Earnings Call: Q1 2019

May 9, 2019

Quarterly report

Ladies and gentlemen, welcome to the SKO and Company Q1 Interim Report twenty '19. Today, I'm pleased to present CEO, Jens Peirch Sanderson. 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. Jens, please begin. Thank you very much, and also welcome to our Q1 conference call. Overall, Skor and Company saw a good start of the year with positive growth. You should also bear in mind that Q1 is our smallest quarter due to strong seasonality in some of our companies. The revenue overall was up by 21% to 4,700,000,000.0 and we saw a mix of both organic growth and also effects from our CCS acquisition. EBITDA increased 28% to DKK $4.00 1,000,000. It was up 12% if we exclude for IFRS 16 effect. Profit from our associated companies increased due to a very good development from our fish farming operations in North Australia and Chile. We have a strong focus on our net working capital, and it's ongoing, will continue into 2019, and it's on top of the agenda of management in all our businesses. Cash flow from operations improved to 100,000,000. And normally, we have a rather weak cash flow in Q1, so we are very satisfied with that development. The guidance for 2019 will be maintained both on a group level and also on individual businesses. Our revenue is expected to grow 10% to around 20,000,000,000. EBITDA will be in a range of DKK 1,800,000,000.0 to DKK 1,975,000,000.000. We have to bear in mind also here that we expect to see a positive effect from IFRS 16 of around 200,000,000. So that was the overall introduction. Let me look a little bit into each of our company and starting with BioMar. If we look at Biomark, the revenue was up 13% to $2,100,000,000 Volume was up 12% to around 250,000 tons for the quarter. Also here, we saw a very good development in all three divisions. We have also had positive climate conditions in the quarter. EBITDA in Biomar was up from $80,000,000 to 132,000,000 And again, we experienced a positive effect from IFRS 16, but underlying our EBITDA increased 22%. In fact, BioMar is the company in our portfolio where we see the largest effect from IFRS 16. Generally, we had a very good margin management and also positive sales of what we call functional FEED. Our Zalman division, which is the biggest division, delivered strong results, and Norway performed better than expected. A few highlights from Q1. I could say a very good progress on the new Tasmanian factory we are building and also on the capacity expansion going on in our Danish factory. We got full ownership of our joint venture in Chile, where we acquired the remaining 50% from AquaChile and gives us an additional 60,000 tons capacity, which we hopefully can start utilizing second half of this year. Guidance for 2019 is, as mentioned, maintained. We see an EBITDA in the range from DKK $820,000,000 to DKK $890,000,000, a gain here, plus IFRS 16 effect of around DKK 130,000,000 on EBITDA. As usual, we have big contract negotiations going on in Q2 and during the summer period. However, we have seen a good start of the year, and it gives a good comfort for our full year outlook. And also, some of the contract negotiations has already come out on a good turn. From BioMar to FiberTex Personal Care, where we saw revenue increase of 9% to $590,000,000, mainly driven by higher raw material prices. Volume was flat, specifically due to development in Asia, where we see lack of volume from our big branded customers in China. EBITDA was increased from 83,000,000 to $99,000,000 We had a positive effect from raw materials, but also good development in sales of what we call value added products or products with softer in softer materials. In Q1, we completed our new U. S. Print facility, and it's now ready for commercial production and will come into production on full steam during Q2. Guidance for 2019 maintained. EBITDA is expected in a range of $320,000,000 to €340,000,000 As I mentioned, a very good and promising start of the year. However, we will and expect to see negative effect from raw materials in the coming months, but the guidance will be maintained. The next fiber text business, fiber text nonwovens. We saw an increase of 11% to $450,000,000. Especially here, we saw good volume development in Europe as we also expected. And then we had full effect from our acquisition in Brazil last year in the quarter. Our EBITDA, however, was down from $45,000,000 to $39,000,000 We still see some negative effect from raw materials positions from 2018, but it's we are nearly through these raw materials. In fact, we also saw our South African operation that has been struggling over the years in a slightly better performance. We acquired a new site in U. S, Greenville, because we have strong expectation to The U. S. Market in future. This acquisition gave us expected negative effect