Earnings Call: Q2 2019

Aug 15, 2019

Hello, and welcome to The Discount Company First Half twenty nineteen Interim Report Call. Today, I'm pleased to present CEO, Jens Berg Sorensen. Mr. Sorensen, please begin. Thank you very much, and also a warm welcome to everyone from here to the Q2 presentation for the Skolon Company. We saw a Skolon Company high activity level also in Q2 despite softer markets around us. Our revenue was up by 10% to close to DKK 5,000,000,000. And the increase was mainly coming from GPB's acquisition of CCS, meaning acquisitive growth. But in general, we can say, looking out in the market, we have good and long term strong market positions in, in fact, in all our companies. Our EBITDA increased 5% to $419,000,000. We have also to mention here that we saw a positive effect from IFRS 16 of 51,000,000. In this EBITDA figure also, we had some one off costs and PPA regulations, which materialized above the PPA and which, of course, had a negative effect of around 25,000,000. Positive was cash flow from operations improved to 128,000,000. We have, as some of you may remember, a net working capital focus ongoing in the company, but we also have seen that the balance of customer mix and geography has changed a little bit over the quarter. Cash flow net working capital is on top of the management agenda in all businesses, and we expect good things to come in the second half. Our return on invested capital was reduced to 12.4%. And here, especially, we saw an effect on our acquisitions and a very strong investments program where invested capital increased immediately, but it takes time for profit to show. Guidance for 2019 is slightly up. Our revenue is now expected to grow to 20,500,000,000.0. And our EBITDA will now be seen or expected in the range of DKK 1,850,000,000.00 to DKK 1,985,000,000.000. And we have a good feeling for that. We also have to mention that in this guidance, there will be a positive effect from IFRS of around DKK 200,000,000. From a general view to drilling down to each of our companies, I will start with Biomac one, where we saw a flat revenue of DKK 2,500,000,000.0 volume at twenty eighteen-eleven, which was expected. We had 285,000 tonnes. We saw lower volumes in Norway, which also was expected because we didn't gain the last year oil contract, and we started a very soft in Q2. We have seen good development in all other biomass sectors. EBITDA was up from 174,000,000 to 191,000,000 also here. Positive effect from IFRS, flat underlying development. However, we also have to mention here that last year, we had income from our company, Norway Lettsy, of DKK 13,000,000, which we did see in Q2. Settlement division, in fact, delivered quite strong results. Norway, much better than expected, but as expected, below last year. And as I mentioned from the start of it, it was due to the loss of our new contract. During Q2, we had we got 100% control of our Chilean joint venture, which resulted in 29,000,000 a accounting gain on equity divestments. We reorganized normally the entire setup and structure in Norway that's showing us a very good development. Margins have improved, and I think we have seen a much better customer balance also on the long term in Norway. We have good progress on capacity investments. We are building new factories in Tasmania. And of course, that will significantly impact CapEx in 2019 with about DKK 200,000,000. Guidance for Biomark has increased. We expect now a turnover of around DKK 10,800,000,000.0. EBITDA has increased received now in the range from EUR $870,000,000 to EUR $930,000,000. We have to mention also here that there's an IFRS 16 effect, unchanged from the last guidance, of around EUR 130,000,000. Also, everyone has to bear in mind that second half is always very important for Biomar, but we feel that we stand on a good and balanced contract situation for the coming half year for Biomark. Turning to Fibrofix Personal Care. Revenue here was up 4% to $5.00 €6,000,000 We saw a flat volume due to continued slow demand in Asia. This demand specific goes on. The global brands are suffering in China, meaning they are not requiring material, say, amount of material from Fibrotox Personal Care. EBITDA was flat at EUR 72,000,000, a small negative effect from raw materials, but that has been compensated by a positive effect from ForEx. We have had in the quarter start up costs of our new print facility of around 4,000,000. Still see quite fierce competition in Europe, which we expect will continue. But we set that off by increasing our sales of what we call value added products, software products with a lot of specialty functions. In joint Q2, we have been seeing our new U. S. Print facility positive development. First, commercial printing is out of the factory. It's been going quite well. And also, we have kept our focus on developing a niche and high value product specifically for the European market. Guidance for 2019 will be maintained. Turnover, around €2,300,000,000 EBITDA expected in the range of $320,000,000 to €340,000,000 as also first guidance we gave. From FibroTex Personal Care to FibroTex Nonwovens. Here, we saw revenue increase 6% to €443,000,000 We have seen very good and positive development in