Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2022-Q1

[Jens Sørensen, executive]

Hello, everyone. Welcome to the presentation of Schouw & Company's Q1 report. I will do the presentation, and then after this presentation, there will be Q&As, and I will instruct you later on how to do the Q&A session.

2022 Q1 was a quarter that suddenly became very turbulent for Schouw & Company. We saw a huge impact from the Russia and Ukraine conflict, uncertainty in general increased and it has been really challenging for all our companies and organizations around the world. But still activity continued to be at a very high level across all our companies. Our order book is still strong. In fact, we have an all-time high order book as we speak.

Revenue for the group was up 28% to DKK 6.3 billion, impacted by higher volume and of course, also a huge effect from increasing raw material prices. Our EBITDA was down 24% to DKK 364 million. However, looking at what we call the underlying profitability, then we saw it as very speed goods. We had a lots of negative effect from exploding costs, especially freight and energy impact of around DKK 80 million in the quarter. We also had an impact from what we mentioned and called one-offs of around DKK 72 million. So all in all, the quarter was impacted around DKK 150 million. Our net working capital increased from Q1 '21 today with DKK 2 billion and from year-to-date with DKK 1 billion. We have, of course, very, very strong focus on the development of our net working capital, but we also have to say that we have taken strategic decisions on being able to supply our customers around the globe. So of course, we have been building inventories over a period of time.

Looking at our -- the largest company in our portfolio, BioMar, then revenue was up 34% to DKK 3 million Here, we had also a very huge impact from increasing raw material prices. But under that, we saw satisfactory growth of our volume of 8% especially our Salmon division and our LatAm division showed very good development in the quarter. We have had some biological challenges in Salmon division, meaning that there was not that much salmon at sea in some of the countries.

EBITDA was down from DKK 133 million to DKK 54 million. Here, we had a huge impact of one-offs around DKK 60 million. Unfortunately, we lost a patent case in Norway [ costing ] and then we had a write-down of activities in Russia altogether, as I mentioned, DKK 60 million.

BioMar also been severely affected from increasing energy and freight costs around DKK 40 million. So more than DKK 100 million of impact for BioMar in the quarter. So as I said, we see here the underlying profitability at a rather satisfactory level.

Contract negotiation season is ongoing in the salmon, as you all know, we are negotiating large contracts in Q2. As we speak, we see good progress. Let's hope that we will be able to have good volumes and attractive margins in the period. Guidance for BioMar is impacted by the stock of our Russian activities. It's mainly hitting our operation in Denmark. We supply all the feed to Russia from our factory in Bunde in Denmark.

Revenue is now expected to be between DKK 16 million to DKK 17 million, also impacted off a very high and increasing raw materials. EBITDA is now down in the range of DKK 890 million to DKK 940 million impacted by effect of not selling to Russia.

We do not expect to sell to Russia as the rest of the year, but we also have to say that this guidance is without any write-down from our Russian assets. In Russia, main assets is [indiscernible] and cash as a liquidity and of course we are working on getting liquidity out of Russia.

From there to GPV, where we saw the strongest quarter ever in the history of GPV. Revenue was crossing what we call an important DKK 1 billion mark. Very high activity from many customers and segments. In fact, we could say that all our segments from GPV are delivering high growth. We have a very solid backlog and we continue to see very strong order intake. In fact, our order intake is now reaching into the start of 2024.

EBITDA was 20% up to DKK 91 million. We saw a very high efficiency and scale effect and we could offset that there's a lot of pressure on cost in general. We see an increase in component prices, et cetera, but GPV has been able to manage that quite well.

We have a difficult component situation, and it really puts pressure on our net working capital, but it also put pressure on the organization just to supply and secure components enough is really a huge challenge for the organization.

We have a huge inventory build to support all-time high backlog. And of course, this inventory build is the strategic decisions we have taken [ tying ] up a lot in the net working capital, but also we have been able to secure components at attractive prices.

We see a guidance upgrade in GPV, and here, again, effect from our strong backlog revenue 10% up to DKK 3.5 billion to 3.7 billion and EBITDA in the level of DKK 310 million to DKK 350 million.

