Schouw & Co A/S

CSE:SCHO

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Jens Sørensen, executive]

Welcome to the presentation of Schouw & Company's Q2 '24 financials. We overall, had a very satisfying second quarter in spite of volatility and tough competition, it really continues. And in more, all markets we are in the world. Our top line was down 5% to DKK 8.7 billion. Here, we saw a negative impact from raw materials and also from a lower activity level in some of our segments.

Our EBITDA was, however, up 11% to DKK 737 million. It was driven by a very strong development in BioMar, and I think also it was very satisfying that we -- in spite of the tough competition and tough markets, managed to increase margins across the board. We have a very strong focus on delivering our results. Our investment level in 2024 have really been adjusted. It's a year of consolidation, so we have invested quite significantly lower than the previous years. We are also running profit protection plans in all our companies to offset more soft and volatile markets. We have a small guidance update. Our top line is slightly down, but our EBITDA will now be in the range of DKK 2.81 billion to DKK 3.06 billion.

From the overall look at the Group, I will move into each of our 6 companies, starting with BioMar, the biggest company in our portfolio. BioMar really had a very, very satisfying second quarter, and they have over the last years, had strong focus on profitability and innovation. Their volumes are slightly down, and it's driven mainly by the Salmon segment. So meaning that a turnover of DKK 3.99 billion is 4% down. A lot of activities is going on to protect their profitability, and we have commercial excellence programs that really drives profitability uplift. Our EBITDA was up by 36% to DKK 361 million, the strongest second quarter we've ever had in BioMar. BioMar continues to have very good momentum in the market. They are building long-term relations with their customers. But at the same time, also focusing on credit and risks, because when you really move large volumes in a volatile market, things can happen.

We're also establishing a new global ERP platform, investing around DKK 200 million to finalize 1 ERP in BioMar. Our guidance of BioMar -- guidance has changed to the positive top line, however lower, due to volumes but a very strong uplift in EBITDA and now guiding DKK 1.41 billion to DKK 1.48 billion.

From BioMar moving into GPV, which saw exactly the opposite of BioMar. They are as challenged as we expected. Top line was down 16% to DKK 2.28 billion. Soft markets in more or less all industrial segments around the globe. Order intake however, slowly picking up. EBITDA was down 24% to DKK 144 million. Here, we, of course, has effect from lower sales. We also had impact from ERP cost and also from closing down our operations in Malaysia.

In spite of the market conditions, our contribution margin saw a small and very satisfying uplift. We have full focus on protecting the long-term profitability in GPV. We are fully focused on driving efficiency in at all factories, reducing inventories and also preparing for future by looking at the global factory footprint. As I mentioned earlier, we closed down our operation in Malaysia and moved it to other factories in the region. The guidance for GPV will see a downgrade. The expected uplift in second half of '24 is not kicking in as we expected. Top line now expected to be DKK 8.9 billion to DKK 9.3 billion, and also meaning that we have to reduce our EBITDA, now in the range of DKK 610 million to DKK 660 million for the year.

Looking at HydraSpecma, we really saw a stable activity in a very uncertain market. Top line was up 2% to DKK 788 million, especially our newly formed Renewable Division were driving the growth. Our global OEM and Nordic IAM impacted from softer markets around. EBITDA, however, up 7% to DKK 88 million. Here, we also saw synergies from the latest acquisition kicking in. And across the board in HydraSpecma, we have seen very good cost management and efficiency also here, we see a company driving the agenda for future profit uplift.

Factory footprint decision are made throughout HydraSpecma. We are moving production to our new low-cost facilities and also a lot of focus on R&D and innovation in specific segments. The guidance for HydraSpecma slightly adjusted EBITDA now DKK 300 million to DKK 330 million, but it's still in the previous range. We see the effect from softer demand and a lower backlog activity and the requests are expected to pick up ultimo 2024, also looking into some very attractive segments as Defense and Marine and so on, expect further growth from these segments in the future.

