Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Schouw & Co. Q2 Report 2020. Today, I'm pleased to present the CEO, Jens Bjerg Sørensen. [Operator Instructions]Speaker, please begin.

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

Thank you very much, and welcome to everyone to presentation of our Q2 2020 report. Q2 was a quarter heavily influenced by the global COVID-19 pandemic, but our companies have in general responded very professionally and diligently in this difficult situation. I think I can say that our conglomerate strategy and diversification really showed strength during the quarter. We delivered a strong and very satisfactory quarter.Our revenue was flat at around DKK 5 billion, impacted by lower raw material prices, but only 2 out of our 6 companies were hit by reduced volumes. The group EBITDA increased 23% to DKK 517 million. We saw a profitable product mix and lower raw material prices in most of our companies. We also, as I mentioned, had a very strong execution with high efficiency and good cost management throughout the group.Cash flow from operations improved impressive 375% to DKK 607 million. Of course, we saw some positive impact on the current tax and VAT payments in the different countries. We also had a solid effect from our strong and resisting focus on our net working capital, but there's still room for further development. CapEx for the quarter was only DKK 79 million, which also meant that we could reduce our net interest-bearing debt significantly to a leverage of 1.5x EBITDA today.We're also happy that we can reintroduce our guidance for 2020. This is due to much better and improved visibility in all our companies. We now expect the turnover for the year around DKK 20.6 billion. EBITDA is expected in a range of between DKK 1.94 billion to DKK 1.11 billion (sic) [ DKK 2,11 billion ], virtually unchanged compared to the guidance we went into 2020 with. Of course, there will still be uncertainties on the development of COVID-19, but this guidance is the best as we see today.Looking at BioMar, BioMar delivered the best Q2 ever, where revenue was up 7% to DKK 2.7 billion. They saw a 9% increase in volume to 210,000 tonnes, especially due to strong development in our Salmon division, whereas both the Latin and EMEA divisions had slightly lower volume mainly due to COVID-19 effects. And this lower volume was mainly caused by low shrimp exports from Ecuador to China and decline in HoReCa demand in Europe.EBITDA in BioMar increased very satisfactorily from DKK 191 million to DKK 222 million. Also here, we saw a very good product mix with good sales of functional feeds. We have also experienced our efficiency and strong cost control in all areas of BioMar.Looking a little bit into Q2, we're very pleased to see that we had smooth start of 2 new feed factories in both in China and Tasmania. In fact, these 2 factories were started more or less virtually, so we didn't -- we couldn't send people to these 2 markets, but we have managed to run them. We also signed the letter of intent with Vietnam-based Viet-UC on acquisition of their feed factory in -- joint venture of their feed factory in Vietnam. We experienced that our nonconsolidated farming company Salmones Austral in Chile was hit by low salmon prices out of Chile.The guidance for 2020 is expected a turnover of DKK 11.5 billion. EBITDA in the area of DKK 940 billion to DKK 1 billion. Of course, also here, we had some concerns on how will the important HoReCa segment develop, how will shrimp export to China from Ecuador, see how -- and will we see a recovery in U.S. in the third and fourth quarter.Then on to Fibertex Personal Care, where revenue increased 8% to DKK 548 million. In fact, volume was up 21% in the quarter, which was very satisfying. We experienced strong demand in Asia, more moderate in Europe but still growth and good demand in there. We -- I think we experienced effect from changes in the supply chains globally, meaning large customers more and more sourcing at reliable suppliers. EBITDA at DKK 124 million compared to DKK 72 million last year. Here, we see a huge effect from strong capacity utilization. However, also, we had a positive raw material gain of DKK 32 million in the quarter.Throughout the quarter, we saw that the industry continues to focus on specialty and value-adding products, large customers, as I mentioned, looking for securing supply more long term and the industry capacity seems to be in a much better balance now.Guidance for 2020 will be increased again due to a very strong order intake. The visibility of revenue unchanged, about DKK 2.1 billion. EBITDA now expected around DKK 390 million to DKK 420 million. And of course, it's created by a very positive effect from corona-caused demand.Looking at Fibertex Nonwovens, we saw really strong execution from Fibertex in this quarter, which also made them able to deliver the best Q2 ever. Although revenue was reduced 12% to DKK 392 million, but we saw strong sales of specialty products and wipes, partly offsetting a