Nikos Mamoulis, Chief Executive Officer of Frigoglass, commented:"The sales reduction in the quarter was mostly driven by lower cooler investments from breweries in Russia and difficult trading conditions in Nigeria impacting demand for glass containers. Despite lower sales, EBITDA margin improved by 50 basis points following efficiency gains and lower energy costs in Jebel Ali glass operations as well as savings from group-wide cost containment initiatives.
Volatility is expected to persist due to near-term economic uncertainty, most notably in Russia and Nigeria. In this environment, we remain focused on the elements of our business that we can control. We focus on value creating for our customers innovation to drive top-line growth, efficiency programmes and across the board cost reduction to support operating profitability. We continue to implement strict cost and capital spending discipline across Frigoglass. In this context, we will take any opportunity to optimize our manufacturing footprint, improve cost competitiveness and drive the transformation to a leaner and more efficient organization.
We are confident that the implementation of a long-term stable capital structure and our business improvement initiatives will enable Frigoglass to pursue its growth strategy.”
The challenges experienced in some of our main markets during 2015 persisted in the first quarter of 2016. Against that, we maintained our focus on innovation, cost reduction and efficiency improvement related initiatives to limit the impact of adverse macroeconomic conditions.
First quarter consolidated sales declined by 15.1% to €101.9 million, mainly driven by a double digit sales decline in Eastern Europe and lower demand for glass containers in Nigeria. The difficult macroeconomic and trading conditions in Russia continued to put pressure on beverage consumption, leading to cautious cooler investments mainly by key brewery customers. In Western Europe, sales grew by 24.3%, reflecting ICOOL’s placements by Coca-Cola bottlers in the region. Sales in Africa increased by 24.9%, compared to a weak prior year quarter, while intense competition impacted our Asian business sales in the quarter. In the Glass business, sales declined by 24% as the difficult macroeconomic environment continued to adversely affect demand for glass containers in Nigeria.
Gross profit (excluding depreciation) decreased by 5.8%, to €21.6 million, with the respective margin improving by 210 basis points year-on-year to 21.2%. The margin expansion mainly reflects efficiency improvements and lower energy costs in Frigoglass Jebel Ali. Last year’s first quarter was impacted by the furnace maintenance in Dubai, leading to materially lower volume output and cost underabsorption. The margin improvement also reflects a favorable geographic mix driven by the sales increase in Western Europe, more than offsetting volume led underabsorption of production overhead costs and the adverse impact from the devaluation of South Africa’s Rand. Operating expenses (excluding depreciation) declined by 4%, to €11.5m, reflecting cost containment initiatives.
In the first quarter, EBITDA declined by 10.6% to €10.7 million. Despite that, EBITDA margin increased by 50 basis points year-on-year to 10.5%. Glass business operating performance was the main driver of the EBITDA margin improvement. Depreciation decreased by 6.5% to €8.2 million mainly due to lower investments in Glass Operations. Lower EBITDA resulted in an Operating Profit (EBIT) of €2.5 million, compared to an EBIT of €3.2 million last year. Net finance cost was €9.5 million in the quarter, compared to €3.1 million in 1Q15. The increase mainly reflects a low base last year as we benefited exceptionally from foreign exchange gains. Net finance cost was impacted by higher average short-term borrowings and a higher effective interest costs. Frigoglass reported net losses of €8.3 million in the quarter, compared to losses of €3.9 million in the first quarter of 2015.
Net debt at the end of the quarter reached €308.8 million, compared to €287.8 million last year. The 12- months (LTM) Free Cash Flow generation was more than offset by interest paid and adverse foreign currency movements, resulting in higher net debt. LTM Free Cash Flow was negatively affected by increased capital expenditure due to the furnace rebuild in Nigeria and the acquisition of the 20% minority interest of Frigoglass Jebel Ali, offsetting our initiatives towards improving receivables collection and our tight prioritization of our capital investments since the start of the year. In 1Q16, capital expenditures amounted to €2.8 million, compared to €7.6 million the first quarter of 2015.
Cool Operations’ sales declined by 11.7%, primarily driven by lower cooler investments from brewery customers in Russia. Sales to Coca-Cola bottlers grew by 22% in the quarter, recovering from the previous quarter’s double digit decline due to increased placements mainly in Russia, key Western European markets, Vietnam and Kenya.
Sales in our Eastern European business declined by 19% as economic and political instability in Russia continued to adversely affect beverage consumption. The slowing economy and recent beer consumption excise tax increases led our brewery customers to significantly reduce orders in Russia. Sales to Coca-Cola bottles in Russia more than doubled, also reflecting orders being shifted from the fourth quarter of 2015 to the first quarter of 2016. Western Europe had a solid top-line performance in the quarter, up 24% year-on- year, reflecting ICOOL orders by Coca-Cola bottlers in the region and the benefits of the Company’s continued commitment to its innovation programmes.
