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Schouw & Co A/S
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Ladies and gentlemen, welcome to the Schouw & Co. Q3 Interim Report 2018. [Operator Instructions] Today, I am pleased to present CEO, Jens Bjerg Sørensen. Please begin.
Thank you very much, and welcome to everyone to the presentation of our Q3 report. Q3 was a quarter of challenge as we expected, its revenue was up by 4% to DKK 5 billion. We saw a positive effect from our recent acquisitions, but in general, we can also say our company had kept both market share and positions over the year and quarter. Our EBITDA was, however, 8% down from DKK 483 million to DKK 445 million. We continued to see tough competition in most markets and in most segments and also raw materials continue to fluctuate quite a lot.BioMar, Fibertex Personal Care and Borg all came up with lower EBITDA than the previous year. Cash flow from our operations in the quarter was in the area of DKK 560 million. Of course, new -- our new companies and higher activities also demand higher net working capital.At the end of last quarter, we initiated a share buyback program of DKK 200 million. The program is well underway, and we expect it to be finalized and run until December 28 this year.The full year guidance for Schouw & Co is narrowed. Our revenue is expected to grow 5% to around DKK 18 billion. EBITDA is now in the range of DKK 1,580,000,000 to DKK 1,650,000,000, and it's also naturally when we are closing year-end that we narrow our range. We have a full focus on optimization and efficiency in all our operating companies. We expect our CapEx [ to climb ] program of DKK 750 million to be finalized within this year.Also interesting to see that the increase in profit after tax from associated companies now is expected to be around DKK 75 million. We are running what we call a streamlining agenda in Schouw & Co. And after the quarter, we closed the deal on acquiring CCS as a paid-on acquisition to GPV, meaning that we will double the size of GPV when the acquisition is closed. We divested our biogas energy company, Xergi, was 50% owned. We have sold a non-core property in Frederikshavn, and we have also changed investments in our venture activity. So after several years, we focus on streamlining. You could say that we have nearly finalized this streamlining program.Looking at BioMar. We saw a revenue of DKK 3.1 billion. Also have to bear in mind that Q3 is really the main season for BioMar. We saw 2% increase in volume to 367,000 tonnes year-to-date. We have sold and produced 879,000 tonnes. BioMar saw a positive effect from the acquisition of Alimentsa, the company in Ecuador in shrimp segment. We experienced a negative impact from lower volumes in Norwegian market, as we also addressed at our last announcement that we lost several contracts last quarter. And we have also seen what we call not optimal farming weather in several of our EMEA markets in the quarter.EBITDA is declining as expected slightly to DKK 246 million for the quarter. And again, here we have a positive effect from Ecuador, Alimentsa, which compensates the decline in volumes we saw in Norway and in Northern Europe in general.In Q3, we continued the good development in our nonconsolidated companies, and we also started to see effect from all the cost and efficiency initiatives we took over the summer. The construction of our China factory in Wuxi is in very good progress, and we expect to be able to have commercial production running at the end of this year.Looking at 2018 guidance. We upgraded the expectations revenue in the area of DKK 10 billion, and EBITDA is now raised from DKK 665 million to DKK 705 million to now DKK 690 million to DKK 750 million. It was a small upgrade compared to the downgrade we needed to exercise after Q2.Here, we have really seen the effect from the cost and recipe optimization programs we have initiated after we lost the contracts in Norway. So all over in BioMar, we are really having a strong focus on efficiency and optimization programs.We also have seen much better weather conditions in Northern Europe in the last months and expect that to last a year or 2. Our associated companies expect now profit after tax to be up by DKK 20 million to around DKK 70 million.From BioMar to Fibertex Personal Care. Revenue here is up by 9% to DKK 552 million. We see continued growth in Asia, but the growth has been lower than expected and lower than previous periods. Our print business is in good development. EBITDA, as expected, reduced from DKK 98 million to DKK 75 million. Here, we see a negative effect from lower volume in Malaysia. As we addressed earlier also, our customers in Asia, they are facing tough competition from local Chinese brands, offsetting volume requirements. They have also faced