Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the fourth quarter media and analyst conference call. I am Alice, the Chorus Call operator. [Operator Instructions] And 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 Dr. Norbert Klapper. Please go ahead, sir.

Thank you very much, Alice. Good morning, everybody. Thank you very much for being with us this morning. I have Relindis Wieser here with me, our Head, Group Communications; and Kurt Ledermann, our CFO. And Kurt and myself will walk you through the presentation on Rieter's 2019 sales and orders. I'm on Page 2 now of the presentation, the key messages. As expected, sales were quite low last year. We booked CHF 760 million. Despite that, our EBIT margin will be around 11%, and our net profit around 7%. This is due to the nonrecurring profit contribution from the sale of the piece of land in Ingolstadt. We reported -- we gave you a report on that earlier on. The order intake went up by 7% compared to the previous year. In particular, the fourth quarter was quite good. We booked CHF 401.6 million. This number includes CHF 165 million from the Egyptian holding company. But in addition, we booked CHF 236 million, which were not related to this order. When you compare this to our third quarter, which was at CHF 146 million, this is a quite significant improvement. The first half of 2020 is expected to be significantly lower in terms of sales and earnings. This is a consequence of the low order intake in 2019 in the first 3 quarters. Today, we announced further capacity adjustments. And those adjustments are a reaction to structural changes in markets and demand patterns. We will come to that point later. And what we also announced today is that if we get the building permit for our Rieter CAMPUS on time, we will start construction of the buildings this year. I will now hand over to Kurt, who will go through the following pages with you.

Thank you, Norbert. Welcome, and good morning also from my side. As already reported, 2019 as a whole was characterized by 3 main factors: first, the trade conflict between the U.S.A. and China; secondly, excess capacity in spinning mills; and thirdly, political and economic uncertainties in regions of importance to Rieter. These factors resulted in a general reluctance to invest. For these reasons, sales of new machines in the business group Machines & Systems were at a very low level of CHF 389 million, a decline of 42%. In the business group Components, the 12% decline in sales is also due to the lower order intake, respectively, to reluctance to invest. This mainly affected the business activities of SSM and Suessen in Germany. The wear and tear part business continued at a normal level. The 2% year-on-year decline in sales in the business group After Sales is mainly attributable to the lower volume in the machinery business, resulting in a lower demand for installation services. As a consequence of the decline in order backlog, H2 2019 was 17% below H1 2019, and H1 2019 was already 25% below H2 2018. Each business group suffered in the H2 to H1 comparison, Machines & Systems with minus 24%, Components with minus 13%, and After Sales with minus 4%. Also, the currency translation effect on sales numbers was negative for all business groups. The impact is relatively small at only 0.5% compared to the overall decline of 29%. The market situation and the reluctance to invest I mentioned before is clearly reflected in the sales figures in Turkey with minus 57%; India, minus 32%; and other Asian countries, also with minus 32%. Sales in China with minus 8% as well as North and South America with minus 3% remained relatively stable, slightly below the prior year level. The business group Machines & Systems posted an order intake of CHF 563 million, an increase of 20% compared to the previous year. This is primarily due to the fourth quarter of 2019, in which an order intake of more than CHF 300 million was booked. This figure includes orders from the earlier announced contract with Cotton & Textile Industries Holding Co. of Egypt for the delivery of compact and ring spinning systems in the amount of around CHF 165 million. This number reflects the total volume of the contract. The installation services, a high single-digit amount, are shown on the After Sales. In the business group Components, order intake amounted to CHF 222 million, a decline of 15% compared to the previous year. Due to the weak market conditions, order intake in the fourth quarter of 2019 was below CHF 50 million, lower than the previous quarters. Overall, the decline in the year under review can be attributed to a low level of investments by customers in the business units SSM and Suessen. With an order intake of CHF 141 million, the business group After Sales reported a year-on-year increase of 1%. The fourth quarter of 2019 in contrast with an order intake of CHF 45.5 million was significantly higher than previous quarters, which is largely attributable to the installation services for the Cotton & Textile Industries Holding Co. project in Egypt mentioned before. At the end of 2019, Rieter's order backlog amounted to roughly CHF 500 million, a clear CHF 175 million above December 2018. With this, I pass the word back to Norbert. Thanks very much for listening.

