Good afternoon, ladies and gentlemen. We would like to welcome you at today video conference in connection with the nine months 2020 financial results published by Česká zbrojovka Group today. Please note that this conference call is being recorded, and since we have over 20 participants, I would like to ask you to mute your call. I would like to introduce today's speakers on the call. It's Mr. Lubomír Kovařík, the Chairman of the Board of Directors and President of the company.
Good afternoon, everybody.
It is Mr. Jan Drahota, the Vice Chairman of the Board of Directors and the Group Head of Finance. We will go through the presentation slide by slide. It's a short presentation, and afterwards you will have the opportunity to ask questions. You can ask questions either via raising hand on the Teams application or simply unmute your camera and make yourself available for questions. This conference call will be recorded, and the recording will be published, most likely by tomorrow on company's website. Now I would like to hand over to Mr. Kovařík to start the presentation.
Thank you so much, Klára. Good afternoon, everybody. Again, basically, we can say that we have very successful period for the first nine months of this year. From the sales perspective of view, we reach revenue almost CZK 5 billion for this first nine months of this year. We increase our sales by 10% compared with the same period of the last year. Main driver for our sales was civilian market in the United States, where we recognize a strong demand for our products, which is associated with huge increase of demand on the civilian market. We received top award in a Digital Transformation Competition 2020 with first online configurator of civilian firearms in the industry. Our strategic projects are running. We continue with discussing with Arkansas Authority about the conditions. We have agreement about all key points of our project.
Despite the lockdown caused by COVID-19 pandemic situation on the world, we expected start of construction in Arkansas project in early 2021, start of production in end of the next year, and full ramp-up in 2022. From acquisition perspective of view, we acquired 25% stake in Spuhr i Dalby company. This is the Swedish manufacturer producer of optical mounting solutions of firearms, upgrades with very strong focus on law enforcement. Česká zbrojovka Group received granted time exclusivity to conduct due diligence for the potential acquisition of 100% stake of Colt company, Colt Holding Company. Negotiation of the definitive documentation is anticipated to be ready for execution by the end of this year. Can we go the next slide, please? On next page. Thank you so much. We reach, as I mentioned, we reach revenue CZK 4.9 billion for the first nine months, sorry.
These numbers are presented by 337,000 of sold pieces, which is more than 18% higher figure than the same period of the last year. Last year, we sold 284,000 pieces. As I mentioned before, the main driver is demand on the U.S. civilian market. We sold 260,000 pieces of pistol for first nine months. This number is more than 23% higher than the same period of the last year. And we sold also 122,000 pieces of long guns, more than 10% of the same period of the last year. If you look for our breakdown from the geographic perspective of view, we can see that 70% of our revenue were generated from the U.S., near 10% generated from Europe, excluding the Czech Republic, near 7% from our revenue or sales was generated by the Czech Republic, and more than 13% from the rest of the world.
Now at the moment, I would like to ask Jan about the continue of the more detailed information from the economic perspective of view.
Thank you. As Luboš already said, the revenue, we grew in terms of all key performance indicators. In terms of revenues, we reached almost CZK 5 billion of revenues in the first nine months of 2020, exactly CZK 4,964,000,000 , which is around 10% more than in the same period of last year. We grew, and we maintained the level of operating profit margin. We grew in terms of absolute amount to CZK 860 million of operating profit, and we maintained the operating profit margin at above 16%. In terms of EBITDA, as you know, we had hit to the EBITDA in the first half of the year by revaluing our derivatives portfolio or hedging portfolio, which we have, which is mostly non-cash based. In terms of EBITDA, the EBITDA decreased by a little bit above 7% to amount of CZK 152 million .
On this graph, in this chart, you see that if you take into account the revaluation, the non-realized gain on the revaluation of the derivatives, the increase of EBITDA is basically in line with the increase of the operating profit and revenues. In terms of net profit, it's the same story. The net profit is slightly down to CZK 478 million for the first nine months of the year. It's also influenced by the revaluation of derivatives portfolio, which once again, I will repeat, it's mostly non-cash. Also, it's as of end of September 30, 2020, and as you know, there was, again, big movement in exchange rates, euro and US dollar. Czech koruna appreciated quite substantially. As of today, the value would be quite different because as of today, the derivative portfolio will be closer to flat or slightly positive.
