Belysse Group NV (BELYS) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Belysse Group regarding the trading update H1 results. To our customers request, this conference will be recorded. [Operator Instructions] May I now hand you over to Cyrille Ragoucy, CEO, who will start today's conference. Please go ahead.

Yes. Thank you very much, and good morning, everyone, and welcome to Belysse Group H1 2023 Trading Update Call. If you have not already done so, you can download the earnings statement and this presentation from the Investor Relations section on Belysse.com. I need to start with bringing you -- your attention to the disclaimer on Slide 2. I will not read it out, but please do so and make sure that you have read it at a point. So moving to Slide 3. First, I will start with the general summary on the first half of 2023. Afterwards, Andy Rogiest, our CFO, will take us through the financial review. And finally, Ruben Pattheeuws, Strategic Project Director of Belysse, will give us a quick update on the BEYOND program, and then I will do a quick conclusion. We'll end the call with a question-and-answer session with analysts following our stock. So moving to Slide 4. From a financial standpoint, we saw H1 2023 consolidated revenue of EUR 156 million, which is a decrease of around 5% year-over-year. With organic revenue growth impacting our results of 5.8% versus H1 2022, while exchange rate impact contributed to 0.6%. Our U.S. business saw a stable revenue year-over-year, while our European business faced a decline of 10%. Our H1 2023 adjusted EBITDA was EUR 12 million, minus 28% year-over-year, with an adjusted EBITDA margin of 7.9% versus 10.3% in H1 2022. The net debt at the end of the period was EUR 157.1 million, including EUR 29.7 million of impact from IFRS 16 lease liability, resulting in a leverage of 5.5x. In response to the weak demand across the European market, we have taken multiple initiatives to lower our cost. I will talk about two main ones that will impact our H2 2023. So a change in sourcing from raw material. Since the start of the year, it made sense to change our sourcing of raw material outside of Europe. This enabled us to lower our purchasing price, the price differential since the start of the year is EUR 4.5 million. Early July, we implemented, so that's the second main initiative that we took. We implemented a fixed cost reduction program. The 2023 impact will be EUR 1.7 million. And the full year -- the full run rate impact is EUR 3.4 million. Obviously, so it's a very high level, but Andy will go deeper into the detail when he is going to run us through the financials. So Andy, the floor is yours to go through the financials.

