Tessenderlo Group NV (TESB) Earnings Call Transcript & Summary

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

Thank you. Good morning, good afternoon or good evening. Welcome to our Tessenderlo Group Conference Call Half Year '23 results from [indiscernible]. First, I want to take you through the key events of the first half of this year. To start with, the successful combination of Tessenderlo Group and Picanol Group into one large industrial international group. In January '23, Picanol became a business unit in the Machines & Technologies segment of Tessenderlo Group. Machines & Technologies includes Picanol; includes Proferro, which is the casting; and includes Psicontrol, which is our electronics business. In Akiolis, we have been acquiring Spanish -- the assets of a Spanish rendering company in the state of Catalonia. The plant is mainly specialized in pig and poultry secondary [flow] rendering. And this area, Catalonia is the most intensive pig and poultry farming region in Spain. We assumed operations at the plant in the first quarter of '23, and we hope to start the plant really up in the third quarter of '23. In the meantime, we have been putting assets in order and making the necessary testing for the successful start-up. Tessenderlo Kerley International has been acquiring the activities for the distribution of Thio-Sul in Europe produced by Esseco, which is located in the North of Italy. The deal has become operational in March '23 and the March fertilizers produced by Esseco are now marketed by Tessenderlo Kerley International. PB Leiner has made a joint venture in Brazil, meaning that the D&D Participações Societárias have entered into our business. They are a leading Brazilian tannery group. They have been taking 40% minority stake in our plant. And we believe that the combination of their know-how and technologies and our know-how and technologies will lead to a more successful operation in Brazil. And we can tell you that the start-up of the joint venture has been very good, and we have been working on very interesting projects for the future. PB Leiner, we also have made there a joint venture to produce fish collagen and also sell fish collagen under the brand of SOLUGEL of PB Leiner. We have taken the participation of 80% in the biotechnology company in Hainan. Hainan, which is an island in the south of China. The joint ventures with Hainan Xiangtai Group, and they will produce collagen from grown fish, so not from wild catch, but a sustainable product being collagen peptides from cultivated fish, which is the specialty of our partner. Our first shipments have been done in the second quarter of '23. We have been selling the participation of Rieter. We sold about 654,000 shares, which was 14% of the Rieter Holding. The sale has been done so that we can -- the money is available and the focus on our existing business to really see that we can grow further in what we are doing today and also be able -- there are interesting opportunities to be able to take these in the market. Picanol has also launched the Ultimax rapier weaving machine at the ITMA fair in Milan, Italy. The ITMA fair in Milan, which is a 4-year event is considered as the Olympic games of textile machinery. In this exhibition, we launched our new Ultimax rapier weaving machine, which has been received by a lot of enthusiasm by our customers and by the market because we have been able to present a new technology for rapier weaving machines, whereby we saw that we were one of the only players who have been able to really introduce new technology in respect of weaving. We also have started the construction of our new plant in Defiance, Ohio near Great Lakes in the U.S., and it will produce liquid and sulfur-based fertilizers like Thio-Sul, KTS and K-Row. And also in the future, it will produce sulfite chemicals for industrial markets. This plant is start -- intended to start operations by the end of 2024. We have had some delays mainly to the start-up of the plants where we have been looking into what is the right time to start up the construction to take advantage of weather and also eventually reduced cost prices for making the investments. We are also making a new plant, as you know, in Geleen, in the Netherlands, also for the production of Thio-Sul. There we are on the track for launching the plant and having it operational by mid-2024. The construction works for the new Picanol Group headquarter are on track. You see on the picture it's already coming the shape of the building, which will be important that we offer really interesting facilities for our teams in Ieper involved in all of our businesses in leper and that we will be able to attract young people and more talent in an interesting environment, not only in respect of the technology we have, but also a nice working environment. So as you can see, despite all the clouds and the uncertainties we have continued during the first half of the year in respect of strengthening our businesses with bolt-on acquisitions and also by the construction of 2 new factories and also buying the Akiolis factory in Spain. So you see, we believe in the further expansion of our activities and supporting our activities to create a good future to the company. Now after the balance sheet date, we have in Violleau launched the new organic fertilizer line, whereby we will now have an integrated production on a site in the north of France, whereby we take C2 materials from the market and convert it on-site into organic fertilizers. The next slide is the share repurchase program. So we launched this program in March '23 for a value not exceeding EUR 40 million. We did it because the share price was below book value and the Board of Directors was of the opinion that it was an interesting opportunity to proceed with the repurchase of our own shares. So by the end of '23, we have acquired 344,000 shares at an average price of EUR 29.61 for the total value of EUR 10.2 million. So now we can come to the results of the first half year. Kurt, if you can take us through this.

