Colt CZ : Analyst conference call transcript

6M 2022 Analyst conference call transcript COLT CZ GROUP SE

Jan Drahota, CEO:

Good morning. Today I have Jan Zajíc with me, Dennis Veilleux is not going to participate even though he is in Europe, but he is at the moment flying out of Sweden to the US so I have to excuse him. But let us go forward to the presentation. First of all, six months at glance or key KPIs for six months, revenue up by 49% to7,049 bn CZK, adjusted EBITDA In the same rate of increase of 49% and the amount of 1.795 billion CZK, net profit up by 44% at 1.183 billion CZK and adjusted EPS almost 35 CZK per share up 44% in the last six months or in the first half of the year. So, overall, the comment is that it is a record first half of the year for the group and obviously it does reflect and we will go into detail what are the main drivers of that but it shows that that we are still growing in a very healthy space. So base so if you go to the next slide.

First of all, this is more detail about a breakdown of our sales, there is geographical split and also split by unit sold. First of all, units sold you'll see that the unit sold increased slower than the revenues. So, a little bit less than 20%, 19% to 363 thous. unit sold. You see that there is a let us say faster growth of long guns compared to handguns.

And this basically reasons the faster growth of dollar revenues or CZK revenues. We are selling a higher value product. So basically, the product split is better or is more expensive. As far as the geographical growth is concerned, I would say that you will see that most of the key markets wind up in terms of their importance at the expense of US.

So, you'll see that US is, is now below 60% of our sales, so around 58% of sales. The reason is, I will say growth in other markets, but also, you know, that we have been saying for some time that we see the healthy share of US market around fifty to maximum 60%. So, we are getting closer to let's say, healthy split. The comment, or if I were to comment on one particular market as well or, or other markets as well, it's Czech Republic went up because of the Czech army deliveries, Canada, it's caused mainly by the inclusion of Canada in our consolidation in h1, Europe, very healthy market, you know, growing significantly. And Asia, same thing. Africa, you know, dramatic drop, but it is caused by one off events. So, we see potential there as well. So, this is driven by a larger transaction. So, we have not realized any larger transaction in H1.

If you go to next slide.

So, first of all KPIs revenues, I already did command at 7.049 billion CZK, 49% up and the same for EBITDA, I also did comment it. Maybe it's always interesting to see that EBITDA margin, you know, is around 25.5%. So, it's a strong EBITDA margin and it shows, it confirms once again, the better product split, and also our ability to control costs in the first half. As far as the guidance is concerned, we are confirming guidance for the EBITDA at 3 billion to 3.3 million CZK. And revenues, they are saying that currently we see the revenues at the end of the year in the range of 14 to 14.6 billion which is slightly lower than original nature 14.4 To 14.8 billion CZK.

At this slide, you'll see that there is a comment that guidance has been confirmed despite a challenging environment, I will say that my comment would be the same as in after q1 results. Obviously, we are in an environment where we see first of all shifts in demand. So, we see that the demand is moving or increasing significantly or at least the interest and potential demand is increasing significantly on the m&a side or to our professional customers. And at the same time, they are segments on US commercial market. US commercial market as a whole is a little bit weaker about what we see that there are segments of the market which are which are much weaker, and then there are segments which are really strong for us. So, it's definitely a different market than maybe 18 months ago. Nevertheless, I would say that our diversification in terms of customers, but also products, give us confidence that we are able to reach guidance and also that we are ready to capitalize those opportunities, because there are real opportunities on the market. And we see significant because even on the commercial market in certain categories of products for more brands. So, we thought we believe that there is still you know, market share to gain and money to be made.

If you go to the next slide just this is just an illustration of what I said at the beginning, you know, earnings per share almost 35 CZK in the first half of the year, which is 54% increase and and same goes for net profit. There are small adjustments you can see them in the annex of the presentation, I would say I would name the two which were the same for EBITDA first of all, there were some one off costs or costs related to advisory costs related to m&a which we excluded in most slides out and 30 million and same goes for the and also we started to implement the ESOP program in the in the H1 or Q2. So, there is a there is a cost of around 33 million related to that.

