Grammer AG (GMM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a warm welcome to today's earnings call of the Grammer AG following the publication of the first half year figures of 2024. I'm delighted to welcome the CEO, Jens Ohlenschlager; and the CFO, Jurate Keblyte so the gentleman and the lady will speak shortly and guide us through the presentation and the results. [Operator Instructions]. So we're looking forward. And with this, I hand over to Senior Vice President, Investor Relations, Ms. Tanya Bucha.

Thank you very much. Also from my side, a warm welcome to our today's conference call. As already mentioned in the next 30 minutes, our CEO, Jens Ohlenschlager; and our CFO, Jurate Keblyte will, as always, provide you with an overview of our first half year's figures. And afterwards, as already said, there will [Audio Gap] where all of yearou are welcome to ask us any questions you might have. And having said this, I'd like to hand over to you, Jens.

Thank you very much, Tanja, and good afternoon to everyone. Thank you for your interest in our company. I'm glad to welcome you to the presentation of the Grammer Group's business figures. We appreciate your interest in Grammer and look forward to provide an overview of our business performance in the first half of the year. I will begin with a brief overview of the most important business developments. The first half year was embossed by differences in the regional development. While in the region Americas, the passenger car and commercial vehicle volumes have been on forecasted or an expected level. Demand for commercial vehicle in APAC and EMEA, specifically dropped substantially, caused by the lack of state-supported infrastructure programs, real estate crisis in China, partially also in Germany and high interest rates. The automotive sector developed volatile in both regions, EMEA and APAC, some OEM winning, others losing market share in the first half of the year. The discussion about disadvantages of electrical vehicles stopped state subsidies in Germany and ongoing high electricity costs led to consumer uncertainty and reluctance to invest in the vehicles independent of the driving type. This resulted in a revenue drop or decrease by EUR 58 million. Commercial vehicle in that recorded a drastic decrease, EUR 60.4 million and automotive sales was sidestepping with a slight increase of 0.3%. Operating EBIT fell FROM EUR 29.9 million (sic) [ 26.9 ] to EUR 15.6 million. This, for sure, unsatisfactory development is mainly driven by the decline in revenue, higher costs caused by an underutilized equipment capacities, high start-up costs and the manufacturing side in North America, negative effects from currency translation also persisted. To address the challenges of 2024, to drive efficiency and profitability in '24, a top 10 program with focus on result improvement was initiated, which we had already presented at the annual press conference in March 28. Top 10 program already contributed in H1; however, the initiatives introduced were not yet able to fully offset the negative volume effects and higher operating expenses. We expect that the improving effects will become visible in the second half of the year and beyond. A colleague on the Executive Board, Jurate Keblyte, will now give you a deeper insight into our figures.

