Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Rieter Results Press Conference Call 2021. I'm Maria, 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. Good morning, ladies and gentlemen. I sincerely hope that you, your families and your teams are doing well. Before I guide you through the key messages, I'd like to highlight what is new compared to our January 27 sales and orders update. There are 3 major topics I would like to mention. Number one, the market recovery continues. And this is why we -- today, we communicate that we expect an order intake in half year 1 this year, which will exceed what we had in half year 2 2020. The second big topic is we expect an operating profit in 2021. And the third topic that we will like to -- that we will talk about today is we are ready for the market recovery based on the decisions that we took last year. All right. Let's move on to Page #3, the key messages. You are all aware that we had a sharp decline in demand in 2020 due to the pandemic. You saw the trough of this development in the second quarter where we booked an order intake of only CHF 46 million. The market recovery started in the second half of last year. The order intake in the fourth quarter came back to a level of CHF 215 million. As a consequence of the low sales last year, retail has booked a significant loss, an EBIT margin of minus 14.7% and a net profit of minus 15.7%. I guess, we can say today that our crisis management was successful because we see that we are ready for the market recovery. And what was also important was to consistently implement the strategy. We will come to that point later in the presentation. It is not a surprise to you that the Board of Directors will not propose a dividend payment to the AGM in April. And the last point on my key message list here is the outlook. As I said already, the market recovery continues. We clearly see the recovery in our numbers. So we expect, as I said, a good order intake in the first half year of 2021, which exceeds what we had in the second half year last year. All right. So I'd like to turnover to Kurt for the financial results.

