Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the AS Schouw & Co. Conference Call 2020 Q3 report. Today, I am pleased to present CEO, Jens Bjerg Sørensen. [Operator Instructions] Speaker, please begin.

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

Thank you very much, and good afternoon to everyone. Welcome to presentation of our Q3 report.The strong momentum we have seen in Q2 continued also into Q3. All our companies have, in general, responded very professional and diligent to this difficult situation we are in. Our conglomerate strategy and diversification continues to show strengths.At group level, our revenue was up 3% to DKK 6.1 billion. And that was better than expected -- that was better-than-expected activity in all of our businesses.EBITDA increased 9% to DKK 676 million, and that was a record quarterly EBITDA in the group. Very positive effect from both volume and scale in most of our businesses. We have seen a very strong margin management and tight cost control, which have improved our EBITDA margin. Cash flow from operations improved, I would say, impressive 49% to DKK 1.1 billion. Here, we saw a positive impact from prolonged tax and VAT payments of around DKK 125 million. But we also saw a very solid effect from our long-term focus on net working capital, which was reduced 16% to around DKK 3.2 billion. We had a CapEx of DKK 160 million in the quarter. And our net interest-bearing debt was significantly reduced to a leverage around 1x EBITDA.Guidance for 2020 increased due to strong 9 months performance. Turnover, expected to be around DKK 21 billion. EBITDA now expected at a level of around DKK 2.07 billion to DKK 2.2 billion, which is somewhat higher than the forecast in the beginning of 2020.However, significant lower income is expected from our associates, especially our farming company or farming operation in Chile, Salmones Austral. We still see some uncertainties around impact from the global pandemic. The full year CapEx is expected to be around DKK 550 million.From group level, let me look into BioMar. BioMar delivered a solid quarter. Revenue was up 4% to around DKK 3.5 billion. We saw good volume increase of 8% to 408,000 tonnes. Especially we experienced strong sales in our important Salmon segment. EBITDA was slightly down to DKK 326 million for the quarter, but this was mainly due to negative currency fluctuations. Also, we saw that our volume in what we call lower-margin markets increased, and we had less sale of functional feed in some of our markets.Looking a little bit into highlights from Q3. Also in BioMar, we saw net working capital significantly down, and we also had a very strong cash flow. Good was also to see that the shrimp export from Ecuador to the important Chinese market was back on track. We have had and continue to have tight focus and control on debt or developments. We saw a successful startup of our Tasmanian factory, and our new 40,000 tonnes extruder line in Ecuador is ready to operate into Q4. And then as mentioned, our non-consolidated farm -- Salmones Austral was hit by low Salmon prices out of Chile and also fair value adjustments of the biomass of the fish standing at sea.Guidance for 2020 will be maintained. Turnover of around DKK 11.5 billion. EBITDA now expected from DKK 960 billion to DKK 1 billion. Of course, we still have some concerns on what's going on in the very important HoReCa segment, that's where fish from our farming customers are delivered into this segment. We have, however, then as mentioned, seen shrimp export to China. That's being good again from Ecuador.Moving on to Fibertex Personal Care. Here, we saw our revenue decrease slightly to DKK 509 million, only due to impact from lower raw material prices. Our nonwoven volume was up with 13% in the quarter, and our print volume up with 19%. We have an EBITDA at DKK 97 million compared to DKK 93 million last year. Here, we had a positive effect from volume but also, which is worth noting, a negative raw material effect compared to Q3 '19 of DKK 17 million.Looking a little bit into what was going on in Q3. Also here, net working capital was reduced as planned. We decided in the quarter a new DKK 250 million investment in ongoing capacity in Malaysia and a new print line in U.S., second print line in U.S. We introduced interest in cooperation with FPC on sustainable PPE. And we delivered a strong return on invested capital of 17.9%. Guidance for 2020 maintain, which means revenue unchanged, about DKK 2.1 billion. EBITDA expected in the range of DKK 390 million to DKK 420 million. Then moving on to the other Fibertex company at Fibertex Nonwovens. We have to say, we really saw the strong momentum continued and the Fibertex Nonwovens delivered the best quarter for Q3 ever. Revenue