Earnings Call: Q1 2021

May 6, 2021

Ladies and gentlemen, welcome to the conference call of Alstom Group AG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Andreas Niedermeier, who will lead you through this conference. Please go ahead. Yes. Thank you. Good morning, everybody. Thank you for Joining us today, and welcome for the Q1 analyst call. As always, we start with an executive summary here And then move on to the figures after some strategic topics. At the end of the presentation, we will be available for questions. And so let's Keep the disclaimer here and go directly to Page 4. So yes, so Page 4 should be available now. And here, we start with So this year has started extremely positive for us despite some background noise. With record sales And a very strong EBITDA, we started the year with a strong tailwind. We are seeing a noticeable recovery in the market environment Across board, especially in the automotive and the steel industry, we are equally successful in further developing our pharmaceutical portfolio Products with BioSelect for RNA test and our dicern diamide for metformin. CreaPure, hard hit last year by the sudden decline in training activities, is back on the growth path Because customers shifted their purchases to the high quality clear pure available from us, from Altsken. And even our fertilizer business, Polka, has grown compared to last year because farmers appreciate more and more the various positive aspects of What we also see, however, are turbulences in the commodity and logistic markets. When a ship is stuck in the Suez Canal, you hold your breath for a moment. But we have been able to absorb everything So far through forward looking management of the supply chain. And this is, of course, where the strength of our Verbund comes into play Because we produce our essential raw materials in the Verbund production in house and can steer them through all production stages to the product with highest demand. What continues to balance is, of course, the pandemic with home office, Testing arrangements and other organizational measures, this is increasingly putting a strain On the team, but motivation is high, and we have started into one of the best quarter ever. And what happens next, you may ask. And therefore, I hand over to George. Yes. Thank you, Andreas. As frequently reported in recent quarters, the nitriles business has developed very favorably. In summer 2019, we successfully commissioned the first expansion phase, which we were able to utilize very, very quickly. Ongoing inquiries from the pharmaceutical and biocide industries have prompted us to start the next expansion step. The CapEx is expected to be around €12,000,000 which will result in a capacity increase of about 50%. The annual sales potential associated with that depends on the product mix and is comparable to the investment amount at least, But in any case, more than EUR 10,000,000 and up to EUR 20,000,000 depending on the product portfolio. In addition, our team has achieved Sensational things. Despite corona, we are on time and on budget for the investment. The plant is technically complete. The test runs are currently underway, and we will be commissioning the plant on time in May. The capacity utilization for the second half of the year is largely secured. So this will be done one of our next growth areas. But what was the investment rationale and what are the products and in particular applications behind the name Mistrales? We have vast experience in this gas phase process. And via ongoing improvement, we make certain that we are a benchmark for the market. Our process is continuous, Solvent free and therefore sustainable. We are seen by our customers as a very reliable source of raw materials Made in Germany. But production aspects are only the basis. On the market side, There are developments that support our decision. Many customers search for a robust supply chain And AltsChem as the sole non Asian supplier of nitriles is a central piece of this strategy. Nitriles are in high demand for various aspects of our daily life. They are used in pigments in automotive coat tanks. The brilliant colors, for example, of the pigment red 254 Are still replacing older and highly toxic heavy metal containing pigments. PR254 even has a premium name. It's called Ferrari Red. As population grows, innovative crop protection solutions are required. Michells serve as building blocks or even solvents in a multitude of established and novel insecticides, Fungicides, herbicides or biocides. Temperatures are on the rise And so are the numbers of sun hours per day. UV absorbers have become established to protect from sunlight. Many of those require nitriles as raw materials. But the most important and ever growing end market for nitriles Our active pharmaceutical ingredients. Available for many years, but still a preferred solution for cardiovascular Diseases are the class of the so called Sartanes. They are based on nitriles as key starting material. The excellent purification possibilities implemented in the first expansion phase give also access To a class of new HIV drugs. So you can see an exciting field of applications, But let's get back to the numbers now with Andreas. Yes. Thank you, George, for this market information. I think that's a very interesting thing always where these chemicals are really used. Yes, now we are back on the Facts and figures. In the Q1 of 2021, sales jumped by 10% year on year to EUR 104,000,000. And in absolute terms, the 2 segments, Specialty Chemicals and Basic and Intermediates, contributed almost equally to the sales growth. The significant increase in turnover also had a positive effect on EBITDA in the Q1 of 2021. This has EUR 16,700,000 And that's €4,400,000 or 35.8 percent higher than in the same period of the previous year. In addition to pleasing revenue development, especially for the high margin prep materials ratio and the moderate increase in other expenses items Also had a positive effect on EBITDA. Supported by the positive product mix in terms of margin and still favorable raw material prices, The EBITDA margin has now reached at a level of 16%. Earnings per share rose from €0.43 to €0.78 And the increase is mainly caused by the very good earnings situation. The overall growth is volume based with a growth rate