Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to the Schouw & Co. 2018 Q2 Interim Report. Today, I am pleased to present the CEO, Jens Bjerg Sørensen. [Operator Instructions] Speaker, please begin.

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

So thank you very much, and good afternoon to everyone listening on the line. Overall, Schouw & Co. had a good and satisfactory second quarter, with growth in both revenue and earnings. But we also saw that competition continued in most markets. We saw harsh climate conditions and also difficulties on supply of components and certain raw materials. Due to development in specific markets, we unfortunately had to send out profit warning and downgrade our full year guidance for 2018. Looking into the figures, overall figures for Schouw & Co., revenue was up by 10% to DKK 4.4 billion (sic) [ DKK 4.5 billion ] for the quarter. We saw a positive effect from our recent acquisitions but fluctuating currencies gives a negative impact. EBITDA was up by 12% to DKK 399 million, and we -- here, we experienced positive contribution, mainly from our recent acquisition of Alimentsa in Ecuador from HydraSpecma and also from Borg Automotive. Cash flow from operation was as expected in Q2. New companies and higher activities demands higher net working capital. First half is also our, in brackets, "weak" cash flow half, so we expect cash flow to peak in H2. The full year guidance for Schouw & Co. 2018 has been downgraded. Revenue expected to grow 6% to DKK 18 billion. EBITDA was, however, lowered in the -- around DKK 100 million to a range of 1.5 -- DKK 1,580,000,000 to DKK 1.7 billion. And as I mentioned in the start, this was due to expected lower volume in BioMar Norway and in FPC Malaysia. I will elaborate a little bit on that later on. Expected CapEx for the year will be in the area of DKK 750 million. Also, we have to realize that we operate under volatile unpredictable market conditions, especially concerning raw materials components and currencies. We have also announced and are going to initiate a share buyback of up to DKK 200 million. We expect it to run this year and will end on the 28th of December, 2018. Looking very shortly into each of our operating companies, I will start elaborating on BioMar. Revenue in BioMar increased 11% to DKK 2.5 billion, and overall, it was a good and satisfactory quarter for BioMar. We saw some negative revenue impact from ForEx of about DKK 150 million. However, volume increased 8% to 288,000 tonnes. And for the first half, it was 512,000 tonnes altogether. Again, here, we, of course, experienced positive effect from Alimentsa. BioMar has been influenced negatively by climate issues and was affected in Q1 but also in Q2 and strangely enough, Q1 was because of severe cold weather and Q2 was because of severe hot weather. So that's the name of the game when you are in the biological business. EBITDA increases 11% to DKK 174 million. And again here, Alimentsa from Ecuador compensates for a negative development we saw in Salmon division. The negative effect in Salmon division was due to, as I mentioned, the poor climate pace. Our EMEA division realized their earnings as expected. Looking into Q2, we saw also a stronger development of our nonconsolidated companies, and we have an interesting capacity expansion in our BioMar Denmark facilities going on, DKK 90 million investment. We will see there a total capacity of 150,000 tonnes, and this capacity expense is in good progress. Outlook for 2018 is unfortunately downgraded. We expect now revenue of DKK 10 billion, and EBITDA has been downgraded from a range of DKK 720 million to DKK 780 million -- DKK 770 million to now DKK 665 million to DKK 705 million, as expected. And again, this is due to the competitive situation and lost contracts in Norway. We expected, when we started up 2018, around 80,000 to 100,000 tonnes more in Norway than we have gained. So, of course, that will have an impact on our guidance. All units -- other units performs as expected. We have initiated both efficiency program and optimization programs and also cost reductions around BioMar group, but, of course, we are looking specifically also into the Norwegian situation and get our competitive edge back up there. All contracts in Norway will be renegotiated in 2019, so that's also the name of the game in this business. From BioMar to Fibertex Personal Care, revenue at a level with last year, DKK 486 million. We saw a continued growth in Asia and also our print business overall, on general had a good development. EBITDA was reduced from DKK 82 million to DKK 69 million. And here, we experienced significantly a negative impact from currency and the raw materials specific in Malaysia. In the quarter, it was around DKK 6 million to DKK 7 million, but for the first half, it has had an impact of DKK 20 million. We also had a difficult start of the second print line in Malaysia; it has been quite problematic. Again, also in Malaysia, we experienced higher energy cost than expected. But we're looking at our Danish operation, we experienced better performance than expected and a good development in spite of very tough market conditions. Moving a little bit into the highlights of Q2, we have construction of our print facilitate in U.S. It's well on track and we continue to focus on developing new and higher-value products. Outlook for 2018 downgraded. Revenue, about DKK 2.1 billion. EBITDA, downgraded DKK 40 million to a range of now DKK 310 million to DKK 330 million. Here, we saw, as I mentioned earlier, effect from currency and raw materials in the H1 -- in the first half of 2018. And now we expect lower volumes in Malaysia in second half. We expected, in fact, that we really could pick up the lost -- the difference in the raw materials and currency in Q4, but some of our premium brand customers, they're challenged