increased 9% to DKK 478 million. Important was that we saw the important automotive segment being stabilized. EBITDA in very good development from DKK 47 million to DKK 80 million for the quarter. Here, there was a very positive impact from what we call specialty wipes, filtration and products for industrial applications. Still very solid results in our U.S. units, but also very strong traction in Turkey operation. I think also Fibertex Nonwovens have had a very strong cost control and a lot of efficiency gains due to good capacity utilization all over the production sites.Global footprint and capacity platform, which we have invested in over the years, really shows value now. And we can also see that being flexible and innovative continues to be a very important driver for Fibertex Nonwovens. Here, we can see that we can lift the guidance. That's mainly coming from a very strong Q3. Turnover expected to be DKK 1.7 billion. EBITDA now expected to be around DKK 240 million to DKK 265 million, which I think we have a good comfort on, mainly due to strong -- continued strong U.S. development and very positive sales of our specialty products.Then looking into GPV. Revenue here, up with 13% to DKK 836 million coming from mainly strong sales to our MedTech segment, a [ 3-digit million ] ventilator. Also and then we saw -- experienced mix development in some of our other segments. EBITDA increased very satisfying 50% to DKK 84 million. Positive impact from tax sales. Q3 2019 was negatively impacted from [indiscernible]. But also here, we had a very a strong focus on cost control and efficiency, which also helped to increase the EBITDA.All our factories operated well in spite of difficult conditions in some of our contracts due to COVID-19. We have now started implementing our new manufacturing execution system across all companies, expecting to be implemented over the coming years. Also here, we will be able to lift our guidance due to strong Q3 and solid backlog. Turnover expected at around DKK 2.85 billion EBITDA now in the range of DKK 230 million to DKK 250 million. We -- however, we cannot -- we do not expect to continue to have this high sales to the MedTech segment.HydraSpecma had a 4% down on the revenue to DKK 473 million. Here, the wind segment continued with a strong and solid development. And a lot of our large OEM customers came out with a faster recovery than we expected. EBITDA increased 6% to DKK 57 million, which really was due to high efficiency and very strong cost control all over in HydraSpecma.Looking a little bit into highlights. We had also here a strong focus on inventories and reduction of net working capital. We are building a new factory and office facility in Gothenburg, which is in good progress. And HydraSpecma have continued to adjust capacity and costs to the actual market situation.Guidance uplift also here due to continued good momentum in especially our wind segment. Turnover now expected at more than DKK 1.9 billion and EBITDA in the range of DKK 185 million to DKK 205 million.Finally, for automotive, revenue reduced 6%, as expected, to DKK 242 million. Demand still soft, but in general, improving. Some of our important markets do we now see recovering. EBITDA, however, increased 17% to DKK 38 million. And also here, due to very strong internal cost control efficiency, FTE reduced with about 200 people. And strong focus on all efficiency and cost matters.In Q3, we could announce the acquisition of Spanish TMI company doing [indiscernible]. Company with around DKK 100 million turnover, 135 FTEs, won't have any P&L effect in 2020. Borg also succeeded in reducing their net working capital significantly. However, we think that our inventories are currently a little bit too low, so we will have to lift our net working capital a little bit. Better sales from Borg and high-efficiency triggers guidance uplift turnover now around DKK 875 million expected, and EBITDA around DKK 90 million to DKK 110 million from Borg.So wrapping up short, we are very happy with the development in Q3, strong development. And our conglomerate strategy and diversification shows strength. Companies have been executing very professional in difficult times. Our financial position is good and with potential for seeking opportunities.We will lift our -- we have lifted our guidance due to our strong performance. EBITDA expected above precorona guidance, which we are very satisfied with. We expect to deliver -- continue to deliver strong cash flow, and we have good comfort in our present leverage. We are looking at many opportunities, both M&A and CapEx investments. But we also have to mention that COVID-19 has not disappeared, and it is more relevant as ever.So with these closing remarks, I will open up for questions.

