Grammer AG (GMM) Earnings Call Transcript & Summary

So good morning, everyone. My name is Tanja Bucherl, and I would like to welcome you to our annual conference for the financial year 2024. During the next 40 minutes, Jens Ohlenschlager and Jurate Keblyte from our Executive Board will guide you through the presentation, which you can also find on our website. Afterwards, as usual, we will have our Q&A session. So feel free to ask any questions you may have. We will be happy to answer them afterwards. And with that, I would like to hand over to you, Jens. Stage is yours.

Thank you, Tanja. A warm welcome also from my side. My name is Jens Ohlenschlager. I'm the spokesman of the Executive Board. And together with my colleague, Jurate Keblyte, we are going to present today the GRAMMER Group results for the year 2024. We appreciate your interest in GRAMMER and will inform besides financial performance also about strategic initiatives, and we'll give an outlook for 2025. I will start with a brief overview about the most important development and achievements of 2024, which will set the course also for the upcoming years. Last business year was again challenging with a fragile global economy and volatile demand situation and as many other suppliers as well -- it's not working. Can you get on the next page? Thank you. Last business year -- sorry, was, again, a challenging business year with a fragile economy and volatile demand situation and as many other suppliers as well, GRAMMER had to navigate through a difficult business environment. Helpful in strengthening resilience and to focus on core competencies has been the Top 10 program with 10 major initiatives and activities. Some of the initiatives shown on that slide, together with other groundbreaking projects. We successfully sold the business segment TMD, which has been a burden for the last years. The sale was a milestone in portfolio cleanup and will help us to focus more on our core businesses, which is selling interior components and commercial vehicle seats, started the transfer of administrative tasks and functions from high-cost country Germany to the new service center in Serbia. Meanwhile, more than 70 employees have taken over jobs formerly done in the headquarter. And end 2026, we expect a headcount of around about 200 to be employed in Serbia. Further initiative to reduce personnel costs, especially in the GRAMMER headquarter, we continued the reduction of staff headcount by elimination of several organizational levels. Successfully, we have been also in the long-term refinancing when 2 new syndicated loans could be signed, and access to the Chinese financing market was achieved. Last but not least, the integration of Jifeng Europe was successfully finished. Three manufacturing sites in Eastern Europe and 2 lean administrative hubs in Germany will provide synergies in various areas. While all these initiatives and projects will help to support GRAMMER becoming more profitable in the future, it cost -- first of all, costs of around about EUR 36 million for restructuring. And having this said, I'd like to hand over to Jurate to bring us in details to 2024.

