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

Ladies and gentlemen, welcome also from my side, and thank you for joining our today's conference call. Our prepared slides are also available under the Investor Relations section of our website, www.r-stahl.com. A replay of the entire conference will be at the same place shortly after we will have finished. Please be aware of our disclaimer statement, which you find at the beginning of the slide deck. And now I'll pass on to Dr. Mathias Hallmann, our group's CEO, who will walk you through the presentation.

Good morning, ladies and gentlemen. A warm welcome to our investors and analyst call, also from my side. We start with the highlights of 2022. Overall, we confirm our preliminary numbers we already published in February this year. Our order intake jumped 20% to a level of EUR 313.5 million. Our sales improved year-on-year 10.6% to a level of EUR 274.3 million. And we saw an EBITDA pre increase of EUR 4.4 million or 24.5% to a level of EUR 22.3 million. Free cash flow slightly improved to minus EUR 4.4 million despite a very strong buildup of working capital in order to safeguard deliveries to our customers. And we see a very nice net profit increase by EUR 6.9 million to EUR 1.9 million due to higher sales and improved cost structures. The earnings per share ended at EUR 0.30. We go into the details. We saw -- we see a strong development in almost all of our regions. Germany, up 7%, Central region, up 9%; Asia/Pacific, 4% and Americas 42%. Also, we have to admit that, that came from a very, very soft level due to the COVID crisis. We have still very strong embedded in the oil and gas industry in Americas, and that was heavily affected during COVID, and this is the recovery now, but we also see ourselves growing strongly into other segments. This is something I'm going to address later on when we talk about ongoing strategy implementation. Looking at the P&L. Yes, it starts with the increased sales. We see good economies on the personnel cost side with an increase of 5%, where we increased sales by 10.6%. And negative impact from higher material costs due to supply chain issues. We had to buy significant volumes sometimes, especially for electronics on the gray market, what drove our material cost. But we will see in our first quarter numbers that this is improving right now, and that was a temporary effect in 2022 only. These were the 2 main effects. Overall, EBIT increased then from minus EUR 0.1 million to EUR 4 million or EUR 3.9 million, and EBITDA pre from EUR 17.9 million to EUR 22.3 million. and the strongest increase in improvement, as I already explained in the net profit from minus EUR 4.9 million to EUR 1.9 million. That's also due to a very strong financial results where our interest expenses were basically offset by the strong performance of our Russian subsidiary. Free cash flow, it starts with a good improvement in the net profit. But then we see that we had significant changes in the working capital, as already explained in order to safeguard deliveries. We have -- which then brings down cash flow from operating activities to EUR 6 million, where we had EUR 12 million last year. We cut our investments down or controlled our investments, but I have to say, without harming our future development. We will catch up this year with these activities, so that we finally end in a free cash flow of minus EUR 4.4 million, where we had minus EUR 6 million last year. Our net debt increased to EUR 29.2 million where it was at EUR 18.3 million last year. These are the numbers. So we saw a good improvement in '22. When we now move to '23, this nice development, which basically came from the second year in 2022 is accelerating. You see here the order intake and the sales development over the last 3 years, starting from the bottom. In the Q3 and Q4 of the COVID crisis, we see improved numbers during 2021, accelerating numbers into orders in 2022. We couldn't catch up really with sales in the first half of the year due to supply chain issues, which we partly sold in the second half. And now in Q1, we see a dramatic improvement on the order side and also a very nice improvement. Again, on the sales side, orders are up 29%. Sales are up 28%. Nevertheless, the gap between orders and sales is still big, which brings us to a very nice order backlog of, in the meantime, EUR 126 million. The preliminary results in Q1, you see the sales improving 28%. Cost of material only increasing 18%. So our material ratio, as I already indicated, is going down. We have several effects there. First is that we managed to implement price increases. Second is a very, very strong quality of the orders. And thirdly, we get our supply chains under control, and that results in these improvements. We see very nice efficiencies on the personnel cost side where we basically have only 10% of the sales improvement in -- as an increase on the personnel cost that drives very nice economies. Operating expenses are slightly up as we have to catch up with a couple of initiatives which we couldn't fully implement during the COVID crisis. But nevertheless, that all results