That's also important to say here. For the first time, we are ready to give guidance. We are giving guidance for three KPIs. One is revenue. We see our revenues at the end of this year in the range of CZK 6.15 billion-CZK 6.45 billion. In terms of EBITDA, we see the EBITDA in the range of CZK 1.25 billion-CZK 1.45 billion. The risks to both figures, if I start with revenues, is basically our ability to produce, because we see very strong demand for our products worldwide. It's not about ability to place our products, but ability to produce products, because it's not only about the U.S. market, which is very strong, and we have a huge backlog there of orders, but also other markets where we see quite strong demand, and those markets are both civilian and military enforcement.
Very strong pipeline and very strong demand for our product. In terms of EBITDA, and you see it quite clearly by the impact on the nine months period. The risk which we see there or the unknown, is revaluation of the derivative portfolio. As of today, I would be closer to the higher end of the range and time will tell us, but what is important to say that the business which we are doing is a profitable business. Definitely, in terms of operating performance, we know that if we are able to make the guidance in terms of revenues, the EBITDA will come along because all the markets where we sell our products are profitable for us. If we go to next slide, we can briefly discuss also cash position or cash flow generation of the business.
Once again, the business is profitable and also we generating quite strong cash flow. The first nine months of the year are influenced by several factors. One is definitely profitability, also it confirms that the derivative impact is non-cash because the cash flow is very strong. This operating cash flow is very strong. Also, what is important to say here is that it's influenced by the working capital management, we did manage to cash in some large receivables, which were outstanding at the end of last year. It had positive impact on the operating cash flow. That's this. In terms of investing cash flow, so CapEx, for the nine months of the year, we spent CZK 283 million on CapEx. For the first time as well, here we will give you guidance on CapEx for the full year.
It will be in the range of CZK 350 million-CZK 400 million, which is, I would say, in line with the guidance which we are giving during the roadshow, where we are saying that we expect the long-term CapEx to be 5%-7% of revenues, and here we are around 6% of revenue. It's there. We continue to invest quite substantially in our production capacity in Uherský Brod, as you know, our main production facility, in order to be able to satisfy demand for our products. That's this. If you go to next slide, leverage or our indebtedness. As far as the debt structure is concerned, it's very simple. Most of our debt is in bonds issued by Česká zbrojovka Uherský Brod, by the main operating company, CZK 2 billion- CZK 250 million.
We draw our available credit facilities, which we have in the amount of around CZK 700 million, very rarely and currently, or at the end of nine months of the year, the drawdown is around 10% of the available capacity, CZK 70 million. Negligible. We have quite substantial available credit there. In terms of relative leverage, our net debt to EBITDA is around 1x EBITDA on the rolling basis for as of nine months of the year. Absolute level of debt is CZK 1.22 billion. What is probably worth mentioning is that this slide doesn't take into account the proceeds from the IPO. With those, the net debt to EBITDA is around 0.3x, 0.4x EBITDA. Very strong financial position or very low leverage, very conservative.
We like it this way, and we like it for two reasons, because we believe that it is appropriate for business in our industry to be quite conservative, but at the same time, it gives us flexibility for larger moves if we wish to execute those. Luboš mentioned that we are currently having advanced negotiations with a potential purchase of Colt Manufacturing, which is a household name in the industry, one of the most famous names and also very strong name in the military enforcement area. We know that we have ability to execute even larger moves if we wish to, and if it makes sense according to our strategy. That's for me.
Thank you, Jan and Luboš, for the management discussion. Now, you will have the opportunity to ask questions. Please make yourself visible on the camera and raise your hand with the question. First question comes from Mr. Jakub Mičian from Wood & Company. Jakub, go ahead.
I have a few questions, if I may. Following the IPO, what do you think that would be the financing options for the Little Rock project? What is your current thinking on that matter? Second question would be, could you share more details on the potential M&A of Colt? I know that it's obviously due diligence is being done at this stage, so you probably cannot share anything. If there is something, could you share some details? Maybe last question would be, you mentioned, Mr. Drahota , about the big backlog in the U.S. market. Can you quantify how much demand you're expecting in the near term after the presidential elections in the U.S. market? Thank you.
Thank you so much. Jan, may I ask you for the first part of the question?
As far as Little Rock is concerned, we are comfortable that we raised enough money to be able to realize the investment needs, which are needed in the next 18 months. We believe that we are well off there and we have also available potential debt financing there. I think that as far as the Little Rock project is concerned, the IPO served its purpose and we should be able to finance the project without additional substantial debt on the balance sheet. That's the first thing. As far as Colt is concerned, you said it correctly. At this stage we are not ready, prepared, or able to share more information with you. We mention it because this is a transaction which in case we decide to go for it and sign the documentation, we will have to have it approved by the general shareholder meeting.