general higher production costs, especially energy, in Malaysia, [ which started off ] print activities in Malaysia has also taken a negative profit. However, we are now on a good track and expect our print operations in Malaysia to be profitable from next year.We have seen a good performance, a good efficiency in our Danish operation despite very, very tough markets. The construction of our new print facility in U.S. is well on track. It's an investment of around DKK 90 million. And we also continue to work on developing new and higher value-added products, it's in good progress. And also within Fibertex Personal Care, we are running and streamlining efficiency initiatives, and it's ongoing in all areas and in all segments.The outlook for 2018 is narrowed. Revenue about DKK 1 billion. EBITDA is now expected in the range of DKK 310 million to DKK 320 million. Also, here we have to see the competition in Europe continues, and we expect it to be tough and it will be interesting.Fibertex Nonwovens increased its revenue by 12% to DKK 375 million, despite continuous tough markets. We haven't seen a really positive development in our U.S. operation, and we have also received positive effect from our recent acquisition of Duci in Brazil.EBITDA increases a bit to DKK 40 million. Raw material prices continued to increase, and it has been really challenging over the quarter. It has been very, very difficult to get sufficient compensation from some of our large global customers.EBITDA has also been positive impacted of about DKK 5 million from Brazil. We have decided to start industrial-scale production of nano products and advanced filtration needs quite a large investment, but something we are expecting a lot from in future, we expect to become a leading player within the global filtration industry. We recently acquired companies in U.S, Brazil and Turkey. All continues to develop positively, especially if we are looking at Europe where we have been having tough markets and challenged by raw materials and competitions.Outlook for 2018 is reduced. Revenue still expected to be around DKK 1.5 billion to DKK 1.6 billion. EBITDA is reduced to DKK 180 million to DKK 190 million and then it's due to continued challenging raw material situation and it really puts pressure on prices and margins. We have ambitious plans for further rationalizing our factory footprint and drive costs down, and it has been initiated.Looking at HydraSpecma. Revenue increased 11% to DKK 454 million. From a revenue point of view, it was a very solid quarter. We continued to see good and strong momentum in our main segments, and we also have a strong order intake and interesting and good backlog. EBITDA for the quarter, however, was flat. We had some reasons for that. We have initiated increase in our cost to future-proof and grow the business. We have faced increasing component prices over a period, and it's been difficult fully to compensate, but we are on our way to compensate them, that's one of our large key accounts. Also, what has been -- had an effect on EBITDA has been changed in the geographical split, it drives cost and reduced margins to all lines, especially our global key accounts are -- we are following them around the world. We have taken a lot of necessary investments in automation and capacity expansions. We are in the way of finalizing the construction of our new 7,500-square-meter facility in Poland and expect it to operate beginning of Q1 '19.And also here, we have general focus on production footprint. All our activities in Finland has been streamlined, and we are looking into all of the other markets we are in.Outlook for 2018 narrows. Steady, strong demand, solid backlog. Revenue around DKK 2 billion. EBITDA is now expected to be in the range of DKK 170 million to DKK 180 million, and also our activities in China is now expected to pick up.Borg Automotive revenue saw a minor decline to DKK 231 million. We -- in fact, we saw an unexpected sales drop in September. We'll be looking into reasons for that. Couldn't really find them. We have seen revenue picking up, again, in October, well on track again. And whatever still, our strong and leading market position has been confirmed.The decline in revenue and effect from relation of costs [ due to the power ] EBITDA declined from DKK 36 million to DKK 23 million, and we had a severe impact of -- a strong impact of regulation, of course, adjustment of our net deposit obligations to customers around DKK 8 million to DKK 10 million for the quarter.We have been at the Automechanika fair in Frankfurt for the first time in Schouw's ownership period. And we really saw a strong presence and it really underlined our strong acquisitions being at that fair. We launched what we call Borg Mechatronics Forum, an initiative to lift remanufacturing to the