our U. S. Operation, and it's a good sign because we are investing a lot in The U. S. Market. Europe, we continue to see effect from slightly softer demand. EBITDA was down quite a lot from €52,000,000 to 38,000,000 Here, we saw in the quarter still some negative effect from raw materials positions taken in 2018, but we are out of these contracts now. Unfortunately, Unfortunately, we also had some import duties just coming up in Brazil that hit our quarter with EUR 2,000,000. And then we had some one off costs relating to a strategic review and of our setup in India of 7,000,000 So if you look at EBITDA in general, there's been a lot of unexpected and normal things going on in that quarter. Looking at the highlights from the quarter, we have our acquisition of our new U. S. Factory. The integration is going quite well. I think it's operating even better than expected. We have also done a strategic review, as mentioned earlier, on fiber protection and bonus. This review has been finalized, and it was started up to find a way to see if we could significantly improve profit and return on invested capital in Fibroducts and Boeing, something we have had on our agenda for quite a while. The review found interesting things and also gave us a belief on a long term profitable way for five gs and rooms. A strong road map has been built, nine strategic initiatives launched. Among that, pruning of segments and product mix. But overall, also, we see ways to find long term growth for this company. We are going to put much more efforts in growing our auto filtration and high value segments and also growing more in what we call our group geographies. U. S. Has consistently is operating with a new bid margin of plus 10%. We have a plan for adjustment of capacity and cost reductions, and we expect to see effects from 2020 and on that. So we have now really put on a lot of strong strategic initiatives, and we really expect that this will change the long term outlook for this company. Looking at 2019, we lowered our guidance, especially because of weak first half and also with the mentioned one off costs. And due to the first half, we lowered EBITDA, and it's now in the range of EUR 150,000,000 to EUR 175,000,000, meaning also that we maintain sales outlook for second half. Looking at TPV. We saw revenue of $714,000,000 for the quarter. It doesn't make any sense to try to look at what happened last year. Also said GPD is a totally different company. Now with the idea of the decision of CCS, the Swiss EMS company and CCS came with around DKK 400,000,000 of the above mentioned revenue. We have seen softer demand from some specific segments but also encouraging order intake from other segments. EBITDA was up from EUR 24,000,000 last year to EUR 42,000,000, which we think is satisfactory with the ongoing integration. However, also, we have to mention that what we call the old TPV, they delivered EUR 21,000,000 of out of these EUR 42,000,000. And there, we saw in the quarter quite a negative effect from a bad currency to U. S. Negative of around DKK 5,000,000. We also had integration costs and PPA of around DKK 10,000,000, affecting the EBITDA. Integration is running very well. We have now focused on market and customers. Next step will be factory and supply chain footprint, where a lot of analysis are going on. We still have a very attractive project and customer pipeline. I think also important in Q2 is that our Mexican operation continued to show good progress, delivering better month by month, still loss giving but delivering better than we planned. 2019 guidance has maintained EBITDA in the range of 190,000,000 to $210,000,000. And here, we also have to mention that we have one off restructuring integration and PPA cost of around EUR 50,000,000 included in these guidance. From there to Hydrostegma, where we have seen a very, very good development revenue, as expected, $565,000,000, mainly driven by strong sentiment and momentum in the wind turbine segment but also in what we call the moving materials segment. EBITDA increased 33% to EUR 64,000,000. Here, positive effect from IFRS and profit from sales of real estate of both in NIM. We also now see productivity and efficiency at a very high level in Hyderabad. They are stretching their capabilities because of high sales. We are we have started up a new 3,000 square meter logistics center in Finland. Our new Corus factory shows good development and very interesting also now the production of hydraulic units for wind turbines in China is in very good progress. 