Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Schouw & Co. Q3 Interim Report 2019. Today, I'm pleased to present CEO, Jens Bjerg Sørensen. [Operator Instructions] Jens, please begin.

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

Thank you very much, and welcome to everyone to our Q3 presentation. First of all, also sorry for a small delay. There was a technical issue, but I'll continue from that.Welcome again. We have seen continued high activity level all over our companies despite soft markets, and we see it as a very solid and very satisfactory quarter. Our revenue was up by 17% to DKK 5.9 billion. We saw a combination of both organic and acquisitive growth. Our organic growth was at a satisfactory level of 8%. Our EBITDA increased from DKK 445 million to DKK 621 million. If we adjust for a positive effect from IFRS 16 of DKK 52 million, then our EBITDA increased by 28%, which we think is very satisfactory. We had a few one-off costs also that had a negative effect. Cash flow from operations improved to DKK 724 million. Now we see the effect of our ongoing net capital -- net working capital focus, and it is on top of the management, making agenda in all our businesses.Our return of invested capital is below our target, but it's at 12.8%. Here, of course, we see effect from acquisitions and the strong investment program we have been running in the last years in the company. The guidance for 2019 is adjusted with a small positive adjustment. Revenue is now expected around DKK 2 point -- DKK 20.7 billion and the EBITDA now expected in the range of DKK 1.865 billion to DKK 1.955 billion. We have to say it's most likely that we end in the upper end of that range. There is a positive effect on the EBITDA from IFRS of DKK 205 million. So that was the general comments.Now I'll move into each of our companies and portfolios, starting with BioMar. Q3, where we had a revenue of DKK 3.4 billion, volume up 3% to 379,000 tonnes. We saw good development across all markets but especially our EMEA division and Chile showing very good growth. EBITDA was up from DKK 246 million to DKK 345 million adjusted for IFRS 16. We saw an impressive growth of 27%. As I mentioned, also a good development in all our divisions. It's especially very positive to see that the Norwegian market -- or our Norwegian company is now in a very good development, and we see the effect from our changed market approach.Moving a little bit into a few highlights from Q3. We have also to say that the farming conditions in general have been good. We have had good success with selling functional feeds and concepts in nearly all markets. And also, we see good development in the 3 large expansion projects we have in Denmark, in Ecuador and in Tasmania. We have also mentioned that we see a potential IPO of our Chilean salmon farm, Salmones Austral, probably in 2020. BioMar holds 22% as a nonstrategic ownership, and the listing platform gives, of course, easier opportunity to potentially exit this holding.Guidance for 2019 adjusted upwards to around DKK 11 billion. EBITDA now in the range from DKK 900 million to DKK 930 million. We expect it in the high end of the range. We have a very good comfort on this guidance. I have to say also that there's a large IFRS 16 effect of around DKK 130 million in this guidance.From BioMar to Fibertex Personal Care. Revenue was flat, DKK 541 million. Volume also flat due to a continued slowdown in Asia, where we see some of our large global-branded customers losing market share in China. EBITDA increased, however, 25% to DKK 93 million. We had a positive effect in Q3 from raw materials and from ForEx of around DKK 40 million. But also, we faced, as expected, start-up cost of our new print facility in U.S. of DKK 2 million in the quarter. Year-to-date, we have had a negative effect of DKK 9 million. Still see fierce competition in Europe and the new market dynamics in Asia. However, we also saw a lower market capacity -- production capacity in Europe, following that one of our competitors temporarily had to close a factory down.Q3 highlights. It could be mentioned that we have had a very strong cash flow, it continued. We have also had a good focus on developing niche and high-value products. And then we have had a good start of our U.S. print facility. We see good value in what we call post-treatment applications like print. Guidance for 2019 will increase turnover around DKK 2.3 billion. EBITDA range raised with DKK 10 million to DKK 330 million to DKK 350 million. And also here, we see good comfort for the year.Fibertex Nonwovens had a good revenue increase of 70% in the quarter to DKK 437 million. Especially, we saw a very good and positive development in our U.S. operations. Europe, in general, see more soft demand especially from -- or specific from the automotive segment, although EBITDA also increased 17% to DKK 47 million. We have to say also that we had a good development in raw material prices, which, of course, have a direct effect on our contribution margin. Also here, we saw strong sales of added-value products and concepts, something we have been working on for quite a long time. Q3, we also took a