Ladies and gentlemen, welcome to the Rieter Media and Investor Update 2022 conference call. I'm Alice, the conference call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Norbert Klapper. Please go ahead, sir.
Thank you very much. Good morning, ladies and gentlemen. Thank you for being with us this morning. Kurt Ledermann, our CFO, and myself will walk you through Rieter's trading update. I jump right to page two, which shows the key messages of the update, which we published this morning. First line sales of almost CHF 370 million in the third quarter. Year to date, we stand at roughly CHF 990 million. You see that in Q3, we generated significantly more sales than in Q1 and Q2. Our order intake in third quarter was CHF 226 million. Year to date, we stand at roughly CHF 1.1 billion. We are back to normal levels. Order backlog around CHF 2 billion still, as of September 13th, a very high level.
The order backlog reaches far into 2023 in our Components and After Sales business, and it even reaches into 2024 in our Machines & Systems business. We have of course taken action, taken measures against the potential energy crisis in Europe. Although nobody knows what's gonna happen, we will talk about that later in the presentation. We also have included that Rieter participates in the financing of a professorship for artificial intelligence in Winterthur. This is an element of our strategy implementation in terms of technology leadership, which we will also look into during the presentation. We will give you a quick update on the sales process for the Rieter site here in Winterthur. Finally go through the outlook again, which is basically a confirmation of what we have published before. I'm on page three now.
Page three illustrates the progress we have been making in terms of turning backlog into sales based on the implementation of the action plan that we had defined earlier this year. It is about working very closely together with key suppliers who are supplying bottleneck material to us. We are also spending money on developing alternative technical solutions to substitute missing material. Obviously, we also have implemented price increases, and we are working on margin improvement actions related to our backlog. In Q4, we forecast sales of around CHF 400 million, despite all the difficulties in the global supply chains that we are all aware of. I'm moving on to page four now, which brings us from sales to order intake. Here we see order intake by geography.
Again, we have the comparison here of the top five ranking average 11 to 20 versus year to date, September 2022. The picture is unchanged, compared to what we had in the first half year. We see there is a significant change in the regional distribution of our order intake. India, number one, Turkey number two, China number three. China used to be number one for 10 years. Uzbekistan, number four, unchanged. Pakistan has replaced the U.S., which were still a big order intake cluster over the last 10 years. The regional shift of demand continues and the order intake, year to date is still well above average. We're coming to the business groups now. On the following page five, we're talking about sales.
The increase in sales by business groups is not a surprise to you that our business group, Machines & Systems, has the highest additional sales compared to the others. Components and After Sales had a benefit from the program which we discussed earlier. Close collaboration with key suppliers, alternative technical solutions, and what goes along with it is price increases and margin improvement actions. We see that this program works. We see that the business group which had the highest additional order intake also has the highest additional sales numbers year to date. We're going to page six now, which talks about order intake by business groups. Over the last nine months, we saw already that we are close to CHF 1.1 billion.
The record high, year 2021 was driven, as we remember, by a catch-up effect from the previous years and by the regional shift of spinning capacities, which we already looked into, on the previous slide when we saw the regional distribution of where the orders are coming from. As expected, demand for new equipment is coming back to normal levels. Investment sentiment is impacted by the risks and uncertainties out there, which is not a surprise. We also see a lower capacity utilization of spinning mills, and this results in a lower demand for consumables, wear and tear and spare parts. We receive conflicting messages here, yeah. We're not so sure whether the textile chains who are placing orders with the spinning mills don't show an overreaction here.
Again, we saw this in COVID, yeah? That they stopped the ordering, that they stopped the supply chains in textile and later it turned out that consumption did not go down as expected. There was a huge battle to get the additional quantities from the textile supply chain, which were missing. We're not so sure whether this time this is not the same syndrome. We will see. On page seven, we have a couple of things on the potential energy crisis in Europe. It gives you some details here. On the left-hand side of the slides, you see that we have 16 European sites in Rieter. Thirteen of them have manufacturing operations.
