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

Dear ladies and gentlemen, welcome to the Investors and Analyst Conference Call of R. STAHL. At our customer's request, this conference will be recorded. [Operator Instructions] I now hand you over to Dr. Thomas Kornek, Senior Vice President, Investor Relations of R. STAHL, will lead you through this conference. Please go ahead.

Thank you, operator. Ladies and gentlemen, a warm welcome also from my side. In our today's conference call, we will address the developments and our achievements of the past fiscal year 2020. In addition, we will also shed some light on preliminary figures for the first 3 months of the current year. It's a pleasure to have with me today Dr. Mathias Hallmann, our Group CEO, who will lead you through our presentation in a minute. Before we begin, please allow me to point you to our safe harbor statement, which you will find at the beginning of the slide deck. The slide deck is also available under the Investor Relations section of our website, www.r-stahl.com. And with this, I hand the call right over to Dr. Hallmann.

Yes. Good morning, ladies and gentlemen. Welcome to our fiscal year 2020 analyst and investors conference call. Let me start with a summary of 2020, which was a challenging year for R. STAHL. Our sales declined by EUR 28 million to a level of EUR 246 million, a decline of 10% year-on-year. And that was following the demand drop in our major customer industries, and I will point out that later. The strongest impact we saw clearly came from the upstream oil and gas segment. Our EBITDA pre fell moderately by EUR 11 million to EUR 19 million, demonstrating our strongly improved resilience in the business and our improved ability to control our costs. EBITDA pre margin decreased 330 basis points to 7.7% of sales. And finally, net profit came in at a level of minus EUR 3.5 million, down EUR 4.9 million in comparison to the year before. Nevertheless, we kept our strong financial position with a net debt of EUR 5.8 million at the year-end, an increase in debt of EUR 1.7 million year-on-year. Our outlook for the fiscal year 2021 is indicating low single-digit growth on the top line year-on-year with a stronger momentum in the second half of the year, but also in the coming years. EBITDA will be slightly below 2020, and that will be mainly driven by continued significant investments in our strategic initiatives. Let me then go into the financials. What you see here is the sales development in our major regions. And the first thing, which I want to point out that in our core market in Germany, we saw despite the very difficult market development, a slight growth from EUR 62.5 million to EUR 62.6 million. And if we look into our central region, which contains Europe without Germany, and Africa, and I would take out Norway and the U.K., which are the 2 subregions, which are influenced heavily by upstream oil and gas, we would also see a slight growth in the central region. I will point out that a little bit more in detail on the following slides. In Americas, we were definitely hit by oil and gas and also in the Asia Pacific region, we were hit by oil and gas, but also by some order shutdown especially in India. What I just explained, you see in a little bit more detail on Slide 7 were the dark blue points indicate regions where we ended above 2019, the middle blue regions where we had a small decline, up to 5%, and then the light blue regions with minus 5% to 10% and the yellow or orange with a decline in sales of more than minus 10%. And it's definitely when we look into Europe and also in North America, it's only the regions where we are impacted or where we were impacted by upstream oil and gas, where we had a significant drop in sales in most other subregions, we could even improve our sales. And that also indicates that we could improve our market position. Asia was a little bit more diverse. We were heavily impacted in Australia by several crisis. It started with the fires, then we had the floods and then the floods were over, we started with COVID. So Australia was very difficult in 2020. India was also very difficult because we had an order shutdown of more than 6 weeks, so where we couldn't operate our plant. And in China, we were definitely impacted in the first half of the year by the very consequent measures the Chinese government took in place or put in place. Looking at key financial data, we see that decline in sales. Cost of materials came down in line with sales, which is indicating a healthy sales portfolio with material ratio still below 34%. What we see is a significant decline in our personnel costs, which reflects our temporary adjustments of labor capacities to the lower demand. And what we also see is that the sum of other operating income and other operating expenses improved by about EUR 1.6 million to minus EUR 35.4 million. So overall, we could definitely control the impact of the soft top line by consequent cost control that finally -- and I said that already in the summary from this decline of EUR 28 million in the top line, we saw less than EUR 5 million in the net profit showing up. If you look into our exceptionals, and we guided that already, our exceptionals declined significantly, which indicates our good progress in our efficiency program. It indicates that we are more or less done with the restructuring and the things we are implementing right now, I would more consider asset performance improvement or if we could also call it fitness program. And we are definitely done with the restructuring, which we had in the years 2018 and 2019. Slide 10 also shows a little bit more in detail what I indicated in the summary, a much better or much stronger resilience of our business, while our EBITDA pre breakeven level was around EUR 260 million in 2017. We brought it down to roughly EUR 216 million, EUR 217 million in 2020. And that clearly indicates the ability of the business to cope with such crisis much better than we could do that in the past. We said it in the beginning that we didn't increase our net debt too much. It was an increase of EUR 1.7 million, and that was also driven by a good working -- very good cash flow management over the year. We benefited definitely from improved depreciation numbers, driven by the renewed leasing contracts we put in place for our Waldenburg site in 2019, but we also benefited in our working capital, which primarily was driven by factoring expansion. Negative impact, but that was on purpose, came from higher cash outflow from our investing activities due to the consistent execution of the strategic agenda even through this 2020 crisis. When we now move in the strategy update. The strategy update also indicates what I said before that we are not in the restructuring phase anymore. Many of you are aware of our 2020 strategy we put in place at the beginning which was very much focused on efficiency gains. We implemented a central group organization, complexity reduction in our portfolio. We started with lean fundamentals, so the management in our production site, standardized sales processes and started this in consolidation of our IT. These programs are all ongoing in our updated EXcellence 2023 strategy, but all with a different, I would say, focus or different momentum. While we implemented a standard group organization, we now focus on data-driven management in the group organization. What does it mean? We are implementing global balanced forecast, focusing on operational performance