Earnings Call: Q1 2021

Apr 29, 2021

Dear ladies and gentlemen, welcome to the conference call of Andrus AG. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Wolfgang Leitner, who will lead you through this conference. Please go ahead, sir. Thank you very much. Welcome, everybody, to our Q1 conference call. I hope you are safe and healthy, probably in your home offices and getting ready for the loosening of the restrictions in connection with this COVID. As always, I would like to start with some more general remarks. Overall, I think we agree that the world is in the midst of an economic upturn, primarily driven by The U. S, China and also India so far. The effect of that we've seen rising commodity prices for steel, copper, etcetera. We start seeing scarcity of relevant goods, for example, wood or semiconductors. And we see also and get good messages and news from companies that the order intake is picking up. On the basis of this environment and this development, we achieved, I think, good financial results in the 2021. We booked a very good order intake of about or even more than €1,700,000,000 with good developments across all four business areas, including Hydro and including Metals, which in the past showed rather low order intake figures and were lagging behind. Also very important to mention, order intake in service recovered strongly compared to the preceding quarters. On the revenue side, basically, we have achieved the same level of last year's Q1, which, as you will remember, was only very partially impacted by the pandemic. Despite all the restrictions and challenges with regard to travel, health, etcetera, quarantine, we have been able to proceed on our major project sites, especially in pulp and paper, without major delays, which resulted in good and stable revenues, obviously. Service revenue remained rather subdued in Q1. But in light of the good order intake in service, we expect also revenues to pick up in quarters to come. This good revenue generation combined with the cost reductions we have achieved led to a strong development of our operating result EBITDA and the profitability. And again, the earnings development was solid across all four business areas, including Metals, where first positive impacts from the operational measures implemented in Schuller last year are reflected passing Schuller passing the breakeven point. It is too early to say that we have sustainably reached turnaround in metals forming Schuller. However, think things are developing in the right direction and we will continue to work on this topic and update you on this topic. So to summarize, we're very pleased with the development in Q1 and expect continued good market environment in the coming months. Let me now go into the details and the presentation, starting with Page three. Starting with the group order intake at €1,700,000,000 As I said, strong recovery also in the Service business compared to the earlier quarters. Revenue satisfactory at €1,500,000,000 Service revenue still somewhat low. Order backlog €7,100,000,000 EBITDA significantly up. Pulp and Paper, Hydro and Separation continued a favorable earnings and profitability performance. And the turnaround of Metals Forming achieved in Q1, but remains to be stabilized. So no complete release of our concerns in this regard. Profitability EBITDA margin significantly up to 7.4%, up from 4.6% in 2020 Q1. Slide five. Order intake down 7%, but down from an exceptionally high level of €1,850,000,000 in Q1 twenty twenty due to some very large orders in Pulp and Paper. So €1,730,000,000 which would give about 6,800,000,000.0 or €6,900,000,000 if it would multiply it times four, is clearly a good order intake. And you see on the right side that the remaining three business areas Metals, Hydro and Separation show a pickup in order intake. Geographically, Europe and North America are up to 63% share and emerging markets down to 37 basically reflecting the large order for Pulp and Paper in 2020 the emerging markets or from the emerging markets. On Slide six, quarterly development. If we add up the order intake of the last four quarters, which obviously have been hit completely and fully by COVID, order intake has been €6,000,000,000 We have seen a decline in capital compared to the high level of churn. I've already covered that. And Services has shown a strong recovery. At the lower right hand side, you see the development of order intake in Service, down from €690,000,000 in Q1 twenty twenty to €518,000,000 in Q2, euros $530,000,000, $620,000,000 and now €700,000,000 in Q1. So a very good pickup in order intake. So within our accounts again, it's 40% of our total business versus 60% capital. On Slide seven, revenues stable, particularly and metals down as a consequence of lower day intake last year and the rates slightly up in Pulp and Paper, stable. If you look at the share of the service business in the four business areas, we see Pulp and Paper down to 41% from 51%. So this is nothing negative or nearly nothing negative on Service, but reflects the pickup in capital revenues as a consequence of executing these large orders. Metals stable at 25%, Hydro gradually increasing to 35% and separation 51%. Slide nine. Order backlog are down from the peak of €8,100,000,000 but the €7,100,000,000 still a very good order backlog and good visibility and also good load for our both our engineering departments and our factories. On Slide 10, probably the most beautiful slide. EBITDA is up from €70,000,000 in Q1 twenty twenty to €111,000,000 up 58%. Very good development in all the business areas, continuing high profitability, even somewhat higher in Pulp and Paper, 9.7% metals, minus 3.7% to plus 2.8% Hydro basically comparable for both the old metals part and metals forming. Hydro up from 5% to 6%, not quite where we would like to have it, but it's clearly an