Schouw & Co A/S

CSE:SCHO

Earnings Call Analysis

Schouw & Co Posts Record Q3, Raises Full-Year Outlook

Schouw & Company celebrated an exceptionally strong quarter, marking it as their best so far. Group revenue surged by 15% to DKK 10.5 billion, much owed to acquisitions integrating Enics and Ymer into GPV and Hydra respectively. EBITDA leaped over 34% to DKK 909 million, with significant cash flow from operations at about DKK 1.5 billion, helping reduce net working capital and raising return on invested capital toward their 15% target. Highlights include robust performance in the BioMar division, with revenue at DKK 5.8 billion and EBITDA up 17%. The company upgraded their guidance, now projecting revenue between DKK 17.8 billion and DKK 18.2 billion, and an EBITDA range of DKK 1.15 billion to DKK 1.19 billion. Across the board, improved efficiencies and strategic moves promise continued momentum, leading to an upgrade in year-end EBITDA guidance to DKK 2.62 billion to DKK 2.79 billion.

Schouw & Company Delivers Strongest Quarter with Record EBITDA Growth and Revenue Increase

Schouw & Company experienced their strongest quarter ever, with revenue soaring by 15% to DKK 10.5 billion, predominantly driven by recent acquisitions. Net working capital improved, positively impacting the return on invested capital which trends towards the target of 15%. Their EBITDA saw a remarkable 34% uptick, reaching DKK 909 million. The company also delivered solid cash flows from operations, totaling around DKK 1.5 billion. Key drivers of these stellar results included robust margin management, declining raw material prices benefiting BioMar's segment, and the efficient incorporation of new acquisitions into existing business segments.

Business Segment Highlights and Outlook

BioMar's strong quarter boasted a revenue of DKK 5.8 billion, with a 5% increase in volume and 17% rise in EBITDA. Their focus is on scaling tech and Asian segments and capitalizing on joint ventures in China and Turkey for sustained profitability. GPV's growth was amplified by the acquisition of Enics, making it the second-largest in Europe with an EBITDA of DKK 197 million. HydraSpecma and Borg also recorded revenue and EBITDA spikes, with strategic integration and market expansion driving their positive outcomes. Fibertex Personal Care's revenue dip was offset by efficient operations and substantial profitability from its U.S. print business, despite pressure from the Asian markets.

Earnings Guidance Adjustments Reflect Strong Q3 Performance

Based on the robust third-quarter performance, Schouw & Company adjusted their EBITDA outlook to DKK 1.15 billion - DKK 1.19 billion, with overall revenue expectations set between DKK 17.8 billion and DKK 18.2 billion for 2023. Specific guidance for other segments, such as HydraSpecma, suggests EBITDA between DKK 315 million and DKK 335 million, with revenue ranging from DKK 2.9 billion to DKK 3.1 billion. Borg anticipates an EBITDA of DKK 140 million to DKK 160 million, driven by a robust reman business. Despite reduced volume, Fibertex Personal Care foresees an EBITDA of around DKK 240 million to DKK 260 million, implying strong performance amid raw material price volatility.

Expectations for Q4 and Working Capital Reduction

While Q4 typically sees a reduction in customer orders as they postpone to the following year, Schouw & Company has yet to witness significant order postponements. They anticipate a potential softening in Q1 but maintain a solid backlog extending into 2024. The company continues to focus on reducing net working capital, with a noted decrease to 17% in Q3 from 20% in Q2, despite high season behavioral reductions in inventory. The executive team believes further working capital reductions are feasible, particularly in their inventory strategy and efficiency in production.

Capital Allocation Strategy and Share Buyback Program

The corporation continues to prioritize deleveraging and foresees lower investments in 2024. With an allocation strategy emphasizing organic growth, potential acquisitions, and a robust cash flow forecast, Schouw & Company announced a DKK 75 million share buyback program. They aim to take advantage of favorable conditions for acquisitions in the upcoming years and may consider additional actions, such as share buybacks or dividends, dependent on cash flow progression and market opportunities.

