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

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

Good afternoon, ladies and gentlemen, and welcome to Novem’s year results presentation. I’m glad to present today’s first time in my new role as Novem’s CEO. So, let’s go ahead and start the key events. We generated a revenue of EUR 171.9 million, which is a modest decline over the previous year. In percentage, it is -3.1% y/y compared to last year’s Q2. As in previous quarters, the market and trading conditions remain challenging across all regions, especially in Europe, which is seen in reduced sales. Lease process or lower customer callers, additional closing days of the customer as well as postponed launches. Under these trading conditions, we achieved an adjusted EBIT of EUR 18 million, resulting in a margin of 10.4%. These results were mainly in Europe, affected by production inefficiencies and peer utilization due to royalty customer call-offs. The free cash flow of EUR 22.3 million showed Novem’s capability to achieve a strong cash conversion. One action to improve situation will be the closure of plant Bergamo that we announced already in September. The procedure is currently ongoing. We achieved a [indiscernible] socially acceptable agreement with the unions and the RELOCATION which will be finished until end of this calendar year, will help to improve the cost structure and utilization of the current manufacturing footprint. We got an additional hit which was lapped in Slovenia, what caused disruptions in our operation. But thanks to the quick reaction of our colleagues in Slovenia, we could, as we cover and did not discuss or even stop any of our customers. Turning to an end with 2 new nominations. First one is to mention Tesla Model Y facelift, which will bring other back into Tesla’s supplier portfolio. The second one is the Jaguar Panthera. Overall, the order intake in the year 2024 looks promising. In summary, we must face a difficult market environment for 6 years need to a year of transition. Going ahead, this Page #4 to have a look into the financial highlights for quarter 2. As already mentioned, revenue EUR 171.9 million, adjusted EBIT EUR 18 million compared to last year’s EUR 20.1 million, which ended in an EBIT margin percentage of 10.4%. Free cash flow, EUR 22.3 million less in line with last year, 22.8 million. And we see a positive impact in the net leverage coming from 1.5x last year to 1.4x in this quarter. Going ahead to the half-year figures, revenues, EUR 347.1 million, adjusted EBIT, EUR 38 million with a margin of 10.9% compared to last year’s 11.5%, which shows us a very good cash flow in this half year of 17.5% compared with last year’s 20.4% and net leverage already fairs 1.4%. So, I would like to hand over to my colleague, Dr. Johannes Burtscher with good results.

