Andritz AG (ANDR) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the conference call of ANDRITZ AG. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand over to Wolfgang Leitner, who will lead you through this conference. Please go ahead.

Thank you very much for the introduction. Welcome to our third quarter 2021 conference call. I hope you are all safe and well. First of all, I have to apologize for having this conference call not at our usual early morning time at 8:30. I'm in Brazil, and I was traveling. And therefore, the question was should somebody else do the conference call, the usual time or I should do it. So we decided, I should do it and therefore, this unusual time. If you have problems understanding, and I'm sure, Michael, will check it also, please make yourselves immediately heard, but I think it should work out well. I'm here for meetings, but obviously also for the official opening ceremony for the Bracell pulp mill for which we supply 2 complete fiber lines plus recovery boiler, one of the biggest lines in the world, and it has been a good project and is running, and there will be a ceremony today to celebrate it also. You've already have also read yesterday our ad hoc release that we received another very sizable order, which still is confidential. And so I think that underlines the strength of our Pulp & Paper business. As usual, let me give you some general remarks on the overall situation and our financial development during this quarter. Outside influence reasonably good. I think continuing good project activity. Global economy doing reasonably well and also in our markets. And so we see -- we continue to be quite optimistic on the short-term economic activity globally. Obviously, the pandemic situation, I think all of us are following, especially in several countries in Europe, including Austria, by the way, where we see a very substantial increase of infections, so far, not yet same hospitalizations or intensive care unit occupancy. But obviously, if that would continue to accelerate, that obviously could have a negative -- ultimately, a negative impact on the global economy. What we are struggling with are these well-known bottlenecks in the supply chain, combined with high raw material prices, energy prices and above all, extremely high and nearly unavailable freight rates or freight ships from China, so that's definitely the complication. Let's see how long that will last and so far, we have been able to work around that reasonably well, but that definitely is a shadow on the sky, I would say, looking forward. Given this environment, I think ANDRITZ achieved solid financial results in the third quarter. In spite of the lack of large orders, we achieved an order intake of almost EUR 1.5 billion with good developments across all 4 business areas. As you will remember, we had a very good order intake in the first half of the year, and we continue to be optimistic that we also should see, if not as good as second half, but definitely another good half -- second half in terms of order intake. And as we have said, we expect this recent very large order in high triple digits also will come into force this year. So I think it's not overly optimistic that overall, we should have a very good order intake for all of 2021. Revenue was lower compared to the third quarter of last year due to Pulp & Paper capital where the large projects have been nearing completion. So the lower revenues contributed to the overall revenues. Despite this lower revenue, earnings developed very favorably. We were able to digest this mentioned raw material price increases, transportation price increase in the second half to a large extent and to progress on all our major construction sites, more or less as planned with certain limited delays, obviously, and also within the expected cost frames. Overall, all business areas were able to improve the profitability. Pulp & Paper and Separation recorded again a very good earnings and profitability. Schuler continued its positive earnings trend from the first half, confirming its path to a sustained turnaround. And I think Hydro has one of the strongest of all quarters, profitability-wise, but I think these are regular fluctuations, regular volatility on profitability that you have to become used to with the Hydro business depending on finalization of certain large contracts. Okay. If we then start to go through the presentation. I would like to start with Page 2, where you see a summary of Q3. Main numbers, group order intake is 1.5 -- nearly EUR 1.5 billion, lower than compared to quarter last year, lower in Pulp & Paper capital. We have to keep in mind that we have booked large orders in last year. So comparability is not fully given, I would say. Revenues, EUR 1.5 billion, lower capital revenues in Pulp & Paper, as we mentioned. Similarly, Metals and Hydro revenues are also slightly down. Separation is practically unchanged. EBITA, I think the high point, EUR 127 million. EBITA margin at 8.4%, significantly up to comparable quarter and a very favorable development across all 4 business areas, that we'll go into the details in a few minutes. On Slide 5, some more details on the order intake. On the left side, the quarter and on the right side, year-to-date 9. The split in the bars is Capital and Service. You see overall decline compared to Q3 last year was 14%. However, if you look at the $1.7 billion last year, it shows that it has been a quite high order intake for the quarter. Good is that the Service business continues to grow and Capital, as mentioned, possess certain volatility, but clearly based on -- we expect the good order intake for this year should see also increasing sales starting from next year and into 2023. The split by business areas you see in the middle for the quarter and then at the lower, year-to-date 9 results, so Pulp & Paper with EUR 2.3 billion, so about 4% below last year's 9 months. Metals is substantially up from EUR 840 million to EUR 1.2 billion, very good development in both Metals -- regular Metals business and Schuler. Hydro is practically stable at EUR 975 million. And Separation continuing growth at about 6%. And on the right side, you see the 9 months figures for order impact capital, plus 1% and service plus 16% to EUR 2 billion. On Slide 6. You see the quarterly order intake. And I think this is -- this covered basically everything. You see it after 2 strong orders -- very strong orders in Q1 and Q2, Q3 is somewhat lower than preceding 2 quarters. Service side on the right side, plus 12%. Slide 7, revenues. Again, last quarter, right side, it was 9 months. Revenue is down by 9%, Capital down by 18% and Service up 7%. Similar picture over the year-to-date 9, Capital down 12%; Service up 4%; overall, minus 6%. No real surprises at this stage. Share of Service business on the next slide, basically very stable. Pulp & Paper, 44%, a little bit down from the peaks in 2018, 2019. But it's a good thing because Capital has gone up. And therefore, the share of Service has gone down a little bit. Hydro, 40%; Separation, 50%; and Metals, 26%. Slide 9, order backlog, very stable at somewhat above EUR 7.3 billion, typically split. Major backlogs are in Pulp & Paper and Hydro. And the rest is relatively low, and EUR 7.3 billion overall, obviously, is a good order backlog securing good absorption of fixed costs and good utilization rates there. Slide 10. Earnings and profitability, and this is now the reported profitability before -- after ANDRITZ before adjustments. And on the left side, the quarter, up from EUR 104 million to EUR 127 million, plus 22%. Profitability is 6.2% to 8.5 -- 8.4%, sorry, in our opinion, excellent development. And similarly, a very good development for the 9 months, EUR 278 million to EUR 365 million, up 1/3. And profitability up from 5.8% to 8% in spite of lower -- somewhat lower sales as shown before. Schuler continued its positive earnings development, as I said, over the first 2 quarters, and I think shows good progress on the turnaround. You see it also on the next page, 11, Metals, first 9 months, up from minus 2.2% to plus 2.5%. And if you look at the other business areas, Pulp & Paper with 11% in Q3, now around 10.6% for the 9 months compared to 9.4%. And Hydro grew 6.4% in Q3 and 9 months, 6.5%, up from 4%. Separation, another good quarter, 10.6% and year-to-date, 10.0%. If you look at the effect of nonoperating income and expenses on Slide 12, you see the effect that on an adjusted basis, the quarter is slightly down, absolute numbers from EUR 130 million to EUR 123 million. However, profitability is up from 6.2% to 8.4%. And for the year-to-date, profitability -- profit earnings are up from EUR 313 million to EUR 368 million, and profitability parallel 5.8% to 8%. No real sizable changes in Q3. We see approximately EUR 5 million resulting from -- positive from a property sale. Obviously, in 2020, we had very substantial restructuring expenses in Q3 around of EUR 26 million. On Slide 13, the adjusted margins, again, Pulp & Paper, 10.9%; Metals, 2.3%; Hydro, 6.3%; and Separation, 10.0%. In all of them, positive developments. Obviously, still quite a way to go on the Metals side. We really see uncertainty has, by far, not yet finished and we are in the middle of the budgeting process, and we see what we can expect for next year. On Slide 14, I hand over now for the next few slides to Norbert Nettesheim, our CFO, to take you through these charts. Norbert, can you take over?