in the quarter, and we also had costs for the acquisition. So all in all, that had an effect on our EBITDA. In Q1, our new factory in U. S. In Greenville has been integrated. Of course, there's a lot of work going on with that. We have, as mentioned also earlier, a strategic review ongoing in Fibrotection and Boons with the aim of finding ways to improve profit and return of invested capital. And that's the main aim and not because we consider to sell or potentially exit the FibroTex number ones. But we will come back to the strategic review after H2 when we have finalized it. 2019 guidance maintained, but more likely in the low end than in the high end. EBITDA is in the range of €165,000,000 to €185,000,000 And we have, as mentioned, start up costs from our new U. S. Factory in this guidance. TPV had a revenue of $718,000,000, a big increase, but it's caused full effect from our acquisition of Swiss CCS, which we have integrated into GPV. EBITDA was up from €25,000,000 to €46,000,000 We have seen a satisfactory development. The old GPV or the GPV we had before the acquisition delivered €23,000,000 Out of the 46,000,000 in EBITDA, we have, in fact, experienced a huge currency effect from batch the type batch of around 10,000,000 negative in the quarter. Also, have seen the integration costs and purchase price allocations of negative effect of around DKK 10,000,000. The integration between the two companies is running very well. We are running one company, one name, which has been received very positive in the markets. We have a lot of new customers in the pipeline, and we have already experienced the first cross selling opportunities. Our Mexico operation, which sits from below GPV, and as you know, we have been struggling with the greenfield startup, shows good progress but will also, as we expected, be loss making in 2019, but on a much better tone than we saw before. 2019 guidance will be maintained, EBITDA in the range from DKK 190,000,000 to DKK $210,000,000. Here in these figures, we see one off restructuring, integration and purchase price allocation cost of around 50,000,000. From TPB to HydraSpecma, a very positive story in Q1. Revenue increased 11% to DKK $556,000,000, mainly driven by sales to the wind turbine segment and also the segment we call construction equipment. EBITDA increased from 49,000,000 to $60,000,000 We've seen very high efficiency, strong margin management. Our China operations turned around and are in both profitable and in a very good development. We see, however, still long lead times and increasing prices on the main components, and it has affected our EBITDA as well as a very, very weak Swedish kronor. A few highlights from Q1. We have opened a new facility in Stargardt in Poland, 7,500 square meter brand new facility, will improve efficiency in the coming years, see a strong backlog in the main segments, and we have also started and are preparing production of big hydraulic units in China. Our guidance for 2019 will be maintained, positive on it, EBITDA in the range from DKK $210,000,000 to DKK $230,000,000. Hydrospector, they have a very strong focus on reducing their net working capital, but our global footprint and difficult lead times on components increases our inventories in general. Our newest company in the family or in our portfolio, Paul Automotive, experienced a revenue decline, 5% down to DKK230 million. We have, since the beginning of Q4 twenty eighteen, experienced rather soft European markets, and it continued also in Q1, which was expected. We have kept our market share as we see a stable customer base, but still face rather soft demand. EBITDA was down from €38,000,000 to €33,000,000 And of course, effect from lower sales and lower volume, but also a more cautious regulation on our costs. So we have set aside more on core regulations in 2019 than we did in 2018. We have in the quarter done a lot on streamlining. We are streamlining the company. We have we are restructuring our facility in Belgium. We have strong cost and contingency plans, and we are scaling down on FTEs in Poland to withstand the lower volume, expect still to increase over the year. And we have started a new facility for production of third calibers in leading Poland. Guidance is maintained in spite of soft markets. EBITDA in the range of 140,000,000 to €150,000,000 And as mentioned, we expect markets to normalize moreover in the coming months. Short wrap up, we have what I call a positive outlook in our largest businesses and a softer outlook in two of the smaller businesses. But still, we expect to grow in 2019. Revenue around $20,000,000 Guidance is unchanged. EBITDA in the range of 1,815,000,000.000 to 1,975,000,000.000 Strong focus on profitability, and we continue to focus profit over volume in all of our businesses. Also, just to finalize, I would like to mention