It will be a public transaction before we implement the transaction. What is maybe important to say that, in terms of profile, Colt Manufacturing is a potential target with just great complementarities to CZ because it's very strong in areas where CZ is only growing. It's a household name in military and law enforcement. Definitely it would accelerate our efforts to become real leader of the industry, in the small arms industry. It would accelerate our efforts, not only in terms of the presence in military law enforcement, but also in terms of presence in different markets because, as a U.S.-based company, it's present maybe in other markets as we are. That's to that. Last question was about backlog in the U.S. It's a tricky figure to give you, because it's based on non-auditable and difficult data.
I can tell you that the backorders which we have in the U.S. now are, if they were really big, and also one more disclaimer there is that the nature of the backorders in the U.S. is this is demand from our distributors and dealers. Obviously, it can fluctuate. It can be canceled as well, potentially. Our experience is that we have been structurally short or we had structural head backorders in the U.S. in the amounts of tens of millions of dollars. Now, it's in excess of $100 million. It's quite substantial and definitely the market is strong and the demand for firearms is really strong in the U.S., and we don't see that going down in the foreseeable future.
Thanks so much. If I can just have one follow-up on the Colt acquisition. I presume that when you mentioned that 100% of the company would be potentially acquired if the due diligence is complete, obviously that probably comes with some production facilities that they already have. Would you consider selling them or canceling the Arkansas project, or what would be line of thinking in this regard?
Good, but premature question, I would say. Good question, I would say premature at this stage. What is important to say that for us, the two projects are now running in parallel and we are committed to have production capability in the U.S., and we chose Arkansas to build our production capacity there. That's how it is. As far as the potential acquisition of Colt is concerned, obviously they have product capacity and for us, what is important to make sure that we use all the potential synergies, complementarities of the two projects. If we conclude one which is not yet for sure done.
I would say that what is important to say that, and you have to trust us, that we are definitely evaluating all the potential synergies between our European business and potential M&A target, and between our U.S. efforts in terms of distribution and production and the U.S. target. That's basically all I can tell you and what is really at our level because it's really not so easy to say that one is supplementing or substituting the other because that's not simply true or this is not true according to the view which we have on the situation at the moment.
Understood. Thank you very much.
Welcome.
Thank you, Jakub. Thank you, Honza. If you are ready to ask questions, please raise your hand via the Teams application or speak to the microphone directly.
Good morning. This is Petr Bártek, Erste Group. Can you hear me?
Yes. Hello, Petr. We hear you very well.
Definitely, but this is not morning.
Sorry. One more question to Colt acquisition. From the publicly known information about Colt, which is quite rare, I would assume that it will be a relatively big acquisition for you, say half of your size or maybe even more. What are the financing options would you consider? Would it be equity financing or what's your actual target leverage after this acquisition? If you can talk a little bit about that. Then a question, if you have any alternative M&A targets specifically in Europe, or is it the only one which you were working on recently? In terms of your Q3 results, if you can little bit elaborate on each of the markets, how it's developing in the U.S.A., how you can see the demand in Q4 and in 2021 after Biden's victory. If there is any threats you would see.
In terms of the Czech Republic, relatively low revenues in Q3, so if there is any change in the contract with the Czech Army or any development in the civilian market in the Czech Republic and in Europe. It would be very interesting. Thank you.
Okay. Thank you so much. I will answer for maybe the last question about the Czech Republic, about the Army of the Czech Republic and civilian market. As we mentioned before, as we mentioned in the presentation for IPO, the main contract is the Army of the Czech Republic. This is the framework contract. This is from 2020 to 2025. We expected the whole package will be from 2021 to 2023. It means the next two years, we will fulfill the arrangement with the Army of the Czech Republic. All necessary tested as a control test and called the Army test, and we are ready to fulfill this contract. The first part of the contract is the next year. The same situation is the civilian market.
We expected that the next year will be very successful, very much more higher than in the Czech Republic because this year, the situation was closed due the pandemic situation. It was not only in the Czech Republic, it was all Europe. I would like ask Honza about to continue with the answer about the Colt.
Yes. Maybe to add to that, you know that when we are presenting the six months figures, we commented that some of the Western European markets especially were hit by the COVID, but we see continued demand there on both civilian and also selected military law enforcement clients or civilian institutional clients there. We believe that the market is quite strong for our product there as well. That's addition there. As far as the potential Colt acquisition and details, I would say that the synthesis or the logic would be that we first conclude our works. A part of the works is definitely, or one of the stream is financing or the transaction.
