NORMA Group SE (NOEJ) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of NORMA Group SE regarding the presentation of the Q3 2021 interim statement. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Dr. Michael Schneider, CEO of the NORMA Group SE. Please go ahead.

Yes. Thank you very much for the introduction. A warm welcome from my side to our Q3 Analyst Call 2021. Today with me is Andreas Trösch, our Vice President, Investor Relations, Communications and Corporate Responsibility. And Andreas will take the finance part today as Annette Stieve, our CFO, unfortunately, is ill today with a cold. And so far, our best wishes to Annette to recover soon. Maybe a short overview on Q3 financials. It is Page 2 of our presentation. In Q3, our sales were up by 8%, which means EUR 265.7 million, while we had in the previous year Q3, EUR 246 million. And out of this EUR 265.7 million, we generated an adjusted EBITA of EUR 24.7 million, which is 9.3% of EBITA margin in Q3. Respectively, an EBIT of EUR 22.8 million, meaning 8.6% of adjusted EBIT margin. Our net operating cash flow amounted to EUR 31 million -- or EUR 31.2 million, while we have an equity ratio of 44.1%, which increased slightly versus December last year from 41.7%. And our net debt as of September 30 was at EUR 332 million, while we had EUR 338 million at December 31 last year. Our leverage amounted to 1.9x, end of September. End of December, it was at 3.4x. So based on our good cash flow development, we had the chance to delever in the first 9 months of 2021. We had to update our guidance for 2021, which we did in September. We see an adjusted EBITA margin of more than 11%. Previously, we had our guidance at more than 13%. And accordingly, we also adjusted our EBIT margin being more than 10%, previously at more than 12%. Looking at the top line development, which is Page 3 of our presentation. We see that we generated in the first 9 months of 2021 nearly EUR 834 million of sales, which is an organic increase of 24% versus 2020. Of course, we had, especially in the first 2 quarters, mainly in the second quarter, this let's say COVID-19 impact, which was very much negatively impacting last year and so far, 24% year-to-date organic growth for the first 9 months. In Q3 itself, it was an increase of 7.6%, and we will have a closer look in a few minutes on these organic growth ratios. Our organic growth overall, mainly due to strong growth in the Americas region and organic growth of 24%, as mentioned year-to-date, related also to the COVID-19 aspects. EJT sales showing an almost stable development on an organic basis. It's nearly on the level of Q3 2021 with, as mentioned, a very strong organic growth in the first 9 months. SJT, our standard product, showing strong organic growth of 18% in Q3, especially also related to the Water Management business and nearly 20% year-to-date in the first 9 months in Q1 to 3 2021, driven by EMEA and -- or mainly driven by EMEA and Americas region. We had some currency effects, positive translation effects of EUR 1 million. It's around 0.4%, positive in Q3. And overall, for the first 9 months, a negative impact of 3.3%, which is around EUR 22.7 million. You see on the right-hand side, also the regional split, where we have a share of our sales in EMEA of 44%, while we have 41% in Americas and 15% of our sales in APAC. Looking into the segment reporting, which follows on Page 4. We see, in EMEA, an increase of 4.3% of sales. EJT sales slightly, organically declining by 2.5% in Q3 due to the volatility in production related to the material shortages, mainly related to steel, logistics, capacities, containers, et cetera, and semiconductors. But as mentioned in the first 9 months year-to-date, Q1 to Q3, a high double-digit development of 25.9% organic growth. Standardized Joining Technology in EMEA, strong double-digit organic growth of nearly 23% in Q3 and even year-to-date due to a good business development and even a restocking impact in EMEA in the first 9 months of 2021. Americas development, a strong organic growth development of 9.2% in Q3 and ongoing high double-digit increase of 31.7% in the first 9 months. Of course, comparing to a weak prior year 9-month period, we had a very good development in Americas in the commercial vehicles area, mainly related to the heavy trucks, Class 7, Class 8, so that we had a quite strong development of the Americas business. The Americas business in Standardized Joining Technology also had a strong double-digit organic growth, 20% in Q3 and 20.8% in the first 9 months, mainly driven by the Water Management, and Water Management showing another double-digit organic growth of 15.4% in Q3 and 19.4% for the first 9 months of 2021, strong Water Management development in Americas. APAC. We remember APAC EJT business started to recover very early. So they already had in the second half of 2020 a good development. So EJT business in APAC organically declined by 6.7% in Q3, but still is on a high double-digit organic growth level of 21.5% for the first 9 months of 2021. The Standardized Joining Technology business in Asia Pacific showed a slight organic growth, 0.9% in the third quarter, which then leads to an organic growth of 9.7% in Q1 to Q3 2021, after a, of course, also COVID-19-related organic decline of 14.8% in 2020 in the first 9 months. Coming from the top line to some margin developments. You see that in an overview on Page 5. The adjusted EBITA and EBIT margin in Q3 2021 was negatively impacted by significantly lower production volumes in relevant industries as well as higher material and freight costs in all regions. We all know the reasons for this crisis development, if it's container capacities, freight costs, truck availability, semiconductors, steel shortages, et cetera. So this is heavily impacting the cost side and with that, the margin development so that we have a 9.3% EBITA margin in Q3 2021. And on a year-to-date basis, an EBIT margin of 8.6% in Q3 and year-to-date 11.5%. To go into some details regarding financials and P&L, I'll hand over to Andreas.

