Tessenderlo Group NV (TESB) Earnings Call Transcript & Summary

Hello, and welcome to the Tessenderlo Group Half Year 2021 Results Call. My name is Rosie, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Stefaan Haspeslagh, COO and CFO to begin today's conference. Thank you.

Good morning, good afternoon. Welcome to our presentation in respect of the half year 1 results of 2021. We will start with some key events. One in respect of T-Power, we are continuing with the preparation to participate to the auction in respect of a 900-megawatt gas-fired power station in Tessenderlo next to our existing power plants. If we are successful, which we will know by the end of November, we will start investing and we should be ready and operational by November 1, 2025. In the Agro segment, our International division, Kerley International, will build a new Thio-Sul manufacturing plant in Geleen in the Netherlands. We will construct it in the Chemelot site, which is a site specialized for chemical companies. It's a large complex in the south of Holland on basically on the border between Belgium, Germany and Holland. It should be operational in Q2 2023. We have signed all contracts. And presently, we are filing for all applications with the various authorities in Holland. In the mean time, we are looking further where we should make new investments in new production facilities in the Eastern European region. In the Bio-valorization segment, in the first quarter, we have created a new growth unit. A growth unit is a unit whereby we say we've got a business, which we think we have to develop further, taking into account the current trends and here, we decided to create a unit called Violleau, which will grow the organic agriculture fertilizer business in Europe, fertilizer or agricultural solutions. Violleau exists today in the French market. So we are looking -- we established the team to take it to the next level and see how we can develop it further. So basically, these are the most important events before the balance sheet date. The most important event basically has been during the first half also managing the COVID situation in various countries all over the world, combined with the supply chain problems, logistic problems which have been quite important also during the first half of the year. We have 2 events after the balance sheet date of June 30. We have first reached an agreement to divest the MPR business activities, MPR activities, which are a very specific service business towards the refinery and gas filtering businesses all over the world. We have also decided to divest the ECS activities. ECS activities which were located in the fracking area in U.S., whereby we treat basically flows out of the fracking industry. And we purify this in respect of the oil remains in there and put back the rest in the ground. These businesses have not developed significantly over the past, so the impact will not be significant in our operations, in our EBITDA or results. And we expect the sale to be completed during the course of the next couple of months. Important also is that during August, we have changed the name of Mining & Industrial into Molecule because we want this unit to have a specific identity in respect of mining business where we supply products for the mining industry. And also to have an identity supplying chemicals for paper industry, leather industry, also in the food processing industry, where we are also a player so that we really can develop this business further with its own very clear identity. So basically, these are the main events. The only thing is I want you to update in respect to COVID-19 situation. So we keep on taking all the necessary steps depending on the location where we are located and the country where we are located. In respect of protecting our people, also contractors look up to our sites to protect them against this very serious problem. We keep on measure -- having measures which are specific to each plant. At present, all of our plants are running according to expectation. So we have no plans at reduced production or distribution because of specific local COVID-19 problems. However, as just mentioned, logistics change remain difficult because of the situation, whereby we have impact on both costs and availability of transportation means. In the coming weeks, we hope that the impact will be limited. However, we fully depend on the full supply chain We have seen in China already ports being closed because of COVID-19 problems whereby the government has taken specific actions. So this could happen to us anywhere in the world as we are continuously vigilant about this. We have -- we are trying to have stocks available to overcome this problem, but this is not guaranteed. Kurt, maybe you can keep us informed and take us through the numbers of the first half year.

