Earnings Call: Q1 2020

May 7, 2020

Quarterly report

Ladies and gentlemen, welcome to the Scal and Co. Full Q1 twenty twenty Report. Today, I'm pleased to present the CEO, Jens Bjorn Sorensen. For the first part of this call, all participants will be in listen only mode. Thank you very much, and welcome to everyone to the presentation of our Q1 report. Q1 was for us as expected strong and delivered well in line with our long term strategy. We did not see any significant impact from the global corona crisis in Q1. However, it feels a bit strange to spend time on looking back when even the near future is uncertain and changed. But we will do it, and our revenue was up by 3% to DKK4.8 billion. The continued strong development in BioMarket gave good revenue. We also experienced lower raw material prices, which had a negative revenue effect in Fibrotech's Personal Care. Our EBITDA increased 8% to €434,000,000 Here, we saw very strong development in both Biomar and FibreText on loans, whereas BAW Automotive, they really had a negative corona impact on their EBITDA figures. We also delivered a strong cash flow from operations. It improved from it's to an improvement to €181,000,000 for the quarter. We saw a solid effect from our continuously focus on net working capital, but also there, there is still room for further development. We had CapEx of €133,000,000 some €50,000,000 below Q1 last year. The actual corona situation creates, of course, uncertainties, but we have also acted. We have established a task force, and we have also implemented an overall corona strategy. All our companies, they are having solid plans to mitigate the impact and protect their earnings. We have a clear strategy saying people first, profit second. We have also secured our long term liquidity and commitments with a €1,000,000,000 committed facility in April from Nordea and Danske Bank. We do not forget also to look at opportunities or look after opportunities in this difficult situation. We have the strength to do that. The guidance for the company 2020 will still be suspended due to corona, but we are still expecting to deliver decent profits. Our previous expected CapEx of around $550,000,000 to 600,000,000 is most likely to be in the lower end. We will, of course, guide the market accordingly if and when we get more visibility. Let's then take a look at each of our portfolio companies and start with BioMar. BioMar delivered their best first quarter ever. Revenue was up 11% to DKK2.83 billion. Here, we saw an 8% increase in volume to 270,000 tonnes. Especially our salmon division has been key driver for this growth, whereas EMEA and Laddering divisions had a rather flat development. A lot of strong product concepts have really secured good positions at our key customers globally. Biomass EBITDA increased very satisfactory from DKK 132,000,000 to DKK 159,000,000 in quarter. We saw solid results across all divisions. And again, here, we saw a positive EBITDA effect from both volume and also product mix. Our net working capital increased due to, among other things, a different geography spread. In Q1, we experienced saw a positive start up of our new factories in China and Romania. In spite of difficulties traveling to these countries, we started up and the companies are producing in very high quality. We also had expected to continue discussions on our salmon business in Chile, San Mune, South Strat that's put on hold. And just after the quarter finished, we signed an MOU with a Vietnamese company, Vietyuk, to become a shareholder in the feed factory in Vietnam, well in line with our global shrimp feed strategy. Looking at expectations for 2020, we can say that we still expect the Biomark to deliver attractive profits. But it also have to be said that fish consumption in especially the ORECA segment restaurants, catering, flight businesses and so on is, for the time being, very low and hit by corona. May affect fish sales in general and thereby also affect our customers financially as well as their feed consumption. We will continue to have a strong focus on our customers' financial development in the coming year. But again, as I said, we still expect to deliver attractive profitability in Biomark in 2020. From Biomark to the FibroTex Personal Care, where we could see first quarter with a decreased revenue, but it was only due to raw material prices of raw materials. So we had a turnover of €536,000,000 Our volume was up by 4%. We experienced strong demand from all customer types, and we also had some interesting new opportunities in the Medical segment mainly for protective clothing. And we saw effect from globally supply chains changing. EBITDA, same level as 2019, EBITDA of €101,000,000 It's a satisfactory development as in 2019, had very positive one off effects on raw material and products. We also experienced a very positive effect from strong capacity utilization in quarter. During the quarter, we have seen our new print facility in U. S. Running well and also being able to attract new customers in the quarter. Our three non owned factories, one in Alborg in Denmark and two in Malaysia, they are now running at full capacity. And it gives also a good reason for being much more specific on guidance at FibreText Personal Care due to good visibility. We expect revenue to be unchanged, euros 2,100,000,000.0, but the EBITDA is now expected in the range of $320,000,000 to €360,000,000 