Aktieselskabet Schouw & Co. (SCHO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Schouw & Co. Full Year Report 2019. Today, I am pleased to present CEO, Jens Bjerg Sørensen. [Operator Instructions] I will now hand you over to Jens Bjerg Sørensen. Please begin.

Thank you and good morning to everyone. Welcome to presentation of our 2019 annual report. 2019 was a good and strong year for Schouw & Co, and we are very satisfied with our results. We experienced challenging market conditions but also benefited from our strong positions. It was a year where we nearly finalized a major investment program. Our revenue was up 15% to almost DKK 21 billion. We had a positive full year effect from our recent acquisition of the Swiss EMS company, CCS. BioMar continued their strong development also in 2019. EBITDA increased 24% to DKK 1.95 billion or 10% like-for-like if we exclude our IFRS 16 from that. The effect from IFRS 16 was DKK 208 million out of this EBITDA. We had a good development in 4 out of our 6 portfolio companies. Cash flow from our operations improved from around DKK 800 million to DKK 1.4 billion. We saw a solid effect from our ongoing focus on net working capital. But there's still room for further development. We had CapEx investments of DKK 774 million throughout the year and acquisitions of around DKK 260 million in 2019. Our guidance for 2020 is still expecting growth, however, lower level than last year. We expect revenue to grow 3% to DKK 21.6 billion, and our EBITDA is now guided in the range of DKK 1.935 million to DKK 2.105 million. We expect CapEx in the area of around DKK 550 million to DKK 600 million in 2020. We have not factored any major corona effect or estimate into our guidance at this time. Turning on to BioMar. I would say, BioMar had a strong finish to 2019. The revenue was up 8% to DKK 11.2 billion. We saw a 3% increase in volume to 1.2 million tonnes. Especially, we had a very good development in our Salmon segment, and we also saw effect from full ownership of our joint venture in Chile. EBITDA increased from DKK 713 million to nearly DKK 966 million. In BioMar, we had a positive effect from IFRS 16 of DKK 128 million. Still, we are very satisfied with the EBITDA development. Some of the development came from strong profitability in Norway. Norway had been taking back position after losing a large customer in 2018. We also saw and experienced increasing sales of our innovative and functional feed. 2019 was, again, a very busy year for BioMar. We implemented a new market strategy in Norway, and as I said, we gained more momentum and improved profitability significantly. We have new factories built in both China and Tasmania, and they are, of course, ready to start production in 2020. We added new capacity in Denmark and in Ecuador, and we gained 100% ownership of our joint venture in Chile that increased production capacity in Chile with almost 50,000 tonnes. We've also been investigating a potential IPO of our stake in Salmones Austral, the farming company in Chile. BioMar Chile were unfortunately accused by FNE for having participated in a concerted practices in Chile. We do not agree, but we cannot comment any further on an ongoing case. It should also be said, we have not made any provisions for any future potential fine. Guidance for 2020 shows that the solid progress is expected to continue. Revenue of around DKK 12 billion; EBITDA in the range from DKK 1 billion to DKK 1.060 billion. We have some corona effect -- seen a small corona effect in BioMar due to the shrimp exports from Ecuador to China has been affected. And of course, we expect for some lower feed sales in Ecuador. Our associated companies expects profit after tax in the level of around DKK 60 million. From BioMar to Fibertex Personal Care, where we saw a flat revenue in 2019 of around DKK 2.2 billion. The competition continues to be fierce in Europe and also in Asia. Asia remains challenging. We saw lower volume in Malaysia, lower-than-expected, due to the situation on the big global brands in China. The EBITDA increased from DKK 315 million to DKK 352 million. Here, we saw a positive effect from raw materials and currency of around DKK 50 million compared to 2018. We started up a new print facility in U.S., which had a negative impact of around DKK 12 million on EBITDA. Then we had a positive effect from sales of added value in Fibertex Personal Care. In 2019, we had strong focus on starting up our print facility in U.S., in North Carolina, where we have now one printing line in operation. We also had continued focus on building niche products and being innovative and we have streamlining our structure ongoing. The guidance for 2019 shows revenue in the -- of around DKK 2.1 billion. EBITDA is expected in the range of DKK 280 million to EUR 310 million. Looking back at '18 and '19, it's around the same area if we exclude for impact from ForEx and from raw materials. We also see that competition continues to be tough due to excess capacity in the main markets. However, we have experienced some short-term positive demand due to the corona situation to -- meaning that we have seen more volume coming to our factory in Malaysia. Fibertex Nonwovens increased the revenue 8% to DKK 1.7 billion but, in general, it was not a satisfactory year for Fibertex Nonwovens. The growth has mainly been driven by a new facility in U.S., and I have to say that our U.S. operation, in general, had a very solid year. We experienced some soft demand from our automotive segment in Q4. EBITDA decreased from DKK 160 million to DKK 141 million. First part of the year, we were challenged by very high raw material prices. But now we see a positive effect from that. We had, due to a strategic review, some one-off costs in Fibertex Nonwovens. We have restructured our operations in India and South Africa with an effect of DKK 13 