2019 guidance increased. Turnover expected around 2,100,000,000 EBITDA now in the range of $220,000,000 to €240,000,000 We have also to say that we have strong focus on reducing our net working capital. However, global footprint and global trends has increased inventories in the following period. Last company in the portfolio and used company owned, Boro Automotive revenue was unfortunately 14% down to €232,000,000 All over Europe, we have seen soft markets the last six to eight months, continued in Q2, especially the OEMOES segment has softened most. It's general trends that we have seen all over. And in fact, we have kept market shares and not lost any customers during these months. EBITDA down from EUR 41,000,000 to EUR 21,000,000, which, of course, is satisfactory. But we also have to see here that, of course, there's a clear effect from lower volume. But we have also taken some cost restructuring, one off costs, closing down a facility in Belgium, one off costs of €7,000,000 not included in our expectations. We have been much more cautious on the product relation and sales bonuses. So comparing 2018 to 2019, we are much more cautious on a lot of things. And as you know, we have learned the company that I know the company better. I know how the season and the year is growing in that company. Q2 highlights, we have been streamlining and restructuring our Belgium setup. As I said, 28, 30 FTEs have been up and out. We have strong cost and contingency plans, scaling down on FTEs in Poland, started up new Lubyne facility for production of gold calibers to improve efficiency. Overall, meaning that a slow and weak first half does that we need to lower our guidance. That is now in the range of DKK 110,000,000 to 120,000,000. But we also have to say that we expect market to normalize over the coming months. I think we have to say also achieving the first signs on that, that things are going to recover. And also, we expect that we will not have, say, one off costs in the second half as we saw last year. One concern is, of course, Brexit because we have facilities and operations in U. K, and we can speculate around what happens if it's a hard Brexit, etcetera. It's difficult for us. We have taken a lot of measures to be as prepared as possible for that. So all in all, what I would call a mixed outlook for second half because of market uncertainty, global economy, etcetera, but we also think we have a lot of good opportunities, positive outlook in what we call our largest businesses and soft outlook in the two smaller business. However, we have seen improvements, as I said, in all. Revenue, we expect around EUR 20,500,000,000.0. We are now working a lot also on how to prepare the companies for 2020. Guidance slightly increased EBITDA in the range of EUR 1,835,000,000.000 to EUR 1,985,000,000.000. I think also here, we have to say that, again, that we are at the end of a major investment program that we have been running for the last two point five, three years. We are now focused on profitably utilizing our capacity and also strongly focus on reducing our working capital and drive hard on operational cash flow. Of course, we will always be investing. We are a large company, and we always we need to continue to invest in maintenance and uplift, etcetera. So with this remark, I would like to open up the questions. Thank could you please press 0 and then one on your phone keypad now in order to enter the queue? And then after I announce you, just ask that question. And if you find that question has been answered before its return to speak, just press We go to the line of Jonas Guldborg at Danske Bank. Please go ahead, Jonas. Your line is now open. Yes. Hi, Jonas here. A couple of questions. First of all, on BU, Mark. Could you put some words on how the contract negotiations went? So what's the feedback from the market of you kind of approaching them more from a value perspective than from a volume perspective? Then on non loans and the strategic review, you say in your statement that this could lead to lower revenue in the future. Could you share with us how big a share of revenue is at risk in here? And also, how long a period we should see this transition happen? And then finally, a question on bol. You said that you showed on the slide that EBITDA is down EUR 20,000,000 in the quarter and EUR 7,000,000 is from the Belgian restructuring. How much is then coming from this more cautious view on the coal regulations? Yes. Thank you very much. Just thank you, Jonas. Thank you for the questions. First, let me start on Biomar and saying looking at I think, in general, also, have to say, of course, Norway is very important for us, But also, the other segments and divisions in BioMar, they have been doing quite well. And Norway, they have performed in a way we planned. But we also said that we are going from volume to value. We are going to change our customer base. And the contract renegotiations have been, of course, tough but also very positive. Have been perceived open. We have changed our customer base, better balance. And I think our value propositions, etcetera, has been well perceived in the market. Quality it's package of quality, recipes, value added products, distribution, etcetera. And that has been received very well in the market. Of course, there's a way to go, and we will have lower volume in Norway than we had last year. But I think we are very quietly increasing volume and share in Norway and also adding better value. Looking at if I go to your question on fiber, text, non booming, of course, you're saying we improved some segments. Will that lead to lower volume and general relation in these segments? But we are also saying that we are putting much more efforts into added value segments into the Automotive business, etcetera. We have just acquired this company in The U. S. So I think overall, our or not think overall is the ambition still to