Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the press release with 2023 conference call and live webcast. I am Sandra, 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, CEO. Please go ahead, sir.

Thank you very much. Good morning, ladies. Good morning, gentlemen. Welcome back. It's been a while. Welcome back. We thank you very much for being with us this morning at our media investor and investor conference. And we will address 3 chapters today, which you find on our introduction slide here. The key messages related to 2022 will be covered by me. The financial results will be presented by Kurt Ledermann, our CFO; and the outlook will be shared with you by Thomas Oetterli, who will succeed me as the CEO of Rieter as of March 13, Monday next week. Page 3 shows the key messages, which are already known to you to a large extent from the January communication. I will focus on 7 topics around the key messages this morning. Number one, Rieter generated record sales of more than CHF 1.5 billion in 2022. In this context, I would like to share some insights with you regarding the challenges in 2022 and their impact on profitability. Second, I will talk about the action plan to increase profitability, which is in place. Third, I would like to talk about order backlog and order intake, followed by number four, strategy implementation and number five, market situation. My sixth point on the agenda is the ITMA Milan plans that we have, followed by the site sales process in Winterthur and I have an eighth item, unfortunately, on the agenda, which is the earthquake in Turkey and Syria. Let's move on to Page 4, topic number one, record sales challenges and their impact on profitability. We show here on this slide a comparison between 2021 and 2022. In 2021, Rieter generated 4.9% EBIT margin from much lower sales. In 2022, in the half -- second half of the year, EBIT margin was at 4.7%. So we were able to overcompensate the loss from the first half year. 2022 was characterized by 4 major challenges. A top line growth of 56% year-over-year is a challenge by itself. It's a major stretch to an organization. On top, we had a drastic increase in material and logistics costs, along with cost to compensate massive material shortages, in particular, for electronics. And we had to build the automatic winder business from the assets we had acquired and integrated into retail. The combination of the 4 challenges stretch the retail organization and team to its limits. I would like to take the opportunity and express my appreciation and gratitude to the Rieter team around the globe who made things work and generated the profit despite those challenges. Looking at gross profit development on Page 5, you can see the impact of the cost increases and of the acquisition. We expected CHF 130 million gross profit on top of what we had generated in 2021 from the additional sales volume, but we only got CHF 52 million. I would like to illustrate what happened by sharing 2 numbers with you. The additional burden from logistics costs amounted to approximately CHF 10 million and the under proportional margin of the automatic winder business had a negative impact of around CHF 20 million. As you know, we had started early to implement countermeasures, but they were not sufficient to compensate the impact of the cost increases, which hit the backlog we had booked in 2021. On Page 6, I'd like to share with you the structural cost development, which also shows the impact of the challenges. Obviously, an additional sales volume of 56% results in higher structural costs. The big rocks, though, have been cost to compensate the material shortages of around CHF 15 million, particularly development costs for alternative technical solutions. And we had additional structural cost of more than CHF 30 million, which came along with the acquisition of the 3 businesses we had acquired in '21, '22 respectively. The second topic on my list, the Rieter action plan, Page 7. You saw the progress we were making in the second half year compared to the first half year. In half year 2, we generated an EBIT margin of 4.7%, which overcompensated the loss from the first half year. Execution of our backlog remains a priority. Material shortages have improved, but there is still work to be done. The same applies to mitigating the inflation impact. Price increases and price adjustment clause new to our industry have been implemented. Cost reductions and backlog improvements will continue. We are working on improving the automatic winder business and we have tailwinds in some areas, for example, in logistics, which I will come to on my next slide. On the next slide, Page 8, you see the 2 cost indicators we have been talking about for quite some time now to illustrate what happens and what the impact to our business is. You see here the container freight rates between Shanghai and Rotterdam and you see the price per tonne aluminum. Container freight rates came back to previous levels. We are talking about $2,000 today instead of $14,000 at peak level. Aluminum did not fully come back. So we are satisfied to have implemented the price increases which makes sure that we pass on higher cost to our customers. Page 9 addresses my third topic, order intake and order backlog with CHF 1.157 billion order intake was still at good levels. Order backlog of CHF 1.5 billion is still strong. It's reaching a couple of months into 2023 for after sales in most of the components units and into 2024 for the Machines & Systems business. On Page 10, we come to topic #4, strategy implementation. You know that Rieter pursues the strategy of a system supplier. We love our single machine business. We love our components business and our spare parts business, but our goal is to offer a combination, a combination of the