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

Welcome to Schouw & Company's Annual Report 2023. I will, as usual, do the presentation and then afterwards, we will open up for questions and answer session. Yes, I think we need to change. Schouw & Company came in with a year with very solid progress. Q4 came out much stronger than expected, and we continue to deliver growth. In fact, we could say that we delivered an all-time high both on top-line and on EBITDA. Our top-line was growing 14% to DKK 37.2 billion here from -- came from the acquired companies DKK 4.9 billion in 2023. Our EBITDA was up 25% to DKK 2.85 billion, which we, of course, see a very satisfactory in a quite turbulent year. Our cash flow also was up 450% to DKK 1.8 billion. However, Q4 came out a little bit lower than expected, but here, we saw a significant reduction in our supplier debt. We expect cash flow to continue on a strong level also into 2024. Our ESG agenda, which is very important, continue to deliver on our very ambitious targets. We are also getting ready for a new repoing machine in 2024. Our net working capital continues to be a very important focus area in Schouw & Company. We saw a good and solid development in the inventory days. However, as I mentioned, also BioMar supplies -- this was down in Q4. We still see good opportunities to reduce and balance our net working capital also into 2024. And it is, as usual, a very strong focus area for Schouw & Company. Looking also into our debts, our net interest-bearing debt increased as expected, but our leverage came down to 2.1x. We financed over the year 2 acquisitions. One was the acquisition of Ymer to HydraSpecma and then SBS final payment to them of DKK 270 million. And then we had also a revaluation of our leasing up DKK 425 million. So all in all, quite a positive development in our net interest-bearing debt throughout the year. Looking into each of our companies, I will start with the BioMar. BioMar continued a very satisfactory development. Top-line was flat around DKK 18 billion, but we had a very strong Q4. Volume overall was flat where our EMEA and LatAm is offsetting a lower volume in the Salmon Division. We had a strategy throughout 2023 to leave nonattractive tenders and contracts. And I think it really played well into our margin management thinking. Our EBITDA came out very strong and was up by 23% to DKK 1.25 billion. We are working with a strategy called Commercial Excellence, a very strong execution on that. And also throughout the year, we saw quite favorable raw material positions. We had a good impairment of our activities in Vietnam of DKK 35 million. We have seen a difficult market, but we have implied a new strategy, and we strongly believe in the Asian strategy going forward. We expect also a solid 2024 turnover around DKK 7.5 billion to DKK 18.5 billion EBITDA in the area of DKK 1.21 billion to DKK 1.2 billion. I also expecting to be able to increase EBITDA in 2024. We will keep our strong focus on commercial excellence, also favoring contracts and be able to offset volume if we don't find it attractive. From BioMar into GPV, here, I'm saying that the new leader is materializing. We crossed the DKK 10 billion turnover mark in 2022. In fact, we had a DKK 10.4 billion turnover. Order intake over the year was very strong. However, we saw order intake as expected, softening a little bit in Q4. Our EBITDA was very satisfactory at DKK 743 million. We had a lot of integration activities going on and also, of course, thereby some one-off costs around DKK 40 million one-off cost throughout the year. We have had full focus on inventories and net working capital in GPV over the last year's inventory has been building up because of difficulties in -- from the component market, but inventories are easing off now, and that we see also most of the component market normalizing. Integration, as I already mentioned, has been very successful new leader, #2 in Europe, we have built scale and one company culture. We expect more synergies to come. I think we, in our business plan announced that we will see synergies to materialize over the next 2 to 3 years. We still have a 10% EBITDA target for GPP. However, we see the market slowing down a little bit, expect first half to be a little bit difficult. Order intake is still good, expect a turnover around DKK 9.1 billion to DKK 9.7 billion and EBITDA at the level of DKK 710 million to DKK 760 million, as also meaning that despite of lower top-line, we will be able to have a strong margin in DPV. From DPV into HydraSpecma, where we saw a very satisfactory growth, 17% in 2022, turnover DKK 3 billion. From here, our newly acquired wind from IMO technology in Sweden was DKK 450 million. EBITDA increased 6% to DKK 323 million that was as expected and also very satisfactory in a year where we had a lot of integration going on -- integration costs, but now we also really see scale and also the effect of focus on strong margin management and commercial excellence. We have had a very solid and well-executed integration of the Ymer Wind. And now