Bystronic AG (BYS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Full Year 2021 Results Conference Call and Live Webcast. I am Myrad, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Alex Waser, CEO of Bystronic Group. Please go ahead, sir.

Welcome to our full year results 2021. We are very excited and proud to present you our first annual report in the name of Bystronic. Please take note of the disclaimer for our presentation. Now let me briefly provide an overview of today's agenda. I will present you the highlights of 2021, our market environment and strategy execution. Beat will then provide you with more details of our financial performance. And I will wrap up with our outlook for 2022. I'm very proud of the transformation we completed last year. This wouldn't have been possible without the commitment and engagement of our 3,500 employees. We had a very successful year both in terms of the transformation and when looking at our numbers. Let me touch on a few highlights. We experienced a strong recovery in order intake and our sales are back to pre-pandemic levels. We delivered strong EBIT growth, despite 2021 being a year of investments. For example, we expanded our regional presence and invested in the service organization with additional service technicians as well as in our Smart Factory Software Suite. Overall, we are well on track for our confirmed midterm targets. Beat will later elaborate on the numbers in more detail. Before we look into our own performance, let me discuss our market environment in 2021. We experienced a very positive industry dynamic. As you can see on the left, for example, demand within the European machine tool industry recovered strongly. Our customers were very cautious in their investment behavior in 2020, but they have gained confidence for economic growth in 2021 again, and hence, increase demand. At the same time, transport capacities were still very limited as a consequence of the pandemic. This resulted in strong price increases. Industry dynamics were positive across our regions, but the sentiment in China cooled down in the second half. Given our market environment, let us now take a closer look at our performance across industries and regions. All our industries performed strongly except for the automotive sector, where we have only a small exposure. Looking at our regions, they all posted double digit growth. Americas led growth in order intake as it doubled compared to last year. This also shows that our expanded local presence and investments are paying off. Our Strategy 2025 centers around the 3 pillars: systems, software and solutions and service. In all areas, we made good progress. In the systems business, we continued to focus on innovation and further expanded our different market segments. Let me provide you one highlight. We see an increasing demand for automated systems. Therefore, we invested further in a competence center for automation in China in the silver segment and expect to launch first products actually this year. In software and solutions, we are continuing to test our Smart Factory Software Suite with several customers globally, ready for market launch later in H1. In service, we successfully launched our modular service packages. This resulted in sales growth of 30% for this part of the business. I'm very pleased that we are now selling more than 90% of our new systems in gold and silver segment with the service package. We have a strong portfolio for our core applications like cutting and bending. As a part of our strategy, we are screening M&A opportunities to further strengthen our offering. In line with this, we acquired Kurago and Antil. Kurago is our specialist when it comes to software development, located in Spain. We have operated a joint innovation partnership since 2019 and have now fully taken over the company. Antil is located in Italy and offers automation solutions. We have already had a 70% stake in the business and acquired the remaining 30% in November last year followed by full integration in Bystronic. Now let me hand over to Beat for a more detailed financial review. Beat?

