Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Semiannual Report Media and Analyst Conference Call. I'm Sasha, 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 is my pleasure to hand over to Dr. Norbert Klapper. Please go ahead, sir.

Thank you very much. Good morning to all of you. Thanks a lot for being with us today for the presentation of the half year results 2021. I jump right into the presentation to Page 2, the key messages, which you saw in our press release already. Order intake of CHF 975 million, as announced earlier. Sales, we booked CHF 400 million in the first half year. The EBIT was at a level of CHF 9 million and the net profit at a level of CHF 5.3 million. We will give you an update on strategy implementation and crisis management today and, obviously, also an outlook. Let's move on to Page #3, where we have the order intake by business group. Now we see this amazing development in our business group, Machines & Systems. And the key drivers for this development are a catch-up effect in 2019 and 2020. There were low investments in our industry. And at the moment, the industry is catching up on that. And there is one more thing, which is important. This is a regional shift of demand, which has to do with China, in particular, with the cost development in the country. Customers invest more outside China and customers in China invest in new technology to stay competitive, two developments, which are good for Rieter. I can illustrate this by the hit list of the countries, the country ranking in the first half year in terms of order intake. On top of the list is Turkey, followed by Pakistan, then comes China and India and Uzbekistan. I must not forget to mention Latin America, which is exceptionally -- which was exceptionally good in the first half year. Let's move on to sales by business group on Page 4. Sales, CHF 400 million, which is, of course, a lot better than last year, first half year 2020. You see here the development. It's still impacted, of course, by the low order intake in the Machines & Systems business of last year, the growth rates we have mentioned in the press release. What I would like to add here is that you see the nice development in Components and After Sales, which is a result of the spinning mills, which are working under a high capacity utilization as opposed to what we had last year. Let's move on to Page 5, sales development by region. Of course, this does not reflect what the dynamic we saw in the order intake in the first half year. However, also in sales, you can see the pattern, which we experienced in the market at the moment. You see a very nice number from China. You see the market recovery in India. And you see the market recovery also in the Asian countries. I mentioned Vietnam. I mentioned Pakistan. I mentioned Uzbekistan already. What we don't see in sales here is the recovery in Turkey, which happened in the order intake in the first half year, not yet in sales. We will see sales going up in Turkey in the coming months. So this is the comments and the observations I wanted to share with you on order intake and sales. And now I hand over to Kurt for the financial highlights.

Thank you, Norbert. Good morning, and welcome also from my side. And let me start on Slide 6, with the financial highlights. You heard it already from Norbert, order intake of the first half year was at CHF 975 million. Sales significantly increased by more than 57% compared to previous year period to CHF 400 million. However, as expected, they were still impacted by the low order intake of the financial year 2020. Order backlog is at the very high level of more than CHF 1.1 billion. Gross profit also developed very nicely from CHF 64 million to CHF 125 million or from 25.1% to 31.1%. This increase was driven by CHF 37 million from the higher volume and CHF 31 million due to increased margins. The free cash flow improved pleasantly compared to the first half year 2021 from minus CHF 95 million to plus CHF 53 million. Besides the strongly improved cash flow from business, the disciplined spending for CapEx and the high inflow of customer advanced payments from the strong order intake added to this development. Therefore, net liquidity improved to CHF 99 million and liquid funds remained stable at CHF 280 million compared to both last June and last December closing. I'm on Slide 7 now, earnings before interest and taxes. As the waterfall chart on Page 7 shows clearly, the main driver for the EBIT improvement from minus CHF 55 million to plus CHF 9 million was the higher gross margin due to the volume increase. The one-off effect associated with the reversal of allowance for machinery that was delivered in the first half of 2021 contributed CHF 8 million to this development. R&D and SG&A expenses were, in total, CHF 10 million higher than last year. Besides some positive COVID-19 effects lowering the expenses last year, this increase includes volume-driven expenses like warranty costs, accruals for variable salaries, et cetera. Other income includes a reversal of provision due to a court ruling in favor of Rieter amounting to CHF 4.1 million. This positive one-off effect was compensated by other negative one-off effects of similar size, also included under other expenses. Other expenses were lower since last year's number includes restructuring expenses of more than CHF 7 million. And I move on to Slide 8, the balance sheet. There are 5 noteworthy points I want to highlight in the balance sheet. Liquid funds remained, as I said before, on last year's high level of CHF 280 million. Net liquidity increased, as mentioned before too, by CHF 57 million to CHF 99 million due to the high free cash flow. As in the year before, we managed net working capital to be negative. That means that inventory and receivables could be fully financed by trade liabilities and customer advanced payments. A good share of these advanced payments is related to orders that are expected to be delivered in the second half year 2021. Therefore, we anticipate that this position will be reduced in the coming months when order intake is normalizing. Therefore, we plan for net working capital to increase. The high free cash flow was used to repay short-term bank loans, which are included under current financial debt. And finally, the balance sheet was strengthened in the first half year by additional CHF 26 million to CHF 377 million. The equity ratio slightly decreased by 1.1 percentage points. Overall, Rieter's balance sheet is very solid and well prepared for the upcoming challenges. With this, I give the word back to Norbert.

