SP Group A/S (SPG) Earnings Call Transcript & Summary

Hello. Welcome to the presentation of our first half year's result. And here, we have Tilde Kejlhof, Tilde is our CFO; and I am Frank Gad, and I am the CEO and then we also have with us [indiscernible] behind the scene, helping us with the technical issues. [indiscernible] with our customer service, not present today. We would like to go through the figures we have just released. But for those of you who don't know us, we have been in business for 50 years. Last year, we sold our services and our products in 97 countries. We have now subsidiaries in 12 countries at 3 continents. So we are in North America, in Europe and in Asia. And we [indiscernible] 2,485 committed employees. We are selling Surface Solutions and Plastic Solutions to our industrial companies around the world. We try to act as an innovative, reliable and competitive partner for our customers, and we have many different technologies, so we try to help the customer with Plastic and Surface Solutions in many, many different areas and in many different industries. The picture here shows our Guidewires. Guidewires are one of our own products of [indiscernible] products and the Guidewire business has been growing quite well in the first half of this year. However, the total business was not growing. We saw a top line decline of 2.2% in the first half. So we sold for DKK 1.370 billion. However, first half last year was all-time high for a first half. So it is a decline, but we have again strong figures from last year. Our own brands fell with 18.9% and that was [indiscernible] business that saw a decline of 48%. All our brands and product lines were growing. EBITDA fell 7.8% to DKK 230 million and the EBITDA margin fell 1.0 percentage points to 16.8%. Profit before tax fell by 29.7% because of the negative growth of the top line, the lower EBITDA margin, we also saw higher depreciation due to the investments we made last year and made so far this year, and we have seen high interest rates that has led to higher costs on the debt burden. But we still made more than DKK 100 million in profit before tax in the first half. Earnings per share was DKK 6.97. We have decreased the debts with DKK 22 million since the beginning of the year, and we have increased our equity with DKK 130 million since the beginning of the year, and this is after we have paid dividend to the shareholders [indiscernible] DKK 36 million, and we have also made a net purchase of own shares in the market. We have launched our new product here, which is a test kit in the Danish market, and we are now ready to go abroad and also launch test kit in all European markets. This is produced by Meditec. Here, you have a comparison over the last 2 years, where we have been growing on the top line, we have been growing on the EBITDA, we have been growing on the bottom line, and we have been growing [indiscernible], and we will also see that on the following slides here. This is the top line development. We have been growing 10% in average during the last 12 years. However, in the first half of this year, we are down with 2.2 percentage points. We believe certainly that we will end up the year with a growth. However, it might be lower than what we have been saying so far, but we'll come back to that. EBITDA was down with 7.8% in the first half of this year. However, it has been growing 16% in average over the last 12 years. And the EBITDA margin was a bit down, but still at a very high level. So we're 1 percentage point down. And the earnings before tax took a significant drop because of the higher interest rate depreciation and the lower EBITDA. But still, we are on 12 months holding at DKK [ 200 ] million. We have been growing 20% in average over the last 12 years and believe we get back on track. Net interest-bearing debt to EBITDA is 2.2%, and that is more or less the same, nevertheless, we had at the end of '22, then it was a bit better in the first quarter and now we are 2.2% again. So still a healthy level. [indiscernible], we have in the first half year's results you see in the first column, Q2 against Q2 last year, decline on all lines, then the first half also declined on all lines, except on net equity when the equity was up with DKK 130 million, and it is actually up to DKK 258 million compared to end of June last year. We have had a strong cash flow from operation in the first half of this year where we generated DKK 186 million. And since we are not too busy, we have also been able to scale down on a number of investments. We are still completing all the investments we have launched before we saw the top line decline. And we are also launching new investments where needed. So therefore, investment -- cash flow from investments has been decreasing from DKK 164 million last year to DKK 74 million this year. And therefore the net generation of cash that has been due to pay dividend and to reduce debt. Equity ratio is up -- is now 45.7%, and this is the first time we have ever been more than 45%. It's up from 40.8% at 12 months ago and 42.7% back in the end of '22. So I'm unhappy with the top line, I'm unhappy with the profitability, however, it is still at a reasonably good level. And then I'm happy with the development in the cash flow and in the equity, and I'm sure that the debt will be decreased further because we still are working with our working capital to get that reduced if we don't get the top line up much faster than what we see at the moment. And here you see the development in our own plants, and we have seen the that is the [indiscernible] business. Decline was [ 48% ] in the first half of this year. And this is something we also have seen in the past when there is happening in the world economy when our customers delay investments in health and safety and a delay investments in loan capacity, and that is hurting us. But normally, it will improve again after a couple of quarters. We have, however, seen that we have had a good increase in the Animal housing ventilation business, in the Guidewire business, in the medical packaging business and in [indiscernible] components. And all in all, we have sold more or less the same as we did in first half of '21 of all the products. It is a focus area to increase the sales of [indiscernible] faster than we increase the rest of the business because in general, we