Earnings Call: Q3 2019

Nov 7, 2019

Quarterly report

Ladies and gentlemen, welcome to The Skol and Company Q3 Interim Report 2019. Today, I'm pleased to present CEO, Jens Perriet Sampson. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Vince, please begin. Thank you very much, and welcome to everyone to our Q3 presentation. First of all, also sorry for small delay. There was a technical issue, but I'll continue from that. Welcome again. We have seen continued high activity level all over our companies despite soft markets, and we see it as a very solid and very satisfactory quarter. Our revenue was up by 17% to 5,900,000,000.0. We saw a combination of both organic and acquisitive growth. Our organic growth was at a satisfactory level of 8%. Our EBITDA increased from EUR $445,000,000 to EUR $621,000,000. If we adjust for a positive effect from IFRS 16 of EUR 52,000,000, then our EBITDA increased by 28%, which we think is very satisfactory. We had a few one off costs also that had a negative effect. Cash flow from operations improved to $724,000,000. Now we see the effect of our ongoing net capital net working capital focus, and it is on top of the management agenda in all our businesses. Our return of invested capital is below our target, but it's at 12.8. Here, of course, we see effect from acquisitions and the strong investment program we have been running in the last years in the company. The guidance for 2019 is adjusted with a small positive adjustment. Revenue is now expected around 20,700,000,000.0, and the EBITDA now expected in a range of 1,865,000.000 to EUR 1,955,000.000. We have to say it's most likely that we are in the upper end of that range. There is a positive effect on the EBITDA from IFRS of two zero five million. So that was the general comments. Now I'll move into each of our companies and portfolio, starting with Biomark Q3, where we had a revenue of $3,400,000,000 volume, up 3% to 379,000 tons. We saw good development across all markets, but especially our EMEA division and Chile showing a very good growth. EBITDA was up from €246,000,000 to €345,000,000 Adjusted for IFRS 16, we saw an impressive growth of 27%. As I mentioned, also a good development in all our divisions. It's especially very positive to see that the Norwegian market or our Norwegian company is now in a very good development, and we see the effect from our changed market approach. Looking a little bit into a few highlights from Q3. We have also to say that the farming conditions in general have been good. We have had good success with selling functional fleets and concepts in nearly all markets. And also, we see good development in the three large expansion projects we have in Denmark, in Ecuador and in Tasmania. We have also mentioned that we see a potential IPO of our Chilean Chilean salmon Pharma Sandoz Australis probably in 2020. Pharma holds 23% as a nonstrategic ownership, and the listing platform gives, of course, easier opportunity to potentially exit this holding. Guidance for 2019 adjusted upwards should move around €11,000,000,000 EBITDA now in a range from 900,000,000 to €930,000,000 We expect it in the high end of the range. We had a very good comfort on this guidance. I have to say also that there is a large IFRS 16 effect of around 130,000,000 in this guidance. For Biomark to FibroTex Personal Care, revenue was flat, $541,000,000. Volume also flat due to continued slowdown in Asia, where we see some of our larger global branded customers losing market share in China. OIBDA increased, however, 25 to EUR 93,000,000. It had a positive effect in Q3 from raw materials and from ForEx of around 40,000,000. But also, we faced, as expected, start up cost of our new print facility in U. S. Of DKK 2,000,000 in the quarter. Year to date, we have had a negative effect of DKK 9,000,000. Still see fierce competition in Europe and the new market dynamics in Asia. However, we also saw lower market capacity, production capacity in Europe following that one of our competitors, February, had to close a factory down. Q3 highlights could be mentioned that we have had a very strong cash flow. It continued. We've also had a good focus on developing niche and high value products. And then we have had a good start of our U. S. Print facility, which is good value in what we call post treatment applications like print. Guidance for 2019 increased turnover around €2,300,000,000 EBITDA range raised with €10,000,000 to €230,000,000 to $350,000,000 And also here, we see good comfort for the year. Private ex Mongols had a good revenue increase of 70% in the quarter to $437,000,000 Especially, we saw a very good and positive development in our U. S. Operation. Europe, in general, see more softer demand, especially from more specific from the automotive segment, although EBITDA also increased 17% to EUR 47,000,000. We have to say also that we had a good development in raw material prices, which, of course, had