Burckhardt Compression Holding AG (BCHN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. We would like to welcome you all to the Burckhardt Compression presentation of the 2019 results. First of all, I hope you and your families are staying healthy in this very special time. This year, we present our results in a different way, I think you all know why, under these really special circumstances. And we apologize that we cannot meet you this year in person. 2019 was a very interesting and challenging year for all of us at Burckhardt Compression, and we also were able to celebrate 175 years of our company. And you can imagine in these 175 years, we have already gone through many different crisis. Short to the content, we start with key highlights, market dynamics, operational review. Rolf Brändli then, our CFO, will go deeper into financial review. At the end, we have strategic update and the outlook. At the very far end, you have then the possibility, through the chatbox, ask your questions. Key highlights. Sales and EBIT were a guidance. The order intake in the last quarter has been affected already by the COVID-19 crisis. We had revenue up 5.1%. And in revenue, we had a record revenue of more than CHF 600 million, with exactly CHF 629.6 million. You might remember, last year, we were very close at CHF 600 million with CHF 599 million. EBIT is up 23%, up to CHF 54.8 million. And EBIT margin also increased by 1.3 percentage points up to 8.7%. Order intake was down by 7.8%, but we should not forget that we had a record order intake in 2018. And the 2019 level is still the second-best level we had, and it was lower -- but it was lower than 2018. Systems was down in order intake by 17.6% (sic) [ 15.6% ]. That had especially to do in the last quarter where we could already feel the impact of COVID-19, especially with order intake coming from Asia, since China was already closed in the last quarter of our fiscal year. Service was up 6.7%; and with the correction of acquisition, was slightly down about 1%. Important here is to mention that as we told you already in the past, we still had about CHF 10 million in LNGM costs included. But as I mentioned, order intake is still at the second highest level, and also the EBIT improvement of system was really a positive sign, where we will go into it a little bit later. Coming to the highlights. We had a further improvement of the overall financials of the BC Group and especially, as mentioned on the previous slide, the improvement of the EBIT of the Systems Division. With the Systems Division, we could also improve the gross margin, resulting from the improvements of the many different programs we had started. We told you already about this, which many of them we have finished. Just to mention some of them, procurement, procurement in best cost area, efficiency increase in project execution, major reduction of margin slippages or having actually almost no slippages in 2019. We had the acquisition of the remaining 60% of Arkos. Now we fully consolidate Arkos, and with Arkos, we have now the possibility to really push the more profitable downstream business in the United States. And with 14 locations, we are very well positioned where we have petrochemical industry, where we have refinery industry and where we also have gas processing industry. Last but not least, we could also acquire the reciprocating compressor business of JSW, Japan Steel Works. The signing was in March in the last fiscal year, and we could close then in April. And with JSW, we have access to about 800 to 1,000 additional machines. That gives us a nice volume on the service side. And what is also very important, about 350 machines are running in Japan. So we have a nice entrance also here in the Japanese market. Lowlights. Of course, the COVID impact on the Swiss side, as I mentioned before, especially on petrochemical projects. And also oil and gas companies have announced that they will, short term, reduce CapEx to actually protect the liquidity. You all have probably read about this. And that will also have some impact short term on our business, but we are still convinced that in the midrange and long term, this business will come back because corona will also come to an end. We also have some impact on the service side. Spare parts is doing well. Field Service, of course, you can imagine with the travel bans we have, it is difficult to actually dispatch field service engineers. As an example, in China, we should install new machine projects right now, which we have delivered in the last 2 years. However, it's impossible to bring service engineers and service experts from Switzerland or from other countries in the world into China right now. Also some revamped projects, some major overhaul service projects have been postponed for the time being. This is also because of travel restrictions. We have low financial performance of Arkos. Arkos is really in the focus for 2020 to increase the profitability. Arkos has been affected short term by the upstream oil and gas business where this is a major business of Arkos that has, because of the lower oil price, come to a very low level at this point. But we are also convinced that pushing the downstream business more, we can also push the profitability of Arkos. Last but not least, the LPG marine