Belysse Group NV (BELYS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the shareholders' call regarding the Q1 2021 results. [Operator Instructions] I am now pleased to present Cyrille Ragoucy, Chairman of the Board and CEO; Jan-Christian Werner, CFO; and Emmanuel Rigaux, CTO. Gentlemen, please go ahead.

Thank you, very much, and good morning, everyone, and welcome to Balta's first quarter 2021 results call. If you have not already done so, you can download the earnings statement of -- and this presentation to 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 done so. So I'm on Page 3 now, and I'll walk you through the today's agenda. So I will start. I'm Cyrille. I will start with the general summary on the first quarter 2021. Emmanuel Rigaux, our CTO, will then walk us through in detail on our next results. And Jan-Christian Werner, our CFO, will talk to us about the financial review. We will end this call with a question-and-answer session with the analysts following our stock. So turning to Slide 4, for the financial summary of Q1 2021. The first quarter of 2021 reflects similar characteristics to Q4 2020. All our key markets and divisions still experience COVID-19 restrictions, such as shop closures, and we expect that revenues will recover to a normal level with the increasing pace of vaccinations. Despite depressed volume due to the restrictions, our Q1 2021 adjusted EBITDA margin ended above last year, reflecting the margin impact of NEXT, continued cost savings and the timing affected of low 2020 raw material price flowing in our P&L. Since the start of the year, we experienced and are experiencing a significant freight and material cost inflation, combined with, in some cases, the lack of availability of materials and containers. This is a key focus point for us. In response, we have introduced price increase for our products. And if needed, we will do more increases where and when necessary. Let me now provide you with few highlights of Q1 2021. So we ended up the first quarter with consolidated revenue of EUR 153 million, which is almost 5% below last year first quarter. Despite the ongoing restriction, we saw a continued ramp-up in rugs from U.S. direct shipment and e-commerce, while residential was impacted by lockdowns and the commercial market is still to recover. Adjusted EBITDA was EUR 21 million, with an adjusted EBITDA margin of 13.6%. The adjusted EBITDA ended up 24% above last year's first quarter. The profitability improvements reflect the positive margin upside of NEXT initiatives, our fixed cost savings, and the remaining tailwind of lower raw material price for the second half of 2020. Our leverage was further reduced to 4x from 4.2x at the end of 2020. Year-on-year net debt increased to EUR 293 million, mainly driven by seasonal working capital increase and the one-off financing fee related to the successful extension of the notes. JC will walk us through the detail of our financial results later in this presentation. But for now, I'd like to give the floor to Emmanuel to walk us through the next update.

Thank you, Cyrille. So moving to Page 5 for the latest NEXT numbers. As you can see in the first quarter of 2021, NEXT, continued to deliver strong results. And a material part of our margin improvement in the quarter was once again achieved through NEXT enhancements. Regarding our top line growth initiatives, we are well on track with EUR 80 million of cumulative sales since we started the NEXT program. We achieved year-on-year EUR 12 million incremental revenues in Q1 2021. In e-commerce, we continued the ramp-up through our U.S. e-commerce fulfillment center for Rugs and our European partnership with leading digital platforms. E-commerce revenues more than doubled in Q1 2021 versus the same period of last year. Our direct route-to-market approach to architects and developers and other high-growth segments in commercial tile remained stable year-on-year as the demand remains subdued from COVID-19 restrictions. Other NEXT revenue initiatives continued on the other hand to deliver strong results with EUR 9 million of incremental sales in the first quarter of this year. Moving on to Page 6 for an update on cost competitiveness and margin improvements. So NEXT initiatives achieved EUR 1 million of incremental adjusted EBITDA versus the first quarter of 2020, and we continue to have a strong pipeline of NEXT cost initiatives. So we remain well on track with EUR 14 million of net cumulative adjusted EBITDA savings to achieve our EUR 16 million target for the full program. I now give the floor to Jan-Christian for the financial update.

