Novem Group S.A. (NVM) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the full year 2022-'23 preliminary results of Novem Group, which will be presented by the CEO, Gunter Brenner; and CFO, Dr. Johannes Burtscher. [Operator Instructions] I would now like to turn the conference over to Gunter Brenner. Please go ahead, sir.

Thanks a lot. Also, good afternoon. Welcome from my side, Gunter Brenner speaking, to our Q4 full year '22-'23 financial preliminary results. Saying that, I would like to start with Page 3 from the presentation. And here, you see Q4 key events. Backed by strong revenue in Q4, Novem could again break the EUR 700 million mark in our last business year '22-'23. This means 14% plus volume year-over-year. Adjusted for favorable foreign exchange effects, organic growth would have recorded at almost 9%, precisely 8.9%. We also see a robust margin development throughout the whole year with an adjusted EBIT margin or EBIT in absolute euro numbers of almost EUR 82 million, EUR 81.7 million, which equals to 11.7% of revenue. We still see in this last business year, adverse impact from higher input costs on the 3 major areas; material, energy, and transport. But we also assume that the peak level on price increases somewhat being achieved, but not yet resulting in price decreases. So not major further increases, but also, as I said, no decreases. Instability of some suppliers in Europe created additionally temporary pressure on the purchasing side. Instability of suppliers means we also saw some insolvent suppliers where we have to transfer our products to alternative suppliers, backup suppliers on short notice, creating a lot of efforts, time consuming, but also eating cost for the transfers we had to make. We see an outstanding, as we see it, outstanding free cash flow in the last quarter, '22-'23, which put the full year number up to EUR 84.5 million. With that, the cash reserves reached a record level of EUR 165.5 million and is also demonstrating the Group's funding capability. And with that also the net leverage ratio of 1.1x came down to the lowest level since the refinancing the business in July '21. So for the full year, to sum up that page, you see a strong top line growth with a stable margin development for the full year '22 and '23. On the next page, some more details about our Q4 financial highlights compared to the previous quarter before. So revenue increased, as I already said, 9.3% in the quarter from EUR 159 million to EUR 174 million in this quarter. Adjusted EBIT almost stepped sideways EUR 22.3 million down to EUR 21.2 million. And with that, the adjusted EBIT margin from 14% down to 12.2% in this quarter 4. Free cash flow, EUR 45 million, EUR 45.2 million, down to EUR 39.6 million. And as I already mentioned, the net leverage ratio came down remarkably from 1.5x to 1.1x. So on Page 5, we see the full year '22-'23 financial highlights. As already said, revenue net grow to almost the same level before the Corona crisis, from EUR 614.5 million to slightly above EUR 700 million for our full year '22-'23. Adjusted EBIT grew from EUR 80.9 million to almost EUR 82 million, precisely EUR 81.7 million. And with that the adjusted EBIT margin 13.2%, down to 11.7%. Strong growth in free cash flow, as already mentioned, from EUR 65 million to EUR 84.5 million. And again, net leverage ratio came down from 1.5x to 1.1x. So for further financial analysis and details, I would like to hand over to our CFO, Dr. Burtscher.

