Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Schouw & Co. Q1 Interim Report 2019. Today, I'm pleased to present CEO, Jens Bjerg Sørensen. [Operator Instructions] Jens, please begin.

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

Thank you very much and also welcome to our Q1 conference call. Overall, Schouw & Co. showed a good start of the year with a positive growth. You should also bear in mind that Q1 is our smallest quarter due to a strong seasonality in terms of our companies. So the revenue overall was up by 21% to DKK 4.7 billion, and we saw a mix of both organic growth and also effects from our CCS acquisition. EBITDA increased to 28% to DKK 401 million. It was up 12% if we exclude for IFRS 16 effect. Profit from our associated companies increased due to a very good development from our fish farming operations in Australia and Chile. We have a stronger focus on our net working capital and it's ongoing and will continue into 2019, and it's on top of the agenda of management in all our businesses. Cash flow from operations improved to DKK 100 million, and normally, we have a rather weak cash flow in Q1 so we're very satisfied with that development. The guidance for 2019 will be maintained both on a group level and also on individual businesses. Our revenue is expected to grow 10% to around DKK 20 billion. EBITDA will be in a range of DKK 1.8 billion to DKK 1.975 billion. We have to bear in mind also here that we expect to see a positive effect from IFRS 16 of around DKK 200 million. So that was the overall introduction. Let me look a little bit into each of our company and starting with BioMar. If we look at BioMar, the revenue was up 13% to DKK 2.1 billion. Volume was up 12% to around 250,000 tonnes for the quarter. Also here, we saw a very good development in all 3 positions. We have also had a positive climb in the conditions in the quarter. EBITDA in BioMar was up from DKK 80 million to DKK 132 million. And again, we experienced a positive effect from IFRS 16, but underlying, our EBITDA increased 22%. In fact, BioMar is the company in our portfolio where we see the largest effect from IFRS 16. In general, we had a very good margin management and also positive sales of what we call functional feeds. Our Salmon division, which is the biggest division, delivered strong results, and Norway performed better than expected. A few highlights from Q1. You could see a very good progress on the new Tasmanian factory we are building and also on the capacity extension going on in our Danish factory. We got full ownership of our joint venture in Chile, where we acquired the remaining 50% from AquaChile and gives us an additional 60,000 tonnes capacity, which we hopefully can start utilizing in second half of this year. Guidance for 2019 is, as mentioned, maintained. We see an EBITDA in the range from DKK 820 million to DKK 890 million, a gain here plus IFRS 16 effect of around DKK 130 million on EBITDA. As usual, we have big contract negotiations going on in Q2 and during the summer period. However, we have seen a good start of the year, and it gives full comfort -- that gives a good comfort for our full year outlook. And also some of the contract negotiations has already come out on a good term. From BioMar to Fibertex Personal Care, where we saw a revenue increase of 9% to DKK 590 million, mainly driven by higher raw material prices. Volume was flat. It is specifically due to development in Asia where we see a lack of volume from our big branding customers in China. EBITDA was increased from DKK 83 million to DKK 99 million. We had a positive effect from raw materials but also good development in sales of what we call value-added products or products with a softer range of the materials. In Q1, we completed our new U.S. print facility and it's now ready for commercial production and will come into production on full steam here during Q2. Guidance for '19 maintained. EBITDA is expected in a range of DKK 320 million to DKK 340 million. As mentioned, a very good and promising start of the year. However, we will and expect to see negative effect from raw materials in the incoming months, but the guidance will be maintained. The next, Fibertex business. Fibertex Nonwovens, we saw an increase of 11% to DKK 450 million. Especially here, we saw good volume development in Europe as we also expected. And then, we had full effect from our acquisition in Brazil last year in the quarter. Our EBITDA, however, was down from DKK 45 million to DKK 39 million. We still see some negative effect from raw material's positions from 2018, but it's a -- we are nearly through these raw materials. In fact, we also saw our South African operation that has been struggling over the years in a slightly better performance. We acquired a new site in U.S. in Greenville because we have some expectation to the U.S. market in future. This acquisition gave us expected negative effect in the quarter, and we also had the costs for the acquisition. So all in all, that had effect on our EBITDA. In the Q1, our new factory in U.S. in Greenville has been integrated. Of course, there's a lot of work going on with that. We have, as mentioned also earlier