Cabka N.V. (7GW.F) Earnings Call Transcript & Summary

Good morning, and welcome to Cabka's 2025 Half Year Results Conference Call. My name is Nadia Lubbe, Corporate Strategy Manager at Cabka. With us today are Alexander Masharov, CEO; and Frank Roerink, CFO. Alex and Frank will both make a short presentation, after which we will go to Q&A. For those of you following the call via the webcast, you will be able to submit your questions via the Q&A module. A copy of this presentation has been uploaded to our investor website at investors.cabka.com. [Operator Instructions] Also, please be advised that today's conference call is being recorded. I would like now to hand over to Alex, who will take you through our operational highlights for the first half of the year.

Thank you, Nadia. For everyone joining us, a very good morning, and welcome to the H1 2025 results call. Before we get into the numbers, I would like to be clear that in the first half of 2025, we made real progress. Despite ongoing challenges in our end markets, we have delivered on our top priorities. While our overall revenues were slightly lower than last year, we are now starting to see commercial momentum, both in Europe and in the U.S., which we expect to continue into the second half of this year. At the same time, our SHIFT plan is delivering lower costs, improved cash and much tighter execution. In the U.S., we are seeing early signs of recovery with new client wins, improved utilization and much better visibility. As we head into the second half of 2025, we are increasingly confident that full year results will be at least in line with 2024. As I mentioned, headline sales were slightly lower year-on-year, down 2% compared to the first half of 2024. However, sales in the U.S. saw a genuine improvement, and we believe we are now seeing early signs of improved commercial momentum in both U.S. and Europe. We are also encouraged by the positive development in our gross operating margin, which increased by more than 200 basis points. As we have highlighted before, during the first half of this year, our focus at Cabka has been on turnaround strategy, which I'm pleased to say has yielded measurable results. As a result of our SHIFT program, our free cash flow generation improved substantially compared to last year as we were able to reduce both costs and CapEx. Frank will go into more detail on these lines later in the presentation. You may wonder why our EBITDA performance was still lower given the improvements I've just mentioned. Well, EBITDA would have been higher if not our deliberate inventory reduction, which supported cash but had a temporary impact on our P&L. Again, I'll let Frank go into more detail later on in the financial section of this presentation. Now let me talk in a bit more detail about what has been going on in Europe and in the U.S. Starting with Europe. We have seen weakness in the first half of this year as clients still remain hesitant. Revenues in our portfolio business were down substantially, but I would highlight that this is partially due to the very tough comparison base given last year's large contracts, which fall into H1. Contract manufacturing, on the other hand, was a clear bright spot for us in Europe with 24% improvement in revenues. Turning to the U.S. As you know, this has been a very difficult region for us following the flooding at our St. Louis plant 3 years ago and following necessary reconstruction period of 1 year. I'm pleased to be able to tell you today that we are now seeing some early signs of recovery. The reorganization of our sales force and the investment in pricing are now yielding real results. We have seen new client wins, and we believe we are gaining market share. Our capacity utilization has improved by around 5 percentage points to 10 percentage points by expansions in our contract manufacturing lines. We expect this trend to continue into the second half of the year as well. Looking at our product development, we are launching two new products in the CabCube range. We will give more detail on product development road map at our Capital Markets update that we will hold on November 19. As we announced in June, our current CFO, Frank Roerink has decided to leave Cabka. I would like to take this opportunity on behalf of both the management and the Supervisory Board to thank him. Frank has been a key partner in this journey, and we are grateful for his role in Cabka's evolution to a listed company. Our new CFO, Mark Letterie, joins us as of 1st of September. Mark comes from Vinmar, where he was Finance Director and Group Controller. Mark brings his experience of the plastics and polymers market to Cabka and will work alongside Frank during the month of September to ensure a smooth transition. And now I'll hand over to Frank, who will run you in more detail through the financial section of our results and presentation. Frank?