Thank you so much, Kurt. I'm now on page -- what page is that, page...

Nine.

Nine. Yes, Rieter CAMPUS. You saw that we made the decision to execute this project, and we have talked a couple of times about it. The Rieter CAMPUS is an important element of our innovation strategy. And the innovation strategy, obviously, is part of the success that we are enjoying in the market at the moment. We do this here in Winterthur, despite the fact that it is quite costly because we know that we need to attract talent for the future. We need to have an attractive working environment for our people. which supports creativity and innovation. And we need to have access to leading-edge technology in Switzerland and in Europe, and this is what the CAMPUS is supposed to contribute to the strategy. Start of construction will be this week, I guess, right? So we will have -- we will see that this week. We will have a groundbreaking ceremony in September. And the buildings are supposed to be ready in early 2024. Kurt asked me to share the decision with you that we will lease the Rieter CAMPUS. We will not make the investments from Rieter funds. The reason is very simple, we don't want to tie up Rieter money in the buildings. I'm coming to the outlook now, and I have to apologize that we don't have a slide, but it is in the press release, obviously. So I'm going to refer to what we published this morning. As already announced, the first half of 2021 has been characterized by a strong market recovery, this is the catch-up effect, in combination with the regional shift in demand for new machinery and systems. Rieter anticipates a normalization of the demand for new systems in the coming months. The company assumes that spinning mills will continue to work at high capacity levels. This is important for our Components and After Sales business. For the full year, Rieter expect sales to be above CHF 900 million. Yes, you might ask the question, guys, you have CHF 1.1 billion of backlog in your books and now you tell us that you don't -- you think you can only turn CHF 500 million out of this into sales in the second half of the year. Yes, we are cautious here because there is an issue, there is a challenge in terms of realization of sales from the order backlog. And this is about bottlenecks in material deliveries, for example, electronics. I guess, Rieter is not the only company that has this issue. You've heard this a couple of times, yes. And Rieter has this issue as well. And what we also have is freight capacities, yes? Freight capacities are bottleneck in particular. Sea freight is not easy to get and it is quite expensive. And of course, we have the ongoing pandemic in key markets and key countries, which are important for us. So that brought us to the point to say, okay, we expect sales for the full year to exceed CHF 900 million, which would mean more than CHF 500 million in the second half of the year. All right. I guess, that was the presentation and the comments we intended to make. Thank you very much for your attention. Let's talk about your questions now.

[Operator Instructions] The first question is from the line of [ Corrina Fu ] from UBS.

No, I'm sorry. I didn't dial anything.

Would we hear you?

Okay. No, I didn't have a question. I didn't dial anything. I'm sorry. I don't know.

Not a problem.

The next question is from Christian Arnold from Stifel.

A couple of questions from my side. First, maybe looking back to H1. I mean, you were always guiding for sales below breakeven level of CHF 400 million. Now you did reach the CHF 400 million. So maybe you can share the information about what was the driver for that in the last 1, 2 months in terms of, I don't know, product, regions, units? That will be my first question.

Is there one more coming, Christian? No. Okay. So Christian's question, sales below breakeven. This is what we had forecasted, and now we came out at breakeven. The reason is very simple. There's 2 things, which went better than we thought. Number one is the demand for components and wear and tear parts from the spinning mills exceeded our expectations. And number two is we had machines produced and on stock, where the final payments of our customers were missing. You know that in Rieter, you only get a machine if you pay for it upfront. And then based on the market recovery and the good development of the spinning business, our customers made their final payments and we shipped the machines. So they went from the inventory into sales, and that is what we had not anticipated at the extent it happened.

