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

Welcome to the presentation of our 2022 reports. It has indeed been a very busy year for Schouw & Company, and I'm pleased to say that we had a very strong and satisfactory year under very difficult circumstances. Our top line grew 35% to DKK 33 billion. Of course, organic growth was the main driver for that, but also our input cost impacted a lot on our growth. We had a growth from our newly acquired activities of DKK 1.8 billion during the year. Our EBITDA was record high in 2022, DKK 2.3 billion, 5% up. Underlying, in fact, we were -- we saw even higher EBITDA, but we had what we say, nonoperational impact of around DKK 100 million on our EBITDA. We had also a very strong development in our associated companies. They deliver that result after tax of DKK 130 million, which was significantly up compared to 2021. We also really continued to push the ESG agenda throughout all our companies. We are starting to deliver on our ambitious targets. One example is that in 2022, 21% of all our electricity came from renewable sources. But we will continue to push hard and focus ESG also in the future. If we look into our net working capital, we saw a very large increase. It's really a focus area for Schouw & Company that has been it over the last 2 years. Net working capital increased from a very high level in 2021 with more than DKK 2.5 billion throughout 2022. Main impact is coming from the newly acquired Enics, which came into GPV in Q4 2022. But also we have to understand that it reflects really the supply chain volatility and material shortages around the world. And also, we have to understand the kind of the business and the climate we are operating in. We are a business-to-business company, servicing large customers around the globe and delivery abilities is very important for us. Our inventory days went up and especially in our electronic company, GPV, we saw a huge increase, but that was also strategic decision we took. But most of our other companies were well in control with the inventory buildup. Of course, we saw high inventory levels because of also increasing input costs. Looking a little bit at our development in net interest-bearing debt, we also here saw a significant increase. We now have a leverage of around 2.4x our EBITDA. Net interest-bearing debt was up EUR 3 billion throughout 2022. The bridge for this development consists of three items, of course, as I already mentioned, our net working capital build. And then we had investments both in CapEx and also in merger and acquisitions. And then also lastly, we gave out to our shareholders nearly DKK 700 million in 2022 in share buybacks and dividends. So still, we feel that we are at a very comfortable leverage in Schouw & Company. We also had significant CapEx going on in 2022, a huge CapEx program of SEK 1.1 billion. This CapEx program is now easening off, although we also will see a significant CapEx level in 2023. But that's based on decisions already made in '21 and '22, where we see the cash flow effect in 2023. So there's huge activity across the portfolio. Looking at one of the companies where we have invested a lot, the Fibertex Personal Care, we really see that CapEx will slow down over the coming years. I will now jump into each of the companies in our portfolio and starting with the largest company in the portfolio, BioMar had in 2022, really a very satisfactory development. Their top line grew 34% to nearly DKK 18 billion. However, the volume was flat. So we saw a huge impact from increasing raw materials into the top line. When I say volume was flat. It's mainly in our Salmon division. We were hit by a lot of regulatory issues in Chile. And then of course, we also stepped out of Russia and saw less demand for shrimps during Q4, also meaning that the shrimp farmers demanded less feed from us. EBITDA were strong. We were, for the first time, crushing the DKK 1 billion EBITDA mark, which we were very pleased with, and also it's very good to see that the BioMar were able to offset what I would call exploding costs and then also our withdrawal from Russia, which also impacted especially our EMEA division quite a lot. We saw strong margin management throughout the divisions of BioMar. BioMar also expects a strong 2023 turnover in the area of DKK 18 billion to DKK 19 billion and EBITDA up to a level of DKK 1.08 billion to DKK 1.15 billion. It's mainly driven by higher volume more mix in the different regions and then continue to push hard for margin managed throughout BioMar. Moving from BioMar to Enics. GPV, which is our electronic manufacturing service company when I say Enics, it was because we acquired Enics and merged that into GPV in Q4 and thereby created a really new European leader. GPV -- the new GPV now be top 2 in Europe. Top line grew 86% to DKK 5.9 billion, but also I have to say that, that accounts for 2022 will be a lot of the merger and so on. And so it's first really get into 2023, we will see a full effect of what has been going on in this company. Enics came in, in Q4 and added EUR 1.4 billion to the top line of GPV. Our EBITDA was EUR 465 million and came out stronger than expected some months back. We had a very strong Q4, especially our legacy GPV delivered very solid in Q4. Net working capital increased, as I already touched on, to a very high level. It's a focus area throughout GPV, but also at Schouw level, inventory built has, of course, been made facilitate a very, very high backlog. Order intake still very impressive for GPV also looking forward. We are now integrating a full speed GPV has took over in Q4 2023 will really be a year of integration for the new company. And they will, of course, push hard for synergies and looking for the strategic potential we are seeing in this merger. We