have better profitability on our own brands. And we will get -- hopefully, we'll get all the product lines to growing in very soon. [indiscernible] industry is growing again, and that is very nice. We had last year a decline in the first half, but now it's growing [ again ] in the first half of this year. We are back on [indiscernible] 12.5% in the second quarter and 7.9% in the half year. We have seen good growth in automotive, and we have also seen good growth in other demanding industries. We had a decline in the healthcare business, mainly driven by the lower sales of economical products, but there's growth in other areas of the business. And then the food-related business is overall down at 13.9%. That is what you see in the right corner at the bottom. So the peak in the first half is up 32% of the business is healthcare, 30% is cleantech, 12% is food-related, and 6% is something on wheel, we call that automotive and 20% is all the other industries. And then we ended '22 with, I would say, better customer concentration that we have had in the past because now we have customers who are 10% or more and the 10 largest accounts for 48% and the 20 largest account for 57% and the picture has not changed dramatically in the first half '23. 15% of our sales is in North and South America, 10% is in Asia Pacific, 47% is in Europe, outside Denmark and then 28% in Denmark. And then we have spent the first half of this year to get our new factory in Poland on track. We have got 12,000 square meters more to 1, and that is used mainly by Ergomat, who now has space to grow again, but it has also given more space to the oil companies in Poland. In China, we have a consolidated Tinby and SP Moulding on one site and then we've got more space around that site. So we -- I think in a better position, we're a low cost base and the potential to improve our efficiency and still have good potential for growth. And then we have decided to build a new injection modeling factory in Atlanta in the U.S. This one has not been shown on the chart yet because it will hopefully be ready in the middle of next year, but we will put it on the charts when we have it up in operation. So that leaves us with the global footprint with plants now and then sales offices in the Netherlands, in Norway, in Sweden and in Canada. We have not made any acquisitions at the beginning of this year, we made 3 last year when we bought [indiscernible] and Meditec and we also are ready to do more acquisitions and we have always coffee ready if somebody wants to have a chat with us. So please give us a call or come. And historically, we have been buying good companies with good management team that has helped us to grow the top line, the bottom line and made it better and strong product portfolio. So with the changes in the beginning of this year where we saw a decline in the sales outside Denmark, mainly in North America, but we have seen growth in Denmark, then the figures have changed a bit here. So now our sales outside Denmark is down to 17%. Share of employees outside Denmark is down to 69%. [indiscernible] we closed one factory in China. So therefore, we have reduced from 18% to 17% and on total from 32% to 31%. And then we plan to open one in Atlanta in the U.S. next year, and that will take us back to 18% and 32%. And I still think that we'll continue to grow faster outside Denmark as we have been doing the last decade or so, then we're going in Denmark. So what we see at the moment, I think, is that many customers are adjusting inventory level to the changed environment where the interest rate is higher, the growth is a bit slower and the value change has been normalized. So it is easier to get the goods when you need them. And if it is easier to get the goods for when you need them, why tie on a lot of cash in inventory. Our share price has had a very negative development in the beginning of this year, and we are behind the market. And I'm sure to that, I will improve. We have, however, longer on being able to outperform the market. Here you see a slide of what I said from 16 to now. And on the bottom one, you see what has happened from January 2010 and until now. And we abate a dividend this year to all the shareholders, and that is the same level as we did last year, and we intend to continue to pay between 15% and 20% of profit after tax to the shareholders. We have got more shareholders. So we are now 350 shareholders more than we were at the beginning of this year. So we are 3,650 and we have 3 large international shareholders, that is Lannebo in Sweden, Odin in Norway and ATP in Denmark, and our largest shareholder is Schur Finance, and that is our Chairman and Schur and his family with 15.7% and I have 12%. And then we have the 3 big funds here. And all the other shareholders on the remaining 52% [indiscernible] approximately 1/3 of the shares international investors on [indiscernible] of the shares and banking investors outside the management 1/3 of the shares. Customers demand better and cheaper products. And at the moment, we are busy helping our customers to make cost-out projects, so we try to help the customers to get rid of wood, metal and glass and substitute with plastic and composite because that makes their products better, more competitive and light and in many cases, also more durable. We manufacture globally with a powerful team, the right equipment and right technology, customers focus on core business and outsource plastic production to us or competitors. So we try to use our scale and our skill to make a more competitive solution for our customers that gives a customer a lower CapEx, lower OpEx, better quality. Customers want fewer and better suppliers. Our ambition is to be preferred supplier. So when the customer is decreasing the number of suppliers, then it is important that they choose to continue with us and the only way we can convince into through that, that is that we give them good customer experience each time we have an opportunity to do so. And then the other megatrends and going in population, the climate and the scarcity of resources, we have chosen to have a strong exposure to growing global industries that is healthcare, cleantech and the food industry. And I hope that we intend also in North America will get on speed to put off more on land and offshore because we needed to get the more green