Andritz AG (ANDR) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the Full Year 2019 Results Conference Call of Andritz AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Dr. 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 fourth quarter of 2019. Three of our four business areas, that means Pulp & 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 intake that we have achieved confirms, I think, in numbers, the very good market position that we have in the market, especially in Pulp & Paper. It's very reassuring that Xerium, which we acquired in October of 2018, developed favorably and fully in line with the assumptions that we had in our business plan when we acquired it. So as a result, our service and aftermarket share in Pulp & Paper, and overall in the group, continues to rise, which obviously is good for our profitability and good for reducing our volatility from the unavoidable volatility in our capital businesses. Obviously, in Metals Forming, Schuler, but also the rest of Metals has been difficult, but I'm very confident that we have laid the foundation for positive earnings development in the future, with a very far-reaching restructuring program that we have launched that which we have fully reserved in 2019. So far, things go as planned, and we expect, as we have always said, first tangible positive effects, rather in 2021, maybe starting towards the end of 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. Let me go towards the presentation and into more details. On Page 3, you find the key numbers. Group order intake, new record high at EUR 7.3 billion driven by Pulp & Paper, which booked several large greenfield pulp mill orders, but also as we saw a very good activity in the -- on the boiler side pulp recovery but also fewer biomass power boilers. Order backlog, EUR 7.8 billion, reassuring for the future. Sales increased to over EUR 6.6 billion, also a new record high. EBITA, obviously, it's impacted substantially by the restructuring measures, which accounts in total of EUR 113 million. Approximately 3/4 of that is for Schuler. And the profitability, EBITA margin adjusted by these extraordinary items, is 6.8%, basically or practically at the same level as 2018 with 6.9%. On Page 5, you see the order intake, plus 10%. Of that, 3 percentage points organic, the rest as a result of acquisitions of full year. Accounting for the acquisitions, predominantly Xerium obviously. If we look at the order intake by business area, Pulp & 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 increased it slightly. On Page 6, the quarterly intake after 2 very strong quarters, obviously, Q4 with EUR 1.5 billion was not as high. We have booked, as we said, several large orders for pulp mills. And in the Hydro side, probably the biggest order has been this pump storage hydropower plant in Dubai. On the right side, order intake by region. It's interesting to see the share of China, 11% compared to 18% in 2018. So it's basically minus 1/3. And this also is reflected in the absolute numbers of the EUR 1.2 billion order intake in 2018 from China. 2019 was EUR 769 million only, which also is a confirmation of the relative weak status of the Chinese economy in 2019. On Slide 7, the sales development, similar picture, plus 11%. Again, 3 percentage points of that organic growth; the rest, M&A-related. By business area, repetition of the order intake, Pulp & Paper is strongly up. Metals, in this case, stable. Hydro, minus 3%, and Separation, plus 8%. Slide 8. Service share and service millions of sales, up from EUR 671 million in the third quarter to EUR 757 million. And for the full year, up by overall 8%. In the longer-term development, you see a compound annual growth rate of 10%. And as a percentage of total sales, 40% after 36% in 2018. The share of Xerium may be of interest on a quarterly basis. Approximately EUR 110 million sales volume comes from Xerium, for a total of about EUR 450 million for the full year. On Page 10, the share of Service business by business areas. Pulp & Paper is now 50% or 51% aftermarket related. This is very reassuring, very good. Separation is second in 45%. Then Hydro, 32%, and Metals, historically and traditionally the lowest year for aftermarket sales with EUR 27 million, but also quite sizably up from the 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 & Paper. Hydro is still being -- no, no.. Pulp & 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% as to 6.8%. If you take the restructuring expenses overall of EUR 113 million, as I've said, approximately 75% or slightly more, with EUR 82 million, is in Metals and a smaller amount for Hydro, Pulp & Paper and also Separation. Slide 14, profitability by business area. Pulp & Paper continued very good profitability, 9.8% or respectively, 9.4%. Metals, flat 0; plus 0.5% before and minus 4.5% 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 regard to details. The bridge from EBITDA to net income, let me briefly go through. So from EBITDA, we take out depreciation, EUR 194 million. Of that, EUR 46 million is IFRS 16 related, EUR 35 million comes from new acquisitions, and we have EUR 19 million of certain impairment losses, both in Metals. And in Metals, we took out the pilot plant we have at Schuler or one of the pilot plants we have at Schuler, and Hydro also had to take down some manufacturing assets. Then IFRS 3 Amortization, EUR 76 million. Of that, EUR 49 million comes from newly acquired companies, predominantly Xerium. And EUR 29 million impairment of goodwill, and EUR 20 million -- all of that comes from Schuler, EUR 29 million. Of that, Yadon, the Chinese acquisition, we reduced the goodwill by EUR 20 million. And on the tooling side, Aviva, we had to reduce the goodwill to, I think, by this time 0, by EUR 9 million. Takes it to EBIT of EUR 238 million. Then we have the financial results, minus EUR 57 million. And increase