Thank you very much, Alex. Good morning also from my side. I'm pleased to present you our financial results for the year 2021 in more details. To provide you with a transparent apples to apples comparison, we have split our financials in the annual report into Bystronic's continuing operations as well as the discontinued operations. On the next few slides, I'm referring to Bystronic's standalone figures. Please note that we had to make certain adjustments to the Bystronic 2020 figures and integrated some Conzzeta related costs that historically were reported separate and not as part of the sheet metal segment on the Conzzeta. Now with regards to 2021. Our order intake grew by more than 50% to CHF 1.2 billion. This is both the combination of real underlying growth and some pandemic catch-up effects. We estimate that a bit less than half of this increase was due to postponed investments and thus a catch-up impact. With such a high order intake, our net sales developed strongly to CHF 939 million, an increase of 17%. This is at a slower pace than the growth for order intake due to capacity constraints for components as well as in an outbound transportation. We also do see a trend away from single machines towards integrated solutions, which have a longer delivery and installation time. So the time from order intake to net sales has increased. Both our systems business as well as the service business performed well. As Alex mentioned, we hired an additional 80 service technicians and launched our modular service packages. We achieved a 30% sales growth to CHF 205 million. Overall, our service business accounts for 22% of net sales in 2021. Our EBIT grew by 67% to CHF 70 million and our net result nearly doubled to CHF 57 million. Given our asset light business model, we improved the operating free cash flow to CHF 65 million and our return on net operating assets stood at 25.5%. With regards to dividends, the Board of Directors proposes a dividend of CHF 60 per Class A registered share. Now let us take a look closer at the P&L. First of all, our underlying EBIT development. In 2020, we achieved a 5.2% EBIT margin. Last year, we grew EBIT by 67%, which resulted in a reported EBIT margin of 7.5%. As you might recall, we previously communicated an expected EBIT margin between 8% to 9% for 2021, and our reported figures are slightly below this range. There are 2 main reasons for this. First of all, we recorded a onetime provision of CHF 6 million at year end. This resulted from reassessment of assets and liabilities, where we took a more conservative approach. The large share of the CHF 6 million relates to provisions for tax liabilities outside of Switzerland and the rest to valuations of inventories for spare parts. Secondly, supply chains were very challenging in 2021, especially in the second half. Costs for material and transportation increased considerably. Overall, excluding the CHF 6 million provision, our underlying margin would have been within the previously communicated EBIT margin range. Now let me provide you with some details to understand the EBIT performance. Key to our business is the material quote, which we calculate as the combination of material expenses, net of changes in inventories. From 2020 to 2021, the material quote improved from 47.3% to 44.9%. We regularly negotiate procurement prices with our suppliers and had expected further savings in the second half. However, due to supply chain constraints, these didn't fully materialize. While we recorded some improvements in a few categories, especially cost for electronic components increased. In addition, due to strong sales and order intake some volume arrangements we have exceeded, and therefore, new higher prices from our suppliers had to be accepted. Personnel expenses overall grew under-proportionally. Please note that the first half of 2021 included still some costs from the former Conzzeta organization. Other operating expenses increased with an unfavorable impact on our profitability. The overall increase of CHF 41 million can be split into CHF 23 million volume impact, CHF 12 million higher other operating expenses and the CHF 6 million onetime provision I previously mentioned. Variable costs for us means mainly transport, warranty cost and installation capacity. Our priority, especially towards the year-end, was to deliver and to install the systems with our customers, even though it came with higher costs and a considerable margin impact as we decided to engage external installation support. In the second half of 2021, in direct relation to the sales volumes, transportation costs were higher than in the first half. However, in addition, we were confronted with higher freight rates of some CHF 5 million, which translates into about 1 percentage point of EBIT margin. Our other operating expenses increased due to resumed travel and representation costs as well as costs for our global expansion. Below the EBIT, let me make a remark on the net result. Our tax rate of 18% is lower than last year due to the corporate tax reform in Switzerland and a favorable country mix. Going forward, we expect tax rates of 21% to 23% given that we're growing our business outside of Switzerland overproportionately where we face higher tax rates. I'm very pleased with our cash generation last year. Operating cash flow was strong due to our business growth and diligent net working capital management. A key driver for our cash flow development is our strict policy to collect advanced payments from customers. As indicated previously, we spent nearly CHF 30 million or 3% of sales on CapEx. In 2021, we invested in new Brand Experience Centers in China and Korea and a new facility for silver level automation, as previously mentioned by Alex, in China. Given the divestments of FoamPartner and Mammut, we recorded a cash inflow of CHF 320 million. This resulted in a free cash flow of CHF 356 million. Our liquid assets on December 31, 2021, amounted to nearly CHF 500 million. One of our key strengths and foundation for our growth strategy is our strong balance sheet. Total assets have increased to CHF 1.235 billion, an increase of CHF 274 million. This mainly relates to an increase in liquid assets by CHF 241 million. Despite our 17% sales growth, our net operating assets have declined from CHF 231 million at year-end 2020 to CHF 219 million at year-end 2021. As I already mentioned, this is due to our well-established and strictly applied policy to collect advanced payments from customers up on order intake. We take up to 4 payments from our customers from order intake until sales recognition. These advanced payments now amount to over CHF 150 million on a year-over-year increase of over CHF 100 million and well overcompensates the CHF 70 million increase in inventories. Basically, this allows us to grow cash neutral. Overall, our solid net working capital management resulted in a high return on net operating assets of 25.5%. You will notice that this already meets the first of our 3 midterm financial targets. We are very pleased with this. However, we want to achieve a RONOA of 25% consistently over the years. Also note that the number can fluctuate somewhat depending on the levels of order intake. With 66% equity ratio, we continue to have a very solid balance sheet with no debt. If I recall the exchanges I had with some of you over the past months, one of your key question always centered around capital allocation and dividends. So here is the answer. For 2021, the Board of Directors proposes a dividend of CHF 60 per Class A registered share. The past few years have been characterized by the transformation, and our shareholders always participated from our divestments. For the period 2019 to 2022, we will have distributed an amount of CHF 435 million. Under the assumption you were a shareholder on January 1, 2019, this results in a 27% return from dividends. We now have completed the transformation, and going forward, Bystronic plans to pay out between 1/3 to 50% of the yearly net profit as ordinary dividend. Even though the payouts to shareholders were attractive in the past years, we remain well capitalized for our future growth strategy. Of our total free cash flow from CHF 356 million in 2021, we distribute CHF 124 million to shareholders. This means that liquidity remains high for Bystronic with CHF 370 million of cash and an equity ratio of 62% after the proposed dividend payment. As Alex already has mentioned, we are looking to expand our portfolio with the remaining liquidity, and I'm convinced that we can generate even more value for our shareholders by increasing this money into our business. And with this, I will now hand back to Alex.

