Grammer AG (GMM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. And on behalf of Montega, a warm welcome to today's earnings call of the Grammer AG following publication of the financial full year results of 2023. We're delighted to welcome the spokesman of the Executive Board, Jens Ohlenschlager as well as CFO, Jurate Keblyte, who will speak in a moment and guide us through the presentation and the results. After the presentation, we will move on with our Q&A session in which you will be allowed to ask your questions directly to the management. So having said this, I hand over to Senior Vice President, Investor Relations, Tanja Bücherl.

Good morning. My name is Tanja Bücherl, and I would like to welcome you as well to our today's annual conference for the fiscal year 2023. Over the next roughly 30 minutes, you will get a presentation by our Executive Board that will guide you through the last year. As you already heard, afterwards, there will be, as usual, a Q&A session where we would like to very much welcome you to ask the questions that may be raised during the presentation. And with that, actually, I would like to hand over directly to Jens.

Yes. Thank you, Tanja. A warm welcome. Also, everyone from my side. My name is Jens Ohlenschlager. I'm the spokesman of the Executive Board. And I'd like to thank you, first of all, for your interest in our company. On behalf of our team, I welcome you joining us today for the presentation of the Grammer Group results for the year 2023. We appreciate your interest in Grammer and we are excited to share with you the highlights and insights from our performance in the year of 2023. Joining me in this presentation is my colleague, Jurate Keblyte. Together, we will present our financial performance, strategic initiatives, and we will give an outlook for 2024. As usual, we will begin with a brief overview of the most important developments. First of all, I would like to provide some context of the broader economic landscape in 2023. The global economy lost momentum over the course of the past year and continue to be impacted by global crisis, including the war in the Ukraine and the Middle East. While supply chains have largely recovered from the disruptions caused by the pandemic, other issues such as global industrial production and investment uncertainty remain. In 2023, Grammer demonstrated resilience, even faced with challenging global conditions. Despite these difficult macroeconomic conditions, we significantly improved revenue and earnings in 2023 compared to the same period last year. Revenue increased by more than EUR 146 million to EUR 2.3 billion, and EBIT also improved significantly from minus EUR 45 million to EUR 42 million. These positive outcomes were driven by contributions from both our automotive and commercial vehicle product areas as well out of the regions, EMEA and APAC. While we also improved our results in Americas, it's important to acknowledge that we still fell short of expectations there. To address these challenges and drive efficiency in 2024, we've initiated a top 10 measure program, which will be explained later in some more details. I hand now over to my colleague, Jurate Keblyte, who will take us through the key figures and the contributions of the 3 regions.