Thank you, Jens, and good morning, everyone. Today's conference is a special one for me. This is my last day and my last task at GRAMMER after 5.5 extraordinary years. I'm a little bit nervous or as much nervous as on the first day -- on the first conference, but I'll do my best to guide you through to the numbers well. Before we deep -- dive deep into the numbers, again, a reminder, we did it already in the Q3 conference that our financial performance in 2024 has been extremely impacted by the sale of the TMD that Jens has already mentioned. Our financial reporting has been adjusted accordingly after the transaction. The TMD business has been deconsolidated from the balance sheet and classified as discontinued operations. With this, TMD is no longer included in the single P&L and balance sheet positions that we are presenting today. So P&L and balance sheet represents continued operations only. This classification has applied to both the reporting year and the previous year period. So the figures are now adjusted to exclude the activities. So starting with the overview of the main KPIs. I would like to mention that in the contrary to the expectations at the beginning of 2024, the market did not recover during the year, but continued to worsen throughout the year, impacting our revenue, which drops below the previous year level even when looking at continued operations only. The regions and product areas have been affected in a very different way. We will see this on the following pages. As a result, and despite severe reduction of the headcount, the cost and the operating EBIT dropped by half. EBIT from continued operations is positive, but carries the mentioned restructuring costs, restructuring expenses that have been adjusted in the operating EBIT. In addition to low earnings, the free cash flow has been under the pressure also due to high expenditures and investments needed to prefinance the high and strong order intake generated in 2022 and 2023. So taking a closer look at the revenue split. Overall, the revenue for continued operations fell in 2024 by 6.5% to around about EUR 1.922 billion -- so EUR 1.922 billion. And as we can see here, the commercial vehicles business has been affected heavily. We have been anticipating a normalization of this business after the record years 2022 and 2023, but the decrease has been double of what we have been expecting. And it was not foreseeable at the beginning of the year. So the decline will persist throughout the year, leading to overall drop of 16% down to EUR 652 million. Automotive appears to be pretty stable on the group level with EUR 1.270 billion. But we will see later in the following pages, significant deviations in the regions. And I have to mention already here that the volume changes from global OEMs to local OEMs in China have been influencing also here the mix and the earnings significantly. So summarizing, the operating EBIT has been negatively affected by the drastic revenue drop in commercial vehicles, also delays in capacity adjustments, which have been caused by 2 positive prognosis at the beginning of the year, and also by the rise of the business with local OEMs in China that have been replacing the business of the global OEMs. As a result, we ended up with an operating EBIT of EUR 41.6 million, which is around about 50% below the previous year. And as already mentioned, in the addition to the weakness in revenue, the EBIT has been burdened by exceptional expenses for restructuring measures so EUR 35.7 million restructuring expenses and also EUR 0.8 million for refinancing costs. The currency effects have been this year positive with EUR 3 million and supported here a little bit on the EBIT side. So now turning to the employees. As you might know, we report the number of employees, including temporary workers and as average over the year to provide a more accurate picture. Without temporary workers, we had an average of 12,116 employees at GRAMMER's, which is 5.2% less than in the same period of last year, including temporary staff, the numbers that you see here, the number of the employees overall decreased by 3.3% to nearly 13,990. Going region by region. In Americas, we now employ a number of 3,298 employees, which is the number without the TMD. And this is a slight increase in comparison to the previous year by 2.6% and is in line with the increase of our revenue in South America. In EMEA, we reduced our workforce by 11.2% to 7,268 employees on average over the year. And as already mentioned, the adjustment lagged behind the decline in revenue, we trusted the economic prognosis and the forecast at the beginning of the year. And also the statements from our customers or the beliefs from our customers have started rather slowly with the adjustment of temporary workers and other socially responsible measures. However, at the end of the year, we were at 6,664 employees, which is also our new base for the year 2025. And this is another 604 employees below the average that you see here. In APAC, a strong use of temporary workers again has been required to manage the growth or the change that I've been mentioning towards the business of the local OEMs. So in addition, we have been recruiting also own employees, so from the overall increase of 346 employees, 270 were leased workers and 76 were own employees. And as you can see, the number of employees in central services was on the previous year's level. The reduction from the transfers to the GRAMMER business center in Serbia that Jens has mentioned has started at the end of the year. So this is not yet visible in the average numbers. It will become visible in 2025. Now turning to the capital expenditure as a result of our success in order income in the previous year. An increase to EUR 96.3 million was not avoidable. However, a big part in there, EUR 25.7 million is for assets under the rental and lease agreements and capitalized in accordance with IFRS 16. The pure CapEx for plants and equipment has been at EUR 70.6 million. Regionally, APAC accounted for the first time with the largest share of capital expenditure, overall, 40.7% with EUR 38.7 million. And this has been for the basic plant setup in Changzhou and EUR 16.3 million IFRS 16 capitalized leases for the expansion in Tianjin. Changzhou and Shenyang. In EMEA, the investments for the financial year 2024 amounted to EUR 34.6 million and were mainly related to machinery, mostly injection molding machines and project-specific investments in facilities in Germany, Czech Republic and Poland. In Americas, the investments were at EUR 11.5 million, mainly related to replacement of various equipment in Brazil and Mexico. Several services continued to invest into development of new generation of commercial vehicle seats and the 2 major digitalization projects, product life cycle management and manufacturing execution system, and this amounted to EUR 11.5 million in total. Now let's have a look at the main balance sheet values. The working capital has decreased to EUR 173 million, and this was mainly driven by the sale of the TMD. Forecast -- free cash flow from continued operations amounted to minus EUR 24.5 million and was significantly burdened by these prefinancing requirements from order income. So here, we need to continue our efforts in reducing these cash outs also in discussions with our customers, especially as long as the volumes from the running series remain rather low. The EUR 24.5 million are from continued operations only. And since the overall free cash flow is relevant for the development of the net debt, I don't want to leave unmentioned that the discontinued operations including the proceeds from the sale of the TMD itself have contributed with positive EUR 8.1 million, leading to overall free cash flow of minus EUR 16.4 million. As a result of the negative free cash flow, the net debt increased accordingly, carrying, however, EUR 130 million subordinated shareholder loan from our main shareholder in Ningbo Jifeng, which can be rated as equity instead of debt. And this is why we are here mentioning 2 numbers, EUR 485.5 million as recorded net debt and adjusted by the EUR 130 million subordinated loan amounts to EUR 355.5 million. On the next slide, we have the other side of these adjustments, first of all, in the equity, if we take this EUR 130 million subordinated shareholder loan as equity, we can see an adjusted equity of EUR 396.9 million instead of recorded EUR 266.9 million and leading also to adjusted equity ratio of 23.3%. And in general, in this recorded equity of EUR 266 million, obviously, we have the negative impact from the net profit of minus EUR 92.8 million, which includes also discontinued operations that have been amounting to overall EUR 44.7 million. The hybrid loan that we have received from Ningbo Jifeng of -- that amounts to EUR 45.7 million has been offsetting this negative effect by half. Reported leverage rose to 6 turns as a result of this net debt development and EBITDA decreased from EUR 138 million to EUR 81 million, but adjusted leverage is at 3.1 turns and is considering this reclassification of EUR 130 million as well as the restructuring expenses that have been deducted from the EBITDA according with the definition of the covenants with the banks. The gearing reaches around about 182%, but adjusted for the subordinated loan is below 100% at 89.9%. So with this, I would like now to turn to the development of the regions. And here on the first page, we have EMEA, which has suffered the biggest impact from the current crisis in the automotive industry and also from the overall weak economy, especially in Germany that has led to this severe drop in commercial vehicles. Overall, we have recorded a revenue here of EUR 1.044 billion, which is 13.8% down compared to previous year. The drop is in the higher-margin commercial vehicles business of 23%, particularly challenging, leading also to a dramatic decrease of operating EBIT by nearly 61% to EUR 25.2 million. As already reported, this decline was due not only to the fixed cost coverage from lower revenue, but also our rather cautious reduction of staff at the beginning of the year in the plants caused by the misleading forecast from the market players. In addition to the weak operational business, EBIT has been burdened by the expenses for severance payments, resulting in an EBIT of EUR 9.8 million. Accrued severance payments account for the biggest portion of the satellite projects, but also for the white collar layoff in 2 big German plants. We are confident that with this uncomfortable but unavoidable transformation of the headquarter and that is also affecting the regional functions of EMEA and kicked off already in 2023, we are starting now to see the first results. So the materialization of the savings will become visible in 2025 and is going to build a strong base for GRAMMER for the upcoming years and for the region. And already here, I would like to mention that last week, the union, IG Metall and GRAMMER have reached, another milestone, another big agreement for the locations in Amberg. We have agreed for a restructuring and future tariff agreements, “Sanierungs- und Zukunftstarifvertrag, which will strongly support the competitiveness of GRAMMER in the region and also globally. And Jens will for sure, add a few words to this when talking about the outlook for the upcoming year. Now turning to APAC. The revenue here increased slightly by 0.8% to EUR 536.6 million compared to previous year. And adjusted for the currency effects, it's even a little bit higher, 2.8%, however, still significantly behind our expectations in this region. Automotive revenue increased by 6.8% to EUR 404.6 million. Adjusted for currency effects, this was an equivalent of EUR 111 million, but the overall volumes short fell of our -- fell short of our expectations. And especially the American and the European OEMs have lost volumes to the local OEMs, which now account for more than 50% of our automotive revenue in GRAMMER China. It is, however, worth mentioning that the competition amongst the suppliers to the local OEMs is much stronger, really fierce. And we are, on one hand, seeing the effects in our profitability due to that so it's definitely less profitable than the global OEMs. But on the other hand, we are really proud as we have been able to achieve a significant portion of this business locally. Commercial vehicles business decreased by 14% to EUR 132 million in this region. And as a result of this revenue decline in commercial vehicles area and also the mix described in the automotive industry, we have lost quite some profitability down to EUR 46.5 billion, so 25.6%. Now turning to the last region, the most challenging one, Americas, as you all know, and following the sale of the TMD here, the figures have been adjusted also retrospectively, representing for '23 and '24 continued operations only. So looking at this, we see the revenue increase of -- to EUR 391.7 million. However, this increase is attributable to the methodology of separation in continued and discontinued operations. Originally, the Delphos plant was belonging to TMD and has been transformed throughout the year 2023 into a separate legal entity of GRAMMER in the middle of the year, so half of the year, the CV sales of Delphos has been eliminated. And actually, in reality, the CV business remained stable in the region, pretty stable. We have been recording in the annual year report 2023, EUR 119.9 million in CV, and now we are having EUR 115 million so it's rather stable, and it remains with GRAMMER. This has not been sold. The automotive business recorded a slight increase of 0.2%, representing EUR 276.3 million. Operating EBIT remained negative at EUR 15.8 million minus, still requiring measures to achieve breakeven, which is expected to happen in 2026. The EBIT of minus EUR 19.8 million includes restructuring cost of EUR 4.1 million and a slight positive currency effect of EUR 0.1 million. And now this is bringing us back to Jens for the outlook for the year 2025.