Earnings Call Transcript 2023-Q3

[Jens Sørensen, executive]

Welcome to Schouw & Company's Q3 reporting conference call. We had, again, this year -- this quarter, a very strong and a very satisfying quarter. In fact, it was the strongest quarter ever for Schouw & Company. All our key figures improved. Revenue at group level was up 15% to DKK 10.5 billion. Most of it is driven by the acquisitions of Enics into GPV and Ymer into Hydra.

Our EBITDA was up more than 34% to DKK 909 million. We saw a very good and strong development across the board in all our companies. We also delivered a very solid cash flow from operations of around DKK 1.5 billion. Here, we really saw the effect of a strong push and focus on delivering cash flow and bringing down our net working capital.

In fact, our net working capital base declined as -- because of this, our return on invested capital also increased and it's on an increasing trend now towards our target of 15%.

From a general view until BioMar. BioMar had really a strong quarter. Revenue was around DKK 5.8 billion. Here, we saw an effect from declining raw material prices, meaning also that our turnover had at the same level as last year, but our volume was up 5% in the quarter.

EBITDA was up 17% to DKK 470 million. It was very good to see a very strong development in our Salmon segment, and especially our Norwegian market delivered a very solid result and development. Also, our facility in Ecuador delivered a very good profitability despite low market prices on shrimp. We also saw solid margin management across the board as a very strong driver for our impressive good EBITDA uplift.

We have now focused on getting the new segments in BioMar up to speed. We want to grow and develop our newly formed tech division and also we are looking very much into getting more volume into our Asia segment. Our joint venture companies in China and Turkey continues to deliver solid profitability. Also means that the strong Q3 means that we can upgrade our EBITDA guidance.

Revenue now expected around DKK 17.8 billion to DKK 18.2 billion and EBITDA now at spread between DKK 1.15 million and DKK 1.19 billion. From a BioMar to GPV, with GPV continued a very strong growth over the quarter. Turnover now a DKK 2.5 billion. Here, we really saw the full effect from the acquisition of Enics, and now we are working on our new strategy, 1 new leader in Europe, and we have created a company that now takes a #2 position in Europe.

We saw demand from our very strong and solid European industrial customer base really continue in Q3. EBITDA far better than expected and now at DKK 197 million here, we saw a very solid cost management and very good efficiency, also effect from a scale now running 19 factories around the globe and also mix effect from customer base.

Net working capital with GPV is still a very high priority and focus area, and we have a strong reduction program in place. The component situation starts to easing off now, but we still have delivery a difficult delivery situation on critical components. We have new facilities and extended capacity in place and we are continuously evaluating the footprint of GPV to drive efficiency overall in the company.

Guidance upgraded on back of a very strong and solid Q3. Revenue now expected to be DKK 10 billion to DKK 10.4 billion and EBITDA uplift to DKK 690 million to DKK 730 million. We also see demand starts to soften a little bit, but still very good order intake from, as I mentioned earlier, from large customers throughout Europe.

From GPV to HydraSpecma, revenue up 16% to DKK 683 million. Also here, we saw a good uplift from acquisitions, the acquisitions of Ymer cooling came in. We, however, then had a negative impact from development of the Swedish -- the currency, Swedish kroner. We have a lot of activities in Sweden. EBITDA, however, was up 13% and DKK 18 million in the quarter.

Here, again, strong efficiency uplift had positive effect on EBITDA, and it was able to offset the integration costs from Ymer. HydraSpecma is really focusing on future and building future put a lot of efforts in R&D and our innovation has accelerated. We have a new factory ready in Poland and a lot of footprint decisions going on throughout the group.

The integration of Ymer into our new formed renewable division has really went well. EBITDA guidance is now narrowed. We see a slowdown in wind, but it's offset by a good track in global OEM revenue now expected to be between DKK 2.9 billion and DKK 3.1 billion. EBITDA expected to be delivered around DKK 315 million to DKK 335 million.

Then to Borg. Borg revenue was up 4% to DKK 476 million. Very positive to see that our reman business is really recovering. We had a very slow start on 2023. Trade business is lower as expected because we now see the impact of the missing Russian market. We left the Russian market late last year. EBITDA is slightly up to DKK 45 million. Our legacy business or our reman business really delivers very solid profitability.