million on EBITDA. We had a one-off cost on acquisition, M&A and also on our strategic review program going on. In 2019, we expect to see -- in 2019, yes, we had a strategic review going on, and it outlined our strategic direction. We have had very good integration of our new spunlacing facility in U.S., We decided to downscale our operation in South Africa and move line #2 to U.S. where we are out of capacity and expect to see positive impact from them in future. We have also started production, industrial scale production of nano products and advanced filtration medias. Outlook for 2020 is revenue of about DKK 1.75 million -- billion, sorry. And EBITDA in the range from DKK 165 million DKK EUR 185 million. We will see an uplift in U.S. We have a strong position now in U.S., and we think also we will see a positive effect from a more focused European operation. We have, due to the corona situation, short term -- experienced strong demand of materials to face masks. So for the time being, we are running full capacity at our nano lines. Turning on to GPV. Revenue increased to DKK 2.85 billion. It was a totally different GPV we saw in 2019. We had full effect from the acquisition of Swiss CCS. However, we also experienced that few larger customers showed slower demand, especially in the semiconductor industry in Swiss. But we have gained a very solid position in the European EMS market. EBITDA increased to DKK 196 million. We had a negative -- a very negative impact from currency from the Thai baht of around DKK 17 million. And, of course, also some costs from integrating 2 companies in the year, the size of around DKK 11 million. We are still struggling with profitability in our Mexico operation due to lack of top line. The operation there is now running efficiently, but the EBITDA effect is around DKK 29 million -- negative of DKK 29 million. In 2019, as I mentioned, we have had a very successful integration of CCS. We can now say we have one company, one name, and the name is now GPV. We have extended our factory facilities in Thailand to secure capacity and improve efficiency. Our Mexico operation shows operational progress, but as I mentioned, lacks top line. We have been working on establishing a long-term factory footprint strategy and decided on that. Looking at the 2020. Revenue is expected to be flat, DKK 2.8 billion. EBITDA in the range of DKK 210 million to DKK 240 million. We see some uncertainties on demand from several large industrial customers among other things due to the corona situation. HydraSpecma increased the revenue 6% to DKK 2.1 billion especially the wind segment were the key driver for growth. We had strong sales to the wind segment in 2019. In Q4, we experienced soft demand from a large customer from the vehicle segment, especially in our Swedish operations. EBITDA increased in 2019 from DKK 175 million to DKK 215 million. In HydraSpecma, we had positive IFRS 16 impact of around DKK 30 million. HydraSpecma have had strong focus on cost out projects at all levels and also on production efficiency at all the facilities. 2019 had a strong focus on setting up future supply chain. We have been ramping up production in China and our Chinese operations were very profitable in 2019. We have relocated our Borg setup to a new and efficient 7,000 square meter facility. We have implemented or opened new warehouse and logistics setup in Finland, and we decided to build new facility in Sweden outside Gothenburg. Outlook for 2020. With a revenue of around DKK 2 billion, EBITDA in the range of DKK 200 million to DKK 220 million. And also here, we see some uncertainties on demand from several large industrial customers also due to corona situation. Borg Automotive had a lower turnover in 2019 with DKK 918 million in top line. We experienced soft demand throughout the year. However, it started to pick up again in the last months of the year, but this soft demand started already Q4 in 2018 and something we have seen all over in the market, customers, competitors, et cetera. We were confirmed that we had a strong and leading market position. EBITDA declined from DKK 131 million to DKK 110 million. Here, we really saw effect from lower volume and, of course, efficiency and things with relations on costs and so on is affected here. We restructured our Belgian setup in the OEM and R&D, and also took some one-off costs on that. We also activated some R&D costs in 2018, which we didn't do in 2019 due to new structure. Also in 2019, we had a full focus on strengthening structure and build internally. We have been building a strong pipeline in most markets. Interest in new customers in the pipeline. We have restructured, as I mentioned, our R&D and our OEM setup, and we have adjusted our general cost base and implemented IT structures throughout the company. Guidance for 2020. We expect growth. Revenue of around DKK 975 million and EBITDA in the range from DKK 110 million to DKK 120 million. Maybe we could see some positive short-term impact from the corona situation as goods from China may not be flowing into Europe at the same pace as in 2019. Wrapping everything up and outlook for 2020. In general, we see continued challenging markets, but also interesting opportunities. We expect to grow in 2020, despite this softer demand. And we really think that our strong positions and innovative products will be key drivers for us in the coming years. Revenue expected around DKK 21.6 billion. We have capacity to grow and also want to defend our market shares. EBITDA is now expected in the range of DKK 1.935 billion to DKK 1.2 billion. And we have a really strong focus on profitability in all companies. We do not forget our focus on net working capital in 2020, we will still be prudent on that, and there is still something to do that. So with these closing remarks, I would like to open up for questions.

