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Edited Transcript of RFRG.AS earnings conference call or presentation 16-May-19 10:59am GMT

ROTTERDAM Apr 2, 2020 (Thomson StreetEvents) — Edited Transcript of Refresco Group BV (Zuid-Holland) earnings conference call or presentation Thursday, May 16, 2019 at 10:59:00am GMT

* A. C. Duijzer

Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board

* J. H. W. Roelofs

Refresco Group B.V. – CEO & Member of Executive Board

Mirabaud Asset Management Limited – Senior Credit Analyst & Assistant Portfolio Manager

Good day, ladies and gentlemen. Welcome to the Refresco First Quarter 2019 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Hans Roelofs, CEO of Refresco Group. Please go ahead, sir.

J. H. W. Roelofs, Refresco Group B.V. – CEO & Member of Executive Board [2]

Thank you very much. Good morning, everyone, and welcome to the Refresco First Quarter 2019 Earnings Call with our bondholders. With me today is Aart Duijzer, Refresco’s CFO.

I’ll start today’s presentation with a brief introduction to Refresco, followed by the highlights of the first quarter of 2019. Then Aart will take you through our financial performance. After Aart’s presentation, I will return briefly with a recap of the key messages of today, and then it will all be followed by Q&A. Today, Refresco is the world’s largest independent bottler with leadership positions in Europe and North America, serving leading retailers and branded beverage companies. A quick reminder over our headline statistics. Refresco is active in 12 countries. We have 265 beverage bottling lines in 60 factories, providing customers access to a total nonalcoholic�beverage portfolio. 9,500 people work for us across Europe and North America. Our pro forma volume is around 12 billion liters, and our revenue is around EUR 3.7 billion. As a leading player in Europe and North America, we are well positioned to address industry opportunities and challenges and to drive exciting developments across our product and packaging portfolio. I will come for that in a minute.

Let’s first take a look at the financial highlights for the first quarter. Group volume increased 13.5% to 2.6 billion liters. This increase was a combination of additional volumes related to the acquisition of Cott’s bottling business and organic growth of 1.8%. The results and volumes of the former Cott business were consolidated into our group results as of January 30, 2018.

Gross margin per liter, one of our key performance indicators, was EUR 0.156 compared to EUR 0.144 in the first quarter of 2018. This positive is a combined effect of: one, synergies from the Cott acquisition; two, recovery of input cost increases; three, a higher share of value-added products and services to our customers; four, a conversation for increased complexity of the portfolio leading to higher cost; and last but not least, strengthening of the U.S. dollar and British pound against euro. Adjusted EBITDA was EUR 81 million compared to EUR 44 million in Q1 2018, Aart will come back on that, making the first quarter a solid start to 2019.

Turning to the integration process, the real conclusion is it remains well on track. We are overperforming our plan in overheads and will on — and well on track to achieve projected procurement synergies. Furthermore, our 2018 investment and production capabilities are starting to pay off, and we continue on our investments to drive efficiencies and innovation. Finally, we confirm that we are on track to realize the synergy plan in full, that is EUR 67 million run rate synergies by mid-2020. The beverage�market in North America and Europe remains very dynamic. We see continued demand for new, innovative and sustainable products. Categories such as water plus, ready-to-drink coffees and functional beverages are growing fast across our markets, as is demand for nonalcoholic�beverages and cans. We also see continued outsourcing trend by A-brands, who can benefit from our scale, unit production platform, innovation capabilities and are full focused on cost optimization in the total supply chain. In line with our growth and value creation strategy, we have embarked on a new journey to transform Refresco from a bottler into a beverage solution provider. We will strongly focus on innovation and industry sustainability thesis.

I would like to mention a couple of services to be provided. Product redesign and new ingredients. 80% of our innovation is product- or recipe-driven; and based on our knowledge and product redesign and ingredients, we believe that with this knowledge we can outperform the market. The recent acquisition of Columbus concentrate manufacturing facility in R&D platform adds significantly to our innovation skills and capabilities.