best machines, the best components, the best spare parts, the best service and the best digitization. These are the ingredients of a superior spinning system. On Page 10, you can see what we have achieved in this respect in 2022. We sold complete ring and compacting systems for around CHF 19 million, having in mind that the missing machine, the automatic winder, only came on board in April. And we sold complete rotor systems for around CHF 130 million. In addition, we reached a major milestone related to digitization, essential monitor, the monitoring system for the entire mill was released for sales in December for all retail systems. Now retail has the platform to make the system intelligent. Topic #5, market situation follows on Page 11. Obviously and I guess you hear this in many presentations, the investment sentiment is impacted by the global uncertainties and turbulences by increasing financing costs to our customers and in our case, by low textile consumption. What comes on top in our business is the ITMA effect. ITMA is the big trade show, which is going to take place in June in Milano. And this happens every 4 years and customers tend to hold back investments to see what's new at this trade show. What you also see on my slide is the operation rate of spinning mills and this operation rate is pretty low. February shows 66% in comparison to the 76% we discussed in January. The normal level and with this scope that we have here would be around 90%. We took for this consideration China out. You know that in China in February, we had the Spring Festival break, so we have to eliminate that. And obviously, we took Turkey out because of the earthquake. 66% in our view is an overreaction of the industry. I -- you know that I'm doing this business for quite some time and it's not the first time that I see that. Textile consumption did not come that down to correspond to this capacity utilization of the mills. We expect the turning point to be reached in the coming months. Our expectation is particularly supported by what we see happening in China. We think that the Chinese market will pick up soon again. Two strong indicators are the household deposits in China of consumers have grown dramatically last year. So there is disposable income there, which can be spent for consumption. And we see yarn stocks and fabric stocks going down, which means that the textile chain starts to pull. So that is what we build our expectation on and we -- that is why we think we will see the turning point soon and China will make the starting point. On Page 12, you find our considerations regarding ITMA, the trade show in Milan. Our innovations are on track. We focus again on lowest cost per kilo yarn. This is why our customers buy our equipment because it offers to them a system which provides the lowest cost per kilo yarn. Digitization is another topic we will focus on and recycling. An investor event will be held on June 12 in Milan. Let's move on to Page 13, the site sales process in Winterthur. We are very happy with the progress we're making and we are confident that we will be able to make a decision during the course of the year. My last topic is a very sad one, Turkey. You are all aware of the terrible earthquake which hit Turkey and Syria on February 6. One Rieter employee is among the victims. On that day, Rieter had 85 employees in Turkey. They have been evacuated by the Rieter Turkey team swiftly and they are safe, including their families. We brought them to a safe place. Approximately 2/3 of the spinning capacity in Turkey had been affected by the earthquake. Kahramanmaras, which is in the press all the time, is a place we know very well. We have a lot of customers there. And the same applies to Gaziantep. They are centers, these 2 cities are centers of the spinning industry in Turkey. We are working full steam on putting our service station in Kahramanmaras back into operations. And I can report to you that last night, I received a message that yesterday, we have processed the first orders in our fallback solution type of operation in Kahramanmaras, so the business has started to pick up again. And we go through the mills together with our customers to determine what needs to be done in order to fix what has been broken. I can also report to you that we booked a major order in February from Turkey. So the business has not stopped. In addition, we are preparing a donation focusing on housing. Housing is the big bottleneck at the moment, a big issue. Many buildings have been destroyed. You all saw the horrible pictures. And we have discussed with the local authorities and with our customers in Kahramanmaras, where we could help best and this is why we decided we will make a donation, which is focused on housing, housing for our people, but also housing for others because our customers have a couple of bottlenecks now. Of course, power is one bottleneck, material, raw material is a bottleneck and people are a bottleneck. They have no place to stay. So housing is the best we can do and that is why we agreed on doing that. In summary, I have to tell you today, it's too early to tell what the impact on our business is going to be. We go through the process now of assessing the mills together with our customers. And once we have completed this we have a better understanding of what's going to happen. I trust I was able to share with you the facts and our views on today's topics, the record sales, the challenges and the impact on profitability. The action plan to get profitability back on track, order backlog and order intake, strategy implementation, market situation, ITMA Milan, the site sales process in Winterthur and the terrible earthquake in Turkey and Syria. I thank you very much. And I hand over now to Kurt Ledermann for the financials.