Thank you, Beat. Let me summarize this. We delivered a good performance in 2021 and have a strong market position. This is the foundation for further growth in 2022. Our market environment remains challenging. Especially along our supply chains, we experience constraints when it comes to availability of components and transport capacities. We expect that the constraints from the second half of 2021 will continue in the first half of this year. For us, this means longer delivery times and higher costs, especially in procurement and for transport. As countermeasures, we have implemented several price increases in 2021, mostly in the second half. Given our high order backlog, this will materialize with the time lag. On the basis of this high backlog, we expect a sales growth of 10% to 12%, adjusted for an unfavorable FX translation impact and an EBIT margin of 8% to 9%. This is under the assumption that the situation on the procurement market normalizes throughout the year. With this, we are well on track to reach our ambitious midterm targets. Thank you. We will now move on to the Q&A session. But before we do so, let me share a quick video as an update from our software solutions. Thank you. [Presentation]

[Operator Instructions] The first question is from Walter Bamert from Zürcher Kantonalbank.

Three questions, if I may. The first is on order development. You mentioned that you think that a lot of your -- about half of the orders in the last year were from pent-up demand. Does the order intake you experienced in January and February give you some evidence on this? Or how did that perform, because I think Q4 was still at a very high level? The second is, could you remind me of the price increases you made last year and what you expect this year? And the third one is on seasonality. Do you expect in the order development some atypical or typical seasonality this year?

The order development actually that we have seen is pretty much in line with what we communicated in the past. The CHF 1.2 billion order intake that we have seen last year included the catch-up, as Beat has mentioned. And we can see that actually now how we're getting back to a, let's say, more normal level. However, January and February had actually been a bit better than last year than we expected. So we feel actually confident that -- we have seen a bit of a catch-up, but we do see a nice incline of our order development, and we are happy to see this in January and in February. Second question was, I think, in terms of price increases. I'm not sure -- do you want to say something, Beat?