Thank you, Markus. And also from my side, a warm welcome to everyone. Let’s look into the group numbers in more detail. As already mentioned, have moved basically sideways from EUR 175.2 million in the previous quarter to EUR 171.9 million first quarter under review. As already mentioned in the previous quarters, we were negatively affected by foreign exchange due to the weaker U.S. dollar and Chinese Yuan particular compared to last year. All in all, we had a ForEx effect of EUR 6.5 million. The largest part is attributable to Chinese Renminbi, USD 3.6 million, EUR 2 million. So, if one looks at the series developments only, then we have a reduction by 4.4% at constant rate, we actually look at a flat development of our sales revenue. The decline, as already said before, was largely driven by Europe. From a segmental perspective, as already said, largely attributable to weak customer call-offs and volatile customer call-offs, but all the model changes that had an impact in this particular quarter. Vis-a-vis the overall market, we use LMC as an independent market source, we saw the light digital production being reported on a positive number, 5.6% y/y. And as we said last time, there is a key overrate of lower-end non-premium brands driving this development of the overall automotive market. If one looks at the different continents in Europe, as an example, it is driven by Renault [indiscernible] but also Nissan and Tesla Model Y, in Americas, largely by Honda, [indiscernible], Ford and Subaru, and in Asia, not unexpectedly by BYD, the top brands, Scales. So also kicking these brands, it is quite clear that there is a catch-up effect, as we mentioned, previously, but also the overweight of nonpremium brands and premium brands with a low CPV content. With a few on tooling. We had a strong tooling closure in the particular quarter, 22.3%. So, this is significantly higher than a year ago by EUR 1.4 million, again, driven by a number of important closures in this quarter. And from a local perspective driven by Asia. On a 12-month basis, we have now reported revenue top line of EUR 688.1 million. So, there is also a slight decrease visible in this number from a rolling last 12 months perspective. And this, once again, making this financial year for the period of transition. With regards to our adjusted EBIT, as Markus already mentioned, we generated EUR 18 million of adjusted EBIT translating into 10.4% EBIT margin. And this is the red line in our financial analysis, there is a pronounced weakness of Europe, also visible in our profitability, and this is clearly driven by the low performance by the underutilization of our plants in Europe, mainly Clinton and Charlotte and also Baltimore in particular, which is currently in the closing procedure as mentioned before and because of this overall situation, we have taken a number of actions. Most importantly, the closure of the Baltimore production and the relocation into our bigger volume plants in Europe, planting in Charlotte, but also, in addition, releasing the head the personnel costs in our locations, which is largely driven by the reduction of lease and temporary workers to adjust to the lower top line. So, Europe is, to a large extent, responsible for the performance in terms of our profitability. To the contrast, Americas is performing very well. And the other huge difference between the different segments. And we see this later also when we look into the segments in more detail. In this quarter, we could also post certain price compensation for higher material and also labor cost that we agreed with our OEMs, and this is a low single-digit number, but we could also post in this particular quarter. If one looks at the lower chart on the left, we are relatively stable if one looks across the last 4 quarters in terms of profit and profit margin development. On the next page, we see our free cash flow, showing EUR 22.3 million. So, it’s more or less the same number than a year ago. And here, the cash flow is also largely determined by working capital movements in operating the operating activities cash flow, largely driven by tooling payments that came in very positively in the last 3 months of revenue. And so far, very good performance. Basically, all the different components mean favorably except of payables. And this is largely driven by the lower top line that also showed an impact in the level of the payables, but other than that, strong performance in free cash flow was visible in the last quarter. The list on the operating activities; we see that maybe when we talk about CapEx, cash flow from investing activities, minus EUR 2.4 million, so lower than a year ago, also contributing to the free cash flow in total. On the last 12-month basis, it is still almost EUR 100 million, EUR 97.7 million, and this is also well above prior year levels, although due to the good performance of in our previous quarter Q1 compared to a year ago. What capital expenditure, we made EUR 4.6 million. So, this is almost 20% higher than with the comparison a year ago. In terms of the investments undertaken [indiscernible] located in our larger plants in Mexico and China and also here in Europe, in Charlotte and Riga. We have a CapEx ratio of 2.7% in terms of revenue. And this is exactly the number that we also have for the last 12 months at this 2.7% level. In the context of Bergamo and the relocation of those platforms from Italy to the Czech Republic and Slovenia, there is no CapEx involved. So, this is basically a transfer of the equipment and as the platforms accordingly and also obviously further utilizing the available production capacity is the target destinations in Charlotte and [indiscernible]. So no impact there from the closure of Italy. And other than that, also in view of the current utilization, there is obviously no need to further increase the footprint. To the contrary, we are in the current status further consolidating and optimizing the available capacities. So that’s on capital expenditure. For the year, we think this will also stay in a similar range and be around 2.5% of total revenue. Total working capital decreased significantly 12.8% in this relevant quarter over last year. So once again, almost all components moved sensibly, in particular, studies that came down very well. As said before, largely driven by payments from our customers regarding the closure of projects and the equivalent cash inflow from those projects. But obviously, also, as we have this negative trajectory on the top line, we see also the same situation here with receivables, inventories and also contract assets. So that’s the reason why total working capital came down quite nicely now to a level of 20% from 23% to 19.8% in terms of revenue. That’s a pretty low number also historically for Novem. In terms of gains outstanding, the DIO is still recording at 38 days, similar levels compared to last year. And yes, there is still a certain impact of safety stock levels in there. And given the current situation, this is also an area that we will further optimize in the following months to come. Other than that, we are satisfied with the working capital development, making also this valuable contribution into our free cash flow. With regards to the capital structure, as already mentioned by Markus, we have a net leverage of 1.4x LTM EBITDA. So this is lower than a year ago, largely driven by a higher cash balance, EUR 136.6 million to be precise. And this is extraneous the cash liquidity position even after the exceptional dividends that we paid in August this year following the annual general meeting. So here, once again, and this is also what round like last time that we should have a good and robust leverage capital structure with 1.4x. This is basically in line with what we expected also 3 months ago, we paid upward the tense to date and once again, mainly by optimizing our working capital and free cash flow performance. That’s on the group numbers overall. In the next chapter, I’d like to take you through the segmental figures in more detail. We have already mentioned the big headlines in terms of our 3 regions, Europe be under pressure. America is being actually very well, and Asia being also in a traditional situation. If you look at Europe, we with EUR 2.2 million lower than a year ago, this was and is mainly driven by the sluggish trading conditions. As we see this in the week call-offs, as already said before, we see customers taking off days, reducing the number of work days. And in addition to this, and this makes stealing the plants very challenging in Europe also changing the core of quite frequently and also at short notice. So, all of this adds to a no utilization of our capacities, i.e., do why we make these efforts in consolidating our footprint in Europe. And yes, not to forget to mention, we have, in addition to this, also the phaseout of the BMW 5 series that is also visible in the numbers and as already expected. On the refers to the contrary, and this is really in short contract. So, Europe is performing very well. And this despite we have a negative foreign exchange effect, as said before, ranging to EUR 2 million. And once again, it’s the same explanation as in previous quarters, it’s driven by a very stable but also very strong call-off. And here, once again, these are the large, the big LTVs that are clearly more effluent than any of the other platforms that we have in our portfolio. And yes, also here, once again, driven by BMW, the big X5 platform, but also X3, X4, but also GM [indiscernible], making contributions here and leading to this strong top-line performance. And yes, this makes it also different to Europe easy or easier to run our operations. And here, basically, our largest facility in Mexico and Carretero and also in Honduras, in Tegucigalpa, are much more efficient than the other plants. With a view on Asia, well, this is EUR 4.4 million lower than last year, driven by currency, as I said, the Chinese Renminbi is particularly weak, the ties We had a EUR 3.6 million impact there at constant rate. So, this is one impact. But on the other hand, also a change in the product mix in our portfolio. Here with the new platforms, also the new platforms with our new customers, the Chinese customers like the Lotus Lambda, not ramping up as quickly as we and the customer expected. And on the other hand, also the model changes being knocked as positive as obviously, the customer expected most importantly to mention here - the switch over from the old Mercedes spans each to the new cars, which is slower than expected. On the other hand, we had a good tooling business in this quarter. As I said before, with some of the larger closures like the Chinese WX size, also the FAW platform, the whole fee, which we reported previously, or the new other time that we also closed in this particular quarter. Last but not least, adjusted EBIT by segment. And here, this is sort of a reflection of what we already heard. So, reach in Europe, exceptionally strong in Americas and transitional in Asia. As said before Europe, the top-line mix here, the big difference. And it’s not only the top line in terms of volume but also in terms of stability. So, we still have these inefficiencies that resulted from volatile changing call-off, a short notice. Yes, as Markus mentioned, we also had the impact in Slovenia, where the flooding caused a few days off in terms of production and restoring operation. But basically, it’s still volume-driven top line in terms of volume and quality. And that means the European quality level of the margin also down to 3.7%. So, the EUR 2.8 million of EBIT, adjusted EBIT 83.7%, which is obviously, joke to the sharp contrast, Americas making a very strong contribution to the overall group results, EUR 2.6 million, and this translates in a really strong margin of 17.4% EBIT margin. So, we see that major change between the continents and also what volume does and the quality of the call of the stability that we have and that we do see in Americas, and we also see that going forward. So we remain very bullish on Americas, also backed by obviously a very positive, strong portfolio that we have there in place. Last but not least, Asia, I think I said already the key headlines here. Model changes, most was one of the biggest topics here. And to a certain extent, also the dilution from tooling. As said before, we closed a number of tooling projects and yes, tooling is relatively comparatively speaking, to the series business lower. And therefore, we had an EBIT of EUR 2.6 million only in Asia compared to previous year, which was very volatile at 5.1% and making the adjusted EBIT margin and 11% compared to last year of 18%. So that’s also on the segments. revenue and bottom line. And now we would open the Q&A session, and I appreciate your questions you may have.

