Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the media and investor conference call. I am Paul, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [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. Thanks a lot for being with us this morning. I will guide you through the presentation now. It's a short presentation. We have a trading update today, followed by the Q&A session, as usual. On Page 2, we have summarized the key messages for today. In the third quarter, Rieter generated an order intake of almost CHF 700 million. This brings us to an order intake after 9 months of close to CHF 1.7 billion. We will also give you a quick update on the acquisition of the 3 Saurer businesses and a quick update also on the credit lines we renewed. This is an information we will -- we have shared with you also in the press release. And we have an update on the outlook for this year. Let us move on, on Page 3. We see a comparison Q3 '20 compared to Q3 '21. And while it is impressive to compare these 2 numbers, I'd like to draw your attention to the CHF 700 million we booked in the third quarter '21. We see 2 driving factors for this development -- in this development. The first one is a catch-up effect after 2 years of very low investments in the spinning industry. And the second driving factor is a regional shift in demand. While the catch-up effect is easy to understand, the regional shift in demand needs more explanations, and I will come to that point later. I'm moving on to Page 4. Page 4 shows the comparison of order intake year-to-date by business group. And here, we see that the big push we had in the business group Machines & Systems, Machines & Systems achieved an order intake of close to CHF 1.3 billion in the first 9 months, and this is where the catch-up effect and the regional shift in demand are particularly evident. But also, the business groups Components and After Sales show a strong growth in order intake: Components, plus 95%; and After Sales, plus 123% compared to what we had last year. The reason here is the continued increased demand for spare and wear-and-tear parts as well and the utilized spinning mills -- highly utilized spinning mills. They have a very strong capacity utilization of our customers, and this is the main reason for this development in Components and After Sales. As a result of what I said, the order backlog that Rieter has had on the books by September 30 was around CHF 1.562 billion. And obviously, the backlog for RAS and RCO is, in terms of months of sales, lower than the backlog in Machines & Systems. We are talking in Machines & Systems about roughly 18 months of sales that we have in the order backlog. And in Components and After Sales, we're talking about 6 months. Let me move on to this regional shift of demand that I was mentioning earlier. We have that on Page 5. What we see here is an illustration of what we observe in the market. You see on this slide 2 boxes: the average order intake over the last 10 years by geography compared to the distribution of order intake by geography over the last 5 months. And you see the ranking over the last 10 years. China was on top, followed by Turkey, India, Uzbekistan and Europe. And what we experienced, what we see this year, first 9 months, is #1, Turkey; #2, Latin America, was not on the list before; India, #3 again; Pakistan was not on the list before; and China, #5 instead of #1. What is the reason for this? China's spinning industry stands for 50% of the global capacity, roughly. Costs in China have increased to a level at which many spinners are not competitive anymore on the world market. And you see that in the press. You have your own sources where you know this from energy cost, labor cost, for example, they have grown significantly in China. And there are 2 consequences to this lack of competitiveness of the Chinese industry. First consequence is more investments outside China to replace production capacity, which stands in China today. And the second consequence is investments in China to improve the competitiveness of the industry, which intends to stay in the country. And for both issues for the investments outside China and the investments inside China, Rieter has the right products. When you look at the boxes again here and you see the 2 numbers, the totals, yes, and you compare what we had over the last 10 years on average, CHF 940 million, roughly, and you compare it to the CHF 1.7 billion, roughly, which we had in the first 9 months, this is not a full year, yes, you see that this is more than a catch-up effect. It's obvious that the comparison of these 2 numbers tells you that there is something structural going on, and this is what I tried to explain to you. I'm very happy that Rieter has the right products to support customers in the moves that they are making along these lines. Let us move to Page 6, a quick update on Saurer. You know that this is a transaction which is not -- which has not been done the classical way, let me put it this way. So we are in the middle of the carve-out of the 3 businesses that we have acquired. The carve-out is going as planned. There's no hiccups. It's just going according to our expectations. But we have not included Saurer numbers in the figures that you have in front of you. We will do this next year when the carve-outs are over. When we are done with the carve-outs and we have a solid ground to work from, then we will publish our numbers, including Saurer. Let me move on to Page 7 to the outlook. The outlook is basically unchanged to what we had published earlier with 2 exceptions. First, the paragraph tells us -- first section says first 9 months were characterized by a rapid market recovery combined with a regional shift. We talked about that. Rieter expects the demand for new systems to gradually return to normal in the coming months The word gradually was missing before, and I would like to explain to you why we made that change. We expect the demand for new systems to normalize step by step despite the long delivery times, which we have at the moment. And the reason is this regional shift and the underlying rationale. I told you that the Chinese spinning industry stands for 50% of the global capacity. In 2018, Chinese spinning mills consumed 22 million of fibers. And I told you that we expect a significant portion of this capacity to be replaced outside China. And to produce 1 million tons of yarn on an annual basis, you need an investment in equipment of approximately CHF 1 billion. This is why we think that the regional shift will continue for some time, and Rieter has the right products. The second section of the outlook tells you the company assumes that the spinning mills will continue to work at full capacity. We see this in our monitoring. They enjoy a very nice business. You also saw the cotton price above USD 1 per pound. So our customers are enjoying a very strong business at the moment. For the full year '21, we anticipate sales of around CHF 900 million. Here, we had before above CHF 900 million. And why did we do this? Why did we make that change? We -- the reason for this modification are bottlenecks in logistics and material supply, and I would like to explain to you how we look at these 2 challenges. You all know about these challenges. They are in the press every day. The shortages in material and supply are a challenge, particularly related to semiconductors and electronics. Although we ship our machines, even if parts are missing, we complete them on site after installation when the parts become available. This ensures that customers can start production as soon as possible. We are not losing time by storing the machines or whatever. We ship, we install and we complete as soon as the parts become available. The bottlenecks in sea freight and also in train transportation and containers and so forth, they are the second challenge we are faced with. We will do everything we can to ship as planned and as agreed upon with the customer, but we are aware of the challenges, and that is why we made this change. The realization of sales, as I said before, coming back to the outlook, from the order backlog continues to be associated with risks, as I said, bottlenecks in material deliveries and freight capacities as well as the ongoing pandemic. We must not forget about that. We have countries, for example, Vietnam and/or Malaysia where the pandemic is by far not over yet, and this is an additional challenge for us. But as I said, as I told you, the way we are handling it allows us to ship and allows us to install. But the challenges regarding transportation, sea freight and also trains are there, and this is why we are more cautious with our sales outlook now. All right. So far the presentation, we are open for questions now.

