Grammer AG (GMM) Earnings Call Transcript & Summary

Welcome to our today's conference call. So I would also like to welcome Jurate Keblyte and Jens Ohlenschlager. They are sitting together with me here in the room Ursensollen. In the next roughly 30 minutes, you will get an overview about the first 9 months of this year in that very difficult global environment that we are currently in. And afterwards, as usual, there will be a short Q&A session, where you are very much welcome to ask us any questions you might have. And with that, I would like to hand over to Jens.

Thank you very much, Tanja, and a warm welcome to all of you joining us today for the presentation of GRAMMER Group's financial results. We appreciate your interest in GRAMMER and look forward to provide an overview of our business performance and the key milestones in the first 3 quarters of 2024. Let me start with a brief review, Q3 2024, a rather exceptional but also decisive quarter in this year. Toward the end of 2023, in the light of an emerging slowdown in our business environment, GRAMMER has kicked off a Top10 program designed to boost profitability across the organization. The economic conditions worsened throughout the year. This program has proven crucial to safeguard the financials of GRAMMER in the current crisis to come out stronger from it. As a part of these efforts, we are delighted to report several milestones that have been achieved within Q3. We successfully completed the sale of the TMD Group in September 2024. That marks a significant step forward in streamlining our operations and refocusing on core business and products. But the sale is just a single milestone, and the economic situation is forcing us to do better in all regions, stay focused on the Top10 measures. We also continued progressing on other critical transformation initiatives. The EMEA region, for example, we further advanced our cost reduction efforts and achieved an important milestone in the satellite project, which is standing for headcount reduction in the headquarter and a substantial transfer of functions from the headquarter to our new service center in Serbia. With Jifeng Automotive Interior, which is a subsidiary, our majority shareholder, Ningbo Jifeng, an agreement has been reached for a merge of activities. Like GRAMMER, JAI is active in the European automotive market, focusing on headrest and armrest production. The integration of JAI will sustainably strengthen GRAMMER's group growth and profitability, supporting our revenue and profitability targets for the coming years. While these strategic initiatives are essential to our long-term growth, they have also resulted in significant burdens in the current financial year, including restructuring expenses of EUR 31.1 million and increased demands on our existing workforce. We recognized these challenges and remain committed to manage them carefully as we move through this transformational phase. Regarding the macroeconomic conditions, which have continued to worsen in the first 9 months of the year and impacting our revenue, resulting now below last year's levels. The decline was particularly evident in the Commercial Vehicles area, while the Automotive area remained relatively stable, though with regional differences. In APAC, the revenue decline was mainly driven by the weaker Commercial Vehicle business and negative translation effects, whereas in EMEA, both product areas were affected by the downturn. As a result of the revenue decline and ongoing operational challenges, EBIT also fell below the previous level. Additionally, our free cash flow, reflecting both continued and discontinued operations, was under pressure due to high expenditures and investments needed to prefinance the strong order intake generated in 2022 and 2023. My colleague on the Executive Board, Jurate Keblyte, will now give you a deeper insight into our figures of Q3.