Thank you, Gunter. And also from my side, a warm welcome to everyone. As already mentioned, we present to you today our preliminary results for last year, into Q4, while the audited financials together with the annual report will be published later this month, on the 29th of June, this month. So on Page 7, let's look back on revenue once again. As you can see from a glance, we had more or less equal distribution of revenue over the 4 quarters. Nonetheless, the last period of the financial year '22-'23 was pretty strong, especially in Series overall, we posted a growth of 9.3%, so it is EUR 174.1 million. As we reported all the way through last year, we always recorded a positive impact from ForEx in this last quarter. This was 1.7%. So if we had constant ForEx rates, revenue would have been lower by 1.7%. And this translates to around EUR 3 million that was given into the top line because of ForEx. As a side comment, for the full year, this amounted to EUR 31 million and basically relating to the U.S. dollar and the Chinese renminbi. Now if you look at the 2 areas, Series and Tooling, we posted actually the strongest quarter in terms of Series revenue. So turnover generated from the sale of our Series products with a growth rate of 8.4% over the same period last year. And as mentioned before, being the strongest quarter ended last year. If we compare this and this is the right way to look at it in looking at market data, as you know, we have a reference point, LMC. We saw a similar growth rate in terms of units produced in this quarter. And that increased from exactly 20 million units last year to 21.3 million units in this quarter. So overall, 6.8%. So if one looks at this from a Series revenue perspective, taking ForEx into account, this is a trend along the lines with the overall market. In terms of Tooling, we generated EUR 11.6 million. So this was actually the lowest revenue with Tooling in the last year in terms of quarterly distribution, but still ahead of last year's quarter. And insofar, also here strong growth from the Tooling business. We see this later in our presentation, from a geographic point of view, these Tooling closures were to a large extent located in the Chinese market, actually 2 significant projects with Lotus and Volvo Polestar. As Gunter already mentioned before, overall, we posted EUR 700.3 million. So after a few years of downturn and sideways development, we are back to EUR 700 million, where we were pre-pandemic times where we had our record turnover actually in the year 2018-19 with EUR 711.1 million. So that's on the top line. Moving on to the next page to the adjusted EBIT. As already said, we generated EUR 21.2 million adjusted EBIT. This translated to a margin of 11.7%. So almost a sideways development to the last quarter of the previous year, where we had EUR 22.3 million and 14% of EBIT margin. Now with regards to the profit drivers, we have to mention the same factors and all the issues that we saw during the whole year particularly relating to the material prices. And as Gunter already mentioned before, in this quarter and in this quarter in Europe, we had particular headwinds from distressed suppliers where we had to take additional higher costs, not only from prices, from supplier prices, but also from the transfer of some of the supplies we take from our vendor base. These distressed companies under insolvency proceedings, mainly related to chrome-plated parts, plastic parts and also one tool manufacturer in this regard. So that is a one issue that kept going. And now we have a normalized level for material input costs and the same for transportation and energy costs that have actually come down a little bit. With regards to customer compensation, we mentioned this in our previous calls, we make progress, and we have made further progress. These discussions are ongoing. They remain difficult and protracted. In this last quarter, we had actually one customer payment that's related to Americas. We will also see this later that this helped the Americas region to achieve a significant profitability also in comparison to Europe, in particular. Other than that, Tooling, as mentioned before, at a higher level than previous year, which led to a certain dilutive element as the Tooling segment is less margin heavy than the Series business. Overall, EUR 81.7 million of adjusted EBIT. And as said before, 11.7% margin. As you can see also from the lower chart, pretty similar to the revenue distribution across the year, it's a relatively balanced representation over the last 12 months. On the next slide, we see our free cash flow. Here, we have also to report a very strong free cash flow in the last quarter, not as high as a year ago, which was exceptional high. But also this year, this was a strong result. And basically, it's the summary of many initiatives that we have been pushing very diligently, especially in the area of working capital, lowering inventories, although a major part of that is relating to reducing Tooling net on our balance sheet, but also keeping overdues to a low level, having a strong utilization of our factoring lines both in Europe and in Americas and also strong vendor payment management. So altogether, this helped achieve a very strong free cash flow for that quarter and also helped the full year free cash flow to reach a very high level of the already mentioned EUR 84 million. So this is on here, perhaps besides the segmental breakdown in operating and investing cash flow, investing cash flow was at EUR 4.8 million in this last period. This compares to actually a positive number of EUR 0.8 million in the previous year, where we already explained that there we had a posting of a onetime currency translation adjustment of EUR 9.2 million. But this is the overall representation of operating and investing cash flow for the quarter and the year. If one wants to look at the cash conversion, which we define as adjusted EBITDA as a percentage of the free cash flow number is 74%. Also this is a very strong number for free cash flow generation. Capital expenditure on the next slide, we had EUR 5.7 million of CapEx in the last quarter. This was significantly less than a year ago. And if some of you remember, that was the period, the quarter where we had the highest capital expenditure in relation to the takeover of the Faurecia aluminum business where we had an exceptionally high element of that CapEx. Other than that, the capital expenditure ratio in terms of revenue stood at 3.3%. And also this for the same reason, as said, being lower than a year ago with more than 5% of revenue. Overall, for the full year, which is pretty much in line with our guidance, is close to EUR 18 million, EUR 17.9 million, of investments, and this is a similar level than a year ago with EUR 18.6 million in terms of the distribution across the quarters. Overall, for the year, capital expenditure ratio came down to 2.6% once again, in comparison to the EUR 700.3 million revenue. On the next page, we look at our working capital development that moved favorably in the last quarter and also in comparison to the period a year ago. We recorded a level of EUR 124 million of total working capital. And also in terms of as a percentage of revenue, this is a strong number, actually