Okay. Thank you, Cyrille. Good morning to everybody listening. Perhaps we can go to the Slide 6. To start with the second quarter results of '23. So we had a consolidated revenue of EUR 79 million, this is representing a decrease of 11.5% year-over-year. In the U.S., our revenue decreased from EUR 46.8 million to EUR 43.6 million, and this is representing a 7% decrease. The volumes in the U.S., they improved compared to the first quarter of '23, but they were below last year because, especially last year in the second quarter, we had -- we were shipping some large orders in Europe. The revenue decreased by 16.4% versus last year to the level of -- to an amount of EUR 35.4 million. And this is the result of the lower volumes, and these are due to the continued low footfall in the Residential segment and the delay of projects in the Commercial segment. So we can turn to Slide 7 to talk about the adjusted EBITDA. So the Belysse Group consolidated adjusted EBITDA for the second quarter was EUR 7.3 million. This is a drop of a decrease of 33.4% year-over-year. So we realized EUR 10.9 million in the same quarter last year. The adjusted EBITDA margin resulted -- results was 9.2% versus 12.2% in the second quarter '22. The U.S. division realized an adjusted EBITDA of EUR 8.9 million in the second quarter, and this is a 6.8% year-over-year decrease, but the adjusted EBITDA margin is at 20.5%. So this EBITDA margin for the quarter is back in line with the historical performances. And this is, as we explained on previous calls, where previous quarters, we had a temporary drop and the result that was driven by the higher raw material costs, and that was driven by or linked to the Beyond [ tradition ] project we had in the U.S. and that we had in 2022. And that we finalized successfully in the first quarter of '23. In Europe, our adjusted EBITDA was EUR 1.6 million [indiscernible] negative. So despite the fact that we had peak raw material purchase prices of last year affecting our second quarter results and this is linked to the First-in, First-out accounting methodology. We can still state that our unitary margins have improved compared to prior year, and this is due to the realized sales price increases. We can turn to Slide 8. So as Cyrille already mentioned, we took a number of initiatives to lower our costs in response to the weak demand across the European markets to lower our cost base. So since the start of this year, we were able to open additional ways of raw material sourcing, which were globally lowering our purchase prices. So from a cash flow perspective, the list has already started to benefit from this new procurement ways and as well as the lower cost of energy that we are experiencing versus '22 -- 2022 and the end of '23. So if these lower costs have impacted the results immediately since the beginning of the year, our results for the European division for the first half -- for the first semester, would have been higher by EUR 4.5 million. But however, as we mentioned earlier, with the FIFO accounting practice, the lower purchase prices will impact the results with the delay, and this is for us in the second half of 2023. Additionally, additional important initiatives we undertook was that in response to the rig demand. We also implemented a fixed cost reduction program, and that was implemented early of July. We are expecting that in the year of '23, the fixed cost reduction will have an impact -- a positive impact of EUR 1.7 million and an annualized permanent impact of EUR 3.4 million. So let's turn to the slide on the cash flow. For the second quarter, cash flow, we ended the quarter with a cash balance of EUR 26.9 million which is EUR 1 million higher than the position at the end of March, so at the end of the first quarter. And this cash inflow was mainly driven by the positive EBITDA and the trade working capital improvements that were induced by inventory reduction. So we can now go to the information regarding the first -- [indiscernible] in the first half. So in the first half of 2023, we saw a consolidated revenue of EUR 155.6 million representing a decrease of 5.2% year-over-year. In the U.S., our revenue was in line with last year at EUR 81 million. While our U.S. business saw a slow start, volumes have recovered since and since the middle of the first quarter. And again, as said, we are at the same level as last year after 6 months. In Europe, however, our revenue decreased by 10% versus last year to EUR 74.7 million, and this decrease was driven by the lower volumes and the lower volumes of those were driven by the lower footfall in the Residential segment and the delay of a number of projects in the Commercial segment. We turn now to Slide 11, on the results on the EBITDA. So our adjusted EBITDA for the first half of 2023 was EUR 12.2 million, which is minus -- almost minus 28% year-over-year. And our adjusted EBITDA margin is now at 7.9%, and this was 10.3% in the first half of 2022. Our U.S. division realized adjusted EBITDA of EUR 13.9 million in the first half, this is minus 11% year-over-year. So as said earlier, the EBITDA margin had a temporary drop in the first quarter and the beginning of the year due to the higher raw material costs following the change of our main yarn supplier. In Europe, our adjusted EBITDA is now after 6 months, EUR 1.6 million negative. And this is because of two main effects. First of all, the peak raw materials that we had in 2022 -- at the end of 2022 flowing into the results with a delay and the lower volumes linked to the lower footfall in Residential and the delay of the Commercial project also having a negative effect. We now go to the bridge on the first half cash flow. So as mentioned, we ended cash position at EUR 26.9 million, so the cash outflow of EUR 11.6 million in the first 6 months was mainly driven by the debt repayment and the interest payments, which included, amongst others, the half yearly interest payment of EUR 5.1 million for the senior secured notes. We also had an important cash out in the other working capital, and that relates mainly to the settlement of prior year rebates and bonuses as well as deferred social charges, and we elaborated on that one on the Q1 '23 call. So we can move to our leverage chart. So our leverage is standing at 5.5x, excluding the IFRS 16 lease liabilities. The net debt at the end of the period was EUR 157.1 million, and this is including EUR 29.7 million of IFRS 16 lease liabilities, and this is flat compared to the first quarter '23. Leverage went from 4.6x at Q1 '23 to 5.5x, but our total liquidity remains strong and has even improved to EUR 65 million at the end of June, where it was EUR 64 million at the end of March, at the end of the first quarter. I will now hand over the floor to Ruben Pattheeuws, the Strategic Program Director of Belysse for an update on the BEYOND program.

