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

Good afternoon, everybody, and hello from Winterthur. I would like to welcome you to the year-end result of the Burckhardt Compression group for fiscal year 2020. First, I really apologize that, again, like last year, we cannot meet in person. I really miss you, seeing all of you together again. But hopefully, we can do that next year. And I really hope you all are healthy in this really challenging special times. For the next couple of minutes, Rolf Brändli, our CFO; and myself, would like to give you more details about fiscal year 2020. And we want to focus, and this is maybe a takeaway from you, what are the 4 topics? We want to give you a short update on the markets. What happened in 2020 in these challenging times, and how do we see the outlook? We also want to discuss and show you the fluctuations we had in half year 2020, half year 1, half year 2, and also how this has an impact on half year 1 and half year 2 in 2021. We also want to talk about the temporary low equity ratio, due to the acquisitions we made in the last couple of years, and we also want to show the increase of RONOA to 13.6%. Rolf will tell you more about this. And last but not least, the last takeaway from this presentation is that we still confirm and we still stay behind the targets of 2022. The disclaimer, I think we can jump over the disclaimer. We have split the presentation in 5 points. We start with the highlights, some market dynamics, operational review, financial review, and given by Rolf Brändli. And at the end, strategic update and the outlook. Highlights for 2020. At the top, you see the financial results. We achieved an order intake of CHF 676.6 million. This is the highest order intake in the Burckhardt history. We had sales of CHF 658.6 million. Also, this is the highest sales in our history. We reached an EBIT margin of CHF 60.8 million, which results in a margin -- or an EBIT of CHF 60.8 million. This results in a margin of 9.2%. You see also right on the right-hand side the comparison to fiscal year 2019. On the Systems Division, we also had an increase in order intake on the Systems Division. We also had an increase on sales. We also got improved, again, the EBIT margin, which ended up at 3.9%. On the Services Division, we have also a higher order intake. We have a slightly higher sales. Service was quite a challenge also at the beginning of 2020. We could not really reach the EBIT from the previous year and ended up at 20.6% margin, which we will also explain later on. Overall, what are the highlights for 2020, further improvement of the group financial performance. The overall increase in order intake, which was quite heavy at the end, second half of fiscal year 2020. We could also already received first orders for the hydrogen mobility and energy segment. We had a successful launch of the new small marine compressors. And -- but also was a highlight that we took over the remaining 40% of Shenyang Yuanda Compressor in China. Where there is sun, there is rain. We had -- the SYST had a significant drop of capacity utilization in the second half. This will also come partly into the first half of 2021. We will come to this later on. And SERV, slightly lower EBIT margin due to the underperformance of our costs. And also at the beginning of the fiscal year, we reported that also in the half year, we had an underutilization in Field Service and in some of our service centers because of partial closure because of the lockdowns. Short, some market dynamics, what happened in 2020? Due to lower gas prices and lower crude oil prices, we had low activities in the gas gathering and processing industry, nevertheless, we could sell again some high-speed machines for underground gas storage. We had a positive development due to continuing and recently even stronger trends toward more environmental-friendly and cost-effective energy in the gas transport and storage area, onshore as well as in the marine business. We could also book, again, some LPG orders. We had also unloading terminals and different applications. The Refinery business at the beginning of fiscal year 2020 was actually very low because refineries cut down expenses immediately because of the low crude oil price. We saw a slight improvement towards the end of fiscal year 2020, and we see this improvement also going into 2021. Industrial gas, H2 mobility and energy, I already mentioned, we received some nice orders in that area. And we also see quite some activities going on into 2021 and even beyond. There's a lot of discussion going on into hydrogen as energy for mobility. And we also have -- since we have a global economic growth, and we also saw activities increasing in other industrial gas applications, also for standard high-pressure machines out of India. We also received some biogas application, nitrogen application, carbon monoxide, carbon dioxide, also different industrial gases. Last but not least, the petrochemical business. Here, we actually saw -- right after the shutdown already in February, we had already an improvement in this area. And that continued for the rest of the fiscal year, especially China, but also Central Asia we saw quite some activities in the petrochemical and chemical industry because we still have an increasing demand for industrial plastics. The corona situation, I think, you all are aware of it. It's in everybody's mouth. We had already reported. We had a crisis team originally, and we continued that crisis team quite successfully within the Burckhardt group. That was under my leadership. We also updated our people regularly what's going on. That was very important because with all the changes in government regulations, what's going on, I think, a clear proper communication to the employees was very important. And one thing is very important that the health of our employees, our business partners, was always the main focus during this crisis management and is still today in the main focus. We also had business continuity. I think this is clearly shown in the figures. We had a challenge at the beginning to keep up the supply chain. That also improved. And I think over the year 2020, people and the world started to live with the coronavirus. Beginning in, let's say, January, February, March, also in