JOST Werke SE (JST) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining JOST Werke Q2 2021 Conference Call. [Operator Instructions] Our speakers today are Joachim Dürr, CEO of JOST Werke AG; and Christian Terlinde, CFO. I would now like to turn the conference over to Joachim Dürr. Please go ahead.

Thank you, Emma, and a very good morning from Neu-Isenburg, and a warm welcome to our Q2 conference call. JOST has closed a very strong second quarter, supported by storing markets and also slightly impacted already by material and freight cost impact. The highlights were that we increased our sales by 56%, and we achieved a new sales record of EUR 273 million in 1 quarter. Our adjusted EBIT grew to EUR 30 million and the adjusted EBIT margin rose to 11%. Our high operational flexibility and the better capacity utilization limited the impact from domestic chain constraints and rising material prices that we've seen in Q2. The strong fundamentals for growth in the transport and agricultural markets continue despite the ongoing pandemic and that was what we could benefit from. Therefore, we confirm our postsale outlook for 2021. Looking at the market development. As I said, very strong market in absolute terms in all regions. If you look at the year-over-year comparison, it looks even stronger, but partially, that's due to the very weak markets that we've had in Q2 of 2020 due to the pandemic impact. So let's look at Europe. In Europe, the truck market were up 75%. It has been a very strong market, and the 75% is a calculated number because last year, as you all remember, we had with the truck OEMs somewhere between 4- and 6-week closures in the second quarter. Trailer markets, also up 55%, very strong markets overall. And the tractor market, even though it did not go down a lot last year, we only had a slight decline in Q2 last year was up 27%. So we have a very robust market for tractors. And JOST could benefit from those markets with a 52% reported increase in sales. In North America, very similar situation to Europe, even more pronounced also because the downturn in 2020 was more pronounced. So for truck, 148% increase versus last year. For trailer, 57% for trader production. And for Ag, the positive surprise here also 22%, very strong demand for tractors favored by rising surprises. In North America, we increased our sales by 78%. Asia Pacific and Africa needs a little bit of explanation in China, which is the dominating part of that market. We have seen truck production go down already in Q2. It has not impacted host that much, and that's because we have articulated -- we are supplying into the articulate tractor segment, which has not been impacted by the overall decline. And as you all know, China with the introduction of the China 6 emission regulations is expecting, and we've seen some of that already in Q2, lower production numbers for the remainder of 2021. On the Trailer side, it was stronger in all markets including China. So that's where the Prognosis Institutes tell us, 15%. As I said, U.S. has not been impacted as much in the Q2 by the decline in the truck market in China. All other markets have performed quite well. So overall, in the region, we can report 46% increase in sales. One additional remark. If you look at the actual demand from the end customers, that continues very strong and maybe even a bit stronger than what we see in the market because right now, the limiting factor is the production capacity at our customers and their supply chain. And the demand from the end customers would actually even be a bit higher, and that's why we see orders already being written for the 2022 time frame. But let's come to more details and Christian will explain to you more -- in more detail the financial numbers.