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

I have 1 -- 2 questions. First, maybe to your outlook slide, I spotted an additional change you made. And I mean at the half year figures, you were talking about spinning mills to work at high capacity or very high capacity. And now you are saying at full capacity. So what does it -- I mean what has changed? I mean, basically, it's to the good. And maybe you can give us an update then, what does it mean full capacity in terms of utilization, in terms of activities and et cetera, et cetera? And yes, that will be my first question.

Yes. I mean that is -- I have to admit, I guess it was done unintentionally. The capacity load of our -- of the customers' mills are unchanged. They are at a very high level, and the ones who produce high-quality yarns are fully booked. And in addition, I can say, from what I hear from the customers, they are making a lot of money at the moment.

Okay. Second question, update on the huge Egyptian order. Where do we stand here? Will we have the shipments done mostly in '22? Or do we have some further delays here?

What we hear from Cairo is -- and what we see at the construction sites is that they are making good progress with the buildings. We expect to ship half of the order next year. That's where we are...

Half of it?

Yes. Half of the order during the course of next year.

Okay. And the other half in '23?

That would be the thinking at the moment, yes.

There are no further questions at this time. [Operator Instructions] We have a follow-up question from the line of Christian Arnold from Stifel.

I have further questions. So if nobody wants to ask something, I am happy to do that. I mean this huge order backlog you have or huge order entries you have right now, I mean comparing that to the production capacities you have, I mean it looks like that you could easily achieve sales of CHF 1.5 billion, CHF 1.6 billion in the next 2 years. Do you have the production capacities to do so, probably also helped by the Saurer activities you are acquiring? Or do we have to have some production capacities built up in addition?

