Earnings Call: Q1 2021

May 6, 2021

Yes. Thank you very much. Ladies and gentlemen, very warm welcome to our conference call today regarding the Q1 figures of the Q1 2021. As the conference call of several companies have overlapped today, we moved this conference call up an hour just for your convenience. As always, I will start with some headlines of the 1st 3 months. And after that, my colleague, Thomas Esulat, our CFO, will discuss financial figures on the Q1. I will then close with the outlook on the current year. At the end, of course, you have the opportunity to ask questions as always, and we are more than pleased to take your questions then. Well, with regard to the financial figures of the Q1 2021, part of them have already been published along with the ad hoc announcement in April, and we also had a conference call at that day. In Q1 2021, sales increased by 7% to €424,000,000 due to the strong demand that we saw here at the Enercon Group. If exchange rates had remained unchanged, group revenues would have been up by 10.7%. Due to the strong sales development, efficiency gains and the sale of our Austrian subsidiary, EBIT increased by more than €30,000,000 to €48,400,000 year on year. This results in an EBIT margin of 11.4% compared to a margin of 4% 1 year ago. The operating free cash flow increased to €28,600,000 from a level of minus €2,200,000 in previous year's Q1. By the way, this does not include the sale of our Austrian subsidiary as well as the payment received by Plastic Omnium with regards to the agreement on our new joint venture company, EKPO Fuel Cell Technologies. We further continued to optimize our net working capital to a level of €430,000,000 We managed to reduce net financial debt to €400,000,000 which means that the net debt EBITDA ratio decreased to 1.9 compared to last year's figures of 3.1. As part of our agreement with Plastics Omnium that we signed last year in October, we have started the business activities of EKPO Fuel Cell Technologies for harnessing the market potential. We have very strong ambitions. We target for revenues of €700,000,000 to €1,000,000,000 and a market share of 10% to 15% by 2,030. In the context of this agreement, we also executed the disposal of our Austrian subsidiary to plastic Omnium and realized a gain of €10,900,000 In the past months, you might have noticed some news of Ehren Klinger on the battery business, which underline our competencies in this area. 1st of all, in March, we announced a major order for cell contacting systems by a global battery manufacturer. Our cell contacting systems, which will be included in a series platform of a German premium car manufacturer. This large scale order totals volume in the mid triple digit €1,000,000 range over a term of approximately 9 years. We will start the production for this order in the first half of twenty twenty two. This brings me to the next news. We will ramp up this order at our new site in Neufen, which is really close to our headquarter here in Bettingen. We have established this location on January 1, 2021, and will bundle our activities in battery technology there. Another news actually is part of the Q2 as the corresponding event took place only 10 days ago. We received and so called IPSA funding by the Federal Ministry of Economic Affairs and Energy as well as by the Ministry of Economic Affairs of the State of Baden Wurttemberg for our innovative battery cell house design. The total funding volume amounts to €33,800,000 and this will be paid in the years to come until the end of 2026. Applying core skills, we are able to produce cell lit with less components, require less materials and thus shrink the carbon footprint by about 40%. This is an important contribution on the global path towards climate neutrality. Well, ladies and gentlemen, so far from my side, and let me now hand over to my colleague, Mr. Jesselat, our CFO, and he is going to explain the figures of the Q1 2021. Yes. Thank you, Doctor. Wolf. Also a warm welcome from my side. I would like to comment the financial results for the Q1 starting on Slide number 5. The sustained demand for L'Enclinger's products around the globe is reflected in the group's strong position with regard to orders. At EUR 577,000,000 order intake was up EUR 222,000,000 or 62.5 percent on the same period in the previous year. This also resulted in a surge in the group's order backlog by €197,000,000 or 19.9 percent to €1,186,000,000 The increase in revenue to €424,000,000 is mainly two reasons. First, we have seen a strong increase of around 38% in China and also growth by roughly 5% in Europe. And second, the segment's aftermarket and Engineered Plastics contributed increased sales compared to last year's Q1. Foreign exchange effects reduced group sales by 3.6%, and this was primarily due to a direction taken by the U. S. Dollar, but also the Brazilian real, the Mexican peso as well as the Turkish lira. No revenue from acquired or divested companies was accounted for in the reporting period. And all in all, we saw an organic increase in sales of 10.7%. On Slide number 6, you see the sales split by region in more detail. In