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

Ladies and gentlemen, thank you, and welcome to the R. STAHL Investors and Analyst Conference Call for Q3 2024. I'm Moritz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Judith Schauble.

Thank you, Mr. [ Ziesler ]. Good morning, ladies and gentlemen. Thank you for joining our today's conference call. Our prepared slides are available under the Investor Relations section of our website, www.r-stahl.com. Shortly after we will have finished this call, a replay of the entire conference will be provided for download at the same place. 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 CEO, who will walk you through our presentation.

Yes. Good morning, ladies and gentlemen. Warm welcome to our Q3 2024 analysts and investors conference call. Let me start with a summary. We are obviously entering a difficult difficult market environment right now. Our order intake slowed down from EUR 82 million last year to EUR 74 million Q3 2024. But we have to have in mind that also Q3 2023 was a soft quarter in comparison to what we experienced in the first half of the year. In sales, we still show a little growth of 1.7% to EUR 87.4 million. That's primarily supported by strong order backlog from the oil and gas industry, mainly from the Americas. You will see that later. EBITDA pre decreased from EUR 13.5 million to EUR 8.8 million, mainly because of onetime effects driven by the implementation of our EXcelerate program and lower operating performance. Positive is that the free cash flow increased to EUR 10.8 million -- by EUR 10.8 million to EUR 6 million. Last year, we had a minus of minus EUR 5 million due to a strong reduction of working capital and net profit consequently fell by EUR 4.4 million to a level of EUR 1.8 million and that resulted in earnings per share of EUR 0.28, prior year was EUR 0.96. If you look into the sales, we see more or less stable sales in Germany, the Central region and Asia Pacific, and some growth in Americas, but that was mainly driven by a strong order backlog in the Americas from which we also benefited in the third quarter, and we also benefited as a whole from strong order backlogs we had from previous years. If we look into the profitability statement, we see slightly increasing sales of EUR 87.4 million, a decreasing operating performance due to the sale of finished goods. Our cost of materials ratio actually went up to 34.1% from 33.4%, but that was mainly driven by mandatory write-offs in a volume of EUR 850,000 due to low stock turnover. So this is also one effect of the slowing economy. We have our IFRS stock valuation procedures. And when stock turnover goes down, we have to write off. This doesn't mean that we have to scrap. We're more or less building still reserves in our material for the future. But nevertheless, we have to book it in the quarter as a negative impact. Without that, material costs would actually be below last year, but -- so it's a little bit higher. Personnel costs as a percentage of sales increased due to the lower operating performance. We have higher expenses due to the EXcelerate program mainly. We are now in the implementation cost, and we face high cost for software implementation, especially for our renewed planning and forecasting processes. And as a consequence, we see a lower EBITDA of -- EBITDA pre of EUR 8.8 million against EUR 13.5 million last year. We see the difference from EBITDA to EBITDA pre is only EUR 100,000. So almost no restructuring cost. What's also interesting is that the financial result is lower due to the discontinuation of our Russian subsidiary, ZAVOD Goreltex, which we had to write off in Q4 2023 and so the contribution of this very profitable business isn't there anymore. We displayed this all on the next page where you see where the effects are. The effects definitely in the lower EBITDA come from negative gross profit development due to lower operating performance and higher -- mainly higher other operating expenses and lower other operating income. Personnel costs in a year-on-year comparison are almost equal. If you later on take your time and look into the backup, you will see this EBITDA bridge for the 9 months, and that looks completely different because there, we had a strong increase in gross profit, which was then eaten up by higher personnel costs due to personnel cost inflation and also higher operating expenses. So the quarter clearly indicates that times are changing, inflation comes to a normal level, but sales go down, operational performance are -- not yet, but operational performance is going down. Sales are expected to come down in the consecutive quarters and operating expenses are still on a high level. So this is the challenges we have. Also, when I think about our operating expenses, they will come down with the full implementation of our EXcelerate program. But until then, we cannot and will not give up on consequent strategy implementation. Working capital statement -- the free cash flow statement, I already mentioned it. It's -- we start with the net profit, which is lower year-on-year. No big effects in depreciation and amortization, which are on the level of last year. Then we have some expenses without cash flow impact. So cash flow is a bit lower than in Q3 last year, but then the big change comes. While we were building up working capital in the range of EUR 13 million last year, we lowered our working capital by close to EUR 2 million this year. And that results then in a strong improvement of cash flow from operating activities in the range of close to EUR 11 million and also in an improvement of the free cash flow in a range of EUR 11 million. When we look at our order intake or the long-term development of order intake and sales, then we clearly see the challenges ahead of us. Honestly, we were expecting those market weaknesses more in Q1 and Q2 when we did our planning based on the experiences we had in Q3 and Q4 last year. Now we see a similar development like last year, where we started with a very strong quarter in Q1, still strong in Q2 and a significant drop in Q3. This year, we will not go further down from what we see, will rather increase a little bit in Q4, but we have to expect that also sales will come down slightly in Q4 as we were eating up order backlog significantly in Q3. And that clearly indicates where we have to concentrate in the next couple of weeks and months, and this is controlling our costs. And I mentioned that already in Q2 -- in our Q2 call, we are well on track with that. But on the other hand, as I just mentioned, we cannot and will not give up the implementation of our strategy, which then drives cost into the other direction. If I look at our forecast, we remain -- our sales forecast somewhere between EUR 335 million and EUR 350 million. We stay in the previously mentioned range of the EBITDA, but we would expect that we come in, in the lower half. So we detail it instead of EUR 35 million to EUR 45 million, we expect now an EBITDA pre range between EUR 35 million and EUR 40 million, where we end at the end of the year. Free cash flow will be positive in the middle single-digit euro million amount. And we would expect also a slight increase of the equity ratio in case -- or depending on the expectation that the interest rate for the valuation of our pension provisions stay stable. So this is our outlook. Better than Q3, but a lot of work ahead of us with these changing environments we are facing right now. That's from my side, and I'm open for questions.