Yes. Thank you, Emmanuel, and good morning, everyone. Turning to Page 7 for the first quarter 2021 revenue bridge. First quarter revenues were EUR 152.6 million, representing a year-over-year decline of 4.5%. Based on strong volumes, our Rugs business continued its positive upward trend from second half of last year, while our residential business was more affected by continued COVID-19 restrictions with most of our end markets still in lockdown. Also, Brexit pull-forward effects from the fourth quarter 2020 affected the first quarter 2021 accordingly. Last but not least, our commercial business continued its weaker but stable COVID-19 trading also during the first quarter and requires longer than the other divisions for the post COVID-19 recovery to materialize. In Rugs, the first quarter revenues were EUR 59.9 million, 22% up versus last year. Especially our e-commerce business and our U.S. direct shipments performed strong and significantly outperformed last year's first quarter. U.S. e-commerce revenues more than doubled year-over-year, although still slightly impaired by fixed costs, while we are nearing the critical mass. Our commercial business declined year-over-year by 19.5% to EUR 45.7 million as we still experienced deferred lead times as well as cautiousness on starting new projects. In Residential, revenues decreased to EUR 43.2 million, down 8.2% versus Q1 2020. Key drivers were the COVID-19 restrictions, especially in Western Europe, as well as the unwinding of the Brexit-related pre-stocking during Q4 2020. While our export business outside of Europe continued to grow steadily. Turning to Page 8, on the first quarter adjusted EBITDA. Despite COVID-19 restrictions still affecting most of our end markets, we achieved a first quarter consolidated adjusted EBITDA of EUR 21.2 million, up almost 24% versus last year. As year-over-year overall revenue slightly declined, the adjusted EBITDA margin increased to 13.9%, up 3.2 percentage points from 10.7% during Q1 2020. Supported by the favorable raw material prices and the time delay before purchases come into the P&L, the absolute contribution margin was largely unchanged versus last year despite the 4.5% decline in revenues. The contribution margin percentage increased by nearly 2 percentage points versus last year to 36% as our business continued its transformation to more higher-margin products, increased direct route to market, growing export sales as well as efficiency savings from our lean projects. In combination with the continued year-over-year fixed cost savings of around EUR 5 million in the first quarter 2021, Q1 adjusted EBITDA result improved to EUR 21.2 million. Rugs adjusted EBITDA in the first quarter was EUR 11.2 million, up EUR 6.9 million or 161% compared to the same period last year. The adjusted EBITDA margin increased significantly from 18 -- sorry, 8.7% to 18.6%, driven by strong volume growth and respective production inefficiencies, better product mix, lower raw material costs as well as continued strict cost control. It should be noted, however, that the Rugs' first quarter of 2020 was particularly weak as initial COVID-19 impacts were already incurred starting as of March 2020. Commercial adjusted EBITDA for the first quarter was EUR 6.4 million, down EUR 1.8 million or 21% compared to the same period last year. With volumes impacted by COVID-19 and a slightly unfavorable geographical mix, the adjusted EBITDA margin decreased slightly to 14.1% from 14.4% during last year's quarter, underlining the resilience in our commercial business. We adjusted already during the second half of last year our mode of operations to the lower but stable business environment, therefore, benefiting from continued fixed cost savings across our commercial operation, especially in the U.S. Residential adjusted EBITDA amounted to EUR 3.8 million, down EUR 0.3 million or 7.5% compared to last year. The adjusted EBITDA margin of 8.8% is slightly up versus last year, driven by the impact of NEXT savings as well as lower raw material prices. Moving on to Page 9, cash flow. The first quarter ending cash position amounted to EUR 87.2 million, including EUR 59.3 million drawn under our revolving credit facilities, hence a decrease in net cash during the first quarter by EUR 19.1 million, in line with expectations. Included in the EUR 19.1 million cash reduction is a EUR 3.6 million repayment under our RCF facility as well as the before mentioned extraordinary financing expenses of around EUR 7 million related to our successful exchange offer on the senior secured notes, which was paid in March. With further EUR 11 million now available under our revolving credit facilities, the total available liquidity amounted to EUR 98.3 million as of the end of Q1. The cash usage during the first quarter is largely related to the normal seasonal working capital patterns such as the U.S. patio season build-up, the Belgian taxes, and the coupon on the senior secured notes. The inventory build-up in the first quarter amounted to EUR 14.7 million. Combined with trade receivables, trade payables and other working capital, the overall net effect on working capital amounted to EUR 4.9 million. Despite COVID-19 restrictions in a number of our end markets, we, again, did not observe any material changes in payment terms, factoring levels or at debt levels during the first quarter. Finally, CapEx spending during the first quarter amounted to EUR 6.4 million and is well in line with guidance and leaves a lot of flexibility, if needed. Moving to Page 10, leverage. Our net debt position, including EUR 36.3 million of debt related to IFRS 16, amounted to EUR 292.8 million at the end of the first quarter. Excluding our IFRS 16-related debt, net debt was EUR 256.5 million. The increase in net debt by EUR 9.6 million during the first quarter is primarily driven by the normal seasonal working capital patterns outlined before as well as the one-off refinancing expenses. Based on the materially improved last 12 months adjusted EBITDA, our net leverage decreased to 4x by the end of March, which means we are back to the pre-COVID crisis levels of year-end 2019. With that, I will give the floor back to Cyrille.