decision on moving 1 of 2 production lines from South America -- South Africa, sorry, to the U.S because U.S. is expanding and showing strong development. We have adjusted our capacity costs, and we have also seen and we are very satisfied that we've had many interesting requests on materials from our new nano line. The 2019 guidance is narrowed since outlook has been changed, DKK 1.6 billion to DKK 1.7 billion. EBITDA in the range now from DKK 155 million to DKK 165 million due to softer demand, specific in the automotive segment, and we know that this segment is reducing stocks and things last quarter of the year.From Fibertex Nonwovens to GPV. Revenue of DKK 741 million, full effect from the acquisition of Swiss CCS. We saw softer demand in some of what we call the old GPV segments. EBITDA was up from DKK 37 million to DKK 56 million, which we think is a satisfactory development. The integration between GPV and CCS is ongoing. What we call the old GPV had DKK 18 million EBITDA in Q3 and as I said, was challenged in some of its segments but also challenged especially from currency, baht -- Thai baht and U.S. dollars, which had a negative impact of at least DKK 5 million in the quarter. Year-to-date, we see a negative effect of plus DKK 15 -- minus DKK 15 million in the period. And then also in Q3, we saw around DKK 5 million in integration costs. Integration, what we call integration Phase 1, has been very successful. Integration Phase 1 is on market, it's on customers. We'll implement it also on organization. Next phase will be on factory and supply chain footprint. We still see a very attractive customer pipeline, project pipeline. Our Mexican operation continued to show progress, but it's still a loss-making unit. 2019 guidance maintained. Turnover of around DKK 2.7 billion. EBITDA in a range now from DKK 190 million to DKK 200 million, and we say that it's due to negative effect from currency, but it's compensated by lower integration costs.HydraSpecma had a revenue increase, 9% to DKK 494 million. The high activity level that we have seen throughout the year continued, mainly driven by wind turbine and what we call stationary material segments. EBITDA increased to DKK 53 million. And even adjusted for IFRS 16, it was 30% up -- 38% up, mainly due to high sales, strong productivity and efficiency and meaning also that we can run our capacity nearly to its maximum. We have a continued focus on optimizing factory and logistic footprints. We have decided and announced building a new facility outside Gothenburg and we are investing continuously in automatization and innovation.The guidance of turnover, expected around DKK 2.1 billion. We had to take our EBITDA guidance a little bit back, back to the first 2019 guidance of DKK 210 million to DDK 220 million, specifically due to a slowdown in the automotive or the stationary material segment. We see, currently, significant inventory adjustments from some of our key customers. We have a strong focus on reducing net working capital. But of course, global footprint and global presence increase inventories.Last company in the portfolio but not least, Borg Automotive. Good to see that revenue was up 12% to DKK 258 million. We have -- we saw a soft demand for nearly 10 months now, but now we see market is normalizing, and it starts to grow slowly -- or it starts to grow. We have ended that period maintaining our strong market position. EBITDA increases 46% to DKK 32 million. And of course, it's a positive effect from sales picking up but also due to very strong cost control and production efficiency. We have continued to focus on expanding and developing our product program, so we can have a larger size of share of wallet from our large customers. We have closed down the R&D facility in Belgium. It's now finalized. 2019 guidance maintained. Turnover of around DKK 900 million and the EBITDA unchanged in the range from DKK 110 million to DKK 120 million. I also have to say that Brexit is still a concern. But obvious now, no impact of significance in 2019, but it's something that we are concerned about.So wrapping everything up. 2009 (sic) [ 2019 ] is closing up, and we have a good comfort on delivering on the year. Revenue, as I said, around DKK 2.7 billion. Guidance in EBITDA narrowed, DKK 1.865 billion to DKK 1.955 billion. We expect to deliver in the upper end of that range. Cash flow and net working capital is, of course, still top of mind in all our companies. Also, I have to say that, in 2019, we will finalize most of our very ambitious investment program. And we will, moving into 2020, have focus on profitability, utilizing our capacity. We're still investing but at much lower level. So we are now preparing all our companies for a more challenging 2020 but still with a lot of opportunities. And we have some companies that are seeing softer demand, but also companies that, to a limited degree, are affected by global economy. So all in all, expected to end 2019 on a good note and then looking into 2020, where we are preparing for whatever comes.So with that, I will hand over to questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Jonas Guldborg from Danske Bank.

