BEWI ASA (BEWI) Earnings Call Transcript & Summary

Today, we are going to focus on 3 things. It has been a challenging quarter in what is still a difficult market. We see improvement not only due to the seasonality, but also in the volumes in Q2 compared to Q2 last year, a positive sign for the near future. We are also going to look into the long-term opportunities and the market ahead of us. Welcome to the first quarter presentation for BEWI 2024. I am Christian Bekken, the CEO, and together with me, as always, our CFO, Marie Danielsson. EU has set a target to become climate neutral by 2050. To reach this EU has made it a legal obligation to reduce emission by at least 55% within 2030. It is only 5 years to 2030. And there is an urgent need to improve efforts if we are going to reach that target. In this picture, you see some colleagues of mine in the middle, [ Amaude ] and [ Eunice] with some friends in Sweden on the World Cleanup Day. We in BEWI know that we make products that are protecting people and goods for a better every day, like, for example, helmets to protect children when they're out bicycling, but we also know it is important to take responsibility, responsibility to reduce CO2 emission by insulating more so that we use less energy, to recycle more, create less waste and make the packaging even more sustainable, also to lower our emission to mitigate the climate change. In BEWI, we see this as our greatest business opportunity. The first quarter was difficult, and we are not pleased with the result. We try to do our best, and it's challenging when the effects are delayed. Our revenue on $244 million, high EBITDA of $19 million, nigh EBITDA margin of 7.6%. We are going to use our energy on further improvements, not on excuses. But there are some explanations. Challenging markets condition in an already weak season, a winter with a lot of snow in Nordics, makes it very difficult when you are exposed to the construction market. On top of this, Easter came in March this year and in April last year. We have a positive margin, but we are not satisfied, and we will continue to improve and to cut costs going forward. Going into the second quarter, we experienced stronger demand so far compared to the same time last year. In one of our biggest and most profitable markets, Benelux, we see this year 10% higher volumes than we saw last year. We actually see positive signs in all the divisions, and that is very promising. The ramp-up of the new production line in Etten-Leur with high-margin products is going well in Q2. In the insulation market, we see increased volumes also in Denmark, and we are gaining market share in Finland, especially in XPS. In Packaging, we will have a positive margin effect coming from a lag in price agreements. In automotive, we continue to grow volume, taking market shares. In circular, we see higher margins, and we are already almost sold out for volumes in Q2. All this is clear indicators on better market conditions going forward, but it will take time. What will speed up this process is the regulatory changes like renovating houses with more insulation. We in BEWI will continue to deliver on our key priorities: more recycling, capacity adjustments and cost reductions, capitalizing on our investments, strengthening our cash position, first step, EUR 100 million in Q2, and then evaluating strategic opportunities for growth going forward. BEWI have invested over EUR 50 million in recycling over the last 6 years. In 2023, we produced over 50 million fish boxes, and that is 30,000 tonnes of material. But more importantly, we collected 27,000 tons of EPS, 90% of the fish box volumes we produced. BEWI's next target is to collect and recycle more than we produce. And there is not many companies in the European industry that can say the same. I'm very proud over that accomplishment from our organization. We have worked for over 5 years testing, failing, improving, developing and of course, as I said, investing over EUR 50 million to be able to recycle as much as we produce. This will be BEWI's largest competitive advantage in the future. Now it's just a matter of time before we reach these targets. And looking at the regulatory changes in EU, this is about to happen right now. 2030 is only 5 years away, and that is the last time we have to change. As an example, packaging with 30% recycled material is one of these regulatory requirements and BEWI, we can fulfill that today. BEWI is also one of the biggest producers of reusable boxes to the food industry, and 40% of reusable boxes is the target for 2030. The solution is not to delay the implementation, but to work together with fact-based knowledge to find the right solutions. And with that, I leave the word to you, Marie.

