Earnings Digest — Synthos tyred out; Difficult start for Pfleiderer

Arturo Alaimo
+Alexandros Chatzigiannis
+ 3 more

15 June 2023•7 min read

Despite a busy earnings schedule, 9fin aims to bring you up to date with results you may have missed during the week.

Below you will find a TLDR earnings summary for selected companies in the European HY market. The summary aims to capture earnings performance, recent updates and any guidance mentioned in the call.

In this week’s edition we cover Graanul Invest, Pfleiderer, Synthos, Allwyn, Lutech, and David Lloyd.

9fin clients can see how bond and loan prices have changed following earnings releases, all earnings flashes here and transcripts here.

Graanul Invest

Arturo Alaimo | arturo@9fin.com

Links: Transcript & Playback; Earnings Review (available to 9fin clients)

Estonian wood pellets producer Graanul Invest (B1/B+/BB-) suffered from lower demand and declining pellets prices in Q1 23. Revenue increased 21% YoY to €151.8m, mainly helped by Q1 22 being comparatively weaker, in last year’s context of raw materials shortage impacting production and time lag in pricing pass throughs.

Customers overstocked in 2022 ahead of the winter months, worried about supply shortages and also pellets prices going up. However, winter was warmer than expected, which did not help customers de-stock, resulting in lower demand in Q1 23 and volumes declining 15%. The lower demand across the industry led to a sharp drop in wood pellet prices after Q4 22.

Market conditions for Graanul’s raw materials (biomass), however, have improved in recent months, with prices starting to decline. However, the decline has been slower than the slowdown in wood pellet prices, resulting in lower EBITDA levels (-15%) and margins (13.9% vs 18.9% in Q1 22). Management expects EBITDA performance to improve in the next quarters, supported by a reduction in costs and rise in volumes, but did not provide guidance for the full year.

The lower demand resulted in high working capital during the quarter. On the other hand, capex was cautious in Q1 23 which helped Graanul deliver a free cash flow of €15.3m (vs €8.9m in Q1 22). Management guided FY 23 capex to be €10-€12m, of which €5-6m would relate to maintenance.

Pfleiderer

Arturo Alaimo | arturo@9fin.com

Links: Transcript & Playback (available to 9fin clients)

Wood products manufacturer Pfleiderer (B1/B/B+) had a difficult first quarter in 2023, with slower demand impacting both revenue (-8.7% YoY) and EBITDA (-18%) performance. However, management noted Q1 22 to be a stronger comparator, as the company and its end-markets only began to feel the impact from the Ukraine-Russia conflict in the second quarter.

Revenue was also impacted by the group changing its energy supply strategy. During 2022, the group was buying energy needed for the production cycle at 2021 prices, thanks to forward purchasing agreements. Owning three CHP plants, the company was also able to produce energy and sell it in the market at the elevated prices of 2022. This has now changed, according to management, as they are using their own energy in the production cycle and only selling the excess, considerably reducing sales volumes.

Inflationary pressures have taken a toll on consumers, as people are less able to afford expensive home items, particularly impacting the kitchen and furniture markets. Rising mortgage rates have made new constructions and renovations too expensive at the moment, driving volumes down by 20%-30% in the construction market.

Despite Urea and Melamine prices, accounting for the majority of Pfleiderer’s chemical costs, largely decreasing YoY (by 45.9% and 32.5% respectively), this also drove down selling prices in the Silekol segment, as pricing mechanisms in customer contracts are based on commodity indices. On the other hand, wood prices — the main raw material for Engineered Wood Products (EWP), continue to increase YoY (+50%), and 4% compared to the previous quarter.

The group has attempted a few strategies to maintain a stable performance. Firstly, the higher wood price has been fully passed on to customers, while it also benefitted from energy trading with €5.7m contributed to EBITDA. Finally, it also started implementing a cost savings program, aiming to boost performance by €20m by 2023 year-end, and supporting Adjusted EBITDA with €6.7m in Q1 23 only (33% of FY 23 target). Nonetheless, the large drop in volumes, -11.9% and -9.5% in the EWP and Silekol segments respectively, completely offset these benefits, and margins declined to 14.1% from 15.7% in Q1 22.

Synthos

Alexandros Chatzigiannis | alexandros@9fin.com

Links: Transcript & Playback; Earnings Review (available for 9fin clients)

A sharp decline in European construction activity since June 2022, alongside weaker tyre replacement markets hurt chemical manufacturer Synthos’ volumes and performance in Q1 23. Construction is a key driver for insulation materials, and new construction slumped in the face of rising interest rates last year. Despite weak volumes across its business lines (15% drop YoY), the company is pushing ahead with capex plans this year aimed at capacity expansion, though squeezed margins on one form of synthetic rubber (ESBR) led to the closure of a plant in Czechia this quarter.

