Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the media and analyst conference call. I am Sandra, the Chorus Call operator. 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. Good morning, everybody, on this frosty January morning. I'd like to jump into the presentation right away. The presentation that you all have in front of you. On Page 1, we have summarized the key messages. And the key messages are: number one, our order intake in the fourth quarter, we booked an order intake of CHF 215 million, which is a strong sign of the market recovery and of the success of Rieter in this market. In total, we came out at CHF 640 million order intake. Well, this is not a surprise. You've seen the numbers, in particular, from the second quarter and the third quarter. But what is quite positive is the increase that we saw in the fourth quarter, 215x 4 is not what we need to make a ton of money, but it is, for sure, above our breakeven point. So we are confident that the market recovery will continue and at times will be a lot better in the near future. As expected, sales was low CHF 573 million. This was a sharp decline compared to the last year, which was already a bad year. But as we said before, the impact of COVID is what made the number that -- which led to that decline in sales. So despite the fact that the second half of the year was better than the first one. As we also discussed in October, we see the CHF 573 million, which is very low. The result is then also inevitable. You know that Rieter is running at a breakeven point of roughly CHF 800 million and sales of CHF 573 million lead to a loss. Despite cost, strict cost discipline and despite the short time work that we have introduced when capacity utilization went down, we will book a loss for 2022 at the EBIT level of 15% and at the net profit level of roughly 16%. We will also see a first half 2021, which will still suffer from the COVID-19 situation. You know that the low order intake in Q2 and Q3 of last year will turn into sales now in the first half year of 2021. And this is why we expect sales below our breakeven point of roughly CHF 400 million in the first half year of 2021. And I also have to announce a change in the group Executive Committee. We will come to that point at the end of the presentation. Let me take you through Page #3 here. We see the order intake by quarter, and we see the massive impact of COVID-19 on the second quarter. We see the start of the recovery in the third quarter, and we see the continuation of the recovery in the fourth quarter. And the assessment -- our assessment of a market recovery is supported by a couple of other indicators. The spinning mills that we are monitoring are back to normal capacity utilization. The cotton price is above $0.80 a pound, and our order backlog of CHF 560 million also is a strong indication for the market recovery. We booked orders in the fourth quarter from all regions of the world. And when we come to Page #4, where we see the order intake by business group. We see, as you would expect, that the business group machines and systems have suffered most from the COVID-19 crisis. There is a delay in recovery in the new machine and system business, which is also understandable. When you have a spinning mill, and you are a textile guy, you -- the first thing that you do when market recovery starts is you spend money on raw material, and you spend money on components and spare parts to get your mill running. And once you've achieved that, think about new investments, and this is the mechanism that we see in the numbers here. Let me go to Page #5, sales by business group. We talked about sales already. We see the COVID hit. And we see the positive trend when we compare half year 2 to half year 1, and -- so we see that the market recovery is also reflected in the sales numbers. The stronger indicator, of course, is order intake because there is a delay when you take order intake compared to sales of roughly 0.5 year or even a little more, in particular, in the machines and systems business. On Page 5, we have the sales development by region. I'd like to draw your attention on this slide to Turkey. We grew sales in Turkey against the trend and despite COVID, almost back to normal levels. Our normal levels in Turkey are roughly CHF 150 million on an annual basis. And although the situation in the country is challenging, customers are investing, and Rieter has an attractive offering, and this is what we see in these numbers. We benefit here from the innovations which we launched in 2019. On the next page number -- this is #7, we have some information on what we expect to happen in the first half of 2021. We see the recovery in the capacity utilization of our company also. We only have short time working in a few areas, and it's going down week by week. However, the low order intake in Q2 '20 and in Q3 '20 will have an impact on sales in half year 1 '21. And this is why we expect sales to come out below the breakeven level in half year 1 2021. Last but not least, I have here an information about my team, the group Executive Committee. We will have a change on the group Executive Committee. You are aware that has Carsten Liske has decided to pursue his career outside Rieter. We announced that in summer last year. And now we have decided on the succession. Roger Albrecht will take over from Carsten Liske on March 1. He has been in charge of our components business in Suessen for the last 3 years. And Roger has done a great job of developing and launching innovations, and at the same time, improving the cost structure of the company he was in charge of. And this is, of course, a very important experience that he made and also the track record that he showed by doing that, which is important for the position in the machines and systems business as well. All right. So far, the update on sales and orders. We are open for questions now.

