Andritz AG (ANDR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Andritz webcast regarding the publication of the first half and Q2 2023 results. My name is Stefan Schantl, and I will moderate today's webcast. I would like to welcome our President and CEO, Dr. Joachim Schönbeck; and CFO, Norbert Nettesheim, who will present the highlights of the first half and Q2 2023, today. [Operator Instructions] But now I would like to hand over to Mr. Schönbeck. Please go ahead, sir.

Stefan, thank you very much for the kind introduction. Good morning, ladies and gentlemen. Thank you very much for joining our conference call for the Q2 results 2023, and for your interest in Andritz. We are very happy to report that we had a good business development in Q2 that we could somehow withstand the weakening economy and the lower investment activities. We had, in summary, we can report quite a healthy development of the business. Starting with order intake, we could book EUR 2.3 billion new orders in the second quarter. That is up 5% to the second quarter in 2022. The revenue was EUR 2.1 billion, that was up 20% against the second quarter of last year. And from that, the order backlog we could even increase again to EUR 10.6 billion, which in the -- with the prospect of the further weakening economy and probably a bit more difficult times gives us a good workload for the months to come. The reported EBITA was at EUR 174 million. That is up 15% from the comparing quarter of last year, and the EBITA margin was at 8.1%, down from 8.4% in the quarter 2 in 2022. The net income, we could increase compared to the previous year's quarter by 27% to EUR 119 million. We could close -- in the second quarter, we could close an important acquisition for Andritz. We acquired a family-owned company, Dan-Web in Denmark. It's a leading supplier in the nonwoven area. They are producing nonwoven webs based on airlaid technology that complements our broad portfolio we have in the nonwovens business. And what -- where we see specific potential is that besides that nonwoven web forming done by airlaid, we see a huge potential for dry molded pulp packaging and parts, for example coffee cups, coffee cup lids, and so on and so forth, can be produced through that technology in a dry way while what is customary today. It's done in a wet -- through a wet process. And so the dry process, as you can imagine, saves a lot of energy because you spare the energy for the drying. So we are very happy and we believe that we can grow that business substantially. Let's have a deeper look to the financials in the second quarter. The order intake for the second quarter, as I reported, was up 5% for the first half of the year. It was basically on the high level of the first half of 2022. We are now at EUR 4.7 billion. You can see the order intake is mainly driven by -- in the second quarter, is mainly driven by hydro. We were happy to announce that we could book a large order for hydropower plant in Laos, 1.5 -- 1,500 megawatts. And I will come to that a bit more in detail later. We were down in Pulp & Paper. We could see that the investment activity in Pulp & Paper decreased. You probably know that pulp and energy prices were hitting basically historical lows in the last quarter from historical record figures 6 months ago, which is quite a deep drop. And we have to report that order intake is down in Pulp & Paper on the capital side but we are happy that we could increase the order intake in the service area in Pulp & Paper compared to the second quarter of last year substantially. Very good development also in metals. You can see we were up 4% in the second quarter to more than EUR 500 million. And for the first half of the year, we even could increase by 19%. The order intake by region, you could see that -- you can see that Europe, North America is at 53%, down from 58% in the last year, which we believe is also quite significant. Looking to the revenue, we had a strong increase from last year to EUR 4.1 billion in total, up 24%, definitely driven by the high order backlog that we have. I think we had now, for many, many half years in a row, we had a book-to-bill ratio larger than 1. And therefore, we have a lot of backlog to work on the revenue. You can see from the numbers, the increase is driven by all -- nicely by all business areas. Pulp & Paper and Metals, up more than 20% on the quarter; Hydro up 18%; Separation, 5%. But you can see if we look to the half year figures. All business areas are growing double digit, and I think that is a very good situation. If we look to the share capital service, capital increased a bit, for sure, this growth is driven by some very large projects on the capital side. But looking -- having a closer look to the service, you can see that we could very well increase the service revenue. If you compare from first half year 2022, we were at EUR 1.3 billion, and we could increase that to almost EUR 1.6 billion in the first half of 2022. And you can see that this growth was supported by all 4 business areas. So all 4 business areas could increase the service amount and therefore help us to provide a more secure and more stable business and business outlook. We are particularly happy that in Separation, we could beat the 50%. And now we are -- in Separation we have more than 50% service revenue, which we are very happy with. The order backlog increased compared to second quarter '22 by 7%, also increased compared to end of last year and compared to the end of the first quarter. So we are -- we go in with a good workload into, I would say, maybe a bit more uncertain times. Pulp & Paper and Hydro, they account for 70% of the total backlog. Earnings increased significantly. EBITA and EBITA margin, on a reported level, the earnings EBITA increased by 22% to EUR 333 million. That's 8.1%, down from 8.2% in 2022. On the -- if we look to the adjusted EBITA, we increased from EUR 270 million to EUR 335 million that we had even 1/10 percentage point up from 8.1% to 8.2% EBITA margin percent. So we would say we are in a stable business -- in a stable development there. If we look here more into the details, reported margins, I would say we are stable in Pulp & Paper and Hydro. In Metals, we are nicely up from last year, 0.5 percentage point on the half year and 0.8 percentage points in the quarter. It is very good. Separation is definitely driven by extraordinary effects. And maybe we go to the adjusted figures that you can see operationally, we really had an increase in Separation for the first half year, but also for the quarter. So we are -- I would say we are quite in a -- quite confident and happy that we are on a good track there. And some of you might remember that Separation for many years was one of the areas of concern. Now I would ask our CFO, Norbert Nettesheim, to explain to you the financials in more detail.

