Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2022-Q2

[Jens Sørensen, executive]

Welcome to the presentation of Schouw & Company's Q2 report.

We had a very satisfying Q2, in spite of a very difficult environment. It was difficult to maneuver for our companies in this environment. Main costs continued to increase. We saw energy and freight costs up with more than DKK 100 million throughout the quarter.

I think we have seen strong efforts in all our companies to work hard on getting compensation for majority of the price increases. They have been worked very hard on getting price increases up in the market.

We have used a lot of tools from what we call our operational toolbox. It's very necessary that you are on top of things when things are as turbulent as they have been in this quarter.

We saw a very strong and satisfying growth, 34% up to DKK 7.5 billion. Input cost has, of course, been a very strong driver in this growth. But we have also seen organic growth of 9%. Volume and activities have been up in most of our companies. EBITDA came out at a very satisfactory level of DKK 564 million, including several one-offs of around DKK 25 million.

Our net working capital continued to grow. It's a very important focus area for us. But our inventory has increased as expected and also as a strategic decision from us. So we have been able to deliver and supply our customers also throughout the quarter.

Let me then turn on to BioMar. As you know, the biggest company in our portfolio. Revenue was up 42% to DKK 4 billion. Of course, here, we saw a very huge impact from raw material prices. We had a satisfactory growth in volume, 9% up, and it was a little bit more than expected. EBITDA up 24% to DKK 261 million. We saw a very good development in our Salmon division. Especially, Chile came very, very well out of the quarter. And the Salmon division was able more or less to offset the impact we had from not selling anymore to Russia.

Energy and freight cost has been up a lot and close to more than 50%, DKK 50 million impact throughout the quarter.

BioMar have continued to expand and pursue the strong growth strategy. We acquired and have been integrating the Tasmanian tech company, AQ1. And we have also just recently announced a new JV on establishing feed factory at Iceland, very interesting new market, a market we have a strong belief in. But of course, it takes time to build and be ready with a new factory up there.

We are coming out with a guidance upgrade due to optimizations and very good margin management throughout BioMar. Revenue is now expected to be between DKK 16.5 billion and DKK 17.5 billion, of course, also the -- because of the cost inflation. EBITDA is now up to DKK 910 million to DKK 960 million. And as I said, because we have seen very good optimization and also good volume in some core markets throughout the last period.

We still hold assets in Russia in BioMar around DKK 45 million, mostly is cash at bank, just for information.

Then turning on to GPV. Another very strong quarter for GPV. Continued solid demand from the market. And once again, in a quarter, the turnover exceeded DKK 1 billion, more as a DKK 1.1 billion turnover for the quarter. They are building on a very solid backlog. And the order intake in GPV is still continuing at a very strong pace.

EBITDA was up 27% to DKK 97 million. And of course, part of it is due to the fact that we can deliver on this very strong backlog, but also high efficiency throughout all the production units in GPV.

We have still a very difficult component situation. It continues to put pressure on both our net working capital as mentioned and then also on our organization. We have a very huge inventory built up to support this very strong backlog.

We are very proud to announce intended merger with Swiss-based, Enics. It was announced in June. Enics, as I said, a Swiss-based company, DKK 4 billion turnover, 7 factories and 3,500 employees. A very perfect and good strategic match to GPV. We will then build a European #2 in the EMS business or electronic manufacturing service business. There's a strong strategic rationale, and we are really expecting to find scale. We will come with further information when the deal is closed. Expected to be closed beginning of October if all authorities allow us to.

Guidance will be upgraded for GPV. Revenue now up -- expected up 10%, between DKK 3.9 billion and DKK 4.1 billion, and EBITDA now around DKK 330 million to DKK 360 million. And these figures, you don't see any impact from Enics. And of course, when we have a closing, we will come out and tell more about the figures and impact on -- expected impact on 2022.

Then turning to Fibertex Personal Care. Revenue was up 6% due to continued increasing raw material prices. Volume in our Malaysian division has been challenged over the quarter. Some of our key customers have been challenged in their markets, especially in China. EBITDA, as expected, down 23% to DKK 43 million, I think, when we had this call last time, we also said that Q2 would be very challenging for FPC also due to higher raw material costs.