The first question comes from Christian Arnold from Stifel.

Yes. I have a question on your outlook for fiscal year next year, especially first half basically, that you expect a loss-making half year on the back of the lower Q2, Q3 orders you just mentioned. Would it be kind of a fair assumption that H1 next year would be somewhat similar with -- or variable with H2 this year in terms of sales, in terms of EBIT loss of some CHF 30 million? That will be my first question. And the second question is also somewhat related to that, in terms of your large Egyptian order around total of CHF 210 million. Your guidance for the first half, does this imply any business already from this Egyptian order? Or do you expect the Egyptian order to become sales relevant only in the second half? And maybe the split between '21 and '22 in terms of Egyptian order, how -- when will that become relevant? If you can say, that's something.

Yes. Thank you, Christian. The Egyptian order, yes, we have not -- we don't expect shipments to go out in the first half year of 2021. We see a progress in Egypt. We see the buildings -- building construction going on. But based on the shipment schedules that we are looking at the moment, we don't expect shipments to start before half year 2. And the outlook for the first half year, well, all I can say today is that we expect sales below the breakeven level, and as a consequence, a loss. We will give you a more precise outlook on the full fiscal year in March. All we can say today is that we don't expect sales to be above our breakeven level.

Okay. And would it be fair to assume that now about the Egyptian order, maybe -- so half of this CHF 210 million will be recognized in H2 and third half in FY '22?

Well, we talked about that already. And the shipment schedules are in the making at the moment. Would -- I said last time, would I strongly reject this assumption? And I said, no. And I would repeat this statement today.

Okay. Very good. And last question, a smaller one. On the restructuring costs for 2020, how much was booked here? Or it's somewhat implied in your EBIT guidance for 2020? And do you expect further restructuring costs in '21?

Kurt, would you please try to answer that question?

So we are not reporting EBIT at the moment, so I cannot give you more guidance on the restructuring. But of course, it's included in the guidance that we give.

Okay. I think at the 9-months call, you were talking about some CHF 10 million?

Yes. It's still the numbers we would maintain.

That's still valid? Okay. Okay. And for '21, you don't expect anything there?

We will be more precise on that later in the year, in March, I guess, we can say more about that. At the moment, we have no restructurings to communicate.

The next question comes from Charlie Fehrenbach from awp.

I was wondering -- I'm wondering a bit that you're announcing a loss for the first half year '21. Don't you have any more possibilities to streamline your costs or your production capacities to avoid a loss?

Yes. The strategy we have chosen to implement is to keep our capacities at the level that we need for a normal course of business. So what we have done is we have not restructured last year, with the exception of what we announced in January before COVID hit us. This has been done. But as a result of COVID, we have not done restructuring. We have kept our capacities. We have kept our people in order to be prepared for the upturn. And we will continue to do that. We will not -- our capacity utilization in our company is going up at the moment. The orders are coming in. And the orders have to be processed. So #1 is, it would be -- not be our strategy to go down with capacity further. And #2 is, it wouldn't even be possible at the moment because the capacity load is going up.

The next question comes from Armin Rechberger from ZKB.

First, about your order intakes in the first quarter, second and third quarter, and in regards of your Egyptian order, that means for the last CHF 40 million to CHF 45 million. When did you book them? In which quarter of 2020? I'm talking about the CHF 40 million.

Yes, yes. I get where you're coming from. I mean we booked it in the third quarter.

Third quarter. All CHF 40 million or CHF 45 million, in this range?