Thank you very much, Joachim, and also hello and a warm welcome from my side. Ladies and gentlemen, let's start with the region Europe. Europe in Q2, as Joachim already mentioned, boosted very, very strong sales with 52% higher than last year. However, we need to be aware of the fact that during Q2 in 2020, most of the truck OEM plants were closed for a significant period of time, and that's why you see a much, much stronger increase in Q2 than you, for instance, see for the full half year 2021, where our organic growth is about 30%, and this is much more in line with our expectations as well. So overall, a good development on the sales side, the FX development was minimal in the European region. And overall, the transport markets developed somewhat stronger than the agricultural market, but that is not a big surprise. As you are well aware of the transport business is a much more cyclical business than the Ag markets or Ag business. And therefore, we've seen stronger growth rates on the transport side. But in both business lines, the order intake continues to be very strong. If we look at the profitability and in that regard, I'm speaking about adjusted EBIT, you see that the adjusted EBIT grew even faster than the sales growth. Again, I do not want to speak too much about Q2 alone. If we look at H1, I think this is more telling where you still see a significant 3-digit EBIT growth compared to prior year with 129%, and now we are seeing in Europe, an overall year-to-date EBIT margin of 9.8%. And please bear in mind that Europe bears the bulk of the headquarter fixed cost portion. And this is something that we've been saying year-over-year and especially last year, when the sales went down, that our SG&A costs are rather fixed and already very, very lean and slim. And therefore, now we are seeing the positive effect that we have not basically 0 growth in SG&A costs, while our sales and our gross margins are increasing, and this is now obvious in the adjusted EBIT that you're looking at. In general, we already were facing some challenges by material costs and also logistics costs. especially logistics supply chain from Asia to Europe, but also from Asia to North America, which I will come to later. Our posing challenges. And I'm not only speaking about material stuck on the vessel in the Suez Canal, but I'm also in general speaking about the overall very, very significant rise in logistics freight rates. So overall, as I mentioned, we have now achieved an adjusted EBIT margin in Europe of 9.8%, and this converts to EUR 30.9 million in adjusted EBIT. Let's move on to North America. In North America, as Joachim said, the rebound of the North American market was even more pronounced where we saw now very good development on the truck, but also on the trailer side, overall, JOST was able to show in comparison from 2020, an improvement in the quarter 2 of 94% organically. If you compare that to the reported growth of 78%, you see there was a very, very significant foreign exchange rate impact. The U.S. dollar -- the value of the U.S. dollar deteriorated on average from $1.10 for a euro in 2020 to $1.21 in 2021. So this impact is significant. So if we were looking at the numbers in USD, you would see a 94% increase in Q2. And even for H1, you would see 56%. So if we look again at the profitability of the company in North America, you see a significant boost in profitability of 91% for the half year and 200% even for Q2 to Q2. And again, what we saw in Europe in Q2 was very similar to what we saw in North America in Q2, where the big truck OEMs were shutting down their production plans due to the impact of COVID. And therefore, I would once again say that looking at H1 is more telling than looking at just Q2. But in both cases, we're very satisfied to see the margin improvements to 8.3% in H1, which is much, much better than where we were a year ago. And even in Q2, it's much better going to 9.1%. So overall, also North American business positively impacted by the growth in business, negatively impacted by material price increases as well as freight cost increases. Let's move on to Asia Pacific, Africa. Our region in the East where you see basically a sales growth in that region for the fifth consecutive quarter. And this is very, very positive because you need to be aware of the fact that in Q2 last year, China was already recovering or had recovered from the impact of COVID-19, where China was closed basically in February and March. But since end of March 2020, we saw very high increases. But even now, after EUR 34 million in Q4 -- Q2 2020, we -- I just went back and looked at the EUR 47 million that we reported in Q1. And now given -- even in a year where the increases would not be expected to be that strong after already good year 2020, we have been able to post EUR 50 million in sales in Q2 2020. So very, very satisfying results. FX-tailwinds play a minor role with 3.8%. So organically, we're at 42% growth. Profitability-wise, positive development. Both in H1 and in Q2, we have achieved 17.6% EBIT margin, a margin that I would say has been outstanding and unmatched, so 55% growth in Q2, 186% in H1. And you can really say that basically, with one exception, and that is India, all our production capacity were heavily utilized, especially, of course, in Wuhan, in our Chinese production plant, but also in South Africa and in Australia. And such a high utilization obviously leads to much higher margins. On the other hand, we've benefited still from a very high proportion of heavy-duty couplings in China, which are now essentially at some point going away with demand slightly becoming lower. But overall, a very favorable product mix. And the only negative is really that -- is the fact that India was unfortunately hit with another wave of COVID, as you've probably seen on the news, which caused also our plans and those of our customers to stop for a certain period of time in Q2. But the good news is that we're back on track. The plant -- our plant as well as our customer plants are back in production in Q3. So this has been stopped. If we look at JOST overall, you see here how the profitability and the sales development has been. We've achieved a very strong growth in all