Schouw & Co A/S

CSE:SCHO

Earnings Call Transcript 2022-Q3

[Jens Sørensen, executive]

Welcome to Schouw & Company's Q3 presentation. I will shortly give a highlight -- update on the group and then step in to give a small dive into all of our companies. From an overall point of view, it has been a turbulent and volatile markets also in Q3. But in spite of that, I think we could say that we have had a satisfying Q3 results. Our main costs really continued to increase over the quarter. energy and freight were up with more than DKK 190 million, which we had to go to the market for compensation for. There's been a hard work in all our companies to get these compensations through, use many tools from the operational toolbox. We saw strong growth plus 33% up to a turnover of DKK 9.2 billion, and input costs were the main driver for this growth. In fact, we had lower volumes in most of our companies. EBITDA was at a very satisfactory level at DKK 677 million. In fact, best EBITDA in a quarter ever in Schouw & Company's history. Our net working capital continued to grow. We have had a lot of focus on reducing our net working capital or balancing our net working capital, but inventories increased, but it might have topped now. We, of course, see a negative effect on our retail invested capital now and it's below our target of 15%.

Looking at BioMar, revenue was up 15% to DKK 5.8 billion for the quarter. There was a huge impact on -- from raw material prices. Volume declined 2%, mainly because of lack of sales to Russia. And then we also saw a volume decline in China -- in Chile due to regulatory figures.

EBITDA came up at a very satisfactory level was up from DKK 278 million to DKK 403 million. We saw a very good margin development in salmon and especially our operation in Chile have improved margin significantly compared to Q3 2021. Of course, also, we experienced a negative effect from lack of sales to Russia, which was and has been an important market for our Baltic operations for many years. energy and freight also increased a lot for BioMar in the quarter, DKK 72 million up in the quarter. So BioMar had to offset that in the market. BioMar continues to expand and pursue a very ambitious growth strategy. We have had integration of the newly acquired tech company AQ1, start-up of a new technology activity in BioMar, the start of AQ1 has been very positive. We also had a buy option on the remaining 30% of our shares in Ecuador. This buy option has been prolonged for 5 years and we continue our collaboration with the partner Alimentsa, in Ecuador. Denmark upside the price up great guidance due to the optimizations and very good margin management. Revenue expected now to be DKK 16.5 billion to DKK 17.5 billion of course because of raw material price increases. EBITDA is now up in the range of DKK 960 million to DKK 1 billion. Cash in Russia has to be mentioned that we have cash in Russia or liquidity in Russia of around DKK 40 million, which could be at risk.

From GPV -- from BioMar to GPV, continued strong development sales up with 46%. Demand still at a very high level. Turnover now at DKK 1.2 billion in the quarter. We still have a very solid backlog, and we continue to see strong order intake in GPV. EBITDA flat DKK 96 million, but a little bit better than expected. Also here in GPV, we have seen increasing input costs, but we have had a very high efficiency in our supply chain.

Still very difficult component situation continue to put pressure on our net working capital and also on our organization. There's a lot of hard work to try to manage to get components in on time. We have a huge inventory build up because of this component situation and also to support our backlog. A lot of effort is going on to try to reduce and balance our net working capital and inventories. We have merged the Swiss-based Enics into to GPV, starting from first of October after we got to the closing and all the approvals in place. Integration is up and running, and we are now in the making of a very strong European #2 EMS player. GPV have the possibility to upgrade the guidance, of course, because we see very strong development in what we call legacy GPV but also because the Enics is coming in now in Q4.

Revenue were expected to be around DKK 5.2 billion to DKK 5.6 billion, EBITDA in the range of DKK 370 million to DKK 410 million. Here, we expect a positive impact from Enics of DKK 20 million to DKK 40 million. It is expected that the Enics will contribute with DKK 60 million to EBITDA, but then there will be some PPAs, and we do not have a total overview of the impact on these PPAs so far.

Just for a small recap, Enics, Swiss-based company in '21 had a turnover of DKK 4 billion and EBITDA of around DKK 220 million, just to mention the size of the Enics. From GPV until FPC, Fibertex Personal Care, revenue here was up 11% due to increase in raw materials, volume 4% down. We are still challenged in Asia or and the factories out of Malaysia, which we have been throughout 2022. EBITDA was as expected, down 33% to DKK 63 million. Here, we, of course, see an impact from lower Malaysian volume, but also the continued increasing energy costs really impact, we had an increase in energy cost of DKK 24 million in Q3. Costs, we are not -- we don't have any possibilities to pass on to our customers.

