Earnings Call: H1 2021

Aug 17, 2021

Okay, great. So welcome everybody to another Zoom call of Ring Mittal, this time SE. For the first time, you might have noticed that we changed our legal status. So today, we're going to have a short presentation on the very basic figures, preliminary figures that we have on H1 2020 1. It's been a fantastic quarter. I try not to use the word record quarter, but it actually is. So we're very delighted how our company developed in the past 3 months, and hopefully, this will continue for the rest of the year. I'm going to pass on to Christophe Petrie, our CEO now. Good morning, everyone, and thank you for joining our Q2 call for our preliminary figures. Yes, as Ingo said, we are all very happy and delighted to introduce you to our extraordinarily good figures. And I would start immediately already with the revenues of Q2 or of the half year. Please bear in mind, just as a small disclaimer, it's not the final, final figures yet. It's the preliminaries. The final figures we will publish on the 16th September with a full report then. So even for the Q and A later on, I might not be able to comment on each and every detailed figure yet. But yes, I mean, you all know that usually our preliminaries don't change significantly. Maybe 100,000 up and down on the revenues, but not more. So group revenues are significantly up close to 26%. We are at €78,300,000 in the meantime now, while actually the total output was even higher, close to €80,000,000 The main drivers were, of course, a significant upbeat in steel prices, but also a significant volume effect and a more favorable US dollar, which we have seen. Despite this revenue increase, we were actually able to keep our gross margin very stable. We were relatively stable, which is the main driver then in the end for a significant upbeat in the EBITDA in our operational profitability, which is up 74% and we are now at $11,300,000 for the half year. The EBITDA margin is at 14.3%. And now in the meantime, more or less within the original guidance, which we have given in the year 2016, which showed an EBITDA margin of 12.5 percent to 15%. So we are close to the 15% already. And This is, in the end, an effect of the great work on the shop floor and further investments which we have done into automation. Within industrial, I think we can go to the next page, Ingo. Thank you. Within industrial packaging, the main growth engine are, as mentioned, the raw material increases. It's not only steel, I have to say. It's also the plastic prices, which affect our inliner revenues. The raw material price effect is 15.3%. But also, and this is important to say, it's the organic growth effect, which especially comes from the ring business, and this is close to 10%. I have to say in that respect that the increase in ring volumes is definitely more than 10% because our in liner business is only stable. So therefore, the increase in ring business is really extraordinarily good. Also within industrial handling, we see that there is a significant and very pleasant upbeat now as well. Volume increased by 11.9%. In that respect, I would like to mention that the steel price effect in industrial handling will come only in the second half of twenty twenty one. Usually, we have longer term agreements with the customers and therefore steel price increases will come into effect in the second half of this year. Yes, then industrial packaging again very good extraordinarily good performance. And especially as mentioned within the ring business, we have seen an upbeat throughout the regions. Very strong were the United States and also Italy, but to a certain extent then also Germany. In Germany, what we have seen is that especially our lid business actually was improving predominantly. We have seen nearly a double in turnover or in output within the lit business and that gave an extraordinarily good push. The in liner business was actually comparably weak compared to all other segments. We have only seen a stable performance of the round bottom liners and form in liners and nearly no business within the beer tank liners. So this is significantly down also compared to the prior year. This is especially due to the lockdown situation, which we have seen in the beginning of the year. It now, since I would say June, slowly picks up again. But this together led to only a stable or even a slight downturn in revenues in the inliner business. The bag in box systems, however, improved. We have shifted some of our work into the first half of the year. Usually, the big season is the Q3 for the bag in box systems and we were able to shift already some of our business into Q1 and Q2. This will help us to have most probably a record year in the bag in box systems this year as well. In industrial handling, I've mentioned already we had a very good Q1 and Q2, especially. The business not only stabilized but improved significantly. The EBITDA margin of 13.3 percent is now more or less on group level. And there is more to come in the second half of this year. I've mentioned already steel price increases will come into effect. And we see an upbeat nearly from each industry that is the forklift industry and the tractor industry. They are both really pushing the business significantly. This all in all then leads to a significant increase in our guidance. This is I mean, the first half of twenty twenty one is already very good, but also the second half of twenty twenty one, we expect to be extraordinarily good. This is the reason why we are increasing our guidance significantly to €150,000,000 to €160,000,000 in group revenues. The EBITDA, we even increased from €17,000,000 to €19,000,000 for the year 2021. Again, it's always the same. This is based on the current material prices. This is based on current exchange rate situations and is now including the business of Hosto, where