in order to make sure that we control our operational performance over all group functions on a global level and measure it using the same KPIs instead of further reducing our portfolio. We move to active portfolio management, meaning we define the core program, a core stock program, which we already implemented in our European core markets and where we give the promise to our customer that this core program or the product from that core program would be available to him in times between 3 days and a week. We extended our lean activities from our production sites in almost all operational activities, especially in internal sales, and we are also starting with lean office activities. The standard sales processes, we have defined. They are implemented in our global SAP program and will be rolled out with our global SAP. What we are focusing right now is globally standardized sales tools, also sales balance scorecards where we measure and control sales performance but also electronic customer interfaces and programs for structured market penetration. And with our IT EXcellence program, we really drive the global standardization of all of our IT systems. And in parallel, we do move all of our global IT systems to the nearest technical and performance level. On top of that, on the technology side, we are working on the continuous portfolio renewal and on market-driven innovations in all of our business units. We will come out with very nice new products and innovations in the lighting segment, in our automation units, but also in our low voltage portfolio in 2021 and 2022. And on the growth side, I also -- I already mentioned that under the Sales EXcellence program, we really focus on market penetration and business development that starts with listing and feed activities that our products are listed with all global accounts that we are early involved in feed activities in global projects and that we support our feed sales from the headquarters from our specialists and also support them with continuous training on U.S. technologies. We move in new gas applications. We are very successful already with LNG, where we would consider ourselves as market leader, especially for LNG ships, but also for gasification units, and we are right now extending our portfolio into loading and unloading activities, and then we move forward to the end users. We started with hydrogen activities where we already worked on a couple of hydrogen fuel stations in the Netherlands, and we see first activities in the field of e-fuel. And on top of that, we started working on digital services strategy, which I will also point out on the next slide. But before I will do that, I really want to point out that the strategy when you look at it, from a broader perspective, is a strategy which drives the digitalization of our stars in all aspects of the business. We invest in our digital infrastructure with the harmonization of IT systems. We implement global and standardized value levers or KPIs and automated reports. We digitalize our lean processes. We do that, in particular, in production where we implement RFID for serial number recording, mobile data logging in logistics, digital manufacturing documents or assistance systems for assembly. And these are only some examples, we heavily invest in the digitalization of all of our products. Clearly, our automation products are digitalized already but also in the future, all of our lighting products can be integrated in automation networks and can be addressed as automation components and will be digitalized and even the low voltage portfolio in the coming years will carry much more digital parameters than ever before. And all that will allow us to continuously move in the field of digital services, where we right now work on first customer projects, which typically start with condition monitoring of explosion protection relevant pieces of customer plans that can be the control of deicing, deicing equipment in LNG plants in the Nordic region that fully automated shipped that can be in the field of tunnel drilling that we are working on a couple of these digital services together with our customers, and we will be developing our digital services model from that, together with customers following clearly defined customer demand. Some more details on the outlook. And the first slide you see here is indicating a little bit the market situation. And to understand how to read it, I will explain. What we see on the very left is the project portfolio we were working on and had a volume of more than EUR 100 million for a potential volume of more than EUR 100 million. It was in the oil -- upstream oil and gas piece. It was in the petrochemicals piece. It was in the chemicals and natural gas piece in the Middle East. And in summer, in the middle of the COVID crisis, basically, despite the natural gas activities, almost 100% of that project portfolio was on hold. We saw then a good recovery until September, but no further recovery until February 2021. So roughly 2/3 of these projects came back. But besides the much lower activity, which we do see right now, we also have to have in mind that until we can see these projects in our top line again. It will definitely be the second half of 2021 or even in 2022 because these -- the company is driving this project, they typically stop them between 6 and 9 months or even longer. And that will still create, let's say, a kind of a gap in the project activities, which we will see in the market. Nevertheless, we saw a nice recovery of our order intake in Q1 2021. We -- you might remember, we had a very, very strong start in 2020. Then we saw strongly declining orders in the second, the third and the fourth quarter. And what we experienced in the first quarter now was an increase in order intake of about 20% against Q4 or of about 13%, if I compare with the average of Q2, Q3 and Q4 of 2020. So some promising signs at the horizon, for me, to a certain extent, surprising, but we are happy to see that market development. And it's not contradictionary to what I just said. Because when we look into the orders, it's mainly driven by small and mid-term brownfield investments. That means customer, most likely or in many cases, customers, which are in shutdown, they make use of these shutdowns and work on technical upgrades or renewals, which they cannot do as long as these factories or these are in operation. If you look at the preliminary results of Q1, we still see low sales of EUR 58.2 million despite the stronger order intake. From this stronger order intake, we will definitely benefit from the second quarter and also in the third quarter. And these low sales or these top line reflects the low order backlog at the year-end 2020. And yes, as I said, we will benefit from the stronger orders in the second quarter. We mitigated that impact of lower sales strongly by controlling our travel costs and personnel expenses as well as we benefited from some moderate exchange rate gains. But we continue to increase our CapEx expenditures, which illustrates the continued investments in the implementation of our technology-driven strategy. So summing this up, we are seeing low single-digit growth year-on-year with stronger momentum in the second half. EBITDA will slightly be below 2020 following the strong strategic investment, but we will remain with our strong financial position due to positive free cash flow and very moderate net debt level as a result of that. This is it from my side, and we are open for questions.