From GPV to Fibertex Personal Care, where we saw revenue up 18%, but that was only due to increasing raw material prices, volume in our Malaysian division was down. We have seen the effect of increasing freight costs and more and more materials are now staying in the region. We used to export quite a lot of materials from Malaysia to our U.S. operation, but due to these transportation costs, it has been difficult.

EBITDA, as expected is down 14% to DKK 69 million, again, impact from lower volume in Malaysia. And of course, also increasing cost of -- from energy. Energy is now 5% of our revenues, but it has really increased over the last year.

We have a new line in Malaysia, [indiscernible] line ready and it's installed. It will be in operation end Q2. It will secure increased efficiency and also lower costs to offset some of the older lines in Malaysia. Guidance is downgraded, EBITDA now around DKK 290 to DKK 330 million.

We are doing that because the PP prices are pulling [ equivalent ] prices as we expected in -- when we came out with the first guidance, they are not declining as expected. We also see soft volume in Malaysia, and we are working to offset increasing energy prices. That's the reason behind the downgrading of our guidance.

Then on to Fibertex Nonwovens where we saw a satisfactory development in spite of lower profit, we have to remind ourselves that Q1 '21 was very special. We had very, very high volume, and we were selling special products among them, a lot of material to respiratory masks. We are not selling to that in Q1 '22 as expected.

Revenue was flat because of low volume. But demand is in general increasing -- demand is increasing, and in most of our segments, our Automotive segment is picking up but slowly.

Our EBITDA in Fibertex Nonwovens is down from DKK 96 million to DKK 42 million, but as I said, also as expected, this effect from lower volume and from a lower product mix. We have really been able to offset very significant price increases on raw materials and also on energy. There has been very hard work throughout the organization to compensate that.

We have a DKK 600 million investment program running, and it's running as planned. We expect 2 new lines to be up and in operation mid-2023, producing specialty wipes, strong concepts on sustainability, and we have already experienced a very strong and solid interest from global Tier 1s.

So looking forward to have these new lines in operations in 2023. Our guidance is maintained, EBITDA in the range of DKK 180 million to DKK 220 million. And we have [ parts ] to keep that. We have to continue to push hard for offsetting increasing costs, but our organization has so far been able to do that and showing a very strong excellence in that area.

From Fibertex Nonwovens to HydraSpecma, where we have seen very solid development and continuation of the very high activity. We have seen, in fact, over the last year, revenue was up 12% to DKK 643 million, especially mainly driven by our global OEMs, off-highway equipment, construction equipment, et cetera. Order intake continues at very high level.

Our EBITDA was up 28% to DKK 82 million and driven mainly, of course, by good turnover, good revenue, but also very high efficiency combined with strong pricing execution, also HydraSpecma has expected or experienced a lot of increases on components and things like that. We also see good profitability from changed product mix where we have a higher margin than in other segments.

HydraSpecma continues to develop and invest. We just acquired a small Dutch-based company called GSS, easy bolt-on, DKK 35 million turnover, but going to help us to distribute further into Europe. We are just starting up 1st of April, our new facility in India, in Chennai in India, 4,500 square meter production facility mainly to accommodate the wind turbine industry.

Guidance from HydraSpecma upgraded due to the good start of 2022. EBITDA now DKK 270 million to DKK 290 million. And in this guidance, we were also offsetting increase in costs and also the effect from cloud, this IT thing we have to put on our G&A.

Last company in our portfolio, not least, but last, Borg experienced significant growth that continue to grow and also with the satisfactory profitability. Good to see that organic growth was plus 20% in our old reman business. Total growth of Borg was 74%. But here, we have had a strong effect from our newly acquired SBS coming with -- or adding DKK 145 million to the top line.

We also see continued strong demand across Europe, seeing that some competitors are weakening, and we are getting opportunities on that account. EBITDA slightly down to DKK 38 million, but here, we had negative impact from our Russian write-down of DKK 11 million.

So looking at what we call normalized EBITDA was plus 21% and in fact, very satisfactory, driven by high efficiency and strong pricing execution. The integration of the newly acquired TMI from Spain and the SBS company, they are both in very good progress.

Guidance is upgraded when we adjust for the impact from our Russian activities, then we see EBITDA in the in a range of DKK 180 million to DKK 210 million and again, also offsetting effect from the cloud setup.

