Grammer AG (GMM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. On behalf of Montega, welcome to the earnings call of Grammer AG following the publication of the Q3 figures of 2023. The results will be presented shortly by the spokesman of the Board, Jens Ohlenschlager; the CFO, Jurate Keblyte; and the Senior Vice President Group Finance, Georg Leykauf. The floor will be opened for upcoming questions following the presentation. Let me now hand over to the Senior Vice President Investor Relations, Tanja Bücherl.

So good morning, good day. I would like also to welcome you to our conference call today. So in the next 40 minutes, our Executive Board, Jurate Keblyte and Jens Ohlenschlager will provide you with an overview of the first 9 months of the year. Afterwards, as usual, there will be a short Q&A session where you are very much welcome to ask us any question you might have. And having said that, I'd like to hand over directly to you, Jens.

Yes. Thank you, Tanja. Good morning, and welcome to the presentation of Grammer's current business results. My name is Jens Ohlenschlager, and I thank you for your interest in our company. Together with my colleague, Jurate Keblyte, we would like to present the figures for the first 9 months of 2023, and give you an outlook for the year as a whole. As usual, we will start with a brief overview of the most important developments of first 9 months. Global economy remained significantly below its long-term growth trend in the third quarter. Nevertheless, the U.S. economy was still largely resilient, thanks to the stable consumption [Audio Gap] investments. In China, the property crisis led to an increasing headwind and weaker growth, while in Europe, especially Germany, the economy remained weak, particularly in the [Audio Gap] economic conditions, Grammer significantly improved revenue and earnings in the first 9 months compared to the same period last year. Revenue increased by EUR 141 million to EUR 1.7 billion in the first 3 quarters of 2023. And EBIT also improved significantly from EUR 2.5 million to EUR 30.5 million. Both divisions, automotive and commercial vehicles as well as our EMEA and APAC region contributed to this. We were also able to improve our results in the Americas, but they're still behind our expectations. My colleague, Jurate Keblyte, will now take you through the key figures and the contribution of all 3 regions. Jurate.

