R. STAHL AG (RSL2) Earnings Call Transcript & Summary

Thank you, operator. Ladies and gentlemen, welcome also from my side. It's my pleasure again to have with me today Dr. Mathias Hallmann, our group CEO; who will lead you through our presentation in a minute. The slide deck is also available under the Investor Relations section of our website, www.r-stahl.com. Before we begin, allow me to point you to our safe harbor statement, which you will find at the beginning of the slide deck. With this, I hand the call over to Dr. Hallmann.

Good morning, ladies and gentlemen. Welcome to this conference call. We will start the call with a summary on the fiscal year 2019, then give you some details on the 2019 financials, an update on our strategy in point 3, and then finally, an outlook on 2020. So let me start on Slide 4 with a summary of 2019. In 2019, we managed to offset slightly softer sales with further improved business structures. Sales slightly came down to EUR 274.8 million, minus 1.9% year-on-year mainly due our sustained focus on profitable business. As a result of that, we could double our EBITDA pre from EUR 15.2 million to EUR 30.4 million, which was mainly a result of the mentioned improved product mix, efficiency gains and some strong effects from the first-time implementation of the new accounting standards with respect to IFRS 16. EBITDA pre margin also improved 560 basis points to 11%. And the effects of IFRS 16 contributed about half of that, but we will see details on that later. Earnings per share improved by EUR 1.31 per share from minus EUR 1.10 per share to EUR 0.21 per share. And the IFRS 16 application, in our case, the lease accounting of our premises in Waldenburg mainly and inflated pension provisions lowered our equity ratio by about 500 basis points to 22.5%. Our net debt remained at a comfortable level of about EUR 4.2 million at year-end, excluding the new leasing liabilities. Our outlook for 2020, despite the global recession, it's not too pessimistic. We should not see a decline of our top line of more than 5% in a year-on-year comparison. And we would expect, at this point of time, our EBITDA pre to come -- to reach a low digit double (sic) [ low-double-digit ] million euro number by the end of the year. Let me move to the details of the financials, starting with Page 6. There you see our sales breakdown in the 4 regions we typically report. Germany, we see a year-on-year reduction in sales of 11%. Similar development in Asia Pacific, where we see minus 9% in lower sales. Both regions were mainly heavily affected by our new policies that we don't accept big orders with very low-margin and unfavorable risk profiles. And we had some of these projects still in our fiscal year 2018 comparison. If we take that out, we would see similar developments like we see in the central region and in Americas, where we could further improve our market position and achieve sales improvements in the central region of about 4% and Americas of about 10%. The order intake on Slide 7 shows the typical seasonality with stronger order intake in the first 3 quarters and then a typical reduction of some millions in Q3 when we move to the year-end. Nevertheless, we saw pretty strong sales at the -- in the last quarter of 2019, which should now see then in the order backlog coming down to EUR 67 million by the end of the year, minus EUR 9 million to the first quarter but -- and you will see that later. This doesn't concern us too much at this point of time because we first see that the quality of this order backlog is much higher than the quality of the order backlog we had in the years before with all these inflated numbers from nonprofitable business. And we also see a strong increase in the order backlog in Q1 of 2020. Slide 8 shows key data of the income statement. So again, we start with somewhat lower sales, minus 1.9%. First, very interesting comparison is probably, if you see a reduction of minus EUR 5.3 million in sales, you also see a reduction of minus EUR 5.4 million in the cost of material. So that directly reflects the much better product mix we now have in the business, which then leads to 210 basis points of year-on-year improvement in our material costs. Second major impact comes from other operating expenses. These were, on one hand side, heavily influenced by the first implementation of IFRS 16, which made up EUR 7.6 million, but also by significantly lower expenses -- operating expenses and less exceptionals. Those effects, then you see in the EBT, where we have an improvement of roughly EUR 10 million, which comes mainly from the improved or from the much -- excuse me, from the better mix, from improved productivity and some lower exceptionals, which I just described. We then had to pay some taxes. In fiscal year 2018, our taxes were basically 0. In fiscal year 2019, we had to pay taxes in some parts of the world where we made profits again. So that net profit shows an improvement of EUR 8.3 million. And the -- yes, what do you see then on the last line, you see the EBITDA pre, the double number. I already reported, and half of that impact is from operational