NORMA Group SE (NOEJ) Earnings Call Transcript & Summary

Ladies and gentlemen, also welcome from my side, from our side, to our Q3 2020 analyst call. And today, I'm here together also with Annette Stieve. Annette Stieve is our new CFO since October 1. And then so far, we are complete in the management board since October. And of course, we all are happy to have Annette on board. And maybe as we have a special situation, I hand over briefly to Annette so that she also can say welcome to you all.

Thank you, Michael. Thank you. Yes, hello all together. My name is Annette Stieve. Well, I joined this company since a month now, which was pretty interesting. Maybe a few words to my background. I spent 21 years with one of the biggest automotive suppliers in the world, the Faurecia Group. There, I ended up at the end in the position CFO responsible for Northeast Europe, which was at that point of time, the biggest footprint. I went then over to a distributor and wholesaling company who is taking care about tools and e-commerce distribution. I spent 2, 3 years nearly there at Hoffmann Group in Munich. And I hope now that I could bring in the expertise of, on the one hand, this automotive supplying, on the other hand, this trading e-commerce story to NORMA. It's a pleasure to be with you.

And we, of course, are happy to have, as I mentioned, Annette on board. And maybe after that special introduction, as we have that special situation, we now enter into our financials overview, and I go to Page 2 of our presentation to give you an overview on the Q3 financials, Q3 2020 financials. You saw in the publication that we have sales of nearly EUR 246 million, which is around 10.2% below last year Q3. And we generated, out of these EUR 246 million, an adjusted EBITA of EUR 28.7 million, including EUR 1.5 million costs related to the change program Get on track. And so far, we are below last year Q3, which was EUR 38.7 million. And based on this, EUR 28.7 million in Q3 2020, we have an EBITA margin of 11.7% versus 14% in the last year in Q3, once again, including EUR 1.5 million costs for Get on track. Adjusted EBIT correspondingly is at EUR 26 million, EUR 26.3 million. Of course, also including these amounts for the Get on track program. That means the margin, EBIT margin, excuse me, of 10.7% in Q3 2020 versus 13.3% last year. If you would exclude these costs for the Gas on track program of EUR 1.5 million, you would have seen an EBIT margin of 11.3% and also an EBITA margin of 12.3%, which is overall a sequentially better quarter in Q3 versus last quarter, nevertheless, down versus last year, driven by that crisis mode where we are in because of the corona development. We have a very positive cash flow development. Cash flow development was good in Q3 with a net operating cash flow of EUR 40.6 million, still better than last year where we had EUR 37.4 million in Q3, which shows the consequent cash focus and liquidity management that we have. Balance sheet shows an equity ratio of 40.9%, slightly lower than end of 2019. Net debt as of December 2020 is at EUR 371 million, which was less than end of last year, with a positive impact, of course, in leverage in relation to June 30. Leverage as of September 30 was at 3.6. Banking leverage, which we should take into account without the costs for Get on track program that can be adjusted in that financing contracts, is then at 2.9 end of September. We published the guidance a few weeks ago, where we mentioned that we expect for the full year 2020 organic sales for the financial year 2020 to decline around 16% organically. And we expect an adjusted EBITA margin of more than 5% and an adjusted EBIT margin of more than 4%, once again, including the cost for the Get on track program. Without these costs, it would be, instead of more than 5% EBITA, more than 8% EBITA as expectation for 2020. If we switch to Page 3 of the presentation, we see a couple of details on the sales development. As mentioned, sales in Q3, nearly EUR 246 million. For the first 3 quarters year-to-date, EUR 691 million, And this reflects, overall for Q3, an organic decline of 7.5%, and for the 3 quarters year-to-date, minus 17%. Once again, in Q2, where we were in the absolute corona crisis mode, we had a 34% decline. So we see sequentially improvement, but of course, still below last year. This organic decline of 7.5% in Q3 is driven by 2 or 3 facts. Of course, we still have a weak EJT business in EMEA and Americas region, which is impacted by the COVID-19 crisis. And especially, the truck business was affected by that development in the Q3 this year. We sequentially improved in relation to Q2 2020 the DS business, but year-on-year, still weak in all regions. While we have a very good development in the water management business in the U.S. where we saw 10.6% increase versus last year in the water management business, which shows the importance of that part of the business for the whole group. And if you look on the first 3 quarters of 2020, we see that the reduction, organic reduction of 17.1% reflects EUR 143 million lower sales as in 2019. The regional split is impacted by that. That means Americas and APAC share of our sales are slightly increasing, while the EMEA percentage of sales is going from 44% last year to 42% this year. If you have a deeper look on Page 4 in the regions, in Q3, EMEA, we saw that and we mostly saw a sequential recovery once again. We saw in the EJT business, EMEA, the COVID-19 related decline of 23.8% in the first 3 quarters year-to-date. In Q3, we showed a sequential recovery. It's minus 11.9% versus the 23.8% for the full -- first 3 quarters. DS also declined 17.6% organically year-to-date, 13.9%, and we also see here a sequential improvement in Q3 due to some destocking effects and the downturn driven by the COVID-19 pandemic. In Americas region, we have more or less the same picture in EJT driven by the COVID-19 pandemic. We have an organic decline of 33.4% in the first 3 quarters, 18.6% in the Q3 alone, while we have a slightly different situation in DS. Water management products, as mentioned, grew substantially also in this year, the first 3 quarters 2020, plus 6.5% in Q3. Stand-alone, 10.6%, our water management up versus Q3 2020. APAC shows a different story for the EJT business. We saw, for the EJT business, a strong organic growth of 11.5% in Q3 2020, which is a quick recovery after the COVID-19 shutdowns and reductions, which led very quickly to a solid organic growth of 4% in the year-to-date figures 2020, Q3 year-to-date. DS also hurt by COVID-19 pandemic. We saw a decline of 14.8% year-to-date, 6.5% in the third quarter. If we go to Page 5 and switch from sales into the margin development, we saw that the economy recovery in Q3 took place significantly based on a strict cost control. And all the measures and programs that we published and mentioned to you, so that we see an EBITDA margin in Q3 of 16.3% and an adjusted EBITA margin of 11.7%, once again, including the cost for Get on track program. If you would take out these costs for the Get on track program, we would have seen an EBITDA margin of 13.1% in the time range Q1 to Q3 2020. And correspondingly, the adjusted EBITA margin, excluding costs related to the Get on track program at 8.2%. So this terrible second quarter that we all had, we left. We are, as shown in that graph, at 16.3% EBITDA, 11.7% EBITA, which is not the level where we want to be, but it shows that we are on the right way. With that, I would like to hand over to Annette, who will give you some details more on the P&L and balance sheet.