that we are at the end of what we call a major investment program that has been going on in all our companies over the last two years. Strong focus on utilizing capacity. We have you will see cash flow effect as investment cash flow effect from the remaining investment programs, which we decided back in 2017. And we will have strong efforts on reducing net working capital and drive operational cash flow also in 2019. So with these remarks, I would like to open up for questions. Thank you. Our first question comes from the line of Jonas Guldborg from Danske Bank. Please go ahead. Jonas. This is Jonas. First of all, if you could talk a little bit about this strong focus you have on working capital. What especially are you doing? And maybe give some try and talk about how you're doing it. And maybe also where you think you will end for the year. Then on nonbones, you have this negative effect from raw material prices on your earnings. Maybe you said it and I didn't hear it, are you able to give a number on this negative effect on EBIT? And then the last thing is on this core regulation. You said you put more site in 2019. Could you just try and explain what this means and how much it is? Yes. Thank you very much, Jonas. Thank you for your questions. First, on the working capital. We are running what we call a corporate program on working capital, strong focus in all our companies. And then we are running a program with four of our companies initiated from corporate where we have some outsiders to help doing a lot of analysis, etcetera. So in fact, a strong program running. And of course, we expect net working capital to reduce to be reduced over the year. I cannot put a 100% exact figure on expectations so far. But we initiated this program, and it's new, and it will drive net working capital down definitely. If we if you look into the nonwovens, we still have had some raw material effects from 2018 where the raw materials were high. We buy raw materials from India, China and around, and we have been having fixed stocks, but still a lot of on stocks that we have been used here in 2019, I would say, around DKK 5,000,000, 6,000,000 effect on that. If we look into the core regulations, it's we normally, every month, set aside something on this regulation. It's a rather complex structure. But last year, we experienced that we have been maybe not conservative enough in the start of the year. As you remember, we had to do a negative regulation at the end of the year. So this year, we have started more, I would say, much more conservative. And in fact, it's around 6,000,000 more in the quarter than last year. And these DKK 6,000,000 are then impacting EBIT negatively? They are impacting EBIT negatively. No, but maybe it can maybe come back. But it's more also if you compare 2018 to 2019, then we have a much more, you could say, cautious, prudent view on these regulations because we had to do something last year. So around €6,000,000 more in regulations. Okay. And then the net working capital program you're running, that would have effect from this year? Yes, yes. It is already having effect, and it will have effect from this year, but not full effect. We are it's a big program we are running and then starting have started like this. Okay. Thank you very much. Thank you, Jochen. And the next question comes from the line of Laurit Kirchhoff from ABG. Please go ahead. Thank you very much and thank you for the presentation. My first question is when you gave your initial guidance for Q4, you essentially had two months of visibility for this quarter and yet Biomar has delivered 13.5% growth and for HUGOSPSMA 11.3% growth. Could you just guide us through what you're expecting for the rest of the year on the top line? Because it seems that you're guiding for almost low or even negative growth for those two businesses for the rest of the year with the current guidance. You could say so, but we also see we have had a good volume development in Biomar in Q1. And this volume development, especially in Norway and Chile, was bigger than we expect. Now we are going into the big contracts negotiations. And as you may remember, we lost or declined a big contract to Leroy Last year, a full effect from the April 1, meaning all the volume from Lehroy is gone now. We had maybe a little more volume in Q1 from Lehroy as we than expected. And also biological conditions in Norway was much better than expected. In fact, biomass and volume grew 11. Then looking into hydropower segment, we have also had a very, very strong Q1 because we had we delivered more into the wind turbine industry than expected. And we expect the wind turbine our deliveries to that to be a little slower in Q2. You already mentioned on Beomar that you had a few negotiations or in that was coming out on good terms. Can you put a few highlights on that? More