export wherever we operate.

As a result of our trading operations, we have high profit, PLN 161 million EBITDA, and so this is the record-setting EBITDA, the first time in the history of the company. Another pleasing factor is that the financial situation is quite stable. That's for you, who make analysis. So we have better results than expected. Good cash flow, payment of the dividend and the debt of the company is lower. An important factor is that during the recession, when the banks are looking deeply into the companies, our situation is quite safe and comfortable.

Now about the macroeconomic factors, are there any factors that are helpful? We may say that the average price of aluminum in Polish zloty dropped by 9%, but the U.S. dollar is more expensive. So the whole situation is not really that good. So we can't really look for a one-off circumstance that helped us to achieve good results because they are due to the growth of sales. The volume of sales has grown, and this is why our situation has improved so much.

Ladies and gentlemen, now let me move on to Flexible Packaging segment because Rafal Warpechowski is not with us. We will be -- Lechowicz. I am sorry. Mr. Lechowicz, he will be invited to join us whenever anything disturbing is happening to this segment because he is not a member of the Board, let me remind you that. So as the member of the Board, I will be actually reporting this. So whenever things are good, I will be reporting on this segment. If something bad happens, Rafal will be here. So again, a record-setting result in the extruded -- in the Flexible Packaging segment. We were actually afraid of what would be happening in this market -- on this market. But there's one thing that should be highlighted, export and sales in Poland and outside of Poland. And those 2 kind of sales are equal right now. And this is quite optimistic that 31% of export is sent to the Western Europe. So the old Europe. The big companies, companies who are good payers, companies who look for good quality, and we are very happy about that. And this is a huge driver for us.

Another positive information in Flexible Packaging segment is the fact that we started another BOPP film line. So we should thank the whole team, the whole team working in the Flexible Packaging segment because the 3 months before the deadline during the time when the situation in the construction industry wasn't very comfortable. And actually, the construction for this kind of machine for this kind of line is not really easy because this is highly -- this is the work that requires a lot of precision to the millimeter. And then we had to launch the machine. And then before the deadline they were able to generate PLN 3 million profits -- in profits, well, because this is what we are expecting. Well, this is a huge success. So once we put all those factors together, it's not a surprise that the Flexible Packaging segment recorded a really good profitability and good result after the third quarter.

Let me tell you that we will be attacking Western Europe even more with our exporter. So you can expect that export will be the majority of our sales as compared to sales in Poland, and we can expect good results, good earnings report after the fourth quarter as well. So this is the information that I have from this segment. So we should be at piece, and no investments in this sector. Well, everything has been done according to schedule. As we planned, we did whatever we planned. So with this kind of big investment with many things, negative things that may have happened during the construction of the new plant in [indiscernible]. Well, doing it on time, in timely manner is something to be proud of. So that's all from Alupol Packaging. And let me give the floor to my colleagues. They will be talking about their segments. So thank you so much.

[Piotr Wysocki, executive]

And now a little bit about Extruded Products segment. As the CEO said, the changes in sales are because of the lower alumini level. And so the prices of the metal that are key factor for us. And now the share in the segment sales. Well, let me highlight motor industry, automotive industry and transport industry. Because in automotive industry, there has been talks about slowdown, but we maintain our position with the help of the huge work of our trading department, and we are able to actually increase our share. You can't really see it right now, but we are increasing our sales.

Now geographically, our export geography -- according to geography. Well, let me highlight one thing that you can see on this graph. Of course, Germany is still our biggest market, but what do we do in case of Brexit? Well, I have to tell you that the U.K. is not really taking a lot of our -- export is around 2%. So we are actually keeping an eye on the money that should come from there. That's the only thing that we focus on.

Now quantity, sales and volumes of sales. So well, the slowdown has affected us here 1% -- 1% growth. This is a good result, close to a historical result during the last quarter. And now the production capacities increase or decrease because -- but that was due to the new press. So our production capacity has increased. We have hard alloys press. A new press has been launched and now it is operating and producing, and we are producing profiles.

And now investments. As I've said, counter rotating press for hard alloys, as I've mentioned, well, that investment has been completed. Well, the anodizing line, well, we are constructing the building. Now we are finishing the construction of the roof over the building that will be used for the line. Cogeneration is tightly connected with the anodizing line, but this is postponed a little bit because we've asked for the EU funds. And as a company, we have to go through a very long and painful path. And well, the competition will be settled in December of next year.