Thank you very much, Jens, and a warm welcome also from my side. As usual, we will start with the overview of the whole company, and then we will move on to the regions. And even though it is slightly repeating here, a little bit closer look to the group revenue EBIT and operating EBIT, first. So revenue in the first half year fell by 5% on a year-to-year basis to EUR 1,114.5 million. Adjusted for currency effect, this decline represents 2.3%. Looking separately by product area, as Jens already mentioned, automotive made overall stagnating impression. However, there has been a lot of movements between the regions and even within them. EMEA decreased in the automotive by 5.3%. Americas saw a slight increase by 3.2% and APAC increased by 6.7%, APAC being China for Grammer in automotive. All in all, the regions remained below expectations in the first half year, even those who have developed positively compared to previous year. And in addition, in China, we saw a big swing between local and global OEMs. All of these developments led to overall revenue in Automotive of EUR 754 million, which is only 0.3% compared to previous year, and as already mentioned with rather negative development of the mix between the regions and within the regions. On the other hand, in the higher-margin business of Commercial Vehicles, the revenue fell really drastically by 14.5% or EUR 60.4 million, of which the biggest shares attributable to EMEA with EUR 61 million. Adjusted for currency effects, the decline is EUR 9.7 million -- sorry, 9.7%. So as a result, commercial vehicles dropped back to around 32% of the overall revenue, bringing us temporarily significantly away from our targeted 40% revenue share. This revenue development Grammer recorded a significant decline in operating EBIT to EUR 15.6 million. Also increased cost as a result of the volatile planned capacity utilization and start-up costs for the new commercial vehicles plant in North America and also translation effects -- currency translation effects contributed to the weakness in profitability. Adjusted in the operating EBIT in this year is only currency effects. In the previous year -- first half year, we had in addition to negative currency effects adjustment of the restructuring expenses of around about EUR 3 million. So looking at the EBIT. So the difference in operating EBIT has been driven especially by the business development, but also these adjustments and looking from the EBIT perspective, there has been sideways development compared to previous year. Now moving on to the development of the employees. Since 2023 -- since third quarter of 2023, we report a number of the employees, including temporary workers, means also leased employees to provide a more accurate picture. So this number has decreased compared to previous year -- previous first half year 2023 by 3.4% or 555 employees in average. In Americas, we were in average 187 employees less or 3.8%, while revenue remained stable. So this reduction is the result of the P2P after profitability program where we have reduced already end of last year the SG&A staff significantly and also have been working on reduction of fluctuation of the blue-collar employees and are seeing here now some positive development. In EMEA, headcount decreased by 8.9%, significantly 737 employees already down and mainly with regards to the blue-collar and as a result of the decline in revenue, while the number of the white-collar increased very slightly as a result of the high order income that we are now working on. In APAC, a strong use of leased workers was required to manage the revenue growth. In addition, all employees were recruited to cope with the strong order income from the previous year. And from an overall increase of 360 employees, 250 were leased workers and 110 were hired directly by Grammer. In CS or central services or group functions, only a few people have changed. This was a transfer from EMEA to CS to drive improvement programs and also due to the increase of regulations that every company in Germany or European Union needs to comply with. So now moving on to the capital expenditure on the next slide. Here, we see a huge increase compared to previous year 67.5% or EUR 57.3 million CapEx planned increase. And this increase includes also EUR 19.4 million of assets for rental and lease agreements that were capitalized in accordance with IFRS 16. While not immediately impacting our operating cash flow, these lease agreements are increasing our net debt so I wanted to point it out here, especially because compared to previous year, it's a big amount. Looking by region, EMEA accounted for EUR 18.3 million of this CapEx, which is nearly 60% plus compared to previous year. And these investments are primarily supporting new product launches, especially in Eastern Europe, where we have been, yes, looking to ramp up the programs from the order income from 2022 and 2023. In Germany, we continue to look the modernization of commercial vehicles plant, saw some investments also here in Haselmühl. In APAC, China, actually, investments have tripled to EUR 27.9 million in the first half year 2024. However, this includes EUR 15.7 million for the leasing and pace extensions of the plants. In Americas, CapEx decreased from EUR 9 million to EUR 5.3 million. Investments were mainly related to the renewal of various equipment in Brazil and Mexico. In Central Services, we continue to invest in our -- continue to develop our new seat generation for commercial vehicles as well as into the 2 big digitalization projects, PLM, product life cycle management and MES, manufacturing execution system, and this led to EUR 5.8 million. Moving on to the development of working capital, free cash flow and net debt. We can state that working capital increased significantly by EUR 62 million -- nearly EUR 62 million compared to the beginning of the year, and this is mainly driven by the trade accounts receivables and other assets and contract assets. Contract assets and also receivables, especially reflecting the ongoing development work on the project acquisition so