Earnings Call: Q1 2021

May 6, 2021

Earnings release

So it's shortly after 2 o'clock now. I think I'll just start with the introduction and whoever joins misses out on me, but I'm not the important person here. So thanks, everybody, for joining our ring metal Q1 call, Zoom call today. I think we've really come out with some impressive figures, really good development of revenues and EBITDA. And the room is already filling up with investors. We've prepared a Q and A. Please feel free to ask your questions. Q and A. Please feel free to ask your questions. You can either then just unmute your line or type me the questions in the chat window, and then I will read them for you. So I'll hand over to Christoph now. Thank you, Ingo, and a warm welcome from my side as well. Thank you for your interest in ring metal. I would like to give you a short and quick overview of Q1, which indeed, as Ingo has mentioned already, is quite an impressive quarter for us. It's actually a record quarter for ring metal. And if we compare it to a very good quarter, it's quarter 1 in 2020, we see that the development really goes towards the right direction. Basically, our revenues are up close to 7%, EUR 36,100,000. The EBITDA increased significantly by 21.5%. The gross profit already increased significantly. The main drivers, of course, is apart from the general economic development is especially the steel price development, which we will see later on. One figure which is not shown here on the slide, but I would like to give it to you as well, we have it in our corporate news, is the EBIT figure. And the EBIT actually increased by close to 40% year on year. And as mentioned, it's quite impressive, these figures, and we are very happy with the performance of all of our segments in the group. The main drivers, well, yes, 1st of all, the differences from steel price effects, acquisition effects and organic growth effects within Industrial Packaging. We have zero effect from acquisitions. 2020 was the 1st year where we haven't done any further acquisition. And most of the revenue growth, as we see, comes from the steel price effect. Again, I would like to remind that Q1 2020 was already a very good quarter, and revenues were up significantly, EBITDA was up significantly. And the organic growth effect within Industrial Packaging is only 0.4%. One other reason why it is only 0.4% is actually the situation in the Industrial Packaging Liner segment because we are still not selling any beer tank liner business, which usually is around €3,000,000 to €4,000,000 per annum. This is missing out totally. And another issue is that especially customers, the drum manufacturers, they have to somehow reduce their capacities because they are not getting enough raw material. They are getting enough rings, but they have a lack of steel sometimes. And therefore, they cannot run on full capacity. However, their order book would allow to increase the capacity. Within Industrial Handling, we see that the organic growth effect is negative, close to 8%. We were focusing especially on higher margin business in this area. And the so called OEM business was not as attractive and not as good as in Q1 2020. Again, 2020 already was quite a good quarter. And what we see is and we have discussed it in several roadshows and investor presentations, is the development of the steel price. And let's say, the raw material mega cycle overall, which we see. And we were really able to participate from that development, and that was the main driver to the revenue increase. But also, we were able to pull out of nearly all of our existing agreements with our customers. So we have pulled out of all the MEPS index relations. That was necessary because MEPS was not reflecting the actual price developments on steel. And we had several discussions with our customers and we were able to pull out of all the MAPS agreements. We are only sticking to the CRU index in the United States. And apart from that, we have switched all of our customers to spot prices month by month. This will continue most probably throughout all of Q2 and Q3 as well, and we are currently in discussions about Q4. Basically, we have realized that even in the long term, the MAPS Index here in Europe does not reflect our actual purchasing level. And we are only trying to get away from MAPS Index with most of our customers where it is possible. With the big customers, Greif and Mauser, we will most probably not be able to do that on the long term. But at least with all the other customers, we will be able to do that. Ingo? Thank you. The different segments, you see that especially within Industrial Packaging rings, we had a very, very strong business, a very strong growth rate within the revenues, and this really applies to all locations. So starting in the very West with the United States, we see revenue growth and volume growth. We see a very strong business in the UK. We see very good prices, but quite stable volumes in Germany. And we see increasing volumes in Italy and quite stable volumes in Turkey and in Spain. And in China, actually, volumes are slowly increasing as well. One very important aspect is that the customer basis, however, has slightly changed towards more reconditioning business. As steel prices go through the roof and steel availability is significantly down, We see that more and more end customers and end users switch from new drums to reconditioning drums. For us, from the ring side, this is not a big difference. We're just supplying to another customer. However, when we look into our lip business in Atollandorn, we see that this business is significantly up. Our lip business in volumes has nearly doubled. So we have gained new customers and the existing customers demand a lot of additional products, and we were