Yes. Good morning, ladies and gentlemen. As always, I'll now dig a little bit deeper into the group's P&L. Starting with the EBITA, as explained by Joachim EUR 332 million, a very good number for the first half year, 8.1%. Then bringing it down to net income means taking off the amortization number. You see there a EUR 24.1 million, which is also an increase or a lower amortization compared to last year. That is simply from the fact that the Schuler depreciation is over now and that this is digested in the group's balance sheet now. We expect for the rest of the year a similar number. So this is now, let's say, pretty stable contributor to increasing of the net income. EBIT 7.5% is an increase of 0.2 percentage points compared to previous year's first half, EUR 308 million. Next step then is the financial result, which, as you see now gets also into a very nice dimension. In the second quarter, we had the first time since years certainly driven by the interest situations in the financial markets, a positive financial result, plus 1.4. We assume that this will continue as long as the interests are on the level as they are. We are sitting on a huge amount of cash. We are well financed midterm, and we have the opportunity to invest our money now at a little bit higher interest rates, which will contribute to the financial results also in the second half of the year. EBT with 7.3 million -- sorry, 7.3 percentage, also up. 6.7% was the last year's comparable number. And from that, we have to deduct the taxes which, as you see here, amounted to 26.6% at the tax rate. You might recognize that this is a little bit higher than in the last quarters. It's simply due to the fact that we are in the process of a repatriation of cash from China to Europe or the U.S. And that this process costs a little bit of taxes in the -- in China, which slightly increases the tax rate for the group. But in total, it's very beneficial for us to have the cash in the future here at our hand and to have it available for investments or other issues. Now, at the end, then we -- as Joachim pointed out already, EUR 221.5 million as net income, 5.4%. Also an increase compared to previous year's comparison period of where we had a 4.9%. So overall group's P&L, from my point of view, also in very good shape. Just to transfer it to the equity. OCI is at EUR 9 million. Not that big anymore because interest effects and exchange rate effects are also there, digested. EUR 230 million total result leads then to nearly EUR 1.9 billion equity and an equity ratio of 22.6%. So that's about the P&L. The next is then our cash flow development. And here, I have to put a little bit of water into the wine, and I immediately want to point out the big red bar in the middle. As you see there, in the first half year, a significant increase in net working capital, EUR 363 million. So the trend which we saw in the first quarter is continuing. As the explanation, I have given in the first quarter is still valid. We have increased in the first half year, our contract assets by EUR 230 million, and we have increased our inventories from completed contract orders by another EUR 110 million. So simply the fact that we are now working on the execution of this huge order backlog consumes cash. And these 2 positions coming out of the execution of the contracts nearly explain the complete change in the working capital. The balance is out more or less. The question will be how will it continue? How will it develop? We are heavily working on this issue. We are heavily looking into our payment schedules for the big projects. And we are sure that in the second half, this process will be stopped and that we will see then a trend back to, let's say, reducing working capital, and then with this also a positive effect on cash flow. With this big effect of EUR 363 million increase in working capital, we end up at EUR 79 million negative cash flow in the first half year. But as I said, I consider it as a temporary effect, and it will turn in the other direction. And maybe one remark. In addition, we have to have in mind that in the last year, the complete last year, we reported EUR 710 million cash flow, which was a significant cash flow compared to the results, which we reported last year. And last year, it was driven by, let's say, a big decrease in working capital, nearly EUR 150 million. So that means this year, it turns a little bit into the other side. But over time, it will balance out, and we are sure that we will deliver sufficient cash for what we have to do with the cash to pay dividends and to invest in growth. That's about the cash flow, and it ends up very simple arithmetically in the net liquidity, which is now down by nearly EUR 370 million driven by the dividend, which we paid in the first half year, EUR 208 million. And as I explained, driven by the negative cash flow and the increase in working capital. So that's it for the numbers in detail here. You'll see the slide where we put together all numbers for the group P&L and the group numbers before Joachim goes into the divisions, I'll quickly show you that. Overall, it's still a similar picture, very nice sales and profits, very stable order intake and currently temporarily a little bit unfavorable situation with regard to cash which we are, as I said, hoping on the topping, which we are sure that we will turn it into the other directions in the future quarters. So that's from my side. Questions later, if you want, and I give the word back to Joachim.

