Belysse Group NV (BELYS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the shareholders call regarding the full year 2021 results. [Operator Instructions] I'm now pleased to present to you Cyrille Ragoucy, Chairman of the Board and CEO; Jan-Christian Werner, CFO; and Ruben Pattheeuws, Transformation Officer. Gentlemen, please go ahead.

Yes, thank you very much, and good morning, everyone, and welcome to the third quarter -- fourth quarter results 2021 and actually full year results 2021. If you have not already done so, you can download the earnings statement in 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 make sure that you have done so. Turning to Page 3 for today's agenda. So I will start the general 2001 summary. Ruben Pattheeuws, our Transformation Officer, will then elaborate on our NEXT results and BEYOND program, and JC, Jan-Christian Werner, our CFO, will take us through the financial review. And we will end the call as usual with question-and-answer session with the analysts following our stocks. So turning to Slide 4 for the financial summary of the full year 2021. Just as a reminder, as on November 28, 2021, Balta entered into a binding agreement to sell its Rugs, residential polypropylene and nonwoven business together with the Balta brand. So this is why this presentation will talk about the overall Balta, but we'll talk as well about the continuing operation after that sale. So full year 2021, consolidated revenue of the group amount to EUR 634 million or plus 12.9% year-over-year as the business started its recovery from COVID-19-related downturn. For the continuing operation, we had sales of EUR 277 million representing a plus 7.1% year-over-year. Full year 2021 adjusted EBITDA for the group amount to EUR 87 million or plus 28% year-over-year, representing an adjusted EBITDA margin of 13.7%. In 2020, it was 12.1%. For the continuing operation, the EBITDA -- the adjusted EBITDA is EUR 43 million, which is 13.3% year-over-year -- plus 13.3% year-over-year, and it represents an adjusted EBITDA margin of 15.6% versus 14.7% for the full year 2020. For the whole group, the margin improved, mainly due to the implemented price increase before raw material cost inflation, fully materialized and due to continued efficiency and margin improvement for our -- from our NEXT program. As an overarching comment, I would say that the recovery of the continuing operation has still some untapped potential to reach pre COVID-19 level as it is mostly commercial. Net debt increased by EUR 47.5 million to EUR 331 million at year-end 2021 from EUR 283 million at the end of 2020. Due to higher working capital, mainly as a result of cost increase in raw material, energy and transportation. Our leverage decreased to 3.6 from 4.2 at the end of 2020, driven by a strong LTM adjusted EBITDA. JC will provide you a lot more detail on our financial results later in the presentation. So moving to the next slide, it's just a slide reminding you the scope of the transaction that will happen early Q2 2022. So the completion of the transaction is subject to certain conditions precedent, most of which are operational in nature and involve the carve-out of the divested business. The transaction has an enterprise value on a debt-free -- debt and cash-free basis of EUR 225 million. And as I said is expected to close in Q2 2022. The transaction will allow the continuing operation to focus on developing its Commercial business in Europe and U.S. under the main brand of modulyss and Bentley as well as its premium European residential polyamide business, ITC. And as I said before, we believe that the business, so the continuing business has not yet fully recovered from the effect of the pandemic restriction. The new Balta Group will have a stronger cash flow and balance sheet as well as a reduced risk profile. Higher average EBITDA margin and a better cash conversion will enable more investments in sustainability and growth through innovation, manufacturing optimization and more agile digital solution. Being more focused and less complex is also expected to improve overall efficiency. The transaction will significantly reduce Balta Group overall absolute debt, and is expected to deleverage the group balance sheet at the time of completion. And again, JC will walk us through that debt during his presentation. So going to the next page, obviously, this transaction does not come without a clear organization and a clear approach and clear processes. So we have created 14 functional and cross-functional work streams that are addressing the carve-out activities in all relevant areas. The key elements are the future organizational setup carve out of our IT systems such as our ERP and definition of the end-to-end supply chain flows. 800 contracts have been listed and assessed with action ongoing to execute contract split and transfer where needed. And I can tell you it's not a walk in the park. So we are doing that and we should be ready to close, as I said, Q2 2022. Now I will hand the floor to Ruben, our Transformation Officer, to discuss our NEXT and BEYOND initiatives. Ruben has been deeply involved in this program over the past years. and is taking over from Emmanuel Rigaux, who was recently promoted to Managing Director of Commercial and Residential Europe. Ruben, the floor is yours.