And as expected, trade still not able to offset price increases and no Russia business in 2023. We are pushing hard for both growth and profitability in Borg. We have a very strong sales pipeline, and we have started up a new push in the market on our reman business, also trying to capture a much bigger share of wallet from our large customers by a combined go-to-market strategy between reman and trade. Guidance, a bit more positive EBITDA now in the level of DKK 140 million to DKK 160 million based on a very strong demand from our reman business.

Then moving on to Fibertex Personal Care. Revenue was down 27%, mostly due to lower raw material. As soon as raw materials prices start to fall, we will see it on the top line in Fibertex Personal Care, but we also had less volume mainly from our Malaysian set off. The volume in Malaysia continues to be at a low level compared to years back -- better-than-expected 28% up to DKK 81 million.

Here, we had really saw a positive effect from raw materials and that was able to offset lower Asian volume our Danish operation, our European market had very good volume, good margins. We had also a positive effect from the lower energy cost than expected and very positive also to see that our print business, mainly our new facility in the U.S. really starts to deliver solid profitability.

The Asian market continues to be under pressure. There's excess capacity and it drives both price competition and volume also because of much lower birth rates in China and less diaper assumption than expected. EBITDA guidance with better comfort. Revenue expected slightly lower due to raw material prices declining, but the EBITDA is now expected to be around DKK 240 million to DKK 260 million for the year.

Finally, [indiscernible] towards on Fibertex Nonwovens. Revenue up 3% to DKK 523 million. Our European market is in very good development and our U.S. wipes volume is still challenged. However, we see now upward trend and a better position in U.S. than previously. EBITDA had strong development from DKK 20 million to DKK 49 million for the quarter.

Especially here, Europe delivered well, and our facility in Brazil also really drives strong profitability our U.S. wipes business still with negative impact, but as I said, improving and also improving profitability. We have still full focus on turning our U.S. wipes business around. We have 2 businesses in U.S. 1 for wipes and 1 for needle punched in nonwovens and this old facility is doing quite well.

It's, of course, a key driver for profitability, and we see very strong wipes pipeline starts to kick in. Guidance slightly more positive. EBITDA is now expected to be around DKK 150 million to DKK 170 million. We have a strong focus on pricing excellence and innovation in Fibertex. And wovens trying to move much more from volume to value-based products.

Concluding overall guidance upgrades, it's based on strong profitability and results from Q3. We see still good momentum in most of our companies, and this momentum is expected to continue throughout the year. We have very good cost control, see a lot of efficiency activities going on at all our factories. So now we see EBITDA guidance in the spread of DKK 2.62 billion to DKK 2.79 billion for 2023.

And with that, I would open up for questions.

[Jens Sørensen, executive]

I think we have a question from Claus Almer. Claus Almer question from you. If you are -- maybe muted.

[Kasper Okkels, executive]

[indiscernible]

[Ulrik Bak, analyst]

A couple of questions from my side. The implied guidance for GPV suggests that Q4 EBITDA will be in the range of DKK 125 million to DKK 165 million. That compares to what you reported in Q3 at almost DKK 200 million. This suggests that you're already seeing a dramatic decline in volumes in Q4 already.

So is that the case? And how should we think about this implied guidance also when we think about 2024, because annualizing this range would yield a significantly lower number than what you're reporting for '23. So any comments you can share on that, please.

[Jens Sørensen, executive]

Thank you for the question, Ulrik. Q4, we have seen demand softening. But we have not yet seen it as dramatic as you are mentioning here, but we expect that December will be slow. And normally, we see especially on the circumstances as we see now where financing costs are higher and so on that a lot of customers really try to postpone orders and push it into next year.

So we -- I will not say that you could take the Q4 guidance and then put it 4x on and then say, okay, that's the guidance for 2024. That's not what we see so far. We more see that we expect December to be slower because of destocking from a lot of our large customers. So that's the background for the guidance.

[Ulrik Bak, analyst]

Okay. That's clear. Then perhaps on these order delays, can you share any values, how much of your order backlog has been postponed and for how long have they on average been postponed, please?