Yes, yes.

Yes. Okay. And then how much sales already you booked from the Egyptian order?

0.

0? Even not for any components or service? Nothing at all? Okay.

No. I mean the Egyptian order is a number of spinning mills -- new spinning mills which need new buildings or significantly upgraded buildings before we can ship any piece of equipment. And that is what drives the process. That is what also determines the time line.

Okay. Well, I'm a little bit surprised about your guidance for 2020. Very high losses of almost at -- net income of more than CHF 90 million. Are my calculations correct? It's easy calculation, but am I correct with this assumption?

I mean when you do the math based on the numbers, which we published, that's about it. Yes.

Wow. Okay. And then you say in first half year, '21, you won't reach breakeven. Can you remind us at which level you think you are breakeven now with your new actions in place, I mean?

I mean when you look at our year 2019, yes, you saw where the breakeven is at the moment with Rieter. We had sales of CHF 760 million. And when you take out the extra profits we generated by the land sale in Ingolstadt, we had a loss of a little less than CHF 10 million. So the breakeven point is roughly at CHF 800 million, right? The restructuring last year, that we did early last year made a change to the breakeven point to some extent, but it was not a huge restructuring, yes? So we can say that the CHF 800 million is still about the level where we are at the moment. And for the half year, this would be CHF 400 million. And that is why I'm saying we don't expect sales to be above the CHF 400 million line.

And is it a fair assumption that you might even book a loss for the full year '21? Because I mean -- because I assume that the -- your margins on the Egyptian order might be very high as it is a very big order. So you might even book a loss for the full year '21. Fair assumption?

I mean the visibility at the moment is too low to say that today. We will try to give you an outlook in March for the full year. But the order momentum that we saw in the fourth quarter doesn't tell us that the risk of a loss for the full year is very high. However, it's too early to say that. It will depend on the next 2 months, January, February. And in March, we might be in a position to be more precise on that.

Okay. And my last question, regarding CAMPUS, any news there?

Unchanged. We will -- we expect the -- we are looking at the market situation, as we said earlier, to determine whether we start with the construction work in the first half year of 2021, and this is still our position.

The next question comes from Rolf Renders from Helvea.

I was intrigued by what you mentioned that the spinning mills that you monitor are back to normal. It would be great if you can elaborate a bit more on that.

Sure, sure. Let's go through this spinning mill monitoring, which is really important to us. It was very helpful thing to do that, and it continues to be a very good exercise for our organization. You know that we are monitoring roughly 600 mills around the world. And we are at the moment at the capacity utilization, an average capacity utilization of roughly 80%, and this is what we had before COVID-19 also. In April, we were at 30%. In September, we were at 70%. And now we are back to 80%. And what we also have mentioned last year is the number of mills which are running, and I can tell you today that, at the present moment in time, we look at a number with -- or a percentage of 90% of the mills that we are monitoring which are running. That in April, we were at a level of 40%. And in September, we had already hit the 90%. So the 90% of the mills were running in September, but they were not fully loaded. And now the 90% are running, and they are loaded at a level on average which is the level that we had before COVID-19. And I can also tell you that at the moment, we don't see an impact of the second wave of COVID-19 on the capacity utilization of the spinning mills.

That's great. That's very helpful. And to continue that on the regions. You have published, of course, sales and orders a bit. But what do you see as coming from, let's say, new demand out of new markets? And what I mean with that is the development that the world becomes less global and maybe the world wants to become a bit less dependent upon Chinese textile. What kind of upstreams do you see there?

