Tessenderlo Group NV (TESB) Earnings Call Transcript & Summary

[Audio Gap] I'd like to highlight, as in respect of our Industrial Solutions segment, whereby PC loos which was the division producing [ gavel ] and ferric chloride has been transformed into Kuhlmann. Kuhlmann Europe is a strong identity. It's an identity that exists since 1825, and we wanted to bring back our history into our business, and it's a well-known name in Europe. So we believe very much that this will help to grow our business. At Kuhlmann Europe, we have terminated a niche business, which is the production of sulfur derivatives which is a long-standing small activity of the Tessenderlo Group. Basically, we have to source virgin materials from the market and we are fighting with people using side streams to make the same product, meaning that with the current raw material situation, we were not competitive at all anymore. The impact both on turnover and EBITDA is not material. The next point I want to highlight to you is the decision to build a new KTS factory, an SBS factory in the Great Lakes area in Defiance. So we will build a complete new factory there, which will be about the same size as our factory in East Dubuque. We expect the plant would be operational first quarter 2024, providing that with the current crisis on availability of equipment and materials that we can stick to the planning we have been laying out. In our Agro segment in Europe, we have been acquiring the assets of Fleuren Tankopslag, which is a tank storage company on a waterway. We have acquired this company and its assets because they're located on a strategic position for storage of our products that will be produced in [ rain ] which is [ indiscernible]. And from there, we will also be able to organize distribution of our products into Central and North Europe. The next one is less good news, whereby for the Bio-valorization segment, we are in the process to stop the joint venture for the production of fish collagen in China. However, we are looking for other opportunities because we believe in our product portfolio. It's important that we can offer fish collagen also to our customer base. Back to the Agro segment. The construction of the plant in Geleen is going quite well. We are supported by all our engineering companies and authorities to move ahead with the factory. And right now, we expect the factory to be operational third quarter of 2023. And we have some key events that happened after balance sheet date. The one is in the Industrial Solutions segment. There, we can announce that we're acquiring -- we are in the process to acquire the production plant and the business of Pipelife France, in Gaillon which is about 1 hour out from Rouen, France. This means that with position of that plant, we will have 3 plants in France, 1 in the area of Amia, 1 close to Bujoin in the Central France, and 1 close to Rouen, the plant. And 1 is specialized in pipes for gas, water and cable protection. So basically, with the acquisition of this plant, we will be completing our product in the French market. So we believe very much that this will be a benefit to our global business footprint in France. However, for the first coming years, we do not see a material impact on our Tessenderlo Group business or EBITDA. Back to the Agro segment. As you remember, we have launched a separate growth unit called Violleau. Violleau that will focus on the production and marketing of organic fertilizer. It's a company that is starting its activities in France, whereby, basically, it is using side streams converted from the mid-chain by Akiolis and whereby Violleau convert this into organic fertilizer. This has to be seen basically in view of the European commission direction that they want to give to European agriculture, whereby they want 25% of agricultural surface to be organic. Then in the T-Power segment, we have beginning March submitted a new permit application for the construction of a 900-megawatt combined cycle steam in the gas turbine in Tessenderlo. So basically, it's a lot of turbulence going on in Belgium in respect of nuclear energy and gas energy. And what we decided to do is that we will go ahead and file for the application for construction of the plant so that we are ready to participate in any auction or any system that the government is proposing to invest in that type of business. So we are not yet there that the plant will be built. But what we want to do is we want to be ready for a permitting site that we can move ahead in case that the opportunity comes along. Then in respect to financial topic. As you know, we have a bond which is expiring partially this year. While we have been buying back already EUR 35 million of the bonds that would come to maturity, I believe, July this year. And in order to secure our financial buffer, we have taken up new facilities to make sure that we have our cash available in case that any transaction would be interesting to be executed by the company. On the conflict in Eastern Europe. The conflict in Eastern Europe has a lot of impact in Europe and on a global scale. What we see is we see, on the one hand, prices of food and feed going up like the wheat prices, corn prices. So these are going up, impacting the wheat chain, impacting the cost of food for the consumer, impacting inflation. So this has a very big impact overall in the business environment in Europe specifically and worldwide partially. One of the things that affects us quite a bit is that we are sourcing MOP, sulfate of potash, in Russia and Ukraine. Right now, these sources have been blocked because of sanctions. And because they are blocked, we have to look for alternative supplies. So we have a crisis team working on this to organize the production, to organize the sourcing and to see how we can evolve to a solution. At present, there is not an immediate risk of having to close our factory, so we are working on potential solutions on short, middle and long term. So Kurt, maybe you can guide us through the 2021 results.

