Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2023-Q2

[Jens Sørensen, executive]

Welcome to our Q2 reporting conference call. We had a very satisfactory quarter. Activity continued at a very high level across all our companies. We also confirm a very positive outlook on 2023. Our revenue was up 23% to DKK 9.2 billion for the quarter. It was mainly driven by our acquired companies in GPV and HydraSpecma. Our EBITDA was also up 18% to DKK 660 million. Here, we saw a positive effect from -- also from our acquisitions and also in all our company, we had a very strong pricing discipline over the quarter.

Our net working capital build is slowing down, and we expect to drive a strong cash flow in the second half. Net working capital has been a strong focus point for the companies over the last year. Our finance costs, however, are increasing at a very high pace. We have a strong focus on debt and net working capital continues to be top of mind.

Our investment level is expected to leveling out, and we will expect to see our return on invested capital improving in the coming periods.

Looking from the broader view and then looking into each of our companies, I will start up with the BioMar, where we saw revenue up 3% to DKK 4.2 billion. We still see some impact from higher raw material prices. Our general volume for the quarter was down 3%. Here, we mainly saw a climate effect and regulatory issues, especially in our large Chilean market.

Our EBITDA increased slightly to DKK 260 million, in spite of the downturn in volume. We had a very good balance between input costs and prices. And we also saw a recovery in Chile and our Baltic, our Danish operation managed really to offset part of the Russian sale from last year. Our contract base in general is very good. It's in a good balance. Our joint venture companies, both in China and Turkey, continues to deliver very strong growth. EBITDA in these companies increased by more than 100%.

EBITDA guidance for BioMar maintains. Our revenue is now expected to be between DKK 18 billion to DKK 18.5 billion, and EBITDA maintained, as I said, in the level of DKK 1.08 billion to DKK 1.15 billion.

Then moving on to GPV. Our large electronic manufacturing service company where the very strong growth continues, turnover of around DKK 2.7 billion. And now we really see full effect from the acquisition of Enics building one new leader and having that as a strategy. Our large customers also in GPV, continue to grow. EBITDA was better than expected for the quarter, landed at DKK 189 million. We have a full effect of strong capacity utilization and also scale effect is kicking in at GPV now. Net working capital is still at a very high level, and it continues to be a key focus area for the company. Our inventory reduction program starts to really now to materialize.

We are also looking to build future and upgrading production facilities continues. Our factories in Thailand and Sri Lanka, they are now well in operation, and we have a close look at footprint and proximity size for the future. Guidance upgrade for GPV, we expect a stronger second half. Revenue is now expected to be in the range of DKK 9.9 billion to DKK 10.3 billion, EBITDA uplift to DKK 650 million to DKK 700 million expected for the year now. We also have to say that we see demand starts to soften a little bit among smaller and midsized customers. But as I mentioned earlier, our AAA, our large customers are really still pushing hard for orders.

Moving on to HydraSpecma, where we see the good momentum continues, our Ymer acquisition is now really kicking in. Revenue was up 18% to DKK 769 million. And the order intake from our global OEM is still at a very attractive level. Our renewable division has as expected softening demand, but still looking positive on the years to come. EBITDA was up 10% to DKK 82 million and that was really driven by high efficiency and particularly also sales and development in our global OEM division.

HydraSpecma, they are also preparing for future growth. They are building a new R&D department for the renewable division. We are building a new state-of-the-art facility in Stargard, Poland, 16,000 meter square -- 16,000 square meter factory and we are working hard on integrating Ymer into our Renewable division. The guidance for HydraSpecma maintains. We see, as expected, a slowdown in the renewable or especially in the wind business, but that is more or less offset by the strong momentum in our global OEM. Revenue, around DKK 2.9 billion to DKK 3.1 billion. And EBITDA at the level we had from Q1, DKK 310 million to DKK 340 million.

Then moving on to Borg Automotive, Borg realized revenue of DKK 486 million, in line with the Q2 '22. Our reman business, still a little sluggish, but it is recovering slowly. We had a little tough start in Q1, but now we see a recovery in the reman. Our trade business is lower, mainly also due to the sales we had to Russia in Q1 and a little bit in Q2 last year. It closed down now. So therefore, EBITDA, down from DKK 59 million to DKK 44 million. As I said, also effect from Russia, but mainly also low margins in our trade business due to high inventory at high prices kicking back from '22, and then also effects from lower capacity utilization in our reman business.

Also building the future, they are working hard on fully integrating the trade business into Borg [indiscernible] to get a bigger share of wallet. We are developing and integrating several new products in our pipeline, and we became approved supplier to the OE producer of trucks, new business segment we are entering into.