So with regards to price increase, I think we need to split this into 3 elements, one being on the spare parts and on the service side. So there, we have taken multiple price increases last year, and we continue to do this, this year. That is one element. We do see price pressure on our entry-level segment, continue to see that in China. There, it's very difficult to increase prices. It's basically reducing the decline. And then the second one being -- or the third one being on our silver and gold segment. And there, we have taken also multiple price increases, actually more to the latter half of 2021. So we will see the effect only trickling in kind of towards the second half given the strong order intake towards the second half of 2022. And we've taken another price increase now at the beginning of -- in the beginning of this year. But again, there, due to the order intake and the backlog being very high, this will only then trickle through on our financials in 2021 in the latter half and then also into 2023. And then with regard to seasonality...

Yes, I'm happy to talk about the seasonality quickly. So we have different elements of seasonality. Let's start with that part where we see less seasonality, and that's probably around projects, larger projects. And that's also not that much around software projects, where we see historically -- or where we have seen historically seasonality is more on the single machine type of business. So all in all, I think we see what we have seen in the last years. But because our mix of orders is going towards a bit more software, but certainly much more larger systems, we see actually a bit less seasonality in our opinion, especially the first couple of months of this year. So Mr. Bamert, I hope we have answered your 3 questions.

The next question is from Tobias Fahrenholz from Stifel.

Let me start again with the outlook. Could you provide here some further flavor? Wouldn't you regard the sales target as slightly conservative in view of the booming order intake and the rising prices which you mentioned? So have you built in some kind of safety discount here, which is obviously fair in the current environment? And when it comes to the margin, you were splitting out the special cost for last year. You're looking for 8% to 9% EBIT margin. What have you considered for headwinds in the area of supply chain and logistics? That would be my first part, if I may.

Yes. So we do see an annualization effect, obviously, of the transportation cost, right? I mentioned on one of my slides that we have seen this coming in. It's inbound and outbound, unfortunately. And only some of the outbound we can pass through to our customers. So that annualization effect will take place also this year. It was 1 percentage point on the half year 2021. So that will continue to happen this year. We don't see any onetime costs with regards to transformation or any accruals, et cetera. So that is all behind us. And then on the -- we do see challenges on components. We continue to see that. We don't have the crystal ball. But what we have built into our forecast is that it will improve in the second half of 2021, so that we do get a flattening out of the component costs.

Okay. And do you also have some concrete signs that it's really getting better in the supply chain? Or can you somehow reengineer your products? And maybe you could also speak a little bit about Russia, Ukraine, what's the sales exposure? And I know there are also suppliers of yours producing in this area. Are you also sourcing directly from this area?

Yes, of course. I mean, obviously, the Russia and Ukraine story has many secondary inputs or impact actually. Maybe I'll talk a little bit about the reengineering very quickly before I go to some of our suppliers or partners. The reengineering part is a part of what we're doing. We have done that in the last month. We continue to do this. Unfortunately, some of our key suppliers haven't really lead up -- or lived up to our expectations because that's the main bottleneck. So we are going different ways now when it comes to changing -- to other suppliers, changing components to -- in terms of reengineering it or finding other ways. One of the questions we get very often asked is the question on our main supplier or partner that is IPG Photonics. As you can imagine, that's our biggest partner that we have. We have worked with him since many years. We know the people very well. We are almost in daily contact. We see that they had issue or have issue currently in their plant in Russia. We also see that some of the key components that are being built in Russia, they are also built in Germany and U.K., and obviously, some of the key components when it comes to the growing crystals also in Boston. So they are sending us confident messages that we -- that they can manage the situation. We have not seen any signals different, to be honest. We see a potential issue of products that are built in Russia and being sent to our China plant in Tianjin. However, there, we do have a second supplier that immediately can step in and is stepping in currently also to deliver some laser source components. So from that standpoint, so far, we don't know what's going to happen for the months to come. But for our products only -- I cannot talk for all of the products for IPG Photonics. For our products, it looks fairly stable right now. Also, the outlook for the next 3 months we are being told -- and again, we have another session within a day or 2 -- is stable. So that's what I can say from that front. I'm not sure whether the question was related also to Russia and Ukraine, but maybe I can say 2 or 3 words about the business. Russia and Ukraine are obviously 2 completely different markets. They account for approximately CHF 20 million in sales, I would say, underperforming profitability. So we are not too concerned about that part of it. Obviously, we have suspended both. We have about 10 employees in Ukraine and about 19 in Russia. And we're trying to follow through the current situation there. But we don't think that with the size of what these 2 markets are representing to us, that, that changes anything in our story either this year or 2025. Now I hope I have answered all the questions, Mr. Fahrenholz.