we have created what we call our new Renewable Division and it's delivering as expected. We see, however, volatile markets and softer demand from global OEMs, especially in H1. Turnover, expected DKK 2.9 billion to DKK 3.2 billion, and EBITDA in the level of DKK 300 million to DKK 340 million. Looking at both our legacy reman activities saw a very strong development in '23, especially in Q4, where our reman volume was up 29%. We delivered a turnover of DKK 1.9 billion. EBITDA was DKK 153 million. And here, we had a lot of activities from our new acquired company, SBS. And we also saw one-off costs from integration of around DKK 20 million. Inventory in the price adjustments has been the reason behind that. And we also see inventory and price adjustments due to more normalized supply chains. The purchase of SBS was settled. We paid the price as expected and at the expected level, DKK 277 million was paid. And we expect now really to grow, go, and come back on track. Turnover expected DKK 1.9 billion to DKK 2.1 billion, especially also driven by very strong demand from our reman activities. EBITDA expected to go up in the level of DKK 170 million to DKK 210 million. And again, our very strong market position as #1 in reman in Europe has been reconfirmed throughout 2023. Looking at Fibertex Personal Care, we expect at a very difficult 2023, but came out stronger than expected. Turnover, however, was 23% down to DKK 1.9 billion, a lot of effects from lower raw materials, but also our Asian markets continue to be soft. All in all, our volume was down 8%. EBITDA was DKK 262 million. And as I already mentioned, better than expected. Our European market improved their margins. We saw higher efficiency and also lower energy prices helping Fibertex to 2023. The Asian market is still challenged, and we expect it to be challenged for a longer period. It's still a growing market, but at a slower pace. I think I have elaborated on earlier also that a lot of new capacity has been implemented into the market. We work hard on rejecting low-margin contracts and instead of trying to build value with our customers in Asia. 2024 will be a year with focus on optimizing at all levels. Turnover expected in the area of DKK 1.6 billion to DKK 1.8 billion volume expected to flatten out now. So we don't see a decline in Asia more. And we expect the EBITDA in the area of DKK 160 million to DKK 200 million because of strong price pressure, but Fibertex Personal Care still expect to continue to deliver strong cash flows. From Fibertex Personal Care to Fibertex Nonwovens where we saw progress at many levels. However, our U.S. wipes business is still challenged due to start-up of new production lines, et cetera, turnover was DKK 2.2 billion and Q4 really saw a very positive uplift in volume. Our EBITDA was up 50%, up to DKK 169 million. And under the circumstances, very satisfactory that we could increase it like that. So very good development in some important segments. Our Brazilian entity delivered very strong. And as I already mentioned, our U.S. wipes segment still with a negative impact in 2023. We have a strong pipeline to accommodate our new capacity. We are working very hard in high-margin product segments and also in attractive geographies. We need still to turn our U.S. wipes business around to fuel our expectations. But again, in 2024, we expect to grow our profitability turnover of DKK 2.3 billion to DKK 2.5 billion and EBITDA up to DKK 200 million to DKK 240 million. So looking a little bit into overall guidance for 2024. Let me also elaborate a little bit on our investment level. We have a huge CapEx program easing off. We have future-proofed our capacity and have capacity to grow. We see high activity across all of our portfolio companies and most of the companies are fully invested for the moment. Of course, running plus 80 factories around the globe requires a lot of maintenance cost to keep high efficiency. But all in all, investment level of DKK 760 million or 2.1% of revenue. So we now see that we are entering into a period with lower capacity and CapEx investments. Looking at the 2024 guidance overall, as I have elaborated on positive momentum to continue. Expect good activity in most companies, top-line expected in the area of DKK 35.3 billion to DKK 37.8 billion. However, as we always say, when we are discussing a growing company top-line, we have to note that the raw material fluctuation, component prices and so on, they are all impacting our top-line. However, EBITDA expected in the area of DKK 2.68 billion to DKK 2.98 billion for 2024. So wrapping up, we still think that Schouw & Company is a strong investment case. We increased our dividend for 2023 from DKK 15 to DKK 16. We are continuing share buyback, which we just announced of DKK 200 million. We expect to improve our cash flow generations throughout 2024, continue to deleverage our net interest-bearing debts. And I think looking at each of our companies, our platform is as strong and relevant as ever. So I think with these concluding remarks, I would open up for questions.