in an EBIT improvement of EUR 7.2 million from minus EUR 1.1 million to EUR 6.1 billion, and EBITDA pre improvement of EUR 7.4 million from EUR 3 million to EUR 10.4 million, and net profit from improvement of minus EUR 5.4 million to EUR 3.9 million, which results in earnings per share of EUR 0.60 for the quarter, which is 100% up in comparison to the full year 2022. So a good start, good start into the year. We get our operations under control. We leave COVID behind us. And then so we start concentrating on strategy again. What you see here is, let's say, very high level description of our strategy. Those who follow us for quite some time, they might remember our initiative, which we call Stahl 2020, we concentrated very much on efficiency, lean operations, processes, especially the sales processes, IT harmonization. We streamlined our portfolio, reduced complexity and we put first innovation projects on -- into our plans and implemented them. We then added with our EXcellence 2023 program, which we released in 2020. We added the targeted growth initiatives, which are very much based on ongoing megatrends, I'm going to come to that. We focused on segments like pharma, chemicals, LNG and started focusing on hydrogen. And in the meantime, we also added nuclear. We started our sustainability initiatives and concentrated on data governance. These initiatives, I would say, are part of our DNA. Now we are not giving up on them. We are going to run them over the next couple of years, but we add another 2, let's say, building blocks into our strategy. The first is internationalization. If we look into our numbers, I would -- I dare to say we have a market share in the DACH region; Germany, Austria, Switzerland, which is beyond 1/3. We have a market share in Europe, which is probably somewhere around 20%. And when we leave Europe, we are probably nowhere above 5%. Nevertheless, we do have a leading portfolio in every aspect. We have a leading automation portfolio. We have a leading lighting portfolio. We have a leading low-voltage portfolio, and we have a global presence. And this is one thing we are going to leverage in the next couple of years that we really concentrate on the internationalization of our business in terms of processes, structures. That means implementing the strategy, which was not really possible during the COVID crisis and develop market shares, but we also need to focus stronger on a global culture of the business. And the next building block is digitalization. We started with that. I mean most of our products are digital. We started thinking about digital services and digital business models. We automate and digitalize our internal processes. But this is something we have to accelerate. And what we need to add is also a global comprehensive data structure. And we are going to step in first application of artificial intelligence in order to really become, I would almost say, kind of a digital enterprise in the next couple of years and drive efficiencies in every aspect of the business. Quickly -- quick look on the megatrends, the population, the global population is growing. The climate is changing. Mobility is increasing. Digitalization is driving all aspects of our environment and our businesses, and that drives need and we, at Stahl, can benefit from that as we explain in the next slides. Energy change, we talked a lot about it. We were always saying LNG is the bridging technology to hydrogen. We started predicting that 3, 4 years ago. I think in the meantime, everybody knows it. This is a prediction of global LNG demand until 2040. It's from June 2020, I would expect that the numbers are even higher with increased investments in LNG and increasing focus on climate change in all parts of the world. And we are strongly benefiting from it. What you see on this slide is LNG value chain. We have our natural gas production, you'll have liquefaction, then you ship, you regasify and you bring it to the end users. We, as Stahl, are historically very strong on the liquification side. We are very strong on the shipping side. We are actually the market leader on the shipping side. I think 80% of all LNG ships worldwide, at least 80% are equipped with our automation devices. We do have enormous demand, increasing demand, stable demand over the next couple of years. And now we work ourselves more towards end users. We will be seeing effects that ships are not allowed with their oil engine to move close to cities. They will have additional LNG driven engines that requires bunkering and that also requires -- the ships need to be provided with LNG on the sea that requires the engines that requires automation. And we already see strong demand from the end user side, and we are working ourselves into it, and we see first nice successes. And I guess -- and I'm very positive that we will build our strong position also into that segment. On hydrogen, we do see strong demand for hydrogen, [ not tomorrow ]. Even we have first nice projects but definitely in 5 to 10 years. And the specification work is being done today. We are -- our position in LNG, we virtually built 5, 10, 15 years ago when we