Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Media Investors Conference Call. I'm Stuart, the Chorus Call operator. [Operator Instructions] At this time, it is my pleasure hand over to Norbert Klapper. Please go ahead.

Thank you so much, Stuart. Good morning, and welcome to our Q3 investor update. I will walk you through the slides with the cornerstones of the update now, and then Kurt Ledermann and myself will be happy to answer your questions. On Page 2, I have the key messages. As always, we had in the third quarter, a significant recovery in order intake compared to the second quarter. You saw the numbers, Q3, CHF 174 million versus Q2 EUR 45 million, really a depressed order intake in Q2 due to the COVID pandemic. The order intake after 9 months is with CHF 425 million, not high, it's relatively low. But it is driven by the second quarter, obviously. In half year one, we booked, as you might remember, CHF 250 million of order intake. The COVID crisis management is in place. I can say it works well. The 3 priorities are clear: Protecting our people, keeping our commitments to customers and ensuring liquidity. And I will come to that point later in all 3 dimensions. I guess, we are doing well. Continuous implementation of the strategy. Well, this is a heartburn issue. We must not drop the ball on the strategy implementation during the crisis. And it is our ambition to keep track, even if things are difficult. I can say that this works quite well. Outlook for the end of the year, half year 2, obviously, will be stronger than half year 1. Half year 1 had -- we had sales 245 -- CHF 254 million, sorry, and the net result on the loss of CHF 54 million. Today -- From today's perspective, we can say that we will not have second half of the year at breakeven levels. The reason is that customers are postponing shipments. There is delays in particular in building construction, but also in processing orders from a financial point of view, from an approval point of view. And our customers are faced with that kind of difficulties, and that is why they are shifting shipments. This is the issue that we have on the table, and this is why we don't see a breakeven level for the second half of the year. Let me go into the next -- on the next slide, on Page 3, I have the recovery -- the illustration of the recovery that we saw in the third quarter. It is significant. We reported in July that we saw the market recovery coming, and this has continued. At the moment, our assessment is that the positive trend sustains. The spinning mills are better utilized. The cotton price has recovered significantly, and we can, of course, see it in our projects in negotiation list. So that is how we look at the market at the moment. On Page 4, I have the order intake by business group after 9 months. Here, you see that the Machines & Systems business was not suffering as much from the situation as the sister business groups. The reason being that the machinery business was already in a difficult situation in 2019. Components had a reduction of 33% compared to the previous year, and after sales, 22%. And the reason is, obviously, it is the fact that the spinning mills were not in operation for some time, in particular in the second quarter. And when they started again, they started to order wear-and-tear parts again and spare parts again. But while they were closed, they -- we did not have that business. And this is the reason why the numbers are the way they are. Our backlog is around CHF 515 million, which is quite high, and the cancellations that we had are in the normal range around 5%. The crisis management, as I said before, is in place, and it works well. Protecting our people is -- the precautions have been implemented across the globe. Our teams are doing a great job in making sure that we keep the infections at the minimum level and make sure that we protect our people in case we have an infection in the company. Even in regions with high infection rates, it worked very well. Customer commitments, our supply chain is working. As I said before, there is sometimes a workaround required. And sometimes, we need to spend some extra money to make sure that the -- that our machines and parts and components arrive on time at the customer. But from an overall perspective, the supply chain is working well. And liquidity, you saw the numbers. In September, we paid back the bond of CHF 100 million, and we renewed it by a new bond in the order of magnitude of CHF 75 million. It was a smooth transaction done very professionally. And on my next slide, I have Page 6, so continuous implementation of the strategy. You know that this is very important. I said before in my introduction, this is a heartburn issue to not drop the ball while the crisis keeps us busy. And I can say that we are doing well on that. I'm happy with the progress that we have been making, and we continue to do that. And it also says here on that slide as a reminder that we hold on to the project campus for reasons that we have discussed before. And depending on the business situation, construction work is supposed to start in the first half of 2021. We will review this when we have a better look into the year 2021. The last slide on my -- in my little presentation here is the outlook 2020. We talked already about the second half of the year. It will be stronger from today's perspective. How much stronger? We don't know because it depends on the shipments in the coming weeks. We will not be able to make it breakeven, I said that already. There have been too many shipment shifts into 2021. Due to delays, our customers are confronted with, and the root cause is COVID-19. So far, the presentation and the explanations. We are open for questions now.

First question is from the line of Christian Arnold from MainFirst.