I am today, by the way. Just for your information, I'm in Neuenkirchen at the Hostel plant looking for the situation here, how the whole integration process proceeds. We are very happy with our acquisition of Hostel. Business is running very well and we are now looking a little bit closer into the integration process and also into identifying the synergies and shifting some production volumes from one plant to the other to have some synergies in transportation costs. This is the situation from our side for now. And I would now be open for Q and A. Everybody who's interested in asking a question, please just unmute yourself and feel free to ask or raise your hand in the chat and ask something in the chat. I can then post the question for you. Hi, everyone. I would just kick it off, if that's okay. And first of all, Christoph, could you quantify how free cash flow looked like in the first half? Do you already have that number? No. Unfortunately, this is the number we don't have yet. But most likely, I mean, if you look at our operative cash flow, at least in the past, it was pretty much on the EBITDA level and that's what I expect for the operational cash flow for the first half year as well. And the free cash flow, I mean, we have invested in the first half of twenty twenty one already in the inliner business. We were upgrading our beer tank liner machine again and we were upgrading some other units and some other machines there. I would expect that free cash flow should be anywhere in the region, I guess, around the SEK 7,000,000 to SEK 8,000,000, but that's only a guess, Christian. I cannot tell you the exact Sure. And could you and the second question, could you you were talking about efficiency gains at all the plants and automation. Can you quantify the impact from efficiency gains in the first half compared to last year's first half? Well, this is actually nearly impossible to be very honest because I mean last year, we have seen a very challenging Q2 and we have seen a lot of movements within volumes and therefore it's not really possible to quantify it. We have certain areas where we can quantify something and this is, for example, scrap rates. This is, for example, productivity that is rings per paid man hour and all of these things. That's something what we can quantify. That's figures we don't publish, to be honest, but this is something where we can quantify something. But there are other things which is just nearly impossible to quantify. In the end, if you look overall, the main drivers, less scrap rate, higher productivity, higher rates per paid man hour, less quality complaints. Those are the drivers where we can really put, let's say, a price tag on. But that's figures we don't want to publish because this is really very sensitive data and something what at least our competitors and even our customers should not know about. Right. And then the third one, you're also mentioning and you last said that M and A, another acquisition might be possible. What exactly, I understand that it might be delayed and might happen in 2022 because of corona, but what exactly are you looking at? Is it another player in the ring business in Europe or Northern America or an expansion in the inliner product portfolio? We are currently more focusing on the inliner portfolio to be honest for two reasons. One reason is with the acquisition of Hosto, I would say more or less we have now, let's say, finalized the acquisition process at least in Mainland Europe. There is nothing more we can do or we should do. Looking to the United States, I would say pretty much the same situation. There is maybe one more competitor we could have a look at, but that's not the case for now, especially since we are still restricted from traveling to the United States. The inliner business, we are looking at a few potential acquisitions. And however, we are not in the position to be at a, let's say, a final stage yet. This is due again to travel restrictions, but also, let's say, due to the market in general. I mean, everyone was suffering or was afraid to suffer last year and now this year everything is nearly booming. So price expectations might go through the roof and we don't want to buy at a peak. So we are actually quite easy on that to say let's wait and see how things develop. We don't want to feel under pressure regarding any acquisitions. And maybe just one last one. This year is going to be fantastic, also you're benefiting a lot from the steel price effect and the fact that you have flocked in prices quite early. What are your expectations for next year if you can already make some pretty basic ones? Is it going to be a big drag on growth? Or would you be able to compensate that by more flexible contracts? Or how do you expect this to go on in the next 1 or 2 years? I would divide it a little bit into the different segments we have. Looking first on the ring business, I would I mean, I cannot predict how steel prices will develop. I think we can all read in the newspapers more about it. And I don't want to I'm not in a position to have accurate or more accurate data than the journalists maybe. Therefore, I would always refer to public information. But what is quite clear, we have done our homework in the past and looking at the profitability of the group. I don't expect that profitability should go down to the levels which we have seen in 2019 2020 again, because we are now at a different stage and on a different level. If steel prices come down and volumes as well come down, maybe we see, of course, a small decrease in profitability. But basically, I would not expect to come down to the levels which we have seen before. We are really at a new level now and basically we have done the homework in the ring business. Looking at the inliner business, I would expect actually that business continues to be