Earnings Call: H2 2019

Mar 4, 2020

Ladies and gentlemen, welcome to the Full Year twenty nineteen Results Conference Call of Ambrek 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 Doctor. Wolfgang Leitner, CEO, who will lead you through this conference. Please go ahead, sir. Good morning, everybody. Welcome to our full year results conference call. Before I start and go into details, let me quickly summarize how we see the year. Overall, we are satisfied with the development of 2019, obviously not the least, thanks to a very strong 2019. Three of our four business areas, that means Pulp and Paper, Hydro and Separation, have shown favorable developments in spite of a not so easy global economic environment, and I'm not yet speaking of corona, obviously. The record order impact that we have achieved confirms, I think, in numbers the very good market position that we have in the market, especially in Pulp and Paper. It's very reassuring that Clarion, which we acquired in October 2018, developed favorably and fully in line with assumptions that we had in our business plan when we acquired it. So as a result, our service and aftermarket share in Pulp and Paper and overall in the group continues to rise, which obviously is good for our profitability and good for reducing our volatility from the underweight of the vulnerability in our capital business. Obviously, metals forming Schule, but also the rest of metals has been difficult, but I'm very confident that we have laid the foundation for a positive earnings development in the future with a very far reaching restructuring program that we have launched and which we have fully reserved in 2019. So far, things go as planned, and we expect, as we have also said, first, tangible positive effects rather in 2021, maybe starting towards the 2020. Separation business continues to improve. So overall, we are happy with the development. Obviously, if we look at net capital, that has shown very positive results I should rather say very negative results, meaning turning it into negative again. And as a result, our net cash position has turned into positive again. So also on the pure financial side, I think we are quite happy with what we have achieved in 2019. Now let me go to the presentation and into more details. On Page three, you find the key numbers. Group order intake new record at €7,300,000,000 driven by Pulp and Paper, which booked several large greenfield pulp fill orders, but also saw a very good activity in on the boiler side, both recovery but also fewer biomass power boilers. Order backlog, 7,800,000,000.0, reassuring for the future. Sales increased to over €6,600,000,000 also a new record high. EBITA, obviously, is impacted substantially by the restructuring measures, which accounts in total of €113,000,000 Approximately three quarters of that is for Schuller. And profitability, EBITDA margin adjusted by this extraordinary items is 6.8%, basically or practically the same level as 2018 with 6.9%. On Page five, you see the order intake plus 10% of that three percentage points organic, the rest as a result of acquisitions of full year accounting for the acquisitions predominantly cerium obviously. If you look at the organic sector business area, Pulp and Paper, excellent development. Metals continued weakness. Hydro slightly lower than last year. And separation, plus 3%, which we feel is very good because if you remember, in 2018, separation received a very large order for the wastewater treatment plant of Shanghai. And obviously, this in 2019, this was not the case. And nevertheless, they could not only maintain the order intake level but also even increase it slightly. On Page six, the quarterly impact after two very strong quarters. Obviously, Q4 with €1,500,000,000 was not as high. We have booked, as I said, several large orders for pulp mills. And on the hydro side, probably the biggest order has been this pumped storage hydropower plant in Dubai. On the right side, all impact by region, interesting to see the share of China, 11.7% compared to 18% in 2018. So it's basically minus onethree. And this also is reflected in the absolute numbers after €1,200,000,000 order intake in 2018 from China. 2019 was €769,000,000 only, which also is a confirmation of the relative weak status of the Chinese economy in 2019. On Slide seven, the sales development, similar picture, plus 8%, 11%, again, plus three percentage points of that organic growth, the rest M and A related. By business area, repetition of the order intake, coffee paper strongly up, metals in this case stable, hydro minus 3%, waste separation plus 8%. Slide eight, service share and service millions of sales, up from €671,000,000 in the third quarter to €757,000,000 and for the full year, up by overall 8%. In the longer term development, we see a compound annual growth rate of 10% and as a percentage of total sales, 40% after 36% in 2018. With the share of Cerium, maybe of interest on a quarterly basis, approximately €110,000,000 sales volume comes from Cerium for a total of about €450,000,000 for the full year. On Page 10, the share of service business by business area. Pulp and paper is now 50% or 51% aftermarket related. This is very reassuring, very good. Separation is second in with 45%, then Hydro of 32% and Metals historical and traditionally the lowest share of aftermarket sales with €27,000,000 but also quite positively up from previous years by some acquisitions but also by organic growth. Page 11, order backlog, slightly lower than Q3, but overall a very good development. As always, approximately 75% of the order backlog comes from hydro and pulp and paper. Hydro still being no, no, pulp and paper now having surpassed hydro in terms of share of order backlog. On Slide 13, EBITA chart after extraordinary expenses minus 13%, prior to extraordinary expenses plus 10%, profitability wise, 6.5% down to 5.1% or before extraordinary items, 6.9% up to 6.8%. If you take the restructuring expenses overall of €113,000,000 as I said, approximately 75% or slightly more to 82,000,000 is in metals and smaller amounts for hydro, pulp and paper and also separation. Slide 14, profitability by business area. Pulp and paper continued very good profitability, 9.8% or respectively 9.4. Metals, black zero plus 0.5% before and minus 54.5% after restructuring. Hydro, 8.1% versus 7.2%. Continued very good profitability in separation, 6.6% versus 5.8%, a clear continuation of the last several years with increasing profitability. Now I'm getting really confident that we have turned around separation. Slide 15, rather complicated chart, but trying to fulfill all your expectations with regards to details. The bridge from EBITDA to net income, let me briefly go through. So from EBITDA, we take out the depreciation, 194,000,000. Of that, 46,000,000 is IFRS 16 related, euros 35,000,000 comes from new acquisitions, and we have €19,000,000 of certain impairment losses both in metals and in metals. We took out the pilot plant. We have Echula. For one of the pilot plants, we have Echula. And Hydro also had to take down some manufacturing assets. Then IFRS three amortization, 76,000,000, of that €49,000,000 comes from newly acquired companies, predominantly Cerium and €29,000,000 impairment of goodwill, 20,000,000 all of that comes from Schuler, 29,000,000. Of that, Yadon, the Chinese acquisition, we reduced the goodwill by €20,000,000 And on the tooling side, Arviva, we reduced the goodwill to, I think, the size by this time, euros million to 5,000,000 Exit to EBIT of two thirty eight million euros Then we have the financial results, minus €57,000,000 An increase in interest expense is Schuldsche and Arlen replacing a bond. Refinancing of financial liabilities to Serum. This is FX hedge, foreign exchange hedging of about €16,000,000 internal hedging and leasing IFRS 16, obviously, also has approximately €5,000,000 impact on financial results. And we have relatively high tax rate of 32% because of certain adjustments and deferred tax assets. So Slide 16, my favorite slide, obviously, cash flow. Our cash flow from operating activities is up at eight twenty two million euros How come? Obviously, depreciation change in provision, other changes is standard, I would say. Change in net working capital, that's a very good thing. Have €330,000,000 positive effect after €279,000,000 negative effect in 2018. All the numbers going to the right direction. Contract liabilities, favorable respect of 152,000,000 increase in liabilities, euros 85,000,000 favorable decrease in contract assets, 70,000,000 decrease in trade receivables, 27,000,000 advanced payments, 33,000,000 and €18,000,000 decrease in inventory. Part of that is driven by the order intake, obviously, which has an effect on that. But as you see from each of these contributions, we have concentrated a lot on net working capital. And what we see now is the effect of this concentration and these efforts. Slide 17. Again, summary of all the figures. I don't think I have to go into any details. Maybe capital expenditure, $857,000,000. Liquid funds, up from €1,280,000,000 to €1,600,000,000 and net cash from minus 100,000,000 to plus €245,000,000 Predominantly, this change in the working capital comes from Pulp and Paper. We will go to that also. Dividend, as we have said, we want to pay dividends in the amount of 50% to 60% of net income, the 70% per share for approximately 55 of payout ratio. So the proposal is 70% per share, which obviously is substantially less than 2018. And I'll come to the business areas. A lot has been said already. Pulp and paper, very good project activity, both in pulp and also in desolving pulp, in viscose pulp and on the power side also, the biomass activities in Japan continue. Domestic environment unchanged, tough, but I would say as usual. Strong income, Slide 32, strong increase in order intake, increase in sales, increase in EBITDA. EBITDA margin is still very good. I think that's more to be said. Metals I'll pin that on Slide 23, both metals forming and processing, low demand. And obviously, as a consequence, fierce competition. Our