Earnings Call: Q1 2018

May 3, 2018

Dear ladies and gentlemen, welcome to the Presentation of the Q1 Results twenty eighteen of Andros Group. 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, CEO, who will lead you through this conference. Please go ahead, sir. Thank you very much. Good morning, everybody. Welcome to the first quarter results of Androids. If I may summarize the first quarter in a nutshell, then obviously, as you have seen, sales and profitability are rather weak. However, we are very confident that this is a temporary effect and we are very optimistic that we can make good over the course of this year what we have made in the first quarter. Positive is definitely order intake. We have now the fourth quarter in a row with increasing order intake. The level itself is very good. And we see also for the coming future, for the coming quarters and coming months, good project activities so that we are cautiously optimistic on the development of the order intake in the next several months. And our last but least, which is reflected in the order intake, Schuler has had some important successes in entering the Asian markets for press lines for the automotive industry, a goal that we have pursued for actually several years. And that has now realized, Obviously, as we've all said, profitability of these orders is not dramatically good. So we have to buy our way into this market, but it's a very important step and critical for the future of Schuler. So much the summary, if we now move on to the details on Slide two. Sales down 7% compared to first quarter twenty seventeen. See with exception of separation for all other business areas, sales are down, partially influenced by higher sales relatively higher sales in Pulp and Paper, but overall 7% down. Geographic split, as always, very stable, no dramatic changes compared to last year. Slide three, order intake. We have overall minus 2% in the 2017. However, this has been a very high order intake. So with $1,530,000,000 we are very happy and see that as a very good level of order intake. Hydro has caught up and has a good order intake of $435,000,000 up 40%. Partially based on the weak quarter relatively weak quarter in 2018. However, the comparative quarter in 2017, the $650,000,000 was extraordinarily high. If you would multiply that by four, you come to $2,600,000,000 which is 30% about what we usually have in this pulp and paper business area. So on an average level, our order intake in pulp and paper has been quite reasonably good. Metals up somewhere 6% and separation also up 12%. By region, very good order intake in Asia, excluding China and other than that, I think no dramatic development. So highlights certainly in this order intake for this quarter. As a consequence, backlog is slightly down to 6%, no dramatic changes, no risk of underutilization in any of the business areas. As we have said, we continue with gradual downsizing of hydro. This will continue this year. And with that being in place, we have basically good order intake for all our capacities with regard to manufacturing as well as engineering. On Slide five, EBITDA from $97,000,000 down to $72,000,000 minus 26%. Difference comes approximately two thirds of the difference come from lower sales. And as I said, we are confident we can make good for part of all of that over the course of this year. And one third this reduction is caused by some moderate limited cost increases in some of the orders predominantly in metals. Profitability in iron separation is unchanged and Pulp and Paper is lower. And last year, however, still at a good level. So overall, is down from 7% to 5.6%. Again, two thirds of the decline in profitability, volume related, one third gross margin relatedsome cost overruns. Slide six, figures again, a few comments on the left side. Financial result, slightly negative with $1,400,000 lower average net cash, low interest rates in Brazil and also the cost of the bond for short term island that we issued in the middle of last year. Cash flow negative mostly or mainly caused by a substantial increase in net working capital, increase in DOC receivables. Net liquidity down compared to last quarter, first quarter twenty seventeen substantially, 300,000,000, about half of that is a timing issue because this year we have paid the dividend already in March. There is last year, the dividend has been paid in April. So that explains about half of the shortfall and the other half is caused by working capital increases, etcetera. Yes, I think that's it for Slide six. On the next slide, moving on to the individual business areas. Hydropower, no change in the market. I think all the the elements that make life a little bit more difficult than it used to be, like investments in solar and wind are still in place. We are doing our best. We see some larger projects in the market. We have booked one in the first quarter. We see a few other larger projects also in the coming quarters. So I would say last year definitely should be the low point of order intake level for Hydro. And hopefully, we can move up somewhat from that already this year. On Slide eight, the numbers, as we've said already, order intake up substantially from $3.00 $9,000,000 to $435,000,000 Sales are slightly down, more or the same, EBITDA slightly down and EBITDA margin 6.1% after 6.2% in last year. Then moving on to Pulp and Paper, Slide nine. Good market environment both for pulp, very high pulp prices and also for brown paper and also for power boilers, biomass power boilers. So overall, good market environment. If we look on Slide 10, then you may say that this is not really reflected in the order intake, but again, Q1 twenty seventeen with €650,000,000 has been exceptionally high. So the €457,000,000 this year are reasonably good order intake. And I would say we are confident that this year, at least the next one to two quarters should be good quarters in order intake for Pulp and Paper. Just I think yesterday or a day before yesterday, it's been released that Mr. Putin insists on getting some pulp mills in Russia to avoid having to export the wood and missing the value added that could be created by converting it into pulp. So that could be support to one or the other pulping projects that are active in Russia and where we are also involved. And also in South America, there should be what has been published, at least one pulp project go ahead this year in Chile. And I think also for next year, in spite of the consequences of the merger between Fidriya and Suzano, also for next year, I would be confident that there is at least one pulp project going ahead in South America. And biomass is quite active, especially