Also the machining, so automation of the production. Well, we started it, and we continue implementing this, and you can see it on the next slide. Well, this is something particularly pleasing. This is what we do with regard to automation that we do, that we implement, maybe not across the whole segment, but wherever it is possible to replace hand work with automatic work, we do that. So I'm showing you the examples how the efficiency may grow. So the first case, this is the -- a very specific profile. So in the first case, 43% lower cost. And in the second case, this is an aluminum detail. So the production of this kind of aluminum details is part of our strategy from 10 years ago, and we continue producing it. Well, in this case, the cost drops down by 45%. So the outlays that we have on the automation, the cost of automation that we pay can be returned very quickly.

[Tomasz Grela, executive]

Welcome, ladies and gentlemen. Aluminum Systems segment. Traditionally, we would like to show you our earnings. We are very pleased with them. In the third quarter, the sales grew by 12% as compared to the similar period last year. So this translates into 17% of growth of sales year-on-year. Well, this is due to the growth of sales volumes in each segment in Poland and outside of Poland. So the only drop of sales has been reported in the ready goods sold in Poland. So these are 2 contracts in Szczecin, Posejdon and Mennica in Poland. Well, they are coming to an end, quickly approaching to their completion. But according to our policy, we will not be -- we'll not have stronger position in this segment.

Now about the structure, let me remind you that we are working in 3 areas. So construction system. This is 59% of our portfolio, 30% of the sales is generated by roller shutters. And the 10% is others. So accessories in the U.S. and accessories produced in [indiscernible] plant. So the share has not changed. And we are able to continue dynamic growth in each of those areas.

Now with regard to export situation, well, it was a very good situation. Our export grew by 24%. And as we -- as you can see, our export sales and share in our -- in areas and segments, you can see it on the graph, still 22% of our sales goes to Czechia and Slovakia; and then U.K., 17% share. And the biggest growth happened in those 2 markets.

A couple of words from me, because on the previous slide, about capacities in our other segments. Well, you won't see it here because we are not a production company here. So what's -- what does that mean? It means that we have no limitations with -- as far as the production is concerned, as far as the development and increased sales is concerned.

And now a few information, a few words about the situation outside of Poland, USA and Canada. This is a very interesting market for us with good perspectives. The last time I told you about the certification process for our products that should be sold on the U.S. and Canadian market. Well, we have completed the fourth stage, and we are waiting for the last certificates. And that means that according to American documentation, we will be able to sell our systems on those 2 markets. Also, during the third quarter, we were able to sign another prestigious contract for the construction in New York. Well, of course, the construction will start later on, but still, the contract has been signed in the third quarter and the building will be constructed in Manhattan in New York.

And now the growth of sales in Poland was 5%. As you can see, systems are 13%. Well, what's the difference? Because -- well, the sales of the ready products was smaller because of the completion of 2 constructions that I've mentioned. As you can see on the pictures, both buildings are very important. Mennica building is very interesting. And this is the most advanced building. And well, our company has never been involved in this kind of very modern, very advanced system.

And the second building, this is Posejdon in Szczecin. This is very characteristic building as well. It is well-known already as one of the most eco-friendly buildings in Poland, reduction of CO2 emissions are really big, 76% lower. And our products and our solutions are very well composed into the building. And another interesting fact is the element that is the green wall that you can see on the picture. And this element should also decrease the CO2 emissions by another percentage. So this is also an interesting fact.

And now new contracts. As usual, we signed several dozens of contracts. I will show you only 2 buildings because we don't really have much time. On the left, this is -- we show you buildings from Poland and from outside. On the left, Poland; on the right, Foreign. Symphony hall in Bielsko-Biala. This is what -- this is the building that will use our systems. And now export, as you could see, our export grew by 24%, and this is not one-off situation because we want the export in our segment to continue growing, and I believe there is a good chance for it. And the works, the efforts that we've done in recent years with regard to research and new certifications, should translate into the growth of sales, the growth of export in our segment. Another thing that should be highlighted, another thing that actually contributes to profitability is the growing share of energy saving products. So this is a high-margin products, and the low-margin products are not popular anymore. And these are the examples of the contracts that we've signed recently. We are showing you actually some exotic places for us in terms of our export destinations. For instance, Mongolia, which is an not usual destination. So Ukraine, Finland as well and traditionally, the United Kingdom.