[Jens Sørensen, executive]

Yes. As I said, we have not seen -- really seen postponements kicking in at big scale. But of course, we have seen, as I said, demand softening a little bit, but we expect that some of the customers really start to push orders into 2024. Still have a very solid backlog also reaching far into '24.

But as I say, low visibility, a little bit uncertainty, that's part of the guidance for Q4, but that's not what we see for '24. Maybe we will see slow Q4 and a little slower Q1 off.

[Ulrik Bak, analyst]

That's clear. Then a question to BioMar. You've said on previous occasions that the contracting environment has been improving over the quarters, particularly in Norway. So can you perhaps share some color about when old contracts, they roll over, what the impact will be and when we will see that impact, obviously, we saw a strong Q3, but if we look at quarters, some quarters ahead, will we see a similar improvement year-over-year as we saw in Q3?

[Jens Sørensen, executive]

Yes. I think there are some interesting points on the contract base as you say in Norway that -- we also have to take into consideration that the Norwegian kroner is rather weak. So if we look at it, in Norwegian kroner, in fact, we have had an even stronger Q3. So we have had a very good margin management, strong contract base in Norway.

And I think we see now that we are in a very good position and utilizing our capacity very well. We also -- the contract environment has changed a little bit. So it's not now only Q2 where you do the contracts, you more negotiate contracts over the year.

So in general, we are not saying that Q2 then all contracts are renewed. It's more on an annual base could be more or less saying every month, we will renew a contract. So we see effect of it, and we will see that rolling also into 2024.

[Ulrik Bak, analyst]

Okay. And another question on BioMar. Last week or 2 weeks ago, 1 of Mowi's fish feed factories experienced an explosion. Have you -- do you have any color on that? Do they -- are they in operational currently? And are they now sourcing fish feed from you or your competitors?

[Jens Sørensen, executive]

To be honest, I don't have any flavor on that at all. And I have not heard that they are in the market for sourcing bigger volumes. But if they were, could be problematic because we are supplying the customer base we have. So we are not just giving up good old customers if movie had some problems. So it could be a problem for them. But I haven't heard much about it, to be honest.

[Ulrik Bak, analyst]

Okay. And then my final question on net working capital, we saw a significant decline in the net working capital as a percent of revenue to 17% in Q3 versus 20% in Q2. So is this level sustainable? Or is there even more potential to improve it going forward?

[Jens Sørensen, executive]

Yes. We have set very ambitious targets for our net working capital in general and pushed hard on it. And now we see also that we succeed with that, you could say 70% is a rather strong level or low level. And I won't say that we can get much further down. But we continue to push hard on it.

And then, of course, also Q3 is a high season for some of our companies, meaning also they are reducing inventories, but we will continue to push hard on net working capital.

[Kasper Okkels, executive]

We'll try Claus Almer.

[Jens Sørensen, executive]

Claus Almer.

[Claus Almer, analyst]

Can you hear me?

[Jens Sørensen, executive]

Yes, now we can, Claus. Loud and clear. And then we couldn't again.

[Kasper Okkels, executive]

Next line Andre Thormann.

[Jens Sørensen, executive]

Then Andre, while we are waiting. Are you available?

[André Thormann, analyst]

Yes, I'm here. Can you hear me?

[Jens Sørensen, executive]

Yes, welcome.

[André Thormann, analyst]

That's great. Just following up on the working capital, which I just asked about. Can you maybe give some flavor on how we should look at this in Q4? And maybe also give some more flavor on the working capital potential improvements in GPV, should we see absolute improvements in working capital as realistic for GPV? That's the first...

[Jens Sørensen, executive]

Yes, of course, GPV has been growing a lot. And that, of course, also ties up more working capital. But as I said, we continue to push hard on bringing down net working capital -- so we will see that, but I cannot say exactly how much we will see, but we work hard on continuing to reducing working capital.

But also we take strategic decisions on inventories and working capital sometimes also from a commercial point of view, we need to be able to deliver or we could utilize our financial capabilities to tie up a customer and so on, but continue to push on, we will do that.

[André Thormann, analyst]

And for BioMar on working capital, where do you see the key potential for continued improvement here?

