Belysse Group NV (BELYS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the shareholders call regarding the Q3 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 Third Quarter 2021 Results Call. If you have not already done so, 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 on the disclaimer on Page 2. I will not read it out, but please do so, and make sure you have done so. So turning to Page 3 for today's agenda. I will start with the general comment summary on the third quarter results. Then Emmanuel Rigaux, our CTO, will then walk us through our NEXT results. Then Jan-Christian Werner, our CFO, will then explain the financials. We will end up the call with a question-and-answer session with the analysts following our stock. So turning to Slide 4 for the financial summary of Q3 2021. Trading in the third quarter of 2021 added to the improvement shown over the last 15 months. We had a strong EBITDA performance in the quarter as for every quarter in 2021 with a margin that end up at 13.8%, slightly below the 15.1% achieved in Q3 2020. Let me give you a few highlights on -- for our Q3 results 2021. The first highlight is obviously the strong increase in raw material, and to be clear, this is clearly an understatement. And transportation costs for the first seen in industry in Q2 2021, so all those costs were seen in the industry starting in Q2 2021. This has started to significantly impact Balta's cost of goods sold. While the start of the quarter still saw some benefit from the lower cost of raw material purchased earlier in the year, this effect is coming to an end. To cover this cost, we have continued to implement our NEXT program to improve efficiency, but we have as well raised our price across all divisions to pass on the inflationary pressure. The latest significant energy cost increase in Europe started to impact us as from December, and it will require further action. Our Q3 consolidated revenue amounted to EUR 151 million, which is almost 5% -- plus 5% versus Q3 2020, with Rugs and Commercial revenue improving over Q3 2020, while Residential volume and revenue softened. Our volume in the Commercial division are slow to recover and are still below pre-COVID-19 levels. However, what we see is Q3, we see an improvement in the U.S. market. Our adjusted EBITDA was EUR 21 million with an adjusted EBITDA margin of 13.8%, as I said previously. The adjusted EBITDA ended up just below last year third quarter but 21% above Q3 2019. This reflects the positive upside of price increase, our NEXT initiatives, offset by higher cost of raw material, logistics and energy, and it reflects as well our fixed costs which are back to a normalized level. Finally, our leverage is reduced to 3.3x from 4.2x at the end of 2020, despite increase of raw material price reflected in working capital. JC will provide us a lot more detail on the financial results later in the presentation, but now I'll give the floor to Emmanuel to walk us through the NEXT results.

Thank you, Cyrille. So moving to Page 5 for the latest NEXT numbers. Our NEXT program continued to deliver strong results in Q3 2021 on the commercial side. The top line NEXT initiatives delivered EUR 42 million of incremental revenue year-to-date, '21 versus '20, which firmly puts us ahead of target and continues to show some progress on a quarterly basis. We have already achieved EUR 110 million of additional cumulative sales since we started NEXT, a further increase of EUR 10 million in the last quarter. To go more in detail, e-commerce continues to show growth versus 2020 both in the U.S. and Europe. We successfully established new connections to leading marketplaces in the U.S. and in Europe and are planning to roll out further connections with key marketplaces in Q4 with now a fully functional B2B trading platform in the U.S. called baltarugs.com. Our Direct Route to Market initiative, on the other hand, shows slow progress in 2021 due to construction slowdown in Europe, while growth rates in the U.S. segment is returning to pre-COVID-19 levels. Last, our new sustainable quality in rugs, new generation and regeneration, continue to meet strong demand, which evidences the ever-increasing importance of sustainability in our industry. Moving on to Page 6 for an update on margin improvements. Operational mix margin improvement initiative added EUR 5 million to our year-to-date 2021 adjusted EBITDA versus 2020. And our Lean program, in particular, has continued to deliver robust targets in Q3. Our logistical efficiency project represents a good example of strong overall performance, so we expect to outperform the 3-year Lean target by EUR 2 million for the full program. On Procurement, new initiatives continue to be launched in order to bring additional benefits in an increasingly difficult context. And I will now turn to Jan-Christian.

