Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2023-Q1

[Jens Sørensen, executive]

Good afternoon, and welcome to the presentation of Schouw & Company's Q1 '22 report. My name is Jens Sorensen, and I'm the CEO of Schouw Company. I will take you through our report and our figures. Q1 was for Schouw & Company, a very satisfactory quarter. We came out better than expected. We saw a very high activity level across all our companies.

And once again, I think we could say that our companies, they are relevant in the market, and they have a very strong positions. Our revenue was up 38% to DKK 8.7 billion. Organic growth was around 1/3 of the increase and the rest was coming from our newly acquired company, Enics. EBITDA was up 40% to DKK 511 million. It was a combination of effects from lower energy cost mainly from our 3 big energy consumers BioMar, Fibertex Nonwovens, Fibertex Personal Care. We also had very good cost management, meaning a good combination of controlling our costs and getting the right prices in the market.

We had a one-off impact in 2022, and that was offset in 2023. Our net working capital increased mainly due to a much higher activity level in general, we still face and see supply problems on critical components. It's also easing off a little bit. We have seen that our focus on a better balance starts to materialize. We expect this to start increasing our return on invested capital during the coming quarters.

I'll now look into -- with a very quick plan into each of our 6 businesses in our portfolio. Let me start with the largest company in our portfolio, BioMar, where revenue was up 21% to DKK 3.7 billion. Here, we saw once again huge impact from raw material price, meaning that the raw material prices was really driving revenue. Volume was flat. We also have to bear in mind that the Q1 is normally a low season in BioMar -- we faced the impact from climate meaning post cold and hot waters and also some regulatory issues hit some of our divisions.

EBITDA was up from DKK 54 million to DKK 117 million. Again, effect from raw materials and also mix between the different segments or divisions we are operating. We also have to mark that in mind that in 2022, we were hit by a one-off cost of around DKK 60 million. So when we are looking at the EBITDA.

We have a good progress in all our contract negotiation. Normally, they are running over Q1 and Q2, and it's mainly in the Salmones segment. So normally, we used to elaborate a little bit on these contract negotiations, we see a good progress in them. Our joint venture companies in both China and Turkey really delivered strong growth and also good profitability, meaning that overall, the guidance for 2022 with the BioMar was maintained revenue around DKK 18 billion to DKK 19 billion EBITDA in the span of DKK 1.08 billion to DKK 1.15 billion.

As usually, we really need good conditions in the second half of '23, which is our high season. So there, we need a good farming conditions and good climate throughout the year. From BioMar, moving on to GPV which now is the second largest company in our portfolio.

The strong growth we have seen over the last years really continued turnover now DKK 2.7 billion for the quarter. There, we see full effect from the newly acquired Enics where we have combined Enics with GPV and they created this one new leader strategy that really starts to kick in. Both the legacy companies, meaning Enics and over GPV really also delivered good organic growth.

We still see high demand from key customers and key segments. EBITDA was better than expected and reached DKK 179 million for the quarter. Here, we also saw very strong cost management and high efficiency across the board. -- integration costs are included, but they have not been material in the quarter. Net working capital is still at a very high level. It's really a key focus area in GPV. We have a huge inventory builds to support our huge backlog. And we also have to bear in mind that we are in the service business contract manufacturing.

So we need to be able to supply when we are contracted added. We have also added a new capacity and expanded some of our factories during the last period and more capacities in the making. Our new factory in China will open in Q2. And our large facility at Sri Lanka is also in the modernization making.

We have [indiscernible] also restored new lines at several of our factories. We made a small upgrade -- guidance upgrade on turnover is only effect from increasing component prices, meaning that we now foresee or guide revenue in the area of DKK 8.8 million to DKK 9.2 billion. EBITDA, however, maintained at a level of DKK 590 million to DKK 640 million. In fact, we expect second half of '23 to be a little bit more challenged for GPV.

From GPV moving on to HydraSpecma, HydraSpecma really continued also their very satisfactory development. Looking at the quarter was very strong. We had a first turnover from our newly acquired Ymer Technologies kicking in. Revenue plus 23% to DKK 791 million. Order intake from most of our global OEMs is still very attractive. EBITDA, up 5% to DKK 87 million. But here, we also have to see that there was a negative impact of DKK 23 million from PPA coming from Ymer.