Thanks, JC. So before we move to Q&A, let me conclude the first quarter of 2021 earnings presentation. So while revenues were still impacted by COVID restriction in all our divisions, the results of the first quarter 2021 do confirm our recovery. Overall, the Q1 adjusted EBITDA increased year-on-year by 24% and the adjusted EBITDA margin increased from 10.7% to 13.9%. Q1 2021 benefited from the impact of 2020 lower material costs flowing into the Q1 P&L. Our revenue should recover to normal levels as vaccination program takes effect in the countries that are opening up, although the macroeconomic situation remains uncertain. In our Rugs business, the adjusted EBITDA margins remain high, with our North American business having a steady growth in e-commerce channels and in this quarter, in direct shipments. In Residential, we were impacted by lockdowns in our main markets. In Commercial, volumes are still to recover from pre-COVID situation -- well, from pre-COVID market. In spite of the volume drop for Commercial, the adjusted EBITDA margin was only moderately down versus last year's first quarter, thanks to fixed cost savings and the positive effect of -- from NEXT. Cash remains comfortable at EUR 87.2 million with an additional EUR 11 million headroom under our RCF. And as JC said, our net leverage reduced to pre-COVID-19 level to 4x, driven by Q1 adjusted EBITDA improvement. So obviously, our intention is to mitigate the cost inflation. And we do have implemented selling price increase in Q1 2021, and we'll introduce additional selling price increase where and when necessary. But obviously, we remain very vigilant with the sharp inflation of freight and material and the lack of availability of some materials and containers in certain routes that we experienced since the start of 2021. And let me finish this call -- this presentation by saying that the Balta management teams remain committed to the transformation of Balta by improving operating performance, prudent cost management and executive -- execution of our NEXT strategy. So this concludes the presentation. Just for your information, Balta intends to publish its H1 results -- the 6 months results of 2021 on August 27, 2021. So if we have any questions, so I'll hand it back to the operator. If we have any Q&A, we can start with Q&A now.

[Operator Instructions] So first question from Wim Hoste from KBC Securities.

I will start with 2 then. And the first one is about this discussion on raw materials and selling price increases, et cetera. Can you help us understand if there was already any effect from increased selling prices in the first quarter numbers? And to what extent have you been able to pass through the raw material price inflation that we see? If you look at Bloomberg indices on polyamide, polypropylene, we talk about tens and tens of percentage points of raw materials inflation. So to what extent have you been able to pass that through in your setting for Q2 contract prices? And can you help us understand a little bit that -- that's -- yes, I would keep it there.

Yes. Okay. Thanks, Wim. That's -- I think that's the main question. And it's the right question, actually. So thank you for asking the first question. So it's -- obviously, it's a challenge. What we have done up to now is to increase -- we passed on 2 price increases already. So the first one was what we saw in end of 2020, but early 2021. And then the second one was, what we saw in the second part of the quarter in 2021. So those price increase have been -- it's all our divisions. Most of them have 2 price increases, some just 1, but at the right level. What we -- you don't see much of those in the Q1 results because we -- what we have done is -- it's an announcement to our customers, but they will take into effect in Q2. What -- and as you know, because -- and we said that several times during the presentation, we have several months before -- between the raw material hit our P&L., because it goes through manufacturing and then inventory and then we sell. So it's -- there is no impact yet that you can see on our P&L from raw material cost increase and the price -- the selling price increase that we've done.