And of course, it's a strong positive effect from corona cost demand. From Fibrotech Personal Care to Fibrotech Nonwoven, happily to announce that they had a very strong development in Q1, the best Q1 ever in Fibrotechnical bone's history. They have been struggling for some years, and it's very positive to see this. Revenue was CHF $445,000,000. Our U. S. Operation continues very good strong development, whereas the important automotive segment really reduced the demand significantly, especially at the end of the quarter. Then we saw a positive increase in sales Materials to Medical Hygiene segment in the quarter. EBITDA increased from €39,000,000 to €54,000,000 And one of the things also was that we could see good effect from overall efficiency improvements in all operations and then, of course, a changed product mix. In the quarter, we have been working hard on mitigating corona effects. We have been downsizing our production capacity due to low demand from auto segment, whereas we have been pursuing the strong demand from Medical segment to build lasting businesses. Outlook for 2020 is, in spite of the crisis and the automotive negative outlook for the automotive segment, not too negative. We see a kind of a balance between the local auto demand with demand from new segments. We expect to continue our strong development in U. S. However, we expect also EBITDA reduced slightly, but it could end up close to the bottom of our previous guidance. From Fibrotechnical loans to TPV. Here, we experienced revenue down with 6% to CHF $718,000,000, and that was caused by rather slow demand from large industrial customers across markets. We also had or saw impact from temporary close down of important production sites among other sites, our site in China and also our site at Sri Lanka. Our EBITDA was at twenty nineteen level of €46,000,000 Of course, it's affected from lower turnover and product mix. And it also had to be said that we had in 2019, they had a negative effect of PPA of €8,000,000 So that should be taken into consideration also when looking at 2020. During the quarter, of course, a lot of efforts has been spent on mitigating the corona effects. We have also, luckily wise, seen stronger demand from customers supplying the medtech industry. And here, we could foresee interesting new opportunities. And we still also have a very interesting project pipeline and large outsourcing cases to look at in GPV. 2020 outlook is blurry due to uncertainties from our large industrial customers. We expect lower sales and thereby also reduced EBITDA. Q2 is expected to be hardest hit. Order backlog is not too bad, but we expect Q2 to be hit. And then as I mentioned, we also see interesting opportunities arising in the medtech segment with supplies out of Switzerland and with good profitability. From there to HydroSpecma, where we had revenue 4% down to €530,000,000 Still, our wind segment business is a key driver for growth, have been performing well over the quarter. But the soft demand we have seen from large customers from the vehicle segment continued also in Q1. And it also have to be mentioned that our two Chinese factories, they have been closed down for some time in the quarter. EBITDA was €57,000,000 but with the EBITDA margin at twenty nineteen level. We had, of course, a negative impact from lower sales, but then we saw a good effect from efficiency and investments we have been making over the year to increase productivity. Also, factory footprint with production in low cost countries is important. In the quarter, again, strong focus on adjusting the business to the current situation, especially in Sweden, where large Swedish industrial customers more or less closed down in March, April. We had to take hand on that. We are building a new production facility in Gothenburg, and it's well underway. We also had a successful CEO succession and a new management structure implemented during quarter. Outlook for 2020, quite blurry. However, we foresee continued good demand from our important wind segments. Large industrial OEMs will continue to show soft demand. We expect that to last full 2020. So thereby, we, of course, expect lower sales and in the year in 2020. And then last, for Automotive, where we saw a flat revenue of €232,000,000 In fact, we had a very strong start of the year. We were happy, and it was positive. Thought we were now we are back in business, having defended our position in 2019. But we have also seen an instant effect when most countries in Europe closed down. No cars on the road means no cars to service. And it has been very difficult to move products around in Europe also. So BAWA Automotive, by far, the hardest corona hit of our six companies. EBITDA fell from €33,000,000 to 24,000,000 not all corona related, but here we saw a quite strong effect from government imposed salary increases in Poland and also product mix with increased sales to OEM, meaning lower sales prices and margins as expected. During the quarter, of course, Bo and the management team has had full focus on how to mitigate this corona situation. And we have to say also that at the start of the crisis, it was really difficult to look into the situation. We have now a much better view on what to do. And we have reduced and downsized a lot of places. We've also been able to improve the productivity in Poland a bit to offset our salary increases. But again, we are focusing a lot