Okay. Thank you, Stefaan. If we first have a look at the operational key figures and you see that we do not only compare the first quarter of '23 with what we reported in 2022, but also you see that the column was added to the pro forma figures. So the pro forma figures, including this also Picanol, so the real comparable figures for this year, in fact. Revenue amounts to EUR 1.6 billion in 2023 compared to what we reported EUR 1.3 million -- EUR 1.3 billion, it's an increase by 21% as compared to the pro forma figures of last year. It means a decrease of the revenue by almost 5%. For the adjusted EBITDA, we see that we come from a pro forma adjusted EBITDA of EUR 266 million to come now to EUR 205 million with a decrease by 23%. The profit and loss for the period ends at EUR 83 million, of which EUR 80 million is attributable to the equity holders of the company, the difference, the EUR 3 million difference is, in fact, related to the results, which is now for the minority shareholders of PB Brazil. Capital expenditure amounts to almost EUR 100 million. It's significantly higher than what we had in last year. And of course, there are several important projects also included in this capital expenditure, which has made that the amount is higher than in previous years. We have in 2023, the acquisition of the former Spanish rendering company. We have the acquisition of production assets for the Chinese fish collagen plant, we have the ongoing construction investments for the 2 new plants that I already mentioned, the 2 new Thio-Sul plants in the Netherlands and in the U.S. We have, for example, also the ongoing construction investments for the new HQ office building for Picanol Group. So a lot of additional growth investments, important major investments also this year. If you look at the cash flow from operating activities, it amounts to EUR 108 million compared to a pro forma cash flow from operating activities last year of EUR 104 million. So despite the fact that the adjusted EBITDA is about EUR 60 million lower than the pro forma adjusted EBITDA of last year, we were able to maintain our cash flow from operating activities at the same or even a little bit higher level. This is because the investment that we had to do this year in the trade and non-trade working capital was much lower than what we had to invest last year in the first 6 months. If we look at the net financial debt position. In fact, we are currently at a net cash position. We have a net cash position of EUR 13 million. Last year at the end of June, we still had net debt of about EUR 48 million. Three transactions which had a significant impact. In fact, on the net cash position of this year is, first of all, the acquisition of Picanol. At the moment of acquisition, Picanol Group had a net cash position of EUR 35 million. So we took it over at the moment of first consolidation. Also the sale of the Rieter shares in the first 6 months led to a cash inflow of about EUR 81 million. And these positive impacts were partially offset by the dividend payment, which led to a cash outflow of EUR 40 million in the second quarter of this year. If we look at the group revenue per segment and the contribution of each segment to the group revenue, you see that, in fact, for the 4 major segments, Agro, Bio-valorization, Industrial Solutions and the new Machines & Technologies, each of them contributes between 23% and 27% of the group revenue, while T-Power contributes 2% to the group revenue. If you look at the contribution of each segment to the group adjusted EBITDA, we see that with the new operating segment, Machines & Technologies, we have now a further diversification of the group and also more balance between the different segments. Agro contributes EUR 43 million to the adjusted EBITDA; Bio-valorization EUR 35 million; Industrial Solutions EUR 53 million; Machines & Technologies