Thank you, Alex. I have a few slides to explain the details behind our financial performance of the first half of 2025. Let me first take you through a summary of our key financial metrics for the first half. Revenues of EUR 90 million were broadly in line with last year, showing a 2% decline compared to the first half of 2024, primarily due to volatility in the RTP European market. However, we are seeing early signs of improved momentum, which supports our confidence in the full year guidance and outlook. Our gross operational margin improved by over 200 basis points, rising from 49.5% in 2024 to 51.7% in 2025. This reflects the positive impact of our SHIFT program, particularly in driving operational efficiency. SHIFT also delivered nearly EUR 6 million of inventory reduction in the first 6 months as part of our continued effort on working capital management and cash generation. While this contributed to a stable net debt position, it also had a temporary impact on our gross margin and EBITDA margin. The latter declined from 11.3% last year to 10.1% in 2025, which we expect to partially reverse in the second half of 2025. Operating expenses decreased by 1%, driven by cost savings from the SHIFT program. And adjusting for a one-off release of prior year accrual, the underlying savings are EUR 1.1 million. Capital expenditure totaled EUR 5.4 million, which is a 42% reduction compared to the same period last year of EUR 9.3 million. This reflects our disciplined approach to investments under the SHIFT program. Let me take a closer look at the European sales performance for the first half of 2025. Overall, sales in Europe declined by 8%. In general, uncertainties around the impact of the U.S. tariffs on business in the European Union and the higher cost of capital caused many smaller customers to delay investments in inventories. This impact was most visible in our portfolio business, which saw a 15% drop, reflecting broader market volatility. Despite this, contract manufacturing rebounded strongly with a 24% increase, signaling a recovery in demand and renewed larger customer engagement in this area. Customized solutions remained stable, supported by a loyal customer base and consistent order volumes. Our ECO product line continues to perform well, delivering 7% year-on-year growth, resulting in EUR 14.2 million in sales for the first half of the year. Next, we take a closer look into our U.S. sales performance. Portfolio in the U.S. saw a 2% decline as a result of an aggressive pricing strategy to regain market share and winning back customers we lost after the flooding. We grew our volume with 8%. Customized solutions has increased by EUR 800,000 in the same period last year -- compared to the same period last year to EUR 1.6 million in this year, primarily due to existing customer base. To increase our capacity utilization in the U.S., we successfully brought customer manufacturing volume into our operations. As I stated before, our profit performance in the first half of 2025 has been impacted by our inventory reduction program. At Cabka, we report movements in our finished and semi-finished inventory directly in our pure profit and loss statements under other operating income. This accounting method ensures that production efficiencies or inefficiencies in our variable material costs, such as energy and raw materials are reflected in real time. This offers a more accurate picture of how efficient our operations are performing. This is reflected in our gross operating margin being gross profit divided by total operating income. And we improved this by more than 200 basis points, rising from 49.5% to 51.7%, resulting from the SHIFT program. When we then look at our gross profit margin, being the gross profit divided by sales, you notice a reduction of 80 basis points from 50.5% to 49.7%. In the first half of 2025, we were able to reduce our inventories with more than EUR 5.6 million. Although this has a direct positive cash impact, it also has a negative impact on our gross profit margin. For illustration purposes, if our inventories would have remained stable, our gross profit would have been up with circa EUR 1.5 million to EUR 2 million, bringing our gross margin 2% up and more than 1% above last year. Operating expenses decreased by 1%, supported by cost savings realized through the SHIFT program. Most notable is a EUR 1.1 million reduction in personnel expenses. Part of this gain was offset by inflationary pressures and other fixed costs such as in-sourced services and maintenance costs. Additionally, the prior year period included a one-off release of an expense accrual from earlier years. Adjusting for this non-recurring item, the underlying reduction in operating expenses would have been EUR 1.1 million. Operational EBITDA stood at EUR 9.1 million, representing 10.1% of sales. Adjusted for the aforementioned inventory reduction, our EBITDA would have been circa EUR 11 million or 12% of sales versus 11% of sales last year. The company's net debt position remained stable, amounting to EUR 72.3 million as of 30th of June 2025. Cash flow from operating activities substantially improved to EUR 200,000 compared to last year of minus EUR 4.4 million. The operational EBITDA of EUR 9.1 million was offset by noncash adjustments, income tax paid and minus EUR 6.7 million movement in working capital. This movement in net working capital was minus EUR 2.1 million in our trade-related working capital, which I'll come to in a minute, and minus EUR 4.6 million in non-trade working capital movements. Investing activities resulted in a net cash outflow of EUR 1.4 million net, mainly due to EUR 5.4 million in capital expenditures, partially offset by EUR 4 million in proceeds from asset disposals through a sale and leaseback agreement. Financing activities reflected cash outflows primarily from interest payments and lease financing costs, adjusted by a positive impact from foreign exchange effects. It is important to highlight that we successfully obtained a waiver for this reporting period. Discussions with our syndicate of banks are ongoing to adjust the level of the covenants for the period of at least the next 12 months. The Management Board expects to complete these discussions by the end of August and to be granted a new waiver, thus removing the material uncertainty and ensuring going concern again. Let me talk about the net working capital position. It stood at EUR 28.6 million for the first half of 2025, representing 15.7% of sales, which is well within our medium-term guidance range and reflects a 26% reduction compared to the EUR 38.6 million as of 30th of June 2024. The EUR 5.8 million decrease in inventories reflects the results of our SHIFT program. Trade receivables increased with EUR 3.1 million due to the timing of customer payments and trade payables decreased mainly due to payments for machinery and equipment at the Belgium plant, which were committed in the prior period. Overall, the slide highlights our continued disciplined financial management and a positive trajectory in optimizing working capital to support the company's liquidity. Looking at the capital expenditure for the first half of 2025, it amounted to EUR 5.4 million, which is EUR 3.9 million lower than the same period last year and well below the levels during the period 2022 to 2024. This reduction underscores our disciplined investment strategy under the SHIFT program. As communicated during our Capital Markets Day in November last year, we aim to allocate about 50% of our annual CapEx to replacement and maintenance, with the remainder 50% directed towards growth initiatives. In line with this guidance, EUR 2.7 million was invested in replacement and maintenance, ensuring we continue to sustain our existing asset base effectively. Expansion and automation investments totaled EUR 2 million, focusing on next-generation solutions such as new molds and automation to drive further and future efficiencies and profitability. Additionally, EUR 700,000 was invested in our ECO business, supporting our commitment to sustainable initiatives. That concludes the financial overview I wanted to share with you. Before Alex takes you through the outlook of 2025, I would like to briefly highlight our financial calendar for the remainder of 2025. Key dates that are important for our stakeholders to note. First, we will hold an extraordinary general meeting in October to put the appointment of the new CFO and the new Supervisory Board member to a vote. The detailed agenda will be published on our investor website under the Corporate Governance section. Next, our Q3 trading update is scheduled for the 21st of October. And finally, as mentioned earlier, we will host a virtual Capital Markets update on the 19th of November, where we will provide a detailed update on our strategic road map and medium-term goals. With that, back to you, Alex.