Yes. Let's go through the regions. Thank you very much for the question. The -- let's start with the Asian countries: Pakistan, Bangladesh, Uzbekistan, Indonesia, Vietnam, for example. These countries benefit from 2 things. They benefit from the fact that textile exports from China have to be substituted because customers, big textile chains and some governments are not supporting exports from China anymore. So capacity has to be built up outside China to do this business. And this business goes then into countries like, as I mentioned, Pakistan, Bangladesh, Vietnam and so forth. And some of these countries also have an additional benefit. They have weak currencies, so they attract investments. That is what we see in the Asian countries. When I come to China, you would -- you might expect that the market in China would be low. Well, this is not the fact. Because there is a huge domestic demand in China, of course, there is some capacity, which will not be needed anymore because the exports are going down, but the domestic demand is strong. China is back to normal, as you have seen in the press. So there -- and our customers in China are making investments to stay competitive for the domestic demand. We've seen that in the fourth quarter. In India, we also have a good situation. And the Indian spinners are also benefiting from the substitution of exports -- Chinese exports. And the Indian rupee is a weak currency at the moment, so that is also helping them. And we also see in India, after the hit that the country took from COVID-19, that domestic demand has picked up. So that is the third region. The fourth, which is the Americas, in the Americas, we also see that the near-shoring of textile production in Central America and South America is taking place. We had a very nice order intake from South America and Central America in the last couple of months, and the momentum is quite positive. And then Turkey, Turkey is also, as you saw in our sales numbers, yes, last year, in Turkey, we see investments happening. And they are triggered by a couple of things. One of them is a duty that the Turkish government has put on yarn imports into Turkey. Because that means that if you are a textile guy in Turkey and you depend on yarn imports from outside Turkey, your competitiveness is severely -- takes a severe hit from these import duties. And this triggers yarn production investments in the country. So that is the situation at the moment. We see a support of the market recovery from across the globe.

That's great. I hope that continues then. You have -- of course, the strategy to be a market leader and invest in R&D. And if -- and then a few rep numbers. I think the capital employed, including goodwill which you paid for some acquisitions, is around CHF 500 million to CHF 600 million. And you aim to make between 8% and 9% return for the equity provider. Now with a loss of CHF 85 million or around there and the loss underlying before also, are you aiming -- do you think you can make up for these losses, plus make up for the required returns going forward through the cycle?

Your assumption about the net assets or invested assets is about correct, around CHF 0.5 billion, as you say. Our weighted average cost of capital is around 9%. And this would mean you would have to be above this over the cycle. Now we are in a down cycle, of course. And then when you look on the total cycle, we have to make this up. If not, we are withdrawing value for the shareholders. And I think this is the ultimate target we have.

Okay. So you're still convinced that, that is possible. And does this include the CAMPUS investment? Or is this coming on top, of your capital employed, I mean?

This -- of course, if you take the capital employed of today, the CAMPUS investment would at least part come on top of it, but has to be generated a return on this. And we are confident that this should be possible, yes.

The next question comes from Sebastian Vogel from UBS.

I got 3 questions. The first one, in the press release, you mentioned that you have seen deferred deliveries. I guess a bit of a common theme that you have seen over the course of 2020 overall. I was just wondering if you can shed a little bit more light how that developed in -- over the course of the fourth quarter. Is that intensified or eased the situation? If you can add a little bit more light there, that would be appreciated. And the second thing, moving a bit backwards, with regard to the fourth quarter 2019 in the after sales business. Can you quickly remind me what of this CHF 46 million could be or was somewhat related to the Egyptian order? That would be great. And one last question. I mean there was some news flow in the beginning of the year with Savio being sold. Do you think your competitive backdrop is changing or is somewhat impacted by these developments over there?

Yes. Okay. I'll take the first question and the third question. And the second question, I'd like to hand over to Kurt. Yes, deferred deliveries, delay in deliveries. Sebastian, you are working for a bank, right?

I do, yes.