Yes. Thank you, Emmanuel, and good morning, everyone. Turning to Page 7 for the third quarter revenue bridge. Revenues for the third quarter of 2021 were EUR 151.5 million, representing a year-over-year growth of 4.9%. While overall volumes reduced by 6% compared to last year, the implemented price increases and positive mix effects compensated respectively. In our Rugs business, third quarter revenues amounted to EUR 52.5 million, up 8.7% versus last year. Volumes were down 7% compared to the extraordinarily strong third quarter last year, especially in Europe, as well as on direct shipments, which normalized compared to the very strong first half year. On the other hand, we continue to see very strong demand from rest of world, primarily from Latin America. Our Commercial business started to show signs of COVID-19 recovery with improved revenues year-over-year by 9.9%, EUR 48.9 million. While we still experienced COVID-19-related cautiousness from corporates and starting new projects, volumes in our U.S. business increased strongly by more than 10% year-over-year. Residential revenues decreased year-over-year by 3.6% to EUR 45.5 million compared to the very strong comparable period last year. This is driven by a softer market in combination implemented price increases. Turning to Page 8 for the third quarter adjusted EBITDA. Adjusted EBITDA for the third quarter was EUR 21 million, down 4% versus last year, resulting in the last 12-month adjusted EBITDA of EUR 93 million. While this continues to be a success in these extraordinary times, it should be noted that it includes the outstanding fourth quarter 2020 EBITDA result of EUR 27.9 million. Based on the EUR 21 million adjusted EBITDA, the group's third quarter adjusted EBITDA margin reduced to 13.8%, down 1.3 percentage points versus last year. Rugs adjusted EBITDA in Q3 2021 was EUR 8.5 million, up EUR 1.6 million or 22.3% versus last year, resulting in an adjusted EBITDA margin of 16.1%. This represents an improvement in EBITDA margin of 1.8 percentage points versus last year, which is driven by favorable pricing and improved product mix in all major territories. Commercial adjusted EBITDA in Q3 2021 was EUR 7.9 million, up by EUR 0.8 million or 10.6% versus last year. The adjusted EBITDA margin slightly improved versus last year by 0.1 percentage point and is at 16.2%. The improvement is driven by the aforementioned volume recovery, especially in our U.S. business, while also our European operations profited from implemented price increases. Residential adjusted EBITDA in Q3 2021 was EUR 4.2 million, down EUR 3.1 million or 42.5% versus last year. The adjusted EBITDA margin reduced by 6.2 percentage points to 9.2%, which is caused by the significant increases in raw material and energy prices, while the required price increases have not yet fully taken effect on the results. On top of the higher cost prices, which affected third quarter results, the lower volumes resulted in temporary operational inefficiencies. Moving on to Page 9, cash flow. The Q3 ending cash position amounted to EUR 53.6 million, which represents a net cash position of EUR 0.9 million. As we have returned some cash under our RCF facilities earlier this year, we currently have a further EUR 17.5 million available under our existing revolving credit facilities, bringing total available group liquidity to EUR 71.1 million as per end of Q3. Consequently, our cash position decreased by EUR 33.8 million during the quarter, which is primarily related to raw material price-driven inventory increases of EUR 17.4 million. The remainder is due to the aforementioned EUR 6.5 million repayment under our RCF facilities and the EUR 9.2 million interest payment on the notes. While the increasing raw material prices have respective impact on cash as well as on supplier limits, we continue to not observe any material changes in factoring levels of debt levels as of Q3. Finally, CapEx spending during Q3 amounted to EUR 6.2 million, which is well in line with guidance. Moving on to Page 10, net debt and leverage. Our net debt position, including EUR 39.7 million of debt related to IFRS 16, amounted to EUR 322.5 million at the end of September 2021. Excluding IFRS 16-related debt, net debt was EUR 282.8 million, representing an increase of EUR 27.6 million. Based on the continued strong last 12-month EBITDA, our net leverage only slightly increased to 3.3x compared to 3x at the end of June, remaining well below the pre-COVID crisis levels of 4x at the end of 2019. With that, I will give the floor back to Cyrille.

Thanks, JC. So before we move to Q&A, let me conclude this third quarter call and briefly recap what we said. So we saw an increase in both turnover and profitability on our Rugs business due to improved pricing and mix. Residential saw a soft market reflected in our sales. Our Commercial division has improved, but volumes are still to recover pre-COVID-19 levels. The adjusted EBITDA margin increased above 16% despite stable volume and mix. We saw the start of the recovery in the U.S. market. Overall, the Q3 adjusted results ended up at an adjusted EBITDA margin of 13.8%, which is a material improvement versus Q3 2019. The latest significant energy cost increase in Europe started to impact us as from September and will require further action. The last thing that I want to share with you is our NEXT program is coming to an end, and it will be replaced by another program called BEYOND. And it will be -- the program BEYOND will be built on the 3 pillars, the following pillars: sustainability for innovation, efficiency, agility going digital. So 3 pillars: sustainability, efficiency and agility. BEYOND will be explained and quantified at the full year 2021 results call scheduled on the 25th of February 2022. Just to remind you and to say again that Balta's management remains vigilant to ensure that we continue to respond appropriately to the global economic uncertainty and is committed to further transform Balta by improving operational and operating performance. With that, let me hand back to the operator for Q&A, if any.