improvement and the other half comes from the IFRS 16 implementation. On Slide 9, you see the major impact of IFRS 16 in the income statement and in the cash flow statement and the balance sheet. First thing is that other operating expenses were going up by EUR 7.6 million. This was mainly due to the fact that leasing expenses were taken out of the other operating expenses and moved to depreciation and amortization to a large extent, but also some portions we see in the financial results. And overall, that -- those EUR 7.6 million show again up in the EBITDA pre. We already reported that, that EBITDA pre benefited 50% by operational improvement and 50% by the implementation of IFRS 16. On the cash flow side, we see a EUR 7.1 million improvement on the operating cash flow and those EUR 7.1 million directly move to the cash flow from financing activities. So that is balanced. On the balance sheet, we see an extension of the balance sheet by EUR 33.8 million due to the lease accounting of property, plant and of our property, as I said, mainly the building and premises in Waldenburg. And on the passive side, you see it in the noncurrent -- mainly in the noncurrent lease liabilities and in the current lease liabilities and some impact on the equity. Altogether, our equity ratio came down by 300 basis points due to this extension of the balance sheet. Slide 10 shows a reconciliation of EBITDA to EBITDA pre. Difference is our restructuring charges, which came down roughly 30% from EUR 8.6 million to EUR 6.1 million, driven by slightly lower severance pay and significantly lower leasing and consulting costs. And we should expect at least the same improvement, if not a better improvement, in these numbers in 2020. On Slide 11, you see our key data of our cash flow statement. At first cash flow benefited heavily from the improved profitability. You see that in the first line in the net profit line and then some of positive impact from IFRS 16. Prior year heavily benefited from a reduction in our working capital, which we brought down by EUR 11 million. In this year, working capital remained stable as we put our focus more and more on customer service, reliability, and as we have our working capital numbers well under control. We also see some higher cash flow from investing activities. We started to implement selective investments in our automated production, and we also have to see that the prior year included some cash collections from the sale of property in an amount of EUR 4.7 million. Let's quickly go on Slide 13 and discuss a little bit where we are in the implementation of our strategy. Most of you should be aware and are aware of our STAHL 2020 program, which was mainly consolidation and housekeeping. And the 5 central pieces of that program: a central group organization, complexity reduction in our product portfolio, lean fundamentals; mainly focusing on production, improved and standardized sales processes and an IT consolidation. These 5, let's say, pillars were helping us mainly in the improvements we could achieve in 2018 and in the first half of 2019 in order to consolidate the business and bring it back into black numbers. In the meantime, we moved the focus of this strategy more from consolidation and housekeeping to growth and long-term strategic development. So the central group organization has been implemented. What we are working now on is really data-driven management that we have standardized data or KPI in all parts of the organization, which helps us to have the right discussions on the right numbers and drive further improvements, especially also on the interfaces of the global organization. Instead of further reducing our product portfolio, we reduced roughly 50% of our sellable articles in the last 2 years on a global scale. We now focus on portfolio management, meaning on standard portfolio, which we have on stock and which we want to do with our customers in 24 hours, and that certainly drives higher lot sizes and better planning processes and therefore, higher productivity in the operational areas has also dramatically improved customer service when it comes to on-time delivery. Our lean program, in the meantime, extended to other pieces of the business, especially to internal sales and engineering, but we are also planning to extend it further in other pieces of lean office applications, including R&D processes. Sales processes were standardized. They are right now also implemented in the global rollout of our SAP system. What we focus on right now is more a strategic market development and the relevant training and upgrading of our sales forces. IT consolidation is still ongoing, but with our IT excellence program, the focus is really on developing kind of a competitive edge and a competitive advantage out of our IT infrastructure and processes. What we added on the lower part, we see it on the lower part of the slide is that we really create data in order to understand our markets to have much more market intelligence than we had before to understand market sizes, trends competitor strategies much better than we did before, which we need to fine-tune