Thank you, Frank. Before we move on to Q&A, I would like to discuss the rest of the year. As we head into the second half of 2025, we are increasingly confident we'll be able to meet our full year guidance. This will also be with much improved cash flow profile compared to last year as a result of a continuing contribution from our SHIFT plan, which is expected to contribute around EUR 2 million in annualized benefits and substantially lower capital expenditure. Let me also briefly touch on the PPWR legislation. It remains hard to quantify by how much and by when this will boost our sales. But in our conversations with customers, we see that the subject is gaining importance. This will undoubtedly develop over time into a tailwind for our business. As I already mentioned, we'll be holding a Capital Markets update webcast on 19th of November, when we will share more information with you on our progress. And with that, I would like to hand back to the operator. Could you please open the lines for Q&A? We'll be happy to answer them.

[Operator Instructions] And the questions come from the line of Luuk Van Beek from Degroof Petercam.

First, I have a question about the order book. You mentioned in the press release that gives you confidence in revenue growth going forward. Can you comment on the main areas where you see opportunities for the second half of this year? Is it in certain geographies or products? So that's the first question. And then a question about the cost levels. Can you comment on the utilization rates? So where do you have much spare capacity left and the cost levels in H2? Is there any further cost savings coming on or any other changes in costs that we should be aware of?

