BEWI ASA (BEWI) Earnings Call Transcript & Summary

Welcome to this presentation of BEWI's results for the second quarter and first half of 2022. My name is Christian Bekken, and I am the CEO of BEWI. With me today, as always, I have our CFO, Marie Danielsson, who will take you through the financials. Our operation -- our presentation includes some forward-looking statements, so I would like to point your attention to our disclaimer. We will start with some highlights for the quarter before Marie will go more details into the number. I can't help being proud of BEWI and its organization, once again delivering a record quarter. There is no such thing as a free lunch, meaning that we have worked hard for this, and I have promised some of my colleagues to smile more on this presentation. It is limited, but nevertheless, I will do so. We have throughout Q2 and are still seeing solid demand from our key markets, but we are also watching everything carefully, as we always do. Half of our 40% growth in sales comes from organic growth, showing that we perform on our megatrend strategy, trying to invest in growing market and megatrends. All segments contribute to top line and EBITDA growth. [ Styrene ] raw material price continued to increase in Q2, and that combined with strong demand gave us a strong gap in the quarter. We see positive development for sales to the food industry, needless to say that we are in a good position in that segment. Global shortage of electrical components continue to dampen the volumes to automotive and HVAC. And we have announced year-to-date 4 acquisitions in line with our strategy. And of course, we received approval from competition authorities to close Jackon transaction conditional to smaller divestment with which process -- which have processes ongoing to sell off them as we speak. Some financial highlights for the quarter, but of course, Marie will go more detail into the numbers on each segment. Net sales, EUR 277 million, 40% growth, 90% comes from organic growth, showing the strong platform which the company is built on. As I said earlier, a solid demand from our key markets. It has been hard work, but we have managed to increase prices in all segments. We see a positive development for sales to the food industry and 21% is explained by acquisitions, including contribution from IZOBLOK, Volker Gruppe, Kemisol, Trondhjems Eskefabrikk, Jablite, Berga Recycling and some smaller acquisitions. An EBITDA of EUR 40.3 million, up 28%, we continued to deliver. 13% is organic growth. All segments contribute to positively organic growth, a continued strong GAP for RAW, 14% improvement from acquisitions, positive contribution from Kemisol and Trondhjems Eskefabrikk. IZOBLOK is still impacted by shortage of electrical components. We have only limited information from Jackon, but it's clear that they have not succeeded with the price management in the same way. So they have a lag from increasing raw material prices. We also, in this quarter, as many others in the industry had extra costs and challenges related to supply chain disruptions as well as higher cost of material and energy. But as always, we continue to work with a positive attitude and proactively with good success with price management and alternative solution to make the best out of the situations at all time. And as you can see, it has paid off. Key acquisitions confirming our strategy. In Q4, we closed Volker Gruppe and Kemisol in Circular and Insulation business. In Q2, we closed Trondhjems Eskefabrikk. Jablite, where we were a minority shareholder, now taking over 100% of the shares, a 2-year process. And Berga Recycling, in 1 paper Packaging, Insulation and also in Circular Business. In Q3, we will close BalPol and Jackon in Insulation and of course, Jackon in the category transformative acquisitions. And we still have a strong pipeline of attractive M&A opportunities going forward. We have managed for many years now to make a profitable growth from acquisition, making companies stronger together than they are on their own. Looking at what the company are today on last 12 months running, consolidated pro forma base included Jackon, we are a company close to EUR 1.5 billion in turnover and with an EBITDA of EUR 190 million with a strong diversified business model with cross-border synergies, which -- many of them are not taken out yet. Some highlights to connect to our growth, recent geographical expansion to Belgium, U.K. and Baltics. The segment Insulation accounts for increasing share of the group sales in line with expectation of a positive long-term outlook for energy-efficient solutions. A positive development for sales of packaging to food industry including paper packaging and traded products. The recent acquisition strengthened the integration between segments through internal sales of raw material to our own downstream and improved Circular offering. And we continue to consolidate within Circular solutions leading our industry towards a circular economy and creating a leading global recycling company. Related to the closing of Jackon, 4 facilities will be divested representing less than 1.5% of the turnover. We also continue to strengthen our diversified and integrated business model. If you look at the diagrams, you can see that we are diversified across countries all over Europe, where we have good market position in each country. If you look at the other side, we are also diversified across end markets. A big portion of our turnover is food packaging, which is a very stable market. After all, we need food. We see the improving automotive production. It has been an all-time low, and it will continue to improve with a shift to electrical cars which uses more of our products. And in Insulation, we are in the beginning and the end of the construction period, and we sell solution for renovation and new build. We have in our Insulation segment solution to save energy in all buildings. Also the HVAC industry, heating, ventilation and air condition, are a growing market for us. So our business model is still the backbone of organic growth and M&A opportunities going forward. The acquisition of Berga Recycling, a company which intrigued us with a vision to become the world's largest agency for materials for recycling. We are speaking about Industry 4.0. It is digitalization, and Berga is the digitalization of BEWI Circular. The knowledge and information in Berga is to collect material and bring it to the recycler that can create most value for the product. Berga has a proven business model with a turnover of EUR 31 million and a 10% EBITDA. They collect 80,000 tonnes of recycled waste and 15,000 tonnes of that EPS and they bring it to become new material. Together, we will transform BEWI Circular and continue to challenge the existing business models in recycling. And our platform has now EUR 74 million in turnover and EUR 6 million in EBITDA, and we will continue that journey. Acquisition of BalPol, a leading provider of insulation, mainly in Lithuania, the strategic rationale there is a classical acquisition with geographic expansion, providing a platform for further growth in Baltics, broadening the insulation offering to include complementary solution like also PIR panels, which they produce and sell, platform for circular activities in Baltics and increased internal raw material consumption. Then I leave the word over to you, Marie, who will take us through the financials.