[Operator]

[Operator Instructions] Our first question is from Jonas Guldborg of Danske Bank.

[Jonas Guldborg Hansen, Analyst]

Yes, Jens. I would like to start with a question on where you started on cash flow and cash that you have piled up now, after reducing net working capital very impressively here. You're talking about further capacity expansion projects. So could you elaborate a bit on where you're looking to expand capacity? And also with this net working capital reduction we saw in Q3, are there any one-offs in there? And also, do you see continued upside from net working capital reductions going forward?And then a question on BioMar, where we saw revenue up 4% in the quarter and up 7% year-to-date. But it looks like you gave a pretty cautious outlook for the fourth quarter. As I calculated, you implicitly expect a 7% decline. So what are the main reasons for this shift in momentum in BioMar?And then my last question is also on BioMar and the fact that you've seen a decline of functional feed sales in certain markets. Are you concerned about this? Is it -- what's -- where it's coming from, so to speak? Yes, those would be my questions.

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

Okay. Thank you very much, Jonas. Yes, let me start commenting on our cash flow. I think we -- and net working capital, as I mentioned, we saw impact of DKK 125 million from deferred taxes, et cetera. So of course, we continue to have strong focus on cash flow but, of course, there's a limit to how far we can take it down and we continue to expect to grow. But still a strong focus on that. I don't see a huge upside, to be honest, on reducing net working capital further. But we are on it, and it's important, and it's my personal vendetta on net working capital. So we're looking into that.Asking on CapEx, we are -- there are some companies where we are short of capacity. We just announced, as I mentioned, a new line in Malaysia for Fibertex Personal Care. We could look into capacity constraints in Fibertex Nonwovens, especially spunlacing capacity. So that's some of the capacity investments we are looking into. But also, as I said, we are always looking and exploring interesting M&A opportunities, and we continue to see growth opportunities that way around. So that's also where we expect to find attractive opportunities.

[Jonas Guldborg Hansen, Analyst]

It sounds like we should expect some M&A very shortly, because even if I calculate on the capacity expansions you have announced and the acquisition in Spain and maybe a little bit in nonwovens then still your leverage will be very low, as I see it. And so should we interpret this as you are looking at M&A within a short time horizon?

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

Jonas, there's nothing new in this. We're always looking into and looking after attractive opportunities. But I think also, as we have discussed earlier, that we have a comfort in sitting on some cash for some time because the worst you can do is to hurry up and do some M&As. But we are looking into opportunities. And if they come, we are ready to take them and we are willing to take them. So but there's a time for everything, and we have to do the right thing and be sensible on that. So I think that's the answer to that.Looking into BioMar, then the volume, there's a big volume uplift from the Salmon markets. And there are different margins in the different segments. So I think some of it is due to mix of volume in segments.We have seen a decline in functional feed, not a huge concern, but I mentioned also last time in Q2 that functional feeding, especially Ecuador, was down due to the difficult situation with China. This has improved. But of course, it's something we are always looking into because it's important for our margins. And we do not have a big concern, but we always experience that when prices on fish and shrimps and so on go down, then something happens fast and then it recovers back again.

[Operator]

Our next question is from Laurits Kjaergaard of ABG.

[Laurits Louis Kjaergaard, Lead Analyst]

Laurits here, just a few questions for me, maybe focusing a little bit on GPV, which you also raised your guidance on here, citing strong Q3 and backlog. Could you just talk a little bit about what's happening in GPV at the moment? Your implicit guidance for Q4 doesn't look like you have the same momentum as you guide in Q3, Q2. And also your statements regarding that the MedTech sales are not sustainable, I heard you saying that. So could you just elaborate a little bit of what's going on?And also in terms of the integration with CCS, you mentioned this implementation of new manufacturing systems, but will we also learn about consolidation of the factories between the 2 companies?

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

Thank you, Laurits. Yes, I said that we cannot expect same sales of MedTech in Q4. It's a huge MedTech order supplied out of our Swiss factory that has been supplied over Q2 and especially in Q3 and have had quite an important impact on both turnover and earnings. And we do not see same pace on that in Q4 because the order we have, it's not fully supplied, but we have supplied most of it in Q3. So that's the reason behind that. And then we have the -- a lot of other large industrial customers that have been quite weak in Q3 peaking up a little bit in Q4, better momentum on that.Integration with CCS is going as expected. And of course, we are looking at and evaluating best factory footprint always. And it's part of the strategy, looking into our global factory footprint. So there's a review going on, on that. And we need to continue to look at that to be efficient. And also this new manufacturing system will help to be more efficient and also to look into where should we -- what should we do here on our footprint.

[Laurits Louis Kjaergaard, Lead Analyst]

Okay. Can we model some sort of synergy cost between the 2 companies which we should be able to see next year?

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

I think we have seen a lot of them already over the last 2 years. But of course, we are looking into factory footprint and so on, but it's -- we do not really have something we could say, you could model this and that. But we will -- we are continuously looking into it and will come back if something happens.

[Laurits Louis Kjaergaard, Lead Analyst]

That's fair. And another question on [indiscernible] looking at the wind segment, which you say is doing quite well. You previously flagged that in Q4, you might experience some weakness in the wind turbine segment. Could you elaborate a little bit of what's going on there?

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

Yes. So we have still a good backlog with wind. But I think also people who have been following the wind for many years know that Q4 can be busy or sometimes also orders postponed, then there's a lot of things going on. But we feel feel comfortable with this segment, and we have a very good backlog also into the coming years. So when you have a backlog, sometimes it can be postponed a little bit, but you still -- we are going to deliver the orders, but it can maybe be a little bit into the 1 and another year. But still good comfort on that.

