SAF-Holland SE (SFQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the SAF-Holland SE conference call regarding the Q3 2021 financial results. [Operator Instructions] Let me now turn the floor over to your host, Petra Muller.

Yes. Thank you, operator. Welcome, everybody, to our Q3 2021 results presentation today. My name is Petra Muller, and I'm heading the IR and Comms Department of SAF-Holland since November 1. I'm very much looking forward to working with our analysts and their discussions with investors about SAF's equity story. Please note that this call is being recorded, and a replay will be available on our website at safholland.com later today. Your participation in the call implies your consent with this. Joining me today are our CEO, Alexander Geis, and our CFO, Inka Koljonen. Following the usual procedure, Alexander Geis will guide you through the financial highlights of the group and the regions and Inka Koljonen will provide some more details of our financial performance. Alexander Geis will close the presentation with our current market outlook and our guidance. After this introduction, we will be happy to answer your questions. Please note that management comments during this call will include forward-looking statements, which involve risks and uncertainties. For the discussion of risk factors, I encourage you to review the safe harbor statement contained in our quarterly statement and this presentation as well as our annual report. All documents relating to our Q3 2021 reporting are available on our website. And now without further ado over to Alexander Geis.

Good morning, everyone, and a warm welcome to our today's Q3 call. This is Alexander Geis. And together with my colleague, Inka Koljonen, our CFO, we will be showing you our Q3 2021 results. Given the difficult circumstances like heavy raw material increases, supply chain issues and higher logistics costs your SAF-Holland performed well and also invest wisely into our future setup. Our today's presentation consists of highlights first 9 months 2021, our financial performance and the outlook for the full year. Please, let's get started with the highlights. Next page, please. Group sales in the first 9 months increased from EUR 709 million in 2020 to now EUR 925 million in the first 9 months of 2021, which was driven by all 3 regions. The increase of sales, a favorable product and customer mix, a solid aftermarket and our cost discipline were the main drivers for an adjusted EBIT of 7.7% in 2021 versus 5.4% the year before. Due to ongoing supply chain tightness, our net working capital ratio reached 15.5%, and Inka will come back to that later on. Our operating free cash flow, which was affected by strong growth and the required net working capital buildup came in with a positive EUR 9 million. Last but not least, our CapEx ratio reached 1.4% by end of September. The quarterly overview on the next page, please. Starting with our sales. You can see in the upper left that the increase from EUR 709 million to EUR 925 million equaled a 30.5% year-over-year; FX-adjusted, even higher at 33.9%. Q3 sales came in with EUR 317 million versus a EUR 232 million the year before. Good sales despite the plant shutdown in August. Speaking of adjusted EBIT, I can report a solid 0.7% for the first 9 months, with an equal split in all 3 quarters of 2021. Q3 reached 7.7% versus the 6.4% the year before. Restructuring costs are on a very low level with only EUR 1.7 million in the first 9 months of 2021 versus a EUR 11.7 million the year before. On the following 3 pages, you can see how the different regions performed and starting now with EMEA. Here, sales increased by 34.7% to now EUR 545 million versus EUR 405 million the year before. Main drivers were a strong OE trailer business and a solid aftermarket. All our axle plants in Germany and Turkey are fully booked into 2022, and the teams are working on a further increase of capacity. Worthwhile here to mention that the ramp-up of our new axle production in Russia is on time, and we will be producing the first axles by end of Q1 2022. Thanks to a good customer and product mix and a solid aftermarket our adjusted EBIT reached 9.8% in 2021 versus 8.7% in 2020. And Q3 came in with 9.8% as well. Next page for Americas, please. Sales increased from EUR 250 million to now EUR 300 million in 2021, which is a 19.8% increase or FX-adjusted even 27.1%. Q3 was EUR 105 million was as good as Q2 and mainly driven by higher trailer and aftermarket sales. Q3 truck business was impacted by order postponements due to chip shortages also in North America. Our adjusted EBIT for the Americas region reached 5.5% versus 3.5% the year before. And in Q3, the team was able to reach a solid 5.4% despite all the cost inflations we also face in the Americas. I would like to mention that we, as the management team, decided to install a new, leaner and better fifth wheel assembly line in Mexico, and we already started this middle of this year, and the first step is to assemble for our aftermarket latest in Q1 2022, which helps increasing our aftermarket sales and our overall gross profit in the region. APAC on the next page, please. Here, I'm happy to report that our homework pays off slowly. Sales increased by 48% from EUR 54 million in 2020 to now EUR 80 million in the first 9 months of 2021, which was driven by increased OE sales and a growing aftermarket business. Our adjusted EBIT in APAC goes up from a negative 9.9% in 2020 to a now positive 2% in 2021. Good to see that the adjusted EBIT in Q3 further increased slightly to 2.5%. And here, I'll pause for a while and hand over to Inka. Thank you.

