Hello. Hello, and good afternoon. On behalf of HC Andersen Capital, I would like to welcome you to this Q3 2023 earnings call together with SP Group. My name is Philip Coombes, and with me today I have CEO of SP Group, Frank Gad, who will take us through the Q3 results and the latest developments. Before moving on, I'd like to quickly introduce you to the platform. Some of you may be new to the platform, but you can see that you can ask questions in the text box below the image, and you can post your name in the box on the left-hand side. But I'd like to say a big welcome to Frank and pass over to him now.
Thank you very much, and thank you for listening in. In the third quarter, we had a decline in our sales of 4%. We had hoped for growth, and we have also seen the interest rates go up in Europe as well as in the rest of the world, and that has increased our total financial cost. On the good sides, we have sold a lot of our guide wires. We have sold more ventilation equipment. We have sold more medical packaging. We have sold more industrial standard components.
We have increased our cash flow from operation, and we have increased our equity, and we have reduced our net interest-bearing debt, and we will try to go through that in the presentation. There's no changes in the group management. The four of us has been here together since the spring of 2020.
We celebrated 50 years anniversary last year. We have sold our services and products in 97 countries last year. We have subsidiaries in 12 countries at three continents, so we are in North America, in Europe, and in Asia, and we are 2,485 committed colleagues. We make surface solution and plastic solutions, and we use a number of different technologies, and we sell our products globally. This is a picture of our guidewire. That is one of our own products we distribute and sell globally. We have seen the top line decline with 2.7% in the first nine months of this year. Sales of own products were down with 16% to DKK 455 million.
EBITDA was down 8.6% to DKK 324 million, and the EBITDA margin declined 1.1 to 16.6%. Profit before tax ended up at DKK 139 million. Earnings per share was at 8.9. We reduced the net interest-bearing debt by almost DKK 70 million, and we have paid dividends, and we have purchased our own shares also in this period, and we've increased our equity with DKK 125 million since the beginning of the year. We have introduced this new test kit from Meditec.
We sell that to hospitals, but also to the food industry, and we have got approvals now to sell it in the European market. Over the last two years, we have grown on the top line. We have improved our EBITDA, and we have improved our profit before tax. We've got a healthier balance sheet, so we've become a bigger company, a more profitable company, with a stronger balance sheet. If you look at the last almost 13 years, then you can see our top line development here, and the top line has been growing with 10% in average from 2010 to 2022, and then in this year, we have seen a decline of 2.7%.
We've also seen negative growth in a few quarters earlier, and I am convinced that we soon will get back on track and get growth back to the business again. We had planned for growth, and we've got a little bit of worse product mix this year than we had last year. So, our EBITDA has declined due to the lower top line and a little bit lower margin, and you can see the margin, decline here. It is, however, still at a historical, high level.
Frank, if I could jump in here. We've seen a bit of a fluctuation in the EBITDA margins throughout this year, down a little in Q2 and then up a little in Q3. Could you put some words on what this fluctuation is driven by, and if this is seasonal and yeah, a little bit more on this?
It is mainly due to product mix, and what has changed in the product mix, we'll look at the next slides here, but a major contributor to the change here is that we have sold less of our private label brands this year than we did, last year, and you'll see that a few slides later. That is the main driver. There's not much seasonality in it. Earnings before tax is down due to the lower EBITDA, but also much higher financial cost this year compared to last year, so it is down with 31%. Net interest-bearing debt to EBITDA is 2.2, and that is more or less at level with what it was last year.
So, despite EBITDA has declined, we've also been able to reduce the net interest-bearing debt, and therefore, this ratio is more or less the same. Here is the third quarter results and the first nine months results, compared to last year, and we have been through the profit and loss statement. You can then see the equity is up with 19%, compared to last year, and also up during the year. And the cash flow from operation is DKK 102 million in the third quarter, up from DKK 73 million, and the cash flow in the first nine months is DKK 288 million, up from DKK 210 million. And the cash flow in the first nine months of this year is actually more than it was all of last year, as you can see on the right side.