Thank you, Norbert. Good morning, and welcome to this call from my side. I'm starting on Slide 5 with the financial highlights. The year 2020 was a challenge for Rieter. We started the year with the expectation that the recovery, which set in, in 2019, continues. In the second quarter, COVID-19 changed the situation. The recovery in the business with new machines stopped. The sentiment to invest into new spinning mills or machines suffered. Additionally, the demand in the textile end markets slumped with a significant effect on our Components and After Sales business. Let me highlight some of the key figures on this slide. Sales were at a very low level due to the exceptional market situation. All 3 business groups suffered. The gross margin decreased from 27.6% to 23.4% or by CHF 76 million, 2/3 of the lower gross margin was driven by the lower volume. The remainder was due to a low capacity utilization within Rieter. To be ready when the market ramps up, on purpose, we did not adapt Rieter structure substantially due to COVID-19. The EBIT reflects the low gross margin described just now. This negative impact was partly compensated by the cost-reduction measures, including short-time work and many others. SG&A was reduced by CHF 20 million. R&D expenses, however, remained on the previous year's level since we did not stop our innovation program at all. Please note that previous year's numbers include a nonrecurring profit of CHF 94.5 million for the sale of the real estate in Germany. Net profit is a result of the just said. In addition, we booked higher net interest expenses of CHF 2.8 million. This is mainly due to a nonrecurring interest income in 2019. Noncapitalized tax losses carryforward had a negative impact of close to CHF 20 million. The bar chart on Slide 6 shows the effect of the pandemic by quarter. After a solid start in the first quarter and the unprecedented slump in demand in the second quarter, textile retailers were forced into various lockdowns. The consumption broke away. Therefore, spinning mills operated at a very low capacity utilization rate. This led to a substantial lower demand for wear, tear and spare parts in our business groups, Components and After Sales, and a low appetite to invest into products of our business group Machines & Systems. With less than 1/4 of the order intake in Q1, the second quarter was a disaster. The recovery set in as early as in the third quarter, still on a moderate level and accelerated in the fourth quarter to CHF 250 million, even higher than Q1. This corresponds to an annualized number of CHF 860 million, a level clearly above breakeven. Slide 7 shows that all 3 business groups were affected by the slump in demand in the second quarter of 2020. Despite the recovery in order intake in the third and fourth quarter of 2020, the weak second quarter was only partially offset. The business group Machines & Systems was particularly hard hit by the effects of the pandemic with a year-on-year decline of 35%. The business groups Components and After Sales each recorded a 24% reduction in order intake. At the end of 2020, Rieter had an order backlog of around CHF 560 million, CHF 60 million above the already high level of last year. This number includes about CHF 200 million for the order from the Cotton & Textile Industries Holding Co. of Egypt booked in 2019 and 2020. The graph on the left side of Slide 8 shows the comparison of last year's numbers. Overall, sales dropped by some 25%. All business groups were affected. Machines & Systems as well as Components were 24% below previous year. After Sales closed 27% below previous year. On the right side, you see a half year 1 to half year 2 sales comparison. The clear recovery by 25% was driven by the business group Machines & Systems with 47% growth. A substantial base effect, half year 1 was on an extremely low level supported this clear growth. The Components business followed a different pattern with both half years at about the same sales level. In half year 1, the sales did not drop since a considerable order backlog could be converted into sales in Q2. However, in half year 2, Components sales were then affected from the low order intake in Q2. After Sales grew by 20%. This reflects the continued improvement of the operational rate in the spinning mills during half year 2. Overall, the sales figures in half year 2 were also strongly improved against half year 1, still on a low level, annualized at around CHF 640 million. The bar chart on Slide 9 shows that with the exception of Turkey and Africa, all regions were affected by the low demand as a consequence of the COVID-19 pandemic. Thanks to the innovative range of products and services, Rieter benefited in Turkey from customer willingness to invest and increase sales by 83% or CHF 55 million to CHF 122 million. In the 2 important textile markets, China and India, sales decreased by 32%, respectively, 49%. In the Asian countries, excluding China, India and Turkey, compared to previous years, sales fell by 37%, the same decrease of 37%, Rieter also saw in North and South America. In the smaller market in Europe, sales fell by 7%. And in Africa, a year-on-year increase of 11% or CHF 2 million was recorded. As you can see on Page 10, there are 3 main effects that influence the EBIT compared to previous year and led to this difference of almost CHF 170 million. Firstly, gross margin was CHF 76 million below last year. As I mentioned earlier, 2/3 of this reduction was driven by the lower volume. The remainder was due to a low capacity utilization. Secondly, CHF 95 million nonrecurring profit from the sales of real estate in Germany in 2019. And thirdly, CHF 20 million of savings in SG&A due to cost-cutting measures. Please note that at least a part of this reduction is not sustainable. It includes, for example, short-time work, reduced cost for trade fairs or traveling. It is obvious that these expenses will normalize once the pandemic is behind us. R&D expenses remained on previous year's level since we did not save on our innovation programs as mentioned before. There are 5 noteworthy points I want to highlight in the balance sheet on Page 11. Liquid funds almost remained on last year's level of over CHF 280 million. As in the year before, we managed net working capital to be negative. That means that inventory and receivables could be financed by trade liabilities. Besides an active management of net working capital, Rieter could also profit from high advanced paid prepayments from customers linked to the increased order intake in Q4 2020. Between March and November 2020, bank loans in the amount of CHF 130 million with a term of 1 year were drawn and increased current financial debt. Part of this increase was used to repay the CHF 100 million bond, which was due in September '20, and therefore, also classified as current financial debt. The CHF 75 million bonds issued in August 2020 with its 4-year term increased noncurrent financial debt. Equity decreased by CHF 120 million, and as a consequence, the equity ratio by 11.4 percentage points to 36.4%. The free cash flow on Slide 12 amounted to minus CHF 75 million in 2020, reflecting the poor market situation in the business year. Depreciation and amortization remained on the previous year's level and are clearly above CapEx. CapEx were reduced by around 10%. As mentioned, we did manage net working capital tightly. Hence, it did contribute CHF 13 million to free cash flow. The higher tax payments include tax effects from last year's sale of real estate in Ingolstadt. Finally, on Slide 13, the dividend proposal already mentioned by the CEO. Due to the loss of CHF 89.8 million at the net profit level in the 2020 financial year, the Board of Directors proposes that shareholders waive the distribution of a dividend. This is in line with Rieter's dividend policy to pay out 40% of the net profit. With this, I hand over the word back to Norbert.