Looking a little bit further ahead, we could say, we still expect the Asian market to increase over the coming years. And we will need more capacity and more volume years ahead, but we have also our new [indiscernible] 5 line already installed in Malaysia, but we will not be able to start it up and operate it before beginning of 2024 due to several technical issues. Guidance in FPC downgraded because of costs increasing, especially or mainly energy and then has a volume effect from Malaysia turnover now expected to be DKK 2.4 billion to DKK 2.5 billion and EBITDA around -- in the range of DKK 250 million to DKK 270 million. Then from Fibertex Personal Care to Fibertex Nonwovens. Fibertex Nonwovens had a really challenging and also unsatisfactory quarter. Turnover was up 22% to DKK 509 million, of course, also mainly driven because of improved cost of raw material prices. We have seen a slowdown for Fibertex Nonwovens in important segments, mainly in the wipe segment in U.S.

However, we have seen the important auto segment starting to bounce back. EBITDA was down from DKK 38 million to DKK 20 million. And as I mentioned, very slow U.S. wipes market hampering our profitability over the quarter. In fact, we could see main problems in Fibertex Nonwovens today is our development in U.S. We've also seen a change in product mix and higher input costs had a negative impact on our earnings. Energy was up DKK 19 million in the quarter compared to last year. It's been also a lot of hard work going on in Fibertex Nonwovens to compensate these increasing costs. We have initiated a very thorough and strong protection plan for our profits. We have implemented a new management structure, a new setup in U.S. And as I said, our wipes business are in a difficult situation because the wipes market, in general, in U.S. is slow. We've also been looking at competitors and what's going on there and it's exactly where the same outlook from our competitors. Guidance for Fibertex Nonwovens downgraded, turnover now in the range DKK 1.9 billion to DKK 2.1 billion and EBITDA at a level of DKK 110 million to DKK 130 million, and a big challenge on task for Fibertex Nonwovens is really to fight for getting sufficient volume into the system. From a Fibertex Nonwovens and then to HydraSpecma had a very high activity over the quarter and a very strong margin management, satisfactory development. Our global OEM customers continue their positive development, whereas wind, our wind segment was a little bit slow and -- but it was also expected. Revenue up 12% to DKK 589 million. Order intake from a global OEM still very positive.

Looking at the EBITDA in HydraSpecma was up 10% to DKK 71 million. Also in HydraSpecma, we see increase in cost on components and other variables, but HydraSpecma has really been strong in offsetting those increases in the market. Margin management, as we call it, has been very well executed at HydraSpecma. HydraSpecma also looking into future construction of the new 15,000 square feet production facility in Poland has started. And it's really a part of optimizing the overall global factory footprint for HydraSpecma. That comes also out with guidance upgrades, EBITDA now in the range of DKK 290 million to DKK 310 million. Of course, there is a huge challenge to deliver on backlog, but we think the backlog really supports this upgrade. Then last Borg, sustained -- the revenue, and we also saw a small improvement of earnings turnover was up 6% to DKK 459 million mainly due to the positive effect from our newly acquired SBS demand on what we call remained products slowing down due to less mobility in Europe. And that's what we normally see when the financial situation, economic outlook gets slow, then we will also see a slowdown on mobility. EBITDA was flat of DKK 42 million. We experienced some lower volume on key remained products as freight calibers, et cetera. And also, we saw increase in costs, but most of that was offset by efficiency gains, mainly at our production facility in Poland. The market is difficult for the time being due to inflation. And as I mentioned, also less mobility in Europe. But we expect to come back with full force, meeting 2023, again, on demand.

Guidance is narrow EBITDA now DKK 170 million to DKK 190 million. We also have an earn-out value on our SBS, which for the time being, is unchanged. So summing up on our guidance. Here, you will see chart on guidance for each of our companies, and then summing it up to the group guidance saying that turnover on -- expected to be around DKK 30 million to DKK 32 million here impact from -- Enics is kicking in EBITDA now between a range of DKK 2.09 billion to DKK 2.6 billion. And the guidance we feel good confidence on, but of course, still uncertain and fluctuating times. So with this guidance of data, I will open up for questions.