However, we are downgrading our guidance. EBITDA is now -- is reduced from before DKK 160 million to DKK 190 million and now in the range of DKK 130 million to DKK 160 million, and is really because we don't think we can pick up on the slowdown we saw in trade. Our demand in reman seems to be improving but trade margins still under pressure.

Then on to Fibertex Personal Care. Revenue, as expected, down, 22% down due to a mix of lower raw material prices hitting our top line, of course, and then less volume. Our volume in Malaysia continues to be at a low level as expected. Our print business, however, improving and showing good top line development. EBITDA, far better than expected, 37% up and at a level of DKK 59 million for the quarter. Here, mainly a positive effect from raw material, and that's really offset the lower volume. Our energy costs also lower than expected or lower than what we forecasted in our budgets.

Our Asian markets, they are -- it is still under pressure, and we think it will be under pressure for a longer period. There is, as we explained earlier, also excess capacity, and that drives tough price competition and then also effect from lower growth rates in China and thereby, less diaper consumption in that market.

However, upgrade -- uplift on our EBITDA. Revenue, we expected slightly lower due to raw material prices declining. But EBITDA now lifted from DKK 180 million to DKK 210 million, and then now up to a level of DKK 230 million to DKK 260 million based on positive trend on raw materials and then a strong control on our cost base.

Then finally, moving on to Fibertex Nonwovens. Revenue flat at DKK 560 million. Volume, as expected, lower than first half '22. Our wipes and construction segments, they are soft, whereas our very important automotive segment in good development where we see order intake and demand coming up. EBITDA at DKK 39 million, and as expected, we still have very low profitability in our U.S. wipes business, particularly at our newest factory in Greenville. Energy and raw material expected to decrease, and we saw that also in the quarter.

As I mentioned, North American business or particularly wipes, remain the pain point, number one, in Fibertex Nonwovens. It takes time to come back. There's a strong plan for turnover. We have a new management team in place. We have a lot of new products in pipeline.

Our production capacity for advanced and sustainable products is -- starts to kick in. We expect to deliver first products late in Q3 and then picking up in Q4 '23. So there, we see a really strong pipeline, and we have a solid turnaround plan in place for our U.S. business. Guidance, however, is maintained.

EBITDA expected to be around DKK 140 million to DKK 170 million. As I mentioned also, we see cost pressure softening, and we have strong focus on pricing excellence and margin management in Fibertex Nonwovens.

Then rounding it off or ending up with an overview of our updated guidance estimates. Overall, still a positive outlook. Of course, some differences between segments and companies. We also have to mention here that our financial costs are expected to be significantly higher than guided in Q1.

We have seen negative development in interest, and the impact of that was simply evaluated too low from our side. Top line now expected to be DKK 36.6 billion to DKK 38.3 billion, and EBITDA now with a small uplift in the level of DKK 2.48 billion to DKK 2.73 billion.

And with that remark, I will open up for questions. Claus Almer?

[Claus Almer, analyst]

Yes. I have a couple of questions, Jens. So first of all, if you take BioMar, after Q1, the comment was that you now, at that time, expected to end in the lower end of the range. That comment has been removed. So what has happened in Q2? Or maybe what do you see rest of the year? That will be the first question.

[Jens Sørensen, executive]

Yes. We have had a good, as I mentioned, also a good balance in our contracts. As you know, we negotiate some of them in Q2, but it has been spread more over the year. But have a good contract, good volume base. We have seen recovery in Chile. Chile was because of biological and regulatory issues low. We've seen a good recovery there. Expecting also our Ecuador, our shrimp business to come out a little bit more positive. So overall, it's an effect of a lot of things going in the right direction. Raw material contracts a little bit better even we see and expect a negative impact from the El Nino, then we still believe that we have a good base, both on costs and also on contract model.

[Claus Almer, analyst]

You said you see some positive impact from raw material contracts. Does that mean raw material prices? Or is it your contracts? And is that Q2? Is that second half?

[Jens Sørensen, executive]

No. I said we haven't really spelled out maybe pronounced it a little bit wrong, as we see there is an El Nino out there, and that could create a price pressure on certain raw materials, especially on fish oil and fish meal, but I think we have good cover and also we have good plans for optimizing our recipes, and we are -- we know how to handle that situation after many years of experience.

[Claus Almer, analyst]

You mean you said -- I think you said price pressure means higher prices due to El Nino.

[Jens Sørensen, executive]

Yes, on Certain raw materials, especially fish meal and fish oil.