Moving on to Borg Automotive. Here, we really saw solid development in all of our segments. Top line was up 12% to DKK 548 million. Again, here, we really face a tough market, tough competition, mainly from China products, and it is a challenge, and it will continue to be a challenge in the coming time. EBITDA very satisfactory, 29% up to DKK 57 million, again, efficiency up, but salary costs in some of our production unit is really challenged, due to inflation and salary increases. We also saw a very strong profitability uplift in one of our troubled segments products for Steering. Borg continues to strengthen their market position in Europe. They have very strong brands and are active in both the Reman and the Newman segment.

We are extending our product offerings across the product groups. We have introduced around 104 -- 140 new products in the last quarter. And we have a really strong focus on driving the circularity agenda and also on sustainability. Borg expects to keep the guidance from Q1, meaning that delivering EBITDA in the range of DKK 170 million to DKK 200 million. However, also competition here continues to push hard in all segments, but we have a lot of tools in the box to withstand the competition. Moving on to the 2 Fibertex businesses, starting with Fibertex Personal Care, top line was, as expected, down 7% to DKK 488 million. FPC is active in two regions with very different dynamics. Looking at our Europe segment, Europe business, there we see a very strong demand, more or less full capacity utilization, whereas looking into Asia, we have idle capacity, and there's a lot of -- very tough competition, i've elaborated on the reasons for that earlier on in my presentation for especially low birth rates in China and the overcapacity is the issue.

EBITDA also down as expected 24% to DKK 44 million for the quarter. Again, as I mentioned already, fierce competition, low volume in Asia is really driving this development. However, also seeing and getting raw material effect over the quarter. It is a raw material-driven company. We will see up and downs on that. Interesting also to see that there's a new dynamic in the Nonwovens markets. Today is -- Asia driving innovation. FPC is well positioned to participate in this innovation.

We see in Europe increasing market share to private label brands, maybe not as sophisticated products.

Also interesting to see that Southeast Asia now start to grow. Full year outlook slightly increased EBITDA now expected in the range of DKK 170 million to DKK 200 million. Moving on to the last company in our portfolio, Fibertex Nonwovens, the very good development continues. The top line now up 7% to DKK 600 million. Most of the segments in FIN or Fibertex Nonwovens have increase in volumes.

Fibertex Nonwovens involved in a lot of different segments. Our new capacity in U.S., of course, also delivers a volume uplift. EBITDA, a very solid development, 50% up to DKK 58 million. And again, a strong effect from volume increase and product mix. U.S. in good development, but still challenging on the new production line for the wipes.

We are transforming Fibertex Nonwovens for the future, something that has been going on for quite a long time. We have full focus on innovation and added value products. We have a new products in our pipeline, very promising, very interesting new products coming in. And we are also looking very hard into how to utilize our new capacity to produce added value products.

Solid first half result drives positive outlook. Top line maintained. EBITDA expected to be in the range of DKK 210 million to DKK 214 million. So concluding expectations for 2024, the Q2 guidance update now, as I elaborated on earlier, per company, looking at it from a group perspective, slightly down on top line, but improving EBITDA guidance in the range of DKK 2.81 billion to DKK 3.06 billion. BioMar, of course, with very strong profit uplift, GPV hampered from challenging industrial markets. And that's the two main things in the new guidance from our side. So I think with this slide and these comments, I would open up for questions.

[Jens Sørensen, executive]

Claus Almer, Welcome.

[Claus Almer, analyst]

Yes, a few questions from my side. The first is Jens, the comment you made in the start of your presentation, you have introduced profit protecting initiatives in all divisions. What does that actually mean?

[Jens Sørensen, executive]

I think, I said profit protection planning, meaning that when we see soft markets and volatility and so on, you of course, need to work on a lot of different things. You need to work on your cost base, the way you go to market and there's more meaning that we are -- we are in front of things and careful on costs and investments and so on. Because we have a strong desire to deliver on our profit plan and our -- on our guidance.

Also meaning when you are operating in volatile industrial markets, you need to be on top of things. So we are running plans in all -- I would say -- I said in all companies in, all fairness in the 5 industrial component -- supplier companies meaning BioMar, of course, also working a lot, but they are -- they have other things to work on.