in their markets and they have softened their demand. Also, we expected our print facility in Malaysia to deliver better results than we now see due to problematic running of line 2.Competition in Europe continues to be tough. But so far, our Danish operation has handled it well. Looking into Fibertex Nonwovens, we saw revenue increase 12% to DKK 420 million in spite of tough markets. We have seen a positive -- very positive development in our U.S. operation and, of course, also effect from our Brazil acquisition. In fact, Brazil has contributed DKK 31 million to top line. We saw a small increase of EBITDA in the quarter to DKK 52 million. And here, we have seen raw material prices continue to be challenging. However, we have had a positive effect from our new Brazilian acquisition, but also product mix has been a little bit different and somewhat the segment has been squeezed. Looking at the first half in general, we have had one-off costs of DKK 5 million in Fibertex Nonwovens. Moving a little bit into highlights of Q2, still continued tough competition in Europe and then the integration of the new Brazilian company is going smoother and better than planned. Outlook for 2018 is maintained. Revenue, DKK 1.6 billion; EBITDA in the range of DKK 195 million to DKK 205 million. We see challenging raw material prices continues and also a little soft demand in the important segments and they put pressure on our guidance. Going to HydraSpecma, you could say not the star, but a positive surprise in this year. Revenue for the quarter increased 20% to DKK 550 million, and we are now also to say it was a very good second quarter. Good momentum in main segments, very strong order intake and good backlog. EBITDA was up by 29% to DKK 48 million. And here, we especially saw scale effect and improved efficiency in our Swedish operations and EBITDA was up despite of increasing component prices. But these component prices has been compensated by overall efficiency improvements. Highlights for Q2, we have to say that we see longer and longer lead times on important components. It increases our net working capital because we have decided on a strategic inventory buildup. We are constructing new facilities in Poland and it's well on track. Outlook for 2018 is upgraded. Still, as I mentioned, strong demand, solid backlog. Revenue is upgraded with DKK 100 million to DKK 2 billion; and EBITDA with DKK 10 million to a range of DKK 165 million to DKK 185 million. So in general, positive outlook on this company. Borg Automotive 2018, like Q2. We acquired, as you may know, Borg in 2017, so it's relatively new in our portfolio. Revenue was up 8% to DKK 268 million. We experienced continued positive demand across segments and markets. The OES market shows strong development, especially one segment of product group brake calipers really continues to grow. EBITDA was as expected, DKK 41 million. Looking and comparing to 2017, we have to say also that '17 was affected by several one-off costs in -- around DKK 30 million. We've seen good efficiency in our Polish production facilities. But also, EBITDA has been affected by planned cost increases from upgrading of ERP and organizational resources. We are preparing Borg for future growth. Still, we are seeing a company with a return on invested capital of 24%. We have decided to expand our capacity in Eastern Europe, and we see a really solid pipeline of potential new customers across Europe and it has been confirmed. But of course, it takes quite a long time to run customers in. Outlook for 2018 maintained. Revenue in the size of DKK 1 billion; EBITDA, DKK 155 million to DKK 175 million. The last operating company in our portfolio, GPV. There, we saw revenue up 4% to DKK 297 million. We have seen effect from new customers and new products, but also, we experienced a bit softer demand, especially from 3 large customers that were very big last years. Good thing is that we have seen order intake really picking up again the last months. EBITDA has declined from DKK 27 million to DKK 24 million. And here, we really still have a negative impact from starting our products and facility in Mexico. We have planned a negative contribution from Mexico, but it was -- has been a little bit higher than expected due to difficulties of getting components and getting products approved by customers. And we have also seen effect from this longer lead time on specific components. Mexico operations shows, however, good progress. We see improved efficiency and increased demand. We have decided the expansion of our Thailand production facility, and it's well in progress. And we also saw a strong pipeline of new customers coming in. 2018 guidance is maintained. So revenue, DKK 1.2 billion; EBITDA, in the area of DKK 120 million to DKK 135 million. However, we are a little cautious on the components situation. We really see difficulties in sourcing in important components. So overall and in general, Schouw & Co. see unchanged challenging markets, which we face fierce competition, but we have also strong measures in mind to offset that. Q2 was as expected. Now we see revenue of around DKK 18 billion, positive full year effect from Poland and Alimentsa. We also see a good platform for our future lies in new capacity. Our EBITDA is now expected in the range of DKK 1.58 billion to DKK 1.7 billion and it's built on also uncertainties on raw material components and currency fluctuations. Also, because we have faced this tough competition and also have downgraded our guidance, we -- all our companies have initiated cost and efficiency optimization plans. We have already had them in place before because the markets are tough. But we really continue to focus on profitability and return on invested capital as our main priorities on the short run. So with that wrap up, I would hand over and like to take questions.

