Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the media and investor conference call. I am Sandra, the Chorus Call operator. [Operator Instructions] 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 Thomas Oetterli, CEO. Please go ahead, sir.

Good morning, ladies and gentlemen. Also, a warm welcome from my side. First, let's have a look at the environment we are all in. The turbulences in the world have continued. Geopolitical challenges, inflation, high interest rates have kept uncertainty high regarding the economies in the near future. As a consequence, textile demand is still on a low level, resulting in respective low order intake. Second, the team has continued to work on the strategic front and executed well on our performance program "Next Level" to prepare for a tough year 2024 with lower sales levels than what we have experienced in 2022 and 2023. We cannot change the market. But we can change the attitude with which we act in such a market to satisfy the requirements of all stakeholders. It is all about excellence in execution, delivering on our commitments with tangible action plans and proper follow-up. Let's start with the key messages on Slide #2. Our performance program Next Level is on track. I will share with you the actual status of the different key initiatives we have taken to achieve a strong competitive level in the future. Order intake in the third quarter 2023 was only at around CHF 127 million, one of the lowest quarters in the recent past. This is a result of the previously explained low market sentiment in the textile industry. Sales were around at CHF 335 million for the single quarter, CHF 1.1 billion for January to September 2023 and therefore, well on track with our guidance for the full year. As a consequence, our order backlog is at around CHF 900 million and still extends well into the year 2024. Our sales activity for the Rieter site could be successfully closed and will help to improve our balance sheet. And last but not least, we can confirm our outlook we have shared with you at the half year closing call in July 2023. Our operational performance has, therefore, improved as expected. I will directly go to Slide #3 and report on the actual status of Next Level. At the half year closing call, we announced our performance improvement program, Next Level, with which we want to substantially improve our competitiveness for the future. In a nutshell, we are on track. A lot of the initiatives could be concluded, and we are confident that this program will lead us to a much better performance level also in challenging times. In sales excellence, we started to measure customer satisfaction with Net Promoter Score, and we will strive to improve our aftersales and component business share to ultimately achieve a more balanced ratio between new machine sales and after sales business. We introduced a standardized process and organization to further enhance our product competitiveness. First results are encouraging. We also worked hard on our effective supply management and can proudly say that our supply performance has dramatically improved. The shortfalls in purchasing of critical components will disappear until the end of 2023. And our progress to achieve agile structures is well on track and will make us leaner for 2024. Let's move to a key topic of Next Level on Slide #4, our adaptation of structures. We have achieved conclusions with our employee representatives in our key sites and we'll finish most of our reductions of positions in the overhead functions until the end of 2023. This is a very painful but necessary part of our performance program, and I'm happy that all the relevant parties show the constructive way forward. As the market environment is still on a low scenario, we will execute adjustments of our production-related positions in the coming months. Timing, magnitude depends on our production planning, which is a result of our sales plan. First adjustments will already be implemented in the fourth quarter 2023 and beginning of 2024. We can confirm the key points of the program "Next Level" on Slide #5. The onetime cost will be in the magnitude of around CHF 45 million to CHF 50 million. Most of the program initiatives will be implemented by the end of 2023. The whole program has a strong return with around CHF 80 million per year. The majority of this CHF 80 million will be visible in our profit and loss statement for 2024 and will mitigate the negative impact of our lower sales volumes with less gross profit. I turn to Slide #6. In the past, everybody was keen on seeing the so-called ITMA effect in the respective years. Our innovations presented at the ITMA Milano met with great resonance. Our strategic direction to bring our products towards more automation, digitization and technology leadership was the right one. There are many projects in the market where exactly these topics are key for decision taking. However, due to the low market sentiment, final project decisions are still pending. We are sure that once projects will be approved and released, we will strongly benefit from our innovations. For certain products, we issued reservation list and within 2 days at the ITMA, all those reservations could be placed. It is a question of timing, until this will turn into order intake and sales later. Now I will hand over to Oliver Streuli, our new CFO, for the financials.