If you go to the next slide. I would say that here, what is important to comment is guidance for capex. This is another guidance that you are giving. What we see is that we will be let's say at or below 5% of revenues. Currently we are saying that it's 700 to 730 million CZK.

We now I manage the capex at the global level. So, we are really scrutinizing all the capex and the level of CZ and Colt to make sure that we have the right capacity and balance capacity also with the production capacities, which we have as a, let's say, satellite production capacities, you know, suppliers or our partners. And again, you know, the business is generating, you know, good cash flow out.

If you go to next slide. Debt structure, this is confirming, I will say that here, there is nothing, no significant change compared to the q1 of this year, the bonds are still the same. So, we are financing mainly by the bonds, you know that the interest rate exposure of those bonds is hedged in the amount which is higher than the net debt. The net debt is at 3.743 bn CZK.

It's after the payment of the dividend in H1. So, some leverage even after the dividend payment is around 1.5x EBITDA So, for us, it's, we see that we have significant room still to realize our acquisition, let's say ambitions and, we see, and yet we are still at the conservative levels in terms of endeavors.

You go to next slide, please.

In the h1 report, you will see that we signed SPA to purchase 100% shares of our minority investment in the past in Spuhr. There is more detail about Spuhr I would say it's a niche player. And so, in terms of financials, it's a small company, but we see huge potential for the business, it's because it nicely fits into our portfolio. And it fits for two reasons. Because first of all, it manufactures most advanced or most or highest rated mounting solutions or vertical mounting solutions for military, military products. So, I would say that all the special forces or all the, let's say, elite units are using, most of them, using Spuhr mounts for air optics. So, we believe that going forward, the system will be more and more important. So, it gives us an edge here. And also, and this is really important, it has great experience in upgrading certain products actually of our competition, so HK products and B five and also G 3. So, G 3 rifles. So, we see also potential, because what we are witnessing is that governments are currently around the world. And the interest to expand on defenses definitely has grown. And there are you know, there are customers who want to upgrade the fleet immediately, but there are also customers who are considering, you know, upgrading in the form of a upgrade of the current fleet. And then to do a real, let's say, consideration in terms of what road system to adopt, and also what category to adopt. So, I think this gives us a good intermediate, let's say solution for customers who are still hesitating. So, on this slide, we also have references of some of the product and our blue-chip customers.

The business is growing or is very, has been growing quite nicely in terms of revenues, but also has a good profitability, it has higher profitability than our current business, you know, significantly. So that's we believe this skill, which can be really, I would say deployed in the group and really leveraged.

If you go to the next slide.

This is a slide which is just several information not all of them are, let's say from the same category, first of all, it sums up that we paid dividend. There was record dividend for us 25 CZK per share. First of all, also in the first half or in q2 or 30th of May, we released around 330,000 shares as a part of the earnout to Colt shareholders who sold us Colt. Also, we already discussed that we started to implement ESOP for the employees, and you'll see that there was around 1/3 of ESOP implemented in the six months of the year in Q2 of the year. And last information is a bit different but I think that this also gives you more info which I believe that you will be asking about energy costs. I will say that for us energy costs and you know that is definitely that's a bigger focus in Europe than in the US. So, we give here a bit of granularity on CZUB, because and you'll see that the cost went up significantly over the last two years, it has been very fast, you'll see that in 2021. The costs for energy, which is gas and electricity were around 70 million, this year, we expect 240 next year 450. It once again shows that the let's say the output, let's say the profitability of the business is very strong, the business is robust, because even though the costs are higher, significantly year on year, we are showing healthy growth in EBITDA or operational profitability. And this was the last slide.

Klára Šípová:

Ladies and gentlemen, if you have any questions, please raise your hand in the team's application or speak directly to the microphone, you can unmute yourself.

And the first question comes from Atinc Ozkan from Wood&Co. Please go ahead.

Atinc Ozkan:

Good morning. All thanks for the presentation. I have a couple of questions, but I'll limit them to two for the moment being. The first one is if you could provide some update regarding your efforts to start producing CZUB design products in the US at Colt facilities. How is that progressing? If you could provide us any maybe key targets or any recent achievements?