Asia Pacific, we noticed a strong increase in revenue, while sales in Europe increased by 6.2% on a foreign exchange adjusted basis. Group revenue in North America only slightly increased by 0.6% and even went down on a reported basis due to the development of the U. S. Dollar. When comparing our sales figures with the markets, we're able to outperform light vehicle production in both Europe and North America, which by the way represent the 2 strongest sales regions of Helsinki. While our geographical sales footprint in Germany and the rest of Europe are almost identical to previous year's period, North America has a share of 24% of the group's revenue compared to 27% in the previous year. The Asia Pacific region now represents 19% of group revenue compared to 15% in the previous year's period. With regard to our segments and business divisions on Slide number 7, we see that Original Equipment segment is on track. Erinklinger generated sales revenues of 3 €34,000,000 in the segment. Revenue growth of €21,000,000 or 6.8 percent was attributable primarily to the lightweighting elastomeric technology business unit, which saw a disproportionately large increase of around 18%. At around 7%, the increase in revenue related to the Metal Sealing Systems and Drivetrain Components Business Unit was roughly in line with the group average, while revenues in the shielding technology business unit declined in the period under revenue. The e mobility business, which represented around 2% of group revenue, grew by a good 14.6 percent to EUR 7,300,000 but is still a relatively low pace. Slide number 8 presents the earnings figures for the Q1. EBIT reached a strong level of €48,400,000 and the EBIT margin was at 11.4%. Let me outline the main drivers for this development. As part of the agreement with Plastic Omnium, we sold our Austrian subsidiary and received an earnings effective payment of €10,900,000 But even when not including it, we achieved an EBIT margin of 8.8%. And in combination with a favorable product and regional mix, the strong capacity utilization on a relatively low cost basis resulted in a good earnings contribution. We have to consider the high price level for raw materials. The effect in the Q1 was comparably low, but it could have a stronger impact in the upcoming quarters. Our extensive program to improve the efficiency levels had a further impact of €4,000,000 on the EBIT increase. To sum up the earnings situation, net finance income amounted to EUR 1,000,000 in the quarter under review, an improvement of EUR 10,900,000 compared to the same period of the previous year. A large part of this is due to the net result from currency translation, non realized currency effects as the same quarter of the previous year had included significant net foreign exchange losses, especially for the Mexican peso. In total, the net result from currency translation was positive at EUR 4,700,000, while it stood at minus EUR 3,100,000 in the Q1 of 2020. In addition, interest expenses decreased also thanks to significantly lower net debt. The loss from associates, which relates to the interest held at Hofer AG improved by EUR 600,000 to minus EUR 1,600,000. Income tax expenses increased by EUR 6,400,000 to EUR 10,900,000 in the Q1 of 2020, and therefore, net income attributable to the shareholders of Ergenklinger increased to EUR 37,900,000 coming from EUR 2,000,000 in the Q1 of 2020. Accordingly, the earnings per share increased significantly, amounting to $0.60 after $0.03 in the Q1 of 2020. Let me now turn to Slide number 9, showing the performance of our segments. The aftermarket segment again developed strongly in the quarter just ended, recording an all time quarterly high in terms of segment revenue. Particularly Eastern Europe and North America saw a significant expansion in revenues. North Africa and Asia also made visible gains. In total, revenue generated by the aftermarket segment in the Q1 of 2021 grew by €3,100,000 or 5.9 percent to a total €55,400,000 Segment EBIT was again very high at €11,900,000 and the EBIT margin of 21.5 percent was slightly above that seen in the 2020 financial year as a whole, which was 21.4%. The Engineered Plastics segment increased its revenue in the reporting quarter by €4,200,000 or 14.5 percent to €33,100,000 which represents a disproportionately large increase in relation to group revenue. The segment was therefore able to make good use of its tailwind generated by a robust economy, while also benefiting from the encouraging performance of the automotive sector as a whole. As regards to the segment's bottom line performance, both revenue growth and the continuing commitment to strict cost management had a positive impact. EBIT increased significantly by EUR 3,700,000 to EUR 7,200,000 as a result of which the margin the EBIT margin improved markedly from 12.1% in the Q1 of 2020 to 21.8% in the period under revenue. Now we come to Slide number 10. Net working capital increased due to more expensive business in the Q1 of 2021. It amounted to EUR 430,000,000 EUR 27,000,000 higher than at the end of 2020, but lower than at the end of the same quarter a year ago when