Thank you very much. And also warm welcome from my side to all participants. Let's have a look at some details of the P&L, starting with the material costs on Page 6. You see that the material costs went up in the third quarter as well as in the first 9 months. That has something to do in the third quarter with the increase and build up of inventory of finished goods and semi-finished goods and due to the method of our accounting, more detailed look in the gross profit. If you look at gross profit in Q3, it went down by 1.6% due to the factors that Michael already mentioned, material costs. But looking at the 9 months, and that's the good news here, is that it's almost stable. It improved even by 20 basis points in the first 9 months when you look at the gross profit. Personnel costs improved there as well. Starting with the 9-month's view there, it went down substantially. That's due to the fact that in the previous year, we had the provision built up for our Get on track program, but also in Q3, it went better by -- from 27.2% to 26.4% due to the improvements that we made during the course of the year. On the other hand side, looking at OpEx. OpEx went up in the quarter. Main reasons there is, on the one hand side, the volatile order behavior of the OEMs on the automotive side, meaning that short-term cancellations and changing in order behavior leads to more than normal tool changes and extra costs on our side. Then temp workers are up in the quarter as well. On the one hand side, due to still the ongoing Corona situation and temp workers needed in order to replace our own personnel being in quarantine and also our improvements on the factory landscape leads to the fact that we have double personnel and more temp workers in order to cope with transfers of machinery. Freight cost is another factor, which leads to higher than usual OpEx costs. And then on the EBITA and EBIT side, the numbers have been mentioned in the beginning of the presentation already. We see year-on-year, first 9 months, a nice development, leading to 12.3% on EBITA and 11.5% on adjusted EBIT for the first 9 months, while the quarter with all the mentioned factors went down from 11.7% to 9.3% on adjusted EBITA and 10.7% to 8.6% on adjusted EBIT. On the next page, some housekeeping for the operational adjustments. As you know, we do not adjust anything on EBITDA. So the costs for the Get on track program are not adjusted, leading to the fact that reported EBITDA equal -- is equal to adjusted EBITDA. The only adjustments that we are doing on a regular basis is PPA, purchase price allocation, from the past acquisitions. On the one hand side, EUR 1.1 million on depreciation PPA and then another EUR 15 million on amortization PPA. After tax, that leads to a difference between reported and adjusted EPS of EUR 0.38, EUR 1.60 at reported and EUR 1.98 at adjusted EPS for the first 9 months. That brings me to the next page. Speaking about EPS, you see also there the nice development in the first 9 months on adjusted EPS up to EUR 1.98 in the first 9 months, reported EPS 1.60 per share in the first 9 months. In the quarter, on the other hand side, slightly down from EUR 0.50 to EUR 0.44 on the adjusted EPS and EUR 0.36 to EUR 0.32 for reported EPS. Switching from the P&L to the balance sheet on Page #9, starting with net debt. It decreased slightly by 1.7%, comparing December 31 to September 30 this year, which is a nice development due to the strict cash control measures and the cash collection that we did. Equity ratio improved very well to 44.1% from last year's 41.7%, and also the leverage improved as already mentioned in the beginning to 1.9x compared to the pandemic number of 3.4x at the end of last year. Gearing improved as well from 0.6 net debt to equity to 0.5 at the end of September net debt to equity. From the balance sheet onwards to the cash flow statement, looking into the quarter on Page 10. Our adjusted EBITDA went down, as mentioned, from EUR 40 million to EUR 36 million. Trade working capital inflow of another EUR 6 million. And the investments increased because of higher business activities to EUR 10.8 million, leading to the fact that we had a solid net operating cash flow of EUR 31.2 million. Cumulated for the first 9 months from last year's EUR 49 million, we improved in net operating cash flow to EUR 70.5 million in the first 9 months of cash flow development. Then from my side, last but not least, NORMA Value Added. Our NOVA is also negatively affected as the whole P&L in the quarter. We closed the quarter with minus EUR 2 million of NOVA in Q3. Year-to-date September, it is plus EUR 16 million from last year's minus EUR 43 million, so a strong improvement in the first 9 months to EUR 16 million NORMA Value Added in the first 9 months. And with these details, I hand back to Michael.