able to produce these additional volumes with nearly no extra workforce. So the capacities are available, and we were able to supply and to deliver. EBITDA also within Industrial Packaging is significantly up in industrial packaging rings. This is again, especially due to the fact that we have realized and accomplished the product reallocation plan, which we have announced already last year and fulfilled according to plan now. We have reallocated ring types from Germany, especially from our main plant into the UK, into Spain, to Italy and to Turkey. This gives us the opportunity to actually free up some capacities in Germany and especially to reduce our Well, it looks like there is a little problem with Christoph's line. I'm just getting some WhatsApp messages, if it's Christoph or the person who writes me. So I'm just going to lead you through the presentation until he's back. If you look at the industrial handling business, basically, I think No, no, I'm back. Okay, great. Okay. So again, industrial packaging liners, the beer tank business is down. Apart from that, everything is really going very well. What we see is even the bag in box systems are running very good. We have shifted a little bit towards the first half of the year by leveraging our customer bases and also pre producing some additional back in box systems, which we will be able to sell later on within the season then. And so this business is, from a revenue perspective, doing okay. From an EBITDA and EBITDA margin perspective, it's not doing okay because, again, the beer tank liner business usually contribute a significant amount of EBITDA to this segment. Industrial Handling, as mentioned before, we were focusing more on higher margin business where we could. We have not continued some businesses or some orders, which we felt we are losing money with. This applies to the OEM business. And we are still in the process of increasing our prices due to the steel price effect. We see that throughout the whole product range, tractors and forklifts are really going quite well and the demand is picking up. We see year on year that revenues are slightly down. EBITDA is down as well, but the EBITDA margin is improving. And we see clear signs that especially now in Q2, where we had the big dip last year, we will not have this in this year. And therefore, we are quite confident with Industrial Handling as well. The outlook or the guidance still stays where we have put it in early this year. The group revenue is between SEK 115,000,000 and SEK 125,000,000 and EBITDA between €11,000,000 €13,000,000 We are still quite cautious in that respect because we it is difficult for us to really foresee how that COVID development looks like and especially the situation with our customers really look like. Since steel availability is going down And we yes, again, we are quite cautious. However, it is, I mean, not a big secret, I guess, with these excellent figures that if this continues for another month or so, we would need to adjust the guidance for sure. And we are currently looking at that very closely. Apart from that, maybe some or 2 words, more soft fact words. We have initiated within our single entities in Germany that our most of our workforce will get the opportunity to get vaccinated. In industrial handling, for example, I can report you already that we have a doctor coming into the factory giving vaccines to the employees who wish to get vaccinated. So we are slowly getting into a situation where we are less dependent on any COVID issues, at least within our workforce. In Industrial Handling, we had a significant COVID outbreak a few weeks ago, where I think more than 12 people were affected. Not all of them had COVID, but they had to stay at home. And therefore, we are now pushing as much as we can to get our workforce to be vaccinated. In the United States, we have run this already, and all of our employees got the chance to get vaccinated. Some took advantage of that, some obviously didn't. But that's, we believe, something what we can offer to our workforce, and it's important to do it. And then another issue regarding the M and A outlook, we again, we don't give a guidance in that respect. But definitely, we are quite confident that we will be able to fulfill maybe one transaction in this year. We are closely working on that. And I believe we are on a quite good track in that respect. For now, that's it from my side. I would now hand over to Ingo and to everyone participating. If you have any questions, please feel free. Yes. Just we start with one question from the chat here. Christoph, what's your opinion on why revenues in Q1 were still down in Industrial Handling despite the basically good situation at more and more of our clients? Well, first of all, it was down because in last year, 2020, I mean, you always need to see the reference points. 2020 was a very, very, very good quarter for industrial handling. And SEK 2,600,000 in industrial handling in the Q1, now in 2021, is actually quite a good figure. We are very happy with this. And if we compare it to Q4 2020, we see a significant development. We are still down compared to 2020 because the whole development and recovery of this segment just takes more time than within Industrial Packaging. I mean, we were down in 2020 by 17%, more than 17%. And so therefore, what we see in Q1, we have already recovered and stabilized. Okay. And then one second short question. What is the current revenue breakdown from the in the industrial packaging between rings and liners roughly? I don't have the figure in detail here, but I would say let me calculate it. It's we are doing I would say we are close to €4,500,000,000 maybe €5,000,000 in Industrial Packaging Liners. Okay. Great. So before we come to the next question from the