it stood at €453,000,000 even though sales levels were lower at that time. As planned, the Helsinki Group has scaled back its investment activities over the past 2 years without neglecting projects of strategic importance. As a result, payments for property, plant and equipment in the Q1 of 2021 were low at €11,600,000 They related to a number of investment projects from all plants worldwide and included expansion investments for new ramp ups, especially dedicated to new technologies. Against the backdrop of an encouraging business performance of the 1st 3 months of 2021, Erlingklinga was able to generate operating free cash flow of €28,600,000 This figure does not include the payments associated with the sale of the Austrian subsidiary as well as a payment of €30,000,000 which Erving Klinger received from the EKPO agreement with Plastic Omnium. As of March 31, 2021, ELLING LINGER had equity now of €950,000,000 which corresponds to an equity ratio of 45%. The increase of €137,000,000 within the 1st 3 months 2021 was due to the recognition of net income for the Q1, differences from currency translations as well as the discounted investment of plastic Omnium in the EKPO fuel cell technologies. Among others, due to the positive operating free cash flow, Ehrenklinger was again able to scale back its net financial debt. Compared to the figure posted at the end of 2020, it was down by €59,000,000 to now €400,000,000 Compared to the same quarter of the previous year, it was cut by as much as €203,000,000 Erinklinger therefore continued to pursue the steady reduction in debt as initiated in the Q1 of 2019. The net debt to EBITDA ratio improved to 1.9 as of March 31, 2021, down from 3.1 a year earlier and even 4.7 2 years ago. Having said this, I now turn back to Doctor. Woff. Thank you, Mr. Jesulat, for the explanation of the figures. Well, ladies and gentlemen, let me now draw your attention to the current year where we are expecting market upswing compared to this really terrible corona year 2020, which comes in the light of various unstable surroundings. North America is expected to grow production numbers by 20% in 2021, while Europe is expected to grow by 12%, and China is expected to grow by 5%. On a global basis, this leads us to an expected growth of global light vehicle production of around 12%. While we are positioned to capitalize on this favorable outlook, there are various factors that lie outside of our sphere of influence. The level of uncertainty for the rest of 2021 remains significant as general conditions continue to be very challenging and very difficult. While the pandemic is far from over, measures aimed to relaxing some restrictions are currently being discussed in conjunction with the rate of vaccination. In addition, bottlenecks in the supply of semiconductors are affecting the automotive sector really, really strongly and may lead to production cutbacks among manufacturers as and of course then consequently also among suppliers. Moreover, supply chains are still not consistently robust and commodity prices remain at a very high level or even increase month over month. In light of the aforementioned risks and opportunities, we refer to our ad hoc announcement on April 16, 2021. Reflecting the successful Q1 of 2021, we have adjusted our earnings outlook for the full annual period. We now anticipate an EBIT margin of around 5% to 6%. Previously, we had 4% to 5% in relation to group revenue, which is expected to come in roughly in line with the change of global automobile production. All further explanations remain unchanged to the numbers we have provided in our full year analyst conference. Well, ladies and gentlemen, so far my final remarks, and I thank you very much for your attention. And Mr. Esselat and myself, of course, are more than happy now to take your questions and answer your questions. Thank you. We will now begin our question and answer Our first question comes from Christoph Roskabi, Deutsche Bank. Please go ahead. Your line is now open. Hey, Christoph Roskabi from Deutsche Bank. Thank you for taking my question and also for moving the call up by 1 hour. That was really helpful. The first one would be on your exposure to a specific customer. We had Ford out last week announcing quite significant cuts to their budgeted production for Q2. Looking at your revenue exposure, I would assume that Ford does not account for more than 10% rather high single digit, if at all. If you could comment on that. And also, if you have received over the last 2 weeks from a couple of OEMs rather short notice cuts in their call offs versus the previous budget? Well, first of all, the Ford Group, which is a local group, is our biggest customer. It always was and it still is. It amounts up to 9.6%, 9.7%. So it's slightly below 10% of total sales. Just to give you the information, when I started here at Elinchino 25 years ago, Ford and GM had a total part of revenues of 60%. Ford was more than 30% 25 years ago. So we really grew remarkably with Ford, but we grew even more with other customers so that they now represent slightly below 10%. Yes, still the biggest customer, but slightly