restructuring program, which surely is continuing on plan. On Slide 25, profitability. As I said, flat zero pre restructuring costs and negative after restructuring costs. Order intake is down somewhat minus 18% of that, full of approximately minus 13%. The restructuring costs of the provisions that we have taken is €2,000,000 for capacity adjustments and some other restructuring costs. Slide 26, Hydro. No change in market. Also, increasing discussion on climate change should have a positive effect. So we are still, let's say, optimistic for the midterm future. We also see for this year some larger projects on the horizon, But basically, we have to assume for the time being that the market is what it is and will not increase substantially. On Slide 27, very positive on the profitability side. The margins pre extraordinary expenses 8.1%, still very good. And we will do our best to keep it in this range. Slide eight, separation. As I said, very favorable order intake, slightly up compared to the high level of last year. Across the board, municipal activity is good, and certain industrial activities in chemicals in mining and minerals are good. Feed and biomass is stable. So consideration of stabilization and gradual improvement through organic growth and in certain internal continuing restructurings. On '29, you see the result, order intake plus 3%, sales plus 8% and EBITA margin before extraordinary items from 4.8% to 6.6% or after 4.8% to 5.8%. So much for the year. On Slide 31, the outlook. I've only called, if not corona, to give you some reassurance. But obviously, corona comes on top of already relatively shaky economic environment last year, especially in China. And corona obviously has a very strong impact on China. Where do we stand there? We, as Androids, with our 3,600 employees in China, we are, to a large extent, fully back to work. 90% plus of our employees are working. We have done, I think, very wise decision at the beginning of corona where we have purchased through our purchasing department globally masks. So we ended up buying 200,000 masks from five weeks ago, something like that, and sent them to our Chinese factories, which enabled our Chinese factories to offer masks to the workers when they came back, which was a requirement for them to start working as we hear from several companies that they have problems because they cannot get the masks and therefore their workers cannot come into the factories. So we are back to normal work, would say. We expect the first shipments out of Chinese sports probably this week. So I think from that standpoint, it looks quite good. Obviously, hundreds of orders we have are impacted because they have sub suppliers from China. We are working with all these sub suppliers to make sure that we are that we can get back to work, can try start to catch up some of the delays. As you probably know, the rules in China are that people had to take vacations, had to take reduce their overtime or had to go into negative overtime and now need to recover that by working six days, seven days a week. Chinese government has also promised a substantial, I know, let's say, opening up of the loans to Chinese companies. We have obviously had to declare force majeure in for many of these orders, as have done many of our Chinese suppliers. But I think all that is happening in a good spirit. That means that our suppliers obviously want to catch up as much as possible and we want to catch up as much as possible and not just add whatever has been lost in time now to the execution times. But inevitably, February, we have to consider February in China as a lost month, both in terms of production but also in terms of consumption, which certainly will have some impact on the automotive industry especially but also many other industries. But again, the question is how much can be caught up. And Xi Jinping has clearly declared that he expects everybody to catch up. What is happening in Europe and in The U. S, I would say I'm not giving any medical expertise because I don't have that. Personally, I think people love to be afraid of. And you certainly could make an argument that some of the actions that are being taken are a little bit overdone if you compare it to many other similar pandemics like the flu and the SARS and other things. But I think we have to see and watch the development that would become over the next few weeks. I'm personally optimistic that it will we will see a disappearance of corona, if not within the next four weeks and certainly within the next six or eight weeks. But again, no guarantees. So let's see how things develop. Overall, as we have seen, the year has begun quite good. We had a large order for new pulp mill in Uruguay from UPM. So we expect total order intake for the first quarter. And beyond that, we are not very pessimistic, but we are cautious. And I think the attitude is let's wait and see and adjust to whatever is will become then the real situation. Obviously, for the steel and automotive industry, corona is not the best development