[Laurits Louis Kjaergaard, Lead Analyst]

Okay. And lastly, just on Borg. You mentioned obviously the cost controls that you're initiating now. Are you in a situation where you're perhaps cutting too much in order to not have volumes ready once you see capacity being uplifted? Or will 2021 likely be also quite a slow year for Borg, and then we will see some momentum following that?

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

It's a good question because we have actually been discussing when you really cut down, how far can you cut down. But we have shown also, taking in technology and so on, that we could cut down. We are at the lowest, we cannot cut more. And we have a capacity of around 145,000 units per month, and we see demand picking up. So we have to take in again, but we will be very cautious and try to keep the momentum and the efficiency we have had. And we do not see 2021 as weak. In fact, we expect a good start on 2021. We are not quite ready with budgets and so on. But we had such a tough 2020 Q2, Q1 that we expect to be better in next year on that, and that's what we are planning for.

[Operator]

Our next question is from Ulrik Bak of SEB.

[Ulrik Bak, Research Analyst]

Also a few questions from my side. And the first one is on BioMar, where you report volumes are up 8%, but EBITDA is down 6%. Firstly, can you please elaborate on the regional split of the volume increase? I know you mentioned that Salmon has performed well, but what about Chile Salmon compared to Norway Salmon and also the shrimp business? Does any one of these segments, do they have negative growth? Or is it just higher, lower positive growth? If you can elaborate a bit on that.

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

Yes. Thank you for that, Ulrik. Right, volume up 8%, coming a lot from Norway. We have had a very good situation in Norway. Chile, a little bit flat, but margins a little bit lower due to the low Salmon prices.What is interesting is that shrimp is, I say, attractive margin area to be in. And shrimps volume was down in Q3, picking up again now due to a good export of shrimp from Ecuador. But Norway, good development. Chile, more flat. And then shrimp volume a few percent have been down, but picking up again.

[Ulrik Bak, Research Analyst]

Okay. And also, can you provide any indication of the EBITDA split during Q3 among different regions or species? Salmon versus...

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

Yes, it's a fair question, but I think we have elaborated on it also earlier. We do not split up on segments. A lot of good reasons for that. But I think we have indicated also that Ecuador is attractive, meaning also if volume is down in Ecuador, we can see that on our margins. Norway, volume up, tough competition, meaning that we have good volume but margins lower. But very strong return on invested capital in Norway. So combining these things, of course, then it's difficult to elaborate on each of the regions.But also, look, bear in mind also that functional feed have seen a little bit down in Q3, also impacting our EBITDA. And then we have had also quite an impact from negative currency fluctuations, especially on NOK and U.S. dollars in the year -- in the range compared to last year of around DKK 17 million. Just to make that clear.

[Ulrik Bak, Research Analyst]

Okay. And a question on Fibertex Personal Care. Can you please talk a bit about the market dynamic for the company for Q3 compared to Q2. Has it been similar in terms of volumes? And what do you expect going forward considering several competitors are, just like you, investing in additional capacity?

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

Yes. I think, yes, on the volume and the dynamics, they have been as in Q3, strong volume of uplift 13%. But then, again, a loss compared to Q3 last year on raw materials, that's around DKK 17 million. So if you make a like-for-like comparison to last year, then the volume uplift also has given a very good uplift on EBITDA.So same market dynamics. Of course, competition are also announcing new capacity investments, but there is really a strong demand for nonwovens and speciality nonwovens. So we are quite confident also into to 2021 and even maybe a few years ahead because of the dynamics has really changed. And I think some of the large customers, they want reliable long-term suppliers of quality nonwovens.

[Ulrik Bak, Research Analyst]

Okay. That is clear. Then my final question, also on Fibertex Personal Care. You say that the revenue is dropping in Q3 due to raw material prices. But the raw material price already dropped in Q2 where we didn't see a similar drop in revenue. Is that just due to a time lag due to the contracts? Or is there a different explanation?

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

No. It's exactly as you're saying, it's a time lag. And so there, we were hit by, you could say, in Q3 by a negative time line compared to Q2.

[Operator]

Our next question is from Hans Kehl of Nykredit. Hans, your line is open. [Operator Instructions] There are no further questions at this time. Please go ahead, speakers.

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

Okay. Thank you very much. That was what we had to say, and thank you very much for everyone listening and also for everyone asking questions. So goodbye from us.