below 10%. We are pretty slightly below 10%. We are pretty strong in the U. S. With Ford with the Ford Motor Company. We have also some business, of course, here in Europe, also in Turkey, where Ford is partnering with Ottosan. So the influence of the closure, you probably referred to the closure of the 2 plants in Cologne and in St. Louis. We will maybe see that a little bit, but it will not have a magnitude like you might expect it because we have a broadly based business with Ford also in South America and Brazil and all over the world. Your second question, yes, we see that OEMs change their orders due to the shortage of semiconductors, but we're not only talking about the shortage of semiconductors, we always talk about some supply problems with regard to steel, aluminum, some other raw materials. A lot of the suppliers of raw materials, yes, they got surprised by the strong demand that came up in the Q1. So we will see that still some problems in supplying raw materials in the Q2, and I expect it also for the 3rd Q4. Thank you. The second question will be a bit on margin phasing. You had a quite good Q1, obviously, above also on an underlying base above the target range. Should we expect, as guided by OEMs as well, that Q2 will see the biggest hit in terms of production closures and that's also feeding through to your business so that we essentially move from the highest margin in Q1 potentially for the full year to the lowest margin in Q2 and a more stable environment in second half? Or would you see other developments in the phasing throughout the year? Well, the dynamic in our expectation should slow down to some extent. It's too early to say the latter part of the year is going to be okay because there is too much going on in the supply chains to really come to a right conclusion at this point in time. But dynamics goes out a little bit. We will see that. And but from a cost structure, when we talk about the margin structure here, taking into account that the operating leverage comes from pretty clean execution utilization of existing capacities, it should have an impact, but it my expectation would be that it would not be to the very negative filing for Q2. That would be my estimation. But we have to say also that in the supply chains, there is a lot of force majeure letters going around nowadays, and it's really hard to make estimations because you may face situations tomorrow that you have not seen coming. So but that would be my estimation. Thank you. On the bridge then, do you expect for the full year that the efficiency program is offsetting entirely the raw med headwind? Or will the raw med headwind increase in H2 more significantly and then it might be on a net negative between the 2? On the material cost, I think we'll see some more negative impact based on different parts of pricing structures of the raw materials that we buy. We will see also a continuation, of course, of some positive points. So far, my estimation would be the overall effect would be net positive for the year coming out of the efficiency program, but it's an early estimation. And one thing, if I may add this, of course, we still have some cost savings that we did not expect in the way we still have them or we have them because nobody really expected that this pandemic situation is going on and is burdening us, all of us, now, I would say, at least the first half year of twenty twenty one and still will have effects in the second half year of twenty twenty one. We still have a travel ban in the whole company group. So that, of course, saves travel costs, which we had expected that they occur at least in a certain extent in the first half year. For example, 2 days ago on Monday, the big aftermarket fair in Frankfurt, Automationica, was canceled for September. So that, of course, saves a lot of costs because we always have a big booth and a real, let's say, a big presentation of our aftermarket business there on this fair. So the costs that we have in our budget for 2021 for the Automationica will not occur, yes? So we will have cost effects in the rest of the year, but those are not sustainable cost effects because if in 2021, we will see an Automationica Frankfurt, which I hope is going to happen then because then we're back to normal, then of course, we have to spend in September 2022 around about €600,000 for this fare, for this appearance on this fair. So we will have some effects that are not sustainable based on this special situation in the pandemic. Thank you. And my last question will be essentially on your joint venture with Plastic Omnium. Your partner has teased in the last earnings call or revenue call they had that we should expect order intake for the JV, essentially announcements in the coming weeks. Is there anything that you could shed light on already? Or any comment on that that we probably are ahead of order intake news when it comes to hydrogen and the JV? We are not in a position to do that today. And one thing you have to see is that this business, be it fuel cell business or be it battery technology, is based on the, let's say, behavior of the customers, highly sensitive, highly