Thank you, Luuk. Let me take those questions. So where do we see commercial opportunities is both actually in Europe and in the U.S. In the U.S., this comes from continuing to load our capacity and utilization rates in [Technical Difficulty] contract manufacturing. In Europe, we [Technical Difficulty] basically the details, but we do see opportunities in our portfolio [Technical Difficulty] basis of our business with some lately wins that we have encountered in the past 2 months that has not been yet delivered. So we are quite confident in our guidance [Technical Difficulty]. As to your question regarding the utilization, we still have, obviously, capacity -- free capacity in our U.S. factory. However, it's much lower than it was in December 2024. We have improved it substantially from -- in the last half year. I would assume that we'll improve it even more during H2. In Europe, our free capacity is not really something which is so substantial. We are producing at full power. We have capacity, and we know how to manage it well. From the cost perspective, SHIFT plan is a yearly program, it's an annual program. Obviously, we have managed to do a lot in H1 with much less. This trend is going to continue to H2. If you're asking, are we going to do any sufficient turnaround changes on the cost base, the question is no, we just need to continue to do what we installed in H1. And if we continue doing through to H2, the results will be positive.

Okay. And one remaining question for now, and then I'll jump back in the queue. But you also mentioned a new commercial approach in the U.S. Can you elaborate a bit on that?

Well, there are a few things happened. We acquired -- we had a big losses in the past 2 years with a major customer in the U.S. So we were looking for new customers, obviously, and there was a big focus on our sales team. We have acquired the new customer. We already shipped in April, the first shipments for the customers. It's a long-term customer that earnings from that customer will be yielded in Q4, but mainly in 2026 as well. We also acquired a couple of customers in the contract manufacturing arena. A lot of them started already in H1. A few of them will be falling into H2. Obviously, I cannot name the customers.

[Operator Instructions] And the next questions come from the line of Thomas Martin from BNP PE.

I just wondered if you could give us perhaps a bit more insight into the price and volume trends through H1, I guess, by region. It sounds like you've reduced pricing in the U.S. and gained volumes. Could you just give us a bit more color on those trends between Europe and the U.S.? Second question, just related to the debt negotiations. Can you confirm, will there be -- with the current restriction on dividend payments whilst you're in breach of covenant or whilst you're operating under a waiver on covenants, will that be -- or do you expect that to be fully removed once you've finished your debt negotiations later this month?

Thank you. Let me touch on the first one, first question of yours. The second, Frank will answer. So on the price volume, in the U.S., part of the strategy was to regain customers that we lost during the flood. In order to regain customers back, we have potentially giving pricing a little bit away to earn those customers back. In Europe, it has -- we have not given substantial pricing away in order to win volumes, and this is also showing in the numbers. There is a pressure on pricing everywhere in Europe. But I think we have our benefit as a company and our commercial advantages to keep that pricing on the level that it is. You can also see it in the gross margins that are stable or even higher. Frank?

Yes. Thank you, Thomas. Indeed, your question was linked to the debt discussions with the syndicate and what that would mean to dividend payments. Clearly, under the current discussions, and as you know, we've alluded to this before, while we are in a waiver period and not complying with the original agreed covenants, dividend payments will be put on hold. And as soon as the company is in more financial safe waters, clearly, this will be back on the table again.

That's great. Could I perhaps just ask one other one is just you noted in the results the small European volume customers who have been cautious in H1 for a number of understandable reasons. I just wondered if you have yet seen any suggestions or any changes in behavior there? Is there any catalyst that you think they are looking for in order to revise their outlook? I appreciate it's been a rather challenging period on geopolitics and macro, but any insight would be helpful.

Yes. Let me try and elaborate on that. As we see customers are very tight holding their cash very close to their chest, I would say. This is why our order book and our visibility in terms of time is a little bit shorter than it used to be 1 year or 2 years ago. So we have -- we keep our sales on the same line, but our visibility in terms of the regular shipments is just a bit more tight as we see customers used to place orders 12 weeks ahead, 16 weeks ahead, 2 months ahead. Today, this happens sometimes 3 or 4 weeks ahead. Actually, what we have done to accommodate that is we are much leaner and much more efficient in planning our production. But the effect is that our visibility is slightly lower. Only on big wins that we have, as I mentioned, in Europe and the U.S., we have a long-term visibility of half a year ahead, if that helps.

And the questions come from the line of Luuk Van Beek from Degroof Petercam.

Yes. I have some other questions on the revenue mix. In the past, you talked about trying to move more customers towards standardized solutions that you can produce larger shares and be more efficient. Can you explain how that is proceeding? And also, I noticed that the contract manufacturing went up both in Europe and the U.S. Is that mainly to fill up any spare capacity? And do you expect that to continue in H2? And then thirdly, on the inventories, can you comment on which areas you reduced them most and if you're happy with the current levels or if you should expect any further movements in H2? And can you also comment on the level of factoring if that has been -- remained stable during H2?