Thanks a lot, Jurate, for the detailed presentation of the numbers for the year 2024. Looking on the new business year, looking on 2025, we, first of all, must determine that the market environment remains challenging and volatile. Geopolitical tension, tariff debate recently and the upcoming risk of inflation may will influence demand for vehicles. However, the conditions are the same for all market participants. In 2025, GRAMMER will continue to progress the initiatives and activities of the Top 10 started already last year. The plan with a revenue of EUR 1.9 billion, while the 3 regions, APAC, EMEA and Americas are expected to develop different. A decline in customer demand in Americas, slight increase in EMEA and APAC. APAC, I'd like to add that substantial growth is seen with domestic vehicle manufacturers, while [indiscernible] or other external customers will stay maximum on last year's level. For the operating EBIT, we expect a positive input from all going lean and cost reduction initiatives already started last year. We plan with an increase in operating to EBIT 60 million. As mentioned, the Top 10 will be continued and will help and support to achieve financial targets. And I'd like to explain some of them with your view on that slide, continue with our negotiation to get cost compensation from all our customers. This is valid for the automotive customers as well as for the commercial vehicle customers. We will focus on efficiency and productivity increase in the regions, EMEA and Americas, and we will more focus this year on the performance improvement in the area of global engineering with a huge potential there. We continue with cost reduction measures in the area of personnel costs with the transfer of further administrative functions from high-cost country to our service center in Serbia. As a milestone, we also mentioned already for the sustainable personnel cost reduction, I'd like to mention the collective agreement for the sites in and near Amberg, which will help driving costs down and make GRAMMER more cost competitive. Over several months, we negotiated with representative of the unions. Beginning March, we settled, a compromise was found, which gives guarantee for the years period on investments on one side and a specific amount of employees on the other side, but also substantial cost cuts already to be executed in 2025. Coming closer to the end of our presentation, a brief view on innovative products invented and produced at GRAMMER. Our seats provide safety and high level of functionality and ergonomics, which helps the driver staying concentrated and working highly efficient. Efforts and focus in 2025 and the upcoming years will be on keeping GRAMMER in its extraordinary excellent position as global market leader in the area of commercial vehicle seats. And last, I'd like to draw your attention to our green initiatives. As verification of GRAMMER's strong commitment and execution for sustainability, we achieved the silver status from EcoVadis sustainability rating. We see this just as an interim step. The ultimate target for sure is to go for the gold medal. We are quite confident that this can be achieved even soon. With that information, with that statement, I'm at the end. I'd like to hand over to Tanja.

