Earnings Call: Q3 2020

Nov 5, 2020

Quarterly report

Ladies and gentlemen, welcome to the AS Shaw and Co. Conference Call twenty twenty Q3 Report. Today, I am pleased to present CEO, Jens Berg Sorensen. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Speaker, please begin. 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 strength. At group level, our revenue was up 3% to 6,100,000,000.0, and expected activity in all of our businesses. EBITDA increased 9% to $676,000,000, 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 1,100,000,000.0. Here, we saw positive impact from prolonged tax and VAT payments of around $12,025,000,000. But we also saw a very solid effect from our long term focus on net working capital, which was reduced 16% to around DKK 3,200,000,000.0. We had a CapEx of DKK 160,000,000 in the quarter, and our net interest bearing debt was significantly reduced to a leverage around onetime EBITDA. Guidance for 2020 increased due to strong nine months performance. Turnover is expected to be around DKK 21,000,000,000 and the GEA now expected at a level of around DKK 2,070,000,000.00 to DKK 2,200,000,000.0, which is somewhat higher than the forecast in the 2020. However, significant lower income is expected from our associates, especially our farming company or farm operation in Chile, San Monza, Australia. We still see some uncertainties around impact from the global pandemic. Full year CapEx is expected to be around $550,000,000. From group level, let me look into Biomar. Biomar delivered a solid quarter. Revenue was up 4% to around DKK 3,500,000,000.0. We saw a good volume increase of 8% to 408,000 tonnes, especially we experienced strong sales in our important salmon segment. EBITDA was slightly down to $326,000,000 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 feeds 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. It was also to see that the shrimp export from Ecuador to the important Chinese markets was back on track. We have had and continue to have tight focus and control on depth of developments. We saw a successful start up 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 nonconsolidated pharma salmon Australis was hit by low salmon prices out of teal and also fair value adjustments of the biomass or of the fish standing at sea. Guidance for 2020 will be maintained, turnover of around DKK 11,500,000,000.0. EBITDA now expected from DKK $960,000,000 to 1,000,000,000. Of course, we still have some concerns on what's going on in very important rakers segment, that's where fish from our farming customers are delivered into this segment. We have, however, then, as mentioned, seen a shrimp export to China that's being good actually for me. Moving on to Fibrotech Personal Care. Here, we saw our revenue decrease slightly to DKK $5.00 9,000,000, 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 had an EBITDA at 97,000,000 compared to DKK 93,000,000 last year. Here, we had a positive effect from volume, but also, which is worth noting, a negative raw material effect compared to Q3 'nineteen of CHF 17,000,000. Looking a little bit into what's going on in Q3. Also here, net working capital was reduced as planned. We decided in the quarter a new DKK $250,000,000 investment in non holding capacity in Malaysia and a new print line in U. S, second print line in U. S. We introduced interesting cooperation with on sustainable PP. And we delivered strong return on invested capital of 17.9%. Guidance for 2020 maintained, which means revenue unchanged about 2,100,000,000.0 EBITDA expected in the range of DKK $390,000,000 to DKK $420,000,000. Then moving on to the other Fibrotech company as Fibrotechnical Moons. Perhaps you we really saw the strong momentum continued and the our Friedreich and Ambrose delivered the best quarter in Q3 ever. Revenue increased 9% to DKK $478,000,000. Important was that we saw the important automotive segment being stabilized. EBITDA in very good development from 47,000,000 to 50,000,000 for the quarter. Here, it 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 the Turkey operation. I think also, FibroTecmo and Bones have had a very strong cost control and a lot of efficiency gains due to good capacity utilization all over their 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 the section on volumes. Here, we can see that we can lift the guidance, and it's mainly coming from a very strong Q3. Turnover expected to be $1,700,000,000 EBITDA now expected to be around $240,000,000 to $265,000,000 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 TPV. Revenue here, up with 13% to $836,000,000, coming from mainly strong sales to our medtech segment, three digit million ventilator order. And then we saw experienced mixed developments in some of our other segments. EBITDA increased very satisfying 50% to CHF 84,000,000, positive impact from tax sales. Q3 twenty nineteen was negative impacted from Typax. But also here, we had a very strong focus on cost control and efficiency, which also helped to increase EBITDA. All our factories operated well in spite of difficult conditions in some of our countries due to COVID-nineteen. 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 2,850,000,000.00 EBITDA now in the range of DKK $230,000,000 to DKK $250,000,000. We however, we cannot we do not expect to continue to have this high sales to the mid tech segment. HydroSpecma had 4% down on the revenue to $473,000,000. 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 57,000,000, which really was due to high efficiency and very strong cost control all over in Hydrostegna. Looking a little bit into highlights. We had also here 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 growth progress. And HydroSpecmen have continued to adjust capacity and 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 1,900,000,000.0 and EBITDA in the range of DKK 185,000,000 to DKK $2.00 5,000,000. Finally, for Automotive, revenue reduced 6% as expected to DKK $242,000,000. Demand still soft, but in general improving. Some of our important markets do we now see recovering. EBITDA, however, increased 17% to €38,000,000 and also here due to very strong internal cost control efficiency FTE produced with about 200 people and strong focus on all efficiency and cost matters. In Q3, we could announce the acquisition of Spanish TMI, a company doing reman of turbochargers, a company with around CHF 100,000,000 on a turnover, 135 FTEs, won't have any P and L effect in 2020. And Cor 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. Ever sales from Boro and High Efficiency took us guidance uplift and turnover now around DKK $875,000,000 expected and EBITDA around DKK 90,000,000 to 110,000,000 from Boral. So wrapping up, Shaw. We are very happy with the development in Q3, strong development and our conglomerate strategy and diversification showed strength. Companies have been executing very professional in difficult times. Our financial position is good and the potential for seeking opportunities. We will lift our we have lifted our guidance due to our strong performance. EBITDA expected above