Then we have reduced our investments. We're still investing in the future, so we're buying new equipment, new technology, but at a slower pace than last year. So, we have this year invested DKK 120 million instead of DKK 198 million in the first nine months. We have reduced our net interest-bearing debt since the beginning of this year. In the fourth quarter of last year, we made an acquisition. That was why we had a big jump from end of September to end of December last year. Then you can see we increased the equity, and therefore the equity ratio has gone up from 42% last year to now 47%.
Coming back to your question, Philip, here you can see that is our revenue from our own brands, and we have actually seen a good growth in the sales of animal housing ventilation, guidewires, of medical packaging, and industrial standard components. However, the sales of ergonomic matting is down this year from the very high level we have seen in 2021 and 2022, but we are still at a higher speed in this business than we were back in 2019 and in 2020. And it is something we have seen before, that if you have a headwind in the economy, then companies do not invest in ergonomic solutions and working environment short term, but they will start to do that again after a few quarters.
And, if you look detailed into the figures, then you can see that the decline in the first and the second quarter was, around 50%, in the third quarter was only 25%. And I'm pretty sure that we soon will be back to growth again also in that area. But all of the proprietary products are down to approximately 23% of sales, where the last year were around 28, and that has an impact on the EBITDA margin.
Frank, I have a question here. A big theme in the economy recently is that companies have been destocking, and they maybe built up too much working capital during the corona years and after COVID-19 in 2022, and that's then been coming down in recent years. How much do you see this being an absolute fall in demand, and how much do you think is this sort of destocking theme?
I think the destocking, in combination with the FX headwind, we have seen the dollar at a lower level this year in DKK compared to the first nine months of last year. We have calculated that we are missing approximately DKK 18 million on the top line from the change in FX mix. The combination of FX mix and destocking, I think, makes up more than the decline in the top line. Why are people destocking? Well, they were buying a lot when they could not get what they wanted. We all remember they could not get the chips and the electronic goods, and they were afraid they could not get the plastic.
We have all the time been able to supply people what they want, but apparently they all have been buying too much plastic for a while, and now the interest rates have gone up, so now they want to destock and convert to cash, and bring the cash back to the bank manager, so he will reduce the interest charges. We see that going on, I think, across the world in more or less all industries. Some of our customers are also selling less this year than they did last year because of the change in the global economy. If you look at the European economy, then I think we are close to zero in growth this year, but the world economy is still growing.
Our challenge is that 75% of our business is in Europe, and here things are not growing. The good thing is we have not lost any customers. I know that we have not seen any of our customers going bankrupt or going out of business. And to the contrary, we've got new customers on board, and therefore, I'm convinced that we soon will see growth coming back again.
Frank, we just got a question from the audience here about, do you expect this destocking cycle to continue into 2024, or how do you view this?
I think- l et's go to the next slide, then I can elaborate a little bit on it. Because if you take the CleanTech industry, as is the first picture here, then we have seen a 10% growth in the first nine months, but we actually saw accelerating growth to 17% in the third quarter. Here we saw destocking taking place during 2022. Many of our customers in this industry were destocking last year, and it is my impression now that they have this behind them, and they are growing again. If you take the next one, that is the healthcare revenue. Here we saw destocking in the first six months, but actually zero growth in the third quarter. And here, I think most of them have also destocking behind them, at least at the end of this year.
There are other industries where things has actually been moving pretty good until now, but they might have a slowdown. I think it is different from industry to industry, and overall, I think that we are very close to where they have stopped the destocking if you look at our total portfolio. I do not expect that destocking will be a big issue next year.
That's great.
And if you look at the figures we basically had just elaborated on, then you have them all here. The healthcare industry here, we have seen growth in the third quarter, but a decline in two first quarters. The clean tech, we saw decline last year, slow growth in the first two quarters, high growth in the third quarter. Food related, slowdown in the first two quarters, lower slowdown in the third quarter. Automotive, growth in the first two quarters, but now they are slowing down. And all demanding industries, it's a mix of everything, and here we have seen some of the companies really doing destocking now, and some of them are also very affected by the world economy.