digital age, and we continued to have and see a large and interesting pipeline of new customers across Europe.Outlook for 2018 is downgraded. Revenue around DKK 1 billion, and because of the drop in sales in September end the acquired durations, we now expect our EBITDA to be in the area of DKK 135 million to DKK 145 million.Finally, GPV. Revenue was up 6% to DKK 322 million. Fewer of our large customers have experienced slower demand, but we then saw a positive effect from new customers and new products in our portfolio. Order intake in general on a good and positive track.EBITDA was up by 19% from DKK 347 million. And still, we -- also we have to say that we see negative impact from starting our production facility in Mexico. So within this EBITDA number, we have seen a year-to-date effect of around DKK 20 million of starting up cost in Mexico.We also face -- still face longer lead times on components, and it really continues to challenge our efficiency.Q3 highlights Mexico operation shows good progress. We have seen improved efficiency and also what is very good increased demands. The expansion of our Thailand production facility is well in progress. But the big thing for GPV was -- after Q3 was the acquisition of the Swiss EMS company, CCS, and the acquisition will create a strong and leading European EMS company with probably a size of GPV, and it's -- 2 companies nearly, we could say, is a perfect match. One is strong in the northern part of Europe, the other one is strong in the tech region. We will see a lot of synergies coming from sourcing and global footprint, and also we think we can help fill in our factories, making the factory footprint more efficient around the world. So we will guide in more on this acquisition when we are coming with our 2019 expectation and also we first need to finalize and close the deal 100%, but we don't expect any problems here.The 2018 guidance is narrowed. Revenue DKK 1.225 million -- billion. EBITDA in the range of DKK 125 million to DKK 130 million. We have to say that we have not included expected acquisition costs in this and we don't have the figure right now, but expect it to be around DKK 10 million when we get all the final bills into our accounts.So summing up, we see still unchanged challenging markets, relatively soft demand, fierce competition, Q3 more or less as expected. Now expect revenue of around DKK 18 billion positive, they're fully effect from [ Borg and Alimentsa ]. EBITDA is now expected in the range of DKK 1,580,000,000 to DKK 1,650,000,000. Again, uncertainties on raw materials and components, but we are close to the year now. What's also important is that we, all over in our companies, have initiated cost and efficiency optimization plans, and we continue to focus on profitability and return on invested capital. So with these final wrap-up words, I will open for questions.
[Operator Instructions] Our first question comes from Jonas Guldborg of Danske Bank.
The first question would be around Borg Automotive. You say that the impact from the adjustments on these deposits is around DKK 8 million to DKK 10 million. So the rest of the cut and guidance is then stemming from the missing sales in September? Is that rightly understood?
It's rightly understood. Yes, it is.
Okay. And then a question on how large are these net deposit obligations to customers relative to revenue?
Relative to revenue, now we have to calculate. I would say, the net obligation, we don't 100% disclose, but around DKK 200 million is the amount. And the way we do this, I think you've seen the global market prices for cars has been falling, then we have to reduce the deposits we have out there. And then, we will buy cars cheap and we expect them to be more competitive on the long run.
Okay, and then when you're writing in the report that it is an unusual amount for 1 quarter. So it's just to get a feeling for -- is this then something that happens once every second year? Or is it even more unusual?
I would say, in the time we have now, our ownership has not been that long, we haven't seen it, and I think it's not something that we have experienced before. Also looking back in the history, of course, it was rather unexpected that the core market price has suddenly dropped like that. Another thing is also that we have -- if you look at our return of cost and we have a 2 years' obligation, and this 2-year obligation, we expect around 10% of the cost will not be returned, but product mix -- of course, we have seen much more [ break calibration done. ] It means that we have seen this return percentage also decline a little bit from 10% to maybe 8%, 7%. So it's something we are looking at in general, but a lot of things happened all of a sudden in this quarter.
Okay. So it's a sum of many things and not just the decline in profit at this time?