pre corona guidance, which we are very satisfied with. We expect to deliver continue to deliver strong cash flow, and we had good comfort in our presence to leverage. We are looking at many opportunities, both M and A and CapEx investments. But we also have to mention that COVID-nineteen has not disappeared and is more relevant as it is. So with these closing remarks, I will open up for questions. Questions. Our first question is from Jonas Goldberg of I would like to start with a question on where you stopped on cash flow and the cash that you have piled up now after reducing net working capital, very impressive here. So you're talking about further capacity expansion projects. Could you elaborate a bit on where you're looking to expand capacity? And also with this reporting 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 take a pretty cautious outlook for the fourth quarter. I calculated you implicitly expect a seven percent decline. So what are the main reasons for this shift in momentum in Biomar? And then the last question is also on Biomar and the fact that you've seen a decline of functional fee 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. 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 125,000,000 from deferred taxes, etcetera. 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 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, the new line in Malaysia for Fibrotech's Personal Care. We could look into capacity constraints in Fibrotech's nonbones, especially in spondation 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 and A opportunities, and we continue to see growth opportunities that way around. So that's also where we expect to find attractive opportunities. Yes, it sounds like we should expect some M and A very shortly because even if I calculate on the expenses you have announced and the acquisition in Spain and maybe a little bit on those, then still your leverage would be very low as I see it. And so should we interpret this as you are looking at M and A within a short time horizon? Johannes, there's nothing new in this. We are 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 and 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 time there's 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 to Biomar, then the volume and 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 feed, especially Ecuador, was down due to the difficult situation in China. This has improved. But of course, it's something we are always looking into because it's important for our margins. 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. Okay. Our next question is from Laurent Kiergaard of ABG. Jens, Laurit here. Just a few questions from me, maybe focusing a little bit on GPV, which you also reached 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? Is your implicit guidance for Q4 doesn't look like you have the same momentum as you got 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 two companies? Thank you. You, Laurence. 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 is 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 do on our footprint. Can we model some sort of synergy costs between the two companies, which we should be able to see next year? I think we have seen a lot of them already over the last two 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. And another question on Huttrolf Spezmer, just looking at the wind segment, which you say is doing quite well. Previously flagged that in Q4, you might experience some weakness in the wind turbine segments. Could you perhaps elaborate a little bit of what's going on there? So we have still a good backlog with wind, but I think also people have following the wind for many years knows that Q4 can be busy or sometimes also orders postponed, and there's a lot of things going on. But we 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 one and another year, but still we can't afford on that. Okay. And lastly, just on Borker. 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 get volumes ready once you see capacity uplifted? Or will 2021 likely be also quite a slow year for Borg? And then we will see some momentum following that. 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'll 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. Our next question is from Ulrik Back of SEB. Hi, Jens and Casper. 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 of volume increase? I know you mentioned that salmon has performed well, but spread out Chile salmon compared to Norway salmon and also the shrimp business. Does any one of these segments today have negative growth? Or is it just higher or lower positive growth? If you can elaborate a bit on that. Yes. Thank you for that, Rodolf. Ride 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 salmon prices. What is interesting is that shrimp is, let's say, attractive margin area to be in and shrimp's volume was down in Q3, peaking up again now due to export of shrimp from Ecuador. But Norway, good development, Chile more flat and then shrimp volume our feed for shrimp have been down, but they're picking up again. Okay. Thank you. And also, can you provide any indication of the EBITDA split during Q3 among different regions for species salmon versus shrimp? Yes. So a fair question, but I think we have elaborated on it also earlier. We do not split up on segments. We've got 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 retail invested capital in Norway. So combining these things, of course, then it's difficult to elaborate on each of the regions. But also also that functional feed has been a little bit down in Q3, also impacting our EBITDA. And then we have had also quite an impact from a negative currency fluctuation, especially on NOK and U. S. Dollars in the year in the range compared to last year of around DKK 17,000,000, just to make that clear. Okay. And a question on Fibrotech's first one here. Can you please talk a bit about the market dynamics 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? Yes. I think, yes, the volume and the dynamics, they have been, as in Q3, strong volume uplift at 13%, but then again, a loss compared to Q3 last year on raw materials, as in around 17,000,000. So if you made a like for like comparison to last year, then the volume uplift also have 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 specialty nonwovens. So we are quite confident also into 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 course, not loans. Okay. That is clear. And my final question also on five zero six 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? It's actually, 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 lag compared to Q2. Our next question is from Hans Kehr of Nick Your line is open. Hello? Hello? Hi. Miss Hans? Alright. Just to remind you, if you want to ask a question, please press 01 on your telephone keypad. There'll be a brief pause while we register any more questions. There are no further questions at this time. Please go ahead, speakers. 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 Ausch.