saying that we still see a lot of competition, but we have gained a few contracts, and we've also lost a few. Again, with the mindset that we are looking at profitability and not on volume. Of course, we need some volume to run our business, but we have our profitability as aim number one. But we have had positive experiences from some of these negotiations, but that's the way I'm going to go. That's very clear. Just one last question for me, and perhaps I'll come back. On GPV, you mentioned a few large customers experienced reduced business activity during the quarter. Is this for GPV? Or is it for CCS? And also, how is the acquisition doing in terms of what you're guiding at the moment? In fact, it was for GPV, a little bit for CCS because CCS are having some customers doing business or in the semiconductor business, and they have been pretty low. So order intake first quarter was not disappointing, but lower than expected. And we've seen order intake taking up again. That's what we can say on that. You had one question more, I forgot that integration. Integration, sorry. The integration has so far really been successful. As I said also, one company, one name. We started out First Day with the same name, a lot of things going on. And we have started to see to reaping the first low hanging fruits. A lot of things that's going on. Of course, there's still a long way to go, but so far, very positive. And it's two cultures that get together, and normally, you will see more complications than we have been seeing so far. That's clear. And on Mexico is on GPB. What's the adverse FX impact there for this quarter? It's same as last year. And the next question comes from the line of Claus Elmer from Nordea. Thank you. Yes, also a few questions from my side. The first is about the 2019 guidance. Jens, you mentioned in the report and I think also in this presentation that the guidance is for several divisions in the higher end of the range now. Why didn't you lift the low end of group guidance? That will be the first question. Yes. In fact, it's a good question, Klaus, but I think we already have we still feel that we have this stress in our guidance, and we feel comfortable with that. And we also feel that we are much more on solid ground when we get into second half because we have these contract negotiations and so on going on. And we also know that over these months, it's very, very important what's happening. So that's the reason behind it. And then we see some disturbances on currency and things and a little soft demand somewhere. That's the reason. Okay. And you're still expecting a needing winning some new contracts in Norway during the contracts negotiations during the summer months, right? We expect to win, you could say, either a few new contracts or increase volume in some of the contracts we are already in. So it's a dual game, you could say. Sometimes it's easier to gain more volume in a contract with a customer you are already supplying because of your quality, your logistics setup and so on. So it's a mix of both. Okay. And then just finally, maybe you could update us on pricing development and excluding the raw material impact within Biomar in the different markets. Is price or contribution margin going up, down or flattish compared to what we saw maybe in Q1 and Q4 last year? I would say it's a big question, but I would say it's very broad, I would say. But if you look at Norway, contribution margins margin has been down in Q1. But then it's a mix of product. There's a lot of things you can do on your value added products, etcetera, etcetera. But they are down. But looking in general, well, Chile, Scotland, I would say it's around the same level. Ecuador may be a little bit down because mixed product mix, etcetera. So all over, maybe a little bit down in salmon and stable in the other ones, something around that, but nothing to really worry on. Okay. And then just as a final question. Okay. The situation in China, have you seen are you starting to penetrate some of these local clients or customers? And at what price? We have not gained any new customers yet in China. We have a task force and a strategic task force operating in China now, and I think we expect to gain the first customer. Maybe we've got one or two very small customers. I'm not fully aware of that, but nothing significant. But we expect from the second half to start selling into China and also because we need to decide on what how to distribute, should we set up a special distribution center, etcetera, etcetera. So it's a rather big story going on, but we want to penetrate China in a different way. And as there are no further questions, I'll hand back to you, Jens. So thank you very much for listening, and also thank you for the questions. So goodbye from August. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.