[Operator Instructions] And our first question comes from the line of Jonas Guldborg from Danske Bank.

Jens and Kasper, a few questions from my side. First of all, talking about net working capital. You reduced net working capital to sales from around 19% in '18 to around 18% in '19, still a high level. So I guess, we should expect further improvement in 2020. So confirmation on that would be my first question. Then secondly, you have previously flagged some Brexit risk in -- especially in Borg and in BioMar. Could you just elaborate a bit on how you view the world right now, given the Brexit and how it is implemented into your guidance? And then lastly, on Nonwovens, Fibertex Nonwovens. Just remind me of the total one-offs in 2019?

Thank you Jonas, and thank you for your questions. So first one on net working capital. Yes, I think it has been my personal focus area in '19 and say, we have not won the battle yet. But we are -- we expect also to reduce in '20. Of course, if we see activity level increasing and so on, we have to adjust to that. But we have strong focus on that and expect to reduce, and we have some areas where we still -- there's still room to improve on. Looking at Brexit, you could say, if we look at BioMar, we are not that concerned because most of what's going on in U.K. is internally. There was some discussions on giving raw materials in, but as long as there's no deal, et cetera, then it will first be into 2020, if something happens. We haven't factored anything into that. Goes a little bit the same with Borg, where we have been nervous on what about a hard -- if a hard Brexit, et cetera, came. Now we expect no real impact in 2020. But of course, we have to consider and look at what happens throughout the year when the negotiations are ongoing. If we turn to Fibertex Nonwovens, we have had one-offs of around DKK 20 million in 2019.

Our next question comes from the line of Claus Almer from Nordea.

Yes. Also a few questions from my side, and will take them one by one. The first question goes to BioMar. Jens, you mentioned that you expect negative volume in Ecuador in 2020. Shouldn't that have a negative EBIT margin impact? That will be the first question.

Yes. As -- my point is that in the first months, we have seen some lost volume on feeding because they didn't sell any shrimps to China. But China has opened up again, and maybe I didn't remark that 100%. But China has opened up again and Ecuador is now exporting shrimps back to China. So we will lose some volume, but we have factored that into the guidance we are giving now. It's because we know what we have seen so far, and we don't expect big losses in the coming months on volume.

Okay. And then coming back to the big thing, net working capital. And congratulations with the first important steps in the right direction. But looking at BioMar, net working capital is up by, I think, 55% versus end of '18. What is -- is that disconsolidation of your previously partly owned Chilean farm? Or is it -- what's going on in that area?

That's one, but it doesn't explain everything. There's multiple of factors going on. One thing is, we are building our new facility in Tasmania. And Tasmania, they are supplied from U.K., and we are ramping up volume, and we have had a lot of volume from U.K., on the sea and down to Tasmania. And we also built up security stocks in Tasmania. So it means quite a lot. Then we have changed the sales, more volume in geographical areas with longer credit terms for customers. Norway, where we used to have more volume with a very, very short payment terms, et cetera. So it's a mix of things, but we expect net working capital in BioMar really to fall in 2020.

As the percentage or absolute?

Absolutely, but also as a percentage because one of the key drivers is really building up in Tasmania, has -- it's really building up a lot, yes.

So these longer credit terms, that -- is that a temporary issue? And why do we really offer that to farmers who are making a lot of money these days?

Yes. That's -- it's -- of course, it's something we are on every day, but it's part of the way you compete in the market. It's priced at payment terms. It's -- whatever goes. So if you move more sales to the Mediterranean area, to South America, and so on, they are normally longer payment terms than in the -- around the North Sea area. And of course, it's something we are addressing a lot and working on. So yes.

And there's no change in the -- sure. And there's no change in your use of supply chain financing, so still around this DKK 500 million, as I recall.

There is no change in that. So we have -- yes.

Okay. And then just my final question. Share buyback, given the strong cash flow and hopefully, the same in 2020, shouldn't we expect a program to be announced?

As I -- of course, it's one of the tools we have in the toolbox, and we discussed it, of course, on a running basis. We have not decided anything on that. But I'm not excluding anything on that. But it's not in the making for the time being.

