Grupa Kety S.A. (KTY) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to this presentation on discussing the results in the Q2 2024. The name of the Board of Directors, the presenters are Dariusz Mañko, the Chairman of the Management Board; Roman Przybylski, Vice President; and Rafal Warpechowski, Board Member and CFO. Let's start with the introduction from Mr. Chairman.

Good morning, ladies and gentlemen. Welcome, ladies and gentlemen, to the next conference of Grupa Kety. Today, we are going to discuss the results in the Q2. Let me start by saying that, in fact, nothing much has happened, and we can also say that it is a little bit boring. And it is mainly due to the fact that the result -- the markets are poor, the Polish market is poor, but also European markets do not demonstrate their willingness to increase. Sometimes it is a side movement and some indicators of manufacturing ratios are negative, particularly in Germany. And if Germany is not in good condition, also the Europe part suffers, including the Polish market. And what we concentrate on is executing, doing our job and taking some attempts at any price to use our equipment to achieve the volumes and to maintain employment of our people. Sometimes, it is at the expense of mergings and the CFO is going to discuss this particularly an extrusion products. These are the times and this is what the market looks like and we of course cannot complain. As in terms of volumes, it has been a good time for all 3 segments, and this is the most satisfactory and we believe this is the biggest success in the Q2 that in difficult condition, our usage of the machine and equipment was high. We also improved the results as a group -- as a capital group. EBITDA is on PLN 256 million and PLN 166 million of net profit, so this is 10% year-to-year increase. And I believe that for all our shareholders who are used to stability and also some solid results of Grupa Kety, it is good news that in the difficult times we are not letting you down and we are maintaining or even increasing value of the corporation you are shareholders with. And out of the stars, worldwide stars we have, which also give us a lot of satisfaction in terms of the work we do and the management and development. So it is the agreement to purchase sales. One of the main players in the sun visors market. And it is a great thing and a great history as we have purchased from the current owner or the owners of SELT, we have purchased Aluprof at some point in time. And 10 years ago, it gave us a good, nice drive to merge Aluprof with Metalplast-Bielsko and maintain this Aluprof name and the marketing costs were distributed to much bigger entity and we could do more in terms of promotion and being aggressive in the market and marketing expenditures. And so needless to say that it was a success. And now our -- one of our segments is, I mean, Aluprof, you know very well. And it all started with a purchase of Aluprof and also from the same owners. And now we are in a moment in time where the owners of SELT want to sell the other part of their business, I mean, sell itself, which greatly over the last year was developed and they have a strong position in the market -- in the domestic market with some interesting export directions and with the products, which are very close to what we offer and we believe that. So this is also some kind of fate that we are on the same path. But for Grupa Kety, again, it is an important pivot point. That's what we believe. And I can also say that I also believed this for many, many years as the CEO, and this is a point in time when that company together with other segments will allow us strongly take a leap to European markets to export. And this is a foundation for Grupa Kety to start thinking about its position in Europe in a way -- in a well-considered way and also efficient way. This is how this investment should be perceived as this is something what we are going to remember many years in the future that, that was the moment when Kety knocked on the European doors very strongly and they are an important player, also in this segment, which seems to be a new in our group, I mean the sun visors. As the Vice President, Mr. Przybylski is responsible within the group for the mergers and is going to be responsible for integration of that company with our group. Let me pass the floor to himself, and he will make a presentation as this is also his inputs in these investments. And honestly, this is also going to be a great challenge, so 1 plus 1, we need to generate at least 5. Let me pass the floor to my colleague. Thank you.