Yes. Thank you for handing over, and good afternoon to all of you who are on the call. And in the last slides, I will quickly continue on this presentation of our results down to net income and cash flow and liquidity, and do a quick summary of all the major KPIs, that's my last slide. Starting with Slide #14, bridge between EBITA and net income, nothing really spectacular. We start with a 10.7% EBITA, as already heard from the presentation of Dr. Leitner. The regular depreciation of EUR 120 million, which is a little bit lower than last year's depreciation, simply due to the careful investments, which we did so far in the last year. Then 8% EBITA, also a little bit up. Last year, we had 7.9% at that time. And then the other provisions down to net income not very significantly changed compared to what you have heard in the second quarter and the half year report. We have the regular IFRS 3 amortizations, which are a little bit lower than last year because of the regular end of the depreciation of intangibles from very old acquisitions. We had the EUR 3.3 million impairment, which we did in compact fiber, which is absolutely not very significant, simply housekeeping measure, and then end up at 6.9% EBIT or EUR 315 million. Financial result, EUR 25.3 million. This might be a little bit surprising that, that's negative. Interest result -- pure investor result within this number is EUR 17 million -- minus EUR 17 million interest expenses. We have 10 million other financial result effects, which are coming from a payment to a minority shareholder and extra dividend payment to a minority shareholder, the topic and EUR 3.5 million FX effect. What also should be mentioned that in the interest result of minus EUR 17 million, we have about EUR 3.5 million special effects from an extraordinary down payment or payback of a loan in the range of EUR 120 million, which cost us a little bit of a onetime cost, but which will pay back very shortly, and which will then show up in lower interest numbers in the next quarters. So it was kind of a prepayment of money for getting this loan paid back. So EUR 25 million and thereof EUR 3.5 million onetime effect. This leads then to the EUR 290 million EBIT -- sorry, EBITA, 6.4%. Last year, we had -- sorry, half year was 6.1%, so Q3 contributed positively to the overall year-to-date number. And then we apply at the moment 27.5% periodical tax rate, leaving then EUR 210 million net income, which is also a little bit -- a slight increase to 4.6%. So we are approaching the targeted 5%in small steps, but we are confident that we are continuing up in the next quarters this way. Positive also was other comprehensive income, so that the total income will be EUR 250 million, also effect of nearly EUR 40 million from exchange rate effect on the translation of foreign equity. Total equity after Q3 is then 19.7% after 18.6% after Q2 and after 17.8% at the end of the last year. So also here, we are continuing our way to at least 20% equity quarter, which we communicated to you in the -- last time as our target. So from our point of view, overall, nothing really breathtaking, but continuing our constant process of improvement also on net income. Next, Page 15, also not spectacular. There is only 1 topic I'd like to mention. This is a significant increase in net working capital of EUR 127.2 million. Last year, we had, after the third quarter, also a minus of EUR 108 million. This is an effect which mostly is a temporary effect, which we don't consider sustainable. As Dr. Leitner explained, we had in the third quarter, no big -- real big projects in order entry. The high -- small order portion at a very high service portion, which leads naturally to a lag in down payments. And this then immediately have an influence on working capital. I said various times in plant business as we are in, we have these typical fluctuations in these ranges. We expect that in the Q4, it will change with further large orders, which we are expecting. It will also change a little bit in the area of our inventories, where we, due to some logistic problems in Q3, also could not get all the stuff out of our house. And then we certainly will also have a slight increase -- a slight effect on this increase in inventories, which then turn in the other direction in Q4. So we are very confident that in Q4, this will change and we can then record significantly better picture also on cash flow in Q4. We should be on Slide 15 -- 16. This is a regular normal slide. You know about our liquidity development. Net liquidity is at EUR 377 million. We expect for the Q4 also here a significant increase from positive cash flow. Cost liquidity is down by EUR 203 million, But out of this is more than EUR 150 million repayment of loans. As I said already before, we did that in August, a repayment of more than EUR 120 million. extraordinary repayment simply to maintain our financial results a little bit by not having too much -- not too much liquidity which is currently not used. But we have replaced it -- we are in the process of replacing it by other instruments, which gives us -- which keeps our flexibility with regard to acquisitions and spendings which are necessary. So no need for worrying. It is intended to have a little bit lower level as we had it before. So good plus net income and cash and liquidity. And then you have on Page 17, the summary of all our financials for the full year for the whole group -- sorry, for the first 3 quarters for the whole group. All positive except sales, which was mentioned already due to the order entry last year a little bit lower. And the net liquidity topic and the cash topic, which I mentioned before. All the others are positive. And yes, we are very confident that it will remain as we show it here. So that's all from my side, then I can give back the word to Wolfgang Leitner.