The decline is by far the largest. But when we look at the decline [ would be minimal ] looking and adjusted at our cost in general.
Okay. And then just second question is on the BioMar upgrade of EBITDA. How big of the DKK 15 million to DKK 20 million are coming from the initiatives you started after the -- during the summer, say? Is it all across the DKK 33 million?
You could say yes, the margins -- in fact, margins have improved, but also it's a little difficult to just put exact figure on, but margins in Norway, they have improved. Also because we have been able to change product mix a little bit in Norway, taking some of our volume a little bit more on added value products, functional fee. So there's also a mix going on there, but also efficiency things have meant a lot. But in general, I'd say also the entire attitude in the organization and the way we think in Norway has changed and then we have seen also quite a positive effect from better weather in northern part of Europe than expected. We see a lot of positive effect from all the initiatives we took, and it has been coming faster than we expected.
Yes, understood. Just so I understand, because if the weather has been better in northern Europe in Q3 and you expect it to continue into Q4, what is then impacting your revenue guidance negatively because there should be positive effect from this, I would guess?
Jonas, revenue is -- in this business, revenue is a little bit difficult to analyze on because we normally look a lot on volume and then it depends on raw materials, it depends on recipe, product mix. So there's a lot of factors into that you should take into consideration also. So -- but we expect more volume in -- and we have already seen that October was positive on volume in especially what they call the Baltic areas, northern Europe and so on. And also, as I said, better margins in Norway because of product mix.
Our next question comes from Claus Almer of Nordea.
Also a few questions from our side. The first one is trades and customs you mentioned, which is actually targeting old traditions. Could you please quantify the effect we should expect next year? And maybe also to put some color whether this is a margin improvement [ approving ] or is more a margin protection initiative? That will be the first question.
Yes. Claus, I think that we will not -- we cannot prove that 100% quantify next year because it's part of the general [ purchase ] and of course, we will guide next year. But I can say overall that we expect still results to improve and grow next year. We have initiated -- taking a lot of initiatives because, as I think I mentioned it several times, that we expect the market to be a little bit softer and we expect tougher competition and we are going to drive efficiency on utilizing the huge capacity investments we have made over a long time. So we will see few investments next year. We are looking a lot into what we call -- we call it underperforming products or underperforming segments, et cetera, and have plans for that. And of course, all the market improvements in general is part of the business. Could you change your recipe? Could you work on lighter products? Et cetera, et cetera. So it's a broad spectrum of initiatives. But it's really something that we are putting strong focus on because I really believe that it's time now for us to do that.
Just be sure, did you say that you expect improving results next year?
I said we expect our -- we expect to develop positively next year also, yes, and I think I have said that also last time that we, of course, expect to get some of the lost volume back and also to improve result by doing necessarily immediate profit and margin initiatives.
Okay, so this only covers the BioMar, but your initiatives were covering all divisions, right?
They're covering all divisions, and I think also if you look at the budget assumptions we made this year and the work we initiated on each company, all of them knows quite clear what the agenda will be for next year.
Okay. And then this difficult supply situation as you mentioned in the report. Can you put some more color to this?
Yes, we have -- if you look at the electronic components -- if you look there, a lot of the components, HydraSpecma, usually then lead times have been very, very long and really prolonged over the period. Prices has been increasing. So we have really been facing a tough situation in this and we have made a lot of plans on how to avoid it and how to get off the hook on price increases from suppliers, et cetera. And of course, also try to [ buy ] -- to sort of put the prices back on our customers, et cetera. So it has been quite a challenging situation.
And that's unchanged or does it use with all the initiatives? Or how should we think about it going forward?
I would say the prices -- the component prices, certainly components, we don't see any ease on prices there. But then we are looking for alternatives. We are looking -- if it's a certain component, looking at the alternatives we can take in, looking at how can we optimize our recipes. That's where we have our hand on it, on our own. Can we do lighter products, et cetera, so it's a lot of initiatives that we need to do about that because we have seen how difficult it is to go to large global customers and ask for price increases, even it looks obvious because we can justify that the raw materials have increased.