on adjusting our production capacity and our supply chain. So that being said, outlook for 2020 is very uncertain. And of course, due to our main markets more or less are closed down. But then still we expect to strengthen our market position when things opens up again by taking advantage of our size and our product range. We are looking into reduced cost base but also in respect for being able to take in future opportunities. So this said, we expect sales and EBITDA to see a significant drop in 2020. Wrapping up. At SCOR, we have full focus now on protecting people and their profitability. We have a very clear corona strategy with strong actions implemented in each company. We are also going to utilize strengths and position both short and long term. And we are also we have the willing to be bold if we see interesting opportunities arise in this difficult period here. Outlook is blurry and uncertain, but we think our conglomerate strategy now shows strength and spread risk. We expect, in fact, to deliver quite strong cash flow in 2020. And as I said, profitability will be reduced, but we still expect it to be at a rather attractive level. And we also say the world will normalize, but at what speed? We do not know, and that's why we still have suspended the guidance for 2020. So with that being said, I will open up for questions. Thank you. And our first question comes from the line of Jonas Guldborg of Danske Bank. Casper. I have three questions, and I'll take them one by one. So first of all, your net working capital in Biomar is up 50% year on year. And you mentioned a lot of reasons for that in the report, but I feel pretty confident that you are not satisfied with this level, which is more than 13% of revenue. Could you talk a little bit about how you see this develop for the rest of the year and what level relative to revenue you will be satisfied, so to speak? Yes. Thank you for the question, Jonas. I'm sure you're right. We are not satisfied with that because you also know that we have a strong focus on net working capital. There is some geography in it also, meaning that we have more volume sold in markets where there are longer credit terms. But then we have also the utilization of supply chain financing has had an impact also in the quarter. And then we have our a new implementation of a new setup in Norway with where we are a shareholder in a company called Let's Sea. And now we have to take the fish stock into our as inventory, so that's also up. And then, of course, we have our buildup of a new factory in Tasmania, where we have produced a lot in U. K. To make safety stock in Tasmania. So it's tying up quite a lot of capital also. So these four things are key drivers. And then, of course, also we have the effect from taking over Alitek or our new company in Chile, the joint venture. So these things are main drivers. We expect the net working capital to be reduced in the coming years over the year, and our objective is 10% net working capital of turnover. But we have strong performance And on do you expect to reach that by the end of this year, 10% of revenue? We do not expect that. It's our objective, but we see this year will also because we and we face some customers asking for longer terms because they have still fish at sea and things like that. And there, of course, we need to balance risk and the outstandings and things like that. But it's our objective. Okay. Then my second question is on margins in Biomar. First of all, if you could put some color on what is driving the margin improvement in the quarter? And then also, tie a few comments to what is an attractive earnings level in Biomar for 2020. Is it 4% or five or 6% EBIT margin? As of the of course, you know it's low season, meaning also that efficiency in the factories in some areas will be low. But we have seen a margin improvement also because we have more some of our segments in shrimps and so on, margins are different than in salmon. So there's a species mix and then there's also a product mix, added value product, things like that. And then we have had also interesting raw material positions in the quarter. We expect EBIT margin, of course, to improve over the year, And we have an objective of 6% EBIT margin for Biomagnet. That's what we are looking into. Okay. And then my last question is for GPV and Borg Automotive. If you could give us the growth rates for March and for April for these two companies, that would be very helpful in trying to model the coming quarter. And then also if you could put a number on the share of fixed operational costs versus variable costs in these two companies. To be honest, I cannot be that specific. Maybe we can elaborate on that a little bit later and maybe Kepler can look into it. But of course, if you take GPV, it has been more soft demands over the quarter. It's not just end of or mid March and so whereas BOW really, I think, down to index 10 or 20, the last weeks of March. Without disclosing too much on April, I can say that the index in April for was not as bad as we expected or feared. I think we saw index between 6070%, closer to the 70s. And the 70% index on turnover, whereas we expect May to be lower because there, we really see the impact. So that's as it is. GPV, more over the quarter. And then, of course, also now we expect May, June to be lower because we have delivered on our backlog, and the order intake has been lower for the