April, the world got into a shock situation. Nobody knew what's going on. But I think we learned to work around it, and that was also one of the reasons why business continued. And I really have to say a big thank you to all our employees. A lot of them have already been in the home office for a very long time. And I know it's a very challenging time in the home office, having family, having wife and kids also at home. But I really -- I'm really proud of our employees, how disciplined they have handled that in the last couple of months. One challenge we have currently is India. That also creates a little bit of stomach ache for me. I hope also that India finds very soon the solution how they can handle the corona crisis. And what we also had, we still have some travel restrictions. Some countries are opening right now. Some countries, as in Asia, are closing again. So this is a challenge. Nevertheless, we can still send service engineers, especially when they have assignments for a longer time, we can even take into account the quarantine for 10 days, which I know, I'm fully aware, is not really fun for our employee, but when we are half a year in China we can handle that. Some information to the market dynamics. Where do we see the markets go? There, we really have not changed anything since the last time. We still see in the gas gathering and in the processing industry a demand -- an increasing demand for natural gas. On the gas transport and storage, there is quite a big issue right now or an issue is the decision for Qatargas that has been delayed. As you know, they have already announced that they need 100 LNG ships. I assume the first orders will come by the end of this year. We still see a lot of activities in underground gas storage, also unloading terminals. As I mentioned before, the refinery business is slowly coming back. Also here, cleaner fuels refinery being retrofitted. We see some applications for biofuels. This is something we really have to see. This is also quite interesting, also for synthetic fuel, what's going on in this business. The industrial gas business, we still have continued high activities for hydrogen mobility and energy. There, we also expect some more orders, and that's quite an exciting area, but we also have to see how that develops because energy for producing hydrogen is quite a big discussion. And last but not least, also the petrochemical industry. Also here, we still see further demand in industrial plastics. And also what is very interesting is chemical recycling, where the old plastic is going to be recycled back to synthesis gas, to syngas, and this syngas is then be used as a raw material, again, for producing plastic and this syngas, of course, has to go through a compressor again before it becomes plastic. Some operational review. First, the Systems Division, we had an order intake above prior year, especially with the second half -- a very strong second half. We had further success in export compressors from Shenyang, which is really exciting for us that we can now more and more also bring these machines into the export business. We had a strong recovery and actually fast recovery that market China already recovered by the beginning of our fiscal year and, of course, helped quite a lot also to -- for this good performance of the Burckhardt Compression group. We had growth in sales, mainly benefiting from the high order intake in prior years. We had a slower order intake in the first half of 2020. That is then affecting the sales in 2021, especially in the first half of 2021. And we had also a gross margin above prior year, despite, as we have already reported, an underutilization, especially in the second half in engineering. It's not so strong in the production. We have now underutilization in production because of some missing orders from the first half of 2020. This is a little bit the interaction between half year previous year and half year this year. And what we expect for the development of the SYST Division is we have in 2020, we have a second lower loading. We had quite a good loading. And in sales, first half year 2021 will be lower than sales in first half year of 2020. That means we have a second half of 2021 that will be much stronger than '20, the first half, but we also will have in the first half of 2021 a lower sales than we reported for SYST in the first half of 2020. So this is the comparison with the half years again. The Services Division, here you can see also the comparison, the numbers, in fiscal year 2020 and 2019. We already reported that for the half year, but of course, it has also an impact of the full year result is the 10-year agreement for a marine application, a 10-year service agreement with low double digit amount. We had sales 3.1% higher than previous year. If we take out the acquisition, we are 5.1% lower than the previous year. That has mostly to do with the lower load of Arkos field services in the United States. It was quite a challenging year in the United States. And we also had, as already indicated previously, we had also lower load in some service centers and Field Service beginning of the fiscal year. We have also a slightly lower gross profit and EBIT. However, we reached the 20%. We also mentioned that already in the half year report that we are convinced that we reached 20%, and we have clearly also expected to reach the 20%. Arkos was already mentioned. We had a minus CHF 2 million EBIT in Arkos, and this is net of the U.S. government grants so that you know where this is coming from. What is expected in service for 2021? We expect higher sales. We also expect a further improvement of the capacity utilization, especially when travel restrictions ease up. As I said, in some areas, we see again that travel restrictions are getting stronger. In this regard, we really try to localize more service that we are not depending so much on the travel back and forth. And this is something we're working really hard on, more localizing of service capacities. And last but not least, and this is really in the focus of the whole management, is the improvement of the profitability of Arkos. This is one of the main focus in general for 2021. With this, I would like to hand over to Rolf, who gives you more insight about the financials of fiscal year 2020.