Thank you very much. Yes. And going through the individual business areas on Slide 19, Pulp & Paper. I think a lot has been said. So the third quarter has been very good. EBITA margin of 11% at the high end of our targeted range of 10% to 11% as we have communicated during the Capital Markets Day, everything good. Maybe just 1 word to this order intake. Obviously, this we had to publish yesterday in ad hoc this very large order. It is not at all reflected in the Q3 numbers, obviously. And year-to-date 9, 10.6% EBITA, very good result, good market position, good project activity, execution of the large orders is running well. As I've said, we have had the start up of this Bracell mill, which is a huge mill. And so far, it is running very well. And so I think in Pulp & Paper, we are really in good shape. And also the market, as we see it, looks quite good also into the, let's say, first half of next year. We are quite optimistic that this project activity will continue, obviously, not with this super-sized projects. They will not come every quarter. In Metals, Slide 20, the EBITA margin has been -- in Q3 has been 2.8%; year-to-date 9, 2.5%. Order impact overall in the quarter, very good. And 1 point -- and year-to-date 9, EUR 1.2 billion compared to EUR 840 million in 2020. Metals Processing, we had a very high order intake, very interesting orders and expect towards the end of the year, continuation of that trend. And Forming is slightly down because large orders have been booked in Q3 2020, but overall, also good order intake. Revenues, obviously, slightly lower, as we said before, and earnings in Schuler continues to be positive and is making progress on the turnaround Metals P is, as always, from time to time studying with one or the other projects. So there's a small hiccup, which probably will have a slight impact on the second and on the fourth quarter, but not at all sizable but might slightly decrease the progress that Schuler is taking. Then, Separation, very favorable business, good development of order intake both for the quarter and for the 9 months with EBITA margin of 10.6%, also largely in the range that we have defined; year-to-date 9, 10%. And good activity across the various industry customer segments that Separation is active in. And also a good development of new products in purchase and really becoming a valuable member of the ANDRITZ group compared to what we had to defend a few years ago. And then to conclude, Slide 24, outlook. Again, we expect no dramatic change, having in mind that COVID can have an impact and having in mind that complications in transportation and supply chain issues are a complication, but so far has not had any sizable effect, neither on the order impact nor on the execution. And the financial guidance, we confirm the revenues will show a slight decline compared to 2020, where it was EUR 6.7 billion. We expect a significant increase in reported EBITA compared to the level of EUR 392 million from 2020 and a profitability of around 8% compared to the EBITA margin last year of 5.8%. With that, I can conclude and expect your questions.