regions, both in transport and agriculture. And you can see here also the breakdown by agriculture and transport. So overall, in H1, you see 57% growth in Ag and 41% growth in transport. This is also very comparable to the Q2 numbers. Once again, we had some FX-headwinds. But overall, very positive sales development now for the group. Adjusted EBIT development much better than that. We've been able to post for the full -- for the half year 2021, now 11.2% EBIT margin compared to the 11% in -- or compared to the 7% in H1 2020. That's a 4.2 percentage point increase or 131% higher EBIT now at close to EUR 60 million for H1. So this once again proves how flexible our business model and our operations are, we are now benefiting from this flexibility as we were benefiting from flexibility admittedly also in 2020. But of course, there, the impact of fixed cost was much stronger than it is now in 2021. I would say, in summary, a very positive result, both for Q2, but also for H1, especially considering the fact that we have to deal already with significant material and freight cost increases. And this is -- for us, we believe it was a good quarter. Now if we look at the development of net income and adjusted earnings per share, you can here see that, first of all, our earnings per share grew from EUR 1.04 to EUR 2.69. That's more than doubling the amount. And if we look at this bar here, this adjusted earnings bar, you see that we are in -- we start with net income of EUR 24 million, the usual taxes and the finance result will bring us to an EBIT of EUR 30 -- to a reported EBIT of EUR 30 million. And now I would like to speak a little bit about the adjustments that you're seeing here. The EUR 40 million depreciation and amortization of purchase price allocation-related items is exactly the same amount as it was in 2020. So there is no change. And then you see a positive EBIT adjustment of EUR 13 million, which comes from the disposal of our company, JOST U.K. We've decided during Q2 to sell the hydraulic cylinder production business, which was sold under the name of Edbro to a private equity fund. They've acquired the business, they have acquired the plans and will carry on with that business going forward. It was a noncore business for JOST, and we have now adjusted for EUR 13 million loss of disposal. However, EUR 11 million of that EUR 13 million were noncash related items. We did receive EUR 8 million in cash for the company. That we have other exceptionals of EUR 2 million, which is in line with prior years. So nothing unusual. And then you can see that we are now posting an adjusted EBIT of close to EUR 60 million, as I mentioned, and this is a record high number for H1 for JOST. And we subtract the rather low EUR 2 million in interest costs, which also are lower than in the prior year, but also lower than we expected because of better leverage rate at the end of the year. And then our pro forma and once again, let me say, pro forma tax rate of 30% leads to EUR 70 million of pro forma taxes, bringing down our adjusted net income to EUR 40 million. And the EUR 40 million of adjusted net income compares to EUR 16 million in H1 2020, but also for EUR 40 million in H1 '29. So you can see a significant boost over the past 2 years in adjusted net income, which essentially will also benefit our shareholders. Now let me look at a few more balance sheet-related items. Return on capital employed increased to 16.8% compared to 12.1% for the year of 2020. Also that is a very positive development. Our equity ratio is stable around 30% despite a dividend payment that was happening in Q2 of roughly EUR 15 million. As you know, we have decided to pay out a dividend this year after a canceled dividend with the support of all our shareholders in 2020. We've paid out over 70% of last year's results with EUR 15 million. And that still kept our equity ratio stable at 30%. Our leverage is going down further despite the dividend payment. We've now -- we're now seeing a leverage rate of 1.63%. So fully in line with our full year expectation to be somewhere between 1.5x and 2x -- not 1x -- yes, 1.5x and 2x. So we are obviously targeting to bring leverage down further. Let's see if we're successful to potentially bring it down to below 1.5x. Cash flow related items and working capital development that is a cash conversion rate now at 90.1% compared to 89.4% in Q1. Unfortunately, our cash -- free cash flow was close to 0. That is entirely driven by the increase in working capital. So we had significant increases in inventories, 14%, straight receivables were up by 41% and trade payables were only up by 7%. So basically, despite very good cash inflows from higher operations, unfortunately, we had to prefinance all that growth and therefore, not unexpectedly we now have a rather stable or not -- we now have a flat development in free cash flow. So basically, no change despite the very positive development on the top line. But overall, I guess, this is the expected development, and we are expecting to return to very positive cash flows going forward in the second half of the year. So there is nothing to be concerned about, even if our trade receivables are up by 41%, I'm very happy to assure you that the overdue receivables are very low, continuously low and our customers are paying us. We're not seeing any bankruptcies. So it's a good development on the liabilities or payables. As you're also aware, we have some rather smaller suppliers. So there is no chance really to extend payment terms, and that's why we are only increasing trade payables by 7%. CapEx with 1.3% of sales is currently rather low. We keep our rate of 2.5% of sales for the full year. So It just has something to do with timing of the different outflows, but overall, the EUR 3.6 million is in line with what we were expecting also for the second quarter and it's comparable to Q1, where we had EUR 3.9 million in capital expenditures. So overall, our net working capital is now at 20.3%. So there is no risk of not achieving our goal to be below 20% at the end of the year. But we will continue to try to bring it down even further. And with this, I would like to hand it over back to Joachim for the outlook for '21 and some closing remarks.