business is still continuing and remains at a low level. This is mainly to do, as we already mentioned in the past, with the overcapacity that has been built between 2013 and 2016. A few words to COVID-19, how did we tackle the crisis, how did we approach everything. We built right away a crisis team under the leadership of myself. We had daily updates on the global situation because you know we have about 30 to 35 subsidiaries all over the world, and it was very important that we deal with them actually on a single base because each country had their own regulations, each country had their own step going into the lockdown as well as right now, each country has their own way how to get out of the lockdown. Today, we have only biweekly information meetings to keep up with the different situations. Rapid sanctions -- rapid actions have been taken to also protect the health and the well-being of employees. This was very important for us. We started to dispatch people into the home office. Out of Switzerland, about 70% of the office people worked or still work out of the home office. We had banned, of course, traveling. It was also not possible to travel as air traffic got to a standstill. And we also shifted work schedule, so we worked in shifts. As an example, in the factory, in the workshop where we had a lot of large groups of people working together, we worked in shifts so we could actually split the group and the risk for getting infected. Thanks to the great work, and I really appreciate what all our employees did all over the world, we could still continue our business. We could still fulfill our sales for 2019. Most of the BC locations continued operation. Of course, sometimes from time to time, some location was closed maybe for a week or 2 as imposed by the government. But nevertheless, overall, most of our locations continue business. We had a weekly monitoring and still have a weekly monitoring of the supply chain with our strategic procurement meeting and also intense communication with customers through digital channels. And today, we also negotiate, interestingly enough, also with our customers through digital channels. So the world has really changed using now modern technology to communicate with each other. Of course, we still have to focus to proactively navigate through these challenging times. We diversify global manufacturing footprint. You know we have in China, we have our large manufacturing. We also give you a short update on our China operation. Since end of February, we also work again on our new factory. And I think this diversification of different manufacturing location helps us also right now in this challenging time, having Shenyang Yuanda; having production in India, which also, at one point, was a little bit limited; having assembly in Korea; having factory in Switzerland; and having the assembly in the United States, this diversified footprint that really helped us to also go through the crisis. We have a very broad global service network. You know we have more than 40 or even 50 service locations all over the world, where we have people on the ground. So wherever we have local service business, we can also maintain local service activities. As I mentioned already in the introduction, the challenge right now is to bring foreign experts into the country, as an example, in China for start-up new plants. We had some delayed deliveries, but we did not get imposed with any liquidated damages. And we were still able to fulfill our requirements by the end of the fiscal year. Most of these delays happened within the fiscal year, and just some few minor projects have been switched from 2019 into 2020. We still have a solid balance sheet. Liquidity, including credit lines, are secured. Rolf Brändli will tell you later on more about it. We have a stable balance sheet with an equity ratio of about 36%. We have no increase in bad debt provisions related to COVID-19, and we continue to maintain focus on our midterm targets while proactively navigating through the uncertain operating environment for the next couple of months. But for us, the target is still the mid-range plan 2022. Some words to market dynamics. You all know this slide with the markets, the 5 markets. Going to the upstream oil and gas business. As you know, this is the only business on the oil side which is directly affected by the low oil price. Nevertheless, gas exploration continues not only in the United States, but also in other countries because this is also driven, as we say in the title, through environmental regulations. And as you all know, natural gas as a source, energy source, when we actually use natural gas, we have about 25% less CO2 emission than when we burn oil. Gas transport and storage. Also this segment very strongly affected by the environmental regulations. You know the LNG marine business and also other solutions where we look currently using natural gas as a fuel, but also the petrochemical industry using natural gas as a less expensive feedstock instead of oil. Refinery, also driven by clean fuel application, also taking the last drop of the barrel, which is normally not a very clean crude oil to refine, also this last drop of the barrel into cleaner environmental-friendly fuel. Also refinery is really driven by upgrading to the next