[Operator Instructions] The next question is from Charlie Fehrenbach from AWP. Mr. Fehrenbach withdrew his question. Now we go on with Serge Rotzer from Credit Suisse.

Can you remind me how much sales did you mentioned you have in Russia, Ukraine? I was not understanding this correctly. This would be question one. And then question 2 would be about the backlog. Can you explain to me, do you have any frame contracts with your customers? Can you increase prices on the existing backlog? If yes or no, how much is the exposure of that? Secondly, you said that you have increasing lead times. Can you give me an indication, lead times last year to this year, for example? And lastly, what is the FX impact on the backlog given the appreciation of the Swiss francs? Would you -- can you express the current backlog -- what's the downside of the FX impact? And lastly, do you have any transaction impacts on the backlog? And then where does this come from?

I think we're going to cover the sales in Russia and Ukraine, if that wasn't -- and talk a little bit about the lead times. And maybe Beat wants to talk some of the other elements of the 5 questions. Sales in Russia combined -- Russia and Ukraine are approximately CHF 20 million, CHF 15 million to CHF 20 million out of, let's call it, CHF 1 billion for this year, CHF 1 billion plus this year. When it comes to increasing lead times, we have seen 2 things happening. One is, obviously, in some areas, our partners, our suppliers have delivered, but they have delivered in much, much lower growth rates what we need, and that actually has built up the backlog. And when the backlog goes up, then as a consequence of that the delivery times become longer. So that's one effect of it. We don't need 10% or 5% more components in certain areas. We need like 50% more components in certain areas. And that has been the main issue of it. So it's actually less our own capacity than getting components to build our products and deliver it to our customers. The other effect of longer lead times is an effect of mix. While in the past, we had a much higher mix of, let's say, single machines or systems, we see more and more larger systems coming towards us, and they have as per definition longer delivery times. Sometimes delivery times are not even driven by us. Sometimes they are driven by a customer finishing a plant or opening a plant, et cetera. So we have -- many projects they are actually timed towards the customer, not towards us. So maybe that's the 2 feedback from my side. And then there was an FX impact question and the backlog question on the pricing. Maybe Beat, you want to say something on that?

Yes. So let me cover that, Mr. Rotzer. So if you look at our currency exposure from a translational side on the top line, there's basically 3 main currencies that we're operating in: the U.S. dollar, then we do have the euro and the Chinese renminbi. So the U.S. dollar accounts for about CHF 300 million. Euro is about the same. And then about CHF 100 million in Chinese yuan. So if you look at the backlog, it's about half of that. So it would be about CHF 15 million in terms of impact, unfavorable with regards -- and that mainly comes from the euro, obviously, which have devaluated against the Swiss francs. On the other hand, there is a positive impact on the U.S. dollar. Yes, so that's basically it. Then your question was also on the transactional side. So there we actually do see a slightly positive impact at the moment. The reason is, on the euro, we have a pretty good natural hedge, which almost flattens out. And then on the U.S. dollar, slightly favorable given that the U.S. dollar has strengthened. And then also on the renminbi side, because it's kind of on the -- inside China, it's also a very good natural hedge. So overall, CHF 15 million about on the backlog.

