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

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Q1 2023-'24 results of Novem Group which will be presented by the CEO, Gunter Brenner; and the CFO, Dr. Johannes Burtscher. [Operator Instructions] And I would now like to turn the conference over to Gunter Brenner. Please go ahead.

Thank you for introduction. Good afternoon, and welcome to our Q1 '23-'24 presentation and key events from Novem, saying that I would like to start with Page 3 of the presentation. And first point is our sales, our revenue in the first quarter, '23-'24, we achieved total revenue of EUR 175.2 million which was down versus the same period last year of around 3.7%. Series sales were almost similar than last year. Reduction is mainly due to less tooling income. Series sales also in U.S. and Asia, specifically in the U.S. due to good SUV sales, our strength in the U.S. is that we do deliver a lot of [ low ] selling SUVs. So that performed well. But as you see in the presentation, trading conditions in Europe remained challenging with volatile call-offs from OEMs. This is a sudden call-off reductions from one day to the other or even plant closures for a couple of days from one OEM to the other. One example, amongst others, is Stellantis platforms, the Alfa Romeo and Maserati platforms, they recorded around 1/3 lower than prior year but it also affects German OEMs shutting down their plants -- in example for an extended holiday period. So U.S., Asia, good, Europe still suffering. With that, we achieved an adjusted EBIT margin of 11.4% of revenue, which was stable and was also partly supported by customer compensation payments for the well-known reasons, material price increases, energy, freight, things which keeps us busy over the last 2 years, and we saw some compensation from customers. Utilization of manufacturing footprint will be further optimized as part of our regular process. In other words, we are transferring production from 2 so-called lower-cost countries, giving you one example, the G class from Mercedes was transferred over Christmas, December -- January last year from Vorbach to our better cost plant in Slovenia Zalec as part of our further optimization process. And we are continuing to do so to strengthen our financial results. Very good news is that we secured a full electric luxury vehicle, it's so-called the E12 from the customer Avatr, Avatr is a Huawai backed Chinese joint venture. We supply full interior for that car starting in 2 years. And this marks the next key milestone -- milestone in strengthening the group's position in the Chinese market. A quick update on that. So far, we acquired around 10 different car platforms from Chinese customers. This Avatr is one, we acquired 3 platforms from customer, FAW, [ lotus ] Avatr, Geely Polestar. So that sums up to almost 10 platforms. It's all electric cars, by the way and the content specific on the FAW platform is pretty high. I mean the most luxury FAW platform we deliver is the so-called [ 801 ], which is a competitor to -- you could say, to Mercedes S-Class or will be a competitor to Mercedes S-Class, BMW 7 series, and it includes 23 components in that car, which is content by cars that of more than EUR 500. So good progress in China. This all comes down to the Local Tech Center in Langfang. That proved to be instrumental in acquiring this new Chinese premium accounts. And we already mentioned in previous sessions, we started this Tech center almost 3 years ago. And by now, we are fully equipped and up and running with program management, application engineering, design testing, and this is one milestone for our success with Chinese OEMs. So summing up that page, we see a robust margin development in a still challenging market environment, as I said earlier, specifically in Europe. Turning the page to come to more detailed numbers, financial highlights. So sales is down 3.7%, mainly in tooling from EUR 182 million to around EUR 175 million. And with that, the adjusted EBIT is also a bit down from EUR 21.4 million, 11.8% adjusted EBIT margin last year to EUR 20 million and 11.4% adjusted EBIT margin in our first quarter, this business year. Very good news is free cash flow is up from minus EUR 2.5 million to EUR 11.2 million and outperforming last year by almost EUR 14 million. And with that, the net leverage goes down, improved from 1.6x to 1.0x. So that gave you a quick overview of our overall business. For more financial data, I would like to hand over to my colleague, Dr. Johannes Burtscher. Thanks.