[Claus Almer, analyst]

So maybe we could drill a bit down. So does that mean you will start reducing FTEs? You put travel marketing stops. So what -- or is it more a plan that can be started if you see things worsen?

[Jens Sørensen, executive]

Yes, we don't go into all these details, of course, in some different ways of looking at it from company to company. But in general, just saying we need cautions on a lot of things and be prepared to flex.

Looking at the -- if you look at FTEs, you can see GPV have reduced their FTEs with 1,000 people over the last year. So of course, they are moving on that issue also, if you look at the top line and the results and so on. So a lot of things is going on to protect our guidance and our profit.

[Claus Almer, analyst]

And you've become more concerned compared 2Q -- after Q1, where you didn't mention this?

[Jens Sørensen, executive]

No, I'm just saying that we can also -- we are living in the world where we can see things are more soft. And when you see things softening up, then you also need to be prepared and to do things. I'm just also telling the market that, of course, we are not sitting on our hands. If things start to develop and we have in all companies plans and discussions on how to offset if things don't go the way we expect it.

[Claus Almer, analyst]

It's always good to be well prepared, if things should be deteriorating. My second question is GPV. You mentioned that contribution margin improved but EBITDA is down. And I know revenue was down. So does that mean you are unable to adjust your fixed cost base to a lower activity level? And is that possible in the coming quarters? Or you need the scale to maintain your profitability?

[Jens Sørensen, executive]

Yes, it's super relevant and good question, Claus. I said when I say the contribution margin in GPV improved slightly, but it's also good that they can improve their contribution margin slightly, when we see the pressure on prices and everything in the market.

Then, of course, scale means something and we have also IT costs for the quarter, we didn't have last year. We have a cost base that we're working on. We had close down costs on Malaysia. So we had costs below contribution margin that, of course, had an effect on EBITDA. But really, I think it's positive while worth mentioning that we can maintain contribution margin at a reasonably good level in spite of lower activities.

[Claus Almer, analyst]

Okay. And then I don't want to disappoint you, Jens. So I will ask an open question. What do you think about your development in net working capital?

[Jens Sørensen, executive]

In fact, quite satisfied, but of course, I would have expected to see it a little bit down, but you also know sometimes it moves from quarter-to-quarter, but main reason for that is debtor in BioMar. So that is -- we know where things have been moving, and we are still on it, and we saw a good decline in Q1, and we haven't stopped that Claus. And you will see also that, that we will continue to push out on it. Like cash flow also.

Ulrik Bak?

[Ulrik Bak, analyst]

Just a question on your updated guidance. So the implied guidance on EBITDA for the second half of the year implies a negative to flat EBITDA growth year-over-year and only positive growth potential in Borg and Fibertex Nonwovens. And this obviously stands quite in contrast to the development during the first half where earnings have been quite a bit up.

So I guess my question is, can you just confirm that you are indeed seeing an overall softening of your demand across your businesses?

[Jens Sørensen, executive]

We are seeing an overall softening demand, but also trying really to offset. I think also if you look at company by company, of course, GPV really facing that most others -- most of them trying to offset it.

And then if you look at BioMar had a very, very strong first half. Also expect that BioMar have good development in the second half, but you also know biology volume, a lot of things can play in here. But BioMar, still with a strong profit uplift because of -- mainly because of H1, but looking into still a good comfort around BioMar.

[Ulrik Bak, analyst]

Okay. Jens, and my second question on BioMar. This gross profit per kilo has been quite extraordinary over the past 3 quarters, and this quarter, it was up more than 30% year-over-year. And you have previously mentioned that it has been driven by improved supply and demand particularly Norway, lower share of low-margin contracts and then a positive impact from declining raw material price. Can you say anything about the impact from the declining raw material prices just to get a sense of what is a sustainable level going forward?

[Jens Sørensen, executive]

Yes. I think we are -- maybe now we don't expect raw materials to decline much in the next quarters. But think we are at a level where, because of our commercial excellence and our products mix added value and so on. We try to keep margins at the high level. Now we go into the very, very high season in Norway, where there will be more basic food -- basic feed. Now they are really in the fast-growing process and sort of more standardized feed and so on.