Okay. And then just to finally -- actually we look at Christmas [ wish ]. BioMar is becoming more and more global, but your disclosure rate does not follow the same rate. It would be very helpful if you could provide some more color to Alimentsa. How much profit do you make from that division in Turkey, all your divisions, that will make it a little bit easier to understand the underlying development?
Yes. A fair point, Claus. We will look into it, and I also understand what you're saying. But also one thing is -- and of course we have to be open and it's part of the way we think and communicate, but the 2 largest competitors today, we don't see anything from them and they are looking into all our figures and everything. But of course, I understand what you say, and we will look positively into it.
And when you are in the good mood, could you then provide some color to Alimentsa in Q3? What did it actually constitute on revenue, especially on the profit level?
I would say that Alimentsa was very important for us in Q3 and Alimentsa more than offset Norway.
Okay. Thanks for 2 unknown numbers, but...
I think it was more than normal.
Our next question comes from Klaus Kehl of Nykredit Markets.
First question about Fibertex Nonwovens. I agree that it continues to underperform and I guess you are not really satisfied about this business. But how should the -- what should really change that picture going into '19? That would be my first question. And then secondly, you have a fairly solid development in your net working capital and also your cash flow here in Q3. Is that sustainable? Or is there any unusual things affecting the numbers? And any thoughts about your net debt end of the year, excluding the CCS acquisitions? That could be pretty helpful.
Let me start elaborating a little bit on fee when somebody's trying to find an answer on the net interest-bearing debt. If you look at Fibertex Nonwovens, you could say that we had a good development on volume and so on. But you also have to realize that one of the very important raw materials built in PET has increased nearly 30%, and it has been very difficult for us to get sufficient compensation on that. We have been working so much on doing [ -- build ] a factory footprint. And really if you look into the 3 new companies, U.S., [ Brazil ] and Turkey, they have performed quite well. They've been under pressure in Europe, especially in what we call construction business. That's pure textiles [ and so I'm going to mark things ] largely to say frankly, and we are looking into how should we address that. And then we have also looked a lot into our South African operation, and we are -- we have made some plans for how to change this. So of course, there's a lot to work on in Fibertex Nonwovens, but we are also putting on strong measures to change this. And we have these long-term goals on EBITDA, and we think we can find a way to get there.
Do you really think that the 9% is realistic?
The 9% is realistic if we succeed with the kind of turnaround focus we have in some segments, yes. And then you asked about cash flow and net working capital. If we look into next year and if we look into the way we are looking at investments, et cetera, I think we will be able to reduce our net working capital, and I also think we will be able to generate quite interesting cash flow next year.
Okay. And do you have any thoughts about where you could end the net debt position, end of this year?
I'm looking at Kasper and Erik and -- maybe we can -- I will turn back on that just before we finish the session here, okay?
Our next question comes from the line of Lars Heindorff of SEB.
The first one is regarding your CapEx. I think you could help me a little bit regarding traffic outlook here for the fourth quarter and maybe also into the early parts of 2019, but what I'm particularly interested is, of course, the development in BioMar? And then also to some extent in GPV against, of course, during the recent acquisition. But you do have some plans, if I understand it correctly currently...
CapEx, the expected CapEx this year, around DKK 750 million, and we are well underway with them. Some of them of -- decided CapEx will, of course, first be finalized in 2019. But looking at CapEx for 2019 in general, you will see low CapEx investments quite significantly, as in when we look into that, we do not expect any large investments in BioMar. We have the Tasmanian factory in the making. We had the upgrade of the Danish factory, it's decided and is already in the making. So we don't see any very large new investments in BioMar. And if you look into GPV, we have decided on upgrading facilities in Thailand, where we are lacking capacity. But also in the light of the recent acquisition of CCS, we have decided to give you the closer look, and we will see these 2 companies together and we will come up with a new CapEx program when we are into the new year. So I think, in general, GPV, it's too early to say what would CapEx be, but we expect some of the CapEx we thought we should do when we were GPV stand-alone will either be postponed or changed.