Okay. Talking about the spinning mills. I mean, you gave us in the recent calls always an update in terms of running spinning meals as well as the capacity utilization. Could you also give us here an update again?

Sure. We continue to watch 750 spinning mills around the globe and their capacity utilization. So this monitoring is still in place. And the capacity utilization is above 80%, which is pretty good.

Okay. And the number of running spinning mills, I mean, the ratio here. Is it still 25...

Yes, there's only a handful of mills, which are not running, yes. So they are trying to get every pound of yarn out that they can produce.

So you're talking still about above 90% of spinning mills being run?

Yes, yes, yes.

Yes. Okay. Next question would be, I mean, of course, you cannot expect the same order of -- order intake in the second half than you had in the first half, but I believe there will be some couple of millions order intake also coming in the second half. So I wonder how much sales can you digest on an annual basis with your current structure and the needed time to prepare yourself. I mean, is it -- I mean can you digest CHF 1.2 billion, CHF 1.3 billion, CHF 1.4 billion of sales on an annual basis?

I mean, our capacity is sufficient to produce machines for a sales level of CHF 1.2 billion. Depending on the mix, it might be a little less and a little more. This is also a thing that we need to take into consideration, what machines. So CHF 1.2 billion, if we have to produce them in a certain period and we don't have machines on stock that go out in addition, we're talking about this order of magnitude.

Okay. And is that After Sales and Components? Or is it just the Machines & Systems business?

That is everything together.

Okay. And my last question, I don't know if you can or want to comment. One of your major competitor has some financial problems, and I wonder if you have seen or felt anything on the market already.

Yes. I mean, you are referring to Saurer, right? There is 2 companies -- there's 2 Saurer's companies in Germany, which have filed insolvency in June. So our spinning solutions is under some kind of Chapter 11 protection, and they filed for this protective shield they call them. They filed for it on June 17. And then Saurer Technologies, which is a company, which is not in direct competition with us, filed insolvency on June 23. And there has been a communication, and of course, there were lots of questions from customers and so forth. So we are addressing the issues that our customers are coming up with. And if they ask for support, we are there.

Okay. But so far, I mean, yes, it's pretty new. It's pretty early. So, so far, you haven't -- yes. You haven't got anything?

I mean, you can imagine what that does in a market. And -- but I mean, we are there for our customers if they need us.

The next question is from Dominik Feldges from NZZ.

Question first will be really about concerning your outlook bottleneck there, maybe also in terms of workforce. And do you -- or do your customers have faced any issues for -- because, I don't know, the shortage of labor or also again because of restrictions related to the pandemic and could -- as a result of this, the general upswing we see in the economy. Could you face increased wage inflation? That will be one question. And then I would like to -- since it's so topical address, the political side, especially with regard to China, this Xinjiang province. We had the Swissmem highlighting on the day before yesterday that it was really important not -- for Switzerland, not to participate in any sanctions against China. What is your view there? I mean, it was also mentioned that 20%, if I remember correctly, of the cotton is being produced in this particular province. And that it really, as a textile machinery company, you cannot help. You must be active there. So I mean, can you give me -- I mean, what's the situation? I mean, is -- could this become a problem for you increasingly as we go forward?

Thank you, Dominik. Number -- the first question on workforce is wage inflation. We see wages going up around the globe with our customers, and it's not only an issue in China. It's an issue in the United States. It's an issue everywhere. And this is -- of course, this drives the demand for our technology because our technology is focused on highest possible efficiency and high automation of the machines. So we enjoy a very nice demand and order intake on our little ROBOspin, our piecing robot for the ring spinning machine. And this is the reason. The reason is wages are going up, and it is difficult to hire enough people to run spinning mills. We have customers who have idle capacity not because they don't have orders, but because they don't have people. So that drives the demand for Rieter's technology. And of course, we experienced similar things in our workforce, and that is the reason why we have to increase prices. And that's what we're doing. And the China issue, Xinjiang. So yes, the situation in China is the following. In Xinjiang, we have a very modern machine population. So the demand for upgrades and for replacement of old equipment is not a Xinjiang issue. This happens other parts of the country. And of course, we share Switzerland's view here regarding the importance of China for the Swiss economy. And my personal experience is with these type of things, sanctions don't help. But this is my personal opinion. We are still in China. We have a good team there. We have a great factory. They are fully loaded, and they do a very good job. And China will stay an important market for us based on the fact that the industry outside Xinjiang has to be upgraded in order to stay competitive.