Well, let's have a look then a bit closer to the P&L margins. Concentrating on material costs, we can see a slight decline from 43.2% to 41.6%. This is -- the reason is a permanent working capital management, a very strict one and a kind of destocking, which brings us to these figures. Having looked to the profit -- gross profit margin, we can see slightly the same. We see a destocking and go there from 58% to 57.1%. In referring to the personnel costs, we see that the personnel expenses and the ratio declined a little, which is a good news. So we see the first results of our measurements, We could reduce our headcount slightly, in particular, in APAC and therefore, we could turn the increase to a decrease. And it has to be mentioned that within this, there is also an expense of EUR 400,000 out of Get on track. We have a look to the net expenses. We can see that these net expenses slightly increased by 1%. In here, we can also see Get on track cost, which influenced these results by EUR 1.2 million. Having looked to the adjusted EBITA, we can see that the EBITA dropped down from 2019 to 2020 from 14.1% to 11.7%. However, we are convinced that a sequential recovery is already visible if we compare to the figures year-to-date or if we refer to the second half of the year. The adjusted EBIT is visible or declined from 13-point 3% to 10.7% out of the same reasons. Having then a look to our operational adjustments, well, it has to be emphasized again that Get on track, we didn't -- so we went over to a classical policy to a very conservative policy. You cannot see here any adjustments for our Get on track program, EUR 23.7 million. Costs are -- found their way in this EBIT. So our adjustments are, for the time being, very conservative and classical, depreciation, amortization, PPAs referring out of past mergers and acquisitions. Having -- what the impact on the EPS is visible there. So we started with the reported EPS by minus EUR 0.17, adjusted EUR 0.44 and come then to an adjusted EPS of EUR 0.27. On the next page, we can see in this moment our adjusted EPS, again, negatively, for sure, impacted still by the COVID pandemic and this Get on track cost. If you see there the net income and the adjusted EPS, you can see that at the end, the trend is -- in Q3 is already better than we can see in the year-to-date. So we could improve adjusted from EUR 8.6 million to EUR 15.8 million and reported finally from minus EUR 5.5 million to EUR 11.4 million. Having a look then to the net debt and the balance sheet ratios there, you can see that we stay since beginning of the year, we declined our equity ratio by 70 basis points to 40.9%. This is -- on the one hand, the reason for that is the net loss and the negative currency effect. We could see very good news, I think, a very good development on the net debt side. We see that the net debt could decline from EUR 601 million to EUR 572 million. And we have a very solid and good balance sheet -- cash in the balance sheet of EUR 201 million, which I think is remarkable in these times. Having a look to the debt ratio and to the leverages, we face for the time being a leverage of 3.6. This is the unadjusted leverage we adjust in this moment for our financing contract deleverage and come out by Q3 with a leverage of 2.9, which also improved according to the first half of the year where we pointed out 3.1. By this, I think we -- concerning the liquidity aspect, we are very well positioned. This you can see also on the next slide, where you can see, up to our understanding, a very solid maturity profile. You can see that no covenant breach is possible, at least until March '21. And looking to the covenant itself, we are convinced that we would not touch that under the common circumstances. So also having the leverage beyond 3.25 and at 2.9 for the time being, we would stay with a very optimal interest result in this moment. Repayments already have -- for 2020 have already been repaid or prolonged. So therefore, I think this work is done. And we have really a good available credit limit of EUR 130 million, which is available at this moment. Having said that, we should have a look to the cash flow development. Also a pretty solid one, what I already pointed out, the EBITDA 2020. We have to remember always that we have this Get on track cost in there. We did a very strict working capital management, which led to an inflow for us amounting to EUR 7.8 million in Q3. We were able to decline our factoring programs, our supplier financing by EUR 19 million compared to the end of last year. Pointing out now, we could drop it down to EUR 52 million by the end of September. We could achieve capital spendings or decrease our capital spendings to a minimum. It decreased in Q3 to EUR 7.3 million and for the full year to 21.6%. So all in all, you can see here a very strong and solid cash flow in Q3, which is even higher than 2019 by 8.6%, and we are coming out here for the quarter to 14.6. Coming now to our NORMA value added. For sure, this declined under the already explained reasons. For Q3, we are facing there a NOVA of minus EUR 2.8 million, amounting to the year-to-date number of minus EUR 43.5 million. I would give over to Michael.