Asia market still expected to increase over the coming years. We have a start-up of our new Reicofil pipeline in Malaysia. That was expected to start here in second half of '22. But due to some technical issues, it will be postponed until Q1 '23.

Guidance will slightly be downgraded due to soft volume in Malaysia. Turnover, around DKK 2.5 billion, and EBITDA, in a range of DKK 290 million to DKK 320 million, based on also expected decline in our PP prices.

From FPC to Fibertex Nonwovens. It has been a very challenging quarter for Fibertex Nonwovens. Turnover up 10% to DKK 563 million, only because of huge raw material impact. Volumes down in 2 segments, in wipes and in filtration materials. EBITDA then also down from DKK 82 million to DKK 40 million. Of course, here, we see effects from lower volume, especially also from product mix and higher costs. We are supplying less what we call into the advanced product segment in this quarter. And then we had, unfortunately, an unexpected loss on a debtor in U.S. of DKK 13 million, impacting the EBITDA result.

We have initiated a strong protection plan in Fibertex Nonwovens, and they are pursuing hard on that. Guidance will, of course, because of this weak Q2, be downgraded, turnover now expected DKK 1.9 billion to DKK 2.1 billion, EBITDA, around DKK 150 million to DKK 180 million. Of course, the organization will continue to push hard for offsetting increased cost. They have worked hard on it already and continue to fight hard for getting necessary volume.

Turning on to HydraSpecma. Continued very good development to -- especially what we call global OEMs kind of companies, producing off-highway equipment, et cetera, went as expected, being slower in Q2. Revenue up 7% to DKK 652 million. Order intake; however, still positive. EBITDA, down from DKK 86 million to DKK 74 million. But here, we also have to look at the effect from a sale of real estate back in Q2 '21 of DKK 12 million. So meaning we have EBITDA same level as '21. Of course, we have also here seen increasing cost in components and other variables as transportation and so on. It's been worked hard and put strong efforts into being compensated in the market for these increasing costs. There's also in HydraSpecma continued focus on the development in our net working capital and especially on our inventories.

Guidance for HydraSpecma will be maintained. EBITDA, in the spread of DKK 270 million to DKK 290 million. And here, we have a strong backlog to deliver on.

Last company in our portfolio, Borg. Borg continues to grow. Turnover was for the quarter DKK 482 million. Here, we experienced organic growth of 19% in what we call the old reman business. That's the business where we remanufacture parts. Total, we had a 65% growth of turnover. And there, we saw the effect from the newly acquired SBS, DKK 130 million, which they bring into the turnover. We see -- continue to see a solid demand across Europe for both SBS products, but also for reman products.

EBITDA up 25% to DKK 59 million. Have seen satisfactory efficiency and very strong pricing execution at Borg. Also good development in SBS. We are extending product capacity in Poland to accommodate increasing demand on specific products. Guidance will be maintained. EBITDA, DKK 170 million to DKK 200 million expected. And we also see that the earnout value on SBS, which was downgraded in Q1, is unchanged for the time being.

Then finally, just to sum up on our updated guidance. Being through all companies, meaning that we now expect group guidance of around DKK 2.07 billion to DKK 2.27 billion. As I said, underlying demand, still good. We have continued efforts on compensating huge cost increases. We intend to be on top on it, and all our organizations are working hard on that. It's including effects from Russia, meaning lower EBITDA because we don't have any sales from BioMar to Russia, and then also the realized write-offs of 44 -- DKK 45 million. And also mentioned earlier, no impact from the announced Enics merger. New guidance on that will be updated when we close, as expected, beginning of October.

So with that, just mentioning the last thing. We are having our Capital Market Day. It has been a long time coming. And we now have a Capital Market Day in Copenhagen on 1st of September. I hope to see a lot of you there. We will have 3 themes, building on scope -- long-term ambition. We will bring in the CEO from BioMar to elaborate on the BioMar 2028 Plus strategy, and then the CEO of GPV [indiscernible] Who will introduce the Enics merger and elaborate also on the impressive development that GPV have been true over the last years.