grow but to grow on other segments, more value added segments. And we have this 10 or nine Must Win Battles plan. It will take two to three years before we are at the end of them, but we will see, hopefully, already strong effects from 2020 on that. If we look at fall, then we could say Q2, as I said, 7,000,000 from closing down in Belgium, but also on course, sales bonuses, etcetera, DKK 10,000,000. So comparing the quarter, you could say DKK 15,000,000 to 20,000,000 compared to last year. And then, of course, effect of lower top line also means something. Sure. Okay. Thank you very much. Thank you very much. We now go to the line of Laurent Kergaard of ABG. Please go ahead. Your line is now open. Thank you very much and good afternoon. Also three questions from me. First of all, on the BioMarket, take us through what type of contracts that you have won in Norway, Chile, UK, sort of what can we expect in regards to volume versus value here? Where did it go well more specifically? And where can you perhaps be getting the better earnings here in those sort of three jurisdictions? Second question on FIFA Tech's Personal Care. We still see softening as you write in Asia in regards to the larger players. Imagine Procter and Gamble and Kimberly Clark may be on the radar here. In your annual report, you write about that you're refocusing your sales force or sales activities towards perhaps some of the other players in the markets. Just a few words on that. And then the last question is mostly with the car industry, both in terms of nonwovens but also in Borg. What sort of triggers are you seeing? In your initial statement, you saw that you see sort of more positive indicators in the market. What specifically are you looking at here? Yes. Thank you very much, Lars, for the questions. Of course, Biomite, it's a big question to answer because it's U. K, Chile and Norway. And we generally do not comment on all contracts and what kind of customers we do have. Of course, everyone knows that we have this very large U. Contract in Norway, which we keep in gaining last and again this year. But in Norway, in general, we have we are normally, there will be two suppliers at one customer. We have changed sometimes from being having 30% now going to 70%, etcetera. So some of the customers there, we have changed the volume balance, meaning that we are the biggest supplier now. We have been coming in to new customers in all the smaller players. So we have really worked hard on this getting a much better customer balance and not being dependent on one very large customer. And also, working more on customers where they could see that the profile we are having with our value added products, our distribution network, etcetera, the way they want to have us. So in Norway, you could say it's something and a strategy that has been planned for should go for maybe the next years and started well this year. So volume lower in Norway than last year, but they have more profitable volumes. So far, so good. U. K, very good contract situation. We have some contracts running for some years there. So that has been very good. And in Chile, we took over more capacity because we acquired 50% of the remaining 50% from our joint venture. And in Chile, we are more or less sure now. We have had very good and successful contract negotiations, maybe also based on that we finally have capacity enough to approach some of the attractive customers in Chile. If you look at FibroTec Personal Care, you could say Asia has been soft. And you're right, it is the big customer. It's P and D, KC, but also some of the Japanese big players. And we have been looking into a big been doing a big study in China. And we are setting up a small sales facility in China and looking on how to get a more broader customer base in China. It's just started, So let's see how that develops, but we're putting resources there. Looking at the development in the car industry, you could say it's twofold because fiber takes no longer in this one situation where supply materials for new cars mainly to Tier one suppliers. It could be to a seat supplier or to a supplier doing something specific delivering directly to the car industry. Of course, do we see a soft demand in the car industry in general? We are, of course, cautious on that because of what's going on. But we are we have won new contracts for new car models, and that's where we are positive. Looking at both, it's a totally different thing because that's parts for old cars. And if the sale of new cars will be lower, then people will be running their older cars much longer and then they will need new spare parts and repair. And so it could be, in fact, maybe a positive long term situation for us. And just two follow ups, if I may. On BioMar here, Do you have any suggestions how you can guide the market in the second half of this year and the first half of next year in regards to sort of a gross margin perspective on these new contracts? And then also a follow-up there on Borg. Shouldn't it be less of a correlation between new builds and new cars going down and the restoring of old cars? You could say, of course, I would say our experience from a totally different business perspective, we have been