Thanks, Thomas. Good morning, ladies and gentlemen. Let's quickly come to facts and figures on Slides 7 and 8. On Slide 7, we show the 9 months order intake by business group. Order intake dropped by 59% year-on-year and shows a continuation of the low level of the first half year 2023. The major drop is seen in Machines & Systems but also components and after sales are still on a low level due to the low capacity utilization of spinning mills. A different picture is seen on Slide 8. regarding sales by business group for the first 9 months. Overall, we were able to achieve an 11% growth year-on-year, driven by high volumes in Machines & Systems as well as in after sales. Components was slightly negative, driven by one component business unit, acting in a more machine type setup of business which is characterized by shorter cycle times. Of course, an increase of sales and the decrease of order intake is not sustainable over the longer term. Our key focus is, therefore to grab the greatest possible share of a potential market rebound in the coming months, which brings me to our order backlog as of the end of the third quarter in 2023 on Slide 9. Our order backlog as of September 30, 2023, amounts to around CHF 900 million. The order backlog extends into the year 2024. As we anticipate a stronger fourth quarter 2023 and have some optimism for the beginning of 2024, we are still planning with a low scenario for 2024. Next Level will prepare us for this scenario and will allow us to achieve a positive EBIT margin in 2024. Some indicators are showing some light at the end of the tunnel. Our cancellation rate in the reporting period was within the usual range at an average of around 5% of the order backlog, but with a slight downward trend. And the number of projects that addressed to us is increasing, which gives us the assurance that the low point of the market should be behind us. That's it from my side. Back to you, Thomas.

Thank you, Oliver. Another positive topic about the execution drive is the sale of the Rieter site on Slide #10. We were able to successfully complete the transaction as of September 26 in this year and received the whole sales price of CHF 96 million. This will not only result in an extraordinary profit contribution on EBIT level of around CHF 70 million to CHF 75 million, but also tremendously helps us to improve our balance sheet in terms of net debt and equity ratio. If we contribute with strong operational results in the future, as planned on the Next Level, the minimum equity ratio of more than 35% will be achieved midterm. Let's go to the outlook. We can confirm the key point of our outlook presented with the half year results. The market environment is still on a low level, and we do not expect an improvement until end 2023. We confirm sales of the previous year's level of around CHF 1.5 billion. And we confirm our EBIT margin of around 5% to 7%. This includes the special effects from the sale of the Rieter area of about CHF 70 million to CHF 75 million as well as the onetime cost for Next Level of around CHF 45 million to CHF 50 million. Both special items amount together to less than 2%. With this, we close our presentation, and we are now available for your questions.

[Operator Instructions] Our first question comes from Walter Bamert from Zurcher Kantonalbank.

You have been very consistent with your guidance and the explanations, however, I think it would be helpful that you can confirm that the guidance for this year already includes the cost you expect also from the production-related capacity reduction expected for next year? Or do we have to expect more cost there?

Good morning. Thank you very much for the question. I will take this up. This CHF 45 million to CHF 50 million are included in -- are including the production-related headcount or position reductions. So this 400 to 600 positions, we will face over the next coming months are included in this setup of cost of CHF 45 million to CHF 50 million. So no additional costs are foreseen at the moment.

Perfect. And then the second question, now that we see a certain downturn in the market, how disciplined is your competition? Are they disciplined when it comes to pricing? Or do you see ugly developments when it comes to the few projects that are out there?

Well, competition is always tough. Even in good times, you always find someone who might offer at a lower price than you are offering. We are not seeing someone who is the cheapest in the market. That's not our ambition. We always try to generate a value proposition, which allows us to achieve a higher price than competitors. Otherwise, it would become very, very difficult for us. Our market share of roughly 30% is driven by innovation and by a better so-called total cost per kilogram yarn produced. So customers are willing to pay a higher price for a Rieter equipment and for a competitor equipment. But of course, we always have to drive this innovation drive. Otherwise, we would lose that advantage. Now last but not least, of course, when the cake in the market gets smaller, all the market players are getting more nervous. And yes, the one or the other is might considering also to be more aggressive on the pricing front. But this is not the strategy we are following. We want to generate value for money. This has been our strategy in the past and also will be the strategy in the future. So we have not lost market share now because of maybe some pricing attacks of all this.