[Jonas Guldborg Hansen, Analyst]

Yes. I have -- let me start pick up on the cash flow side. Very good execution here in Q3. And I would just like to hear, how convinced are you that you have broken the trend now and from here we will see continued improvement in net working capital and thereby in cash flow? And as a follow-up to that, maybe you could just remind us what you expect CapEx to be in '19 and maybe also to what extent that, that will decline in 2020? And then lastly, if you could put some more words on the development in BioMar's associated companies in China and Turkey. Revenue was down 15% and EBITDA down 40%. What exactly is happening there?

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

Yes, thank you very much, Jonas, for the questions. Let me start, of course, with the first question on cash flow. I'm -- it's not to say very, but I am very convinced that we are on a good track, and you will see strong cash flow the coming years, mainly because we have a really strong focus on net working capital, but also on our CapEx utilization of whatever we have invested in. So we expect to continue this positive development also into 2020, have a very good comfort on that.CapEx in '19. I don't have the figure 100% here. It's coming in a few seconds, but I can tell you that, in 2020, CapEx will be significantly lower than in '19, where we -- I think the only really -- the larger CapEx investment we have in '20 is installing the South African line for Fibertex Nonwovens in the U.S. we will have to build and so on, but it's not that big.Then looking into BioMar, you could say that JVs -- there are 3 things -- there are 2 things in the JVs. First of all, also Salmones Austral have had a smaller profit, so far this year, not much, but they have had. Then we have in Turkey slowed down a little bit due to debtor risk. The economy in Turkey is -- had been a little bit challenged. So we have stopped for some supply -- supplying some customers because we don't want to take the debtor risk. China factory has not been up and running as expected, being a little bit difficult. It's importing from Denmark. And then also in the Southern part of China, we have to be more cautious on credits and debtors. So that's the rationale behind that.

[Jonas Guldborg Hansen, Analyst]

Okay. Yes. And then just a follow-up on China and the development there. Do you expect that we see any positive impact from the swine flu -- African swine flu out there?

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

Yes, we see -- but we see effect, and we also expect that there will be more stronger demand on farmed fish and so on, definitely, in future. So we will see that. And also, when we get our factory up and running, expect to really run extruders end of this month, beginning next month, so -- and we will be able really to supply the market with high-quality feeds, which is a strong demand for.

[Jonas Guldborg Hansen, Analyst]

Okay. And did Kasper find the CapEx number for '19?

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

Kasper?

[Kasper Okkels]

DKK 800 million including all investments.

[Operator]

And the next question comes from the line of Laurits Kjaergaard from ABG.

[Laurits Louis Kjaergaard, Research Analyst]

I would like to start in the other end, looking at the Borg Automotive there. You experienced a soft demand in the past 10 months. And I feel like it was a little bit difficult to explain what was actually happening there, if it was inventory reductions or what was happening. And now it seems that this -- the situation's turning around a little bit. Do you have more insight to what was happening and what was the reason for this soft demand?

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

Yes. But it has been blurry, to be honest. And then we have asked markets, we have asked customers, et cetera, even also heard rumors from competitors that it has been softer due to inventory, a lot different things and -- but now it start coming back. And also, as we have said, it's spare parts and the car has to run. And at a certain point, you'll need to replace the spare parts. So yes, we have really been searching for it, but we have seen inventories being brought down definitely. And then also one thing, there has been some consolidations going on in this business. And we think these consolidations also have had -- that people have looked more carefully on their inventories.

[Laurits Louis Kjaergaard, Research Analyst]

Okay. Fair enough. And then looking at BioMar, we saw that Bakkafrost, they acquired Scottish Salmon Company there, which is one of your customer. And as far as I remember, you have sort of a contract expiring in the end of 2021. Any insights to this acquisition and what we can expect in the market? Because obviously, Bakkafrost, they sort of produce their own feed for their salmon. Any thoughts?