a strategic review ongoing in Fibertex Nonwovens with the aim of finding ways to improve profit and return of invested capital. And that's the main aim and not because we continue to sell or potentially exit the Fibertex Nonwovens, but we will come back to the strategic review after in H2 when we have finalized it. 2019 guidance maintained. It's more likely in the lower end than in the high end. EBITDA is in the range of DKK 165 million to DKK 185 million. And we have, as mentioned, startup costs from our newest factory in this guidance. GPV had a revenue of DKK 718 million, a big increase, but it's cost full effect from our acquisition of Swiss CCS, which we have integrated into GPV. EBITDA was up from DKK 25 million to DKK 46 million. We have seen a satisfactory development. The post-GPV, or GPV we had before the acquisition that delivered DKK 23 million out of the DKK 46 million in EBITDA. We had, in fact, experienced a huge currency effect from patch -- [ tri patch ] of around DKK 10 million negative in the quarter. Also, we have seen integration costs and purchase price allocations of a negative effect of around DKK 10 million. The integration between the 2 companies is running very well. We are running one company, one name. It has been received very positive in the markets with a lot of new customers in the pipeline. And we have already experienced the first cross-selling opportunities. Our Mexico operation, which is from the old GPV and, as you know, we have been struggling with the greenfield startup, shows a good progress but will also as we expected, be loss-making in 2019 but on a much better tone than we saw like before. 2019 guidance will be maintained. EBITDA in the range from DKK 190 million to DKK 210 million. Here in these figures, we see one-off restructuring integration and purchase price allocation cost of around DKK 50 million. From GPV to HydraSpecma. Very positive story in Q1. Revenue increased 11% to DKK 556 million, mainly driven by sales in wind turbine segment and also the segment we call construction equipment. EBITDA increased from DKK 49 million to DKK 60 million. We've seen very high efficiency and strong margin management. Our China operations turned around and are in most profitable and in a very good development. We see, however, still long lead times and increasing prices on the main components, and it has affected our EBITDA as well as very, very weak Swedish krona. A few highlights from Q1. We have opened a new facility in [indiscernible] in Poland 7,500 square meter brand-new facility. We will improve the efficiency in the coming years, see a strong backlog in the main segments. And we are -- have also started and are preparing production of big hydraulic units in China. Our guidance for '19 will be maintained with a positive outlook EBITDA in the range from DKK 210 million to DKK 230 million. HydraSpecma have -- they have a very strong focus on reducing their net working capital, but our global footprint and difficult lead times on components increases our inventories in general. Our newest company in the family right now, portfolio Borg Automotive, experienced a revenue decline, 5% down to DKK 230 million. We have since the beginning of Q4 '18 experienced a rather soft European markets and it continued also in Q1, that was expected. We have kept our market share through sheer stable customer base but still face rather soft demand. EBITDA was down from DKK 38 million to DKK 33 million. And of course, effect from lower sales and lower volume but also a more cautious regulation on our costs. So we have set aside more on core regulations in '19 than we did in '18. We have in the quarter done a lot on streamlining. We are streamlining the company. We had -- we are restructuring our facility in Belgium with strong cost and contingency plans and we are scaling down on the FTEs in Poland to withstand the lower volume expect still to increase it over the year. And we have started new facility for production of brake calipers in Lipiny, Poland. Guidance is maintained in spite of soft markets, EBITDA in the range of DKK 140 million to DKK 150 million. And as mentioned, we expect markets to normalize more over the coming months. Short wrap up, we have what I call a positive outlook in our largest businesses and a softer outlook in 2 of the smaller businesses. But still, we expect to grow in 2019 revenue around DKK 20 million. Guidance is unchanged, EBITDA in the range of DKK 1.815 billion to DKK 1.975 billion. Strong focus on profitability and we continue to focus profit over volume in all our businesses. Also just to finalize, I would like to mention that we are at the end of what we call a major investment program that has been going on in all our companies over the last 2 years, strong focus on utilizing capacity. We have -- we will see cash flow effect, as investment cash flow effect from the remaining investment programs, which we decided back in 2017. And we will have strong efforts on reducing net working capital and drive operational cash flow also in 2019. So with these remarks, I would like to open up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Jonas Guldborg from Danske Bank.