started working with our customers and the same, we do right now with potential providers of hydrogen technologies. You see the Stahl logo almost everywhere. On the powertrain side, we know it, but also on the storage and distribution side for hydrogen when it comes to electrolysis, when it comes to storage, but also when we think about the methanization and CO2 buffering, we are in the game. And then also then transportation and when we come to the end user, our technology is needed. And what I can say is that 100% of our automation portfolio, 100% of our lighting portfolio and the vast majority of our low voltage portfolio is already today hydrogen ready. Our new segment, nuclear power. I know nuclear power is not -- that's not a positive, let's say, impression on everybody, but our strategy is very clear. As long nuclear power plants are being built, we will participate in making them as safe as possible. We are not in the position to charge whether nuclear is a good or a bad technology. The U.K. is planning to approve one huge power -- nuclear power plant every year up to 2030. And after very good specification work from our side, we were awarded the first the first nuclear power plant, Hinkley Point C. We are going to deliver all lighting equipment -- LED lighting equipment for this plant, and that has a minimum volume. What we see right now is roughly EUR 10 million. We are going to -- we are expecting that, that volume will be increasing, and we are hard specified for the next projects, which are coming up. So this is a very nice development for us that we quickly moved into a segment where in the past, we had no orders, no volume. And now I would expect a double-digit million-euro number in this segment every year in the decades to come. Digitalization, as I said, we are focusing on processes. Our sales processes are becoming more and more digital, finance processes are digitalized, all of our automation products are digital per definition. All of our LED lights have a digital interface and can be addressed in an automation network. And many, many of our low voltage applications and products are becoming more and more digital. We are right now developing digital service models, because more and more customers ask for example, for condition monitoring, so that we monitor and control their devices remotely. We see that more and more customers do have less competency for explosion protection. So they expect us not only to plan their installations and deliver product, but also engineer builds and maybe in the future, completely run it and take responsibility for performance. And that can also be -- only be done with digital models where we remote control devices for our customers. So this is something we are moving in and -- in order to become a digital company and around that, we have to build data models and artificial intelligence capabilities, as I already explained. What we see here is a nice example. I talked about it some years ago. Now it's real. It's the first fully remote-controlled ship for transportation in the oil and gas industry. It has been built in Norway. One of our big customers was heavily involved, and we delivered equipment for heat tracing and lighting. When it comes to internationalization, what I also described, we see Europe here. And Europe right now has probably 70-plus percent of our turnover. We have a good presence in North America. We have a very good presence in Asia Pacific, and we have distributor assigned in almost all relevant markets in the rest of the world. And this is clearly now where our internationalization strategy is going to focus in the coming years in order to bring our style on a different economic level as we have it today. Last but not least, about our outlook or our guidance, our sales forecast right now is somewhere between EUR 305 million and EUR 320 million. We still see some supply chain issues. Also, they are weakening. Getting people on board is also a challenge. So we will still -- we are going to struggle for a while to bring our sales to the level where our orders are. Nevertheless, we don't loose on the order side. That means that competition is having the same problem. EBITDA pre, we expect somewhere between EUR 30 million and EUR 36 million. We will definitely need to add new positions in order to implement strategy and manage the growth, but we will also be seeing salary increases during the year, significant salary increases, so that will put some pressure on our cost structure. But nevertheless, this is a very nice improvement compared to the numbers we saw last year. Free cash flow, we expect to move into the positive range with a single -- low single-digit euro million amount. And a slight increase of our equity ratio under the assumption that interest rates of our pension provisions stay almost stable. Risks, everybody knows at the Russian-Ukraine crisis, the ongoing supply chain issues and inflation on an interest rates. Nevertheless, we are dealing with that since quite some time. So that I would expect that we have it well under control. This is it from my side. Thank you very much, and I'm open for questions.

