Belysse Group NV (BELYS) Earnings Call Transcript & Summary

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

Yes. Thank you very much. So good morning, everyone, and welcome to Balta's 2020 first year -- first half year results call. If you have not already done so, you can download the earnings statements 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, but please do so, and please read it before. So I'm on Page 3 now for the agenda of today. So I will start with a look at the results of our first half of 2020. A quick update then on COVID-19. And then Jan-Christian Werner, our CFO, will take us through the financial review. So Slide 4 for the financial summary of our first half of 2020. We ended up the first half with revenue of EUR 266 million, which is 24% below last year first half. Excluding the impact of currencies, our revenue declined by 24.7%. The organic top line was driven by COVID-19 across all divisions. The adjusted EBITDA was EUR 18.3 million versus EUR 37.3 million in last year's first half. Our H1 results were [indiscernible] first in Continental Europe and later in U.K. and U.S. Revenues decreased by more than 36% during the second half of the semester of 2020, so second quarter of 2020, compared to the same period in 2019. As of mid-May, we experienced an easing of this trend. And this continued in June. NEXT has resumed in early July, and we expect to benefit to return as operations go back to more normal level, albeit with some delay. Leverage at the first half of 2020 was 5.9x, while net debt declined to EUR 320.3 million versus Q1. So moving to an update on COVID-19, in line with what we already communicated to the market when we publish our annual report of 2019. COVID-19 represents an unprecedented disruption to our business and a material challenge to the industry and to Balta. Needless to say that the second quarter has been significantly impacted by the lockdown implemented for most of our regions. We, therefore, turned into cash-is-king mode as of mid-March to significantly reduce our operation -- operating expense and tightly manage our cash flow. As communicated early July, the revenue shortfalls impacted more severely in April with an easing trend starting in mid-May and continuing in June. We took specific COVID measures, including temporarily shutting down 6 of our 8 plants, closing them in April and partly in May to meet the reduced demand while continuing servicing our customers, promptly reducing as well home office for our white collars. So we took some measures as well. We have reduced our employees expense by accessing government and employment program for a vast majority of blue and white collars and by voluntary reduction of the monthly compensation for myself to expanded leadership team by 50% to 30%, respectively. We have dramatically reduced discretionary spend, lower sampling costs, deferred expense and made savings through lockdown restriction as we did not travel and did not have any events. In June, office will open progressively, and our production site were running towards more normal capacity. All this has been done taking into account social distancing in all our plants and offices and supplying personal and protective equipment to our employees. I must say that I'm proud of the behavior of my Balta colleagues and want to thank them for their continued resilience through the second quarter and beyond. Finally, we have successfully managed our working capital in the second quarter. As a result all of these measures, we held EUR 87.5 million in cash at the end of June 2020. We will continue to adjust our mode of operation to the change in the external environment. With a strong cash in hand that we had at the end of the second quarter, we forecast our existing cash on hand and cash flows to be sufficient to support our business through the ongoing production ramp-up. With this, I will give the floor to JC, our CFO, who will elaborate more in detail on the first half 2020 financial review. Go ahead, JC.