Another slide on our investments, let me give you a short overview because they are not too big. Our center, R&D center has been completed, and it is operating -- powder coating line is functioning already. Production hall has been moved to the next year due to procedural-related issues. So everything that was supposed to be completed this year has been already completed with the exception of one project that required to be moved to the next year because of some procedural, permit related issues.

So what else do we do outside of operational activities? Well, we do think that we can be proud of because these are high-margin products, good activities. We can show off. So this is the marketing -- perfect development of products and in the coming years, we will be focusing on sustainable development, innovations and eco-friendly construction. And we are showing you the recent events that we participated in. So a green building conference. Aluprof was a partner of that international conference focused on sustainable development and various directions that can be taken. In the construction part, we showed our solutions.

Another event was the innovation exhibition during Warsaw Build, and this is a traditional event in Warsaw. But that was the first year when innovative products were shown, and as a partner, we showed our product that will be sold. And the third event is the international competition announced by the companies that are involved in the solar industry, and we got the third award for the solutions that were used, for instance, in Romania, and that shows you that we take part in all important events.

Shortly, what else can happen in our segment in the nearest future? Well, next quarter, as far as next quarter is regarded, well, all our estimations are safe. With regard to the future of our segment, I need to tell you that sales volume in Poland is 10% of sales volume. Our share in Poland is 43% in one segment and 70% in the second segment. Why do I tell you this? Can you imagine the share of the aluminum products around 4% as compared to PCB products in Western Europe, this is around 40%. So you can imagine how much is still ahead of us when it comes to this segment. So with the share that we have, 43% and 70% in the market, every second element will be produced by our company. So sales volume will be growing in Poland and, definitely, outside of Poland as well. But unfortunately, the situation is actually not that good. We are selling mostly in Czechia and Slovakia. But still, there is still a lot to win, a lot to be sold outside of Poland. So there is a lot of room for further development there. Thank you so much.

[Rafal Warpechowski, executive]

Good afternoon, ladies and gentlemen. Now the financial results. As it was already said, it was a very good quarter in terms of operations and the financial results reflect very well the situation. And the company dealt very well with the situation -- global situation, starting with the sales volume, the 3% growth, but 9% drop of aluminum sales. We know that it was possible only because the volume has grown. EBITDA is growing as well, we are talking about PLN 161 million. This is the highest result in the history of the company, over PLN 400 million of EBITDA after 3 quarters. And all the results have been improved as compared to the previous year.

And now cost. This is mostly interest rates. And the tax level is similar to the historical consensus. So the net profit is also good. Net profit after the third quarter is PLN 99 million.

And now cash flows. In the third quarter, we can see that the cash flows -- operating cash flows are growing. And the second good news is that we are continuing investment program, and we are doing it very well, and we find some savings while continuing this program. Cash flows are PLN 159 million, so we have 3 first columns here on the graph, a very good EBITDA. And the working capital is also really good and PLN 9 million tax, taxes and other operating costs. And we paid for the CapEx, PLN 46 million, and we paid the first tranche of dividend. And we still were able to have PLN 49 million cash. And we use that cash to pay our debt. And here, you can see that our debt has been decreasing since the beginning of the year. And that actually shows you that the indicators are on a very safe, good level. The leverage is around 43%. And those indicators let us see the future as a safe situation. And now structure of debt. There are no changes here. 1/3 are the long term loans, and we use them to fund our investments. And we have 17% debt in Europe. This is a natural security situation leverage for us.

And another slide are the prospects for the fourth quarter, and we are expecting of a stabilization on the market especially with regard to raw material prices. Well, so the changes are slowing down. So we are expecting more stability. But definitely, market environment, it will not be an easy area because there are some concerns about the economies, about the market. So the situation will not be easy.

Now operations and investments. We know that the fourth quarter will differ from the second and the third quarter, so historically, the earnings after the fourth quarter are lower traditionally. But basing on what has been said by my colleagues, well, the situation shouldn't be bad. And how about CapEx? We were planning to spend PLN 280 million this year, but we have some cases where the tasks have been moved in time, postponed, and that was connected with the legal situation, permits and so on. And in some cases, we are actually going through the subsidy process. So the CapEx level should be several percent lower this year.

Now finance. Despite the challenges that we'll face in the next quarter, well, it seems that this PLN 488 million of EBITDA should be achieved. So we stand by the initial estimate. Thank you so much.

