Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I am Matt, your Chorus Call operator. Welcome, and thank you for joining the Schouw & Co. Conference Call 2021 Quarter 2 Report Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Jens Bjerg Sorensen, CEO. Please go ahead.

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

Thank you very much, and welcome to everyone to the short presentation of our Q2 report. Overall, we had a very satisfying and strong quarter. We are still operating in a turbulent world, but demand for Schouw & Co. is in general very strong. Our revenue was up 13% to DKK 5.6 billion and EBITDA increased 8% to DKK 557 million. Cash flow from operations was DKK 269 million. And our return on invested capital had a very satisfactory level at 16.2% and is well above our 15% target. Looking a little bit into the quarter, we could see we have had increasing costs on raw material components and transportation, and it has really been a key challenge for all our companies. We have seen very high activity levels in all companies, and that has given a positive pressure on capacity and also on our supply chains in general. The order intake for most of our companies are at a historical [indiscernible]. The corona situation, especially in Asia, is still a concern. And our net working capital increased due to the strategic decision on being able to deliver and also we saw an effect from higher raw material prices. The guidance for '21 is slightly up, and that is due to strong first half and also the attractive backlog we are having. Turnover is now expected around DKK 23.7 billion and EBITDA now at a level of between DKK 2.155 billion to DKK 2.340 billion. Still, we expect to implement or to do CapEx at a level around DKK 1 billion. That was the general overview. I'll now move into each of our companies, starting with BioMar, where we, in Q2, saw a very good volume development and also saw that market demand is slowly is recovering. Revenue was up 6% to DKK 2.85 billion and volume was up 4% to 322,000 tonnes. EBITDA was slightly reduced to DKK 250 million. Net working capital in the quarter for BioMar reached a level of DKK 1.4 billion, and return on invested capital is still at a satisfactory level of 18%. Volumes in Chile was, as expected, lower and also had a negative effect on our EBITDA. We have seen a margin pressure throughout the quarter due to steep increase in costs of raw material, transportation and also a fiercer competition than normal. We have a very strong contract position. And as you know, we have always in Q2, negotiating a lot of large contracts. And in all main markets, we have good contract positions and increasing volume expectations. We also saw a positive development in our joint venture in China. Very good for us is also to see that salmon prices in general have recovered, both in Norway and in Chile. Guidance for 2021 is now a turnover up with DKK 1 billion to DKK 13 billion. That's due to more volume and a positive effect from raw material prices. EBITDA however, is slightly reduced now to a spread of DKK 940 million to DKK 985 million, and that is due to, as I said, increase in raw materials. We see more and more difficulties in getting full compensation at all customers on these increasing raw material costs. Our associated companies also developed positive, especially -- well, I mentioned Salmones Austral, our Chilean farming company. We now guide them with results of around DKK 50 million into our books following the recovery in the Chilean salmon prices. From BioMar to Fibertex Personal Care, where we saw very volatile raw material situation and it has been very challenging. Revenue was up 2% to DKK 558 million. EBITDA, as expected, down more than 50% from -- down to DKK 63 million to DKK 61 million. Return on invested capital now at 13%. We have strong demand, continues in both Europe and Asia, but a huge negative impact from raw material especially the most important, polypropylene, where we have a negative effect of DKK 65 million compared to Q2 in 2020. So if we look at Fibertex Personal Care in general and exclude the impact on raw materials, then we saw a very strong performance in general, very high efficiency in all factories -- factory in fact, at historical high levels. Guidance for 2020 is maintained. Revenue unchanged, about DKK 2.2 billion to DKK 2.3 billion and EBITDA is still expected in the range of DKK 320 million to DKK 360 million. We keep a large spreads because the raw material situation is a continued concern for us. And then also the corona situation in Asia in the 3 countries, Thailand, Malaysia, Sri Lanka is a concern for us. And this situation in Asia postpones, in fact, the installation of our new line number 9 with around 3 months. Looking at Fibertex Nonwovens. I think it's a pleasure to see how that has developed. The solid and very satisfactory development continued also in Q2. Revenue up by 30% to DKK 511 million, and EBITDA increased DKK 22 million to DKK 82 million, giving a 16% EBITDA margin