[Jens Sørensen, executive]

Ulrik Bak, please.

[Ulrik Bak, analyst]

A couple of questions from my side. Firstly, on the Fibertex Personal Care and Fibertex Nonwovens. Can you perhaps talk a bit about how the Q3 result was affected, respectively, by demand slowdown and costs? And also how you view Q4 split into these 2 components, considering the downgrade of guidance for these 2 companies?

[Jens Sørensen, executive]

Yes. Thanks for the question, Ulrik. We just look into the figures here. You could say -- if we look at the most important -- 2 very important costs for both companies, of course, raw materials and then energy. Looking at the energy impact on both companies would be in the range of DKK 42 million in the quarter, respectively, DKK 23 million on Fibertex Personal Care and DKK 19 million on Fibertex Nonwovens. Then, of course, also we have had a lot of fluctuations on the raw materials. But as you know, Fibertex Personal Care, they have a positive pass-on mechanisms going on, but that could not offset the energy increases. And then in Fibertex Personal Care, we have had impact on lower volume in Malaysia.

Looking at Fibertex Nonwovens, two things, really, as already said, the energy DKK 19 million. But U.S., it is really U.S. driving the very unsatisfactory results in Fibertex Nonwovens. We have, over the year, a very, very big swing in earnings and profitability in U.S., and it's due to wipes. We have a lot of good business going on in filtration and so on. But I would say, most of the deviation for Fibertex Nonwovens is coming from U.S. And then we have seen this, as I said, slowdown in wipes sales, wipes demand expected to pick up in -- when we get into 2023 because most of the company seems to be at the end of the destocking.

[Ulrik Bak, analyst]

Okay. Then a follow-up question to 1 of your remarks during the presentation that you say that you want to fight for volumes in Fibertex Nonwovens. That sounds as if prices are not going to come up in 2023 and thus margins won't come up. Is that correctly understood?

[Jens Sørensen, executive]

Maybe that was -- maybe I think you're a little bit too strong on that. I said fight for volume, meaning we want volume in to -- also to run on scale and so on. But we are not fighting for it for any price and so on. We expect margins to come in at a reasonable level, but we need volume also really to improve profitability. And of course, there's a lot of sales work going on in the market where we have seen the slowdown. But also, we expect to get volume back because the market is getting more positive in general.

[Ulrik Bak, analyst]

Understood. And then about the costs in 2023. Also looking at Fibertex Personal Care and Fibertex Nonwovens, will you be better able to pass costs through to your customers in '23 compared to Q3 and perhaps Q4? And how fast will that reduction in raw material, any reduction in raw material costs filter through to the P&L? I know there's different dynamics between the 2 companies, but yes.

[Jens Sørensen, executive]

Yes. And in fact, I didn't really answer your question on the Q4 because in Q4, we -- I think we are a little bit more optimistic on energy than we were some months ago. So maybe impact energy will not be as tough as expected. Mainly, we were very nervous on Fibertex Personal Care because as I elaborated on also earlier that in Fibertex Personal Care, we do not have pass-on mechanisms on energy, we have on raw materials. So that's why we are much more confident on raw material because that we can pass on, on a quarterly basis.

Looking into 2023, we -- as we speak, expect lower energy cost but again things are very volatile. Looking into Fibertex Nonwovens, then we want and we are working very hard on getting, as I said, volume back into the up market wipes or added value wipes. And one of the problems in Fibertex Nonwovens has also been that some very interesting profit segments have slowed down, and we expect them to come back a little bit. So we are working hard on offsetting costs, but in Fibertex Nonwovens, we cannot go out and just to ask for compensation, compensation if raw materials increases. However, we expect raw materials to decrease, and then we do not have any obligation to pass that decrease on to the market instantly.

[Ulrik Bak, analyst]

Understood. Have you been looking at FTE reductions already? Or are you planning to do so?