[Operator Instructions] Our first question comes from the line of Klaus Schlote with Solventis.

Very good numbers, especially Q1, very strong. Maybe we start with Q1. If I calculate it correctly, we have got an EBITDA pre margin of about 13.3% in Q1. If I do the same exercise for the guidance for '23, looking at the low and the high end of the guidance, then it's somewhere between 10% and 11.3%. So that would mean quite simply thinking that during the next quarter's profitability on the EBITDA pre level should come down a bit. What is your thinking on that?

Yes, Mr. Schlote. As I said in -- during the explanation of my last slide, the strong increases in the personnel costs are coming now. We will be seeing an increase of 5% to 6% in Germany, starting, I think, from June. And if you put that together with our personnel cost ratio than you are -- where you have probably 1%, 2% or even more of EBITDA. And this is the biggest effect. The second effect is that in order to deal with all the growth initiatives and prepare for strong growth rates in the next 2, 3 years, we have to build or we have to acquire some talent. And these are the major effects. Also typically Q2, April, May with all these public holidays are historically weaker. And when we put all that together, this is our expectation.

Okay. And on your words in the beginning of the annual report, you are mentioning that you will, in the midterm, gather or reach a very good profitability. Can you put a number to that?

I can do what you can do. I mean, if you analyze our P&L, you see that when we finally cover our fixed cost, we almost -- we get a kind of a [ turbo ], because we are very much fixed cost driven due to our global structure. And when you look into the improvements and the numbers, it's that we strongly increased sales and without really building lots of personnel resources. And I would expect if we see -- if this development is going on, and that's my expectation. In the midterm, we should have a double-digit EBIT profitability percentage.

EBIT, okay. Then regarding your outlook in the annual report, you are mentioning that you are expecting the performance to go up further in '23, and so -- but you're kind of putting a kind of a setback in so far, as you say, on a lower level. So the increase -- my understanding is the increase in '23 in terms of percentage points, in percent might be a little bit lower than '22. Is that a correct understanding of your...

No, on the top line, we would expect -- I mean, 2022, we had a growth rate of 10.6%, and if you look at our growth rate in 2023, the lower barrier of the guidance is probably around 11%. So we do expect accelerating growth, and we see that already in all -- let's say, on a year-on-year comparison. But the 30% from the first quarter, that's not realistic, because we will most likely not see a 30% order intake increased during the year, and we will not be able to ramp up production with a level of 30%. And this is built into this forecasting. But what you could expect or what you can expect is that these numbers already today indicate ongoing growth in 2024. And we have -- we still have very good orders for 2024.

[Operator Instructions] We have a question from the line of Christian Sandherr here with NuWays AG.

I would have a follow-up question on the topic surrounding the nuclear power plants. So you've only been talking about supplying lighting solutions for the plant that's currently being built in the U.K., and there's an additional plant planned every year. But looking more on even just pan-European space, there's lots of plants being built. So are you also trying to get in any of the other plants? Because I think if you -- with one client, you can do roughly EUR 10 million in sales. I think that's quite significant potential, and if so, why not?

Yes. The background of Hinkley is that the owner of this plant, I think, is EDF, like -- and the main engineering contractor is also a company coming from France. So now we all know that France has to refurbish roughly 50 nuclear plants in the coming decades, and they are planning to build another 6. And we are very, very well positioned to participate in that development also. The work, which we did in order to get specified in the U.K. was done mainly in France with our French colleagues, with the participation of our U.K. colleagues and the announced with participation of our technical teams in our wire plant -- in our lighting plant in Weimar. Yes, our expectations is that we also move into other markets and see additional potential. And France would be the market number one with huge potential. Right now, I'm not unhappy to start with EUR 10 million per year in the U.K. But there is most likely more to come, yes.

Okay. Great. And then can you also shed a little bit of light on how you intend to grow your international market share?

Actually, the same way we did it in Europe. It's really the implementation of the strategy, really putting all these programs into operations we had -- we implemented here starting with process improvements, process standardization, IT standardization. This is already ongoing. And then the other thing is really market, let's say, business development. What you see in our industry, it's highly regulated. It -- it's highly depending on internal and external approvals, and it has high entry and exit barriers. What we couldn't do during the last couple of years is really investing in the amount of specialist capabilities. You need to have, for example, in automation, you need to have in lighting in order to work with the customers, get specified, develop specific solutions for the customers and then start delivering product to them maybe a year, 2 or 3 years later. We just didn't have the funds to finance it all over the place. We couldn't travel the way we needed, and this is what we could not implement this fully, the strategy we implemented in Europe, but we know it's working. We know we do have a fantastic portfolio, and therefore, we are very, very confident that we can start building a very stronger position in these markets, for example, the U.S., the Middle East, Asia, but also in parts of Africa than we did in the past.