in interest expenses, this Schuldscheindarlehen replacing the bond, refinancing of financial liabilities of Xerium. This is FX hedge, foreign exchange hedging, of about EUR 60 million, internal hedging; and Leasing IFRS 16, obviously, also has approximately EUR 5 million impact on financial results. And we have a relatively high tax rate of 32% because of certain adjustments in the deferred tax assets. So Slide 16, my favorite slide, obviously, the cash flow. Our cash flow from operating activities is up at EUR 822 million. How come? Obviously, depreciation, change in provisions, other changes in standard, I would say. Change in net working capital, that's the very good thing. We have EUR 330 million positive effect after EUR 279 million negative effects in 2018. All the numbers go into the right directions: Contract liabilities favorably expect of EUR 152 million; and increase in liabilities, EUR 85 million favorable; decrease in contract assets, EUR 70 million; decrease in trade receivables, EUR 27 million; advance payments, EUR 23 million; and EUR 18 million decrease in inventories. 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 in these efforts. Slide 17. Again, the summary of all the figures. I don't think I have to go into any details. Maybe capital expenditure, EUR 157 million; liquid funds, up from EUR 1.28 billion to EUR 1.6 billion; and net cash from minus EUR 100 million to plus EUR 245 million. Predominantly, this change in net working capital comes from Pulp & Paper with regards to that [ offset ]. Dividend. As we have said, we want to pay dividends in the amount of 50% to 60% of net income. The EUR 0.70 per share is approximately 55% of payout ratio. So the proposal is EUR 0.70 per share, which obviously is substantially less than 2018. Excuse me. Then I'll come to the business areas. A lot has been said already. Pulp & Paper, very good project activity, both in pulp and also in dissolving pulp and viscose pulp. And on the power side, also, the biomass activities in Japan continue. Competitive environment unchanged: Tough but I would say as usual. Strong income -- Slide 22, strong increase in order intake, increase in sales, increase in EBITDA. EBITDA margin is still very good. I think that one is to be said. Metals. Both in Metals, Slide 23. Both Metals Forming and Processing, low demand. And obviously the consequence is fierce competition. Our develop -- our restructuring program with Schuler is continuing on plan. On Slide 25, profitability. As I said, flat zero restructuring costs and negative after restructuring costs. Order intake is down somewhat, minus 18%. Of that, Schuler, approximately minus 13%. The restructuring costs of the provisions that we have taken is EUR 82 million for capacity adjustments and some other restructuring costs. Slide 26, Hydro. No change in market. Also the increasing discussion on climate change should have a positive effect. So we are still, let's say, optimistic for the mid-term 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. 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 28, Separation. As I've 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 in minerals are good. Feed and biomass is stable. So continuation of the 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 EBITDA 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 have only a cold. I have not corona, to give you some reassurance, but obviously corona comes on top of already relatively shaky economic environment last year, especially in China. It's -- corona obviously has a very strong impact on China. Where do we stand there? We -- we at Andritz, with 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, a very wise decision at the beginning of corona, where we have purchased, through our purchasing departments globally, masks. So we ended up buying 200,000 masks some 5 weeks ago. It's 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 them up, and therefore the workers cannot come into the factories. So we are back to normal work, I would say. We expect the first shipments out of Chinese ports probably this week. So I think from there, 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. We can start to catch up some of the delays. As you probably know, the rules in China 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 6 days, maybe 7 days, a week. Chinese government has also promised the substantial 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 as we want to catch up as much as possible, and not just add whatever has been lost in the time log 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 an impact on the automotive industry especially, but also in 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, 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 -- what will come over the next few weeks. I'm personally optimistic that it will -- we will see a disappearance of corona, if not within the next 4 weeks, then certainly within the next 6 or 8 weeks. But again, no guarantees. Let's see how things develop. Overall, as you have seen, the year has begun quite good. We had a large order for new pulp mill in Uruguay from UPM. So we expect the order intake for the first quarter. And beyond that, we are not very pessimistic but we are cautious, and I think that to deal with this, let's wait and see and such as to whatever is -- will become then the real situation. Obviously, for the steel and the automotive industry, corona is not the best development because they have already been in rather difficult situation. So clearly, there are no signs, especially no signs for recovery. And the rest, maybe still an increase in the travels that they have. And as I've 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 & Paper, these are some very large orders, we need to continue on with our plans for the restructurings 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.