We consulted with our shareholders, meaning we call a general shareholder meeting we present the case to them because this transaction will have to be approved by the general shareholder meeting, we present the business case to shareholders at the general shareholder meeting. We implement it. I would say it's very premature to discuss what is target leverage and what are the financing options. We know that, you see that the group has very little leverage. We know that we have quite wide range of financing options, I think that anything can be implemented because we know that in combination with Colt, we would not reach too aggressive leverage structures if we implement transaction which we want to implement. I would say that at this stage, unfortunately, I'm not able to give you detail.
What I can tell you that we haven't changed our opinion on the business. We still believe that our business deserves not too aggressive leverage. We don't feel like financial engineers. We believe that we are more industrialists, we should behave like ones. At the same time, we know that the business is generating substantial cash flow, we will propose to shareholders something which will make sense in terms of the overall package to shareholders if we decide to implement the transaction, to make sure that there is a lot of value created together. I know it's not too concrete, it's vague, but that's the best answer I can give you. If I didn't answer anything which you also asked, just, maybe U.S. market, last question there.
U.S. market is very strong market. We believe that the market will remain strong for foreseeable future. Definitely there is a bit change paradigm as you saw that there was a lot of new and first-time buyers in the U.S. on the civilian market. We don't see that finishing with elections. It's really the situation. As we already discussed during several presentations before the IPO, we are not here to speculate about potential changes or potential restriction, several regulations. What we know is that we have very wide portfolio of products. We base our portfolios. You see our bread and butter is pistols. We know that our products are sought after. We are not in AR-15 platform. We are very comfortable about our ability to increase our sales and our position and market share in the U.S. in the foreseeable future.
That's how we look at business. That's how we plan our business for 2021.
Very good. The second question from Petr also concern potential or alternative M&A targets in Western Europe or in Europe in general.
Definitely for us. We execute our strategy. Strategy is to become global leader in the industry and also to not only in terms of firearms production, but also we are looking at, let's say, products which are complementing our products, will be optics, optoelectronics or ammunition or specialized ammunition. Definitely we are looking at the market. I would say that this is right to say that if we were to implement the acquisition of Colt, then we would need some time to digest. We are not crazy here. We believe that this is a definitely substantial acquisition in terms of the overall impact on the group.
We know that there are still opportunities for further consolidation of the industry making the group really unique in its one-stop shop capability, especially versus institutional customers, which is important and will be more and more important going forward. We see opportunities both in the U.S. and Europe as well, obviously.
Thank you.
Maybe if I have a follow-up question on the Little Rock project. If I understood correctly, you want to start the construction early next year?
Yes, correct.
Start production in middle of 2022?
Start production end of the next year and the full production 2022.
Okay. The backlog is currently over $100 million, right?
We are very careful about the backlog figure, and I tell you why, because the backlog figure is a figure which is something which is, especially in the civilian market, these are orders which are canceled by our customers. We are very careful about interpreting those orders. Definitely, the current level of backlog we have not seen in our history yet. I would say that we never reach such high levels of backlog for our products. If you look at the sales, which we realized for nine months, it's incredible. Backlog figure is about $100 million, that's correct. I would be very careful how to interpret the backlog figures because of the strong demand. People are maybe placing orders to make sure that they get at least one. It's really difficult to estimate how much is inflated and how much is real.
Definitely the backlog is very strong and we know that the demand is very strong for our products. What is important, one more thing here, distribution channels are pretty empty. That's important to say that we know that, no matter what happens to the market, distribution channels have to get more stocked up because they are very empty now. There is really lack of product from anybody in the distribution channels.
Thank you.
Okay. Thank you, Jan. Any other question?
Good afternoon, this is Pavel Ryska from J&T Banka. I don't know if you hear me at the moment.
Yes, I can hear you. Go ahead.
It's okay.
Thank you. Because I'm over the phone, not over the application. I have one more question related to the figures for the first nine months of the year. If I got it right from the figures, the growth in the number of guns or weapons sold was quicker than the growth in revenues. Just to interpret this, do I get it right that there was a certain shift towards short guns in the product mix that you sold, which caused the average selling price to be lower during the first nine months of this year compared to previous years? If so, does this mean that the average buyer in the U.S. is, let's say, an every civilian who is buying a short gun for his or her defense purposes, compared to, for example, sport shooters and other categories of customers?
That would be it. Thank you.
Honza, do you want to answer?