Okay. And this will mean -- if you talk about investments, you're mainly talking about personnel, right?

We talk about specialists. It's not huge numbers, but for example, when you want to sell -- imagine you want to sell automation, you need a critical mass of people. You probably need a hub with 5 specialists, which you have to finance over a period of 2 to 3 years until they start paying back.

Okay. So we're not talking about the massive CapEx program...

No, no, no. We are not talking about CapEx. We are talking about investments in automation experts, in lighting experts, in business development people that -- we do have the structure in place. We do have the global footprint in place to grow this business to EUR 500 million without major investments.

Okay, great. And can you -- for last question, maybe give some insights on the order intake in Q1. Is there anything in particular that was driving it because it was obviously exceptionally high?

No. No. It's no big projects in it. LNG is [ fruitful ]. LNG is extremely strong pharmaceutical with automation, it's extremely strong but also special chemicals, even the oil industry is strong. So it's really coming from all segments.

The next question comes from the line of Christian [indiscernible] with [Indiscernible].

I have another question with regard to the nuclear power. How does this involvement nuclear power impact your environmental footprint and ESG factors? Does it impact -- does it have an impact, yes?

It's definitely ESG-driven, because the old generations of nuclear plants, they were always, let's say, standard lighting. And as part of ESG strategies from our customers, now the whole industry is moving towards LED lighting with much lower energy consumption. This is the driver behind it for us. It's supportive. First of all, the European Union has classified nuclear power as sustainable energy. And secondly, LED lighting on the current regulations is seen as a very positive factor in an ESG strategy.

But it doesn't have an impact on your own ESG?

Yes, it has, because the amount of product, which is classified as under the EU Taxonomy, which is classified as sustainable, yes, is increasing. So it will have a positive impact on our ESG reporting in the coming years.

Okay. And I didn't understand your remarks about Russia. Can you make some -- help me out with what is the situation in Russia and...

Very simple. Okay, we stopped any business with Russia to make that very clear. We are following 100% political frame, which is we are having -- but we do have a 25% -- historically, a 25% participation in a Russian company. And this company is just booming. It's driven by the fact that Russian customers, which bought from outside Russia, don't have this possibility anymore and have -- they have to buy inside the country, and that's driving strongly the business of this company, and we participate in that. To make that very clear, we don't have -- we don't deliver to them. We have no influence on financing or day-to-day operations. We also didn't see an opportunity until today -- a reasonable opportunity to step out. But we, on the other hand, we are participating in the from the development or in the development and benefiting from the development in Russia. It's a kind of unfortunate almost windfall from this crisis, yes.

And you're partly able to profit financially at the moment, or is it a future -- stays the money there? Do you get the money?

We are getting dividends under the current limitations, but we are getting dividends.

The next question comes from the line of Ulrich Sachse with UniCredit Bank.

Dr. Hallmann, first of all, very good figures and an impressive order intake and order book you have already. You point out your internationalization strategy. Could you just give us a better view on the cost of this, especially the R&D rate should be impacted by this? How much do you need to invest to internationalize your business?

The R&D rate will -- I mean we will not significantly go up due to this internationalization strategy. The reason for that is that 90-plus percent of our business are under the ATEX or ECX, EICX norms, and that's a standard which is applicable almost everywhere outside North America. So definitely, I would see. With the growth rate we have, our R&D rate is rather going down at also our absolute cost might slightly increase because we also have the -- we have to face the realities that we will not be able to build up the organization that quickly and find the right people and define the new programs. So I would not see that the R&D rate is going up. What we need, and I already explained that we need experts on the market side, on the sales side, but I mean, if I assume a 20, 30 experts into the market for automation and lighting, assume a cost of maybe EUR 100,000 per person an year, then we need another EUR 10 million of turnover in order to compensate that, and that will be easily possible with these investments. This internalization strategy should not harm our P&L, because we don't see huge investments in equipment, in plants, in infrastructure. We don't see jumping fixed cost, it's all on -- at the customer end in order to work with customers and the payback should be 2 years maximum.