our strategy for the future. And then we also added the really long-term growth and innovation initiatives. First is -- the one of it is business developed management and listing and feed. We really engage with customer as early as possible. And when it comes to big projects, we engage with customers in the feed stage in order to be involved in the early specification of the project and not in the later stage when projects are only assigned via competitive pricing. The listing is a very necessary strategic piece of our business because in many big corporations, you need to be an approved vendor, and it doesn't help you if you have the technically leading portfolio. But when you look at your customer base, you have to see that in the majority of your customers. So on a big portion of your customers, you are not an approved vendor. Then we heavily focus on new gas applications like LNG, as we see the market turning from oil to gas. And I can report that 2 out of the 3 biggest customers of R. STAHL globally in 2020 will be LNG customers. And I could almost see that we have -- that we build an LNG share in our business of more than 10%, when I look into our global sales. We started heavily with the digitalization of our products and solutions. Naturally, 100% of our automation portfolio is digital. In the next couple of years, all of our lighting portfolio will be digital and intelligent and heavily merging with our automation solutions. But we also -- we are also working on digitalized energy distribution solutions and all kinds of digitalization in our standard switchgear portfolio. We started an initiative for hydrogen and e-fuel, which we see as the next big wave after LNG. And I was certainly talking when I moved into the business world 20, 25 years ago, we were all talking about the war of talent. I think we have it now. We are in the middle of war for talent. And therefore, we are working on strategies to be the employer of choice, and not only in our regions where we are present with our premises, but also in the global industry for explosion protection. Quick look into the future. Starting with Slide 15, we already mentioned -- I already mentioned that our outlook is not too negative, but we also have to accept that we are dealing with a couple of issues which we cannot ignore. So the world will definitely move into a global recession. Newest data expect GDP reduction in comparison to 2019 of minus 3%. We also saw data expecting 4% to 5% for the next year and a strong recovery in 2021. When we look on the pieces of the business, which are relevant for us and we know that almost 50% of our business has some exposure to petrochemical business and offshore oil and gas. Then we saw -- after the first big crisis in '15, '16, we saw a slight recovery of the market in '17, '18 and '19. And we also benefited also from that recovery in 2020 because EAGLE shows strong order intakes in the -- at the end of the presentation, but what we have to expect latest in the second half of the year that the CapEx further -- again, decline in CapEx spending on offshore, but also in all other parts of the oil industry and the global recession will hit us somewhat. We also have to deal with temporary shutdowns, supply interruptions, high absenteeism rates in our workforces and additional cost to overcome high achievement, supply interruptions and shutdowns. So that's -- the whole crisis will definitely influence us. Nevertheless, we had a reasonably good strong quarter. Q1, we ended with sales of EUR 65 million and EBITDA pre of EUR 4.7 million and a net profit of minus EUR 0.6 million. What you -- and the year-on-year comparison was EUR 0.1 million. What you don't see in this number is that we have a significant increase in work in progress in our sites. That means we have some product, which we can't deliver right now because customers have closed down. We have some work in progress for huge orders, which are sitting in our warehouses. Well, we are in the acceptance testing with our customers, which will be delivered in April and May and June. So if we look at the operational performance, this is not completely reflected in those numbers and should be at least on the level of Q1 2019. And we had the strongest order intake with EUR 78.8 million in Q1 2020. The strongest order intake since I in this company, and I started in late 2017, and actually the strongest order intake since 2016. And on top of that, we see that the quality of the orders is very high. So we didn't take any huge projects with low orders. And that, despite all the problems we are seeing around us, makes us positive again that we will end 2020 probably with reduction of max 5% of sales, with a reduced EBITDA pre where we expect a low double-digit million euro number, at least, a positive free cash flow and a stable equity ratio. The assumptions for that is that we -- that the order intake will sequentially go down in Q2 and Q3, but not collapse. And I think that's the most important thing that we don't see forced shutdowns and production of our sites around the world. This is it from my side. Thank you very much. Operator?