[Operator Instructions] We have the first question is from Andreas Willi, JPMorgan.

First question I have is on the margin development. Normally, we see Q4 higher than Q2, Q3 in terms of the seasonality of your business. Is there a specific reason this year that, that should be different compared to prior years? So that's my first question.

No.

Okay, that's clear. And the second question. In terms of the Pulp outlook, you already commented on that, given you're now in Brazil as well. Are there other larger orders out there of a material scale? Or is your comment about a continued good environment more like in terms of continued good activity level for kind of midsized orders and rebuilds and kind of the base business?

So I would say, risky to have hypothesis on these large orders that's currently in double-digit million orders. But I would -- I see one or the other on the horizon also for next year, yes.

And my last question on Hydro in terms of the order outlook there. You had earlier commented that maybe we can get back towards the EUR 1.5 billion at some point. We haven't seen it kind of yet in Q2, Q3. Are there projects out there with a reasonable chance of being approved for the next few quarters that we could move back towards that level?

I know that I'm exhausting my credibility with you, but yes, we have projects around. And I think there is a good chance to approach this EUR 1.5 billion.

The next question is by William Turner, Goldman Sachs.

Looking at the project that you announced yesterday. Obviously, this is a very large order. I mean, must be one of the largest ANDRITZ ever had it, if not the largest. How -- can you just share a little bit more about the time line on which it's supposed to be delivered? I think the large producer who may came from doesn't expect ramp-up to be until 2024. Is it a similar profitability because I know that some of these larger orders are -- can sometimes be more competitive in the bidding process? And then finally, like in the first quarter, would it be fair to say that did this have any impact on distracting maybe some of your sales force who are -- in the Capital business who are concentrating on winning this large order rather than some of the maybe small to medium ones? Did that have an impact from the 3Q?

I need to come back to this last question, I'm not sure I understood it. Why these are -- first of all, this very large order has usual -- has a profitability, usual customer to be large orders. Clearly, it's a Capital order. It's not a Service order. Clearly, it's a very large order. So there are different profitabilities, but it is not unusually, I was able to smell that you are concerned about it's timing, whether it's unusually lower or unusually higher. And it's a good project with a competent customer. And we're extremely happy that we have been trusted with this order. We expect it to come into force in this month. The execution will take 2.5 years roughly, something like that, maybe a little bit more. Don't expect any sizable revenues from that for the -- at least first half, first 9 months, end of next year. Really the main impact on revenues will be 2023. Obviously, we started 2022 already. You're concern with regard to the sales force, I didn't understand, to be honest. Sorry for that.