Thank you, Jens, and hello, good morning to everyone also from my side and very well warm welcome to our presentation. I will start as always with the overview of the whole group. and then moving on to the 3 regions in more details. As we have heard, the revenue growth already presented -- represents almost 7%, adjusted by currency effects, it's even 10.4%. As we can see in the chart, both areas contributed to this growth. Commercial vehicles grew by 9.1% on a currency adjusted basis and automotive by 11.1%. As a result, commercial vehicles now accounts for around 35% of total revenue. So we continue to work on strategies to increase the share towards the targeted 40%. EBIT improved to EUR 42 million, mainly due to the impairment in Americas last year, reaching now EBIT margin of 1.8%. Adjusted for restructuring cost of EUR 4.1 million in Americas and negative currency effects of EUR 10.7 million, operating EBIT reached EUR 56.8 million, which represents a margin of 2.5%. This operating EBIT represents an improvement of 60% compared to previous year, but remained below our expectations, our guidance of EUR 70 million. I will comment on the development of the earnings more in details on the regional level. But on the next page, I would like to give a high-level overview about the main reasons for the deviation to the guidance. Firstly, we have, in total, overachieved our guidance in terms of revenue, but the mix between commercial vehicles and automotive as well as in regions has been unfavorable. The volumes in commercial vehicles remain significantly behind expectations in China, Japan, Brazil and the U.S., and we are mainly compensated by automotive business in EMEA. China in general remained behind expectations also in automotive to save more precise, planned volumes with global OEMs, we have not achieved. A second huge unfavorable development we saw in translatory currency effects in earnings, especially in China, Japan and as well as in Mexico, amounting here, as you see on the chart, to EUR 11 million roughly. And this before mentioned mix of products and regions amounting to EUR 9 million. We have initiated early in the year, measures to compensate those unfavorable developments, but they were not enough to compensate for all of it. And particularly, in the fourth quarter, we fell short on our expectations, especially on customer negotiations with -- one German premium OEM and one American OEM, we have not been able to achieve an agreement. Now turning to the development of the employees, which is quite in line with the development of revenues and is also, yes, notable that since 2023 -- since third quarter of 2023, we report these numbers of employees, including temporary workers to provide more accurate picture. Without temporary workers, we had an average 40,241 employees on board throughout the year. It's only 1.4% more than in the same period last year. Including temporary stuff, as you can see here, the number of employees increased to 3.8% -- by 3.8% to nearly 16,000. In Americas, the number of employees decreased slightly by 1.8%, mainly due to a closure of 2 locations in U.S., while the number of employees increased in Mexico due to the ramp-up of new programs. A reduction of staff in SG&A in Americas has been started in October. So not having a big impact on the average number of 2023. On the positive note, we have managed to reduce the fluctuation compared to previous year. We have been reporting that it has been a struggle for us as well as the absenteeism, but we are still struggling to find qualified personnel in some of our plants, especially for technical, more challenging professions. In EMEA, head count increased by 4%. It's mainly driven by the new product launches and the change in the product mix. In APAC, we have used a lot of temporary and leased workers to manage the revenue growth. The number of hired employees increased only slightly by 3.5%, while the number including temporary workers increased by 15%. On the next page, we see the investments of the past year as planned. These increased by 6.7%, reaching EUR 97.1 million and include EUR 12.6 million for assets from rental and lease agreements that were capitalized in accordance with IFRS 16. By region, most investments were made in EMEA, totaling to EUR 40 million. It's [ 111% ] above the previous year's level. These investments are primarily supporting new program launches in automotive sector, particularly in console business. Additionally, we continued with the modernization program in our -- in our plant in Haselmühl -- main commercial vehicle plant in Haselmühl called Mayflower. This included replacement of investments and the implementation of a