[Jens Sørensen, executive]

I think as they have improved a lot and also when we -- there are differences on payment terms on different markets, you could say, Norway and you could see, as I say, Q3 has been very strong in Norway, where we have total different payment terms or debtor situation than we have in other markets.

So -- more sales in Norway means also we are bringing down net working capital if we go more to other markets, and we will have longer payment terms and so on. So of course, Salmon business in general brings down net working capital.

[André Thormann, analyst]

That's clear. But just to be sure and to follow up, where is the continued improvement potential in BioMar for working capital?

[Jens Sørensen, executive]

I'm not saying there's a huge improvement potential. If you look at it now, you could always -- you could see that it's at a quite decent level. So I will not say that there's a huge improvement potential, but it's something we'll keep working on, and it's a clear priority and a clear focus on a focus area also for BioMar.

But of course, as I said, the terms, debtors, again, of course, the inventory build so there's a lot of small things we constantly work on.

[André Thormann, analyst]

Makes sense. And then just 1 last from my side. That's on Enics integration because you mentioned you already see good synergies here. Can you maybe quantify how much that is? And also what drives these early synergies already from Enics?

[Jens Sørensen, executive]

Yes, it's good efficiency in the factories a little bit on the sourcing side, but we have had a lot of inventory. So the sourcing side has not really kicked in yet, but good efficiency, utilizing capacity a little bit also on general cost base.

So the start has been promising, and we expect really to see the new or the combined company to deliver on the business case and the synergies, we are very confident on that.

[André Thormann, analyst]

And can you quantify how much the synergy is -- have been.

[Jens Sørensen, executive]

Around DKK 40 million or something so far. And of course, there will also being cautious. So all in all, I would say it has been a positive effect in that size. And the business case, as we mentioned it, where we said that we expect synergies around -- so altogether around EUR 15 million to EUR 16 million in the coming years.

[Kasper Okkels, executive]

Let's try it once again.

[Jens Sørensen, executive]

Claus we try you again. Something -- some other question? Kasper?

[Kasper Okkels, executive]

Ulrik [indiscernible]

[Ulrik Bak, analyst]

Yes. My follow-up questions. Just in terms of capital allocation, now you are announcing a share buyback program of DKK 75 million. With the strong cash flow generation now, what are your priorities as we look ahead, if we look at organic growth investments, M&A share buybacks. So just to hear your preferences as it stands now?

[Jens Sørensen, executive]

Yes. As -- We expect to continue to drive and deliver solid cash flows also in 2024. Preference, first, to deleverage, looking at the financial costs, et cetera. So we're really looking at deleveraging. We are -- I think we will see lower investments in 2024.

Of course, also looking into are there any attractive acquisitions that we could do. We also think that the climate for doing acquisitions, we will be a little bit better in the coming years. So we're also preparing ourselves for that. And then let's see if we could do something more on share buyback or dividends and so on, depending on how cash flow will develop and also on what kind of interesting opportunities we will see out there.

[Ulrik Bak, analyst]

That's clear and very helpful. But can you perhaps quantify the 2024 CapEx level, you say it's going to be below the current years. So perhaps just some flavor.

[Jens Sørensen, executive]

Yes. And very honest, Ulrik, we have not finalized budget rounds yet, just seen a few of them, but the message is that we expect see lower CapEx in general, but I cannot quantify it yet. We haven't had a final discussions on that.

[Ulrik Bak, analyst]

Okay. But perhaps asked in a different manner. What is the maintenance CapEx level of your entire portfolio of companies.

[Jens Sørensen, executive]

Plus DKK 0.5 billion.

[Ulrik Bak, analyst]

Okay. That's clear. Then a similar question as I had on GPV. The implied guidance for Q4 for both Fibertex companies looks quite weak compared to what they reported in Q3. So -- is that a similar dynamic as you commented on GPV customers holding a bit back before year-end? Or what...

[Jens Sørensen, executive]

Looking at Fibertex Personal Care, we could say also has a lot to do with the raw material effect, and we have seen the raw materials declining and increasing. And there, we will have a negative effect. So it's expected that we cannot have the same positive raw material effect as we saw in Q3. So that's a different thing.