and EBIT well above 10%, and 10% has been a long-term target we have for Fibertex Nonwovens. Return on invested capital also at a very satisfactory level of 16.2% and well above our target. We have seen a very good and strong development in Europe. Our auto and construction segments, they are more or less back on track. Our U.S. market has been very strong, especially on materials to what we call specialty wipes and filtration. Still a high activity in U.S., but short-term demand on specialties in U.S. is softening a bit. We see that some of our large customers have been building stocks over the last quarters. We have a guidance uplift coming from strong first half turnover of DKK 1.9 billion to DKK 2 billion. EBITDA now expected from DKK 270 million to DKK 290 million. Still, a raw material situation is a concern in general, could impact negatively in H2, but strong start and the good order backlog we have is positive. Looking at GPV. Also here, we saw very strong market demand continued, and we had very high order intake. Revenue was up 13% to DKK 763 million. EBITDA increased 24% to DKK 77 million and return of invested capital nearly at our 15% target, it was in fact 14.8%. We have had very high activity, and that has really given good efficiency in all production units, but it's also pressing our capacity at some of our larger factories. We see continued increasing component costs and pressure on allocation and allocation on supply of critical parts. We have been investing and installed new lines on several factories and we have decided to move ahead with the consolidation of our Asia footprint and investing in developing our facilities in Thailand and Sri Lanka. We have a guidance uplift due to a strong first half and a very solid backlog yield. I would say we have a really historical high backlog. Turnover is now expected between DKK 2.9 billion to DKK 3 billion. EBITDA, around DKK 260 million to DKK 300 million. And that's based on our core customer base and not as last year where we had a big MedTech order that had a very positive impact on 2020. We won't see that in the second half in 2021. HydraSpecma saw all the large customers continue to grow. Revenue was also up here with -- in the 30s, 33% to DKK 609 million. EBITDA increased DKK 40 million to DKK 86 million and ROIC, again, very satisfactory at 16.3%, about -- again above our 15% target. We sold a facility in Denmark, in Greve, and had a positive contribution of the DKK 12 million on EBITDA but still very satisfactory EBITDA development. We have had really solid demand for components and systems within the Power & Motion segment, continued strong order intake from all important segments. We are seeing increasing activity in Asia, it requires a new facility. We had decided to build in India, but a big investment, that DKK 10 million investment in a 4,200 square meter site. We have a guidance uplift due to strong demand and, as I mentioned, a solid backlog. Turnover expected DKK 2.2 billion to DKK 2.3 billion. EBITDA now around DKK 240 million to DKK 265 million. Here also, we still have global pressure on raw materials and shortage of components continuing, and we do not expect the wind segment to continue the strong momentum in the second half. Finally, Borg Automotive really had a solid market position as basis for strong development. Revenue up from DKK 173 million to DKK 293 million, nearly DKK 300 million in the quarter. EBITDA increased impressively from DKK 11 million to DKK 48 million. Also here, we had to remember that Q2 '20 was a quarter with very low activity due to corona. Net working capital increases from low level to around DKK 229 million. Return on invested capital, also here at a very satisfactory level of 23.8%. Here, we also have seen solid demand from all segments and all countries. We have a very high efficiency in production. And what we call best-in-class deliveries in the industry, and it really strengthens our position. Borg continues to pursue ambitious growth plan with the latest acquisition of SBS that was approved 1st of July, so now we start to implement that into Borg. We had a guidance uplift also here, positive demand. Turnover now around DKK 1.3 billion and EBITDA around -- in the spread of DKK 160 million to DKK 180 million before PPA, purchase price allocation, effects from this year. So wrapping up. Strong and satisfactory Q2 development, we see that our conglomerate strategy continues to show strength, good diversification. We are in a financial good position, and we have potential for seeking opportunities. We are, of course, looking and as always, having a lot of dialogues going on. We had -- we are lifting our guidance due to a strong first half. But still, we have concern on what happens on the raw material prices and also on the freight and transportation side. Backlog is solid. Second half is -- our guidance is also based on a more normal market condition in the second half, in general.So with that concluding remarks, I would like to open up for questions.