It's not a surprise to you that these 16 sites have individual profiles in terms of energy supply and energy consumptions. They are not the same, so we had to develop individual plans for each site to mitigate the risks that we see today. We have set priorities. Number one priority is to keep IT and communication technology running. Priority number two is to keep manufacturing running, and then all others follow. Manufacturing is also an important issue here. It will not help if our manufacturing operations are running and we don't get material and parts, yeah. We have taken additional measures to ensure security of supply as much as possible. Of course, this is all accompanied by energy savings.
The energy that you save, you don't need, you need to buy. That is why we have been working on that and made a couple of investments also, for example, in heat recovery in production. It is worth to note here that we have manufacturing operations, major manufacturing operations, outside Europe, where energy supply is not a big issue at the moment. I'm coming to page eight, Artificial Intelligence, to give you some background on information on our decision to finance a professorship of artificial intelligence in Winterthur. We do this because artificial intelligence supports our digitization strategy. What I have here on this slide is the Rieter ring and compact spinning system, which is integrated, being integrated by ESSENTIAL, Rieter's digital spinning suite.
You know that we have recently completed the system by acquisition of the automatic winder, the last process step in the ring spinning system. All machines are connected to ESSENTIAL, and all machines can be monitored by ESSENTIAL in an intelligent way with preventive actions and so forth, yeah? Of course, there is more that you can do with a digital platform which integrates the system, and this is the application of artificial intelligence to address the headaches that our customers have. The headaches are, we have noted here on page eight, the typical profile of headaches our customers have, lack of experts, lack of operators, and process efficiencies. Artificial intelligence is a key technology to exactly address these headaches, and that is why we made this investment. It's all about technology leadership.
On page nine, you'll find the quick update of the sales process for the Rieter site. You know that we started the process earlier. We're quite happy with the indicative offers which we received so far, and we will move on with the process according to plan. The outlook is basically a confirmation of what we said earlier. We anticipate a weaker demand for new systems in the coming months. The demand for consumables, wear and tear parts and spare parts will depend on the capacity utilization of the spinning mills. As I said, we will see what way the spinning, the textile industry will go. It might very well be that there is an overreaction again, like the one that we saw during COVID. For the full year 2022, we expect, as we said earlier, sales around CHF 1.4 billion.
The realization of sales revenue from the order backlog, which has worked well in the last couple of months, yeah? is, of course, associated with risks. We all know that, yeah? Shortages in material and logistics, COVID lockdowns and so forth, yeah? There is still risks out there that we are all aware of, and we're doing everything we can to mitigate these risks. Despite significantly higher sales compared to the prior year, we expect EBITDA net result below last year's level. The reason for that, the reasons are considerable cost increases, which hit our order backlog, materials and logistics. Additional costs which we had to spend to compensate material shortages, and we had expenses and costs in connection with the acquisition that we did last year.
Of course, we are, it is clear to us that as the market and technology leader, we will benefit from the high, order backlog that we have on our books. The order intake is not that important at the moment because the order backlog is so high. We have a significantly improved market position, and we get this feedback also from our customers. We see it also in our negotiations and in our order intake when it comes to ring spinning and compact spinning systems.
The continuation of the regional shift in demand, which is in favor of the regions outside China and at the same time triggers investments in China, we know that we will benefit from this in the future. The opportunities that I was just addressing, you find on my page number 11 here, which again explains that there is in addition to the high order backlog, which is so important at the moment. We have a huge opportunity from the market development, the exodus of the spinning industry away from China, which drives investments outside China, where Rieter is very well-positioned, and also investments into premium technology in China. We also see that when we talk to our Chinese customers, it's going in this direction.
At the same time, as you are aware, Rieter has improved the market position of the company significantly by the acquisition that we made into the ring and compact system. The digitization is a USP, the system integration through ESSENTIAL of the entire process chain, the entire system, and that is why the investment into artificial intelligence is important. We see that recycling of textiles is more and more an issue in the market. We are working with customers to bring the Rieter ring and compact system to a level with recycled material, which is unmatched. That is another USP that we are developing, which is important going forward. All right. So far, the investor update. We're open for questions now.
