Earnings Call: Q1 2015

Apr 14, 2015

Welcome to the conference call regarding the publication of Garesheimer AG's Q1 Results 2015. At the moment, all participants have been placed on a listen only mode. The floor will be open for questions following the presentation. Now I hand over to Mrs. Anke Leonardz, Corporate Senior Director, Investor Relations and Creditor Relations at Garesheimer AG. Good afternoon and welcome to our Q1 results conference call. With me today are Udo Roebuck, our CEO and Reiner Bouchon, our CFO. As we did in the past, we are presenting a set of slides to accompany our remarks on this call. The slide presentation, the press release and the quarterly report are posted on the Investor Relations page of our website at garethhammer.com/investorrelations. Please note that this call is being webcast live and will be archived on our website. Before we start, I would like to remind you that the presentations and discussions are conducted subject to the disclaimer. We will not read the disclaimer, but propose we take it as well into the records for the purpose of this conference call. Our agenda for today starts with the presentation by Uwe and Heine. After that, we will enter into a Q and A session. With that, I hand over to Ulf. Thanks, Anke. Good afternoon, everybody, and thank you very much for joining the call. Our Q1 came in as expected, with a slight decrease in revenues on an FX neutral basis and a strong improvement of our adjusted EBITDA margin. So there's no change to our guidance. On top, we benefited from currency tailwinds, given that the strong U. S. Dollar currently drives revenues and earnings when compared with our guidance, which is based on constant currencies. We are on track after Q1. Good performance in the Q1 2015 is what we have on slide 4. More important, the adjusted EBITDA increased substantially by 7 point 2%. Sorry, I got lost here somewhere in my notes. So before we go to the EBITDA, which I like to comment more on, we start with the revenues. Revenues rose by 1.4 percent to €301,800,000 Excluding exchange rate effects, we recorded organic revenue growth of minus 2.4%. As predicted, revenues in the plastics and devices increased only slightly in the Q1, plus 0.3% organic, but showed a much stronger mix with higher parts sales offsetting lower tooling revenues from last year's record high in Q1. Demand for devices remains strong and our pipeline for new projects is exciting. In Primary Packaging Glass, revenues came in flat compared to prior year's Q1. As expected, the weak demand in the U. S. Continued through Q1 and resulted in an organic revenue growth of minus 4.9%. We expect that starting in Q2 demand will increase and we are confident to achieve our revenue targets for the year. Revenues of our cosmetic glass business are recorded mainly in Europe and came in at about prior year's level. In Life Science Research, we recorded only flattish revenues on an organic basis. As Life Science Research is almost a pure U. S. Business, reported numbers reflect strong tailwinds from the U. S. Dollar. More important, now I come to the point to the part that I like most, the adjusted EBITDA increased substantially by 7.2% and the margin improved to 16.9%. In plastics and devices, profitability benefited from the favorable revenue mix with tooling revenues just on normal level, so that the margin improved significantly from 15.5% up to 18.5%. In primary packaging glass, we managed our cost down to lower utilization levels and kept the margin with 19.1% almost stable quarter over quarter. In the course of the portfolio optimization as announced last year, we took 1 U. S. Furnace permanently out of service. The improvement of the adjusted EBITDA translates all the way to the bottom line. Net earnings per share increased by 20.7 percent to €0.35 Adjusted net earnings per share were up 13.2 percent to €0.43 And we managed our operating cash flow to a substantial increase from minus €1,700,000 to €15,900,000 quarter over quarter. The first half of that improvement was due to €7,800,000 lower CapEx spending compared to prior year. That's however only a timing effect. We continue to execute our key initiatives in plastics and devices and primary packaging glass that we have addressed during our last two calls. And we keep pushing all of those projects that will drive revenue growth and efficiency improvements over the next year. In fact, we are making excellent progress on both investments and growth projects. Here on Slide 6, we have a few picture documenting that. As you know, we are about to build a new building for a new inhaler in the U. S. We started last year and now in Q1, we have successfully completed the setup of the clean room in our PEACH pre plant. Next steps are hiring and training, installation of equipment and then we will start the complex validation process. In the Czech Republic, we are enhancing our production capacity for 2 existing inhalers. Here we started to build a new production hall last year. As of today, our check plant has basically all installations done and now go