[Michal Malina, executive]

Thank you so much for the presentation. These are all news that we wanted to share with you, all the earnings that we wanted to share with you. Now is the time for your questions. So please go ahead.

[Dariusz Mañko, executive]

Ladies and gentlemen, before the questions are asked, during the last conference, I was talking about strategy that we will be able to present during the first quarter of 2020. So we don't really want to say that it won't be presented, but let me put it this way, we continue to discuss the strategy. We think about it. We have million or so ideas that we put on paper, and it looks quite promising, it looks quite good. And as you know, I never say things -- I always stick by my word. And I keep the word that I give. And everybody who has shares in our company knows that we deliver what we promise.

But the only thing is that we have one question mark, and that is connected with the situation on the market. And if we are unsure if there is no stabilization in the fourth quarter with -- that regard the tendencies on the market, the trends on the market or the stabilization of the prices or so on, well, we will have to change the strategy. And I hope that you will understand that because we continue operating according to the 2020 strategy. So the path has been set but we want the document that we will share with you next year to be the best quality, as usual. Well, we want you to believe that this is the market that put the recession behind or that the recession was just a small one. The slowdown was really a small one. And this is when we want to present you with the document. There are no discussions with the Supervisory Board. We haven't talked to them yet. We are preparing for the new strategy, but these are the thoughts that we have right now, and I'm sharing them with you. As simple as that.

[Michal Malina, executive]

And the question?

[Unknown Analyst]

Good afternoon. The first question is as follows, now the compensation for energy prices, have you received any information from your provider about the amount?

[Rafal Warpechowski, executive]

Yes. Indeed, the talks have been going on for months. And definitely, in the fourth quarter, we will finalize it in October or November. The compensation will amount to around PLN 8 million, PLN 9 million because that applies to the first half of the year.

[Unknown Analyst]

Norsk Hydro informed about restructuring their businesses. Do you see it as a chance or maybe potential acquisition?

[Dariusz Mañko, executive]

Yes. We've seen it. Nothing is to be bought. But restructurization is always good. This is always an excellent information for us if other businesses have to go under restructurization. That -- and the last excellent market moment was the merger with another company, Hydro. And this is actually a good situation.

[Unknown Analyst]

What will be the next year's CapEx?

[Dariusz Mañko, executive]

We will publish that in January.

[Unknown Analyst]

What can you expect?

[Dariusz Mañko, executive]

I believe that the CapEx will be lower in 2019 (sic) [ 2020 ]. This is sure. This is for sure, despite the changes. But we had a very big investments in various segments. So we had hard alloys press, for instance. And we are not planning to construct any new press next year. And the whole will be constructed, and that is the change from this year to the next year. The construction will happen next year. So we don't really have investment needs in terms of organic investments, but we are observing the market. And whatever we have right now should be enough next year.

[Unknown Analyst]

So you don't really have any organic needs. Do you have any other needs?

[Dariusz Mañko, executive]

Well, yes, definitely, you can always look for victims, where the blood is, the victims are always there. But no, there were a lot of companies last year who were actually saying that, well, they were very brave, courageous, and they wanted to be sold or buy things and so on. And this year, their profits are 30% lower. So actually, this is a very interesting situation for a company as ours, we have a very good standing financial position.

[Michal Malina, executive]

Are there any other questions?

[Pawel Wieprzowski, analyst]

Pawel Wieprzowski, Wood. Now Flexible Packaging segment? This is my first question. You said that we can expect growing export volumes, which will -- should exceed sales in Poland. How about the erosion in EBITDA because the market is actually quite dispersed in Europe, so how about prices?

[Dariusz Mañko, executive]

Please do not be actually concerned because, well, Flexible Packaging segment is still a small share. We should be happy that we are not just talking about the production BOPP film in [indiscernible], which is unprocessed product. So foil for fresh food, it's very difficult to have margins here, but I'm very happy that in our old business, core business, so the packagings, multilayer packaging, I'm very happy that we found customers there. And this is what we are looking for because the margin goes through all the layers. So the fact that those packagings are multi layers results in good margins. And the customers, we have to remember that in the Western Europe, we are not the main supplier for those companies. We are usually a backup supplier for them, a safety supplier for them. And it's very difficult to have higher margins there. Because, for instance, if people need -- if a company needs a permanent backup for 10% of their sales, this is us. We don't really want to say that we are not an important supplier. But actually, these are the conditions of doing business with big corporations like Unilever, for instance, and we may say that as a small company from Poland, we can join them, we can make business with them, and this is important, and we create our prices and they are accepted.