Innovation/incubator role. The remaining 20% is about innovation of real new product concepts. We want to be an incubator for new products and new initiatives in the market.

Sustainable packaging. Concerning the sustainable packaging, our responsibility will be to use less and recycle more. In the weeks and months ahead, we will put reduce and recycle very prominently on the agenda with all our customers and suppliers, and the recycling of PET will get special attention.

Nutrition or sugar. Our efforts to reduce sugar and offer alternatives are paying off nicely across our portfolio, and we’re working together with our customers day-in, day-out to meet the market’s demand.

Last but not least, our procurement services. I would like to mention that we are nicely on our way to work together with our retail customers as well as with our branded beverage companies to coordinate the sourcing of raw materials and packaging materials and to optimize and make it more efficient for all of us together.

I would now like to hand over to Aart, who will take you through the key financials in more detail.

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [3]

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Thanks, Hans. Now indeed let’s look at some of the key financials. And just as a reminder, the results reported are on the level of Sunshine Top B.V., an entity owning 100% of the shares of Refresco Group B.V.

To start with the main KPI, our volume increased by 13.5% to 2.6 billion liters. As Hans already explained, this increase is mostly related to the acquisition of Cott’s bottling activities. The results of Cott’s are consolidated in the group results as of the completion of the acquisition on January 30, last year, for both North America and U.K. The organic like-for-like growth was 1.8%.

From now on, we will focus more on the gross profit margin per liter than on the revenue and revenue per liter. This is related to the increased share of contract manufacturing.

In the quarter, the gross profit margin per liter increased to EUR 0.156 from EUR 0.144 in the same quarter last year, and I will come back to this in a minute. With EUR 81 million, the adjusted EBITDA in the first quarter was 84% higher compared to the same quarter last year. The main reason for the increase being the acquisition of Cott, the realization of synergies and the implementation of IFRS 16.

Now over to the gross profit margin per liter, which, as said, is one of our most important KPIs. Our gross profit margin per liter was EUR 0.156 in Q1 2019 compared to EUR 0.144 in Q1 2018. And as you can see in the charts, also previous years it was quite a bit lower. The significant increase this year is related to recovering input price increases that we incurred in the course of 2018, mix improvements and ForEx compared to the same quarter last year, both the U.S. dollar and the pound sterling strengthened versus the euro. More and more customers are asking us to produce more complex products and provide added-value services. The gross profit margin per liter starts to reflect that. And please be reminded that the development of the gross profit margin per liter follows a seasonal pattern. The gross profit margin per liter is always a bit higher in the first and the last quarter and a bit lower in the second and the third due to mix differences.

If we look at the profitability development, the reported EBITDA was EUR 79 million in the first quarter versus EUR 34 million in the same quarter last year. In 2018, we were still reporting as a publicly listed entity. The total one-off cost in this quarter were fairly limited and mainly related to the acquisition of the Cott concentrate manufacturing business in Columbus, Georgia. As a result of the acquisition of Cott last year and to take private by PAI, approximately 1/4 of the total goodwill was allocated to customer contracts and other intangible assets, mainly brands. These are amortized over a 10- to 20-year period, leading to a noncash charge of EUR 12 million in this quarter and approximately EUR 48 million full year. Implementation of IFRS 16 increased the amount of debt on the balance sheet with approximately EUR 330 million at the end of the quarter; and on an annual basis, it increases the EBITDA with approximately EUR 74 million.