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

I have a couple of questions. Maybe first on the Rugs business. Can you explain, yes, how the e-commerce is working for you? What kind of traction you're seeing from -- or you're expecting from the -- also the new clients you will sign or start up with in the coming months? And then also on Rugs, yes, what kind of share of wallets do you have for the 2022 contracts? Can you offer a little bit of clarity how -- yes, how that looks? That's the first questions on Rugs. Then a little bit the same on Commercial. Can you maybe help us understand how the order books are looking for the months to come? Are you seeing also in Europe improvement in the order books? Do you expect that kind of a similar trend as you already saw in the U.S. in Q3, with double-digit growth? Or can you just help us understand the Commercial momentum also for -- yes, for the Commercial division?

Thanks, Wim. So we start with the Rugs division. Maybe, Emmanuel, do you want to explain as the e-commerce, the new clients and where do we stand? We shall start with this.

So on e-commerce, we -- as you know, Wim, if you remember, we had a very strong Q1 in the U.S. and in Europe. Q2 was slower. The growth was a little lower but still positive versus last year. And then when you look Q3 '21 versus Q3 '20, we actually see a slightly lower level, and that's because we had an exceptionally high Q3 in 2020 in terms of e-commerce activity. To go move by geography, I mean, the online Rugs markets in the U.S. slowed down in Q3. That's clear also from what you see from the large marketplaces. And -- but still, year-to-date, on the -- in terms of pure players, we do show quite an impressive growth year-to-date with brick and clicks, which are traditional customers with digital components. In fact, there is an effect, which is that our largest business customer has decided to do the [ experiment ] himself, so it doesn't show in our e-commerce sales anymore. So in a way, slightly after [ visual ], but we -- so with brick and clicks, we show less than last year. And in Europe, there was an impact from Brexit rules, so we have lost direct-to-consumer drop-ship customers because of that, and we are currently taking a number of steps. So you were saying, what are we doing? So we have -- as I mentioned earlier, we have launched a B2B web store for the U.S., and we are now becoming [ the raging ] presence on a growing number of marketplaces through the full leverage of our digital tools, which are -- we have a very powerful digital integrator that we use to connect to new marketplaces, and we also have enhanced our digital marketing capabilities. So this is where we stand currently.

Thanks, Emmanuel. Emmanuel was talking about an impressive growth in the Rugs business and pure player in U.S. To put a number on that, that's plus 63%. So is growing. It's -- and we're getting there. But -- and then we're developing our capability in Europe, as Emmanuel explained this. On the share of wallet for 2022, we're comfortable that we have what we need in the Rugs business in mainly across the board and mainly in U.S. on the outdoor business. So that's -- I would say, we won't comment more, but that's -- we're comfortable on -- for 2022 in the U.S. market for that. On the Commercial side, in order book in U.S. is a lot stronger than last year. In Europe, it is stronger as well, and the trend is getting better. The problem is -- or the challenge that we have is some projects are delayed. We have the project, but they're delayed, and the starting point is delayed as well. What we see is that some customers have had difficulty to get their -- to finish their project, difficulty to have some -- the materials to finish their project. So we have the project. They're delayed. We have a good order book on -- very strong in U.S., quite strong actually in Europe, but the projects are delayed, and the start in the project are delayed. Wim, does that answer your question?

Yes, it does. I have one other question I would like to squeeze in, if I may, and that is on the whole inflationary environment. Far after, obviously, the raw materials inflation, now also energy prices and transportation cost increases, which you clearly hinted that it's your -- in your outlook statements. Can you maybe put a number of -- on the additional inflation from raw materials and energy, et cetera, that you will see in Q4 versus Q3 to give us a bit of an idea? And also explain whether, yes, to what extent pricing actions have been implemented or announced? And what kind of delay those might -- maybe have and cause margins to be temporarily under pressure? So to walk a little bit through the dynamics there, that would be helpful as well, I think.

Yes. JC, do you want to start on that? And then I'll help maybe at the end. Yes.