Thank you, Christian. Yes, how will the market continue for the remainder of the financial year 2021. We expect continued strong markets, especially in Europe and in North America. In Europe, the demand for heavy-duty trucks will continue strongly for the remainder of the year, and that's what we see in all the callouts that we get from our customers. Also for trailers, we see that our customers are booked out for the remainder of the year. And for agricultural tractors, that demand should continue to be on a very high level. Same is true for North America, and all of that gives the picture of a very solid market. In absolute terms, almost a record market. In relative terms, if you compare it to the previous year, obviously, it looks even better due to the impact of the low production of last year. But in North America, also very strong for the remainder of the year for trucks and trailers and also for agricultural tractors. Asia, I've already talked about the China impact with the China 6 emission regulation that led to a polar head effect in production. So there was a lot of vehicles produced into stock on the truck side in China, and that stock now needs to be sold, and therefore, the production rate for the remainder of the year will be lower than last year. All other markets in that region, we expect to be as strong as we've seen them in the first half year of this year. The same is true for trailer. Also there, we see the strong markets continue for the remainder of the year. In summary, we could say that the end customer demand is even higher than what we see in the markets. The limitation is right now the capability of our customers of the truck and trailer OEMs in the transport segment to produce with all the limitations that they have in supply shortages, everybody has heard about the semiconductors that are limited with the logistics capabilities that are at a limit in the harbors with COVID cases in Chinese harbors that restricts the material flow. And obviously, also there, we see impacts of material and freight costs that may lead at one point to cancellations when the product gets too expensive. So right now, we can say an extremely strong end customer demand. So the fundamentals are very strong, which leads to strong production rates at our truck and trailer OEMs, also very positive at the tractor OEMs. That's for the market. And based on the very strong first half year and a very strong end customer demand, I'm very happy to confirm the positive outlook for 2021. Our sales, we expect to grow in a low double-digit percent year-over-year and a low double-digit number can start with 1, but could also start with the 2 in that regard. We expect our EBIT to outgrow our sales despite the material and freight cost impacts that we are already noticing that we expect to be also there for the remainder of the year. And a consequence of that, our adjusted EBIT margin will grow and will be higher than in previous years. Our planned CapEx continues to be at around 2.5% of sales. So we will continue our CapEx strategy as in the previous years. So total summary and takeaways. We had a very strong Q1 in 2021 with all regions and businesses contributing to the growth that we have seen. Especially in the transport market, we saw a rebound and the boost to our overall performance. The logistic disruptions and the material price increases have already affected Q2 slightly, but our operational flexibility allows us to limit that negative effect. And the boost in profitability mainly came from the higher utilization rates that we have compared to the previous years. So strong markets, attractive products, flexibility in operations. Therefore, JOST looks very positively to the remaining fiscal financial fiscal year and is well positioned to achieve all the financial targets that we have established for 2021. I also would like to give you a safe debate and the warm invitation to our Capital Market Day that is planned for November 23 at 1:30. And this will be a virtual meeting. There may actually be 2 meetings, virtual meetings, and we will give you insight into our growth plans for our agriculture and our transport business, and that will also include some deep dive in some of our product development projects. So we're looking forward to see or hear you all there in that virtual meeting. That concludes our presentation, and we're looking forward to your questions. Thank you very much.