Thank you, Marcel. And welcome to our fiscal year 2020 broadcast also from my side. I will now guide you through the financials of this fiscal year, starting with Slide #14. Despite the coronavirus pandemic, total order intake rose 11.4% to CHF 677 million. Net of acquisitions, growth was amounted to 9.9%, excluding both currency translation and the acquisition effects. After the first weak half year, order intake at the Systems Division increased significantly in the second half of the year to reach CHF 405 million for the full year. This is a plus of 12%, comprising further successes with compressors exported out of China. First successes in Hydrogen Mobility & Energy, a strong recovery of the Chinese market overall, and the good performance in the petrochemical industry as well as the gas transport and storage sector. Order intake in the Services Division rose to CHF 272 million, which is 10.5% higher compared to the previous year or 3.1%, excluding the effects of acquisitions. The prior year figure does not include the compressor business of JSW and only includes 4 months of Arkos versus 12 months in the closed fiscal period. The order intake includes several major orders for Engineering/Revamp/Repair. And as disclosed already in our half year, closing a 10-year service agreement in the low double-digit million amount with a customer in the Marine business. Then as shown on the Slide #15, total sales for 2020 was amounting to CHF 659 million, which translated into 4.6% growth or 4.4%, excluding currency translation and acquisition effects. Thanks to the high order backlog from the recent years, sales in the Systems Division increased by 5.5% to CHF 410 million. The Services Division reported sales of CHF 249 million, corresponding to growth of 3.1%, respectively, a reduction of 5.1% net of acquisitions. In the light of the great challenges created by the coronavirus, Arkos has not yet met our expectations, both in terms of sales and profitability. But also excluding Arkos services, sales remained below the prior year, which is mainly due to the lower load in Field Service and the temporary closure of some service centers due to the coronavirus. How did the overall profitability down to level net income develop? Total gross profit increased by 10.9% to CHF 166 million, which resulted in a gross margin of 25.2%. That's 1.4 percentage points above the prior year. While gross margins in the Systems Division rose by more than 3 percentage points to 14.4%, Services closed at 43%, 1.3 percentage points below the last year. That's mainly a result of the dilutive effect from the below-average margins on the Arkos business and the reduced capacity utilization due to the temporary closure of the service centers. SG&A expenses were amounting to 14.1% of sales. That compares to 14.8% in the prior year. Also in absolute figures, SG&A expenses remained below last year, despite the full inclusion of Arkos. That's mainly due to significantly lower travel expenses resulting from corona-related travel restrictions. Total spend in research and development rose by CHF 4.8 million to CHF 15.4 million, reflecting the high number of ongoing projects such as new marine solutions, and innovative applications in the area of hydrogen mobility and energy. Other operating income was mainly consisting of the contribution from the real estate company and came to CHF 3.1 million. The reduction of CHF 5.6 million, if we compare it with last year, is largely attributable to currency effects and lower government grants that we received last year in China. The all-proportional increase of earnings before taxes is the result of lower financial expenses, which is mainly caused by positive foreign exchange effects on intercompany loans. Tax rate increased to 20.3% compared to the exceptional low level of 16.2% last year, which was the effect of the one-off effects coming from the Swiss tax reform, and we also had some taxable -- relevant taxable income in locations with tax exemption. As a result of the improved financial performance, the group net income closed 18.4% above the prior year at CHF 47.2 million. With this and the acquisition of the remaining 40% shares of Shenyang Yuanda, earnings per share for the shareholders of Burckhardt Compression increased significantly by 36% from CHF 9.56 to CHF 13 per share. The Board of Directors is proposing to the general assembly the distribution of dividends in the amount of CHF 6.50. That's CHF 0.50 more than last year per share. This represents a payout ratio of exactly 50%, which is at the lower end of the target range of 50% to 70% in order to strengthen the future equity ratio as well. A few comments on the balance sheet. The balance sheet total lowered by almost 10% to slightly less than CHF 800 million. Property, plant and equipment decreased by 11% to CHF 180 million, mainly due to the netting of the new real estate in Shenyang with related government grants that we partially received and still will receive in cash in the current fiscal year. Inventories lowered by 28% to CHF 190 million, with a lower level of work in progress as per the closing date. Trade accounts receivables ended the fiscal year at CHF 260 million, slightly above the previous year, following a very high invoicing cycle towards the end of the fiscal year. The aging structure, on the other hand, saw a further improvement with accounts receivables overdue more than 60 days now accounting for 28% and compared to 37% in the prior year, still mainly related to China. The balance between advanced payments from customers compares to work in progress and advanced payments to suppliers ended the year with a positive amount of CHF 11 million. That compares to minus CHF 47 million last year. And as Marcel mentioned that, obviously, it had an impact on our return on net operating assets, which also further improved. As a result of the derecognition of the minorities from the acquisition of the remaining 40% in Shenyang Yuanda compressor and the goodwill offset from the acquisition of the JSW compressor business, all in line with Swiss