Thank you, Norbert. A warm and sun welcome to Winterthur this morning. It's good to see you in person. Some of you I have not met, never met since I'm CFO 4 years ago, almost never met because of the situation. So it's really nice for me to speak here and to meet you personally. Let me start with the financial highlights on Slide 16. 2022 was again a challenging year, also very different compared to the previous years. A huge order backlog of more than CHF 1.8 million promised a record year. And so it was. Sales were up by 56% at the record level of CHF 1.511 billion. This number includes around CHF 190 million from the acquisitions. Drastic cost increases for material and logistics and a massive material shortage reduced the EBIT. Additionally, expenses in connection with the acquired businesses burdened the profitability. Hence, price increases, cost reductions and measures to improve backlog margins were continued. Order intake was at CHF 1.157 billion and remained at the high level, thanks to Rieter technological lead and broad international presence. Despite of a much weaker order intake and record sales in the half year 2, the order backlog in December 2020 was still -- 2022 was still on a high level of more than CHF 1.5 billion. Let me now highlight some of the other key figures on this slide. Mainly thanks to the high volume, the gross profit increased by CHF 52 million. The margin, however, suffered from the before-mentioned drastic cost increases for material and logistics. Additionally, the acquisition of the winder business diluted the margin. EBIT margin for the full year was at 2.1%. While in the first half of the year, EBIT was at minus 1.6%, we succeeded to deliver a 4.7% margin in the second half of 2022. The previously mentioned price increases, cost reductions and backlog margin improvement paired with a clear focus on customer delivery were the key to this positive trend over the year 2022. Free cash flow was negative for the year. Specifically, the strong sales volume in the last months of 2022 led to an increase of net working capital, namely inventories and trade receivables. Net debt followed the free cash flow. Basically, the increase in net working capital is temporary refinanced with short-term loans and cash. Finally, the Board of Directors proposes to the Annual General Meeting to pay out a dividend of CHF 1.50 per share. The payout ratio of 56% is clearly above the target minimum of 40%. On Slide 17, you see a closer look at the EBIT development compared to the previous year. Gross profit added CHF 52.5 million to the EBIT. Based on the volume and the margin in 2021, this effect would have been CHF 130 million. However, due to the transit cost increases from material and logistics and the negative mix effect from the acquisition, almost 2/3 of this potential volume improvement was absorbed. Three effects have driven structural costs, that is R&D and SG&A. First, the higher sales volume increased some expenses that are not fixed costs. Second, alternative technical solutions that were developed to overcome the material shortages led to substantial additional cost of CHF 50 million. And last but not least, the consolidation of the acquired business added costs. In total, the acquisitions lowered EBIT by over CHF 20 million. The other income and expenses reduced EBIT in 2022 in total by CHF 9 million compared to 2021. This is mainly due to positive effects in 2021 that did not repeat in 2022. Increase of the total assets in the balance sheet by more than CHF 100 million on Page 18 was mainly due to the increase of the net working capital. These higher inventories and trade receivables were funded by additional current financial debt and cash. Shareholders' equity did decrease by CHF 36 million, while the net profit added CHF 12 million to the equity, CHF 18 million were paid out as a dividend. An additional effect of minus CHF 29 million due to unfavorable exchange rates had to be recorded in equity. This is mainly due to the asset exposure in euro, CNY and Indian rupees. The equity ratio fell from 28% to 23%. There were various reasons for this decline. Firstly, equity was CHF 36 million lower, as I just explained. Secondly, the total asset increased due to the higher net working capital. This stretched the balance sheet and reduced the percentage of equity. This effect will disappear once inventories are delivered, receivables are collected. As a global active industrial group, Rieter strives for a strong balance sheet with an equity ratio of 35% -- of at least 35%. This target remains unchanged. The free cash flow on Slide 19 was more than CHF 225 million lower in 2022 than in 2021. In 2021, the main driver was customer down-payments when orders were placed. In 2022, these orders were converted and down-payments invested in inventories and accounts receivables. This explains CHF 200 million of the difference. After returning to normalized volume, this effect will be reversed. Depreciation and amortizations are CHF 6 million above CapEx. This is mainly related to the additional amortization from the acquired businesses. CapEx are CHF 8 million above previous year. This reflects the investments that were done to eliminate bottlenecks as well as investment in the acquired businesses. Finally, on Page 20, the dividend proposal already mentioned before. Based on the results of 2022, the Board of Directors proposes to the shareholders a dividend of CHF 1.50 per share. This is a total payout of CHF 7 million. The payout of 56% of the profit is clearly above the targeted minimum payout of 40% stated in Rieter's dividend policy. With this, I close my presentation and hand over to Thomas Oetterli.