And the banks are guilty of that, yes? Let me be very open on that, and the forwarders, yes, I have to be fair, and the construction companies. What we already -- what we saw during the course of 2020 is that all the processes that you need to finalize an order to get the final payments in place, to get the financing in place, to do the construction of the buildings, and to get the stuff where it's supposed to go to, this has slowed down significantly. So we see this in negotiations with bigger financial packages that our customers need. It takes a very long time to get everybody together, to negotiate the contracts, to finalize the contracts and to eventually put the LCs into place. We've seen this in many countries. And that delays the process significantly. And the same -- in order to be fair and not to blame everything to the banks, the same is with construction. The construction companies are slow. And it takes a long time to get the construction started. And then the speed is not as we've seen it in the past. They have problems with their workers who are -- some of them are infected, and they don't have enough workers and all that type of stuff. And the same is with the forwarders. The forwarders have suffered a lot from the COVID-19 situation. There is an imbalance in the global logistics systems. There is way too many containers, for example, in one corner of the world, and there is a lot of containers missing in another corner of the world, for example. And that gives you a huge imbalance and delay in the process. This is what happens here.

Understood. And has that intensified over the course of the fourth quarter or somewhat eased a little bit? Or is it pretty much the same over fourth quarter as compared to the first 9 months?

I guess we see some improvements before -- because some of these processes that were -- that everybody was used to do in a face-to-face type of working style, they have changed and they have adapted to the fact that it goes via Zoom or Teams or whatever today. And there is processes who -- which have improved due to that. Others have not. This logistics thing has not improved as far as we can see. It is still around. And the fact that in countries where we are working there -- that we run into situations where the construction companies are missing half of their people due to COVID-19 infection, this has not changed neither. So on the Savio acquisition, yes, I mean it's not a secret. We made an offer for Savio. And we thought it was an attractive offer. But apparently, it was not attractive enough. Do we think that the dynamics in our industry will change a lot by this acquisition of our Belgian friends from [indiscernible]? We don't think so. We think the [indiscernible] is a very strong company. We expect them to continue to develop this business. We have a high opinion of their capabilities. At the same time, this is a stand-alone business for them. They are not in the spinning business today. So that is why we don't expect a major change in the dynamics and competition in our industry. And the aftersales question, could you please help us again? What is the question about aftersales?

Yes. In 2000 -- the fourth quarter of 2019, the order intake and the aftersales model was quite pronounced for the quarter. And I was wondering if that was also impacted by the Egypt order, that's one part of the Egypt order, not only in a machine part, but also booked as an order intake into the aftersales, if at all.

Yes, yes. That's true. We did that. The installation part went into the aftersales order intake in '19. You're asking about '19, right?

Right. Absolutely. And I was just wondering if that is a -- sort of a rough -- would have on how much of this CHF 46 million, like a CHF 1 million or something like a CHF 10 million, kind of a ballpark idea in that regard.

Yes. I mean from the top of my mind, I guess we're talking about CHF 9 million? Yes?

Yes. I think so. Around ...

Yes, CHF 9 million roughly.

The next question comes from [ Andrew Gibson ], [indiscernible] Capital.

The real question here is the -- is looking at the components and aftersales. Obviously, between 2019 and 2020, you showed some cyclicality in this. And I understand that, that would be a function of mills not running, not therefore needing servicing, et cetera. If you say today that the mills are now back up to 90% of them are running and they're at 80% capacity utilization. And if one might assume that the demand profile continues upwards, but the capacity of flows put in place. What do you reckon you can see? What might you see as a peak cycle in components and aftersales? How high could that become? And obviously, that is a variable in your P&L or in your sales in a half year that doesn't have a long order backlog associated with it. So could that come through in H1 2021 to somehow ameliorate some of the difficulties you're going to see in the first half this year?