Of course, if things happens, more biological challenges and so on, we can see more functional feed being sold. But the budget now is based on business running smoothly where more and more standard feed coming into the fish and so on. So that's what we base the guidance on, but still trying to keep a high margin level.

[Ulrik Bak, analyst]

Understood. So did I understand you correctly that you say that during the peak Q3 peak season that there's more basic feeds being sold, which dilutes the margin?

[Jens Sørensen, executive]

Yes, it's diluting a little bit, but there is more basic feeds, and we have not taken into guidance that we should sell a lot of functional feed and so on. So that's one of the reasons behind that. And we don't do that. We'll most say, okay, we expect growing season normal and not with a lot of challenges and so on and so. So that's the reason behind it.

[Ulrik Bak, analyst]

Okay. It's just -- perhaps I'm a bit confused, but the GP per kilo is normally peaking in Q3, which I would think was because it's the more high-margin feeds that's being sold?

[Jens Sørensen, executive]

Yes. No. Of course, it's not only high-margin feed and you of course, you were touching on a very important point. it's also efficiency, because we run a lot of volume logistics and so on that really drives margin in Q3. Because you have much more throughput on the big factories and logistics and so on. And of course, also I understand your question saying, don't you see a larger or a bigger uplift in BioMar guidance than you are coming with? But when we are looking into things normalized as we speak, that's what we see.

[Ulrik Bak, analyst]

Understood. Then a question on GPV. You mentioned some costs related to an ERP system. Can you perhaps quantify how much the costs were in Q2? And for how long we will see this cost drag and potential benefit of it as well?

[Jens Sørensen, executive]

Yes. There were DKK 7 million -- DKK 20 million for the quarter. So of course, it's quite a lot. And it's the start-up of a new -- of a new 1 ERP that will benefit a lot over time because we can run products at different factories and things like, we need to have an ERP upgrade. And of course, there will come costs and, as you also know now, you take the cost immediately instead of having depreciations on them.

So you will see a pickup in that over the years, maybe the start-up cost DKK 20 million for the first quarter. is high, but we will expect to see increase in IT cost over the coming year or years even, because it takes time to implement it.

[Ulrik Bak, analyst]

Okay. So there will be perhaps not DKK 20 million per quarter, but a bit less per quarter for...

[Jens Sørensen, executive]

It's also reflected per year. It was it was DKK 7 million for the quarter, and it's DKK 20 million per year. So it's reflected into the guidance, to be 100% specific.

Yes. André?

[André Thormann, analyst]

So just a few questions from my side as well. And just following up on question around BioMar guidance because, I didn't fully get it. So just to be completely sure, why do you expect BioMar EBITDA decline in the second half year-on-year? Sorry, it's just there was some background. That was my first question.

[Jens Sørensen, executive]

On repeat -- why do the expect EBITDA in BioMar to decline in second half? Yes. As I said, you cannot just take -- extrapolate over the year, a lot of things is going on and also, how does the how does the contracts look that's something else. Also maybe there are in the main season, a little bit lower margins, even I said that we are, of course, protecting our margins around more standardized feed. A lot of things going on, and that's what we are seeing now. But if you ask me, and I think also I said that earlier on that I feel good comfort on the guidance in BioMar. If we look compared to last year even on lower volume, it's a significant profit uplift in BioMar, I think we need to be realistic also on how we can drive, because it's also balance, which we are very into. It's a balance between volume and margin.

And you can go over the cliff on too high margins and, all by a sudden you start to decline your volumes and then efficiency starts to run off and so on. So it's a balance.

[André Thormann, analyst]

But you have just seen such a dramatic increase in EBITDA in the first half. I mean do you have anything indicating currently also in the current trading that this shouldn't happen in the second half?

[Jens Sørensen, executive]

As I'm saying, we expect lower volume because of biology. A little lower volume in Norway, more standardized feed in Q3. As I also said, the contract changes a little bit when you get into the main season. So a lot of small things is driving the expectations as we see them now, and we have not taken into consideration that we should sell a lot of functional feed and so on.