new logistics system with automated guided vehicles, connected to the SAP enterprise warehouse management, which has been implemented simultaneously. Investments in APAC increased approximately by 28% to EUR 27.5 million in '23. And one of the largest items here was the new paint shop in Ningbo plant, allowing us to increase our vertical integration by insourcing. Other major investments were made in relatively new Hefei and Qingdao plants where production of the Chinese OEMs has already started or will start soon within this year. In Americas, investments decreased slightly from EUR 19.7 million to EUR 17.1 million. As a significant portion of the investments was allocated to a new seat, foam -- and foam lines for capacity expansion for commercial vehicles. In addition, several machines were relocated following the closure of one of the mentioned plants in order to reduce future investment needs. The ongoing relocation of the seating business from Tupelo to Delphos also involved some smaller investments. Now let's take a look at working capital, free cash flow and debt development. Despite the increase of business volume, we managed to reduce working capital to EUR 195.8 million, which represents 35 days of this working capital, an improvement of 9 days compared to previous years. The significant increase that we faced in trades accounts receivables due to the increased business volume also towards the year-end was more than offset by improved inventories and prolonged supplier payments. Biggest improvement has been achieved in inventory management, reaching now of 35 days, a reduction of 6 days compared to previous years. And DSO with 95 days have been now increased by 2 days as a result of a bigger portion of revenue in China with rather long payment terms. And as I said already, this were compensated by prolonged DPOs reaching now 54 days compared to 49 in last year. This positive contribution from working capital, combined with improved earnings before taxes resulted in improved free cash flow that has been achieving EUR 48.2 million at the end of the year. Accordingly, also the net debt decreased from EUR 429 million to EUR 401 million, reflecting higher outflow for increased financing costs as a result of higher interest rates. On the next slide, we take a look at equity leverage and gearing metrics. Equity rose slightly compared to the end of 2022, thanks to a hybrid loan of EUR 19.1 million from, again, Grammer's main shareholder, compensating the negative FX effects in the OCI, other comprehensive income. Leverage reduced to [ 3.2 turns ] as a result of the positive debt development and slightly increased EBITDA from EUR 117.4 million to EUR 123.8 million this year. Gearing also improved, reaching now 128% due to the reduced net debt and increased equity. Now let's turn our attention to the development of the regions. And we start again with EMEA, Grammer's headquarter and largest region, generating more than 50% of the revenue. Here, we have achieved a revenue of EUR 1.2 billion, representing a 7% increase compared to the same period last year. With nearly EUR 640 million in the first half year, EMEA achieved record revenue for a half year ever. However, in the second half year, we faced weaker market conditions resulting in the revenue of EUR 571 million only. Also here, automotive performed better than commercial vehicles, while commercial vehicles grew by 2.9% or adjusted for exchange rates effect 5.4%. Automotive experienced stronger growth of 10.9% or adjusted for currency effects, it's a smaller difference, 10.2%. EBIT in EMEA increased slightly by 2.6% to EUR 16 million, translating to an EBIT margin of 5%. Adjusted by negative exchange rate effects of EUR 4.1 million, operating EBIT has been on a par with the previous year's margin of 5.3%. And with that, not reaching the targeted increase of profitability. Main reasons for the deviation to the targeted profitability are attributable to unfavorable mix between automotive and commercial vehicles and reduced and volatile volumes in the second half year as well as challenging launches that we have been facing and that has impacted the productivity and nonquality costs negatively. Now turning to APAC. This is the region with the highest revenue increase in 2023. It has achieved remarkable 25% raise to EUR 532 million. Adjusted for currency effects, it has been even higher. It reached 35%. A significant portion of this increase can be attributed to the base effect of the previous year where we saw business impacted still by COVID-19 lockdowns in China and the global semiconductor shortage in the first month of 2022. Also, our new factory in Hefei, which supplies one of China's