Two questions from my side. First, yes, you're refraining from giving us a quantitative guidance outlook for 2020. However, I still try to get some numbers of you. So I mean to be breakeven, you need to have half year sales figure of around CHF 400 million. That is what we have discussed at the H1 reporting. So now you are expecting a loss. And I'm fully aware that there's lots of uncertainty shipments, which will be canceled or -- not canceled, but transferred to next year. But still, are we thinking about the sales of CHF 350 million? Are we thinking about CHF 300 million or CHF 375 million? Just to give us a little bit of flavor here that will be helpful. And the second question I have is on the spinning mills operating currently. You were talking about 90% end of September. And if I recall correctly, we had 40% I think in April, and you were talking about 80% in June. However, I think what's also important is the capacity utilization rate, right? In April, this 40% of global spinning mills had a capacity utilization rate of 30%. And in mid-year, we were at 60%. So where are now this 90% of operating spinning mills right now in terms of utilization rate?

Thank you very much for your questions. I mean the first one is an easy one. I cannot give you any further details on what we expect for half year 2 in terms of sales. It is a high level of uncertainty and a very low visibility. So that is all I can say about it. The spinning mills, that is a good question. We are monitoring 2 different figures as you pointed out. We are monitoring the number of spinning mills in operation, and we are monitoring the capacity utilization of the mills. The number of mills in operation in April, we had 40%; end of June, we had 80%; and in September, we were at a level of 90%. This is what you find in the trading update also. The capacity utilization, in April, we were around 30%. In September, we were above 70%. The normal level is 80%. So we are moving towards normal conditions as far as this is concerned. By the end of June, we had 60%, roughly.

Okay. Maybe coming back to my first question. I tried a different way.

No, no, no. The answer is no. The answer is no.

Okay. You can't give us also no figures in terms of, let's say, sales year-to-date until September?

No, this is not part of the trading update.

The next question is from the line of Armin Rechberger from ZKB.

Well, you mentioned Components and After Sales that they suffer from spinning mills not in operation. But I mean, now during the last 3 months, they should be, as we just pointed out, quite well operating. And so After Sales and Components, to my taste, should have shown better figures. Why is that? And then you mentioned cotton prices, high cotton prices. That can be good, but also can be bad as input prices for the spinning mills are high. I think you interpret the high cotton prices as positive. How is that? And then the markets, you don't say anything about the markets, not about Turkey, India and China. Can you shed a little bit light on this?

Yes. Thank you, Armin, for your questions. Components and After Sales, yes. I mean, a big part of the recovery that we saw in the third quarter was driven by Components and After Sales compared to the second quarter. This is -- as you said, the mills have started to order wear-and-tear parts and spare parts again, and this is what we see in the numbers. The cotton price, yes. The cotton price is very good for customers who have stock of cotton or contracts for cotton that they bought earlier, which gives them a very low input cost. It is not good for the customers who have to buy cotton now, but it tells us that there is demand for cotton in the market. So our -- the textile value chain is demanding cotton again, and that tells us that the recovery continues. That's the way we look at it. And the markets, yes, I can give you an update on the markets. Let's go through it real quick. We have China. Up until -- well, quite recently, we saw that the capacity utilization in China is not as strong recovering as in other parts of the world. But recently, we saw more positive signs. So our assumption at the moment is that the Chinese textile industry is also recovering, and we will see what impact this has on investments. In India, the capacity utilization of the mills is supported to be very strong, and we are expecting investments. In Turkey, capacity utilization that we see is good, and we are expecting investments in Turkey as well. In the Americas, we have a focus on Latin America at the moment. The domestic consumption has increased, and there is government support in Latin America that we see the reflection of this we see in our order intake. In Africa, we are focused, as you obviously know, on Egypt very much at the moment. And I was in Egypt 4 weeks ago, and I can report that I saw customers who are quite positive about the business at the moment. So we are expecting also a good investment sentiment in Egypt as well. In Europe, the European textile industry at the moment is driven by the nonwoven business, yes. Nonwovens is what you need for masks and for personal protection equipment and that type of stuff. So that is a business that is not very important for retail, but we see in our numbers that this business is very strong at the moment. So that is a quick update on where the markets are.

Regarding cotton, again, maybe. Well, I assume that lots of spinning mills, they have very low stock now, and they are forced now to buy expensive cottons. So don't you see it a little bit different maybe?

I mean, what we look at is, of course, the spinners margins. And the spinners margins are not so bad at the moment. So they seem to make money on what they do. I guess it has to do with increases in yarn prices, which follow the cotton price. And it has to do with the customers who have access to cheaper cotton from the past.

And China, you mentioned that the capacity utilization was not very strong. And now just lately turned a bit to the better side. Why is that? I mean, China recovered first from COVID-19 and then didn't show recovery signs. Why is that?