So all in all, just a quick plans at our updated guidance, as I mentioned, 2 of the companies where we are downgrading guidance mainly due to our Russian activities or not selling to Russia any longer, then we are maintaining the guidance in Fibertex Nonwoven. And then we are upgrading the guidance in what we call our industrial solution companies, such as 3 of the 6 companies.

So group guidance will now be from DKK 2.07 billion to DKK 2.3 billion, and here, we have to bear in mind that, that is without any write-downs of our Russian assets. So we feel that in spite of challenging times that we have been able to so far to offset very, very severe price increases on especially freight and energy but also raw materials.

There's still a lot of uncertainty and increased global risk, but our professional and dedicated organization will do whatever they can to offset this uncertainty.

So with this, I will just move on to the last slide, just mentioning that we are having a Capital Market Day on the 1st of September somewhere in Copenhagen, venue to be confirmed. But please book the date in your calendar. We are looking forward to seeing as many as possible at our Capital Market Day in Copenhagen.

So with that, I will open for Q&A session. You know the drill on Teams, all microphones are muted now. But if you have a question, raise your hand, and then I will see to that your microphone will be open, I think, Kasper is controlling that with the tough end . So if any questions, then -- I can see we have Klaus with the question -- Ulrik, sorry.

[Ulrik Bak, analyst]

Yes, firstly, I'll just comment that I think you should consider adding a line in the P&L with nonrecurring items because I found it largely confusing to compare an updated guidance, which was before provisions related to Russia with EBITDA reported numbers, which included the provisions.

Then on to my first question, so you mentioned some numbers in the beginning of your presentations related to was it the Russian impact on the one-off. Can you please just repeat those numbers?

[Jens Sørensen, executive]

The Russian impact, if you take the EBITDA as it was in Q1, then we have the Russian impact of around DKK 50 million, DKK 46 million Russian impact, then we have the lost patent case of DKK 16 million, altogether DKK 72 million.

Then I think also I mentioned that's not one-offs. What we have had huge impact from what I said, exploding cost on freight and energy of around DKK 80 million, but that's not one-offs, of course. One-off around DKK 70 million to DKK 75 million.

[Ulrik Bak, analyst]

And then a question on this negative EBITDA effect from the lost sales to Russia. You said the total is DKK 80 million for 2022. What is the composition between the portfolio of companies of those DKK 80 million?

[Jens Sørensen, executive]

As the main part is coming from BioMar, and then the second is a Borg SBS and then Fibertex Personal Care. So that's the 3 companies impacted, but BioMar, by far, the largest.

[Ulrik Bak, analyst]

And then again to BioMar and the adjusted guidance, you decreased the midpoint by DKK 90 million. I'm just trying to bridge the different factors that you've mentioned. You said something about lost Russian sales towards a lawsuit, cloud.

So but if I add it all up, and if I assume the lost Russian sales is you say it's a large part of the DKK 80 million, but if I just say it's DKK 60 million, and I added to cloud of DKK 20 million, lawsuit of DKK 16 million, then it actually implies that you are upgrading the rest of the business. Is that a fair assumption or...

[Jens Sørensen, executive]

I think the assumption is that we are keeping the business as is. We are not upgrading in general. So we are saying this is -- we expect because, as you also see, Q1 was the mix -- the product mix was different. And so we expect BioMar to deliver on guidance in the last 3 quarters.

[Ulrik Bak, analyst]

And the lost Russian sales, do you expect to be able to offset that to other markets?

[Jens Sørensen, executive]

I have to say in BioMar we cannot offset everything. We have a very -- we have over 25 years, built a very strong and very also profitable market in Russia. We cannot offset that. It's a huge volume out of Denmark.

Of course, we are working hard on trying to see if we can use the capacity elsewhere and so on. So we can offset something, but it takes a long time in BioMar. Then we have in FPC, I expect that not -- maybe not this year, but we'll be able to sell the volume elsewhere.

And in Borg especially SBS have had a very strong position in Russia. It takes time to get new markets. So it's not something that will be done tomorrow, but of course, we work hard on it. We can use some capacity for other markets, but it takes time.

[Ulrik Bak, analyst]

And then yes, a final question on BioMar, the gross profit per kilo was obviously down again. And I think it's the lowest level you -- yes, you've seen in a long time for many quarters. Should we look at this as a trough and that we will see it improving from here?