Thank you, Gunter. And also from my side a warm welcome to everyone. I will now lead you through our group results in more detail. Starting with revenue, as already mentioned before, we posted a relatively small decline in revenue in our Q1 '23-'24 versus last year. Now foreign exchange played a quite important role in this context, measured at constant foreign exchange rates, the revenue would have been higher by EUR 2.2 million, mainly relating to a weaker U.S. dollar and Chinese renminbi. The EUR 2.2 million split up in EUR 0.7 million, U.S. dollar, and EUR 1.5 million for the Chinese renminbi. So in other words, if we had constant foreign exchange rates, the turnover would have recorded at EUR 177.4 million. So that is the impact from foreign exchange. And the remaining decline, if you look at this number, is to a very large extent driven by Tooling. You can see this from our breakdown of our revenue in Series and Tooling is that we had a lower Tooling revenue in Q1, and this is predominantly the reason for the lower turnover. And by the way, the foreign exchange impact is largely attributable to Series. So if we take this into account, the Series revenue would have actually improved and grown over last year at constant foreign exchange rates. Now if you look at the market overall and as you know, we always quote LMC data, we see a 16.8% soaring increase in light vehicle production from 19 million units to 22.2 million. This is a plus of 3.2 million. And I think as we alluded also in the previous calls, this is a quite clear explanation here that the majority of the improvement, the increase is relating to lower-end non-premium brands, which is obviously not our captive market. In more details, we see significant increases in units produced. If we look into Asia, from BYD in particular, Wuling, Subaru, Mahindra, but also Tesla Model. Why? In Europe, it's another breakdown, but clear increases from brands like Renault, Skoda, Ford, but also here Tesla Model Y. And in the Americas, largely driven by Honda, Ford and also Tesla, the Model Y making a significant contribution to LMC, light vehicle production numbers. So it is always important to understand when we look into our numbers in comparison to the market, there is a clear overweight of lower-end non-premium cars platforms in the current environment. And as we explained also in previous times, there is obviously also a certain catch-up element in these numbers that we see from these public data. Now looking into Revenue Series only, we have almost a sideways development, EUR 151.9 million to EUR 151 million. So it's almost steady. We see that later in the regional breakdown that we do have differences that are quite significant between Europe in particular, and Americas and Asia. But once again, I'd like to emphasize, if we had constant foreign exchange rates, this revenue series would have noted higher than last year posting a small increase of around 2 percentage points in series revenue only. And once again, the major explanation and reason for the decline rests in tooling, EUR 30 million a year ago, where we had significant closures of tooling projects. In particular, the BMW X5 in China, the 7 Series BMW, that was the largest platform that we closed a year ago and also the JLR Range Rover sport last year. While this year, we closed BMW x5 LCI, the LifeCycle Improvement, the new E-Class, Mercedes and the Porsche Macan. So still a reasonable tooling turnover in the quarter but lower than a year ago. And as we always explained and outlined, tooling revenue is a project-type business. It's a periodic, it cannot be seen and evaluated as series revenue for all the reasons mentioned before. LTM, we currently record slightly below EUR 700 million, EUR 693 million turn over. On the next page, the adjusted EBIT, as Gunter already said 0.4% (sic) [ 11.4% ] in margin terms compared to 11.8%, from EUR 21.4 million to EUR 20 million. If we look also into the P&L and the various components of profitability, I think it's fair to summarize in a nutshell, that the key issue is with our personnel expenses. And here in Europe, this is the focal point we have here. The biggest challenges in terms of the call-offs being not stable and in particular, volatile at a short notice, and this makes it utterly difficult to run our factories in Europe efficiently. And that's the reason why personnel expenses in comparison to top line is not as we'd like to have. So we have here almost 3 percentage points in revenue or operating performance higher and this is due to the situation in Europe. And yes, it turns down to more people, higher capacities, that you need to actually absorb fluctuations that we have. But also over time, we can shift as unfortunately call-offs arrive at Novem and our plants at a too short notice to react in a sensible way and to lead our operations efficiently. Now having said this, we have made further improvements in terms of material expenses. So also here, if you look at the ratio in terms of sales, it has come down positively, also because there is not only a normalization, but actually a certain savings results in material purchasing for the input costs, same is with freight, especially for input -- incoming freight that is also positively reflecting in the stable energy cost bill. So that is helping in the area of material expenses. And we look forward to see more of that to come later in the year. In addition, and this is also not get plannable as other things that we had customer compensation payments in Q1 to a certain extent, as we have said