Thank you very much. Good morning, ladies and gentlemen. As the CEO has mentioned, the company, it is something what we know very well. And a large part of the history is common. And the most important is that the market is perceived as a very perspective as the trend -- all the megatrends and the longer perspective are very supportive for us. I mean the climate warming trends for thermal modernization, all this makes the sun visor segment attractive and is going to grow in the next years. And also it is a segment which is close to us. We have some synergies with our existing business in the market -- marketing with Aluprof, but also in value chain. It is very clearly -- we have clearly downstream synergies with SWW and so many advantages of this overtake, of this merger. And the condition for now is that in June, we signed a preliminary agreement to purchase 100% of shares at the price of PLN 420 million, minus net debt. So it will be like [ 10% to ] EBITDA what the company achieves. So we are planning to make the closing at the latest in October or sooner. It is conditioned by obtaining of antitrust and agreement was, we need those from the Polish, Czech and Austrian market and the Polish regulator has already submitted the permission. And now we understand that we do not need a Czech clearance, and now we are waiting for the clearance from Austria. And as Mr. CEO said, let me just reiterate this as the company is the leader in the markets of visors in Poland, but also they are selling to Hungary, Germany, Scandinavia and Austria and the potential for further grow is big. The market is huge. And so we believe that this is going to be EUR 7.5 billion of the market, and these are 14 largest countries in Europe. And clear extrapolation shows that through our European Union, it is going to be like more than EUR 10 billion. Other players in the market are present, large international groups, many local players and the potential for development of the segments within the group and building based on SELT and further development abroad is huge. So we are very enthusiastic and we are waiting for the clearance. We are waiting for the closing, and we are happy to take more steps to build European leader in this segment.

Thank you for presenting this deal, this opportunity. And now let's move on to discuss financial results and operational activity. The Financial Director, the floor is yours.