Thank you so much, Kurt. So I'm on Page 15 now, strategy implementation. Most of you know my mantra on Rieter's strategy, 3 pillars of our strategy: technology and innovation leadership; growing the business on Rieter's installed base; and the continuous improvement of our cost structures. On Page 15, I come to the first point of my mantra, innovation and technology leadership. We launched last year the innovations we presented at ITMA 2019 in Barcelona, and I would like to highlight 2 products today in that context, the new card C 80 and the new comber E 90, two very important machines in the Rieter portfolio. And we can say today that the launch was a success. We are preparing additional launches for this year. When I come to the second point of my mantra, doing more business on Rieter's installed base on Page 16, here, we have a similar situation. We were busy last year with launching the innovations we presented in Barcelona. And I can report to you that we booked major orders for our piecing robot, ROBOspin, and also for the compacting devices, COMPACTdrum and COMPACTeasy. To give you a little background on what that means for a customer, those 2 products, ROBOspin helps to automate the ring spinning machine. And this is important because the ring spinning machines are not at the same level of automation as rotor machines or air-jet machines. So it helps to make this technology more attractive to our customers. And COMPACTdrum and COMPACTeasy are compacting devices, which help to turn a ring spinning machine into a compact spinning machine and vice versa very quickly. It is a huge advantage in terms of flexibility for our customers. In this bucket here as well, we are planning for additional market launches this year. Coming to the third element of the strategy, continuous improvement of the cost base. I can report that we executed the restructuring program, which we announced in January 2020. 180 positions in Europe were affected. On top of that, we made use during the pandemic of the flexibility that we have in our setup, which means that we used short-time work. We use the time credits for vacation and overtime and a couple of other things that helped us to save cost while we maintained our workforce onboard. We kept our workforce onboard, which is very important today when the orders hit our books and we need our teams to do the business that is coming in now. This is why on my bar chart here, you see that there's not that much of a difference. There was no additional restructuring on top of the 180 that I was just talking about. On Page 18, there is one more important element of our strategy, CAMPUS. You know that this is an important project to us. It is part of our strategy. It is part of the first point of our strategy, the first pillar, innovation and technology leadership. And we are fully committed to it. You saw that our equity ratio suffered last year, it took a hit in 2020. So we decided to review the timing of the implementation of the CAMPUS. It's a big investment. And you know how important a strong balance sheet is to us. Last year gave a clear evidence why we think that way. This is why we will look into the timing later this year depending on the business situation. Let me come to Page 20 to the outlook. We expect the market recovery that began in the second half year 2020 to continue. Let me give you 3 -- 2 background information. Number one is the cotton price. You might have seen that the cotton price almost doubled since the trough that we saw in -- during the pandemic. We were at CHF 0.90 a pound yesterday. And you can -- you don't know about the spinning mill capacity utilization that we monitor. Here at Rieter, we are back to 83%, which is more than what we had before the pandemic. And 95% of the mills that we monitor are busy at the moment. So this is a clear indication of market recovery. The second point on my outlook slide here is we expect an order intake, as I said before, in the first half of this year, which will exceed what we had in the second half year 2020. These were roughly CHF 390 million. And thanks to the improved capacity utilization, we will stop to do short-time working by the end of March. So in April, we will be back to normal. Nonetheless, as already announced, Rieter still anticipates that sales in the first half of 2021 will be below the breakeven point. And the last point on my outlook slide here is in connection with the high order backlog at the beginning of 2021 and the orders which are coming in, Rieter expects an operating profit for the full year 2021. So far, our presentation. We are open for questions now.

[Operator Instructions] The first question is from Christian Arnold from Stifel.

Yes. I have 2 that sort of I would like to discuss. First, in terms of your positive EBIT guidance for '21. I wonder how much of the Egyptian order is baked into that guidance? So in the second half, how much of this Egyptian business do you expect to become sales and profit? And the second question would be on your order guidance that H1 '21 orders will be higher than the H2. What does it mean for your order intake in January and February? Could you give us here some color in terms of divisional development of orders, regional development? And do we see a similar pattern like what we have seen in Q4 with order intake momentum of plus 23%?