Why -- meaning that the underlying EBITDA is very strong based on very high efficiency and also quite good and attractive customer mix. HydraSpecma really see high activity in many areas. They are working hard on integrating Ymer and creating the new renewable division to be prepared for strong growth in the coming years in this division, also preparing a new factory in Stargard in Poland, which will be ready with Phase 1 in Q2 '23.

Guidance is, however, maintained. We see a slowdown in our wind segment only expected to slow down in '23, but it's more or less offset by good order intake in our Global OEM segment revenue, DKK 3.1 billion to DKK 3.3 billion and EBITDA maintained in the range of DKK 310 million to DKK 340 million. Then moving on to Borg our company that are remaining parts for the automotive business will realize the revenue of DKK 481 million, which really was in line with Q1 last year. Our main business is rebounding after a relatively slow second half 2022.

Our trade business lower due to less activity in specific markets. EBITDA was down from DKK 38 million to DKK 29 million. Here in Borg we had one-off costs to a new ERP and the system and organizational changes of around DKK 7 million in the quarter. We also had a lower margin from our trade business due to high cost prices of old inventories.

Net working capital is still at a high level, but it is leveling off. We have on purpose builds more inventory on what we call our high-running remain products that meaning Brake Calipers and expected to lower the inventory over the last -- the year coming quarters.

We are now having full integration of SBS into the existing Borg platform. guidance maintained, meaning EBITDA in the span of DKK 160 million to DKK 190 million, also based on that we see that the demand for remain parts is improving over the coming period. Then touching on Fibertex Personal Care. -- where we, as expected, saw revenue down 19% due to a mix of lower raw materials prices and less volume and less volume was, as I mentioned, expected in Malaysia, and it will continue to be at a low level throughout 2023. EBITDA, however, better than expected around DKK 70 million and at the same level as Q1 2022.

We had a minor positive impact from raw materials and then really a good balance between cost and pricing in both Europe and Malaysia. Fibertex Personal have really put a strong focus on improving our profitability. We have closed down our printing facilities in Malaysia and starting to move print to U.S., our new print facility in U.S. is running at full capacity and a very good development.

We continue to innovate in new products. We just introduced a new product where we reduce weight with a 25% product that has been very well received in the market. And then especially Fibertex are really pushing strong on the sustainability agenda. Guidance maintained revenue were a slightly lower due to raw material prices, but EBITDA at the same level, meaning DKK 118 million to DKK 210 million for the year. We see a positive trend on raw materials and cost base in general for Fibertex Personal Care.

Then last but not least, Fibertex Nonwovens Revenue here was up 11% to DKK 569 million. Volume, as expected, a little bit lower than in Q1 '22. But what's important to see is that the very negative trend we saw on Fibertex Nonwovens throughout second half 2022 has stopped. We have seen very good demand from the automotive segment. Our wipes business is picking up slowly, but a steady EBITDA, DKK 42 million and better than expected coming from that raw material cost has started to decrease.

Product mix improving. And then we have seen a rather strong pricing management from Fibertex Nonwovens. We are starting up our New spunlacing line in US. We have had the first drivers, and we expect the new line really to start producing full commercial through Q2.

It's a line that is going to produce special wipes to what we call Tier 1 customers in U.S. We have a very strong product line and the pipeline is very solid. Guidance for Fibertex Nonwovens is maintained with EBITDA in a spend of DKK 442 million to DKK 170 million. Also here, we are seeing that the cost pressure is softening, and we are really keeping strict eye and focus on pricing excellence.

So with that, let me just finish off with an overview of our guidance unchanged 2023, starting off positive, but we still need to watch out. We have to have a strong focus on demand and costs. So we expect top line to be in the spend of DKK 36 billion to DKK 38 billion, and EBITDA is expected to be from DKK 2.4 billion to DKK 2.65 billion. And with this update on our guidance, I would open up for questions, Ulrik Bak , please?

