Belysse Group NV (BELYS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the shareholders' call regarding the first quarter 2022 results. [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, and good morning, everyone, and welcome to Balta Group NV First Quarter Results for 2022. 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 to the disclaimer on Page 2. I will not read it out, but please do make sure that you have done so. So turning to Page 3 for the today's agenda. So I will start the general summary on the Q1 2022 results. Then Jan-Christian Werner, our CFO, will take us through the financial review. And then at the end, we'll have some question-and-answer session with the analysts following our stock. So turning to Slide 4 for the financial summary of Q1 2022. So 2022, obviously marks a new important chapter in the history of Balta with the closing of the transaction with Victoria PLC and transformation of Balta Group NV into a more focused and resilient business. Just please take note that for the purpose of this presentation, we will predominantly focus on the results of the continuing business. So during Q1, we experienced a recovery of our commercial business with a strong order book conversion to sale as COVID-19 restriction eased. For our residential business, even if our volumes were higher than the previous year, we suffered significantly from the unprecedented and sudden cost increase that in the quarter, we were not able to pass on or we passed it on only partially to our customers. Few highlights for Q1 2022, we ended up the first quarter with consolidated revenue of EUR 75 million, which is 15% above last year first quarter with an organic revenue increase of -- by 11.4%, while the FX impact contributed to 3.6%. Commercial increased by 15.7% and the Residential by 13.3%. Our adjusted EBITDA was EUR 6 million, a decline of almost 34% with an adjusted EBITDA margin of 8%. Pretty much the commercial EBITDA increased to EUR 7 million, and the residential EBITDA declined to minus EUR 1 million versus the plus positive EUR 2.6 million of Q1 2021. This EBITDA for residential clearly does not reflect the potential of our business. It is not clearly satisfying and not at an acceptable level, and we'll take the measures, and we'll take the means to move that to a better level for Q2. Pro forma, the transaction, assuming it would not have closed -- assuming it would have closed on the 31st of March. Q1 net debt was approximately EUR 157 million resulting in a leverage of 3.8x. Pro forma total available liquidity, including headroom under the RCF at the end of Q1 amount to approximately EUR 65 million. And I leave JC now giving us more detail on our financial results for Q1. Go ahead, JC.

Yes. Thank you, Cyrille, and good morning, everyone. Moving on to Slide 5, the first quarter revenue bridge. First quarter consolidated revenues for the Balta Group were EUR 171.7 million, which is 12.5% above last year. For the continued business, namely our commercial and residential PA business, revenues were EUR 75 million, a year-over-year growth of 15%. Our Commercial division, which now represents approximately 70% of our business in terms of revenues, realized Q1 revenue of EUR 52.9 million, which were up 15.7% versus the first quarter of 2021. Although volumes did not yet fully return to pre-pandemic 2019 levels, both Europe and the U.S. reported a double-digit revenue increase, mainly driven by the implemented price increases, while also the volumes slightly improved versus last year, showing a clear continuation of the recovery as well as the strong order book further transitioning into sales. Our Residential PA division realized Q1 revenue of EUR 22.1 million, up 13.3% versus the first quarter of 2021, which is mainly driven by strong volumes, up by 9% year-over-year in combination with implemented price increases. Turning to Slide 6, adjusted EBITDA. Balta Group consolidated adjusted EBITDA for Q1 2022 amounted to EUR 13.1 million, a decrease of 38% versus last year. For the continued business, adjusted EBITDA was EUR 6 million, a decline by EUR 3.1 million or 34% versus last year. The declining EBITDA reflects a partially anticipated slight margin compression versus a strong Q1 2021 comparable, which benefited from 2020 cost price timing effects and the rapid recent surge in input prices, resulting from a strong increase in global inflation, market interruptions caused by the Ukraine war, especially in Europe as well as other supply chain distribution disruptions, e.g. resulting from further covered outbreaks in China. Due to the unprecedented speed of change, some of these effects can only be passed on to customers with some delay, resulting in timing differences. Adjusted Q1 EBITDA for our commercial business was EUR 7 million, up from EUR 6.4 million in the same quarter last year. Despite the strong cost inflation experienced, especially in Europe, Q1 adjusted EBITDA margin only slightly decreased to 13.2% from 14.1% last year. Especially our U.S. business showed strong recovery and order book execution towards the end of the first quarter, while the first quarter contribution margin for our U.S. business improved compared to last year, despite existing market conditions. Our Residential PA business, adjusted EBITDA in Q1 was minus EUR 1 million, down from EUR 2.6 million in the same quarter last year. The disappointing Q1 performance was largely driven by the high input cost pressure and timing delays in passing these input price increases on to our customers. Moving on to Slide 7 for the Q1 2022 cash flow from continuing operations. As we close the disposal transaction of a material part of our business on April 4, we have isolated the disposed business completely from the cash flow presentation in order to show a pro forma Q1 cash flow for only the continued business as if the transaction would have had occurred on January 1. Therefore, we have isolated all cash flows related to the disposed business on the left side of the graph, namely all cash movements during Q1, the actual cash position as well as the share of interest on the senior secured notes. On top, we have isolated the impact of the transaction on the continued business, namely the compensation received, the repayment of the notes and the RCF plus related transaction expenses. In order to present a pro forma continued business cash flow for Q1. Based on this pro forma presentation, continuing operations consumed EUR 11 million of cash during Q1, mainly driven by a combination of the disappointed business performance in Europe as well as investments made in working capital, primarily inventories to support our strong commercial U.S. business transition back to growth as well as the EUR 8.4 million scheduled debt service, primarily the half year interest payment for the senior secured notes. Following the adjusted pro forma starting cash of EUR 35.3 million, the pro forma ending cash for the continuing operation amounts, therefore, to EUR 24.3 million which represents a total liquidity of EUR 65 million, including EUR 41 million of headroom under our new revolving credit facility. Moving on to Slide 8 on pro forma net debt and leverage. Overall group net debt at the end of March 2022 increased by EUR 20.2 million to EUR 351 million from EUR 331 million at financial year-end 2021. The increase in group net debt is mainly related to higher working capital, largely as a result of cost increases in raw material, energy and transportation, resulting in an increase in group leverage to 4.4x compared to 3.6x at the end of 2021. Pro forma for the disposal, hence, for the continuing business, net debt was at EUR 157 million, a decrease in net debt versus year-end 2021 by EUR 174 million and a decrease versus Q1 actual by EUR 194 million. This results in a pro forma leverage improvement of 0.6x to pro forma leverage of 3.8x, assuming the transaction closed on March 31. Key drivers for the significant reduction in debt are the repayment of the notes, the repayment of the RCF as well as sale and leaseback and other IFRS 16-related debt, which transferred as part of the disposal transaction to the buyer. With that, I will hand the floor back to Cyrille for concluding comments.