Thank you, Kurt. I'm on Page 6 now, the capacity adjustments. I told you already that we are planning to make capacity adjustments. And there is 2 big portions here. The first one relates to our site here in Winterthur. We have started the consultation process today with the workers' council in order to stop or to close our assembly operations here in Winterthur. This affects 87 jobs. And the second big portion relates to the business group Components. Here, we talk about 90 jobs. And there is a couple of sites where we are planning to make changes and reductions: in Suessen and Gersthofen, both sites are in Germany; in Boskovice in the Czech Republic; and in Enschede in The Netherlands. Let me try to explain to you why we do that. We -- and I pick the assembly in Winterthur as an example. What does that mean, structural changes in the market? We do this because we see that this operation has become subcritical, and what is even more important is we are of the firm opinion that this operation will stay subcritical, even if the market picks up. And the reason for that is that the market and our customers are used to buy premium machines which are produced -- which are being produced in countries outside Western Europe. This is a consequence of the move of the industry to Asia, including, of course, the companies who are building the machines. This is not a Rieter issue. This is -- for the whole industry, this is true. And that means that they buy more and more machines which don't have Swiss origin, and that is the reason why we think that this operation will stay subcritical and we have to make that change. We have similar things -- similar reasons for the changes we do in the business group Components. As I said, the consultation processes have started today. And based on the results of these processes, we will make the final decisions and then communicate them appropriately. The effect of those changes will be a reduction of the running costs of around CHF 15 million from 2021 onwards. For the implementation of the changes of the reductions, we will have a onetime cost this year of the same order of magnitude. What is also important to note is those reductions are not supposed to jeopardize our ongoing innovation program, the implementation of the innovation program and are not supposed to jeopardize our ability to respond quickly to an increase in demand, which might happen at some point in time. I'm moving on to Page 7 now, the Rieter CAMPUS. You are aware that we have applied for a building permit of the Rieter CAMPUS at the end of 2019. The campus includes a Customer and Technology Center and as well as an administration building. Yesterday, the Board of Directors decided to start the construction work on the Rieter CAMPUS most probably in 2020, provided that the legally binding building permit is issued in good time. So if we get the legally binding building permit on time, we will most probably start with the construction works this year. This is a strong commitment to Switzerland and to Winterthur that Rieter makes here. And I know that there is different opinions among you on this matter. We are absolutely convinced that this is critical for Rieter to do this. The campus will be the source of Rieter's technology leadership in the future, and that is the reason why we are planning to make this investment. I'm coming to Page 8 now, the profit outlook for 2019. As I said already, we expect an EBIT margin of around 11% and a net profit margin of around 7%. This includes the nonrecurring profit contribution from the sale of the piece of land in Ingolstadt. And the order of magnitude of the net profit contribution is, as you are aware, roughly EUR 60 million. So far, the presentation. We are open for questions now. Thank you.

[Operator Instructions] The first question comes from the line of Christian Arnold with MainFirst.

I have a question on the Egyptian order. I mean you were saying CHF 165 million. That was also mentioned in the Machines & Systems business unit, however. And you also added that for the installation, you had booked an additional high single-digit amount in the business unit After Sales. Is that correct? So in total, actually, you have booked orders for the Egyptian business more in the magnitude of CHF 175 million?

No. This is a misunderstanding. The total amount is CHF 165 million, and the installation volume is part of this.

Okay. So that means for the Machines & Systems, you actually have booked CHF 155 million.

This is the order of magnitude.