Norbert, thank you very much for this deeper explanation. Let's have a look on the business areas very quickly. Pulp & Paper, as already reported, order intake down. Definitely market is cautious to invest. Reasons I already told you, paper prices are down, demand is down, pulp prices are down, energy prices are down. So all our customers are very, very careful at the moment. We could increase order intake on the service side, which is -- which is good and helps support our profitability. Sales is nicely up. Revenue, 23% in the quarter, 26% for the first half year. So is EBITA, which is up 20% for the quarter, respectively, 25% for the first half year. That is quite good. You could see by -- order intake by regions, we have 30% -- 60% coming from North America and from Europe while on the revenue side, this region only represents 43%. It clearly shows that the large projects in execution are outside Europe, and that's also at least for the pulp side, a trend that we will also -- that will continue in the future. The Metals business area, we are happy to report that the good development is continuing. So we are confident that the dark times are over and that the restructuring in Schuler and in metals processing finally comes to an end, and we can harvest the fruits. You can see order intake up 20% for the first half year, 4% for the quarter. The revenue nicely up above 20%. Now the revenue is at EUR 470 million for the second quarter. EBITA is nicely up. You could see 50% even for the quarter, 35% for the first half year, while the margin increased to 4.9% EBITA margin for the quarter and 4.8% for the first half year. So we are confident that we are on the right track to move to the EBITA targets that we have announced. We are happy to report to you that we made a small, but I would say very important, first step to enter into this very, I would say, good market in the future, the production of green hydrogen. We have received and we have been selected to deliver the FEED study for a joint venture of Koppö Energy in Finland to deliver the FEED study for the, I would say, the heart this investment project. This is the green hydrogen electrolyzer, producing green hydrogen from renewable energy and then combining it with biogenic CO2 to make -- to produce an e-fuel. In this case, it's methane, which will then liquified and transported to the users. We have been selected to do this FEED study for a 200-megawatt green hydrogen plant, quite significant size. We are working together with our technology partner, HydrogenPro from Norway. We delivered the study in the second half of 2023, and we expect that the customer will place the order for the plant on an EPC basis, including the lifetime services beginning of next year. And we would be happy to continue working for them on that basis as well. Looking to Hydro. We have an excellent development in the business. Order intake in the second quarter was up 63% to EUR 657 million, driven by this large order from Laos. The order backlog increased by 5%, the revenue increased by 18%; so did EBITA, up 18% to EUR 14 million in the second quarter. The EBITA margin remained stable compared to previous year at 3.9%, definitely some room for improvement there. So a few words to this new order from Laos with a capacity of almost 1,500 megawatts. This will be the largest hydro power plant in Laos and it will be one of the largest at hundreds ever supplied on a single basis. And we will supply the turbines and the generators. So the heart of the power production will be delivered from Andritz. The design is made such that we have oilless bearings to protect the water, and that we have a fish-friendly design, which makes it more convenient for the environment to take that power station. It will supply electrical energy starting in 2029. So as you can see, quite a long execution time. The key components for the generator, we will deliver from our factory in Weiz in Austria. Separation had a good development. You could see it was a slowdown in order intake. So there, I would say, the slowing down of the economy, we could already see. This was driven by capital business. We could nicely increase the service business in that area. I already reported that, which is quite good. Revenue is nicely up for the quarter and for the first half year. The EBITA is, I would say, stable compared to the previous year. The EBITA margin was 12.6% in the second quarter on a good level, even though it is down from 14.8% compared to the second quarter last year. But I explained to you this is by extraordinary impacts. The order intake by region is well balanced between Europe, North America and the Rest of the World. Before coming to the outlook, let's have a look to the roadmap that we have presented you at the end 2 years ago in 2021. So we had the target to have the business volume well above the EUR 7 billion towards the EUR 8 billion. I think we have well overachieved this with an order intake and revenue both above EUR 4 billion for the first half. The EBITA margin, solid 8% as we are at 8.1% in the first half. The net income, we wanted to increase above the 5%, which we already did last year in '22. And we are also, with our first half, we are at 4.5%. So we are well on track there. We wanted to continue M&A. We made -- we can -- we could close 7 acquisitions since 2022. And we reported all of them to you. Some of them are very good, some of them are really of high strategic relevance. And we believe all of them will contribute to the growth perspectives that we have. We wanted to reach the ESG targets, and we are happy to report that we are well on track. What is our outlook and guidance for the rest of the year? We see that the high interest rate and the slow economy will impact project and investment decisions. So we are -- this will go down. We don't see a change in that -- in the second half of this year. However, the demand for our green products, we expect to keep quite stable. Despite that, the economical and geopolitical challenges, we have learned to watch them very closely because things can happen very fast. We will continue to do that. So we expect for the rest of the year that we can continue the profitable growth, and we anticipate a significant increase both in revenue and earnings compared to 2022. And thank you very much for your attention.