standard of Euro V, Euro VI. And as we have already mentioned to you, we are sure that we also will see Euro VII, Euro VIII standards with even cleaner fuel to come. Industrial gas. Industrial gas, oxygen, nitrogen, carbon dioxide, carbon monoxide used in many, many different applications. Is it for food, beverage, is it for the medical industry and many different applications.? This is still growing in the area of about GDP, and we still see a lot of application. Hydrogen as a fuel can also be part of this segment. And there, we also see quite a lot of activities coming up, even starting already in Switzerland. But also China, we see hydrogen; Southeast Asia general, we see a lot of activities in hydrogen as a fuel. Then last but not least, petrochemicals chemical industry, also still driven through the increasing demand for chemicals and petrochemicals. And there, we see quite a lot of activities, especially in China, CIS countries and Russia coming in the near future. Operational review. As we already said in the introduction, the Systems Division turned profitable again. We are really glad that after all these years, we could manage to bring the Systems Division into black figures. We have told you that we will solve the LNGM issues by the end of fiscal year 2019, and we have done so. I know some of you might ask the question, why am I sure that we have solved the LNGM issues. Because we have been really focusing on this one that we can solve the issue. And one of the biggest issue was actually or the biggest issue was solving the piston rod issue of the smaller LNGM compressors. This has really been finished in 2019. And also thanks to a great work of our people who were traveling before corona actually came into the game, we could actually finish most of the work on all these LNGM carriers. We had first successes for SYCC export. That means Shenyang compressors being sold outside of the United States -- outside of China, sorry. We had a project in the United States, but we also have 2 machines sold to Hungary in Europe for natural gas storage, and we have sold 2 machines to Poland for a petrochemical complex. Shenyang also did a great contribution to our financial results in 2019. They really did an excellent job despite the fact that they also parallel building a new factory, that they also have started already relocating part of the old factory into the new factory. Shenyang Yuanda also contributed locally in China quite heavily to the petrochemical business, which is quite an interesting profitable business also for our friends at Shenyang. We had already mentioned that order intake was below the all-time record order intake on 2019 but looking over the cycle was still at a good level. That resulted then in an EBIT of CHF 6.4 million or 1.7% of return of sales. Services Division. One of the highlights we mentioned already is the 60% acquisition of Arkos, which also be the focus in 2020. Then the order intake was, of course, with Arkos 6.7% up. We consolidated Arkos the last 4 months of our fiscal year. We had a lower EBIT compared to previous year. That really has to do because of the dilutive impact of Arkos. And we also spent some more money on further expansion of our global sales network and service network. And here, we have to mention, of course, with the marine business having today more than 80 gas carriers in service, it is important that we really grow also our service activities in the marine sector to keep up with the increasing demand of ships. A short update on Shenyang and Arkos. Shenyang had, we mentioned that before, an excellent operational and financial performance, the success of selling SYCC Shenyang products outside of China. We also work on the new factory, and we are back to build on the new factory and to work on the new factory since February 25. And we still hold on to our final date or that we finish our construction end of September. Of course, because of the unknown and, let's say, not-so-sure situation, what's going on, we have canceled the inauguration for September 2020 and have moved it into April 2021. Nevertheless, the deadline still stays with end of September. We also upgraded our foundry in Shenyang, and this is very important so that we can use the Shenyang foundry more and more as a qualified supplier, internal supplier for our casting needs. Arkos. Arkos, of course, we want to accelerate the growth of the more profitable downstream business. We also want to increase the penetration of the BC machines. Our people have done a study that we have currently contact to about 50% to 60% of the close to 300 BC machines in the United States. So we have already a large potential to increase our business on our own machines. But with also the 14 locations, we really want to increase also the downstream business on OBC machines. The United States, as you know, has the largest installed base and gives us a lot of opportunities and has a big potential for the aftermarket business. We also have hired a new Managing Director, and our new Managing Director just started actually last Friday, his new job. And I'm sure with him, we also want to drive and we will drive Arkos to a next level of profitability. That was short from my side. Now I would like to hand over to our CFO, Rolf Brändli, for the financial review.

