Belysse Group NV (BELYS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q1 2020 results announcement call. [Operator Instructions]. I am now pleased to present Cyrille Ragoucy, Chairman of the Board and CEO; and Jan-Christian Werner, CFO. Gentlemen, please go ahead.

Thank you very much. So good morning, everyone, and welcome to Balta's First Quarter of 2020 Results Call. If you have not already done so, please, you can download the earnings statement and this presentation from the Investor Relations section on baltainvestors.com. I need to start with bringing your attention to the disclaimer on Page 2. I will not read it out, but please do make sure that you have read it. On Page 3, this is today's agenda. So I will talk about the COVID-19 and what we've done to limit this crisis and look at an overall result of the first quarter 2020. And Jan-Christian Werner, our CFO, will then take us through the financial results and an update on NEXT for Q1. So I'm on Page 4. Obviously, the -- and we have already communicated to the market when we published our annual report. But as we all know, COVID-19 represent an unprecedented disruption to our business. The wide variation in potential outcome present material challenge to the industry and obviously to Balta as well. First and foremost, I'd like to tell you that we're determined to protect the safety and health of our employees and customers, and we have done so since the start. Our internal COVID-19 task force has been leading daily since the start of the crisis, and they are currently working to make the exit strategy a success. So what we are doing today is managing our cash for the foreseeable future, and we all contributed to significantly reduce our operating expense and manage our cash flow. Let me provide you some details around some of the measures we took. So first of all, we have temporarily shut down 6 of our 8 plants. This has been able -- and they're all in Belgium, by the way. So this has been able to help us reduce our operating expense by 37%. All our plants are still shipping, and they all shipped during that period. And we have -- we are and we have reopened them on an as-needed basis where we could sell for cash or when we could factor the invoices. Our plant in Usak have been -- in Turkey, have been open, albeit at a very low producing rate. And our plant in Bentley, so in U.S., has been producing all along and shipping during the whole period. The second thing that we've done is have reduced employee expense to allow 20% cost reduction. This has been done by accessing government unemployment program for blue and white collars by implementing a hiring freeze and by reducing monthly compensation of almost everyone. So CEO, paid Director, member of Management Committee and the group-wide leadership team. And this has been done, respectively, by 50%, 40% and 30%. I need to be clear, this compensation will not be returned in the future. So it will not be compensated, and all that has been done voluntarily by everybody. The third thing that we've done is we've put product launch on hold. Fourth is, our procurement team is reviewing all raw material purchase and negotiating with our suppliers. And finally, we have reduced marketing expense, samples and other capital expenditure by approximately EUR 20 million. And this is on a run rate basis, but obviously, it depends on the way the year will unfold. To protect our liquidity position, we monitor our account receivable and account payable daily. We have -- we drew, mid-March as a precautionary measure, EUR 72.7 million of revolving credit facility in Europe and U.S., and in April, we reached an agreement with our banks to adjust the covenant calculation for the impact of COVID-19 through Q2 2021. So going to Page 5, let me debrief you quickly on the overall results, the financial summary of our Q1 2020. We ended up the quarter with revenue of almost EUR 160 million, which is 13% below last year first quarter. Excluding the impact of currency, our revenue declined by 13.6%. The organic top line was driven by growth in Commercial, while Residential and Rugs declined. From mid-March, our revenue was impacted by a significant slowdown due to COVID-19 lockdown measures, particularly in Europe. Revenue decreased by more than 29% during March 20 compared to the same period in 2019 as a result of a decrease in orders from our customers. The adjusted EBITDA for Q1 was EUR 17.1 million. This is slightly below last year first quarter. Our first quarter results were in line with management expectation until mid-March. We saw a 15.7% increase in adjusted EBITDA for the first 2 months of 2020 compared to the same period of 2019, driven by strong margin improvement from NEXT initiatives. And the adjusted EBITDA margin for the same period from '20 to '19, so in '19, it was 8.5%; and in '20, it was 10.2%. We're now planning for when we return towards a normal activity and are confident that Balta will be able to resume NEXT improvement once the situation normalized, albeit with delays. Leverage in the first quarter of 2020 was 4.3% -- 4.3x, sorry, versus 4x at the end of 2019. The increased leverage year-on-year results from a working capital increase due to seasonal patterns as well as COVID-19. I will now give the floor to JC, our CFO, who will elaborate in more detail our first quarter 2020 financial result. JC, go ahead.