Thank you, good morning. As Christian was mentioning, again, we delivered a record result this quarter. And we have been very acquisition intensive. So of course, that contributes to this. But again, important is that we are growing organically in all our segments. The net sales, it's up from EUR 198 million to the EUR 277 million. It's a mix, 50-50 approximately between organic and the acquisition. When it comes to organic growth, it's mainly driven by price increases because we experienced that the volumes at these times are overall, very stable between the segments and in the regions. And then EBITDA, this is important. Again, EBITDA is increasing. It is increasing between organic and acquisitions, approximately 50-50 as well. But we are growing in the quarter in all the segments organically. But if you then compare to the year-to-date numbers, where most of the organic growth is coming from RAW. You can now see that this is stabilizing where we a couple of quarters have had increasing raw material prices, and that has been a good thing for our RAW segment. And Insulation, which is the lighter green color that you see and that is now picking up more and more earnings. They are now catching up, and it's now very evident that we managed to transfer the price increases to our customers. And again, Christian said it as well, it's not just that it's price indexations that it's easy to send an invoice to our customers. It's also increase in extremely good work from our local management on price management. Segment RAW, again, stable volumes. It means that the top line net sales, the increase is coming from increasing sales prices, increases the earnings as well, rather stable. You see a dilution on the margin. It's pure mathematics. Following that, we increased sales prices with underlying raw material prices. And the reason for that we managed to increase the EBITDA, it's -- again, it's a good market. We can take the prices we need, but it's also a very good performance from our purchasing management. It's a very good work done by sales in this segment, and it's also a very well-run operation. All right. Insulation. Net sales, it's up approximately close to 50 percentage. As for the group, 50-50 organically and from acquisitions. As I repeat myself, volumes are stable. That means that the increase organic in top line is mainly price increases then. And as mentioned, we had EUR 4 million increase in EBITDA mainly. This is actually coming down from organic growth to close to EUR 3 million. It is the rollover, the lag we have in adjusting our prices. Now it's very evident that we managed to push the price increases to our customers. And then recent acquisitions, Kemisol, you know about. That was an acquisition late last year. Jablite was a company that we own to 49 percentage until the second quarter where we acquired a residual 51 percentage, contributing as well positively to the result as from day 1. Packaging & Components, again, organic growth, but also contribution from the acquisitions that we have. We have stable volumes, but I want to highlight the food industry, the food trading that we have started to acquire a few years back and continue to grow, performing extremely well, also contributing to organic growth. When it comes to EBITDA, yes. Also here, the increase with EUR 3 million in the quarter. Here, most is coming from the acquisitions, but also price increases impact the growth from organic. What you have seen for some quarters, and you also see that in this quarter is that we do have a margin that goes down. It's 3 reasons. One is our product mix. We are growing on food trading. Trading has lower margins compared to our production activities. Second is the factory up in Senja, a new fish box facility that is in a ramp-up phase. We have the full cost structure and not yet full production. And the third reason for this is the acquisitions that consolidated have a lower margin currently than BEWI previously had. And this is IZOBLOK mainly. It's the automotive industry that is well familiar to you that it's not performing as it should, in the longer run. Last, but not least, Circular. This is the segment that is responsible for collecting and recycle raw materials so that we can use it all over again in our production. We have built it step-by-step. It's acquisitions, it's green fielding. We have local initiatives. And as you can see, we have a big shift up in both earnings and on our net sales. This will continue. I think Berga has proved on that. And keep in mind here that Berga is only consolidated 1 month then. So if you want to understand Circular, you need to go to Christian's Page 2, see a pro forma Circular number. This is the consolidated full profit and loss. I'm not going to read through the comments. But it's one thing that I would like to highlight and that sticks out in this quarter. That is the capital gain from sales of assets. That comes from -- it sounds strange, but it's from this acquisition of the majority part of Jablite. And one can say that this is pure accounting. But what it is, is that when you buy out the majority, you need to revaluate your underlying shares that you already owned, which was close to 50-50. So that means that from the last 2 years when we acquired the first basically 50 percentage, the increase in the share of -- or the value of the company is up close to EUR 10 million. And that goes back a little bit to the strategy that we have that [ BEWI ] minorities try to understand the company. They have done a fantastic job in Jablite to take or develop the company. And now we took full control of the company. So that's a success story. It comes back a little bit to this slide, which we have from time to time. And it's back to highlighting that we do have rather big minority stakes, which you don't see the full value of in BEWI's consolidated numbers. This slide explains it, and I'm not going to go through it, but I think the EUR 9.7 million that we realized when we have now got full control is a proof that there are hidden values. Capital structure. We have a leverage that is increasing. It's coming from all the acquisitions. We've done a few in the second quarter. We buy them on a multiple higher than our leverage. So it impacts the leverage in a quarter. It's not that evident on the return on capital employed since we use an average capital employed base to calculate that one. We do have an unutilized credit facility of EUR 100 million at this time, and our net debt in total is close to EUR 300 million and EUR 200 million, excluding IFRS. Cash flow, positive cash flow in the quarter. It's coming from the very good results. Working capital is positive in the quarter. We have managed to keep that in control, but it's also that we had even more increasing raw material prices in the first quarter, which now are stabilizing. And into the third quarter, it should not increase. It should rather be the opposite, that it should be a further cash release on working capital due to seasonality. And then we have spent EUR 9.2 million on CapEx, and we are in line with our policy when it comes to how much we should spend. And with that, back to you.