chat, we have 3 people intending to ask the question themselves. The first one is CT. I think that's Chiams Wu, am I right? Yes, Ingo, you're right. This is Gerald Pappas from Bauer Briseld. I have two questions, please. I'll take them 1 by 1, please. First, could you please comment a little bit on current trading? And what should we expect in Q2 in terms of sales and EBITDA? And maybe what's the price impact do we expect on top and bottom line in Q2? And should we expect similar strong profitability as in Q1? Yes. Definitely, yes, you should expect this when we look into the current trading. Again, we are cautious. We don't want to push too much on that. But the current situation really looks for Q2, at least, looks very, very good. The steel price has increased further on. And therefore, the steel price effect will be even more than what we have seen in Q1. And I mean, the overall question is how sustainable is our current margin. And we are very, very sure that at least for Q2, we will be able to sustain this margin throughout the whole quarter most probably. The big question is then Q3 and Q4, and this is something what we are looking at within the next weeks. But Q2, we are quite confident. And maybe one more word in that respect. The reason why we are able to sustain these margins is really that we are doing the prices month by month, and we have pulled out of the MAPS Index related contracts or agreements. And doing the prices month by month, we are in a much better situation to sustain these margins. And the very important aspect is the customers more and more realize that we have done our homework. We have secured prices. We have secured volumes early in advance, and we get supply. This is something what is very important to understand. We are a trustful and reliable partner to our customers. And just to give you one example, in U. K, we are usually not buying any steel forwards. We're usually buying spot. Now the U. K. Steel market, especially with the situation of Liberty Steel, is in a big crisis and prices are going through the roof. Our customer Greif needs urgently rings and we are not able to source the steel in the U. K. So what we have done is we have talked to our suppliers in Germany actually, and they are now able to supply certain volumes to the UK and help out in that respect. And this is something what especially Greif and also Mouser, the big customers, really appreciate. We are a trustful partner, and they realize that. Okay. Thank you. My second question is on Industrial Handling. We have seen positive cross reads from players like Kion and Jungheinrich recently. So would it be fair to assume a double digit growth in Q2 in that segment? Compared to Q2, if you only compare the quarters, I would assume that because Q2 in 2020 was really, really bad. That could happen. To be honest, I don't recall the exact figures. So I don't want to say it will be a double digit development. But for sure, it will be a positive development. Okay. Thank you very much. Great. So on that topic, I think another question from the chat fits in perfectly until we hand over to Florian Pajshifter. So what do you think, Christoph, is the right time to sell the industrial handling business, a question that comes up regularly? Yes. And I expected that question somehow. I think it's not now. And the question overall is and we are discussing this back and forth many times. The question for me is when are we in a position to be an attractive target for an investor. And that is we still need to have something in our back end for future development. But selling at the current stage is, in my perspective, too early because we still have a lot of room of improvement, and we see it we have a great Managing Director in place now, a great management team actually, and they are pushing the business even in these difficult times now. And by talking to them regularly, I believe it's not now. But it will also not take another 3 years most probably. So somewhere in between. Okay, great. So now I hand over to Florian Pilschister from Stifel Europe. Go ahead, Florian, please. Yes. Good afternoon, everyone, and congratulations first to the stellar results in the Q1. And my first question similar to John's, is on the margin in packaging. So the 15% really is impressive. And I was wondering how sustainable that is also in an environment where volumes would increase more heavily again and you would need more lease workers that usually lead to a drop in yield or a slight drop in yield. So how sustainable is that even in, let's say, full utilization scenario? Well, first of all, the 15% is the average of packaging rings and packaging liners. And don't forget, within packaging liners, we are not where we want to be. So we are missing out on all the high margin beer tank liner business. So we have some headwinds there as well. And talking about margin sustainability in the Ring segment, I mean, it's difficult to say because we are now at a point where we have adjusted our pricing mechanisms. And yes, it is an extraordinary good situation for us because we are able to supply and that's exactly what the market needs and is demanding from. They are not willing to have major price discussions currently, and that's good for us. There will be a point in time where we get more pressure from that side. So I would say taking that into account, but also taking the headwinds into account, the 15% within Industrial Packaging is more or less a sustainable figure, at least for the next, let's say, a period of time, which is more than the next three quarters. Okay. Very clear. I mean, but Harte answers my second question, which would have been if the beer tank inliners would come back and we are at a normalized level overall in the Packaging business again. Where