Tessenderlo Group NV (TESB) Earnings Call Transcript & Summary

Hello, and welcome to Tessenderlo Group 2023 Results. My name is Caroline, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Luc Tack, the Chief Executive Officer, to begin today's conference. Please go ahead, sir. Thank you.

Good afternoon to our European friends, and good morning to our American friends. Thank you and for joining us on this investor's call today and thank you for your interest in our company. Today, I'm joined by Miguel de Potter, our new CFO, who will be explaining to you our numbers, and I also have Frederic and Kurt, who you all know with me here in the room. So let me turn over to Miguel to start to give the highlights on the numbers to give the explanations, after his explanation I will give you some flavor on what happened in 2022, 2023 and looking forward in 2024 in an attempt to make sure that we connect all the dots and that things are very clear and understandable to you all. So Miguel, please, the floor is yours.

Thank you very much, Luc, and welcome, everyone, to this investors call for the figures of '23. We will start our call by going through our key events that have marked the year '23 and some events going forward that we can expect for '24. The first event was our share repurchase program that we started in May 2023, where we started a program for buyback of shares not exceeding EUR 40 million. At the end of December '23, we reached EUR 32.4 million at an average price of 28.21 per share following the authorization by the Extraordinary General Meeting we have the right to continue purchasing treasury shares. The leadership changes after a very long period serving as Chairman and CFO, COO of the Tessenderlo Group, Stefaan Haspeslagh has decided to leave the company. And we welcome that decision at the end of December 2023. He will continue to serve until the next general assembly as the Chairman of our company. On the first of January to replace Stefaan, I joined Tessenderlo Group as the new stand-alone Chief Group, Chief Financial Officer; and my colleague, Sandra Hoeylaerts also joined our Executive Committee as the Chief Transformation Officer, together with Luc Tack that you heard earlier this -- earlier on the call, we are forming the new Executive Committee of Tessenderlo Group. Further that and more back into the business. We have decided to invest in a new ferric chloride production capacity for our common sit in Loos in France. This ferric chloride capacity expansion will allow the Loos set to be one of the largest in the world to produce coagulants for sale in the European market. We believe that it is a predominant market for us going forward. And as the demand increase, we will seek to increase the capacity. The works will start at the end of this year, and we anticipate a first startup at the -- during 2026. Our U.S. plant in Defiance is on schedule, and the plant will be delivered by the end of 2024. This plant will work for our agro business, producing the likes of Thio-Sul, KTS and K-Row, so we expect the first batch of production by the end of this year, although the first results will be feasible in the 2025. We are very happy to be able to offer a new production facility in this region of the world, very close to the Midwest agriculture communities. But we are not only building in the U.S. for the agro sector. We're also building a plant in Geleen in the Netherlands, also predominantly to produce Thio-Sul. This plant will be ready earlier than the one in the U.S. and should be operational right before the summer or are at the early start of the summer and will contribute for about 6 months to our results. Our new headquarters for Picanol in leper, Belgium are being finalized. And by the end of 2024, we plan to move the old headquarters from Picanol to the new ones. And this is on schedule and on budget as well, which is important. We'll go then to the 2023 results and the main operational figures. Revenues came to EUR 2.928 billion, down 11.8% compared to the pro forma figures or adjusted EBITDA came to EUR 318.7 million, down 32% -- 31.8% from the pro forma figures which is in line with our outlook announcements last year. Our EBITDA margin for the whole group is about 10.9% compared to an EBITDA margin of 14% last year. We generated definitely cash flow from operating activities close to EUR 220 million compared to the same amount last year but we increased our capital expansion plans and disbursements. Our capital expenditures were EUR 178 million compared to EUR 134 million last year, half of those or a little bit more than half of those capital expenditures are actually due to growth and not to replacement of existing assets. So we still believe, definitely, in the segments we are investing it, and we see growth potential in most of the segments as we highlighted in our key investments a few slides before. Our group revenue per segment with the integration of Picanol has changed slightly where last year, we still had 69% of our total revenues coming from our agro and Bio-valorization business, it's now down to 52%. You see that the Picanol integration under the machines and Technology segments is currently falling. For EBITDA segment, we see that the Agro and Bio-valorization are still a large portion of our EBITDA contribution, 41% this year, but compared to 66% last year machine and technologies, basically the Picanol Group is accounting for 14% of our EBITDA today. So let me go a little bit more in detail on a segment per