booming new energy vehicles, manufacturers also contributed to this positive development. This is reflected in the strong currency adjusted revenue increase of 41% in automotive, which now generates over 40% of the revenue of the Chinese OEMs. On the opposite, the revenue of global OEMs remained below expectations, leading also to unfavorable margin development in automotive. Revenue in commercial vehicles increased by nearly 13% to EUR 153 million. Adjusted for currency effects, it has been higher, 22.5%. Overall, however, commercial vehicles business remained below expectations in China as well as in Japan. But even behind expectations on the top line, this strong development led to a significant EBIT contribution for the group. Now with less than 50% of EMEA's revenue, the region has generated nearly the same EBIT. And despite unfavorable customer mix in automotive, start-up costs for new plants, lagging volumes in CV and even overproportionately high freight cost to Japan, operating EBIT margin still increased slightly by 11.7%, making us also confident that also in this year, the margin can be kept close to the double digit. Now turning to the region where we're having the biggest challenges since a while. Here, the revenue has amounted to EUR 622 million, which is 7.5% below last year. [ May ] reason in automotive was anticipated, but 4 months earlier as planned, executed discontinuation of a customer product and associated closure of our plant in Deloitte. In addition, the volumes remained far below expectations in commercial vehicles, especially Brazil as well as with some global OEMs. On the positive side, it is important to mention that in 2023, we have achieved record order income for Americas, which is going to help us to leverage already existing capacities and also SG&A costs going forward. Jens will give some more insights into the order income later. Taking a look at the EBIT development. First thing to remind is the impairment of EUR 73.6 million in the previous year, making it clear why our comparison of operating EBIT is much more sensible. Operating EBIT in 2023 is adjusted by restructuring costs of EUR 4.1 million and negative currency effect of EUR 3.9 million, leading to an operating EBIT of minus EUR 42.7 million. This is an improvement of EUR 5.6 million only, so far behind our expectations. However, I would like to point out some measures that have been initiated and came along with one-off cost burden in 2023, so not being adjusted in the operating EBIT and going to contribute to the improvements in 2024. So first of all, it is the already mentioned closure of plant in Deloitte. This event has been used also to relocate and upgrade equipment aiming to reduce investment needs for this order -- record order income that we have achieved. These costs amounted to approximately EUR 6 million. And as I said, are not adjusted in the operating EBIT because we are using a pretty strict definition for the adjustments. So it burdens the earnings that we report. Another already mentioned event was also downsizing and partially also relocation of our SG&A functions, that started in October and has burdened also operating EBIT by EUR 0.9 million with onetime expense and not had a big positive impact in 2023 yet. And the third and event to restructuring measure that is worth mentioning is also a transfer of our commercial vehicles production from Tupelo to Delphos and also implementation of SAP system in Delphos, which is part of our footprint adjustment strategy and has amounted to EUR 2.3 million, also not adjusted in EBIT. In addition, our operating EBIT has been burdened by approximately EUR 5 million for extraordinary high ramp-up costs for new programs and a new paint shop in Mexico as well as unfavorable fixed translation effects of around about EUR 9 million, resulting mainly from Mexican Peso. And last but not least, we haven't been successful -- as successful as targeted in the negotiations with the customers on the inflationary price adjustments, mainly with one customer in the -- with one U.S. OEM and with one German premium OEM. So having those measures in mind, the underlying EBIT that we can calculate for the upcoming year or, let's say, cleaning this out would be EUR 19 million. And having this in mind and the headwinds that we have been facing, it is really notable that the turnaround progress is ongoing, and we are confident to improve significantly in 2024. Organizational adjustments, also like appointment of Guoqiang Li as President and implementation of Dedicated CRO for TMD will also enforce the execution of the measures. And I'm handing back over to Jens, who will also say some words about Guoqiang.