The situation at the moment regarding capacity, production capacity is the following. You know that we kept our production capacities during the crisis. We have talked about this a lot last year, also in these calls, and I'm very happy that we did that, yes? So the capacity has not been reduced as opposed to what we hear from other industries, yes? So we didn't do that. And I guess when we look at it today, that was a good decision. Number two is we made investments already this year into bottlenecks, yes, to get rid of bottlenecks based on the capacity load that we see by product, yes? Bottlenecks exist, of course, in relation to a certain product range that you want to produce. And that is what we already did, yes? The machines will be coming in the first half year next year. So we will extend -- we will get rid of some of the bottlenecks and, therefore, extend our production capacity. Otherwise, we don't think about major investments, yes? At the moment, we will watch the market. We see that our customers continue to place orders with us despite the fact that our delivery times have exceeded 12 months by far. And I guess the reason that we hear from them is that they say, okay, the structural change in the market will go on for a long time. And if I don't place the order today, I have to wait even longer. So I do it, and I live with the fact that my delivery time exceeds 12 months or even 18 months. That is better than waiting longer. That's what they are doing. That is what we have -- what we see them making their decisions on. And so at the moment, we don't have plans to further expand our capacities significantly.

Do you think there are also double bookings? We see in some other industries that people actually order, not only earlier, but also much more than what they need in order to be sure that they get at the end something.

I mean to afford a double booking at Rieter, you need to have a lot of money because you have to place 2 down payments, yes? And I guess that's not what they're doing, yes? I mean we know them for many years. I mean 90% of our customers, we know for many years. We know what they are doing, how much money they have, how their business is going. We have not seen double bookings at this stage.

Okay. Then maybe a question related to higher material cost. How much are you affected by that? And how much have you increased your prices? And when have you increased your prices?

We started early this year to increase prices, and we go through the third round of price increases now. And this was absolutely necessary to cover the material cost increase that we see. So we're very happy that we did that early enough. And if prices go up further, we will continue to increase prices. If material cost go up further, we will continue to increase prices. Nobody likes it, but it is what it is.

You said that you started early this year with the first one. When was the second? When was the third one? And could you give us an indication in terms of magnitude?

If I remember right, the second one was in June, and the third one was in September, yes?

And we are talking here about percentage point-wise kind of magnitude?

I guess, in total, we have passed the double-digit percentage points.

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

I wanted to ask you something on Latin America. It's really a long time I don't see that name on your agenda. Can you give an indication how big the orders are and if it's sort of a one-off or goes also into the shift trend? And maybe then, in this case, what's the thinking behind?

Yes. What we hear from our customers is that they see an opportunity in supplying yarn to the U.S. market, and they do this by replacing Chinese suppliers. That is what's going on, yes? And we have many customers in Central America who have not invested over the last 20 years, yes? Let's say, there was a machine here and a couple of machines there, but now they are investing into new mills, yes, complete systems, latest technology. And the opportunity that they see is to supply the U.S. market from Central America. And you know that labor is available in Central America, yes? And I would expect the U.S. government to support this, yes? So I guess that is a movement which has a lot to do with the regional shift with building up capacity outside China in order to replace what is installed in China today.

Right. So we're talking basically Mexico or also Brazil?

We're talking Mexico, El Salvador, Guatemala and, in particular, Honduras.

All right. Interesting. But can you give an indication of how much in this CHF 1.6 billion comes from Latin America?

Can I do that?

Big range.

Let's say, low 3 digits.

Low 3 digits, okay. That's -- okay, nice. Nice to hear that.

It is -- compared to what we had over the last 20 years, it is huge.

Huge, yes, yes. Yes, absolutely.

It is huge, yes.

That's why I was asking. Okay. Another question is on the -- you mentioned that your clients are making -- what did you say? What did you say exactly? Let me see. Excuse me. They are making a lot of money? No, you said something else. They are earning -- I don't know. They're making a lot of money, maybe that's what you said, if I'm correct.

Yes.