segment so that you can have a view on how those markets have developed for us. So we'll start with the Agro segment for which we count 4 different companies, Crop Vitality, Tessenderlo Kerley, NovaSource and Violleau. This segment has actually been impacted by negative volumes and will lower selling prices. Lower selling prices were also affected by high valued inventory that we were carrying on from 2022. This is where you see 18.5% top line decrease from EUR 974 million to EUR 793 million. You also see a decrease in our adjusted EBITDA because of a decrease in non-margin by 52.5%. Our adjusted EBITDA margin remains in the low double digits at 10.4% for the Agro segment compared to 17.8% last year. Within the Agro segment, the EBITDA of NovaSource increased, helped by the contribution of new products on the Bio-valorization segment, we have two companies, PB Leiner and Akiolis. There, we saw that actually the decrease and lower revenue was mainly due in the timing of the second half of the year, and it was due to both less volume and less pricing, so the decrease is not as harsh as in the Agro segment. So top line decrease is 9% or EBITDA definitely is decreasing faster because of an erosion of the margin and some inventory write-offs as well. Our adjusted EBITDA margin is decreasing from 14.3% to 6.9%. Our Industrial Solutions segment, which is comparing the company's DYKA, Moleko and Kuhlmann for which we have -- we are investing in a new chlorine fabrication process, as I mentioned earlier in this call. There, the Industrial Solutions segment helped basically study throughout the year. DYKA has suffered on the construction volumes in general as the entire European market has suffered and contracted in the construction sector. The revenues of Moleko also decreased because from 2022 -- at the end of '22, we stopped a contract with Barrick Gold, which was one of our major contracts but we managed to improve the margins at Moleko to mitigate the loss. DYKA also included new plants in France for the full year '23, which helped getting -- recovering some of the volume lost on the other plants. And Kuhlmann has actually been favorable for -- and a growth potential for the entire Industrial Solutions segment. Therefore, we even managed to increase our EBITDA margin and have a relatively similar EBITDA as last year. Our machine and technology segments, which comprise the Picanol Group that was merged in the course of 2022. So we're talking about the three companies, Picanol, Psicontrol and Proferro. There, we can see that we had lower volumes. However, Picanol Group managed to have a better margins on its sale. -- top line decrease of 15.2%, but we have managed to get an EBITDA margin of 7.3%, which is an increase compared to last year of about 41%. The T-Power segment, T-Power, relatively stable segment. However, we were impacted by higher efficiency payments linked to gas prices in 2022 with very high gas prices, which we didn't have in 2023. We are still operating in the gas tolling agreement with RWE and we will continue to do so until mid-2026, RWE during the year as decided not to exercise its option to continue the gas tolling agreement or extend the gas tolling agreement for the next 5 years. We are currently assessing and exploring options for the plant beyond the period of 2026. Our adjusted EBIT to profit in details, our EBIT amounts to EUR 120.1 million. We've got some small adjustments here and there or finance cost and income have a net value of minus 3.6. This is a difference between our interest expenses, interest income or foreign exchange translation as well as a profit on the sale of shares of Retail Swiss company shares that were held by the Picanol Group to come to a profit of EUR 114.4 million. We also managed during the course of the year, not only to generate operating cash, but to reimburse all that and to go from net debt to a net cash position, where you see the adjustment, last year, we finished the year with a net debt of nearly EUR 60 million. And now we have a net cash position of EUR 10 million. In the meantime, we purchased shares our own treasury shares for an amount of EUR 32.4 million, and we paid a dividend to shareholders. So even by spending EUR 72 million to remunerate our shareholders and to have one of the record CapEx years ever, we still managed to generate cash going forward and value for the company going forward. Our outlook for 2024, and some of you might say we are somehow conservative. But we believe we are realistic. Our current outlook and as we see the market is relatively stable operations and that we do not expect big variations between the EBITDA of 2023 and EBITDA or adjusted EBITDA for 2024 but we will continue to monitor the situation. And in our call in August for the half year results, we will give you an update on where we stand. Given the results of the year, we will propose to the shareholders at our Annual Shareholders' Meeting to pay -- to approve a gross dividend of EUR 0.75 per share. Our annual report will be available on the website as from April 5, which is next Friday, together with our sustainability report. And I will finish off by giving you some update on the financial calendar we have decided to organize an analyst and asset manager day here in Brussels on April 29, for which we will give you further details later next week. The Annual General Meeting of Shareholders will take place on May 14, and our half year results are due on August 21. I will give back the word to you, Luc.