Perfect. Thank you very much, Thomas. Let's have other analysts asking questions.

The next question comes from [ Mark Kaven ] from AWP.

My question goes to the job cuts. Can you already quantify more or less how much of the up to 900 job cuts will be affected in Switzerland or maybe in Winterthur?

Thank you for the question. I think it's important to get clarity to that. In the half year results, we announced that we have a reduction in overhead functions of around 300 positions. This has been mainly in Winterthur, but also in Germany. We said that we will close or shut down our presence in Ingolstadt. This has been agreed and will be achieved by the end of '23. And we said that roughly 100 positions will be canceled in Winterthur. That's it. The other 400 to 600 positions are much more volume dependent in our production sites. And as we do not produce any more in Winterthur, Winterthur is not affected by this number. So this is more in our production sites in Germany, in Czech Republic, in India and in China. There, we have our major production sites. And there, we will also see according to our production volumes, the reduction of this capacity. So Winterthur is not affected by this.

The next question comes from Emrah Basic from Baader-Helvea.

I will start with the first one. Could you maybe give us some color on the regional development. What's driving China -- positive China development? And also in terms of the rest like which regions are declining the most? And just what are your clients in those regions saying? Just to get a bit some more color, that would be great.

Okay. Thank you for the question. So we also said at half year, and there is no difference to that, that in our order intake, we saw a very low market sentiment worldwide with one exception. The exception is China. We were discussing in the past the spinning mills will move out of China. This is a certain trend, which happens, yes. But on the other side, the Chinese business, are then confronted with higher competition from other countries. So they also have to ramp up their technology and have to go to the latest state of technology in their spinning mills. So the reality is that China has been growing for us in terms of order intake if you compare 2022 to 2023. But the rest of the countries -- there was not a big difference how much it was dropping. So the rest of the world, very, very low levels, one exception, China being at a good level and we even could gain some market share. Now discussions, I'm traveling really in the last couple of months in all the major markets. We spent roughly 50% of my time with customers. And it's very interesting to see what they say. They are, of course, impacted by high financing costs because usually, these are bigger investments they have to do. So high interest rates are creating some uncertainty. That's 1 side. And the other side is that there is still a low market sentiment in textile demand in the Western hemisphere due to Ukraine war, due to still uncertainty about energy [ earnings ] due to high inflation for food. And so people are, at the moment, still saving money in the areas of clothes, textiles. So that's what we see. What we also see is that now stocks of yarn, stocks or fabrics, stocks on the retail side of clothes is going down. And in the discussions I have with customers, they are very bullish now to plan projects. There are many, many, many projects, just someone has to push to [ option ] to take it off. But with this economical environment, they are still hesitating to do the investment. Interesting is what they say. They say we now are since 1.5 years, so since more or less the end of quarter 2, 2022, it is very low level of order intake and customers are expecting that rebound will be much, much steeper. So it will not be like a [indiscernible] curve. It really will be a strong pickup once the market is coming back. Now the key question is, when does this happen? And there nobody there is really to say it will be towards the end of the year or it will be in Q1 or maybe this somewhere in Q2. But everybody somehow is confident that it cannot take so much time anymore. And we also share that confidence.

Perfect. That's quite helpful. Now just a quick 2 other questions. Now that we're already in Q4, I mean do you expect a slight sequential improvement in order intake for the last quarter?

Yes, we do expect that Q4 will be better than Q3. Now in all fairness, Q3 was so low. It does not take so much to be better than Q3. But nevertheless, we have some confidence that quarter 4 in order intake will be better than quarter 3. And of course, all of us hope that this is the start of a trend. As I mentioned before, there are many, many projects at the moment, we are negotiating. And if only half of them really turn into reality, then we should expect a better Q4 and also a better Q1.