[Operator Instructions] And the first question comes from Konstantin Volk from NuWays AG.

Here's Konstantin Volk from NuWays. Can you hear me well?

Thank you.

Yes, we can. Thank you.

Okay. Great. I have a couple of questions. And the first is about order intake. So can you give please a little bit more color around the weak order intake and which sectors are in particular affected?

Yes. The strongest weakness, and that's an ongoing development, is definitely in the chemical industry. We hardly see any investments. And what we also see is that the day-to-day business is on a very low level in the whole European chemical sector. What we saw region-wise, while we were well on track in the Americas, that Americas slowed down significantly, almost dramatically in the third quarter. That's probably due to all these unsecurities in front of the election, which took place yesterday. I would now expect a strong recovery there in Q4, but definitely in Q1 next year. Then what we also see is a certain slowdown in the pharmaceutical industry, which was our -- is our biggest automation customer. In general, it's -- all sectors are a little bit weak, and we -- and decisions -- there are still projects in the market. Decisions are delayed. And we do have the feeling that this is all linked to huge unsecurity in the market from decision-makers because projects and initiatives are not disappearing. They stay in the market, but decisions are not made.

Okay. Understood. And about the geographic sales mix, you mentioned that America was quite strong compared to the other regions due to the oil and gas industry. Do you expect an impact of the second Trump presidency who will probably support the oil and gas industry?

Definitely. Americas was strong in sales based on order backlog and very soft in order entry based on the market environment. What I now expect is that especially investments in the oil and gas sector will come back. I wouldn't be surprised if we also see rising demand in the Americas in all the other sectors because especially in the last 2 months, orders dropped almost 50% on average in the Americas, and you could really feel that nobody wanted to make decisions. And now it's clear who will be leading the country and Trump will definitely be positive for the oil and gas industry and for investment decisions in especially the U.S.

Okay. Sounds good. And then just for my understanding, so free cash flow increased significantly in Q3 due to the reduction in working capital. Is that because of the ease in supply chains? Or is there a different reason for it?

