SP Group A/S (SPIR.OL) Earnings Call Transcript & Summary

Hi, and good afternoon. On behalf of Hans Christian Andersen Capital, I'd like to welcome you all to this presentation of the Q2 2025 report from SP Group that was published yesterday. My name is Rasmus Køjborg, and I have the pleasure of welcoming CEO, Lars Bering; and CFO, Tilde Kejlhof. They promised to take us through the quarterly numbers here and recent highlights. So a warm welcome to you. Before I hand over, also a warm welcome to those of you who signed up for today's presentation. As usual, you can ask questions during the presentation in the chat room on your lower right corner. And if you're not comfortable writing in English, you can also do it in Danish, and I'll translate the questions. And of course, we'll be recording this and put it on different platforms afterwards if you want to see it again. But with that, I'll leave it to you, Lars and Tilde.

Thank you very much, Rasmus, and thank you to all of you who has chosen to tune in and listen to us. SP Group is a global manufacturer of plastic solutions. We are producing 73% of our revenue is produced whereas customer-specific solutions where we act as a sub-supplier and 27% of our revenue comes from our own products, our own brands. We produce on 30 factories in a global setup with just a little above 2, 400 employees, and we operate a number of different plastic technologies. Our strategic focus on the sales goes to the areas, Healthcare, Cleantech and FoodTech, which I will come back to a little later, but we also produce a large number of other plastic components. Thank you Rasmus. We had, as you might remember, a strong growth in Q1. It was actually the best quarter ever, both on top line and on bottom line. And it was followed by a Q2 where we saw some slowdown. Totally seen in the first half, we had a reduced sale of our own products, but we have sub-supplier products on a slightly upward trend. We have made many new agreements on new projects for both Healthcare and for Cleantech which we expect to contribute to growth in the future. We have also made agreements on new projects for the defence industry. And for us, that part is in the category as we call other, which I'll come back to. We have had a focus on reducing complexity, improving efficiency and that has contributed to improved margins. We have decided to increase the space for our Medical production. We have seen how we utilize our space and our machinery as we need more space for Medical production but that I will come back to also in a little later. Overall we've seen -- we expect 2025 in line with what we realized last year in terms of revenue and also the margins. However, it's still a very unsecured world but that is how we see it right now. If we take the whole tariffs and trade war area, then we can see that a new U.S. EU trade deal in the way it is presented right now, that will only have a marginal effect on us. We have more and more production in the U.S. for the U.S. so it will not hurt us very much. The cost that will arise, we expect that we can pass on to our customers over time. But on the same time, we are also in close dialogue with customers who see needs of moving production from one region to another region, and we expect that to go on in the coming months. During the second quarter, we have also started a share buyback program, and we have now decided to increase it with additional DKK 40 million because we see that there's room for this. In the second quarter, we also paid out DKK 48 million in dividend to our shareholders, all in all, which, of course, have affected our financials in this quarter. Then I said this about the complexity reduction, we are looking into the whole structure of the group. We are merging Dan-Hill-Plast, Neptun Plast, Atlantic Floats into Gibo in order to make the business more simple. We are changing name in the business Coreplast and Ulstrup Plast so all of our injection molding business for industry is named the same. We are looking at this with customer eyes and working on to make it more simple to become a customer in SP Group. Then we have closed down a small factory in Thailand. It was a small satellite production for communication equipment. But here, the customer does not need the products here anymore. So we will produce it in the future in one of the other factories. Overall seen on the first half year, we have sold products for DKK 1.467 billion which was a reduction of 1.2% compared to first half last year. EBITDA was reduced to 3.7%, and we realized the level of DKK 291 million. And likewise, EBIT was also reduced to 5% to DKK 192 million. The sales of our own products was reduced by 11.5% to DKK 388 million. All this led to the fact that we realized an EBT of DKK 167 million, which was a reduction of 6.7%, which also meant that earnings per share fell to DKK 10.6, which was a reduction of 6.2%. Despite paying out dividend and spending have started to buy back shares, we have been able to reduce our debt. So the net debt is by end of Q2, DKK 757 million. And on the same time, our equity grew to DKK 4 million to DKK 1.7 billion. We are doing very well in the Medical area, and we have a demand for increased capacity for the new products that -- or projects that we have made agreements about with our customers. We have started up the Atlanta factory. It runs very well, it is still ramp up. And as we write in the half year message that the factory will affect the result negatively this year. However, we have been ISO-certified of the medical standards, we have started to use our new cleanroom of 1,000 square meters. And we have also made new projects that will give us additional business in '26 for this factory. So we still see this Atlanta factory as the right choice, and we are also very happy with the progress that we are doing there. Then we have decided to expand our capacity for Medical production in Poland with a huge focus on capacity, efficiency and special utilization all over in the group, especially in the Polish plants. We are able to convert a 7,000 square meter building from traditional industrial production to medical production. And we will start this year constructing both a big cleanroom and a big white room for a different type of Medical production and we will start to produce in these 2 facilities in Q1 '26. So we will move some machines around, and we will also [indiscernible] some new machines to start this in quarter 1 next year. Our own products has not sold so good in quarter 2. And this has affected the first half year where sales were reduced to DKK 388 million. There are big projects that has been postponed. We have seen a number of places where customers are unsecured due to the trade wars and tariffs -- risk of tariffs. We have seen reduction components for agriculture ventilation, general industry parts that we classify as our own products because various spaces. And we have also seen this lack of sales in Ergomed. But all in all, we see it as a postponement of orders. We do not -- we have not lost any customers or we have not seen any projects go away. We merely see it as a postponement. If we take all of our customer groups, then we have seen that the Healthcare business has fell 1.4% to DKK 584 million in the first half year. This is Medical equipment, Medical packaging, and Ergonomics and safety products. The Cleantech accounts for 25% of our revenue. This is renewable energy, it's components for energy reduction and insulation products. Here was a reduction of 8.1% to DKK 400 million. FoodTech is 12% of the total revenue in the first half year, and it fell by 5.1% to DKK 171 million. And here, it is mainly the agriculture ventilation products that has impacted this area. Then we have had a nice growth in the category Others. Here it is component as furniture components, components for specialist vehicles, maritime products, defence industry, and this increased by 12.3% to DKK 313 million. If someone are able to remember further back, then you will remember that we actually had a big drop here from '23 to '24. So you could say DKK 313 million is coming back to a bit more normal level. And it is especially components for the satellite industry -- satellite communication industry that has picked up again.