Thank you, Kurt. Ladies and gentlemen, the last time, a very warm welcome at this time from my side. I'm really delighted to be here and to be talking to all of you. It's really an enormous privilege to be asked to take over the role as a CEO and the leadership of Rieter because we are starting a new phase in our journey. I also would like to take the opportunity to thank and to congratulate my predecessor Norbert, who has steered this ship through rough times. But we achieved major gains in solidifying our technology leadership. In the last couple of weeks, I already had an intensive introduction program and I had the chance to get to know the company, the processes, the products, the organization and also our service delivery. I was delighted to see that in fact Rieter has everything it takes to stay successful. The first impressions and findings I was able to gather allowed me to set short- and mid-term priorities. And you find them on Slide #23. There are, in fact, 4 different areas. I think the first is our top line generation. The second is how can we perform in our operational excellence. The third is the focus on people and the fourth one, all our efforts in the area of sustainability. So let's start with our first key priority top line. You see our 3 short-term key priorities for 2023, which also Norbert mentioned in his part, execution of the backlog. This is our primary goal. We have a very high order backlog and we have to execute this. And the backlog extends into 2023 and 2024. Sadly, we also have to manage the Turkish orders in the last weeks. In the next few weeks, we must manage these Turkish orders together with our customers to mitigate the consequences of the terrible February 2023 earthquakes. And last but not least, innovation leap at ITMA 2023. We have been working over the last couple of years to remain technology leader. Now we want to make our ITMA presence a success. And hopefully, we will delight and also inspire our customers. In the midterm, we also will focus on 3 priorities: Point number one is enhance service offering. Our first-class service is also a major factor when customers choose Rieter solutions. Therefore, in the midterm, we will further enhance our service offering in the business groups after sales and components to make our customers even more successful in their operations by optimizing the usage of their equipment. Enhanced Net Promoter Score, customer-centricity is the basis of our success. We will continue to aim for the perfect customer experience and strengthen customer loyalty. We will measure continuously our progress in this regard. And the digital road map. With the sales release of essential monitoring in December 2022, we have reached a major milestone in our digitalization journey. Essential is our digital platform for spinning mill control, monitoring and optimization. Our vision is to completely digitize spinning mills so mill owners can unlock their full potential of their technology and reach new levels of performance. The second area is operational excellence. Also Norbert highlighted here, our key priorities mitigate the inflation impact. Inventory management, for many good reasons, we had an inventory buildup of CHF 141 million in the reporting period. Now the short-term objective, as also Kurt has mentioned, is to bring this inventory down to a normal level so we can improve our net debt situation. Planned improvements in the automatic winding machines business is supported by the move of our operations within Germany into our new facilities in quarter 2 of this year. With that, we expect streamlined production processes and increased operational excellence. Big term, we will work on product value engineering and lean production concepts. One important midterm goal is improve our value engineering. The goal is to further reduce costs by adding efficiencies to our production processes, optimize our supplier sourcing and at the same time, improve the functionality of our products without increasing their cost. Lean production and capacity management. It is now crucial for us to bring product margins into the target range. This includes further improved capacity management by optimizing our basic production capacity utilization. The third maybe should be the first important area are our employees. The short-term goal is to move into the new Rieter campus in early 2024. Preparation, as mentioned, are in full swing. I'm really excited about the contributions that the campus will make to further improve the creativity, innovation spirit of the Rieter team and to make us more attractive for top talent. What are our midterm priorities? Agility or an agile structure. As you all know, we are operating in cyclical markets. We, therefore, must permanently adapt to change, which is why we need to enhance our agile structure. This will allow us to react even faster to evolving customer needs and to adapt quicker to changes in the environment and in the markets to innovate faster or to innovate at a faster rate and thus, better meet our customers' requirements. Talent management, innovation is key for our success, but this demands a strong foundation built on talented employees who bring our ideas to life in close exchange with customers and suppliers. And inclusion and diversity. We have a global presence and this gives us access to the full spectrum of human diversity. We know that with an inclusive and the diverse work culture, we will increase our collective intelligence and the ability to innovate. Last but not least, let's talk about sustainability. Short term, we have to work on the most [indiscernible], establish an integrated ESG reporting and solidify our internal organization and processes for the proper ESG management. Looking ahead, we will translate our commitments into practice across the entire Rieter Group. This includes the establishment of sustainability governance bodies in our organization, a state-of-the-art sustainability reporting and the further embedding of sustainability in our product development and internal decision processes. Midterm, we won't substantially contribute just to a better world. Push recycling spinning process. Less than 1% of garments are recycled in a closed loop system today. After the use phase, only this quantity is processed into equivalent products or used to manufacture other products. Our technology is ideally suited to help close the loop and thereby provide solutions for society's waste problem. Road map to net zero. We plan to switch entirely to renewable energy sources to power its heating and cooling systems by 2030 and therefore, directly influencing reduction in Scope 1 and Scope 2 emissions. Reducing Scope 3 emissions can only be achieved through our supply chain. The plan here is to cooperate with our suppliers in this regard. And last but not least, make our customers green. Energy efficiency is critical when it comes to improving sustainability in the spinning process. With our energy-efficient products, we will support a continuously decreasing energy requirement. Or in this way, Rieter is making an important contribution to reducing CO2 emissions and in helping our customers to bring to life their net zero vision. Now what is the outlook for the financial year 2023? So please turn to the last page, Page #24. For the coming months, Rieter expects below-average demand for new equipment at first, with a revival expected in the second half of 2023 after ITMA. Rieter also believes that demand for consumables, wear and tear parts and spare parts will recover during 2023. For the 2023 financial year, due to the high order backlog, we anticipates sales in the order of magnitude of the previous year. The realization of sales from this order backlog continues to be associated with risks in connection with the ongoing geopolitical uncertainties, rising financing costs, continuing bottlenecks in the supply chains and possible currently unforeseeable consequences of the earthquake in Turkey in February 2023. Despite the price increases already implemented, further global cost increases continue to pose a risk to the growth of profitability. We will specify the outlook in the 2023 semiannual report and also have served a couple of months and we'll be a better counterpart for you. Thank you very much for your attention and I'm handing back to Relindis for the question-and-answer part of this session.