decline in the auto segment. U.S. market continues very good development in all segments.EBITDA increased from DKK 38 million to DKK 60 million, and this was really an effect from move to more high-margin and specialty products that gave this impact and also good effect from overall efficiency improvements and cost cutting throughout all companies in part of its management.During the quarter, we have adjusted production capacity accordingly, meaning moving from low-margin, high-volume products to higher-margin, lower-volume products. We have experienced strong demand from the medical segment, which we think also opens future opportunities. Our nanoproducts continues to development and also creates a solid basis for future.Guidance for 2020 will be turnover around DKK 1.6 to DKK 1.7 billion. EBITDA, increased expectations, in the area of DKK 205 million to DKK 225 million. And then you have to emphasize that we continue to see strong U.S. development and positive sales of specialty products.GPV saw their revenue down 5% to DKK 676 million. Especially here, we experienced soft demand from very large industrial customers across all markets. But then on the positive side, we had impact from temporary -- on the negative side, we also had a temporary impact from closedowns in some of our sites.EBITDA increased with DKK 20 million to DKK 62 million, a good impact from high efficiency and product mix, customer mix. Also I'd like to mention that in 2019, we had a negative impact from PPA and that will be DKK 10 million. During the quarter, we have continued with our investment program in efficiency and automization. We have decided to implement a uniform manufacturing execution system of all sizes, meaning we're now really getting the 2 merged companies to one company.We also experienced stronger demand and interesting backlog from the important medtech segment, meaning that outlook for 2020 will be a turnover of around DKK 2.7 billion, EBITDA at a level of DKK 200 million to DKK 230 million. And as I mentioned, expected positive impact from the medtech segment.HydraSpecma had a difficult Q2. Revenue was down 90% to DKK 458 million. We have 2 very large different segments and the good side is that we experienced good development in our very important wind turbine segment, whereas we saw very soft demand from large vehicle segment customers, especially in our Swedish operation. EBITDA reduced from DKK 64 million to DKK 46 million. Of course, a huge impact on negative -- a negative impact from lower sales. There have been a strong effort on cost cutting and efficient utilization of capacity on all sides. Also I'd like to mention in '19, we had a positive impact in Q2 of DKK 6 million from real estate sales.We have extended our warehouse facility in Denmark. It's now in use, and we have decided to increase production capacity in China mainly to serve the expanding wind turbine business out there.Outlook for 2020, turnover expected at DKK 1.8 million. EBITDA now DKK 160 million to DKK 180 million. Wind is a key driver, and there are still some uncertainties in the vehicle segment.Borg Automotive also had a very difficult Q2. I have to say better than -- they came out better than feared. Even revenue was reduced 25% to DKK 173 million. They saw demand from all major European markets was very low. Customers were closed down. And as we say, no cars to repair when there are no cars on the road. And that was really what we experienced, especially in Southern Europe and U.K.EBITDA was down from DKK 21 million to DKK 11 million. It could have been worse. We saw a really good impact from strong efforts on productivity and cost cutting across all functions. We have also received a positive effect from government schemes of DKK 4 million.Throughout the Q2, our factory in U.K. has been closed down, totally closed down for 2 months. Our Polish facility has been reduced in manning. Good thing is now we see demand picking up especially from large European customers.Outlook for 2020 will be a tune of around DKK 850 million. EBITDA in the range of DKK 75 million to DKK 85 million. Wrapping up, very strong Q2 development and better visibility. Our conglomerate strategy really showed strength. All our companies have been executing very professionally in difficult times, and I have to pay tribute to all our management and employees around the globe. And doing that, our financial position is good, and we have a potential for seizing opportunities.We are also working hard on preparing our companies for, what we call, mix model looking -- starting to look into 2021. We are having our guidance back at the same level before the suspension. EBITDA, however, expected to be stronger than what we delivered in 2019. Strong -- expect really strong cash flow. But also, we have to mention that COVID-19 crisis and this terrible situation has not disappeared. We need to continue to take responsibility for people and organization, and we need to be prepared to act accordingly.So with these words, I would like to open up for questions.