Yes, Annette. Thanks a lot. Following 2 more slides, where we would like to focus on. You all, meanwhile, know our Get on track program, the cost and benefits time line that we also showed to you in the last quarter session. We see in 2020 around EUR 30 million of costs for that program. We expect already EUR 5 million of savings, so that we expect a net impact out of that program in the range of EUR 25 million. We are well underway for that program and are very optimistic that this program will bring us significantly forward as we also show in 2021, where we see a net impact then of around EUR 25 million, adding up to EUR 30 million, EUR 40 million, and in the in the peak level starting 2024, EUR 50 million additional profit in the next years, where we are very well on the way to realize that Get on track program in all regions. If you go to the Page 14, you see the outlook on 2020 as a company guidance that we published a few weeks ago. And the main topics here are that we expect an organic decline of around 16% compared to the previous year. And as we saw with a sequential improvement over the quarters and taking the regional view, this means by region, EMEA, we expect significant organic decline as we also expect for Americas and for all whole APAC region a noticeable organic decline. Adjusted EBITA margin, as I mentioned at the beginning, of more than 5% and more than 4% adjusted EBIT margin, both once again, including the costs for the Get on track program that I mentioned earlier. I think these are the most important guidance issues, financial result, up to EUR 15 million tax expenses between EUR 3 million plus and EUR 12 million minus so that we have to see according to the, let's say, tax measures that we take in Q4. Of course, we see that the adjusted earnings per share strongly decreased in relation to the previous year. And pure mathematically, based on EBIT development and capital employed development, NOVA also will be negative this year between EUR 45 million and EUR 60 million. The investments in R&D will be at around 5% of the EJT sales as we have on a long-term average. Innovation is a very important part of our work of more than 20 invention applications. In terms of quality, the proportion of defective parts in production should be below the value of 20 parts per million. CapEx in an average rate of 5%. Net operating cash flow developing very nicely, more of -- more than EUR 60 million. We all know in these crisis periods, cash is fact, profit is opinion. And so far, cash flow management is very important, and this runs very well. And dividend in a long-term average of 30% to 35% of adjusted net profit for the period that we also had in the, let's say, normal years. We all know that in this year, we limited the dividend to a minimum, but our clear target is to pay a good dividend again. With that company guidance and these remarks, I hand over to you again, and we are happy to get your questions and go into discussions.

And the first question is from Andre Finke, HSBC.