through training and then validation. In India, we completed construction of our new facility for violent ampoule manufacturing. Next steps here are again hiring and training then machine installation and validation. These initiatives are all very complex. In contrast, the installation of new equipment in primary packaging glass tubular glass seems to be an easy one. But far wrong, but also PPG, we started to implement our global machine strategy and we have to perform training and validation for each and every machine to minimize the start up costs, while we are maintaining high service and quality levels. All in all, the Q1 was in line with our expectations. We expect an acceleration of the growth rate throughout the year. With this, I would now like to hand over to Reinhard, who will run you through the financials before I will come back on the outlook. Thanks, Uwe. Ladies and gentlemen, welcome all from my side. Let's have a look at the revenue development and the relevant effects for the first quarter 2015 on slide number 7. On group level, revenues were up by 1.4% and amounted to €301,800,000 Excluding the effect of especially the foreign currency movement, organic revenue growth quarter over quarter was minus 2.4%. So we had a strong and positive currency translation effect, which can mainly be attributed to the U. S. Dollar. You can see this pattern of stronger reported growth rates compared with the organic growth rates in all of our 3 divisions. Let's start by having a look at the Plastics and Devices division, where growth came in at 1.5% helped by currency translation. The organic growth rate amounted to 0.3% and reflects strong growth in part sales especially in inhalers. Also Primary Packaging products made a contribution to growth. But the tooling and engineering revenues, which have been abnormally high in the prior year's Q1, came back down to a more normal level, thereby almost offsetting the growth effects coming from the product side. In the Primary Packaging Glass division, the pattern of soft demand that we saw in the second half of the financial year did actually continue in the Q1 2015. While positive currency translation effects did push revenues growth into positive territory, organic revenue growth was minus 4.9%. It was caused by softer demand and the effect of the furnace that we had permanently closed at the end of the previous financial year, since it did not meet our targets. To offset this effect, we extended the holidays of our plants in the U. S. And finally, in Life Science Research, the strengthening of the U. S. Dollar quarter over quarter caused a 12.4 percent rise in the reported revenues in the Q1 2015. But this positive development was poorly thanks to the euro U. S. Dollar foreign exchange rate movement. Organic growth was actually negative at minus 1.7%. The softer demand was partly offset by the extension of planned holidays in our U. S. Plant. So to sum it up, we saw soft U. S. Demand in the Q1, which led to lower organic revenues. However, strength in key currency, most of all the U. S. Dollar pushed the reported growth rate into positive territory. Overall, this development in Q1 was fully as expected. So let's move on then to the adjusted EBITDA slide and that's slide number 8. Here the development in the Q1 2015 was positive driven by the markedly lower tooling and engineering revenues in the quarter, which have lower margins. The adjusted EBITDA margin in Q1, twenty fifteen was 16.9% compared to 16% in the prior year's Q1. The group's adjusted EBITDA came in at €51,000,000 in the quarter, above the number in the prior year's quarter where we had amount where it had amounted to €47,600,000 In the second line on the slide, you can see that the margin in Plastics and Devices went up from 15.5% in Q1 2014 to now 18.5% in Q1 twenty fifteen. This is primarily due to a positive mix effect coming from the aforementioned lower tooling and engineering revenues as well as the plastic primary packaging business. In primary packaging glass, the margin amounted to 19.1% and was only slightly below the level in Q1, 2014, which had been 19.6%. This means that our countermeasures in the form of our continued high cost discipline and the extension of planned holidays in that segment seasonality, weaker demand and the strong tailwind coming from the U. S. Dollar translation led to a flat margin quarter over quarter. Effectively, we achieved a margin of 12.1% for the quarter, which is slightly below the margin in Q1, twenty fourteen, where it had amounted to 12.2%. To sum it up, we managed to slightly increase profitability in Q1 compared to the previous year and that was achieved by a margin increase in plastics and devices as well as for our continued high cost discipline in primary packaging class. Now please move on with me to slide number 9, which shows the improvement of our earnings figures in Q1 20.50. 