[Operator]

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

[Jonas Guldborg Hansen, Analyst]

I have 3 questions, and let's take them one by one. First of all, I would like you to talk a little bit about how COVID-19 is affecting the 2 Fibertex companies? And by that, I mean, is the high capacity utilization we saw in Q2, Is that still going on here halfway through Q3? In your prepared statement, you talked about future opportunities in Fibertex Nonwovens. I think in the announcement, you're saying that on the other side of COVID-19, we don't expect any impact on Fibertex Personal Care. But if you could talk a little bit about how COVID-19 will affect the 2 Fibertex companies longer term, if at all?

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

Yes. And of course, longer term, it's difficult to really be certain, but we expect that this positive effect will last for some time. We see changes in the way our large customers [indiscernible], meaning the supply chain will be different, which will provide volume [ loss ]. Especially looking at Fibertex Personal Care, you can see that the large customers really are eager to contract for '21, discussing '22, having a new approach to the suppliers and so on. So I think that's going to give us a positive effect and really continue to give good volumes. So margins and so on, we haven't discussed yet, but we are quite positive on the opportunities.Looking at Fibertex Nonwovens, we have seen a total change from selling low-margin, high-volume products due to [indiscernible]. And then we have been working on for 10 years to change, moving more into added value, functional products and it has really happened now. And we see also that what is going on due to the COVID will continue. There will still be a lot of use of face mask materials, specialty, wipes, et cetera. So we feel quite comfortable in that. And also, we have seen a minor breakthrough in 2 very important filtration segments. So we're quite confident on good opportunities in the future.

[Jonas Guldborg Hansen, Analyst]

Okay. Could I -- should I understand the comments around Fibertex Personal Care as you are also then seeing an easing of, what you said, price pressure from your customers if they want to discuss already now for 2021 and '22?

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

To be honest, we have not been in really price discussions yet. We do not really see that. And we know when these large volumes start to be really discussed, then one thing is volume and [indiscernible] but then prices starts. So I can't really say that we have seen that recently, yes. But I think we benefit from high efficiency due to capacity utilization and the way we can run our lines.

[Jonas Guldborg Hansen, Analyst]

Yes. Sure. Okay. Then if you could help me on BioMar and your guidance there because as you're guiding for negative revenue growth in H2 or after having plus 9% in H1. So -- and also on EBITDA, you have 18% EBITDA growth in H1, but are guiding for negative EBITDA growth in H2. Could you just explain how that comes about?

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

i mean -- as I think our EBITDA increased in Q2, could we provide more...

[Jonas Guldborg Hansen, Analyst]

But you're guiding for negative growth in EBITDA in H2. So it's going to be...

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

Yes. Of course, we expect that volume will decline somewhat. We also expect some differences between the different segments and volume. And we have some segments with higher margin than others and -- so where we see -- or expect to be a little bit effect will be in our high-margin segments. So that's -- yes. We also expect volume a little bit down due to maybe restricted feeding in Chile, restricted feeding in Norway. They can't sell as much salmon as expected. So that's part of our thinking that we see soft -- not very much, but soft -- a little bit softer demand and then a change from region to region.

[Jonas Guldborg Hansen, Analyst]

Okay. Makes sense. And then my last question is just really if you could give an update on your expected CapEx for 2020.

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

I'm looking at [ CapEx now ]. We had some of the -- in fact, we have postponed a few investments, but I think it's around DKK 300 million, DKK 400 million, maybe DKK 0.5 billion, something like that. But we are working on postponing some of it, yes.

[Operator]

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

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

Yes. First of all, Jens, with your comment that Q2 was heavily impacted by COVID-19, then I almost say, I hope it will continue for many years because there was quite a stellar performance you had in Q2, obviously, with this caveat that people should not be sick by COVID-19.One question regarding lower revenue guidance for full year. How much of that is due to FX and raw materials? That will be the first question.

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

Claus, thank you for the comment also on COVID-19. When I say it was heavily, it's meaning that there was a lot of hard work going on to offset these things and so on. So it was really top of mind in all organizations and management. But I agree, we were very satisfied with the outcome of it. Looking at the turnover, I think it is really raw material prices and FX that are impacting expectations to turnover.

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

Okay. Then we've seen at least for other companies that due to no traveling and so on, there's been a lot of cost savings in the quarter. And most likely, that will not continue forever. Can you put some color to how much of your cost savings have been caused by both state aid and also, yes, people not traveling and so on?