And the first question we received is from Igor Kim of Bankhaus Lampe.

I've got a couple of questions. First, on your 2020 outlook. First, I appreciate that you gave relatively specific guidance, which is quite rare, I would say, occasion in this times of uncertainty. And the question is basically on your EBITDA guidance for 2020. If I look at your top line, the upper end of EUR 275 million basically suggests flat year-over-year, but EBITDA almost half compared to what we've seen in 2019. If you say it will be a low double-digit figure. And last year, it was EUR 30 million. So the question is, does EBITDA outlook reflects the lower end of the guidance? Or it also reflects the upper end of the guidance? But upper end will be probably reach at the expense of the lower-margin products. Is that correct? Or could you give a bit of color for the guidance?

Yes. Thank you for the question. The EBITDA, when I talk about a low single-digit number, certainly reflects the more lower part of the guidance. But even when we move a little bit up, what we see right now that we have to cover significant costs to overcome the breakdown of supply chains that we have to overcome high illness rates in some pieces of the business. And that from time to time, we have to move out teams into quarantine, and not all of them can work from home, which also puts significant stress and cost on the business. So the EBITDA guidance is difficult at this point of time. And so I would say it is the lower end of the expectation. Also when we move up a little bit, when we strongly outperform our top line low end, then I would also see a stronger EBITDA development.

Okay. And another question, I think in the last year, you had a better demand from components and somewhat smaller from projects. Do you expect this trend to continue in this year?

Definitely. Definitely, I would see the industry more focusing on maintenance and repair business and smaller upgrades, which typically drives component business and MRO business for us. And we already see huge projects, which are not too late in the process to be at least delayed. And therefore -- and this is completely in line with our strategy that we focus on more profitable component business and walk away from huge projects without margin, yes.

Okay. And the last question, you provided a fairly good presentation slide on oil price effect on the CapEx. But I think it's -- it refers to the overall CapEx budget of the oil industry. And how would it impact exactly you, I believe, to a lesser extent, but we -- compared to what you show in terms of forecast for the next couple of years? Or do you feel now that there is a demand from oil and gas industry? So oil industry is somewhat lower than in the prior year. And of course, year-to-date's sharp decline of WTI futures, I don't know. Does it have any negative impact on you, if you could briefly comment on that?

I mean now you really challenge my crystal ball, yes. I -- there are a lot of questions. I mean, let me quickly discuss one example. If you look into the North Sea deepwater oil exploration, we are 100% sure that these players -- especially the Norwegian players, they need to invest in automation and they need to invest in maintenance. And they will rather cut investments down on completely new projects. And -- but they will not stop with maintenance and upgrading and automation. So -- and that should play into our cards. But this is an assumption because the industry already cut down MRO expenses dramatically after the last crisis. And they can't follow that strategy forever. So yes, we are positive that it will not hit us to the extent we see on those slides.

[Operator Instructions] And the next question is from Winfried Becker of FMR Research.

I have 2 things I want to discuss with you. First is the...

Becker, we can hardly hear you. Could you repeat your question again, please?

Yes. Is it little bit better now?

Yes.

Much better now.

Yes. Okay. Yes. First question is about your financial situation. I have recognized you were able to reduce your net financial debt position end of '19, you have communicated a new credit facility. But looking forward into the current situation, I can imagine that you're also forced to save cash in your organization. And that would be helpful maybe that you can give some information on that side, what you are doing, maybe you can touch your CapEx plans for the current year and how you deal with that, that is very helpful. And then maybe the second point, maybe more as a clarification, which is related to the corona impact. Is it right that currently, all your factories around the globe are in operation, maybe on a reduced level, whatever? But are they in operation and what is their outlook on this? And maybe thinking a bit positively, when some macro experts expect that we will come very fast out of the crisis? Is it, to some extent, a problem to lift up production when demand is also picking up maybe at earliest in the second half? If you could comment on this, would also be very helpful.