[indiscernible]

Yes. Thank you for taking my questions. Go to 2024 guidance. Could you provide us with some context on the upper and lower end of your guidance range in terms of which main drivers we should expect influencing, whether you end up at the upper or the low end of the guidance?

Yes. A very relevant question. You know we always -- when we guide like this because we give a spread on each company and then you add it together and so on, and then you get the level we are looking at. I think in general, we see 2 areas where we have seen soft demand a little bit in GPV and HydraSpecma, expecting not a difficult but a more challenged first half and then, of course, FPC with volume in Asia. I think overall, for the other companies, we are quite confident in the guidance. And I think speaking now and just seeing the first 2 months materialize, I feel looking a little bit up in the -- not in the very high end, but passing the midpoint, absolutely.

Perfect. Also a few questions related to GPV. Can you provide an -- first of all, an update on how the integration of Amex is progressing? And if possible, quantify how much of the expected DKK 100 million synergies have materialized so far?

Yes. I think I also said already in the presentation that the integration has been a very strong, especially on the cultural side because that's always the first thing you look into what about the culture, how will the organizations get together. We have a very strong management team now. We have a very strong operational structure. [indiscernible] also from both sides of GPV and Enics, some production sites we had to work hard on to optimize. We are closing down. In Malaysia, we are building new factory in Slovakia, and moving 2 factories into one new site, doing a lot of things. So integration going very, very well. We still see a lot of synergies to come. I think also you will see the effect of synergies expected now because we expect turnover to drop because of the demand and then still expecting EBITDA at same level as 2023. So over the coming years, we still expect to see significant synergies materializing, especially when we have the new factory platform or footprint well in place.

And the second question to GPV is concerning your EBITDA margin. You reported an EBITDA margin of 7.1% to 2023. So there's still a bit of ground to cover before reaching the 10% side. This is to provide some clarity on when you expect GPV to achieve this target? And what you expect the main drivers behind the margin expenses will be.

Yes. So if you look a little bit into, we also had some one-off costs in 2023. So a normalized margin a bit higher than 7.1%. Then of course, margin should be driven and will be driven from full integration from our footprint activities that's going on from also sourcing procurement. So a lot of activities across the board is going on. And we expect, of course, to deliver this 10% target within 2 to 3 years' time. And I think we said that a target of 2026, but we are pushing hard on delivering as soon as possible. But a lot of activities that need to materialize.

Very clear. Just one last question from my side, and then I'll jump back in the line. So the last question is related to BioMar. So given the decline in region fee consumption in Q4 2022, which appears to have continued into 2024 as we saw a quite significant drop in January. Could you provide some insight into how you experience the market and as you guide for full year activity levels for BioMar to be on par with 2020? Do you expect the year to be even more towards the second half of the year than the normal seasonality?

I would say we also saw that the BioMars in Norway is lower than expected. I think we have had a quite good start from a BioMar point of view of 2024, but we expect lower volume. But that's also, of course, we have stepped out of contracts that we didn't like the profitability on. So I think we will see BioMar and volumes, in general, not continue to fall but flattening out. And then as you also said, Q3, a lot of things can happen there. We saw, especially BioMar was very strong in Q4 2022, but that was mainly margin-driven. Ulrik Bak.

Also a couple of questions from my side. Also on BioMar, you reported a very strong Q4 results for BioMar. Can you provide some color on what geographical regions did particularly well?