Thank you, Jens. And also from my side, good morning, and a warm welcome to our presentation. I will start with an overview of the group key figures and then move on to the 3 regions. On the revenue side, we achieved a growth of almost 9% to a solid EUR 1.7 billion in the first 9 months. Adjusted for currency effects, revenue growth was even higher at 11.9%. Both divisions contributed to this growth. Commercial vehicles grew by 10% at a currency-adjusted basis, and automotive by 13%. As a result, commercial vehicles now account for around 35% of total revenue, and we continue to drive the increase of the share further to our targeted 40%. EBIT for the 9 first months amounted to EUR 30.5 million, giving an EBIT margin of 1.8%. Adjusted for restructuring cost of EUR 3.4 million in Americas and negative currency effects of EUR 4.5 million, the operating EBIT achieved EUR 38.4 million with a margin of 2.2%, while in the same period of last year, the operating EBIT margin was only 0.1%. The higher share of revenue in our most profitable region, APAC, as well as inflation compensations agreed with our customers already last year, contributed in particular to this improvement of the earnings. However, at the same time, price increases that were not passed on, especially from earlier years, as well as higher energy component, and not least, personnel costs, continue to weight on earnings and make inflation management one of Grammer's most important ongoing tasks. Looking at our regions, I already mentioned that the positive development in APAC has contributed heavily, but also EMEA was with a positive development contributing to the improved earnings. Americas improved also, but here we were faced with external headwinds, onetime effects and slower improvements in operations as expected. Let us now turn to the capital expenditure in the first 9 months of the current financial year. At EUR 58.6 million, this was slightly below the previous year's level. The region in that most investments were made is EMEA with EUR 23.6 million, and this represented 12.9%, an increase compared to the previous year. Investments in the region were made for new program launches in the automotive sector, especially for new consoles. And we also continue with the modernization program called Mayflower in our [Audio Gap] in Commercial Vehicles plant, Haselmühl, which comprise logistics with [ PEWM ], Enterprise Warehouse Management [Audio Gap] by approximately 19% to EUR 16.6 million. And one of the largest items here was a new paint shop at the Ningbo plant, allowing us to increase our vertical integration by in-sourcing. Other major investments remain the still relatively new Hefei plant, which supplies local Chinese OEMs. In Americas, investments went down from EUR 16.5 million to EUR 10.4 million. A big portion of the investments here were related to new seat and foam line for capacity expansion in the Commercial Vehicles division and headrest in Automotive division. In addition, several machines were relocated as a result of the plant closure in Beloit in order to reduce future investment needs. We will talk about it a little bit later. Ongoing relocation of seating business from Tupelo to Delphos was also going along with some smaller investments. On the next page, we see that the working capital of EUR 207.4 million as of September 30 was lower than at the end of 2022, despite the increase of business volume. This increase of the business volume goes along with a significant increase of trade accounts receivables, but that was more than offset by improved inventory management and prolonged supplier payments. The lower cash outflow from working capital compared to the same period of last year and significantly improved pretax profit combined with lower cash outflow for investing activities resulted in significantly improved free cash flow of EUR 44.3 million compared to minus EUR 40.8 million in the 9 months of the last year. Accordingly, the net debt reduced from EUR 429 million at the end of last year to EUR 406.4 million as of end of September. And I would like to point out here that in the previous year, we were at EUR 490 million net debt at the end of September. On the next page, we see our equity, leverage and gearing. Equity rose very, very slightly compared to the end of 2022 due to positive earnings after the taxes, but also other comprehensive negative income. Leverage, however, improved further to 2.9x, mainly supported by the increase of EBITDA LTM from EUR 117 million to EUR 140.4 million. And also gearing improved to 134%. On the next slide, we have our slide of the employees. And this time we have made a change here compared to our previous presentations. We have included the temporary workers in order to demonstrate a more accurate future of the development in the employee structure. In terms of own employees, not the least and not the temporary employees, we had an average of 14,299 people on board in average for the 9 months, which is 2.1% more than in the same period last year. Including temporary staff, the number of employees increased by 5% to over 16,000, reflecting better the development of the business. In Americas, the number of employees decreased slightly following the development of the volume. In EMEA, it increased by 4.1%, mainly driven by volume increases in Commercial Vehicles and Automotive. In APAC, the number of employees increased slightly by 1% of our own employees. However, including the temporary employees, increased 16.6%. It shows that the strong growth in revenue in this region was made possible by the flexibilization of personnel by use of the temporary workers. Now let's proceed with the regions, and we start with EMEA, which, again, in the first 9 months, was generating, yes, the biggest portion of the revenue of Grammer. We achieved here EUR 920 million revenue, which is 8.3% up compared to the same period of last year. On a quarterly basis, turnover in the third quarter of this year was slightly below EUR 280 million after a strong Q1 of EUR 328 million and Q2 with EUR 311 million. This reduction is mainly seasonal, but also impacted by supply chain issues caused by the floods in Slovenia. Looking again at the first 9 months, Automotive has outgrown Commercial Vehicles. While Commercial Vehicles grew by 4.4%, or currency adjusted, by 6.5%, Automotive rose by 12.1%, or currency adjusted, by 11.2%. EBIT in EMEA rose by 17.6% to EUR 46.2 million or 5% EBIT margin. Operating EBIT was adjusted for negative currency impact of EUR 3.3 million and ended with EUR 49.5 million or 5.4% margin, an improvement of 0.9 percentage points compared to previous year. Mainly increase of volumes and improvements of operating performance, but also better inflation balance, means higher share of past inflation cost to customer in the 9 months, were the main contributors to this positive development of the earnings. Now going to the APAC region. It is worth mentioning that here we have witnessed the highest revenue increase. This was 25% to EUR 382 million compared to the same period of last year. Adjusted for currency effect, the revenue growth was nearly 36%. A big portion of this increase tracks still down to the base effect of previous year, when the COVID-19 lockdowns in China and the global semiconductor shortage weighted on business. But also our new factory in Hefei, which supplies one of the booming Chinese new energy vehicles, car manufacturer, contributed to this positive development. This is also well reflected in the strong currency adjusted revenue increase of 43% in the Automotive division. The division generates now over 40% of its revenue with Chinese OEMs. Revenue in the Commercial Vehicles increased by 11.1% to EUR 112.9 million. Adjusted for currency effects, the increase was 21.1%. As a result of this positive top line development, also EBIT in APAC increased significantly to EUR 42.9 million. Besides the lack of volume, the region has been burdened last year by high freight costs to Japan as well as start-up costs for the new plants. The EBIT margin increased to 11.2%, which is within our target range. And we are particularly pleased about this as the new revenue with the OEMs, with the local OEMs mentioned earlier is not without start-up challenges and generally generates lower margins. Operating EBIT in APAC is only slightly adjusted for negative currency effects of EUR 0.3 million. Moving on to Americas. The revenue of EUR 476.4 million for the first 9 months was slightly below last year's level. The anticipated discontinuation of a product and the associated closure of Beloit plant was expected to happen later in the year. So therefore, this slight reduction of the revenue has happened a little bit earlier. The EBIT loss in Americas reduced to minus EUR 38.7 million from minus EUR 51.2 million in comparison to last year. Adjusted for restructuring costs of EUR 3.4 million and negative currency effects of EUR 1.1 million, the operating EBIT was minus EUR 34.2 million, which represents an improvement of EUR 17 million compared to the same period of last year. There were 4 main reasons that hindered faster improvement over the last 9 months. Firstly, the above-mentioned disconnection of a program and the respective closure of the plant cost that caused, besides the usual closure cost, also onetime expenses for the transfers of the now unutilized equipment to other plants that I mentioned at the CapEx will reduce our investment needs in the future. Another restructuring measure, the transfer of the commercial vehicles production from Tupelo to Delphos and the implementation of the SAP in Delphos caused also more trouble and cost as expected. The third topic in Mexico. Here the plants were faced with higher ramp-up costs for new programs and also a new painting shop. And last but not least, we are also facing headwinds from exchange rate development of Mexican peso. As a consequence of the above mentioned failures, changes in the top management of the region were made and a Chief Restructuring Officer, especially for the functional plastic business, the former TMD, was onboarded. We are confident that these measures will reinforce the P2P - Path to Profitability project, and will support our aim to achieve the sustainability... [Technical Difficulty]