are still targeting DKK 10 billion company and a 10% EBITDA as a long-term target for the new company. Looking into 2023, as I say, we are operating a new platform. It's the year of integration. Turnover expected to be DKK 8.4 billion to DKK 8.8 billion and EBITDA around DKK 590 million to DKK 640 million. Then turning on to HydraSpecma, where we saw really solid development throughout 2022. They have really worked in a very volatile environment, also a lot of component shortages, et cetera, to one of their segments. Win slowed down a little bit, but still turnover growth, 10% to DKK 2.5 billion. And mainly driven by what we call global OEM, the vehicle segment. Also very satisfactory EBITDA of a little more than DKK 300 million based -- created by very high efficiency through our HydraSpecma and also very solid pricing excellence throughout the year. Always difficult to go out in the market and ask for compensation when costs are increasing. We are building a much stronger HydraSpecma. We announced the acquisition of Aima Wind, and we closed it by first of February 2023 and thereby also created a renewable division. So we are with that new division, that new acquisition is ready to capture the expected long-term growth in the wind segment. For 2023, we are expecting a turnover of DKK 3.1 billion to DKK 3.3 billion and EBITDA in the level of DKK 310 million to DKK 340 million. We see wind slowing down a little bit or expect wind to slow down a little bit in 2023, but that will also then give a good opportunity for integrating [ Wimer, ] and then being able to really push hard for growth in the years to come. Then looking at Borg, we had a full year effect from our trading from the acquisition of the trading activity, SBS, and that really came in, we saw a turnover increase of 33% to DKK 1.8 billion main growth there really came from the trading activity. Our reman market slowed down throughout second half of the year due to lower mobility in Europe. We always see that when inflation and costs are increases people are driving a little bit less and don't need that many spare parts. EBITDA came out of DKK 180 million, mainly because we saw a very strong finish from our trading activity that compensated the slowdown in reman. We are building a new platform. We are now fully integrating the trading activities and pushing hard for innovation on new products to remain on. We are also in the hard work on implementing a new IT and synergies. We expect 2023, a turnover of DKK 1.7 billion to DKK 1.8 billion. So meaning no significant growth. That's because we experienced a full effect from the pullout of Russia and also a soft first half from our reman activity. EBITDA expected to be DKK 160 million to DKK 190 million. Then finally, our two Fibertex companies starting off with Fibertex Personal Care. Personal Care had a really tough 2022. Demand in Asia was low and something started late 2021 and has really been pushing into 2022. Turnover, however, was up 10% to DKK 2.5 billion, but volume was down 10%, excluding -- only coming from our facilities in Asia. So the Asian market is soft and competition in that region, very, very hard. EBITDA, EUR 40 million down to DKK 270 million. And we also have to say we had throughout the year positive effect from pricing on polypropylene and ForEx of around DKK 70 million. We are preparing for our Line 9 in Malaysia to be up and running in 2024. So we are pushing hard to build volume and to build volume through innovation and new customer base. We see and expect a soft 2023. Long-term outlook still positive. Turnover around DKK 2.2 billion to DKK 2.4 billion. And EBITDA, we have to say at an unsatisfactory level DKK 182 million, DKK 210 million but that's without any impact of PP pricing, flat PP pricing flat volume and flat impact from ForEx. Then last, Fibertex Nonwovens had a very, very difficult year in 2022. In fact, I would say, was the perfect storm for that company. Our important U.S. market collapsed. Our customers were destocking and energy prices in Europe short and was really up and then raw materials also very much -- turnover, up 14% to DKK 2.1 billion. Volume, however, down 7%, mainly driven from a U.S. market and really gave an EBITDA -- hit EBITDA down 50% to DKK 111 million. Europe energy prices effect into our European activities was DKK 60 million in higher energy prices, which we could not compensate in the market. So -- but we have had a very hard work going on throughout the company on pricing excellence and really driving hard for getting compensation. We are having new capacity coming in the U.S. market. And of course, one could ask why are you investing in capacity in U.S. when you had such a difficult 2022, but we are investing in capacity to capture high-value markets, new innovations, and we have a very, very attractive project -- product project going on. So a lot of new things is happening in U.S. Turnaround in U.S. in 2022 is to secure profit. We have strong plans. We expect turnover to be DKK 2.3 billion to DKK 2.5 billion and EBITDA up to a level between DKK 140 million and DKK 170 million. So that was a very short to the fourth to our six companies. Let me then close off just by an overall look at the guidance looking into 2023, we still at a high level, say, uncertainty and volatility, but I also think we have throughout our companies cautious positive look on opportunities. We expect to continue to grow and develop top line to be between DKK 36 billion and DKK 38 billion, and EBITDA level from DKK 2.4 billion to DKK 2.65 billion in 2023. That's how we look at things now. And we have started out the year. It's very, very early days. But so far, so good. So that's the best guidance we can give to the market as we speak. So with this closing remark, I would open up for questions.