Thank you, Thomas. Yes, a warm welcome also from my side. We will start with a Q&A session here in Winterthur afterwards, open the line for the participants in the conference call and then answer the questions from the webcast. As usual, the Q&A session will be recorded. I kindly ask the participants here in the room to mention the name and the company and then write the questions you may have. We will start on the right-hand side in the conference room. Please go ahead, sir.

Walter Bamert from Zurcher Kantonalbank. You mentioned that you have quite some order backlog into the next period. But if I look at the numbers you are fully busy for 8 weeks. If we consider what you have in the backlog and not the incoming with service and spare parts orders. So why so conservative in your guidance? How is the split in the backlog between installations in this year and into the next year? And if it's into the next year it's because of Rieter or because the client is not yet ready?

The last sentence I didn't get. Because?

Why do you have orders into the next year? Is it because the client orders it for next year because his installations are not yet ready to receive your equipment?

Okay. Yes. Thank you very much. So the split is the following. We have in the components and the after sales business backlog, which reaches a couple of months into 2023 in most of the units. And we have in the machines and systems business a backlog, which reaches into 2024. The reason why we have orders in the Machines & Systems business, which are reaching into 2024 is mainly because of the customers. You know that for a new spinning mill, you need -- normally, you need a new building. You need to erect the building and you need to make a couple of things before we can supply machines. And that is the main reason why it reaches so far into 2024, along with the fact that our Machines & Systems business is pretty busy.

If you do have to make a split for Machines & Systems, how much is '23? How much is '24?

This is a moving target at the moment due to the fact that we have the uncertainty in Turkey.

The next question over here, Mr. Meier.

Andreas Meier, [ BHF ]. You mentioned the winder business, which you integrated last year. It made about CHF 130 million sales and over CHF 20 million in loss. Can you a bit explain what's happened there and of this operating loss or profit and how this [indiscernible]?

We only consolidated this business as of April 1st last year. And of course, there is a cost to forming a unit out of the assets that we have acquired. We did an asset deal. We didn't buy a company. So we have had to build the business from that. And that is what we've done last year. In addition, we had to take over a backlog. And this backlog was hit by the price increases, the cost increases, the same way our backlog was hit by the pricing -- cost increases. And that is the major reason for the loss.

How is the development of the business?

We are quite happy with what's going on in terms of order intake. We have immediately started to increase prices, obviously and we see an improvement in the margin. And there is one big thing that's going to happen this year to this business. We will move it from the place where it is today, where we share an operation with Zara. We will move it away from that and put it in a place which is not too far away from it, but it will be our place. And it will offer -- this move will offer the opportunity to make a couple of improvements and also cost reductions. That's what's going to happen this year. We have started to build -- to refurbish the buildings where we will go and to -- we have started with the move already. So we will see the improvements during the course of the year. And the backlog, which has been hit by the cost increases will be gone by some time.

Chris Arnold with Stifel. Just a follow-up question that the movement in Germany will be probably also what they call some excellent costs. We have here a figure of share?

No, we don't have a figure yet. We are in the middle of the planning of it. You know that there is a couple of issues at the moment when it comes to construction and buildings. So we don't have a clear picture yet. I guess, later in the year, we will be able to give you an indication. Thomas?

I think what we can say is what kind of cost probably will occur. And this will be depending on how smooth such move works, like in private areas when you move, usually, it never works exactly as you have planned. So there are 2 major topics. One topic is that we have to finalize the new facilities and you have moving cost. This is not such a big number. What we are trying to do is to minimize the time where we have an outfall of the production. Because when you move your production capacity for that period of time, you take out the machines, bring them to the new place to have to start operations again and this easily costs you a couple of weeks. And of course, we will try to speed up, first of all, that time process and then to recover with extra shifts and work that we can further work on the backlog elimination. But that's not yet clearly accounted for. We don't know yet how long it will take.

On your sales guidance. You are guiding for stable sales. So we are talking about this [ CHF 50 million ], CHF 40 million. That means organically, actually your sales are down because the winding business is only consolidated.

Okay. 3 months winding machine. It's not that big. Yes. Yes. Okay. Fair enough. Yes.

Okay. And thinking about the low activity rates at the spinning mills, is it fair to assume that, I mean, having this stable guidance that maybe the new equipment business will grow, whereas the components and after sales business will rather decline this year?

I'd be very cautious here, having in mind that the situation in Turkey is not clear yet. It will depend a lot on the ability of the Turkish spinners to go back into business quickly. This will have an impact on our business in after sales, in components and potentially also in the new equipment business. So I wouldn't dare to give you an estimation on the split today.

Okay. Okay. But is it fair to assume that the second half will be stronger than the first half absolute terms also in terms of sales?

That could be. But again, I remain cautious here. I have a big uncertainty in this equation and this is Turkey. It's getting better than I thought I have to admit. I would -- I did not expect us to be able to go back into business with our service station that quickly. And I did not expect a major order coming in from Turkey in February right after the earthquake. So -- but I'm cautiously optimistic.

Then maybe on new net debt, which increased a lot and we have now a net debt-to-EBITDA ratio of 3.4x, if I -- yes, calculated correctly. And you continue to say that this negative impact from special on net working capital. Do you have, say, guidance or brief or, yes, a loss indication where you expect net debt to be everything those more or less in line also we have budgeted, excluding now the size sales?

And I think to say what is the normal net working capital is a bit difficult. But of course, I have a number in my head. And I would say it's about CHF 100 million that is in the net working capital that should come out once we go back to normal levels.

Okay. Okay. So it should be then around CHF 200 million or even below CHF 200 million annually?

Yes. Sure.

That's number...

Absolutely. It is important. You are right.

Thinking about [indiscernible], yes.

Yes. I mean when you talk about the financial stability of the company, you have to bear in mind that we have unused credit lines of CHF 250 million. So even if things go not as expected, the company is safe.