Then on the Rieter CAMPUS, what kind of preparation cost have you booked in 2019? And what do you foresee for 2020?

Preparation cost?

I mean all this kind of, I don't know, regulations, planning, et cetera, et cetera. You probably -- I mean, you need -- you probably had already some costs, expenses booked into your 2019 figures. And what does it mean for 2020?

So Arnold, maybe I can pick up this question. So if you say cost, you mean -- a big part of this is, of course, capitalized because it's project cost, preparing for the project. And this is also a single-digit amount million Swiss francs in this year. And for the current year, it's a bit difficult to say because we don't know when we really get this permission that we can start the building. So it's unclear. When we start earlier, of course, it will be more. And when we start later, it will be less. So I cannot give you a number at the moment.

Okay. So there was no significant impact on P&L in 2019. And for 2020, you cannot give us any number yet.

Yes. There was not a high impact on last year's P&L. And for this year also, the project will start and most of it will be capitalized. That project cost will be capitalized.

Okay. And the total amount of the capitalized project cost will be? Can you give us here any number?

CHF 80 million.

CHF 80 million, okay. And the last question from my side would be this positive order momentum we have seen in Q4. I mean excluding the Egyptian order, from which areas, from which regions, the projects, are they coming?

Yes, we can answer that question. So the range of countries where -- from which these orders came is quite broad, but there is 3 countries which are most important here. And this is China, Turkey and Uzbekistan.

Your next question comes from the line of Patrick Laager with Crédit Suisse.

Actually, a follow-up question regarding the question asked by Christian around geographies. My question would be more around the demand by machines -- type of machines, I mean. Is it more -- are you seeing demand more for rotor? Or is it more for ring spinning machines or, let's say, for specific innovations you presented back in June last year? This would be helpful, actually, to have a sense how things will develop in 2020.

Well, what I can say is there is the balance here of the mix. Is -- the mix is quite balanced. Yes, there is ring and compact spinning, there is rotor spinning and also air-jet.

Okay. So basically...

There is no clear focus, Patrick. There's no clear where we could say, wow, that is, let's say, a rotor boom or so. No, there is -- it's quite balanced from a spinning point of view.

Okay. And it's not driven by specific innovations which have been presented or launched in June at the ITMA? Okay.

I guess it is very much driven by the innovations.

Okay. But you're not happy to provide more information about what kind of innovations?

I mean you know what we presented, right? We presented the new rotor systems. We presented an upgraded ring and compact spinning offering, and we presented -- not very prominently, but also, we also promoted our air-jet machine and the system that goes along with it, yes. So it is not a surprise that there is demand and orders from all 3 areas.

Okay. Good. The second question would be how did you basically start the new year? Because I think this is important to know how things will develop in H1. Because, of course, Q4 was very, very strong, and congrats for this. But we don't know to what extent this is going to be robust in Q1, Q2 this year.

All I can say about that is that we continue to work to try to turn the demand for new machines into orders. I cannot give you a number. Today is January 29, and we will see how things develop. It is -- we are working on it.

Okay. Good. And my last question is more longer term or, let's say, midterm. What would be the -- let's say, the sustainable margin you're hoping to achieve once all these restructuring measures have been completed successful? I know this will take some time. And there is -- of course, there is kind of risk associated to all these restructuring measures, but just to get a sense what could be a sustainable margin once everything is completed.

I mean this is a question for the midterm targets. And as I said a couple of times, we are not working on those targets at the moment. This is not a priority. The old midterm targets you are all aware of, 10% EBIT margin at CHF 1.3 billion sales. So what I also said is that I see -- the likelihood of achieving 10% is higher in my view today than the likelihood of achieving CHF 1.3 billion.

This is a positive.

Your next question comes from the line of [ George Muller ] with [ NZZ ].

I would like to see what happened with the assembly which will be closed in Winterthur. Where exactly will these machine be assembled in the future?