Thank you, Alex. So a couple of comments on the investments. On the CapEx; year-to-date, we stand at 1.4% spending for CapEx in terms of our group sales versus [Technical Difficulty] which means that we have spent less money. A few comments on that one. So first of all, CapEx is not a linear spending. And definitely, in Q4, significant CapEx is still expected to come. But please be also aware that our sales is a little bit higher or significantly higher than we expected originally when we gave out the guidance. So we may come out a little bit below the number. Then talking about the content of the CapEx. Alex mentioned already a few highlights. So focus of the investing activities for the first 9 months were definitely efficiency enhancing measures. So we have invested into new machines for friction welding, specifically in the Bessenbach factory. And then the second focus area for CapEx has definitely been growth CapEx. We reported the establishment of the new plant in Russia, which is a market of huge importance for us. We reported also on the capacity expansion plans in the Turkish plant. And as Alex mentioned, we have opened a new fifth wheel assembly line in Mexico, which will also strengthen our footprint in Americas. Then on the net working capital. So the supply situation is unchanged to what we have been reporting in the previous quarters. This means that we are facing shortages in the supply chain and that the prices are still very, very high. So this means that we have had to keep our inventory levels high to secure delivery and market performance, but we are definitely working on reducing the levels towards year-end, and this will also happen. And then on the next page, you see basically the mathematical results of all of this, which is the cash conversion rate. I would say, a KPI we've been reporting since a few quarters and where we also have internal focus on demonstrates the ability to convert EBITDA into cash. You see the huge investment into net working capital that we've done. So the cash conversion rate in percentage of the EBITDA is still in the 30s, like in the first 2 quarters as well, but will improve also significantly towards year-end. On the next page, I would say, very positive development regarding our balance sheet structure and the deleveraging characteristics. So further significant deleveraging has been achieved in the previous month quarters, the driver was here the good cash performance and the improved net debt situation. But in the last 2 quarters, the main driver for this has been the improved EBITDA. And as you know, we are using for this ratio, the unadjusted EBITDA of the last 12 months. So here, this has been the main driver for the improvement of the net debt-to-EBITDA ratio, meanwhile, to 1.59, which is significantly better than our target range of 2 to 3x. So representing and demonstrating a good balance sheet structure and financial headroom for further growth. Yes. And with that, I would hand back to Alex for some comments on the current outlook.