Yes. You said it. Your interpretation is pretty accurate. Obviously, and you saw it, that the number of handguns, meaning pistols mainly, sold, outperformed long guns quite substantially in the first nine months of the year. So that's it. We did grow quite substantially on the, and probably faster in terms of percentage, an absolute amount of pieces in the polymer frame pistols. And that there, the value of polymer frame pistol is definitely different. Absolute value of the polymer frame pistol, P-10 is on the retail market sold for, on the U.S., if I take a reference U.S. market, it will be sold for around $500 in compact size. And for example, Shadow 2, our sporting icon, will be sold for 3x the value.
Definitely there is a huge growth, and especially first time buyers are buying something for self-defense, it will be polymer frame pistol. You nailed it, so there is nothing more to add.
Okay
This is what we discussed. The more military law enforcement clients are concerned, especially Luboš discussed the Czech army, then the split shifts towards the long guns, assault rifles, and then the value of individual pieces is much higher because of the complexity of the product.
Okay. Thank you. Maybe just one follow-up question popped up in my mind. The price itself of, for example, short guns or long guns, what is it doing at the moment? Are the prices on the market, the end customer prices, are they going up or are they staying the same in the U.S. for, let's say, an average pistol in a shop? Or is the development very different?
It depends, really, and I would divide the answer to the question to two pieces. First of all, what is in general on the market, then how we react. First of all, in general, the prices on the market are growing overall in general by inflation plus something. Let's say inflation. U.S. inflation may be higher, so let's say inflation. Obviously, there are markets where there are segments of the market where you have higher and segments of the market where you have lower pricing power. I can tell you that if you see that there is a segment of the market we have higher pricing power, then we might increase the price more aggressively. If there are segments of the market where we have lower pricing power, we will stick to what the market gives us. What market takes, so that's how it is.
Okay, thanks.
The next question comes from Bohumil Trampota from Komerční banka. Boh, go ahead, please. I have another registered question, and that is coming from Jakub Mičian from Wood & Company.
Sorry, just one more follow-up from my side. A quick question on the logistics costs, which were somewhat a headwind in the first half because of the lockdowns. Now, looking into the fourth quarter now, is there a renewed lockdown pressure? Is there any reason to think that logistics costs would be an issue once again in fourth quarter?
No, not really. We don't see that. I think that the world got accustomed more to it. I think that even ourselves, we have plan B and C, we don't look at logistics now as the biggest, let's say, challenge to our business. Obviously there can be situations where it's more expensive, but I would say it did went down quite substantially with the renewal of the passenger flights. It went down and also it made us think more about, or twice, about some other commodities, how we handle the logistics there. I would say that it's not a major concern for us.
Exactly. It is nothing significant for us.
Thanks.
Very good. Do we have any other questions from the participants?
This is Petr Bártek, Erste again. To the cost side, there was still a relatively high increase in personnel costs, if you can elaborate a little bit on that. Maybe also on the progress in Germany and in Western Europe with setting up the sales force there, how it's developing. Thank you.
Okay. Sure. I will answer that. There is no significant change to our discussion for the six months period. First of all, yes, you are right, there is an increase of personnel costs and it's a mix of different reasons. One of them is setting up a Western European team, so increasing the cost base there because it's a high-cost market. Second one is that we pushed and a part of the bodies of the company were not in the past, part of the, let's say, salaries of the company. It's this base. There is a base increase because of the inclusion of new people there. I would say that overall, we believe that we have under control the cost for salaries. As far as the Western European efforts in general are concerned, it's really very strong.
There are a lot of streams and a lot of efforts done on many fronts. We managed to certify some of our products for civilian market, which we didn't have certified in the past. We are working on institutional clients quite intensively. I would say that we look at it as not a one-year project, but medium-term project, three, four-year project. We see that we already have some quick wins, and we are very optimistic that we are growing our presence, respect, and profitability in those markets. That's basically it.
Thank you. Yeah.
Thank you. I just received an email from one more participant, from Komerční banka, that it couldn't ask questions. Maybe, Boh, would you like to try again? We see you muted, so maybe if you unmute, we could hear you better. We are still muted, Boh. Okay. Do we have any other questions? Maybe Boh will ask his questions via email or.
Okay.
Okay. No.
Okay. In this case, thank you very much.
Thank you very much. Thank you, Luboš and Jan, for taking your time to spend with investors. Any other questions, please send us an email or call us either later today or tomorrow. We were very pleased to have such a great participation on the call. We look forward to talking to you soon. Thank you very much.
Thank you so much. Thank you. Bye-bye