Yes. I'm very satisfied with the development in Norway, and we have been pushing hard on Norway over the years, margins have been squeezed, et cetera, et cetera. But now we have really worked hard with -- I mentioned our commercial excellence program, looking at contracts, looking at our added value or high-performance feeds, et cetera. So Norway has been a very, very strong driver in this margin. But then in general, just commercial excellence across the board, for especially Norway has been strong.

And any comments on Chile? When I look at some of the fish farmers, they don't have a very rosy view or outlook for Chilean volumes.

We still -- we went ahead -- lost a little volume as -- but that was because we said no to some contracts. So we have lost a little volume and focus much more on long-term cooperation with farmers and then also trying to add value on functional feed and things like that. But you're right, price levels for the time being on salmon not as Roche as it used to be, you can also -- if you look at our own Salmon [indiscernible], where we have seen a lot of fair value adjustments on prices and so on. But we feel that we are standing on a good position in Chile. We have a strong customer base there.

Okay. And then just in terms of your guidance, you are -- at the midpoint, you are guiding for flat earnings growth in '24 versus '23 for BioMar. Given that the trajectory in Norway seems to be improving. Obviously, there is some challenges in Chile. But this supply-demand balance that you've talked about in Norway improving to your favor. Any reason why that should come to a halt in '24?

Yes, I think we need to be realistic. But I also said that I feel quite comfortable on the guidance from BioMar. But we have seen this BioMar's adjustments and so on reductions in Norway and -- but it's really -- BioMar is looking good, strong Q4 developing well into Q1. So I feel very confident on guidance with the BioMar.

That's clear. Then a question on GPV and the order book development. I know you don't disclose it, but have you can talk about how it has developed over the past few quarters, how it's developing into Q1 '24, Whether it's accelerating? Or is it just a straight-line decline? Yes.

Yes. There have been 2 things with the DPV order intake. One is a lot of customers just a year back, they gave orders for very, very long out as 2 years orders. And so we have a backlog that is reaching in well into 2025. That has changed. Customers are now much more reluctant to give orders with a longer view. And they've also reduced the orders into 2024. So we have seen a softening in order intake, and it has continued also into Q4, not dramatically, but I think we have said, [indiscernible] we will see demand softening. We still have a very attractive backlog, but not with as long as horizon as we used to have. But again, Q1, Q2 expected to be slow from GPV. But to be honest, also a little bit better start than expected on top-line. But let's see.

Okay. So the phasing of the GPV guidance, we should expect a weaker H1 and then perhaps a pickup in H2? Or how should we think about that?

That's as we see now. Claus Almer.

Yes, I hope you can hear me.

I can.

Perfect. Good. So I also have some question regarding BioMar. First of all, it sounds like there is a broader mix of contracts, meaning there is some that is attractive and some comes with an unattractive margin. That sounds a bit different from what we've heard in the past. Is that correctly understood?

I think it's understood the way that we have taken a new strategy on what kind of contracts we are working with, how long we want to be with the contracts because what has changed is that a lot of customers, they want longer contracts. You also [indiscernible] many years go, you at know that normally, Q1, Q2, we were negotiating the volume for the actual year, which was very stressing. Now we see customers wanting a much longer-term contracts to secure supply and so on. And there, of course, we are evaluating on what should we go into there. So when we say low margins and so on, it's a valuation of the entire contract over a longer period and also what are we able to supply a functional feed and things like that. So a lot of things is going into it, yes. But we are more hesitant to take volume and contracts than we maybe were before.

And so the one thing I'm trying to understand is more -- is that because farmers are more cost cautious on the pressure. So some of these potential clients just don't have the ability to pay the price you want? Or why this change? I understand about this multiyear contract structure, et cetera, but is it also fundamentally change in the market where some clients are just not attractive anymore.

Of course, also there's a capacity issue. So we need to utilize our capacity as wise as possible and also as attractive as possible. So we are looking at the capacity balance, long-term views with customers and so on. So also, we are in a position where we have learned that we can also work and balance our volumes. And we do not need the last tonne to be profitable. We more need to work smart with the capacity we have.