power going forward and to speed up the retransition until we have a lot to offer. We also have a lot to offer in health care industry, where we need to improve our health care systems in many countries, including Denmark. And in the food industry, we want better and safer food that makes a lower . The outlook for '23, we have adjusted it slightly. Previously, we said we expect it to grow between 5% and 15%. I still expect that we will grow, but we are -- [indiscernible] growth in the first half of the year. I still believe that we will grow in the second half. So we reach somewhere between 7% and 10% on the top line as growth. We maintain our EBITDA margin between 16% and 19%, and that is also where we have been in the first half, but the bottom line will go down due to the lower top line, the higher interest rates, so we now guide 7% to 10% in earnings before tax instead of 9% to 12%. And as you can see, there's still an overlap. So it's not so we have changed completely the outlook, we're just a bit more cautious. And I think what has happened in the first half of the year, the new outlook is less optimistic, but I'm [indiscernible], but there's still an overlap to the year. It might turn out at the end of the year that we could have living with the old outlook, probably decided to change it now because the figures are as they are after the first 6 months. We still believe that going forward, we can continue to grow with our customers. We can have space for new customers, that is called organic growth. We will continue to make acquisitions [indiscernible] good companies with own products and trademarks, so we get the bigger portfolio of own brands. The ambition is to generate revenue between DKK 3.3 billion and DKK 4 billion in '24 and increase own brand, so that becomes of sales from the 27% it was last year, continued the internationalization and that is why we are opening up a new plant in Atlanta. And last year, we opened up a new plant in Bangkok. And this year, we have opened up a new big plant in Poland. We're also investing in all other countries. We will include operation with our customer to increase the use of recycling material. We'll continue to invest in technology and in people and go for competitive strengths and all the time, try to act as an innovative, reliable and competitive partner for our customers. And it is still our ambition that we change ourselves from being in the last year to be in the next year. And to do so, we have to grow this year and next year. Our EBITDA margin last year was 18%. Well, that is still within the reach [indiscernible] this year. And I hope we next year can take it to an even higher level. So we're guiding 17% to 24% ambition and the bottom line between 10% and 12%. So the earnings before tax in the level of DKK 400 million next year. The net interest-bearing debt to EBITDA was 2.2% last year, and that is still the case that we can the business more. So we have 22.2% -- 2.5% or 3.5% for next year and the equity rate was 42% last year, it is 45% now and we go between 25% and 45%. So there is, you can say, a room in our balance sheet to expand the balance sheet. However, the interest rate has gone up and debt is not free anymore in which we also have realized this year. We need to sustainability in everything we do. And therefore, we have an ambition to reduce our environmental impact from the operation [indiscernible] later by 2030. All the electricity we consumed this year in Denmark, in Poland and in Slovakia is based on green energy. I think we produce ourselves, part of it is specificates. We have this year invested in a new solar panel farm in Finland that has just started to produce. We put more solar panels on the roof in Finland as well as in Slovakia, and we are still working with partners in Denmark to establish a big solar panel farm in Denmark, [indiscernible]. And on sale all this up in we are buying our green power from windmills and solar panels. We have, as you know, reported on Scope 1 and Scope 2 and we are trying to get ready to report on all the new KPIs we have to be brought on in the future. We believe that we with our team and our technologies support all the sustainability development goals. Plastic waste in the environment is, of course, a concern, so it has to be catched and recycled, but we do not reduce all the consumer waste that is ending up in oceans. We have a responsibility to enter to clean it. And here you see a fantastic picture from the ocean cleanup organization, and they are using our vendors to keep them in floating and catch the plastic waste in the Pacific Ocean here. Consumer waste can be made into new products. Here, we have made a fence around the factory where we are replacing wood fences. Here, we have made a floor in [indiscernible] container for a French shipping company, where we replaced the plywood floor with consumer waste. Here, we have made a new lid, Nycopac pallet lid in 100% recycled plastic and TPI's wind tools are produced in 90% recycled material and then there's 10% virgin on top to give it a UV protection. Here, we have together with Muuto produced a unique chair that consists of 25% wood fibers and 75% plastic. Nycopac has developed a sleeve system that is all recyclable and a number of the parts are produced with recycled material, and we are trying to illustrate that when you move the goods out to the customer, then it is a sleeve in a full pallet. And when it comes back, you can see on the top -- at the bottom, then you can fold it so it doesn't take up so much space, and thereby, you can reduce the space needed for the return side. All in all, we believe that we are part of the solution. We are not part of the problem, because the modern society needs our solutions in the cleantech industry insulation, generating renewable energy, reducing energy consumption, cleaning air, cleaning water and measure consumption of water and gas and electricity. In the healthcare industry for diagnostic equipment, guidewires, ergonomic solutions, medical packaging and drug delivery devices. In the food industry, all the way from the farm to the table, and in automotive to make vehicles lighter and more energy efficient. And I think that the electrical vehicles will be a big opportunity for us because we need a lot of plastic and this is a new industry compared to the old combustion technologies.