Thank you, Christian. 7 quarters. We have actually been in a declining market trend for 7 quarters. It was in the third quarter of 2022, we started to notice the declining volumes in the Nordics in insulation. And after that, the volumes in Raw followed ,and the volumes in other countries in Insulation and Construction segment followed. And then approximately as from mid-'23, also demand from other industrial segment started to decline. In this first quarter, sales is down approximately EUR 52 million. EBITDA is down approximately $9.5 million. And as Christian mentioned, of course, we cannot say that we are happy with this. But we are quite pleased with how the organization and the company has managed over all these quarters to adapt to the market situation. We are also pleased to see how resilient business model is to be able to still deliver results on these levels after so many quarters in this environment. And that's not just because what we deliver here today because it's also important because it says something about what we can do when the market turn around. The overall picture is that the volumes are down in most regions across the segments. And again, due to that the market is still soft. It has been an extremely long, it has been a cold, it has been a wet, snow winter. And on top of that, we had the Easter break in Q1 this year compared to Q2 last year. In our downstream segments, we have remained the margins at the same level as last year, even if the volumes are down. But that is not the case in our upstream. I think that is the disappointment, if I can express it like that, that our upstream segment has not only had a challenge with the volumes, but also with very volatile raw material prices in the styrene prices. And that has been hard to maneuver from a selling price perspective, and I will come back to that when I speak about a segment role. But the result could have been a few millions better in our upstream segments and circulars selling prices. They pretty much follow the burden prices. So they are impacted by this fact as well. A few things if we just look at the full income statement. Again, sales is down 18 percentage. As always, that's a mix from price and volume. We are taking down the cost base. Part of this is, of course, related to the lower volumes. But in fact, fixed costs are 5% lower compared to last year, and that is for all the different measures taken. So is the personnel cost slightly down then from last year. We have unfortunately been forced to take out 150 employees, or FTE. And then we have the salary inflation. It has been a quite high salary increase last year, which offset part of this, but we are still on a lower personnel cost level. Depreciation is stable or on the same levels as last year, financials slightly up, and that is, of course, due to the increase in policy rates if we compare to last year. Cash flow then, negative, but definitely not a surprise. This is in line with what we expected. And why is that then? Yes, that's, of course, because you do have a seasonality impact in Q1 in working capital. You end Q4 in December in low season. You end Q1 in March when you're about to go into high season. So we have a working capital impact in the first quarter of a negative $25 million cash flow. And all of that is more or less related to accounts receivable. And then we have said for a quite long time that we are focusing on the working capital and how can we reduce that. And of course, inventory is something that we work extremely hard with. And then you might have picked up that inventory is actually increasing slightly. Now we're talking about a few millions. And this is again then coming from that we have had an upgoing price trend in raw materials, approximately 5 to 10 percentage. And that means that we tie more capital into the whole value chain. So the volumes in inventory are actually down, but then due to increasing prices in euros, it's up. Then we have CapEx, which we also have been talking about a lot. That is still in a totality on a quite high level in Q1. That will continue in the second quarter because we are now in the end phase of paying the last installment of all these organic growth initiatives, which Christian will come back to what that means for future earnings. But I want to emphasize, and that should be very clear that the target of EUR 20 million in CapEx in 2024, that remains. So again, this is what we expected for the first quarter. And you can also see that CapEx related to maintenance CapEx, that is decreasing significantly versus previous quarter. I'm back to my 7 quarters in a declining market mode because that, of course, means something to the financial KPIs, which then also for 7 quarters has gone in the wrong direction. I think it's fair to say that what works against us the most at this time is the earnings. And with that said, that we are not continuing having a high priority on the balance sheet, but it's still the earnings that makes the difference at this time. If we compare our net debt to March last year, we have taken down net debt ex IFRS with EUR 20 million. And on top of that, we have made available an additional SEK 20 million in our RCF. So that's an additional EUR 40 million. And then an easy conclusion is to say that, yes, but you divested real estate, and that's true. And if you look at the rolling 12 cash flow, you have all the divestments in there. But those money has, to a large extent, been spent on all these growth initiatives so that we have been able to take down the debt that is mainly related to the normal operational cash flow. Then I know that -- I don't know if we've said it externally before, I know that Christian mentioned it earlier in this presentation, but we decided for some months ago that we should have a minimum of EUR 100 million cash available because that is so important in these markets. By the end of this quarter, we are close to $80 million, $78 million. We know that we have real estate transactions coming in, $10 million already closed in the second quarter. There is an additional $10 million. That adds up to $20 million. We have a compensation for an old acquisition of close to EUR 8 million coming in, which means if I make the math for you, that we have the $78 million and we could add approximately EUR 28 million to that. So we are at those 100 already at this time. And to summarize, again, just to repeat myself, balance sheet, main focus, we continue to do what we can to strengthen the balance sheet. And we believe that when the market turns, that also means that we are greatly positioned to turn around the KPIs that we have and reach back to our targets again. So then looking into the segments. Raw, mentioned still struggling with the volumes following the soft market. The EPS prices, the selling prices of raw, official prices, have declined approximately 7% in this quarter. And that gives you a feeling about how much of the decrease is related also to volume. We believe that, yes, these volumes, of course, it's market driven, but I said before, we also have had a tough winter. We also had the Easter season. So there are different impact in this volume drop. And then also what we still experience is that our customers, they are still very cautious on building inventory. So normally, when you could see them building inventory end of Q1 to be prepared for the high season coming in the second quarter. That has not been the case this year. And then also mentioned before, it has been a volatile styrene market in the first quarter that continues also into the second quarter. And that means that the perception on what is the market price for EPS is very different from -- different from different customers, of course, but it's deviate from the price that we pay for the styrene. And that has pushed the margins further down. So while the selling prices has declined 7%, the styrene prices has more or less been flat. And that impacts segment Raw's EBITDA in the quarter with a couple of millions because that means a lot to the results. Insulation then, same story. Still a soft market impacted by exactly the same reason as mentioned for Raw. We are very pleased with that it seems like the volumes are in April and May increasing if we compare to last year. And we are also very pleased with, still, the operational and financial performance that segment do after all these volumes in a declining trend. They deliver margins on the same levels as last year. And of course, that means that all these restructuring schemes that we have been pushing through and the work that we still are doing and also all the synergies from all the acquisitions, they have impacted the financials for the segment. I think it's also worth mentioning that the results in the Nordics in Q1 is essentially better compared to Q1 last year. And then we have the opposite in Benelux and in Germany. And that goes quite hand-in-hand with also how the downturn started. It started in the Nordics. And then it came by the end of Q2 in Benelux and the German region. And now we can see that the performance is catching up in the Nordics, and we still haven't managed to handle -- not to handle, but we are still not there yet in the Benelux and Germany. And U.K. and Spain that have been performing on good levels, I would say, over these quarters, both volume-wise and also financially, they continue to deliver on these good levels. So still not any big signs of a poor market in these areas. All right. Packaging components, it's always a mixed picture in this considering that there are so many different industries behind this segment. But we are very pleased with that automotive continue to deliver stable volumes, stable financials. They do -- they approximately 20 percentage of the sales in this segment is now related to the automotive segment. Then we have the fish boxes. Last year, the first half was quite weak volume-wise for the fish boxes. Seems to be the same this year, and that is driven by the biological challenges that you have out in the sea here in Norway. And the difference then compared to last year is that last year, still the more industrial customers and HVAC in particular, they were still an upgoing trend. I think that we also, in the second quarter, said that HVAC is still strong, and then it went down from the mid of last year. And that explains the difference compared then to Q1 last year. But positive then is that if we compare to Q4, the industrial segment is now performing better, and that is both driven by that the volumes are slowly picking up, but also all the different restructuring schemes that have an impact to the financials and the performance. So we are pretty much delivering on the same levels as in Q4, and that's a combination between an improved industrial segment. We had some weaker results in the Automotive segment. And then just to end with Circular, Christian mentioned that we have invested a lot in our Circular segment. We continue to do so. We believe that it's so, so important to have access to recycled materials in the future. But we are struggling on the profitability. I would say it's 2 main reasons to this. One is more the market because the Circular, the products that we sell, the recycled material, goes mainly into insulation products in the market. This is, as you know, weak. And then it's about the price. Still, it's hard to get paid for recycled material. And now is the virgin prices on a generally low level or has been in the first quarter. And that means that the preferred choice is still virgin over recycled material, unless there is a price advantage. But again, we cannot do anything more than continue to invest and believe in Circular because we -- this is the future. We believe that we will have a great competitive advantage by our Circular segment. And the market needs to mature. We believe that it will soon do so. It will be supported by the legislation that will come in Europe and already is implemented in a few countries. And when that happens, it means that demand will increase and also the sale prices. So with that, I leave the word back to Christian again.