Thank you, Stefaan. Good afternoon to everybody. If we look at the results of the first half of 2021, we see that revenue has increased to above EUR 1 billion. It's an increase by 9% or almost 13% when excluding the foreign exchange effect. The adjusted EBITDA has increased from EUR 182 million to EUR 185 million. Without FX impact, it's an increase by 7% or about EUR 12.5 million. The profit and loss for the period EUR 97 million, as was also the case in previous reporting periods. This also includes net exchange results, which were positive in the first half of '21 positive for an amount of EUR 7 million. And these concerns, in fact, exchange results, mainly on intra-group loans in U.S. dollar, which were not hedged. So when excluding this accounting impact, the net result would have amounted to about EUR 90 million in 2021 compared to about EUR 93 million last year. Capital expenditure fully in line with previous year. It includes a lot of investments, additional storage capacity in the Agro segment, advanced payments also for the construction of the new Thio-Sul plant also in the Agro segment. Investments also for the valuation of gelatin site schemes and the optimization of the valorization of animal byproducts in Bio-valorization. So a lot of investments continue to be done. The operational free cash flow has decreased a little bit, EUR 130 million compared to EUR 141 million last year. The difference is mainly related to the increase of the trade working capital, which had led to a cash outflow of about EUR 14 million this year, while the variance was practically 0 in the first 6 months of last year. Net financial debt, EUR 118 million. It's a decrease by almost 51% compared to prior year. Remember, at the end of last year, the debt was EUR 201 million. I have also to mention that in the EUR 118 million, what is also included as a guaranteed payment that we had to make to Elia, the Belgian transmission system operator related to the tender for the construction of the second gas-fired power station in Belgium. It's a guaranteed payment of EUR 16 million. So if we would not have paid this guarantee, the debt would have been around EUR 100 million. If we look at the group revenue per segment, in fact, in line with previous year, we see that the 3 main segments still contribute about 1/3 to the group revenue. Agro 37%, Bio-valorization 29%, Industrial Solutions practically the same 31%, T-Power in line with expectations, in line with prior year, about 3% of the group revenue. However, we see more and more a shift within the contribution of the different segments to the group adjusted EBITDA, we see that Agro has decreased its weight a little bit to EUR 75 million. It's 41% of the total group EBITDA while Bio-valorization remained stable compared to prior year, 23% contribution, it's in total, EUR 42 million. Industrial Solutions is also good for 23% of the group adjusted EBITDA but it has increased significantly compared to prior year when the adjusted EBITDA only amounted to EUR 25 million. And for T-Power, it remains more or less in line with prior year EUR 26 million of adjusted EBITDA. If we have a short look now at the different segments, one by one, the first segment, the Agro segment. We see, in fact, that the revenue has increased by about 10% compared to prior year when excluding the foreign exchange effect, thanks to an increase of volumes, in fact, in the 3 activities. And in Kerley International, there also the volumes were impacted by the start of the partnership agreement between the Tessenderlo Kerley International and Kemira, which was already announced last year, under which Kemira produces SOP fertilizers in Sweden and it is the Tessenderlo Kerley International, who will partially market these products. The adjusted EBITDA of Agro remained more or less in line with prior year, minus 3.5%, but the segment was in the first 6 months, significantly impacted by the increase of raw material prices such as sulfur but also by increased transportation costs. And while the adjusted EBITDA of the Tessenderlo Kerley International still remained stable, the adjusted EBITDA of NovaSource increased, thanks to higher volumes. However, the adjusted EBITDA of Crop Vitality there, we saw a decrease of the adjusted EBITDA as higher sales volumes were more than offset by lower margins. The second segment of the group Bio-valorization, we see an increase of revenue by 6.4%, mainly thanks to favorable market conditions and also an improved product mix. The adjusted EBITDA there, it remained in line when excluding the foreign exchange effect at EUR 42 million. As in fact, there, we saw that the favorable margin circumstances for fats and proteins, they were offset by lower margins of some of our gelatin products. Third segment of the group, Industrial Solutions, where we saw a very significant increase of revenue in the first half of the year, 27% increase to EUR 315 million. And this is mainly thanks to DYKA Group, where we saw an increase of volumes and also sales prices. And we have to mention that last year, of course, in the first half of the year, the volumes were negatively impacted by the corona pandemic, something which did not occur this year. And also this year, it included for the first time, the full half year contribution of the new production plant that we have in France, which was, in fact, only acquired during the first half of last year. On top of that, also the growth of the product portfolio positively impacted the DYKA Group sales volumes. The adjusted EBITDA of Industrial Solutions, it increased by 73% to EUR 42 million, mainly thanks again to DYKA Group, wherein, of course, the increase of DYKA Group sales volumes had a positive impact, but also an improved product mix and a further increase of production efficiency based on investments that we have made in the previous years, this also further helped to increase the adjusted EBITDA. The significant increase of raw materials purchase costs, which we saw in the DYKA Group was offset by timely pricing management. But also had a positive impact on the adjusted EBITDA in the first half of 2021 was the stop of S8 Engineering. The adjusted EBITDA of the other activities remained stable. The fourth and last segment of the group, T-Power. The contribution in revenue was in line with expectations. Also, the adjusted EBITDA was, in fact, in line with expectations as they fulfilled or T-Power fulfilled all tolling agreement requirements. The small decrease that we note in the adjusted EBITDA is mainly due to ongoing development expenses for the construction of the second plant in Tessenderlo. If we look at the reconciliation between the adjusted EBIT and we go to the net result of the group, we see that there is a small amount of EBIT adjusting items, the more exceptional nonrecurring items just below EUR 2 million. It includes some gains on disposals of assets that we will no longer use, some changes in provisions and also the impact and revaluation of an electricity purchase agreement, which we not use anymore ourselves. If we look at the finance costs and income, in fact, it's an income in the first 6 months of the year. It's a positive amount of EUR 2.1 million. It, of course, includes also the exchange gains of the first half of the year for EUR 7 million. So without this EUR 7 million, it would have been finance costs for about EUR 5 million in line with expectations. What we would expect from Tessenderlo, minus EUR 5 million in the first 6 months of the year, including the borrowing costs, borrowing costs mainly on the bonds, on the T-Power loan and also on our lease liability. Income tax expense amounts to minus EUR 26 million. It's an effective tax rate of 21%. It mainly relates still to taxes that we pay on our operations, on our activities in the United States and a small share of result of investments of EUR 0.2 million brings us to a net result of EUR 97 million. To end the outlook, the group still anticipates a continued high level of uncertainty in the second half of 2021 due to difficult supply chain circumstances and other challenges posed by the ongoing corona pandemic, where the development of customer demand and margin is exposed to increased risk. However, based on the current available information, the group is able to confirm its previous forecast that the 2021 adjusted EBITDA is expected to be in line with the adjusted EBITDA of 2020. And this takes already into account also the negative foreign exchange effect this year, which will certainly have a significant impact on our total adjusted EBITDA. To finalize the financial calendar, the results of 2021 will be published on March 24 next year.