Claus? Welcome. Are we getting Claus? We can hear you, Claus. Ulrik?

Yes. Hello, Jens, can you hear me?

Yes, I can. Welcome. Thank you.

Yes. A couple of questions from my side. Just on the BioMar guidance. You have previously talked about improving market fundamentals and that new contracts are negotiated at higher levels than the ones replace. So to what extent is this dynamic included in the guidance for BioMar considering that you're actually guiding for a weaker EBITDA margin for '23 versus '22?

Yes. As our new contracts, everything is reflected into our guidance. That's as we see the world as we speak. And when you look at -- also on turnover and of course, we also have to take into consideration the -- that raw materials, although things seems to be in a better balance now, raw materials really impacting a lot on the margin. So we are, for the time being, more looking into a margin per kilo in real value instead of percent. So I think we have taken into consideration into our guidance, what we are seeing now. And then still expect quite a significant uplift in what we see next year.

All right. And can you just repeat your assumption in terms of volumes for '23 for BioMar?

We expect volumes to grow, but also with a different mix in the different regions. So that also affects a lot, but we are back on growth, and we expect also to grow within Salmon. And expect to grow a little bit within our LatAm but we also have to realize that the effect from pulling out of Russia also means a lot on our EBITDA, and that volume is not coming. So we will lose volume, and we lost, of course, also last year volume to last year but now we have a full year effect of that also.

Okay. That make sense. Then a question on GPV. So how much of this positive delta on EBITDA is driven by the Enics acquisition and how much from the organic part of GPV?

It's difficult to say because we are looking into integration costs throughout the value chain, and synergies, et cetera. So of course, now EBITDA is coming -- Enics is coming in with a lower margin than GPV in general. So we still expect the GPV to continue growing on their margin, and then to bring Enics up at level, and it will take at least throughout 23 and into '24. We don't see full effect of synergies yet because we still have a very, very high level and, of course, sourcing procurement means a lot in such a merger as this one.

Okay. And then that connection, the EBITDA margin target of 10% that you have for GPV. Does that mean that you -- we need to wait until '25 before that materializing or 26? How do you view that?

I think '26, that's a long period. We see '23 as the year of integration and a lot of things is going on, and we will push hard on synergies and everything. And we think we announced that we expect synergies in the level of DKK 100 million, and they are going also to fuel the 10% ambition. But we should, in '24, start to see effect from these things of '25. I think that's where we are expecting that margins will be close to target level.

Okay. That's very clear. And then a final question. You had a comment about uncertainty in supply chains for your guidance for '23 in GPV. What do you mean by that? Is that sourcing of components? Or is it something else?