[Jonas Guldborg Hansen, Analyst]

This is Jonas. First of all, if you could talk a little bit about this strong focus you have on working capital. What especially are you doing? And maybe give some -- try and talk about how you're doing it? And maybe also where you think you will end for the year? Then on nonwovens, you have this negative effect from raw material prices on your earnings. Maybe you said it and I didn't hear it. But are you able to give a number on this negative effect on EBIT? And then the last thing is on this [ core ] regulation, you said you put more site in 2019. Could you just try and explain what this means and how much it is?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

Yes. First, on the working capital, we are running at what we call a recovery program on working capital and a strong focus in all our companies. And then we are running a specialty program with 4 of our companies in Asia from corporate, where we have some outsiders to help doing a lot of analysis, et cetera. So in fact, this strong program running and, of course, we expect the net working capital to reduce -- to be reduced over the year. I cannot put a 100% exact figure on expectations so far, but we initiated this program. It is new and it will drive the net working capital down definitely. If we -- if you look into the nonwovens, where as I said, we still have had some raw material effects from 2018, where the raw materials were high. We buy raw materials from India, China and around, and we have been having big stocks but still a lot of on stocks that we have been using in '19, I would say around DKK 5 million, DKK 6 million effect on that. If we look into the core regulations, it's -- we normally every month set aside something on this regulation. It's a rather complex structure but, last year, we experienced that we have been maybe not conservative enough in the start of the year. If you remember, we had to do a negative regulation at the end of the year. So this year, we've started more, I would say, much more conservative. And in fact, it's around DKK 6 million more in the quarter than last year.

[Jonas Guldborg Hansen, Analyst]

And these DKK 6 million then impacting EBIT negatively?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

Yes, impacting EBIT negatively now. But maybe it can maybe come back but it is -- it's more that if you compare '18 to '19, then we have a much more, you could say a cautious view on these regulations because we had to do something last year. So around DKK 6 million more in regulations.

[Jonas Guldborg Hansen, Analyst]

Okay. And then the net working capital program you are running, that would have effect from this year?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

Yes. Yes. It is already having effect. And it will have effect from this year but not full effect. We are -- it's a big program we are running and then starting -- have started running this.

[Operator]

And the next question comes from the line of Laurits Kjaergaard from ABG.

[Laurits Louis Kjaergaard, Research Analyst]

And my first question is when you gave your initial guidance for Q4, you essentially had 2 months of visibility for this quarter, and yet BioMar has delivered 13.5% growth and profitable space by 11.3% growth. Could you just guide us through what you're expecting for the rest of the year on this top line because it seems that you're guiding for almost low or even negative growth for those 2 businesses for the rest of the year. What's the current guidance?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

You could say so for the -- we also see -- I think we have had a good volume development in BioMar in Q1. And this volume development especially in Norway and Chile was bigger than we expected. Now we are going into the big contracts negotiations. And as you may remember we lost or declined a big contract to Lerøy last year had a full effect from the 1st of April, meaning all the volume from Lerøy is gone now and we had maybe a little more volume in Q1 from Lerøy, as we had expected. And also biological conditions in Norway was much better than expected. In fact, BioMar's volume grew 11%. Then looking into HydraSpecma, we've also had a very, very strong Q1 because we had -- we delivered more into the wind turbine industry than expected, and we expect the wind turbine, our deliveries to that to be a little slower in Q2.