Thank you, Marie, strategy and outlook. Here, you can see a picture from Lithuania, a commercial building with PIR sandwich elements and insulation from BEWI. As you can see, the roof is covered by solar panels, a good picture of the future, the future of commercial buildings, not only preserving energy but also producing energy. Still, it is a challenging market, and we are focusing on capacity and cost optimization. But we are also preparing us for growth that will come both operationally and strategically. Our strategy is firm, and our long-term financial targets remains the same, and we will be in position to take advantage for further growth when the market rebounds. As we have stated before, our ambition is to double the revenue in the next 3 to 5 years with increased exposure, like you see here towards insulation and energy preserving products. The greatest challenge of our generation is climate change, and the solution is to mitigate it. 40% of the energy consumption in the EU comes from buildings. 75% of the buildings built before 2000 are not energy efficient. Climate change requires more energy-efficient buildings. For the EU to reach its climate reduction targets, renovation is required at large scale. And new buildings must be 0 emissions by 2030. BEWI is already a leading European insulation provider, and we will continue to strengthen that position. We need more buildings, but the main growth will come from using more insulation. As you can see on this illustration, in the '90s, we used 10 centimeters of insulation. Today, we are using more than 30 centimeters of insulation, and regulatory changes will continue to put pressure on using more and better insulation. Insulation products are the most important product in the construction industry because the best way of saving energy is not using energy at all. Here, you can see an example, a picture of a 0 emission building from Loren in Oslo. 2,400 square meters with GreenLine EPS, including 100% recycled content, saving in production, 67% of CO2 compared to the conventional production. Without any doubt, the future way of building buildings. That puts BEWI in a good position. As the figure shows, when we see a rebound in volumes on 35%, the earnings uplift potential for BEWI insulation would be over 70%. That is with the cost structure and margin level we have today. On top of this comes positive effects for the other segments as well. Remember then that 35% volume uptick will still be approximately 20% under the market we saw in '21 and '22. And then we will have the same EBITDA as we had at that time, around EUR 200 million. But at that time, we had 20% more volumes. We have already invested for the future, and the next years, we will be capitalizing on these investments. When we are up and running, this will add also EUR 75 million in sales and in organic growth on new markets for BEWI, as you can show in this picture. To summarize, it has been a challenging quarter for several reasons, but we see positive signs going into Q2. It's not the seasonal effects, but positive signs in terms of volumes and markets. We continue to improve our operations, and we are continuing to cut costs. Our priority for us will continuously be to strengthen our balance sheet and at least reach EUR 100 million in cash in Q2 and the strong fundamentals and growth opportunities are still ahead of us. And with that, I will open for questions.