of almost 13%. What cost us profitability compared to the previous year, however, were unfavorable exchange rates, especially the U. S. Dollar. This single effect was minus €1,700,000 in the P and L. All in all, we can be quite satisfied with the start, Even if there is still potential for further optimization. So much for the big picture and the overview. Let us now analyze In more details, the different segments, and therefore, we jump directly to Slide 10. Starting with the Basic and Intermediate segment. This segment comprises the production of Basic and Intermediates products That are either required for the manufacture of specialty chemicals or marketed as stand alone products. The products are used In a variety of applications, for example, in agricultural, steel production and the automotive industry. The Basic Intermediates segment also achieved more than a pleasing growth in sales in the Q1 of 2021. Here too, we succeeded in convincing the market of our products on a broad basis, starting with our solutions For hot metal desulfurization, sulfur for pharma and dicium diamide as an essential raw materials In the pharmaceutical industry, up to our nitrile product range as well. The backbone here Is a stable, reliable and efficient product network within the NCN chain mainly. Even after more than 100 years of production experience, we were able to implement further process cost optimizations extremely successfully In the last 6 months and thus continue to positively influence the segment's results. Through digitalization and big data evaluation, We managed to achieve a higher output from constant raw materials and capacities. We are critically observing The extremely volatile development on the raw material and electricity market so that we can minimize the risk. At the same time, we ask our customers to share The burden of input cost increases. In this overall environment, we managed to stabilize margins on a good level. At €2,800,000 EBITDA was around 47% better than in the previous year, and this segment can therefore be summarized Sales are largely driven by volume and margins significantly improved mainly by economy of scale. So that's it for the Basic and Intermediate segment. Let us now move to the next page. This is the Specialty segment. Only to remember, as always, the Specialty segment produces and sell high quality specialty chemicals such as Cremino, Crepure, BioSelect, Iron and Dormex to name but a few. And the development within this segment was extremely pleasing. We were able to further increase the utilization of almost all plants compared to an already high level in the Q4 of 2020, So that we are increasingly stretching the capacity limits in some plants and additional business requires investment In addition to the consistent implementation After Cremino's strategic intensification of our market presence, we successfully drove forward the strategic realignment of our market presence in the area of nutritional supplements in the Q1 of 2021, so That we can report sustainable growth rates for ClearPure among us. Beyond ClearPure, we continue to work hard on of Liberdura and core products intended for end customers, and we are convinced that we will be able to offer interesting end customer products Good growth rates even though we may not see significant returns for a few years to come. In the area of Chemical Solutions, We were able to successfully continue the Made of Bavaria trend from the previous quarter in quarter 1 2021 And place new products on the market as well as win new customers for existing chemical solutions. Comprehensive Sustainable process cost optimization support the segment's positive EBITDA margin development as well as we have already heard from the Basic and Intermediate segment. We were able to deliver the pharmaceutical and agricultural Specialty Products BioSelect and Dormex Worldwide at a stable and high level. Changes in the COVID-nineteen test procedure will not leave our BioSelect Quantities unaffected and have continued to establish further application for those products in parallel. On the one hand, The EBITDA reflects the strong operational business development across all our business units in the segment. And on the other hand, process Cost optimization can further underpin this trend. Increases in raw material costs as well as an unfavorable Euro, US exchange rate burned the results but have been successfully compensated so far. So let us now move on to the 3rd segment here. This is Others and Holding. This segment comprises all activities not allocated to the other segment. And this segment was also able to essentially repeat The development of comparable quarter of 2020 in the Q1 of 2021. The customers of our chemical parks Purchased our services in the 1st 3 months of 2021 at a similar level as in the previous year. There were shifts between some services. For example, in quarter 23 of the last financial year, we saw higher demand for storage capacity, while in this quarter, we saw more production volume related The segment's results reflect a price increase based on planned cost increases, and it also shows That the cost discipline measures introduced are having the desired effect. All in all, sales Of €6,500,000 were approximately at the previous year's level and earnings of €400,000 were in line with our expectations here. So then we have prepared some additional information on our balance sheet. In total, balance And what has been the major changes within assets? So tangible assets were more or less stable on the level of €194,000,000 Therefore, this is a good sign that CapEx was more or less on the level Of depreciation, inventories were stable despite its good sales. And in the area of receivables, in addition to reporting dates related Recent, among other things, the considerable increase in quarterly sales led to a significant increase in spread receivables Up to €47,000,000 here. So what was or what can we discuss on the liability side? Equity increased By €14,000,000 to €82,700,000,000 This led to an equity ratio of 1% in previous year. The long term Interest rates increased from 0.5% last year and are now up at the level of 0.8%. And this results in a decrease in the pension provision, namely on the level of €132,900,000 And the cash effect was only at the level of EUR 400,000 