[Operator]

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

[Jonas Guldborg Hansen, Analyst]

First of all, on the situation in Fibertex Personal Care in Malaysia, is this thing about -- your premium customers losing share, is this a situation you have seen before? And if yes, how long does it usually take before they kind of work their way back to growth? And also, maybe a few more words around what you're doing to mitigate the situation? And second question would be on your net working capital. You say that the acquisition and the investments require higher net working capital. On my calculation, you are -- your net working capital has grown by more than DKK 700 million over the last year. Could you kind of give a feeling for how much of it is organic and how much is acquired?

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

Yes. Jonas, thank you very much for the questions. First, elaborating a little bit on the Fibertex Personal Care. We see -- over the years, we have always seen demand fluctuating quite a bit in Asia. And normally, we really experience strong demand in Q4 and, as I said, we expected that we could pick up more volume to compensate what we lost on currencies, et cetera, in the first half. But our premium customers are challenged and they have also initiated a lot of initiatives to get back. So we expect that this situation will level out and we will be back with volume on our premium customers, again, also into 2019. It's not -- we do not see that as a very difficult situation. But looking at the short run and from a quarter-to-quarter, we will see these fluctuations. Then looking into net working capital, you could say that we have from our new acquisitions, we -- in 2018, net working capital effect is around DKK 200 million. Then we have, as I also mentioned, on the HydraSpecma, and the same goes for GPV, decided on a strategic buildup of important components. And it has been quite sizable also. So these 2 things has really contributed a lot to the increase in our net working capital. We also see good potential for optimizing on net working capital in future. The main issues still are in BioMar, not issues, but we have seen an increase in net working capital for components and new companies are taking up most of it.

[Operator]

Our next question comes from the line of Klaus Kehl of Nykredit Markets.

[Klaus Kehl]

Klaus Kehl from Nykredit Markets. Kind of a follow-up question about this net working capital and your increased focus on this one. Do you have any -- or do we have any -- or could you give us an indication on where your net debt would end the year-end? And the reason why I'm asking is that, assuming that you will be able to reduce your net working capital and you most likely will reduce your CapEx, then you could end up with a net debt in the range of DKK 1 billion year-end and your net debt-to-EBITDA would then be well below 1x. So in that respect, I was wondering whether also you could give us your thoughts about your capital structure going forward? And whether we -- whether it would be fair at least to think about a new share buyback going into 2019. That would be my first question.

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

Okay. Well, thank you very much for the question. I think your take on our year-end NAV and the net interest-bearing debt, is, of course, an as-is situation. And if it was that, I agree that we will, of course, reduce net interest-bearing debt significantly. We -- now we have -- but, of course there, a lot of things can happen and we always are looking on new opportunities, et cetera. And we don't have anything specific in the pipeline for the time being, but that's what we are here for and that's what we are prepared for. Then you could see our share buyback program is something new. First time we really started and we have been discussing that for quite a long time. And now we start up and then we will see how it goes and how the effect is on that. And I will not say that we will not start up other. It could -- we could also look into it in next year, but we did not promise anything on that. Let's first see how it goes and also do we have some interesting investment targets in our portfolio before that time. But now we have started, so of course, it's part of our -- what do we call it, our toolbox now.