[Jens Sørensen, executive]

Yes, we have been looking a lot into that, and we have already reduced FTEs in several places in our European setup, [ EMS ]. Also, we are looking a lot into to move production around between the European factory, factories utilizing a best cost position in the factories, which we have in Europe. So a lot of work is going on, on that. And of course, reductions on FTEs and everything plays in. We have profit protection plan going on, and we are using all possible tools in the toolbox.

[Ulrik Bak, analyst]

Okay. And then a final question on some of your CapEx investments in the Fibertex companies, especially Fibertex Nonwovens. Can you just provide a brief recap of what you have committed to in terms of CapEx when it will be finalized? And also I'm sure, you've mentioned several times that you target a ROIC of 15% on these investments. Just -- what is the time line? I realize it's -- yes, the outlook is very uncertain, but if you could just provide some color would be great.

[Jens Sørensen, executive]

Of course, Yes, we have 2 new production lines in the pipeline for Fibertex Nonwovens, one in U.S. is spunlacing technology, one in U.S. and one in Europe. Let me elaborate on the European one. First, it was intended to be set up in the Czech Republic parts due to the energy development, [indiscernible] or Czech has a very high energy price as we said, we are reevaluating, should be place it may be somewhere else in Europe. This new line intention was that the new line should start up in Q4 2023, might be postponed a little bit because we are reevaluating and we could move it to somewhere else.

So the first effect was expected to be Q4 2023. Then we have a new [indiscernible] line in U.S. for a totally new kind of wipes, we call it sustainability wipes or wipes made out of a new material and so on, expected to start up in 2023, medium 2023, and of course, first, expecting profitability to kick in, in 2024. This line is on time plan, and we expect to start it up in 2023, and we are in negotiation with very, very large blue chip customers on this new sustainability product. So a lot of interesting things that's going on there. So two new lines. One might be postponed we have invested, so we have paid most of it. So it's on the books, and it was first expected to come with profitability in 2024.

Claus Almer. Claus, you are welcome if you are there.

For further questions, Ulrik maybe you could?

[Ulrik Bak, analyst]

Yes. Sure. I can jump in with a new one. Just a question on BioMar. Obviously, you improved your gross profit per kilo quite considerably during Q3 and also the EBITDA per kilo more than 40%. And how is that possible given that input costs have increased compared to last year? And also, what has been the key drivers? You mentioned something about Norway, Chile, but which have the most impact from...

[Jens Sørensen, executive]

I've -- call it kind of turnaround and Chile has really had a huge impact as our margins in Chile improved so much. We were really under pressure last year, the Chile impact. But also in Norway, now we see profitability improving, efficiency higher and also good mix of added value products especially in the salmon market. So it's the salmon markets that drive. I would, in fact, to be fair, say, all 4 segments in the salmon market as in Norway, Chile, U.K. and Tasmania, all 4 of them improved their margins. And that's a big volume in Q3 going to the salmon market. Freight is the key driver, number 1 and 2, I would say.

[Ulrik Bak, analyst]

Okay. But I suppose you would get even more tailwind when and if input cost, freight cost, energy cost decreases?

[Jens Sørensen, executive]

Yes. I would say, in general, Ulrik, like that we are rather -- not we are -- we are positive on BioMar and the outlook for future if nothing seriously happens. We have a very good position, high efficiency. And as you also say, input cost will change. Of course, also the larger customers want their share of that, but we are positive on the outlook for BioMar in the coming years. Yes.

[Ulrik Bak, analyst]

All right. Then a question about GPV. Previously, you've mentioned that you had quite a long order book and quite a good visibility and the challenges was about sourcing the raw materials. So what -- how has the order intake been in Q3? And how long is the duration of the order book currently compared to perhaps one quarter ago?

[Jens Sørensen, executive]

I think it's still very attractive order intake. I think it was the same level as in Q2. Also orders kicking in to 2024. So nothing has really changed. And of course, we are evaluating that every month, what is happening in the global OEM market, et cetera, but there's still a very strong demand and no changed outlook on that. But it's really something we're evaluating because as I also mentioned, we are building or have built a lot of inventory up, and we need to be on top of that.

[Ulrik Bak, analyst]

And do you have any downside risk in terms of customers delaying or canceling delivery of orders?