That was our presentation. I would like to invite you with questions to either put up your hand or just open the microphone. There are only a limited number of people participating on this call. So who will be the first one.

Hi guys, this is David speaking. Two questions. The first is on your acquisition pipeline. You mentioned that you haven't done an acquisition this year, but you're looking, how is it looking out there in terms of prospects and valuation expectations from potential sellers, that they're becoming more reasonable or not?

I think we have tried to make a precision on prices all the time. And historically, we have been buying companies typically at 5x EBITDA on a debt-free basis. And I don't think that there will be opportunities to do so. And if we can do that, then it would make sense for the shareholders and for us. We see a number of, you can say, teeters floating around in the market. But we're not seeing too many deals done actually.

Okay. The second question is just in light of rising interest rates, what is your philosophy on managing the mix of fixed versus floating rate debt in your debt stack, including whether you hedge or not some of that interest rate risk?

We have traditionally used hedged interest rate or you can say, longer-term fixing of interest rates in our mortgage finance and we still do so whereas in our overdraft facilities, we are using the floating interest rates. And we have saved a lot of money on that strategy during the last 15 years, basically since the financial crisis, but we have been hit this year. And looking back, we should have had more hedged. But you can see a description of the actual situation end of '22 in our annual report and perhaps Tilde will explain a bit more where we can find this how it looks.

Yes, it's like on Page [ 118 ], you can see the split between fixed interest and it's around 20% of the debt is fixed.