The first question comes from the line of Walter Bamert with Zürcher Kantonalbank. Please go ahead.
Good morning, everybody. Thank you for taking my question. Could you share with us your experience with the reengineering of the electrical controls? How does that work? Is it that you have it for entire product line that you already shifted to the new concept, or do you have to renegotiate with the client, if you may use that component instead of the traditional one? Where are we there? Let's say, what percentage of your new system sales is now equipped with the new control, and what percentage of your offering is already ready for that?
Well, to be very honest, we don't look at it that way. We make the decision what control we put into a machine, yeah. What we promise to a customer is performance, and it is our duty and our obligation to make sure that the machine does what it is supposed to do. The technical solution that we apply is our decision, yeah. We are more and more implementing the new controls in the field, yeah. The tests have been successful, and now we are in the process of introducing it. Our customers are basically not interested in it, yeah. Our customers say, "Okay, as long as the thing is doing what Rieter promised to me, I'm fine.
There are machines, including the new electrical control, left the factory already?
Yeah. The first ones are in the field. It goes in both ways, yeah. Machines which have been in the field already are working with new controls, and the shipments that we are making are getting new controls as well step by step.
Okay. This is just beginning. It was not instrumental to get the good revenue figure in the third quarter.
It might have had an impact, but it has started.
Okay. You go model by model with introducing it, or you do it across the product offering?
We will not disclose this information to the market.
Okay, I will come back later with a follow-up. Thank you.
All right. Thank you.
The next question comes from the line of Andreas Meyer with Finanz und Wirtschaft. Please go ahead.
Yes. Hello, good morning.
Good morning.
Just a question about the acquisition of the Saurer business. How much in the third quarter comes from this newly acquired business?
I will.
New orders and in the turnover.
Yeah. You find the detailed information at the last page of the presentation. On page 16, you see the numbers.
Only on nine-month figures.
Okay. We also have published it on the. Let me see whether I have it available, the quarterly figures. No, it is not here. We have published also in the half year numbers. You can take the difference. I can send it to you afterwards. It's just calculation.
Okay. Thank you.
The next question comes from the line of Christian Arnold with Stifel Schweiz AG . Please go ahead.
Good morning, gentlemen. Three months ago, you were giving us information that about 80% of the order backlog of June 2021 became sales in the last 12 months. I wonder if you have a similar information here, how it looks like now, yeah, with current quarter. Yeah. Order backlog. Have you washed all out, let's say, the orders with a mismatch between costs and selling prices? Yeah. Where do we stand here?
I mean, the wash-out of the orders, which we have taken and which are suffering from significantly higher cost is progressing step by step. The cost development in major areas is helping here also. We see some relief on logistics, we see some relief on raw materials, on electronics, unfortunately not yet. The wash-out is progressing month by month, but it's not over yet, Christian.
Okay. Will it be over next year?
Hard to say. It depends on a couple of things, yeah.
Okay.
In particular, it depends on cost development, yeah.
Yes. Thinking that you started with your price increase, I think in Q4 last year, taking care about higher prices, and you also introduced your price adjustment clause beginning of the year. One would have to assume that your order backlog today, given, let's say, stable costs, you should have a significant improvement of your backlog margins the coming months, right?
I mean, you are heading towards an outlook for 2023, and I ask you for your understanding that we will talk about this in March next year and not today.
Okay. Yes, I do. On the Egyptian order, where do we stand here?
Yeah. I can report that we have started to ship in June, and we are shipping according to schedule now, month by month.
Okay. In terms of the overall volume, where do we stand here now? I mean, what do you expect to year-end, where we stand?
I don't know this from the top of my mind. I would say we should be, by the end of the year, around CHF 50 million. That is what I would think.
50.
5-0.
Okay. Thank you very much.
Thank you, Christian.
The next question comes from the line of Emrah Basic with Baader Helvea. Please go ahead.
Yes. Hi, good morning. Just for clarification, first question. You stated in summary that you have a three-digit million order outstanding. Now what's the development on that? Is this actually also possibly referring to the Egyptian order?