Andreas, thanks a lot. Two more charts. Get on track program, cost and savings time line. Overall, we are on track with our project -- program. We are well underway with the major savings in 2021. And looking on the net effect of that program of EUR 25 million in 2021, we will see these EUR 25 million out of the improvement program, coming from additional measures and the onetime cost. Net effect, EUR 25 million, especially also in the purchasing area. Our outlook for 2021. Updated company guidance as of 14th of September. We expect organic sales growth in the low double-digit area with an adjusted EBITA margin of more than 11% and an adjusted EBIT margin of 10%, generating a net operating cash flow of more than EUR 110 million and a NORMA Value Added between EUR 10 million and EUR 25 million in 2021. With that, we hand over to you and are happy to take your questions and discussions.

[Operator Instructions] We have the first question is from Peter Rothenaicher, Baader Bank.

Firstly, one question regarding the material cost issue. So this is hurting more or less every company in the automotive supplier area. And as we hear from other suppliers, they are in strong negotiations with OEMs regarding compensation for these higher material costs. So what do you expect now for the fourth quarter? Do you see here the possibility to get back some money and with the opportunity, perhaps, and this would help the margin in the fourth quarter?

Yes, Peter, thanks a lot for that question. I think the -- all companies in that -- the automotive supplier part are in a similar situation. We also are in strong negotiations with our customers. These negotiations are going on very well. And so far, we also expect, on the pricing side, positive impact to cover part of the material costs. This will be the case in Q4 and still more important for 2022.

Okay. And then the second question. Typically, your fourth quarter is somewhat weaker in terms of sales. This year, we have a special situation in the automotive area. On the one hand, we still hear from significant semiconductor shortages. On the other hand, I think OEMs are eager to produce as many cars as possible. So what is your view then on the potential sales development in the fourth quarter? Is there a chance that Q4 might get to a similar sales volume as the third quarter?

Well, if I take the LMC figures that came out this -- that were published 1st of November, we see for the fourth quarter an additional decline than in relation to what we saw in October. In October, for the light vehicle production, according to LMC figures, we expected a downturn worldwide of 14.6%. Now we have some LMC market analyst figures going from 14.6% negatively in Q4 to minus 18% in the fourth quarter. So from our point of view, there is still significant pressure on the market. And apparently, according to LMC, a weaker situation as what we expected 1 month ago.

And perhaps can you comment a little bit on your business trends in October?

Well, we see in October, the Q3 development, we are currently closing the month of October. It is in line with our new guidance, so that we are in line with that guidance for the fourth quarter. This is what we see for October. The LMC figures also indicate that fourth quarter will be overall weak as we have expected in our guidance.

Okay. And the last point, you mentioned the third quarter some headwinds from COVID-19 with quarantines of employees. Is this still an issue for you in the fourth quarter? Or has this issue terminated?

No, it is still an issue. Unfortunately, COVID has not yet terminated. We see that development still that we have worldwide, people in quarantine. And in average per month, I would guess we have around 100, 110, maybe 120 people in quarantine because of COVID-19 development. So unfortunately, this goes on.

Our next question is by Nicolai Kempf, Deutsche Bank.

Nicolai Kempf speaking from Deutsche Bank. So my question will also be on the production environment. I mean I understand that the volumes were rather below in the last quarter. But can you confirm that the environment is kind of stabilizing a bit so that you have less cancellations, which, I believe, are especially causing this inefficiency in the production ramp-up because what we've heard from the OEMs, from BMW and Daimler is that it's gradually getting better in the last quarter. What's your view on that?

Well, Nicolai, first of all, we do not have cancellations, but we have reductions of order books partly. And they are still a very, very inefficient situation where we have order book requirements from OEMs in total. And if these products are not -- or could not be sent the next week to our customers, it's extremely inefficient and generates additional production costs. Unfortunately, overall, this goes on the -- in the EJT/OEM business. And so far, there can be the one or other customer, as you mentioned, where we see some positive development. But overall, we have that volatile situation and still have to live with that, with these inefficiencies and with these costs.

Okay. Understood. And maybe just one follow-up on the high input prices. When do you think you can pass them on to your end customers? And are you trying to maybe reduce the length of the cycle that you can pass them on quicker?