Let me start with the first three questions. So we are still in the same strategy. We invest in what's called portfolio business, which is our bread and butter. And this bread and butter is where our development also goes. We -- the only thing is it doesn't yield results in 3 months' time, it's usually 12 months projects and developments take time. Even when we develop a CabCube that we launched right now, the sales of the CabCube will reach its maximum in a year from now. It will start delivering today, but the level of sales out of those products will come in a year from now. On your second question about contract manufacturing. Well, contract manufacturing plays an important role in [indiscernible], especially in terms of utilizing capacity and generating cash, maintaining operational leverage. Still, while we continue to develop our product portfolio, contract manufacturing helps us to balance the business and ensure that our assets are working efficiently as we execute the SHIFT plan. So it's a valuable contributor, and we see the mix evolving in line with the demand in our long-term road map. So I'm quite happy with the fact that we were able to increase our contract manufacturing, both in Europe and in the U.S. And in the U.S., it's especially a very -- it's a very important KPI for our company while we gained the market share back after the flood. Maybe on the factoring, I'll let Frank answer.

Yes. Thank you, Luuk. You had two questions, one on factoring, you asked whether it was at the same level as the end of last year. Well, indeed, we have further reduced the factoring. It's about 15% to 20% lower than we had by the end of 2024. So that on the factoring. And your question on the inventory reduction, where did we reduce the most. Predominantly, we had a first priority on reducing our semi-finished and finished product levels. Clearly, we target first -- we have a very large offering to our customers with many different SKUs. So we first target the slow movers and the low-margin products where we've substantially reduced inventory. Of course, our strategy remains to remain close to our customers. So shipping pellets from one place to the other is not economically helpful. So we have optimized inventory levels on site to be able to accommodate the customers much more elegantly than what we did in the past. So in that sense, we have been able to take a lot of the slow movers. Next priority will be to further look into how we can optimize the raw material position of the company as well. But I think in terms of amount of inventory, we currently are at the levels where -- which is healthy. I don't see significant further reduction. I do know that as we guided already for the second half, we will partially reverse some of the inventory reduction to make sure that we are with the growing volume are able to always accommodate customer demand.

We have no further questions on the phone line. So I will now hand back to you for the webcast questions. Thank you.

Thank you so much. We have a question -- next question is to Alex. Can Cabka benefit from the current tariff turmoil under the Trump administration? And if Cabka will be able to produce locally and therefore, avoid import tariffs?

Yes. Thank you, Nadia. Well, yes, to some extent, our local-for-local production setup means we can supply customers from within their own region, avoiding most of import tariffs. We do not expect a major immediate impact. This structure could give us a competitive edge if tariffs need the customer to favor local produced solutions. We do, however, highlight it very intensively with our customers in our negotiations because going forward, you do see hesitance in the U.S. because the uncertainty is there. Obviously, having a production facility in St. Louis is a big benefit, and I think will become a competitive advantage for us going forward.

Thank you, Alex. We have another viewer question. It's also pointed to you, Alex. Q2 sales showed a deterioration versus Q1. But as you've also indicated earlier, signs of an improved commercial momentum sales, both in Europe and in the U.S. Has that already translated in overall sales growth? Or when do you expect this to materialize? Also, and then the second part of that question, you also mentioned price investments in the U.S. to regain share. What was pricing in the U.S. for the group in H1?

Yes. We are indeed seeing early signs of improved commercial momentum in both Europe and the U.S., particularly in the U.S., where recent wins, as I've mentioned, are becoming to contribute. That said, the impact on overall sales growth will be more visible in the second half as these contracts ramp up and volume build. On pricing, we have maintained overall pricing discipline at the group level. In the U.S., we did make targeted price adjustments where necessary to support customer retention, as I said before, growth and bringing customers back. But these were selective and balanced with our margin objectives. For the group, average pricing in H1 was broadly stable compared to last year. If Frank can give more details, but I think this is where we are today.

Yes, I think it's a very good summary, Alex. No more further adding.

[Operator Instructions]

Thank you so much. I think that is we have no further questions coming via our webcast module as well as on the online conference. I think that concludes our conference call for today. We would like to thank you for participating, and you may now also disconnect.