BEWI ASA (BEWI) Earnings Call Transcript & Summary

Hello, and welcome to the presentation of the results for the second quarter of 2024 for BEWI. My name is Christian Bekken, and together with me, as always, our CFO, Marie Danielsson. Today, we will focus on 3 things. The market is still tough, but there are clear signs of improvements. How are we positioned in order to accelerate growth when the market comes back? And number three, what makes BEWI better positioned than our competitors. Put your attention to the disclaimer. We had revenues of EUR 277 million for the quarter, down by 4%, which we are relatively pleased with given the tough markets. An EBITDA of EUR 29 million, of which approximately EUR 7 million is compensation for costs we have had related to the acquisition of Synbra. Weak margins from RAW but more positive results and development from downstream. Marie will go more into the details later. We have now had a challenging and declining markets for almost 2 years. Throughout this period, we have clearly shown our ability to adapt for the market situation, good or bad. As communicated before, we have a strong focus on cash flow and to strengthen the balance sheet in these difficult markets. And even if we see clearly signs of recovering, it can take time before the market is back where there was. So we continue to cut cost as we want to be cautious. At the same time, we work to take market shares and to focus on margin management, meaning price adjustment, but also other measures to improve and maintain margin at this current level. This, together with a reduction of our inventory, meaning working capital by EUR 20 million since last year, resulted in a solid operational cash flow this quarter of about EUR 23 million. In addition, we have completed real estate divestments, ending the quarter with more than EUR 100 million in available cash and other liquidity, just like we communicated that we should do in the presentation for quarter 1. And then more important stuff, the operations. Segment for segment, starting with RAW. Still tough when 70% is building renovation and construction related. However, the good news is that the volume is stable compared to last year. The styrene monomer prices have been highly volatile with a 20% increase since the second quarter last year and 11% since the previous quarter compared to only 6% increase in the official EPS prices. This leaves us with a lower gap for the quarter. However, it's a lag, and we will continue to improve. We have now started to sell CR EPS, and we prioritize to sell in U.K. and Spain because these countries have already plastic tax. We will come back to this later in the presentation. And then to Circular. It has been challenging to use recycled material in our production. Now the challenge is to collect and to get enough material. This is likely because of the increased market interest for recycled plastic. But we are confident that our fully invested setup in collection and in use of recycled material is highly competitive, and we expect to continue to increase our collection and recycle volumes going forward. We have a better position. We are collecting more places. We have a more efficient production and we have more stable usage of the recycled material, leaving us to be highly competitive in this segment. As I said in the introduction, we see clear signs of recovery for Insulation. For example, higher volume in foundation elements for the new build in Benelux, we call the product Power [ Kiss. ] We have also been sold out of construction boards, but we are glad for our new line in Olen, which now is up and running. That doubles our capacity in construction board. And we will now see increased sales in that high added value product. We also use more recycled material, and we sell more products from our product line, GreenLine, which includes our product with a lot of recycled content into Insulation. For the Packaging & Components, biology have been challenging for the Norwegian fish industry. It has been a negative impact for us in Q2, but now it's a positive impact in Q3. However, we see a steady growth year-on-year. HVAC is very much similar to the Insulation & Construction with a slow recovery on volumes. Also in Packaging, we focus on our CR EPS and again, in particular, to those countries, which are imposed plastic tax already. They have imposed it on packaging that does not include recycling material as it gives us a competitive advantage to have these tax-free products in those countries. In summary, we continue to deliver on and work with what we consider our key priorities for long-term growth. Increasing collection and use of recycled materials, we take the responsibility. And at the same time, we've got a huge, huge competitive advantage on this. We are adjusting our capacity and cost to the existing market. We are also fully invested to capitalize in the growing market we see, and we have strengthened our financial position, and we will continue to do so in difficult times. But we're also going to take advantage of that position when the market rebounds. Then we will reduce our exposure in some markets while increasing it in Insulation, a market we believe strongly in. We do this because we see that the energy-efficient solution and Insulation will give us more synergies and upside potential for all our divisions. It gives us profitable volumes in RAW. We can become a full service provider in Insulation, and we can increase our volumes for HVAC components. And of course, also increasing volumes for Circular, which brings me to the next page. There, we have been working steadily for years investing in collection, producing and using recycled materials. Now we are ahead of our competitors and many they are behind. We can now offer tax-free products to our customers in countries like U.K. and Spain. There is already implemented plastic tax in these countries. And we hope to soon see more countries doing the same to increase the incentive to use more recycled material in a responsible way. When we talk about CR EPS in BEWI, it stands for certified recycled EPS. It's not just a product but a system, a system which gives us the rightful advantage like not paying for tax for now in some countries, but EU has, for several years, communicated very clearly, either use recycled content or you pay tax. And BEWI has invested EUR 50 million in believing in this. So it's a relief that it's now starting paying off. Every country can implement these tax systems in different ways, but very simplified. It means that we will either use 30% recycled content or you need to pay a tax, very often approximately EUR 300. We believe that it is essential to adjust for this given today's level of production in BEWI or recycled content, 30,000 tonnes, if we mix this in with virgin material, it gives us 100,000 tonnes with 30% recycled content. This can mean up to EUR 30 million in savings or increased competitive advantage for BEWI throughout the value chain, including the products and of course, the customers, which, at the end, pay these tax. And we have already now started to sell this CR EPS material, and we expect this to increase our volumes in the market. As we have communicated before, we have ongoing activities to increase our cash flow and strengthen our financial position. This remains a high priority to us. We have done a lot, but we will do more. We continue to reduce costs and to improve margins. We will lower inventory, and we will reduce our working capital. In addition, we have reduced investment to around EUR 20 million this year. And we will also be as low as that next year. And we are in the process of doing some strategic priorities to further increase our exposure into Insulation. We are looking to partner up or divest assets or in a combination to free up capital to accelerate our growth in Insulation and other energy-efficient solutions. Based on these efforts, we will raise our ambition to more than EUR 150 million in available liquidity by the year-end. This liquidity will give further comfort but also position us to act on attractive opportunities when the market now is rebounding. Repeating, we will continue to be aggressive in cutting costs, making us highly competitive when the market rebounds, being in the position strategically, operationally and financially to take the opportunities when they arrive. By that, I leave the word to you, Marie.