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

Yes. The state aid around the globe is around DKK 25 million. Not traveling, so -- we are not a company with a very, very large marketing and travel spending and so on. But we estimate made DKK 10 million, DKK 15 million impact from these things. So let's say maybe altogether DKK 40 million or something like that, including savings and so on.

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

Okay. And then my final question goes to the cash flow. And obviously, you are very satisfied by the cash flow in Q2, which is coming from the net working capital. But maybe I would argue it's not that impressive. You're increasing your user supply chain financing. You have some duty postponement. You have lower revenue. And I know BioMar is pulled in the wrong direction, but are you -- this is no question, Jens, but are you satisfied by the cash flow really?

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

I think I said also in my remark that net working capital still needs improvement. So I think that was a clear message that even I think cash flow is quite good, I agree totally with you, we have also had help from these government places. And I'm pleased, but I'm not satisfied, okay?

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

But it couldn't -- actually say, it's ex status quo. The things that has improved the cash flow in the quarter is, yes, one-off and not really driven by the underlying improvements. Would that be a fair statement?

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

No. It's not a fair statement, but it's only coming from there. But I take your point that it's not only coming from these things. They're also coming from [indiscernible] and focus on it, so yes. Of course, BioMar still tried to deliver which some of the other players really couldn't.

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

And BioMar, is this just due to mix? Or do you actually see an adverse trend in BioMar?

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

It's a lot due to mix. Moving volume from Norway, so that we have huge sales in Norway with very, very short term and thein into Ecuador, Chile, et cetera. It's a different volume and it is a huge part of us.

[Operator]

Our next question comes from the line of Ulrik Bak of SEB.

[Ulrik Bak, Research Analyst]

I have a couple of questions to BioMar. You show an impressive volume growth of 9% in the second quarter. And you write in the report that the growth is a result of the new facility in Australia and -- as well as more innovative product offering and close collaboration with customers. Can you elaborate what the split is between the 2 factories? And what do you expect in terms of growth for, yes, the second half year?

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

And you could say now the Tasmanian factory still is very small compared to the rest, but you have to know also that the main volume was moved from U.K. to Tasmania, meaning at crude level, it's not a really new volume. It's just moved to Tasmania and now produced in Tasmania, meaning it's more profitable. So it's not significantly for the quarter, but it's a change. And it's important that we started that in a good way. So volume-wise, not very big impact. Positive impact on profitability, not big. But we have made losses -- start-up losses in the first quarter and now we are profitable already in Tasmania.For the second half, it's difficult still to say -- we have a little bit better sales in the U.K. than expected. So -- yes, I think it won't offset that much because moving from Tasmania to U.K., meaning a little bit better margins, but not very much impact.

[Ulrik Bak, Research Analyst]

So if I understand you correctly, the growth has -- the majority of the growth has been from this new innovative product offering and customized products for your customers? Is it basically in Norway?

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

No. Very good growth in Chile. We have been growing very well in Chile, taking market shares, huge growth in Chile, yes.

[Ulrik Bak, Research Analyst]

Okay. And then second question, your gross profit per kilo has been up over the last 3 quarters by 10% to 20% year-over-year. But this quarter, it was down almost 20% year-over-year. Can you shed some light on what dynamics have caused this development?

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

I think, again, when we are talking about geographical split, if you look at our EBITDA margins, it's difficult to elaborate. The EBITDA margin on BioMar is up for the second quarter from 7.6% to 8.2%.

[Ulrik Bak, Research Analyst]

But that's versus revenue. If you take it versus the volume?

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

Yes, but it's depending on mix also. There's a lot on mix. if you move from -- between the different segments, there's really a lot on the mix and the contribution margin. So that's the movement. Movement between the different segments really makes that.

[Ulrik Bak, Research Analyst]

Okay. Then my final question on BioMar. You mentioned something about less new fry releases could affect volumes in the future. So what is usually the time lag before reduction in fry releases happens before BioMar can feel it in terms of lower feed demand?

