ElringKlinger AG (ZIL2) Earnings Call Transcript & Summary

Yes, ladies and gentlemen, hello and good afternoon, and thanks for being available on such a short notice today. I welcome you to our conference call on the preliminary and unaudited figures for the fiscal year 2024. I will start with some remarks on today's release. Afterwards, you will have the opportunity to ask questions as usual. Let me first come to the preliminary and unaudited figures. Summing up, we have recorded solid results for the 2024 financial year with a strong top line in the fourth quarter. Adjusted EBIT is in line with full year's guidance and a strong operating free cash flow essentially contributed to a considerable reduction of net financial debt. We have generated sales revenue of EUR 1.803 billion, which is a slight decrease to previous year's figure. We've been faced with headwinds from foreign exchange effects and assuming stable exchange rates, revenue would have decreased by 0.9%, which roughly corresponds to the market development. The markets have principally developed in a heterogeneous way in 2024. According to S&P Global Mobility data, light vehicle production in North America declined slightly in North America and quite moderately in Europe, while production in the region Asia Pacific trended sideways. Regarding to the earnings situation, adjusted EBIT amounted to EUR 86.2 million, which corresponds to an adjusted EBIT margin of 4.8%. The group, therefore, met its October '24 targets of posting an adjusted EBIT margin of around 5%. The operating free cash flow has developed quite strongly, particularly in the fourth quarter. The strong operating free cash flow considerably contributed to the reduction of net financial debt, which stood at EUR 250 million as per December 31, 2024. This is the lowest year-end number since 2011. At the same time, it provides the basis for the further transformation of the group. In 2025, the upcoming ramp-up of the large-scale contracts at the new battery hub Americas in South Carolina will be recognized here. Due to the scaling back of net financial debt, net debt-to-EBITDA ratio stood at 1.7. And if EBITDA is adjusted especially by the one-offs from the divestment, this operating or if you want to say, adjusted net debt-to-EBITDA ratio would be even at 1.3 compared to 1.5 in the previous year. As mentioned, this low ratio is the basis for our further transformation. Yes, ladies and gentlemen, almost 1 year ago, we unveiled our group strategy SHAPE30, which is our guideline for preparing ElringKlinger for the next step of the transformation. Our mission is to shape and to focus ElringKlinger along the 5 success factors. And with our transformation strategy, we aim to achieve a better profitability level in the group, particularly in the OE segment. This will contribute to meeting our midterm targets. Therefore, the realignment of ElringKlinger announced today with a focus on profitable business opens a new chapter for ElringKlinger. We have implemented measures to screen out nonperforming assets. We focus on a competitive product portfolio with a strong emphasis on the profitable components business. You may remember this slide from previous presentations. It underlines our strategic approach. While we expect cash flow from the ICE business to decrease over time, e-mobility cash flows are expected to rise. The basis for this expectation has been set up by our high-volume nominations which are currently ramping up or will start ramping up in the course of the year or in 2026. As a reminder, over the past 3 years, we have received nominations for non-ICE applications of several billion euros. The first evidence of the ramp-up effect can be seen in the 2024 financial year figures with sales revenue of the e-mobility business unit have more than doubled comparing EUR 48 million in 2023, now with EUR 103 million generated in 2024. Where we see limitations to an increase of enterprise value, however, measures are taken in such noncore areas. In October '24, we signed a contract on the divestment of our 2 entities in Sevelen, Switzerland and Buford, Georgia in the U.S. By the way, the group affected the closing, in particular, the legal completion as of December 31, 2024. This divestment was another step forward on our way to enhance the profitability of the group. Now we have adopted a strategy package of measures for the successful transformation of the group with a substantial impact on our 2024 financial year figures. Let me provide some more details on these measures. First, we have reassessed our new technologies. In this context, ElringKlinger is discontinuing its systems business for electric drive units and will focus on its profitable components businesses. In total, impairment losses recognized in respect to new drive technologies up to EUR 85 million. In addition, the group is reviewing its other shareholdings and will take further steps if necessary. Second, we decided to strategically reorientate the metal forming and assembly technology business unit. This decision follows the principle to screen out nonperforming assets, which also includes the network of sites. All in all, we booked impairments for some individual sites amounting to EUR 45 million here in this regard. And third, we have had to follow up impairments from the divestment of the 2 entities in Sevelen and Buford. The impairments amounted to EUR 103 million in total, thereof EUR 58 million already been booked in Q3 2024. And last but not least, we reduced the number of global locations. We'll discontinue operations at the sites in Thale in Germany and Fremont, California, where we have not been able to secure follow-up nominations despite considerable sales efforts. We have recognized restructuring costs here of EUR 5 million in total. These measures will support our way to improve the profitability of the group, in particular of the OE segment. We expect to unlock annual earnings potential of around EUR 10 million from 2026 on. It will not yet be fully realized this year because in 2025, it will be influenced by the investment cycle for some large-scale orders, which start to ramp up in the second half of the current year. Yes, the full and audited figures for fiscal year 2024 will be released on March 27 at the same time when the press conference starts in the morning. An analyst conference call will be provided in the afternoon. The then released figures will include the full range of the full profit and loss account, the full balance sheet and cash flow statement and therefore, more details on the financial KPIs. Moreover, we will provide you with the outlook on fiscal year 2025. The invitations will be sent out in due time. Yes, ladies and gentlemen, thank you for your attention here. And now I'm happy to answer your questions.