Thank you very much for your presentation. We are now ready to move on to the Q&A session. [Operator Instructions]. We have already received some questions. The first question comes from UBS.

The next question comes from Sven Weier from UBS.

Yes. It's Sven here from UBS. The first question, Dr. Schönbeck is regarding just the outlook statements that you just made because if that demand for green products is expected to remain stable. Obviously, curious to hear from you how much of your order intake do you consider to be geared into green products. Are we really talking about the majority here or -- could you help us a little bit on that one? That's the first.

Yes. We have a target to reach, to make half of our revenue with our green products by 2025. Last year, we have been at, I think, 45% if I recall correctly. So -- and I would say, renewable energy is about -- out of this 45, it's about -- it's roughly 30%. And that is definitely -- that was one main driver in the first half of this year. But we also see that investments like in this green hydrogen apparently is now starting to evolve. But also on the battery side, we have -- we are looking out for projects and we at least see that the project activity is not slowing down but rather increasing. We reported last year that we made a major acquisition there to set ourselves up, and we can see that apparently, what we can offer is of high interest to our customers. But these are markets, it is difficult to really make a clear assessment in which months somebody will place a firm order. Does this roughly answer your question?

Yes. I mean, directionally, yes, of course. I just wonder what happens to the rest of the order intake, right? Whether you see -- I mean, we've seen a bit of a slowing on the pulp equipment side. Should we see something similar maybe on the equipment side in the other divisions to come through in the coming quarters, whereas in Q2, you were still quite strong in metals. You are still strong obviously on the hydro side. So is that something that is still going to slow, or is Q2 a relatively good yardstick, so to speak, also for the second half?

No, I would say -- and this is why we gave this kind of a mixed guidance. We see -- on the renewable side, we could see it rather stable, and this includes hydro, yes. We see activities there going on. On the Pulp & Paper side, we definitely see a slowdown. On the Metals side, we are surprisingly up. Apparently, a lot of investment is going on. Metals industry needs to care a lot about decarbonization, but they also need to care a lot about the new market of e-mobility, where silicon steel is needed in to other specifications that is currently on the market. We could pick an order for, I would say, highly sophisticated modern cold rolling mill in Europe for exactly that application, and we could see now many projects like that coming up. So I don't see a too big downturn there.