[Operator Instructions] The first question comes from the line of Nicolai Kempf with Deutsche Bank.

I think my first one would be on the guidance. which is still really quite abroad. Given that you achieved a margin of 11% in the first half, is it fair to assume that you could achieve similar profitability level in the second half? And what could be upcoming headwinds if you see any? And the second one is on the raw mats, which is surely a burden currently on your profits. Can you give some color how you can pass them on to your customers? And how long does it take probably?

Okay, Nicolai. Thank you for your question. So I would start with the question to the guidance, and then Joachim will cover the raw material prices. So you're absolutely right. We did achieve the 11% margin, and that is very positive development. However, the second half of the year is traditionally a much weaker year -- weaker half of the year for us. So right now, we are in the summer shutdowns. So the summer shutdowns will end sometime during this month in -- especially in Europe, but also in North America. And also then we -- at the end of the year, obviously, we have the holiday season also with weaker sales. So overall, we are seeing a -- or as as always, we're expecting a lower H2 as in comparison to H1. The -- and you will -- and we are cautiously watching what will happen like we did last year, what will happen on the truck markets where we have more pronounced ups and downs. And therefore, this is what currently we are very comfortable with the guidance, but it's -- we're watching everything. And as we did in the last year, there -- we might adjust the guidance when necessary. Okay. And then.

Okay. Yes, the question concerning raw material impacts, we expect the highest raw material impact to to hit us in Q3 and maybe Q4. That's what we see from the global indexes that we follow. We have agreements with all our customers on how to transfer part of the burden of these material prices to our customers. You asked for the timing. Usually, the answer is anywhere between 6 weeks and 6 months is when we will see the impact where we have agreements that are unbearable and that are too long, we are renegotiating those agreements. So we are in very constructive discussions with our customers to find a fair share, pain sharing, as we call it, for this -- for these material impacts. And in our industry, this is -- if you want a common way to deal with this, we've never seen such an extreme spike in material prices, but we have had material prices that were almost similar about 12 years ago. And there, we've also managed in the industry to balance that between all players in the value chain. And that means also the end customer, the OEM and the suppliers. So yes, it will be a lot of work. And yes, we will not be able to transfer 100%. But as you've seen early in our guidance, we expect that we can manage this so that we can balance that impact.

If I may just follow up on this. I mean you did mentioned the higher raw mats in the first half very well. Is there -- do you think it will be more incrementally negative in the second half? Or do you think it could maybe improved because we already achieved a very high level of these formats?

No. No, I think the impact of the raw material will be the biggest in the second half because we see now the index is going up. But it's also true that our compensation that we get on the price side from the customers will also increase in the second half because we've only received very little from our customers. So if you look...

In H1.

In H1, yes. So if you look at only the raw material, yes, the prices will be higher in the second half than they were in the first half. And will that hit our results? Yes, but we will transfer a lot of that to our customers and to maybe also to our suppliers. So we will balance that as usual, in a very professional way with the partners in the supply chain.

Yes, understood. And congrats to a very good quarter.

[Operator Instructions] At this time, we will hand over to Romy Acosta for written questions. Please go ahead.