Yes. Okay. Thank you, Stefaan. If we look at the results of the second half of the year, we see that revenue has increased to about EUR 1.1 billion. It's an increase by 31% when excluding foreign exchange effect, also the adjusted EBITDA increased to just below EUR 170 million in the last 6 months of the year. It's an increase by 25%, and this brings us to a total revenue of the year of just below EUR 2.1 billion. It's an increase by 21%, and the adjusted EBITDA increased by about 40% to EUR 354 million. That's an increase of 12.6%, in line with our revised outlook of November last year, excluding the foreign exchange effect of about minus EUR 7 million, that's an increase of 15%. The result of the year, the net result is a profit of EUR 188 million. Last year, we were around EUR 100 million. But as is the case already during the last years, we also have some exchange gains and losses mainly on intra-group loans in U.S. dollar, which are not hedged. If we would have excluded these results, the net result of the year would have been EUR 173 million compared to EUR 129 million last year. Capital expenditure of the year in line with previous year, around EUR 100 million. And we have an operational free cash flow, which is, however, below the one of last year, EUR 25 million lower than last year despite the higher adjusted EBITDA. This because we invested a lot in additional trade working capital, about EUR 70 million increase of trade working capital, while last year, the trade working capital remained stable. And this increase can be explained by the increase of activity also during the last months of the year, but also higher purchase and sales prices. Thanks to this cash flow, we were able to reduce our net financial debt by about EUR 125 million to EUR 75 million. If we would not have included the IFRS 16 lease liabilities, the net debt would have amounted to around EUR 20 million. If we look at the group revenue per segment, and you see revenue has increased by more than EUR 300 million. However, the relative weight of the different segments in this group revenue did not change that much. As well Agro, Bio-valorization and Industrial Solutions each contribute about 1/3 to the group revenue. T-Power contributed about 3% to the group revenue. For the adjusted EBITDA, increased by EUR 40 million. We see that the Agro segment there, we see a significant increase of the adjusted EBITDA by more than EUR 20 million to EUR 147 million. For Bio-valorization, adjusted EBITDA remained stable compared to prior year. And for Industrial Solutions, we also see an increase by more than 40% to EUR 76 million while T-Power adjusted EBITDA remains stable. If we have a brief look at the different segments one by one. For the Agro segment, we see that the revenue in 2021 had increased by more than 30%. Revenue during the year was impacted by higher volumes and also an increase of sales prices, which were implemented during the year to compensate the higher raw material, energy and transportation costs, but also helped -- and would also positively impacted revenue on the start of the partnership between Tessenderlo Kerley International and Kemira. If you look at the adjusted EBITDA, it increased during the year by more than 20%. And the adjusted EBITDA of Crop Vitality in Tessenderlo Kerley International, they both increased, thanks to favorable market circumstances, while the adjusted EBITDA of NovaSource remained stable. Remember the Agro margins were under pressure in the first half of the year. But unlike the first half of the year, we were able to increase sales prices during the last 6 months in order to compensate for the increase of raw material and other costs. For Bio-valorization, in fact, during the second half, we see the same evolution of the results as in the first half of the year. And for the full year, revenue increased by 13%, mainly thanks to an improved product mix and also market prices for fats and proteins that increased substantially. The adjusted EBITDA remained stable over the year. However, we have to remind you also that in 2020, the EBITDA increased already significantly in 2019, the adjusted EBITDA only amounted to about EUR 57 million, while now we are around EUR 80 million. It remained stable in 2021 as favorable market circumstances for fats and proteins were offset by lower margins of some gelatin products. For Industrial Solutions, we see that the revenue increased by more than 20% during the year, mainly thanks to DYKA Group, where revenue was positively impacted by higher sales volumes, but also increased sales prices also implemented to compensate the higher raw material, energy and transportation costs. The volumes in 2021 were positively impacted by the first full year contribution of the newly acquired production plant in France acquired during the first half of 2020. Next to that, also, the first half of 2020 was negatively impacted by the Corona pandemic. What also helped to increase the volumes or the growth -- further growth of the product portfolio of the DYKA Group. The adjusted EBITDA increased to EUR 76 million, impacted by the increase of DYKA Group sales volumes, mainly in the first half of the year and improved product mix but also a further increase of production efficiency based on the investments we made in recent years. Timely pricing management was able to offset a significant increase of costs during the year. Also positive to the evolution of the adjusted EBITDA was the stock of the activity S8 Engineering, the stock has a separate activity. This contributed positively to the EBITDA. Also the contribution of Kuhlmann Europe increased, but this was offset by a decrease in moleko. For T-Power,the results during the second half of the year and the full year were in line with previous year, were also in line with expectations as T-Power fulfilled all tolling agreement requirements. The small decrease that we see in the adjusted EBITDA over the year is mainly linked to the development expenses that we incurred for the construction of the second power plant. The reconciliation between the adjusted EBIT and the net results. Adjusted EBIT, EUR 224 million. In 2021, we only had an insignificant amount of EBIT adjusting items, EUR 2 million, brings us to an EBIT of EUR 226 million. We had a net finance income impacted by the net foreign exchange gain of about EUR 15 million. So without this gain, the net cost would have amounted to EUR 10 million. This includes the interest expenses on the lease liabilities, the T-Power loan and also the bonds we have. Income tax expense, EUR 43 million during the year, mainly related to the activities in Belgium and in the United States. Share of results of investments was EUR 1 million, brings us to a net profit of EUR 188 million. For the outlook for the year 2022, we anticipate a continued high level of uncertainty due to the current conflict in Eastern Europe, the difficult supply chain circumstances and also other challenges following the Coronavirus pandemic. The development of customer demand and sales margin could come under pressure during the coming months. However, based on currently available market information, the group expects that the adjusted EBITDA in 2022 will be in line with the one of 2021. And here, we also take already into account the expected positive foreign exchange effects following the strengthening of the U.S. dollar. As a reminder, $0.01 change in the dollar rate impacts our adjusted EBITDA by approximately EUR 1.5 million. The guidance in this outlook, however, does not include the risk of further deteriorating economic and financial market conditions. To end the financial calendar, we intend to publish our annual report on April 6. The Annual General Meeting of Shareholders will take place on May 10, and we will publish the first half year results on August 25.