No, it's 2 things. The major issue is the ease in supply chain. I mean during COVID, we had to -- we had a choice between pest and cholera, so we could order materials via multiple channels in order to stay in the market or we could not and then we wouldn't have delivered to our customers. And we decided for the first. What we faced then when the supply chains were normalizing is that we were flooded with materials. And now we -- then we had one initial effect that the stocks went up. We are bringing that down now significantly, and that will be ongoing in the next couple of months. So we will see stock reductions on top of what we already had. And then the other effect is this standard write-offs of material due to the reach -- or the reach of those. But as I mentioned, this is not really harming us because we are putting that in our [ steel ] reserves as we will be using the materials anyway.

Okay. Understood. One last question from my side about the other operating income. It continued to be on a relatively high level. And how much of that was from the EXcelerate strategy program in Q3?

Q3, let me quickly guess, it should be around EUR 1 million to EUR 1.5 million. But my colleague will give me the exact number in a second. It's EUR 1 million. It's EUR 1 million -- yes, it was much higher in the quarters before. So, we will come to an end.

And the next question comes from Klaus Schlote from Solventis AG.

So I got a question concerning this EXcelerate program. You just mentioned EUR 1 million expenditure in Q3, and that's it then. So Q4, there will not be much left. What is it in total so far? And what is the return? I mean how long will it take to earn this money back?

It's -- in total, I would say, in the first 9 months, it's roughly EUR 3.7 million. And we had some start-up costs last year. So we are probably somewhere close to EUR 4.5 million. The question of the payback is simple or difficult. It's just the way you look at it. With EXcelerate, we will be -- we will bring us into position to really in detail to understand and steer our business. So now what's the value of that? If you assume midterm 1% higher profitability because of better decision-making, then the payback is probably close to a year. So I definitely see a payback of this in 1, 2 years. Do I have a reporting which clearly shows me that payback? No, because this is exactly why we implement EXcelerate, yes.

Then I have a question regarding your slide on Page 10, low order intake weakens long-term growth path. That sounds quite dramatically, I would say. Can you give us -- can you put that in numbers?

No. I mean the numbers you have here, yes. I mean if we -- you see clearly that we come from a phase where we had much higher order intake than sales, then we [ catched ] up with our operating performance. And now we ran into a phase where we started eating up our order backlog. If I would expect we have -- in Q4, we still have a good effect from order backlog. From Q1, we can only eat what we earn. So meaning if in Q1, orders come back to a level of EUR 90 million, we are fine. If they stay on a level of EUR 75 million, we run into significant problems. And therefore, we are -- I wouldn't expect that it stays on this level because, as I said, I see huge demand in the market. We see the projects. I think with the election in the U.S. and hopefully, with some other positive -- with some positive developments in other places, that insecurity walks away from the market, and we see more and quicker decisions quickly. And then when we move up to an order entry level of EUR 85 million to EUR 90 million, again, we are fine. But the curve is the curve at this point of time, and my crystal ball is not telling me more than yours.

I thought so. If your crystal ball tells you more than I know.

My crystal ball -- I mean, I told you what it tells me and this is the demand. I'm positive in the long run. I'm positive in the long run because the demand is there, the projects are there. We know them. We are in contact. We are not losing market share. We are consequently implementing our strategies and improve our operational performance. And eventually, the markets come back. The question is now how many quarters will we have some problems or how many quarters ahead of us, we will suffer.

What is the -- in the past, how many quarters had been basically the situation where the order intake was below the...

Look at last year, we had those 2 and then we -- all of a sudden, it jumped again on a very healthy level, yes. This is the one thing, but is this -- is that statistically relevant in a changing world? I don't think so. Nevertheless, I come from a market potential perspective. I come from what we do and what I see from competition. And therefore, we will definitely see better quarters. Short term, I'm just -- there's just too much unsecurity in the market.

Okay. Then you mentioned you're focusing controlling costs for the time being. And on the other hand, as I understood it, the main part of your strategy is the internationalization of sales. So are you kind of putting it on the back or -- for some time and for cost reason, you're pushing ahead with the internationalization of sales?