Thank you, Christian. As Christian mentioned, the market has been challenging for 2 years now, but we are now experiencing a relatively stable market situation on [ low ] levels, but with early signs on improvements. In the second quarter, net sales ended at EUR 277 million, and this was a decline of 4.3% compared to last year. And there are small movements in the respective segments. We recognize different developments in the different industries and in the different regions. Volumes in RAW are stabilizing, while volumes in Insulation & Construction develops in different directions, depending upon how early out the region were in the downturn. This is also a pattern that we noticed in relation to the industrial customer segments within Packaging & Components. EBITDA decreases approximately EUR 2 million. Our upstream segments are performing better, while the results in our downstream segments are declining. However, the picture is more complex than that, and I would like to highlight that the underlying development in our downstream segments is much more stable than it might look at the first sight. If we then move into the different segments, starting with RAW. Our volumes are on a low level, but this is, again, following that the building industry is still weak. And even if they are low, they are stable compared to last year, while EPS prices or the market prices for EPS has increased approximately 6% compared to last year. And that impacts, of course, net sales positively. Styrene prices has increased approximately 20%, and this impacts the gross margin negatively. Our view is that the large difference between the movement in EPS prices in relation to styrene prices to some extent, of course, as always, is explained by the normal price lag that we have. But we do also believe that this is a consequence from imbalances that there is in the market given the weak market. We continue to be very cautious on the cost side and at all times, we try to optimize the efficiency and production and now with the ramp-up in the new extruder and in which we produce gray and recycled material, the cost structure is improving step-by-step. EBIT ends at EUR 8.7 million, and this is positively impacted by the compensation in relation to an acquisition back in 2018, as Christian has mentioned. If we look into Circular then, we continue to invest in Circular. And this is, of course, because we think this is so important for the availability of recycled material. In the quarter, we started up the new Circular hub in Sweden, and that increases our recycling capacity of GPPs, with 40%, so from 25,000 tonnes up to 35,000 tonnes. And with increasing usage of recycling materials in our production, this capacity, this additional capacity in combination with collection is so important for us to be able to close loop. Christian mentioned that it is a challenge for us to access the waste stream at this time and to increase the collection. We see this as a healthy sign of the increasing interest in recycled material. But still, we need to keep in mind that the market is immature. There is a high volatility, both in purchasing prices and in selling prices, and we are still struggling with the profitability. Sales has decreased approximately 15% compared to last year, but sales is still catching up from the previous quarters. And even with the lower volumes, we have managed to improve the EBITDA in this quarter. And this is partly explained by increasing burden prices because then it's easier for us to hold the margins up. If we then go into our downstream segments and starting with Insulation. Here, you can see that sales is pretty much in line with last year, and this is a net effect from lower volumes, but we do have higher sales price. Now the volume development differs between the different regions, and we do have increasing volumes in the Nordics and in U.K., but the volumes continue to decrease in the other regions. Following seasonality, of course, the volumes improved substantially compared to Q1. EBITDA then are declining from last year, but I do dare to say that the underlying performance is actually improving. The quarter is negatively impacted by EUR 0.8 million related to implementation costs for our new ERP system. And we do have EUR 1 million lower in contribution from our jointly owned companies that operate in Germany and in France, and that is where the market is the toughest. And if we adjust for this, Insulation & Construction delivers a higher EBITDA and a higher margin compared to last year. And that is even though we have lower volumes in Benelux. And I think you are well aware of that we do have higher margins in that area due to the product mix. And the drivers for this, that is the much improved results in the Nordics and Germany, where we early on adapted the cost structures. And now we see the very positive impact from that. Moving then into Packaging & Components. The development in segment Packaging & Components have been mixed if we compare to last year. But the important message here is that we do see improvements in the operation towards the industrial customers compared to previous quarter. In totality, sales and EBITDA has declined, but this needs some more explanation. And if I then start with the industrial segment. Here, the market was still good in Q2 last year, and it started to decline in the third quarter. We now experience that volume slowly improves and the EBITDA is steadily increasing. And at this point, this is mainly following the cost measures that we have taken. The fish boxes and the sales to the food industry has continued to be on the lower end, and this was expected just as we expect that the volumes will improve in the second half of this year, and that is following the biology. The volumes that we have is, though, in line with Q2 last year, but the margins are much lower. And that's a consequence from the lag in sales price, where we last year were in a decreasing price trend, favoring from higher sales prices and lower costs for the raw materials, while we this year experienced the opposite with an increasing price trend. This is the lag that evens out over time. That's important to keep in mind. Automotive then continue to develop well. They deliver on stable volumes and are improving results quarter-on-quarter. So with this said, yes, the earnings EBITDA has declined, but this is explained by pricing mechanism in the fish box segment and a still strong market for the industrial segment last year, where we're now, after close to 1 year in a declining market trends, seeing positive signs in the market again. Moving on to the consolidated income statement and a few things that I would like to highlight. Sales, again, then has decreased slightly 4%. We do have smaller movements in the respective segments. Raw materials, if we include goods for resale as a percentage of sales, has increased with approximately 1 percentage point and external cost has decreased. This is, of course, following lower volumes, but it's also a consequence from that we have cost reductions. And in the totality, the fixed costs are in line with last year, but personnel cost increases, and this is following the salary increases that is impacted by underlying inflation. Depreciation increases approximately EUR 1 million. This is related to the sold real estate and the treatment under IFRS 16. And the same financial net also increases, and this is mainly then driven by the essentially higher policy rates if we compare to last year. And this means that we end with a net profit of EUR 1.4 million. Okay. Then we move into the financials. We do have a good operative cash flow in the period of EUR 23 million. This is in line with last year, but then to keep in mind, last year, we had a positive impact on financial items following settlement of currency swaps. And this year, it is compensated with improved cash flow from working capital reductions. Year-to-date, working capital still is impacting negatively with EUR 17.5 million, and this is explained by seasonality. And I think Christian has said it a couple of times, but we have a high focus on reducing working capital. And over the last 12 months, we have managed to reduce the inventory with EUR 20 million, and this is close to 15% of the inventory value. And this is, of course, good, but it's even better if you consider that the underlying raw material prices has increased with approximately 10 to 20 percentage [ point ] depending upon where we are in the value chain. And we continue, of course, to take measure to further reduce the inventory. We also continue to reduce our CapEx levels significantly. And as expected, still high in the second quarter in relation to the full year estimate, but that's back again to that we are now finalizing the larger expansion projects. And we expect to keep the CapEx level at this level also into 2025, which is below the long-term target of the 2.5 percentage of net sales. And this is given the larger investments that we have made over a longer period of time. Then finally, on the capital structure. I think it's well known that a key priority for us is to strengthen the balance sheet, and we have now reduced net debt ex IFRS with EUR 30 million since June last year. And this is coming then from that we now have reinvested all the real estate that has been under the agreement. We have had a good operating cash flow, and that includes, of course, the reduction of the inventory levels, and we have been very cautious on CapEx. And this also means that in a totality, cash on hand and available credit now is about EUR 100 million that we set as a target for a couple of quarters ago. And for the same reason, with the lower net debt leverage now has decreased to 4.8%. Our financial targets then, still far away to go, I would say. But we keep the targets with a leverage below 2.5% and a return on capital employed of 20%. And as Christian has mentioned earlier, we now are preparing for growth in our key markets, and we are positioning us not only operationally, but also strategically and financially for this -- with all these measures that Christian has mentioned. So with that, I leave the word back to Christian.