in Asia also, where we have a very good position. So overall, as I said, we are reasonably optimistic on order intake. Slide 11, Metals. Metals forming, I've already said, important successes for in selling press lines for the new automotive markets in Asia and in China, and I say in Asia, outside China and in China. Metals processing unchanged. You all know how the stimulus fee looks like, so that certainly has limited upside potential. Slide 12, order intake up 6%, sales down as a consequence of lower intake during the last few quarters and EBITDA margins substantially down both caused by low sales, but also by some cost overruns as I've said before. Slide 13, separation, continuing good development in the liquid solid separation part of this business area. So we have a good order intake and see good project activity. So we are optimistic that separation continues on its way up from both with regard to order intake, but also with regard to profitability. Sales profitability typically have a peak in the fourth quarter, so that will take another two quarters until that will be visible, but order intake should continue on a very good level. On Slide 14, you see the numbers, order intake up 12%, sales up 8.6% and profitability basically unchanged at 4.6% versus 4.7%. To conclude on Slide 15, the outlook, we see good project activity and see hydro on a better level higher level compared to last year. Pulp and paper, we see good project activity. Metals, at least the sugar part, we see continuing good productivity as well as separation, so that our guidance stays unchanged that we expect sales comparable to 2017 and solid profitability. So that's my summary, and I look forward to your questions. Thank you. We will now begin our question and answer session. We've received the first question. It comes from Jacob Byrne of Goldman Sachs. Please go ahead. Your line is now open. Hi, good morning. A couple of questions. Firstly, just on the metals. Could you just go into a bit more detail about the cost overruns, which obviously had quite a big impact on profitability and how we should be thinking about those cost overruns in the context of the year. Would we expect those to continue into the coming quarters? That's the first question. Yes. If you may answer us directly, I would say the projects where we have these cost overruns are very advanced. So they should be basically finished, I would say, in this quarter, second quarter. And then we know whether there's anything else coming up or not. We are currently in the final stages of completing direct and then starting up. But on the overall profitability, keep in mind, as I've said, with a substantial part of the order intake increase of Schuller comes from this new market, the other margin definitely is lower. So there may be some continuing pressure on the metals margins in the next, I would say, four to six quarters probably, on this level as we see in this quarter, but we'll have some, let's say, diluting effects on the coming quarters, which hopefully should be within the one percentage point range on profitability. Okay. Thank you. And just on hydropower, it's a market you've been, I guess, somewhat cautious on for the last On the couple of hydropower? The hydropower. It's been a market which has been somewhat challenging. And obviously, you've pointed to 2017 potentially being the trough. Can you just give a bit more detail what sort of what you're seeing in terms of perhaps tendering activity, greenfield opportunities versus brownfield opportunities, how we can think about that order intake developing from here on, let's say, a one to three year view? Yes. I mean, the main factor that is implanting the hydropower market is a boom in solar and wind. Either one of these two electricity sources is adding in the range of 60 gigawatt per year now. That's combined about three times what type of power used to add per year. And that's obviously must have an impact because there's not really the growth of electricity consumption is not as big. The costs have come down both for solar and wind, so they are competitive. And we see auctions taking place in South America where investors are willing to sell long term solar electricity for $30 slightly above $30 per megawatt hour, which is extremely low and makes actually hydropower new investments not really not profitable. We have also to keep in mind that in Europe and to a certain extent also in the state, in North America, the low cost opportunities for Isobar have been invested already. So what is now open for investment is slightly more remote, slightly either has slightly higher cost or requiring a slightly higher distance to connect to the regions where the electricity is consumed. That has an impact. On the other hand, China has a big project underway to connect remote areas with solar, but also with hydropower electricity production to the coastal areas where electricity is definitely needed, continues to be needed, which is a stand for hydropower. And so we see as long as it's gray, as we have said already last year or before, in our midterm plan, we assume a somewhat lower level for hydropower, not dramatically, but we don't think we can get up to the old levels. And we have started to adjust to that some two years ago already and we will continue to do that also this year so that we are no kind of no concern about profitability, but may see may not see the peak or the impacts that we have seen in some three, four, five years at all. Okay. And perhaps just want to finish on the guidance. So obviously, operating profit during the first quarter was a bit down for the reasons you've given. But just checking your I understand correctly that you still feel you can sort of make that up in the coming quarters to meet your sort of stable profitability year on year. Is that fair? Yes. Keep in mind that last year, had some special effects in profitability in the range of about million euros roughly. So whether we can with that similar effect this year, on that, but other than that, I think we should be in the range, not saying we will be exactly there, but in the range of last year. Okay. Thank you very much. Thank you. The next question is from Sven Weier. Please go ahead. Your line is now open. Yes. Good morning. It's Sven Weier from UBS. Just on the EBIT bridge for the first quarter again, you mentioned those one off costs and lower sales, but is it also fair to assume that last year in Q1, you had a mid single digit one off in there, so we should keep that in mind as well? And you also mentioned digitization expenses, which I would be also curious about, If you can maybe give us some more color to the effect for Q1 and how