Fair enough. And then I noted, Jens, you saying something like very confident about the BioMar guidance. That sounds in wording that the likelihood of a guide top rate seems pretty, pretty high. And I know you didn't -- et cetera, et cetera, but that would be my translation.

Okay. But I didn't say that, Claus, and I think maybe Ulrik, fair enough squeezed a little I said that the guidance for BioMar, I feel confident on. That's meaning that that's the guidance we are giving.

But my question is seem just get very content, but confident normally means that let's just say you are aiming to the upper end of the guidance range, if not better. We fair.

Yes, that's fair. We're always doing that, honestly, as we have to aim, of course, but that's what we see now, Claus. And I think you know how we think and what we do. So yes. That's sure.

Okay. Then a question regarding input costs and cost inflation. So what do you see from input costs? Do you start to see some relief on that front?

Yes. And I think also I said when I was presenting GPV that we have seen a cost on a lot of materials more normalizing and we see lower cost. Of course, we have inventories and we need to handle that in a very, very good way to secure that we keep price levels up and so on. But we can't -- we see component and raw material lower prices coming in, but still a way to go, but that's what we see and that's what we expect.

What about the BioMar?

Yes. BioMar, it's a bit different animal because the mix of proteins and so on. And for the time being, there is El Nino and really impacting raw material as a fish meal, fish oil, particularly oil. So you need to balance [indiscernible] and oil a lot. So it's more difficult on BioMar. But we have good positions, and I think also that's why we are saying that we feel that we have good confidence in our present guidance.

Okay. And then I will not disappoint you, Jens. That's obvious question. And we have had this many, many times. Net working capital Q4 did not develop as you had hoped for far from actually. So did BioMar grow on the behalf of network capital development? Or what went wrong?

That's a very fair question. I think if something went wrong, you could say the balance between our accounts payables, we paid out more suppliers than expected and so on. So there was a huge deviation there. We already seen our cash flow coming back. So we also know that it doesn't go into a black hole. It goes to somebody and then we will see cash flow coming back. So -- and then I said I expected higher cash flow, to be honest, in Q4 than we saw. But it's still good to see. I think the first months now that we are more or less back on track. Yes, Andre?

Yes. And just starting where Claus left on cash flow. Just if you can remind us. How much working capital tailwind do you have left in GPV for 2024? And what should we kind of look up for here? Because I understand it's one of the key drivers for cash flow in 2024?

Yes, very solid question because, of course, we have a huge inventory built in GPV, and we are looking on, of course, reducing inventories and so on, and we expect also cash flow to improve in GPV. I'm not giving you an exact number on it, but we are positive on the development.

Okay. That's clear. And the second thing is also regarding GPV. You touched a better on it, but how many synergies should we look out for 2024 in GPV?

Yes. It's also -- it's a fair question, but it's also very difficult to set an exact number on because things are melting together. You could say the water is running together now. But we expect as the reason why we can maintain our EBITDA level in spite of a lower top-line and so on is, of course, because we see full effect and not full effect, but a lot of effect from closing down Malaysia from one factory in Slovakia and a lot of things going on. So we will drive harder on it, but I can't give you an exact figure. Of course, we try to follow synergies from every quarter. But we will see synergies in 2024. And we are very firm on reaching this DKK 100 million corner synergy as we said when we did the merger or acquisition.

That's great. And in terms of HydraSpecma, and I heard you said that it was a bit more, as I understood, muted in the first half. But what is your expectations for the second half, especially in terms of the wind market? Should it come back then? Or what do you see?

That's what we expect, and we are very positive on the wind market in general. We saw a little so down. But in fact, the new renewables, especially the cooling or the Ymer that came in, have done very well in 2023. And we expect that all. We have a lot of projects in the pipeline, and you know it takes time. We developed together with the last wind turbine companies, and we have a lot of new developments going on. So we are positive. Maybe Q3, Q4, see it starting again. So, yes.

