NORMA Group SE (NOEJ) Earnings Call Transcript & Summary

Thank you very much, operator, and welcome to all of you to NORMA Group's Q1 2023 Results. Together with my colleague, Annette Stieve, I will lead you briefly through the facts and figures of the First Quarter 2023, followed by a more detailed introduction to our company program, Step Up. Starting on Page 2, you will see that NORMA had an organic growth of 2.1% on the same level as in the previous year with an adjusted EBIT margin of 7.2%. Net operating cash flow came in at minus EUR 45 million with a healthy equity ratio in the balance sheet of 46%. Net debt stands at EUR 414.3 million, and the dividend proposal at the Annual Shareholder Meeting of EUR 0.55 will be presented to the shareholders on Thursday this week. Looking now into more details, please find the top line development on Page 3. The already mentioned organic growth of 2.1% splits in, one, positive pricing of 5.9%, and two, a volume decline of 3.7% in the first quarter 2023. We had a mixed picture in terms of industries. In the engineering part of the business, we had a strong growth of 6.3%, while the standardized business was declining by 2.9%. Currency effects contributed positively by 1.3% to the sales development. All this led to a balanced regional split of Europe and Americas with 44% each, while Asia Pacific stands at 12% of sales. Switching now to Page 4 and looking in more detail to the regions, we can see that Europe delivered a strong double-digit growth of 13.2%, with good volume effect in Mobility & New Energy, while the standardized business had a high single-digit growth of 8.2%. All in all, organic growth in Europe stands at 11.8%. In the Americas, we saw a good growth in heavy-duty vehicles business, leading to an engineering growth of 2.4%, while we experienced a decline of 4.5%, specifically due to a weak U.S. water business, which declined by 8.1%. This decline was caused by heavy rains in the western part of the U.S. in combination with some destocking at customer level. The challenging environment, especially in China, led to an organic decline of 8.9% in the Engineered business, while the Standardized business declined even more by 16.7% also due to the weak water business in Asia Pacific. Overall, the region declined by 11.8% year-on-year. Looking at Page 5 to the margin development. We can see that the EBIT margin stands sequentially improved at 7.2% compared to 6.4% in the fourth quarter of 2022, while as expected, still down year-on-year from the strong previous year's 10%. For more details on the numbers, I hand now over to my colleague, Annette Stieve.

Thank you. So let's have a look to the development of our profit and loss margins. We start there with the material cost ratio, which decreased by 110 basis points due to lower inventories of finished goods and work in progress, while our gross profit ratio almost stood stable at 53.8%. The personnel cost ratio increased by 50 basis points to 26.1%, mainly due to labor cost inflation. OpEx ratio increased by 240 basis points, mainly due to freight costs on the one hand and IT implementation costs of planned projects on the other side. Our EBITDA margin and our adjusted EBIT margin both decreased by 280 basis points to 11.7% and respectively, to an EBIT margin of 7.2% in Q1. Looking to our EPS, our earnings per share. It's well known that our adjustments are only due to further or prior M&A activities. Our earnings per share reported amounts to EUR 0.24. Our adjustment amounts to EUR 0.13, and our adjusted EPS, per share, is EUR 0.33. Having a look then to Page 8 to our dividend development, in particular, on the EPS, we can see there the development of our earnings per share adjusted and reported. And the most interesting here is the dividend per share, which -- the dividend proposal to our AGM will amount to EUR 0.55 per share, which is then fully by -- with 31.3% fully in the range of our dividend policy, which is between 30% and 35%. If we look on Page 9 to our equity ratio, net debt and debt ratio, we see on the one hand that our net debt increased by roughly 18% due to a strong cash outflow from operating activities, the disposal of non-current assets and higher leasing liabilities. These are majorly projects like our investment in the new plant, Lithia Springs, in the U.S. and in extensions of our Chinese plants, which will come. Our leverage increased to 2.7 due to higher net debt and the lower EBITDA. Our equity increased from 45.2% to 46%. Considering our net cash on Page 10. We -- our net cash amounts to minus EUR 44.8 million, and it is majorly determined by, on the one hand, working capital outflow of EUR 66 million due in particular the decrease of our factoring programs, which amounted by the end of the year to EUR 77 million. And we reduced it by roughly EUR 15 million. Our CapEx increased mainly due to new locations on the one hand, NDS, our water -- new water plant, Lithia Springs and on the other hand, our extension of the Chinese plants. This results finally in a net operating cash flow of minus EUR 44.8 million which is a decrease compared to the Q1 '22 of roughly EUR 16 million. My last page describes at the end our NORMA value added, our NOVA and our ROCE. So there, we can see that our NOVA decreased from 5.1 to minus 9.4. This is mainly impacted by, on the one hand, the decrease in EBIT, but one of the major effects which is new currently is the development of the WACC, where we see an increase from 7% for '22 now to 9.25% in '23. Having said that, I give over, again, to Miguel, who will provide you with the guidance outlook.