Thank you, Cyrille. At the end of 2018, we launched our holistic 3-year transformation and earnings announcement program called NEXT. And today, we are pleased to report that the program has been a resounding success, surpassing the initial targets of 3 years ago. Through the efficient implementation of commercial excellence, procurement excellence and lean strategies in all of our 8 plants, we managed to drive our top line growth and improve our margins. If you look at the current slide, we see that the revenue enhancement initiatives such as e-commerce and Rugs, focus on new growth segments for Bentley, our direct route-to-market approach in modulyss and the continued launch of additional innovative and sustainable products in all divisions has generated EUR 122 million of incremental revenues versus 2018, of which EUR 54 million in 2021 in spite of the challenging global logistics conditions. Moving on to the next slide, we see that the margin improvement through lean and procurement initiatives have driven EUR 17 million of EBITDA savings versus 2018 of which EUR 4 million in 2021. If you look at our Lean program, it has continued to deliver above target also in Q4, and a very good example of such strong overperformance is our logistical efficiency projects. Overall, we have outperformed the 3-year lean target by over EUR 1 million. Turning to the next page, continuing the strong legacy of our NEXT program, we have outlined a 4-year road map called BEYOND, which consists of 3 courses of action. First of all, there's an increased focus on sustainability through innovative products as well as production processes. Secondly, the incremental drive for efficiency through more lean strategies and procurement; and thirdly, an emphasis on agility through digital initiatives such as e-commerce. The BEYOND program will be detailed further at the end of H1 2022. And with that, I will now hand the floor to our CFO, Jan-Christian Werner.