improvement. And a very good and excellent development in separation more than doubled from 4.5% to 9.5%. So to be honest, we are very satisfied with that. And I think that based on this, this really has been a good quarter and makes us optimistic. And I would hand over to Norben Leddesheim, our CFO, to take you through the next few slides providing some details on the financials. Yes. Thank you, Doctor. Leidner, for handing over. Good morning to all of you and who are on the call. Looking to the P and L, as Doctor. Leiner said, nearly all our numbers improved. You see it on the slide, starting with €111,000,000 EBITA, euros 151,000,000 EBITDA if you adjust depreciation, which is also significantly higher than last year. And then reduced by the other financial elements, the IFRS three amortization, it gets to a 96,400,000.0 EBIT, also more than EUR40 million better than last year. The financial result is a little bit worse than in first quarter of the last year due to a onetime effect. Here, we have an extraordinary dividend to be shown according to IFRS similar to interest to a minority shareholder for the IR Tech issue where we took over the complete company now and where we have to pay a dividend to the minority shareholders. EBIT of €84,000,000 nearly doubled and with a lower tax rate compared to last year where we still have 31%, now at 27.5% expected for this year. We lead to this EUR 61,000,000 net income, which is clearly a doubling of our net income and has now lead us to a 4.1% net income margin, which is now certainly in the range, which is more satisfying than in the last two years. Looking to Page number 12, cash flow. Also nothing really exciting, Starting with €61,000,000 in net income, adjusting the tax and the interest and the noncash relevant items, it leads to the €139,000,000 gross cash flow. Also based on the better operational profit and the better net income, significantly improved compared to last year. Then a small downturn, increase in net working capital, which add up some cash, the amount of EUR 36,000,000, but this is a normal process in the capital business. But in some periods, you also have here a decrease and this adjustment of taxes and interest, which leads to the EUR 69,300,000.0 operating cash flow, which is compared to the net income and cash conversion rate, again, bigger than one. It's also, from our point of view, a satisfying view. And this is then also the basis going to Page 13 for the development of our liquid funds. Here on the summary page, the lines the first lines have been explained, but of the line in detail. Just wanted to emphasize, still careful on the capital expenditure side with the €32,000,000 which is a little bit lower than the average in last year. This leads then to liquid funds of €1,600,000,000 Here, you need to have in mind that payment of the dividend is included in this number and also an out payment of more than €30,000,000 for a company which we acquired in France, which is called La Roche and which belongs to the nonwovens division which we have in our company. Net liquidity, $365,000,000, still a very good base for further activities and further investments. So far from my side, I'd to pass back then to Doctor. Leinhard. Yes. Thank you very much. On Slide 15, we start with the Pulp and Paper business area. Yes, I think everything is positive there. Again, the order intake lower than the €1,100,000,000 last quarter last year's quarter, but €850,000,000 excellent order impact, excellent profitability, also containment on cost side on the employee side. And yes, I think we have covered everything on pulp and paper already. On Slide 16, Metals. We see, obviously, the effect here on the cost reduction, restructuring measures that we have taken in the last, actually, years. Order intake with €429,000,000 reasonably good. Order intake, very good order intake, substantially above the revenues of €316,000,000 EBITDA margin from minus 0.7% to 5.9% and EBITDA margin 2.8% after the loss of minus 3.7. We see also in the non performing part a very good order intake. And as we said, positive profitability in both sub segments of this business area, Schuler continues to see declining costs, also declining workforce. That will continue for at least one more quarter. So then it will probably slow down towards the end of the year for the second half of this year and then for next year, some remainders to be seen. But basically, by midyear, we probably have seen the vast majority of these cost reductions, which then the effect should be then seen from then on in the quarterly income statements also. Yes, I think that's it for Metals. Next Slide 17, Hydro. Good order intake without any large order being booked. There is still hope for large orders, but I'm not going to be more specific on that taking into account the experience we have made on waiting for these large orders. And revenue up 6% and profitability EBITDA 8.8% and EBITDA margin 6% as we think best profitability of the industry at least outside China. Chinese companies, we don't really understand. We have also published today, I think, the new order for Australia for Kitson, which is a pump storage, very interesting project in the mine basically, shows that pump storage is still active and that we most likely will see more of that in the future. Also see on the last line of the table the effect of the cost containment measures there. So employee number is down from 7,200 to 6,770. And finally, separation, stable order intake, but good project activity going forward and slight 5% up in revenues and profitability, a lot improved, thanks to cost very strict cost containment, cost reduction activity. EBITDA margin up from 7% to 11.7% and EBITDA 4.5% to 9.5%. Very good development. We are happy with the business area. We see good opportunities for both growth and continued good profitability