And if you look at the financial ratios, then we started and look only at Q2, then please keep in mind that Q2 last year was a very nice quarter. The top line in Q2 was DKK 680 million, it's a decrease of 10.7%. The EBITDA was DKK 125 million, it's a decrease of 18.8%. EBIT was DKK 75 million. EBT was DKK 65 million disposes a decrease on almost 30%. If you look at the cash flow, then from operating activities, the cash flow was almost DKK 100 million. We used the DKK 26 million for investments. We paid debt share back program and dividend per share of DKK 61 million. And if you look at the full year in first half year, the decrease in the top line was 1.2%. That was an EBITDA on DKK 291 million. The EBIT was DKK 291 (sic) [ 192 ] million and EBT was DKK 165 million. Earnings per share was DKK 10.6 million it's a decrease of 6.2%. Equity was DKK 1.7 billion that's the first time it was about DKK 1.7 billion. From the cash flow from operation, we had DKK 228 million, we used DKK 84 million for investments and then paid debt shareholders -- dividend to shareholders and share back program of DKK 170 million. The interest-bearing debt was DKK 756 million, and the gearing was 1.3 compared to last year it was 1.8, and the end of '24, it was 1.4. The ratio was 55. If you look at the top line, there has been growth during the year. However, the last 12 months, there was a small drop. It was a decline in Healthcare, Cleantech and FoodTech. However, all other segments was increasing. EBITDA and the EBITDA market, also here, we have a nice decrease during the years, both in EBITDA and the margin. However, the last 12 months, there was a drop. The drop was due to lower revenue and a changed product mix. And the same story goal for the EBT and the EBT performance, margin performance. It has been a steady increase during the year, but however, if you look at the last 12 months, there has been a decreased due to lower revenue and product mix.

Yes. And then we come to the outlook for the full year. We have had to adjust our outlook for the full year. From the start of the year, we expect growth from 3% to 10%. But based on the results we have seen in quarter 2, we came out with an adjustment on July 10, where we now say we expect revenue in the level of our revenue growth in the level of minus 3% to 3%, basically saying we aim to hit the same numbers as we did last year. We expect also that we can keep our markets, we expect EBITDA margin from 19% to 21%, and we expect an EBT margin in the range of 11% to 13%. Finally, we have -- if you have seen in our report, we have put in a new logo, which we are also updating our visual [ apps ]. And we will launch a new website on September 1, both with a new site telling about SP Group and what we are able to do, but also a new investor site, which I hope that you will go in and have a look at on September 1 or after that. So all in all, in summary, we had after a very good Q1, where we set a nice records on earnings on revenue and earnings. We had a lack of growth in Q2, mainly due to postponed orders, due to uncertainty among our customers. Our new U.S. factory has come off from a very good start. It's also very important. It is one of our biggest investments ever in making new factories. We have increased the share buyback program, and despite a lot of uncertainty, we see that new tariffs between EU and U.S. will only hit us marginal. That was all from our side. Rasmus do you have any questions for us?