Thank you, Christian. Then we will start the Q&A session. My name is Charlotte Knudsen. I'm responsible for Investor Relations and Communications. [Operator Instructions] The first one is from David Nielsen. How much of the revenue decline in Q1 this year compared to Q1 last year in the Insulation and Construction business is driven by volumes and pricing, respectively?

Of course, that differs from region to region. But if I remember and I do the numbers correctly, it is between 15% and 18%, which is from the volumes, also the down-crease in volume is between 15% and 18% in the quarter for insulation.

Thank you. And the second question also from David. This one goes to you, Marie. How do you view the risk of BEWI running into liquidity and covenant issues over the coming quarters and into 2025?

I assess that risk to being low. As you can see is, we have approximately close to EUR 80 million in available cash end of Q1. We have control over further cash coming in. We have the $20 million from real estate. We have this compensation of another EUR 8 million. So unless anything happens that we are not aware of as per today, I assess this risk as low.

Thank you. And then another question also from David. Again, referring to the Insulation and Construction business. It would be helpful if you could provide some insights on BEWI's end market revenue mix. How much of the revenues approximately comes from new build versus renovation, and also the split between residential and nonresidential, also referred to as commercial buildings? Christian, please.

The split in general between new build and renovation is 70% new build and 30% renovation. Of course, that differs, and we see things, for example, now increasing renovation, for example, as I showed in the presentation, the flat roofs, which are insulated and putting solar panels on top of it. Then they use our insulation, hard insulation, very often XPS. And the split between building houses and commercial buildings is approximately 20% commercial buildings, but that is also increasing now compared to housing in the times we've see now. But that is a general figure.

Good. Thank you, Christian. Then we have a question from Herman Dahl at Nordea. How is the order intake in Insulation and Construction segment so far in the Q2 compared to the same period or the same quarter last year? Christian, please.

Yes. I touched upon some markets in the presentation like Netherlands and also Denmark, which is the stronger part of it, which we are very pleased with. But in general, we see that demand is -- on order intake is approximately 10% higher this Q2 compared to Q2 last year. That's -- yes.

Okay. And then another question from Herman in Nordea. What is -- I have to translate this one. How much do you think for further cost reductions beyond the synergies already extracted and the cost cuts you have implemented related to the low demand? What's the kind of further potential for that?