also the last time, we have still this process ongoing. We are in good discussions. And also in this quarter, we posted certain compensation payments from our customers, and they arrived in Europe. We see them in the European segmental performance. As a result, we achieved this EUR 20 million adjusted EBIT, as mentioned before, and we currently stand at an LTM of EUR 80.4 million taking into account the last 12 months. On the next page, we have a quick view on free cash flow, Gunter already mentioned strong performance in comparison to last year where we had actually a cash drain in free cash flow, minus EUR 2.5 million. Now this quarter, it turned positive and largely positive in comparison to last year. Here, we have to say that we have made good progress with receivables, partly driven by volume and also factoring that was positive and also, we see that in the balance sheet in terms of the other receivables that we have, lower contract assets that also helped to improve working capital in that respect. Investing activities were fairly low, but still in line with previous quarters, EUR 2.2 million and that led overall to a free cash flow summarizing operating and free cash flow together at EUR 11.2 million. Now if you look also here at a full year perspective, we almost reached EUR 100 million with EUR 98.3 million on an LTM basis, although this is a very appealing number in terms of our cash flow performance overall. Capital expenditure here, we had 1.9% of revenue spend in the quarter, EUR 3.4 million, as you can see from the upper slide, it's more or less a sideways development, EUR 3.7 million to EUR 3.4 million. And yes, in terms of the locations, it's relating to our big plants, especially in Mexico, Queretaro, Pilsen and Langfang. The investments that we undertake relate all to growth CapEx, so basically relating to new projects and SOPs that we have in our portfolio. The footprint, as we heard already before, is in a sound condition, there are no requirements for capacity increases given the current market conditions. This is not the case. To the contrary, we look at further improvements in terms of the utilization of the current available capacities. And there, we have already made some good progress and further initiatives are planned for later in the year. [ Total ] working capital, as already said before, good improvement here, EUR 155 million to EUR 140 million, basically in terms of the movement of overall working capital. Also here you can see it from the breakdown of working capital, the largest contribution is from tooling. And here, we have 2 aspects: first, deferred cash outflows. So the outflow to basically prepayments that we make and undertake toolmakers were deferred and lower also in comparison to last year for a number of projects, some of which also being delayed and also cash inflow from payments for tools, for projects that we closed in Q1. So this is the largest improvement there. What is also worth mentioning, and we should always look at this as inventories where we have a more or less stable development. There is still a certain requirement for safety stock, it is still part of our operational readiness initiative. But given topline, there is also a further improvement potential there. But currently, we have a relatively stable situation in terms of inventory and stock level movements. There's one item that we control very regularly, frequently is overdue balances. We have a very rigid regime of following up with our accounts. We saw some overdue balances rising. Last time, we reported about several companies that we have as suppliers that are in financial distress. So this is a warning also for us to look into the receivables part as well. And here, in particular, Tier 2 and Tier 3 accounts. And clearly, this is a matter of concern, but we follow up very well, very regularly and this is very much under control despite the environment becoming even more difficult. If we look at trade working capital only, so excluding contract assets where we saw quite a movement, as I said before. And excluding tooling net, also here, we have a good development, 20.3% of revenue. This is actually almost our internal benchmark down from 24.2% a year ago. So working capital in general is in a very robust and very solid situation at Novem and makes obviously a considerable contribution to our free cash flow. You can see it also in terms of the more operational KPIs measured in days, DIO at 41. This is the only KPI where we want to see further improvement but DSOs at 36 and DPO at 55 being in a very healthy situation. Capital structure. Here, we saw a gross financial debt of EUR 288.5 million and a significant increase in cash and cash equivalents that actually led to a net financial debt of EUR 118.7 million only. So this is a market improvement over last year. And when you look at the lower chart at the bottom on the left, it's a very nice, it's almost an idealistic representation of deleveraging the company, as we said, all the time along in almost every call from 1.5 down to 1.0. So this is the lowest level since we actually refinanced the company as part of our public listing in July 2021 and a very positive development. And as you know, from the ad hoc release that we made recently on the dividend distribution that is actually up for decision next week at the Annual General Meeting, is that because of the very low leverage and the very strong free cash flow that we propose a dividend of in total EUR 1.15 per share. So this altogether led to this proposal and to this recommendation