coming months. Then you asked on was it specific on costs, Jonas? Yes. How much is fixed? And then how much is viable in these two companies as a share? Yes. I think we could comment a little bit back to that. But of course, not fixed costs are not that big because component costs, especially in GPV, are very, very high. So but let's come back on that. It's not you cannot do a lot of things on fixed costs, to be honest, in these companies. It's more to say it like that. It's not that you would say, okay, let's half the fixed cost, and then we will see a significant improvement. That's not possible. Okay. Fair enough. Thank you very much for your answers. Thank next question comes from the line of Klaus Armer of Nordea. Also a few questions from my side. Coming back to Jonas' question regarding how Q2 has started. My question is a bit broader. How have you seen Skolt Group performing so far in Q2? That would be the first question. Yes. To be honest, Claussen, thank you for the question. We have April and then a few days to May. To be honest, our FPC business, and we also, as expected, they have really been doing well. Fiber takes no loans better than Fiat because when I say Fiat, you always look into what is going to happen. But they have been doing quite well. As I also said, both, a bit better than Fiat. Biomar, good and as expected. Then I don't really know about the GPV and HydroSpecma precisely, but not disasters for the first months here. So, so far, April is not a disaster. We feel quite comfortable on that. We are a little bit more reluctant or hesitant when we are looking into May, June in some of the companies because there we see backlog and orders and so on Excluding those being exposed to automotive, do you think is it 20% revenue drop? Could it be 40%? I know this is the impossible question, but if we try it anyway to give some color to the magnitude. Didn't Klaus, to be honest, I couldn't really hear what was the question specific. No, sorry. I'm just trying to a bit more into Q2, and I know it's very difficult to give any exact answer. But in round numbers, do you think it was on group level, it is minus 20%, it's minus 50%, it is no your best guess? Yes. It's absolutely not minus 50%, I have to say that. It will not be that. It will be I said, we will see things down. But again, it's a mixed bag of candy. And then as I said, the five zero six Personal Care, they really had a strong April without saying too much. And as I said, the one who has been most hardest hit is four. They were index 70, will be lower in May and June, but we will not see a disaster, not at all. And the Biomark, which they are so large in our portfolio, and they are not looking into disaster either. They are working hard to try to keep volume at the level that are the expected time. It's not it doesn't look too bad. Okay. And just maybe keeping an eye on Biomar, what when you have discussions with customers, what are they saying about volume, about their willingness to still buying high value added products? That will be the second question. Yes. That's a good point, Klaus, you could say. Of course, also in always in crisis like this, there will be they will start to challenge value added products, not because they are not good, but they don't need to grow the fish as fast as they would before because they have too much biomass standing at sea. But they need to feed, so there will be more basic feeding. Then when you have a lot of fish at sea or big biomass, then something could happen with diseases, things like that. And then they will have a use for that. It's for certain that they are, of course, more on, what should we say, traditional feed. But they will have to feed. Then, of course, if you look at it from segment to segment, you could say, looking at South Europe, where Greece, Spain is big on farming, bass and bream. Majority, let's say, 70% to 80% of these fish, they are sold fresh, and they are sold to the restaurant business, most of it. And you cannot freeze that fish down. So of course, there's something there, nervous, will consumption come up again. I think in the salmon business, you would see they can freeze. They can do a lot of things. And they are quite smart in changing supply chains. They have a big market setup, more and more moving into the supermarket private consumption. And then one that has really been a concern for us has been shrimp. Out of Ecuador, Ecuador is the largest exporter of shrimp, high quality shrimps to China. And that stopped. No Chinese New Year or things like that. But it's back nearly 90% consumption in China now. So that's a broad perspective on it. And then, of course, some of the customers having fish at sea don't sell the volume as expected, they can be a little challenged on liquidity. And there, we have to really carefully look at that and balance that. Okay. And then just my final question. That's about this wording guidance you gave in the report. You can try to explain what is behind this guidance? Is it the normal input from the different managers and then you are putting the scope filter on top of that? Or how do you really It's a kind of sorry. That's right. Yes. It's kind of a combination, Claus. Yes. A combination? What do you mean by that? No. I mean, of course, when you said it's a normal scope filter on that, that's why we are here. We are collecting all the numbers. We're discussing it with the CEOs. And of