And the fixed interest rates consist of mortgage finance on buildings in Denmark. And then part of it is also basically where we have rent agreements and buildings at wards where the rent has been fixed for families.

Understood. How much of the debt balance that -- net debt balance that we see in this interim report. How much of that is lease liabilities?

Well, it's about 212 in the end of the year, and it's around the same level

Thank you. Who's next?

I'll chime in here again if there's no other takers. Just on the working capital, you said that, that's something you expect to continue to improve throughout the year. What -- are there particular metrics that you saw that you're trying to target in terms of maybe inventory days on hand or kind of where do you think the biggest opportunity still remains at the end of the year to improve working -- make your working capital leaner?

I think we can improve on our inventory because in some areas, we have some inventory that is going to slow because our customers have slowed down what they actually buy from us, but they have forecasted at a higher level. So we have a lot of raw material based on that higher level. And that means we are still getting raw material in and then the demand has been gone 20% down in some industries. And it takes a while before you can say we get the inflow adjusted to the outflow. But it is not a fresh fish. So it is not something that will deteriorate or -- it is plastic pellets in general, and we can use that also next year. [indiscernible] and then there is also an area where we have some customers who are getting too slow in paying the bills, and we're trying to improve that. And then we have slowed down on what we actually are buying. So that means our debt to our suppliers is lower than what it usually should be. So coming back to concluding on this, we aim at having a net working capital that is 50% of the last 12-month sales.

Sorry, could you repeat that? I missed it. What percentage?

of last 12 months same. That is [indiscernible] a bit away from that at the moment. In the way we calculate net working capital is also included, you can say what we are net in the money or out of the money on the hedging contracts. So we have had some things, and that is in the money. Then this is counted as net receivable and therefore, it goes into the working capital. And that is diluting the features a bit because you can see our equity has been growing faster than our earnings. And the reason you can find on page at the back end of the question

Page 14, Note 4.

Yes. There you can see we are at the moment, DKK 73 million in the money on our hedging contracts. At the same time last year, we were DKK 96 million out of the money. So overall, it is good that we are in the money, but it is in our working capital figure.

Got it. Okay.

[indiscernible] because in my opinion, this should not be counted as working capital because it has nothing to do with working capital when you do hedging. But that is apparently how the international standards are and how you present things.

I see. Okay. And then just -- I know that through the second half of the year, you're still expecting growth. Is it -- do you expect it to come disproportionately from any one of your target centers -- target sectors, health care or cleantech. Is there one in particular that you expect to be stronger?

Well, we -- as you can see, we have actually good growth in -- we have put those in a number of our own brands. We expect that to continue, and then we hope that we can get growth back again in ergonomics in the second half of this year. So this is on your own products, ones are doing extremely well with growth, and we expect that can continue. And if you take this one, then we have had a period where the windmill customers have been suffering a lot from disruption in the value chains and in the shipping transportation and with costs and all that. And that has destroyed the profitability short term. So the -- all of our major customers in that industry have had a tough figures last year and also the first half of this year. But I think that we gradually improved because value chains are getting back to normal, order flow go back to normal. They are all reporting good order intake, good order stock, that should lead to that they will start to buy more again. So I expect they will buy more in the second half of this year than they have been doing in the first half of this year. And you can see the health care overall and the green transition is to better this year than it did in the same period last year, and still it is a good potential. Health care is still a good potential for growth and especially if we can get ergonomics back on track, and that is -- I mean, people can delay investment for a while, but not forever. So it is a matter of time before I think it would be back again. To the best of my knowledge, we have not lost customers or we have not lost projects. The projects and the customers are just trying to keep the money at home instead of sending them out in investments. industries, there are a lot of opportunities.

You mentioned how the owned brands tend to have higher margins than the rest of the business. Kind of what is -- if you were to generalize kind of what kind of uplift in margins do you get by selling an own brand product from kind of your standard -- from the majority of the rest of what you saw?

We have not disclosed that, but we aim of having [indiscernible] on the bottom line from [indiscernible] own brands. And we cannot have that as a subcontractor when we sell subcontracting business.

