Frigoglass SAIC announces audited results for the quarter and six months ended 30 June 2016.
Second Quarter 2016 Highlights
Sustained recovery in West Europe (+27% y-o-y) driven by ICOOL’s penetration in Coca-Cola bottlersOngoing beer market challenges in Russia resulted in lower demand for coolersGeographic sales mix and Service business performance led Cool EBITDA margin up 100bps to 11.8%Naira’s devaluation impacted Glass business top-line and EBITDA during the periodCapital structure review process with advisors is ongoing
Second quarter consolidated sales declined by 5.1% to €137.8 million, primarily driven by the continued weak beer market and macroeconomic environment in Russia. The adverse conditions in Russia resulted in a double digit sales decline in East Europe in the quarter. Sales recovery in West Europe continued, growing by 27% year-on-year in the quarter due to the sustained momentum of ICOOL among Coca-Cola bottlers. In Africa, sales were broadly unchanged to the prior year’s quarter, while our Asia business saw sales growing by 14% due to increased demand in most Asian markets.
Sales in the Glass business declined by 3.5%, with currency translation having a negative impact of 9.7% on sales. Gross profit (excluding depreciation) decreased by 11.6% to €28.9 million in the quarter, resulting in a gross profit margin reduction of 150 basis points year-on-year to 21%. The margin deterioration largely reflects the effect of foreign exchange fluctuations on the price of key raw materials required for our Nigerian glass business as well as lower fixed cost absorption caused by the volume decline in Plastic Crates in Nigeria and the Jebel Ali Glass business. These adverse factors more than offset the 30 basis points year-on-year gross margin improvement to 21.6% driven by the favorable geographic sales mix in Cool Operations following Western Europe’s increased contribution and our focus on developing the higher-margin Service business.
Operating expenses (excluding depreciation) declined by 6.9% to €12.4 million, reflecting a 20 basis points improvement of operating expenses over sales margin at 9%. The improvement reflects lower administration expenses and our strong focus on cost efficiency measures. EBITDA in the quarter was €17.3 million, down 11.4% year-on-year, with the respective margin declining by 90 basis points to 12.6%.
The margin reduction primarily reflects the impact of the devaluation of Naira on the Glass business. The EBITDA reduction and the higher year-on-year deprecation charges resulted in an Operating Profit (EBIT) of €8.9 million, compared to an EBIT of €11.5 million last year. Net interest expenses of €7.1 million were more than offset by foreign exchange gains mainly due to the devaluation of Naira, resulting in net finance income of €5.9 million compared to net finance cost of €7.9 million a year ago.
Frigoglass reported net losses of €16.8 million in the quarter following restructuring charges of €11.4 million relating to the cessation of its manufacturing operations in China and €4.9 million in expenses associated with the ongoing capital structure review process. Excluding restructuring costs and capital structure review related expenses, Frigoglass reported a net loss of €0.5m for the quarter, compared to a break-even result last year.
Net debt at the end of the quarter was €319.5 million, compared to €283.9 million a year ago. The 12-months (LTM) Free Cash Flow generation was more than offset by interest paid and adverse foreign currency movements, resulting in a higher year-on-year net debt level. It was also adversely affected by increased capital expenditure due to the furnace rebuild in Nigeria and the acquisition of the minority interest of Frigoglass Jebel Ali, offsetting the cash release from the improved receivables collection, proceeds from the sale of the plant in Turkey and tight capital spending since the start of the year.
Total equity deteriorated by €63 million to a negative €63 million at 30 June 2016, compared to 30 December 2016, impacted by adverse foreign currency translation of €43 million mainly due to the devaluation of the Naira, the restructuring costs related to the closure of the manufacturing operations in China and the loss for the period.
Segmental Review
Cool Operations
Cool Operations’ sales declined by 5.6% in the quarter following significantly lower cooler investments from brewery customers, primarily in Russia. Sales to Coca-Cola bottlers were up 8% in the quarter, partly offsetting the reduction of sales to brewery customers. The continued recovery of sales to Coca-Cola bottlers was driven by increased cooler placements mainly in Nigeria, France, Ethiopia and Poland.
Europe
In Russia, beer industry specific challenges and the weak macroeconomic conditions continued to adversely affect brewery customers’ cooler investments in the quarter. Restrictions on packaging sizes and rising inflation leading to the reduction of consumer’s purchasing power continued to put pressure on beer consumption. Overall, our Eastern European business saw sales declining by 24%. Western Europe’s sales had a good recovery, growing by 27% in the quarter. This performance reflects strong execution of our commercial strategy for further penetration of Coca-Cola bottlers.
Africa and Middle East
Sales in Africa and the Middle East were broadly unchanged compared to the prior year. Increased cooler placements from Cola-Cola bottlers in Ethiopia and Nigeria were fully offset mainly by lower sales in South Africa due to the continued macroeconomic challenges and adverse foreign exchange translation impact. In the Middle East, sales to the Coca-Cola bottler in Saudi Arabia were up in double digits for the quarter.
Asia and Oceania
In our Asian business, sales increased by 14% driven by soft-drink customers in Vietnam as well as growth in several smaller countries in the region.
Asia remains a highly competitive region that we target to improve our cost competitiveness through operational excellence, productivity gains and manufacturing volume consolidation initiatives. Despite the lower year-on-year sales, EBITDA increased by 3.6% to €12.4m in the quarter.
EBITDA margin improved by 100 basis points to 11.8%, mainly driven by the favourable geographical sales mix stemming from the increased contribution of Western Europe. The EBITDA margin improvement also reflects further development of our higher margin Service business, the benefits of lower raw material prices and reduced operating expenses due to lower employee related costs.
Operating Profit (EBIT) reached €7.8 million, 2% lower year-on-year. Cool Operations reported net losses of €23.2 million in the quarter, impacted by restructuring charges of €11.4 million associated with the closure of the manufacturing operations in China, €4.9 million extraordinary expenses related to the ongoing capital structure review process and higher year-on-year foreign exchange losses. Excluding restructuring and capital structure review related expenses, Cool Operations reported net losses of €6.9 million in the quarter, compared to a net loss of €1.2 million in the prior year’s quarter.
Glass Operations
Glass Operations’ sales declined by 3.5% in the quarter, while on a currency neutral basis, sales were up 6.2% year-on-year. Despite the continued difficult market conditions in Nigeria, the local operations saw sales increasing marginally by 0.9%, impacted by unfavorable foreign currency translation and slowing demand for our complementary Plastic Crates business. The core container glass operations had a solid performance, with sales growing 18% in the quarter, mainly reflecting orders being shifted from the first quarter to the second quarter of 2016. The solid performance was achieved despite the 14% foreign exchange impact on sales.
Our business in Dubai saw sales declining by double digits over the quarter, reflecting a strong comparative quarter last year. In 2Q15, Jebel Ali benefited from orders from brewery customers in West Africa as Nigerian operations were running at almost full capacity.
Second quarter EBITDA was adversely impacted by the devaluation of Nigeria’s Naira. Fixed cost underabsorption due to lower volumes in the Plastic Crates and the Jebel Ali Glass businesses also impacted the EBITDA margin in the quarter. Overall, EBITDA was €4.9 million, compared to €7.6 million last year, with the respective margin deteriorating by 730 basis points to 15%. Operating Profit (EBIT) reached €1.0 million, compared to €3.5 million last year. Glass Operations’ net profit reached €6.4 million, compared to profits of €1.1 million in 2Q15, driven by foreign exchange gains due to the devaluation of the Naira.