Okay. That sounds great. The second question is the second pillar of your strategy is the ESG part. Could you give us a brief outlook on your ESG strategy and maybe a support via ESG rating by an external agency? Is there anything planned?

We are right now in -- I mean we started internally to build a kind of ESG balanced scorecards in the last 2, 3 years in order to collect first numbers. It has many dimensions. It has the dimension to reduce our internal CO2 footprint. That's for sure. Part of that was also the buildup of our solar plant here in Wildenburg, which brings us close to CO2 neutrality. The second, let's say, big building block is the product side. I already talked about the LED lighting. We are growing significantly with our lighting portfolio, and all these LED lights are rated as sustainable product under the EU taxonomy. The final ESG strategy, we are right now defining the KPIs, we are defining and we will be starting with full reporting in 2024. And -- but we will also be -- already today, we are rated from sometimes from investors, from customers. And -- but part of this ESG strategy is also that we will be looking for external rating. I don't know what the organization we use for that. The market is developing quickly. We are observing it. As I said we are building -- we are defining building the strategy right now, but it's not finalized.

Okay. And the last word, congratulation to the extension of your contract.

Thank you.

[Operator Instructions] We have a follow-up question from Mr. Schlote with Solventis.

A follow-up question regarding CapEx. It was mentioned quite a few times, but without a number, do you have -- can I -- Dr. Hallmann, can you give us an idea about CapEx in '23, level of CapEx?

Should be around EUR 16 million to EUR 18 million, I would expect.

Okay. And then the Russia was mentioned business of ZAVOD, I guess, is the name of the company, where you have got the 25%. And there was a write-down in the Q1 on ZAVOD in the order of EUR 3.1 million...

Yes. It was back in Q4.

And the reasoning was when I remember correctly that Russia was downgraded to non-investment grade, but is Russia now back in investment grade? Or what is the reason that we have the -- turn to you -- or you turn the right down back.

You are absolutely right. It was pulled down on investment grade, and then it was just the higher, let's say, risk rate in which we needed to apply in our predictions, which we brought down the entity value. What we then saw -- and another effect was this very strong or weak exchange rate in the beginning of the crisis. You might remember the ruble was at RUB 140 per EUR 1. It then came down to RUB 60, and it's now stabilizing somewhere about RUB 80. And so the exchange rate changed back to the precrisis level. The business development itself was very strong, and that brought the whole valuation despite that Russia is still on a very low rating level, brought it back to the original valuation.

And I saw that you have a dividend of EUR 1.7 million to get from the ZAVOD, I guess.

ZAVOD Goreltex, yes.

Yes, Goreltex. EUR 1.7 million in terms of dividends from this company or your participation there. And do you think you actually get the money in '23, or is that rolled back in Russia?

Under the current regulation, we can pull RUB 100 million -- RUB 10 million per month, which is roughly EUR 120,000. We started that process in -- I think it was in October last year, November last year and until now. So November, December, January, February, March, April, 6 months, we got the money. So -- and now you can calculate, it will take another 12 years until we have it -- 12 months, sorry for that.

Maybe ZAVOD will generate further profits and you might get a dividend?

Yes, yes. So under the term regulation, we will get roughly EUR 120,000 per month for the foreseeing future.

Okay. And then you mentioned -- did I understand it correctly that you got an offer to sell your stake in ZAVOD?

We see -- we didn't get a reasonable offer or something we would consider as serious. We had different people approaching us, but at this point of time, nothing we would really consider.

There are no further questions at this time. I hand back to Dr. Mathias Hallmann for closing comments.

Yes. Thank you very much, ladies and gentlemen, for participating in this investor and analyst call. And hope to see you all again when we publish our hopefully, positive Q2 results somewhere in August. Until then, I wish you all the best. And thank you.