Thank you very much, Christian. So on the first question, Egypt. We are at the moment in the process of structuring the shipment schedules with our Egyptian partners, and I would expect us to turn between 25% and 50% of the order into sales, yes? I cannot tell you a more exact number because the shipment schedules highly depend on the progress of the buildings. And this is what we are in the progress of discussing with the customer at the moment. In terms of order guidance, yes, what I can say is that what we see at the moment is orders coming in from all parts of the world, yes. All regions are -- in all regions, there is investments, which is very good for Rieter in particular. And in terms of divisional recovery, well, it is the classical case that we discussed earlier. What comes first is wear and tear parts because customers ramp up their spinning mills. Then they do spare parts and single machines, and then the bigger projects come down the line. And this is exactly what we see at the moment. It started with wear and tear parts. It continued with the recovery of spare parts and single machines, and now we expect bigger projects to be booked.

Okay. And in terms of growth, that's similar to what we have seen in Q4?

I cannot give you a better indication than the number that I said. We expect more than in half year 2 2020.

Okay. And then maybe just a follow-up on your Egyptian order, so 25% to 50% orders into sales. That assumption is also included in your EBIT guidance of being positive for the full year.

Yes.

[Operator Instructions] The next question is from Armin Rechberger from ZKB.

Breakeven level, you mentioned. Can you put a figure on this breakeven level? And then, yes, I try again about order intake. Christian already tried to. But if you take at all first half year -- second half year, sorry, last year, above CHF 390 million that means roughly around CHF 200 million per quarter you expect. So there was no growth from Q4 to Q1, you expect for -- I mean, for the next 2 coming quarters, you don't expect growth in comparison with Q4 2020.

Thank you, Armin. The breakeven level, yes, I mean, you all know what ballpark figure we are operating with. We are working with a breakeven on a full year basis of CHF 800 million sales. That is what we are looking at, plus/minus depending on the restructuring that we are doing, depending on the mix, depending on a couple of other things. But CHF 800 million is, on a full year basis, the right order of magnitude to think about. And yes, Armin, even though you tried, again, I'm not going to tell you more about half year 1 2021 order intake than what I said. We expect more than the CHF 390 million that we had in the second half year of last year.

Maybe I can add to the breakeven. Breakeven is a little bit a tricky figure because it also depends on the mix, which business group contributes to the sales. And if a lower-margin business group, they're contribution to sales to breakeven is higher and the other way around, just to keep it in mind.

So you're pointing to the fact that a bigger part of new sales will come from very big order from Egypt with maybe quite low margin.

No, I don't want to point to anything. I just want to mention that this is an interesting factor on this.

The next question is from Rolf Renders from Helvea.

Can you elaborate a bit about the client interaction you see per region? What's going on in China? What's going on there for the local market? How is this, how do you call it, improved issue in influencing maybe also international retailers of companies like Zara? Just some flavor on the end markets, that would be great.

Thank you very much, Rolf. So the regions, yes, let's start with the Asian countries. What we call the Asian countries, you know that this is countries like Pakistan, Bangladesh, Vietnam, Uzbekistan and a couple of others, yes? So the Asian countries are in good shape. They benefit from the fact that customers are pulling business out of China and are placing it in other parts of the world. And the Asian country, Southeast Asia and Central Asia are in a good position to take this business on. But it requires additional investments, and that is what we see in our order book. Let's talk about India. India is also in a very positive investment mood. There is a strong domestic demand, and there is also benefits from the situation in China. We see textile chains placing business with Indian customers as well. Let's talk about China. In China, we see 2 things. Number one is the exports of apparel and textiles out of China become more and more difficult. We talked about it already. Big textile chains have decided to place business outside China, which was placed with Chinese customers before. At the same time, there is a big domestic demand in China. And the players who have decided to serve the domestic market in the future, they invest because there is cost increases in China and they invest to stay competitive in the domestic market. Let's talk about Turkey. I was in Istanbul last year -- last week, and I can report that the Turkish market is also in good shape. Our Turkish customers are making money because they also benefit from this reshuffle of orders away from China and into other regions. And they also are having incentives to invest because the Turkish government put a higher custom duty on yarn imports, which makes it difficult to stay competitive for companies who have to import their yarn into Turkey in order to produce apparel from it. Let's talk about the Americas, North America, Central America, South America. We see also investments in this part of the world, in particular in Central America and in South America. And this has to do also with the structural change in the textile industry away from China and into other markets, but also with the fact that the domestic demand in South America and also in North America is in good shape. And last but not least, Africa. You know that our focus in Africa is Egypt. But Egypt is not the only country where we see positive developments. But I mean for Rieter, it is very high on the list. This is obvious. Rolf, does that answer your question?