We have to push ahead because what we see -- if you look in our detailed numbers, we still have 70% of our sales in Europe, and Europe is probably less than 30% of the global market. If we want to have long-term growth, we have to build the base for that. And it's exactly the same discussion we had during COVID. Would we give up on our strategy in order to achieve better results? To a certain extent, you have to do it, to a certain extent, but you cannot give up on strategy.

Can you put a number to your efforts or your money you are spending on improving or -- the international business?

That's difficult. It's -- no, I can actually not because when you -- imagine if you add 5 salespeople in an international region and you add probably other people in central functions, how do you see that? Is that an investment or -- because part of it is paying back quickly, part of it is paying back long term. But it's definitely the case that when we think about adding resources, this will take place in the Americas and in Asia Pacific and not in Europe in the next couple of months.

Will the headcount, will that change? Would you...

No, we will probably more -- yes, I think we will -- it will change. The distribution will change. I'd rather expect the headcount to come down. We see less headcounts in the European region, and we see higher headcount in the Americas and in Asia Pacific.

And 2 more questions. One is atomic nuclear industry is that -- was one of the fields where business was growing. What is the current situation there?

We are still very positive. I think there should be a decision soon in the U.K. And there, we are definitely set as the supplier for another big investment. And then we are working with all the other relevant -- or with the major relevant players also with respect to France. But these processes are slow. So long term -- midterm, long term, I expect significant business there. We are very well positioned, but the projects, they don't come quickly to the market because it's very, very, very complex and slow decision-making.

Then with regard to ZAVOD Goreltex, that was written down last year. But are you still owner of the 25%?

Yes, we're still owner. We see many developments right now, all not really promising. The first thing is that the rules for selling the business are very much tightened. The rule was that a Russian company needs to make a valuation. And then from this valuation, you have to deduct 50% of the price. And then from what's left, you have to pay 5% to the Russian government, and then you can sell. But the next question would then be bringing the money out of the country. Now this -- what I heard this deduction is 60% or 65%. In the first step, you have to pay 15% to the country of the remaining value and still there is -- when I know that correctly, there is a kind of a list with the Central Bank and when they have money, then they take a couple of those entries from the list and those people get paid. So what would it mean in a nutshell, if you have a business worth, let's say, EUR 10 million, you probably get EUR 2.5 million, but you don't know whether you get it.

And in terms of dividend, dividend paid...

No dividend payments. And then the next thing is that the owner is -- 75% of the ownership is with the state. That means sanctions are tightening, especially from the U.S. side. We cannot involve ourselves into the business. And then there's a clear strategy of the people who are nominated from the Russian government to control the 75% that they want to sell the business as a whole. And that means we have to expect that the business will be taken away from us eventually. So this is the situation. We still try to find a way to get some money back, but not very promising at this point of time.

And maybe the last one just came to my mind, hydrogen business.

We are doing very well. So when business is in the market, we are involved. We are very strongly involved in NEOM in Saudi Arabia. There's a big project coming, which is called HyNet in the U.K., we are strongly involved. So we are well on track. But what I always said in the past is the news flow is much stronger than the investment activities.

Would you expect sales volume of EUR 5 million next year out of hydrogen? Or is it too high?

Yes, EUR 3 million to EUR 5 million, somewhere 1% to 2%, yes. If things go well, yes. Today, we are below 1%. But it all depends. I mean, today, renewable energy stocks in the U.S. are going down and everything else is going up. The market is expecting that the new President will not be in favor of alternative energy investments. And -- yes, let's see.

[Operator Instructions] So it seems there are no further questions at this time. And I would like to turn the conference back over to Dr. Mathias Hallmann for any closing remarks.

Yes. And thank you, ladies and gentlemen, for your participation. There will be no call -- no further call this year. I think we will be issuing our preliminary numbers in the first half of February 2025, 18th, my people tell me and then we will have our next investor call in May with the yearly number -- or in April with the yearly numbers and the Q1 numbers, hopefully. Then talk to you again in April 2025. Thank you very much. Bye.

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