It's still sourcing of a few key components. But as I also said, it seems that supply chains in general are easening up. But specifically, if you go into the electronics, there are still very few very key components that there is a lack of capacity off. So it's something we really need to be on. But we have seen it easening up and do not expect, in general terms, that long delivery times any longer. But still, if we miss one or two key components in GPV, then we have problems in delivering.

Yes, hello, can you hear me?

Yes.

Just a couple of questions first, BioMar. Volumes were down pretty hefty during the second half of the year. And I mean, you described at least partially why. And looking at history, there's a clear historical seasonal pattern in that operation. But if you look at biomass now, it seems like the first half for Salmon in -- especially in Europe, will be unusually low production, whereas it will pick up in the second half of the year. And secondly, you have your new lines in Ecuador for shrimp feed entering production. And also on a year-on-year comparison, the Russian volumes, I guess, those were phased out during the second quarter in '22. So does that mean that the -- on a change basis that this year will be unusually tilted towards second half of the year in BioMar?

That's a quite good point. I think we will see it tilting a little bit towards the second half. But we also know normally as Q3 is really our main season. So I can't say it will tilt a lot, but maybe we will see it going in that direction. But also I think we have to see that we expect getting more volume in Salmon outside Europe because we saw Chile last year where we had a lot of regulatory issues that specifically hit some of our large customers, meaning that they were down on volume in -- especially second half. Then, of course, also, as you mentioned, the new extruder capacity coming in production now in Ecuador, and that will level more out because volume in Ecuador is more equal monthly and not so much seasonal. So -- but I don't think we will see a huge effect towards second half. Of course, as you all rightly point, Russia volume was phased out Q2 last year. So that is already taken into consideration.

And have you given any indication of the volumes in the new lines in Ecuador, any tonnage or...

No, we do not give any guidance specifically on lines, et cetera. So we don't do that. But of course, we will have we will have more capacity, but we also know that it's extruded capacity coming in. And then we will take out pelletized capacity. So we will -- we are in this in this period where we are phasing out pelletized feed to excluded feed. So capacity-wise, of course, there will be more capacity, but we will also take something out.

Okay. Great. And finally, on the GPV, I think it was quite impressive numbers taken into the account that I think you quoted in the presentation that there was DKK 35 million of integration costs already there. And looking at your guidance, I mean, it appears that, well, taking into account that Enics had, let's say, approximately half the margin of GPV, you will face integration costs. I think the guidance is quite bullish for this year. So would you say that you bought it in the right moment? Or is that business -- because mathematically, if you use last year's or your indications of the margins in Enics, the guidance appears very bullish.

I think you'll have to look into -- try to look into Q4. And as you said, the integration costs, et cetera. So the Q4 is not indicator for profitability in general. But I think we had a very solid Q4, if you look at taking off PPA and integration costs and so on. But rightly, Enics is a company that delivered lower margins than we than GPV historical have done. And that's also the basis for the entire business case that we think with the GPV business system and the way we do production and efficiency that we can run it more efficient, we can bring up margins. And then there is quite a significant amount of synergies to take in, but they will not materialize throughout 2023. But we are quite -- we feel quite confident on our long-term target as of the 10, 10, as we call it, DKK 10 billion turnover, 10% EBITDA.

And can you say anything about the level of integration costs that you have built into your 2023 guidance?

We have built in, in the magnitude of DKK 20 million to DKK 30 million of integration costs, yes. And then we have a PPA and things -- so there's a lot of things -- as I also said, it's a year of integration, and we'll try throughout the year to make it as transparent as possible. Claus?

Yes, I hope you can hear me.

Loud and clear, Claus. Thank you.

That sounds good. So the first question goes to this input cost deflation, inflation. So you are trimming your top line at best, which I guess is given some areas of lower input costs. Which areas do you see? And how do you see -- I know you don't guide on cash flow to avoid talking about net working capital, then we should just talk cash flow. What should we think from this point?

Yes. Yes. But I think it's very relevant, Claus, what you're saying, of course, we are pushing hard on also bringing our cash flow up. And we have built a very high net working capital and inventory level, and that's what we are pushing hard on throughout 2022. We also see that raw material prices are going down. We see better supply situation on a lot of components, but we have also especially in GPV and we have to look maybe mainly into GPV. We have built up a lot of stock because we have such a strong backlog but bringing down inventories, of course, will create stronger cash flow, and it's really something that we are very observant on that we need to have a stronger cash flow in 2023.