It is hard to tell where the domestic textile consumption in China has recovered. I mean, when the reports from China came in, that the economy has recovered and everything is back to normal, we were not sure whether this also was true for the consumption of textiles in the country. What is for sure, an issue in China, is that there seems to be a movement in the industry of the big textile brand to take business out of China and place it in other parts of the world. And what I also could imagine is that our Chinese customers had to come to grips with this before they went back into the business the way they did it before. So that is the 2 things that we are looking at when we come to that question.

Next question is from the line of Rolf Renders from Helvea.

On the overcapacity situation, which you discussed in the past, what is the situation there? Is capacity taken out? Are things stopped? That would be 1 question. Maybe I take it one by one, that's easier. I have 3 questions.

Well, it is very hard to tell whether the overcapacity is just standing idle, or whether the overcapacity is -- has started to disappear. We don't have a clear picture on that. What is obvious is that the region in which the majority of the overcapacity is installed is China. And we just talked about China.

Okay. So that remains unserved. In your comments on one of the first presentation, you mentioned the delays by clients because of postponements of buildings, financing and approval or approvals. Can you elaborate a bit on financing and approvals? That's not -- what is it depending upon?

I mean, it depends on the way authorities, custom services, banks are working. The whole thing has slowed down significantly. If you are a customer in whatever country today and you apply for a loan, it takes a lot longer to get the money compared to the times before COVID because the banks are on short-time work or they have longer breaks or half of the people are in quarantine time. That's the issues which currently happen. The same applies to customs. The same applies to government authorities, who need to be involved. And that is what we have on the table at the moment. The whole world has slowed down.

Right. Okay. No, that's good. And do you also see the cost of financing going up and governments doing specific textile subsidies?

No. At the moment, the only program that we've seen was in Argentina, where the government has supported or is in the process of supporting investments. It's -- as far as we know, it's not a textile-specific program, it is about investments in general. But otherwise, we have not seen any government programs at a major order of magnitude in the market.

Okay. And then maybe final question. You mentioned to continue with the strategy. And of course, you have the liquidity to do that also. When are you planning to communicate the potential ambitions or targets as a result of success of this strategy?

I guess that is, at the moment, not a priority. We are in the COVID crisis -- in the middle of the COVID crisis. So I guess we will continue to talk about that when the crisis is over. That is what I would expect.

Next question is from the line of [ Johanna Sprinkman ] from AWP.

The employees are on short-time work. And is short time enough? Or do you plan job cuts? And my third question is, when do you expect the normalization of the business?

Sorry for the second question. When do we expect what?

A normalization of the business.

Normalization.

Yes, normalization.

Okay. Thank you. Yes, short-time work is what we decided to go for when we went into the crisis. So the priority is clear, we keep the jobs and we adjust our capacity with the health of short-time work. That's what we're doing at the moment. We have applied for short-time work until the end of the year. And when the year is over, we will sit down and see whether this is -- continues to be the right thing to do or whether we need to do different things to adjust capacities. It will depend on what we see in terms of the market recovery. That is the way we look at this, and that is the way we're going to make our decisions. So far, I guess it was the right thing to do to apply for short-time work because at the same point in time, we are still executing our restructuring that we have announced in January. We are well on track with that. That happens in parallel. And we will be done with this program by the end of the year as anticipated. The business going back to normal. At the moment, I'd say the most likely scenario for next year is that the market recovery continues based on the signals that we received, as I told you already. So it might be back to pre-COVID levels by the end of next year or it might take a little longer. But if we have a big lockdown crisis and whatever during the winter time, this will, of course, not be the case. From what we see at the moment, the signals are indicating that we will see the business going back to normal during the course of next year.

The pre-crisis level?

Yes. More or less.

And how many people are on short-time work?

Oh, we have 2 in short-time work.

In the numbers?

In Germany and in Switzerland, this should be around 1,200, 1,500 people, something like that. Yes, 1,200.

1,200, 1,500?

Rather 1,200 than 1,500.

We have a follow-up question from the line of Armin Rechberger from ZKB.

Armin, are you with us?

Can you please unmute your telephone?

I'm sorry. Yes, regarding short-time work, you implement now short-time work, but second half is stronger, though not as strong as hoped for, but stronger than first half. How does that fit into the picture, a very weak first half with no short-time work or almost none and now you implement much more short-time work? And then I have follow-up questions, maybe one by one.