[Jens Sørensen, executive]

You will see that improving. I also said that we are now in the contract negotiations on the salmon contracts and so on, and we have to have compensation for energy and transportation and so on.

And of course, it's a challenge, and it's hard, but we will have some of the costs into the new contracts. So it's -- you are right, it's a very low per kilo margin, but impacted by transportation by energy and then there's also some mix segments where we are -- some of our high-value markets or high-margin markets has been a bit down due to biological conditions. Russia, as I said, very high-margin market has also been out of -- no sales. So that's the reason, but we will work hard on getting margins back.

Klaus Kehl?

[Klaus Kehl, analyst]

First of all, also a question about BioMar. You mentioned that I think you said that input costs are exploding and you definitely have to raise prices. What does this mean for the competitive situation in the industry going forward?

And also, we just talked about margins being squeezed quite significantly. Do you dare to give us any comments about what would be a reasonable margin for '23 in BioMar? That would be my first question.

[Jens Sørensen, executive]

It's a very good question, but also very hard to answer, especially the later part of the question. Yes, as you say, from the competitive situation, I think all in this industry, they are facing exactly the same challenges as we are meaning exploding energy costs, we are using a lot of gas, in fact, in most of our factories to dry the fish feed and so on.

And then you also know it takes a lot of transportation and logistics around. So I think all of us are faced with that and raw material, same situation, a lot of materials coming -- raw materials coming out of Russia and Ukraine, difficult to get.

So I think everyone has to look into how to compensate. We can compensate in 2 ways. Of course, going to the market asking for higher prices, and we do that, but you also need to work on your recipe composition, optimize, use best cost raw material, and that's a huge operation to do that. And then, of course, also looking into the to the logistics setup. When we are discussing 2023, I think it's very difficult to say what kind of margin we can expect, but we are working on improving our margins, especially in our salmon segment. And we are really working hard on that.

The problem is that in some of the contracts we have today, we have these cost plus contracts. They do not take into consideration that energy all by a sudden exploded. So we have to factor that in one or another way in future.

[Klaus Kehl, analyst]

Then you just mentioned that you use a lot of gas. In a worst-case scenario, there is no gas in, let's say, a couple of months. Then what? Can you switch to oil? Or any thoughts about that?

[Jens Sørensen, executive]

Yes, we can switch to oil. We can switch grids to electricity of -- and of course, we are preparing and also have contingency plans and so on in place. But it's not done overnight, but it's something we are working hard on.

But we think there will be gas available but -- and also we are one of the industries where we think we will have a priority for gas or we know that. So -- but still, we are working on what can we do in the future, and we have to do that.

[Klaus Kehl, analyst]

And then a question about your net working capital. It's going up again. Could you talk a little bit about what you will do in order to get it down? And do you dare to give us a estimate for your net debt end of the year?

[Jens Sørensen, executive]

No, I do not dare to do that because it's still too uncertain, but be sure that we are working very hard on this. And mainly the net working capital is driven from 2 sides. One is, of course, to expect higher activity, but then also increasing raw material prices as some raw materials increasing 30%, 40%, meaning also when you have inventories on them, of course, your inventory value will be much higher.

And then it's driven mainly from inventories in our industrial companies, meaning GPV as our electronic company. They are the, by far, the largest -- they have, by far, the largest inventory built and also thereby the kind of explosion in net working capital.

I think in the other companies, we can work more around it, but we have to realize also that components, raw material prices have increased a lot. So that's one thing we can do. And then, of course, work hard on other ways to work with when we get our backlog. How do we then handle that backlog? We have the highest backlog ever. And when you have a backlog, you need to secure that you have components, et cetera, in stock. And we are looking into that also.

Are we are we strong enough on that? Is our enterprise resource planning systems good in open source. So there's a lot of hard work going on. And we have a strong intention of bringing down our net interest-bearing debts. And also, of course, we expect to generate cash flow in the last 3 quarters.

First quarter is the lowest cash flow quarter in [ all Schouw ] companies. So we expect to bring it down, but I do not -- I could dare, but it would not be serious to give any figure on expected net interest-bearing debt in year.

Claus Almer.

[Claus Almer, analyst]

Yes, a few questions from my side. The first is about your guidance. Maybe you could put some color on what would it take for a scenario where you're in the low end? Or in the other end of the guidance range?