order income already mentioned several times from previous years. And this increase could not be offset by equity nor liabilities as a result, leading to free cash flow of minus EUR 57.3 million. Accordingly, also the net debt increased from EUR 401 million at the end of last year to EUR 491.6 million in this year. And last but not least, on the group level, equity leverage and gearing. Yes, we have seen already the metrics before. For the leverage and gearing, equity remains stable compared to end of 2023, while the ratio has slightly deteriorated due to increase of the total assets. Equity was affected by the negative net profit, but on the positive other comprehensive income and capital measures in China have compensated for it. Main item in the other comprehensive income was actuarial gains from pension plans amounting for -- to EUR 4.2 million and equity injection into the new Grammer Harbin plant and the takeover of 50% of the shares of our -- the joint venture with FAWSN, that contributed with EUR 3.2 million to the equity. So as a result of the net debt and EBITDA, the leverage has increased to 3.9% and gearing as a ratio of equity and net debt has increased also to 156.3%. So now turning to the regions and starting as always with EMEA which is still the biggest, the largest region, generating 50% of the revenue. But as we have already stated before, has been suffering the biggest drop and therefore, really dropping nearly down to 50% of the revenue. While in the past, it has been significantly above. Here, according also to S&P Global Mobility, automotive production overall fell significantly. So Grammer was affected as any other automotive supplier or even OEM by this downturn and the reason Jens has been explaining already before. As a result, the business in the region was pretty weak with EUR 561 million revenue only, which is 12.3% decrease compared to the previous year. And especially painful is that a big portion of this decrease is also driven by commercial vehicles business. This area has plummeted by 20%, leading also to a significant drop. In addition, high personnel costs had a negative effect on EBIT, which totaled to EUR 15.4 million and a margin of 2.7% only compared to the 5% in the previous year. So we do not see also a quick recovery over the next few weeks or months on the market. So it will take tough action to get back on track. And we have already laid down the groundwork for this. With the top 10 measures program even started already last year, we are accelerating the efforts and are confident that we will be able to cope with this downturn and get not only back but also to more profitable business in EMEA. Turning to APAC. The revenue here increased slightly by 3.3% to EUR 254 million. But as said, it remained below expectations. Adjusted for currency effects, the revenue was significantly higher at 7.8%. Actually, we are seeing here that the weaker RMB leads to a weaker presentation in euro and also a weaker contribution to the overall Grammer Group, results in terms of revenue, but also EBIT. Automotive revenue increased year by 6.7% to EUR 181 million. Adjusted for currency, the revenue growth was even higher by 10.8%, equivalent of EUR 188 million. The overall volumes, however, fell short of our expectations, as already mentioned, especially American and European OEMs have lost volumes to local OEMs, which now account for more than 45% of the automotive revenue at Grammer China. At the same time, commercial vehicles decreased by 4.2% to EUR 73.2 million. Adjusted for currency effects, and this is a slight increase of 1.2%. The FX impact is quite different from the automotive because approximately 20% of the commercial vehicle revenue in APAC is generated in Japan, which accounted for half of the decline in commercial vehicles revenue. As a result of this unfavorable development of product mix in revenue, EBIT declined by EUR 5.1 million to EUR 23.5 million. Also, the already mentioned FX translation effect and the ramp-up of the new plant in Changzhou have contributed to the margin decline. However, we expect a recovery in the second half of the year and a better business development going forward when the economy stabilizes. Now turning to the Americas. The revenue amounted here to EUR 327.1 million and was with that slightly higher than the previous year. Adjusted for currency effects, the revenue growth was 5.2%, an equivalent of EUR 334 million. Automotive has accounted for a slight increase of 3.2% to EUR 263.9 million and commercial vehicles also grew by 1.4% to EUR 63.2 million. Adjusted for currency effects, the automotive area saw slightly higher growth of 3.6%, while commercial vehicles performance was significantly better, 11.7%. A big portion of commercial vehicles revenues generated in Brazil, where we saw quite a good recovery. The EBIT in Americas amounted to minus EUR 9.6 million, and with this representing an improvement in comparison to previous year. However, this improvement is still slower than targeted due to these external headwinds and also ongoing restructuring expenses. In addition, we were affected by already reported 3 big strike at [ Audi ] in Mexico in the first quarter and also restructuring measures, which are not adjusted as nonrecurring costs in EBIT nor operating EBIT included expenses also for the transfer of commercial vehicles production within the U.S., includes SAP implementation as well as ongoing temporary costs for consultants and lawyers. In the second quarter, we saw an improvement in EBIT compared to the first quarter from minus EUR 6.4 million in Q1 to minus EUR 3.2 million in Q2 so that we can see that the measures are getting effective even if slowly than targeted. And nevertheless, as reported already in our Q1 call, we continue to validate further restructuring options and opportunities, including the potential divestment of functional plastic plants, the former TMD business. And with this, I have finished the report over the group and the regions numbers. I would like to hand over back to my colleague, Jens, for the outlook for the full year.