[Jens Sørensen, executive]

We don't have a long-term downside risk on it. But of course, if some of our good and loyal customers start to postpone and so on. We will also be part of that, meaning we could sit with inventory longer than expected, meaning also we would tie up more net working capital. But there's an obligation to take these in the past, we have an inventory within a certain period. But of course, also if a big customer suddenly starts to reduce demand then we need to also be flexible.

[Ulrik Bak, analyst]

Yes. I have another question on net working capital. As you noted, it increased quite a bit in Q3 versus Q2 and also compared to last year. So what is your outlook for the upcoming quarters? Has it peaked now? And will it get improve from here due to lower raw material prices and so on? Or what are your thoughts?

[Jens Sørensen, executive]

Yes. Sort of, we will reduce it. We have a very strong -- as Q4 is also important for BioMar and a lot of working capital is tied up in inventories on the raw materials in BioMar. They're using that figure in Q4. And you could say, in fact, our net working capital increased by DKK 2.4 billion. And it is a lot, and I think I said last time we were on a call that, of course, also it has surprised us that it should be that big, but that's where we are now. And it's -- I think all our net working capital can be explained in 2 places. We have DKK 1 billion more in BioMar mainly in raw material that we know will be used over the coming quarters then we have DKK 1 billion more in GPV, where we have backlog and customer support on that. So that's where we need to reduce, and we are pushing hard on that. So we will reduce our net working capital. And as you also said, we expect component prices, raw material prices, et cetera, to go down. And of course, that will also reduces.

Claus?

[Claus Almer, analyst]

Yes. Let me follow on the net working capital. It looks good that or sounds good that you want to reduce the very high level, given your revenue in the next couple of quarters. But I guess, you will also need to add to the inventory for the revenue beyond that. So is it actually realistic to lower the level, it's not cost inflation and raw material deflation?

[Jens Sørensen, executive]

Yes. So taking GPV, maybe the 1 that has increased over a long period, the most, DKK 1 billion more tied up than we used to have. Then look at the days at inventory, and that's a key driver for me, and they have doubled the days of inventory because of a lot of different things. But in future we do not need to have inventories of staying on for 200 days. We need to reduce that number because we used to have much lower number of days. So we can do that.

[Claus Almer, analyst]

Okay. And then when talking about GPV, is the guidance you have now, is that based on no supply chain constraints in Q4? Or how should we think about your implicit Q4 guidance?

[Jens Sørensen, executive]

As you think about -- yes, of course, on that and then also, as I said, Enics kicking in with -- so they come in with an EBITDA of expected DKK 60 million. And then we have all these PPAs and we don't have a full overview on that yet. So that's part of it also, Claus.

[Claus Almer, analyst]

But normally, you say that if the world were perfect, you would be able to deliver much better performance and you will always unsure whether supply chain will ease or not. So given the new guidance, excluding the M&A part, obviously, how do you see the whole supply chain delivery situation, what do put into the guidance?

[Jens Sørensen, executive]

Yes, we have put in and we still see difficulties in Q4. We also expect it to eased up when we are looking into 2023. But for Q4, still a lot of challenges on it. And also -- we have a new company coming in, a lot of efforts in a big company coming in, a lot of work going into that. So I think there's a little bit -- put a little bit of uncertainties and also how will it come in when we have to manage these 2 companies from day 1 off.

[Claus Almer, analyst]

Sure. Okay. And then as to BioMar and the impressive performance in Q3 despite a negative volume trend, is that -- should we expect a positive full year impact in '23?

[Jens Sørensen, executive]

Yes. As I said, we are positive on BioMar. We see they are on a very -- they have a very good direction. Even they lost a little volume in Q3, mainly driven by regulatory things in Chile. But we are positive on BioMar and expect it also to continue with that in the coming years. There's a lot of things driving that. We've changed the profitability in Chile and we expect Norway to continue the very good development. So a lot of things is going on there. We are -- yes, I think you could expect to see that.

[Claus Almer, analyst]

Then about Personal Care, you have a ROIC of 7%. And I know we've been discussing this over the years, whether Enics really makes sense to add all these new lines. What do you think about a 7% ROIC and your willingness to keep investing in this business?