[Laurits Louis Kjaergaard, Research Analyst]

You already mentioned in BioMar that you had a few negotiations and that was coming out on good terms. Can you put a few highlights on that?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

We're saying that we still see a lot of strong competition, but we have gained a few contracts and we also lost a few. Again, with the mindset that we are looking at profitability and not on volume, of course, we need some volume to run our business, but we have our profitability as a #1. But we have had the positive experiences from some of these negotiations, but that's still a long way to go.

[Laurits Louis Kjaergaard, Research Analyst]

That's very clear. Just one last question for me and perhaps I'll come back. On GPV, you mentioned a few large customers' experience reduced business activity during the quarter. Is this for GPV? Or is this for CCS? And also how is acquisition doing in terms of what you're guiding at the moment?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

In fact, it was for GPV and a little bit for CCS because the CCS are having some customers doing business are in the semiconductor business and then they have been pretty low. So order intake in the first quarter was not disappointing but lower than expected but we've seen order intake ticking up again. So that's what we can say on that. You had one question more, I forgot that. Integration? Integration, sorry. Integration has so far really been successful. I said also one company, one name started out first day with the same name, a lot of things going on. And we have started to see reaping the first low-hanging fruits, a lot of things that's going on. Of course, there's still a long way to go, but so far, very positive and it's 2 cultures that came together. And normally, we will see more complications than we have been seeing so far.

[Laurits Louis Kjaergaard, Research Analyst]

That's clear. And on Mexico, it's on GPV. What's the adverse effects impacts, therefore, for this quarter?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

It's the same as last year.

[Operator]

And the next question comes from the line of Claus Almer from Nordea.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Also a few questions from my side. It's about the 2019 guidance. Jens, you mentioned in the report and I think also in this presentation that the guidance is for several divisions in the higher end of the range now. Why didn't you lift the low end of group guidance? That will be the first question.

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

It's a good question, Claus, but I think we have been -- we still feel that we have this stress in our guidance and we feel comfortable with that. And we also feel that we are much more on solid ground when we get into second half because we have these contract negotiations and so on going on. You also know that over these months, it's very, very important what's happening. So that's the reason behind it. And then we see some disturbancy on currency and things and a little soft demand somewhere. So that's the reason.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. And are you still expecting needing -- winning some new contracts in Norway during the contract’s negotiations during the summer months, right?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

We expect to win; you can say I [ want ] a few new contracts or increase volume in some of the contracts we are already in. So it's a dual gain. Sometimes, it's easier to gain more volume in a contract or with a customer you are already supplying because of the quality logistics and so on. So it's a mix of both.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. And then just finally, maybe you could update us on pricing development and excluding the raw material impact in -- within BioMar in the different markets, is price or contribution margin going up, down or flattish compared to what we saw maybe in Q1 and Q4 last year?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

I would say it's a big question, but I would say that it's very, very broad, I would say. But if you look at Norway contribution margins, margin has been down in Q1. But then it's a mix of product. There's a lot of things you can do on your value-added products, et cetera, et cetera, but they are down. But looking in general in Chile and Scotland, I would say it's around the same level. Ecuador may be a little bit down because mix, product mix, et cetera. So all over, maybe a little bit down in [ Salmon ] region and stable in the other ones, something around that. But nothing to really worry about.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. And then just as a final question, the situation in China, have you seen -- are you starting to penetrate some of the niche local clients or customers. And at what price?

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

Yes. We have not gained any new customers yet in China. We have a task force and a strategic task force operating in China now, and I think we expect to gain the first customer. Maybe we've got 1 or 2 very small customers, that I'm not fully aware of that, but nothing significant. But we expect from the second half to start selling into China. And also because we need to decide on what -- how to distribute and should we set up special distribution center, et cetera, et cetera. So it's a rather big start that's going on, but we want to penetrate China in a different way.

[Operator]

[Operator Instructions] And as there are no further questions, I'll hand back to you, Jens.

[Jens Bjerg Sørensen, President, CEO & Member of Management Board]

So thank you very much for listening, and also thank you for the questions. So goodbye from all of us.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.