50. Starting with adjusted EBITDA, which was up 7.2%. We first of all deduct ordinary depreciation and amortization as well as the amortization of fair value adjustments. Ordinary depreciation and amortization went slightly up in the quarter, reflecting our high CapEx investments in our business. At the same time, the figure for the amortization of fair value adjustments was slightly lower and reflect the fact that some fair value adjustments have been fully amortized according to the depreciable life. So after these costs, EBIT amounted to €24,600,000 which is 13.1% above the figure that we recorded in the prior year's Q1. Then the next items are the net financial finance expense for the quarter, which slightly improved due to the lower applicable pension interest rate and the tax charge, which was a touch higher while the tax rate of 27.5 percent was still almost as low as in Q1, 2014, where it had amounted to 27.2%. The combined figure of finance expenses and taxes was slightly higher in the Q1 compared to the last Q1. But as EBIT was markedly higher quarter over quarter, net income still rose by an even stronger rate of 22.8 percent and amounted to €12,700,000 after €10,300,000 in Q1 of the last year. Accordingly, both earnings per share and adjusted earnings per share were up by 20.7% 13.2% to 0.35% and 0.43% per share respectively. So overall, on the earnings side, it was a successful quarter with good improvements in all earnings metrics that you can see on this slide. Let's then have a closer look at the key balance sheet and cash flow figures. Overall, we recorded a solid set of results meaning our balance sheet remains healthy and cash flow developed February. Total assets were up by 5.8% on the comparative quarter's end and that's coming from higher current and non current asset values, which was mainly driven by changes in foreign exchange. Excluding the positive effects from foreign exchange translation, the total assets figure would have been driven by 0.8%. Group equity was up by 9.2 percent to €623,500,000 most of the increase attributable to the positive development of group net income. Accordingly, the equity ratio rose to 36.8%. Net working capital was up by about €35,000,000 compared to the previous year's quarter. However, a lot of that was caused by the strengthening of the U. S. Dollar. And if we look at the average net working capital figures, this figure was only about £17,000,000 higher than the comparative figure for the previous year's Q1. CapEx spending was 7.8% lower than in Q1 2015 as 2014, but this is only a temporary effect as CapEx for the whole year will be spent as previously guided. And finally, looking at the key cash flow figures for the Q1, what I can say is that all of them are up. The reasons for that are first of all the higher earnings figure quarter over quarter and then for sure the lower CapEx spending and the lower buildup of foreign exchange neutral by net working capital compared to Q1 2014. So overall, the good Q1 performance is reflected favorably in the balance sheet and cash flow figures for the quarter. Speaking of cash, let's move on with me to slide number 11, where you can see our long term financing structure. It remains very solid and provides us with mid- to long term funding security. The interest rates are completely fixed and the long term bank debt and the bonds have residual terms of about 1 3 years respectively. As Aurel communicated on the occasion of our full year results conference, we intend to do a refinancing later in the year, of course, without touching the bond. The amount of cash and cash equivalents we had at the end of the Q1 was €67,600,000 and our revolving credit facility still gives us more than €160,000,000 drawn in interest. The net financial debt figure of €441,100,000 is higher compared to the November 30, 2014 figure of €423,800,000 The increase resulted mainly due to the strengthening of the U. S. Dollar. For an exchange neutral, the increase would have been only €5,200,000 Because our last 12 months adjusted EBITDA improved further since the end of full year 2014, the adjusted EBITDA leverage figure remained at a very solid level of 1.7 times last 12 months adjusted EBITDA. That means we still have a lot of headroom within the existing structure to continue to implement our growth strategy. Now before I hand it back over to Uwe, let me just wrap up the key points from my part of the presentation. In Q1 2015, we increased the operating profitability of the company by 7.2%. At the same time is true and the same is true for EBIT, which we managed to increase by 13.1% to €24,600,000 Also, we increased reported earnings per share by 20.7% and that's despite higher one offs compared to Q1 2014. And operating cash flow also improved markedly and was now clearly in positive territory in the Q1. So overall, we continue to have a very strong setup in place and that will enable us to execute on our strategy for profitable growth going forward. With that, I now hand it back over to Ulf. Yes. Thanks, Rainer. We'll now come to the guidance. In summarizing what I have said so far, Q1 came in, in line with our expectation and we fully confirm our guidance for the fiscal year 2015. As I have said, we expect growth to accelerate throughout