GAAP fair accounting standards, the equity ratio fell to 28% compared to 36% in the previous year. The net debt position slightly improved from CHF 92 million to CHF 82 million. And as earlier disclosed, during the half year closing, we also have refinanced our debt with a bond in the amount of CHF 100 million and a term of 4 years with a coupon of 1.5%. And also adequate liquidity is secured with according credit lines that are in place. On the CapEx side, as this graph shows here on Slide #18, we had in 2019 CHF 28 million of CapEx. That is including CHF 14 million for the relocation project of Shenyang Yuanda compressor, which is now shown net on the balance sheet, net of the government grants. The according assets have been activated and are already shown and disclosed in the current closing. For 2021, we are expecting a CapEx in the amount of CHF 22 million, which is about the same level as we have depreciation and amortization down the road. It's mainly for machinery, equipment, tools as well as hard and software. Then a glance on the cash flow statement. As you can see here on the Slide #19, total cash generated from operating activities increased by CHF 82 million compared to the prior year to CHF 132 million, mainly due to changes in net working capital. The cash outflow from investing activities includes payments of CHF 21 million for the acquisition of the JSW compressor business, and the cash flow from financing activities is reflecting the refinancing that I mentioned earlier with the bond of CHF 100 million, the distribution of dividends and half of the payment for the remaining 40% of the acquisition of Shenyang Yuanda. The remaining half of this transaction will be paid out towards the end of fiscal year '21. As per the balance sheet to date, total cash closed at CHF 75 million, with borrowings in the amount of CHF 157 million, resulting in a slightly improved net step position of CHF 82 million. With this, I hand over to Marcel again, who will tell you more about the outlook. Thank you very much for your attention.

Thank you very much, Rolf. Now as mentioned by Rolf, let's come to the outlook. First of all, what are our key priorities in fiscal year 2021? We want to further materialize and benefit from the acquisitions we did recently. We also want to push sustainability, that's also something we mentioned in our press release in our Shareholder Letter. Digitalization, of course, and the service products together with digitalization, and further improve the financial performance towards the MRP 2022 target. In the Systems Division, we want to further optimize cost levels through procurement, global procurement, also with process optimization and variant management. We have many different compressor types, cylinder types we want to consolidate that we have less variations in the future. We want to further push hydrogen in Mobility & Energy by increasing globally now our sales force because we cannot do that out of Switzerland because only we have to do that also locally, especially if we assume that travel restrictions still will continue. Then further for Shenyang Yuanda compressor exports, we have made quite some progress in this in 2022. We could sell to different areas high-speed machines, diaphragm compressors, but also process gas machines. We want to further push this. And of course, as mentioned, half year -- the first half year of 2021 still has a lower loading, especially in our factory here in Winterthur, because the way the orders came in in 2020, and we do everything possible to mitigate the negative impact of this low capacity utilization. On the Service Division, already mentioned, Arkos is in the focus of the management team. Further improve the financial situation and further prove the downstream business. We have already made some progress, some nice progress in 2020. And we see also the opportunity to further make progress in the downstream business. I mentioned it, push digital products together with our service and maintenance concept. This is very important. Also here, we have made quite some progress in 2020, especially in the Marine business. This is quite exciting, but we also have now onshore possibilities where we can also use the digitalization and our maintenance concept to help support our customers. We also want to further materialize service volumes from the installed base of the JSW machine. The business has been integrated in 2020, quite successful. And our people did a very good job here. And now we want to also materialize and benefit from this installed base of the JSW compressors. Coming to the guidance of fiscal year 2021, we see sales between CHF 620 million and CHF 650 million. What we have included here, and this is why we show a range, we have some larger petrochemical projects being scheduled currently to be delivered end of March. And they are on the production cycle well on the way. This is not a problem. But with shipping, and we don't know what corona is doing the next couple of months because it will not go away, definitely not. We will see. So there is a possibility that maybe one or the other project might slip into 2022. We try everything to avoid this, of course, but this is why we guide the range. The EBIT margin is slightly higher than in 2020. Here, we also expect, again, an improvement. What is very important to say here that 2021 will be heavily loaded in the second half. We will see lower sales in the first half. We have seen that in the past. That also had to do with the order intake because the order intake really improved in the second half of 2020. And what is also very important that we point out when you put the numbers together that we expect also the sales of 2021 in the first half being lower than the first half of 2020. I know we have a lot of first half, second half, but I think that's clear. Otherwise, you can ask us again. And with this, we also guide 2022. You have seen the order intake in the past years, and we are confident that we will reach our mid-range plan of 700 million sales and 10% to 15% EBIT margin in 2022.