we lodge to the Annual General Meeting next week. Factoring the nonrecourse factoring was a little lower than a year ago, but it's an important pillar of our financing means in our financing structure. So also this is very much stable as in previous quarters. So that's on the group results, in more detail in the next section. I'd like to give you some more flavor on the regional breakdown. First, on revenue. We mentioned already a couple of points, and you can see there is a certain distinction between Europe and the rest of the world, Europe being in a challenging market situation compared to the other 2 continents. And we can see this also here in terms of revenue where we posted a lower revenue in Europe because of not only volatile but also weak customer call-offs, Gunter already mentioned, the Stellantis platforms with Alfa Romeo and Maserati that obviously lead to a poor utilization of our operation in Bergamo but also some platforms that are subject to EOP/SOP of a change of the platform. This is in particular viewed for the Mercedes-Benz GLC, so the smaller SUV of Mercedes-Benz with a revenue decline and also relating to a negative mix impact. And similar also in comparison to last year, we see already the BMW 5 Series come down. We have lower revenue turnover compared to a year ago. And yes, this is approaching the end of production for this platform in [ Charlotte ] and E class that is subject to a change model then later in this calendar year, where we have a similar situation. Also here, the volatility in these platforms is quite significant. And that is the situation in Europe, in particular, the contrast program really rests in the Americas where we had a strong performance, mainly driven by Series. So there was little tooling in Americas in this quarter but driven by very strong Series sales. And even here, we had a ForEx impact that jeopardize the topline but nonetheless, strongly driven by the bigger SUVs. And yes, once again, we talk about the BMW X5, X6, X7, GLE Mercedes-Benz, Audi Q5 being the main drivers of this growth. And yes, Americas is a real backbone for the group and has increased in terms of the weight within the overall business. And Asia, now on surface, we look at a decline of revenue, but only on surface because here, again, we would have to differentiate between Series and Tooling, last year this number of EUR 26 million, we had a big tooling project included. This was the BMW X5 in China, where BMW decided not only to produce it in Spartanburg, but also in Shenyang. So this is around EUR 7 million only relating to that platform. So if we excluded this and look at Series revenue only, then the growth is there and actually very strong. So Asia, Series revenue only had actually the strongest, the highest revenue growth of more than 10%, so double digit. So once again, in summary, Americas, Asia in Series revenue doing very well and being in a good situation, while in Europe, we have exactly this other situation. Profitability also by region. And yes, to some extent, to a large extent, this is in line and correlating with revenue. And here, in terms of -- in Europe we have the EUR 6.2 million, last year EUR 7.2 million, and yes, the issues here relating to the operational inefficiencies. So yes, the personnel expenses, in particular, being too high for the number of revenue and business volume we have and leading to the situation in the plants being not fully utilized and efficiently run, that made an impact here. And in addition, also the further issues that we have relating to this with over time and weekend shifts also that we had to absorb such fluctuations. There were some developments, as mentioned before, customer compensation was one of which, and we don't want to -- not mentioning it that with regards to material expenses, there is a positive trend to be recognized with input costs and also freight expenses, especially for inbound costs and this in Europe. So over time, this should improve, in particular, if and when we see a higher stability with the call-offs from our customers. Americas, once again, very strong, being very stable. Yes, we have volume platforms with our big SUVs, it's a sideways development EUR 10.4 million, EUR 10.5 million last year. Actually, the performance could be even higher and stronger if we had not also here a negative FX effect. And this is in particular in Mexico with the Mexican peso being very strong, especially in comparison to the U.S. dollar, but also to the euro. It's a little untypical because in the past, we always saw the Mexican peso being pegged to the U.S. dollar. And yes, with our main cost blocks in Mexico in Queretaro, with our personnel, but also the lease contracts. This is obviously jeopardizing profitability with this FX transaction effect. And Asia with EUR 3.4 million doing well. Last year, EUR 3.6 million, yes, higher volume, also relating to the tooling project, as mentioned before. And yes, Asia is currently benefiting from an extended platform, the E-Class that has been extended by around 6 months from April to October and also delivering a positive mix effect into the numbers of Asia being very stable like Americas. So also here, in terms of profitability equal to revenue to topline, we see sort of these 2 worlds picture at Novem and our numbers. LTM adjusted EBIT, as mentioned before, EUR 80.4 million. So this is a small minor decrease compared to the last time when we reported this. And that brings me through the end of the financial presentation. And we invite you now for our Q&A session. Thank you.