We have the first question coming from the line of Michael Punzet from DZ Bank.

I have one question regarding the saving potential of roughly EUR 10 million. Is it related to all the mentioned measurements? Because when you announced the divestment of entities, you gave us numbers of rough sales of around EUR 175 million. And I think you mentioned in the conference call that the contribution to the EBIT was minus 20%. So only this divestment must lead to a higher saving potential. Maybe you can explain a bit in more detail for which measurements -- how you came to the EUR 10 million figure from all the measurements you mentioned?

Yes. Thank you much for your question. The one part here that we have in terms of savings going forward on a year-to-year basis is missing depreciation, and that would be EUR 5 million. And then on the other side, we have EUR 5 million with cash effect in the figure that I give from 2026 on. What I said in the Milano call was that in the past, we had an amount of 10% of group sales here in terms of the amount of the divested companies here in terms of its share on total sales, 10% of group balance sheet and roughly 20% of group EBIT. The figure now that I have that includes some services that still remain for the foreseeable future. And the figure that I have given now is a figure I'm pretty sure we can attain. There is more potential. But for now, this is the number I'd be given as the figure going forward with a noncash effect and the cash effect of EUR 5 million, roughly speaking.

Maybe a follow-up. the divestments, you said 10% of group sales that I can remember that is also printed in the presentation, but the minus 20%, I have to assume that was related to the revenues that there was an EBIT margin of minus 20%.

The negative margin share was in the past up to 20%. This is what I said. And what you're saying is after the divestment, the figure essentially should be higher. Is that what you say?

Yes, because when you sell roughly EUR 175 million in sales and with a negative EBIT margin of minus 20%, the saving potential from this transaction must be much more higher than the mentioned EUR 10 million.

Yes. No, this is after having reviewed this point, there is upside potential, I think, but the figures I'd be giving now is the EUR 10 million that I was mentioning.

There are no more questions at this time. I would now like to turn the conference. Wait, there is a last-minute registration from Jasper Thiedemann from Deutsche Bank AG.

I just got one. So if I'm not wrong, the implied adjusted EBIT margin in Q4 would stand at about 3.7%. I was just wondering whether you could provide a little bit more color around that? Like what certainly drove that sort of sequential and year-over-year decline?

Yes. The fourth quarter here, you're right, it would be in terms of EBIT adjusted 3.7% or EUR 16.7 million. Essentially, it was a mix of effects that we have seen here. There is some effects from our activities here that are not part of restructuring or impairment costs that were recorded here in EBIT adjusted. And this is one share of it. The compensation for that was in the aftermarket, where we had not too bad fourth quarter. And the rest was pretty much a mix of compensation and in some areas of weaker business performance.

The next question comes from the line of Akshat Kacker from JPM.

A couple of questions, please. The first one, could you just explain a little bit more on what's really driving the free cash flow beat in Q4? And the second question is in terms of all of these business segment closures or site closures, could you just tell us if there could be more cash needs for carrying these out in the first half of next year or in 2025 basically? And what are your current assumptions for cash restructuring in 2025, '26, please?

Yes, Akshat, thank you for your question here. Some effect here on the free cash flow was an amount of roughly EUR 10 million positive coming from the divestment of the 2 sites. When you say, okay, what is the extraordinary portion, let's say, of free cash flow here, then it's EUR 10 million coming out of the divestment and the rest is pretty much ordinary free cash flow. In addition to that, part of the reduction here in net debt is that we reduced, through this transaction, our net debt by the divestment of, so to say, EUR 20 million liability bank liability, which went out together with the entities. When we look at cash needs for the foreseeable future, there is, on one side, a material figure that is associated with the industrialization and the implementation of new business that we had acquired. When we look at Q4 and when we look at the remainder of the year here 2024 in terms of CapEx, we have seen a little bit of ramp-up in terms of investment, and that's going to be continuing over in 2025. In terms of cash need for potential restructuring, there is no decision made yet as we look at further opportunities that we have here in the group, but there is no figure that I have here because no decision was taken so far in terms of that.

There are no more questions at this time. I would now like to turn the conference back over to Thomas Jessulat for any closing remarks.

Yes. I would like to thank you for your participation in this call here. We will release the audited figures for the fiscal year 2024 on March 27. And until then, all the best for you all. Thank you very much.