Next question is from Edouard Riva from ZKB.

Congratulations for the results. And my first question would be, now that you're expecting revenues for the full year of around -- or slightly more than CHF 900 million, what would be your expectation regarding the EBIT margin should you reach those CHF 900 million to CHF 1 billion sales?

I mean, you could do the math very easily. We have a breakeven of roughly CHF 800 million, and we have an average margin a little bit above 30%. So you can do the math. It's not rocket science.

Okay. I would have a second question. It would be, do you also observe those very important order intakes at competitors? Or is it -- are you a special case?

No. I guess, what we see is that the premium suppliers are pretty full. I'm not so confident about the mid-segment players, but the premium players in the market have a very nice order intake.

Understand. And finally, you mentioned earlier that you were expecting a normalization of the order intake in the following course of action. And what kind of numbers do you observe as being normal, so to say?

I mean, from our annual report that our market normally is at a level between CHF 3.2 billion and CHF 4 billion. And with a market share of 30% that Rieter roughly has, this tells you what this is on an annual basis for Rieter. It's between CHF 960 million and CHF 1.2 billion. And that is what we expect the market to go to. We don't know at what speed. We don't know whether there will be a bullwhip effect or not. That would be crystal ball considerations, but that is what we expect to happen going forward.

The next question is from Patrick Laager from Crédit Suisse.

And also, by the way, congrats here for this very strong result. Quick question, I'm not sure you will be able to share your view about this transaction, but we heard about Luc Tack acquiring the stake of micro people. And investors who are familiar with Rieter could think about the company now moving more downward across the value chain by, for example, partnering with Picanol, which is, as we know, controlled by Luc Tack. Is that a plan you might implement? This would be my first question.

Well, Luc Tack is on the Board of Rieter now for more than 4 years, I guess. We're working together with Picanol occasionally, where we have things of common interest. For example, digitization. But this is more like an exchange and a joint development in smaller areas, if that works for both parties. And that is what we're doing at the moment. There is no further ideas or plans to bring this to a different level, like the one that you suggested.

Okay. But the idea to move downward across the value chain would make sense, I guess. I mean, if we look at -- or look back when you did this acquisition of SSM from Schweiter, that this was a very smart step. And basically, personally, I'm a bit, yes, hoping that you will conduct another acquisition more downward, this value chain, to get closer to the end customer. And your balance sheet is very strong. So is this just fantasy here? Or is this going to be an option for you to make an acquisition more downward?

I mean, we would be interested in making an acquisition, which strengthens the company in any case. Would this be a downward acquisition in knitting or in weaving or anything else? Hard to say. Would it be an upward acquisition in terms of ginning, for example, of cotton or fiber, something which has to do with fiber? Well, that is hard to say. You know that we are looking that we are looking for strong acquisitions, and I'm very happy about your assessment of the SSM acquisition. Obviously, I look at it the same way. But what is important to us is adjacencies, right? Things that we understand, businesses that we understand. And there is only a limited amount of players in the market, no matter whether you look in our core business or you look downstream or upstream. So it has a lot to do with opportunities that the market might present.

I mean, the reason why I'm asking these questions is that I would prefer the company to be much more broader-based, not just in pre-spinning and spinning, but more into, yes, finishing. And because what we are currently seeing is basically a very strong up cycle across the entire industry, and I would expect pretty much all the big players across the industry to benefit from this up cycle. So this would, let's say, prevent Rieter to -- not to collapse, but again, to have very much lower orders in the next maybe 18 months by trying to be positioned more downward the value chain here. I mean, the next question here, and that's more a follow-up question to the 2 other guys who asked a question, to what extent are you really gaining market share? Or are you just benefiting from this up cycle? Or are you really gaining market share, especially in [ ROBOspin ]?