into an original staircase for the acquisition. And so we always saw when things were a little bit difficult, the new sales saw, I would say, we had good times. And I think you could say that when there are so few new cars, those the old cars will still be running, and they will be needing spare parts and repair and so on. So that's why we see that maybe that could be good for us, which we think so. I think guiding on CN for Q4, H2 and H1 in 2019 and 2020. We do not do that. But of course, in general, second half will always be better because of volume and scaling. Yeah. Thank you very much, guys. We now go to Klaus Armer at Nordea. Please go ahead. Your line is open. Thank you. Yeah. Also a few questions from my side, and, yes, I will take them one by one. The first question goes to the whole macro situation. And I know your cyclicality might not be as large as we see for other capital goods stocks. But have you taken any steps to mitigate if things should deteriorate from here? That would be the first question. Yes. Think we have just before the summer holiday, we had all our CEOs together where we were looking into what if things goes as we could fear. We have and that we discussed, of course, a lot. Every company has contingency plans if things really go bad, but we have already said we will be low on investments. We have the capacity we should have. We think we can run our capacity even tighter. We have been looking into our cost base. We are looking into innovation. And also, as I said, we have a strong networking capital program going on. So I think we are really cautious on this, and we have tried to be in a situation like that before. And some of the experience, of course, we can use again, but it's a new world. But we have been discussing it a lot. And especially on the investment and capacity side, we have been very cautious. Okay. And is it fair to conclude that so far, it's actually only within the automotive industry you have seen some softness, really softness in the demand picture? Yes. It's yes, more or less that. I mentioned also on the DVD that we have in fact, segments we have seen a softening. It could be some of the companies supplying the semiconductor industry. We've seen some other industries softening the demand, but then we've seen an increase in some other industries in PPV. So you're right, trying to say yes, PPV mixed. But if you look at a company like Biomar, one should really be cautious when I'm saying it, but maybe they are not having seen the same macro outlook because it's a totally different business, supplying feed for fish and food, etcetera. Okay. And then you mentioned working capital, and I saw that your working capital drag was much better than last year, but I guess you're still not in as you know, it could be better, I guess. So how's going with your initiatives to to push all divisions to to improve net working capital? And since I know this is your personal KPI, Thank you very much for asking, Klaus, and reminding me. No, we have just had a big seminar going on on that. And the problem is, of course, it's something that takes a long time. Maybe I can have a sometimes you also need a lot of points. If things soften up a little bit, supplies will be shorter, etcetera, etcetera, so we can reduce inventories. But we have been working a lot on it, and there's strong awareness on it all over. One interesting thing is, in fact, the mix of geography. Big volume in the whole, in BioMar, the terms of payments, very, very short because farmers out there have strong cash flow and so on. But if you remove that volume and business, etcetera, to Equitable to China, etcetera, then it's a totally different volume. That changed your debt to base, etcetera. So there's a lot of things in that order. It's not an excuse, but it's very complicated. And we are working hard on it, and we expect to see reductions on that and also to see a quite strong cash flow. This year? This year, also, yes. Yes. Okay. And then just the final question. Hydro and the exposure to the wind sector, how do you see your pricing environment? Are you able to take advantage of a very strong demand for your customers? No. We are I think we are able to take advantage of they want strong, reliable long term suppliers. Maybe you can soften a little bit on terms and so on, but always, you need to be competitive. And if you are too eager on pricing and so on, they won't forget that for the next time. So of course, there are small things you can work on and so on, but it's not going to be. Okay. And there's no really negative impact from all the trade war implications? So far, not really. Of course, we have moved production of some hydraulic units to China to supply vessels and other turbine manufacturers in The U. S. We have the old manufacturing setup in The U. K. We have Buy Online U. K. So of course, it's something we're thinking on a little bit, but it's difficult to see what happens. We now go to the line of Lars Heindorff at SEB. Just one question for my part, and that's regarding Mandovens. I think on previous conference calls and presentations, you have been talking a little bit about the market situation and mentioning that it would have been nice with some sort of