We are building in Winterthur 3 types of machines. We are building ring and compact spinning machines. We are building cards and we are building combers. The cards and combers will go to China, and the ring and compact spinning machines will go to India.

Okay. And how many blue-collar jobs will be left in Winterthur after you close this assembly line?

The decision that we are in the process of making means that we will stop industrial operations in Winterthur. So no blue collars will be left.

Okay. So these are -- but imagine that you are producing 3 types of machines in Winterthur for the time being. So -- and now you say you stop the production. So I don't get exactly what that means.

What we are building -- as I said, we are building today with our -- in our assembly, we are building 3 types of machines. And those 3 machines -- those 3 types of machines will go -- 2 of them will go to China, 1 of them will go to India. And that means that the assembly in Winterthur will be closed. There will be no blue collars left.

Okay, okay. I now understand. And concerning the number of jobs of the overall group, I think you gave us the number in mid-2019. Do you have the number at the end of 2019 for the overall group, how much jobs there are, including the temporary...

Let's see whether we have this number in a reliable way.

So the number I have for mid-2019 were 4,743.

Yes. We were still in the 4,700s.

Okay. And you announced in March 2019 a reduction of the jobs overall of 5%. At what time have you reached this minus 5%? Is that already done at the end of 2019?

Yes, this is more than done when you look at the number of people that we have. But I need to be precise here. The 5% was related to the positions and not to the workforce. So there is, of course -- there have been reductions last year where we had to leave a position open, which we will fill again when the business comes back. So the reduction of the positions of the 5% has been achieved in fall last year.

Okay, okay. And I understood right that the overall investment for the Rieter CAMPUS is expected about CHF 80 million. That's correct?

Yes.

The next question comes from Santiago Domingo from Solventis.

The first question is related to the last year. I would like to understand a bit better how much were the spindle deliveries installed in the last year -- during the last year. And what's the market share of Rieter? It's around 30% as it was during the 2018?

We -- I mean, we don't have the final numbers yet, but we assume that we are still in the order of magnitude of 30%. We were at 30%.

Okay. And another question related to the H2 of 2020. You mentioned that the H1 will be more challenging than the last one. I assume that the second half will be a bit better due to this Egypt order.

Well, this depends on the order intake of the coming weeks. Order intake in the first half year of this year will have a certain likelihood of turning into sales in the second half of the year. So the Egypt order will make a contribution. But we also need to watch what comes in addition over the first couple of months in 2020.

Okay. And one last question is related to the net cash after the real estate sale. Do you have more or less the number of net cash that you will have at the end of 2019?

Say it again. The number of?

Yes, the net cash that you are going to have.

Net cash. Oh, net cash. Yes. Yes, we have not published that number yet. We will do this in March.

The next question comes from the line of Angelika Gruber with the media.

I've got another question related to the changes in assembly you're doing in Winterthur. If everything goes according to plan, when will this happen? And how many blue-collar jobs will be left in Switzerland then?

We will have the consultation process now. And if that all goes according to expectations, and we will come to the decision that we have anticipated today, we expect to execute this -- to implement the change and the reduction during the course of this year. So by the end of the year, we should be in a position to have fully implemented it. And to be very honest, I cannot answer the question on the number of blue-collar workers in Switzerland after this reduction. What I can say is that we continue to have industrial activities in Switzerland in Rapperswil, in Pfäffikon and also in Horgen. But I cannot say you -- tell you from the top of my mind how many blue-collar people are involved here.

I see. And I would have the second question related to China and the outbreak of the coronavirus. Does it have any impact on your business? Because the Chinese authorities have prolonged the holidays, so I would be interested whether you expect a little bit lower sales or what the impact is.