[Claus Almer, analyst]

And so on the raw material part, do you see, excluding El Nino, whatever going to happen, do you see a starting easing? Or is it flattish? Or do you still see a need to pass through cost inflation?

[Jens Sørensen, executive]

Now we see a starting easening. But again, as El Nino can change the picture because via some other protein sources could be better and so -- but we have seen easening on raw materials in general, yes. But then you also know, customers knows also that. So it's a balance and a unique strong pricing discipline in the market.

[Claus Almer, analyst]

And that leads to the second question, your favorite topic, cash flow and net working capital. So you said an expected very strong free cash flow in the second half of the year. Is that coming from profitability? Or is it coming from lower net working capital? And can you give some flavor maybe to the number?

[Jens Sørensen, executive]

Yes. It's coming from multiple of things. Of course, as I said, we have had focus on that for a long time. You know that. And of course, profitability will drive cash flow builds down of bringing down inventories will also bring in cash flow. We are looking at our debtors. So we are looking at whatever we can, and I can also assure that we already saw in July a stronger cash flow than expected.

So I think we are on a good now, but it is a lot of things affecting our cash flow. So it's not just one thing, but of course, good profitability and then a very strong focus in each company on the net working capital elements.

[Claus Almer, analyst]

Is there any different tools, focus on your network capital than we have heard for the last many quarters/years?

[Jens Sørensen, executive]

No, I think it's the same. I think also, if you recall some years back, we also -- when it was necessary, [indiscernible] delivered strong cash flow and so on. Of course, it's always necessary. But there are handles you can pull. And then maybe also you could say we have -- by permits and strategically built up inventories. I think I elaborated on that earlier also said that we decided that we have the strengths to build inventories mainly in GPV and in the companies where components have been critical. So we see that easing off also now. Then we have a different approach also to how do we use our IT and our things to when we get order backlog in. There's a lot of things and we're working on that. Very [indiscernible] necessary.

[Foreign Language] Let me take another one.

[Unknown Analyst]

Just a few questions on -- first on GPV and then BioMar. GPV, you say in your overall statement that you expect improved activity in the second half. Whereas if you write -- if you read what you write in the GPV section, you say that you expect declining activity versus -- in second half versus the first half. Is that related to the point you said about small- and medium-sized customers ordering a little less now?

[Jens Sørensen, executive]

Yes. I think maybe just to be precise on it, I think I said my intention was to say that the reason for the guidance update is that we expect a better second half than we did when we gave the first guidance. So that's what we are saying. But then at the same time, we are saying we also see demand softening a bit, mainly it's because also smaller and midsized companies, maybe they are selling the same, but they are trying to build and -- build down and reduce their stock. So just to be precise, is that we expect better activity in second half than we did in Q1.

[Unknown Analyst]

Yes. And your visibility in terms of -- I mean, you're not announcing any backlog, but what -- how would you say your visibility is in GPV?

[Jens Sørensen, executive]

Asset visibility is, of course, that we are -- now we are in the middle of August. So of course, our visibility is much better than it was 3, 4 months ago. We have a strong backlog still. So we feel quite confident on our guidance and also that we can deliver on the backlog looking always also a book-to-bill figures and things like that. So quite good visibility.

[Unknown Analyst]

Okay. Okay. And then in BioMar, maybe just a detail, but you're referring to a nonrecurring item in around this quarter. Can you quantify that?

[Jens Sørensen, executive]

I didn't get that, to be honest.

[Unknown Analyst]

You are referring to a nonrecurring item in Australia or ...

[Jens Sørensen, executive]

Sorry, in [indiscernible] yes, it's -- yes, I can really count it. It is a joint venture that is [indiscernible] joint venture in Chile, and that joint venture didn't develop as expected. In fact, it was very bad, and they decided to close down or take a full write-off on that. So that's a one-off thing coming in.

[Unknown Analyst]

And can you quantify that?

[Jens Sørensen, executive]

I don't think we have disclosed the figure, but it's not significant. Let's just say it's between DKK 10 million and DKK 20 million effect in some months, something like that.

[Unknown Analyst]

Okay. And secondly, you're still guiding for volume growth in BioMar in the second half despite the fact that I think it's down 2% to 3% if you look at first half year-on-year. Would you expect growth both within salmon and non-salmon?

[Jens Sørensen, executive]

Yes, we would -- we expect, yes, as I said, to grow in summer, mainly also because Chile is coming back and then we are not expecting a big growth in non-salmon, but we expect small growth also there yes.

[Unknown Analyst]

Okay. And so your comments there about regulatory uncertainty is more referring to the past and it's not kind of a cautionary disclosure with regards to the future?