Yes. Thank you, Cyrille, and good morning, everyone. Moving to Page 6 for the Q1 2020 revenue bridge. In the first quarter, we achieved consolidated revenues of EUR 159.7 million, down 13% year-on-year. In Rugs, revenues were EUR 49.2 million, 25% below last year. Sales were lower by comparison with an exceptionally strong first quarter 2019 in parts of Europe. In the U.S., we realized the additional outdoor sales, which were shifted from Q4 last year, while our U.S. e-commerce sales continue to grow, but remain below our expectations. Starting mid-March, Rugs has been significantly impacted by the impact of COVID-19 lockdowns across Europe as well as other parts of the world. Our Commercial business delivered another solid quarter with sales of EUR 56.8 million and top line growth of 2% year-over-year. Our U.S. business continued its organic growth in the office segment as well as in the newly targeted segments, while revenues in Europe slightly declined in the remaining challenging market environment. In Residential, revenues were EUR 47 million, down 14.3% versus last year. Our U.K. sales were lower than last year, driven by the exceptional pre-Brexit stocking benefits incurred in the first quarter of 2019. In Continental Europe, trading continued to remain subdued, while we successfully grow our export business and progress on the shift towards more higher-margin products. Turning to Page 7, on the Q1 adjusted EBITDA. Our Q1 consolidated adjusted EBITDA was EUR 17.1 million, down 2.2% versus last year. This represents an adjusted EBITDA margin of 10.7%, up year-on-year from the 9.5% during Q1 2019. In Rugs, Q1 adjusted EBITDA was EUR 4.3 million, down 31.1% versus last year. The adjusted EBITDA margin was 8.7%, down versus 9.5% achieved during Q1 2019. Rugs Q1 adjusted EBITDA was primarily impacted by the lower revenues in Europe, which could only be partially offset by better mix and favorable raw material prices. In addition, with U.S. e-commerce sales remaining below our expectations, dedicated fixed costs continued to weigh on the Rugs EBITDA. Our Commercial business achieved a Q1 adjusted EBITDA of EUR 8.2 million, up 5.7% versus last year. The adjusted EBITDA margin was 14.4%, which represents a further increase versus Q1 2019. Our U.S. business benefited from continued organic growth as well as from margin improvement from NEXT initiatives partially offset by higher sales expenses. In Europe, we continued to see positive impacts from our Direct Route to Market initiatives as prices and margins improved, here also partially offset by higher sales expenses. In residential, first quarter adjusted EBITDA was EUR 4.1 million, up 25.3% versus last year. The adjusted EBITDA margin increased further to 8.7%, well above last year's realized margin of 6%. Residential primarily benefited from positive impacts realized from our NEXT initiatives, the focus on higher-margin products as well as from favorable raw material prices. So moving on to Page 8 for an update on NEXT. As a reminder, NEXT has 2 key pillars. On the one hand, top line growth and commercial excellence; and on the other hand, cost competitiveness and margin improvement. The first 2 months of 2020 saw strong results from our successful execution on NEXT initiatives. For Rugs, e-commerce grew slowly and steady but remains behind our expectations. While we continue to focus on the implementation in the U.S. first, we have selectively started e-commerce activities in Europe. In our commercial division, we continue to achieve good revenue growth by focusing on expansion into new segments in the U.S., direct route to market in the European tile business as well as synergies with modulyss in the U.S. In our Residential division, we continued moving towards higher-margin products and new collections as well as strengthening our export business. However, the impact resulting from COVID-19, starting mid-March, will have a material impact on our ability to deliver NEXT results at least for the several months as we cannot anticipate how end users will react. Turning to Page 9 on cost competitiveness and margin improvement initiatives, Lean and Procurement savings. Also on Lean and Procurement, the first 2 months of 2020 saw strong results from the successful implementation of NEXT initiatives in the plants. But the impacts resulting from COVID-19 starting mid-March will have a material impact on realizable savings in 2020. In particular, the introduced cash preservation initiatives like the purchasing stop and the partial shutdown of a number of our production plants does affect our ability to generate anticipated lean and procurement savings now and will affect our ability to realize projected savings for 2020. However, based on our experience during the first 3 months of 2020, we are confident that NEXT benefits will resume once production returns to more normal levels, albeit with some delays. Moving to Page 10, net debt and leverage. As previously communicated, we fully drew our existing RCF facility in Europe and the U.S. as a precautionary measure to COVID-19. Consequently, at the end of March 2020, we held cash in the amount of EUR 80.4 million. In addition to that, and as already mentioned by Cyrille, we have agreed with the banks to adjust the covenants calculation from April 2020 onwards for the impact of the COVID-19 crisis. Net debt at the end of March amounted to EUR 326.6 million, including EUR 45.4 million on debt related to IFRS 16. Excluding the impact from IFRS 16, net debt increased to EUR 281.2 million resulting in the leverage of 4.3x. The increase in net debt in the first quarter is primarily related to a temporary increase in working capital, partially seasonal, as well as COVID-19-related. With that, I hand back the floor to Cyrille.