I mean Chinese New Year is holiday season in China. So I have been to China 3 weeks ago, and that was before the outbreak of the coronavirus. And it is clear that -- around Chinese New Year, there is 2 weeks of a break, like our Christmas holidays in Europe. So we have also extended the break until February 10 for our operations in China. So at the moment, we are not working there. But this is just a small change compared to what was planned. Anyway, we will assess the situation again in early February and then decide what to do next. So, so far, we don't see an interruption or lower sales or whatever. It is a little extension of what was planned anyway in terms of idle time.

The next question comes from the line of Alessandro Foletti with Octavian.

I have a couple of questions. One small follow-up on the campus, so to speak. Can you tell us how many employees then you will have left in Winterthur? That will be the first question.

Well, I mean, we -- when the change in Winterthur is -- has been executed, we will have around 400 -- no 500, 550, 580, something like this. And that is the number that I'm working with at the moment. So I have no reason to look at this from a different point of view.

All right. And this will all be working basically in engineering and R&D, I guess, in this case?

I mean this is...

Plus the management.

R&D and development of new machine is, of course, an important issue, and there is a certain workforce here we need for that. But there's many other things that we are doing here, right? We have our global sales here. We have our global operations department here for the business groups' offices and for the business groups -- Machines & Systems. What we also are doing is product care. So we need to look after the machines which are in the field, and that requires a certain workforce. So that is the functions -- that gives you a flavor of the functions that we will have in Winterthur in the future.

All right. And now if I can go, again, to the market. Obviously, you have seen some sort of rebound in Q4. You were mentioning China, Turkey and Uzbekistan. Could you maybe go a little bit more in detail how you see the situation there? How is the financing availability? How is the input/output cost of your clients? And so try to gauge a little bit if we are seeing the bottom of this cycle or if it will project longer.

I mean it's hard to say, after a couple of weeks, what we are seeing here. Are we seeing a replenishment of the stocks which have been emptied of garments and of yarn and fabric? Or are we really seeing a market recovery, which there is indications that there might be a market recovery? When I came back from China, we had talked to customers and they were saying that they look at the agreement that was made between the U.S. President and the Chinese government in a different way than we do. From our perspective, this is not a big change to what was there before. The Chinese look at it in a different way. They -- what has been -- what we have been told is that there is a view in China that this is the maximum damage -- the maximum damage of what the trade war could do has been achieved. Yes, this is the -- it has stopped now, and it can only improve. So that was the perspective that they shared with us. That could speak for a market recovery. Now comes the coronavirus on top. So we will see what the impact will be. And of course, there is a third explanation, and Patrick also already mentioned it. It might well be that the new Rieter machines have an impact on market demand. So it is very hard to say what out of the 3 we have in front of us. Maybe it's a mix of the 3. In my view, this is the most likely scenario that we're looking at, the mix of those 3 issues.

All right. And with respect to Turkey maybe?

Yes. Turkey seems to be driven very much by the new Rieter machines. As you know, the situation in Turkey has not changed significantly. There is no agreement like what we just talked about between China and the U.S. However, our Turkish customers have been quite active in the last couple of months. So we read it in a way that they consider new investments based on the opportunities that are being offered by the new Rieter machines and systems.

Right. And then maybe on India, I was a little surprised to see that India was also down heavily double digit. Can you say something about that?

I guess in India, there is -- so far, there is -- the market is still quite low. And the way we understand the Indian market is there is a big capacity in India which has been dedicated to yarn exports to China. And it is about 20% to 30% of the spinning capacity in the country. And for some time, China has almost stopped China -- yarn imports from India. And that's created, of course, a huge overcapacity in the country. It will depend on whether the Chinese customers pick up again buying yarn from or go back to the future -- to the past pattern by buying yarn from India or whether this capacity can be used for exports or for the domestic market. So far, in India, the market is still difficult from our point of view.

Right. And then maybe a last question, if I may. Do you have already an idea of the number of spindles that have been delivered this year in the market, spindle equivalent?

No, it's -- we don't know yet. We don't have the numbers yet. That's -- the statistics are not ready yet.

The next question comes from [ Shehla Chakma ], SRS.

