Earnings Call: Q3 2021

Oct 22, 2021

Slides

Ladies and gentlemen, welcome to the Median Investor Conference Call. I am Paul, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Doctor. Norbert Klaper. Please go ahead, sir. Thank you very much. Good morning, ladies and gentlemen. Thanks a lot for being with us this morning. I will guide you through the presentation now. It's a short presentation. We have a trading update today followed by the Q and A session as usual. On Page 2, we have summarized the key messages for today. In the Q3, Rita generated an order intake of almost CHF 700,000,000. This brings us to an order intake after 9 months of close to CHF 1,700,000,000. We will also give you a quick update on the acquisition of the 3 sour businesses and a quick update also on the credit lines we renewed. This is an information we have shared with you also in the press release. And we have an update on the outlook for this year. Let us move on, on Page 3. We see a comparison Q3 'twenty compared to Q3 'twenty one. And while it is impressive to compare these two numbers, I'd like to draw your attention to the €700,000,000 we booked in the Q3 2021. We see 2 driving factors for this development in this development. The first one is the catch up effect after 2 years of very low investments in the spinning industry. And the second driving factor is a regional shift in demand. While the catch up effect is easy to understand, the regional shift in demand needs more explanations, and I will come to that point later. I'm moving on to Page 4. Page 4 shows the comparison of order intake year to date by business group. And here we see that the big push we had in the Business Group Machines and Systems. Machines and Systems achieved an order intake of close to SEK 1,300,000,000 in the 1st 9 months. And this is where the catch up effect and the regional shift in demand are particularly evident. But also the business group's components in aftersales show a strong growth in order intake components plus 95% and after sales plus 123% compared to what we had last year. The reason here is the continued increased demand for spare and wear and tear parts as well. And the utilized spinning mills highly utilized spinning mills, they have a very strong capacity utilization, our customers, and this is the main reason for this development in components and aftersales. As a result of what I said, the order backlog that Rita has had on the books by September 30 was around CHF 1.5 62,000,000,000. And obviously, the backlog for RAS and RCO is in terms of months of sales lower than the backlog in machines and systems. We are talking in Machines and Systems about roughly 18 months of sales that we have in the order backlog. And in Components and aftersales, we're talking about 6 months. Let me move on to this regional shift of demand that I was mentioning earlier. We have that on Page 5. What we see here is an illustration of what we observe in the market. You see on this Slide two boxes the average order intake over the last 10 years by geography compared to the distribution of order intake by geography over the last 5 months. And you see the ranking over the last 10 years. China was on top followed by Turkey, India, Uzbekistan and Europe. And what we experienced, what we see this year, 1st 9 months is number 1, Turkey number 2, Latin America was not on the list before India, number 3 again Pakistan was not on the list before and China, number 5 instead of number 1. What is the reason for this? China's spinning industry stands for 50% of the global capacity, roughly. Costs in China have increased to a level at which many spinners are not competitive anymore on the world markets. And you see that in the press. You have your own sources where you know this from energy cost, labor cost, for example, they have grown significantly in China. And there are two consequences to this lack of competitiveness of the Chinese industry. First consequence is more investments outside China to replace production capacity, which stands in China today. And the second consequence is investments in China to improve the competitiveness of the industry, which intends stay in the country. And for both issues, for the investments outside China and the investments inside China, retail has the right products. When you look at the boxes again here and you see the two numbers, the totals, yes, and you compare what we had over the last 10 years on average CHF940,000,000 roughly and you compare it to the CHF 1,700,000,000 roughly which we had in the 1st 9 months, this is not a full year, yes, you see that this is more than a catch up effect. It's obvious that the comparison of these two numbers tells you that there is something structural going on and this is what I tried to explain to you. I'm very happy that Rita has the right products to support that Rita has the right products to support customers in the moves that they are making along these lines. Let us move to Page 6, a quick update on Sauve. You know that this is a transaction which is not which has not been done the classical release, let me put it this way. So we are in the middle of the carve out of the 3 businesses that we have acquired. The carve out is going as planned. There's no hiccups. It's just going according to our expectations. But we have not included Sabra numbers in the figures that you have in front of you. We will do this next year when the carve outs are over. When we