Clear. And if I may follow up on the pulp service business, right, which was strong, as you said. I think that a lot of maintenance shutdowns in the pulp industry, especially in South America, which probably supported that. I mean what you see this kind of discrepancy also to continue in the second half as a service orders remain solid, whereas, as you said, I mean, the equipment side is likely to stay flutter, is the better development that you see continuing.

We can -- we expect that we can -- that also on the full year, we can grow on the service side compared to last year. But we also understand or we know and you need to understand that also the -- some of the service business is very closely related to the production and with some capacity shut down that definitely takes an impact. But what is definitely driving us is that over the last 5 to 8 years, we have significantly increased the installed base through the good order intake we had on the capital side. And so therefore, with a higher installed base, you can expect that also service revenues are growing, especially for the assets that left the warranty period.

Clear. And final question, if I may, just on the hydro adjusted EBIT margin in Q2, which was more or less adjusted, it was down year-on-year, but also sequentially. Was just wondering was that project mix and it's not really -- it's just a temporary effect that we saw in Q2.

Sorry, you were talking hydro?

The hydro EBIT margin in Q2, yes.

Yes, this hydro EBIT margin in Q2 was at 4 -- 3.9%.

This one.

Yes. Are you looking at the adjusted or at the reported?

Yes. I mean, I compare it to what you had in Q1, right? I think Q1, you're at 6%. Right now, it was down to around about 4%, so sequentially lower. And I was just wondering if there was something kind of exceptional in there that drove the sequential decline.

Not really. I believe there was some cost impacts from the increased material prices we see globally. We have rather long extended contracts for hydro, many -- and so they are not -- even though they are not fixed price, the way is that we usually have to go in supplying then the equipment, and we have to suffer on the higher costs. But we have a price adjustment clause in that. But that only comes in after we have really realized how much the cost on the purchases were. So there is, I would say, it's more a timing matter than a substantial matter.

The next question comes from JPMorgan.

The next question comes from Akash Gupta from JPMorgan.

I have a couple as well. The first 1 is on outlook, and I think you raised the wording here and now you call for significantly increase versus just increase you were guiding before. Clearly, the backlog was always there. And I wanted to ask whether there was any change in the supply chain, which led to this higher increase in revenue guidance, or is that just a function of you being conservative earlier. And now you see that based on the first half growth, your full year growth was going to be higher than what you were previously expecting. So any color on this wording of guidance is my first question.

We are in -- it is more related to the time, yes. We have -- we are now 7 months into the year. We had, I think, a very good, very strong first half. So this has what helped us to increase, to increase the guidance a bit because the uncertainties for the last 5 months are definitely significantly lower than they were in the beginning of the year.

And second 1 is a follow-up from what Sven asked earlier on the demand outlook. When you said around 45% of your business is roughly green products. And out of that remaining 55%, I would assume there would be at least 20% would be service. So if we add two, 45% and 20%, which is green and service, and this is a portion where you sound comfortable in growing, is it fair to say that the capital equipment where you are a bit uncertain on the demand outlook is only 1/3 of the total business?

I think your estimation is quite well. So you know our business as good as we do.

And my final 1 is on hydrogen. Again, I mean I think you mentioned that this is a technology from other company. But I'm just curious that what sort of risk are you taking on the whole system? I mean we have seen in capital goods sector, some companies have gone out of their core businesses and taken orders in other areas and have seen significant risk down the line. So I'm just wondering when it comes to hydrogen offering that you -- and then this order that you disclosed yesterday, how comfortable do you feel on the technology risk and the future profitability of this business in the medium term?

For sure, if you do something you have not done before, there are risks, but this is what you need to do if you want to innovate and go new ways. We are working on that area on the development of the technology now since more than 4 years. We invested a lot of R&D into that. We made careful risk analysis, FAA studies and everything you can do to, I would say, more safeguard the future. But for sure, there will come things up, we don't know. I think we are prepared for that. But on the other side, we see a good market. We also see there is a demand coming. And we have, I would say, a good technology on the 1 side. And on the other side, we are capable of delivering projects of that size and we have a good reputation for that. So I believe we are well prepared to be successful in that business as well.

The next question comes from Daniel Lion, Erste Bank.

The next question comes from Daniel Lion from Retail Bank of Brokerage.