Thanks, JC. Thank you for that update. So let me wrap up this call before we go to Q&A. So our first -- our Q1 results were in line with the management expectation until mid-March. The 15.7% increase in adjusted EBITDA in the first 2 months of 2020 was driven by strong margin improvement from the NEXT initiatives. From mid-March, our results were impacted by the COVID-19 lockdown measures. We took immediate action to protect our employees and to reduce our cash risk. We're now planning to return towards more normal activity levels. With NEXT initiatives embedded in Balta, we're confident that Balta will be able to resume NEXT improvements once the situation normalized, albeit with delays. And this is what JC was saying, it's true for Lean, it's true for Procurement, but the revenue will depend on the reaction of the market. However, macroeconomic conditions remain definitely uncertain. And as you can all know, we don't know pretty much what lies ahead. But we have made some forecast that we'll be back at 85% of our -- versus last year of production in quarter 4. I'd just like to add something that I must say that I'm proud of the way the Balta team has reacted to this unseen challenge by showing their dedication and flexibility. And this is a very -- it was very -- it was an unbelievable actually challenge and reaction. So with this in mind, I'd like to open the floor for questions from analysts. We will wait for the first question between JC and myself.

[Operator Instructions] So we have a first question from Maxime Stranart from ING.

So I had 2 questions. So first of all, you mentioned that it was mainly the Belgian factories that were impacted by the temporary closing. So my question would be, how confident are you that the Turkish plant will continue operating given the fact, for instance, that [indiscernible] recently announced that they were forced to close down their factory as well? And secondly, so you mentioned that you may not be [indiscernible] your 6.5x net financial debt over EBITDA covenant by the first half of 2020. Assuming EUR 300 million in sales -- in debt by that time, it would mean that the EBITDA of the first half of 2020 would be below EUR 15 million, is it something fair to assume? And that would be all for me.

Okay. Thank you, Maxime, for your question. I'll answer the first part of it, and then JC will answer the second part of it. So our Belgium factory has been closed, but on a -- we've done that -- it's ourselves who have done that. So it's a voluntary basis. It has not -- it's because of demand. It has not been done because of government ask. It's the same in Turkey. So in Turkey, we have been working at -- albeit at a very slow, low level, we've been working up to now at 20%. But we continue to work and we don't have any problem working. But we're taking care of the, as I said, the health of our employees. So social distancing is a given. And if we know that someone has been near someone that is sick then we ask them to go back home. So we don't see any problem in Turkey, and we still can continue the -- our production. And in Bentley, we never stopped. We have never stopped our plant. We take, again, very seriously the health of our employees and social distancing is a given. And -- but we didn't have to stop as well. Maybe, JC, do you want to answer the second question on covenants and as...

Yes, sure. Sure, I can do that. Sure. Maxime, on the covenant question, I mean, you know that we have not provided guidance for 2020, and we will not do that now. But what I can say to that is, on the covenants, we are completely in compliance with all covenants as of now. And what we've done and agreed with the banks is a proactive approach to provide us more flexibility going forward into the year during the crisis.

So we have another question from Wim Hoste from KBC.

Yes. Two questions from my side. First, on e-commerce. Can you provide a little bit more clarity on the situation in the U.S. and also Europe? In the U.S., I see in the slide deck that I guess it's mostly U.S. related that there is about EUR 0.5 million of additional sales in Q1 2020 versus Q1 '19. I guess Q1 '19 sales of e-commerce were really very limited. So that kind of suggests you're running at -- today at a run rate of maybe around EUR 200,000 revenue a month in the U.S. Can you maybe elaborate on what kind of targets you have? How much revenue you would need to cover your fixed costs? And also, on the European side, and yes, how fast do you want to ramp-up the e-commerce side? So that's the first question on e-commerce. And then secondly, yes, on CapEx, there was a number in the slide deck also that marketing samples and CapEx have reduced by EUR 20 million run rate. Can you single out the CapEx amount for me and what the new kind of CapEx guidance then would be for 2020?

Yes, Wim, this is Cyrille. So on the e-commerce side, yes, what we're saying in the presentation and what we have said actually in the press release as well, is that we're not at the level that can cover overall our fixed cost. What -- and that's U.S. only. What we see definitely is that a ramp-up, a quite rapid ramp-up from now on. We see some very satisfactory sales in the last few months and definitely a large increase in percentage, but even in volume in our sales. So it's coming. It took a bit of time but it's coming to what we're expecting now. But we still a way to go towards our ambition. In Europe, we started, I would say, later, a lot later. And what we're doing is ad hoc today. We don't have any structure in Europe to address the e-commerce yet. But because what I wanted to do is to be successful first in U.S. and then develop Europe. Europe is, as you all know, more complicated to do because of several language, several countries, several VAT. So it's more complicated overall. However, what we're doing today is we're successful in Europe on ad-hoc sales. So that would be the first part of the answer. The second part is CapEx. Do you want to answer that, JC?