[André Thormann, analyst]

But volumes have also been declining in the first half, right? They didn't stop them dramatic a profitability increase?

[Jens Sørensen, executive]

I agree. I agree. But I can't say more on it than I've said that, of course, we will work as hard as possible to push on more margins and whatever we can, but what we see now is what we are saying and without being too conservative because, of course, we have an obligation also to guide as precisely as possible. And we have been through this in and out and discussed it lenghtly, and this is what we are seeing now. And let's see when we will get further on. But we feel good comfort with the guidance.

[André Thormann, analyst]

Okay. And just another question also around BioMar. Can you, in any way, quantify how much tailwind you got on EBITDA from lower raw materials in the first half?

[Jens Sørensen, executive]

I can't quantify it, but -- of course, we have had -- we'll always have some tailwind when raw materials are declining. But again, we have also a tailwind from not tailwind, but being very clever in optimizing and doing innovation and things like that. So a lot of things has really been the key driver also something is also important. We have the country mix. Now we have Norway with a very strong EBITDA margins and [ log-ly wise ] now good volumes in Norway. Ecuador also improved. So also depending on geographies and segments.

[André Thormann, analyst]

And related to that, with how the raw materials are looking currently, do you expect to get sale in the second half as well from that on EBITDA?

[Jens Sørensen, executive]

No, I think I said that now we have based the guidance and so on, on normalized -- or not normalized, but on raw material prices as they are. Emil?

[Unknown Analyst]

Yes. Of course, two questions from my side. And the first one also related to BioMar. So where you reported a decline of 9% in salmon volume compared to Q2 last year, which doesn't come a surprise, as you're focused on building a more profitable contract portfolio, because you happen to say no to some low margin contracts.

But, can you elaborate a bit and if possible, quantify on how much of this volume decline is due to non-renewed contracts versus a general decline in market volumes?

[Jens Sørensen, executive]

I would say, probably 50-50. There were contracts we went out of because, as you said, we were not satisfied with the profitability and outlook. And then there have been biological challenges in particularly in Chile and then also earlier harvest than expected in Norway. So really not just to say strong 50-50, but that's really our clear opinion that it's in that area.

[Unknown Analyst]

All right. The second question relates to GPV. So as mentioned in the presentation, the EMS industry is smart by subdued activity levels, and you do not expect any significant increase in demand to materialize before 2025. So are there any specific segments that step out? Because we have seen among peers that demand in segments like Defense and Security has been quite strong, which aren't segments where GPV as of now has the strongest presence.

Meanwhile, demand in segments like Cleanse, Construction and Communication as well has been more subdued. So does this align with your experience in terms of market demand?

[Jens Sørensen, executive]

Yes. To be really 100%, I mean, that's exactly as it is to the point. And those in the defense segment, of course, they are having happy days and also looking into stronger years to come. And we are supplying all these segments that for the time being are a bit soft, small, not that big in medical, but we are big into really industrials, heavy equipment and things like that. So we are sitting right there in the industrial segments that see soft market for the time being.

[Unknown Analyst]

All right. And just a quick follow-up. As a recall, you have 2 out of the 17 factors in GPV that's currently approved for, let's say, military application. Is that something you're looking into, scaling up in terms of expanding the current capacity and into more, we say, defense security segments?

[Jens Sørensen, executive]

We have started to look into it, but it's not really something that we have been pushing hard on because it takes a long, long time. We have places where, as you rightly say that we are allowed to approve for producing for defense things. some of our small factories. So we need to work a lot on, of course, a very attractive long-term segment that we want to look into.

Thank you. I think that concludes the Q&A session. So thank you very much for everyone.

[Claus Almer, analyst]

Jens, Just a follow-up -- or were you just ignoring me?

[Jens Sørensen, executive]

No, I didn't. Not at all, Claus.