[Operator Instructions] And the first question we received is from Andre Finke from HSBC.

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, in November, when you first came up 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, not dramatic relevance so far. 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 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, let me say, slight to moderate increase in sales, but no dramatic change in guidance on that.

Maybe on the operating cash flow side then. You mentioned that the working capital improvement is mainly related to Pulp, and it's 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, we 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 a onetime effect. And it's not only the order intake as we have seen. I mean we have a favorable development. And 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 cut. I mean it's been a very strong cash flow development, and also the relatively weak share price performance. Why didn't you sort of 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.

[Operator Instructions] And the next question received is from Andreas Willi from JPMorgan.

Dr. Leitner, my question is on Schuler and the outlook here into 2021 and the savings come through. So if we 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 '19 that going forward, kind of, the working net capital ratios should be roughly similar as they have -- as they are now.

Yes. Second question, the answer is yes. Negative as -- is higher but 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 Schuler -- for the Schuler restructuring program, we have never achieved substantial contributions from growth and top line. So we still think that the current level is sustainable or, obviously, after the huge crisis in the automotive industry. So the savings we expect -- overall, we expected approximately EUR 40 million. And of that, probably half should be visible in 2021, roughly.

And the next question received is from Sebastian Growe of Commerzbank.

It's 3, actually. The first one would be around the EBITA guidance. We talked about sales already, but it seems that things have been going materially better at Separation. And I think your indication 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 the way regarding mix, et cetera? Or is this sort of soft guidance when it comes to the EBITA outlook for 2020, is solely a reflection still of Pulp & Paper and the mix deviation that's turning to a slightly less favorable situation eventually in '20 compared to 2019? Second question is on restructuring. You had, obviously, pretty high charges of more than EUR 110 million in fiscal '19. 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 that -- I know that you would have to go to provision if it's already very, very clear, but I think in the background of the question. And then the last question is around M&A and after the massive sell off we have seen, especially on the public equity markets, so can you just give us a sense if it's your appetite for M&A because there's eventually just more interesting opportunities now than was the case 3 months back or so from here? But this has changed your policy in this regard?

Yes, thank you. Your first question, EBITA. Obviously, we have also said that Pulp & 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 a 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. So 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 to rightsize? 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 the -- from where the economy was 2019, so we were rather cautious. So we encouraged our companies, our divisions, to think about their capacity, to they think about opportunities to take out some costs. We will continue with that. As I said, we are confident that Schuler, the actions that have been taken with regard to reducing capacity, reducing personnel in Germany, are sufficiently provided for. Currently, we don't see any large additional restructuring opportunities. I would not say need. I would really see -- say opportunities. But I'm not excluding that we see some continuing moderate downsizing in -- across all 4 business areas, maybe not in Separation. It's not in Pulp & Paper. Maybe in certain items also Pulp & Paper. And our M&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 Xerium and use it to earn back some of the relatively high purchase price. Not high multiples but high in 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 will always continue to look at some smaller acquisitions, and do 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 certainly, there we could see some problems or companies having problems and, therefore, being open for discussions. But there, we do not see our strategic direction. We continue to focus on aftermarket, on automation, on services. And 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 are not -- do not see a dramatic increase in activity on this side.

[Operator Instructions] And we received a follow-up question of Andreas Willi from JPMorgan.

I just wanted to follow-up on the tax rate. Obviously, you mentioned 2019 had some unusual components. What should we assume as a normalized tax rate for 2020?

As a normalized what?

Tax rate.

Tax rate. I think, around 30%.

As there are no further questions, I hand back to Dr. Leitner for some closing remarks.

Thank you very much for participating and your questions, and look forward, first of all, to your reports, and secondly, to our next conference call in about 3 months. Thank you. Bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.