Yeah, it is. We related it to the inventory that we had, right? Inventory is still, of course, staying at a high level because we have this huge order backlog, yeah. The amount of orders which are waiting in this inventory is not that high anymore, yeah. We have been able to reduce it, but inventory levels are still high because we have the order backlog that we need to supply to customers.
Okay. Thank you. Could you give us just an approximate number for your energy costs?
Yeah, that's straightforward, yeah. In Europe, we had 2021 energy cost of roughly CHF 10 million.
Okay, great. Thanks a lot.
The next question comes from the line of Sebastian Vogel with UBS. Please go ahead.
Good morning. Can you hear me?
Yes, we can.
Perfect. I have also three questions. I will ask them one by one. The first one is now since we have also third quarter revenues and then of course fourth quarter for the last year implicitly in terms of seasonality in normal times is there any sort of seasonality between Q3 and Q4?
You mean in order intake?
In sales.
In sales. Oh, I wouldn't know. I don't know whether there's a cyclicality. It depends on the situation in a year. I mean, this year I told you what we expect, yeah. No, I don't think that there is a cyclicality here that we could mention. A significant cyclicality in sales.
Got it. Many thanks. Second question is, I mean, as you said in the press release, there are quite some long lead times on the equipment side. Some are actually supposed to be then delivered in 2024. Is that in some way impacting the demand coming from this relocalization trend out of China, that some orders are not placed because those guys are saying like, "Hey, I first wanna wait until I get my machine before placing additional orders?" Or is that not really having an impact there?
It has an impact for sure.
Hard to quantify, I assume, right?
Oh, very hard. I mean, if you, if you are a customer and you wanna make a CHF 20 million investment into a new spinning mill today, and your suppliers, that you have been talking to, they tell you, "Okay, if you place the order today, you can get your equipment in the second half of 2024." What would you do in the current situation, yeah?
Rather wait, I can imagine.
You say, "Okay, let's see, I can wait another, like another six months before I place this order, given the level of uncertainty that is around us." Yeah. That is for sure, this has an impact.
Got it then. My last question would be on the capacity utilization at the spinning mills that you were alluding to. Can you contextualize a bit from what sort of level they were coming to what sort of level?
You know that under COVID, we did a detailed monitoring of the capacity utilization of the spinning mills, and at that time we said that normal levels are 80%. We have been in the monitoring that we are doing, we saw that we were significantly above this level in summer. Now we see that we are moving slightly below 80%. We don't know where it's going. Under COVID, we would have called it normal, but we see that it went down from a super high capacity utilization to what we called normal before. There is a decline.
Got it. Many thanks. That were my two questions.
Thank you.
The next question comes from Dagmar Morawitz with AWP . Please go ahead.
Yeah, good morning. In order to achieve your sales guidance for the full year, there must be another significant increase in sales in the last quarter. How will this be achieved? Is it mainly price increases or are there other components?
No, the prices for what we have, what we will turn into sales in Q4, they have been agreed a long time ago, yeah. In the equipment business. In After Sales and Components, we will also supply from the backlog. The prices have also been agreed, not that long ago. It's not about prices. It is about more machines, more parts, more Components which we will ship.
Okay, thanks.
The next question is a follow-up from Mr. Bamert , Zürcher Kantonalbank. Please go ahead.
I was impressed that the order intake in adjusted was declining more in the After Sales business than in the Components business by about 10 percentage points more. I thought that business is much more resilient than the Components business. Can you share with me what drives that cyclicality in the After Sales business? Is it also that your After Sales people are currently busy installing machines and missing components?
Yeah, there is a group of After Sales people who are doing this work at the moment, yeah. I mean, the sales guys are not impacted by this. Yeah. The sales force is working normally, and they have the capacity that they need. We need to know that After Sales has a high order backlog, which is very unusual for this business, yeah. Customers are waiting to get the spare parts that they have ordered. I guess what we see here is, number one, the lower capacity utilization of the mills, and number two, the high backlog, which has an impact on the order income or order intake in the third quarter.
Okay. Overall, you would assume Components and After Sales should, over the long run, show about the same development?