Thank you, Ruben, and good morning, everyone. Turning to Page 10 for the fourth quarter 2021 revenue bridge. Overall, fourth quarter 2021 consolidated revenue for the group were EUR 164.5 million, representing a year-over-year growth of 8.9%. Looking at the performance of the individual divisions, our Commercial business fourth quarter revenues for 2021 were EUR 56.2 million, representing a strong 23.5% increase versus last year driven by strong revenue growth in both Europe and the U.S. The growth is a combination of successfully implemented price increases and higher realized volumes during the fourth quarter. As the Commercial segment has clearly recovered somewhat lower and slower than our retail-oriented businesses it therefore still offers untapped potential to return to pre COVID levels once restrictions are completely lifted. In our Residential PA business, the fourth quarter revenue for 2021 amounted to EUR 20.6 million, representing a year-over-year decrease of 2.1%. This is largely driven by lighter volumes and the fact that the full impact of implemented price increases is not yet fully reflected in the fourth quarter results. For the disposal parameter, fourth quarter revenue for 2021 were EUR 87.8 million, up 3.9% versus last year. The increase is primarily related to continuous strong Rugs results and overall, mainly driven by the successful execution on price increases in order to compensate for raw material and other cost increases. Turning to Page 11 on the fourth quarter adjusted EBITDA. Overall, group adjusted EBITDA for the fourth quarter was EUR 21.8 million, which represents a 22% decline versus the extraordinarily strong last year. Overall, adjusted EBITDA margin reduced by 5.2 percentage points to 13.3% compared to the very strong 18.5% achieved during the comparable period last year. Looking at the individual divisions, our Commercial adjusted EBITDA amounted to EUR 9.4 million, representing a fourth quarter 2021 EBITDA margin of 16.7%, normalizing from the high 21.1% achieved during Q4 2020, primarily driven by strongly increased cost of raw materials, energy and transportation. Although we continue to manage our cost structure very closely in line with business normalization, fixed costs have also largely returned to a more normal pre COVID-19 levels. In our Residential PA business, adjusted EBITDA was EUR 2.4 million with a margin of 11.9%, down from a very strong 15.7% in the fourth quarter 2020. The reduction in margin is largely driven by the fact that implemented price increases are not yet fully reflected in the fourth quarter, and therefore, the significant cost inflation is not fully compensated for. By close fixed cost management and improvement from NEXT initiatives helped to partially offset these negative inflationary impacts. For the disposal parameter, the adjusted EBITDA amounted to EUR 10 million with a margin for the fourth quarter of 2021 of 11.4%. This represents a 6.4 percentage points reduction from the extraordinary strong 17.8% in Q4 2020. While our Rugs business continued to deliver strong results, the continued softness in our residential PP business weighed on the fourth quarter results. Turning to Page 12 for the full year 2021 revenue bridge. Overall, 2021 consolidated revenues for the group were EUR 634.3 million, representing a year-over-year growth of 12.9% driven by strong volume growth and price increases. The continued business revenues amounted to EUR 276.8 million, up 7.1% versus last year driven by price increases as volumes remained largely stable versus last year. In our Commercial business, full year revenues 2021 increased by 4% to EUR 198.1 million. As previously discussed, our Commercial business was significantly less affected by the first lockdown in 2020 than the retail-oriented business and remained, therefore, overall more stable during the crisis. Although on a lower level, but it also experienced a slower rebound. However, as restrictions on indoor construction sites eased and projects started up again towards the later part of 2021, the U.S. and also Europe were able to increase sales, but are still awaiting full return to pre COVID levels. Residential PA business saw full year revenues '21 to increase by 15.9% to EUR 78.7 million. The growth in sales was largely driven by the increased price levels and the continued transition to higher value products. For our disposal parameter, full year revenues '21 were EUR 357.5 million, an increase by 17.8% with the majority of the increase coming from our Rugs division, which continued a strong performance with increased share of wallet with existing customers, shipping our products directly to North America and continuing to grow the e-commerce business. Turning to Page 13 for the full year adjusted EBITDA. Group 2021 adjusted EBITDA was EUR 87 million, a significant increase over the EUR 69 million achieved in the comparable period last year. EBITDA margins also improved by 1.6 percentage points to 13.7%. In our Commercial business, full year adjusted EBITDA for 2021 increased to EUR 32.4 million with an adjusted EBITDA margin of 16.3%. Thanks to the swift implementation of price increases to address cost inflation and due to the strong results from NEXT initiatives, the division was able to maintain margins. Our residential PA business achieved full year adjusted EBITDA of EUR 10.7 million, up 45% versus last year with an adjusted EBITDA margin of 13.6%. This represents a significant improvement with the margin of 10.9% as of last year. The early implementation of price increases, strict fixed cost management and margin enhancement from NEXT initiatives contributed to the increase in EBITDA margin against the backdrop of the overall cost inflation. The disposal parameter full year adjusted EBITDA for 2021 grew 46.7% to EUR 43.9 million versus 2020 with an adjusted EBITDA margin of 12.3% up from 9.9% in 2020. The margin improvement was supported by strong volume increases in Rugs across all major regions, a sizable price increase and only a moderate increase in fixed cost expenses. Moving on to Page 14 full year cash flow. Full year group net cash flow in 2021 was heavily impacted by the increase in raw material prices as well as energy and transportation cost increases, which heavily weighed on working capital, primarily inventories. While the inventory quantities remains closely managed in line with the overall volumes recovery in 2021 by 9%, we experienced a normalization in inventory quantities. Driven however by raw material price increases, the cash impact from inventories amounted to EUR 64 million for 2021 and was only partially compensated for by changes in other working capital components. On top of the detrimental working capital developments we incurred during 2021, nonrecurring expenses in line with the refinancing of the notes and the disposal transactions which also negatively impacted cash flow by EUR 13.6 million. In addition, we made voluntary repayments on our RCF facilities during 2021, which amounts to EUR 10 million and hence negatively impact our full year cash flow. These will certainly remain available and can be redrawn at any time if needed. Moving to Page 15, net debt and leverage. Our net debt position, including EUR 46 million of debt related to IFRS 16 amounted to EUR 331 million at the end of December. Excluding IFRS 16 related debt, net debt stood at EUR 285 million. This represents an increase in net debt by EUR 47.5 million driven by the previously highlighted changes in working capital, but also by extensions of lease contracts resulting in higher IFRS 16 debt, as well as the aforementioned extraordinary expenses incurred in line with the senior secured notes extension as well as the disposal transaction during 2021. Our leverage, therefore, increased to 3.6x as of year-end 2021, representing an increase of 0.3 turns versus previous quarter and an improvement of 0.6 turns versus last year. The improvement largely coming from the strong EBITDA results generated during 2021. Moving to Page 16, pro forma net debt and pro forma leverage. In order to illustrate the anticipated effects from the disposal transaction on net debt levels, Slide 16 shows you a pro forma presentation of net debt situation and the future continuous business. Whereas the left bar illustrates the current net debt position of the group amounting to EUR 331 million, the right bar shows a representation of the pro forma net debt of EUR 153 million following the disposal transaction. This reduction would also be reflected, respectively in the 2021 full year net result of the continuous business, reducing the finance expense significantly so that adjusted for the nonrecurring expenses related to the senior secured notes refinancing, pro forma net income for the continuous business would be breakeven to slightly positive. While the disposal transaction will reduce overall EBITDA after continuous business, the achieved net debt reduction is a result of the reduced senior secured notes, the reduced financial leases, as well as the repayment of the remainder drawn under our RCF. This will result in a positive deleveraging as net debt will over proportionally reduce so that the leverage of the continuous business will be 3.3x, an additional improvement of 0.3 turns versus group year-end leverage of 3.6x. With this, I will give the floor back to Cyrille for closing comments.