would you believe margin could go to? So might we be able to see potentially also of some, at some point, steel price headwinds on the margin tailwinds on the margin, EBITDA margins in the Packaging business of between 15% 20%. Do you think that might be a reasonable range for such an full phase scenario? I think this is definitely possible. But the question, of course, then is, if we are working towards the 20%, how sustainable is the 20%. I mean, this is a really big figure, which I wouldn't hesitate to run for. But again, how sustainable is that? I think we need to be realistic on that and we need to be fair to our customers as well. We I mean, at a certain point in time, we come to a situation where the market obviously is questioning whether this is right to buy from a market leading supplier who is making margins of 20%, maybe 20% plus. We see this in other areas of this market where these suppliers, yes, in the meantime now get a lot of pressure. And the question is then, again, is that a fair situation? I would say most probably not. No, that makes sense. So it would rather be reasonable to assume 15% with the occasional spike towards the 20%, but 15% should be more, yes, more the run rate? Anywhere between 15% 18% is for sure roughly the target or the corridor. Going above that is only, I would say, on a temporary basis. You've got problems with the European Commission. My last question for now. Do you have any further levers you could pull in order to improve the profitability? So aside giving aside steep price developments and the addition of beer tank in liners again to the business. So any operational levers you could pull in order to further improve the margin? Or do you think all things have been done that are more or less feasible? No. I mean, if everything would have been done and there are no more additional levers, I would maybe sit down and relax and watch the scene. But I'm not and I will not. There is a lot to do. We had a major setback with the rollout of our new ring forming machine in the ring business. And so these effects have not been taken into account yet at all. The second thing is we are looking for further automation within the liner business. This is a very, very important aspect, and we are working heavily on that. And this will be a major trigger for further margin growth. And then also what comes to mind is and this is we are currently within the liner business. We are really in a very difficult situation because we have reduced our workforce and our capacities, and now the demand is really overwhelming us. This is a very, very difficult situation which we are coping with. Great. Then thanks a lot. And I jump back to the queue. Great. Thanks, Florian. So our next question comes from Christian Sander from Auken Aufeuser. Christian, please go ahead. Hi, guys. Thanks, Igor. And I would have a question on steel. I think you mentioned that you have secured volumes and prices towards the end of last year. So my question would be, for how long does those secured volumes last? And what happens when this runs out? I guess, you would have to go back and, I mean, guess, begin negotiate or something like this. Would that impact your pricing strategy somehow? Because I mean, right now, you probably make some money extra from renegotiate pricing mechanisms. That would be my first one. Christophe? Well, I think his line got cut again. So I will try to give you some answer of that. But of course, it's very interesting to hear his own opinion on this point. A couple of weeks ago, I would have told you, well, Q2 is basically rather set, but there is still a risk of a force majeure that our suppliers could pull and especially that would be the case for Q3. But it would be interesting to see if anything has changed in the meantime in the past 2 weeks on this point. Let's maybe just wait for a second. He should be right back. Sorry, I'm back. Oh, you're back. Did you hear the question, Christoph? No, sorry. Okay. Then maybe Christian, you ask them again. Basically, because you said earlier that you have secured steel volumes and prices towards the end of last year and that gives you obviously a lot of leverage when it comes to price negotiations with your customers because you know what you're going to be paying for the volumes. So for how long have you secured those volumes and prices And what happens when you basically run out all of those pre negotiated volumes at preset prices? Is that changing your pricing strategy? Yes, that would be my first one. Well, we have a certain mechanism, and it's we don't have an overall mechanism to that. So for example, in Italy, we have historically always the situation that we are pre purchasing well, no, we are not pre purchasing. We are securing volumes and prices for half a year. That's that has always been the same. In Germany, the situation is different because with some suppliers, we were able to secure prices early in advance and we have usually roughly between 40% 60% fixed, sometimes in the normal times. And now in the COVID times, we are trying to fix roughly 80% of our average demand. So going forward, it is you cannot say that we have a good price and volume now, which will last until, I don't know, June. This is something we cannot say. We have it quarter by quarter. So we have secured prices quarter by quarter. And looking abroad then, the UK and Spain, we are actually not in a situation because these subsidiaries are so small, we are not in a situation to buy different than spot. You cannot really get volumes and prices in advance. That doesn't really make sense. And in the United States, the system again is slightly different because we are usually buying 50% forward and 50% spot. Great. So it looks like we currently do not have any further questions. If