I mean, short-time work, of course, is we apply based on the capacity utilization. And capacity utilization, for example, of plant is you need to have the capacity utilization of a plant before you can ship. So that is the -- there is a time management to be done here in terms of managing your capacity utilization before you do the shipments and you book sales. So that is the way it works. We do this plant by plant and department by department to make sure that we get it right. And we also make exceptions, if necessary. So this is managed very carefully and very thoroughly, and it works quite well.

Okay. Then about product mix, can you give us some indications there? How is air-jet doing, for example, and product mix more on a compact spinning? Or where is the business doing well or bad?

The product mix is the usual one. So no specific changes in the product mix that we observed in the third quarter.

Okay. And air-jet, some success there?

Yes, we booked air-jet orders in the third quarter. So this is moving on.

And then October, how -- I mean, October is almost over, still good on the same level as in July, August, September.

We see the upward trend in the market going on.

So the trend is going even upwards, not stable?

We see improvements every week, every month. It continues.

Okay, okay. And then the last question regarding the campus. You mentioned in your documentation, depending on business situation, what could it change in the implementation of this project, the business elevation? I mean, just delayed the whole project or make it smaller or even cancel it or what?

The impact of the business situation on campus is not an if impact, it is a when impact. It is about the timing.

Next question is from the line of Sebastian Vogel from UBS.

Hello, can you hear me?

Yes, we can. Thank you.

Perfect. I got 2 questions. The first one is on the delivery of -- performance of delivery. If I recall correctly, you already mentioned on the half year results, and I was wondering are these the same customers? Are these new customers? Has the extent increased compared to the half year numbers? And about what sort of postponements are we talking here, so like a couple of months, a couple of semesters, just to have a little bit of a better understanding there? The second question is on -- with regard to Components and with regard to After Sales. If I calculate it correctly, in the third quarter, with regard to Components, the organic growth like was around minus 29%, the After Sales was by plus 5%. I was just wondering if you can achieve a little more light where this mismatch in the sort of 2 different growth rates were coming from.

Okay. New customers, the delays that is -- I mean, if I had known about it, when we reported the first half year, I would have told you. So obviously, it's new customers, customers who have not asked for a postponement of shipments before, who approached us and said, hey, can we have that later. And the -- there is, of course, different time frames here. Some customers wanted in the first quarter. Others say, no, we need longer with the buildings. We cannot give you a general information on that. It depends on the single contract. And this growth rate thing, I'm not sure that I got it, but I guess Kurt got it.

This is year-on-year, you're comparing? Quarter 3 last year to quarter 3 this year?

That's right.

That's correct. Then when you compare it, you see After Sales more or less of the same level, and we see a lower number on Components. And this basically is a base effect because last year, in contrary to the Machines & Systems business where we had quite a low quarter last year, Components was still at a good level of CHF 57 million last year.

Understood. Makes sense. Just one follow-up question, if I may, on the delivery of postponement. As I said, there were mainly new customers coming in asking for these postponements. What those guys that have asked at the half year results? Would these postponements already delivered? Or are they for additional performance?

I mean, I'm not sure I understand the question.

Let me rephrase it. So I understood that you in the half year, mentioned that you have a certain number of customers that ask for postponement. And now we have seen in the third quarter some additional customers asking for postponement of delivery. I was just wondering if those guys that have asked at Q2, if those deliveries were in the meantime being delivered, if there were some additional pushbacks or push out, so to say, from these guys as well coming.

No, the guys -- the majority of the guys of the customers who had asked for a postponement into the second half of the year have received their machines, but not all of them. There's also some who asked already in the second quarter to shift the shipments into 2021. And so as I said, this is not a general -- we cannot give you a general rule on that or a general development. It depends on the customer on whether he needs a new building or not, on how difficult financing is in the country that he is based and so forth and so forth.

Next question is from the line of Patrick Appenzeller from Research Partners.

I have a question on the liquidity situation. You mentioned a net liquidity or net debt, slight net debt. So it's basically 0 by the end of September. I just wonder, is there any kind of seasonal impact here you have? Or is it just a consequence of, I would assume, a very weak Q3 in terms of sales? Because without knowing the numbers, I think Q4 sales are likely to be higher than Q3, which obviously was still impacted by the lockdown situation. So is it fair to assume that this liquidity situation during Q4, also due to seasonal reasons will improve again?

So basically, it's an effect from the networking capital. So increase of networking capital because of orders that were taken in, and they are produced and not delivered yet. And we assume to be better in Q4, yes. But of course, it also depends on the situation of the market, whether contract can be delivered or cannot be delivered before end of December. So it's always a snapshot, and it's somehow digital, but we expect that moment to be -- to improve yet.