I think you did very well for the first time here at the company, and you already mastered our figures quite well. So thank you for that, Miguel. So let me first tell you that some kind, this may surprise to you, I'm amazed with the results that we were able to achieve last year despite of all the headwinds, we were confronted with and I will go more in detail to this right now. As you know, we have 5 segments, and so we have the segment Industrial Solutions, T-Power and within that technologies where we may say the variances compared to 2022 compared to 2023 are minimal. So let me then focus a little bit more on the Agro and the Bio-valorization segment. On the Agro and the Bio-valorization segment, what you will see if you add up the EBITDA, the EBITDA of both segments in 2022 was EUR 287 million. The EBITDA in 2023 is EUR 132 million. No, that is almost half or a little bit more than half. And so thank you for listening to what I'm going to explain to you. I'll try to do it in detail, so you really understand what dynamics are playing in the market and for our company. But like I said, also in the market because this is not limited to our company. So let me first explain to you why in 2022, we had such strong results and much higher results in both of these segments. Well, if I would call it like I watched to the phone, it was a course that we were writing with the bike, we were going down, and we had the wind at the back. This is really what's happened in 2022. So in 2022, we had a higher intake from our customers in respect of others and our customers building inventories as they were seeing that the prices were going up. In Flemish retail [indiscernible], that is definitely something that we solve with the customers that they started piling up inventories because they said, "Oh, my god, prices are going up, let's fill up our warehouses." This is not kind of one for us because we had also keep inventories, and we were able to sell that with strong margins for sure, contributed in 2022. And then even in the production of 2022, we were still taking advantage of our purchase contracts, which were there at the lower levels and so by having these good purchase contracts that also contributed to high margins in 2022. In 2022, we had a minimal to, let's say, no impact as expect -- respect of the inflation as a consequence of the COVID and the war in Ukraine. I would like to remember everybody at the beginning when the war in Ukraine started, we all thought it's not going to be the [indiscernible] conflict. The bio sector was running [indiscernible] was going very strong, we were getting extremely high prices for all our fabs going into biodiesel. And we were also getting very good pricing for our biofertilizers that were increasing and selling. At the same time, like for our PBT plants, we were getting a very cheap repriced products. All of that in the positioning of the company, like we have been doing over the last years into moving the company into a greener company, more bioproducts, less CO2 and which is really going into that direction and the biofuels for the green transition for biodiesel et cetera. So all of this led to a very strong 2022. Then come 2023, what happened? While we were confronted with inflation. Inflation that really started to be very strong. I think you all will recall that in the beginning, people were saying also the feds and everybody inflation is going to be transitory. It will tick, it will not stay long. But to our surprise, and I think to most people, inflation became very sticky and became very strong. The inflation led to a lot of cost increases. So especially in the second half of the year, we had to -- we started in the first half of the year, but in the second half of the year, we had to increase our prices a lot. The price increases that came along led to seriously the resistance with the customers because the customers were afraid to buy. They had cheap inventories. And also, at the same time, cost of capital started going up and everybody started also working on cost of capital. And that is something that we especially saw in the second half of 2023, that customers were just buying hand to mouth and not anything more. On the other side, we had our suppliers. Our suppliers are demanding high price increases as the result of the war. The result of the war has been and the sections have had a serious impact on our business on 2023. And please allow me to walk you through the consequences. For decades for 40, 50 years, we have been buying our new rate of potash from the mines in Belorussia and Russia. I want to tell you the Belorussian mines are at 1,300 kilometers from our plant in [ Ham ], so in a sense close by when you look at the growth, right? So as the sanctions started to kick in, in 2022, we were very reactive and the discussion started on the sanctions and we still loaded up quickly our warehouses and a rented warehouses to fill up our warehouses in 2022 with the Belorussian material, and the Russian material. But of course, all of that disappeared in 2023. I had to get them to another place, fly into North America, and I had to beg to get MOP from Canada. So we had to change our supply chains, and that came at a high cost. At the same time, I must remind everybody as we make our MOP into SOP at the same time, we make the HCL, which is used also for water treatment production, which is a crucial thing in Belgium and also Belgium Prime Minister contacted us to make sure that we kept HCL flowing so that we can keep supplying ferric chlorides to the market, which we are a responsible company, which we did. And so to give you an idea on the logistics day, today, we are buying MOP out of mines in Saskatchewan. The product is getting loaded on unit trains from the middle of Canada is being transported to Vancouver -- in Vancouver, it is there loaded into