for the pension. So I think that's more or less The balance sheet analyzes, let us now show or have some words on the cash flow. This is printed down at the Page 16 here. So the cash flow development continues to be very positive. Cash flow cash inflow from operating activities was more or less On the same level as previous year, this reflects on the one hand the strong operating business and on the other hand an increase in net working capital and here In especially the receivables. The cash outflow from investing activities increased sharply by €5,000,000 compared to the same period Of last year, almost doubling the main investment projects in the Q1 of 2021 related to the expansion of capacity And the improvement of the Alp Chem's sustainability, the capacity expansion of the Nittrals plant was significantly advanced And is nearing completion, as we have already heard from Church. And construction of the new The regenerative thermal oxidizer plant called RTO plant supports Alstom's path to greater sustainability And investment activity in the same quarter of the previous year was not influenced by major individual investments. So Alstecam's financing activities in the last 3 months were focused on the scheduled repayment of loans and the repayment of leasing liabilities. Overall, this led So from my point of view, that It's for the cash flow analysis. Let us have now a few words to our targets And the situation here. On the target list, we are well on our way. With the general development towards sustainability, we have also included this topic at the top of our target list. Here, all analyzes are running at full speed, and we expect to be able to present the detailed goals And an initial implementation plan here as well by the end of the year at the latest. And here are a few comments on the other targets on the list, starting with the commissioning of the next capacity group. We have talked about Nitral's. The project It is on time and on budget and will go live in May. Increasing our involvement in sales in the pharmaceutical market here, We have already delivered in quarter 1. So we are good working on the topic of creatinine for healthy nutrition via Liberdure. We are on the track, but we are in the process of finding the right B2C market approach as well. And we think that we can report additional information latest on September, I think, to this topic. As well as staying on top of the growth of Crea Immuno, we expect growth to pick up significantly after the Corona topic. And not to forget this against the background of the pandemic events of COVID 19. Unfortunately, this still has a significant impact on our day to day business, but we are still Hi, motivated. So finally, let us move to the outlook on Page A team here. On this page, we would like to confirm our outlook for the year 2021 with regard To sales and EBITDA development on the sales front, we assume that the start up of nitrile production and the topic of preamino We'll again ensure significant growth from the second half of the year. The 1st month of this year have already confirmed A very positive sales trend, and we therefore believe that we can move into the direction of EUR 400,000,000 in sales. On the earnings side, we will also grow. However, we already noticed that prices on the raw material markets are rising significantly across board, which is why we were so rather cautious in our forecast here and expect an EBITDA of €50 €7,000,000 With an excellent start to the year, turnover and EBITDA are expected to develop At the upper end of this forecast and eventually could be a little bit higher as well at the end of the year. So that's it for the quarter one analysis from us. At this point, we would like to thank you For your appreciated attention and are now at your disposal for possible questions, if there are any. Thank you. We will now begin our question and answer session. Our first question comes from Stefan Torgornis, Berenberg. Please go ahead. Your line is now open. Hello to me, Gerhard Algonov. Yes, we can hear you. Hello, Gerhard. Okay. Hi, it's Gerhard Algonov. Hi, Hello. I've got a couple of questions, please. Maybe I missed it at the very beginning or at least in your release, you were talking about repositioning of Kria And leading to a sales uplift of this product, can you explain a little bit what you've done here in terms of marketing and strategy? Yes. I think we commented on it, and it comprises a couple of things. First is the recovery of the traditional business to a very, very big extent. But in parallel, We have also prepared new markets. We look at creatine for vegetarians in functional foods, Where we have initiated developments, we're also looking for creatine into drinks where we have Initiated development and those have progressed and showing first signs that it is accept or can be accepted in the market. And what we have seen is a change in the market, a mind change that the market want to have the high quality products And ask more on the quality than on the price level. Okay. Thank you. And then again, maybe on raw materials and electricity, can you, first of all, have us maybe year on year At the moment in Q2, how on average, what do you see as rises in raw material prices and electricity prices? And also in electricity, how far are you headed at the moment? Yes. So the main topics on the raw material prices On the coal prices and the electricity prices, for sure. For electricity prices, we can say that we have prepurchased the main quantity For 2021, so therefore, we are not really influenced from this market increase. So we have seen at the Stock Exchange EEG level last year of approximately €40 per megawatt And the actual prices at the level of €60 and therefore, we are only influenced for Very small quantity because we have already purchased a big amount last year. So that's it for the electricity. For the Coal information. So from our point of view, we had a real good situation last year, And we are back on more or less the level of 20 eighteen-twenty 19, where we have already seen this high level of coal prices. So the supply chains are there, and we have the possibility To have all the coal on our production available, so therefore, We have all the raw material available we need for production. Would you expect a negative impact