Okay. Two very good questions. I can -- I think I can easily answer them. Cash management, we have simply no cash problem. You see our net debt is close to 0. And the new financing lines, we agreed on with our banks in December 2019, give us more than enough headroom, more than enough headroom. So we -- anyway, I don't see that we will burn a lot of cash in 2020, and even if, our lines are strong enough. So there is no cash issue. And right now, I'm not cutting investments. Investments are -- we are not doing those for fun. We are doing those to improve our strategic positions in the future. And so -- and this corona doesn't -- and this corona will not and does not influence our long-term strategy at this point of time. We are heavily investing in productivity measures, in automation, in new product development. And I'm not considering any reductions at this point of time. So this is to your first question. Second, we have, with the exception of one, all factories in full operations. So Waldenburg is operating, Weimar is operating, Cologne is operating; the 3 factories in Germany. And we didn't have one day of significant interruptions. The same is true for our factories in the Netherlands and in the U.S and in Norway. Then -- and then we have one workshop, that's the easier part. You heard that we acquired a 70% share in Esaco in South Africa. Even we -- also, we have a shutdown, an official government shutdown we have as we are working for the pharmaceutical industry, we are allowed to run operations, and we restarted operations yesterday in South Africa. So we had a shutdown of 2 weeks in a very small workshop, which doesn't really affect us a lot. And we also suffered from the shutdown in India, which is more critical to us, but also there, we could prove the government that we are system critical with our work for the pharmaceutical industry. We got a first exception, so we -- that -- which helped us to work with a very low amount of people and at least get out the finished orders we had in the premises. So we could manage to bring 4 or 5 containers on the ship and solve some of our supply issues. We are right now in the process that we applied for full operation, and we are very positive that we get it granted in the course of this weekend that we will ramp up India pretty quick, and all of our sites will be up and running in early May again. So if the market is picking up, we are not shy of taking orders.

Okay. Maybe another point coming back to the first question. Would you like to give us a number for your CapEx plans for the current year? EUR 5 million and EUR 10 million.

If I take out the activated R&D expenses, which are part of our normal business, it's somewhere between EUR 5 million and EUR 10 million. The issue is not the money. The issue is that we have enough skilled people to implement. So again, I will not stop any project if I have the confidence that the teams have their plans together, they have the resources together and they get it implemented.

[Operator Instructions] And we received a follow-up question of Mr. Becker.

Follow-up question is on the dividend payment. You said for fiscal year '19, it's too early to pay the dividend. Maybe you could summarize briefly what -- let's say, what are the requirements from your perspective so that the whole company is, maybe more longer time, able to ship out cash to the shareholders, that would also be helpful.

Yes. I mean according to our original plan, we were planning to move into dividend payments for the year 2020. So -- but that was before corona. So the strategy is very clear. The strategy is very clear. We want to move back to dividend payments as quick as possible. And we want to implement a sustainable dividend strategy. Sustainable dividend strategy means that we don't pay huge dividends in 1 year and then we stop paying the next year. And if you want to implement such a strategy, you need a healthy balance sheet with some resource, and whether we are able to create these resource in 2020 is now a little bit at risk with the current developments. And again, my crystal ball is good, but not that good that I can really foresee what's going to happen in 2020 completely and now 2021.

[Operator Instructions] So we received no further questions. I hand back to Dr. Kornek.

Ladies and gentlemen, thank you for joining our today's conference call. We look very much forward to staying in touch with you. And as a reminder, our next event will be the full first quarter earnings release on May 14 this year. Have a great day and stay healthy. Goodbye.