Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Rieter Media and Investor Update 2022 Conference Call. I'm Alice, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Norbert Klapper. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen. Thank you for being with us this morning. Kurt Ledermann, our CFO and myself, will walk you through Rieter's trading update. And I jump right to Page 2, which shows the key messages of the updates, which we published this morning. First line, sales of almost CHF 370 million in the third quarter. Year-to-date, we stand at roughly CHF 990 million. So you see that in Q3, we generated significantly more sales than in Q1 and Q2. Our order intake in the fourth -- in third quarter was CHF 226 million. And year-to-date, we stand at roughly CHF 1.1 billion. We are back to normal levels. Order backlog around CHF 2 billion, still as of September 30, a very high level. And the order backlog reaches far into '23 in our Components and After Sales business, and it even reaches into '24 in our Machines & Systems business. We have, of course, taken action -- taken measures against the potential energy crisis in Europe, although nobody knows what's going to happen. We will talk about that later in the presentation. We also have included that Rieter has participated in the financing of a professorship for artificial intelligence in Winterthur. This is an element of our strategy implementation in terms of technology leadership, which we will also look into during the presentation. We will give you a quick update on the sales process for the Rieter site here in Winterthur. And finally, go through the outlook again, which is basically a confirmation of what we have published before. I'm on Page 3 now. Page 3 illustrates the progress we have been making in terms of turning backlog into sales based on the implementation of the action plan that we had defined earlier this year. It is about working very closely together with key suppliers who are supplying bottleneck material to us. We are also spending money on developing alternative technical solutions to substitute missing material. And obviously, we also have implemented price increases, and we are working on margin improvement actions related to our backlog. In Q4, we forecast sales of around CHF 400 million despite all the difficulties in the global supply chains that we are all aware of. I'm moving on to Page 4 now, which moves -- which brings us from sales to order intake. Here, we see order intake by geography. Again, we have the comparison here of the top 5 ranking, average ‘11 to ‘20 versus year-to-date September ‘22. The picture is unchanged compared to what we had in the first half year. We see there is a significant change in the regional distribution of our order intake. India, #1. Turkey, #2. China, #3, China used to be #1 for 10 years. Uzbekistan, #4, unchanged; and Pakistan has replaced the U.S., which were still a big order intake cluster over the last 10 years. So the regional shift of demand continues, and the order intake year-to-date is still well above average. We are coming to the business groups now. On the following page, Page 5, we're talking about sales. The increase in sales by business group is not a surprise to you that our business group, Machines & Systems, has the highest additional sales compared to the others, but also Components and After Sales had a benefit from the program, which we discussed earlier, close collaboration with key suppliers, alternative technical solutions and what goes along with it is price increases and margin improvement action. So we see that this program works. And we see that the business group, which had the highest additional order intake also has the highest additional sales numbers year-to-date. We're going to Page 6 now, which talks about order intake by business groups. Over the last 9 months, we saw already that we are close to CHF 1.1 billion. The record high year 2021 was driven, as we remember, by a catch-up effect from the previous years and by the regional shift of spinning capacities, which we already looked into on the previous slide when we had -- when we saw the regional distribution of where the orders are coming from. As expected, demand for new equipment is coming back to normal levels. Investment sentiment is impacted by the risks and uncertainties out there, which is not a surprise. We also see a lower capacity utilization of spinning mills, and this results in a lower demand for consumables, wear and tear and spare parts. We received conflicting messages here. We are not so sure whether our -- whether the textile chains who are placing orders with the spinning mills don't show an overreaction here. Again, we saw this in COVID that they stopped the ordering -- that they stopped the supply chains in textile and later, they -- and it turned out that consumption did not go down as expected. And there was a huge battle to get the additional quantities into the -- from the textile supply chain, which we are missing. And we're not so sure whether this time, this is not the same syndrome, we will see. On Page 7, we have a couple of things on the potential energy crisis in Europe, it gives you some details here. On the left-hand side of the slide, you see that we have 16 European sites in Rieter. 