Thank you very much, Marcel, and welcome to our fiscal year 2019 presentation also from my side. 2019 closed with an order intake that was again above CHF 600 million. With a rather weak fourth quarter impacted by COVID-19, we could not match all-time record level of last year but closed at CHF 607 million. That's 7.8% below the prior year. Excluding currency translation and acquisition effects, the shortfall to last year was 8.8%. Both divisions recorded a slowdown in Q4. The System Division closed 15.6% below prior year, while the Service Division reported an increase of 6.7% mainly with additional other brand compressor business, which is including Arkos. Net of acquisition, Services' orders were 0.9% below fiscal year 2018. Worth to be mentioned are some long-term service agreements that we have signed in the last year. How does that transform into sales? Sales has crossed, for the first time, the CHF 600 million mark, closing at CHF 630 million, which translates into 5.1% growth or 3.9% if we exclude the currency translation and acquisition effects. Sales within the Systems Division rose by 3.4% to CHF 388 million driven by the high order intake from the prior year and the strong growth in China. The Services division reported sales of CHF 241 million, corresponding to growth of 7.8% or 0.1% net of acquisitions. Service growth was mainly driven by engineering and other brand compressors business. Total OBC business, including 4 months of consolidated Arkos figures, accounted for almost 30% of the total service sales last year. How does the overall financial performance look like? Total gross margin improved by 1.2 percentage points to 23.8%. While gross margins in the Systems Division rose by almost 3 percentage points to 11%, Services closed at 44.3%, which is a minus of 2.7 percentage points year-over-year. This is mainly a result of the dilutive effect, as Marcel mentioned before, from the below-average gross margins from the Arkos business. SG&A expenses were amounting to 14.8% of total sales, slightly above prior year due to the further expansion of the worldwide service network for the service business, which is necessary to support the organic growth. Within the segment Others, we also reported about CHF 1.3 million higher general administrative expenses compared to last year, which is due to expenses for M&A projects as well as some one-off legal fees. Total spend in research and development rose by CHF 1.8 million to CHF 10.5 million. Among several other projects, we specifically worked on improvement of several marine solutions and enhancing compressor solutions for hydrogen applications. Other operating income was up CHF 4.6 million compared to last year, including the contribution from the real estate here in Switzerland, foreign exchange gains worldwide and some government grants that we received in China like every year, but this year, it was a little bit higher. The tax rate of 16.2% was exceptionally low and substantially below our prior year average, which is mainly for 2 reasons. First, we had some one-off reduction in income taxes in Switzerland due to the release of provisions for deferred income taxes. That was an amount of CHF 0.8 million already disclosed in the half year closing. This is related to the Swiss tax reform. And secondly, the higher share of income in locations with lower tax rates or even tax exemptions. And last but not least, we are proposing to the General Assembly a distribution of a dividend in the amount of CHF 6. This represents a payout ratio of 63%, which is well within our guided dividend policy of a payout ratio of between 50% and 70%. Then a few comments on selected balance sheet positions. Following the full consolidation of Arkos, hence a temporary increase in property, plant and equipment related to the relocation project in Shenyang, the balance sheet total rose by 4% to CHF 883 million. While this relocation project is basically financed by subsidies from the Chinese government, large part of that cash will only be received and offset against the asset's open completion of this project, which is expected to take place in fall this year. The equity ratio stood at 36% compared to 40.7% in the prior year, which is still at a solid level. The reduced ratio is mainly the effect of the higher balance sheet total on the one hand and the offsetting of the goodwill from the Arkos transaction against equity, which is in line with Swiss GAAP figure. As per closing date, the amount of work in progress and advanced payments to our suppliers was not fully prefinanced by customer advanced payments. The GAAP was an according CHF 47 million, which compares to CHF 39 million last year. This has to do with the higher load and is mainly driven by projects in China, many of them awarded in government bids where we have not much room for negotiation. Likewise, the still high level of trade receivables contains about CHF 100 million from China, where we have put a strong focus on collection efforts. Mainly as a result of the remaining acquisition of the 60% Arkos and the cash out for the relocation process in China, the total net debt position lowered from minus CHF 49 million last year to minus CHF 92 million this year. Important to mention these days is, as Marcel mentioned already, our liquidity is secured by adequate credit lines accordingly. Then on this graph here, you see our total CapEx investments in fiscal year 2019, which were amounting to CHF 34 million, which is including shown in this light gray bar on the above side. For the relocation project in Shenyang in China, that was amounting to CHF 17 million. For fiscal year 2020, we are expecting total CapEx investments in the range of CHF 20 million mainly for machinery, equipment, tools, hard and software. This amount is basically at the same level as the total expenses in depreciation and amortization. Let us have a look at the cash flow table. Total cash generated from operating activities increased by CHF 9 million compared to the prior year to CHF 50.7 million despite the high workload and the according high net working capital at the year-end. The high cash outflow from investing activities is reflecting the acquisition of the remaining 60% stake in Arkos as well as investments in the context with the before-mentioned new factory in Shenyang. Borrowings increased by CHF 50 million, including the addition to the consolidation scope of approximately CHF 10 million from bank loans taken over from Arkos. And the rest of the increase is mainly related to the financing of the shares of Arkos and the project in China. With this, I hand over again to Marcel, who will tell you more about the strategic update and outlook. Thank you for your attention.