Okay. And then the second one is regarding Fibertex Nonwovens. I understand that you're now raising prices, which sounds reasonable, given the problems that you've been having. But one of the things [ that I've been ] talking about several times before has been the competitive situation in Europe, which, if I understand it correctly, is still adding a lot of pressure on top of the division for reported elements. Any change in that situation there? I think you mentioned a little bit in connection with the Q2 report, that in August you were hoping for a change.
We don't really see a change, as I said, and that's also why we had initiated all these recipe and cost initiatives and then we can't say that we have seen a change. But we have been looking at our product mix and also trying to look into low-margin product, GPV, in this area and we've done a lot of work on streamlining our product platform and portfolio. And I think you'll see effect from that. But we cannot say that competition has eased and it's really driven a lot from raw material prices.
Okay. Then the price increases that you have announced, can you say how much that is?
We have announced around 4% to 6% price increases.
Okay. And we see if you get cuts, they often compensate for the increase in the raw material prices?
It can't compensate everything because -- and again, to be open, there are places where we say we do not dare to go and ask for full compensation because we could risk losing long-term contracts with them, then we have to look on how can we make a escalating pass on mechanism and how can we get -- maybe ask for new projects, long-term projects, et cetera. And then also look into could -- are we allowed to try to optimize on products, on rate and on raw material selections and things like that.
Our next question comes from Laurits Kjaergaard of ABG.
I will also stick to the two-question rule, so I have a question on Borg and CCS. So Borg, you have previously talked about the aftermarket of auto parts growing at 7%. And now we're discussing this deposit obligations where you're right that this will improve competitive strengths with the low prices. Could you just interact, is it still 7% growing market? Would you want to grab more of this growing market? Or what is the correlation here? Second question's on CCS, and we notice that 10 days ago that it seems like the cable and harness business has a little bit lower margins than your existing business in GPV. Is it your intention to keep this line of business? And also, what's your intention to improve the margins of this acquisition?
Thank you for the question. I would say, Borg, yes, we still see and expect the market to grow around at least 7%. We don't see any changes there. We also think and see that our position is strong. We have a lot of interesting, large customers in our pipeline. It takes a long time because there's a lot of quality improvements that you need to be allowed to supply and then fulfill a lot of regulations and so on. So we see still a growing business, and we are very optimistic on the future customer base in Borg, also looking into strengthening our operations in certain markets, a few large markets in Europe where we could become even stronger. So we are carefully optimistic on new opportunities in Borg. Looking in also to add maybe new products to our pipeline. And a lot of our customers, they have asked if you could take in interesting products and we could get a bigger share of wallet with them. So I think that's the answer on that. Looking at CCS, you are quite right that the cable and harness businesses are low-margin business. Of course, we have done some thinking on that, and we are looking into what to do with this segment in the future. We cannot disclose 100% yet, how we are going and what we are going to do. But we have -- I think if I look at the integration plan and what management has already prepared, I think they have a strong plan for CCS. And we expect to be able to take CCS at the same EBITDA level as GPV also because our synergies, we can utilize factory footprint much better.
Is there a similar seasonality in the 2 businesses?
Yes, more or less. You could say it's more or less the same kind of customer types, yes.
[Operator Instructions] As there's no further questions coming through at this time, I will hand back to Mr. Sørensen for the closing comments.
Thank you very much for that. I just had 1 answer pending, and that was the answer on the net interest-bearing debts. We cannot be 100% specific, of course, but we expect it to be around DKK 1.5 billion at the end. And we expect quite a good cash flow from operation in Q4. Normally Q4 is very strong on cash flow. So around DKK 1.5 billion net interest-bearing debt. And with that answer, I would like to close from here and thank everyone for listening and also for asking questions.