course, we have our view on things also. But of course, we take a lot into consideration what's coming from each company. And just to be specific on it, you could say why do we continue to suspend guidance because still there's a lot of speculations. We don't know if things will open up next week or what will happen and things like that. And it would be so that's why we're saying when we don't know more about what's going on, on the political side, then we cannot be more specific. But still, we have a flavor. Looking into pharma, when we are saying that we are still expecting attractive level EBITDA, it will be challenged, meaning that because our customers are challenged, then, of course, they will challenge us. And so we will fight back, and we'll see if we can defend our EBITDA position or even our original guidance. But of course, there will be challenges around it. We do not expect BioMar to be hard hit. Then you take FPC, no reason to comment on that. That's a clear figure. If you take Fibrotection on Bowens, we expect them really to or we can see it, they are stepping up on added value products on nano for protective clothing, mask, etcetera. That will compensate a lot. Then we have GPV, where we're seeing a little bit under the expected first guidance because we think that can compensate something from mid tech, new customers. Then we have hyperspectment, where we seeing quite a bit or not quite, but some below the expected guidance because the entire heavy vehicle construction segment is down a lot. Then we have wins to compensate that. And then four, to be honest, very difficult to say anything about the cost. A small garage at our main markets, U. K, France, Spain, Italy, closed down. When do they open up again? That will be speculations. So that's kind of flavor clouds on that. That's very helpful. Thank you so much, Jens. Thank you. Our next question comes from the line of Ulrik Back of SEB. Please go ahead. Your line is now open. Yes. Good afternoon, Jens. Just a couple of questions from my side. So in your guidance for Biomar, you seem more confident that the revenue will be close to the original revenue guidance at DKK 12,000,000,000. And you seem to be more confident than on EBITDA, where you say that you will be lower probably. Can you please elaborate a bit on that? Is it because you assume the same volumes and less profitability? Or how do you look at that? Yes. More or less, you would say because, as we discussed previously, I think some customers will change their feeding regime, meaning they are not too eager on functional feed because then the fish might grow too fast and they can't sell it and so on. So meaning profitability on some of our functional feeds is a bit higher. That can maybe be offset a little bit by medicated feed or things like that. But that's the rationale behind. And then also geographical spreads where some of our maybe more profitable smaller segments are a little bit challenged compared to the larger ones. So that's the way we see it. Okay. And also another question for Biomar. You alluded a bit to it earlier, but have you seen like a drastic change in customer demand between mid March when the COVID-nineteen pandemic really kicked off and now when adjusting for the normal seasonal swings and in particular in the Salmon division, which showed very strong volume growth in Q1? We haven't. What we have seen is that contract negotiations might be postponed because customers are not doing that for the time being. They are sticking to their normal supply, etcetera. So there's been a little bit around that, but we have not seen big volume changes, not yet. No. And just can you remind me how much more capacity you have in Q2 this year compared to Q2 last year as a percent? We have in Chile even we have taken in the taken over the joint venture, no more capacity sold out. Norway, it's a seasonal capacity, but you could say, in Norway, we have capacity to maybe run 60,000 to 80,000 tonnes more annual based. And then some of the other smaller countries, we do not have much capacity. Okay. And then a final question on FibroTec Personal Care. You increased your guidance on EBITDA. So how much of this guidance increase is due to FX and raw material working in your favor? Nothing. It's only on volume and product mix based on a level of index on raw materials. So we have not taken that into consideration. Okay. And yes, I just saw a last one. On Fibrotech non loans, you reported very strong EBITDA margin for Q1. Can you just put a few words on that performance? And can this level be sustained in Q2 despite low activity in the automotive sector? I think it can be more or less sustained as of the margins in the new products. It's more depending or it can, but it's depending on how much sale will we lose to the automotive segment. And the index for April or for May, sorry, for that was not encouraging. But then we had the other businesses quite promising. So I think we if we the volume we are getting from the new businesses, they have very attractive margins compared to the automotive. Okay. Thank you. Thank you. And there are no further questions at this time. Please go ahead, speaker. Okay. Thank you very much. Thank you for listening to this report in these difficult times. And then I wish all of you a good small holiday, weather seems to be good. Thank you for that. Bye. This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.