are done with the carve outs and we have a solid ground to work from, then we will publish our numbers including Saurabh. Let me move on to Page 7 to the outlook. The outlook is basically unchanged to what we had published earlier with 2 exceptions. First paragraph tells us first section says 1st 9 months were characterized by a rapid market recovery combined with a regional shift. We talked about that. Rita expects the demand for new systems to gradually return to normal in the coming months. The word gradually was missing before, and I would like to explain to you why we made that change. We expect the demand for new systems to normalize step by step despite the long delivery times, which we have at the moment. And the reason is this regional shift and the underlying rationale. I told you that the Chinese spinning industry stands for 50% of the global capacity. In 2018, Chinese spinning mills consumed 22,000,000 of fibers. And I told you that we expect a significant portion of this capacity to be replaced outside China. And to produce 1,000,000 tons of yarn on an annual basis, you need an investment in equipment of approximately CHF 1,000,000,000. This is why we think that the regional shift will continue for some time and retail has the right products. The second section in the outlook tells you the company assumes that the spinning wheels will continue to work at full capacity. We see this in our monitoring. They enjoy a very nice business. You also saw the cotton price above US1 per pound. So our customers are enjoying a very strong business at the moment. For the full year 2021, we anticipate sales of around CHF 900,000,000. Here, we had before above CHF 900,000,000. And why did we do this? Why did we make that change? We the reason for this modification are bottlenecks in logistics and materials supply. And I would like to explain to you how we look at these two challenges. You all know about these challenges. They are in the press every day. The shortages in material supply are a challenge, particularly related to semiconductors and electronics. Although we ship our machines even if parts are missing, we complete them on-site after installation when the parts become available. This ensures that customers can start production as soon as possible. We're not losing time by storing the machines or whatever. We ship, we install and we complete as soon as the parts become available. The bottlenecks in sea freight and also in train transportation and containers and so forth, they are the second challenge we're faced with. We will do everything we can to ship as planned and as agreed upon with the customer, but we are aware of the challenges and that is why we made this change. The realization of sales, as I said before, coming back to the outlook from the order backlog continues to be associated with risks. As I said bottlenecks and material deliveries, the freight capacities as well as the ongoing pandemic we must not forget about that. We have countries for example, Vietnam and or Malaysia, where the pandemic is by far not over yet. And this is an additional challenge for us. But as I said, as I told you, the way we are handling it allows us to ship and allows us to install. But the challenges regarding transportation, sea freight and also trains are there. And this is why we are more cautious with our sales outlook now. All right. So far the presentation, we are open for questions now. We will now begin the question and answer session. The first question comes from the line of Christian Arnold from Stifel. Please go ahead. Good morning, gentlemen. I have one, two questions. First, maybe to your outlook slide. I spotted an additional change you made. And I mean, at the half year figures, you were talking about spinning mills to work at high capacity or very high capacity. And now you are saying at full capacity. So what does it I mean, what has changed? I mean, basically, it's to the good. And maybe you can give us an update then what does it mean full capacity in terms of utilization, in terms of activities, etcetera, etcetera? And yes, that will be my first question. Yes. I mean that is I have to admit, I guess, it was done unintentionally. The capacity load of our of the customers' mills are unchanged. They are at a very high level. And the ones who produce high quality yarns are fully booked. And in addition, I can say from what I hear from the customers, they are making a lot of money at the moment. Okay. Thank you. And second question, update on the huge Egyptian order. Where do we stand here? Will we have the shipments done mostly in 2022? Or do we have some further delays here? What we hear from Cairo is and what we see at the construction sites is that they are making good progress with the buildings. We expect to ship half of the order next year. That's where we are. Half of the year? Yes. Half of the order during the course of next year. Okay. And the other half in 2023? That would be the thinking at the moment, yes. Thank you. There are no further questions at this time. We have a follow-up question from the line of Christian Arnold from Schiefel. Please go ahead. There are further questions. So if nobody else wants to ask something, I'm happy to do that. I mean, this huge order backlog you have or huge order entries you have right now, I mean, comparing that to the production capacities you have, I mean, it looks like that you could easily achieve sales of $1,500,000,000 $1,600,000,000 in the next 2 years. Do you have the production capacities to do so, probably also helped by the sour activities you are acquiring? Or do we have to have some production capacities build up in addition? The situation at the moment regarding capacity, production capacity is the following. You know that we our production capacities during the crisis. We have talked about this a lot last year also in these calls. And I'm very happy that we did that. So the capacity has not been reduced as opposed to what we hear from other industries, yes? So we didn't do that. And I guess when we look at it today, that was a good decision. Number 2 is we made investments already this year into bottlenecks, yes, to get rid of bottlenecks based on the capacity load that we see by product. Bottlenecks exist, of course, in relation to a certain product range that you want to produce, And that is what we already did. The machines will be coming in the first half year next year. So we will extend we will get rid of some of the bottlenecks and therefore extend our production capacity. Otherwise, we don't think about major investments at the moment. We will watch the market. We see that our customers continue to place orders with us despite the fact that our delivery times have exceeded 12 months by far. And I guess the reason that we hear from them is that they say, okay, the structural change in the market will go on for a long time. And if I don't place the order today, I have to wait even longer. So I do it and I live with the fact that my delivery time exceeds 12 months or even 18 months. That is better than waiting longer. That's what they are doing. That is what we see them making their decisions on. And so at the moment, we don't have plans to further expand our capacities significantly. Do you think there are also double bookings? We see in some other industries that people actually order not only earlier, but also much more than what they need in order to be sure that they get at the end something. I mean to afford a double booking at retail, you need to have a lot of money because you have to place 2 down payments, yes? And I guess that's not what they got that they're doing, yes? I mean, we know them for many years. I mean, 90% of our customers, we know for many years, we know what they are doing, how much money they have, how their business is going. We have not seen double bookings at this stage. Okay. Then maybe a question related to higher material costs. How much are you affected by that? And how much have you increased your prices? And when have you increased your prices? We started early this year to increase prices, and we go through the 3rd round of price increases now. And this was absolutely necessary to cover the material cost increase that we see. So we're very happy that we did that early enough. And if prices go up further, we will continue to increase prices. Material costs go up further, we will continue to increase prices. Nobody likes it, but it is what it is. You said that you started early this year with the first one. When was the second? When was the third one? And can you give us an indication in terms of market yield? If I remember right, the second one was in June, and the third one was in September. And we are talking here about percentage point wise kind of magnitude? I guess, in total, we have passed the double digit percentage points. Thank you very much. I go back to the queue if there is any. Thank you, Christian. Thanks. The next question comes from the line of Alessandro Foletti from Octavian. Please go ahead. Yes, good morning, everyone. Thank you for taking my questions. I wanted to ask you something on Latin America. It's really a long time. I don't see that name on your agenda. Can you give an indication how big the orders are? And if it's sort of a one off or goes also into this shift trend? And maybe then in this case, what's the thinking behind? Yes. What we hear from our customers is that they see an opportunity in supplying yarn to the U. S. Market, and they do this by replacing Chinese suppliers. That is what's going on. And we have many customers in Central America who have not invested over the last 20 years. Let's say there was a machine here and a couple of machines there, but now they are investing into new mills, complete systems, latest technology and the opportunity that they see is to supply the U. S. Market from Central America. And you know that labor is available in Central America. And I would expect the U. S. Government to support this. So I guess that is a movement which has a lot to do with the regional shift with building capacity outside China in order to replace what is installed in China today. Right. So we're talking basically Mexico or El Salvador, Guatemala and in particular Honduras. All right. Interesting. But can you give an indication of how much in this EUR 1,600,000,000 comes from Latin America? Can I do that? Let's say low 3 digits. Low 3 digits. Okay. That's okay. Nice. Nice. It is compared to what we had over the last 20 years, it is huge. Huge. Yes, yes, yes, absolutely. Yes, that's why I was interested. Okay. Another question is on the you mentioned that your clients are making what did you say? What did you say exactly? Let me see, excuse me. They are making a lot of money. No, you said something else. They're earning I don't know. They're making a lot of money maybe. That's what you said, if I'm