Thank you, Andy. As a short reminder for everyone, our BEYOND program, which started in January 2022 consists of three pillars. So first, the increased focus on sustainability through innovative products and production processes. Secondly, the incremental drive for efficiency through lean programs. And then thirdly, an emphasis on agility through digital as well as operational improvement initiatives. So if we start with the first pillar, sustainability on Slide 15, we see that our total CO2 emission per square meter produced has been reduced by 16% compared to 2018. And that is a result of the continued delivered impact of energy efficiency initiatives that are reducing both, gas and electricity consumption. If you compare to 2022, where we ended the year with 22% lower CO2 emission per square meter compared to 2018, we see that part of these efficiency gains are offset by smaller production runs, especially in Residential. And those small production runs have been done to reduce inventory. Certified recycled content in our commercial carpet tiles in Europe remains high at 50% compared to 30% in 2018. If we look at commercial tiles in the U.S., there, we have managed to recover from the industry-wide temporary decrease in recycled content that took place in 2022, where we are limited to 24% recycled content. Year-to-date 2023, we are reaching 32% recycled content as compared to 30% in 2018. Turning to Slide 16 to the second BEYOND pillar, is efficiency. The year-to-date 2023 results for lean amount to EUR 1.9 million P&L savings versus 2022 and against a target of EUR 1.25 million. So we are more than 50% ahead of the plan. Currently, there are nearly 40 initiatives running with a key focus on quality, then material, energy, labor efficiency as well as further automation. Also worth noting is that June 2023 delivered the highest savings so far since the start of the BEYOND lean program in January 2022. Moving on to Slide 17 to the third BEYOND pillar, agility. Also as mentioned, I think, in the Q1 update or in the update of full year results 2022. In Europe, we are continuously working on upgrading our supply chain, with a view to enhance delivery performance to our customers by implementing shorter production runs, to increase our responsiveness and service levels and at the same time, lowering our stock levels. This time, we wanted to share a few specific examples of such projects in H1 2023. Now for example, we've done targeted investments in our extrusion department which allow us more flexibility in producing small runs of solution dyed nylon. We've also made process changes in our Print & Dye department, which results in quicker color changeovers for our diet products. And a third example is the installation of a chromojet printer for individual carpet tiles, which enables us to produce highly customized designs in small quantities. With this, I would like to give the floor back to Cyrille for closing comments.

Thanks, Ruben, for the update. So we'll now turn to Slide 18. So as a conclusion, our H1 2023 consolidated revenue was EUR 155.6 million, and adjusted EBITDA was EUR 12.2 million resulting in an adjusted EBITDA margin of 7.9%. Our U.S. business saw a recovery of EBITDA margin to historical performance after a temporary drop affected by higher raw material costs following the change of our main yarn suppliers, and we had talked about that at the last call. U.S. volume recovered during the quarter, resulting in a stable revenue year-over-year. In Europe, we were impacted by weak demand across the market in combination with delayed peak raw material cost affected -- that affected the results. In response to the continued weak demand, a fixed cost reduction program was executed in early July in Europe. This program will lead to a full run rate for full year results of EUR 3.4 million. Our leverage increased to 5.5x for H2. Nevertheless, our total available liquidity, including headrooms under the RCF that we have remained strong and totaled EUR 65 million at the end of the period, with the cost and cash flow improvement that we explained, so the two main item that we explained and the two main actions that we took and that have already been implemented since the start of 2023. And assuming everything else remain materially unchanged, Belysse is expected to have full year 2023 EBITDA above 2022 level and a year-end leverage below 4x. So with this, that concludes the presentation. With this, now I would open the question to our analysts. So if you have any questions, please go ahead.

[Operator Instructions] First question today is coming from Wim Hoste at KBCS.

I have a couple of questions. First one would be on end market demand. Can you maybe elaborate on your order books and volume trends in the month of July versus the second quarter, both for Europe and the U.S.? That's the first question. The second one would be on the competitive landscape. Raw material prices are now coming down, do you see pressure on selling prices in light of relatively weak volume trends? Can you maybe elaborate on that as well? And then a third question would be on the lower costs you mentioned, EUR 4.5 million. If it would have been applied from the start of the year, can you elaborate whether that is based on the current spot initiatives of raw materials or whether that is just the FIFO effects excluded from results? Those are my questions.

Yes, thanks for your questions. So let's start with the first one. So market demand over trend in Europe and the U.S., what we see is a low market demand in Europe, definitely in Commercial and Residential. Commercial, what we see is projects are being delayed, across the board and Residential, a very low footfall. And this is true still in July, and this is what we're expecting for the second half. So we don't expect the second half to be in a better position than the first half. What we see in U.S. is the first half was okay. It's a bit softening today. But we still have in [indiscernible], we still have, I would say, a healthy order book. But -- and we have large projects that are -- that we expect to come. So we just signed a EUR 2 million project a week back, but overall, a bit of a softening in U.S. as well. On the competitive landscape, what we have is we don't see any movement yet on pricing, and we don't expect to see that. I think I would like to remind everybody that we're talking only here about raw material, but there is a lot of other costs that went up a lot during 2022. And if you take all that into consideration, the inflation rate that we had to swallow up to now that we have partly pushed our customers through -- or partly pushed to our customers through the 2022, and -- are still applying. So the raw material, we're able to lower down, but the rest of the -- we have still high inflation compared to 2021. And maybe Andy can answer back the third question on lower cost mentioned on the EUR 4.5 million that we talked about. Andy, do you want to answer this one?