Yes, do you think 1/4 of the buildup of net working capital in '22 will come back this year or just some flavor on what the magnitude could be would be very helpful.

Yes. I'm not giving an exact figure, but of course, we are also very ambitious here. And I think we will get a better flavor on it. looking a few months ahead, but we expect it to be significantly higher than in 2022. And we have ambitious plan for driving that hard. So you might expect a much stronger cash generation throughout 2023.

If I could say that doesn't say a lot giving DKK 1 billion being added to the net working capital Okay. But then we have to wait for...

Yes.

You know what I'm going to ask.

I know exactly. Yes.

Okay. The second question, as you said, supply is easing within the GPV business. Do you see customers changing behavior that they are not trying to source that long as they did in '22 ahead of their demand or anything there to notice?

Yes. So far, not at all. We have started obviously in the first 2 months, very strong and long-term order intake. Of course, we are very observant on what's going on there, but we have still a very high order intake and backlog. And it's really something we need to work on how do we handle such a big order intake and backlog and how can we service our customer cost is -- really it is a service company that are doing electronic manufacturing service. So we have to see how can we get around it. But of course, we also need to look into do we source home or do we buy and make obligations to what our suppliers long term because we have this backlog. So it's really a delicate question and problem.

Okay. And then the Fibertex companies. Your slides show that profitability is half, it more or less is half. And we've been talking about this also in the past. What strategic thoughts do you have with the future of these two divisions?

Let's start with Fibertex Nonwovens. We have a lot of things going on. We had really, as I said, the perfect storm. And then there, we have a clear strategic plan. We need a turnaround in the U.S., and we are -- we have built a very strong plan on that, reorganized done a lot of things. And then it was really a year where many things went the wrong way. We also had some raw material contracts that were not in our favor to really be honest on that. And that really pushed also the company a lot. So we have a strong plan going on that, and we are bringing in new capacity into a high added value product area where we expect a lot from. We have strong projects from Tier 1 customers there. So we will have to do this to -- and see the turnaround in U.S. really come true. And then we will look at the business and the opportunities after that. Then looking at Fibertex Personal Care, you could say, yes, we have -- the issue is that in Europe, we are at full capacity, but of course, the prices have been pushed hard. But in Asia, all by a certain a lot of capacity came in from China. We expect Asia to grow. But of course, we are looking at add opportunities and strategic ways for this company also. So we evaluate the companies on a running basis.

It sounds like you think you should invest yourself out of the issue, adding more capacity et cetera, et cetera. And the history is full of investments and the return of these investments seems not to be that high?

No, I think I said also in my presentation, Claus, that when it comes to Fibertex Personal Care, we do not see any large investments for quite a significant period. We have a line, it's paid. It's in -- we already paid it in the books, but it's not up and running before end 2023, beginning 2024 meaning. We have a lot of capacity to go to the market here. So we do not need any capacity investments in that company for quite a long time. Then on the other hand, Fibertex Nonwovens, we have two lines that are invested. We have paid them. The first line is up and running second half 2023 in U.S., and then we have a line that we have not decided 100% where to place it in Europe because we are looking more into also energy prices and things. And this energy situation really changed our mindset on that. So that's the way it is. We do not see any new investments for quite a significant period. We have done the investments we need.

Okay. And then the low electricity prices -- this would be the last question. But the low electricity price should you help these businesses in -- what do you assume of a tailwind from that point of view?

We assumed a tailwind, absolutely, we have already seen a small effect from it. But of course, also, we have contracts. So we do not buy electricity on a daily basis, but we will see effect, a positive effect from that throughout the year, and that's also factored in to the companies. And if you look at last year, we had especially in Fibertex Personal Care, we had some energy back from our customers where we had a surcharge mechanism. We didn't get everything back, whereas Fibertex on loans really worth fighting. So we see positive impact in these two companies on energy. But as I said, just to make on Fibertex Personal Care, we -- our guidance for 2022 is flat volume, flat PP and meaning no plus or minuses from PP and also flat on energy as it is now.