[Jens Sørensen, executive]

No. It's more to the past. It was in Chile where there was a lot of discussions on too much volume as seen in the cages and in the licenses and so on. And it mainly hit some of our larger customers, and they had to reduce stock at sea, and that's handled now.

[Unknown Analyst]

Yes. And then finally, in BioMar, I think there's been some attention on shrimp prices in Ecuador. And I think you're also referring to short production cycles within shrimp. But I think on previously on the Q&A session, you also said that the situation in Ecuador is improving. Can you elaborate on that?

[Jens Sørensen, executive]

Yes, we see better shrimp prices in Ecuador, not a very great increase and so on but what we see the situation leveling out, better sales into China and U.S., but still not big price increases, but a little better situation, yes.

And I think it was Ulrik Bak?

[Ulrik Bak, analyst]

Also a few questions from me. Firstly, on GPV, along the lines that [indiscernible] just was asking. Most of your peers have been very positive about the outlook reported in their Q2 reports. You guide for a sequential 10% to 20% decline in the H2 EBITDA in GPV versus H1. In that context, can you just put some figures on this order backlog of yours. Has it been flat quarter-over-quarter? Has it increased? Has it decreased? And has there been any cancellations in your orders?

[Jens Sørensen, executive]

We have not seen any cancellations. We have seen somewhat, but it is not significant. But we have -- of course, we have seen some orders being postponed a little bit, prolonged a little bit. That's what we have been seeing. And then we have also on our own efforts has really started to work with the backlog and look at the backlog because how serious is the backlog, how much can we count on it. And when you have a backlog, then you also start up all your procurement requirements, you build inventory and so on. So we have also on purpose reduced backlog because we think that there will be a softening and slowing down in 2024. And we have to be very careful also not building too much inventory based on too long backlog.

So we are maybe a little bit more prudent or a little bit more soft than others, but also we have to look into what kind of segments are we in some of the peers you are referring to, they are in -- more in defense. They are in the medical business and so on. We are much more in pure industry.

[Ulrik Bak, analyst]

Okay. I can't say that was a clear answer, whether it was flat, increasing or decreasing. But I guess it has been -- become even longer than if people are -- customers are postponing orders.

[Jens Sørensen, executive]

Yes. So we still have a very solid backlog. And now we're saying that we feel -- I think I've said that before also when Cedric was on that we feel quite confident on 2023 in the guidance we are giving. And of course, and we have a good backlog for that and expect to deliver within the guidance.

[Ulrik Bak, analyst]

Okay. Then turning to BioMar. You mentioned this Chilean salmon market recovery. Is this -- can you, by any chance, also quantify anything here? How much is BioMar up versus last year or versus Q1? Just to get a feel of the magnitude of the weakness in the market and how fast we can expect it to pick up again and with what magnitude?

[Jens Sørensen, executive]

I just have to understand, do you refer to the volume as the feed volume or to salmon prices in the market? Because I think I said that volume, we were down on volume, and now we expect the volume to pick up in Chile. And then of course, as I said, we have had a good contract negotiations. We have a good base, and that's driving our -- that we expect better volume than in H1.

[Ulrik Bak, analyst]

Okay. But is it your impression that your customers' BioMar's of salmon is higher in Q2 this year compared to last year? Or is it still below?

[Jens Sørensen, executive]

It's not below. I think it's at least at level. And I think also that I saw the latest outlook, expecting a 3% to 4% growth in Chile over the coming years. And of course, it was expected to be more. But then these regulatory issues came in and reduced volume. But we are seeing Chile back on track and also with the increase in volumes. And we have -- as I said, that we have a very -- not very good, but we have a strong contract platform with good volumes.

[Ulrik Bak, analyst]

Okay. And in terms of these contracts, you've previously stated that there's been an improving balance between supply and demand, particularly in Norway, and that did -- this should lead to perhaps better contract rates for Schouw or for BioMar. Is that something we already will see in Q3? Or did we already see some of it in Q2? Or how should we look at that?

[Jens Sørensen, executive]

I think when we are keeping our guidance at the level we have, then I think -- we keep the guidance at the level as we have and thereby, you cannot expect to see bigger improvements because of the contract. We are in a situation now where a lot of customers -- several very large customers, they are asking for much longer contracts. I think I elaborated on that also early on that now we see because we expect tight capacity in the coming years in the market that we see customers asking for 3, 4 years contract.

And we are in the process of discussing internally, do we like these long contracts? What's the risk on that? And we have not taken any really long contracts any longer. So you will not see effect on that now, but as I have said earlier also, I think with the capacity constraints, hopefully, there will be a way to improve margins in our way.