a direct effect on our contribution margin. Also here, we saw strong sales of added value products and concepts, something we have been working on for quite a long time. Q3, we also took a decision on moving one of the two production lines from South America South Africa, sorry, to U. S. Because U. S. Is expanding and showing strong development. We have adjusted our capacity costs, and we have also seen we are very satisfied with that, many interesting requests on materials from our new NanoRite. The 2019 guidance has narrowed since outlook maintained 600,000,000.0 to 1,700,000,000.0 EBITDA in the range now from $155,000,000,000 to $165,000,000,000 due to softer demand, specifically in the automotive segment. And we know that this segment is reducing stocks and things last quarter of the year. From fiber equipment loans to GPV, revenue of $741,000,000 full effect from the acquisition of Swiss CCS. We saw softer demand in some of what we call the old GPV segments. EBITDA was up from EUR 37,000,000 to EUR 56,000,000, which we think is a satisfactory development. Integration between TPV and CCS is ongoing. We what we call the old TPV had EUR 18,000,000 in Q3 and, as I've said, was challenged in some of its segments but also challenged especially from currency type of in U. S. Dollars, which had a negative impact of at least finally in the quarter. Here, to date, we see a negative effect of plus 15,000,000 or minus €15,000,000 in the period. And then also in Q3, we saw around €5,000,000 in the integration costs. Integration, what we call Integration Phase one, has been very successful. Integration Phase one is on market, it's on customers, well implemented and also on organization. Next phase will be on factory and supply chain footprint. We still see a very attractive customer pipeline, project pipeline. Our Mexican operation continued to show progress, but it's still a loss making unit. 2019 guidance maintained turnover of around EUR 2,700,000,000.0. EBITDA in the range now from EUR 190,000,000 to EUR 200 And we say that it's due to negative effect from currency, but it's compensated by lower integration costs. Hydrostegna had a revenue increase of 9% to $494,000,000. The high activity level that we have seen throughout the year continues, mainly driven by wind turbine and what we call stationary materials segments. EBITDA increased to 53,000,000. And even adjusted for IFRS 16, it was 30% up 38% up mainly due to high sales, strong productivity and efficiency and meaning also that we can run our capacity nearly to its maximum. We have continued focus on optimizing factory and logistic footprints. We have decided and announced building a new facility outside Gerberbourg, and we are investing continuously in optimization and utilization. The guidance of turnover expected around 2,100,000,000.0. We have to take our EBITDA guidance a little bit back, back to the first twenty nineteen guidance of the 2010 to 2020, specifically due to a slowdown in the automotive or in stationary materials segment, we see currently significant inventory adjustments from some of our key customers. We have a strong focus on reducing net working capital. But of course, Global Flipping and Global Fracings increased inventories. Last company in the portfolio, but not least, BAW Automotive. Good to see that revenue was up 12%, which reached up €258,000,000 We have we saw soft demand for nearly ten months now, but now we see market is normalizing, and it starts to grow slowly, but it starts to grow. We have, in that period, maintained our strong market position. EBITDA increases 46% to EUR 32,000,000. And of course, it's a positive effect on sales picking up, but also due to very strong cost control and production efficiency. We have continued focus on expanding and developing our product program so we can have a larger size of share of wallet from our large customers. We have closed down R and D facility in Belgium. It's now finalized. 2019 guidance maintains turnover of around €900,000,000 and the EBITDA unchanged in the range from 110,000,000 to €120,000,000 Also, I have to say that Brexit is still a concern, but obvious now, no impact of significance in 2019, but it's something that we are concerned about. So wrapping everything up, 2009 is closing up, and we have a good comfort delivering on the year. Revenue, as I said, around EUR 2,700,000,000.0. Our guidance EBITDA narrowed, 1,865,000,000.000 to EUR 1,955,000,000.000. We expect to deliver in the upper end of that range. Cash flow and net working capital is, of course, still top of mind in all our companies. Also, I have to say that in 2019, we finalized most of our very ambitious investment program, and we will, moving into 2020, have focused on profitable utilizing our capacity. We're still investing but at a much slower levels. So we are now preparing all our companies for more challenging 2020, but still with a lot of opportunities. And we have some