Yes. Thank you, Cyrille, and good morning, everyone. Turning to Page 6 for the H1 2020 revenue bridge. As already outlined by Cyrille, Q2 was an extraordinary quarter for Balta. Our business was heavily affected by the COVID-19 lockdowns and store closures in Europe, primarily during April and May. While in June, we experienced a material recovery in most of our businesses when shops reopened and the lockdown ended. Also worth mentioning are the geographical differences in terms of timing and handling of the pandemic. While Europe was hit earlier by the pandemic and introduced full-scale lockdowns in most countries, the U.S. was hit later and continues to be strongly impacted by COVID-19 as of today. As a consequence, our first half consolidated revenues declined 24% year-over-year to EUR 266.4 million. While these material revenue declines due to COVID-19 are across all divisions, Rugs and Residential were, as said, primarily affected in April and May during the lockdowns while showing a substantial rebound in June following the reopening of stores in Europe. In contrast, given its nature, our commercial operations remained more stable during the second quarter. In Rugs, first half revenues were EUR 84.3 million, almost 30% below last year. Rugs sales volumes have been significantly impacted by the COVID-19 lockdowns across Europe as well as other parts of the world, starting already mid-March. In the U.S., revenues remained relatively stable year-over-year. And also our U.S. e-commerce business profited from the pandemic and sales continue to catch up, although still remaining below expectations and continued to be burdened by fixed costs. Our Commercial business sales declined year-over-year by 14% to EUR 100.5 million. Our Commercial businesses remained more stable during the crisis, not depending on stores being open as well as projects continue to be executed during Q2. In general, our U.S. Bentley operations were hit later and less than our Europe and modulyss operations, while our direct route to market initiatives continues to deliver. In Residential, revenues were EUR 72.8 million, down 28% versus last year. Both our U.K. and Continental Europe trading was significantly impacted by COVID-19. We remain focused on growing our export business and continuing to transition towards more higher-margin products. The latter now represents 40% of the divisional revenue. Turning to Page 7 on the half year adjusted EBITDA. Our H1 consolidated adjusted EBITDA was EUR 18.3 million, down 51% versus last year. This represents an adjusted EBITDA margin of 6.9%, down year-on-year from 10.6% during H1 2019. Despite the cost savings initiatives taken, the usage of governmental measures like economical unemployment as well as initial raw material tailwinds starting to show in Q2, Balta was not able to completely counteract the negative cost absorption and production inefficiencies resulting from the volumes declines caused by COVID-19. As a consequence, Q2 EBITDA amounted to positive EUR 1.2 million, with only the Commercial business delivering a positive EBITDA contribution of EUR 5.8 million in this unprecedented quarter. In Rugs, H1 adjusted EBITDA was EUR 1 million, down 88.5% versus last year. The adjusted EBITDA margin was 1.2%, down versus the 7.6% achieved during H1 2019. Rugs H1 adjusted EBITDA was primarily impacted by the severe volume drop experienced due to COVID-19, combined with an adverse geographical mix, which could only be partially offset by our mitigating savings actions. Our Commercial business achieved an H1 adjusted EBITDA of EUR 13.9 million, down 27.5% versus last year. The adjusted EBITDA margin was at 13.9%, which represents a decrease versus 16.5% as of H1 2019. Both our U.S. and European business were impacted by COVID-19 shortfall impact, partially offset by better mix and fixed cost savings. In Residential, first half adjusted EBITDA was EUR 3.1 million, down 60.9% versus last year. The adjusted EBITDA margin decreased to 4.2%, below last year's realized margin of 7.8%. Residential was able to partially offset the COVID-19 volume impact by better mix, the positive effects from NEXT initiatives as well as fixed cost savings. Turning to Slide 8, on the income statement. Driven by the COVID-19 operational impacts outlined in the previous slides, the adjusted operating profit dropped to a negative EUR 1.6 million, down by EUR 20 million versus last year. The exceptional expenses, which amounted to EUR 2.6 million for H1 2020, continue to be mainly driven by fees related to our NEXT program. Financial income expense increased compared to last year due to the interest of our fully drawn RCF and the sale and leaseback transactions performed during Q1 of this year. The income tax gain of EUR 1.1 million is mainly related to the recognition of deferred tax assets resulting from incurred tax losses. Our reported net loss for the first half of 2020, therefore, amounts to negative EUR 16.8 million, which compares to net profit of EUR 2.7 million for the comparable period of last year. Moving on to Page 9, the cash flow statement. As mentioned before by Cyrille, we hold an ending cash position of EUR 87.5 million as of end of June compared to EUR 19.7 million at the end of Q2 2019, primarily related to the fully drawn RCF of EUR 72.1 million. While Q1 saw the typical cash consumption related to the seasonal increase in inventories, Q2 shows an increase in cash by EUR 7.1 million, thanks to saving measures initiated and tight working capital management. Despite a significantly lower EBITDA result, cash generated from operating activities during the first half of 2020 amounts to EUR 20 million, in line with last year's number. With the emergence of the COVID-19 pandemic, we have strongly focused on cash preservation and working capital management, which led to the material inventory reduction during Q2, good customer collections and a visible purchasing spend control. CapEx of EUR 11.8 million, slightly below last year due to disciplined CapEx spending. Financing cash flow increased versus last year by EUR 75.4 to EUR 59.9 million, largely related to the aforementioned EUR 72.1 million precautionary drawing of our RCF. For the time being, we remain fully drawn on the revolving credit facilities in Europe and the U.S. Moving on to Page 10, net debt and leverage. Net debt, including EUR 43 million debt related to IFRS 16, amounts to EUR 320.3 million at the end of June. While the overall increase during H1 represents a typical seasonal pattern, driven by seasonally increased working capital, based on the increase in cash during Q2, Q2 shows a reduction in net debt by EUR 6.1 million versus Q1. Excluding the impact from IFRS 16, net debt increased to EUR 277.3 million during H1, and for Q2, reduced again by EUR 4 million versus Q1. Despite the reduced net debt during Q2, the net leverage continues to increase to 5.9x, driven by the significantly reduced adjusted LTM EBITDA. This represents an increase of 1.9x versus year-end 2019 and 1.6 versus Q1 2020. However, the net leverage of 5.9x remains well within our covenant, so that the precautionary agreement reached with the banks for the impact of COVID-19 has not been applied for the end of the June period. With that, I hand it back to Cyrille.