vessels, then sit through the Panama Canal to Antwerp. Just imagine the cost that it takes and the working capital and the effort it takes to get the MOP as a result of the sanctions. Yes, in respect of the raw materials for the Bio -- valorization, also there the raw material prices at a certain point, quadruple, it is no secret that the pig herds are being reduced in Germany, in Holland, in Belgium and yet the producers of gelatin are all fighting or less raw materials and this led also to a high increase. High increases, which we then pass on to the customers, but then the customers went on the buying strike because the equipment support, we pay with high prices and also they were working on their working capital and reducing their inventory. Then in respect of the bio market, what we have seen is that the consumer and times of more economic hard hit turning away from the value market and in buying less by product. Also, this resulted for us in drop of sales of bio fertilizers and was a very severe headwind for our company. So all this combined, more expensive raw materials, expensive energy, upgoing labor prices make it ideal that we had a drop in earnings. So then when we talk about, for instance, Asia, in Asia, where we have our competition, for instance, from Japan, what did we see there? In Japan, we saw no inflation. In Japan, we saw in 2023 negative interest rates and we saw a yen tumbling down. I think today, the yen is at 165 against the euro where it has been years ago when we were having very strong results 100 against the euro. So there also, we had a headwind in competition. Yes, there is the emerging markets and the financial constraints and emerging markets. Our working capital in local currencies, both the Turkey, South America and emerging markets evaluated because of the currencies in these countries that evaluated. Again, there's not a headwind that we were facing. Also, credit correct with customers. We are seeing that in emerging markets, Customers find it very difficult to get credits and even so into Turkey lately now up to 70% interest rate. All of this is having a severe effect -- so I hope in a nutshell, you kind of understand the dynamics that happened in 2024. What I must say at the end of the day that I am pleased with the results that we have been able to achieve and to me, there is a huge gratitude that goes through all my colleagues and collaborators here at the group which were so productive and so hard working to navigate all these headwinds and all these difficulties that we have. So now looking forward, and what are we expecting looking forward? I'm sure you're all interested in that. So for 2024, we are expecting the slight pickup of the market. We see green shoots, we see an improvement in the market, but this is gradually and we want to be careful. Secondly, I must tell you that sanctions are still a big headwind for European companies and especially the big headwinds for our company. Where at the beginning, we saw that the sanctions on the MOP was working in some way where production capacities in Belorussia and Russia reduced because they could not sell the product. This has today completely reversed. The mines are shipping MOP from Belorussia and Russia worldwide and renting again at previous volumes. These volumes are then shipped to all countries except Europe. All of Americas Asia and Middle East, and then we have consulted to compete against these products, while they have a lower cost because of sanctions, they sell cheaper and we are working with higher costs. However, since the quality of the products that we make and that we already focus on quality, we still see that we are able to sell and that we are even able to see some progress in the market. But I think this is something that we could not underestimate what our investment industry is confronted with in Chemicals, it is, first of all, for nitrogen, for urea, you need ammonia 40% of the ammonia capacity in Europe is currently timely because of the expensive gas prices. So this is really a challenge for the chemical industry and I think for our industry as a total, it is kind of underestimated the cost of the war and the associated sanctions, which really apply to European companies and not to other companies in the world, even from statistics and shipping statistics that we follow, North America is buying more fertilizers from Russia than ever before. So the trade flows keep going, where we and Europe are not getting -- benefiting from these separate flows anymore. But having said that, I remain positive. I believe in our company and I believe in the strength and the ability of our people, hardworking and also smart working our R&D and our product development. For 2024, we're expecting that the first half year will still be under pressure that we see gradual improvement towards H2 because in H1, we are still plucking out expensive inventories from last year, which are being sold at bad margins. However, we are starting to replace these raw materials, these inventories with a better lot raw materials. We have this mentality of this company of -- that we focus on what we can do and that we -- which is what we have impact and then try to manage the things on which we do not have impact like the world and the trade wars and the sanctions and the inflation, okay? I find that our outlook is that we are presenting to you as a good one. In view of all the headwinds that we are facing, and I'm very motivated I always say we are a strong company. We have a strong balance sheet, but these are not the strongest company that survive. These are the ones that back themselves to changing situations that will survive relative with that spirit and that mentality that we are looking with confidence into 2024. So this is -- I will stop here now. And now we will open the floor for questions. I give it back to you.