If I may interrupt, unfortunately, we cannot hear you at the moment. It seems like the microphone went off.

Now it should work again.

Yes. Now we can hear you again. Great. Thank you.

So thank you, Jurate, for this comprehensive and detailed presentation of the first 9 months. We intend to continue and expand our positive business performance throughout the year. In particular, we expect to be able to achieve further substantial result improvement [Audio Gap] also in the last quarter. Here you can see outlook for the full year. Despite the continuing global economic uncertainties, we'll slightly exceed the revenue forecast of around EUR 2.2 billion, mainly due to the new product launches and good sales in China to new electrical vehicle manufacturers. We expect operating EBIT to double year-on-year to around EUR 70 million despite the weaker results so far in the region Americas. In terms of revenue, we are fully on track after 9 months. In terms of operating EBIT, we still have some way to go. However, we are confident that we will be able to make a decisive profit contribution in the fourth quarter, taking into account the measures introduced as part of our Path to Profitability restructuring project in the Americas as well as other efficiency and cost reduction initiatives. As a result, we expect a strong fourth quarter in Americas. Success is also strongly depending on our ability to reach agreements with our customers to pass on cost increases. We've made good progress in this respect the last month. We are confident that we can continue on this path of partnership with our customers. In addition, we expect positive contribution from volume and product mix developments in both divisions. The final quarter will bring further challenges also in view of the continuing macroeconomic and industry uncertainties. Nevertheless, we expect to meet our targets for the year. After presenting all the figures, I'd like to present further topics that have kept us busy at Grammer in the third quarter. This time we will focus on Tech Days and Driving Days. At the Linde Driving Days in Germany end of September, we showcased Grammer seats product portfolio. Our involvement went beyond just exhibiting. We were also actively involved in training Linde employees and their customers. The event, which attracted over 1,500 visitors, focused on safety and comfort. We also were showcasing innovations such as the haptic warning system, a joint Linde and Grammer achievement, which leads to the vibration of the seat when an object or person approaches the vehicle. In Tianjin, China, our Grammer team held a Tech Day at LOVOL. LOVOL is the biggest agriculture machine manufacturer in China. The exhibition this year also highlighted our innovative technologies, seats and integrated electronic solutions for off-road vehicles. A range of products were shown, including mechanical seats for tractors and premium seats with an automatic positioning system. The Driving and Tech Days not only demonstrate our dedication to innovation, but also reinforced our commitment to excellence in the field, and have allowed us to showcase our capabilities and cultivate valuable partnership. Our focus remains on one of the most exciting growth markets. We are continuing to expand our presence in the China market with the foundation of a new production site in Tianjin. This 20,000 square meter plant with modern facilities will produce high-quality seats for trucks and/or for vehicles with a yearly capacity of 400,000 units and will replace our current facility in Tianjin, which will become too small. This year, Grammer is going to have produced 2 million -- approximately 2 million commercial vehicle seats and about 2 million -- 10 million people come in contact with these products day by day. In the area of new products, I would like to present a new center console for the rear bench of the HiPhi X electrical SUV from Chinese manufacturer Human Horizons. This console created through Grammer's years of expertise as an interior supplier for the Automotive industry elevates the HiPhi's exterior to the level of established premium manufacturers. The console features top-quality craftmanship using fine materials and offering multiple functionalities, in example, a foldout table as well. This premium console was developed with a focus of extravagance and high-end quality and it's produced in Grammer's Shanghai plant. The project's emphasis on customer excellence led to a rapid development process with the center console going from a concept to production in just 9 months. With that, I would like to conclude my speech and thank you very much for your attention. Tanja, I'd like to hand over the floor back to you.

Thank you, Jens, and Jurate, for the detailed information on our first 9 months of 2023. Yes, with this, we also want to give you a direct opportunity to ask questions, and I would like to open today's Q&A session.