I was wondering. You talked about structural changes in the market overall. And that's why you're closing the assembly plant in Winterthur. Does that mean that -- well -- and you said that the customers are looking for, I don't know, not machines being Swiss-made anymore or something like that, you said, not exactly the words you used, but something like that. Does that overall mean that Switzerland or Swiss-ness is losing attractiveness in the world?

I don't think so at all. I guess this is a spinning machine issue. And what we see here is the success of the industry in building up world-class operations in Asia because that is what everybody has done. Not only Rieter, the whole industry has done that. And the reason why we had to do this is those markets were not accessible anymore as import markets. So everybody had to go there and build up operations, and everybody to -- some to -- of course, not to the same extent, but in general, we can say that this build-up of operations, of capacities has been successful. And of course, now the customers say, okay, these machines are also premium machines. So the origin of the machine is no longer a differentiator. What it goes back to is the differentiator is the performance of the machine.

[Operator Instructions] The next question comes from the line of Armin Rechberger, ZKB.

Not many questions left. First, I'm a little bit surprised about your low guidance for 2019. I assume that you might have some restructuring costs. Can you tell me how much you -- how many restructuring costs you have in mind for 2019?

'19, Armin, or...

Yes, '19, '19.

No, there's no major restructuring costs.

No, okay. So surprisingly low guidance for this year for me.

[ Volume driven ]

[ Volume driven ]

Yes, yes. Sure, sure. Okay. Then about Egypt, can you tell us -- give us a percentage of completion in first half year, second half year, meaning how much will get into sales? What's the percentage share of the whole contract in first half year? And how much in second half year?

Yes, we are still in the process of scheduling the deliveries with our Egyptian partners because you know that this is a big program and to get this right is not so easy. However, I'd say that we will -- from today's perspective, we should be able to book sales of roughly 1/3 of the order volume we have booked so far. And this will go into half year 2, not into half year 1.

So if I understand correct, almost nothing in half year 1 and only 1/3 in half year 2.

Yes.

Okay. And then let me try again. I know it's a difficult question. But still, I mean, the level you see now just in these 30 days almost we have now in this new year, is it comparable with the level you saw in the last quarter, excluding the Egyptian contract?

All I can say is that we continue to work on turning the demand for new machines into orders.

The next question comes from the line of Rolf Renders with Helvea.

Gentlemen, maybe a follow-up question on the campus. Can you explain what the overall commitment is? And maybe I have to explain that a bit further. So you have there 100,000 square meters of land. Part of that you will use for the campus, part of that not. So somehow, there's an unlocking of assets happening going forward. And on the other hand, you're investing. How should I look at this combined?

Well, we cannot give you the answer to that question because we have no idea what the unlocking will mean in reality. It's not a priority at this stage, the unlocking of the land that we will not need anymore in Winterthur. We will start working on that in due time. So far, we don't know what the outcome is going to be.

Okay. So that's understood. And if you then talk about CHF 80 million. Is that on top of the land which you have already in your own possession?

On top of the land? I mean we own the land, right?

Yes, yes. So you...

So you don't need to consider -- in the CHF 80 million, there is no land purchase considered.

Okay. So that would be additional. All right. And just to remind, when can we expect an outlook for 2020?

In March, as always.

[Operator Instructions] We have a last minute registration, a follow-up from [Mr. Muller ] from [ NZZ ].

Yes. Just for clarifying the number of employees in Winterthur. For -- today, I think there are 980 and...

No, 980 are in Switzerland.

In Switzerland, okay. In Winterthur, at the time being, it's about how much?

650.

650, okay. Now that makes sense. Okay.

Does that work? Thank you.

Gentlemen, that was the last question.

So thank you very much for being with us this morning. Thank you very much for the questions, and we will make -- give our final report on the year 2019 on March 10, when we have the press and media conference. And we are looking forward to seeing you there. Thank you very much.

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