[Ulrik Bak, analyst]

Jens and Kasper. Just a few questions from my side. Firstly, on GPV, you mentioned that you anticipate a slowdown in demand. Can you just share which segments that you see are still doing well? And are there any particular segments which -- where you're actually seeing a slowdown -- down at the moment? Or is it just an expectation?

[Jens Sørensen, executive]

I think to be honest, it's more kind of a caution as we are not really seeing a slowdown yet. We have a good backlog, but we have seen some customers moving the very big backlog we have into 2024. So it's more looking a little bit in the second half and say, well, maybe things can't continue at the pace it's having now.

So we are a little cautious on it in general also because we are supplying industries that also might face a slow off in demand. But we cannot say that it's a specific segment A or B yet. But we have seen not something very specific, but it's just the feeling we are having.

[Ulrik Bak, analyst]

Right. And in terms of this order backlog, did it increase during Q1? Or what's the status?

[Jens Sørensen, executive]

Yes, it increased slightly to Q1, but not with the same pace as we have been seeing throughout '21 and '22.

[Ulrik Bak, analyst]

Okay. That's clear. Then a question on BioMar. You mentioned that you are well underway with the contract negotiations. Can you share just how large a share of your contract portfolio, which has been renegotiated? And if you can give any flavor in terms of the attractiveness, profitability of these new contracts versus the ones they replaced.

[Jens Sørensen, executive]

Yes. I would say, of course, it's new contracts, but some of them is, of course, new contracts with existing customers, most of them. We just had a big contract negotiations with one big Norwegian group successfully and then also went into a long-term contract with acceptable profitability on. So we are in these contract negotiations. But as I also said, it has -- it is not as [ changed ] as it used to be because a lot of the larger customers, they are moving negotiations from just being Q1 to more over the year and also looking into longer contracts.

So that's what we are looking into now. But we have an attractive base for the still, we need to be competitive in the market.

[Ulrik Bak, analyst]

Okay. And then a final one from me on -- also on BioMar. Just if you can give an update on each segment, shrimp, Salmon, Chile, Norway would be -- yes, would be great.

[Jens Sørensen, executive]

Yes, you could say Salmon, as I said, a good contract negotiations going on, mainly in Norway over these quarters, we are satisfied with what we have seen so far. Chile has been a little bit challenged on [ cemetery ] conditions there Starting, in fact, back in 2022. So a little less BioMar at sea, but we have good contracts there. then we have Australia, still a good base. It has been a very, very hot climate in Australia, meaning that the feeding has been less. But in general, we have a contract base as expected in Salmon. Margins, -- we're always working with our margins, and we are always trying when we get in to see if we call it to sell up, meaning bringing in more functional feeds to our customers.

Looking at shrimps they cut off. Shrimp prices has been down in Ecuador in Q1, picking up a little bit. And there, we are not having these very long-term contracts. But of course, we have a contract base, but it's shorter than in Salmon, but also a satisfactory contract base there. And then looking into EMEA, it's a totally different game. It's more used to call it fight from house to house, shorter contracts, smaller customers, a lot of changes is going on. We have a good position in the Baltic. We have to fight harder increase, and that's as it used to be.

[Ulrik Bak, analyst]

Okay. And then in terms of these high elevated freight cost, the energy cost from last year, now we see them declining across the board. Would that be a benefit for you?

[Jens Sørensen, executive]

It will -- yes, from a starting point, of course, be a benefit because we have a high energy cost, both in Fibertex businesses and in BioMar. But of course, also, as said, the customers, they repapered and they also understand what's going on. But we are having a strong intent on via commercial excellence and pricing power and so on to also keep our share of that. Claus Almer...

[Claus Almer, analyst]

Yes, also a few questions from my side. Yes, you mentioned that you have renewed this contract in Norway at acceptable terms and margins. That doesn't say a lot from the outside at least. So does that mean that the margin is higher than the last contract is the same? Or how should we really understand that comment?