the year. We expect organic revenue growth of 1% to 3% for full year 2014 and 4% to 6% in the year 2016 to 2018. We continue our strong focus on profitability. For the adjusted EBITDA, we reiterate the range of €255,000,000 up to 2 €65,000,000 at constant currencies for 20.15 and an increase in the adjusted EBITDA margin to a level of 21% by 2018. And we continue to invest into the future of our business with the market being in good shape and the mega trends of our industry supporting revenues at constant currencies throughout 2018. But we are maximizing the return of our products, while also improving product quality. We are well positioned for the years ahead and we have defined clear steps to ensure our continued success going forward. This includes expanding capacities at various locations and further standardizing our production technology, some of which were initiated during the past financial year and further progress is scheduled for this year. With that, I hand it over to Anke. Thank you for your presentation. We are now ready to take your questions. The lines are open. And in order to ask questions on a first come Daniel, number of Kvaerlik here. Thanks for taking my questions. 2, if I may. 1, with regards to the organic Q1 performance and putting this into perspective to the full year guidance and particularly looking at the Primary Packaging Glass division. According to my understanding, the Chicago Hates plant will largely be completely refurbished renewed in Q2, Q3, which could potentially burden the performance of this division in Q2 and Q3, I would estimate. So the earnings or the sales growth expansion is then largely coming from plastics and devices? That would be my first question. 2nd question is really a housekeeping item with regards to the tax rate, which was also well below 30% in the Q1. Is that something we should now also expect going forward in this ballpark? Thank you. Yes. Question number 1 is actually relatively actually it's relatively straightforward consideration if you look at the year. Number 1, keep in mind that primary packaging glass does not only include U. S. Business and not only a molded U. S. Business into Chicago, that only a certain portion of that. But you are correct. That effect is estimated to be seen mainly in Q3 2015. And as such, it was part of our guidance, which was seen as that. What we have seen so far and what I have said in the last call was that I continue to see a weak demand for primary packaging containers made of tubular and molded glass in North America in Q1. And I already see looking at the order status and the shipments in March that this will pick up in Q2 as we have expected. So we see the market development pretty much in line with what we have anticipated. From a cost perspective, keep in mind that we have in the U. S. Primary Packaging basically closed the furnace in Q1 and actually also had capacity down significantly in Q1. So that with the additional revenues coming into the next quarter that will also have a positive impact on the bottom line. But it is correct that from a performance perspective, Q3 will be impacted by the Chicago Heights furnace takedown. From the perspective of contribution of plastics and devices, We have always said that's a growth driver of the company. We have always said that we have a couple of issues that this year will impact the growth of that business. The 2 of those you know, The tooling, which you have seen the effect already this quarter, even though that from a mix perspective, we had an outstanding contribution of our parts business that shows in the margins. And on top of that, you know that we do not see the inhaler business growing at the speed we were expected to be. But keep in mind that the inhaler business still had an excellent growth contribution during this quarter. So yes, it is definitely correct that plastic and devices will continue to be the growth driver for Geller Summer also in the coming quarters. But the weakness of the primary packaging glass division should have seen it's low in Q1 and will accelerate growth in the quarters to come. Okay. Answering your question, the tax rate. Tax rate in Q1 amounted to 27.5% and we have some one off effects here. Main reasons are we have I can give you some examples. We have tax refund for prior years in China. We had income resulting from domestic production in the U. S. As well as we had a recognition of deferred taxes in France. So all this effect is roughly €600,000 altogether. And we also had last year a couple of special effects in the Q1. So the 30%, which we normally give you as a run rate is a number which I would work with for the year, because that's a normalized number which we normally use also internally. And I think that's fine because you can't really forecast tax rate going on further because you also can have tax authority discussions at the year end. So the 30% should give you a good guidance going on further. That could change in the future for sure if the emerging markets take a higher percentage, that's something perhaps for 3 to 4 