Thank you, Kurt, for the clear summary of our financial results. Our numbers are, I believe, quite good compared to the previous years. And this is only thankful to our people who have been able to not only handle problems in respect of supply chain, in respect of increasing costs of our raw materials, energy prices, logistic costs. Our people have been faced with getting products to customers, which have also been quite a challenge during the last year. And despite all this, we have been able to have a very good result over the past year. Next to that, despite the difficult circumstances, our teams have been able to execute further our strategic plans. You have seen the decisions we have taken, the investments we have been doing. So we keep on transforming the company to a company creating added value to its stakeholders, especially also towards our customers, whereby we can present real solutions and real value to the problems or the opportunities they have. So we keep on moving in the same direction. We will see how we will get through this difficult current environment, but we trust that we have the people on board in order to achieve a good continuation of our excellent operations. Now I can invite you for questions that we will be able to answer.

[Operator Instructions] The first question comes from Frank Claassen from Degroof Petercam.

Frank Claassen of Degroof Petercam. Two questions. First of all, on the CapEx, what can we roughly expect for 2022? Will it be around the same level of EUR 100 million or different? And what are the main CapEx projects? And then secondly, on Bio-valorization, you indicated that you had a lower margin for certain gelatin products in the second half of '21. What is the reason? And what can we expect there? And maybe related to Bio-valorization, could you also spend a few words on why the JV in China did not work? Why isn't that -- why wasn't that successful?

Thank you for your questions, Frank. In respect of CapEx, we would expect EUR 120 million plus for the coming year. However, the problem we have is the execution of investments because sometimes we have unexpected delays because of supply chain issues in order a shortage of quite some materials, and these are not necessary in time available, meaning that projects can be delayed. So this year, we estimate that this can fluctuate, and we will keep you informed the half year how this is going.