strong and it should increase even because we have seen that there is always a certain delay in that area. We have seen it last year as well, While we have seen the biggest downturn in Q2 in the general industry, Our in liner business was still booming and we have seen the downturn then in Q3 and Q4. So we always see a certain delay and I expect the business to pick up again or even further than in next year. Depending a little bit on potential lockdown situations, I mean, again, we are significantly down in beer tank in liners and don't forget, this is roughly 20% of our business. And then industrial handling as well, that's depending on the general situation of the economy and especially within the forklift industry. I do not expect that there is a significant downturn. I would even expect that business is continuing to be strong. Okay, great. That will be it for me for now. Maybe then I can add on Claus Brunner from Blato. First thing is, if I look at the first half figures and compare them with what you gave out for the Q1, the Q2 must have been extraordinarily good. Is that the kind of profitability level that you expect to maintain over the rest of the year? Or is the first half raise, which is already quite good. Is that the kind of tempo that you would expect to go forward? And my second question would deal with the acquisitions a little bit more. Number 1 is, what is your war chest and what are you prepared to pay for potential targets? Thank you. So the first question, absolutely right. Q2 was extraordinarily good. What you have to keep in mind for the rest of the year is now in Q3, we are in the holiday season, especially in Southern Europe. We are fully closed in our plants in Italy, Turkey and Spain. We have even closed for the first time ever our plant of industrial handling for, I think, a week now due to holiday seasons. And therefore, the Q3 is usually much slower in revenues already and in output than Q2. Q2 is usually our really strong quarter. So therefore, the run rate which we have seen in Q2, we will not be able to maintain for the rest of the year. I would rather say that we are more on the level of the combined Q1 and Q2. That's what I would calculate with. However, what you should keep in mind at least is steel prices are on another level. In Q1, they were about to increase. Now we are I mean, they are further increasing now and we are on another level. So revenue wise, we are definitely not going down for Q3 and Q4. That's our expectation. Regarding the acquisitions, I would say our situation or our position is pretty much unchanged if I look into our willingness to pay certain purchase prices. First of all, we I mean M and A is a significant part of our strategy and we are still really focusing on further acquisitions. But very important is we don't feel obliged or forced to do acquisitions. If we don't have a right target or if a target is not priced well, we don't do the acquisition. We like to take the opportunities which are on the market and purchase price or values we see we feel comfortable with multiples somewhere between 6 8 times EBITDA. It depends a little bit on the growth rate of the company. We have seen some companies which have a growth rate in double digits. Maybe for these companies, we would be willing to pay an 8x EBITDA multiple. In a very extraordinary situation, maybe 8.5, but for sure not more than this. So we would always like to see, well, in the end, an impact on our own multiple and our own valuation. So we don't want to see a multiple dilution with an acquisition. And looking into the size of the targets, we have done some smaller acquisitions in the past and the experience we've gained with this is that pretty much the work we have to do is maybe even higher or even more work than doing a bigger acquisition because in the smaller acquisitions, which we have done, we don't have a professional, let's say, leadership team. So there is a lot of management capacity from our core business, which is occupied then with the acquisitions. And looking at bigger targets, we could expect a more professional leadership team and management team, which could be implemented into the group. Therefore, yes, we are currently looking maybe at a little bit bigger acquisitions for the future, which doesn't necessarily mean that the next acquisition will definitely be a bigger acquisition. But I would say the tendency goes more into this direction. You very much. One addition, if I may. Do you find targets at these prices right now? Because I'm hearing that prices are pretty high at the moment in the M and A field, particularly given that private equity is going around with big money and looking for anything that's not up on the trees by if you count by 3? Thank you. Yes. That's exactly the situation which we experience as well. I mean, usually we would base prices on the past, on the prior year. And no one obviously is willing to accept that currently. And fortunately, we are not interfering with private equity currently, but we see that price expectations from the seller side is very high. And that is basically the reason why we hold our foots still and wait and see how the situation develops. Great. So are there any further questions? If you're interested in raising another question, please just unmute yourself or raise your hand in the chat or place your question in the chat and I'll place it for you. This is Peter at Palm Harbor Capital. Just a quick question on industrial handling. Could you go into a bit more detail of how that turned around and so rapidly? I mean, is it just the Jungheinrich plant that just magically got better? And I think you mentioned land or I guess the agricultural bit. Is there a particular client or something going on there that changed sort of drastically? Or could you just a little bit more color there? And then do you see that