you see that developing for the full year? That would be the first question. Thank you. Sorry, as for the first half of the question, yes, there was a smaller onetime effect in the first quarter that in last year. So that also explains part of the a smaller part of the difference. In the second part, I didn't understand. I think you mentioned in your presentation also digitization expenses. Yes. But that's which probably is also a bit of an influence on the year on year EBIT, I guess. Yes. If I could pass on to Michael from his Yes, are spending on that, but that would people say that it's moderate. We do I think what is best related to, I think we are quite advanced in this IIoT, not only efforts, but also products that we have in the market. We are hiring more than 50 engineers in The U. S. To staff the orders we have received for our optimization software that obviously they have to be trained for nine months. So that obviously costs us in the range of $2,000,000 or up to $3,000,000 So that definitely is an effect from that. So I think it's one of the many smaller effects that have had a limited negative impact on Q1 margins, yes. And then to the nature of the cost overruns again, because it's quite an interesting coincidence because Weilmet also had a cost overrun in Q1 for the first time in a while. So can you describe more the nature of the cost overrun again? Is it a sub supplier that was causing the issues? Or is it more your fault? And maybe some more color on that. Yes. I mean, number one is the fact that both of us are showing some cost overruns this quarter is not the effect of a phone call between Andrew and Alex. Definitely not. It's also not in in our case, it's not in Boston paper. I don't know where it is in wellness. Must be probably most likely not be Boston paper. And it's completely unrelated. I think it's almost since we started zero in the first quarter, any movements, any cost overruns in the first quarter are obviously more visible than if they would happen in the third or fourth quarter. So that's one of the effects. And it's just two or three orders that were late in engineering and cost overruns and erections and some outstanding issues with regards to performance that we still need to resolve and clarify and bring to an end. So it's a difficult mixture if certain things cost more or if a project is more difficult than anticipated. I was just curious because for ViMed, it also sounded a bit like a stretched supply chain right now that everybody has a boom and maybe This some of this is is not in our case, no. It's not supply chain. It's, I would say, 100% homemade. Okay. Sorry to say that. And is it also fair to say that in terms of the earnings, I didn't see it yet, but was there also maybe an impact from the accounting change that this year simply is more back end loaded in terms of how you recognize the profit? No. But the accounting changes have not and will not have any substantial impact. Okay. And then on the free cash flow effect that you talked about, obviously understood on the dividend on the working capital, are you there also confident to reverse that by the end of the year similar to the revenues? Yes. Step by step, yes. Yes. And then lastly, on just on Hydro, I'm sorry, was briefly disconnected during the previous question. But did I understand you correctly that regarding the Hydro recovery, we should see that at the moment more as a kind of a lumpiness of orders. Right? Last year, it was a bit weak. This year, the timing of the order is a bit different. But structurally, we are not looking at a new major up cycle here in your view given what you've just said on the renewables? Is that a fair conclusion or? Yes, I would not see an up cycle. I certainly would hope, and that's also our best guess, that the order the lower order intake last year was very low and was a trial of, let's say, our order intake development. So it should be our basic or average level should be definitely higher than last year. We'll I'm unfortunately But rather confident we will not get the backup to the €2,000,000,000 that we had in the P1 big year. Okay. That's it from my side. Thank you, Doctor. Leiter. Thank you. The next question is from Andre Finkel of HSBC. Please go ahead. Your line is now open. Yes. Good morning. Thanks for taking my questions. Some of them have been asked. A follow-up on hydro and your progress in China after you received that pump storage order in Q3 twenty seventeen, which I understood was some sort of a successful reentry into the market. Can you maybe elaborate a little bit on how project activity in China is progressing and what kind of inroads you have made? And then secondly, maybe you could comment again on M and A pipeline, whether anything has changed from the last call. Thank you. Yes. Mean, new order for pump storage from last year, definitely, it's the first it's the most sophisticated, most advanced technology for pump storage you can have, variable speed. It's the first of these sites being built in China, and Android is building it. So that definitely is a stamp of approval for our technology. It's very good for our reputation in China. In the course of the recent visit of the Austrian government and the President in China, we signed cooperation agreements both with the state grid and with China 3 Gorges for China and for projects outside China. So we think we definitely have gained a lot of ground over the last two years in China. And but let's see when and to which extent this materializes in more orders. Obviously, we hope that we can get another pump storage order maybe this year, maybe next year. And certainly hope also that the cooperation with this state owned hydropower companies outside China on the back of the Chinese development financing or development support should help us in some of the larger project in South America or in Africa. And the second question was M and A. Yes, we have we are looking in some projects, medium sized, maybe one somewhat bigger, but all are definitely not mature and nothing where we would say we see a very high probability that we can go something. Situation is unchanged. It's high multiples. As we have said before, we have moved up our multiple logic somewhat to be able to participate at all. But we will still we have our limits and depending on how these options go, we will decide whether we continue or not. But there are some targets around, yes. Perfect. Thanks. Thank you. As there are no further questions, I would hand back to you doctor Light, ma'am. Thank you very much, and see you or hear you in three months in August. Thank you very much. Thank you. Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.