[Unknown Analyst]

Do you actually see a chance for maintaining EBITDA in this segment?

[Unknown Executive]

Now when we talk to the segment, people often say that, no, I don't think we're going to be able to make it. And then they deliver higher EBITDA. Well, the core business, indeed, that -- and I encourage you to actually visit the plants, because there may be similar plants in Poland, but I have to tell you that this is an excellent device. It works like a Swiss watch. It operates very quickly and manufactures the highest quality product. And this is what we always wanted. In 1997, I was telling you, we are reaching for the highest shelf of production, for the highest quality of production. And we have to focus on the best solutions on the market, best customers on the market. And it's the situation today. It's like when you buy the sweets, for instance, Ferrero Rocher, they are always the same, the same good quality. There is recession. There is a slowdown. There is difficult situation. But if you want to buy something high-quality, then you have to buy it. But often, you have to stand in line to get this product because it's the best quality. And we are still optimistic, where our -- the scale of our operation does not make us worry about margins. And our Extruded Products volumes in the fourth quarter.

[Unknown Analyst]

Well, I'm asking about the cycles, yearly cycles and what kind of margins can be expected? The drop of aluminum pricing, has it been used?

[Piotr Wysocki, executive]

Yes, the margins should be similar to the third quarter. Yes. Now with regard to the volume, well, this is a very short quarter because we've got long holidays. Nothing will be happening during the holidays. Well, we will have 2 weeks of December gone, and there will be some repairs, some organizational things. We have also 2 long weekends in November as well. So volume will be lower, yes, because we won't have time to produce it.

[Unknown Analyst]

Year-on-year?

[Piotr Wysocki, executive]

No, volumes year-on-year. It may be a little bit less year-on-year. But definitely, we will maintain our margins. But as far as the volumes are concerned, it may be a little bit less.

[Unknown Analyst]

So several percentage, several percent year-on-year? Fourth quarter 2019, fourth quarter 2018?

[Piotr Wysocki, executive]

Well, quarter's lower, year's similar level.

[Michal Malina, executive]

Are there any other questions?

[Unknown Analyst]

Santander Brokers Office. Now the situation on the market, because you haven't been very specific, just talking about the foundation and so on. How about the organizational structure of the company? Maybe there is a problem there. And this is why you are thinking about your new strategy.

[Dariusz Mañko, executive]

Well, the holding structure, well, we've worked through this case. And there are always problems there, also connected with settlements and so on. So we stopped there, but we don't forget, we don't say that we won't expand our operation by another segment. We never say that. We don't see a need to do any investment right now. There are no signals like that. But definitely, we could be tempted to use an opportunity that is there on the market, and we may just jump. But we are the company that is owned mostly by the pension funds. And well, our responsibility is to take responsibility, take care of our pensioners. And as a person who is supposed to manage it and deliver results and serving the pensioners, I don't really want to disappoint people. So I don't really want to reach the situation as it happened to other companies who were bigger and had a bigger share of pension funds. And now they cost pennies. We don't really want to have the situation where we have difficulties in management. But well, in the end, this is the pensioner who loses money, and we have to remember about it.

And well, developing our strategy, we focus on safety. So far, we were focusing on the organic growth and dividend payment, including some investments, and that worked so far. But if we want to change and do some financial investments, capital investments, we want to go safe. We want to do things that we are able to deal with on short term. And if something happens, then we have to move to the company and do the management personally to apply the same structure as in other companies in our group, put a man there and then say that this is an asset that generates profits for us.

But if we are to buy companies just to announce that we bought a company. And then later on, it turns out that it's not so easy, because I know that things like that happen. Because, for instance, in France, you may have difficulties letting people go, for instance. And I wouldn't like to have to deal with this kind of situation. And I wouldn't like to make you face this kind of situation. We want to stick to safe solutions. We want to make it safe for you. And this is what Grupa Kety is focusing to. And if people look for adrenaline for something exciting for their portfolio, I think you can go out and find this kind of companies. And I don't think we are going to change much in that department. Thank you so much.

[Michal Malina, executive]

Thank you so much, ladies and gentlemen. Are there any other questions. I believe that there are no questions here in the room. How about our online viewers? Well, nothing online. So ladies and gentlemen, thank you for today's meeting. And of course, we will be presenting future reports. So we hope to see you in the future. And of course, you can talk to the CEO.

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