Thanks a lot, JC. So before we move into Q&A, let me conclude this first quarter 2022 earnings presentation. So as stated earlier, it's -- we're opening a new chapter in the history of Balta Group NV with the closing of the transaction with Victoria PLC. During Q1, our commercial division saw an improvement in sales and EBITDA as well as a strong order book at the end of the quarter, while the results of our Residential PA business suffered from the significant headwinds caused by the unprecedented and sudden cost increase, which require further commercial action in Q2. The first quarter 2022 confirms recovery in adjusted EBITDA for Commercial. The Q1 EBITDA for Residential clearly does not reflect the potential of the business, and we'll have to make some -- we will take some additional action in Q2. Strong liquidity of EUR 65 million at the end of Q1 2022 reflects pro forma cash of EUR 24 million and EUR 41 million headroom under the new EUR 45 million revolving credit facility. And then pro forma leverage reduced to 3.8x as a result of the disposal. So obviously, we're continuing to be confronted with significant inflation for material, energy and transportation costs. Price increase have been implemented across all divisions, but in residential, these price increases have not yet reached their full potential. Given the continued inflation environment, further price increase will be introduced in Q2 to sustain margin. So this concludes our presentation. For your information, the Balta Group NV intend to publish its H1 2022 results on August 26, 2022. So let me now hand over to the operator for question and answer, if any.

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

I have a couple of questions, but I'll start then with 2. First on the cost increases, can you offer a little bit additional clarity? I think you mentioned freight, energy and raw materials as important buckets. But can you maybe split the inflationary environment a bit down in these various buckets and also how you see the costs evolving going into Q2 of each of these buckets? That's the first question, please.

This is Cyrille. So JC, do you want to answer that -- part of that?

Yes, I can do that. I was just waiting for the second question. No, but we can go in this directly. I mean, we -- as you know, this is the time where costs are really racing. They are jumping up and down currently, especially in the situation in Europe, but they're primarily pressure that we are seeing currently and that we're experiencing, apart from the general inflation, is primarily certainly from the raw materials, as you know, which always takes some 4 to 5 months to roll into our P&L, as well as on electricity and gas prices. These are really the key drivers. We're certainly experiencing also some secondary effects, but I think the first 3 are the key drivers.

We have as well material on -- increase in material in back -- on the back of our titles, for example, we have -- and it's not only increased -- well, it can be increased in material. We have a significant increase, but as well it's supply of materials. So we need to shift our -- from one supplier to the next in a week or 2. That means redesigning it, it's a lot of cost that adds to all this. So it's -- it's a significant disruption in all supply chain. That's what we're currently experiencing. And by the time we have those cost increase, and we have set up -- we have agreed with the team on price increase. Additional costs are coming up. And it's -- so pretty much what we have done in Q1 is we're running a bit behind on our price increase, and this is what's reflecting in our results. But we are taking and we have taken the actions to catch that up. And we will take significant action again in Q3.

And can you offer a little bit of clarity on the price increases that will come also segment-by-segment? I think the need in Residential is probably the highest to push through price increase, but can you offer some clarity on order of magnitude of price increases and exact timing when this will be implemented?