So the cotton prices are at 110, plus/minus, above 100, right? So can you give an indication where the yarn price is? I mean it has gone up even more than that?

I mean the game board -- I mean it's not a game. The mechanics in this market for our customers is they have contracts or even cotton or raw material on stock, which they bought for a lower price, yes? The yarn price follows the cotton price or the fiber price immediately. So there is an additional margin potential here for them based on the fact that the yarn price follows the fiber price immediately, but their raw material costs don't. And this is why they are making so much money.

Right. All right. Okay. Great. I think that's what I had in my mind then.

And Alessandro, to make one more point here. And of course, it is a -- quality yarn is scarce at the moment, yes? Because if the quality yarn suppliers from China are not competitive anymore, there is an additional margin potential for our customers, which has nothing to do with this raw material yarn price thing, yes? It is just that the -- there is not enough yarn on the market, and that helps them to increase prices as well.

Yes. Okay. The cotton price, is that high in China as well?

Even a little higher than the world market price.

Okay. There was an issue a couple of years ago with very high stocks at the government of cotton and so on. Is this now solved?

Yes. This is now very difficult for the Chinese government to solve because this is Xinjiang cotton. And there is this cotton ban in a couple of countries, yes? And this makes life quite difficult for the Chinese cotton producers, including the cotton which they have on stock.

Right. So the -- Xinjiang is having a trouble then in general. Is this because of issue with the Uyghurs?

This is a political issue, yes.

The next question comes from the line of Sebastian Vogel from UBS.

I've got 3 questions. The first one is on the supply chain constraints that you've outlined early on. And when do you think they will be removed? And a follow-up question to that one. When you described that you delivered already the machines that are not fully finalized to your customers, how is that impacting your sales recognition? That would be also very interesting to know. And then a follow-up question to this capacity question of one of my colleagues earlier on. So does that mean including the investments that you have also outlined, you are then on a sort of a revenue run rate, including Saurer, of around like CHF 1.5 billion or a little bit above? Is that a fair number there? That would be my 3 questions.

Yes. The supply chain constraints, this is hard to assess, but I think they will accompany us for some more time, yes? There seems to be an imbalance in the systems around the globe. I mean we hear about the problems with semiconductors and electronics for some time. But there is different categories which pop up every day, yes? And things that you wouldn't expect at all, they have nothing to do with COVID, yes? So there is an imbalance in the system, and it will take some time before this system will be balanced out again. So we will have to live with that for some time. So our purchasing guys and our supply chain guys will be busy over the last -- next couple of months. We know that it is just -- it is the situation, and we have to cope with it. I don't expect it to be over before the first semester next year, yes? So it will go into '22, the time frame until the system is back into balance, yes? The machines to customers, yes, we recognize sales when we ship, yes? And we hold on to this because the situation with the missing parts is not our fault, yes? It is beyond our control. It is force majeure, so we ship, and it is also in the best interest of our customers to do that.

For the full price?

And we recognize sales when we ship.

So for the full price?

Pardon me?

So for the full price?

Yes. There is no reason to accept price cuts, yes? It is beyond our control. It is force majeure, force majeure.

Yes. No, it just means delay like, whatever, like because there's some displaced missing use, so you reduce it by 5% that you'd only get back when you get then finally that missing piece also installed. That's not the case?

No.

No, it's -- the part -- the share of the cost is relatively small of the missing parts. So this is not really important for the customer. And of course, we do not invoice when we ship the service part of the contract. This is a -- but this is no change to the past. This is then charged when the installation is done on the side of the customer.

Understood.

But what we do, of course, is we ship the missing parts free of charge, yes? That is a service to our customers that they can expect, yes? And we do the installation and, of course, also free of charge because the installation has been built before, yes? And your third question, investments, CHF 1.5 billion, well, we have not done the budget yet for next year, and we have not an outlook yet. So we will come back to that point in March. But I mean you know what Rieter can do without Saurer. You know what the number is that Saurer had in 2018. We published that. So yes, we will come up with the number in March.

The next question comes from Rolf Renders from Helvea.