Already in Q2 to be seen, so like a sequential downturn in Q1 because of higher raw material on EBITDA? Yes. We will see a little effect In the beginning with the quarter 2, because of accounting issues, we had Very low prices in the stock, and this stock is empty now with the low prices and the higher Stock level prices will come into the balance sheet, respectively, into the P and L with beginning of quarter 2, yes. And maybe a last question on electricity. The CO2 certificates, is that included in your electricity cost? Or do you need to buy certificates? Or how do you So principally, we purchase electricity on the stock market, and there are the in the price Is the CO2 already included? And we can apply for some Yes. How to compensate for some compensation for this CO2 prices Because we are classified as a so called carbon leakage company. And therefore, we can apply for some compensation here. Thank you. Yes. Our next question comes from Peter Harshwell, Fin Capital. Please go ahead. Your line is now open. Yes. Thank you very much for having me asking some questions. It's also about the supply chain and the inventories. You mentioned that you have reliable supplier relationships, and you also mentioned the importance of the fulfillment supply. But just later on, you say that when you cut back that a little bit when you say that in the Coming months, it will show whether the constraints in the raw material markets are subject to normalization. So could you give us an indication how unnormal these markets have been for you in the Q1? So I mean, when we look at the raw material And logistics market, that is in quite a turmoil for various reasons. I mean, Andreas spoke about the blockage of the Suez Canal, which is part of it, but it goes further and much beyond that. I think you remember the cold flow into the U. S, which we had in February And impacted many chemical productions in the southern part of the U. S. It impacted, for example, 2 of For major acetic acid producers who are still rebuilding their production and had a ripple effect on other raw materials as well. So as a consequence, I mean, in Europe, we have counted that there are more than 40 chemicals now on force majeure, And that pressure will remain. In addition, the charges for containers, In particular, out of China are skyrocketing. So the freight costs are tripled or quadrupled. And it remains to be seen to what extent this will ease up and will impact us On the Q2, so far, we have tried to stay ahead and schedule raw material purchases and logistics early. We do want to think that there will be a relief in particular on the logistics situation in Q2 or Q3. And sometimes it's even beyond our control because containers are booked on ships And on short notice, skip from those ships. And that are some of the uncertainties, which Makes us a little bit cautious on both the logistics and sales side and also on the cost side And keeps us within the range of the EBITDA expectations. So the only information we want to avoid is that The analysts quadrupled the Q1. That's the only information. Absolutely, I understand that. Yes. Well, I mean, this force majeure is mentioned Many companies right now Yes, but we are really safe. We have no problem with what measure and topics. We have all the raw materials available. But we are only a little cautious because of the market development here. Absolutely. In the basics and intermediate segment, you mentioned that you try to pass on Pass ons, Yes. But when I look at Page 12, I see that the prices came down by 0.8%. I know this is a special It's open 4%, I think. Yes, open 4%. Yes. Yes. Usually, we are successful to pass on higher raw material costs to our customers, Yes. But it's not possible for all contracts because sometimes we have contracts running For 1 year or half a year, and therefore, it's not possible to change the prices within short notice. Yes. So could you tell us about the fraction of the sales that have an escalation clause? Is this more normal or is it the It cannot be assessed with that criteria. I mean, we try To have contracts with customers with raw material clauses as we get closer to the Basic raw material chain. So in our initial products, where costs Are really the driving factors. We have clauses in the contract where we can adjust prices based on raw materials. But as you add higher value to it, the cost portion is getting lost also in the sales discussion And the prices then are more made by what is the situation on the market. And they are it's Hard to pass on each and every increase. I think it was important to mention that A little to a certain extent, the product mix change and that had also an impact on the price development. We have mentioned that, for example, the carbide business Has increased significantly. And then there, we are much further much closer to raw materials. And the impact of carbide is much bigger in the Q1 than it used to be in the Q1 of last year. If you need the information for your model, I think it's yes, you can imagine Approximately onethree of the contract or onethree of the turnover is linked to price direct price increases or raw material deposit. All right. Okay. Thank you. And the final question, if I may. You mentioned that you want to achieve your sales targets organically. On the other hand, I read that you want to use the share buybacks as an acquisition currency. Does this mean Is it solid for me to assess that in 2021, we're not planning any acquisitions? So there are always some rumor on the market and there are always some acquisitions under progress, but We don't see a bigger acquisition and a bigger growth topic for 2021 years. Okay. Thank you. Bye bye. Okay. Thank you. We haven't received further questions. I will hand back to the speakers. Okay. Thank you very much for your questions. Interesting discussion from my point of view. We can now offer you the opportunity to Visit us virtually at the conferences as shown above here on the Page 2019, and therefore, I think I have to change to the Slide 2019 here. Yes. You can return at the Annual General Meeting on May 12, what is already next week, And we are pleased to invite you to this event as well. Stay safe and sound. Stay in our good graces. And goodbye and thank you. Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.