companies that are slower software demand for all the companies led to a limited degree affected by global economy. So all in all, expected to end 2019 on a good note and then looking into 2020, where we are preparing for one year cost. So with that, I will hand over to questions. Our first question comes from the line of Jonas Guldborg from Danske Bank. Please go ahead. Yes. Good afternoon all. I have a let me start to pick up on the cash flow side. Very good execution here in Q3. And just like to hear how convinced are you that you have broken the trend now? And from here, we will see continued improvement in net working capital and thereby in cash flow. And as a follow-up to that, maybe you could just remind us what you expect CapEx to be in 2019? And maybe also to what extent that will decline in 2020? And then lastly, if you could put some more words on the development in biomass associated companies in China and Turkey. Revenue is down 15% and EBITDA down 40%. What exactly is happening there? Yes. Thank you very much, Jonas, for the questions. So let me start, of course, with the first question on cash flow. I am it's not to say very, but I am very convinced that we are on a good track, and we will see strong cash flow the coming years, mainly because we have really strong focus on net working capital but also on our CapEx utilization of whatever we have invested in. So we expect to continue this positive development also into 2020. We have a very good comfort on that. CapEx in 2019, I don't have the figure 100% here. It's coming in a few seconds. But I can tell you that in 2020, CapEx will be significantly lower than in 2019, where we I think the only really the larger CapEx investment we have in 2020 is installing the South African line for Fewertage and Range in U. S. We will have to build and so on, but it's not that big. Then looking into Biomar, you could say the JVs, there are two things in the JVs. First of all, also, Cellmium and Cellstar have had smaller profit so far this year, not much, but they have had. Then we have in Turkey slowed down a little bit due to sector risk. The economy in Turkey is have been a little bit challenged, so we have stopped for some suppliers supplying some customers because we don't want to take the debt to risk. China factory has not been up and running as expected, being a little bit difficult is important from Denmark. And then also in the southern part of China, we have taken a bit more cautious on credits and So that's the rationale behind that. Okay. Yes. Sorry. Yes. Then just a follow-up on China and the development there. You expect that we'll see any positive impact from the swine flu African swine flu out there? Yes. We see but we see an effect, and we also expect that there will be more stronger demand on farm fish and so on, definitely, in future. So we will see that. And also, when we get our factory up and running, expect to really run Extruders end this month, beginning next month. So then we'll be able really to supply the market with high quality feed, which is from the Monaco. Okay. And did Casper find the CapEx number for 2019? Yes, sir. 800 including all investments. Thank you very much, sir. Okay. Thank you. And the next question comes from the line of Laurence Kiego from ABG. Please go ahead. Thank you very much and good afternoon to everyone. I would like to start in the other end looking at the bulk automotive there. You experienced a soft demand in the past ten months and I feel like it was a little bit difficult to explain what was actually happening there, if it was inventory reductions or what was happening. And now it seems that this position is turning around a little bit. Do you have more insight to what was happening and what was the reason for this soft demand? Yes. But it has been blurry, to be honest. And we have asked markets, we have asked customers, etcetera, even also heard rumors from competitors that it has been soft due to inventory, a lot of different things. And but now it started coming back. And also, as we have said, it's spare parts, and we the car has to run. And at a certain point, you need to replace the spare parts. So yes, we have really been searching for it, we have seen inventories being brought down, definitely. And then also one thing, there's been some consolidations going on in this business. And we think these consolidations also have helped people to move more capital on their inventories. Okay. Fair enough. And then looking at Biomar, we saw that Baggerforce, they acquired Scottish salmon company there, which is one of your customer. And and as far as I remember, you have sort of a contract expiring in the 2021. Any insights to this acquisition and and to what we can expect in the market? Because, obviously, Backefrost, they sort of produce their own feed for their salmon. Any any thoughts? Of course, it's a new situation. But as you also said, we have a contract running for Scottish