and look forward to develop it further. To conclude to the outlook on Slide 20. Pulp and paper, good project activity, both harmonizations and new brownfield or greenfield mills. Obviously, the mood of our customers is good due to the high pulp prices and high demand for various ports and tissue grades, nonwoven, very active, continues to be very active. You will remember last year we doubled the order intake for nonwoven roughly from €250,000,000 to close to €500,000,000 for all of 2020. And we see also pickup in demand for service activities. Metals forming, good Q1. We see a chance that this will continue in Q2, but it is continues to be a rather shaky market. Battery powered cars, battery powered mobility continues to be important, also not to the extent we have seen in the this was the fourth quarter, I think, last year or full year, even full year for Schuler, where onethree was coming from with electromobility. So I think on the good side is that also the non electromobility activity has picked up somewhat and hopefully will stay the same. Metals Processing, again, very high steel prices, therefore, mood in our customers and pickup in project activity. Hydro, stable to the downside, so no risk of going down further. Some midsized large orders are on the horizon for the next very few quarters. And so we see with no concern and some hope to for a pickup in order intake. And separation has covered a very good market situation in several of separation segments, including the environmental area. And therefore, we continue to be optimistic there. And finally, Slide 21. Our guidance, We expect group revenues to be slightly below the 2020 level of €6,700,000,000 in 2020. We expect an increase in the reported EBITA compared to 2020, which showed €392,000,000 And depending on the revenue development, the adjusted EBITA for non operating cost expenses, we expect to be approximately stable year on year. So the baseline of adjusted EBITA for 2020 was €471,000,000 Currently, we do not see any very significant capacity adjustments, but we will continue to do optimizations, and we certainly would further optimize the cost situation we are in. It will be our goal and our challenge to mitigate the desire to increase the costs in light of more active optimism in the market, but we'll do our best to do that. And so we are cautiously optimistic for the remainder of this year. Thank you for your attention, and we look forward to your questions. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your questions answered before your turn to speak, you can dial 02 to cancel your question. And the first question received is from Sven Weyer of UBS. Your line is now open, sir. Please go ahead. Yes, good morning. Thanks for taking my questions. The first one is on the order intake. And Doctor. Leibner, basically, I take what you said on the outlook on the pipeline, it sounded like hydro could be improving sequentially, the Schuller business. I think on the pulp side, maybe there's at least one greenfield project still in the pipeline. So I was just wondering how do you see the chances for a record order intake this year? Because if I take Q1 times four, I'm already slightly under €7,000,000,000 Record was 7,300,000,000.0 in 2019. And with all the momentum statements you made and nothing bad happened, so to speak, that doesn't seem to be impossible in my view? That's the first one. You're starting with an unfair question. I mean, the $7,200,000,000 that we achieved was a year with several large projects going ahead and a very good market share of us. I think it would be too much to expect that. Yes, we I would really say we are cautiously optimistic. The atmosphere is good. But we all know that a good and high pulp price may facilitate the decision to proceed with the project, but it cannot create projects because projects to create projects, it takes years. And they are also basically a fixed schedule because they need to to, you know, wait until the plantations have grown sufficiently, etcetera, etcetera. There may be some bridging, yes. But so, no, I would I would I would not encourage you to assume a record order intake for this year. I think it's still I mean, I cannot exclude anything. But Mhmm. Based on what we know now, we would be surprised if we would exceed this record order intake. And the hydro project you announced today, is that a Q2 order? Or was that already booked in the first quarter? Because it sounds like a relatively sizable one. So it's in will be booked in Q2. Okay. Thank you. The second point is just in terms of the earnings development. And I'm sorry if that is again maybe unfair question. But I mean, look, on Metals, it seems that the turnaround is going a bit faster than we all expected. You also said that the Service business revenues will catch up in the remainder of the year on the back of the strong orders, and you're now already up 40,000,000 more than €40,000,000 year on year on the EBIT, and you're still guiding flat. So would you say that the risk is more skewed to the upside given the momentum, especially on service? Yes, yes. Basically, yes. Because you also said there are more savings to come on Schuhler, right, in Q2. So it's not it's only in H2 where things flatten. Keep in mind that we still do some short work weeks in especially Germany, which is where we know it is majority of Schuler's employees. So we need this reduction in workforce to be able to phase out phase down and then phase out the short work weeks. So we see already this effect of personnel reductions in the form of benefits from the short work weeks. And on the hydro side, the I mean, the restructuring there seems to be going fine as well going by the margin development you had. Yes. Yes. Have some ongoing, let's say, ideas or projects, and but it's moving into the right direction. Yes. And my final