years. Right now 30% is a good one. Thank you. Okay. Then talking to Heichler Key. Yes. Hello, gentlemen. I have a question or 2 questions, in fact. 1 on the primary packaging glass. You said that demand is likely or demand has as far as you can see in the order intakes has increased here. Does that maybe imply some structural improvement in the U. S. That you see capacities of customers coming back on stream on a larger scale? Is that basically the turning point for the difficult situation you encountered in the U. S. Previously? And then secondly, with regard to the furnace repair or the shutdown of the Chicago plant, that's obviously not a sort of standard furnace repair you are doing sometimes. So could you give us a feeling for the extent of the costs related to that shutdown? And when that would be booked? Is it fair to assume that it that will be booked in Q3? Or would you book provisions in Q2 just to get a sense for how that splits across Q2 and Q3? Thank you. Yes. Coming to the revenue question for PPG first, U. S. Business, it's a little difficult to for me to assess what are the reasons right now for the customers to order more. What I see is particularly in the lower value generic areas, much, much higher order rates than I have seen in the last quarters. And this could have multiple reasons. We know that some actually did have FDA issues, but some continue to have those. So I'm not really sure that this is they are out of the FDA issues reason. More likely is it that still a couple of inventory adjustment could have been done going into the year end, but the fiscal year. But right now, I would basically say that it's I really don't know since it I can exclude that it was shift of market share. So we see generally from a lot of customers definitely higher order situations in Q1 and in Q2. And from my perspective that is an encouraging sign. And it was expected since we could not assume that the low order rate would continue since the underlying demand of generic drugs in North America remains solid. So not sure that I can shed more light on this other than what the facts are that is that the order situation has significantly improved during Q2. On the furnace shutdown, yes, it is not a normal shutdown. Might take 60 days plus in start up curve. And most of the costs will be recorded in the Q3. That depends always a little bit on the timing when we start and when we finish. But Q3 is the best assumption that I can give you today. All right. And in terms of the extent of the costs, just to get a sense of that? I cannot disclose that. All right. Okay. Thank you very much. Afternoon, Charles. Dave Daniel from JPMorgan. Two questions, please. Firstly, are you seeing any opportunities for increasing your prices given you've had to increase your investment in quality? And secondly, following on from that, your depreciation and amortization, given your investment on the CapEx side, how should we be expecting the depreciation and amortization line to develop through this year and beyond? Thank you. David, I'll start with the price question. Actually, I like that question since we all want to see an increased value proposition translating in a higher value. I would frame it a little bit different since we have pointed out in our Capital Markets Day last year that we have a couple of new product lines out there in the offering that offer higher value product with a better value proposition for the customer. Those are those will actually sell at higher prices. But obviously, first, we have to go through validations, customer acceptance procedures in the respective facilities. That is nothing that I think makes a significant contribution already this year. But it clearly is our target that with the investments we do with primary glass, we offer higher value products that actually should translate in a higher a better pricing situation compared to a standard container. Yes. Depreciation, we had last year 6 0.8%. This year, it's a slight increase perhaps I can't give you an exact figure, but perhaps around 7%. And we are not expecting that to increase up to the year 2018 above 8%. So we will have a slight increase during the next years and percentage wise due to the fact that we have invested a lot in the past, but mostly in buildings, in machines, all the stuff which will be depreciated over a longer time period. Hopefully that gives you an indication for the next years. Great. Thank you. And then maybe just one quick follow-up. Just wanted to give us any color on how the 4th RDF line is ramping? Can you repeat the question? 