consolidation or maybe that some of your competitors withdraw because of a very basically unsatisfaction competitive situation. What is it that has changed now since you believe that you can actually turn around mangroves by doing internal measures only and only rely on that? And has something changed in the market that will support that? Or how should we view that? I think, in general, of course, we have said the competitive situation is tough. But I think what we have said in the other fiberglass business, that's where we see the really tough competitive situation, especially in Europe. But still here, we have tough competition, but we have changed the segments we are going to work in. We are moving out of the low margin segments over time. We have had invested a lot into facilities where we can produce more value added products in North, and we have seen strong demand from after some of them, particularly in nano, special products for the automotive industry, for wind turbines, etcetera. So we see a strong move that way. And now we have capacity, we have products, we have innovation in place. And then also, we have been working a lot on factory footprint and capacity, etcetera. So it's a plan involving all aspects of the new chain. Okay. And when you say that you expect that this will be if I understand correctly, will it be completed next year? Or will we start to see the impact over the next year? I think you'll see the impact hopefully already when we are working on the plan now. So things will start and materialize, but we will see impact in 2020. And it's a plan running over two to three years because there's a lot of factory footprint, building facilities, structures, etcetera, around this. So it's a plan that we work on, and also, we need very strong measures in that plan also that we'll be taking. Would it be advisable for us to put in some sort of restructuring cost in relation to such closures? That's the first that's the sort of follow-up. And then the second one is do you actually believe that landlords will be able to deliver return on invested capital, is in line with group and some of your targets? Yes. That's to address the last question and without being too specific. First target of this because we need to be realistic is we want to move Finland. We have a plan for that into the range of 11%, which are invested capital, and there we have a plan. And next step is pushing it towards 15%, but we have to see first that this 11%, 12% materializes. We have not considered any restructuring costs so far. There might be some, but it's not significant. Okay. All right. Thank you. Thank you very much, Lars. Okay. Before going on to the next question, which is the line of Ulrik Bach of SEB. So Ulrik, over to you. Your line is now open. Yes. Thank you. Two questions from my side, and I'll take them one by one. My first question is regarding BioMar, where it is mentioned in the quarterly report that BioMar has focused on greater efficiency and more flexible collaborations with customers during the first six months. And firstly, can you please elaborate a bit on that? And secondly, will this have an impact on costs or earnings during the 2019? Yes. Thank you, Roy. This is specifically co specific on Norway. And as I also mentioned, we have reached our structure of Norway quite a lot, meaning we set up new team in some areas, new ways of approaching the market, even new ways of working with our recipe optimization and feeding machines, etcetera. So it's a lot of things that has been going on. And then also the way we approach the customers, maybe midsized, smaller customers demand something else than a very large system like LoRa, etcetera. So that's what we mean by this being more flexible, even more increasing productivity by also utilizing a broader recipe spectrum. Okay. And yes, my second question is regarding raw materials. In the report, it is mentioned that the guidance for several of the portfolio companies is highly dependent on these raw material prices. And so which raw materials are you most exposed to, if you can name a few or the main ones? PP poly polyester poly polyester, sorry, to especially to fiber to express personal care, where I think it's 100% raw material, so meaning 100,000 tonnes of that at least. Then we are in polyester in schools. And then, of course, we have a lot of raw materials, actually proteins in general to BioMite, meaning fish proteins, vegetable proteins, it's a fish meal, it's a of niche products, so especially proteins and oils. And not to forget electronic components that we use in GPV. I think that's the main raw material. And we have a raw material sourcing of plus DKK 10,000,000,000 in the group. In general, of course, it's very, very important for us. And we've got a strong setup on the engineering. Okay. Thank you. No further questions from my side. Okay. And there are no further questions on this call. So can I please pass it back to you for any closing comments at this stage? Thank you very much, and thank you for questions, and thank you for listening. So this will finalize our Q2 'nineteen call. Thank you. This now concludes the call. So thank you all very much for attending, and you can now disconnect your lines.