Okay. If I can just -- this contains that...

2 -- yes. Go ahead. Go ahead.

No. No. Please I'll let you finish that.

No. No. Just when -- just to finish my -- so there are 2 things on material. It's not only material, but it's freight cost as well. And the freight cost is something that is quite important as well. And in some cases, from our manufacturing plants to our -- where we're selling, it could be up to 3x. So -- and this is taken into account as well. So it's -- I think it's coming from -- and we have explanation -- well, we think we have explanation. It's coming from several factors. One of the factor is definitely nobody see -- saw it coming. And we have -- and nobody saw the demand go as high as it's going. And then a lot of force majeure and then what happened in U.S. with the -- in Texas with most of the chemical plants on force majeure. So -- and this is what's driving this price increase.

Okay. Understood. Just to be sure, I mean, if I look at the Bloomberg indices of these key raw materials, then we must be talking about price increases that you push through of 10% at least or even more? Can you just confirm that, that's kind of the order of magnitude we will start to see in top line of Q2? Is that the right assessment?

It's not far.

Okay. Understood. And then just one last question, if I may, then I pass the phone. What does this whole raw material situation mean for working capital outlook going forward? We saw relatively limited, I think, EUR 5 million or so increase in working capital in Q1. Is there much more to come? Or do you believe that is dormant?

No. There is -- well, it's just mechanical one. Unfortunately, it's just mechanical. It's -- we have done a huge effort in 2020 to lower our working cap. And it's mainly what we've done in 2020, a bit of pricing but lots of volume. And so at constant volume, just by the pricing impact, you will see our working capital moving up. And it's just -- it's a mechanical exercise here. And it's unfortunate, but this is the way it's going to be. So it's -- we cannot do anything about it, except if we can continue to lower our volume. What we're committed to, and this is -- that's what we are pushing, is get the -- lower our volume, but even the lower volume will not be able to compensate the cost increase of our material. I don't know if JC wants to add something on that because maybe I'm a bit too -- I'm not sure it's clear. But JC, do you want to add something on this?

I think you explained it the right way. I mean we will work -- certainly continue working, as we said it in communication before on the efficiency improvements and on streamlining and reducing the quantities of inventories. But certainly, the huge price increase that we are seeing will have a pricing impact on the working capital.

Next question from Maxime Stranart from ING Bank.

Yes. Two questions also on my side. First of all, if you look at the NEXT initiatives in terms of EBITDA savings, well, of course, really positive to see that increase of EUR 40 million in savings over the last 2 years, but of course, excluding cost inflation. So maybe could you put some light on what has been the cost inflation over those 2 years so that we can better understand the dynamics in terms of raw materials impact and improvement, thanks to the NEXT initiatives? And secondly, on Residential, well, it has been announced today that the lockdown will ease in the U.K., I think as of the beginning of May. How do you see the recovery in residential flowing into the P&L over this year?

Okay. So I'll answer the second one first, and then we'll try to answer your first question after the -- so, yes, we're expecting, obviously, and this is what we said, in Q1, we were still under a lot of our markets in residential were in lockdown position. And obviously, U.K. is a large market for us. So we should see some recovery in Q2. However, I think that the -- what we saw in Q1 2021 was not what we saw in the first lockdown. When in the first lockdown, in 2020, we had a clear stop. And really, it was really hard stop. What we saw now is less market. So less orders, less shipments, but still a bit of shipments to some of our customers. So we'll see -- in residential, we will see in U.K. the opening will help. And we should see recovery of the market there in Q2. Your first question on NEXT. So I think we need to take that in 2 -- what -- in 2 ways and analyze that 2 ways and split the answer in 2 ways. So one is, NEXT savings, and I will leave Emmanuel talk about that, but the NEXT savings are mainly efficiency savings. So -- and this is what we have been doing. It's lowering our cost and make our plants more efficient, so on the lean side. So that's one. All the raw material price increase that you're seeing, this is something that is addressed partly because we might, in some cases, use our material in a more efficient way. But it's addressed through the price increase -- or so the selling price increase that I was talking about before. So Emmanuel, maybe do you want to answer a bit on the NEXT savings that we missed -- Maxime is talking about the EUR 14 million?