Thank you very much, Rolf. Going to the strategic outlook and also the guidance. First of all, you all know the mid-range plan 2018 to 2022. And if you look at the summary on the right-hand side, where Systems Division -- with the Systems Division, where currently sales above MRP target, EBIT margin at 1.7%. The Services Division is currently slightly behind MRP target. We have here for 2022 a target of sales of CHF 360 million, but we also have to clearly say we are only at halfway through the MRP. We have another 3 years to go. And what is also very important to point out that Arkos in 2019 has only been consolidated for 4 months and will then be fully consolidated for 12 months in 2020. Also, the BC Group overall, the current sales is also here on track with the CHF 700 million. The EBIT margin is getting closer to our target with 8.7%. So this graph should give you a nice overview that we are still on the way and on target with the numbers comparing to MRP 2022. What are our key priorities in fiscal year 2020? That means short term. What is the focus for the BC Group? First of all, it's to maximize from the potential of Shenyang. We have the relocation. We have expanded in the foundry, then of course, Arkos going more into the downstream business, expanding into the downstream business, making Arkos also profitable. Then of course, JSW, the JSW integration globally as well as in Japan, making use right now of the penetration of the Japanese market. And then of course, what is very important, we are still having a challenging time, challenging months ahead of us that we want to proactively navigate the COVID-19 crisis and navigate the company through the COVID-19 crisis. In the Systems Division, further drive the profitability. We are not really there where we want to be. We want to push new applications. I have mentioned it already. Hydrogen in mobility is something that's coming up globally very strongly and even locally here in Switzerland. That makes it even more exciting for us. And then of course, we want to also defend our leading market position on the technological side, but also with a disciplined pricing strategy on the financial side. The Services Division, we have mentioned it already many times, is integrate Arkos and increase profitability. As you can see, this is really a main focus of the management in 2020, integrate JSW in Japan as well as globally and further establish tailor-made service and maintenance concept. What do we mean with this? Long-time service agreements is one of the keywords here. We have already signed with some of the owners and users of the LNGM carriers, long-time service agreement, long-time service agreement or 5 years or even longer. Push the whole digitalization, especially on the service side, making use of the new tools. And I think the first move we had to do to keep up with the corona crisis and bringing our people into home offices and speeding up digitalization, what we have learned here the last couple of months can really help also to push this in a business model and really push further the service activities and make Burckhardt services a one-stop shop in all the aftermarket activities. And here, I have to say I'm really proud how our people in the service organization have really managed in the last 1 to 2 years this transformation, getting out of this OEM image and getting really into this service image. Again, the market, I think here, I don't want to go too much into the details. We have made some adjustments how the market outlook looks like on the way forward. It remains a very attractive market since the gas business is an attractive business. We have already mentioned in the introduction, a lot is driven by clean fuel environmental reasons, and that can also be reflected in this slide. I think in the industrial gas business, we see it very nicely. Oxygen, hydrogen as a fuel, high-pressure oxygen, carbon monoxide, carbon dioxide. As you know, carbon dioxide is the big issue we have, but we can also use carbon dioxide. We can make synthetic fuel out of carbon dioxide. We can make refrigerants out of carbon dioxide. Also the whole gas transport and storage business, that's continue also on the marine side, but we see and we have currently in our test facility the first compressors being shipped for the cruise ship. We told you already this order last year. So they are on the test pad right now being shipped very soon. Even some or most of the cruise ships are on standstill right now. We all know that. But we also know that this business will come back, and the environmental push will still go further. Then to the financial guidance. We currently guide sales greater CHF 650 million for fiscal year 2020, EBIT margin stable and the dividend policy payout ratio of 50% to 70%. I'm fully aware that some of you might miss the guidance for the order intake. But I think you can understand that at this point, it is a challenge to look into the crystal ball and to give a real clear guidance for order intake. The first 2 months, as you can read also in the annual report, have been below previous year. It means 2019, but we really have to watch the situation very careful in the months to come. However, we feel positive as I mentioned in the introduction. Once our service people can travel again and travel all over the world, the service activities will increase. The revamp refurbishment activities will increase. We can already see the demand for service people, but we have already spoken about this because of travel ban, it's very difficult right now to dispatch them. This was it from our side. I would like to thank you for your participation in today's conference.