Good morning, ladies and gentlemen. The results of the Q2 are according to our assumptions after 6 months of completion, EBITDA is about 51%. So we can say that all goes according to what we have planned and a very important good information is what was also mentioned that each of the segments in the Q2 significantly increased the volumes, which shows how the group is developing and what strength it's building for faster development, and we're also building customer base and sales income and we also have the prices of raw materials and exchange rates. So this is why we have this negative results. The EBITDA has increased by 7%, PLN 16 million, PLN 17 million compared to the last year. Nothing has been happening in terms of the financial cost. Quite stable exchange rates and no exchange rate differences. So this is like PLN 15 millions of rates. And last year, we had a couple of millions like PLN 4 million of negative exchange in FX. So that's why we have an improvement in this Q, this quarter. And another quarter where we have this deferred tax on activity carried out with some tax releases. And as you know, the major investments, as we have been informing are about to finish. So this influence in the next quarter should not be expected. And now the composition of the good results over the individual segments, SWW, so Extrusion Products. This is our measure of the market, our measure of the world as we are supplying products to many industries. We have diversified sales and the weakness of the market, it's clearly visible as we have already mentioned, as despite 14% of increase in volumes, which is very good and shows the strength of the segments and how efficiently even in a difficult market, we are able to generate manufacturing capacity, but it shows that EBITDA compared to the last year in terms of the value due to those macro changes is lower. And what is also good is that trend as in the Q1, the EBITDA in the segment was about PLN 50 million, now it is PLN 70 million. So we are observing an improvement, and I hope that this improvement -- expected improvement is going to come true. And as for the structure, actually the decrease in sales for the automotive industry in this segment, this decrease makes the new volumes to go mainly to the construction industry and also the home appliances. So we have some changes in the structure and also some percentage points decrease of exports as the markets, international foreign markets where we are selling almost 50%, almost half of our volumes in those markets were a little bit worse in the domestic market. Another segment, this is our Aluminum Systems Segment. So this is an example of how our integration and the extending of the value chain is bringing benefits. Dozen or so lower EBITDA in SWW and a higher EBITDA in SSA. It is also compensating the difficulties we have experienced at SWW and a very good operational market. There's also 8% increase in volume. Despite income's increase are lower as in the Q3 last year, we have been informing about the decreases, but now the price list quarter-to-quarter are difficult to compare. And no changes in the product structure or share of international sales. So this situation is very stable. But also in terms of the results, it is a very good quarter and we are very happy. The same as with Flexible Packaging. So last year was very demanding, very difficult. Many activities we're undertaking in marketing and manufacturing allowed or helped us now to show the results as the situation with the supply is not very comfortable, but it is quite stable prices of raw materials and the large scale as usage is 90% of the capacity. This helped us to increase the margin. It's a significant increase at about PLN 15 million, PLN 16 million higher EBITDA with 7% of increase in volume. So in each area in commercially, new customers, adjustment to the requirements of the market and very efficient adjustments to unified simple packaging. Also other products which have not been included in our offerings before and also a stable activity, stable operation, very high-quality efficiency, very high efficiency, the largest corporations, worldwide corporations compared with the Q2 last year. So these are 2-digit increases, and they also drive the export sales, which is now 54%, very good stable result in that segment. And now a bit about investments, we have completed almost 2/3 of the annual plan and 62%. This is what we expected as the majority of the investment included in the strategy. So SWW, complex of 2 presses and SSA and new plant in Zlotów, which is a copy of the plant in Bielsko so that's -- so this is Aluprof products. And these projects have been completed in the H1 of this year, and we started selling products from our new plants. So all this happens according to our expectations and our schedule -- time schedules. And for SOG, we are about to start investment plan for the year 2024-2025. So these are 2 plans for packaging. So this is printing lines with shears and lamination machines, these are the projects to be finished in 2025 and the value is about PLN 30 million. And importantly, we also -- it is also possible to get 50% of subsidy, like tax releases and there's recognition according to the new regulations. So that's going to happen after the investment is complete. And the ratio -- the financial ratio within the group, as last year, good results, good EBITDA, allowing us to finance investments and also to decrease our debt, PLN 132 million, PLN 0.8 billion, this is net debt to EBITDA. So we are ready to pay the dividend as declared in September and November of PLN 540 million. And so the ratios are good, correct. And operating capital, this is the opposite trend to last year, but not significantly PLN 10 million increase over the quarter. So it has not affected the situation. Stable, long-term financing, also extended lines in H1 of this year. Euro has a little bit share, but for finance, it is quite natural hedging of our exposure. And it was due to strong zloty and weak euro that this affects our operational values, but we are catching up this pressure. And one nonfinancial slide, I want to mention that a couple of days ago, we have called Extraordinary General Meeting of Shareholders with just 1 item, 1 thing which is requested from the shareholders. This is approval of the motion to issue 2 series of warrants to entitle us to purchase series L shares. It is due to the resolution of December last year, made by the Extraordinary General Meeting of Shareholders and it is related with the original option program from 2020. So we are very close to the first tranche of this project in [ September 2023 ]. The regulations were changed, and the program, which originally was to be started in October was not able to be started due to inability to use bonds as a vehicle, allowing to purchase shares. We used bonds about regulations from October on do not allow us to do that, and this is why we changed the bonds to warrants and the General Meeting in December approved this motion and also accepted the first tranche of the program, and that was required -- as the October deadline already passed, but tranche 2 and tranche 3 were not approved. And that was the case also in the May General Meeting after contacting the shareholders. And after some discussions, we understood the doubts and we prepared a very extensive explanation on why this need is in place, and this resolution will allow us as needed for us to execute the resolution of shareholders from December 2023. And also those materials for the General Meeting is available for you to use. And we believe that in this extraordinary General Meeting, those approvals, those conditional approvals and this increase in equity approval for this will be achieved. And now some words about the perspectives. We cannot see those very clear signs of improvement, and we are not expecting any significant changes in the raw material market, but we are also expecting pressure on the margin and also as a factor significant usage of capacity and volumes are some kind of counterbalance to this, and this is what we keep in hands and this is our operational effort. As my colleagues mentioned, the Q3, it is preparation to close at latest in October, the deal of purchase of SELT, and we are also intensively working on the new strategy. As according to the declaration by the end of this year, it needs to be presented, published and as for the finance, the situation is safe and secure, and we are now preparing money to pay the dividends, and we are also arranging finance to buy SELT. And within the next couple of weeks, we will be able to have the final negotiated offering, and we will be in the forming you, I hope, about how we are going to start this financing. Thank you.