Yes. Thank you, Maxime. So as you know, the impacts that we are showing and that we are sharing with you, our growth impacts before cost inflation, now we also have a series of initiatives on cost avoidance, which we are not including in this set of numbers, but we are obviously having a number of actions to contain cost inflation, particularly on the procurement side. So that's not part of these numbers. But we have a number of actions which are particularly key as we speak, and which are also focusing on continued availability of our raw materials.

Maxime, does that answer your question?

Yes. It does.

So we have now another question from Wim Hoste from KBC Securities.

A couple of other questions from my side. Can you maybe on the Rugs e-commerce, I think you mentioned in the beginning of the presentation that you are getting closer to critical mass. Can you maybe elaborate a little bit further on that? When are you expecting breakeven or profitability to be -- to become maybe at par with your -- the rest of your Rugs business? Can you help us understand, if anything changed with regards to the comments you made, for example, last year or at the time of the full year results release? So that's the first question. Maybe I'll let you answer that one first.

Yes. So we have -- actually, we need to split the e-commerce in 2 now. So one is U.S., and the comments that you're hearing is mainly on -- all the comments that you're hearing are mainly on U.S. And the critical mass is that, as you know, we have a large facility in Savannah, And it's not cheap. And so when we say critical mass profitability is, we need to not only -- well to have a critical mass and a critical volume to get the profitability to the right level of -- in Savannah. So we're getting there. And this is what we -- the comments that I made at the end of -- for the full year results was that we will get to that profitability during the year -- this year. And I stick to that comments. It's -- our volumes are getting higher. It takes so much, and this is true. It takes more time than what we had anticipated, or I had anticipated, but we're getting there. And this is actually very satisfying for the whole team because it's a really hard work to make it happen. What we have done as well is, we are looking at the -- what needs to be done from an IT perspective to facilitate the whole e-commerce business, which, today, is a bit cumbersome on -- with the way we're set up. So this is being -- as we speak, this is being done. And then I'll answer a bit on Europe as well. And so the IT, obviously, will make both sides easier. And on Europe, we have set up a small team as well to address the European e-commerce business. We are the -- so there is no structural moves. So we didn't take a large warehouse as we did in U.S., but the e-commerce in Europe is moving up quite nicely and actually faster than in U.S. because I guess we have some background and -- but we need to catch up the European market share that e-commerce is having. So mainly, it's -- e-commerce is mainly large market share in U.K., Germany, now starting in France.

Okay. And then another question. There have been some moves in the sector. I'm talking about, we had targets offer, also Victoria making some expansion moves. There is -- yes, there seems to be a lot of activity around consolidation or anything like that. Have you any thoughts about what kind of role Balta could play in this -- yes, in this consolidation or this changing environment? I know yes, the balance sheet is probably not allowing to go yourself off to big acquisition target at the moment. But have you any thoughts on that? Or does it mean any change in competitive landscape for you? I'm happy to hear your thoughts on that.

Yes. So Wim, we -- obviously, we're following very closely what our competitors are doing. And yes, it's -- so what we need is to repair -- well, not to repair, but deliver and make sure that our balance sheet is in the right position before we can move forward.

Sure.

So that's -- I don't think we're in a position today to move forward on this. But obviously, we're looking at what our competition are doing. And it's interesting, in some cases, and others, that's their choice. But I think for us, we're definitely in the flooring business. So that's where we are, and this is where we want to stay.

We have no more questions.

Okay. No more? Okay. Well, thanks a lot for assisting to our Q1 results. So it's -- I think we are working hard to make it -- to make our commitment that we made in the I mean, extent work. And we'll talk to you on the 27th of August 2021 for the H1 results, so our 6 months results. Thank you for assisting today, and we'll talk later. Bye.

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