Looking at Nonwovens. We normally always have a rather weak December. We have had that in the last 5 years. So that's something, of course, we are looking into and can we do something there, but expected that December will be as usual rather weak.

[Ulrik Bak, analyst]

Okay. And just for context, the impact from raw materials in Fibertex Personal Care during Q3, how much was the impact?

[Jens Sørensen, executive]

It was DKK 14 million.

[Kasper Okkels, executive]

[indiscernible]

[Jens Sørensen, executive]

Claus we try you again.

[Claus Almer, analyst]

Can you hear me now?

[Jens Sørensen, executive]

Yes.

[Claus Almer, analyst]

I wouldn't miss the opportunity to say congratulations with the cash flow. I know you work hard for a number of years to push down your net working capital. And then -- and I know there's been some separate question regarding this topic, and you don't guide on free cash flow, but maybe you can give a little bit of a flavor on how much more potential short term do you see from lower inventories? That would be my first question. And sorry if you have already answered that one.

[Jens Sørensen, executive]

No, no, no, it's fine. And you're most welcome, of course. No, Claus, we expect positive cash flow also in Q4 around DKK 400 million to DKK 500 million positive cash flow in Q4. Let's see and mainly also coming for reducing inventories a little bit. But that's what we are looking into now. But also, as I said, we see some customers also maybe postponing a little bit, but still positive cash flow. Yes.

[Claus Almer, analyst]

And so DKK 300 million to DKK 400 million, is that free cash flow or cash flow from operations?

[Jens Sørensen, executive]

Cash flow from operations. Yes.

[Claus Almer, analyst]

Okay. That sounds good. Then talking about the whole pricing environment and input cost -- so sure, if you give you the -- you've been sourcing components at a time when prices were slightly much higher than they are today. Is there any area where deliveries is at a different price than your -- what you have sourced to. So we should expect a pressure on the margins?

[Jens Sørensen, executive]

No, that's a good observation. And I think I mentioned also that we, of course, there is price pressure in the market in general, and we are working very hard on offsetting and keeping actual price levels as long as possible.

But at GPV, there are also some obligations from customers to take the inventories at the price it was source at because we buy inventory or components home after their order backlog and so on. So that's -- it's a different thing with GPV. But of course, as you know, the customers will always try to push and find ways and so on. But there, we have quite -- we are very strong on trying to push back and saying, okay, we have an obligation and so on, on that.

[Claus Almer, analyst]

Okay. So we shouldn't, at this point, at least be concerned that they are strong in their push not to pay the price. So they're still paying whatever you have been agreeing on in the past?

[Jens Sørensen, executive]

Yes. So far, yes, they are. But, of course, discussions going on always and there is this push, but we are -- we have some good arguments on it so.

[Claus Almer, analyst]

Okay. And then just my final question regarding BioMar and the joint ventures where you downgrade your expected profit. Should we be concerned about this going into next year? Or is there some specific revaluation, I think you mentioned in the report. How should we think about this going forward?

[Jens Sørensen, executive]

Maybe take it -- we have 2 [ fleet ] joint ventures, 1 in China. I think China is still on a very good track, volume up, expect also to see a positive development in China. And next year, then we have Turkey. Turkey has been very strong the last 1.5 years, but we have really being a little more careful because of hyperinflation and the situation in Turkey and so on and really taking care of debtors and so on.

So Turkey might see lower volume in 2024, but that's a decision we will make and take. And then if you take the other associated, it's not joint ventures, but the Salmon with Salmones Austral in Chile this year has been hit. Two things. We had a joint venture where we had to close down and took a hit on that. As [indiscernible] Salmones Austral then there's been a lot of biomass regulations on prices and so on. And we expect prices to pick up next year. So looking more positively in '24 on Salmones Austral.

[Claus Almer, analyst]

So would it be fair to assume we could do the DKK 100 million just next week -- next year rather than this year.

[Jens Sørensen, executive]

I haven't seen, but yes, that could -- that's fair. Yes. Any other questions, Kasper? Good. No more questions. So -- we are closing down from here, but thank you very much for your questions and for everybody listening in. So goodbye, and thank you very much.