Management acknowledged lower profitability (Adjusted EBITDA -52% YoY) and margin contraction (10% vs 17% in Q1 22), and said they do not expect a volume recovery in the coming quarters, in contrast to their Q4 expectations. In absence of any material improvement in market conditions, management guided the FY 23 EBITDA to ballpark between PLN 1bn-1.1bn (vs PLN 2.03bn in FY 22).

Growth capex associated with capacity expansion and improvement of the sustainability profile remains a priority, with capex projected to peak by the end of 2023 and guided at PLN 700m-PLN 800m for the year. Free cash flow turned negative due to declining EBITDA and inventory build up for ESBR products (elastomers used in tyres, produced by the now-shuttered Czech plant) and seasonality swings in WC. The company also paid a PLN 152m penalty enforced by the European Union for an alleged pricing collusion that involved Synthos’s acquired styrene business from INEOS.

Allwyn

Nour Rahmi | nour@9fin.com

Links: Transcript & Playback, Credit QuickTake (available for 9fin clients)

Czech lottery operator Allwyn’s (Ba2/ BB/BB-) Q1 23 revenues surged by 80% on the back of acquisitions of the UK National Lottery and Illinois Lottery, with EBITDA also increasing by 28%.

The company’s organic performance was impressive this quarter, with revenues and EBITDA excl. acquisitions up 17% and 20% respectively. This underlying growth is the result of a strong online growth momentum, and resilience of the business model against inflation and weak consumer sentiment. Demand for Allwyn’s lottery product is aided by ‘low ticket prices’ and the fact that its players ‘play by habit’ according to management. This resulted in strong cash flow generation with FCF of €322m on a consolidated basis, a 28% increase from Q1 22.

Recently the company issued new SSNs to repay Apollo’s investment and refinance debt, taking pro-forma leverage to 2x in December 2022, which compares to 1.7x as of March 2023 (PF for new issuance and acquisitions). Management appeared comfortable in reaching the 2.5x leverage target, and would not mind ‘going a little bit above that’.

The group confirmed that future dividends would be in line with the past range of €200-300m per year with the next distribution planned this quarter.

David Lloyd

Hee Li Leung | heeli@9fin.com

Links: Transcript & Playback (available for 9fin clients)

Health and fitness club chain David Lloyd (B3/B) delivered a 17.4% increase in revenues in Q1 23 despite a record-high price increase of 12.5%. Price increases were accepted by customers better than the group had expected, and management appeared happy with flat Adjusted EBITDA levels of £39.7m (vs £39.4m in Q1 22) considering inflation and the rising cost of living context in the UK, as well as an £8.8m YoY increase in utility costs.

With energy market prices significantly down since FY 22, management noted that if they had bought energy at the end of Q1, it would have been £15m cheaper than their hedged portion (90% for FY 23). The company is planning to take a more disciplined hedging approach for FY 24, with 41% of energy costs hedged, and is expecting to use three times the amount of electricity it currently uses as part of shifting its energy source from gas to electricity.

Capex investments (£31.5m vs £22.1m in Q1 22) mainly involved the premiumisation of existing clubs (£10.7m) and new club openings (£11.6m), as part of the group’s growth strategy. Investments include 21 spa retreats as of March 2023, with 27 additional retreats planned to be opened by December 2023. The first nine spa retreat projects are already operational and yielding an attractive ROI of 67% (81% if adjusted for energy). Management guided FY 23 capex to be ~£100m, while also mentioning more new openings are in the pipeline for FY 24 and FY 25.

Net leverage remained flat at 4.2x, and liquidity strong, standing at £141m, including an undrawn £125m RCF.

Lutech

Yusuf Sule | yusuf@9fin.com

Links: Transcript & Playback (available for 9fin clients)

IT-service operator Lutech (B2/B), which manages cybersecurity and digital infrastructure, continues to deliver impressive performance. Earlier in March Lutech successfully closed the acquisition of Atos Italia for €205.9m. The now rebranded Lutech’s Advanced Solutions complements the company’s digital offering, and focuses on Telco & Media and Energy & Utilities verticals.

Revenue increased +22.7% YoY to €143.6m for the quarter, with Atos contributing €5.1m. The top performing End-To-End segment (+31% YoY, 50% of revenues), which focuses on digital infrastructures and IT security drove strong performance, but the comparison was made easier by a chip shortage in early 2022 which deflated Q1 22 revenues. Adjusted EBITDA was similarly positive, up +29.5% to €18.9m supported by revenue growth, and cost saving initiatives.

To fund the Atos acquisition, the group issued a €100m TLA, drew €26m of RCF and received €70m cash equity injection. Despite the increase in debt, leverage improved from 4.23x in Q4 22 to 3.69x in Q1 23. Liquidity was also strong, with Lutech ending the quarter with €70.8m of cash and €69m of undrawn RCF.