Thank you, Marie. Now let's talk about strategy and outlook. By the way, a nice picture from our construction site in Denmark, where they, of course, use recycled material in their insulation. Given today's expectation for improvement of energy efficiency of buildings and also the discussions about housing shortage in many European countries, I guess it's needless to explain why we believe strongly in this market. We have started a journey which, in the long run, are the right way to capitalize on BEWI's capabilities. We also see, as we spoke about, clear signs for recovery for the Dutch new housing market, and we can show this by many figures. Here is some of them. You see an increase of sales in newly constructed houses in Netherlands on 34%. You see also that the production of the concrete also meaning cement bricks, slightly up in January to April 2024 after a decline of 50% -- 15% in '23. We are well positioned to accelerate the growth when the markets rebound. We have strong market fundamentals. We have also our tuned production and cost structure, and we have unutilized capacity with a clear strategy and many competitive advantages, like the certified recycled EPS, tax free material and also a very strong M&A line. Short term, the market are still challenging, but with clear signs of recovery. We work actively with our certified and tax-free recycled material to further develop our competitive advantage and to also increase volume. But most of all, and most importantly, we continue to adjust to the existing market. And with that, I'll leave the word to you, Charlotte, for questions.

Thank you, Christian. We have no questions from the webcast this time. Hopefully, that means we had an informative presentation. If there are any questions out there, please contact us by e-mail or telephone. And we hope to see you again next time. And thank you for listening in. See you soon.

Thank you.

Thank you.