[Jens Sørensen, executive]

Yes. But when we say except the terms meeting that it's contracts that we can work with, as we usually do, we go in on what we call basic feed and then we work around it on functional feed on services and things like that. And we feel confident that we can keep our margins in Norway. And I think last year, we saw also a second half that we had quite reasonable margins in Norway. Of course, we don't disclose margins, et cetera, in -- on specific customers or markets. But we feel that with our size and our product segments and so on that we are in a good position.

[Claus Almer, analyst]

I might be a little slower for what does that actually mean? So winning that contract, if you just look at the commodity part, which is the one you say is included in the contract. Is that a better, lower or same margins? And maybe on top of that, if we're going to see input costs going down, will you have the same margin? Will you have better absolute profitability or lower profitability?

[Jens Sørensen, executive]

If costs go down, I don't think we will have lower purely we are having contracts and margins more or less at the same level as last year, and you also know when you're negotiating these big contracts. It's the same customers you had the year before, so you cannot just all buy a certain increase. It's step-by-step, you need to increase. But of course, we will have our share when costs are going down. We will also have an opportunity to get a slightly better margin from that, and that's our intention.

[Claus Almer, analyst]

And [indiscernible] . And so if costs go down, will you then make slightly better profitability in after term keep part of the lower cost? Was that what you were saying?

[Jens Sørensen, executive]

That's our intention, Claus. And also would say, and you know that also that it depends also on when are these lower costs kicking in because we have these mechanisms in all contracts that we need to regulate on a quarterly basis and so on. So there's a lot of elements in margin management in Norway, and we really call it margin management because it's so important for us. And we intend to manage our margins in an attractive way.

[Claus Almer, analyst]

Okay. And then the flattish volume in Q1, you found a little bit disappointed by the performance in Q1. How should we think about -- the probable flattish volume is a mixture of many different species and markets. So how should we really read flattish volume...

[Jens Sørensen, executive]

First quarter of Q1 is quite complicated because you really don't know what's -- how big is the growth is going to be on the Salmon and so on. As I said, we have seen less biomass at sea also in Norway and how much small is coming to and so forth. But the contracts and the expectations from our customers means that we will see volume picking up and especially in , Q4 is very -- they are very important for us.

So we still expect growth at what Q1 was not as expected, of course, not very disappointing or anything, but it was flattish compared to what we saw when we went into 2023. But we still expect the volume to grow.

[Claus Almer, analyst]

Okay. And then GPV, sorry. So the whole supply chain issues that you talked about last year, do we see a normalization -- How was the update on that part?

[Jens Sørensen, executive]

Yes, we see a normalization, but there are still critical components with very long lead times. Some components, we just had a look at it this morning, some components have had lead times of 70 to 80 weeks. And that's -- it's maybe down to 30 to 40 weeks and so on. So it's still complicated, but it's on fewer components than it used to be. So we really see that the supply chain is easing, and we expect to see that throughout 2023, but still some critical components, and we need to build inventory on these critical bonus, but much fewer than last year.

[Claus Almer, analyst]

And so last year, you would rather use the word concerned about what would happen with your order intake and your revenue once things went normalizing. The fact, as you mentioned, order intake is going up or still have growth in Q1. Should we see this as a very strong statement or indication of the sustainability of the EPV business?

[Jens Sørensen, executive]

Yes. I think, Claus, I mentioned also that we see order intake now on a longer horizon, meaning the order intake we see now is '24 and a little bit even in 2025. We also see some customers said postponing as I say, okay, maybe we said we could take it Q2, it's Q3 and so on instead of -- but still, I think strong position, very high activity level, really hard push on factories to be able to deliver.

So we don't see really a slowdown, but just -- we are cautious on it because we see a few tens, but -- but I cannot say that we are not facing good order intake.

[Claus Almer, analyst]

But you've been a bit cautious for the last 6 or 8 quarters or so and you keep saying this, but it seems to grow pretty well for the business.

[Jens Sørensen, executive]

It does, absolutely. No, but I fully agree, and I also acknowledge what you are saying. But I think when the caution is last year, that was more also, Claus, on the ability to get components and to supply and so on.

Now we are looking a little bit into demand, how strong will the demand be second half. But we have a strong backlog.