sensitive. I'm in the automotive business now since 25 years. I have hardly seen so strict rules and regulations with regards to publishing factors because this is the future of our customers. And they are very much focused on those new propulsion systems. And that's why they are really, really sensitive with regard to confidentiality. So we probably will have much less possibilities to publish real good projects and real good orders and all that stuff, which was no problem with the cylinder gasket or with special gasket or whatever with our classical product portfolio. And I have a great understanding for that because they just want to keep their technology and also their strategy just confidential. Understood. Thanks a lot. Our next question comes from Jurgen Pieper, Medtler. Please go ahead. Your line is now open. Yes, hi. Good afternoon, gentlemen. I have 2 quick questions. The one is fairly simple. I mean, you had a great order intake in the Q1. Is this huge battery components order, is it a part of this? Or do you or is it booked in the 2nd quarter in the end? Or do you spread it over, let's say, 2, 3 quarters? And what kind of share of this order intake is would you define as new technology orders? And secondly, you mentioned your growth in e mobility, I think, was 15%. This is certainly good, but it's probably not what not the rate of increase of the e mobility market as such. So everybody is looking for growth rates of 50% plus in the next couple of years. So when would this kind of growth start? Will it start with this order you mentioned, let's say, in 2022? Can we then expect this kind of booming scenario with growth rates of 50% plus? Or maybe would it start a bit earlier? Thanks. Yes. The sizable new project, such as a battery project is not part of the order stock. Order stock is defined as releases from the customers. We see releases now on a low level because we are on a startup phase in the UK and the new plant where we build for a customer a new drivetrain system. And there step by step, we see orders coming in from that. But the rest is not part of it because there are no operational releases, if you want to say so. Both e mobility goes in line with that in principle. There is a broad basis of projects going on, but it's all on a preproduction phase or, let's say, an early production phase. And the dynamics is going to be expected this year also, maybe to the later part of the year where we see some more order stock and more sales being realized. And then also in 2022 when the other projects kick in. But this is also to say our curve here in terms of accumulation of e mobility sales, and we are still in very early phase in regard to that. When we look into the split that we have seen here, this is reflected because on a drivetrain basis for the Q1, it's roughly €2,000,000 What we have in sales here on the battery basis is roughly €4,000,000 On a fuel cell basis, it's low single digit amount. And this is all showing activity, early activity, but the volumes are going to be coming a little bit later in 2021 for some projects and then starting 2022 for other projects. And just one remark. We will never be on the same level as the increase. I assume you mean new registered pure e mobility cars, yes, be it now in Germany or in Europe. Of course, this rate will always be different from the growth rate that we will have in our business unit or in eMobility or in eKPO Fuel Cell Technologies because it's not one to 1 related to the cars that are sold as pure electrical cars. And once all the projects that we have, for example, at eKPO Fuel Cell Technologies, the growth rate in this business will be much higher from my estimation, will be much higher than the growth rate of new registered e mobility cars, yes? There's just no reference in between those two numbers, yes? They're just totally independent, one from the other. So also in addition to that, new orders, we have had it in the presentation beginning of the year, 2019 to February 2021. This is not only e mobility, I have to say, but this is a number that we have published. Non ICE represents in this period 62% of new orders relative to 38% of ICE. So there is strong indication towards that. But as I mentioned before, we are early in the curve. Okay. Thank you. Our next question comes from Akshat Kakar, JPMorgan. Please go ahead. Your line is now open. Thank you. A few questions, please. The first one on the OE business in the Q1. Can you discuss the key drivers behind the more than 5% adjusted margin if I take out the roughly $11,000,000 gain on the sale of the Austrian subsidy on that business? I understand cost efficiencies and you have been tackling production structures as well. But can you talk about different elements from a product mix point of view that help gross margin? I'll follow-up with the rest after this. Thank you. Yes. The improvement here in the OE business essentially comes out of the larger group companies where we had trouble in the past. That is when we talk about our ratios that we watch closely in terms of what is special cost, what is personnel cost and material cost of sales, those ratios improve