Sorry. Yes, sorry. Yes, the main product, sorry to interrupt.

So the main project we see here is mainly the [ Shellane ] plant, which is the Thio-Sul factory in whole of Shellane. The second one is the Defiance factory in U.S. for also Thio-Sul. So these are the 2 main projects that we have. On the other hand, we keep on optimizing processes, debottlenecking factories, all the traditional things we keep on doing. That's why we come to this EUR 120 million. On the Bio-valorization, basically, we have, on the one hand, long-term contracts with customers, and we were faced with increased raw materials. And we have been respecting our contracts, meaning that our margin has come under pressure. And the second point is that we had some setbacks in our production of collagen in South America, whereby we have not reached the volumes that we have anticipated. However, as of the second half of this year, this will be resolved. Then on the China situation. Basically, what happened there, we had an agreement to build a factory on a certain location. Then because of change in regulations, we could not anymore build it at this location. We have to move to another location with completely different standards in respect of environmental things, so that the investment was more than doubled, making it fairly difficult to move ahead with that investment.

Okay. And coming back on the gelatin story. Once these contracts roll off, you do see room to increase prices to offset the higher raw material costs? Is that gradually kicking in? Or how is that dynamic?

We hope that we can follow the general trend of price increases. As you know, Gelatin business is an energy-intensive business, meaning that we are obliged to increase prices, and this is actually what we are doing in the market.

The next question comes from Wim Hoste from KBCS.

I have a couple of questions as well. Maybe if I ask them one by one. First, I wanted to come back on the previous discussion with regards to Bio-valorization. And I'm particularly interested in the outlook for collagen peptides. How collagen -- sorry, how are you looking at 2022? You said that you had some production issues in South America. Can you maybe explain what happened there and what makes you confident of a better 2022 or certainly a better second half?

Well, we have been doing additional investments to secure production running perfect basically as of July this year.

Okay. And the -- yes, the plans you have on fish collagen. Can you maybe elaborate a little bit on that? Where do you want to grow capacity of that product? How much CapEx would it require? Any thoughts on that?

Well, right now, we are looking in the world what is the best possible location to -- or go in a joint venture or build a factory ourselves, and we hope we can find some opportunities which we will be able to report upon in the next meeting.

Okay. Then I have a question on the bonds purchase -- repurchase you did. You purchased back at almost 103% of principal. Can you maybe elaborate on why did you do that? Because if you -- my understanding is if you would have waited a few more months, you would probably fall back at 100%. So what was the incentive for you to do this operation?

It's the net cost, including interest, would have been the same or waiting at the expiry date. So it's exactly -- it's a cash-neutral operation.

Okay. Understand. And then 2 more questions, if I may. Maybe first on the guidance. You're hinting at -- already guiding for a flat full year results. What assumption does that include for your SOP business? Does that assume that you will find enough raw material of MOP from other regions to continue to produce as you did in 2021? Or is that including some hiccups for Agro?

The forecast was including a normal operation and normal supply of MOP for our SOP production. That's why right now, it's quite difficult to see what will be the real impact because right now, we have to look for alternative supplies in the market, whereby 24 million tonnes of MOP has been blocked in the total market of 70 million tonnes of MOP. So it's quite a stressed situation right now in the MOP market, which is a raw material that we convert into SOP.

Okay. And then last question from my side is in previous results, so leases you hinted at the search for expansion of the [ Bio-valorization ] business in Central and Eastern Europe. There's no more reference to that in the press release of today. Can I assume that what everything goes on in Ukraine, Russia, that, that expansion project is put on hold for the moment?

I think the last statement is right. It's put on hold for the moment. So at the moment, things change. We hope we can immediately restart looking for the right investments, the right plans. So we hope this problem is resolved as soon as possible and that then we can move on with our projects. Of course, we believe we can really create value for these crops, with these farmers, in these countries being Russia, Ukraine, Belarus. We have a genuine value proposition for these people.

The next question comes from the line of Christian Faitz from Kepler Chevreux.

I also have a few questions, mostly surrounding your Agro business. So how much of your MOP needs actually does come from Belarus? And can you give us your annual MOP needs in total? That would be helpful as a start.