S and P is sustainable going forward? Well, I wouldn't say that it changed drastically. It was in development, which we have seen throughout the year, and it really got better from month to month and the outlook got better from month to month. So pretty much we have well, first thing is we have invested into a new machine generation there and have upgraded the machine pack significantly. The new machine is in place since I think it is February and running really running on a serial production level since I think it is around April. And this already gave an improvement. But from the customer side, on the top line, we see that really throughout each and every customer business is picking up. If we look at the OEM business, especially with Jungheinrich, business is going very strong and the forecast is really strong as well. But also looking at the restraining systems, which we have, which we supply usually to dealers, this is picking up. And also in the agricultural business, we have customers like it's Deutz and we have especially John Deere. They are all running very well and the demand is very strong. So there is not one customer and not one plant which is asking for supply or for increased supply. It is really throughout the whole industry. Great. So we have 2 questions here in the chat. The first one both come from Chansu Tata from Warburg. The first one is, what is the positive effect from steel prices on EBITDA level? I think that's pretty hard to explain for us and basically impossible. But I'm also curious what you have in mind on that in H1. And which steel price scenario have you affected into your new full year guidance? Let's start with this one maybe. Yes. I mean, for the full year guidance, we have based everything on the current steel price, which is the steel price of July. I think it is July, August, That's the steel price which we have taken into account. We have seen that we will see some further increases in the end of Q3. So in October, we will see some further increases. This has been taken into account as well. So everything is based on the situation which we were able to foresee at the end of July, beginning of August. That's the cutoff for the guidance. And yes, regarding the impact on EBITDA from steel price increases, to be very honest, this is absolutely impossible to quantify that. And to be frank as well, there is not that much of an effect because we are usually only able to pass on the price increases. And what we have done this year, which is different to the years before, we have pulled out of most of our contracts where we were fixed to the index. This applies at least for all European plants, not for the United States. In the United States, the index really showed pretty much the same development as the real purchasing prices have shown. But in Europe, the index was delayed significantly. Now in the meantime, it is on the same level, but the development was different. So we have pulled out of contracts and we were able to pass on price increases, let's say, earlier than we were able in the past. That's pretty much the difference. Okay. And then the second question is regarding the beer check-in liner business. You mentioned the recovery since June. So what have you reflected in your full year 2021 guidance from this product group? Usually, we are at annual revenue of €3,500,000,000 maybe close to €4,000,000 in revenues with the beer tank liners. We believe that we will be able to generate revenues within the full year of maybe around 1,000,000. That's, I think, the run rate we were calculating with. So there should be an effect in the second half of this year, but we are definitely not back to the levels which we have seen in the past. This will still take some time. For us, it's a matter of time only. It's not that the market in general is gone, but I mean it's obvious people don't go to festivals, People don't drink as much beer as they have done in the past in bars or restaurants and so on. So we are suffering from that still, but we see a slight improvement now. So maybe to elaborate a bit on that from my side, we still have a very cautious view on 2021 here, and we do not want to see a Q4 going into the complete opposite direction and then have to correct our guidance. That's why the guidance includes everything we see so far to the current date. So that means until the end of Q3. So whatever happens in Q4, that is not included in the guidance. And we've also stated that in the ad hoc release from yesterday. So of course, if everything runs as smoothly as it did so far in the year, this gives still a chance for an upside. But so far, we just keep it from the view we hold on the level of end of September. That's the guidance that we're currently talking about. And that's why also a beer tank in liner recovery is not really factored in only to a very small extent. So are there any further questions? Then please unmute yourself or raise your hand or ask a question in the chat. Well, it looks like this is not the case. So of course, whenever you might have another question, then please just call me or Christoph directly. We'll always be there to have another conversation with you. And so far, thank you for participating in this call. I hope you like the figures that we presented yesterday. I'm going to pass on to Christophe for the final words of today. Thank you, Ingo. Yes, well, thank you, everyone, for joining our call. And again, on 16th September, we will publish the final figures. I think, Ingo, we have planned some roadshow events as well coming up. So if you Right next Monday, we'll be mostly in the Scandic area with a little bit of France. So whenever somebody is interested in a conversation, please just notify. Okay. And then yes, thank you from my side. All the best. Have a great day and see you next time. Thanks. Bye bye. Thanks guys. Bye bye.