Yes, please. No worries. Yes, so the EUR 4.5 million is indeed calculated in a way as if the FIFO effect was not playing. So the delay through the inventory rotation, that effect was taken out. So it is basically the purchase prices we have been experiencing since the middle of Q1 that we have taken into consideration to calculate the EUR 4.5 million.

So Wim, the [indiscernible] is the price differential between what we would have paid in Europe and what we paid.

Yes, okay. Understood. Just one question if I can come back. The line was very bad, and I lost you for, I think, for about 0.5 minute. I don't know if that's the case for everybody, but -- and that was in the answer on the competitive pressure on selling prices, et cetera. Can you maybe just quickly rephrase that answer and what you said on the competitive landscape?

Yes, no problem. What we see, what I said just before is what we see in the market today is no large pressure. We see some pressure but no large pressure, but I think we have to remember that our costs are -- have been increasing a lot. So the inflation that we had was not only on raw material last year, it was on all costs that went up tremendously in the last years. So we passed on a big part of those costs to our customers, but the -- overall, the raw material decrease that we're talking about now does not cover all the rest of the cost.

The next question is coming from Maxime Stranart at ING Bank.

First of all, you are guiding towards an adjusted EBITDA higher than last year, while at the end of H1, you're EUR 5 million below. So how should we see this evolving over the third quarter and the fourth quarter? That would be my first question. Secondly, digging deeper into that, I presume Europe would be the main focus to recover profitability there? Any information on that would be helpful as well. And then finally, looking at the U.S., Cyrille, you mentioned the market is currently softening a bit. How confident you are that the margin above 20% can remain stable despite this happening? That would be all for me.

So thanks for the question. I'll answer on the last one first. So very confident that the 20% can rain, and we said that at the last call. So what we said is 18% to 20%, actually, we recovered to 20%. That's pretty much what we're -- this is our goal. We went to -- I think, at a certain point, were at 21%, but 20% is what we have in mind. So stable and this is -- it's not going to go down. On the EBITDA, what we're expecting -- and Andy can cover that more in detail, but what we're expecting is a better Q3 and a lot better Q4, and this is mainly in Europe. And this is really reflecting our FIFO effect of the lower material price and the effect as well of the EUR 1.7 million of the fixed cost reduction that we've done early July.

So that's correct, Maxime. So because of the 5 months on average delay, we have through our FIFO accounting methodology, especially on the purchase prices and energy prices. In fact, we have our Q3 towards the end of the third quarter, we will have an important improvement but it will be fully visible in the fourth quarter. So that's the breakdown of the next two quarters.

If I may circle back quickly on the U.S. so if I understand correctly, all the cost benefits you will have in H2 will be basically located in Europe? Anything you can do in the U.S. to improve the margin as well? Or should we expect like a stable 20% going forward?

I think what we can expect, Maxime, is a stable margin in U.S. And mainly what -- well, not mainly, actually, what we're saying and what Andy explained is all the results improvement or the EBITDA improvement is coming from Europe, yes. And by the way, just to be clear, the improvement that we're seeing or that we're saying we will see in Europe, the implementation is already done. It's not like we're promising something that might come. It's already done. It's in the book. It's already implemented.

[Operator Instructions] There are currently no further questions.

Okay. Well, thanks a lot for listening. Just a reminder that we will publish our half year 2023 report on the 25th of August 2023. So there will be no call on that date, but it's just the publishing of the report or the full year -- well, the full half year report that we usually published. And the next call will be the Q3 call 2023 results release that we will have on the -- so Q3 on the 26th of October 2023, and this was the initial schedule. I think we did this one a bit earlier to make sure that we're sharing with you the forecast and the impact on the two main items that we talked about, so fixed cost reduction and raw material costs as well. So thank you for listening and have a good summer. And we'll talk to you on 26th of October. Thank you very much. Bye.