If you are selling equipment to container harbors, and the number of containers moving in the world are going down, or at least not going into pace people had expected, then they're probably not buy more equipment. So this business has slowed down, and there are a number of, you can say, stories that you connect together. And at the moment, that is not moving very fast. At the bottom line here, you see our own brands, we saw a big decline in the automatic business in the first two quarters, lower decline in the third, and I hope soon that there will be back to growth. And the good thing is that we have growth in all the other areas, where we had very negative growth during the COVID period.
And if you put it all together, then 32% of our business is Healthc are, now 31% is Cleantech, 13% is Food-r elated, 6% is Automotive, and all other demanding industries are 18% a nd customer concentration has gone down so that we have no customers who account for 10% of the sales. 10 largest accounts for 48%, and 20 largest accounts for 57%. We have a good footprint. We have 15% of our sales in North and South America, 10% in Asia, and 75% in Europe. Europe is, at the moment, the place where I think things are moving with a slow speed.
We have this year consolidated two factories in Shanghai area, in Suzhou, into one factory. So we have moved the molding into the same facility as Tinby has been in for a few years. So now we have only two sites in China, the one in Shenzhen, that is the one up in the north, and then the two factories that have moved together in Suzhou, and they did that here in the middle of the year. And we have handed back the key to the old premises, so we have reduced our cost base in China, and still have room to grow and give good service to our customers. In North America, we have two plants, and we have decided to make a third plant.
So we have this year acquired land, and we have started building a new factory in Atlanta, where we will do injection molding, and the factory will hopefully be ready for operation in the second half of next year. Then we have still all of our factories in Europe, and we have our sales services in Canada, in Norway, and in the Netherlands.
We have had to adjust on each factory the workforce, so it is adjusted toward the new reality on the demand side, and that means we are in total approximately 121 people less than we were at the beginning of the year. We have not made any acquisitions this year. We made a number of acquisitions in previous years, but this year we have not been able to find a match between what the sellers want and what we feel we can afford to pay. So, we have then decided to keep the money and reduce the debt.
Frank, just on the acquisitions, is this because sellers are still not adjusting to the higher interest rate environment? Or could you add a little flavor to what's going on?
That is our experience, that sellers are not. They still believe that the world is as it was a year ago, and it is not. You can also see that on the share price on SP Group.
Perfect.
But I still, we still have acquisition on our agenda, and we are still drinking coffee, and we still want to talk to people, and I hope also we can do acquisitions going forward. We would also like to continue to pay dividends, and hopefully also reduce our debt. A t the moment, when we cannot do acquisitions, well, then we are reducing debt. We have not launched new share buyback programs. We launched one in August of 2022, and that was running to April 2023, and then we completed that after we had spent the money, and we have launched a new one. All the companies we have acquired during the last eight years, we are very happy with.
They fit in, and, they're all contributing to make a stronger SP Group, and we have been able to increase our EBITDA margin year- by- year since we started this acquisition trail. This slide here, you can see we have consolidated in China, so we're one factory less, now than in the beginning of the year. T hen we've started to build a new factory in Atlanta, in the U.S., so we will, in 2024, I think, have the same number of factories that now, and then we are still open for acquisitions, and then you can put them on top of this. So basically, the slide shows that we've become a much more international company, over the years. So we have now more than 70% of our sales outside Denmark.
We have 70% of our colleagues outside Denmark, and we have 17 factories around the world, outside Denmark, and then we still have a number of factories in Denmark. The share price has declined, and we also declined more than the market, and I'm really sorry for this. However, if you look at the long picture or the bigger picture, then we have still outperformed the market since 2016, and especially since 2010. But I'm aware that we cannot pay our bills with that history right now, so we're working hard to change this picture. We have got a lot of new shareholders during the year.