EUR 45 million contribution; and T-Power contributes about EUR 29 million to the group adjusted EBITDA. If you look at the different segments one by one, first of all, the Agro segment. The revenue decreased in the first 6 months by about 19%, mainly impacted by a decrease of volumes, and this combined with lower selling prices in the market. The adjusted EBITDA decreased to EUR 43 million compared to EUR 122 million last year. And we see that the adjusted EBITDA of Crop Vitality, Tessenderlo Kerley International and Violleau decreased because of lower sales volumes, while at the same time, margins were also under pressure following the lower selling prices in combination with a higher valued stock. NovaSource adjusted EBITDA, it increased during the first 6 months, many thanks to the contribution of the Lannate product line, which was only acquired during the second half of last year. If you look at the figures and you look also at the adjusted EBIT, you see that there is a difference between the adjusted EBIT in the first half of 2022 as reported and the pro forma adjusted EBIT of the first half. We reported last year EUR 106 million of adjusted EBIT and pro forma, it was only EUR 87 million. Where does this difference comes from? When Picanol consolidated Tessenderlo Group for the first time in January 2019, they applied acquisition accounting adjustments on the Tessenderlo Group assets, mainly fair value adjustments on property, plant and equipment and also the recognition of intangible assets. That remaining outstanding amount of fair value adjustments as per year end '22 amounted to EUR 365 million. And following now the determined accounting policies, we took over these remeasurements also at acquisition date. So we took them also in the consolidation of Tessenderlo Group, which means that we will have to depreciate, amortize these fair value adjustments in the coming years. And the EBIT impact for the full year 2023 is estimated at about EUR 47 million. Net of taxes, it will be about EUR 35 million. So in the first half of the year, the EBIT is already impacted by more than EUR 23 million. And the segment where you will mainly find this impact is, in fact, the Agro segment, which therefore also explains the difference between the pro forma adjusted EBIT of last year and last year adjusted EBIT as we reported it. Second segment, Bio-valorization. For Bio-valorization, we see that the revenue, in fact, remains stable compared to prior year. Lower sales volumes and also a decrease of the fat market prices could be offset by higher sales prices for gelatin products, which had to be increased compared to prior years to compensate the higher costs. The adjusted EBITDA of Bio-valorization decreased compared to prior year, minus 31%, lower sales volumes, less favorable market circumstances for fats as well as the start-up expenses for the newly acquired operations by Akiolis Iberia negatively impacted the results. For Industrial Solutions, we see that the revenue remained stable, in fact, in the first half of the year. And despite the challenging market conditions, DYKA Group revenue also remained stable, thanks to an improved product mix. The contribution of the production plants in Gaillon in France, which was only acquired during the second half of 2022 and also higher sales prices. If we look at the revenue of moleko, it decreased, it was also impacted by the expiration of the customer agreements with Barrick Gold at year-end '22, while the revenue of Kuhlmann Europe increased during the first 6 months. Thanks to favorable market circumstances. If you look at the adjusted EBITDA of the segment, it's increased by almost 10% plus EUR 4.6 million. We see, on the one hand, challenging market conditions, which led to a lower DYKA Group result, while Kuhlmann Europe was positively impacted by the favorable market circumstances. Moleko as