Thank you very much. And now let's move on to the Q&A session. Ladies and gentlemen, I can see that there are many questions on SELT. Unfortunately, we will not answer these questions now. You will have to be patient and wait until closure of this deal as formally the company is not our property, and the Board is not going to discuss the situation -- the current situation or the future. Whatever we were able to reveal is included in the communication, is included in the presentation you have seen. And unfortunately, we need to stop here as for answering the questions on SELT. So the other questions are not too many of them. The first question is about SWW volumes and the situation with SWW. Do you assume a further increase in volume, H2 versus Q2?

Yes, of course, as the Q3 has historically always been the best quarter for Extruded Products. And the situation I have been talking about at the beginning of this presentation is not very good in terms of demands in the market. And so this is why we have been using strong efforts of our commercial people to acquire some orders at the expense of our competitors to use our capacity as much as possible. Naturally, as the CFO said, this is a natural counterbalance to the margins -- to lower margins, which unfortunately are here in this area and the Extruded Products, the margins. As for the margins, not much can be done. But in terms of volumes, of course, we always can do something, and we will undertake this activity. Thank you.

And the next question is about the Extruded Products. Also in Q1, we observed regular increase of the billet premium from about $300 per ton to $600. What was the reason for that increase? Is it because of limited supply of billets in Europe? On the other hand, higher transport costs from outside of Europe? Or are there any other reasons?

Let me answer this question. For aluminum prices, it is very difficult to guess what are the laws or what are the rules to set the price of aluminum in the London and also the billets. Obviously, we are trying to understand those natural -- the natural situations like closure of some mines or some closures of billets manufacturers, but there is no correlation. For so many years, I have been working in this industry. I can tell you that I don't want to speak about some conspiracy theories, but some products can be hedged and the financial institutions do this, and they are able to make money on that. So this is good as any other in the market and depending on what financial forces flow through the industry like aluminum, the situation may change. And as for the factors we have observed, what I can tell you is definitely, this premium is not low -- it's not high enough, and this affects manufacturers of billets and the manufacturer of billets have not much field of activity and the significant premium can make them to become not profitable, and they start thinking about limiting their manufacturing and to survive when the premiums are very low. So this risk makes that some of them do this. They decrease the manufacturing volume of billets, some only threatened us to do that. Sometimes as with the magic wand, those premiums can go up or down. So it is difficult to find any fact which would confirm the theory why this premium is high or low.

Thank you. And next question on Aluminum Systems. From the beginning of the year, did the segment change the price list for systems and rollers? And what are the signals from the competition? Has our competition changed their prices in the H1?

As I said, for incomes of SSA, they are not so much changing. That change was about 5%, 6% in the Q3 2023. And since that time, prices have not been changed. So like 1 or 2 months ago, when aluminum significantly was growing, the level was 2,700. We considered this need, and there were some voices in the market. Now aluminum again, the price is lower. So I think that matter -- that the changing of prices is also now pushed forward in the future. And about other players, it might be -- let me add on top of that, the prices are prices, but it is not always this is correct in stone that we use price list. It is not a product available on the shelf. Our customers have some history of cooperation. There are some -- there are also some relationships, there also some discounts for volumes and other reasons, so it is movable. So for our competitors, it is also changeable. Our competitors also decreased their prices, but there are some activities or task when the market is weak. Competition, as they write, they have the different goals. So we are in the market where we are, we are the leader. This is our home market, and we also need to keep some levels. Some competitors, they may feel that this is a little bit exotic market. Polish is the exotic market, and they can offer very low prices, and there are many multiple players in the market. So in fact, answering this question directly, I can say that over that time of the weak markets, some prices are changed and there are also some promotions in the market available, which may make some players to be more better visible in the market, but this is something what we need to face, all of us need to face. In all the industries, it happens, so this is very natural. And we can handle this quite efficiently. Thank you.

And the question about the inflow of products from Turkey. I think I'm -- it's mainly SWW, though we still observe significant competition? Or is that going down? Can you comment on that, gentlemen?

Indeed, this strength decreased particularly when the billet price premium was lower as the discount was lower. Late last year, early this year, this situation was decreased, and we were thinking about requesting some duties. And now we are expecting the situation, the import from Turkey may increase, and it has always been quite high. So we believe that this is significant in Europe. But for quite a long time, we have been efficiently tackling this problem.