[Klaus Kehl]

Okay, okay. Right. And then secondly, about BioMar. You have a target of an EBIT margin of 6% going forwards. And I guess, you will drop below that here in '19. But generally speaking, could you talk about the way forward for BioMar following these contract losses in Norway? What could kind of reaccelerate growth in '19 and '20? And secondly, you mentioned that in Mexico, you had some fairly big losses due to this, as you were starting up a new production facility. Would it be fair to assume that these losses will be eliminated in 2019? Or how should we think about that?

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

Let me take the easy one first. Mexico GPV, our intention is, of course, to make a breakeven in '19. So looking into it, as it is now, we expect to break even in '19, but let's also see how the year develops. As I also mentioned, we see good progress now we have a -- it's a very, very long time to get products approved by customers. So it has been long underway. Now we just say we're a little bit -- we feel we are over the hill now and we can see that we are running and supplying customers a lot of products and so on. So intentions, yes, breakeven in Mexico in 2019. Then looking into BioMar, I think you have to look at BioMar in 2 boxes, you could say. We have the Salmon works, which is very, very big customers, very transparent. Tough competition. And then you have what we call EMEA and emerging markets, much more fragmented and EBIT in the 2 divisions are different. We have a higher EBIT in EMEA and emerging markets than in Salmon. So we -- on the long run, we expect to grow more also now our shrimp strategy where we acquired Alimentsa in Ecuador and so on, goes in that direction. And Alimentsa has EBIT margins and profits well above what we see in the Salmon business. So yes, we see growth in higher margin areas. And then, if you look into Salmon, you could say where we have really seen the problems is in Norway; there's been a tough negotiation year. And, of course, there's a lot of things we can look into, also maybe as the product mix we have went to the market -- gone to the market with this year, has that been competitive enough, have we been tough enough on our recipes, et cetera. So there's a lot of things to do and we have initiated a very strong plan in Norway to get back on track and also to get our -- the volume back next year. You could say we have a capacity standing. We do not need to invest DKK 1 in new capacity, et cetera, to take back, even to increase Norway will cross 100,000 tonnes. And the opportunity is there because as I also mentioned, all contracts in Norway, they are negotiated on a yearly base.

[Operator]

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

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

Just also a follow-up question on BioMar. As you said, you're going to try at least win back the lost volumes next year. Maybe you could put some color on how you're going to do that as normally this is done via lower prices.

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

Yes, Claus, and thank you for the question, Claus. As I said also, I think we have to move a little bit into also our recipe platform, look into our product mix. We have offered the market high-energy products at a higher price, et cetera and that's a lot of parameters to work on. And maybe also because we have had, in the old days, a lot of problems with the physical quality, and today, we have the best physical quality in the market, but we have had a lot of problems. So maybe we have not been strong enough of taking recipes a little bit further to the edge, been too prudent, too conservative on things. So there's a lot of things to work on. And, of course, we are not going to take contracts at any cost, but we see still a lot of opportunities. And also, we have to remember that these contracts in Norway, they go from supplier to supplier, up and down. But this year, it's everything went unfortunately against us and we see a lot of opportunities ahead, a lot of good plans on it.

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

Okay. And yes, maybe I could do a follow-up question. As we know, you've been very successful in Norway the last, at least, couple of years taking market shares. And now suddenly, your go-to-market strategy is not the right one. So have you changed your strategy this time? Or has the market changed? What do you mean about different recipes, that also sounds as offering more standard product at lower price or what?

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

Yes. The market has changed.

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

Maybe that was a lot of questions all at once.

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

In some respect, it has changed on high energy products. And in some customers, we didn't really read the market enough. We continued to push on certain products. But also, we have to say that we saw competitors knocking the door with a very, very low prices, and we have to look into how can they offer prices at that level compared to what we see as a profitable business. And again, we are going to protect volume but not at any cost. But we see a lot of opportunities. And the good thing is it's not only the market; we have also opportunities internally to work on and we are going to work hard on that.

[Operator]

[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.

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

Okay, thank you very much for listening on this late Friday afternoon, and thank you for the questions, and I wish everybody a good weekend. Thank you. Goodbye.

[Operator]

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.