Yeah, I mean, it is, yeah, I would say so, yeah. In rough terms, we can say that.
Okay. As the question before was very interesting one, but I think it didn't deliver more insight. You basically say in the fourth quarter, the additional revenues will stem from more volumes being delivered and invoiced.
Yes.
Is there a lot of, let's say, sales which are near sales and you are sure that you can invoice them by the year-end? Or do you think that you have more production capacities being used in the fourth quarter? Or the question before was also about seasonality. Are there less holidays in the fourth quarter than in the third one? Or where do these additional volumes come from? What is changing within Rieter from Q3 to Q4 that we are able to see more volumes being invoiced?
High production, maximum production outputs, and turning inventory into sales.
Okay. I mean, keep going as you did in Q4. Thank you very much.
No, we need a little more. No, but it's working. Yeah, we see that it's working. In the third quarter, we've seen a clear indication that things are going in the right direction, and that is why we expect a number around CHF 400 million in terms of sales in Q4.
Okay. You mentioned that the order intake shows some cyclical slowdown. What does that mean for the pricing? Is there already fierce competition out there in the market for new machines and systems?
No, at the moment, the market is busily following us on our price increases.
Okay, perfect. Thank you very much.
Thank you.
The next question is a follow-up from Mr. Arnold with Stifel Schweiz AG. Please go ahead.
Yes, on the pricing, do I recall correctly that you actually have increased prices by some 20%, year to date?
Yep.
And, um-
Now from your comments just made in the last couple of minutes, this +20% price impact actually will be less because you're reducing inventories with zone prices, right? The positive price impact of this CHF 400 million in Q4, where will that be?
The 20% price increase is part of the wash-out process. Yeah.
Yes.
It will not be entirely. We will not see it in the full impact in the fourth quarter. Yeah, that's clear.
Exactly. You have a guesstimate where the price impact in Q4 will be?
I'm not gonna give you a guidance on the EBIT and net result today, which goes beyond what we have said in our release.
Yeah. No, I'm not asking about EBIT. I'm asking about the positive price impact, probably in Q four.
We see that the price impact already gives us some relief on margins, yeah. Of course not the full relief. It comes over time.
Okay. Thank you.
The last question is a follow-up from Mr. Vogel from UBS. Please go ahead.
Many thanks. I just have two follow-ups. In the press release, you were talking also about the cancellation rates that have been around like 5% of the order backlog. Again, sort of, can you contextualize that, how these 5% are comparing in a historic context for you?
5% are on the low side. We always work with an average of 10%. The reason being is, number one, that our customers are holding on to their projects because they see the opportunity by taking away business from Chinese textile companies, yeah. The second thing is we have, of course, raised the barrier for customers to cancel an order, because from a contractual basis, we would be allowed to keep the down payment, yeah, if they cancel. That is, of course, a huge barrier to overcome. We negotiate on that obviously, when a customer comes to the table, but from a contractual point of view, we are entitled to keep the down payment.
The down payment is roughly like 20%-30% or more or below, or any sort of ballpark that you can give us there?
Around 15%.
Got it. One very last question with regard to the site selling and the plans over there that you mentioned on the slide deck. In terms of timeline, is there any sort of transparency or clarity that you can give us? What is your timeline for that project to sell?
For what project?
The plant site in Winterthur.
Oh, yeah. We think we will make a decision whether to execute this in 2023. Yeah, we don't need it. We don't have a more precise timeline at the moment. The indicated offers came in. We are working with the indicated offers now, and we're moving into the next round. I guess we cannot say more today than we intend to complete, make a decision, and if we make a positive decision on selling to complete it in 2023.
Got it. Many thanks. That had my questions.
Thank you.
Ladies and gentlemen, that was the last question. Gentlemen, back to you for any closing remarks.
Very good. All right. We thank you very much for the lively discussion about the issues which are on the table at the moment. I hope we could shed some light on the things that you wanted to know, despite the fact that we're only talking about a trading update today. We thank you very much for your interest in Rieter, and we wish you a good remainder of the year, and looking forward to talking to you again in January. Thank you.