Okay. We have one question from the webcast from Pierre Castela. He's asking that the global shortage of chips have an impact on one way or the other on your business activity, please?

Yes. Good question to us. Directly, there is no impact. We don't have a lot of electronic components. We have some where that could hit our ability to supply. But it has an impact, of course, mainly on the truck suppliers. Not so much on the trailer, a little bit on the agricultural tractor customers that we have. So our customers and especially the truck customers. They have been suffering on this semiconductor shortage, and we have seen that their call outs have been fluctuating whenever they had a problem with that. So it does affect us because it needs sometimes a rescheduling of our production because some of our customers have to adjust their call quickly. and it may limit their ability to deliver to the market. As I said and pointed out during the presentation, the end customer market, the fundamental market is very, very strong. And right now, the limitation is not us, it's never us really because we have very flexible operations, but the limitation is the capability of our customers to supply to that very strong end market. And that can be limited by semiconductor. So it's not going to impact us directly. There may be indirect impacts, and the indirect impact that we've had so far was that we had to reschedule and that we were supplying other parts to other customers rather than to that specific customer. So we have not seen a negative impact in sales. That could be the case if there's a lot of truck suppliers that are affected by the same -- at the same time. But we've not seen that happen. So far, we were always able to run our planned production volumes.

Okay. We have another question from Jorge Gonzalez from Hauck & Aufhäuser. He asked the guidance that I think you already answered that, Christian, he's also asking if we could provide some guidance for the working capital revenue for the rest of the year?

Yes, Jorge, as I said already during the presentation, we are now close to 20%. Our general target is to be below 20%. That is something we did achieve over the past several years. There is no reason to believe that we will not be able to achieve this. Last year, we were significantly lower. However, last year was at the end of the pandemic when we have collected a lot of receivables and therefore, my guidance would be or my guess would be that we will be lower than the 20%. Will it be again at the very low levels that we saw end of Q4 2020. I doubt it. Because the overall business environment is just very, very positive, and that means we have to prefinance some of the higher sales.

Okay. And we have another question from Jorge asking your competitor, SAS, has provided a slightly better trend guidance for China and trucks from minus 5 to minus 10, to improve 0 to minus 5, but slightly worse for trailers from 0 to 5 -- 0 to 5 -- minus 5 to minus 10. What is your view on the Chinese market for the rest of the year? And how do you think will compare 2022 to 2021?

Yes. Thanks, Jorge for the question. First of all, the predictions that we received from prognosis institutes for China and APA in general, they are fluctuating a lot. So it's very hard -- much harder to predict these markets from the sources that we get our information from than it is for the North American and the European market. The other comment is that we don't show China numbers. We -- the numbers we are showing is for Asia Pacific America. So it's a mixed where China has a lot of weight, but it also includes India, Australia, South Africa and other markets. And therefore, it's hard to compare these numbers. And as I said, the uncertainty in those predictions is much higher. We expect for China for the remainder of the year for truck, a rather low number for the remaining markets, as I said, that will continue with very solid markets. For 2022, somehow China will have recovered and digested that pull ahead of production that they have had due to the China 6 emission regulations, and we expect China to continue strong. And overall, in APAC, it all depends on COVID obviously, if we have more incidents maybe in Australia than we have in the rest of the world. But overall, we see the market very similar to Europe and North America to continue in that region with a very strong fundamental market.

[Operator Instructions] It seems there are no further questions at this time. I hand back to Joachim Dürr for closing comments.

Okay. Thank you very much for your interest in JOST. And as I said, we have -- we're looking back to a very successful first half year, and we're looking forward to continue based on the very strong fundamentals. Of course, we will be busy with all the topics that we and you have discussed considering material prices and shortages. But we'll have a very successful business that is based on a fundamental market that continues very strong. So we're looking forward to continue the successful story for the remainder of the year. Thanks for your interest, and we're looking forward to see you all in our Investor Relations Conference Call or the Capital Markets Day that we have on November 23.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.