being lower than 20%, which is sort of our internal target. It recorded at 17.7% and also this is distinctively lower than a year ago. Also what I mentioned before, this is largely driven by strong Tooling net management, and this means payments, cash inflow from our customers for closed projects. So Tooling net, if you look at the segments of the bars, you see that this is the strongest contributor to the lower working capital level. But also inventories came down and there is a sort of relaxation in terms of safety stock, safety stock levels and supply chain issues. So in some of our plants, we have been pretty successful in lowering inventory and safety stock levels accordingly. It's different from one plant to the other. And especially here, we still witnessed the most difficult areas in Europe, while in Asia and Americas, it's less stressed in terms of the supply chain frictions than here in Europe. Other than that, it's a strong development, and this also helped, as mentioned before, achieving the free cash flow for the quarter and the full year. As mentioned before, factoring was at a high level. And also here, this helps reducing the receivables levels accordingly. On the next page, we see this, in particular, when we look at our capital structure with our gross financial debt that stood at EUR 288.5 million. So similar level than last year, but the net debt reduced significantly. And this is mainly because of the steep increase in cash and cash equivalents that reached a high level compared to previous year with a much stronger liquidity with EUR 165.5 million last year at EUR 117 million. And as I said before, factoring utilization was strong at the end of the financial year, 31st of March, with EUR 54 million. This obviously helped propel further the liquidity and reducing the net debt to this historically low level of 1.1x adjusted EBITDA. So this is the lowest level as Gunter already mentioned before. If you have a look at the chart at the bottom, you see that we have continuously been able to deleverage the business as we have always mentioned in our conversations and calls. So that's on the Group numbers. On the next 2 slides, I'd like to take you through our operating segments by region. We have already mentioned the one or the other element. The one thing that has remained unchanged is that we do have ongoing issues in Europe with regards to stability and reliability of call-offs from our customers. So this is an ongoing issue. As you know, this makes operational performance very difficult in terms of running our plants in Europe efficiently. And this has been an ongoing matter. When you look at the top line, you see that revenue in Europe came down by 6.5% to EUR 77.4 million. And also here in comparison to last year, it's also because of lower Tooling, but also the issue with a weaker demand and also the phase out of some platforms there where we do already see the implications, namely Mercedes-Benz, GLC and BMW 5-series. So yes, Europe is still an area that is difficult to handle and manage. We see this in the top line and also on the next page in terms of the bottom line. In a sharp contrast, we see the almost opposite situation. In Americas, you can see here a very strong buoyant revenue line. We increased by 16.5% over last year to EUR 68.7 million. We have high running platforms, very stable, solid, especially around BMW X5, [ GLE ], this helps obviously also optimize operational performance and efficiency in our plants in America. So it's really a contrast picture compared to Europe, and this also is a reflection later in the profitability. A part of that, we also benefited from the strong U.S. dollar compared to prior year. And in addition, also from a one customer compensation payment that we saw in the top line as well as in the bottom line. And with regards to Asia, also here, you may see a significant increase from EUR 17.5 million to EUR 28 million. Now here, we have this, as already said before, strong element from Tooling. We saw some major big Tooling projects closed in this quarter, namely Lotus, Lambda and Volvo Polestar. So these are all the 2 Tooling closures that we reported on group level. And this helped the Asia business to recover significantly. And also this time, I think it's the first time that we don't talk anymore about major issues from COVID-19 and restrictions and limitations, which was sort of stopped and abandoned last year, so in the previous quarter. So this is obviously a very positive note in terms of Asia and the market environment we have there at the moment. Last year, by the way, when we reported the EUR 17.5 million, we had one of these well-known shutdowns in the period. And that's the reason why on a year-on-year comparison, the deviation is so significant in a positive manner. On the next page, we drill this down to the EBIT distribution across the segments. As said before, the profitability of Europe is heavily burdened by the issues I explained before in terms of call-offs, volatility, stability of the call-offs from our customers. In addition, we also had these further issues to take and to swallow from distressed suppliers, also this affected profitability in this quarter. Once again, in Europe, and also in addition the weak demand and also the issues in relation to the phase-out of some projects. So once again, this is the picture in Europe with EUR 1.3 million adjusted EBIT, so a pretty low margin level against prior year and in general. Also here, it's a diametral picture and representation for the Americas region with an extraordinary profitability of EUR 15.9 million. So this is a margin over and above 20%. So significant performance from a business that is running extremely well with high-volume Series being smoothly pushed through our operations. And in addition, we had a positive mix in terms of product and also a customer compensation payment. So yes, there are also some onetime items in there that helped achieve this really outstanding profitability for the Americas region. And in terms of Asia, with this EUR 4 million, also much higher than a year ago, 14.3% EBIT margin was also driven by the top line is the key driver for the profitability, but then also from the Tooling closures being very substantial in relative terms for the Asian business. But again, as we know, these Tooling closures have somewhat a dilutive element. And that's the reason when you look at the margin quality, it came down a little from last year to this year. That explains this in relative terms, while the overall profitability for Asia was very strong. Overall, LTM, as you can see here, once again, EUR 81.7 million adjusted EBIT to the 11.7% margin for the Group overall. And that's on the numbers for the segments on a geographic basis. And with that, we would actually go over to our Q&A session and invite you to raise questions. Thank you.

[Operator Instructions] Seems to be that we don't have any questions today.

All right. Then thank you for listening to our presentation. And as I said earlier on, the final audited results and the annual report will be published on the 29th of June. So looking forward to staying in touch with you. Thank you very much for listening. Thank you.

Thanks.

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