But interest rate costs also increased.

Of course, the cost. There is a cost ticket with it, for sure.

Once more again, [indiscernible].

Yes. Some of the questions were already asked, but I have a few follow-ups. Armin Rechberger, by the way. On the net debt level, what the covenants do you have or generally on your loan facility?

You have an equity covenant and we have a gearing covenant.

What are the -- what are the exact metrics on the...

We are not publishing these numbers. But we fully make the covenants for these.

And you said in the annual report that it's met. Okay. Now on a high level, considering a more favorable development on some interest costs and also your order backlog and potentially better demand on spare parts, would it be fair to assume that the margin level for this year could be pleased on the level of the second half of last year?

Again, I'm cautious. Yes, we are all cautious. We have had the reports from Turkey. We have them on the phone on the day after the earthquake and we had a couple of phone calls. Some of our colleagues already went there, the Head of Business of the business grew after sales came back yesterday from the second visit to Turkey and we remain cautious here. As I said, it's getting better at the moment as we thought, but this is an uncertainty, we are not able of getting our hands around today.

And I think it's fair to say that by the middle of the year, we have much, much more clarity.

I would think so, yes.

And there we will make, let's say, a proper guide or more concrete guidance.

Okay. And maybe a last question, but I'm confident and not sure whether you partially declined already, but how much of your order backlog falls approximately on the area in Turkey and Syria? Is it fair to assume that 2/3 of your split that you have in Turkey?

2/3 in Turkey, out of the CHF 1.5 billion?

No, no, 2/3 of your Turkey sales split?

What number are you relating to?

Backlog.

Yes, I understand that, yes. But what number do you have in mind?

I don't have a specific number in mind. I'm just asking you, but potential split of the backlog that would be affected by the earthquake area.

I mean, of course, you can look at any number here on our Turkey order backlog here. What matters is now to go through the mills, mill by mill and see what needs to be done to fix it and also go through the orders with our customers, mill by mill, order by order to see, okay, can be shipped. Is there a delay? Is there a change in scope, whatever is going to happen, yes. So it's very hard to tell you a figure which is meaningful today. But as Thomas said, I guess, in July, we will be able to give you a clear picture of what we expect to happen.

How many of your customers in Turkey are [indiscernible]? Or how many are [indiscernible] by this earthquake?

I mean when we say 2/3 of the spinning capacity is affected, we can also say that 2/3 of our installed base is affected. Roughly. Rough terms. But I mean you know that we have a high market share in Turkey. So it would be a surprise if it would be -- there would be a big difference here in the numbers.

[indiscernible]

I had a question on your [indiscernible] sales, [indiscernible] closely of delinquent sales here in [indiscernible]?

In all fairness, if we sell, we don't sell for free. We would like to get some cash. And yes, of course, this will help our, let's say, balance sheet situation, it will contribute to our net debt reduction, which is on top of any net working capital management we do.

Then I'm trying to understand this restock [indiscernible] transaction. I assume it's going to be a new set. And can you then tell me that [indiscernible]?

It's the leasing accounting on the IFRS, you have to do this. Yes, it's a noncash CapEx. And of course, there will be -- it will be capitalized on our balance sheet under IFRS, a bit artificial, but it's like this.

But what is then the potential amount?

This is...

This is coming on top of what you currently have.

Yes, this is around CHF 60 million plus minus, depends on the final rent we pay lease rate be paid.

Okay. So if [indiscernible] and let's take a guess to sell the site here for also CHF 60 million, then basically has no change and no leverage. Is that [indiscernible]?

But more cash. One is cashless and the other one is with cash. When you sell it, you get cash when you do the lease accounting, you just do accounting.

Okay. Assuming that your lease cash is used as cash to and not be reinvested in, let's say, M&A or in the [indiscernible].

Yes. Can I ask you to speak a little bit louder because...

Loud, that I have a follow-up question in fact. At first glance, I had the impression that the profitability in the office sales business was much weaker in the second half despite higher volumes. Is that correct? And what would be the reason behind that?

Yes, I guess it is the impact of the acquisition. We also have an impact in this business. This is the accounting exercise in connection with the acquisition. The after sales portion of the winding business went into the business after sales. We are very happy with the margins we are generating there, but there is a portion which had to be swallowed due to the fact that there is this wonderful accounting exercise that you have to go through when you do an asset deal.

Second of all, on capital. A quick question regarding Page 28 regarding order intake in 20 -- I see you won't share what is there potentially bit more light you can shed on which region increased by how much order intake '22?

Which -- you mean the second half of '22 compared to the first half or...

Order intake by business.

[indiscernible]

Yes.

Okay. No, I guess what we saw in general, we can say is that the whole level of investments globally went down significantly, yes. I wouldn't be able to pinpoint 1 or 2 regions where things had stopped or something like that, yes. The whole thing went down. And it is still -- what we see is the basic effect, which is still there, is that there is, at the same time, investments in China and investments outside China, which is a very unusual situation. Our Chinese customers have to invest if they want to stay because otherwise, they will not be competitive against the imports with the equipment that they currently have. And I can tell by personal experience, this is true. They are thinking about new investments. I was in China in November. I had a -- discussions with a couple of customers and they know this very well. And at the same time, due to the fact that the Chinese textile industry is no longer able to export the way they did before, United States, in particular, there is these investments outside China. And the change from the 2.2 to the 1.1 goes across the board. It is -- there is no big market where I'd say this has stopped completely or this has not stopped at all. That would not be correct.