Yes. Yes. Let me start with the dynamics, Mr. Hoste. I mean what we have seen certainly in terms of the raw materials is that the PPA prices, they started to increasing strongly following the crisis end of last year, beginning of this year. We saw material increases, as you are aware of, 50% to 60% until the prices were peaking primarily in the second quarter. So the increase was very strong during the first quarter and the second quarter that reached the peak. And since the peak, in terms of price dynamics, as you were asking, we are seeing stable prices, slightly reducing prices with a little bit of different tendencies in the individual segment or better to say, we see the different purchase categories. But in general, we see a slightly declining trend but not at all comparable to the increase that we've seen before. What that means is certainly that, as you are aware, we typically have this type of time lag, 5 to 6 months until raw material price increases and our purchases are rolling into the P&L. So this will certainly then -- we will see the peak, let's say, of the Q2 raw material purchases materializing in the fourth quarter. That's more of what Cyrille mentioned before in the script, and that's what we also indicated. In terms of magnitude, as we always say, we are working on pushing on price increases to our customers, certainly, to compensate for these effects, but we certainly do not compensate on a month-by-month basis or quarter-by-quarter basis. So the compensation is certainly only covering, let's say, for the increases, the overall incur. Having said that, we will see certainly this peak of Q2 rolling into Q4, and the magnitude of the impact will be bigger than we have seen it in Q3, which was also slightly impacted, but which has a time delay from the increases from the first quarter. On the other side, we see energy prices and transportation cost increases that we have mentioned earlier on. This started to increase, let's say, from middle of this year. And what we're seeing there are very strong increases as well. We are certainly partially hedged for the energy increases as we do with our energy suppliers, for example, so that not the full spot prices will be hitting us. But there will be a certain time lag as well until we will be able to pass these on because these increases are coming faster than the raw material price increases. So maybe this is giving a bit of a dynamic how we see the evolution. And as I said, after peaking raw material prices in Q2, we saw stabilization, slight reduction that will then certainly start rolling positively, not to the magnitude, the negative effect happened and the increase at the end of the year, beginning of this year, but it will start positively affecting the results starting next year.

So we have another question from Maxime Stranart from ING.

I hope you can hear me well. Two on my side. I know you do not provide a quantitative guidance, but could you share with us your view on what would be a normalized, let's say, EBITDA margin for the entire company in a normal year, excluding any COVID-19 impact? And secondly, on BEYOND and the objectives you will communicate at the time of the full year results, could you already shed some light on what will be the main, let's say, driver and how you will communicate them to the market? I do recall that for the NEXT plan, it was a gross revenue and gross improving EBITDA, excluding any cost inflation. Is it something you plan to continue doing? Or will you provide us with really, let's say, net impact and, again, a target, let's say, EBITDA margin for the normalized business? That's all for me.

Okay, Maxime, so thanks for the questions. So we won't give you the -- as you know, we don't want to share the normalized EBITDA. I think we have never done that, and we don't want to do that today. On the BEYOND side, I'll leave Emmanuel to answer this one. But we're working on it, and to be clear, and to be frank, but we have a good idea of what we want to do. Emmanuel, do you want to share that?

Yes. As you said, Cyrille, this is still work in progress, but we are working with all the different business units very diligently right now on this plan. So what -- I think the one thing that will be different is that we will communicate on -- also on nonfinancial KPIs as part of our sustainability pillar. But of course, there will be a communication on margin improvement with regards to Lean, Procurement and also innovation because we are investing, and we will continue to invest in new innovative products as a very key part of the BEYOND program. So this is -- I can only give you a rough idea, but this is pretty much the framework of the way we will communicate on BEYOND.

Very clear. And if I may squeeze another question before the end. In terms of debt and, well, refinancing, given the high cost of debt, do you have already a view on the next steps you will undertake on that regard? Or is it too soon to talk about that?

Well, Maxime...

Go ahead, yes.

Yes, yes. Sure. I mean when you're looking at our notes structure, very certainly, as you know, a window of -- kind of window of opportunity after the early redemption penalty end of September fell away. And let's say, before early redemption penalty is taken again middle of March 2023. So there is this window of opportunity, and certainly, there is some interest on our side to reduce, let's say, the interest levels, yes? We think we should be able to achieve something like this given our current net leverage. As I said, we have slightly increased in net leverage, but it's fully driven by raw material price-driven inventory increases, yes? So because of the cash reduction we've seen there, so we are now at 3.3x, which I think are still very healthy levels, yes, and which should enable a move within this window. But there is nothing to report as of now. I mean we are certainly screening the market. We are -- would be open for an opportunity if it opens up, but there's nothing more to add to that there is a clear window of opportunity. And if possible, we would take it, as we communicated already, in line with the notes extension as well.

So we have no further questions. [Operator Instructions]

Okay. Well, thank you very much for assisting to that third quarter 2001 results -- 2021 results. And we'll see you, as I told you, on -- we'll talk to you on the -- for the full year results on the 25th of February 2022. Thank you very much. Bye.

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