4th RTF line. Yes, the 4th RTF line. Oh, the 4th RTF line. That is actually running quite well. It's we are very happy with the result and we are trying to encourage as many customers to close the line. And what we received back from customers is they are very happy with the performance of the line. So I'd say, so far the line is fulfilling the quality expectations that we were hoping to get out of it. And we hope that we will see more and more customers acknowledge that. Great. Thank you. Yes. Thanks very much for taking my questions. First question please. I wonder if you could provide a little bit more detail about the plastic product ramp up into next year actually. I think you've mentioned that this year is particularly burdened by slower adoption or launch of one of your customers for an inhalation device. I just wonder if you could share some flavor on subsequent to your discussions with that customer. Are you very sorts of revenues snap back or start to flow through more visibly into next year? And perhaps following on from that discussion, you can perhaps just take us through progress at Peachtree. So that's the first question please. The second question just again follows on from a little bit of the work going on the Chicago Heights. Is it a fair summary that the reason that you remediate that facility this year is really somewhat opportunistic given you're anticipating volumes from your U. S. Pharma customers? Presumably, this facility would have needed remediating at some point anyway. So perhaps if you can just talk around that. And when do you expect to roll out some of this machine upgrade to some of your other facilities? When can we start to see that activity? Thank you. Yes. I'll start with the plastic product ramp up next year with the customer there where we have reported the delayed ramp up here in continuous discussion. The actual situation I would describe as such there are no news to what we have said before, but we have a strong customer interaction to basically match their demand forecast, their marketing actions with our ramp up curve, we are basically adjusting that frequently. I mean, that is, I would say, a permanent discussion since it is extremely important for the customer if their marketing efforts of the product are successful, you know that they have product in the pipeline. So they work extremely close with us. So we at this point, we expect exactly what we have discussed during the Capital Markets Day that it is 1 year delay. On the PEACHTREE city, I'm a bit on the optimistic side to be honest. It goes well, but we are at the very early stages. We know the most there are a couple of predicted stages in an inhaler new inhaler project. Number 1 is the phase when we validate the product, which means you produce out of a lot of different mold parts and then you have to ensure you know that parts out of all molds can be combined in any possible way to a functional inhaler. We are not there. You have seen the empty facility. So that is one of the next steps. And then of course, we need to trust that our customer is successful in the market. So but the initial signs we see from the customer is that they are continue to be very positive with the product launch. And we have I would say, we are working on all cylinders, so to speak to get this project done. So I'm optimistic on that. On the Chicago high side, I think you made a very smart comment to be honest. It is a little bit opportunistic what we have done. We were planning to do it a year later. A couple of things happened. One of the patents we have filed a little early, so we could do that. The second is that the demand was lower than we have historically seen it. So we have actually a good window to do it for that. And that gives us an advantage in the marketplace. The technology we introduced here is actually partially already introduced in a few other facilities. Technology as well and the rollout since this is a Type 1 business that mainly produces containers for injectable has a mirror product facility in India, where we are implementing right now as we speak actually on a much smaller case since the furnaces are smaller an identical technological project. So the rollout is underway as we speak. Perfect. Thank you. And if possible just one very quick follow-up if I may. Obviously, we have seen some relatively favorable profitability mix dynamics in the Plastics and Device division as one might expect with a higher contribution from the devices. With that in mind and the fact that you anticipate a relatively decent rollout into next year as well, is there any and I appreciate you're not going to give guidance since 2015, but you've given a margin framework. But is there any reason not to assume operating margin progress into 2015 aligned with your broader margin expectations? Are there any events that we should know about that would otherwise sort of impact that sort of progression that appears to be apparent at this stage? Yes. I would say that at this time, I would advise everybody to stick to our guidance. We are certainly trying to implement improvements as quickly as possible. And I think once we are comfortable and we have enough favorable news, we would be glad to share that with you. But at this time, I think I would advise everybody to stick to the guidance. Great. That's it for me. Thank you. Are there any further questions? So this doesn't seem to be the case. And therefore, I would like to thank you for joining us today. Please note that we are going to publish our Q2 results on July 9, 20 15. Thank you very much. Have a great day.