[Operator Instructions] And we have the first question from Akshat Kacker with JPMorgan.

Two questions, please. The first one on the revenue profile of the business in this fiscal year and beyond. So firstly, how should we think about the Series revenue growth this year, as you mentioned a few key project changeovers, especially in Europe and China. And secondly, are you still in a position to confirm that medium-term revenue growth CAGR of 5% to 6%. The second question is on the earnings and margin profile. Do you expect the earnings profile to be broadly evenly split between the quarters this year? Or do you expect some benefit from disinflation and customer compensations in the latter half of the year, please?

First, in terms of revenue, as we already mentioned, the last time and we do this time again, the 5% to 6% revenue, increased growth number medium term is right. So we firmly stand to this number in the medium term. I think you can also see this from the various guidances that are out there that for the current year, we will not get to that number. This year will be sort of a pass-through transitional year. And part of this is, a, the various EOP/SOP situations that we do have, one; and b, also the current weakness of a number of platforms. So as you know, we have not -- an outlook in the market for the revenue development. But for this year, it will be certainly lower and currently we are on a sideways development. So this is something that you should take as a rough guide also going forward. But once again, and I'd like to reemphasize the medium-term guidance is still on. In terms of your second question, the distribution of profitability, to be honest, this is a difficult one. First, as you know, we have a tooling business as part of our portfolio, which is, by nature, a periodic. So here, it simply depends on when and if projects are finished and completed, it's very often depending on the technical progress and then also the so-called green light that we get from our OEMs. But yes, over the last quarters, you have seen, we have had a quite fairly evenly distributed tooling revenue, but this makes an impact. And it does make an impact in terms of profitability. And typically, it's a dilutive impact because, as you know, the tooling business is not as profitable as Series. This is the one element and the other element is customer compensation payments. Also here, we'd like to reemphasize this is not over. We are still in discussions, we talked about last year. Now we talked about this year, there is a delay of 1 to 2 quarters that are then sort of reimbursed by the OEMs. And if and when these compensation payments fall in place, it's difficult to tell. These are the two elements that make it difficult. Other than that, when we come to Series business, it is relatively stable. The major point to keep in mind is actually the working days that we have. And therefore, you see a certain -- not seasonal, but certain patterns like in August or December because of customer holidays. But other than that, also here, the guidance is relatively stable in terms of that. But still taking into account the other two elements that are way quite high, especially now in the current environment. I hope that answers your both two questions, Akshat.

[Operator Instructions] And the next question is from the line of Jose Asumendi with JPMorgan.

I want to follow up on a couple of things on Akshat's questions. Can you talk a little bit around price negotiations and whether we should expect you to conclude additional pricing negotiations in the coming months, which will allow to improve margins across any other regions to offset inflation costs mainly? And then second, can you talk about within Asia, how much is your Chinese business? Or how much is China within your Asia revenues? And how much of that is currently exposed to Chinese carmakers? And what is the revenue opportunity for you in the coming years?

Thank you. Well received, Jose. In terms of pricing, we don't see a further increase in terms of increase in potential. We see currently a certain run rate. I know we have not disclosed the exact number which for good reasons, we don't want to offer. But currently, we have a certain run rate also from last year that we see ongoing, at least for the current year, and partly into next year. To be honest, with the further discussions we have, it is the debate and negotiations turn to become more difficult, but this is quite clear. But as of today, we think that what we have achieved last year will be the same for this year. And therefore, it's not negative, but it's also not positive that we see sort of an uptick in terms of pricing, compensation that we get from customers. I guess, to some extent, the headlines have changed. We started with selective material and commodity groups, we started all with chips and electronic components and aluminum and then it went into energy and the latest is clearly labor inflation. But as we said before, there are certain limits, and we see a sort of a stable development in terms of those compensatory effects from customer negotiations.

And to your questions on Asian customers or how many customers, Chinese customers in Asia, I mean, as I said earlier, we have all just taken those businesses as an order intake, and we are developing with the SOP coming in 12 months to 24 months from now. We launched one project, which is the FAW 202 car call, which is just in the launch process. But I would give you a number if all those platforms are up and running, which we have booked today, we are talking about 30% sales in our Langfang facility with booked business but that's just effect as of today. I strongly believe that we will get much stronger with Chinese customers, and the Chinese customers will get stronger and we have FAW, this Avatr and the Geely. Currently, we are in the process discussion with BYD, which is in my personal opinion, the most attractive customer we had and I can say that we had longer discussions about contracts and payment terms with them, which we finally fixed. So we will receive from now on RFQs from BYD and we will further grow the Chinese business. So the target is as much business from Chinese OEM in Langfang as we could get. As we see clearly, that they have really high content on exclusive interior trim parts. And also, there is no difference, which we received quite often the question in pricing or profitability, I don't see any difference to European or American customers. So future for us looks -- I see this positive in the Chinese market with the investment we did with engineering in Langfang. Hope that answers your question.

And just for the sake of clarity, Jose, if that was also part of your question, the revenue of China is -- or Asia is purely China. So there is no intercompany component in there. So this is sales for China. And actually, there is even but this is a tax-related matter that the revenue that we have with the Hyundai account goes through Europe in terms of building invoicing, so actually the Asia, Chinese business is a little underrepresented in the numbers. But all the numbers you have here are Chinese sales and not sort of distributed into other continents, just to mention.

There are no further questions at this time, and I hand back to Gunter Brenner and Dr. Johannes Burtscher for closing comments.

Well, thank you. We appreciate your questions, as always, and thank you for listening today and looking forward to the next quarterly presentation. Thank you.

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