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

Of course, it's a new situation. But as we also said, we have a contract running for Scottish Salmon Company. And yes, we hope they will honor that. We supply quality feed -- and yes, to be honest, we don't know yet because Bakkafrost is first taking [ own ] now and maybe -- of course, they'll supply feed from Faroe Islands, but it's also very, very complicated to supply because there's a lot of small sites in Scotland. And so let's see what's going to happen. But of course, we think we can compete in the market and maybe also we can supply some of these sites still. We have to see.

[Laurits Louis Kjaergaard, Research Analyst]

Okay. That's very clear. And one last question. Fibertex Nonwovens, you conducted this strategic review, which you discussed in your introduction in the first half. And I think this is the first time we've actually heard of some tangible plan from this review. Could you give some insights to what other things that you're looking at more specifically?

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

Of course, I think most of you have also asked us on South Africa and what are we doing. And now we have -- we are reshuffling capacity. Moving it to the U.S. market was part of the plan, closing down on costs and things in South Africa. Then we have been looking a lot into our product portfolio. We are in a lot of different segments. Obviously, I think we elaborated a little bit on that, we're improving our product portfolio. And then looking into the low-margin products, we are stepping out of some of them over some time now, moving more into advanced products. We are reshuffling capacity, closing down lines in some factories, moving to what we call best cost location and et cetera. A lot of things is going on.

[Laurits Louis Kjaergaard, Research Analyst]

It seems like this is only the beginning then.

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

Yes. We have to -- we have a very solid or strong objective on improving return on invested capital from the very low level it is at now and then up to -- around 12%. So a lot of things have to materialize to reach that objective, and we feel rather confident on that.

[Operator]

And the next question comes from the line of Claus Almer from Nordea.

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

Also a few questions from my side. The first will go to BioMar. And in the report, Jens, I'm not sure if that was you who wrote it, but at least it is mentioned that BioMar will defend its market share. I guess that's a kind of a different wording than you said previously this year. So how should we think about that?

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

You should think -- yes, that's -- I think you should think about it on a more differentiated way, saying that we have a very, very clear strategy in Norway, saying that we are going for profit instead of volume. We have succeeded quite well on that and we are going to continue doing that. Beyond that, of course, now we have a customer base that is different from what we had before, meaning, of course, we need to defend our customer base but still with profitability as objective number one.Then looking in other markets where we are very strong, there, we have decided that if something happens, then we defend our market share. It could be in Greece, it could be in our shrimp business, et cetera, where we have some large customer bases we are defending, the same in Chile. But in Norway, we are continuing to pursue the strategy we made still this year.

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

By this different strategy I saw, BioMar was going to act more rational, something this industry probably needs, but it only goes for Norway.

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

Not at all, no. I think maybe I think you interpreted that a little bit wrong because we are still having -- of course, we are in a growth industry in certain markets. But there are many ways of defending markets and sobering and letting profitability grow. It's not first objective. But of course, there's a balance how can you utilize your capacity, et cetera. But I think maybe it's too -- and it's good you're asking, maybe it's too strong a wording. We are not going blindfolded into a fierce competition on volume and so on. We have tried that, we have been there.

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

Okay. Good. Good for you. Yes. Then the second question about BioMar, in the emerging markets, you reported a volume decline. And emerging markets is including Ecuador, where growth should be pretty solid. So is it China that has declined that much? Or is it Costa Rica? What's behind this negative trend?

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

Yes, China has been declining a little bit. As I also said that we have decided not taking debtor risk. We saw that there were too many customers where we had too large outstandings. So there have been quite a lot of talk on that. Then Costa Rica, we have also decided on a few customers and so on. So in general, our large markets, we have not seen a volume decline. But in some areas, we have decided not to go for volume because the risk was too big.

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

So those markets are actually larger than the growth you saw in Ecuador, which must be the case.

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

That I didn't really get, to be honest.

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

Sorry. I mean you must have had -- given the size of Ecuador, where you also have decent volume growth, I'm slightly surprised that these smaller markets can eat all of the volume growth in Ecuador and dragging down the whole region of emerging markets.