And linked to this question, is the guidance based on the current spot energy and raw material prices, adjusted for whatever hedges you may have. That would be the first one.

[Jens Sørensen, executive]

As a starting point, of course, it's based on what we know now. So of course, we have worked on the guidance more or less until this morning. So we have the new information on energy prices, et cetera, in the guidance.

What it takes if it should be in the low end, I think that there's a lot of volume in this also. We need, of course, to keep our volume, but also that we are able to offset increasing costs as we have been so far. If we should end in the higher end, yes, then we need to continue to work hard on offsetting price increases.

Some of the companies have -- it's more -- it's not easy, but they have a easier road to do that than others. We could see some volume increase in some segments where we have very, very strong demands. So if you could get components and things like that, then revenue could increase and that would then lead us up in the [indiscernible].

But to be fair and open, I would say for the time being, it's difficult really to say A or B. We feel -- it's rather interesting, I feel very comfortable on the guidance we are giving because it's knowledge, and we have worked hard on it. But it's so uncertain times that you also say, okay, I feel comfortable. But in my long life, I think I've never seen costs exploding like that up and down.

[Claus Almer, analyst]

Fair enough, Jens. Is there any of your divisions where you are really struggling to pass through cost inflation?

[Jens Sørensen, executive]

Yes, you could say, if you take Fibertex Personal Care, where we work with contracts with all the big Tier 1 or blue chip customers, there, we have this -- we have been able to -- the raw materials on a quarterly basis. But when it comes to energy and things like that, then it's very difficult because I say, okay, you have your convergent margin. And we have given you the opportunity to pass on raw material costs and so on. It's not easy.

And we have to find a way. We're trying to see if we, next year, can get something into our contract. But they are struggling on that. And then especially also if -- where you have customers, I have to say in the automotive segment, they are tough cookies and you regally need to work hard on it. And of course, they understand 100% the situation. But then they start discussing and it can take 3, 4, 5 months and then all by a sudden they accept it.

So Automotive difficult, Fibertex Personal difficult and then, of course, all the small customers. They accept it, but they are struggling because if prices get too high, they cannot sell their products and so on. So it's a balance, but it's really tough work, and our organization, they are really working hard on doing this.

[Claus Almer, analyst]

And then GPV, as you said, you are now booking orders for 2024. How do you make sure that whatever price quotes you have so far into the future not certainly getting way out of [ WACC ] and turn to a liability?

[Jens Sørensen, executive]

Yes, but that's also a very good question. But of course, we have contract obligations that when we buy home components and so on, most of our customers, they contractually oblige to take at least the inventories and so on. So there's -- of course, we try to balance the risk and we have good contracts in place on that.

But we also know when we have the inventory there, and it's the customer's inventory more or less. They have no obligation, and then say, okay, if you demand, we should take it tomorrow we'll do it. But then maybe it's the last time we are having business together, so it's really a balance. But so far, no problems. We cannot supply enough. But we are really on top of, if we see deep booming what will then happen and it's really contingency plans needs to be in place.

[Claus Almer, analyst]

What's the other way around that you got the orders, but you can't supply. Do you have any liability there?

[Jens Sørensen, executive]

No, not really because we can -- in electronics, you can miss 1 or 2 components and then you cannot supply. It's too dangerous to accept liabilities. So we do not have that.

[Claus Almer, analyst]

Okay. And then just the issues within BioMar with these biological things you mentioned, can you put a little bit more word to this? Is that you or your customers who are facing these issues?

[Jens Sørensen, executive]

No. Yes, it's biological. There have been in Q1 is very strange as -- in the northern part, it has been too cold, colder than normal, meaning that the fish are not feeding that much. And then in the Southern Hemisphere, mainly in Tasmania, which is also attractive margin area. There, it has been so hot that the fish did not feed.

So it's these conditions, climate effect a lot, especially in Q1, so it can be too cold, and it can be too hot. Then we have also seen some algae bloom in Chile, and if the algae is blooming too much, then the fish don't feed. So it's things we experience now and not -- it will always be there. But this quarter, we had both hot and warm and algae bloom and things like that. So it's not a huge impact, but it has impacted.