Thank you, Jens. So thank you, Jurate. Thank you, Jens, for the presentation of our 2024 financial year. And as mentioned already at the beginning, we would like to open now the Q&A session. [Operator Instructions]. So there is one question from Mr. Klauda. So we will let you in just a few seconds. Okay. So Mr. Klauda?

First of all, thanks for the explanations and totally appreciate that this is a very tough year. Maybe one thing I find it fascinating and interesting, your shift in China from kind of the global OEMs to the Chinese OEMs. And I was just wondering, you mentioned that this goes with a kind of lower profitability, but I was just trying to get a bit of color what it takes to get into the Chinese OEMs, how the shareholder helps and what this ultimately really means in terms of profitability? Because we hear a lot of different stories in the sector as to what it takes to get into a Chinese OEM.

I mean I will start to answer and maybe then Jurate or Tanja can support. Yes, for sure, the main shareholder was helping, but I'd like to underline the strong position of GRAMMER since many years, even before the acquisition done by Ningbo Jifeng. We have meanwhile 11 manufacturing sites. So we look on more than 20 or 30 years of experience in China. We have a quite good reputation. This was the base. This was the ground, also step in a business with a lead with the NIO and all the domestic car manufacturers. But I'd like also to admit that at the end, also Mr. Wang was helping us at local car manufacturers. We've not been yet in so much business, and he built bridges. And at the end, we walked over these bridges. So he was, yes, from this point of view, he was a door opener to have access to a customer portfolio, where we've been not yet that much [ reputated ]. And yes, we are quite thankful for that. But at the end, the work with the domestic car manufacturers is totally different. You have to speed. You have to have a 724 communication conversation, you have been quite flexible because the product changes during the project phase are extraordinarily high. They are day by day on changes in the designs. And here, GRAMMER is really in the area of China quite good. And this good is also communicated in the market. So more domestic car manufacturers became attractive for us.