an activity was able to offset the negative impact of the expiration of the customer agreement with Barrick Gold by an improved performance of its other products. If you look at the results of the new segment, Machines & Technologies. As you can see, we do not have the reported figures of last year, we only have the pro forma figures of last year. We see that the half year revenue amounts in 2023 to almost EUR 385 million. It's an increase by more than 4% compared to the pro forma figures of last year. And we see that revenue increased in the activities of Proferro and Psicontrol, while the revenue of Picanol, the weaving machines decreased in fact, as a lower volume could not be fully offset by an increase of sales prices. The whole year adjusted EBITDA increased significantly compared to the pro forma figures of last year, and it amounts now to EUR 45 million, thanks to an increase of the results in all 3 activities. The adjusted EBITDA of the Picanol weaving machines increased significantly compared to prior year as improved margins were able to offset a lower sales volume during the first 6 months. As a reminder, the half year 2022 adjusted EBITDA of Picanol weaving machines was negatively impacted by rising raw material prices, rising to transportation costs and back order costs which could, at that moment, not be translated into higher sales prices, partially due to the large order book. The fifth and last segment, T-Power. In fact, the results were in line with expectations as T-Power fulfilled all flowing agreement requirements, and we see that the adjusted EBITDA amounts to almost EUR 29 million during the first half of the year. If we look at the reconciliation between the adjusted EBIT to the net results, we have an adjusted EBIT of just below EUR 107 million, a very small some EBIT adjusting items EUR 0.7 million negative includes the impact on the revaluation of an electricity purchase agreement and also some further expenses related to the merger of Picanol and Tessenderlo Group, which brings us to an EBIT of EUR 106 million. We have in total finance income and net finance income of EUR 1.3 million, which includes mainly borrowing costs for EUR 3.5 million. Last year, these were higher. There were about EUR 4.5 million. But in the meantime, last year, we reimbursed the bond that we had on 7 years on which an interest was payable of almost 3%. So we brought down the borrowing costs, also included our net foreign exchange losses for almost EUR 9 million, mainly can be explained by exchange losses on intercompany loans, which are not hedged, intercompany loans in U.S. dollar. And next to that, also, we had a gain of more than EUR 11 million on the sale of the retail shares, as Stefaan already mentioned the retail share that we sold during the first half of the year. The income tax expense amounts to almost EUR 25 million, mainly related to our operations in the United States in Belgium and in France, we have a share of result of investments EUR 0.5 million, and this brings us to a net result of EUR 83 million, of which EUR 80 million is attributable to our owned equity holders. The outlook for the full year 2023. We anticipate, in fact, a continuous high level of economic uncertainty, putting the development of customer demand and sales margin more under pressure. And based on the currently available information, we expect that the 2023 adjusted EBITDA will be 20% to 30% lower than the record adjusted EBITDA we achieved in 2022, which referred, in fact, the record adjusted EBITDA to the pro forma adjusted EBITDA of last year, so in total, EUR 467 million as the sum of the Tessenderlo Group adjusted EBITDA and the Picanol Group adjusted EBITDA. To finalize the financial calendar, we intend to publish our results over the full year next year on March 27, and the Annual General Meeting of Shareholders will take place on May 14.