So with that slide, I will just put on this one and open up for questions. [Operator Instructions]

[Jens Sørensen, executive]

Ulrik Bak, could you?

[Ulrik Bak, analyst]

Just a question on BioMar. Gross profit per kilo increased quite a bit in the quarter, and it's actually the highest level since 2019, as I can see in my spreadsheet. And I guess some of it has been driven by higher pass-through of costs in the quarter. But is there also something in your product mix, contract mix and so on which has changed in the quarter compared to last year, which could indicate the profitability will be consistently stronger going forward?

[Jens Sørensen, executive]

Yes. I think you -- as I also mentioned, we have seen Chile coming back. Chile, last year was down, and margins were very low, and Chile has really delivered strong on profitability. Then, of course, also product mix. Also, if we're looking into our LatAm division, good development there. So there's a lot of market mix, product mix, but mainly also driven out of good margin management in Chile. And I think that we expect that to continue also over the next period, absolutely.

[Ulrik Bak, analyst]

Can you allude to how -- what the status is of the Chilean salmon market? Is it back to pre-COVID levels? Or is it -- does it still have some way to go to recover fully?

[Jens Sørensen, executive]

It has been improving a lot. I wouldn't be able to say if it's 100% recovered, but it has really improved a lot. But there's -- there are still things to work on. And I also think we could continue to improve efficiency and our margin management and so on. We are quite confident on the Chilean market and also on our position and opportunities in Chile.

[Ulrik Bak, analyst]

Okay. And then on the acquisition of AQ1, what's the contribution on EBITDA from this acquisition in the quarter?

[Jens Sørensen, executive]

It's been very low in the quarter, also because we have some PPAs and so on. So the quarter is quite blurry. I think we will see, next quarter, we will have a more normalized operational. But it has been profitable, also with EBITDA as expected. So it's, of course, still a rather small company. But we expect quite good impact in the months to come on AQ1.

[Ulrik Bak, analyst]

Then a question on your guidance and your guidance for GPV. The upgraded guidance implies that GPV for the second half of '22 should have a decrease in EBITDA compared to first half of 16% and compared to last year second half, 18% lower this year. Is that a continued reflection of the supply chain uncertainty? Or what is the reasoning from this decline?

[Jens Sørensen, executive]

Absolutely. The main reason is the supply chain and transport around and so and so. So that's our main concern. And if supply chain tightens up and so on, maybe there are some potential there. But as we are looking at things now, we still see these uncertainties. We have; however, seen some supplies being shorter, but still, it's into '23 before we really see a normalized -- and not normalized, but before we see significant improvements in our supply chain. So it's implying that it's challenged and there's a lot of uncertainty still around.

[Ulrik Bak, analyst]

That's clear. But compared to when you last time you gave your Q1 report, has the outlook for the supply chain gotten worse or gotten better? Or is it just more or less the same?

[Jens Sørensen, executive]

I would say, on lead times, it has been better. But still, we are having a lot of inventories. And before we get supplies, it takes time. So lead time has been shortened, but it won't impact '22.

[Ulrik Bak, analyst]

All right. And then a question on Fibertex Nonwovens. Obviously, it's a quite weak quarter. And you talked about demand also seem to be weakening and the bankruptcy of this customer of Fibertex Nonwovens. What does that tell you in terms of the profitability of the end markets and the end market demand that a customer goes bankrupt?

[Jens Sørensen, executive]

It tells us a lot about -- there was a lot of corona or COVID-related products. And this customer has been supplying a lot of products into this. And so it also shows us that low-cost products for this is down and volume is very low. And they couldn't sustain that. I think looking at the Fibertex Nonwovens, we were in it, and we got a lot of opportunities to supply this volume, but it's not our business. Our business is more what we call advanced products and looking into upgrading on specialty wipes and things like that. So it's companies that has really benefited from the corona situation, and they are now suffering because there's no volume.

[Ulrik Bak, analyst]

And this is not something which makes you worry about the investments that you've put into new capacity for Fibertex Nonwovens?

[Jens Sørensen, executive]

Overall, no. But of course, we are looking into, again, to the business case and the business plans and has something changed. But the general view is still that there is a strong market going ahead for these specialties and kind of sustainable products and so on which we are going to introduce into the market. But we are reassessing our business plans. We have the investments in progress now. And we are working hard on getting a stronger sales pipeline up, and we see that. But of course, we'll revisit it again.