question, Doctor. Leitner, is just when we look a little bit more structurally on the Schuller and the Hydro outlook. I mean, obviously, this year in Hydro, we have maybe a bit of a bouncing from a low level And in Schuller, maybe cyclical recovery. But how do you look at those businesses structurally beyond this? I mean on hydro, do you see this? What you see on the pump storage side? I guess there, you probably have a good visibility in terms of project lead times. Do you think that's the beginning of a more structural recovery also in the business or and this order today is maybe representative of more? And also on Schuler, what's the scope there of something beyond just the cyclical recovery? Thank you. I mean, we continue to be favorable and optimistic on hydro. I mean, the long term trend with having so much coal based electricity capacity in the world are having and relating that to the discussion of electromobility and relating that to the discussion that hydrogen might be the next wave of renewable or carbon free energy, I cannot imagine that the world will leave hydro power on the side and will not continue to develop it. So I think we should see the bottom and have seen the bottom the last few years driven by this increase in wind power and the related decrease of electricity prices. But longer term, think everybody needs hydro. And if we would if as I said, if electromobility plus hydrogen take off as everybody is expecting, then you need more green electricity for the production of hydro. And then let's not forget, hydrogen production is, I think, less than half of the efficiency of anything else or a lot will be needed. And therefore, we continue to be optimistic. On sugar, I mean, it's probably a philosophical question which type of cars we will drive in five years, in ten years, in fifteen years. But again, Schuler is benefiting both from conventional cars and from hybrid cars double and from battery powered cars also nearly to the same extent as with fossil fuel driven cars because the only difference is the powertrain and Schuller, a very little, very, very low percentage of revenues of Schuller has been related to this powertrain production of parts for the powertrain. And therefore, long term, are not concerned. We are very confident that Schuller is clearly the market leader, and we are also optimistic that with the cost reduction we have done, with the restructuring we have done, Schuler is now much more competitive than it has been over many years. And therefore, I think we should we have a good reason to be confident that we can continue to improve the profitability of Schuler. Okay. Thank you, Doctor. Leitman. I'll go back in line. Thank you. The next question we received is from Andreas Willi of JPMorgan. Your line is now open, sir. Please go ahead. Yes. Good morning, everybody, and thanks for the time. My first question is on project execution in pulp particularly in Latin America. You mentioned that it's progressing according to plan, but obviously the situation particularly in Brazil is still quite difficult. Maybe you could discuss a little bit the risks around that. Are there also extra costs you're incurring in terms of travel, quarantine, restrictions? What's the risk there in terms of completing large projects on plan and on cost? And the second question, you mentioned the positive sentiment around some of the customers in the metals area, steel prices going up. What's your own situation on the sourcing side in terms of protection with hedges in the projects, but also availability of critical components, electronic semiconductors, particularly maybe in some of your automation related businesses? Okay. I mean, and then South America order execution, we must be really grateful to our employees who are hanging in there, who are who continue to work. Obviously, under difficult circumstances, we do everything we can to support them. These sites are they do thousands of tests per day sometimes, to make sure that, you know, they can contain the risk. So far, I mean, there are many, many challenges. I don't think I've said everything is according exactly to plan. There are obviously certain deviations and changes, but all I can say is that it's reasonably under control. And so far, the effects on these projects are limited. And obviously, now we have another wave in Brazil. We are struggling with another wave in India with our offices and our factories there, but we just received today an update from our company there or one of our companies there that, yes, it's difficult, but it's under control. And they are optimistic that in the May, they should it should have peaked and should be declining again. Whether it's true or not, nobody knows today. So many, many challenges, including transportation from China, which is a big challenge. And that leads also to the second question you had, availability of goods challenging for sheets, metal sheets, steel sheets and plates, you know, delivery times of six, eight months, which used to be from inventory. We need to have an eye on price increases. Also, transportation costs from China have gone up substantially. I think what is unclear so far is whether that will continue for a year or whether it will continue for two or three months or four months and then flatten out again. So this, we monitor that very closely. And on the cost estimate side, the new projects, we clearly take that into account and do not assume that this is a purchaser's market. It's in several segments becoming a seller's market. This chip constraints so far have not had any impact on us. Thank you very much. You. And the next question is from Sebastian Growe of Commerzbank AG. The first one would be on Metals once more on the order part. You had obviously very strong orders in quarter one. And the question that I would have is if you could comment a bit more on the pipeline