Because in the third quarter, the order intake was somewhat lower than in Pulp & Paper, somewhat lower than the last couple of quarters. So there weren't any large orders. Has that been because the sales force has been prioritizing on this particular order? And therefore...

No, no, no. I mean we try to organize that we always pay the appropriate attention to each and any project.

That's great. And then on the working capital, could you just elaborate a little bit more color on why you expect it to reverse in the fourth quarter? It seems to me it looks like you're holding more inventories and that's quite common amongst a number of companies at the moment given the supply chain issues and the issues on shipping some final finished goods. But why do you expect it to reverse into the fourth quarter? And can you just provide a bit more color on that, please?

Obviously, the question was on down payments. We finally already received, but I'm clear as to what are our developed plans to achieve this challenging forecast, Norbert.

Certainly, we have -- in the part of inventories, we have a little bit reserve from material, which we stocked up. At least it will not go up further because we see also a little bit of a makeup from the pretty low inventories in 2020 after the COVID period, where we also decreased a little bit our inventories. So understanding one effect from increase in inventories, we certainly, by the end of the year, will not show up this number because we will not pile up further on our material. And we'll have very many activities running now to bring this a bit further down -- a little bit more down. So we will get here in the fourth quarter a little bit of a tailwind. And as we said already, with the specific orders, we're expecting also significant down payments, which will contribute mostly to the recovery in the fourth quarter. And then we always have -- yes?

And I will quantify from that, are you expecting to receive your prepayment for the order you announced yesterday in the fourth quarter or at least start receiving them?

We expect several effects in the fourth quarter down payments on this one and also coming from several other ones.

Next question is by Richard Schramm, HSBC.

One question I have concerning the logistic costs you mentioned as an extraordinary high end and quite obviously unexpected burden here. So far, I understood that you were obviously able to manage this and also to pass on this additional cost to customers? Or is there a certain portion which you have to follow in your accounts? And could you give us an idea what this might end up for the full year on the bill?

Norbert, do you want to give a qualified estimate? Otherwise, I would give an unqualified estimate.

After this introduction, I cannot do different than saying something. We have done some rough estimations on that and the numbers which you see here are in the lower one-digit millions. These are the regular -- within the regular change of costs. So we will not see, let's say, an impact on profitability out of this logistic cost element. We also have usually a contingency in our projects. So it's all covered by this. So we don't see any major profit impact out of this which go over the regular contingencies, which we have in the project in 2021.

Yes. But clearly, we are -- to a certain extent, we are caught in the middle, obviously, when we have a fixed price and suddenly we have escalations, typically inflation and also contingencies that Norbert said. But what is currently happening, especially on the transportation side is very difficult. I know that even our customers don't get ships to transfer the goods they produce. And that's clearly a very unique situation. Obviously, when this has become visible, we have clearly changed the incoterms. We have made sure that we have open book on that. So we have introduced many different protections, but there remains a certain part where it's too late to do anything and you are -- it depends on getting ownership now and not in 2 months. But again, this does not cause us to change the guidance or say, on that this may have visible sizable impact on our profitability.

Okay. And maybe one other question on Metals and curious especially on Schuler. I think you have also mentioned earlier in last presentation at the CMD that you have a lot of projects here from the segment and customers, which are active in this area. We have now seen 1 company looking into this business and cleaning up its order backlog because they say some of these companies, especially in China, well, might not start the projects they have indicated as planned because of the current disruption in the market, and they have their order back risk as well that there are some customers which might delay projects or even cancel projects in light of the current turmoil in the sector?

We have had similar experiences, and this is included in our statements over the last quarters and also last year. We are cautious when we book an order. But yes, we have seen it also. Do we see a substantial risk on our side? No. I mean to -- we would be -- typically, we would be fully protected regarding the costs we've incurred. Obviously, it could cost some expected revenues, but that we would not see any substantial risk from that for Schuler.

[Operator Instructions] At the moment, there are no further questions, and so I hand back to Mr. Leitner.

Thanks very much for your participation. If you have questions, contact Michael or me, and we look forward to talk to you in -- for the full year. Thank you very much.

Thank you for your attendance. This call has been concluded. You may disconnect.