My second question is regarding something I've been observing in the general defense aerospace industry. In the last couple of weeks, I've seen defense contractors, flagging supply chain disruptions, components shortages, I know you are basically firearms producer, but is this a risk for your company? In the current environment? Thank you.

Jan Zajíc:

Okay, coming to the first question, as you said, whatever the production CU in the US and you might already heard several times from Jan, whatever the goal is, I'm going to have two very flexible production units, I mean, being able to produce CZ products in the US or Colt products in UB. So currently actually working both activities, I mean, to bring in the parts and the products to be new, we have on the table a couple of key components from Colt, for example, 1911. And going to the other direction, that's a little bit related also to our manufacturing, or assembly and manufacturing in Kansas which we just now moving or actually already moved to the West Hartford facility.

And we are getting first results and first products right now. It's already happening for example, scorpions or a duty pistol. So, the project is running, it's very successfully running and, and the ultimate goal, as I said, is to have very flexible to productions for all products.

Jan Drahota:

Thank you. Maybe to add to that, is that as I said, our ambition is to have to, let's say production hubs which are able to switch production between them according to the demand according to the costs. That's the first thing, the second thing, we are also working quite intensively on r&d cooperation. So, when we are talking about new products, we are definitely always thinking whether it makes sense to have the two products for more brands or not. So, you will see first results in next year. And I think that this is really intensive cooperation between CZUB and Colt, to make sure that we deliver on those. As as far as supply chain is concerned, obviously, I would say that we have advantage or advantage that we have a self-sufficient capacity here. Even though we have suppliers. It's not that we don't have any suppliers. But I

would say we don't see real structural problems in our supply chains, either in the US or in the Czech Republic. Obviously, you cannot exclude anything, but I will say that we learned a lot during the COVID times.

So, we were able to stock up a bit of materials, you know, in order to face it. And also, we have worked quite significantly on cooperation between two brands to combine the supply chains. So, there is an ongoing discussion and efforts by both Colt and CZ guys to make sure that the purchasing managers in each company are cooperating and maybe using their supply chains, you know, took advantage of the other company. So, this is what's happening. Yes, the risk is always there. But I will say that we don't see currently and a big hurdle to be able to deliver, to deliver to our customers, more hurdles will be always on our side to be able to flex, let's say to change production according to market requirements, you know, the production makes the ability of our suppliers.

Atinc Ozkan:

Perfect, thank you.

Klára Šípová

Thank you. And the next question comes from Peter Bartek, from Česká spořitelna. Peter, please go ahead.

Petr Bartek:

Good morning. Thank you for taking my questions. First, when I look at your guidance for the full year? The second half outlook looks slightly ambitious in terms of sales compared to the especially second quarter, there was a slowdown in the US as far as I already did. So, if you can elaborate on the origins, from what sources the healthy growth should come?

Where do you see chance to enter new governmental markets in the EU, specifically Germany? If you already have some results in Germany? Maybe also Hungary? What is the production in Hungary? How does it look like?

So that so that will be first question and second. The EBITDA margin guidance for second half is about 19%, or 16-22%. Basically, quite lower than in the first half. So, is it a level this 19% something we should expect, say in the next year or in the midterm? Or what do you think about it?

Jan Drahota:

First of all, answer to your first question about regional sales, I will say that, it will be big simplification to say that the US market is weak as such, there are segments which are really strong and where we struggle to supply the back orders, which we have and that are definitely segments which are weaker, especially the MSR segment, or the polymer frame pistol segments. So that's what I will say today. So, if I look at our position on that, we believe that in our markets globally, both military and law enforcement also commercial where we can supply our products. So, we when we give the guidance, we gave it with the full, let's say, understanding of the current situation and with confidence that we can reach it. We wouldn't give it otherwise. As far as individual European markets are concerned. We don't comment on individual contracts. But I will say that there are, you know, this year, there are no big contracts, you know, being awarded in Germany, we're asking specifically in Germany, but we are definitely working or our teams, our German team is working on opportunities, which are there and which are to be there. So that's coming to Germany.