for Scottish Serna company, and, yeah, we we hope they will honor that. We supply quality fees and yeah. To be honest, we don't know yet because part of the stress taking over now. Maybe of course, the supply feeds from Faroe Islands, but it's also very, very complicated to supply because there's a lot of small sites in in Scotland. And so let's see what's going to happen. But of course, we think we can compete in the market and maybe also we can supply some of these sites still. We have to see. Okay. That's very clear. One last question, so if FeedbackTech's nonwovens, you conducted this strategic review, which you discussed in your introduction in the first half. And I think this is the first time we've actually heard of some tangible plan from this review. Could you give some insights to what other things that you're looking at more specifically? Of course, I think most of you have also asked us on South Africa and what are we doing and how we have reshuffling capacity moving it to The U. S. Market as part of the plan, closing down on costs and things in South Africa. Then we have been looking a lot into our product portfolio. We are in a lot of different segments. Obviously think you elaborated a little bit on that we are pruning our product portfolio. And then looking into the low margin products, we are stepping out of some of them over some time now, moving more into advanced products. We are reshoring capacity closing down lines in some factories, to what we call best cost location, etcetera. A lot of things is going on. It seems like this is only the beginning then? Yes. We have to we have a very solid or strong objective on improving the return of capital from the very low level it is now, and we're not around 12%. So a lot of things has to materialize to reach that objective, and we feel rather confident on that. And the next question comes from the line of council Edema from Nordea. Please go ahead. Thank you. Yeah. Also, a few questions from my side. The first will go to Buma. And in in the report, Yinsh, I'm not sure if that was you who wrote it, but at least it is mentioned that BioMar will defend its market share. I guess that's a kind of a different wording than you said previously in this year. So how should we think about that? You should think yes, that's I think you should think about it on a more differentiated way, saying that we have a very, very clear strategy in Norway, saying that we are going for profit instead of value. We have succeeded quite well on that, and we are going to continue doing that. Of course, now we have a customer base that is different from what we had before, meaning, of course, we need to defend our customer base, but still with profitability as objective number one. Then looking in other markets where we are very strong, where we have decided that if something happens, then we defend our market share. It could be in Greece, it could be in our shrimp business, etcetera, where we have some large customer bases, we are defending the same utility. But in Norway, we are continuing to pursue the strategy we made early this year. By this different strategy, thought Biomar was going to act more rational, something this industry probably needs, but it only goes for Norway. Not at all. No, I think maybe I think you interpreted a little bit wrong because we are still having of course, we are in a growth industry in certain markets, but there are many ways of defending markets and sovereign and leaving profitability growth. It's not first objective. But of course, there's a balance, how can you utilize your capacity, etcetera. But I think maybe it's to me that's good you're asking, maybe it's too strong a word. We are not going blindfolded into a fierce competition on volumes, and we have tried that we have been there. Okay. Good to hear. Then the second question about Biomar. In the emerging markets, you reported a volume decline. Emerging markets is including Ecuador, where growth should be pretty solid. So is it China that is declining that much? Or is it Costa Rica? Or what's behind this negative trend? Yes. China has been declining a little bit. As I also said, that we had decided not taking debt to risk. We saw that there were too many customers where we had too large outstanding. We have been quite a lot of tough on that. Then Costa Rica, we have also decided on a few customers and so on. So in general, our large markets, we have not seen a volume decline. In some areas, we have decided not to go for volume because risk was too big. So those marks are actually larger than the growth you saw in in Ecuador, which must be the case? That that I didn't really get to be honest. Sorry. I mean, you must have had, you know, given the size of Ecuador where you also had, you know, decent volume growth, I'm slightly surprised that these smaller markets can can, you know, eat all of the volume growth in in Ecuador and tracking down the whole region