Yes. First of all, thanks a lot for the comprehensive and detailed presentation for 2023. I'd like to add some additional words to Mr. Guoqiang Li. Mr. Guoqiang Li successfully led Grammer China for several years and accepted, end of the year 2022, also to take responsibility for Grammer's global operations. Mid of last year, we've been successful in nominating a new President for the region China, which was giving us opportunity at the same time to bring Guoqiang Li in the function as Jurate said, of President for the region Grammer in Americas as part of our restructuring and turnaround initiative. And as a logical step and in line, which is already taken global operations responsibilities, it was decided that Mr. Guoqiang Li from April 1 on will become a member of the Executive Board of Grammer. With his appointment, Grammer will be well prepared to go for the ambitious goals in 2024 and the years also beyond. But coming back to 2024. As we look ahead on the current fiscal year 2024, Grammer Group is bracing for continued challenges amidst the complex macroeconomic landscape, high material, energy and steel labor costs as well as potential supply chain interruptions present significant hurdles for us to navigate. However, and nevertheless, we remain resolute in our commitment to deliver results. Speaking about 2024 numbers, despite the mentioned challenges, we expect revenue to remain stable at around EUR 2.3 billion. We also want to increase the operating EBIT to EUR 75 million. This earnings forecast reflects the progress was already made with our top 10 measures. One of the top 10 continues to be the turnaround in the region Americas with the aim of improving utilization rate increasing on machinery, adjusting SG&A expenses and increasing margins in line with our medium-term outlook. However, our forecast for the full year will also strongly depend to a large extent on our ability to negotiate agreements with our customers to effectively pass on inflationary cost effects because this is impossible to compensate only by productivity increase. Accordingly, we are confident in our forecast for the year with the second half of the year providing the decisive impulse from the top 10 measures. In response to the lower-than-expected profitability in 2023, and the emerging slowdown in business development, particularly in Europe, we launched the top 10 measures initiative that we've already mentioned earlier. Now we want to take a look at the specifics where our efforts are focused on. Our initiative includes key levers to improve the efficiency of our operations in EMEA, substantial cost reductions in the global product development organization and to reduce SG&A costs, especially in the headquarter here in Ursensollen. In addition, we are focusing on achieving a turnaround in the Americas region. Further optimization results, for example, by terminating or renegotiating unprofitable projects. The top 10 program is designed to lay the foundation for sustainable improvement in earnings performance in 2024 and the years beyond. I now would like to talk shortly about new nominations. Our strategic initiatives have been strengthened and capitalized in generating a record order intake in the year of 2023, positioning Grammer for continued growth and success. Our commitment to customer satisfaction has driven remarkable results with a record order intake of EUR 2.7 billion in 2023. This is bringing us closer to our midterm target to achieve EUR 2.5 billion revenue in the year of 2025. This exceptional performance underscores the effectiveness of our customer-focused approach, a core element of our strategic initiatives. Over the years, Grammer has built strong relationship with the world's leading automotive and commercial vehicle manufacturers. Our ability to meet the evolving needs and these esteemed clients has been instrumental in our success. But the increased order intake is also an effort for the entire organization and causing a high level of human and financial preinvestment to process the new orders. The impressive order intakes, spends across all regions, including notable contributions from emerging Chinese new energy vehicle manufacturers. This result does not reflect only customer confidence in our products, solutions and speed of execution, but also the effort we've made in our global quality initiatives. Under the theme, order intake reaches new dimensions, we've digitally presented our regional initiatives and drivers of strong customer demand alongside the release of our annual report also on our company website. Speaking briefly about new products. In example, the center console for the Mercedes GLC as an eye-catcher. This center console is bridging the rear seats with a digitalized cockpit. The console impresses with features such as a butterfly armrest lid as a high-quality storage compartment cover with a trim that matches the interior, the center section, including a generous storage compartment and USB socket as well as carrier for the infotainment screen. The design of the center console impressively demonstrates how Grammer combines customer requirements of a modern vehicle interior with high aesthetic aspects, various functionalities, sustainable materials and light weight. The picture on the right side shows an innovative, luxurious central armrest, which was developed for the new BMW 7 Series in close partnership with the customer. It is a central part of the interior design and set standards in terms of aesthetic and luxury, not only in terms of designs, but also in terms of functions and operations. In addition to the high-quality materials, such as perforated leather, cashmere and 3D modeled rear glass application. It also offers integrated heating and state-of-the-art technology with features such as a retractable drawer with cupholder and wireless charging pad. The armrest also increases occupant safety, thanks to a user-friendly locking system. Furthermore, new products from the area of commercial vehicle seating, maximum comfort, optimum economics and intuitive operations. In the tough day-to-day work of truck drivers, these are not only luxury features, but essential seating characteristics for keeping the driver fit and healthy in the long term. Grammer has perfected precisely these features with its road tracker retrofit seat, which is now available for the latest MAN trucks. Worth to be mentioned that numerous trucks for Mercedes Benz and us are already equipped with Grammer seat systems. And coming to the end, I'd like to give you an outlook on future interior trends, with the increasing electrification of powertrain systems as well the further automatization of driving functions. Grammer expects to see significant changes and upgrades to the vehicle interiors in the coming generations of vehicles. End-user expectations regarding comfort, flexibility and functionality will undergo a fundamental change. Thanks to their architecture, electrical cars are more adaptable to customer needs as well as being more spacious, fewer buttons and switches means they are easier to operate. Where there is no longer a drivetrain, the center console will play even a more important role in the vehicle and will include additional functions. In its concept study, Grammer is developing center consoles that combines several functions for new vehicle contrary concepts using modularity and sliding features. And we see ourselves very well prepared for the future customer requirements. Having this said, I'd like to give back the word to Tanja.