Africa and Middle East
In Africa and the Middle East, sales grew by 25% year-on-year, notwithstanding increased currency and economic volatility in key markets. Our sales in Nigeria were higher year-on-year, driven by cooler investments from soft-drink and brewery customers, compared to a soft prior year quarter. Sales in Uganda, Ethiopia and Kenya, however, grew in the quarter.
Asia and Oceania
Sales in our Asian business declined by 26% year-on-year. The decline mainly reflects lower sales in India and Kazakhstan, more than offsetting increased sales in China and Vietnam. Intense competition and price pressure across the region continue to impact our top-line.
First quarter EBITDA was €6.1 million, compared to €8.1 million last year, with the respective margin declining by 140 basis points year-on-year to 7.9%. Fixed cost underabsorption on lower volumes, the adverse impact from the devaluation of South Africa’s Rand and continued price pressure in Asia impacted EBITDA margin in the quarter, more than offsetting a favourable geographic mix due to higher sales in Western Europe. Cool Operations’ net outcome was a loss of €6.9 million, compared to a loss of €2.8 million in 1Q15, reflecting lower operating profitability and higher foreign exchange losses.
Glass business’ top-line maintained the negative trend of the last two quarters as underlying trading conditions remained difficult in Nigeria in the first quarter of 2016. The weak consumer environment, due to the low global oil price, continues to put pressure on beverage consumption. In this environment, our Nigerian operations saw sales decreasing by 35% year-on-year, to €17.3 million, driven by lower glass bottle orders from brewery and soft-drinks customers as well as weaker demand for our complementary plastic crates.
Sales in the Dubai-based business increased by 18% year-on-year, to €8.3 million, primarily led by increased demand from soft-drinks customers in Southeast Asia and United Arab Emirates. The solid growth also reflects a weak comparative quarter last year impacted by lower production output caused by the extended furnace maintenance.
First quarter EBITDA settled at €4.6 million, 19% higher year-on-year, with EBITDA margin expanding by 650 basis points to 18.2%. The margin improvement was driven by higher efficiency rates and lower energy costs due to lower fuel prices at Frigoglass Jebel Ali. It also reflects weak prior year comparatives as last year’s margin was adversely affected by the extended maintenance of the furnace in Dubai which resulted in significant lower production output and, consequently, underabsorption of fixed costs. The lower year- on-year container glass and plastic crates sales in Nigeria impacted EBITDA margin adversely in the quarter. Glass Operations’ net losses reached €1.4 million, compared to losses of €1.0 million in 1Q15. Despite the lower year-on-year depreciation charges due to capital spending reduction and lower taxes, the deterioration in bottom line reflects last year’s foreign exchange gains.
The volatile market environment and economic uncertainty in certain key markets impacted Frigoglass’ top-line in the quarter. The current macroeconomic headwinds in Russia adversely affected the cooler business, with sales declining in double digits. Furthermore, the lack of US dollar liquidity and the uncertainty regarding a possible currency devaluation restrained demand for glass containers in Nigeria. Against this backdrop, Frigoglass remains cautious in these markets for the remainder of the year.
To mitigate the impact of market headwinds on profitability for the rest of the year, we remain strongly focused on innovation jointly developed with our customers as well as cost reduction and efficiency improvement related initiatives. Following the successful launch of ICOOL and Smart cooler ranges, Frigoglass continues to deliver on its product innovation agenda for 2016 with the Hybrid and EvoCool cooler ranges currently in a pilot phase. The Integrated Service System is gaining ground and we are expanding our offering to more countries and regions in Russia. In parallel, we are continuing to execute on our productivity improvement and cost leadership program, while focusing on further optimizing our manufacturing network.
Frigoglass is implementing far-reaching steps to manage its working capital and free up cash through a combination of inventory reduction and improved receivables collection. We expect these steps, combined with planned capital expenditure reduction, to enhance free cash flow generation in 2016. For 2016, we expect capital expenditures to amount to approximately €20 million, far below the 2015 level of €37 million.
Capital structure review
As previously announced, Frigoglass Annual General Meeting (AGM) held in April approved the €30 million Term Loan to be used for general corporate purposes and working capital requirements. The Term Loan matures on March 31, 2017. Following the approval of the Term Loan, Frigoglass entered into amended and restated RCFs with the lenders under those facilities, the effectiveness of which was conditional upon availability of the Term Loan. Pursuant to the amended and restated RCF, Frigoglass extended the maturity of the RCFs to March 31, 2017. Frigoglass subsequently repaid and cancelled €10 million of the principal amount under the RCFs. Furthermore, following approval of the Term Loan, Frigoglass drew down €20 million to fund its working capital requirements and other corporate obligations. The Term Loan and the RCF extension allowed Frigoglass to secure sufficient flexibility to meet its short-term obligations.
Frigoglass continues to work with its advisors to review the full range of available options and establish a stable long-term capital structure. The review is currently ongoing with the objective to implement a stable long term capital structure by the year-end. Further updates will be provided regarding this review as and when appropriate.