correct. So the cotton prices are at $110,000,000 plusminus above $100,000,000 right? So can you give an indication where the yarn price is? I mean, it has gone up even more than that? I mean the game board sorry, the game, the mechanics in this market for our customers is they have contracts or even cotton or raw material on stock, which they bought for a lower price. The yarn price follows the cotton price or the fiber price immediately. So there is an additional margin potential here for them based on the fact that the yarn price follows the fiber price immediately, but their raw material costs don't. And this is why they're making so much money. Right, right. Okay, great. I think that's what I had in my mind then. Thank you. And Alessandro, to make one more point here, and of course, it is quality yarn is scarce at the moment, yes, Because if quality yarn suppliers from China are not competitive anymore, there is an additional margin potential for our customers, which has nothing to do with this raw material yarn price thing, yes? It is just that the there is not enough yarn on the market and that helps them to increase prices as well. Yes. Okay. The cotton price is that high in China as well? Even a little higher than the world market price. Okay. There was an issue a couple of years ago with very high stocks of the government of cotton and so on. Is this now solved? Yes. This is now very difficult for the Chinese government to solve because this is Xinjiang cotton. And there is this cotton ban in a couple of countries, yes? And this makes life quite difficult for the Chinese cotton producers, including the cotton which they have on stock. Right. So this Xinjiang is having a trouble then in general. Is this because of issue with the oil growth? This is a political issue, yes. Okay. All right. Thank you. Thank you. The next question comes from the line of Sebastian Vogel from UBS. Please go ahead. Hello and good morning. Mike, I have three questions. The first one is on the supply chain constraints that you have outlined early on. When do you think they will be removed? And a follow-up question to that one, when you described that you deliver already the machines that are not fully finalized to your customers, how is that impacting your sales recognition? That would be also interesting to know. And then a follow-up question to this capacity question of one of my colleagues early on. So does that mean including the investments that you have also outlined, you are then on a sort of a revenue run rate including Saurer of around like SEK 1,500,000,000 or a little bit above. Is that a fair number there? That would be my 3 questions. Yes. The supply chain constraints, this is hard to assess, but I think they will accompany us for some more time. There seems to be an imbalance in the systems around the globe. I mean, we hear about the problems with semiconductors and electronics for some time. But there is different categories which pop up every day. And things that you wouldn't expect at all, they have nothing to do with COVID. So that there is an imbalance in the system and it will take some time before this system will be balanced out again. So we will have to live with that for some time. So our purchasing guys and our supply chain guys will be busy over the last next couple of months. We know that it is just it is the situation and we have to cope with it. I don't expect it to be over before the 1st semester next year. So it will go into 2022, the time frame until the system is back into balance. The machines to customers, yes, we recognize sales when we ship. And we hold on to this because the situation with the missing parts is not our fault, yes? It is beyond our control. It is force majeure, so we ship. And it is also in the best interest of our customers to do that. For the full price? We recognize sales when we ship. So for the full price? Pardon me? So for the full price? Yes. There is no reason to accept price cuts, yes? It is beyond our control. It is Force majeure. Yes. No, it just may delay like whatever like you have, like because there's some displaced missing use, so you reduce it by 5% that you only get back when you get and finally get missing piece also installed. That's not the case. No. No, it's the part the share of the cost is relatively small of the missing part. So this is not really important for the customer. And of course, we do not invoice when we ship the service part of the contract. This is but this is no change the past. This is then charged when the installation is done on the side of the customer. Understood. But what we do, of course, is we ship missing parts free of charge. That is a service to our customers that they can expect. And we do the installation then, of course, also free of charge because the installation has been built before. And your third question, investments, €1,500,000,000 Well, we have not done the budget yet for next year, and we have not an outlook yet. So we will come back to that point in March. But I mean, you know what Rita can do without SAULRA. You know what the number is that SAULRA had in 2018. We published that. So yes, we will come up with a number in March. Many thanks. The next question comes from Rolf Reinders from Helvea. Please go ahead. Yes. Good morning, gentlemen. Thanks for taking my questions. You mentioned something on the potential from China in fibers, 22,000,000 fibers. Unfortunately, either the line was