You mentioned something on the potential from China in fibers, 22 million fibers. Unfortunately, either the line was too bad, but I didn't follow everything. And then you mentioned, was it 1 million per ton is CHF 1 million? Would you mind repeating or explaining that again?

Yes. 22 million tons of fibers was what the Chinese spinning mills consumed in 2018. This is close to 50% of the world's fiber consumption. And if you want to produce 1 million tons of yarn on an annual basis, you need to invest into spinning equipment CHF 1 billion. Yes? So this tells you what the additional investments are, which are required to move away 1 million tons of yarn production from China to a different place.

Great. And if you would say maybe 10% would move, you could do 30% of that. That's kind of the goals of them.

That could be then the thinking, taking into consideration that Rieter would expect a higher market share than 30% in such a scenario because we have the right products. The markets outside China buy premium, and Rieter has the premium products. And we have a very strong position in many of these markets for many, many years. That is why we would expect more than 30%.

Great. So if China doesn't catch up quick on the competitiveness, this could be a structural tailwind for you for quite a bit to last?

That is how we think about it.

Yes. Okay, great. And then I think last that you communicated about your breakeven level, was it CHF 800 million?

Yes.

I'm not sure. CHF 800 million, right?

Yes, yes.

Is it -- this is ex Saurer then, of course, but is there any reason that, that figure has to be adapted?

At the moment, we are still at that level, yes? No change. But when we -- we will come up with a new calculation and thinking when we know exactly what we will have after the carve-out, yes? For -- in particular in terms of structural cost, yes? That is -- that we will assess that and come up with a modified number or even -- it might even be the same, we don't know yet, yes?

Yes. Maybe a hint from my side, the breakeven also depends on the mix because not all the business groups have the same margin, the gross margin, and so it heavily depends on the mix.

Okay. But the mix is developing in your favor, as I understand it.

Let's come back to that in March, yes? You might be right, Rolf. You might be right, but it's too early to say, yes? Before we see the numbers, we will not comment on that.

Okay, I understand. Then maybe on something which probably also too early to communicate on, but just the thinking on dividends because the equity providers have been in very meager years with dividends. What are your thoughts going forward now that such a strong recovery is happening?

You know, Rolf, that we have a dividend policy in place. Minimum 40% of our net results, we will pay in dividends, and this policy is unchanged. So this will lead us to the dividend proposal next year to the AGM.

Okay. So no room for a catch-up?

Depends on the net result.

Yes. All right. Great. Well, I wish you a very strong Q4 also, and you can blow out the lights.

Well, thank you, Rolf. Thank you.

Thank you.

The next question comes from Edouard Riva from ZKB.

First of all, my congratulations for those impressive order intakes. My first question would be concerning the guidance. You mentioned during the first half year result, it should be slightly or at least over CHF 900 million. And now it's mentioned to be around CHF 900 million. Is there a material change? Or is this just the wording that was changed without any consideration?

So as I tried to explain, this was done intentionally, yes? We -- what we feel -- what we see today is that the bottlenecks in logistics, in particular, sea freight, trains and so forth, they continue to be around, yes? And this is why we are cautious here, yes? The order -- the backlog, of course, would allow for over CHF 900 million and even -- I don't know how much, yes? But the -- what -- when we look at the bottlenecks in logistics and the trouble we have booking a ship or bringing our containers on a train, we said let's put this from over CHF 900 million to around CHF 900 million. And this is what we are confident of reaching despite the trouble that we have around us. And if things go the right way, it will be better.

Understand. My second question would be -- so I understand the explanation about China and the lack of competitiveness. What is your base case scenario concerning the pullout of China? You said, at this time, it's still 50% of the world production. And what is your estimation? It will go down to 30%? To 40%? To 25%?

That -- to be very honest, that would be too much of a crystal ball thing for me at the moment, yes? We will watch it for some time. There is a couple of things we need to consider. The speed of this replacement, the reaction of the Chinese government to it, yes? Will the Chinese government at a certain point in time say, no, that is enough. We stop it now, yes? We put additional subsidies into the industry. Or will they let it go, yes? We don't know that at this point. It will also have to do with the difference in cost and the development of this difference between China and the countries that are the candidates, the replacement candidates, so to say, yes? There is -- for me, it would be too much of a crystal ball thinking. What I would expect is a significant change, yes? How big of a change it's going to be is too hard to tell at the moment.