[Claus Almer, analyst]

Are you more cautious now than you were 6 months ago? -- Was just seeing normal score filter we are talking about...

[Jens Sørensen, executive]

At a different level. Sure, right? But at a different level, this time, it's more on will demand slow off. I think we will be able to get components. We will be able to supply and have capacity of and so on. But what do we see from as per demand point of view, but I'm not very cautious or very nervous to say it like that, if you ask...

[Claus Almer, analyst]

Yes. Okay. There seems to be no other raise hands. I have a few more questions -- you took over 1st of February. So still early days, but maybe you give an update on, have you seen any [indiscernible] prices, both on the offside and on the negative side?

[Jens Sørensen, executive]

Yes, it is very early, but fortunately not any really surprise. Maybe, of course, it's not a surprise, but we know that the demand from wind in '23 is slowing, and then we expected that also. So we have seen that the turbine manufacturers, of course, postponing a little bit on orders and so on. But still, we have -- I think we have got what we have seen and now we are in this phase of looking at the factories, integration, maybe one making 2 factories to one factory and so on. So, so far, so good. I think I think we got in some knowledge also and some skills that we didn't have in the former hydrospace.

[Claus Almer, analyst]

And this today is that offshore, onshore or specific mark.

[Jens Sørensen, executive]

It's a little bit both segments.

[Claus Almer, analyst]

Okay. And then my final question, and I know you're dying for and I am asking this Jens, , Net working capital -- congratulations that it was -- the cash burn was only half that it was in Q1 last year. What to think about this? I know it was slightly helped by actually it was impacted by lower supply chain financing, but maybe a few more words on this.

[Jens Sørensen, executive]

So we had -- if you look at it, you could say we have inventory builds still in GPV, and then we had less supply chain finance in BioMar. 2 main factors. But we see things moving in the right direction. And you'll also see our cash flow was much stronger in Q1 -- in '23 than in '22. So we have this very strong push on it. And if I really look into what I would say that GPV, as I also mentioned, that's our key focus, and that's where we really have seen net working capital, I won't say exploding, but it has really increased a lot, whereas the other companies, they are more in balance. And I have a good feeling that we are moving in the right direction. Now finally...

[Claus Almer, analyst]

But still, DKK 0.5 billion extra net working capital flattish in which provision group level, input costs come down, should we start to expect your net working capital to east rather than the opposite.

[Jens Sørensen, executive]

Yes, absolutely.

[Claus Almer, analyst]

I'm sorry, I forgot to mention this all your hard work to put net working capital improves in your -- in all the divisions.

[Jens Sørensen, executive]

Yes, of course, and I think if you listen to my one to one or when we have Schouw & Co meetings and so on, it's first thing at the agenda every time, and we have a specific task force in every company to look at it. We have a bonus system set up. We have a lot of things that we have been doing on this, but we also have service obligations and thanks to our customers and so on. But it is -- and it's really a strong focus. So it's a balance. But I would expect it or not. I am expecting that it's going to be reduced. Okay. I'm just seeing no more questions. So...

[Unknown Analyst]

So yes, so a more long-term question. You have a return on capital target. I mean if you can talk about the main levers to get their capital intensity getting pricing power and management now when the input cost come down, GPV and synergies in -- if you can get high level, the main levers to get to the long-term return on capital target on the time frame...

[Jens Sørensen, executive]

Thank you for the question. You could say, there's, of course, some moving targets. One is, of course, short term to bring down our net working capital. Then also the way we are investing capacity investments and so on, we are at the peak of a lot of investments we have been doing over the last years. So we don't have any very large investments in the pipeline. So that's one point. Another point, of course, as we said, driving down net working capital and then also strong focus on increasing margins, getting our EBITDA up.

So that's 3 key focus. And then we have still a strong growth agenda, but we are also looking a lot into how to grow without deploying too much capital. So that's the levers we have a strong strategic 3 years plans in each of our companies, which we focus on this.

Okay. Any other questions from the audience. It doesn't seem to be the fact okay. So with that, thank you very much for listening. Thank you very much for the questions, and have a nice weekend and right from Schouw & Co.