[Operator]

[Operator Instructions] Our first question will come from Ulrik Bak with SEB.

[Ulrik Bak, Research Analyst]

Jens, congratulations on the solid Q2 numbers. I have a few questions on BioMar, if we start with that. You stated that part of the EBITDA decline versus last year is due to raw material price increases. But can you maybe just explain this dynamic, how it works? Because I'm quite sure you've previously stated that the changes to raw material prices don't affect BioMar's earnings because there is almost 100% pass-through to your customers. So if you could please elaborate on that.

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

Yes. Thank you very much for the question, Ulrik. I think I stated that in the salmon division, we have this pass-on mechanisms in most of our contracts. Of course, there's a time lag. So when prices are increasing heavily and fast, then we will be lagging and that will have a negative impact on us. In the EMEA division with a lot of small customers and a different way of doing business, we do not have a pass-on on all customers. I mean, Salmon division, yes, we have this, but not in the other division. And then as also in other of our companies, where we have these pass-on mechanisms, we tend to lag when prices are increasing fast.

[Ulrik Bak, Research Analyst]

Okay. So we would be able to see a similar positive effect if and when raw material prices decline again?

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

We will. Yes. Maybe also -- of course, sometimes we also need -- even we have pass-on mechanism, sometimes, you need to negotiate, but you will be able to see that effect, yes.

[Ulrik Bak, Research Analyst]

Yes. Okay. Very clear. Then another one on BioMar. If I look at the historical gross profit per kilo, I could see that it peaked in Q3 and Q4 2019 and then declined significantly last year during the pandemic. I believe there was some FX effect, which was unfavorable for you guys. Are there any reasons why you cannot return to the peak 2019 levels in the second half of 2021 or 2022, for that matter? And if not, then what would be the key reason?

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

That's a good observation, Ulrik. And if you look into -- we think on the longer term, we can. But as we also discussed earlier that during the pandemic and so on, a lot of our customers turned away from value-added products or functional feed and on to more ordinary feed and so on with lower margins. Then we have had a huge effect also with a lower volume in Chile. In Chile, we have less biomass in the sea, there have been algal bloom and a lot of things. So we see a huge effect from less volume in Chile, and we expect, of course, volume in Chile to pick up again, more biomass in the sea. Now we see much better salmon prices and so on. So in general, we will, in the longer term, expect to be back on profitability levels like that. But short term, second half '21, we cannot see that.

[Ulrik Bak, Research Analyst]

Okay. And then a final one. On the competition you mentioned in BioMar. Can you maybe shed some light on whether the competition has intensified compared to pre COVID-19? And if so, where do you experience it? And is it something that is temporary or permanent?

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

It's difficult to say if it's permanent, but it is more fierce and also because some contract has changed hands, et cetera, and we have some -- this especially in the Salmon segment where we really see it. We also know that there is annual contract negotiations. And there, we see some competitors really pushing hard for getting contracts not at all prices, but at very low prices. And then we have seen also a change in Ecuador, where we have moved into larger customers and also a small change in Ecuador also in competition. If it will last, I cannot say, but we have had very good contract positions fighting for them, and now it's up to us to make these contracts more profitable by trying to push for more functional feeds and things like that.

[Operator]

Our next question will come from Claus Almer with Nordea.