So actually, we have, we are now 4,175 shareholders, and that is up 27% during the year, and I think it is the highest growth rate we have ever seen in a year. We have three large shareholders, that is ATP, and Lannebo, and ODIN, and Lannebo has increased its shareholding this year. The same as Schur Finance, and I have, and the management team has. T hen you can see the remaining, and we all reflect that, of course, when the insiders has been buying shares, and then the other shareholders own the remaining 51%. So roughly, 1/3 of the shares are owned by management, 1/3 by international investors, and 1/3 of Danish domestic.
The market condition, well, all our customers, they, they are focusing on getting costs down, and a good way of getting costs down is to make better and cheaper products, and we help the customer to do that. So we get rid of wood, and metal, and glass, and substitute to plastic and composite. I think we have never been as busy as we are right now, looking at new projects where people want to convert metal to plastic. That is a good leading indicator for getting more business in the next years. We continue to manufacture globally with a powerful team, and provide equipment, and provide technology.
This year we have opened a new big factory in Poland with 12,000 square meters, and we have bought the land and started to build a new similar factory in the U.S. to continue to build our global presence.
Frank?
Yes.
I had a question there, where you mentioned that some potential-
Mm-hmm
... new customers are looking at how they can reduce their component costs and maybe switching from metal or glass to plastic. My question was, are you already seeing this? It sounds like you are, but also, do you then expect this trend to accelerate or continue at similar speed to what you're seeing now?
We, I think it will accelerate, because, in good times, companies are busy keeping the business running. In bad times, they have to stop off and rethink what they are doing, and that gives incentive to make new innovations, and substitute wood, and metal, and glass with plastic. So actually, when the economy is slowing down, then this part of the business is accelerating b ut you cannot see that in our top line now, you can see that in our top line in a year or two, because it takes time before people has actually made up their mind, build a new mold, and get it running.
That was going to be my follow-up question, is roughly, what's the timing from agreeing on a project to scale production?
That depends from industry to industry. If you're in the medical business, then it takes quite a while. In other industries, they're much faster.
Perfect.
Then there is a customer focus on the core business and outsource plastic production to specialists, and here we try to help the customer and take over his in-house production, use our skills and our scale to give him a better solution, where he has lower CapEx, lower OpEx, better quality, better delivery on time. Customers want fewer and better suppliers, so it is our ambition to become the preferred supplier. So when they cut the number of suppliers down, and that is also a big trend at the moment, that customers want to have fewer suppliers, but then they choose the best. There, it's important for us that we are one of the ones they continue to work with, and the only way we can assure that, is that we give the customer an excellent service each time, he's exposed to us.
T hen there's a growing and aging population, the climate and the scarcity of resources. We have a strong exposure to world global industries, healthcare, clean tech, and the food industry, because we are more people on the planet. We'll be more in the years to come. We want to have a longer life, and a better life, and less pain. We want to have a green transition, renewable energy, and we want to have better food, and keep the food, so we don't waste as much a nd in all these industries and all these solutions, you need advanced plastic and surface solutions.
T he picture here shows Vattenfall's large offshore windmill park in the Baltic Sea, that was taken into operation in 2021 or 2022, and at the time when they built it, it was the largest offshore windmill farm in the world a nd you can see the windmills are pretty big compared to the service boat, and we've taken the picture in here, because we believe that there's a strong demand in Europe and also in the U.S. to build a lot of offshore windmills and also onshore windmills in the years to come, to get rid of Putin's gas, but also to get rid of coal.
And I am sorry that it takes such a long time to get the permits up and running, but our customers in this industry can really help us change the dynamics in the green transition. We see a global economy that is fragile, and we see no growth in Europe on the overall level. The good thing is that inflation is coming down again, but growth is also down. We are still at high interest rate, and that is slowing down things even more. We invent a lot of new products, and the customers does the same, and I'm sure this will lead to new exciting solutions that contribute to growth and earnings in the coming quarters.
And we have maintained our outlook and still expect a top line that is somewhere between 0% and 2% bigger than last year. EBITDA margin between 16% and 19% of sales, and then earnings before tax between 7% and 10% of sales. And you all remember that we reduced the top line and the bottom line expectation after the six months result. We still... Yes?