Operator?

[Operator Instructions] The first question is by Klaus Schlote of Solventis.

Congratulations to the numbers, especially on the soft side, the adoption to the slower sales, that was, I guess, macro. And I've got a question regarding equity. Last year, we saw equity ratio going down to 18-point-something. This year, again, most likely, there will be a lot under at the bottom line. And what about potential capital measures in this context? Could you elaborate on that, please?

Yes. Good question. Actually, we had some favorable developments for our equity in Q1. As you know, our equity is strongly influenced by interest rates, which directly impact the -- our pension provision. And as we are in a global setup, we are also depending on exchange rate. And these 2 parameters were not in our favor in the last 2 years, and we could significantly benefit from that in the first quarter. So that at this point of time, with unchanged conditions, we would not have any equity issues in the next -- in the coming 2 years. That's the first part of the answer. The second part of the answer is that we have a decision of the 2018 general assembly, which would allow us a capital increase of 10%. And we will -- we are planning to renew this decision in the coming annual assembly in July 2021, so that when in case we would see a negative market development or in case we would see a trick demand for capital for minor strategic acquisitions or for whatsoever, we will be able to react to quickly.

Then a question regarding your strategies regarding the hydrogen e-fuel markets which might develop over the next quarters. Can you give us a flavor on what it means for R. STAHL in terms of turnover or EBIT contribution? Or is it still in a too early stage? When can we see some effects in the numbers from these markets?

The most interesting market from the 3, LNG, hydrogen and e-fuels, is, by far, LNG. I would consider -- and I think this is definitely a true LNG as a bridging technology to hydrogen. LNG has a much better carbon footprint than oil and gas. Then oil has a way better carbon footprint than coal. And it's available in huge quantities, and there are huge investments ongoing at least until 2035. The hydrogen activities, I would consider as this is still strategic investment. We do have business with all big players which are in the hydrogen business today. And we are involved in many new activities around green hydrogen, the planning for infrastructure, but also the -- let's say, the governance model or the technical safety regulations around these hydrogen investments and the operation of hydrogen-driven equipment. But to be honest, that will not strongly impact our top line in the next 5 years. The next 5 years, the most interesting piece of this is LNG. And what we also see as an interesting business developing right now is battery business. Battery business, first of all, is special chemistry. Where we see a significant activities ongoing from which we can benefit. And then the battery plants, which are being built around the world and more and more in Europe right now, they definitely need significant pieces of explosion-protection equipment, especially in the low voltage and in the automation range. And we already had some nice orders outside Europe in 2020. And we see that business developing in Europe in the next couple of years.

The next question is by Oliver Knobloch of Pictet.

Yes, I have 2 questions. Did I hear it correctly what you said that the quality of the order intake in Q1 was pretty good, i.e., not depressed pricing, but rather positive?