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

Also some questions from my side, and I'll take them one by one. First of all, Jens, I know you are looking forward to this question, net working capital. Unfortunately, compared to past quarters, the development is not as good as we have been used to. Is this purely due to raw mats? Or why is that? That will be the first question.

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

Yes. First of all, I agree on the observation that it is not as good. And of course, it's something we are observing on. But I think also I said at the last call that we have decided to favor delivery, being able to deliver and source home critical components and so on. So that's one reason. We are stocking more than we used to. We have a higher activity level. That also ties up more in net working capital. And we have also seen another mix of customers in terms of payment and so on . So it's right. But some of it is really a strategical decision and some of it due to the situation, but we will continue to push hard for that also included. But I think for the next quarters, we will allow our companies to be a little bit more soft on net working capital.

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

Sure. That makes sense. Then moving to HydraSpecma. You also mentioned in your presentation, it's also in the report, that demand will shift to Asia. Is that Asian customers? Or is it Asian markets? And does it mean that you're more going for offshore than onshore? What's actually behind that comment?

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

Yes, it's Asian market. It's not Asian customers. It's large global OEMs moving more activity to Asia. So yes, you could say, of course, it's in wind. That's why we also are building up in China. And we see also some of the large construction material producers as OEM for off-highway. And so we're moving activities into Asia. So we follow them and we are there. So that's the best point.

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

Okay. And then you mentioned that you don't expect the current demand or the first half demand within wind will continue in the second half of this year. Is that correctly understood? And why is that?

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

That's correctly understood. Also, we saw Vestas yesterday announced that they were not expecting to be able to deliver. So we see that the activity level is declining a little bit also due to circumstances from outside, difficult to get the components, enough transportation and so on. So it's not because we lost orders or anything, but they are just postponed due to supply struggles, you could say, yes.

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

Sure. And then coming back to Ulrik's question regarding BioMar and price. You mentioned -- yes, it's also on the report, the intensifying pricing environment. This coming back to the old discussion, price versus volume. And as I heard you stating in this call that you were actually fighting for volumes in contract negotiations, which I think is a different wording than you have said for quite a while.

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

Maybe I would say fighting for is maybe it was too hard a word as we are also defending positions as we have not -- we have had a very good contract period, in fact, without being really fighting for it because we have customers that really wanted us as a supplier because we have had a very, very good quality and delivery situation over a long time. And also good performance on our fleet. But pricing has just been lower than we have seen before, and we have, of course, defended our positions and got more volume with some of our key customers.

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

Well, we know price is an important part of attracting volumes. And as I recall, you, Jens, you said you will rather walk away from margin -- intense margin pressure contracts and thereby trying to help more pricing discipline in the industry. That sounds to be a bit different today if you compare to what you said.

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

Yes, you're totally right. That was our strategy. And I would say also, we still have the same opinion on that. But also, we have to see that in Chile, we have lost a lot of volume, not because we lost but because the biomass is much smaller. And so there's a situation also where we need sufficient volume to run the factories at an efficient level so that we look into also. But we have not really been fighting to take new contracts. We have been defending and we have also been in position where we said, okay, this one, we don't -- in fact, we had a rather large contract that we declined.

[Operator]

[Operator Instructions] Our next question will come from Klaus Kehl with Nykredit.

[Klaus Kehl, Chief Analyst]

Yes. A couple of questions about these raw materials. The first one, if we take it on a high level. On the updated guidance that you provided, is that based on current raw materials and freight rates, et cetera, here at the beginning of August?

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

Yes, it's based on the actual contract situation we have on raw materials and, of course, also on the expectations on some of the very large raw materials, for instance, polypropylene, which we expect to decline or to fall in Q4. So it's really updated on actual contracts we have, on what we see from the market, et cetera. And also it's on actual freight and transportation costs, Klaus.