of emerging markets. Yeah. But you have to say, I'm not quite sure what you're writing 100%, to be honest, because we have You're writing that you're seeing a negative volume growth in emerging markets. Yeah. But there you are. Yeah. But there you are. You are you're suggesting that the Equator is is going down. So you're seeing a flat Oh, no. No. No. No. It's the other way around. I mean, I'm saying that Ecuador should hopefully be growing nicely as we've seen in the past. So if the region is declining despite the positive trend in Ecuador, then other markets must be, you know, performing poorly. And I'm surprised that Costa Rica and China should be enough to crack down the positive performance in Ecuador. Yes. But if you say the positive growth in the quarter, when you expect that it's the two digit growth that we are having, of course, Equitable is not that big and China is still it's got a rather big volume is coming out of China. So China and then Costa Rica have seen a small setback, but Equitable is not going back. Okay. Okay. Okay. And then coming back to Jonas, a question regarding working capital. And maybe I'm not as impressed as Jonas about the working capital performance. But nevertheless, I know this is a key, key KPI for you, a personal job to bring down working capital. Are you satisfied by the performance so far this year? Or how should we really think about how working capital is trending? I think we should think about it that there's still a way to go. And we are not satisfied because we have a higher target, but we see a very good trend, and we're pleased with that good trend we see. But I think also you would see that a net working capital objective and cash flow set is also something running into 2020. But it is, and I think I said it also in first quarter that it is something I'm really putting personal focus on. And there's still a lot to do, But we are on a good development. But we are not we cannot speak to satisfy. Definitely. Okay. And then just finally, didn't hear did you mention a a a CapEx number for 02/2020? Nope. We didn't because we we are mentioning it when we're coming out with our 2020 guidance. But I said 01/10000 that was significantly lower than than '19. Okay. Good. Thank you so much. Thank you very much. And just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. The next question comes from the line of Ulrike Pat from SEB. Please go ahead. Yes. Hello, Jens. Also a few questions from my side. First one is regarding Biomar, where the EBITDA margin has been 10% for Q3, EBIT margin 8%, which is a significant improvement from previous Q3s, of course, this IFRS 16 effect. But I was just wondering whether this is a new normal, a new plateau that we could see in the future. We are aiming for that, definitely. You are right that there is a 16 effect coming from the leasing of charter boats, in Norway. But now we have this level, and we are aiming of maintaining that segment. Yes. I remember Casper once saying that a target of 6% EBIT margin. And this 8% in W, I think it seems quite high. Could you comment on that? Yes. But now you are commenting on also we have had a very strong Q and we also need to you have to see Biomar over the whole year. So of course, if you're looking at this quarter here, we have a good EBITDA margin of 8.3%. But if we take EBIT, it's 5.4%. So it's we're still some way up to the 6%. But we are aiming for that, and that's still the way to go. But depending on segments, geographies, etcetera, etcetera, but we are tracking quite well on that. All right. And then to the revenue growth of Southamen Division of almost 30%. Can you please elaborate on the underlying drivers for this increase? Yes. We took over the 50% owned JV we had with Aperitum, and that's why now we won 100% of this capacity and it goes in on our EBIT line. So that's in our turnover. That's why. Okay. And then one last final question. On in the report, mentioned that the salmon market is growing moderately and the shrimp market is accelerating growth. Can you put more specific numbers on these terms, moderate and accelerating? That's difficult. If you look at the salmon, you also have to look at it from both regional and a global perspective. Chile is growing. Now we have the unrest in Chile, what's happening there. But if you look at Norway, you can see it has been growing quite good this year with I think it's around four to 5% up. Shrimp's more. Equatorial growing maybe at the lower end of 9% or something like that. So maybe Shrimp could be around double digit growth in future, but remains to be seen. But there is a difference between the two. First, I don't know. Okay. Thank you. No further questions from my side. Thank you. And as there are no further questions, I'll hand it back to the speakers. Okay. Thank you very much for questions. Thank you for listening, and goodbye from the Skol and Company. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.