because they have already been in a rather difficult situation. So clearly, there are no signs at best, are no signs for recovery. At risk, there may be still an increase in the troubles that they have. And as I said, hydro looks reasonably definitely looks stable, maybe slightly better than last year with some of larger projects coming up for decisions. What are our goals? Obviously, if we will need to execute the high order backlog, especially in Pulp and Paper, these are some very large orders. We need to continue with our plan for the restructuring, especially in Metals Forming, also with some minor adjustments in other business areas. And our guidance for 2020 is a slight to moderate increase in group sales and group EBITA to reach the adjusted EBITA of 2019. So much our report in 2019 and our outlook for 2020. Thank you, and I hope for some questions. Once your name has been announced, you can ask a question. If you find your question is answered before its return to speak, you can dial 02 to cancel your question. If you're using speaker equipment today, please lift the handset before making a selection. And the first question we received is from Anstel Singh here from HSBC. Your line is now open, Please go ahead. Yes, good morning. Thanks for taking my questions. I maybe take them one by one. The first question relates to your sales outlook for 2020. You mentioned slight or moderate sales increase, I think, November when you first came out with the outlook for 2020. The word slight was not mentioned. I think also in the annual report, it was not mentioned. So is this a reflection to some extent of what we've seen in February and then some precaution regarding coronavirus? Is there any underlying change to the assessment? No, no dramatic relevance of if there was a change, no dramatic relevance to that. I think the guidance we gave now is pre corona, I would say. We don't on the sales side, we don't expect a dramatic effect. I think a lot depends on what can be caught up in the next few months. If China goes back to normal and if Europe does not fall into a huge corona crisis, we would think that the effect could be very moderate. Obviously, if there's any effect, it would be a rather negative effect. The sales increase has always been not dramatic, definitely in the, let's say, mid single digits at best. So we decided to use this what is it, a slight moderate increase in sales, but no dramatic change in guidance on that. Understood. Maybe on the operating cash flow side then, you mentioned that the working capital improvement is mainly related to pulp and is probably, to a large extent, project related. So should we expect to see some sort of reversal in 2020? Or given the ongoing strong order inflow we've seen, should stabilize? Short term, I would not want to give a guidance until the end of the year, but short term, we should see the stabilization, yes, not around that effect. And it's not only the order intake as we have seen. I mean we have favorable development on actually all factors that are influencing net working capital. So it's certainly something that we expect not to disappear completely. Okay, very good. And then my last question is regarding the dividend cuts. I mean, you 've had a very strong cash flow development and also a relatively weak share price performance. Why didn't you consider to keep the dividend stable in that context? We didn't want to change our guidance that we want to have a payout ratio of 50% to 60% or plus 60%. And I think that we have maintained, and we didn't see a reason why we should change that. Okay, fair enough. Thank you. And yes, recover well and speak soon. Thank you. Don't be too concerned. And the next question received is from Andreas Willi from JPMorgan. Your line is now open, sir. Please go ahead. Good morning, Doctor. Leiden. My question is on Schuler and the outlook here into 2021 when the savings comes through. So if you assume a case where the market remains relatively unchanged and therefore your sales levels don't change much, what's the net savings you expect to drop to the bottom line in 2021 in terms of the cost restructuring, the factory closure that should start to benefit you as we go to the year end. And the second one on cash flow, just wanted to follow-up on the earlier question on the working capital. If I understood you correctly that after the big negative swing and then the big positive swing in 2019 that going forward kind of the working capital ratios should be roughly similar as they are now? Thank you. Yes. Second question, the ASP is mainly at higher, otherwise negative, but it should not it's not a onetime effect, and we expect the stabilization around this level. With regard to the savings we have for Schuller for the Schuller restructuring program, we have never achieved substantial contribution from growth on top line. So we still think that the current level is sustainable. Obviously, absent a huge crisis in the automotive industry, so the savings we expect overall, we expect it approximately €40,000,000 And of