[Jens Sørensen, executive]

Yes, from -- our target is, of course, 15%. We are not satisfied with the 7% ROIC. We have also been you could say disappointed about what happened in Asia in 2022 because we expect that and everyone expected the market to continue to grow, but then all the COVID things and so on, changed also what happened in China. And that was a surprise, I think, to the entire [indiscernible] world. So we want to move the ROIC up on to the 15%, again. And I don't think you will see investments in capacity for some time. We have a new line in Malaysia that because of technical reasons, et cetera, we cannot start it up. We expect this to start it up 2024, and we have the capacity for some time. So that's what...

[Claus Almer, analyst]

Just a few more questions regarding this topic. So first of all, what is it of technical issues you have with the new factory, now you have been adding new lines of factories for [indiscernible]

[Jens Sørensen, executive]

Yes. It's -- in fact, it's technical, but it's the back end of the big production line where you do all the slitting and the rolling and so on. And unfortunately, it was misdimensioned. A lot of things happened on that. So we know how 100% how to run the -- it's called [indiscernible] or RF5 line, we can run it more or less blindfolded. But this back end has been redesigned and new setup right and it didn't function. So unfortunately, something we need to. And then the delivery time on getting the right equipment and it's settled. we have settled in so...

[Claus Almer, analyst]

You have solved the issues, but it's just the time?

[Jens Sørensen, executive]

Yes.

[Claus Almer, analyst]

Okay. And then this heavy pressure from Asia, as I recall past comments was that these Chinese manufacturers, if that's where it comes from. There was more a commodity production capacity that was added. So if that's true, why do you really see this heavy pressure from Asia?

[Jens Sørensen, executive]

We have 2 segments we supply. Of course, we have the Tier 1 segment as the prod time gambles and cases and so on. They still want from us. And then we have a Tier 2 segment, and they are more price sensitive. They are also sensitive to transport and freight costs have been -- it's been difficult to supply Malaysia from India and so on China has been more been easier -- it has been easier to for China to deliver in. And then also -- China have also had capacity they've been willing to sell at lower prices. So that's the way it is. But we see also that we will be able to come back when freight costs will go down. And then another thing also, in fact, consumption has decreased and we have been analyzing on that normally you use 4 to 5 diapers in a day. And when economics are tough, then some reduced from 4 to 5 to 3 to 4, and that means some of...

[Claus Almer, analyst]

Okay. And then just a final question, which is another Fibertex company, the Nonwovens?

[Jens Sørensen, executive]

Yes.

[Claus Almer, analyst]

Then is this really a division that you should -- are you the right owner of that? I guess would be the broad question.

[Jens Sørensen, executive]

No, I think that's a very, very relevant and right question, of course, with a ROIC of 1.5%, it's very unsatisfactory. As I also said, mainly driven down by the development in U.S. and the certain added value segments where we have a strong position, but where demand just slowed. We expect that to pick up. Then looking around the industry, you could say all of our colleagues, our competitors they are suffering exactly the same way we are. We still think we have a company that we can develop. We have a clear plan, short-term profit protection plan to move it up and then a long-term plan to move ROIC plus 10%. I think we had the discussion also back in 2018/'19 where we did a big strategy survey on [ FTE ]. And we also said if we cannot see a plan for bringing it up plus 10%, then we need to do something. We think still that we can do that. But of course, we are very unsatisfied with the situation as it is for the time being. But still, we are a good and relevant owner.

[Claus Almer, analyst]

But if you say the whole industry is not making any real ROIC then, I guess, it's more the interest that is your ability? And then it might be more difficult to certainly make a much better profitability than your peers?

[Jens Sørensen, executive]

Yes. No, I'm saying it's not all peers, where we are in the wipes business and so on in U.S., but we are also moving away and was part of our strategy from low-margin commodity wipes and then into much, much more advanced wipes and we were on a good move there, but things slowed down. So we -- the strategy for us is to get into much more advanced products nanotechnology, a lot of things that we have worked on for quite a long time, and we still expect to see good opportunities there. But of course, we need to reevaluate ownership, everything and we always do that, but we still think that there is a clear plan and structure for moving it into a plus 10% ROIC.

[Claus Almer, analyst]

That sounds great. Looking forward to see that materialize in the numbers. That was all for me.

[Jens Sørensen, executive]

Sure. Thank you very much, Claus. Thank you, Ulrik. Any other questions? Okay. Thank you very much for listening and also thanks for the questions.