Klaus Kehl?

[Klaus Kehl, analyst]

Two questions. First of all, if I look at your net interest-bearing debt, it's now up to around DKK 4.3 billion. And I think it's up DKK 1.8 billion since the end of '21. So do you have any targets or anything that we could look at for end of '22? That would be my first question.

[Jens Sørensen, executive]

Yes. To be honest, and of course, we have a target we are working after. But in these times, we have deployed a lot of our capital into inventories to be able to deliver. And so we expect our inventories and our net working capital to decrease, but it's very difficult to give a clear target. We have a clear target of bringing it down and working on it. But we also say that being able to deliver and service our customers is very important. Then, of course, also there's an effect from acquisition of AQ1, the effect from our rather large investment program in both Fibertex Nonwovens and in GPV. So working on bringing it down, but a specific target, I can't disclose yet.

[Klaus Kehl, analyst]

Okay. And in this respect, I noticed that you in the report write something that you have increased the use of supply chain finance. How much supply chain finance do you have end of Q2?

[Jens Sørensen, executive]

We have DKK 1.3 billion, DKK 1.2 billion in -- yes, DKK 1.23 billion, to be specific, in supply chain financing, mainly in BioMar.

[Klaus Kehl, analyst]

Okay. And how much has that gone up here in '22?

[Jens Sørensen, executive]

Around DKK 500 million, DKK 400 million and something, I think it is, yes.

[Klaus Kehl, analyst]

Okay. Right. And then final question. The raw material impact in both Fibertex companies is, yes, rather significant during the first half. Do you have any thoughts about impact for second half? Will it start to become easier? Or any thoughts about that?

[Jens Sørensen, executive]

Yes. I have a very clear thought on -- as I think I mentioned also on the FPC. The guidance implies that we will see a declining PP price, and we are seeing it now. So meaning -- but of course, we are lagging a little bit, but we are seeing falling prices on that. Same goes for Fibertex Nonwovens. However, they are working on a broader raw material platform. They are not only poly-propylene. They also have virgin PET and recycled PET. And price fluctuations are a little bit different there. But we will see declining raw materials in both companies, yes.

Claus Almer.

[Claus Almer, analyst]

So the first question goes to transportation cost and supply chain costs. You are missing this a number of times during the report. Has this gone worse, it is better or the same than after Q1? That will be the first question.

[Jens Sørensen, executive]

I think as energy cost has gone worse, I think transportation costs more or less at same level if you look at the percentage of turnover to freight and transport products around. But energy definitely been higher. And we are working on how to mitigate that by introducing new energy sources, by converting our gas-driven ovens, et cetera, into electricity or oil or whatever. So it has gone worse. And as I say, in the quarter, energy and transportation of freight, up DKK 100 million in the quarter, so yes.

[Claus Almer, analyst]

But you've been really good in passing through, at least as a net to all the customers. And we think going worse, do you see a maximum -- if things continue to worsen, that it would be impossible to pass through? Or are you still in a very strong pricing power position?

[Jens Sørensen, executive]

No. I think we have been in a quite strong position and worked hard on it. Of course, I think if -- we were discussing at the other day, interesting, then in the reman business, we think that the prices are at a level now. It's difficult -- we can get prices, true, maybe. But then we will see demand really go down. I think in -- maybe in a few companies, we could still pass on a little bit. We are working on a surcharge way on energy because that's maybe now the only way we can get if energy continues to increase, then we could have a kind of a surcharge where we immediately put on and also reduce if things happen. So that's the way we are thinking now.

[Claus Almer, analyst]

Let's have the optimistic view, let's assume that these costs will start to decline, at least that will happen at one point. Do you think it will be one-to-one being given back to the customers? Or would you actually be able to be a little bit slow in passing through the cost savings?