So you're losing on the existing backlog margin because the prices are fixed and you have higher material prices. Is this the reason for the low EBIT margin? Otherwise, I don't know what is going wrong. Because FX is a positive impact. You have leverage. You have more projects, so this means software sales, service sales coming later. So what makes you that cautious on the margin, because you already guided 8% to 9% margin last year and again this year and the underlying margin was 8.1%? So can you help me there?

Yes. So it's material cost and transportation, basically. That's -- that will trickle through. We were very optimistic until about Q3 last year. And then really it hit us also with real shortages, not only increases in prices. And that unfortunately will continue into 2022, and we will have the full year effect in 2022. So that's basically what the impact is. And then we will continue to -- we will continue and want to continue to invest into our service organization. We don't want to hold back on that, executing on our strategy. So there will be an additional 100 service employees that we like to hire this calendar year.

[Operator Instructions] The next question is from Daniel Koenig from Mirabaud Securities.

Can you hear me? Can you hear me?

Mr. Koenig, we can hear you.

Can you hear me now?

Yes, loud and clear. Yes.

Okay. Yes. No issues. I had questions, 3 actually. I was wondering of all the regions, which region is now performing the best? So maybe the Americas is performing the best. And then I was wondering how DNE Global is performing? And then my third question was just to make sure I understood this correctly. But January, February, the order intake was better than last year. Did I understand it correctly? That's all.

Maybe I'm going to going to cover the ones -- well, what I tried to say is January and February in '22, the order intake was better than January, February of '21, not compared with the full year, but with the same month, the same period 1 year ago. That is correct, yes. In terms of regions. Well, we have had the slide, where you can see how the regions are performing in terms of sales and order intake. Order intake is obviously very, very strong in the U.S. -- or was very strong in '21. We see actually a really good situation also now with projects coming through. So it's clearly the Americas, and within the Americas, it's clearly the U.S., where we see positive trends in the business, investment appetite. We see that our customers do have work, significant work, and want to invest in highly productive systems. So that may be the answer for the regions. DNE Global is -- I think I mentioned in the past is actually nothing else than, let's say, a westernized DNE system for the entry level. We have just launched that actually in the U.S. and are launching it now in other Eastern European countries as well as in other markets. We actually have quite positive feedback from that. That's a market we haven't really known that well outside of China, because, obviously, DNE is very much focused in China itself with the best part. So we think we have actually hit there a really interesting new market that we are recovering now or covering now. We also think that not only the fact that we are able to open a market like that, but we also think that those customers will mature over time. And obviously, that's a really interesting part for us then to take them into the Bystronic world once they get a little bit bigger and are looking for automation. Was there another question? I think that is what I have noted. Mr. Koenig, did I answer your question?

Yes. Yes.

The next question is from [ Philip Schenker ] from [ EWS. ]

Yes. Just one question on the pricing and hedging strategy going forward. With the experience you now have and the, say, negative impact on costs for this year, you change your pricing and hedging policy going forward?

Yes. So with regards to pricing, it's a challenging situation we're currently in. But one thing we definitely want to look at is looking into how our contracts are established. We don't think that the inflation will go away soon, at least that's -- if we look into the crystal ball, that's kind of what we think. So that's something we're looking into, changing the contracts, linking our pricing to some sort of index, and then continue to negotiate on the inbound side, continue to negotiate with our suppliers to kind of absorb that. Do you want to add something to that?

But that's not like...

Yes. Sorry?

That's not hedging, right? So you're not starting to hedge costs as such. It's more like static price negotiations with your suppliers rather than forward contracts.

Yes. Yes. Absolutely. Yes.

There are no more questions from the phone.

Okay. With this, I would like to thank you all for your attendance and your time. And if there are no more questions, we would like to close this session. Thank you very much, and have a great day. We close with this. Thank you.