We -- the first thing is what I can maybe report is when we analyzed our numbers in detail for 2020, we also saw some margin gains in 2020 against 2019, indicating an overall margin gain of roughly 0.6% over the global sales. That came from price discipline, but also from an improved -- further improved portfolio. And that improved portfolio, we see also in the order intake in the first quarter.

Okay. So I guess this improved portfolio, this was sequentially last year. So it was probably in Q1 2020, much lower than in Q4 2020, right?

Definitely, definitely. Because what we also saw in that -- in 2020 was what I just described that projects were disappearing. And we saw many smaller and midsized brownfield investments. Many of those had to be implemented in short note -- on short notice. Many of them had high engineering and therefore, differentiation potential for R. STAHL, and they were not price sensitive.

Okay. And the second question now we have had a very strong start in crude oil prices in 2021, ETI is up 31%. At what oil price do you think that the industry or the customer -- your customers will change their mind and start more exploration projects again?

I think they are already doing this. My -- our learning was, for example, in the North Sea that before the '14, '15, '16 prices, the cost, and I know 2 numbers, 1 from the North Sea and 1 from the south of Brazil. And they fit very well. In the North Sea, we probably talked about EUR 80, EUR 90. And then Brazil, we talked around USD 100 to USD 120 for each barrel of oil. And the newest numbers, I heard from are between EUR 35 and EUR 40 in the North Sea. And that should be low enough at the current price levels to start investing again. And there's also a clear strategy, for example, from the Norwegian government. They -- and we see also similar activities right now in the Middle East that the players heavily -- plan heavy investments in fully automated oil and gas exploration, that means in the automation of platforms and in automated transportation. So I don't know whether they are already to spend money again, but I'm positive that the business will come back in the next couple of months on -- even on the current price level.

This means also that the projects which are on hold might come earlier than you have planned when you did the projection for 2021 sales that they might come earlier than you think?

No. I don't think they come earlier because all of these -- all of the EPCs and the end customers involved, they will also focus on additional cost reductions on additional automation, that means CapEx and OpEx reduction for these investments. I don't think they come earlier, but I'm sure they come.

[Operator Instructions] The next question is by Ulrich Sachse, UniCredit Bank.

It's Ulrich Sachse from UniCredit. I do have a second -- 2 questions. First, could you tell us something about the development compared to your competitors? And secondly, can you give us a little more detail on how long does it take between your order entry or intake to the sales booking? And how you see the development of this time period?

Yes. The -- let me start with the second question. We do have 3 categories of business. The first is standard business, and I talked about the standard portfolio. If we remain in the standard portfolio, that's probably their order intake and turn over, the gap is weak in normal times. But that's till today, it's probably somewhere around 10% to 15% of our business. Then we have the -- make to order products, which are still products, but specific customer requirements, and we have what we call configured product, which is simple engineering. These things typically take between 4 and 12 weeks. And then we have engineered systems, which is still the majority of our business, I would consider it 40% to 50% of our business. And these engineered systems, they can -- and it depends on the size. They can run between 3 months and 24 months, if it's a big project, which has deliveries over 1 or 2 years. On average, I would see a delay between order intake and sales between 3 and 6 months. But it depends on the region and it depends on the phase we are in right now as we are in this mid-sized engineered and configured orders, it's -- yes, but it's probably also in that range, maybe at the lower end a little bit. Then first question, how did we perform against our competitors? I'm sure we did well. We -- it's not easy to have numbers because big competitors are Eaton, Proscience I mean, they are part of the Eaton Group. You wouldn't get the numbers from them. Then we have Bartek, which is private equity backed, then they also managed not to publish the numbers. And so the only one we can get some numbers is probably Pebble and folks on the automation side. And I think we did very well against the first 2 definitely because -- and that indicates that we were gaining -- or we were not losing business in Germany, in France, in Italy, in Spain, in Canada, in Africa, in the Middle East. So in many of our core markets, even in that crisis, we did not have lower sales than in 2019, and that for me clearly indicates that we gained market share. And that, for me, also indicates that our strategy is showing more and more impact in the market. Therefore, I'm positive that we did better than competition, but I can't prove it. I have lots of indications. And I'm convinced that we did better then maybe Eaton and Bartek and Appleton. I wouldn't make that statement for Pebble and folks because they definitely benefited from strong automation activity.

Okay. There are no further questions. So I hand back to you for the closing.

Yes. Thank you, operator. Ladies and gentlemen, thank you very much for joining our today's conference call. We look very much forward to staying in touch with you. And as a reminder, we will be releasing our figure set or full figure set for the first quarter of 2021 on May 11. In addition, I want to give you a heads up already that we will be available at the upcoming spring conference of the Annual Capital Forum from May 17 until May 19. Have a great day and stay healthy. Goodbye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.