Thank you very much, Annette. Looking at Page 12, we are confident to confirm the guidance for 2023. Sales will grow organically in the medium single-digit range, leading to an adjusted EBIT margin for 2023 at around 8%. Net operating cash flow will come in at around EUR 70 million, while the NORMA value added will be between minus EUR 10 million to plus EUR 10 million. Let me now introduce to you the new company program, Step Up, in more detail, which has been developed by the NORMA teams in the last months. The NORMA Group Step Up program is about growth and efficiency, and it targets -- with this growth and the improvement of efficiency as well and improved mix, leading to a sales split in 2027 of 60% Water Management and Industry Applications, while Mobility & New Energy would be around 40% in 2027. So we would get from a 2022 situation, 60% Mobility & New Energy to 40%, and 40% of Water and Industry to 60% in 2027. The growth part of the program deals along the 3 strategic business units. And you see on Page 14 the different elements of this growth program. Of course, it's imperative for the Group to have a product development for alternative powertrain technology and also to focus on the China and the e-mobility trends. It is very important, and we will come later to that in more detail, however, to have a more selective order intake. In Industry Applications and Water Management, we are driving growth in the different countries with specific country growth plans and focus. We want also to expand everything around make or buy, meaning here to add to our product portfolio third-party products as well, and of course, to extend our business through digital commerce. One fundamental topic in this Step Up program is the capital allocation. We would like to increase the competition for capital to get -- you have seen the split that we target for 2027, to get a better and more resilient business mix and very important, to fade out and prevent of low-margin businesses. In the efficiency part of the program, we are determined in order to improve specifically, but not only in supply chain management and operations and, of course, make better use of existing capacities, implement and monitor and improve machine usage, what we call OEE and of course, reduce inventory and also reduce backlog. And this, together with activities to continue on the IT level to introduce the 365 Microsoft ERP, but also having biweekly drumbeat of all the efficiency activities and as well important to have an ongoing SKU reduction, which is a reduction of part numbers and number of products. What are we targeting in terms of margin? For Water Management, we would be addressing a target margin range of between 15% and 20% as well as for Industry Applications, the target margin range is, again, between 15% and 20%. In terms of Mobility & New Energy, we are targeting double-digit margins as already explained in the capital allocation part. So with these targets for 2027, we will increase NORMA's Group EBIT mid-term on double-digit levels. With that, we are now happy to answer all your questions. Operator, could you please start the Q&A session?

[Operator Instructions] The first question is coming from Marc-René Tonn from Warburg Research.

First one would be on, let's say, the Step Up program and perhaps what you could give us as an indication of where you are right now when talking about, let's say, the individual businesses and the margin you are aiming for, so that 15% to 20% for the Water Management and Industry Application and the double-digit number for Mobility & New Energy. Is it -- the improvement which you have to do until 2027 is very much just Mobility & New Energy or are there also the other 2 divisions or, let's say, business units where you have to do, let's say, major improvements in the years ahead? And secondly, perhaps you could give us some indication on the phasing of the improvement which you are expecting. When talking about 2023 now, and the target for 2027. Is it, let's say, kind of a linear improvement which we should expect? Would it be very much back-end loaded that you say, okay, we have to, let's say, build up the new business mix first and then the results will become as a result of that. But it would obviously be a bit more back-end loaded? That would be the second question. That's a bit more on the short-term development for this year, I think. As expected, I think you mentioned that in the full-year results already that you would start a bit more on the lower end when it comes to your full-year target. Can you give us some indication here what you would expect in terms of savings for the remainder of the year? I think, with a very strong EMEA business in Q1. When we look at growth, it is a bit below your average margin for the Group. Would you expect, let's say, the regional mix to improve in the quarters ahead and also the business mix improving with water having been weak in Q1? Perhaps also some outlook there whether you would expect a bigger catch up in H2? And lastly, what you would expect in terms of cost inflation over the year? Will this be more back-end loaded? Or do you see -- expect more evenly split development over the year?