That's great. And then just one last from my side, and that I know it's a small part of your business, but Fibertex Nonwovens. Just to be sure, in terms of your revenue guidance, how much revenue here comes from the new capacity in the U.S.? Can you quantify that?

Around DKK 100 million is coming in from that. [Technical Difficulty] I think you need to speak up, Sinton.

Okay. Yes, there is some nice here. But do you hear me now?

Yes.

Okay. Good. Good numbers. Just a couple of questions on BioMar and then GPV. First, on BioMar. I mean it was weak volumes, especially in the salmon farming and very strong margins, and I think you elaborated on that. My question is, first, given that you have entered into more long-term contracts, what kind of increased visibility does that give you in one thing is volumes, but also in terms of margins for the -- for 2024?

Yes. Of course, it gives better visibility. But even we have a good margin uplift, and we have -- we have long-term contracts, of course, then the competition is hard and we will be in the squeeze still, but it gives better visibility to plan -- also to plan both capacity and raw material contracts and things like that. So yes, we like that we are not sitting there negotiating Q2 and then what we should deliver in Q3 '24.

But it also means -- I mean, given your relatively low production now, it means that you probably have a lot of ample production capacity. So if things develop as expected, namely that, especially in Norway, you will see sharply increased supply in the second half. Would it be so that you have, let's say, excess materials to sell? And depending on the -- I mean if you see more salmon supply than expected, you might be able to fetch a very good price, whereas if biology disappoints among the salmon farmers, then it would be harder for you.

I think that's your conclusion to point number one, in that we do not have a lot of excess capacity. We are not that much down in volume. So capacity in Norway is limited. We don't have a lot of excess capacity. And even if you go -- let's just say we went into Q3 and there were pressure on volumes and so on. There's still a market and a customer we cannot just take whatever price we want because we also need to be with our customer the year after. So of course, we want and need to work as profitable and as good with our volume as possible. We don't have a lot of excess capacity. Not at all.

Okay. Great. And just 2 questions on GPV. First, that may be kind of a not very important point. But you say in your slide presentation that you maintain the DKK 10 billion target in 2026. I mean I would say that if any of the pure-play listed EMS players have said that they maintain the target of having revenues below 2023 in 2026. I think the share price reaction would be quite harsh. So I mean DKK 10 billion, is that really your ambition? Or is the ambition much higher?

I think that's a very, very fair question and point. We have, of course, growth ambitions for GPV. And I think I can say already now that we expect to exceed the DKK 10 billion turnover at that point. Absolutely. So it's a fair conclusion you are coming with.

Okay. And also on GPV. Earlier, you pointed to primarily smaller customers. Is it fair to say that, that weakness is no more broad-based and also among your larger customers?

I didn't really -- you said that.

I think following Q3, I think you indicated that the weakness within GPV's market is mostly related to the smaller customers. Is it more broad-based?

It's more broad-based, but it's not that we are seeing a big dip from large customers, but more balanced and we see that generally because we are in supplying a lot of companies in material handling industries, things like that, that we see things solving a little bit across the board, yes.

Okay. And it's not the case that you either have lost contracts or, let's say, discontinued not so profitable contracts?

No. We haven't lost one single contract and not discontinued any either.

Okay. My final question is also on GPV. Can you point to let's say, in what categories is the -- if there are some distinctions between the categories within GPV's market with regards to the market sentiment.

I would say we are supplying a lot of large industrial companies, meaning machine builders, things like that. So we have a broad variety of very, very large global Tier 1 customers, but especially within the industry. We are not very big in medical or defense or things like that, but industry at large, yes.

Okay. And also industrial, that means everything from, let's say, ABB to more, let's say, the ones oriented towards electrical products and also haven't much seen results but it's kind of more or less the same?

Exactly. Yes. You're right. Thank you. Okay. I think as I hear from Kasper, no further questions. So thanks a lot for listening. Thanks a lot for the questions, and then good evening to all of you. Thank you.