Maybe a follow-up question regarding the ITMA effect. I'd like to get a bit more of a feeling. If we have these trades there only every 4 years, obviously not very often. If you look back 4 years and maybe another 4 years back, was that noticeable?

Absolutely. Absolutely.

I mentioned it, the fact.

Absolutely. Oh, yes. I witnessed it. Yes. I saw it. Yes. I saw it in '15 and I also saw it in '19. They are waiting. And at the moment with this low capacity utilization of the mills, yes, the pressure to make a decision very quickly is not that high. Now when the market picks up and ITMA comes, it's only 3 months to go, yes. We will have a different situation after ITMA. It would be a surprise to me if we had a different picture by then.

And maybe just another follow-up on that. And because you're going to give a 2023 guidance probably on the profitability level, you will have a much better view already by mid-July of the ITMA effect.

No, we will know how ITMA went because this is going to happen in June, yes. The impact on the order book, we will have an idea of what this is going to be, but the order booking will happen in the second half of the year.

Andreas Meier, [ BHF ]. What have you brought up [indiscernible].

We will not talk about that today. This is sensitive information. We will also not communicate it ahead of ITMA. We will only disclose it at ITMA, right?

Yes, right.

Yes.

So it's a big thing then.

I mean you know how much money we're spending on R&D. So it has to be something significant.

You can say it's the game change event for every 4 years. I mean I'm here now since 6 weeks and everybody just talks about ITMA. And what will happen, how to organize, everybody tries to find out what competition maybe will show.

Rumors.

So it's a little bit guessing and pointing and investigating. So everybody is thrilled. But I think we are super prepared. I'm deeply impressed about the preparation and also about the innovations we will show. And I think it has been mentioned new machines, but a lot is recycling, digitalization, megatrends, which are super important when you look ahead the next couple of years, you have to somehow follow also certain megatrends, which are not only an issue for textile industry, but let's say, global issues.

For a technology leader, it is absolutely key to have a good ITMA.

This is Arnold from Stifel. Yes. Talking about ITMA, I remember we had this huge [indiscernible] the last [indiscernible]. Has this now been concluded to what we spend? I mean how much it had in the books?

So you know that the order has a volume of roughly CHF 200 million. We shipped close to CHF 70 million last year and we will ship a significant portion of it this year again.

And the rest in '24?

Pardon me? The rest in '24, yes. There will be some left for '24, but not a lot.

Okay. And you were saying that the bookings will go in the second half, but it cannot [indiscernible] again, you have these kind of huge order books on each one?

Thomas, this is a question for you.

All these very important people there in Milano, I believe.

But I think you do not have every time a CHF 200 million order, let's be honest. But of course, the team at the moment, we are -- we have already contacted all the big, but also medium-sized customers. We have a list who will come. They come from all over the world to Milan. So we are, at the moment, preparing also a little bit our sales and relationship management that we have them at the right time, we have special events for our agents, but also special events in the evenings for our large customers. And we are sure that we will inspire them. And hopefully, the one or the other order or signing ceremony will happen also during those days. I have no doubt.

What we don't want to do is to negotiate orders at ITMA because this costs you trade show discount, and we don't want to give that. So things have to be agreed upfront. Signing ceremony is great, yes, there's a nice pictures and everything. But the discount rather not.

Any other question in the room? Go ahead.

Did the year start by [ Klaus ] [indiscernible] or did the CFO already getting some receivables in the cash?

Not saying a lot about this, but we are working on our targets for this [ S&G ]. One is to convert into cash.

But the level of business activity from a CEO perspective. At the stable level of the end of last year.

I mean January was -- as expected January is not a great month for Rieter, yes, in terms of our customers' activity. Our Chinese customers are preparing for Chinese New Year and so forth, but also for Rieter. And in February, we had these 2 major things. Chinese New Year, which is always an issue for us. China goes down for 2 weeks and there is almost no activity in this time and the earthquake on February 6. And that was not only a shock to us. That was a shock to the whole industry. And of course, the business that the Turkish spinners had who are out of operation now has to go somewhere. And this process is now in the making. And of course, our Turkish customers don't want to lose this business. So they are working like hell to get their operations back into operation. This is what's going on now. Rico Randegger reported to us last night that Kahramanmaras is -- has left the stage of shock and they are fighting for the business again. And of course, they have to do that. Otherwise, the business will be gone.

Okay. I think there are no more questions in the room. I would like to hand over to Sandra. I can see that there is a question coming from Sebastian Vogel. Sandra, Please go ahead.

[Operator Instructions] We take the question from Mr. Sebastian Vogel from UBS.

Great. The first one would be on the backlog and the previous price action that you have undertaken. Can you remind me when do you think your current backlog will be fully repriced?

I didn't get your questions, Sebastian.