Thank you, Jens, and good morning, everyone, also from my side. Before we deep -- dive deeper into the financial performance of the 9 first months, I'd like to point out that following the TMD sales transaction, our financial reporting has significantly been adjusted. The TMD business has been classified as discontinued operations and is now excluded from the single P&L and balance sheet positions representing the P&L and balance sheet for continued operations only. Means the figures that we are going to see going forward are for continuing operations only. This classification has been applied to both the reporting period and the period of the prior year. It means all figures are now represented without the TMD Group that are separately to be found in our P&L as results from discontinued operations. So starting with the overview about the revenue, EBIT and operating EBIT, is -- as already seen, the revenues for the first 9 months fell by 4% on a year-to-year comparison to EUR 1.47 billion. And looking at the 2 product areas separately, we were -- there was a significant decline in the high-margin Commercial Vehicles area, particularly in EMEA, where the revenue fell by 22%. As a result, also the Commercial Vehicles share of total sales fell by -- to around 34%, temporarily moving us far away from our target of 40%. By contrast, the performance in the Automotive area was stable on the group level, but we will see later the differences between the regions in the upcoming pages when we look into single regions. Operating EBIT was obviously negatively affected by this drastic revenue drop, especially in Commercial Vehicles, but also by negative mix in China and rather slow adjustment of the workforce in production in EMEA. Since we -- originally, we are trusting the economic recovery from -- starting from autumn as all of the prognosis have been suggesting this and also our customers in their forecasts have been claiming for improvement to come. So this resulted in an overall operating EBIT of EUR 38 million, which is 27.5% below the previous year. And in addition to the weakness in the revenue, the EBIT was burdened by the exceptional expenses already mentioned by Jens. So EUR 31 million restructuring expenses for severance payments, EUR 7 million from the sale of the TMD, and also refinancing costs are already included with EUR 0.7 million. Also, currency effects were negative at EUR 1.6 million. So as a result, the EBIT dropped to minus EUR 2.4 million, which, however, accounts already for biggest portion of our anticipated restructuring expenses, allowing us for significant savings going forward. Looking at the employee numbers. Since the third quarter -- I would like to remind that since the third quarter of 2023, we report these numbers including the temporary workers to provide a more accurate and more full picture. So this number has decreased compared to the first 9 months of 2024 by 2.6% or 382 employees, with a very different pictures region by region. In AMERICAS, we now employ a total number of 3,364 people. This is without TMD, and this is an increase of 2.8% compared to previous year, mainly for the staff in South America, along also with the higher revenue as we are going to see in a minute. In EMEA, we have achieved a reduction of the workforce by 10.2% to 7,426 employees, which is already more than halfway to our targeted numbers -- targeted reduction for this year. As already mentioned, the adjustment has been lagging behind the drop of the revenue. Yes, without trusting the economic prognosis and the forecast from the customers and started rather slowly, adjusting the temporary workers only and using more socially acceptable measures at the beginning. In APAC, the overall employee number has increased significantly following also the increase of the revenue or anticipating also a further increase of the revenue, and we are using strongly leased workers to cope with this, so to keep also the flexibility. So the overall increase of 370 employees can be divided into 272 employees being leased and 98 being our own employee increase. And in the Central Services, you also see a slight increase of 3 employees, and this has been mainly transfers from EMEA to the central functions, where we are, yes, using these employees for the improvement programs and also due to the increase of regulations. Now turning to the capital expenditure. As a result of our success of order income in previous year, we see an increase in capital expenditure by 39.4% to overall EUR 76.1 million. And even looking at this economical situation and trying to reduce our capital expenditures as much as possible, this was not avoidable. So -- however, this includes also EUR 22.4 million for assets under rental and lease agreements, capitalized in accordance with IFRS 16. So looking region by region. In APAC, we accounted the largest share of the capital expenditure overall. Nearly 44% of the overall CapEx are attributable to APAC, and this amounts to EUR 33 million, and -- basically for the basic plant setup in Changzhou and EUR 16 million for IFRS 16 capitalized expenses -- lease expenses in Tianjin, where we have been moving into the new plant, and Changzhou and Shenyang. In EMEA, the investment in the first 3 quarters amounted to EUR 27 million, and this is mainly related to machinery, injection molding machines mainly and project-specific investments in facilities in Germany, Czech Republic and Poland. In AMERICAS, the investments amounted to EUR 7.2 million and mainly related to the replacement of various equipment in Brazil and Mexico. Central Services invested EUR 8.5 million in the new generation of seats for Commercial Vehicles and 2 major digitalization projects that have continued. This is PLM, product life cycle management, and MES, manufacturing execution systems. Turning to the working capital, free cash flow and net debt. We see an increase of -- significant increase of working capital to EUR 264 million compared to previous year of EUR 196 million. And this is mainly attributable to the reduction of current trade payables, which decreased by EUR 81 million. And this is also the main portion that has contributed to the reduction of the free cash flow. For the free cash flow, I need to point out that this is still the number that includes also discontinued operations. We will report later in the year also continued and discontinued operations separately. And yes, the big portion of the deterioration is driven by the working capital. However, also the mentioned capital expenditure as well as the weak operational EBITDA has been a big part of this negative development. The