As far as the second question was related to, to the EBITDA margin in H2, I don't know how you calculated it. Yes, I don't know how you calculate it for us. We don't expect the EBITDA margin to go down dramatically. At the same time, we know that there are holidays, they are you know, company holidays at the end of the year, so. So please look at the guidance and going forward, maybe command to that, we are not giving definitely guidance for 2023 and beyond. But our ambition is to grow. Our ambition is to let's say to keep profitability. We always repeat that we believe that profitability in terms of EBITDA above 20% is what is needed in our

industry to be able to invest to machines, to r&d and people. So, we don't plan to go down with profitability. So that's, the best answer I can give you. And we will take the measures in terms of cost, but most importantly, in terms of products to be able to reach, because it's about, it's about competitive products and competitive costs as well.

Pavel Ryska J&T Bank:

I also have two or three questions. So, Mr. Drahota, in your initial comments, you mentioned shifts in demand. Could you provide us with more color on that? What exactly that means, if it is that inside the commercial market, there are big shifts in demand, and you might be struggling sometimes to adjust to them or if it is in the in the public market? My second question concerns the net debt to EBITDA so now you have something around to 1.5. And if you are going to complete the acquisition of Spuhr and Dalhby, where do you expect your indebtedness to stand and concerning for the acquisitions? What kind of acquisitions that could be if you can comment already. And finally, if you have any comments on the payout ratio and the dividend policies, so for the last year, you paid quite a high dividend, which was a nice surprise, and if you could maybe give us an idea of where the payout ratio might stand for this year's profit. Thank you.

Jan Drahota:

Yes, okay. Thank you. So, shifting demand. Yes, definitely. You know, if you look at the global market, what we see is now that there is definitely, you know, growing interest, which is materializing demand on the MLE side, that's for sure. So, we see a bubble, let's say government to come back to the market governments to come back to the market, which was also levels, let's say, I would say delay caused by the COVID. So, there are two things, you know, lower spending and COVID. And we see that the governments are coming back, can we see the guys are busy, basically, the lead time that is slower, it takes more time or longer lead time, but we see quite attractive conditions that about it's always about executing at the end of the day, as far as commercial market is concerned, I will say the only comment I will have to shift in demand is the US commercial market. So, we see is that the most competitive segments and for me the most competitive there are the segments, which grew most during the COVID time, which was the polymer frame pistols and let's say you know, the MSR type of products, the demand has shifted substantially and then there are segments which are really healthy, and where we see really good pipeline and really good back orders. So, so, so, obviously, being a production company, it takes you know, for us, three to five months to adjust to the demand shift and so, so, that basically we are already adjusted, I would say and we took you know, necessary measures to first of all to be able to satisfy demand for in the segments where the demand is really strong, because we see substantial back orders in certain categories, which we see that it we will have difficulty still to justify or satisfy them next year. So, that's basically it. As far as net debt to EBITDA after Spuhr acquisition, you know, the multiple at which the SPV is assigned together with the earn out is, I would say, lower than our multiple so net debt to EBITDA should go to. So, it will I will say microscopic, I am done the calculation but it can be 1.7 times or 1.8 times. So, it's something which, is microscopic. And obviously it evolves in time because we are generating cash flow. So, I would say that this is not material to the net debt to EBITDA parameter. These are all questions?

Jan Ryska:

It was the dividend payout ratio.

Jan Drahota:

Yes, dividend payout, we had a discussion about it on the on the board. And as we are now in the process of planning, the 2023 and beyond. And we have a meeting where we would like to, let's say approved, together with the supervisory board, we would like to where we will formalize the dividend policy in three weeks, but I will say that our ambition is still to reward shareholders for their participation. So, you know, last year looked surprising because there are many extraordinary items in the net profit, so it even increases the payout, you know, particularly to levels which high this year, reflecting the high profitability of the business. Yes, I don't have a figure now. Sorry for that, but we will behave we plan to behave in the same logic