Thank you, Jurate, for the detailed insight in the first half of the year. As we look ahead, so many other companies, we're faced with a continued challenge with headwind with a complex macroeconomic landscape. And this lead us, as you might have seen or you might have been aware that we published -- Grammer published an ad hoc on August 19, '24 (sic) [ August 9, '24 ]to adjust our full year guidance. We now expect the operating EBIT to be at the same level as last year as 2023 when an operating EBIT of EUR 56.8 million was achieved. The group revenue for 2024 as a whole is also expected to be slightly below the previous year's numbers of EUR [Technical Difficulty] million. The main reason for the adjustments of the operating EBIT of the -- Jurate mentioned it, also negative volume effects, the volatile plant capacity utilization based on the lower volumes in some regions, in some countries, high cost for product launches and some of our facilities around the global labor profitability productivity, which is lower as planned. And the initiatives launched in the context of the top 10 measures program, they cannot yet fully compensate all that negative effects. However, we are continuing the program of top 10 also in the second half of the year, which we contribute finally in H1 increase in profitability and Grammer expects positive effects to have favorable impacting, especially the second half of year 2024 and in the upcoming year. Another topic, I'm pleased to inform that one of our top 10 activities has reached a milestone. So Grammer has signed an agreement to acquire the Jifeng Automotive Interior Group last Friday. As a result of the acquisition, the business activities of Jifeng Automotive Interior and its subsidiaries in the Czech Republic and in [Technical Difficulty] by Grammer AG in the form of an asset deal as of December 31, 2024, when the closing is expected. Jiye Automotive -- Jifeng Automotive is [ 100% ] subsidiary of our majority shareholder, Ningbo Jifeng, was founded in 2013. Like Grammer, the Jiye Automotive is active in the headrest and armrest product area in the European automotive market. In the last year in 2023, Jiye generated an annual revenue of roughly EUR 100 million with around 1,000 employees. The acquisition of Jiye will sustainably strengthen Grammer's group growth and profitability and thus support our revenue and profitability targets for the upcoming years. The recent years, Grammer and Jiye already worked together cooperatively in different areas, different projects, different initiatives. This acquisition will now enable us to improve our market position in the headrest and in the armrest segment to approach the customers, our OEM with a uniform brand. We have -- we're going to have a common production planning, going to expand and improve manufacturing footprint in EMEA and to utilize the cost advantages finally for Grammer. And with this information, I'd like to hand over back to Tanja Bücherl.

Thank you, Jens. Thank you, Jurate, for the very detailed information on our business development in the first half year. And as we said at the beginning, we would like to give you now the opportunity to ask directly your questions, and we would like to open the Q&A session right now.

[Operator Instructions] So by now it seems there are no questions so far. [Operator Instructions]. All right. So everything seems to be clear.

That's good. That sounds good. So the preparation has been done very well. And again, thanks to Jurate and Jens. But as always, if afterwards, some questions are arising or if you need any additional information, please feel free to contact me via e-mail or my mobile phone, and we can do that also in a one-on-one afterwards. With that, we then would like to end today's session. We thank everyone for participation and the interest in our company. And we hear us latest for the Q3 report, wishing everyone a good day. Take care. Bye-bye.

Thank you very much. Bye-bye.

Thank you. Bye-bye.