Yes. Great. Much appreciated. And then 2 follow-up, if I may. So one is this specific issue for working together with textile companies in Xinjiang, in the Northwest part of China. Is that becoming a problem for you? And the second part is if you see subsidies specifically for the textile industry in some parts per region.

Well, the subsidy part of the question, we saw in the last couple of weeks subsidies in Pakistan. And we also -- this is also reflected in our order book. We could very well imagine that there is more to come, but that is the only place where we really see it at the moment. And business in Xinjiang, yes, I mean we -- you -- or most of you are aware of the fact that Xinjiang is a point of gravity of the Chinese textile industry. Not too long ago, we talked about 20 million spindles, which the Chinese government has placed in the region. And yes, we got -- we get questions on our business in Xinjiang. But as we always said, yes, Rieter is committed to follow the law, yes, to follow the regulations and the sanctions and the law, and that is what is important to us, yes? Of course, we are against forced labor, which is the discussion in Xinjiang. This is part of our code of conduct. But the basis of our business worldwide is to follow the law, and that is what we are doing in that case as well.

[Operator Instructions] The next question is a follow-up question from Armin Rechberger from ZKB.

Yes. Hello again. 2 questions about the case in England, the court case, I mean. Anything new there? Anything new there? Sorry, my mic was away. Court case in England, anything new there? And Winterthur, about the land you own there. Are you now a step further with your planning? What are you going to do with this land, you're selling it and when or what else?

Armin, you need to help me on the court case. What do you have in mind?

Well, I think it was about an order you got from Uzbekistan, which was done over a company in England.

Yes. Yes. Now I know what you...

And it looked like a pricing case. But as far as I know, you do it very often like this with a company in England.

Yes. This -- the case that we had with the Bundesanwaltschaft is still in the making. We have appealed to the court, and they are -- they have not made their decision yet. From my perspective, it was a lot about explaining how this business works, yes? And this is what we did. We explained it again to all parties. And at the end of the day, I mean, it is the normal course of business in the equipment business, yes? So -- but it is -- of course, we need to explain it and we need to follow the process here. So I'm not concerned about it. And the Winterthur land, yes, I mean, this is not a priority at the moment. We have not made big progress on thinking about the land that will be in excess of what we will need in the future. So I cannot report progress here.

Maybe a follow-up regarding ITMA. Can you remind me what are the plans for ITMA? Will there be a next ITMA in Europe? Will you participate? And where will it be?

Well, next ITMA is Europe. It's in 2023, 4 years after the last one as always. It will take place in Milan. And I have no doubt that we will participate. The question is more what is going to happen to the trade shows this year. We saw already that our Turkish friends have postponed their trade show, which was supposed to take place in June to next year. In June, there is also an ITMA Asia in Shanghai. I would not expect our Chinese partners to postpone this trade show. So this is going to happen, and we will participate as you would expect. And there is, in December, a trade show in Delhi, in India also, and our plan is to participate as usual. What I would like also to say is that, more and more, we get prepared to do product launches independently from the trade shows. That is also on our mind because we were never -- this year and last year, where the trade shows was a little difficult, and our innovation program goes on. So to a certain extent, we are prepared to do market launches independently from the trade shows.

The next question is a follow-up from Christian Arnold from Stifel.

Yes. Just a clarification or double checking. The orders of H2 last year, the CHF 390 million, you want to succeed or exceed this year. That included also Egyptian order in the margin of CHF 45 million in Q3, is that correct?

CHF 40 million, around that.

Yes. CHF 40 million. Yes, yes, in Q3. Yes.