Yes. I mean, it's too early to tell because we measure market share in shipments, as you know, right? So we will only know next year whether we really have increased our market share. What I can tell you is that we are very happy about the hit rate that we generate at the moment. The number of proposals that we sent out to customers, which turn into orders is very good.

[Operator Instructions] The next question is from Mr. Renders, Rolf from Helvea.

The industry has always had -- not always, but for a long time, have overcapacity. Can you give us an update on how you regard that at this moment?

Yes, Rolf, this might still be the case, but the capacity is in the wrong place. Overcapacity is not that important anymore. If the capacity is in a place where the yarn it produces is not competitive, the overcapacity is idle or will be idle. And I guess that is what we're looking at, at the moment.

Okay. That's interesting. So how has that changed then? Is that because of cost? Or what has changed then?

Cost in China. The cost in China go up very fast. And you've seen the growth numbers over the last couple of years, and it has always been an issue for our customers. But growth in China continues. And if I get the numbers right, it has even accelerated. And this drives wages, this drives energy cost, this drives raw material cost. And this is the reason why a significant amount of the Chinese spinning industry is fighting to keep -- to stay competitive.

Okay. And -- but does that mean that this overcapacity, all these machines, are they then just standing idle? Or are they scrapped? Or what is happening with these companies?

Well, if they are too old, I guess they won't be able to sell them on the secondhand market, and they will either just let them standstill, idle or scrap them. Hard to tell. What is important to us -- what would be important to us would be if they all appeared on the secondhand market. But if they are too old and not productive and not efficient, this will not happen.

Great. Then in the past, you gave financial ambitions or targets, which you waived when, a few years back, the market turned when it -- what was it again, it was the U.S.-China trade conflict, et cetera. So then the pandemic happened. And now, luckily, we see that you're growing very aggressively out of this. Do you plan to share new ambition, so mid-term goals now that we seem to have the worst behind us?

We will certainly talk about this at a certain point in time, but it's not a priority right now. Right now, we have a big operative challenge ahead of us. This is converting our wonderful backlog into wonderful sales, and that is what we're focused on.

Yes. Okay. And then indeed, on that point was my third and last question. We all see about this massive price increases of raw materials, so steel, you mentioned chips, to get the goods here. Can you give an assessment of what you expect that to have as an impact on your margin?

I mean, in the current market situation, there is no need for Rieter to digest that, right? What we do is we increase our prices. Nobody loves it, but everybody understands it. So I even made an announcement in our customer magazine a couple of weeks ago that based on the development of raw material cost and freight cost and what have you, Rieter has to increase prices, and we will continue to do so.

That's very encouraging. So from the -- let's say, you've elaborated on this in the past that there is kind of a reference level for more mainstream machines and your goal is always to have a premium for your more sophisticated machines. And do I then understand that you can keep the premium and on top, you can pass on raw material prices?

I mean, the price premium, yes. I mean, our goal is to improve our price premium in the current market situation. This is not a secret. We have to -- prices have to recover from the crisis, which is normal. And in addition, we have to pass on cost increases to our customers.

Great. So that bodes very well. I hope you managed that all operational.

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

In terms of your guidance, the CHF 900 million sales you expect for '21. How much of the Egyptian order is included in that? And when do you expect the remaining part to become sales?

We will not ship to Egypt for the big order this year. We see in Egypt that they are moving ahead with the buildings according to schedule, which is good. But the delivery plans, the shipment plans that we have at the moment start in early '22. So we expect the majority of the order to be shipped next year.

So the -- okay. From the CHF 210 million, the very big part in '22 and the remaining quarter in '23?

Yes, yes.

Okay. Maybe coming back again to my earlier questions about the maximum sales you can produce and also linked to the former mid-term target you had of CHF 1.3 billion, 10% EBIT. I mean, today, would you exclude that you can go back to this kind of level?

No. You heard me talking about price increases, yes. And of course, price increases have an impact here. So on the price levels that we previously had, I guess CHF 1.2 billion would be the right order of magnitude plus/minus, as I explained. But with the prices going up, I mean that has an impact, of course.

There are no more questions at this time.

All right. Good. So we thank you very much for your attention, and we hope you will have a relaxing and sunny summer. When we look out of the window today, it doesn't look too sunny. I hope this is going to change for you when you go on vacation. And we will be back with our trading update in October. Thank you so much. Take care. Thank you.

Bye-bye.

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