Backlog? Backlog?

Yes, it relates to the backlog. When the backlog is sort of fully repriced, meaning that when the price actions that have been undertaken in the past are sort of then fully in the backlog and there is not much left from the sort of previously priced orders in there that there were priced when there was a lower raw material environment?

You mean the margin in the backlog, right? That is what you relate to. Yes. What I can tell you is that the margin is significantly better than last year's margin.

But still some way to go there? Or how would you describe the situation?

Well, there's, of course, still some leftovers and postponements, which we don't like, but the margins are significantly better.

Got it. There was in the outlook statement, a reference to further global cost increases that are an additional risk. What sort of costs do you have there in mind?

I mean it's about material, in particular, yes. What we see at the moment is that cost increases have come to a stop. No matter what we buy, aluminum, steel, electronics, what have you, yes. And there is still some movements, but the big hit that we took last year has stopped for the moment. If it stays at this level, our price increases will be okay and the price/cost ratio will be in an area where we can live with it. But as Thomas said, there is, of course, work to be done on the cost side as far as our costs are concerned and the engineering part of it. But from a purchasing point of view, that should be about okay. If there is an additional future cost increase related to the material that we buy, we will still face the issue of higher cost against the backlog, which had been priced previously. So far, we don't see that at the moment because price increases from our suppliers have come to a stop with some exceptions. But if that -- if we take another hit on that, this is a risk that we had to mention in the outlook.

And I think the second point just to add on Norbert's statement is inflation. So the inflation, of course, puts a lot of pressure on your salary structure in many countries. When you look, for example, Turkey, if you look on Europe, Germany, the European Union area, not all this inflation has been translated into salary increases. So there is something left, the pressure is there. And in case the inflation is not normalizing to a certain degree, you will have another hit by the increase of pressure by the unions, by the works council that they want to have another salary round within the year, not waiting for another 12 months.

Got it. And one last follow-up question to the answer there on the raw materials. I understood that you have made an increasing use of price or raw material pass-on clauses in your contracts already for a couple of quarters now. Would that not mean that these higher raw material costs would be rather passed on? Or how is the situation there?

Yes. We have introduced that. And I told you previously that our customers were really delighted when we came with this idea. In the meantime, we have it in many contracts. And we negotiated into the contracts as much as we can. And the longer the contract, the longer the delivery time is the more important it is, obviously. And yes, it gives us some protection, but it doesn't give us full protection. It would be wrong to say it gives us 100% protection.

Okay. Thank you very much. I can see that we do have questions in the webcast. Sandra, please go ahead.

We have a question from [ Gilhill Zacorn from Landporte ]. Concerning the selling process of retail area, how many potential buyers are still offering and competitive? And what's their vision on plan on the area at all?

We are in the middle of the process and we will not disclose any details about the process at this stage.

Then we have still a question from [ Gilhill Zacorn ]. Are the investigation of the attorney general of Switzerland still ongoing? And what's the comment of Rieter on this case?

I'll take over the questions, Sandra, the line is bad. Gilhill Zacorn asked are the investigations of the attorney general of Switzerland still going on? And what is the comment of Rieter on this case?

Okay. Yes. You know that there is an investigation related to Uzbekistan going on, but it's not an investigation against Rieter. That is the first important point I have to mention, yes. What happens at the moment is there is a discussion or a legal -- how can I say that, a legal issue around the question, there is data, there is information which has been collected by the authorities. And the question that is on the table at the moment is who is supposed and allowed to make use of this information. This is what's going on. That's all, yes. No investigations against Rieter, obviously, and it goes without saying that we are working together with the authorities, 100%. There is full collaboration from our side, but there is no investigation against Rieter. And this discussion on who can use what type of information for what purpose in this investigation, of course, we are supporting the authorities to the best of our ability. But otherwise, we wait for the outcome.

Okay. And the next question is coming from Marc Saint. He is asking, could you help us to understand what you mean by pose a risk to growth and profitability? If your base referenced the EBIT margin of 2.1% in 2022 full year or the 4.7% of half year -- of the second half year?

Well, I guess this is too detailed, yes. I told you about the uncertainties that we have in terms of profitability, right? And of course, we are not happy with an EBIT margin of 2.1%. This is not a secret. So our point of reference is rather the 2 point -- the 4.7% than the 2.1%, yes. But as I said, there is a significant amount of uncertainties out there, in particular, in connection with Turkey, but also in other areas, which we discussed. So we cannot give you a guidance on profitability today. We will see what the team can tell you when July has come and we are reporting about the first half year.

So I can see that no more questions, correct, Sandra, in both channels?

Yes, correct.

Correct. Okay. So thank you very much, Sandra, for your support. I will hand over back to Norbert and to Thomas.

Are there any further questions?

Not so far, sir.

All right. So we thank you very much for this engaged discussion. I thank you personally for having accompanied me, supported me, asked many questions to me over so many years. It's been a pleasure and an honor to do this together with you and to listen to what you had to say about the business. The question you had asked, it was always inspiring to have this dialogue with you and I thank you very much for your interest in Rieter and I thank you very much for having supported me. Thank you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.