Yes, I can do that. I can do that. On CapEx, I mean, Wim, as we said, the EUR 20 million savings expectation for marketing cost samples and capital expenditure is basically a combination of the 3 of them, yes. There is certainly a big part related to CapEx. But in the end, this certainly relates to the assumptions that we've currently made in terms of the ramp-up, yes. As we said, we were expecting a ramp-up starting early June and to achieve production to safe level of roughly 85% in Q4. So there is a lot of, let's say, uncertainty and dynamic also in the savings in respect of the phasing of the ramp-up.

So we have no further question, gentlemen. We have another question from Wim Hoste from KBC.

Yes. Me again. A couple of other questions. First, on the raw material side. Can you kind of quantify the tailwinds you had from raw materials on a kilo per kilo basis? Or -- and how much savings do you expect going forward? Would this, yes, momentum accelerate? So that's the first question. And then secondly is on the balance sheet situation and the refinancing that will come up at some point because your revolving credit facility matures in second half of next year and then the senior secured notes in the second half of 2022. How do you currently look at this refinancings? Will they be replaced by new financing lines, you believe? Will there be adjustments maybe to your footprint or organization? Any thoughts on that?

So Wim, thanks for the questions. Obviously, the second point was expected. And JC will answer the second one. The first one was -- is on raw materials. So yes, the raw material -- our key raw material went down in recent months. Prices are now below where they were a year ago. And what we're seeing is we're starting to see a positive impact on our Q1 2020. And we're expecting that trend to continue during the year 2020. But we are not giving any detail on that. It's -- and we don't -- but you know that there is a delay and what we have been communicating on is there is a 7-month delay between the time the raw material goes down and -- or pricing goes down or pricing goes up and the time we're seeing that in our results. On the refi, I will leave JC to answer that.

Yes. Sure, sure. Wim, on the refi, I mean, you know the current situation, there's a huge uncertainty with COVID-19. And as we discussed also earlier in the call, there is an unprecedented business interruption, let's say, caused from lockdowns and all the measures put into place. So our focus more over the last couple of weeks or months in between -- in the meantime, on stabilizing the business and preparing it for ramp-up. That's where we spend a lot of time lately. However, certainly, we are aware of the RCF maturity, which as you rightly said, is in September 2021, which is a bit more than a year away, as well as the bond maturity in September '22. So a bit more than 2 years away. Hence, it's -- the whole topic is very, very high on our priority list. But what I can say to refinancing is once we are in a more normal business situation, we review the options that we have available in connection with the upcoming debt maturities. Anything else is too early to say at this stage.

But obviously, Wim, it's on -- as JC is saying, it's on the top of our agenda. What we need to do today is making sure that we can manage our cash. We are going through the crisis as best as we can. And this is what we're doing as we speak.

So we have another question from Maxime Stranart from ING.

Again, 2 questions. So first of all, on the NEXT update, can you confirm that all the figures we have disclosed is based on gross sales, as you mentioned last time? And so what is basically the impact on the net side? And secondly, on the working capital, so you mentioned a recurring pattern over the first quarter as usual, but also COVID-19 impact. Can you maybe single out the COVID-19 impact on that side as well?

Okay. Sorry. Can you -- so the first one is confirm that it’s gross, yes. So what we can confirm that the impact of NEXT is gross, but this is -- so yes, all that is -- but this is the -- yes, so it's the gross impact on revenue. What is your second question? I'm not sure I...

Well, I can take the second question, Cyrille.

Yes. Yes, go ahead.

Yes. It was a question on the working capital, Maxime, I understood, and how the split is between seasonal and between COVID-19. I would say it's fair to assume the split is roughly half-half, yes, between COVID-19 and seasonal. Whereas the seasonal is typically rebate and bonus related payments, the COVID-19 is primarily driven, let's say -- as you know, we did a procurement stop. We stopped all raw material purchasing in order to preserve cash, as Cyrille said, and these are certain shipments that were not able to be stopped because they were already on ships and already transported to us.

So we have no further questions, gentlemen.

Okay. Well, thank you very much, all of you for listening to this call. Thank you the analysts, for your questions. And we'll meet you at the Q2 Balta results call. In between, have a safe and healthy continuation. Thank you. Bye.

Thanks. Bye-bye.

Ladies and gentlemen, this concludes the conference. Thank you all for your participation. You may now disconnect.