that, probably half should be visible in 2021 roughly. Thank you very much. And the next question received is from Sebastian Grover of Commerzbank. It's three actually. The first one would be around the EBITA guidance. You talked about sales already, but it seems that have been going materially better at separation. And I think your indications that you provided earlier would also suggest that this should continue into 2020. I would also say that Hydro looks pretty decent for what it's doing on the top line. So the high level thought is just has there been any positive change in a way regarding mix, etcetera? Or is this sort of soft guidance when it comes to the EBITA outlook for 2020? It's solely a reflection still of Pulp and Paper and the mix deviation that's turning to a slightly less favorable situation eventually in 'twenty compared to 2019? Second question is on restructuring. You had obviously pretty high charges of more than €110,000,000 in fiscal 'nineteen. Would you regard that all businesses are now rightsized and fully addressed to the extent that is needed? Or is there anything coming eventually along the way in 2020? I know that you would have to build a provision if it's already very, very clear, but I think the background of the question. And then the last question is around M and A and after the massive sell off we have seen, especially on the public equity markets. So can you just give us a sense of your appetite for M and A because there's eventually just more interesting opportunities now than what's the case three months back or so from here, that this has changed your policy in this regard? Thank you. Yes. Thank you. Your first question, EBITA. Obviously, we have also said that Pulp and Paper has a sizable amount of large orders where we obviously have, on a percentage basis, somewhat lower margins. Our capital has played a larger role than in previous years. So that is on the profitability side, obviously, has moderating effect. And therefore, the guidance is what it is. We are, let's say, realistically cautious. I'm not saying that we definitely think this is a conservative guidance, but the guidance is what it is. As you said, there are some positive effects, but there are also some moderating effects on relative profitability. Do we have the right size? Currently, I think we will continue to take advantage of restructuring opportunities if and when we identify them. Already in the end of last year, we our outlook for the economy was not dramatically different from where the economy was 2019, so we were rather cautious. So we encouraged our companies, our divisions to think about their capacity to think about opportunities to take out some costs. We will continue with that. As I said, we are confident that Schuller, the actions that have been taken with regards to reducing capacity, reducing personnel in Germany sufficiently provided for. Currently, we don't see any larger additional restructuring opportunities, I would not say, I would really see, say, opportunities. But I'm not excluding that we see some continuing moderate downsizing in across all four business areas, maybe not to another separation. It's not in Pulp and Paper, maybe in certain islands also in Pulp and Paper. And our M and A, I mean, we have said after the acquisition of Xerium a little bit more than a year ago that we want to first concentrate on maintaining the very good cash flow from Serum and use it to earn back some of the relatively high purchase price, not high multiples, but high absolute numbers. And I think we still see us in that position. So you see 2020 still as a year where we would not very aggressively look for large acquisitions, But we always continue to look at some smaller acquisitions. And so I believe that opportunities will come up very quickly, not really. And if so, maybe in areas that we are not very interested, like automotive supplier side, that hopefully we could see some problems or companies having problems and therefore being open for discussions. But the opportunity, strategic direction, we continue to focus on aftermarket, on automation, on services. We on the capital side, we have some ideas, but they are I would say they are focused on very few areas. If that would become available, yes, we would look into that. But we currently do not see a dramatic increase in activity on this side. All right. Thank you so much. And we received a follow-up question of Andrea Trudy from JPMorgan. Your line is now open. Please go ahead. Yes. Thanks for the time. I just wanted to follow-up on the tax rate. You mentioned 2019 had some unusual components. What should we assume as a normalized tax rate for 2020? As a normalized tax Tax rate. I think around 30%. You. As there are no further questions, I hand back to Doctor. Leiter for some closing remarks. Thank you very much for participating in your questions, and I look forward, first of all, to your reports and secondly, to our next conference call in about three months. Thank you. Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.