13 of them have manufacturing operations. And it's not a surprise to you that these 16 sites have individual profiles in terms of energy supply and energy consumptions. They are not the same. So we have to develop individual plans for each site to mitigate the risks that we see today. We have set priorities. #1 priority is to keep IT and communication technology running, number -- priority #2 is to keep manufacturing running, and then all others follow. Manufacturing is also an important issue here. It will not help if our manufacturing operations are running, and we don't get material and parts. So we have taken additional measures to ensure security of supply as much as possible. And of course, this is all accompanied by energy savings, the energy that you save, you don't need -- you need to buy and that is why we have been working on that and made a couple of investments also, for example, in heat recovery in production. And it is worth to note here that we have manufacturing operations -- major manufacturing operations outside Europe, where energy supply is not a big issue at the moment. I'm coming to Page 8, artificial intelligence. To give you some background on information on our decision to finance the professorship of artificial intelligence in Winterthur. We do this because artificial intelligence supports our digitization strategy. What I have here on this slide is the Rieter ring compact spinning system, which is integrated -- being integrated by ESSENTIAL, Rieter’s Digital Spinning Suite. You know that we have recently completed the system by the acquisition of the automatic winder, the last process step in the ring spinning system and all machines are connected to ESSENTIAL and all machines can be monitored by ESSENTIAL in an intelligent way with preventive actions and so forth. But of course, there is more that you can do with a digital platform which integrates the system, and this is the application of artificial intelligence to address the headaches that our customers have. And the headaches, we have noted here on Page 8, the typical profile of headaches our customers have: lack of experts, lack of operators and process efficiencies, and artificial intelligence is a key technology to exactly address these headaches. And that is why we made this investment. It's all about technology leadership. On Page 9, you'll find a quick update of the sales process for the Rieter site. You know that we started the process earlier. We are quite happy with the indicative offers, which we received so far and we will move on with the process according to plan. The outlook is basically a confirmation of what we said earlier. We anticipate a weaker demand for new systems in the coming months. The demand for consumables, wear & tear and spare parts will depend on the capacity utilization of the spinning mills. As I said, we will see what way the spinning -- the textile industry will go. It might very well be that there is an overreaction again, like the one that we saw during COVID. For the full year '22, we expect, as we said earlier, sales around CHF 1.4 billion. The realization of sales revenue from the order backlog, which has worked well in the last couple of months, and has -- is, of course, associated with risks. We all know that, shortages in material and logistics, COVID-lockdowns and so forth. So there is still risks out there that we are all aware of, and we're doing everything we can to mitigate these risks. Despite significantly higher sales compared to the prior year, we expect EBIT and net result below last year's level. And the reason for that -- the reasons are considerable cost increases, which hit our order backlog, materials and logistics; additional costs, which we had to spend to compensate material shortages; and we had expenses and costs in connection with the acquisition that we did last year. But of course, we are -- is clear to us that as the market and technology leader, we will benefit from the high order backlog that we have on our book. So the order intake is not that important at the moment because the order backlog is so high. We have a significantly improved market position, and we have this feedback also from our customers. We see it also in our negotiations and in our order intake when it comes to ring spinning and compact spinning systems and the continuation of the regional shift in demand which is in favor of the regions outside China. And at the same time, triggers investments in China, we know that we will benefit from this in the future. And the opportunities that I was just addressing you find on my Page #11 here, which again explains that there is -- in addition to the high order backlog, which is so important at the moment, we have a huge opportunity from the market development. The exodus of the spinning industry away from China, which drives investments outside China where Rieter is very well positioned and also investments into premium technology in China. And we also see that when we talk to our Chinese customers, it's going in this direction. And at the same time, as you are aware, Rieter has improved the market position of the company significantly by the acquisition that we made into the ring and compacting system, the digitization is a USP/system integration through ESSENTIAL of the entire process chain, the entire system, and that is why the investment into artificial intelligence is important. And we see that recycling of textiles is more and more an issue in the market. We are working with customers to bring the Rieter ring and compacting system to a level with recycled material which is unmatched. And that is another USP that we are developing, which is important going forward. All right. So far, the investors update, we are open for questions now.