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

Yes. But you have to say I'm not quite sure what we are writing 100%, to be honest, because we have...

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

You're writing that you're seeing a negative volume growth in emerging markets.

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

Yes, you're suggesting that Ecuador is going down. So we're seeing a flat...

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

No, no, no. It's the other way around. I mean I'm saying that Ecuador should probably be growing nicely as we have seen in the past. So if the region is declining despite the positive trend in Ecuador, then other markets must be performing poorly. And I'm surprised that Costa Rica and China should be enough to drag down the positive performance in Ecuador.

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

Yes. But if you say the positive growth in Ecuador, then you expect that it's a 2-digit growth that we are having. Of course, that -- Ecuador is not that big and China is still -- a rather big volume is coming out of China. So China and Costa Rica have seen a small setback, but Ecuador is not going back.

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

Okay, okay, okay. And then coming back to Jonas' question regarding working capital. And maybe I'm not as impressed as Jonas about the working capital performance. But nevertheless, I know this is a key, key KPI for you, a personal job to bring down working capital. Are you satisfied by the performance so far this year? Or how should we really think about how working capital is trending?

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

I think you should think about it that there's still a way to go, and we are not satisfied because we have a higher target, but we see very good trends. And we're pleased with that good trend we've seen. But I think you will see that the net working capital objective and cash flow, et cetera, is also something running into 2020, but it is -- and I think I said it also in the first quarter, that it is something I'm really putting a personal focus on. And there's still a lot to do, but we are on a good development, but we are not -- we cannot say we're satisfied, definitely.

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

No. Okay. And then just finally, did you mention a CapEx number for 2020?

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

No, we didn't because we are mentioning it when we are coming out with our 2020 guidance. But I said one thing, Claus, and that was significantly lower than '19.

[Operator]

[Operator Instructions] The next question comes from the line of Ulrik Bak from SEB.

[Ulrik Bak]

Also a few questions from my side. First one is regarding BioMar, where the EBITDA margin has been 10% for Q3, EBIT margin 8%, which is a significant improvement from previous Q3, of course, this IFRS 16 effect. But I was just wondering whether this is a new normal, a new plateau that we could see in the future.

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

We are aiming for that, definitely. But you are right there is IFRS 16 effect coming from the leasing of our chartered boats, especially in Norway, for that. Now we have this level and we are aiming of maintaining that definitely, yes.

[Ulrik Bak]

And I remember Kasper once saying that a target of 6% EBIT margin. And then this 8% in that view, I think it seems quite high. Could you comment on that?

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

Yes. But then now you are commenting on -- also we have had a very strong Q and we also need to -- you have to see BioMar over the whole year. So of course, if you are looking at this quarter here, we have a good EBITDA margin of 8.3%. But if we take EBIT, it's 5.4%. So it's still some way up to the 6%. But we are aiming for that, and there's still a way to go, but depending on segments, geographies, et cetera, et cetera. But we are tracking quite well on that.

[Ulrik Bak]

All right. And then to the revenue growth of Schouw's Salmon division of almost 30%, can you please elaborate on the underlying drivers for this increase?

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

Yes, recently we took over the 50% owned JV we had with AquaChile and that's why now we won 100% of this capacity and it goes in our EBIT line. So that's in our [ general one ], so that's why.

[Ulrik Bak]

Okay. And then one last final question on -- in the report, you mentioned that the salmon market is growing moderately and the shrimp market is accelerating growth. Can you put more specific numbers on these terms, moderate and accelerate?

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

That's difficult. If you look at the salmon, you also have to look at it from both a regional and a global perspective. Chile is growing. And now we have the unrest in Chile, what's happening there. But if you're looking at Norway, you can see that's been growing quite good this year with -- I think it's around 4% to 5% up, shrimps, more. Ecuador growing maybe at the lower end of 9% or something like that. So maybe shrimp could be around double-digit growth in the future but remains to be seen. But there is a difference between the 2. Shrimps are growing more.

[Operator]

And as there are no further questions, I'll hand it back to the speakers.

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

Okay. Thank you very much for your questions. Thank you for listening, and goodbye from Schouw & Co.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your line.