[Ulrik Bak, analyst]

Okay. So are you more comfortable with the contract base you have this year compared to last year at the same time in the year?

[Jens Sørensen, executive]

As we have always -- when we have a volume contract, then our customers tend to take the volume and then it's more on the margins and the recipes we can work on and there we feel confident that we have a good way to optimize and work with these customers. So we feel as confident as we can on the contracts. And also we have learned a lot over the years how to handle these large contracts. So we feel good and confident on that.

[Ulrik Bak, analyst]

Okay. And then my final question is on Fibertex Personal Care. Obviously, there was some tailwind from lower raw materials, lower energy costs and FX. Can you perhaps also quantify that? I'm just trying to get at what the underlying EBITDA for Q2 was.

[Jens Sørensen, executive]

We are in Q2, that was -- raw material was not that big. It was around DKK 4 million to DKK 5 million on raw materials. Then we also expected to have a much higher energy prices than we have. So that's also why we can improve guidance, but around DKK 4 million to DKK 5 million, but we expect also tailwind from raw materials in the second half.

André?

[André Thormann, analyst]

So I just have a few questions. First of all, just as a follow-up on your initial comments in both GPV and Fibertex Personal Care around basically, what indications do you already have now for 2024? And what comments can you give because I know you write something about it on Fibertex Personal Care but also gave some initial comments here on 2024 in GPV. So I wonder if you could elaborate more about both of these.

[Jens Sørensen, executive]

Yes. I think, André, what I said on GPV was that some of the backlog is going into 2024. And we have always -- we have had a backlog that is quite long duration. I just said that some of the backlogs and the orders, they have postponed a little bit, maybe even into '25. So we don't really give a comment on outlook for 2024. What you're saying that we expect also high activity level, we see smaller customers slowing up on demand.

But as I also said, the big -- very large customers still positive, still pushing for orders, so we don't see any really signs on very, very soft market or recessions or things like that. I said on Fibertex Personal Care that we expect Asia as our Malaysian operation to be hit by this situation for some time. It takes time to recover volume, not because of competition, but also because the market is slow.

So for 2024, we still expect a difficult market outlook in Asia for Fibertex Personal Care where, as I said, GPV, still a positive outlook, but also things softening a little bit, but that's normal.

[André Thormann, analyst]

Okay. But just one follow-up on GPV. Are large customers also starting to postpone orders that was placed in 2024?

[Jens Sørensen, executive]

We haven't seen that.

[André Thormann, analyst]

Okay. And on Fibertex Personal Care, it sounds like we should already now start to expect a much worse year than 2023 for that business. Is that correctly assumed?

[Jens Sørensen, executive]

Not saying that, I'm just saying that we still see low volumes in 2024. We have a volume base now in 2023. And we expect to keep that volume base, but it is not as we expected. We expect it to grow. We have excess capacity in Asia, and we would like to use that excess capacity, of course. There could become a situation where price competition is so tough that we're saying it's not for us. We are not taking these contracts. It's a balance. We are always looking at profitability and things like that. And we also need to have the courage to say, this is not a contract we are interested in because profitability is simply too low, risk too high.

[André Thormann, analyst]

Okay. Then another question is in terms of Fibertex Nonwovens. I just noticed at least as far as I understood it, the factory in U.S. has been postponed. What's the reason for that?

[Jens Sørensen, executive]

No, the factory in the U.S. has not been postponed. We have postponed, not postponed. We have a line decided for the Czech Republic [indiscernible] line that we have not established yet because we are waiting the -- what is coming out of the new line in the U.S. and the customers, and so we want to learn from that before we really start up in Czech. You could say maybe I think -- we call it SL2, the [indiscernible] 2 line in Greenville, could maybe be 2 or 3 months later than originally expected, but it's going to start up. Now we are into Q3 and really running, hopefully, full speed end Q4.

[André Thormann, analyst]

Okay. And just my last question is in terms of your expectation around net financials, which is now updated. Can you just give a bit of flavor on what your underlying assumption is for interest rates, et cetera. So we maybe can better predict at this time.

[Jens Sørensen, executive]

Yes. We have based it on interest rates being flat now, that's the level we are now. And then also that we expect to reduce our net interest-bearing debt by the strong push we have on net working capital, bring in cash flow and so on. But of course, there are -- we have also seen currency fluctuations that has hampered our financial costs, et cetera. But we expect a flat second half on that.

Other questions?

No further questions. So with that, thank you very much for listening. Thank you for asking questions, and goodbye here from Schouw & Co.