Well, we are constantly working on the contract situation. Typically, we have a time frame of 3 to 6 months to hand over or lead these costs to the customers for the alloy surcharge prices. I think what we see in the contracts is a, let's say, constant adaption to new needs. Currently, we have still the situation that we are talking about 3, 4, 5 months of timing differences to hand it over. And of course, it's a heavy negotiation. There's nobody sitting on the customer's side waiting for us coming. So it's a tough negotiation, so that there are a few months that you need for finalizing these negotiations. And so far, that's currently the situation, although we constantly try to improve our contracts.

The next question is by Harald Eggeling, ODDO BHF.

And one question regarding wage inflation. Basically, in the past, you launched your Get on track program. And now I think we have some wage inflation topic going on. Is your view basically that this is rather a structural issue, which you will have to deal with for the next couple of years? And in case you view this as a structural issue, how are you going to tackle this issue, please?

Yes. Of course, we see overall inflation and even wage inflation that we expect for the next years. And let me remember to one part of our Get on track program, to improve our structures. We are currently in the process of closing 1 location in Germany. Our location in Gerbershausen is decided to be closed end of 2022, and it will be transferred to Czech Republic. So we act on that structural topics to transfer headcount into lower cost or, let's say, best cost countries.

Okay. And regarding the U.S., I mean you have a very successful U.S. Water Management business. And my view would basically probably be that the wage inflation might first be a topic in the U.S., but a relocation from U.S. operations into other countries might not be an option. So should we expect that you rise prices in basically business areas where it might be possible, for instance, Water Management? But how do you deal with this in your OEM business, please?

Yes. Well, in the OEM business, we have to differentiate in the, let's say, DS and Water Management business, where we typically increase once, twice a year our prices. This year, for NDS, we already have the fourth round of increasing our prices to cover these inflation impacts and even the wage inflations. And in the OEM -- on the OEM side, we go in detailed discussions with our customers to hand over cost increases. If these are structurally driven, that's one topic, direct discussions, negotiations with our OEM customers and, of course, structurally transferring production areas into best-cost countries.

Okay. But currently, are there any kind of extra compensation you need to pay to your U.S. employees to keep them on board amid potential wage inflation?

Well, we have an increase in the minimum cost per employee per hour. This is one reason why we are in the fourth round of increasing our prices in the Water Management/DS area. So we have to differentiate Distribution Services business, Standardized Joining Technology business, Water and Industry business. There we have 1, 2 and this year, the fourth round of price increases to cover these inflation trends. And on the OEM side, we are in direct discussions and negotiations with our single customers on a one-to-one basis.

Okay. Last point, then the takeaway would simply then be that you -- in your OEM automotive business are currently facing higher costs. But potentially in some months also when the negotiations were successful with the OEMs, you might be able to charge higher prices, right?

Exactly.

[Operator Instructions] We have our next question, it's by Harald Eggeling, ODDO BHF.

Sorry, one last question. Regarding kind of -- I mean we not know what will happen next year in 2023. But from today's perspective, across the regions, how would your take basically be for regional growth patterns in 2022? Do you have a view you can share with us?

Well, Harald, I think we have a very intensive and high volatility. And as the LMC figures -- and this is what I can share, the LMC figures for 2021 are constantly changing and in fact, going down on a monthly basis. Also the 2022 figures are significantly changing over the month. Currently, if I take the LMC figures published beginning of November, we see for light vehicle production volumes an increase in 2022 of 11.6%. So this is a current information on the trend in 2022. Let's see how reliable and stable these figures are over the next couple of months. But at least LMC, this is good, sees an increase currently of 11.6% in 2022 for light vehicle production worldwide.

Okay. So also one follow-up, please. What basically then is your personal NORMA take for supply chain issues? Do you expect this will basically resolve in H2 2022? Or do you rather think it will be a topic for H1 2023, please?

Well, I would love to have a crystal ball. I would be very cautious at least for the first half of 2022. But I think it's far too early to give a solid assessment and expectation. And so far, it's important to be on the cautious side and to keep flexibility on a high level.

For the moment, there are no further questions. And so I hand back to Dr. Schneider.

Yes. Thank you very much for your participation. Let me maybe summarize from NORMA Group's perspective. Of course, we are all seeing the headwinds in the economy that we have. We have to live with that. NORMA is -- although we are not happy, of course, as others as well with our Q3 development, NORMA Group is very well prepared for the strategic mid- and long-term development with our portfolio and with our measures. So we are very confident and very optimistic on the long-term strategic development, and that we will handle the short-term crisis developments coming from the economy. And so far, on a long-term basis, we are very well prepared. Thank you very much for your participation. And to all of you, please stay healthy.

Thank you very much. Bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.