net debt increased accordingly. It should, however, be noted that reported net debt includes EUR 100 million subordinated shareholder loan from our main shareholder, Ningbo Jifeng, and can be rated rather as equity instead of debt. And therefore, we are also showing the adjusted number that is amounting to EUR 441 million. And on the next page, the other side of this EUR 100 million subordinated loan is seen also in the adjusted equity. So equity, as reported, has dropped significantly from EUR 313 million to EUR 228 million -- EUR 222 million obviously, due to the net loss from continued and discontinued operations, and that amount to nearly EUR 85 million. But at the other hand, as I was mentioning, the EUR 100 million subordinated loan, if we account for it as equity, we see that the -- yes, this has not really deteriorated, and also the equity ratio can be then seen as at still above 20%. Accordingly, the same adjustment has been done also for the calculation of gearing, or you can see that the gearing not adjusted is amounting to 247%. Adjusted is 139%. And looking at the leverage, 5.9 is including this EUR 100 million adjustment. But if we also include the exceptionals that have been already shown on the previous page and amount to EUR 40.4 million in total, so EUR 31 million being the severance payments, EUR 7 million being the TMD sale, the adjusted leverage is at 3.4 turns. Now let's turn to the view of the single regions, and starting with EMEA, which has suffered the biggest impact from the current economic crisis. We now see that the overall revenue was down to EUR 810.8 million, which is 11.9% previously -- below previous year. The revenue drop is, however, much higher in Commercial Vehicles business. This has been particularly challenging. We have been anticipating a reduction of 10% when we have been budgeting the numbers, but the current drop represents 22%, leading to a drastic also decrease in operating EBIT by nearly 62%, down to EUR 18.9 million. As already reported, not only the fixed cost coverage due to lower revenue has caused this overproportionate decrease, but also our rather caution -- cautious reduction of our own staff in the plants caused by misleading prognosis from all market players. In addition to the weak operational performance, the overall EBIT is burdened by expenses for severance payments amounting to overall EUR 16.4 million that are attributable to EMEA region and leading to an overall EBIT of EUR 2.2 million only. As already reported on the page, representing the employee development, we have meanwhile laid off more than 800 employees in EMEA, which makes us sad on one hand but is unavoidable on the other hand. We have done utmost to achieve these reductions of the personnel with socially acceptable measures. The accrued severance payments account for the biggest portion for the project satellite but also for white collar layoffs in 2 big German plants. They are based on a big portion on an assumption of the acceptance of our voluntary program that has been started in September and is ending this week. We are confident that this uncomfortable but unavoidable transformation of the headquarter, which has been started already in 2023 and is now, yes, starting to materialize as well as the decisive adjustment now of the capacities in the plants is setting a strong base for 2025 and the following years for the GRAMMER's EMEA business. Looking at the APAC, we see an increase of revenue by 3.2% to EUR 394.7 million. And adjusted for currency effects, this revenue growth was significantly higher at 6.4%. However, this is still significantly behind original expectations in this region. Automotive revenue has increased by 8.4% to EUR 292 million. Adjusted for currency effects, it's even higher at EUR 11.4 million (sic) [ 11.4% ], or it would represent an equivalent of EUR 300 million. However, the overall volumes fell short of our expectations, especially American and European OEMs have lost their volumes to local OEMs, which now accounts in our books for more than 50% of the Automotive revenue at GRAMMER China. It is, however, worth mentioning that the competition amongst the suppliers for the local OEMs is much more fierce, and the margins are slimmer, but we are very proud having been capable to achieve the significant portion of this business. At the same time, Commercial Vehicles revenue has decreased by 9.1% to EUR 102.6 million, and 1/3 of this drop is attributable to Japan. Adjusted for currency effect, the revenue went down by 5.3%. So we have also here a negative impact from FX. As a result of this unfavorable development in product mix and revenue, the EBIT declined by 24% to EUR 32.6 million. And also here, already mentioned FX translation effects and the ramp-up of the new plant in Changzhou have been contributing to the decline. In AMERICAS, following the TMD sales, the figures are now adjusted retrospectively to represent continuous operations only. And this is a little bit surprising because now you see revenue here of EUR 305 million when we have been reporting even higher revenue for AMERICAS, yes, for the half year. So this is really the adjustment of the discontinued operations. Looking so at continued operations, we saw a significant increase in revenue from EUR 275 million to EUR 305 million, so 15 -- so 11.1%. Adjusted for currency effects is even 15.8%. Automotive has accounted for an increase of 4.7% to EUR 214 million and Commercial Vehicles by tremendous 29.6% to EUR 91 million. A big portion of the CV revenue is generated in Brazil where we -- where the recovery has finally materialized as expected. We have been waiting for this for a while, and it took longer, but now the Brazil business is running really nicely. Operating EBIT has improved from minus EUR 20.2 million to minus EUR 3.2 million. So still requiring some further measures to come to breakeven. The EBIT of minus EUR 9.2 million is carrying the TMD deconsolidation effects that are attributable to AMERICAS. So the EUR 7 million that I mentioned before, EUR 4.9 million are attributable to AMERICAS. The other have been accounted in Central Services. And also negative currency effects of EUR 1 million are included in the EBIT. So looking at these numbers, we are confident that the completion of the Omega project that is still running as well as further streamlining of the regional structures following the TMD sale as well as further operational improvements will bring us next year very close to the breakeven. And with this, I would close the view on the Q3 numbers and would hand over back to Jens for the overall outlook of the 2024.