Thanks, JC. So let me wrap up this call before we go to Q&A with the analysts. So as you understand, the second quarter of 2020 was challenging for Balta due to COVID-19 lockdown that have significantly impacted our results and mostly in April with an easing trend in mid-May and continuing in June. Our existing cash on hand and cash flow should be sufficient to run the business through the ongoing production ramp-up. Balta will continue to adjust its mode of operation to the change in the external environment. We expect the benefit from NEXT to return, albeit with some delays, as operation are ramping up to a more normal level. However, macroeconomic conditions remain uncertain, and this is why we did not give any forecast for Q3 and Q4. So with that, we are happy to answer some questions, if any, with JC.

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

So my first question would be on the working capital targets. You mentioned in the NEXT program that you would target to improve working cap. Can you now communicate the target in terms of percentage of sales or on where you would like to stand on, and also on CapEx, so in terms of run rate per annum, if you could provide some guidance on this?

Okay. I'll start and then JC will take over. On the working cap, obviously, we did a very good job at lowering our working cap in Q2. We -- and the working cap was lowered by obviously using our inventory. So -- and we have today a very low inventory. We will not be able to continue and to manage our Q3 and Q4 with that inventory that we have in hand today. We had to rebuild part of our inventory. Are we going to go back to the level that we had before? No. But we need to build back our inventory to serve better our customers. Is it the right thing? Did we do the right thing in lowering our inventory as low as where we are today? Yes, I still think that we did the right thing. And I guess, the team did a very good job. I'm answering on CapEx and then give the floor to JC. CapEx, we have -- I think we have given a guidance in the past of EUR 3 million -- EUR 30 million. So we gave CapEx on EUR 30 million. Obviously, what we're doing today, Maxime, is still managing -- well, we're managing our -- still managing our cash extremely carefully. And we are assessing all CapEx one by one and we'll not invest any CapEx that is -- that has a return of more than 18 months. So that's where we are today.

Yes. So maybe briefly adding to the CapEx comment that Cyrille made already. Our CapEx, as you can see, is below EUR 12 million for the first half of the year, as we've primarily focused, especially in Q2, on spending on health and safety topics, certainly, but have stopped the investments in NEXT, which we've picked up again in July now. We have spent less than EUR 5 million in Q2. And as Cyrille said, it will certainly be below the EUR 30 million guidance that we've provided earlier.

We have a question from Pierre Rousseau from Barclays.

Maybe if you could comment on the exit rates in July and in the first weeks of August, that could be helpful. And also, how does that compare to your Q4 guidance of 85% utilization rate? Do you see any upside to that target into year-end? The second question would be on the cost savings that you've seen in H1. Could you help us with a little bit of granularity as to how much was public support, how much was the wage cuts, how much was the extraordinary cost action that you took? And how sustainable could that be into the remainder of the year?

Okay. Thanks, Pierre, for the 2 questions. So the first is July and August and then the 85%. We will not comment on the 85%, Pierre, because that's what we just forecast. And this is -- so we won't update. I can update you quickly on July and August. We had a good July from a volume standpoint and actually from a result standpoint as well. August is -- we're expecting a good August from a volume standpoint in Rugs. In Commercial, as JC has said and as JC has explained on the Commercial side, what we see today is we were lower than last year but this higher than -- so we want lower but higher than Residential and Rugs in April. And -- but we stayed like this for the remainder. So that's what we see in July, and that's what we see in August as well. The demand in Residential seems to be high. On the cost savings?

Yes, yes. And coming to the fixed cost savings, I can give you, let's say, the number for Q2 because that was certainly done, the quarter most affected. In terms of savings that are coming, let's say, from economical unemployment as well as white-collar savings, as Cyrille outlined the initiatives early on, we have roughly savings of EUR 15 million, which spread over, let's say, blue-collar workers and COGS as well as white color workers and fixed cost savings. And how far is that sustainable? That is certainly sustainable if it's needed. So meaning we will continue adjusting our fixed cost saving to the market environment that we are seeing.

Does that answer the question, Pierre?

Yes.

Okay. So no next question. I guess we'll close the call. So thank you very much for assisting to that call. Obviously, as you understand, the time that we're living today is unprecedented. And our conditions remain uncertain. I would -- the good news today actually was what the government in U.K. said, where they're pushing people to go back to the office. And hopefully, every government will do that in Europe. So thank you for assisting, and we'll talk to you for the Q3 results. Thank you. Bye.

Thank you very much. Ladies and gentlemen, this concludes today's web conference. Thank you all for your participation. You may now disconnect.