Yes. Okay. And then your EBITDA margin target range of 16% to 19%. Again, this is just kind of a general statement. If you were to look across all of the SP Group subsidiaries and say, which ones are kind of below that range, above that range and in that range? What does the distribution look like?

We have been -- in the first half of this year, more or less all companies being profitable. We have a few small ones, I think too small companies that are making losses. The rest of them are profitable. But some of them at a too low level and we work on improving them. And if you take the whole thing, then we are at 16.8% in EBITDA, and we are at 9.5% in the EBIT margin for the first half of this year.

Okay. But it's not -- it sounds like it's not a barbell situation where there's a lot below and a lot above?

No, no. We have improved many of the low performance last year, in better condition and better shape this year than they were last year, and then some of the very high performance last year are in a lower-performing situation this year, but not in a low performing, but just lower. So I mean, you can see it makes a huge impact on the overall business when the [indiscernible] get down to half of what it was last year, but it is still at a higher level than it was back in 2020. And then we have seen the world economy or the world change slowly coming out of Corona so we can travel again and show our new products in Animal Housing Ventilation. That means we are growing here in this business compared to last year. In the Guidewire business, all hospitals around the world have opened ] they are now doing all treatments that means they need guidewires various operations and medical packaging is the same story. Industrial center components, here we see good performance in sport and leisure in the fishing industry and also in components that we sell to windmill industry and a number of other industrial components. And I still think that can continue to grow also in the second half of this year. So overall, we are confident that we will end up the year with a growth. It might be lower than what we expected at the beginning of the year. But during the year, we have also seen central banks increasing interest rates, and that has put or say people are spending the money and then build some interest, and then they cannot buy as much in the short and then give the industrial companies less to do.

Last question for me, I think, which is the new injection moulding factory that you're building in Atlanta, congratulations on finding a site for it. Could you just help us put that in context of how big that is relative to kind of your existing factories. I'm just trying to get a sense of the scale of what that brings to the group?

We have bought a piece of land. We have -- we are in the process of making the technical documentation for the sources we've got a permit to build it. Last week, it was approved by the local authorities, and we intend to build 10,000 square meters product scenario. And that is as big as the biggest plans we have at the moment within injection moulding. We have then found a local company who has rented half of the square meters for a while on a short-term lease. So we will occupy [ approximately 5,000 ] square meters ourselves, and we will intend to fill that up with injection moulding machines during the first 3 years.

Got it. So you own this facility? Or are you going to be leasing it?

We have been -- we have ended up in a constellation where we own 60% and local investor owns 40% and the local investor will help us with the construction, with the permits, with all the local work. He owns 40%, we own 60%. We have a purchase option to buy them out at fair value in 5 years' time. But we -- this is not our preferred solution. So our preferred solution was to go buy existing nice factory or rent nice factory on a long-term contract. But we have not been successful because we have not been able to find idle new factors in the area. It looks like everybody seem to be very busy there. And the rent we are offered is very high, and we can only make short-term deals. And if you go and make a lease agreement for 5 years and then we have to put in a lot of fixed assets in terms of cooling machines, ventilation, air condition, compressed air, no-lease installations. It is impossible to make a payback within 5 years. And if we have to be out again in 5 years' time, then basically many of these investments are lost. So therefore, we need to have something where there is a longer horizon. That's why we have ended up in this, I would say, very capital-intensive decision. And we have lined up the first customers. We have space for more. So if you come across somebody who wants to have an injection mould made locally in the U.S. instead of importing it from Asia, from Europe, then please give us a call. We would make a we'll make clean room, and we will also make traditional injection moulding. And we have customers lined up and agreements with the first 2 customers now. We can find another handful of customers within the next 12 months. Then we also think that the Atlanta site gives us opportunities in the longer run to give service to customers who want to build offshore windmills in the North Atlantic on the U.S. East Coast. But that could be a step 2 or step 3. Anybody else out there, who has a question or a comment? Do you have more to add?

No.

Okay. Then, thank you very much for listening in.

Thank you.