If we look at the balance sheet, the total assets at the end of the first quarter increased to EUR 5 billion, the increase mainly being related to the acquisition of Cott’s bottling activities. Total equity amounts to EUR 824 million. Equity now represents over 16% of total assets. The liquidity remains strong. Cash and cash equivalents at the end of the quarter amounted to EUR 133 million and still EUR 50 million remains undrawn under the RCF. In the quarter, the working capital increased to EUR 172 million compared to EUR 49 million at the end of 2018. In the same quarter last year, the working capital level was EUR 185 million. The strong increase in this quarter is caused by a normal seasonal pattern, the acquisition of the concentrate manufacturing business and the impact of the exchange rates. There was some stock buildup, although limited related to the Brexit. As said, there is a seasonal pattern in working capital, meaning that at the end of the first and the second quarter, working capital is at its peak level, and in Q3 it starts to decrease and in Q4 it will decrease even further.

Notwithstanding the reasons mentioned before, working capital is a bit higher than we expected, and we are working hard to improve that.

Now I will hand back to Hans, who will present the key takeaways of today.

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J. H. W. Roelofs, Refresco Group B.V. – CEO & Member of Executive Board [4]

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Thank you, Aart. If I look at the key takeaways and I just focus on the figures, there are a couple of things I would like to say: we make a very solid start of the year 2019; synergies are nicely on track; and the improved operating results show a significant step up in adjusted EBITDA.

From a market perspective, I dare to say that we continue to see an attractive and very dynamic market. And from a Refresco profile perspective, I would like to mention again that the transformation from a bottle to beverage solution provider only just started and we still have a nice way to go.

Thank you very much for your attention. This was what we wanted to say. I would like to hand back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We will take our first question today from Ronan Clarke of Deutsche Bank.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [2]

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In terms of EBITDA comparability, I was wondering if you could tell us — so for that month of January alone last year, what was Cott’s EBITDA that we would fill in the missing part for comparability, please?

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [3]

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Yes. Sure. Well, it doesn’t obviously — 2 EBITDA figures there. One is the EBITDA figure of Cott last year, which was not on a like-for-like basis or we do not have accurate indications of that; it was below EUR 5 million. If we look at the EBITDA contribution of the Cott businesses this year that obviously is — there are elements there which are related to the integration and so we combined head office and stuff like that, but it’s, I would say, just below EUR 10 million.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [4]

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So EUR 5 million was the amount that it actually contributed in February and March last year, right?

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [5]

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No, no, just January.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [6]

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Oh, January is the one with EUR 5 million…

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [7]

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So if January is taken, it could have been EUR 5 million if they would have provided. Yes.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [8]

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So I guess then if we take out IFRS 16, we’re talking about this year, 65 verses maybe 39 last year comparably roughly.

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [9]

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Yes. That’s more or less that. Yes.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [10]

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Could you give us some idea of a breakdown of that in terms of raw material recovery and synergies. Just roughly what was the blend?

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [11]

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Well, that’s difficult to say because if we look at the first quarter of last year, there were no specific issues on the raw materials. The raw material impact and increase started in the course of 2018. This year, I would say, we have had a little bit of tailwind but not a lot. It might have been EUR 1 million or EUR 2 million, if that would be my best guess. And of course, if you look at the gross margin development that’s also heavily impacted by both ForEx as well as the price increases. So I would find it difficult to exactly identify that.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [12]

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Okay. And then on working capital. I think you said it was a little higher than you had been targeting. Is it in terms of volume stockpiling? Or is there a bit of value in there as well on the raw material side?

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [13]

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No. There isn’t. There is obviously a little bit of value, which is again related to the strengthening of the pound sterling and the dollar. However, that’s what — that’s not what I was referring to. I was more referring to the volume effect and some pre-stocking, which was a little bit higher than anticipated. I would have expected it to be safe and EUR 15 million lower than the actual number.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division – Research Analyst [14]

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And is that — could not be unwound in the remainder of this year?

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [15]

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Yes. Yes, it will be. Yes.

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Operator [16]

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(Operator Instructions)

We will take our next question from Al Cattermole of Mirabaud.

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Al Cattermole, Mirabaud Asset Management Limited – Senior Credit Analyst & Assistant Portfolio Manager [17]

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I just wondered about the decision not to publish the pro forma EBITDA on a quarterly basis. Obviously, from our point of view, that’s not very helpful because it doesn’t — it gives us 6 months between data points to track how you’re performing. So why have you decided to do that? And then when you do report it, do you expect a significant change from what we saw in December? How should we think about pro forma leverage here?