Okay. Perfect. And then just a quick last one. Do you still expect approximately 2/3 of the CHF 80 million cost reductions come into effect in 2024? I guess I believe that was the number that was said during the half year conference.

I think this is a fair assessment. As we mentioned in our different work streams we have, we will have now finished topic of a more stable and sustainable supply management. So we will not have this, let's say, turbulences in machine material towards the end of the year, this should have disappeared. I think the major adaptation of our overhead structures will be finished by the end of 2023. Site in Ingolstadt start will be closed by the end of the year. Some few people still working into 2024. All the changes in Winterthur have been communicated to the individuals. It has been agreed with the workers' representatives. These have been the 2 big blocks. So this will be executed. And of course, then we still have this product competitiveness, our continuous cost reduction program. This is something which ramps up, of course, there, we do not expect full impact. But I think 2/3 of the impact to be visible in 2024 is also for us is a must and we are very confident that this will happen.

The next question comes from Christian Arnold from Stifel Schweiz.

Yes. Two questions also related to -- actually your comments you just mentioned, maybe more specified, I mean big is the risk that actually the downside sales level could be below the CHF 1 billion you have announced in the course of the Next Level program looking at the order impact of CHF 27 million in Q3. I mean you said you have some positive view on Q4, that is really better. But yes, is there a risk that we actually end up in '24 with a sales level below CHF 1 billion? That will be my first question. The second question, related to the weak order intake in Q3, the CHF 127 million. I would have assumed that we already see some better order momentum on the back of the ITMA that you have some first orders coming from the ITMA as you have showcased very strong products there. So why has this not happened or not significantly happened?

Thank you for the -- it's, in fact, a $1 billion question. This is the question we are also asking ourselves, I would say every single week. So -- and I can give you some confidence there. That's point number one. A significant part of our order intake is also depending on after sales and components. So both are much less volatile than the volume of new machines and systems. So this, I think, is important to know that in the low scenario, roughly half or maybe a little bit less than half of our sales volume is driven by aftersales and components business, which is much more stable. And then we also see that reductions compared to the last year have been there but not as much. And they will come back much quicker. That's point number one. We have a cycle time, which is book-to-bill between 3 to 6 months. So once the utilization of the spinning mills is going up, and I believe this will happen, because the stocks in yarn, fabrics and cloths is getting smaller and smaller, we need new orders to the spinning mills, and this will generate higher utilization of the spinning mills, and this will generate more spare parts, more wear and tear parts in these businesses of the sales and components. So then it's all about new machines and systems. Now when I look into the backlog of the new machines and systems, we have a good chance to achieve the share that we need to bring the sales volume on the lowest scenario level. And you can assume that the book-to-bill cycle in the machines and systems business is between 6 to 12 months. Now when you take all of this together, let's do some mathematics. So at the moment, we have CHF 900 million. We are confirming our sales volume towards the end of the year with roughly CHF 1.5 billion. So we still have to build CHF 400 million, which would mean that the CHF 900 million drops down to CHF 500 million. But we are also getting new orders in the quarter 4, which are higher than what we have seen now in quarter 3. So probably, our backlog towards the end of the year is roughly something like CHF 700 million. Now if we have this trend going slightly better also at the beginning of the year 2024 assuming that we also have still coming in of the sales and component order intake. This will impact whatever we have in the first half year there, this will impact our sales volume in 2024. So we are already somewhere at close to CHF 900 million. Then we need some sales in Machines & Systems at the beginning of the year, which will be built in 2024. And with a cycle of 6 to 12 months, let's take 9, whatever we have in the first quarter, maybe still in April or May will impact our sales value in 2024. So we have a good chance, honestly, to be at this lowest scenario figures. I'm pretty confident. Now you said, is there a risk? There is always a risk. Of course, I cannot change the environment we are in, but we have a good confidence that we will achieve this low scenario, not only in top line, but of course, also in bottom line. It was a little bit extensive explanation, but I think that's probably a question almost everybody has.

And about ITMA, orders from ITMA?