Yes. Thank you very much, Lars and Tilde. Yes, we have a few questions here that came up during the presentation. There was one here, with a gearing ratio near the low end of your range, do you expect share buybacks can increase further if results improve as expected here in the second half of '25?

I do not expect that we will change anything this year, but we will, of course, look at again next year.

Good. And could you expand on sort of the downturn we've seen in Q2? What makes you so confident that the sort of -- it's only temporary postponements? And when do you sort of expect this to restart or to see the orders come in again at the pace you've seen earlier? Is that already happening now here in the beginning of Q3 or at least halfway to Q3?

Actually, what we have seen is that experience is customers who are hesitating to push the order button. We have agreements with our customers, but they're telling us we need to wait for this and this. We have seen that in different cases. That is also a lot of things that are going very well. We made a lot of agreements in '24 about new projects, they are also coming in. So we are producing several thousand different plastic parts every day. So it's a big mix of different things. But the main part of what we see here that actually hit us is that some big projects in different areas, agriculture insulation, on the Cleantech part, on Healthcare part, they postponed.

Good. And as we could hear from the presentation, you're still investing quite heavily in cleanrooms at some of your sites, you mentioned U.S. and Poland. What is sort of the expected CapEx for this ramp-up? That's the question here.

We are building a new cleanroom in Poland now. We're building 900 square meter cleanroom and 800 square meter white room for different types of production. And we expect that this cleanroom in an existing building will have a cost of around EUR 3 million, DKK 20 million, DKK 22 million.

Okay. Very good. And then there was -- I think it was mentioned in the Q2 report here that you prolonged your credit facilities with some of the banks but it's only until spring 2026. Is it usual to have this short time span on these kind of arrangements? Yes, we're not far away from spring '26.

We normally only prolonged 1 year for the banks.

Okay. Good. And then there was a question here. If you could also give some color on the M&A pipeline. Is it lack of short-term target? Is that the reason for the increased buybacks?

The reason for the increased buybacks is that we feel we have capacity for it or liquidity for it. And which you might have seen, we have also formalized a policy for capital allocation and dividend payment, and we merely follows that. We do have a pipeline of interest in M&A targets, but nothing has yet materialized. But we are very -- we are quite picky on how it should fit in. We need to see a very good strategic fit at a reasonable price, of course. We have had a huge focus on organic growth in our medical part, and we will continue to do that. We also see a need for expanding more, creating more space for Medical production going forward because we see good opportunities here. And we like that very much to have this area where we can grow...

Good. And then there was also a question in the presentation earlier on the Danish presentation regarding the defence industry that you're targeting now. Could you put a little bit more flavor on this?

Yes, of course. In the category, although that has always been a slight part of defence products. We see now that it's an area where we can grow more and more. But for now, we will still keep it in the category other. But as the whole industry are facing a big growth, we also see a demand for more plastic parts. And we also have our ideas on where more plastic parts can be used but it's, of course, an area of with great confidentiality. So you should not expect us to put parts for defence industry on our home page. But it is a nice interesting area where plastic can be used in many ways. Many of the products that shall be used must be durable, they must be lightweight. And here our plastic a very good solution despite it's not fully proofed all of it. But there are many, many areas where this can be used, yes.

Very good. And then one last question. It goes here, if the CapEx-driven growth appears sort of inherent to your business model, you need to invest to grow. Can SP Group ever generate ROIC above 20% if you are to sort of invest every time in growing?

I would say so. I mean, we, of course, need to look into also how we use our capacity. We have started to focus on capacity utilization in all of our plants and have a tight focus on making sure that the machines are utilized to a higher degree and see to improve here in order also to improve our levels of what we're doing.

Very good. But with that, we will conclude today's presentation. Thank you very much, Lars and Tilde for the presentation here today.

Thank you, Rasmus, and thank you all for listening in.

Great. Thank you very much. Bye.