[Claus Almer, analyst]

It's not easy. And then yes, I will not disappoint you by a question regarding net working capital. Just looking at your cash flow statement and your net working capital trend, then coming back to your ability to M&A, then by own choice almost, you are reducing your issues of not investing your money, you're just putting it into the inventories. Is that by choice? Or you are not getting all these questions about M&A activity?

[Jens Sørensen, executive]

Claus, it's not 100% by choice, I have to say that. And I think also, to be honest, I'm not surprised because that's a wrong word to use, but we need to tie up that much because raw material prices and things has exploded.

But of course, some of it is by choice, especially if we look at what we call the industrial companies, GPV, HydraSpecma, and so on. We have more inventories that we would normally have also in numbers, so not only in value but in numbers. So meaning inventory days are up at a level we would not normally accept. But we have done that due to this special circumstances. So we have to work half on our inventories and get them down, and it's mainly and main issue is GPV. The other ones, I think when we start into the season, you will see Fibertex Personal Care, especially BioMar, they will reduce inventories and so on so. So you're right, but it's not on purpose.

[Claus Almer, analyst]

I just wanted to ask the usual question in a different way.

[Jens Sørensen, executive]

No problem. In fact, it's interesting because when things develop like this all by a sudden, you have to face new challenges, as you said. Well, why don't you do M&As? Now we're putting it on inventory instead of -- and we would prefer to do a mix.

Ulrik?

[Ulrik Bak, analyst]

Yes, just a few follow-up questions. Also to Claus' question about the guidance. But more particularly on GPV. You are saying you have a full order book for the rest of the year. So what should happen? Or is the top of the guidance range on EBITDA? Is that as good as it can get? Or what -- is there any way it could be even better?

[Jens Sørensen, executive]

Yes. I think Claus, as we speak, it's as good as it could get. But of course, if they have a smooth operation on the backlog, we then -- and we can have more components and so on, and they can maybe have more turnover. Things can change.

But as we speak now, it's very difficult to maneuver in this component situation. I think -- yes, it's -- we're very satisfied with the development so far in GPV, and they are doing very, very well. But I think it's what we see now? Or it is what we see now. We have been around our guidance and a lot over the last 2 weeks.

[Ulrik Bak, analyst]

All right. Then on HydraSpecma, what is the current trading for April or...

[Jens Sørensen, executive]

Yes, they are -- yes, sorry.

[Ulrik Bak, analyst]

Yes, it's just you are hearing about the high inflation slowdown of the economy and industrial companies. Yes, so just what is -- yes, the latest.

[Jens Sørensen, executive]

Yes, the latest, if it goes on HydraSpecma, you could say wind, which is one of the important segments. You know also the challenges from investors and so on in wind.

But if we look at the other very important segment, what we call global OEMs, construction equipment, off-highway, et cetera, very strong demand. So these 2 segments, they are balancing each other. So we do not see any easening off or cooling off on demand from global OEMs.

And then just I forgot to comment on your nonrecurring item line, Claus, we will consider that. So that was a good input from you, thank you.

Klaus Kehl?

[Klaus Kehl, analyst]

Yes, a follow-up question. You have mentioned a lot of times these exploding input costs, but I guess the problem it will only get worse in Q2. So do you have any high-level thoughts about earnings in Q2? Should we expect a similar underlying EBIT, for instance, in Q2? Or yes, some high-level thoughts.

[Jens Sørensen, executive]

Yes, and so when I'm saying exploding now, I think freight costs, we know where they are now more on this. Of course, energy costs still fluctuating. We have seen them slightly down over the last days, but again, fluctuating a lot.

Raw materials, I think we have a lot of our raw materials on contract now. So we are. We feel that we have not 100% control on the situation, but we have a good overview.

And then when you say what should we expect in Q2, we know that Fibertex Personal Care will have a difficult -- it brackets difficult Q2 because we know exactly the raw material input price and what we can get and so on. We can first offset that in Q3. So there, you will see a weaker Q2.

But then BioMar is now also starting more -- the season is more starting up, et cetera. So yes, I think we have a good overview on costs, et cetera, contracts, et cetera. But of course, energy is the real tricky part of this. And the energy and then availability of certain raw materials, all by a sudden things can change because they are not available.

Okay, no more questions. Thank you very much for questions and for listening. So by this, we are closing down the announcement.