We get this question from many people in the market who are also interested because it's a difficult market. So I hope you will not be upset if I don't share this information with you right now. But I can tell you, we are quite dependent on these markets.

Okay. Fair enough. Just to clarify, you mentioned in your introductory remarks that you also source MOP from Ukraine. Is that correct? Because I'm not aware of any Ukraine potash deposits.

From Russia and from Belarus.

Okay, yes, sure. Absolutely. That's what I thought.

I'm sorry if I said it wrong.

No worries. Then can you also maybe discuss your energy cost position and -- for the group as a whole? And how you believe that will change this year versus 2021. Any indication there would be helpful.

In the group, we work with assisting why we hedge our positions for a quite important percentage so that the energy price is quite predictable for our operational and commercial teams. However, there is a part always that is not hedged, which is not a big part. And that will, for sure, impact our operational costs, whereby we hope in the current environment of price increases that we can pass this on to the market.

The next question comes from Christophe Beghin from Kempen.

Stefaan, I have 2 questions. Firstly, on deleveraging. So over the last year, the company is doing well and generating a lot of cash. You're close to net cash, let's say, today. There are some CapEx investments on the table. But let's say that if you're not successful in tendering for a second gas fire power plant, what other options do you have in terms of big investments going forward? What do you plan to do with the balance sheet?

Well, we believe that the current environment will probably lead to increased M&A activity in the sectors we operate. So we believe that in the sectors we operate, there should be additional opportunities for additional investment.

So I can conclude from your statement then that indeed you continue to invest in organic growth opportunities, but maybe intensification with as well add-on of M&A in all 3 segments?

We -- as you have seen, we are looking into small acquisitions on M&A, which make our current business stronger. So we hope to continue for sure that way. Then we have to see in the current businesses we operate other opportunities to make this be stronger. And then the last one, we will continue also organic growth. So we will work on the 3 approaches to grow the company further.

Okay. And then I want to follow up on as well Bio-valorization. If I'm correct, and maybe you can confirm that the Akiolis business did have a great year. Is that correct? Much better than 2020? Because we...

Basically, in the Bio segment, you can say that anything to do with proteins and fats have been exceptionally good. The reason being that fats are converted and used for aviation fuel, for kerosine replacement. And so this is creating an enormous demand from our sector, whereby we have high energy value proposition for this sector.

So that's understood. But then my question is then you had a pretty decent impact on the PV liner business, if I'm correct. So you have indeed outlined that you have seen some problems at Santa Fe. But can you maybe explain a bit more there because your best ingredients peer did report decent results in this division. So what really took place? Is it about that you have been converting capacity in the existing plant from gelatin production to collagen peptides and you've seen some hiccups? Did you lose some market share as a result of that? Can you explain a bit more about that, please?

What you should not forget is that 2020, we had a much higher performance than our competitors. Don't forget that 2021 -- 2020 was a much higher performance. So in 2021, indeed, we have fallen back a bit in our gelatin, but we still have a reasonably good performance. If I say that the fat prices and protein prices have been going very high, don't forget that part of this increase, we have to refund or pay to the slaughterhouses. If not, we would not be able to purchase these materials for us. So the margin indeed in Akiolis was good. The margin in gelatin in the end was not so bad. However, because of our commercial approach and long-term contracts, the margin was squeezed. And secondly, we had a delay or a setback in the production in Argentina. And both of them together means that we did not achieve the 2021 level -- sorry 2020 level, but that level was already higher than our competition.

So the overall conclusion is that you indeed still -- you didn't lose any significant market share to any competitor. It's about still a decent performance, the general conclusion?

Correct. It's a temporary production issue, which will be resolved in July. So -- and we have been able to maintain customer relations for most of the products market shares. So our business is sound to go further in a good direction.

We currently have no further questions coming through. [Operator Instructions] There are no further questions.

Thank you very much for attending our call. We keep on growing with our group in difficult circumstances. We have great confidence in the teams. We have good customer relations, and we have built long-term relations with our suppliers. So we hope that we are well positioned to get through the current prices and create a good future for all our stakeholders, include our shareholders. Thank you very much.

Thank you for joining today's call. You may now disconnect.