[Klaus Kehl, Chief Analyst]

Okay. And then if we turn to Fibertex Personal Care. Then here in the first half of the year, you have generated an EBITDA of DKK 140 million. And if I just say that you generate the same in the second half, that will take you to DKK 280 million. But your guidance is somewhat higher. So -- and I guess, Fibertex Personal Care is pretty affected by these raw material prices right now. So how certain are you about this outlook for '21?

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

We are as comfortable as we can be because we have been looking into expectations of -- as our input costs, polypropylene. We have also contracts going on, and we can see now it's something that these mechanisms, they start at the beginning of the quarter. So we know more or less now what is the polypropylene price for Q3 and that we have adjusted prices to our customers, and we have based it also on expectations for Q4. We can see the positive thing is that more production capacity or cracking capacity as it's called on polypropylene has come into the market basically in Europe. So we feel quite comfortable. Although we could all say -- I think we said also that we maintained a spread of DKK 40 million also into second half in our guidance. And that's because there are still some uncertainties, but we feel quite comfortable that we will be within that spread.

[Klaus Kehl, Chief Analyst]

Okay. Great. And then if we turn to Fibertex Nonwovens. Then I guess there also will be pretty affected by the higher raw materials, especially in the second half. And if I look at the margins, then I guess you have produced a margin of around -- let's see here, let's see here, on EBIT level, of around 12% in the first half of the year. And the implicit guidance for the second half of the year is around 5% or something like that. So how should I think about the dynamics in this company and especially going into '22, what would be a reasonable starting point for '22 in terms of margins?

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

Yes. Good question. We have not disclosed that yet and we are, of course, looking into when -- I think maybe it's not 5%, but you are right that we expect the margins to decline in second half due to raw material prices. We have been -- we have had good raw material positions in the first half, easing it off in Q2. But now we see we face high raw materials in all segments, where we have been good also in getting price compensation in most of our segments. What we see here is also, as we said, we see some of our high-value segments in U.S. softening a little bit in Q3, maybe also in Q4. It's tough situation and for specialty wise, but we expect that to pick up again. And we expect also to see feed at a margin higher than what you are looking at in the second half of this year. Maybe 12% EBITDA is not what we are aiming for. It's not maybe we are aiming for plus 10% EBIT for [ 5 to 6 ] months that we think is very realistic.

[Klaus Kehl, Chief Analyst]

Could you repeat that you're aiming for what?

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

10% EBIT margin, and we think that is realistic.

[Klaus Kehl, Chief Analyst]

So 10% margin for Fibertex Nonwovens going forward?

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

Yes. That has been part of our long term. In fact, we had a long-term margin when we started that on 9%. And now we see if you're looking a little more long term with our new investments with our -- the way we have positioned ourselves into these high-margin segments, that's doable on a little longer term, yes.

[Operator]

We have a follow-up question from Ulrik Bak with SEB.

[Ulrik Bak, Research Analyst]

Jens, just a follow-up question on Fibertex Personal Care. I think you stated in the report that volumes dropped in Q2 compared to Q2 last year. And considering that you're now investing in new capacity and you're also talking about softening demand in your high-margin segments of Fibertex Nonwovens, where you also are investing in additional capacity. Are you in any way concerned about this development that the volumes were a bit soft in Q2?

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

We all -- it would not be fair to say that we are not concerned. We're always looking into it. And of course, we have also done our analysis and so on. But we see underlying that demand continues to grow. We see Asia really continuing to grow also. And this line in Fibertex Personal Care will first be up and running, hopefully, late first half 2022, and we have a lot of activities going on, securing volume and so on. And then also, we are looking into efficiency possibilities. Maybe we are reducing production on one of the old lines because the new one is much more efficient. So I think we have -- we are well in control, but it's, of course, something we are looking a lot into.

[Operator]

There are no further questions at this time. I hand back to Mr. Jens Bjerg Sorensen for any closing comments.

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

Thank you very much. Thank you for hosting us, and also thank you for listening and asking questions. Goodbye to everyone.

[Operator]

Ladies and gentlemen, the conference has now concluded. You may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.