That's very helpful. And in terms of -- and I think it's great that you get in there. But how you view it on the profitability side? I mean, how much really have you give up? Or is it tougher to get to? I'm not sure you can give a little bit of a color here.

I think we have to admit, and I think this is an open book. I mean, with domestic car manufacturers, you cannot achieve those margins you achieve with premium car manufacturers, with Audi with a BMW or with a Mercedes, with comparable products, let me say like that. But I think that the volume helps. Domestic car manufacturers are quite successful. Since the beginning of last year, it's more difficult. And we will not see those margins, but it's still profitable, and it will help to keep a quite attractive level also in the region of China in the upcoming years.

So if I may add here, we ended this year with 8.7% EBIT margin -- operating EBIT margin in China. And this will be the minimum. So we see for this year rather 9%, and we are going to -- so our target on the long run is to become again double digit, but it will never be again these double-digit numbers that we've seen in the past, but we see a solid 9%, 10% in the future, maybe even 11% business because we are adjusting also our own cost structures to these different profit levels and yes, different speed that Jens has been mentioned -- mentioning.

Now this goes maybe beyond your question. We see this as an advantage. Our close cooperation relation and the lessons learned we have now since more than a year in connection of the domestic car manufacturers. We learned a lot, and we take this as an advantage, bringing this know-how this builds in, how we work, how we continue working with the Audi, with the BMWs and with the Mercedes. So we see this as a value add for us. We can give also to German customers. And honestly, they ask also for the Audi and Mercedes. They ask what we can learn from your deal with the domestic car managers, what they do different, and we will bring this in. This also will help us in generating more business convinced in Americas and in EMEA region. So outside of China, is our car manufacturers.

Thank you very much because I do believe this is really a fantastic learning experience and opportunity as well. I see it exactly the same way. If I may add just one other question related to the commercial vehicle segment. I mean it's known that 2024 was a really tough market overall in commercial vehicles. And I think many customers started destocking because they also misjudged what they probably said at some point in 2023. I was just wondering, do you see in the market that this destocking at your customer end kind of it -- when it will come to an end? Or do you have -- I mean, it's tough, but do you have any kind of judgment when this will swing back or where the various markets stand?

We see the base reached. I mean there are no further decline in the commercial vehicle volume demand, not in the region Americas, not in EMEA, not in Asia Pacific, but we are on a quite low level. And when I speak about a low level, we speak here about 15%, 20% volume drop compared to the year 2023, which was 2024, and that level will be continued also in 2025. The long-term forecast, what we see already on customer demand and in these discussions with commercial vehicle customers, there will be not that much change in this year. But let's wait all that infrastructure stimulation program set up also now by the German government, China is doing something. We are quite confident that this will boost in 2026, the demand for commercial vehicle agriculture, construction equipment, heavy trucks because these are equipment, these are vehicles required, yes, in the area of construction work when infrastructure initiatives are stimulated. But for this year -- but we are prepared there is, yes, not light at the end of the tunnel. It will remain on a very low level, on a challenging level.

So we can also say that the first 2 months, what we have seen was really rather stable compared to -- it is on the level of...

Another level of our expectations, but our expectations continued what Q4 we saw last year. And this is what I mentioned, 15%, 20% volume drop compared to a successful 2023. We should not forget to underline that.

So again, the question to the audience. If you have a question to the financial year 2024 to the outlook, please raise your virtual hand or put your question directly into the Teams chat.

We are looking at our back office that is just in front of us. You don't see? Any further questions? Then, Tanja, I will use just 1 minute, maybe just to say thank you. I already mentioned that it is my last conference with GRAMMER after these extraordinary 5.5 years. I would like to thank you also for your interest, for your trust, your support. And I would like to wish also all of the audience, what I have done also to GRAMMER employees yesterday in my farewell. All the best. And I hope that this series of economic crisis are going to come to an end, even if yet we cannot see a stabilization, but we have learned a lot how to cope with those ever-changing environments, and I wish everyone a lot of strengths and a little bit of luck for the future. Thank you so much.

So then also from our side, thank you for your participation and your interest in our annual conference. As always, if you have any questions after the meeting, please feel free to reach out directly to me. And having said that, I would like to wish you already now a happy weekend. Take care and see you latest with the Q1 figures. Bye-bye.

Goodbye.

Goodbye.