too bad, but I didn't follow everything. And then you mentioned, was it CHF 1,000,000 per ton is CHF 1,000,000. Would you mind repeating or explaining that again? Yes. 22,000,000 tons of fibers was what the Chinese spinning mills consumed in 2018. This is close to 50% of the world's fiber consumption. And if you want to produce 1,000,000 tonnes of yarn on an annual basis, you need to invest into spinning equipment CHF 1,000,000,000. So this tells you what the additional investments are, which are required to move away 1,000,000 tons of yarn production from China to a different place. Great. Thank you. And if you would say maybe 10% would move, you could do 30% of that. That's kind of the rules of them. That could be the thinking. Taking into consideration that Rita would expect a higher market share than 30% in such a scenario because we have the right products. The markets outside China buy premium and retail has the premium products. And we have a very strong position in many of these markets for many, many years. That is why we would expect more than 30%. Great. So if China doesn't catch up quick on the competitiveness, this could be a structural tailwind for you for quite a bit to last? That is how we think about it. Yes. Okay, great. Thanks for that. And then I think last what you communicated about your breakeven level, was it €800,000,000? Yes. I'm not sure. €800,000,000, right? Is it this is ex Soudre then, of course, but is there any reason that, that figure has to be adapted? At the moment, we are still at that level, yes, no change. But when we we will come up with a new calculation and thinking when we know exactly what we have after the carve out, yes, for in particular in terms of structural costs. That is that we will assess that and come up with a modified number or even it might even be the same or we don't know yet. Yes. Maybe a hint from my side. The breakeven also depends on the mix because not all the business groups have the same margin, the gross margin. And so it heavily depends on the mix. Okay. But the mix is developing in your favor, as I understand it. Let's come back to that in March, yes? Okay. You might be right, Ron. You might be right, but it's too early to say, yes? Before we've seen the numbers, we will not comment on that. Okay. Understand. Then maybe on something, which is probably also too early to communicate on, but just the thinking on dividends because the equity providers have been in very meager years with dividends. What are your thoughts going forward now that such a strong recovery is happening? You know, Roop, that we have a dividend policy in place. Minimum 40% of our net results, we will pay in dividends. And this policy is unchanged. So this will lead us to the dividend proposal next year to the AGM. Okay. So no room for a catch up? Depends on the net result. No. All right, great. Well, I wish you a very strong Q4 also. Thank you, Roeland. You are well delighted. Thank you for taking my questions. Thank you. The next question comes from Edouard Rivas from CKB. Please go ahead. Good morning, gentlemen. Thank you very much for taking my questions. First of all, my congratulations for those impressive order intakes. My first question would be concerning the guidance. You mentioned during the first half year result, it should be slightly or at least over €900,000,000 and now it's mentioned to be around €900,000,000 is there a material change or is this just a wording that there was change without any consideration? No, as I tried to explain, this was done intentionally, yes? What we feel what we see today is that the bottlenecks in logistics, in particular, seafreight, trains and so forth, they continue to be around. And this is why we are cautious here. The order the backlog, of course, would allow for over SEK900 1,000,000 and even I don't know how much here. But the what when we look at the bottlenecks in logistics and the trouble we have booking a ship or bringing our containers on a train, we said let's put this from over €900,000,000 to around €900,000,000 And this is what we're confident of reaching despite the trouble that we have around us. And if things go the right way, it will be better. Understand. Thank you very much. My second question would be, so I understand the explanation about China and the lack of competitiveness. What is your base case scenario concerning the pullout of China? You said at this time, it's still 50% of the world production. And what is your estimation? It will go down to 30% to 40% to 25 To be very honest, that would be too much of a crystal ball thing for me at the moment. We will watch it for some time. There is a couple of things we need to consider. The speed of this replacement, the reaction of the Chinese government to it, will the Chinese government at a certain point in time say, no, that is enough, we stop it now. We put additional subsidies into the industry. Or will they let it go? We don't know that at this point. It will also have to do with the difference in cost and the development of this difference between China and the countries that are the candidates, the replacement candidates, so to say, there is for me, it would be too much of a crystal ball thinking. What I would expect is a significant change, yes? How big is the change is going to be is too hard to tell at the moment. Understand. Thank you very much. I would have another question. Just do you have an idea when the consolidation