Thank you very much for summarizing so well the activities of the first half year. It's been a challenging first half year of 2021. And I think it's thanks to our people and our teams. And also thanks to our long-term relationship with our stakeholders, including our suppliers, that we have been able to achieve this result. So a big thanks to all these people who work day in, day out for the success of our company. Also, during the second half of the year, we hope that we have more availability of equipment to proceed better with our projects and investments that we had planned because there is not easy access for our suppliers, for their raw materials. So we incurred some delays in execution of projects. However, we hope that this will improve during the coming period. We keep on developing our business as good as we can in each of the segments we operate, meaning we keep on working on debottlenecking on introducing new processes, introducing new products with a higher added value. So we keep on developing new things in our development center and introducing these in the market, making sure that we reduce our footprint and we come up with a higher value of the site streams that we get in from various industries. And thereby also, we make sure that we live to our promise and our promise is that Every Molecule Counts. This is our basis philosophy, and we try really to make sure that every molecule we get in, we create value, and we are really constantly looking to upgrade these incoming streams to the highest possible value. So I thank you very much for the confidence. And I don't know if you still have further questions about the numbers we have published during the day.

[Operator Instructions] And the first question comes from the line of Christian Faitz from Kepler Cheuvreux.

Yes. 2 questions, please. First of all, can you elucidate what your contract structure pertaining to your agricultural segment? How long is your typical contract duration with for example an MOP supplier of yours as a rough average, just to get an idea. And then the second question is pertaining to your Industrial Solutions business. Is that business impacted in away from supply shortages at your customers. And you hear a lot of supply -- a lot of stories on supply shortages at construction sites, et cetera. Is that impacting your demand in any way?

Okay. Thank you for your question. In respect of the first question on contract structure in our Ag business, I can tell you there, we have every type of contract you can imagine. Going from day sales, spot sales up to a longer term, really depending on the customer relationship, the market condition. So this evolves during the time. And you always have to find an agreement with your customer, what type of contract structure you can reach. In respect of shortages, indeed, we have been faced with shortages and supply problems mainly in respect of PVC, PP and polyester. This has been an ongoing phenomenon for basically the last 2 years. And we are striving to cope with it as best possible, trying not to deceive our customers. However, I must tell you that it's been quite difficult because PVC suppliers and other suppliers of plastic materials have been many times declaring force majeure in the course of the last 18 months.

The next question comes from the line of Frank Claassen from Degroof Petercam.

Also a question on Agro. Of course, you've been confronted with higher raw material prices like sulfur. Can you pass these on? And how quickly can you pass these on these higher raw material prices in Agro? That's the first question. And then secondly, on the gas-fired power plant, what if you win the tender, will we immediately see a big step-up in CapEx next year, so -- or will it be more towards '23, '24, the EUR 0.5 billion spend. So how is roughly the timing or the phasing of this CapEx looking?