Thank you, Marie. Now to the summary and outlook. M&A priorities going forward, expanding circular business model, which we have spoken a lot about. We are going to broaden product offering with complementary materials in Packaging and paper. Also, we have spoken about fiber-based solutions. Insulation, it's EPS and other materials, but also solutions, strengthening market position and geographical expansion will continue. The outlook, we experienced solid demand in key markets. Also going into Q3, we are well positioned to meet industry-wide challenges in the value chain, shortage of electronic components, delay in logistics and transport, general cost inflation and also a cool down in the market if it comes. GAP expected to remain at high levels. We expect to have improved the profitability from downstream units and the completion of Jackon transaction is expected to happen in Q3. And we have a continued strong pipeline of attractive M&A opportunities going forward. Summing up, as we have spoken about, we have a solid operational performance with a strong organization. We have a proven business model and a proven delivery capacity also in challenging times. We experienced strong or good underlying demand, and we have a robust financial position, and we will continue to pursue growth opportunities in line with our strategical priorities. And by that, I'll leave the word to questions.

Morten Normann from Carnegie. You mentioned Jablite and the [ EUR 9.7 million ] in the value change in the valuation. We also have 12 facilities on 34%. Do you have any strategy or what you're going to do with those?

In terms of real estate facilities?

No, if we are going to buy out minority from ...

Yes, of course, of course. Also our pronounced strategy at all times is to acquire. We go into a minority position to try to acquire companies. It doesn't work every time. So there is no guarantee here in life. But yes, our continued strategy will be to take over companies. But we are a patient company. We are a very long-term company. It may take years. It may take more, but we see the position as a good position. We also supply them with raw material, and we will continue to be an owner in those companies.

And one question on the real estate sales. What yield was that deal made at?

[ EUR 675 million ].

Herman Dahl, Nordea. On the demand side, you mentioned that food packaging is rather stable and that automotive has been a little weak. Maybe you could comment a bit on how demand is looking in the Insulation business. And what do you expect there going forward? Do you think that your more energy efficient solutions, for instance, will offset potentially weaker demand ahead?

I cannot and will not predict the future. We can only adjust to the future, but the key word is Insulation. I was speaking about that as well. we are exposed to the beginning of the construction period, and we are also exposed to the end of the construction period, a cool down in the general construction market will influence us as everybody else, but probably less than other construction materials because of renovation and insulation and the cost of energy in the society and the crisis we have in Europe today on energy. I cannot predict, but I assume that to be correct going forward. Insulation is one of the most important solutions to solve the energy crisis in Europe.

We have one question from the webcast. It's from [ Henrik Lassen ]. Can we assume that Jackon purchase to be settled during the Q3? And will the 50% cash settlement be paid out during the quarter?

We can assume that. And yes, we will, of course, pay when we close. And it is formalities now as we have gotten an approval from the competition authorities. And as I said earlier in the presentation, we are divesting according to the obligation we have towards the competition authorities and also the divestment they have put upon us.