and also especially on the margin quality, the order backlog. And if you may also comment on the situation in metals processing, in particular, I would assume that with the very high steel prices that are allowing better margins for your customers, that might also allow a bit of an uptick eventually in the margin profile for you, hopefully, at least. So any color on that would be much appreciated. So let's cover that. Yeah. Metals Processing had, I should say, over proportional order intake in Q1. There are still some yes, there's good continuing good project activity, but we cannot expect this continuation of the same level like in the first quarter, but we expect a good year in order intake for metal processing. And Schuler is yes, we hope to basically continue on this level or nearly on this level. Again, visibility for second quarter is reasonably good. Thereafter, I think, remains to be seen. So I think, surely, we in all respects, we see we're happy with Q1. We see short term good activity, but we continue to be cautious how it really will develop. All right. Okay. Thanks for that. The second question is on margins and particularly on the mix part. I think in Metals, we are seeing great volatility. You have been alluding to, yeah, in the situations with the B segment having carried very low margins. I think if I remember that correctly, that should have phased out by now. To just understand really what the quality of the margin in quarter one is concerned and how it can continue from here, I think the answers that you gave to Sven's question would rather signal you are really confident that you can stabilize it at those 23% levels. Is that the right thinking? Or was there any sort of particular positive tailwinds for mix in the first quarter that would be my interest here? No. There were no special effects in the first quarter. I think the quality of the backlog is unchanged basically. And we have, in the case of Methus Processing, we have one or two protein projects that are not fully resolved and represent a certain risk. We hope to finalize that during this year. And Schuler, yes, I think I can only repeat what I said, has been a good quarter. But it would be definitely too early to say that this is now stabilized on this level and there's only way upwards from here. I think we need one or two quarters more to feel confident that this is sustainable. And obviously, medium term, this should not be sustainable. That should be improvable. Yes. Yes. Makes sense. And the last question is on Service. Water sales are currently coming back to pre COVID levels, which is obviously quite a good development here. However, the revenue is still trailing behind, about 4% down year on year. What are you seeing currently on the service environment in particular and especially in Pulp and Paper where it still seems to be a bit soft? So if you could comment on that, that would be appreciated. Yes. We would expect a pickup I mean, definitely, expect a pickup in revenues because we have seen a pickup in orders. As travel restrictions, access restrictions to mills, etcetera, fade out, we would expect additional demand because there has been some pent up demand regarding shutdowns and so on. So you cannot do it indefinitely. So plus the good atmosphere on our customer side price wise and also volume wise, we would expect a pickup there, yes. The next question is from Daniel Lyon of Ersk Group Bank AG. I would like to follow-up to some extent on what has been asked already and maybe to start with the services business pickup that is not expected going forward as travel restrictions are expected to be lowered or cut immediately or cut fully. How do you expect, from current point of view the dynamics of the services business to pick up? Do you think second quarter will already show a substantial improvement? Or is it rather back loaded for this year? How's your current view on this? No. There is no no no reason to expect too much of a backlog situation. And as I said, we can argue whether these restrictions have loosened up sufficiently in Q2. Do you see any effect there? Is it Q3 or Q4? But I think we expect a gradually stabilizing of the current order intake and maybe gradually a further pickup. Do do you see differences in terms of regional pickup and services? Is The US already picking up now? No real no real strong geographic differences, I would say. I mean, clearly, South America is is a COVID wise under pressure, whereas Europe is much more under control. China definitely is under control, but China historically and traditionally is not very important for our service business. So I would not see any any dramatic geographic differences. Okay. And then the second one, also related to profitability. Now usually, first quarter profitability is definitely not about one of the strongest from a quarterly point of view in the fiscal year. So would you really expect going forward to see profitability again fall below this level that we've seen now in the first quarter? Or should we actually think that this should be more or less the, let's say, the floor in terms of profitability already? We expect today you cannot come in to change our guidance. So the guidance is what it is, and it's realistic. And we and I've also said that based on Q1, there may be slightly more upside than downside, but in for the full year guidance, yes. But it's Q1 behind us, so a lot can come as we go. And yes, the guidance is what it is. Okay. Perfect. Thank you very much. Thank you. As we receive no further questions, I hand back to Mr. Leidner for closing remarks. No closing remarks other than thank you for your attention, and I look forward to seeing you or hearing you at least in July at the July where we publish our half year results. Thank you very much, and stay healthy. Bye bye. Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.