Understand. I would have another question. Just do you have an idea when the consolidation with the add-ons you acquired in August will happen?

So at the moment, we are in the carve-out process, and it's 3 different businesses we're looking at. They are a little bit on a different time schedule. But at the moment, the assumption that there will not be much of a consolidation for this year is the best guess I can make at the moment. So consolidation next year is...

Okay. Great. And I think that's it.

[Operator Instructions] The next question comes from the line of Patrick Laager from Credit Suisse.

Just one follow-up regarding Egypt. Initially, if I remember well, initially, you expected sales recognition back in 2020, '21. Of course, in the meantime, we had some little troubles with this pandemic. But there is now this shift towards '22 and '23, which probably is mainly due to the pandemic here. But is there -- just to make sure, is there something which potentially could be related more specifically to the customer? Just to make sure we don't have any kind of impairment in 1 or 2 years' time from now.

Thank you, Patrick. No, the customer is still very much committed to the program. We see the new buildings being erected in Egypt. The buildings that we need for our equipment, we see that they continue to work on the financing with -- at full speed. So no, there is no indication that they are second-guessing the program.

The next question comes from the line of Marti, Pascal from Corisol Holding.

Just a quick question on the downside risk. I mean everything looks green right now. But what are the risks that probably some of your clients will cancel or want to get out of these contracts? And then what are actually the terms with regards probably to the down payments? I mean do you -- would you have to pay that money back to them?

What I can tell you is that at the moment, I receive calls every day from customers who wish to have their equipment earlier. So we're not talking about cancellations at the moment. However, we have all experienced this in this business. And what Rieter does is, in order to protect the company against cancellations, is we take this down payment, as you know, and we don't produce the machines if we don't have the letters of credit in place. There is a couple of exceptions to this rule, but in general, we do it that way. So in case the customer cancels, normally, we don't have the machines on stock, yes, because we have not started producing them. And we don't give the down payment back automatically. What we normally do is we tell the customer, okay, we keep your down payment, and you will come back in 2 years' time with your next order and then we make use of the down payment for this order. That is what we normally do.

We now have a follow-up question from the line of Alessandro Foletti from Octavian.

Just on this China shift issue, can you remind me, I don't remember the number, but how much do the Chinese export?

Out of the 22 million, 9 million tons were exported.

Right. So one could imagine if he wants to be super optimistic that this is the potential? Or then, at some point, you think that the government will react or maybe the local producers will simply react by investing themselves and then keeping this business in China.

I guess it would be unrealistic to expect that the 9 million will go away, yes? But the portion of the 9 million which goes through mills today, which are 20 years old, this portion might disappear.

We now have a follow-up question from the line of Edouard Riva from ZKB.

Sorry for this. There was additional questions. The first one is you mentioned the profit that is made by yarn producers on their inventories. But does that mean that when they have to resupply, then there is no profit anymore since the yarn price is closely following up the price of cotton, so they basically only make a profit on the inventories? Or is that ongoing because they get the cotton at a discounted price?

No, no. I mean then if your yarn price -- if the cotton price doesn't change anymore and the yarn price doesn't change anymore and they find back their equilibrium, they make an average margin, but not an above-average margin. Today, they make an above-average margin, yes?

I understand. And second question, still due to the delivery time, are you not afraid that some machines -- secondhand machines can be sold? Because you were mentioning in the past that there were a lot of machine and potentially overcapacity, and those machines that are likely less used, it could not be shipped away to those countries where the production is ramping up?

No customer in Honduras would even think about buying a 20-year-old Chinese machine for his production. This is not an option.

There are no more further questions at this time.

All right. Thank you very much for this lively discussion. Thank you very much for being with us this morning. We will talk to you again in January, I guess, yes, when we do our sales and orders update. I thank you very much, and I hope to talk to you again in January. And I wish you a wonderful weekend. Thanks a lot.

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