[Jens Sørensen, executive]

I would promise you with that, we will try to be as low as possible. But of course, we are also in a world with competition and so on. But we will, of course, be slow and have a lot of discussions on that because also we were lagging on that. When prices started to increase, it took time before we really were allowed to get the pricing increases. And especially in some segments, it has been very difficult and taking a long time. So we are really trying to keep and protect our margins by, of course, being reasonable, but protect ourselves.

[Claus Almer, analyst]

Okay. Then a question regarding the guidance for BioMar. Initially, you guided for a 5% volume growth, as I recall. And you have update that part of the guidance. So after 9% volume growth in Q2, what should we expect for the full year when it comes to the volume?

[Jens Sørensen, executive]

Yes, of course. And I have to -- again, also Q1, I -- to be honest, I'm not 100% of the volume increase in -- how it was in Q1. But I think in general, you will see a volume. We expect volume to grow also in Q3 and Q4. We have quite a good contract base in our Salmon division. One issue is, honestly, that we do not sell anything to Russia any longer. And Q2, Q3, big volumes, huge volumes. And then we have seen a situation in Europe that is really concerning, no water, as it very, very warm, fish don't eat when it's too warm, and we have a lot of freshwater fish, we feed and they're lacking so much fresh waters in rivers and so on. So it's a concern, but we expect volume to grow.

[Claus Almer, analyst]

Okay. So should that mean we should be a little bit cautious on Q3 volume for BioMar?

[Jens Sørensen, executive]

I wouldn't say that. No.

[Claus Almer, analyst]

So there was more so comment that everything is really, really bad, but actually growing...

[Jens Sørensen, executive]

I think -- Claus, honestly, I think I started saying salmon is quite -- and that's a big volume, but we have really challenges in EMEA, and it's smaller volume there. So maybe you're a little bit right. But I think, I also say that salmon, we feel quite comfortable in salmon and the volumes there. But also, we saw -- we had some good volumes in the shrimp, I would say, in our Ecuador business because some of our competitors had problems in supplying raw materials and so on. So maybe that will offset a little bit. But let's stick out a little bit and say we expect volume to increase.

[Claus Almer, analyst]

Right. Then the final question, and that goes to the Nonwovens business. And let's call it, a roller coaster. So after a number of years of very disappointing performance, then suddenly, you really had strong performance for a couple of years. Then last year was not that great. But you said it will improve during this year, and it hasn't really. So you could say what is the true nature of Nonwovens? Was it before the COVID? The strong performance? Or is it more like we see today, it's actually just coming back to how it was a few years back?

[Jens Sørensen, executive]

Yes. No, I think it's a very, very relevant question. But I think it's a mix. And also, with the way we have worked with Fibertex Nonwovens strategically and investments and so on, we are moving away from volume. We have this trade from volume to value. We have been offsetting U.S. And I have to say, honestly, that U.S. has really disappointed us this year because U.S. was so strong last year. And then maybe we have overlooked a little bit that some of the advanced products, especially for very, very advanced respiratory masks and so on has gone down. But we still pursue this added value strategy. And we strongly believe that profits will improve, and we are on the right track. But we have had a setback.

[Claus Almer, analyst]

So does that mean that, let's just say, 2024 is unaffected by what we are seeing this year? So in '24, we should be back absolutely on track?

[Jens Sørensen, executive]

Yes, absolute. That's the clear strategy, the clear plan. Also, we are coming in with new capacity, not only volume capacity, but new advanced capacity for very, very advanced products. So you -- definitely 2024, we should see that. That's our strategy. And otherwise, we need to do something.

[Claus Almer, analyst]

Okay. That is in my note, now so you can -- that would be the quest for 2024.

[Jens Sørensen, executive]

I'm looking forward, Claus. But 100%, we are not investing and doing a lot of thing if we don't expect to deliver. So that's a clear strategy, and we will work hard on that, absolutely. So...

Thank you, Claus. No hands raised? No further questions. So thank you very much for listening. And sorry, there was the last minute-call, Klaus Kehl? Or is it no hand?

[Klaus Kehl, analyst]

Sorry about that. I forgot to take my hand down.

[Jens Sørensen, executive]

Okay. Good. You're young so it wasn't -- but thank you. No. Thank you to everyone, and thank you for listening. Thank you for the questions. So we say goodbye from here now. Thank you very much.