Thank you. So first question is about the current profitability levels of the strategic business unit. You know that we want to go for 15% to 20% in Industry and Water in 2027 and double digit in terms of Mobility & New Energy. Today, indication is about already in the range for Water, close to the range of Industry and a low single digit for the Mobility & New Energy. So that was question number one. Question number two was about 2023 situation. So we have been communicating already in end of March as we presented the guidance that we would be back-end loaded, which we confirm. So we are very clear about and very committed. And we see clearly the 8% for the year. So yes, we will see increases of volume, specifically in Q2 and Q3. And we will see them accordingly also the margins coming up, specifically in Q3 and Q4. And Annette, to question number three.

Well, I think you also considered our cash position. So at the end, we know that the first quarter is for NORMA, classically not a very strong cash quarter. That's clear. We will improve significantly in Q2 and Q3. And all our combined actions also of the Step Up program will provide that. So these are all things which are deeply structured and are on the realizable way. So I have no doubts about that. In terms of inflation, well, that's a bit always a view in the big glass ball. But however, what we see currently is that the bulk is done. I think it's lightening up a bit. Anyhow when we look to our major pain point, which is still Europe, Europe is still suffering a bit by the Ukrainian war and so on. And the more technical, the more high material our steel, for example, will be, we have the high bulk of energy in, so which means if we don't pay any markups for this, we will not be provided with steel. So it's going to be better, but we are not out.

Just one follow-up, if I may. On the phasing of the Step Up program, I think you're saying for the -- let's say -- do you expect this to be more, let's say, coming late, the improvements for this, let's say, double-digit margins or, let's say, I think it's 13% if we, let's say, take low double digit for Mobility & New Energy and 15% on the lower end for the remaining 60%. Is it more something we should expect in, let's say, with a steep ramp-up in 2026, 2027? Or, let's say, quite a linear development over the years?

Will be -- this will be quite a permanent improvement. The plans are on track. We are there on an execution roadmap where we check that every 2 weeks. It has to become the DNA and -- of everybody here. And that is a permanent way up to 2027, where we consider the, I would say, good double-digit margin.

[Operator Instructions] The next question is coming from Peter Rothenaicher from Baader Bank AG.

Yes. I'd like to ask about premium -- so the first restructuring programs, how strongly are you here progressing? So what is here to see in terms of efficiency of the plant closures? You still mentioned that you still had to use temporary worker to work over hours. How is it going on? Is there some improvement to see in the second and third quarter? And from the savings you initially expected from these programs, how is this looking today?

So Peter, at the end -- well, first of all, just not to confuse anybody, our prior efficiency or restructuring programs are now all based in this new Step Up program. So we're not driving 3 different programs. It's all baked in. Our major activities out of -- get on track where you are focusing on our plant closures, our transfers. This is all executed and done. For sure, we are still not -- and therefore, we did the restructuring. We did our homework in terms of that we, at the end, dismissed our employees, and all the transfer has been done. However, the efficiency of the plants, the last -- programs have been transferred by October last year. We are now working on the efficiency, productivity on the plants, in the plants, in order to bring that back to the level we are used to and to the level which we see in other regions like Americas or APAC because there's no region -- reason why they should be behind. So it's on a good path, but there's still a way to go. And we see there at the end the saving we expect out of this, mostly in the second half of the year or up from the second half of the year, let's say it like this.

Then regarding the development of the specific regions and businesses, so on the one hand, you mentioned the North American Water business was weaker. Clearly, the reasons are clear with the flooding. What do you expect here for the remainder of the year? Do you see here a recovery is in your plan that North American Water business will grow in volume versus 2022?

To be very honest, I don't care so much if it grows in volume or pricing. I take both as accounting and controlling, I take both. At the end, I think the positive news is we were all prepared that the water business should drop down by, I would say, negative growth macroeconomic situations. We were very cautious. So January and February at the end came even better out than we expected. And then we have been now like every competitor as well at the end, we have been touched by these heavy weather conditions. What means that most of these projects which could have not been done in March until the middle of April, there, we see that we will catch that up because these are projects which are ordered. And as soon as the construction can start, it will come. So on top out of flooding, out of storms, we had also storms in New Zealand, for example, comes mostly that people want to have more storm water, more drainage in the garden to protect themselves. So this we see cautiously positive.