The first one relates to the organic sales growth outlook, which implies a weaker momentum in the fourth quarter relative to Q3 year-on-year. And I just wondered, what's the reason for that and whether there's pure caution baked into it because Q4 2019 was not a very strong quarter, I would say? And again, I think that implies basically double-digit organic growth, a decline in the fourth quarter. That would be my first question. And maybe related to that, just maybe some comments also on the sustainability of the growth in the water business. And second question also, I think, also relates to margins. If you look beyond 2020, what kind of margin recovery path do you think it's likely? When should we expect to get back to sort of 13% plus margin levels?

Yes, Andre. Thanks a lot for these questions and happy to take it. Your first question, organic growth, weaker momentum in Q4. We all know that we have a very high level of volatility still. And of course, there is a little bit of caution in that we see based on that volatility. We all have that corona discussions, what is going on in lockdown 2 or not lockdown 2, and we are not knowing how elections in U.S. are going on. So overall, it's a volatile development and a cautious assessment of that sales development. Of course, if we give out a guidance based on that crisis mode in October, we do not want to go back and revise it. So there, for sure, there's a little bit caution in it. Your second question regarding the sustainability of water growth. Our water business is very well positioned in the market from a strategic perspective. All, let's say, mega trends support our water management products in terms of growth, if it's climate change, if it's water scarcity, which leads to the need to handle water efficiently. And this is a global trend and a long-term trend. And so far, we are convinced that the water growth is sustainable and is a very important strategic part of our future development based on these mega trends. And so far, water growth, sustainable and in the sense of our strategic development. Let me also take the question regarding margin recovery in the next years. We are convinced that we will recover very quickly to old margin levels. We had a margin of 13.2% EBITA margin, 13.2% in 2019. And based on our programs, we are very convinced that in the next 1, 2, 3 years, we will significantly improve and we'll get to old profitability levels.

If you refer maybe to [indiscernible]

I did not understand what you mentioned.

I'm sorry. If you would, just a follow-up on the margin answer you gave with regard to coming back to old margin levels, that is referring to the 13% plus. You mentioned, I assume, I'm not sure, the-- let's say, order margin levels of 16%, 17%. Is that a correct assumption?

That's -- in the first step, the old margin level of 2019, which is 13% plus and which is in the second step, the old margin level of 17%.

And the next question is from Nicolai Kempf, Deutsche Bank.

It's Nicolai Kempf speaking, Deutsche Bank. So my first question would be on the pricing side. In the Q3 session, all OEMs across the European board mentioned very strong pricing as a benefiter. So do you see also a bit pricing pressure on your side?

Well, we are in a tough business in automotive -- in the automotive part of our business, which is around 45%, 50%. In that business, there is pricing pressure since I can remember this is going on. Is there an exceptional pricing pressure? I would not say. It's a hard business, tough business, of course, with a high level of price pressure. That's normal part of that business. But no structural change. What we partly see is that we go into intensive discussions, but I would not see a structural change. There is tough automotive business with tough discussions on pricing, of course.

Okay. Makes sense. And one follow-up. So in Q2 and Q3, I think also the OEMs kind of underproduced many cars and inventory is very low, also stated from Volkswagen, some truck OEMs. Do you think that can help you in Q4? And what's the current run rate?

Well, Nicolai, that's a good question. As I mentioned, I think the volatility in Q4 is still very high. Of course, we saw that most OEMs had some destocking. That's, for sure, part of that work. And what we have to see is that we have a good development, especially in the premium cars versus the budget cars. And if you go into OEMs like, if you take Daimler, BMW, Audi, for example, you see in the, let's say, upper range, a significant growth, while in the budget car area, we don't see that. So this all impacts the volatile situation in Q4. And it is important to stay flexible, and this is what we are doing. We see good development in a midterm perspective, but the volatility in Q4 is still extremely high.

And the next question is from Philippe Lorrain, Berenberg.

Philippe Lorrain from Berenberg. Just a follow-up on the question with regard to the margin recovery. Do you have a view perhaps on when you could reach step 1 of the margin recovery versus step 2?

Yes, Philippe, thanks for that question. Of course, I will not give now a midterm guidance in terms of when to reach 13-plus percent and when do we reach 17-plus percent. So we just gave a guidance for 2020 a few weeks ago. For sure, we will recover very quickly. And we have 2 steps that we will take. As I mentioned, we will go to, first, prior level of 13-plus percent and 17%. I don't know if it's 2 years, 3 years, I don't know, from today's perspective, and I am far away from giving a midterm guidance now. But what I can promise to you is that we will recover quickly and improve our margin significantly.