Just a question on the outlook. If we look into the numbers, we can see that we'd need quite a re-acceleration into Q4 to maybe reach some of the top end of the guidance ranges. And, maybe a bit more on what you expect in Q4 and whether we can expect some of this re-acceleration?
We have not said that we will be in the top end or the low end of the guidance. We have just said we will be within the guidance, and we still believe that we will, in Q4, can get within the guidance on the top line. We are, even with a flat environment, in the guidance on EBITDA and on EBT margin. W hat we expect of the fourth quarter is that the growth, but we also know that December is a challenging month, because if our customers are busy, then they want to have a lot of stuff delivered before Christmas.
If they're not busy, then they start to think about making a very nice, balance sheet by the end, and that means they will not buy anything from us in December. I think again here, our customers are in different part of the cycle. So, but overall, we believe that we will have growth on the top line also in the fourth quarter.
That's really helpful clarification.
We want to have sustainability in everything we do. So we want to have an ambition of having zero environmental impact from the operations, and we want to run all our factories on renewable energy a nd out of the electricity we use at the moment, more than 80% is renewable energy, and we have dedicated a number of pages in our annual report to report on our progress in all these areas. We believe that we, with our team and our technologies, support all the sustainable development goals. We do not produce plastic bags, plastic cutlery, plastic straws, disposable plastic bottles or caps. And we are actually very proud that The Ocean Cleanup has decided to use some of our products to keep this net floating, where they can catch plastic islands in the Pacific Ocean.
Plastic has to be recycled and reused, and here's a good example of recycled plastic, where we made a fence out of old consumer waste. Here we have substituted wood with plastic waste. Here we have substituted the plywood from tropical rainforest with plastic waste in a container for one of the world's leading shipping companies. Here we have made a pallet case in 100% recycled material that is one of our own products developed by Nycopac in Sweden. Here you can see we have substituted a plywood pallet. TPI has sold a lot of these wind shields. They're sitting on chicken houses and on pig houses around the world, and they are made in 90% recycled plastic, and then we have 10% new plastic on top.
SP Moulding has together with Muuto made this designer chair, where there's 25% wood fibers in and 75% plastic, so each chair is unique a nd the latest version, the plastic is actually also recycled plastic. Nycopac has also developed this sleeve system that is collapsible, so it does not take so much space when you return the empty boxes. It can be reused, and reused, and reused, and then it can be recycled, and some of the components are actually also made in recycled plastic. And to make a long story short, we believe we are part of the solution because modern society needs our advanced products and solutions in the clean tech industry to make insulation, generate renewable energy, reduce energy consumption, make clean air, clean water, and meters that measure how much the people are using.
In the healthcare business, diagnostic equipment, white goods, ergonomical solutions, medical packaging, and drug delivery devices. And in the food industry, all the way from the farm to the table, and in automotive to make lighter and more energy-efficient vehicles, where plastic replace metal. That was the presentation and an update on what we are doing and how we have come through the third quarter, and where we want to go.
Well, I'll take over and say thank you, Frank, for a great presentation. We have a question from the audience here, so I'll just go back to this slide, and it's about the higher interest rate environment that we find ourselves in now. Has that changed your thinking towards what is your optimal capital structure? The question asks if M&A is still your first priority, and maybe if you don't find an acquisition this year, are you looking to accelerate the repayment of debt?
Yes.
Short and sweet. Okay. Great, but maybe you could add a little more detail.
Yeah, I can add a little. W e've not been successful in, in buying any companies this year. We have generated a lot of cash, as you can see, and I hope also we'll generate cash in the fourth quarter, and we will use that to invest in the future, and to reduce debt, a nd then we paid DKK 36 million in dividend to our shareholders, and we've been net buying own shares for around DKK 11 million. But that was something we launched back in August of 2022, before the interest rates started to go sky high, a nd when I say sky high, then they are high compared to what we've seen in the last decade, but they are not high compared to what it was in the past. I'm also aware of that.