So does that mean there's an M&A potential around the corner?

We are always looking at -- after interesting M&A opportunities. And of course, also, we think maybe with -- if the world a little bit nervous, et cetera, maybe it could open up opportunities. So of course, that's also part of our considerations, yes.

Our next question comes from the line of Laurits Kjaergaard from ABG.

Jens and Kasper. First of all, on the CapEx program which you announced for 2020, DKK 550 million to DKK 600 million versus DKK 774 million in 2019, could you give some flavor on the seasonality of this? And what's the biggest impacts for 2020 that we should look out for?

Yes. I think biggest impact will be in GPV, where we are investing and rebuilding in Sri Lanka, doing something in Thailand, et cetera, then we'll see impact of our new facility in HydraSpecma in Gothenburg, also just outside the Gothenburg. So in HydraSpecma and GPV. And then we are finalizing Tasmania, the factory in Tasmania but it's not a big one. So a lot of the biggest impacts are coming on normal operational CapEx, you could say.

Okay. And as far as I understood, a lot of it would be coming in the first 2 quarters and 3 quarters of 2020. I believe that was mentioned last year.

Yes. I mean, it is normal. As at the end of the year, normally, you have finalized your running CapEx, et cetera. So I think you could say, yes, the first half, maybe the first 3 quarters of the year, yes.

Okay. And just to get a sense of that. So basically, you will be completing a lot of these larger CapEx throughout the first half and then, I guess, over the summer, you'll be looking at your both negotiations with BioMar, so get a better idea of your capital structure. Could we perhaps expect the potential buyback that I believe Jonas was talking about? Or even an extraordinary dividend to be paid during the summer? Or is that totally ruled out?

I think that extraordinary dividend is totally ruled out but you never know, of course, what happens and what the Board decides on. But I think it's not in our thinking. Share buyback is something we have done occasionally and are looking into. And of course, we need to have a balanced capital structure but depending again on what happens in the market, interesting opportunities knocking at the door, et cetera. So -- and of course, we also know we cannot sit too long on cash, et cetera. So -- but an extraordinary dividend, that's not in our toolbox for the time being.

That's very clear. And just lastly, on HydraSpecma, here looking at the slowdown in vehicles, but probably a good result in wind, which you mentioned. Could you give some flavor into what's the mix here between vehicle and wind slowdown or any flavor there?

Yes. The wind has really been strong in '19. And it is our largest segment, that's wind. Then -- with around DKK 500 million or something in internal. So it's a very important segment for us. But also vehicle, as a construction equipment, off-road equipment, et cetera, is a strong segment for us, we -- which came in with the acquisition of Specma. So it is mainly big Swedish companies there.

So vehicle is how much if wind is DKK 0.5 billion?

I think maybe DKK 400 million or something like that, yes.

And would you give us some clearance of what it was last year?

No. It's around -- maybe around DKK 400 million last year, yes. Something like that.

[Operator Instructions] Our next question comes from the line of Ulrik Bak from SEB.

Jens, also a few questions from my side. As I see it, you performed very strongly in BioMar in Q4 and has continued a very wide revenue cost per kilo spread. And I was just wondering because we saw a hike in that in Q3 and now it has continued also in Q4. If this is a sustainable level also throughout 2020?

Yes, we think so. As we have worked a lot on becoming more efficient, also when you get volume and scale and so on, you have the opportunity to drive down costs. So yes, I think it's part of that.

And any particular geographical split of this improvement? Is it primarily Norway where you've done a lot of initiatives? Or is it elsewhere?

It's more -- it's in general, but of course, also Norway, they have really been doing well on a lot of things, but -- and the cost split is, of course, also depending on what kind of products are you selling when you sell more on the functional feed side, higher prices, et cetera. Then, of course, you will see a better cost structure, et cetera. But it's across the company, you could say, but, of course, Norway has contributed a lot also. Yes.

Okay. And then the corona impact on shrimp feed. Why is it only shrimp feed that is being affected and not Salmon?

It's because it's so direct in Ecuador, where we have this operation that 60% of the export of shrimps out of Ecuador goes directly to China. So it has a huge impact. And the grow-out period of shrimps is low -- short, and meaning that there's a lot of shrimps in the making. So yes, so that's why. And you can stop feeding for some time and reduce feeding and so on to secure that growing is not going that fast. So that's the reason, yes.

And as there are no further questions registered at the moment, I will hand the word back to you, Jens, for the final comments. Please go ahead.

Thank you very much. And thank you for questions, and thank you for listening in, and wishing everyone a good weekend when it's coming there. Bye-bye.

This now concludes today's call. Thank you all for attending, and you may now disconnect your lines.