The next question is from Marc Webb from Quaero.

Yes. Two small questions slightly outside Rieter, if I may. You mentioned the capacity utilizations in the mills that you look at had risen to 83%. And if I understood well, you said that 95% of mills were operating. So just a question, what are the other 5%? And where do you think they'll be going? And second question, we can see that Rieter is emerging solid from the downturn and into the recovery. How is the situation with your 2 big competitors and the rest of the market? And how do you feel that your market share is going with your new order wins?

Thank you very much, Marc. So the capacity utilization, yes, 5% of the mills that we are watching are not operating, and I guess that is a result of what we saw last year. I read it the way that a couple of our customers just said, okay, this is not going to be my business anymore, and they stopped their mills. And that is how we look at it. 95% is a very good ratio. And there is always mills in this world, which are not operating, and an operation rate of 95% is pretty good. Situation with our 2 big investors are unchanged. We are all excited about the recovery, and we are looking forward into the year 2021. And we are looking forward to the recovery that we will see both in the market and both for the company and also for the company. And the market share, yes, of course, the market share last year, a little hard to assess because the market was so low. But what we saw in our numbers is that we have kept the market share at 30%, even in last year's market environment. And we are confident that we will -- there will be positive developments in 2021.

The next question is a follow-up from Rolf Renders from Helvea.

Yes. So in the past, you talked about general pricing level. Of course, you have some of the best and high-quality machines, but the possibility for you to set prices depends also on the [ Horgen's ] machines, which are a bit less good. What do you see happening to the pricing level?

Yes. Due to the fact that the market was depressed so much last year, the price has suffered. That is not a surprise. So there is 2 reasons now why price increases are on the agenda. Number one is to come back to a decent price level as we had it before the pandemic, and number two is to make sure that we pass on the price increases that we get from our suppliers. So the capacity load of the industry is going up, which means of our industry, machinery, yes, which means that there is a certain point when we can implement price increases. And as I said, there is 2 good reasons why to do that for the market leader. Number one is to come back to decent prices and number two is to pass on the increases that we see on the supplier front.

And then which magnitude is that coming from suppliers? Is this like in line with steel? Or like was that 5% to 8% or so? Or what magnitude is that happening?

Too early to tell. The race has just started. But I -- we expect price increases from suppliers in very different commodities, yes, across different commodities.

[Operator Instructions] The next question is from Giorgio Muller from NZZ.

I was wondering concerning the CAMPUS project, which you still are following, but you postponed the go ahead. And you said in the second half or so, you will decide to start this project. What are the criterias? Are these financial criterias of the overall Rieter Group? Or is that more connected to the refinancing of the costs of about CHF 80 million?

Thank you very much, Giorgio. We have -- as I said, what is on our mind in that context is our equity ratio. We are below 40% now. And you have seen last year how important a strong balance sheet is for this business, and 36% is significantly below 40%. So that is what we are thinking about.

So no -- but is there a capital increase in the books?

No, no, no. There would be no reason to think about that, no. The capital increase is not on the agenda at all. What is on the agenda is to make money in order to improve the equity.

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

Yes. You mentioned that a lot of the industry is being established now outside China, and they build up capacities. Well, how does China react then? I think they won't put up with this being pushed into the offside regarding spinning industry. Do you see any programs coming up? Or how do they react?

Armin, what we can clearly see is that the big Chinese players are investing outside China to keep their business. We have seen over the last couple of years big investments in Vietnam, for example, done by Chinese companies, but also in other parts of the world. So our big Chinese customers, their reaction is to, number one, invest in China in the competitiveness of what is supposed to stay, yes? And on the other hand is invest outside China into new equipment in order to be able to keep the business that they have with the big textile chains.

But no reactions on the government side? No programs?

As far as I can see, no. As far as I can see today, no.

There are no more questions at this time.

All right. So we thank you very much for having been with us this morning, and we sincerely hope that you will all stay healthy and safe. It's not over yet. At the same time, we see the recovery of the markets. We see the strong signals. And so that gives us confidence that we will have a good year 2021. But please make sure that you stay safe and healthy. Thank you so much. Take care.

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