There's a follow-up from Ulrik Bak.

Yes. Just a question on HydraSpecma. Similar question as for GPV. We have [ UMA ] technologies into the numbers in the entire year. So can you provide any indication of the impact from that versus organic?

Impact from [ UMA, ] I expect this is expected to be...

[indiscernible].

Yes. On the EBITDA 5% on the top line, we expect the impact of Yes, around DKK 500 million on that.

Okay. That's great. And then you mentioned that you have -- yes, the OEM segment is expected to do well in 2023. What is your visibility and the order backlog length of OEM orders? Will it last all year? Or will it drag into '24? Or how do you look at that?

It will last this year. I think now OEMs are not giving that -- orders that long any longer, especially not in the vehicle segment and so on. But we still have a very, very solid backlog for 2023. As I also said, we expect wind to soften a little bit in 2023. That's what we see and expect so also on the backlog.

Okay. And then a final question, a follow-up on the shrimp demand in BioMar. You mentioned in Q4, it has weakened a bit. Does that provide any concerns for 2023? And have you any indication of the drivers -- underlying drivers for this weakened demand?

The stronger driver or the key driver, especially for Ecuadorian shrimp, that's China. And then in Q4, demand was down, prices were up and demand were down also because of still the COVID situation and so on. So we are rather optimistic on shrimps now in 2023 because China totally opened up and people started traveling again and so on and so. But that is really the key driver for us. Then we have our Vietnamese setup, which has also been very, very difficult in 2021, and that has been due to corona and things in China because Vietnam is delivering a lot into China.

Okay. But volumes are expected to grow in Ecuador shrimp volumes?

Yes. You're right. You maybe you should you try again?

Can you hear?

Yes, now I can hear, yes.

Fantastic, it's working. I think the vast majority has already been answered. So you only have two left. Looking at your ROIC, it was considerably lower than last year. And I understand this is mostly caused by higher invested capital and that you, of course, focused on bringing this down. But could you maybe also elaborate on timing of when you expect a normalization to your, of course, taking into account the acquisitions you completed in 2022?

Yes. No, Andy, you know we have this ROIC target of 15%. And of course, we have been -- it has been hampered by our net working capital build. We expect to bring that down. And then also, we have -- we have, in fact, investments of around DKK 1 billion out of the two or, in fact, three lines and the two Fibertex companies they are invested, but they do not -- they have not brought in any EBITDA so far. So that's, of course, a key driver for the push on ROIC. And we expect when they get into operation, of course, also that should help our ROIC back in towards our 15% target.

Okay. And then you're also write in the CEO statement that you see indications early in the year of cost inflation and general economic uncertainty. So when you think about the key concerns or sort of areas of risk to address in the coming year, what topics are on top of that list?

Yes. It's a topic number, I would say, yes, one, is really to be able to offset costs if they continue to increase. But also at the same time to be able to withstand the pressure on lowering our sales prices because some cost maybe starts to lower, but we still need to have a high prices or the price level we have need to compensate what we didn't compensate earlier on. So really to withstand the push on lowering sales prices. And then, as I've stated several times, looking on our net working capital and deliver strong on cash flow. That is really we are looking into. So 2023 should be a year where we are looking and focusing very much on the operational side of our companies.

Okay. And maybe just a quick follow-up. So thinking about the risk of selling price deflation, what business areas do you see the greatest risk for that in?

I think it's to be honestly, it's across the companies. But of course, we have a very, very large Tier 1 customers. We are strong in the Automotive segment in the Personal Care business, Procter & Gamble and the likes. So we have a lot in the wind turbine divesters, DEs and so on. And they are carefully monitoring costs and inflation. And of course, they are coming back. There are a lot of good ideas on what we should do and so on. So -- it's something we really need to balance, and that's why we also work with what we call commercial excellence. It's part of our thinking. It not only pricing, but a lot of other things involved in maintaining strong margins.

Doesn't seem to have any more questions.

Good. I'm just being told no more questions. So thanks a lot for everyone visiting and also for the questions. So on that note, we will stop from here and wish everyone a good weekend.