Thank you, Kurt for this very clear explanation. We come to the end of our presentation. So now we are opened for your questions. Thank you.

[Operator Instructions] we'll take our first question from Christian Faitz at Kepler Cheuvreux.

A couple of questions actually. First of all, contracts on the performance of your Industrial Solutions business. Can you please explain why this business is holding up so well as I believe it is for a good chunk, construction-related and PVC prices around the globe had been rather weak during Q2? And my second question would be just on what kind of demand trends you see currently, so post Q2 in agriculture at this point in time for your product range?

Thank you very much for your question. In respect of Industrial Solutions, you are right, we see some pressure in the construction industry. And DYKA is performing at level with the market with its competitors. On the other hand, this segment has included our water treatment business, chemicals for water treatment. And there we see a good performance of the business, which is contributing to a stable performance. In respect of our Ag segment, what we see there is that the demand for our sulfur-based liquid fertilizers is picking up. In our precision, agriculture remains a hot topic, and we are really supporting this way of ag. Also, our products they help to make agriculture more sustainable and also likely to get more and more attention to this aspect of our products, meaning that we see demand picking up for the second half of the year.

[Operator Instructions] We'll now move on to our next question from Wim Hoste at KBC Securities.

I have a couple of questions. The first one would be again on Agro. Can you maybe elaborate a bit more on the raw material situation? I mean, both pricing, availability, or stock levels because I think this was certainly an element that drove performance in the first half of last year. So happy to get an update there on MOP. That's the first question. Maybe I'll ask them one by one, if that's okay for you.

Okay. Thank you, Wim, for your question. In respect of the MOP pricing, basically, we think that the MOP pricing has been bottoming right now and that we may see some increased -- price increases of MOP in the second half of the year. We see that the availability of MOP other than our additional suppliers in Belarus and Russia is now available to us. So there's no more problem in terms of having availability of raw material. Your next question, Wim?

Okay. That would be on the weaving machine business. Can you maybe update on the order book and the margin outlook? And the reason I asked the question is that, yes, last year, you had a very strong order book, but you could not translate the inflation into pricing. I see now in the press release that volumes are coming down. So happy to get an update from you on what the order book stands and the margin outlook given the inflationary pressures for the weaving business?

Yes. Thank you for the question, Wim. It's right to clarify this. One, we are still faced with a decrease of the old stocks in the supply chain because of the over ordering that happened during COVID times and just past COVID times. So people are still working through getting down their stock levels, having an impact on the weaving activity with our customers, meaning that the order book because of this is not at historical levels. The second thing that's happening right now is that we have the ITMA fair, people are now evaluating the new technology about which they are really enthusiastic and people will now start looking how this can fit into their weaving machines set up. And so this will take some time before the orders for the new technology will come in. So you're right. Right now, we are going to a lower level of ordering in the Picanol business for the second half.

Okay. That's very clear. Then 2 remaining questions. Yes, one would be on T-Power. There was some press attention in the last few days about, yes, the need for additional gas-fired power stations in Belgium to go -- to cover the coming years. And there was some rumors that there could be another auction installed. So I was wondering to get your thoughts about -- yes, about these press articles, whether yes, you are ready to participate in that auction, what your chances are? So that's on T-Power. And then the last small question would be on the Verbrugge shares. I think in the full year results conference call, it was said that yes, there might be a cancellation of those shares in the coming 18 months or so. So I was wondering to get your thoughts on any update of timing for canceling the shares and if that's still the plan?

All right. Thank you for your question, Wim. In respect of T-Power, according to analysis made which have been made available to us, we have seen that there is no room right now. There is no request for additional volume under the current CRM auction, meaning that we will not participate to this auction that will be happening in September this year. You have, indeed, as you said, on the longer term, there is need for additional production. So we are waiting the evolution during '24 to see at that moment we need to participate to the CRM auction because, as you know, we want to make sure that we have a financial and economical viable project, that's the important condition to which we will continue this project. In respect of Verbrugge, we have made the first step being the integration of the company Verbrugge into Picanol NV, meaning that the shares are now held by Picanol NV and we stick to the planning that within now, I believe, before one year -- I mean, within one year, the shares will be canceled so that we will come back, that the full shares of the Tessenderlo Group will be held by the market and the controlling shareholders.

Okay. That's great. If I can just follow up on what you said about the CRM auction. Why would you not participate in any process that might run in September? What's the difference between running in the short term and then maybe participating in the 2024 auction?

Because the volume needed for that auction now does not allow for 900-megawatt power plant to come in. So it does not make any sense to participate to that auction if you know well beforehand that you will not be selected at all. So what we decided is to focus on the next auction and then we will be fully ready with everything. So at that moment, we think there will be room that will be need for additional 900 megawatts. And on the other hand, we will also be more ready to participate at that moment.

There are no further questions in queue. I will now hand it back to Stefaan for closing remarks. Thank you.

All right. I want to thank you very much for your interest in the Tessenderlo Group. I hope you have been receiving more information to understand better what we're doing. I hope you can see that we still believe in the future of Tessenderlo Group by being -- by acquiring bolt-on smaller targets to make our business stronger and also to keep investing in new factories for the future. So thank you very much. And I can tell you, don't forget, every molecule counts. Thank you very much. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.