Thank you, Jurate, for the detailed insights into the first 9 months of the year. If we look at the final quarter, GRAMMER Group is still facing continued challenges in the industry and a complex macroeconomic landscape. And in light of the business performance to date and the successful sale of the TMD Group, GRAMMER is maintaining its full year operating EBIT guidance of around EUR 57 million as adjusted in August. The initially projected revenue of EUR 2.3 billion will not be achieved due to the significantly weaker demand and the deconsolidation of the TMD. For the full year 2024, revenue of around EUR 2 billion is now expected. And as usual, we report, at the end of our earnings presentation, some milestones and achievements of our strategic initiatives. So in Q3, we announced the start of the new GRAMMER production site in Tianjin, where we produce seats for construction and agricultural machinery. It has been an investment of around RMB 120 million. We are happy about the development of the site since the start of the full production at the end of August. Not minor important, we proudly received the silver medal from EcoVadis sustainability rating with a significant increase in our score. The achievement demonstrates the strong commitment to sustainability in all departments. This year's highlight was major progress in the area of sustainable procurement. This is just an interim step. We will continue to improve in all relevant areas to reach the gold level very soon. And here, I'd like to hand over back to Tanja.

Thank you, Jens. Thanks, Jurate, for the detailed information of the first 9 months. So now we also want to give you a direct opportunity to ask your questions. [Operator Instructions] And we have one question from Mr. Tonn. So Mr. Tonn, you should now be able to unmute yourself. Mr. Tonn, we cannot hear you. The other possibility would be if you write the question into the chat, Mr. Tonn, since we still cannot hear you. So here, we have the question regarding the JAI business. What do you expect in terms of revenue contribution and from when?

We expect up from 2025, a contribution on revenue of approximately EUR 80 million to EUR 85 million. Looking on the book business on the JAI side, this will increase to EUR 100 million in the year of '26, '27.

Thank you, Jens. [Operator Instructions]

But probably it's better to write it directly in the chat because we seem to have here a technical issue with unmuting. But in order to see if there's a question, if somebody is writing, we probably do not see, but if you have a question, please raise your hand.

So it seems that the detailed presentation has already given the answers to many questions. But again, as always, if there are any questions that you will get afterwards, please feel free to contact us directly. And with that, I would like to end today's call and wish you all a good rest of the day. Take care. Bye-bye.

Thank you. Bye-bye.