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

Again, a very big difference on species. If you take salmon, the serve period is around from 18 to 22 months. And -- but if you take shrimps, then a serve is made in 3 months. So there you can see a very fast impact with shrimp business in Ecuador. We saw because of low export or and export to China. And then we can move very, very fast. Whereas salmon takes a long time. What they can do in salmon is more kind of restricted feeding, meaning feeding slow and let the salmon grow slower also. So it is a lot. But I think in the salmon business, we do not expect really to see less smelt releases also because we are finding new ways into the market. Chile is another ballgame because U.S. is so important than Chile, and we have to see [indiscernible].

[Operator]

Our next question comes from the line of Laurits Kjaergaard of ABG Sundal Collier.

[Laurits Louis Kjaergaard, Lead Analyst]

Congratulations on very good results despite all the turbulence. My first question is on the legacy GPV and the CCS operations, which you previously flagged that legacy GPV perhaps had a softening time versus CCS. Can you talk about the sales development in the first half year and your assumptions for the second half year for those 2 businesses, please?

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

Yes. We -- as I said also, we have seen a soft order intake from large industries throughout Europe, both in the old GPV and also in CCS, meaning companies like [indiscernible], whatever you could mention as large industrial companies. Then we have seen another increase in takeout in the medtech, and that especially goes for the CCS.And expectations for second half is that the medtech will really improve and we should also be able to offset the very short -- not very short, perhaps soft order intake and expectations for old industrial companies. So I think that's the way it's balanced, and it's very good that we have really strengthened ourselves into medtech as it's really helped us this year.

[Laurits Louis Kjaergaard, Lead Analyst]

That's very clear. And for Frederikshavn and Borg also, I mean, both of them have some exposure to the auto sales industry. And your included guidance, you find sort of similar negative sales development in the second half versus the first half and even flat to lower margins. Obviously, there's some seasonality there, granted. But what's your assumptions behind sort of the auto industry for those 2 businesses because obviously, it's really volatile at the moment. But what I see is sort of the world is pretty much opening up, especially in Europe at the moment. Is that what you assume for the second half? Or could we be surprised?

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

Yes, it is what we assume. Also if you look at Borg, Borg has delivered so far and we also need to have a very good second half. Normally, second half is a little slow, especially we have December not that good. But we see sales picking up, and that has nothing to do with the automotive industry or car sales. It has more to do with, we need the cars out in the streets running because then they break down and they need spare parts, et cetera. And we also need the auto shops and the repair shops to open up. And that's the expectations we have. We see improved demand from larger customers. Looking at fiber, then it's more volatile because we are supplying, what we call, large vehicles, trucks, car sales, et cetera, and also off-highway equipment. It's more blurry, but we expect it to stabilize. We have seen backlog picking up a little bit.

[Laurits Louis Kjaergaard, Lead Analyst]

Okay. And then a question on BioMar. You talked in your report about out-of-home consumption, especially in terms of the shrimp business, which I believe has quite good margins and have been so previously. Are we expecting a pickup here in out-of-home consumption? Or what are you thinking?

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

To be honest, I think there's a lot of answers to that question. We are expecting that we also will stabilize more because it's such a big market for Chilean salmon. We have seen Europe picking up on out-of-home, et cetera. So we expect it to stabilize, not -- we do not expect it really to increase a lot, but it's very important. But all you can say take a segment like the aviation, flight business, flight industry. If you go on the flight, probably, normally, you will have salmon 2x and nobody is flying any longer. So of course, they need to find new ways to sell these salmon to the customers, so yes. It's something we are really looking carefully into.

[Laurits Louis Kjaergaard, Lead Analyst]

Okay. And just sort of an overall broad question. I mean Schouw is known to be sort of an M&A player. Is there any change of sentiment for any of perhaps the acquisitions that you've been looking at previously? Or has this quarter been -- I understand this has been a turbulent quarter? Has it been a quarter where you've been looking more inwards or have you also been looking at potential acquisition opportunities? If there's any targets, which are having a really difficult time that maybe even good multiples to be found by acquiring them?

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

It's part of our strategy, it's part of our business, and we are always looking into opportunities and also now. And of course, we -- as I say, we have financial strength to look and we've been looking into interesting things. Not done anything, but we will be there and we'll be ready to take opportunities and we are also willing to do.

[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]

Sure. Thank you very much for listening and participating in this Friday afternoon with a very warm summer. Everybody, good evening. Thank you.