[Claus Almer, analyst]

I was also a bit late to raise my hand again. So GPV yes. Now you are saying that your customer exposure is not great in a downturn. But as I recall in past calls, you have also mentioned a large number of your clients are more less cyclical exposed. So it's a little bit confused now. That would be the first question.

[Jens Sørensen, executive]

Of course, you're right on that. I'm just saying that we are also in segments that are very soft. We have segments that are attractive also looking into IT and things like that. So we have a good mix, but some of our very big segments, they are more or less all of them, maybe the perfect storm that they see soft markets. As i also said, we see orders and demand picking up in some segments. So we have a good balance, Claus.

But we have just been seeing also a lot of de-stocking going on. I think we need to take that into consideration also. -- all the big industrial companies around the world have also these very polite questions from the analysts on net working capital and things like that. So it's something that has really been going on for some time.

[Claus Almer, analyst]

So if we are looking into a more difficult macro situation, would that be an opportunity for GPV from an M&A point of view. So are you looking into the bank, how much money do you have to spend? Is there more incoming calls, et cetera, et cetera?

[Jens Sørensen, executive]

Yes, I think it's a very good relevant question. are. We are -- as we said, we have strong ambitions for GPV. We also see this -- of course, you will see downturns. But in general, we have built a very strong #2 position in Europe, interested in expanding it. We have people knocking at the door maybe price levels, valuations have not really adjusted itself yet, but we are still ambitious on building GPV further up and creating a real large-scale company. So looking at opportunities, yes.

Okay. I think on that note, then now one more coming. Good. Sindra?

[Unknown Analyst]

Having some problems with meeting. [Foreign Language].

[Jens Sørensen, executive]

Could you do it in English? Not in the Norwegian border.

[Unknown Analyst]

Okay. On BioMar, I know there has been a lot of questions regarding what some of us it seems like a somewhat conservative guidance in light of the very strong profits and margins in the first half. But and you've been focusing much on Norway.

But obviously, at this time of the year, it's uncertainties regarding biology as we enter the peak season in -- in some summers, there's been a lot of biological problems, meaning that volumes have been less than, let's say, estimated prior to the season. But I would say, as of now, there are a lot of sciences at biology actually is somewhat better than many pundits have expected.

So my question is, is your guidance for BioMar second half is that let's say, if it comes like 8% volume growth year-on-year in a versus, let's say, 1% year-on-year growth. Would that mean a lot of difference for you?

[Jens Sørensen, executive]

Yes. We have excess capacity, but not that much. So of course, we could maybe run even tighter on the lines and so on better [indiscernible]. Of course, there could be some opportunities, but it's not a big thing, but still, yes, could be opportunity. And then, of course, it's excess the volume and there, the margins you have the cost already in advance. So of course, could be interesting.

[Unknown Analyst]

Exactly. And wouldn't that also mean that the titer market also should, let's say, give you better bargaining position?

[Jens Sørensen, executive]

Yes, of course, it's always a situation. If things really happen, let's just say that the market was up 8%. That's quite a low in volume. You also know all the figures and so on compared to 1%. So of course, there could be some farmers that really would be in volume or in feed problems couldn't get feed enough to grow the fish as fast as they expect. So could be opportunities, yes.

[Unknown Analyst]

Okay. And then finally, could you just remind us how much of your volumes in the Salmon division that is fixed on, well near or long-term contracts as opposed to, let's say, more short-term duration on sales?

[Jens Sørensen, executive]

Yes. I would say in Norway 6% to 7% based on longer-term contracts, whereas if you go to yes, then you could say Scotland also maybe 40%, go to Chile. It's not -- it's only -- it's year-based contract, the same, more or less in Tasmania. So Norway, longer-term contracts also U.K. in general, I think, something like that. But of course, you need to adjust prices. There will be price negotiations and so on, you can have an opinion on we secure you x tonnes in volume, but we need to look into pricing quarterly based or something like that.

[Unknown Analyst]

And that usually kind of cost escalation close?

[Jens Sørensen, executive]

Yes.

Okay. Now I think we can conclude the Q&A session is all. So thanks a lot to everyone listening and asking questions. So goodbye from Schouw & Company.