Okay, thanks, JC. Before we move to Q&A, let me conclude on the financial year, the full year 2021 quarter earnings presentation. So 2021 was a year of recovery from the COVID-19 implication we experienced in 2020. We increased sales and improved profitability, our manufacturing and distribution activities went back to normal level of activities. The continuing operation in full year 2021 saw a substantial increase both revenue and adjusted EBITDA from full year 2020 despite being impacted by COVID-19-related headwinds in the commercial end markets. Revenue for the continuing operation for 2021 was EUR 277 million and adjusted EBITDA for the same period, EUR 43 million compared to EUR 258 million and EUR 38 million for 2020. In 2021, we also saw commodity pricing rising continuously to a level that the industry has never seen before, especially for raw material, energy and transportation cost, and it doesn't seem to be finished, actually. As a consequence, net debt increased, as JC told us, by EUR 47 million to EUR 331 million at the end of 2021. In order to mitigate the impact on our bottom line, we took swift action and increased pricing across all divisions, most market and customer needs. We expect cost -- more cost inflation impact in 2022, which will require further actions. In order to maintain margin, we have launched a new transformation and profitability improvement program that follows the footstep of NEXT which ended this year surpassing its ambitious target laid out more than 3 years ago. BEYOND will focus on sustainability through innovative product and production, lean strategy in production and procurement and emphasis on agility through digital initiatives such as e-commerce. And as Ruben told you, we will detail the program in H1, at the end of H1 2022. The continuing operation has still some untapped potential to reach a pre COVID-19 level, and this is encouraging. Net cash flow in 2021 was heavily impacted by inventory increase driven by higher raw material, energy and transportation cost. So this year, 2022 will be the start of a new future for Balta being less complex and more focused. And as I said several times during the call, we expect that to be in Q2 2022, and we're on track to deliver that. So let me now -- after all those presentations by my colleagues and myself, let me hand it back to the operator for questions, if any.