But we have tried to keep discipline on our acquisition side and reduce debt, and we have not launched any share buyback programs. I agree with the question, the underlying text of the question, that it would be good to reduce debt before we start to buy shares back.
Okay, well, I think that's answered the question well. I'd quite like to take us forward to the slide-
But I really hope that we can continue to pay a handsome dividend to the shareholders, because they deserve that.
Perfect. If I move forward to the slide on the factories. We've seen the consolidation in China. After that, is that something you're also considering in other markets, maybe in Europe, where your factories are more dispersed?
Well, we are always looking at that. What happened in China was that the City Council called us and said that they wanted to build a shopping mall where we had our factory. So if we want to take our equipment with us, then it would be good if we were out by end of June, otherwise they would just put a bulldozer on it. So it was an incentive that there was not much room for negotiation, let's put it that way. We were prepared for that, and therefore, we have been able to move the whole factory during the first three months of this year, and we were out by the end of June. It's good because it gives us a lower cost base going forward.
But as you might remember, it has been difficult to do a lot of movements in China during the last few years due to COVID, where China has been in a lockdown situation. We, we have not planned to close other factories or consolidate other factories, short term, but we are, of course, still, looking very much on what we can, do more in Poland, Slovakia, and Latvia. And, we have been, growing this year in Slovakia. We have also hired more people in Slovakia. In Poland, we've got 2,000 new square meters we need to fill up, and we have not done that yet, but I hope we can do that during 2024 and 2025.
That, that's great. You just touched on it with reference to China, and it's a big question in the market right now about China demand. How are you seeing demand in the Chinese market? Is it coming back to the levels that you expect, or how do you see it moving forward?
No, actually, I think we're doing pretty good in China. I've just been to China. I've actually been there twice this year, but I've just been there a couple of weeks ago, and our team there is doing a great job, and we're growing the business and making money.
Okay, perfect. We also discussed the new factory in the U.S., and I have a question about what percentage of the capacity when it's up and running has already been contracted by customers? To what extent will you have to source the customers once the factory is up and running?
Well, this is a little bit the question about the egg and the chicken, because when we come and say, "Dear customer, we want to produce for you in the U.S.," then he says, "Show me the factory." And we cannot show him the factory before we got any orders. So here we are leaning out and actually building a factory without having firm orders. But we have customers who have said to us that they want to be customers when we are online. And then we have tried to reduce our total exposure by finding a local company in Atlanta who has rented half of the space for the first few years. That's a logistics company. So you can say, well, we plan in the long run to have our finished goods there.
He will rent that pay rent in the beginning, and then we can maneuver in the other part of the business until we have filled it up, and then we can rent back from him if we do that before the first five years, but he has space to keep our balance. So, it is a big risk we are taking on to invest in a new factory. But we have a strong customer base, and they all have a strong market position in the U.S., and they have plans for growth. So. And that's why we have decided to go for it. But I do not expect that we make a profit in the first couple of years.
I think that's a great explanation. I don't see any more questions.
But I'm convinced that on a 10-year horizon or a 20-year horizon, it is the right thing to do. And then you might ask, why have you not just bought an existing factory? And that's because we have not been able to find a good candidate. I f you look back at what has happened in North America over the last many years, then the big injection molders, they have been going with the big pharmaceutical companies, or the big car plants. But companies of our size and with a customer portfolio like ours, a lot of that production has been outsourced to Asia. I think—and then it has been difficult to invest at home when the customers were moving to China, Vietnam, Malaysia, Indonesia, and Taiwan.
I think a lot of that production now wants to return to the U.S., and they need to find a good home, and we hope we can provide them with a good home, where we can produce for them.
That's great. I guess it makes very good sense with higher costs of energy in Europe compared to the U.S. and the nearshoring trend, which we've heard a lot about in the market. I don't see any more questions from the audience, and I think we've covered most of the questions I had. So unless there's any last-minute questions, I'd like to say a big thank you to Frank and to all of the listeners.
Thank you for joining us.
Thank you.