Thank you, Jens. Also thank you, Jurate, for the very detailed information on our fiscal year 2023. And as already said at the beginning, we would like to start now with the Q&A session.

Thank you so much, Mrs. Bücherl for handing it over. So we will now move on to the Q&A session. [Operator Instructions] So the question is, how will Grammer achieve the forecast in 2024.

Shall I start, Jens, and you... Okay. So first of all, as I have tried to explain also during my explanation of the 2023 results, we have achieved already significant progress in the turnaround program of Americas. Even if it did not pay out in 2023, we are very confident that this will contribute significantly in 2024. And we have initiated the other measures, so other 9 measures because one of the top 10 is the turnaround of Americas or actually 2 because we divided it into 2 parts: TMD and not TMD. So other 8 measures that are going to contribute significantly and to save also -- safeguard our profitability in 2024. But as Jens has also mentioned, one of the important measures is also to achieve agreements with our customers for these compensations on inflationary effects. We are doing a lot on our side to compensate, to overcompensate it, but some of the effects are so huge that we will not manage it just by ourselves. So these 3 are the main pillars, consisting not only of 3, but as we have explained several managers -- measures. And I don't know, Jens, if you want to add something in addition.

Just to give some specifics, especially in the area of cost reduction, as we've mentioned, we are forcing to have a substantial reduction on R&D costs, and this is globally. At the same time, our administrative costs, we run programs to get them down on a more cost competitive level. This also will help us and support over the year to achieve the forecast.

Wonderful. Thank you so much for answering and we received in advance, a question by an investor. So regarding the shareholder structure, how is the cooperation with the major shareholder, Jiye Auto Parts? I hope I pronounced it the right way, which owns 86.2% of the shares organized. What do you see as the main advantages?

Very good question. Thank you also for this one. So I think the results in China, the results that Grammer has achieved in China speaks for itself. So this is where our main shareholder has helped us really to step in, especially into the business with the local OEMs and also in commercial vehicles businesses. And we are also using some cooperations in purchasing, especially in tooling, for example. And we are also supporting each other in business management in EMEA. So these are maybe the main pillars. And again, Jens, please.

There are synergies in various areas, but you have already mentioned. I mean I think the most important is to get access in the China market to the new electrical vehicle manufacturers. And here, I think you saw we booked business last year in China with EUR 900 million lifetime sales, and the majority of that are battery electric car manufacturers. And having access to those here, our main investor was helping a lot opening the door and finally, we had to go through with good products with competitive prices, but I see this as a major advantage for us. Not to forget, as Jurate mentioned, synergies and cooperations in the area of tooling, procurement, supply chain as well as in the R&D sector.

All right. And the investor had another question. So TRATON and Daimler have both recently reported a normalization of the truck market. How do you see the current development?

I did not understand, who has reported?

Daimler.

We do not see it yet.

It's -- yes. I mean we cannot speak on a normalization on the truck market. There was a quite good first half in 2023, but we already saw, especially on the truck market, globally seeing a decline on demands in the second half of the year. And this decline, unfortunately, there is a mismatch between the statement. This is continued in the first quarter -- in the first half year of 2024.

So it would be a good news for us if this report materialize.

Recently, we just saw some cuts, especially on the truck side. And the reason behind is that the huge -- the large governmental stipulated infrastructure investment programs have not happened, not in 2023 and have not yet announced also in 2024. And usually, this is a stimulator on the truck sector to sell trucks. And for us, seats to be implemented and assembled in those trucks.

All right. Thank you so much for answering. So -- and then we have no further questions by now. I guess we will wait a couple more seconds, maybe just to check if there are some further questions. [Operator Instructions] It seems there are no further questions. So I guess this would be the end of today's earnings call. So thank you, everyone, for joining and to show an interest in Grammer. So from my side, I wish you a lovely and happy Easter days. And thank you also to you, Mr. Ohlenschlager; and Mrs. Keblyte for your presentation and the time you took. So having said this, bye-bye from my side and I hand over again to Mrs. Bücherl for some final remarks.

Yes. Thank you very much. Also, let's wrap it up from our side here, from Grammer. We also would like to thank everyone for the participation in our meeting today and also for the questions. As always, if there are some questions arising afterwards. Just give me a call, give me a message, and we can have, for sure, a one-on-one also afterwards. And with that, we would like to wish you also very happy Easter holidays and a good day, and we see us already again here in a few weeks for our Q1 release. Take care. Bye-bye.