All right. Thank you for your question. In respect of the higher raw material cost, we have long-term relations with our customers. And we did not want, especially in our liquids business not to upset them. So because they had also a way of working into the market. We are trying to increase the raw material -- our prices because of these increases in due course. And this is a continuous discussion with our customers because they are well aware of the increase of raw material that has been happening over especially the last 6 months. In respect of our gas power plant, you are correct, we expect most of the cash out in '23, '24, but partially and also'25.

The next question comes from the line of Wim Hoste from KBC Securities.

Two questions from me. You mentioned again in the press release that you were studying to expand the Thio-Sul business to Eastern Europe. Can you maybe elaborate a little bit further on your ambitions there? I think the press release mentioned major Thio-Sul investments are being studied. What kind of capacity are you looking at? What kind of countries? And is this -- or are these investments in any way dependent on whether you win the tender for the gas-fired unit? Would that approval there prevent you from going full-fledged into the Agro side or not? You have a strong balance sheet, but I just wanted to double check on that. And then another question on Bio-valorization. I wanted to dive in a little bit deeper into collagen peptides. You expanded the plant last year, you expanded capacity last year. Can you maybe help us understand a little bit better the dynamics in the collagen peptides market also in the context of COVID this year and how you see your collagen peptides business evolving in the future? These are my questions.

Thank you for your questions. First, in respect of East Europe, we are studying various locations. We have progressed a bit more one with another. However, we have to look for establishing a factory there because this area is -- in Eastern Europe is so important for the production of cereals and we really can also rape seed for oil production. And in that area, we really can create more value. These services are enormous in terms of availability for agriculture. So there is a nice opportunity to develop further as we are looking for a long-term project. So we are really carefully looking what is the best possible solution. However, the factory from Geleen, we will also be able to supply already starting from that factory further these markets. We will use capacity that we are building there also to develop further for example, Belarus, Ukraine or Russian market. Your second question in that respect, will investment in our gas-powered T-Power 2 plant or TDS plant, to second plant limit our other investments. We believe not, we want to give each business unit the real opportunity for growth inside the group. And we believe since we only have to deliver by 2025 that we will have major limitations on other expansions within the group.

And collagen peptides?

Collagen peptides, as I explained to you this morning, there is some delay in getting to the market from our plant in South America, in Argentina to be specific. However, during the course of next year, we think we will be able to steam fully ahead of developing the sales in these markets.

And the delay, is that related to the production ramp-up at your side? Or is it market demand, which is not progressing rapidly enough?

Well, because of COVID, we had demand really going very much down. And now we have to ramp up a bit by bit again. And this means also we have to restart the factories. We have to put it into right condition to produce the top quality. So this will take some time to do all that developing market further and getting the plant at the right quality level again.

[Operator Instructions] And the next question comes from the line of Christophe Beghin, Kempen & Co.

I have 3 questions but I will take them one by one. I'm a bit surprised by actually the relatively weak performance of Bio-valorization. As you mentioned, there is a very favorable market conditions in the animal fats and protein business. One of your peers, as you definitely know Darling ingredients has published very strong results within the Gelatin and collagen peptides business. They saw some decent increase in volumes sold. So I'm a bit surprised that you saw the opposite. Can you bit explain there what's going on? Is it -- you mentioned something on Santa Fe. So you saw volumes dropping. Was it specifically raw material supply in Argentina because of COVID and lower activity in slaughter houses? Can you elaborate a bit more there, please?

Well, if you would look over a period of 2 years, you would see that last year, we have beaten the Darling group in terms of generation of results. And this year, they have been catching up with us. If you compare the numbers on their food and feed compared to our numbers, this is exactly what you will see.

So it's really competition snapping or maybe stealing a bit of market share of you. Should I read it like that?

We are in a growing market. And it's a question of the speed at which they have been advancing this 6 months, but we have been advancing faster last year than they have. So if you look at the 2 years together, you will see that we are quite on the same level in terms of EBITDA generation on our business.

So the conclusion is that this is a temporary slowdown because as you definitely know, this is a double-digit growing market going forward, where it's still at their infancy. So we should see this as a rather temporary slowdown or?

As they have been slowing down last year compared to us, we are a bit slower than they are this year. This is basically how you can see this.

Okay. And then second question is with regard to the gas-fired power plant you're applying for. Can you please elaborate a bit more on the economics because it's an investment of, yes, roughly EUR 500 million. And what is the return on investment? Do you see significant synergies with the allocation of T-Power so far? Because of I don't know the collection you already have with the grids. What is the rationale? Is it because you consider it as the best capital allocation, which can be easily defined by depth. Can you please give some comments there, Stefaan, please.