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [18]

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Yes. So that’s a good question and also a fair question to be quite honest, but at the same time, as you can imagine, it also requires quite a bit of work even from the lower levels of the organization to prepare it on an accurate basis. That’s why our intention is to do that twice a year as we, I think, also have indicated in the press release. However, just to assure you, it’s not going to be materially different. If different, it’s going to be slightly better than what we indicated end of last year, would be my guess at the moment. But like I said, it doesn’t involve so much work that we’re only going to prepare it twice a year.

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Al Cattermole, Mirabaud Asset Management Limited – Senior Credit Analyst & Assistant Portfolio Manager [19]

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Okay. And then just on the purchase of the Cott asset. I know in the press release, it does say, it doesn’t have a significant cash flow impact in 2019. So can I just confirm, you’ve not made a — you’re not going to make a cash acquisition payment to Cott. Is that right? Or actually have an outflow…

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [20]

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No, that’s not exactly right. Just to remind you that the net effect, indeed, is very limited. We have made however a significant cash outflow to Cott to acquire the business. However, as we’ve indicated in the press release, we sold only a brand and that sale was relate — that involved a significant cash inflow, and on top of that, we have achieved some working capital improvement. So the net effect of the — of all of these 3 is fairly close to 0.

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Al Cattermole, Mirabaud Asset Management Limited – Senior Credit Analyst & Assistant Portfolio Manager [21]

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And is that already in the Q1 number? Or does that reflect the RCF drawdown…

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [22]

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No, it was in this year. This year.

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Al Cattermole, Mirabaud Asset Management Limited – Senior Credit Analyst & Assistant Portfolio Manager [23]

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And then the RCF draw, is that standard practice? Or is that because your working capital is EUR 50 million higher. Are you — were you expecting to draw the RCF by $150 million?

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A. C. Duijzer, Refresco Group B.V. – Co-Founder, CFO & Member of Executive Board [24]

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Yes. No, maybe there is some misunderstanding. The working capital is 1-5, EUR 15 million higher than I’d expected. So indeed, the cash outflow and the drawdown of the work — of the revolver is quite normal. That’s a normal seasonal pattern, and that would be unwinding in the second half of the year.

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Operator [25]

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We take our next question from Dries De Craemer of Permira Managers.

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Dries De Craemer, [26]

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I was just hoping you could comment on the working — sorry, on the effect of the raw materials in Q1 and the impact that might have on Q2? On the previous call, I think you said that they moved quite favorably in the first couple months of the year. How should we look into that for Q2?

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J. H. W. Roelofs, Refresco Group B.V. – CEO & Member of Executive Board [27]

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For Q2, we do not see a considerable change of that. I just mentioned that in Q1, we have a little bit of tailwind that will continue in Q2. It’s difficult to talk about Q3, Q4 because as you might be aware, a lot of our raw materials are harvest-oriented and harvest-related. So we don’t know all the harvest yet, of course. But for Q1 and Q2, I can reconfirm there’s a bit of a tailwind.

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Operator [28]

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(Operator Instructions) It appears we have no further questions at this time.

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J. H. W. Roelofs, Refresco Group B.V. – CEO & Member of Executive Board [29]

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All right. Thank you very much operator. Let me just restate the key takeaways of our message today, and thank you all for listening in. We look at Q1 2019, I dare to say the following: we have a very solid start of the year 2019. Synergies or the realization of the synergies are nicely on track. And we’ve seen improved results with a significant step up in adjusted EBITDA. We continue to see a very attractive and very dynamic market. And Refresco is going through a transformation from being a bottler into a beverage solution provider. Thank you all for listening in and hear you back in 3 months from now.

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Operator [30]

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Thank you. (technical difficulty)

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