Ladies and gentlemen, at this time, we will begin the questions. [Operator Instructions] The first question comes from [ Brent Thill ] from Kepler.

I was wondering what are you expecting for H2 in terms of growth and profitability by region?

Thank you, Brent. So if we had your question correctly, you asked about the profitability for Asia, right?

No, no. I was wondering what are you expecting for H2 in terms of growth and profitability by region?

Okay. Thank you for clarifying. Well, regarding our forecast, we are not guiding. So, we are not preparing giving a forecast. But as we already said last quarter, and I think that will say a good guidance also for our second quarter, and therefore, for the half year. And given the current circumstances, we see a similar development regarding the next quarters to come, we don’t see a market difference in terms of trading conditions in overall. But yes, there is clearly more pressure in Europe. So here, we should expect that trading conditions might even get worse. We see stability in America, as I said already before. And in China regarding our performance, we are still in the situation of model changes. And therefore, these headlines remain valid also for the quarters to come. So in a nutshell, we see a similar development in terms of top line and bottom line.

[Operator Instructions] I think that there are no further questions at this time, and I hand back to Markus Wittmann and Dr. Johannes Burtscher for closing.

Well, thank you for attending today’s conference call, and we wish you a only occasions already among the flatten and first to new year and looking forward to see and speaking to you next year.

Yes. Thank you very much for joining this meeting and going from my side. Thank you. Bye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for joining, and have a good day.