[Operator Instructions]

Okay, if there is no questions, I guess, we've been extremely clear. We're proud of our results this year in a very difficult environment. I would like to thank the whole team for -- the Balta team for what they've done and the achievement that we've been able to show and to deliver. And obviously, this is -- this will be the last call as we are today as a Balta overall group. Next call should be in with the continuing operation only in a lower -- a smaller Balta -- Yes?

Yes, we have 1 question from Mr. [Ramzan] from ING.

I actually have 4 questions on behalf of Maxime Stranart from ING. My number one question would be, could you provide additional detailed information on EUR 225 million EV sold to Victoria? How does that reconcile with your pro forma debt level? Does this amount include factory? Question number two, visibility on commercial in 2022 and order backlog. Question number three, raw materials and potential impact for Residential PA. And last question, debt refinancing, approximate target cost of debt level.

Well, I thought you were -- 2 questions only. Now I got 4 -- so no, but it's okay. We know Maxime. So thank you for all those questions. So I got additional -- so the split of the EUR 225 million and does that include factoring, well, I think we said it was a debt-free, cash free. And we won't go more in the detail on that. JC, do you want to answer back? But I don't think we have more detail than -- we don't want to give more details on that. JC, do you want to...

No, I think that's the answer, yes.

Okay. On the backlog, so the raw material impact we have never given such a detail in the past. What we can say, and JC can expand on that, but what we can say is we have increased our -- well, we were early in increasing our pricing in 2021. And this has a beneficial impact into the whole year. Pricing are -- the costs are continuing to increase. And you see in the results in Q4, a bit of a lag into the price increase, but you should -- we should catch up in too early 2022 in the residential business. So maybe, JC, do you want to maybe to elaborate a bit more on what I said on the -- this is question number three.

Yes. On the raw material pricing and versus the price increases, as Cyrille said, there is certainly always a bit of a timing effect between as to when the raw material prices and -- we've communicated that a couple of times, it typically takes 5 to 6 months until raw material prices roll into our P&L. And there's a timing effect certainly as to when you put the price increases in place on your sales. It sometimes depends on when the collection is sold or when the product is sold. So it doesn't come in immediate effect to the price increase that you're putting. So that automatically leads to a certain overlap, as Cyrille was saying, into timing impact, which we partially experienced in the Residential PA business in Q4, which should, let's say, normalize in the beginning of this year.

Thanks, JC. And then your question number two on the backlog, so we have strong backlogs in U.S. and in Europe for -- on the residential business -- on the Commercial business, sorry, on the Commercial business. Stronger backlog than the last few years. So that's pretty good. What we see is and what we cannot answer is when that backlog will materialize as the uncertainty is -- there are lots of uncertainty in the market today. So yes, strong backlog. We can see that there is -- we're on track, but will it materialize? That's more complicated to answer. And actually, we cannot answer this one. Can you -- do you mind repeating the fourth question, if you don't mind?

I know the fourth question, debt refinancing. I can take that. As we have communicated in line with the transaction as such, what we will do is we will launch a tender offer upfront to the closing of the transaction in which we will roll forward the notes. This transaction will come at more or less unchanged conditions to the existing notes that are in place. And we will certainly, in terms of debt refinancing at some point, potentially look at the refinancing conditions allowed for, but there is no clear timing envisaged for that yet. And also, I don't want to speculate on potential interest rates that could be achievable for the continuous business then.

We have no more questions.

Thank you. So thank you for listening, and thank you, and we'll talk to you again in the first quarter 2022. Thank you very much.

Thank you. Bye-bye.

Bye. Thank you very much. Bye-bye.

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