The first question comes from the line of Walter Bamert with Zurcher Kantonalbank.

Could you share with us your experience with the reengineering of the electrical controls, how does that work? Is it that you have it for entire product lines that you already shifted to the new concept? Or do you have to renegotiate with the client, if you may use that components instead of the traditional one? Where are we there, let's say, what percentage of your new system sales is now equipped with the new control? And what percentage of your offering is already ready for that?

I want to be very honest, we don't look it that way. We make the decision what control we put into a machine. What we promised to a customer is performance, and it is our duty and our obligation to make sure that the machine does what it is supposed to do. And the technical solution that we apply is our decision. We are more and more implementing the new controls in the field. The tests have been successful. And now we are in the process of introducing it. But -- our customers are basically not interested in it. Our customers say, okay, as long as the thing is doing what Rieter promised to me I’m fine.

Okay. So the machines including the new electrical control left the factory already?

Yes. The first ones are in the field. Both -- it goes in both ways, machines which have been in the field already are working with new controls and the shipments that we are making have -- are getting new controls as well step-by-step.

Okay. But this is just beginning. So it was not instrumental to get the good revenue figure in the third quarter?

It might have had an impact, but it is -- it has started.

Okay. And you go by model-by-model with introducing it? Or you do it across the product offering?

We will not disclose this information to the market.

The next question comes from the line of Andreas Meier with Finanz und Wirtschaft.

Just a question about the acquisition of the Saurer business. How much in the third quarter, how much comes from this newly acquired business in the orders and in the turnover?

You’ll find the detailed information at the last page of the -- or presentation on Page 16, you see the numbers.

But only on 9-month figures.

Yes. Okay. Then we also have published it on the -- let me see whether I have a way the quarterly figures. No, it's not here. So we have published also in the half year numbers. So you can take the difference and then -- but I can send it to you afterwards. It's just a calculation.

The next question comes from the line of Christian Arnold with Stifel Schweiz AG.

3 months ago, you were giving us information that about 80% of the order backlog of June '21 became sales in the last 12 months. So I wonder if you have a similar information here, how it looks like now current -- yes, or the backlog. So have we washout all, let's say, the orders with a mismatch between cost and selling prices. Yes, where do we stand here?

In the washout of the orders which we have taken and which are suffering from significantly higher cost is progressing step by step. The cost development in major areas is helping here also. We see some relief on logistics. We see some relief on raw materials. On electronics, unfortunately, not yet. But the washout is progressing month by month, but it's not over yet, Christian.

Okay. Will it be over next year?

Hard to say. It depends on a couple of things. In particular, it depends on cost development.

Yes. But thinking that you started with your price increase, I think, in Q4 last year, taking care about higher prices and you also introduced your price adjustment close beginning of the year. One would have to assume that your order backlog today, given, let's say, stable costs you should have a significant improvement of your backlog margins in the coming months, right?

I mean you are heading towards an outlook for '23. And I ask you for your understanding that we will talk about this in March next year and not today.

Okay. Yes, I do. On the Egyptian order, where do we stand here?

Yes. I can report that we have started to ship in June, and we are shipping according to schedule now month by month.

Okay. In terms of the overall volume, where do we stand here now? I mean -- or what do you expect that to the year-end where we stand?

I don't know this from the top of my mind. I would say we would -- we should be, by the end of the year, around CHF 50 million. That is what I would think.

5-0, 50.

5-0.

The next question comes from the line of Emrah Basic with Baader-Helvea.

Just for clarification. One -- first question, you stated in [ summer ] that you have a 3-digit million order outstanding. Now what's development on that? And is this actually also partially referring to the -- or referring to the Egyptian order?

Yes, it is. We relate it to the inventory that we had, right? And inventory is still, of course, is still going -- staying at a high level because we have this huge order backlog. The amount of orders which are weighting in this inventory is not that high anymore. We have been able to reduce it, but inventory levels are still high because we have the order backlog that we need to supply to customers.

Okay. And could you give us an -- just an approximate number for your energy cost?

Yes. That's straightforward. In Europe, we had 2021 energy cost of roughly CHF 10 million.

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

Can you hear me?

Yes, we can.

Perfect. I have also 3 questions. I will ask them one by one. The first one is now since we have also third quarter revenues and then, of course, fourth quarter for the last year implicitly. In terms of seasonality in normal times, is there any sort of seasonality between Q3 and Q4?

You mean in order intake?

In sales?

In sales. I wouldn't know. I don't know whether there's a cyclicality. It depends on the situation in a year. I mean this year, I told you what we expect. No, I don't think that there is a cyclicality here that we could -- that we could mention, significant cyclicality in sales.

Got it. The second question is, I mean, as you said in the press release, there are quite some long lead times on the equipment side, some are actually supposed to be then delivered in 2024. Is that in some way impacting the demand coming from this relocalization trend out of China that some orders are not placed because these guys are saying, like, hey, I first want to wait until I get my machine before placing additional orders? Or is that not really having an impact there?