And then in the Asian business, which was really weak in the first quarter, do you have here signals that the Chinese business is recovering? And with regard to the Water business in Asia, is this only due to weather condition or are there some structural problems?

Well, China will be getting into the normal mode as we speak. And that's the reason why in the forthcoming quarters, we see, there, growth again. And also in terms of the Water business, we will see an improvement in the next quarters to come in the Asian environment. This is because of one hand, India, but also because of what Annette Stieve just mentioned, postponement of some projects because of the weather situation in the Australia and New Zealand part of the business.

Okay. And then a last question for you, Miguel. I think you traveled a lot in recent quarters and months and visited the plants in different regions. So what was your view? Where are there really some construction sites where action has to be taken? And what do you think is on the positive side to see?

Yes. Thank you for the question. I'll start with where we still need to do a lot of activities. It's clearly in Europe. It was mentioned before by Annette that we will take a couple of more months to get to the right output and productivity levels. So -- and Q3 onwards, we will see better situations there. In China, I have seen a very well-prepared team for the growth to come, very modern installations and a very competitive situation as well. So this is clearly a field where we are very well prepared also in terms of efficiency and productivity for the growth to come. And the most recent visit to the Americas was also positive, good levels of technology, but also good levels of efficiency. And with Lithia Springs, we have been building a significant milestone. We have been inaugurating ribbon cutting last week the new plant where we will have the expansion for -- you know that this is in the Atlanta area, so the expansion that we need for making our growth and market shares. Within Step Up, by the way, for the years to come in and around the Water business, so this is also well underway.

The next question is coming from Nicolai Kempf from Deutsche Bank.

Nicolai Kempf from Deutsche Bank. One question on my side. I appreciate the Step Up plan, and it looks, that it's moving in the right direction. I'm just wondering because I saw the -- or like -- the topic, M&A twice, both Industry Applications as well as in Water Management. But given your leverage, which is currently set at 2.7x, it seems like it's going to limit your M&A potential. Can you give more color on how you plan to resolve this?

Yes. The way is very clear. We will not jeopardize the leverage levels that we have been working with in the last years. So it is about to be cautious in the field and to not get more risky on the leverage side, very clear.

So basically, do you plan to organically delever and not raise capital if there's already potential target?

What we all -- told all the time. So our Christmas wish list is still priority 1, water target in Europe. There is nothing big on the market. So we might be able to buy even 2 or 3, but these are small targets. As soon as we free now cash flow from our side, we can finance them partially also by ourselves. That's not the big shot. We need more than one. So we will do that step by step, but we will not jeopardize our efficiency program. That's clear.

There are no further questions at this time.

Okay. Then thank you, operator. As you all have heard and as we have communicated, I will go back to the Supervisory Board at the end of May. And I'm very happy to have with us here the new CEO, Guido Grandi, on the phone, in order to introduce himself. Can I now ask you, operator, to open the line of Guido? Thank you very much. Guido?

Yes, I'm not sure if you can hear me.

Now we can hear you. The floor is yours.

Okay. Thank you very much, Miguel. Thank you very much for the introduction. Yes. Hello, everybody. My name is Guido Grandi. I'm 51 years old, married with 2 teenage kids. Originally, I studied Aerospace Engineering. And later on, I got my MBA at Arizona State University with a concentration in supply chain management. Over the last couple of years, I have worked in different management positions and different leadership positions at Ford, but also diversified companies like United Technologies and thyssenkrupp. And my latest experience I got at the WKW Group here in Germany. The last 17 years, I spent in C-level positions with a kind of a diverse background, industrial, service as well as automotive, also supplying different channels, so to say, OEM business, of course, but also service aftermarket business and industrial business. So I'm looking forward to apply these experiences now here with the team at NORMA Group. I'm really looking forward to this opportunity as I find this to be a very interesting, diversified company with obviously a lot of products and a lot of markets that address the mega trends that we're facing as a company, but also as a society. So I think this is a perfect fit, and I'm really excited to work with the team. I was able to meet some of the team members over the last couple of weeks. And I'm obviously looking forward to then have a full start on June 1, and also to grow my relationship with everybody here on the call. Thank you.

Thank you, Guido, for the introduction. We are extremely happy to have you soon here at NORMA, June 1. And with that, that concludes our call for today. Thank you for listening, and have a nice day.