At the end of September, has it kind of a seasonal component?

It's not a component. I would more say it's a cyclical component because the business is growing.

We have a follow-up question from the line of Christian Arnold from MainFirst.

On Egypt, you said or commented in general, I think, that you see good investment sentiment there. And we know that your order backlog of CHF 515 million, that's very much -- or a big part of that is actually your huge Egyptian order. And I wanted to ask you if there is any time schedule change or everything is going according to plan in terms of timing. And maybe if you could remind us about, yes, the sales recognition of this huge order in Egypt when you book -- when do you expect which part of the sales is booked?

Yes. Christian, thank you very much for the question. So CHF 515 million of order backlog. Out of this, roughly CHF 200 million is from the Egyptian Holding Company. So we have received the down payment of the remaining CHF 40 million that we're still open. So now we have all of it on our books. The shipment schedule has been changed because the holding company is one of the customers who are suffering from COVID-19 in terms their civil engineering and building construction work. We will start shipping the machines to Egypt next year. This year, we will not ship the machines for Egypt for this customer.

Okay. And the entire CHF 200 million will be shipped next year, I mean, from today's point of view?

That would be too ambitious. I mean, you cannot digest -- no customer could digest CHF 200 million of spinning machines in 1 year. No, I guess it will be spread over the next 2 years.

50-50?

I don't know that yet. It depends on the progress they're making with the buildings. Is that a number I would strongly reject? No. It could be that way, Christian. It could be that way, but we don't know. We don't know yet.

Next question is from the line of [ Andreas Meyer ] from [ Finance and Burduf ].

Three questions. Can you say something about the pricing of the new orders? And second question, how is your position in the market? Are you gaining market share or not? Or what is your impression here? And then again, about all the costs and capacity measures that you have been -- that you have taken. Can you again explain them maybe a bit in more detail? All these measures that you have begun maybe or that you have -- that has taken effect, maybe since the last 12, 15 months.

Yes. I guess the pricing issue in the market, yes, it's not a surprise to you that in a depressed market, there is an increased price pressure. We have to -- in some cases, we have to react to that and make a compromise that we don't want to make, but this is -- we cannot avoid that at the moment. However, the policy that we expect a decent price for the contribution we make to the success of our customers, this remains, and we hold on to it. We are the market leader. We have a responsibility for the price level. And we will live up to that. Our position in the market, we have not seen indications that we lose market share or win in high rates, it is more or less in the market that we have at the moment. We are at the levels that we were before, where we were before. In cost and capacity, yes, there is 2 things going on this year. Number one is the restructuring that we announced in January. So it concerns, if I remember right, 187 jobs, 187 positions. The onetime cost, the restructuring costs that run into this year, could you please help me, I guess, CHF 10 million?

Yes, it's around CHF 10 million.

Around CHF 10 million, yes. CHF 10 million restructuring costs, which we will book this year. And the -- in a normal situation, in a normal capacity utilization type of mode of the company, the annual savings is around CHF 50 million. So that is the 1 package that we have at the moment, and the second package is the short-time work and the other -- and the similar things that we are doing in countries, which do not have short-time work. So short-time work is predominantly an issue in Switzerland and in Germany. And in India, you have to do different things. And in China, you have to do different things. And in Czech Republic, we have to do different things, but it all goes in the same direction. And the savings that we are making due to the short-time work, we expect to end up this year in an order of magnitude of CHF 10 million.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Dr. Norbert Klapper for any closing remarks. Please go ahead.

So thank you very much for your questions. Thank you very much for the discussion. We think that retail is in good shape in the current situation. So far, we have been able to master the storm very well. And as I said, we see signs of recovery. I would like to highlight that the situation in Europe that we are discussing at the moment, with additional lockdowns and travel restrictions and all the things that go along with it, from our perspective, this is a European issue. Other parts of the world look at the crisis very differently, China, the U.S., Latin America, India. And in India, the infection rates are reported to go down. So that is why we -- at the moment, the signals that we get from the market don't tell us that the situation in Europe will slow down the market recovery significantly. Maybe it's too early to tell that, but what our customers tell us and what we see from the numbers doesn't indicate that the situation in Europe will slow down or stop or revert the market recovery. We will observe that in the coming months and the coming weeks very closely. You know how we do that. We shared this with you. And if market recovery goes on the way we anticipate it now, we will, of course, see the recovery in our numbers also. And if the recovery doesn't continue, retail is well prepared to move on even if that happens. I thank you so much for your attention. I thank you so much for your interest in retail and for having the discussion with us this morning. Thanks a lot.

Stay healthy.

That's important.