you're interested in raising another question, please just raise your hand or unmute your mic or just type something in the chat. We'll just wait for a couple of more seconds. Maayan, I just jump in with one follow-up question. On the M and A side, you already mentioned that you are looking forward to a deal happening this year. Maybe can you give us or provide us with a foggy outlook into 2022, how you would see this will develop over 'twenty one on a similar level? Or how should this pick up more momentum in the next fiscal year even though the current one has only started? I mean, we have clearly said that we would like to postpone our long term view in reaching the €200,000,000 in revenues. We are not sticking to this figure in detail, but this is still the let's say, the way to go forward for us. We don't have a clear path on how exactly and when exactly we will reach that. But what will most probably come up is that we are for 2021, the targets we are looking at are, let's say, smaller targets anywhere between the €5,000,000 and maybe €15,000,000 in revenues. For 2021, I would assume that the target just should get somehow a little bit bigger, but not more transactions. Okay. But from a revenue from an M and A revenue perspective, the momentum should increase year over year? It should, yes. That's what I would currently expect. Sure. Perfect. Great. Thanks And have a good day. Thank you. Thanks, Lohr. And so I think there are no further questions. In case that would be the case, please raise your hand. Yes, okay, please. Sorry, Markus Grimur. Why are you not accelerating M and A now? Because honestly, what are you waiting for? Is there a distressed situation in the market where you're waiting for, where you really expect distressed deals or because if you just were looking at, let's say, economic recovery, it's full on our way. So waiting will just make things more expensive from my point of view. And so and if you really want to get synergy, so what is the point you're waiting for in M and A, in large M and A? Well, there are two reasons for that. First of all is we are not very willing to pay purchase prices based on any business plans going forward. We are usually willing to pay purchase prices based on historical figures. 2020 was for many companies not the year where they are willing to base a purchase price on. That's one reason. The second reason is its management capacities. I mean, we can handle a certain amount of acquisitions and new businesses in the group and do post merger integration. And we don't have the capacities to integrate, I don't know, 4 or 5 businesses per year. This is not going to work for us. And we are currently focusing on targets, which we were able to, let's say, have a close relation with. And we were able to sustain this relation even in the COVID times. For many other targets, which we were looking at in the past, we really well, we were not able to visit them. We were not able to hold this close relationship. And therefore, we need to build it up again. And this takes time. I mean, still, we are not able to travel to easily to China, to the United States, to India, to all these places which are of interest, we don't have a chance. And obviously, we from the executive board, we are not willing to travel to China, stay 2 or 3 weeks in quarantine and leave our business here in Europe behind. Maybe one interesting information on this issue is, normally, we do not give any or do not really state any figures in our guidance on what we expect on M and A. But in our last guidance, we did. So we're pretty positive that we can close one deal this year. A lot of deals have been in preparation. So I would just assume that the next weeks months should give more details to this topic. But nevertheless, I still try to understand. If you are limited in your capacity to manage a number of deals, it would make it more sense to do larger deals instead of trying to concentrate on small deals. And especially now looking at the trough year 2020 from a valuation point of view doesn't make any sense for me at all. So if we all expect a recovery, we have to also assume, okay, what are normalized margins, what is kind of synergy results that you achieved. So if you go out in pricing on track pricing level, you will never ever close a deal. So I think now is exactly the time for you. I fully understood why you paused and put it on mobile. But to be honest, I don't understand why you do not now really try to accelerate, even also in terms of size of the deal. Again, the deals we are looking at are the deals here in, let's say, in Mainland Europe, which are accessible. The bigger deals we are looking at, either they are not in Europe and therefore very difficult to achieve or to get to, 1st of all. And or secondly, it's just that the seller is not willing to negotiate currently because they are they clearly say we, 1st of all, want a full year of, let's say, harmonized figures and then we can talk about purchase prices. And for us, to be honest, we try to stay risk averse in that respect. And yes, you can say maybe we are approaching that a bit too cautiously or too slowly. That's fair to say, and I totally accept that. But I'd rather be on the safe side in that respect. Okay, fine. Thanks. Great. So thank you for your questions. I think there are no further questions, also not in the chat. So great. So this has been a very interesting call. I hope for all of you, we've had quite a decent number of participants. So that's good from our perspective as well. Thank you a lot for your time. If you have further questions afterwards, please feel always free to contact IR. We will always be able to give you answers or arrange and on a call with the management. Until next time, take care. Stay healthy and talk to you soon.