So all of them have been implemented as we speak today. We might have to implement more in June. So we have to distinguish by the way, Europe and U.S. So in U.S. it's immediate because we're in 100% on the project business. So as soon as we have a cost increase, it goes directly to our customers, and we'll pass that on to our customer on project-by-project. In Europe, it's more -- we have a bit more delay before we can pass that on to our customer, and this is why you see that. I will not go into the detail of cost increase, but it's twofold.

I mean, twofold for the...

Well, two -- it's between 10% and 20% of price increase, but it's significant. And by the way, all what you see as well because the big background is what does that mean from elasticity standpoint and a volume standpoint. What we see in our business is that the competing flooring business have definitely higher price increase than we did. So when you take ceramic tile and you take wood, when you take LVT, their costs are increasing a lot more than our own cost. Therefore, their price increase needs to be higher than us.

We had a following question from Maxime Stranart from ING.

Two questions on my end. So you mentioned that you like a cost -- financial expense of EUR 8.4 million over the first quarter. Would it be possible to spread it out in between like the refinancing costs and like the real, let's say, interest expenses you had to cope with? And secondly, looking at 2022, I know you don't provide any, let's say, quantified guidance, but could you shed some light on basically, when do you expect residential, obviously, being done maturely over the first quarter, especially compared to last year, where margin jumped up quite materially? So if you could like give any color on that one would be helpful.

So JC is going to answer the first question on the split of the 8.5% financing cost. I think we -- partly, we answered that question in the presentation. JC, do you want to do that?

Yes. I can give that split. That's not a problem. The EUR 8.4 million financing that you're referring to is the cash number. So it includes basically the interest components of the Q1 notes. It includes the interest component of the Q1 RCF, which was still drawn partially in Q1, and it includes debt repayments done under the sale and leasebacks, for example, in Q1. So that is the cash number, the EUR 8.4 million and what we expect as an interest number going forward would be around about EUR 11 million for the NewCo business. Full year basis.

Thanks, JC. And then Maxime, what -- you're asking for quantified guidance on the residential business. As you know, we don't give guidance, and we stopped giving guidance in '18. But -- yes, we don't want to give guidance. I think we're comparing our Q1 2020 with a very strong Q1 2021. We're comparing -- I'm sorry, our Q1 2022 with a very strong Q1 2021. And because at that time, in 2021, we have passed on some price increase where those price increase were not seen yet in our P&L because of the delay. This is -- so we benefited in Q1 in from raw material from the -- at the end of 2020 with [Indiscernible] where the costs were not as high as we were experiencing. So what we're expecting now is definitely to catch on and to catch up on pricing and on cost and to get back on track on our margin. Does that answer your question, Maxime? Not exactly, but...

Yes. Just -- probably, if I can just jump in on the follow-up, I think as we already added. Like if you look at Residential PA, not -- let's say, an aspirational margin, but what would you expect as a normalized margin renewal year for Residential PA and just like a ballpark number is possible to you?

I don't think we -- have we given that in the past, JC? No, we didn't give that in the past. So I'm not sure I want to give that today Maxime. Anybody have a question?

Yes, I'm sorry. We have a new question from Wim Hoste from KBC.

Can you offer a bit of light on the CapEx needs, you -- or the CapEx budget you have for let's say, both 2022 and the coming years for the NewCo business?

We have -- we don't give guidance on CapEx as well. But we're looking at CapEx today on -- I won't give you a number. But what I can say is, first of all, we're -- depending on our cash, we're looking very strictly our CapEx. We have some CapEx on the go on -- for energy consumption, so to save on energy. And then after that, it's about sustainability. As you know, we are working on our BEYOND program. And we're still -- actually, we're still working on the closing and the split of the 2 businesses, but this is taking a lot of time, a lot more than anticipated. But then we will announce at each one at the end of August, we announced the BEYOND program. It's about sustainability. It's about as well manufacturing excellence, and it's about agility, where an agility will have a big thing on customer service. But I won't give you the number on CapEx, but what I can tell you is we're looking at CapEx with very quick payback on energy consumption.

Okay. I understand. And then a question on the order books for Q2 and maybe also beyond the fact, I think, mostly for Q2. Can you offer a bit of light on both residential and commercial? And then certainly also in the various regions? How is the U.S. order book? How is the European one looking like? Do you see any price elasticity coming, any consumer hesitation in the last few weeks or so due to the situation in Ukraine?

Yes. So we have a very strong order book in the U.S. And what we see is not only a strong order book, but that order book is moving into sales. So that's a very strong one. And -- so that's good. In Europe, we see a strong order book as well for commercial. And we see less of -- well, okay, I would say, okay-ish more order book on residential, but with since the price increase kicked in, a bit of a bit of a slowdown in that order book. But ...

It's purely on Residential?

On the Residential side, but be careful that it might not reflect what's coming because when we do price increases, what we are announcing those price increases. So what happened usually is customers are picking up ahead of the price increase. And then we see months -- with a month delay, it picks up again after. So the volume has a bit of a drop and then picks up again after that price increase a month later. Okay. So any question -- any additional question, Wim or Maxime? Okay. Thank you very much. Thanks for assisting to the call. So we'll talk to you on the 26th of August for our Q2 H1 2022 results. Thanks a lot. Bye.

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