drastically based on the efforts that we have put in there in terms of improving the business and run the business efficiently. This is the key driver in regard to that. And the group KPIs that we have improved here not due to those exclusively, but to a large extent based on that. When you, for example, look at the tax rate now on a cumulative basis, we have single digit losses in the group and very much a normalized tax rate compared to previous periods. And this really is showing that the quality of the individual group companies is coming up. And that's the main driver here in the OE segment. Yes? Yes. Thank you. The second one is on eKPU. Is it possible to quantify the losses in the Q1? And can you also remind us what are you building in as an estimate for 2021 2022, please? Yes. Losses, single digit area for the Q1, low single digit. And we are going to be ending the year maybe at high single digit, low double digit losses in eKPO. Understood. And I would appreciate a few comments on aftermarket and Engineered Plastics as well. Firstly, on aftermarket, we've obviously seen very strong growth in the last few quarters. Can you talk about some structural drivers here? For example, I have seen mention of market growing in North America very strongly. Can you just discuss aftermarket growth opportunities? And also on Engineered Plastics, again, it was a very strong operating result. How sustainable is that going forward? Well, aftermarket business is pretty good on a worldwide basis. Of course, we have established a couple of years ago an aftermarket business in North America and also in China, especially the Chinese aftermarket business is growing strongly very fast, but also North America is quite good. And our traditional markets where we have been strong since many, many years is Eastern Europe, and that is running really well. And also the Middle East, yes, where we have a strong position. For example, Saudi Arabia is very strong. Turkey is pretty strong. So it's overall, but real growth comes from those 2 new markets, North America and China, where we have developed over the last couple of years a program, a North American program and a Chinese program. It's always a question of the programs. You have to look in the aftermarket, what kind of engines are repaired in this market, what kind of engines are sold by the OEs. And then, of course, you have to adapt your program to those engines and buy parts that you combine with our that we combine with our own parts and so called gasket kits that are sold to wholesalers and they sell to the garages, where engines are repaired or refurbished or whatever. So drivers those are basically the drivers. And we see further increase in the aftermarket business. Aftermarket business always is stronger. It's very strong when we have a slow OE business or let's say, when there are not that many cars sold. That was the fact also in 2020. Not a lot of people bought cars in 2020, and that's always traditionally when the aftermarket business becomes really, really strong. But we see this business on a very high level because we have a strong market share. We have a very good reputation in the market. The Elling, we sell that under the brand Elling, just Elling. The Elling aftermarket parts and aftermarket kits are considered in the market as the Cadillac of the spare parts in our business. Engineered Plastics was also good in the Q1. Of course, they benefit also from a strong automotive industry. Total sales of the Engineered Plastics is around about 40% to 45% is related to automotive industry. And the rest is related to medical industry and general industry, machine industry. And we also saw a pickup of the machine industry in the Q1 2021. So of course, the Kunsthorpe Technik benefited from that. Thank you for the details. Just the last one on CapEx. Normally low number in the Q1. In terms of a number for the full year, should we think about a €70,000,000 to €75,000,000 range in terms of total CapEx? Yes. It's going to be increasing towards the end of the year. Roughly speaking, yes, plusminus always some uncertainty what is being pushed then into the next year. But roughly speaking, you have to calculate with a little bit of higher rate going forward. Thank you so much. As there are no further questions, I will hand back to Doctor. Stephan Wolf for some closing remarks. Well, thank you very much. Thank you for attending this conference. Thank you for listening to us. Thank you for your questions, your interesting questions. We wish you all the best. And just a short remark, we have our Annual Shareholder Assembly, General Shareholder Assembly on May 18. It's going to be a virtual shareholder assembly. So I'm inviting you to dial in and follow us during this shareholder assembly, this virtual shareholder assembly on the Internet. And then, of course, we will probably hear each other again when we present the results for the Q2. So thank you very much. Wish you all the best. Good luck and stay healthy. Thank you for attending. And I think we can close this conference call. And also on behalf of Mr. Esselaat, we wish you all the best. Thank you. Bye bye.