Yes. So first to correct you, the collection with the grid, we have to invest in a new collection. We cannot use the existing collection. We are -- we are looking to make a new collection of 11 kilometers to the Elia distribution network. This is a major investment that we would have to do to do the collection. So in respect of collection, there is no synergy. There will be a synergy in respect of operating the plant meaning having what type of teams you need to have available to run 1 plant compared to 2 plants. On the third point, with the auction, which we will be going in, we will only proceed with this project if we have a decent return on investment. So basically, we are making models to understand what could be the revenue generation from the market if we go into the market to sell the electricity. And we are also looking and trying to understand what could we get from the government in terms of support or subsidies for such a gas power plant. So we are really looking into this entire project that we wanted to be really a sustainable project in terms of profit and -- so revenue, profit and EBITDA generation to have really good projects.

Okay. So today, it's too early to make a final conclusion, of course, from there on, but it's a significant investment, where I would say that the return on investment can take, of course, year on year. So for shareholders, it's key to know, of course, what the main rationale here is that -- okay. And the last question then...

Though I can comfort you there really this is that we want this to be a profitable project, all right? This is what -- this is or how we approach this entire project. We cannot give more details because we have to go into an auction. We have many -- we have various players going to the auction. So we cannot share information specifics about returns and so on in respect of that project as this would be a potential breach of confidentiality for such an auction.

Yes. But I can imagine that the management team has a sort of minimum return -- return on investment hurdle rate set up?

I tell you, we will really look at it that it has to be a profitable. I can tell you.

Yes. Okay. Okay. And then last question, a bit a tricky one. But Stefaan, in the last 3 years, you have been explaining how well you have been better diversifying the company. You have generated great results. So all these hard work is paying off. And you mentioned that with an over, they have been allocating a lot of proceeds and means to Tessenderlo. So I consider that that's still the case that you consider Thio-Sul as an interesting investment. But in terms of the valuation, it became much more cheaper year-on-year. Shouldn't you, in terms of capital allocation, is the merger coming back to the table with Picanol because it would be such a more accretive investment in buying out minorities, you have been deleveraging the balance sheet so low. So is that something that can come back?

Well, as I told you, I'm telling you basically every 6 months that this is not on the agenda right now, this is not something we are considering right now. We believe I have read your comments in respect of the valuation of Tessenderlo. I hope that the shareholders see that we really genuinely create cash flow that we are creating a company of the future. But I think this is the project we're after. And we leave it really to the market -- for the market to determine what is the sales price of what is the share price and what is the value they see. But I can tell you, as a company, we keep on going forward and our basis motto is Every Molecule Counts, valorizing every stream, looking at our footprint and really creating a company that has a great future for our people working with it and also for the people believing us and invest in our project.

I should agree with that. And I suppose you do know that we're in the same line there on. But shouldn't then you, as a management team decides to, let's say, start a share buyback because you consider it as a really good investment and especially...

Well so we're investing in factory -- in a new factory in Holland. We're looking in the factory in East [indiscernible]. So we are continuously looking at projects where we see a genuine strengthening of the company. What we want to do is strengthen the company for the future. And this is the fundamental approach that we have towards the company.

But is it then also not frustrating because you have been performing extremely well, but it didn't pay off yet in terms of shareholder remuneration. As the management team that's also something should be under agenda.

Yes. Yes, that's why that we bring out all the interesting information and projects and things we are doing in order to create a sustainable company. Also, you should not forget that at the moment of the merger or just before and even during the recent crisis, we went to a share price of between EUR 80 and EUR 20. Today, we are -- we are EUR 35, we have been to EUR 40. So it's a market -- the market is playing there and it's doing its work. This is what we can say. I believe we give quite some information what we're doing. If you look at toward the sustainability report, at our year report, at our updates, you can follow very well the track of the company.

[Operator Instructions] We've got no further questions.

Okay. So, I have to thank all of you very much. And I can tell you spread the good news you heard about our company to the people you are in contact with, with your investors you are talking to. But fundamentally, we go for a strong future oriented company in a turbulent environment. I believe, over the last 2 years, we have been able to show that in a turbulent environment, we have been able to show a great performance and keep on developing the future of the company. I thank you very much, and we talk to you next year in March. Thank you.

Thank you, everyone, for joining today's conference. You may now disconnect your lines.