with the add ons you acquired in August will happen? So at the moment, we are in the carve out process, process, and it's 3 different businesses we're looking at. They are a little bit on a different time schedule. But at the moment, the assumption that there will not be much of a consolidation for this year is the best guess I can make at the moment. So consolidation next year. Okay, great. Thank you. And I think that's it. Thank you very much. I wish you a great day. Thanks a lot. To you as well. The next question comes from the line of Patrick Lager from Credit Suisse. Please go ahead. Yes. Good morning, gentlemen. Just one follow-up regarding Egypt. Initially, if I remember well, initially you expected sales recognition back in 2020, 2021. Of course, in the meantime, we had some little troubles with this pandemic. But there is now this shift towards 2022 and 2023, which probably is mainly due to the pandemic here. But is there just to make sure, is there something which potentially could be related more specifically to the customer, just to make sure we don't have any kind of impairment in 1 or 2 years' time from now? Thank you. Thank you, Patrick. No, the customer is still very much committed to the program. We see the new buildings being erected in Egypt, the buildings that we need for our equipment. We see that they continue to work on the financing with at full speed. So no, there is no indication that they are second guessing the program. Okay. Excellent. Thank you. The next question comes from the line of Marti Pascall from Corozal Holding. Please go ahead. Yes, good morning. Just a quick question on the downside risk. I mean, everything looks green right now. But what are the risks that probably some of your clients will cancel or want to get out of these contracts? And then what are actually the terms with regards probably to the down payments? I mean, do you would you have to pay that money back to them? What I can tell you is that at the moment, I receive calls every day from customers who wish to have their equipment earlier. So we're not talking about cancellations at the moment. However, we have all experienced this in this business. And what retail does is in order to protect the company against cancellations is we take this down payment, as you know, and we don't produce the machines if we don't have the letters of credit in place. There is a couple of exceptions to this rule. But in general, we do it that way. So in case a customer cancels, normally, we don't have the machines on stock, yes, because we have not started producing them. And we don't give the down payment back automatically. What we normally do is we tell the customer, okay, we keep your down payment and you will come back in 2 years' time with your next order and then we make use of the down payment for this order. That is what we normally do. Okay. Thank you. We now have a follow-up question from the line of Alessandro Foletti from Octavian. Please go ahead. Yes. Thank you for taking a follow-up. Just on this China shift issue, can you remind me, I don't remember the number, but how much do the Chinese export? Out of the 22,000,000, 9,000,000 tons were exported. Right. So one could imagine if she wants to be super optimistic that this is the potential? Or then at some point, you think that the government will react or maybe the local producers will simply react by investing themselves and then keeping this business in China? I guess it would be unrealistic to expect that the €9,000,000 will go away. But the portion of the €9,000,000 which goes through mills today, which are 20 years old, this portion might disappear. Okay. Thank you. Thank you, Alessandro. We now have a follow-up question from the line of Edouard Rivas from TKB. Please go ahead. Thank you very much. Sorry for this those additional questions. The first one is, you mentioned the profit that is made by yarn producers on their inventories. But does that mean that when they have to resupply, then there is no profit anymore since the yarn price is clearly following up the price of cotton? So they basically only make a profit on the inventories? Or is that ongoing because they get the cotton at a discounted price? No, no. I mean, then if your yarn price if the cotton price doesn't change anymore and the yarn price doesn't change anymore and they find back their equilibrium, they make an average margin, but not an above average margin. Today, they make an above average margin. Understand. Thank you very much. And second question, still due to the delivery time, are you not afraid that some machine secondhand machines can be sold because you were mentioning in the past that there were a lot of machine and potentially overcapacity and those machine that are likely less used, they could not be chipped away to those countries where the production is ramping up? No customer in Honduras would even think about buying a 20 year old Chinese machine for his production. This is not an option. Okay, understand. Thank you very much. There are no more further questions at this time. All right. Thank you very much for this lively discussion. Thank you very much for being with us this morning. We will talk to you again in January, I guess, yes, when we do our sales and orders update. I thank you very much. And I hope to talk to you again in January, and I wish you a wonderful weekend. Thanks a lot. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.