Well, let me explain what -- how we look at the cycle before we come to that question. For us, the cycle is the fluctuation in demand for machines, for new machines. We don't look at the cycle or a big cycle in the components and aftersales business. In -- the normal cycle that Rieter is exposed to is that this business is more or less stable. It has some ups and downs, but only -- compared to the machines and business, it's marginal. And then what is really going up and down in a -- to a larger extent, is the machines and business -- the machines and systems business. So -- but that is not what happened in 2020. In -- what I just said was the case in 2029 -- 2019, sorry. In 2019, we had exactly this situation. Components and aftersales was pretty stable compared to previous years. And the trough in demand in the machines and systems business hit our numbers in 2019. In 2020, we had an even lower demand for new machines based on the COVID-19 situation. And the normal cycle did not hit -- did not kick in. What we had is also a low demand for components and spare parts, and this is what we normally don't have. This is the unusual and unprecedented situation that we had in 2020, and this is what also makes our numbers the way they look like. Okay. That is about the cycle. Now your question, what would be the peak in components and aftersales? Yes, I mean, you can look into our history, and then you see what levels we have achieved. And the second part of the question, how likely is it of this happening in 2021? Well, I can't answer that question today. We will see how the next couple of weeks are going. And I hope to be able to give you some more information on that when we do the outlook in March.

The next question comes from Patrick Laager from Crédit Suisse.

Just 2 quick questions. I'm actually happy to see a sequential improvement in your order entries. That is definitely good news. I think CHF 200 million or more of order intake in Q4 is a good number. But I remain concerned about pricing in general across the industry. And I'm basically not sure you will be able to defend your premium pricing. What is your view on pricing in general?

Well, I mean in a situation where the market is so low, it is obvious that pricing is suffering. But I guess when we see the industry going back to normal levels, we will also see some relief on the pricing. It is a clear is -- in my view, it's a clear consequence of the low demand and the low capacity utilization of the industry what we see at the moment, and I expect the prices to recover.

But do you believe that this recovery would be pretty much at the same level we've seen, not pre-pandemic, but in the all good times in textile machinery? Or have we seen a kind of structural shift or pricing erosion here?

I mean the fact that we have new competitors in emerging markets who have a very attractive cost structure is -- has, of course, an impact on pricing. Our strategy to keep the prices at the level where we can make an attractive margin is innovation. And we hold on to this strategy. And we see also the impact of what we are doing here in -- from the sales and the order intake from our new machines that we have launched in 2019. If customers see that the value of the machine for them is higher, they are prepared to pay a higher price, and that is what drives our profitability.

Okay. Good. And my final question is about the ongoing recovery we are seeing. I mean you were happy to share information about the different regions or countries, and you said that you think a broader recovery here. That's definitely good news. How about the demand by product? I mean is this recovery mainly driven by rotor spinning or ring spinning? Or are you seeing more large order entries in air jet technology? This will be interesting to hear.

Yes. It goes across all technologies. I couldn't say that there is a specific focus in terms of technologies. It's in all countries, and it is also in all types of technologies that we are offering.

The next question is a follow-up question from Armin Rechberger from ZKB.

Yes. My questions were mainly answered. But the new one appeared. You mentioned R&D. Can you elaborate a little bit where your efforts are there in R&D now?

Well, you saw what we introduced in terms of new machines in ITMA in 2019, right? You saw a new -- 2 new preparation machines in comber in the cart. And you saw a new rotor spinning machine and devices for the ring spinning machine. You didn't see a new ring spinning machine and you didn't see a new age machine, right?

Okay. So it's now more in air jet and bring spinning?

Well, I don't say that. That is your conclusion. But what we also do is we spend a decent amount of money in digitization of the spinning mill. That is also important to us. We think that there is some additional money to be made for our customers, and as a consequence, also for us.

When I'm right, a few years ago, you tried very hard to attack Uster with their sensors. How is the situation there now? Any -- were you able to be successful with inroads in this area?

I mean our machines don't need Uster sensors anymore. For our machines, we have the sensors ourselves that we need.

But I mean the client, it's up to the client which sensors he likes?

Yes. But our clients buy Rieter machines including Rieter sensors.

Okay. In normal cases. Only in fewer cases ...

Any Rieter machine with a sensor that was not a Rieter sensor, to be very.

Gentlemen, so far there are no more questions.

All right. So we thank you very much for having dialed in today, and we wish you a good remainder of the day. Stay healthy, stay safe. And we hope to speak to you again in March. Thank you very much.

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