[Operator Instructions] We will take the first question from Line Wim Hoste from KBC.

I have quite some questions. Maybe I ask them one by one. First, can you comment a bit on the weaving machine business? I think second half results showed a significant drop versus first half. And my impression was that your order books were in relatively good shape. So can you maybe elaborate on what happens in the Machine & Technology division? And also the outlook for that business, how well filled is the order book, what kind of margins do you expect for '24?

So on the business side, what I can tell you, I even have customers that I'm seeing tomorrow in [indiscernible] is that -- in emerging markets, the customers have been confronted with financing problems, okay? You should understand then that -- the textiles are mainly produced in low-cost countries, and it are especially the lower-cost countries that have had to ask for help, [ IMS ] help to defend our markets, which made the availability of hard currency wasn't there. So this is something which is not limited to Picanol, of course. This is something that the whole textile machinery making industry is confronted with. As you know, I am a Director at Simatex and the President of Simatex. The machine maker Federation. In that respect, I have a good view on European markets and world markets. And so what we are seeing at Picanol is something that we see in the whole -- in the whole industry. So now we feel there are also some green shoots but it's still too early to comment what is going on there. So -- but for sure, the availability in the market has reduced. But also what is somewhat troubling us is that the drop in the yen, the Japanese yen where we have our two strongest competitors on our edge machines being Toyota and [indiscernible]. Even when I look at the numbers because they are listed [indiscernible] is making a loss. Despite the advantage that they have or no inflation and the GPM. But to summarize, I think we have seen the deepest in the market. And I think from here onwards, it will progress, a lot will depend also on the strength of the U.S. dollar, this may surprise you, but we find that if the U.S. dollar remains strong. And if interest rate cuts do not occur in Europe and the U.S. as planned and the dollar remains strong, that remains a handicap for investments in emerging markets.

Okay. No, that's clear. Then I have another question on the outstanding shares. I think, yes, there's a big portion of your capital still in Verbrugge shares. I think previously, it was hinted that because of the fiscal arrangements this would not be immediately canceled but at a later stage. So I was wondering if you could confirm that's still the plan? And by when that cancellation of those shares might happen?

Yes, Wim, indeed, this is what we communicated earlier, and this is still the plan. But there is a process that we need to follow. And we expect that we will cancel those shares before the end of the year, in the third or fourth quarter of this year.

Okay. That's clear. Then a question on T-Power, if I may. Can you elaborate on what the options are for you? And also now that the tolling agreement has been stopped. So I think it's still 2 years to go before the contract to end, but what kind of options are you looking at? And also, does this halting of the tolling agreements change anything to your ambitions to build the second gas-fired power plant in Belgium?

Well, if I may give some clarification on that. Then of course, our tolling agreement is still running until end of June of 2026. So we still have time to investigate the optimal options going forward after June 2026. We are in full process of looking at all these options. And hopefully, this time next year, we can -- which will then still be plenty of time, we will be able to shed some more light on this. But currently, we are investigating all options. In respect of the new gas plant, despite us having our permit, you may know or you may not know, but we had an appeal. And you know what drama happened with INEOS here in Antwerp, and we didn't want to have a problem with that ourselves. And therefore, that project is a nice until we understand clearly what that is going in respect of eventual investment into it this will rather be -- this will only be considered if we are convinced that will be a profitable investment for the company. And in that respect, it will depend on what the request, what the auctions will mean with respect of capacities being auctioned going forward. But I want to make clear, we will not do adventures or crazy things. We will, in that respect, always work from a safe situation for the company.

Okay. Understood. And then the last question for me would be on the inventory write-offs. I think the press release mentioned that there was a EUR 15 million inventory write-off taken in Bio-valorization. I was just wondering if there's also that kind of impact in other divisions accounted for in '23 or if it was just purely on Bio-valorization?

Well, it's -- indeed, you're reading our press release quite well. We have Bio-valorization is making up for basically a little bit more than half of the total write-off, but you will be able to read more in details in our annual report next Friday.

We will take the next question from line Christian Faitz from Kepler Cheuvreux.

One question remaining, please. Can you please elucidate by your taxes were so low in '23 also your tax rate in relative terms? And what we should assume for '24 as a normalized tax rate?

Yes, we can elaborate about that. Well, we've seen that our tax rate, we're paying our taxes everywhere we need to pay. But indeed, we are using our deferred tax options to minimize our tax rate, but our theoretical tax rate is 26% for the group.

There's no further questions at this time.

Well, thank you, [indiscernible], for dialing in this morning and this afternoon, depending on where you are. Thank you for the interest in our company and remain assured that we are all doing our almost best and working day and night to serve the community to serve all the stakeholders of the company and to make step-by-step progress. Thank you all.

Thank you very much.

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