Thanks, Inka. Let's see on the next page, how we see the markets for the remainder of 2020 or the whole year of 2021. Starting on the left side with Europe, very strong markets, very good markets. We see the truck for the whole year with a plus 15%. Trailer, a little bit higher at plus 20% to plus 25%. All the trailer manufacturers in Europe are booked until middle of next year, specialty trailer manufacturers already until end of next year. So this is a good month ahead for us. North America, also quite strong; truck, plus 20%, a little bit lower coming from the plus 24%, where we said in August. This is mainly due to the ship shortages and the postponements of the orders. Trailer, plus 25%. And here the friendly reminder that we have the strategy to focus on air disc brake with both air suspension and mechanical suspension, where we are the market leader and a further increase of air disc brake shares to be expected in the future. In the middle, South America, which is mainly Brazil for us. Here, truck, plus 45% and trailer plus 20% with the acquisition of KLL, we are mainly focusing on truck and bus suspensions. So we see a huge increase. And also here, we won a tender with Volkswagen for the eCrafter, and we are here fully booked until middle of next year, which is a good thing. Then China; truck, minus 5% to minus 10%. So a little bit of a weakening in the truck business. Trailer remains at minus 5% to minus 10%. It's slowing down. And it started in June, July. This is mainly due to the pre buy, the first half of 2021, but also the cost inflation is huge in China. So customers are waiting for investments. And here, we are, SAF-Holland, only focusing on premium air disc brake, including air suspensions. On the right side, and I just came back from a business trip in India last week, very bullish markets. There are huge infrastructure projects going on in the years to come. Truck now with a plus 150% everybody is sold out, and they increased capacity and trailer, where we are, is a plus 100%. So doubling, we are also booked out in our production lines in -- we are located in Pune. So also happy to report that we see a bullish 2022 ahead of us. On the next page, please allow me to summarize our guidance for the full year. And first of all, let me say again that the massive raw material inflations, supply chain issues, increasing logistics and energy costs put a huge burden also in us as your SAF-Holland. Nevertheless, we are confident to achieve our full-year targets with sales of EUR 1.1 billion to EUR 1.2 billion, and adjusted EBIT margin of around 7.5% and a CapEx ratio of also around 2.5% of sales. Next page, please. We are benefiting from the upswing in Europe, North America, Brazil and India, based on our leading market positions, the economies of scale -- safeguard a strong operating performance. We do strategic investments in growing markets like Russia, Turkey and Mexico, a further deleveraging can be expected, and the overall cost pressure is included in our full-year guidance. Here all, we are working hard on the future of your SAF-Holland. Thanks for the trust in us. And now we are open for questions you might have.

[Operator Instructions] The first question comes from Nicolai Kempf from Deutsche Bank.

My first one would be on the guidance, especially on the top line. So I think this implies the last quarter could be the lowest one in terms of revenues for the entire year. And you also stated that you're booked all for many regions and demand remains very supportive. So I know that last quarter seasonality was a weak one, but is there another factor that you're considering, maybe from the lockdown from Covid or some other related matters that would imply that you're a bit more cautious on the last quarter?

Yes. So regarding the top line Q4, I mean, as you know, traditionally, in December, we have a little bit lower sales due to the factory shutdown. But in fact, there is no, I would say, harsh decline from Q3 to Q4. We are talking really, I would say, about the normal decline, which we've had in the previous years as well. So I would say the 9 months top line sales is a quite representative number on a linear basis for the full year. If you take out the usual December factory shutdown.

And then can I just repeat how many months or quarters you're actually sold out over in the Europe and North America?

Well, Nicolai, this is Alexander speaking. Well, it depends a little bit on the business, of course, and the regions. So let's start with EMEA. So basically, if we could increase our capacity from now until tomorrow by another 50%, we would be even sold out. So it's very bullish. People are investing. Low interest rates also help that the people are willing to buy new equipment. The main business we do in Europe or in EMEA is the trailer business, as you might know. So there's a big portion or the biggest portion is trailer, which is axles and suspensions. And we are nearly booked out until middle of next year. We have some slots available, of course, but the orders we are receiving and the orders on hand, we do have means first half year looks pretty good. For the truck business, we also face a little bit postponements from the truck manufacturers in Europe. You know that we have also significant market share in fifth wheels here in Europe. When you go over to the Americas, which is mainly North America. So basically, we have a better split between truck business and trailer business, like 50-50 in OE. Here, we can see that the trailer manufacturers are also booked out until the middle of 2022. And the truck manufacturers, you might know even better, that have a lot of orders in hand. There are a lot of part trucks off-site where chips are missing, so they're just waiting for chips to arrive, and then they then can finish build the trucks and send it to their customers. Also here, the first quarter is nearly fully booked and orders are going into the second quarter of next year. Does it help?

Yes. And congrats on a good resource.

The next question comes from Jorge González Sadornil from Hauck & Aufhaeuser.

I would like to know if you can give us some detail on the mix of volume price or the strong increase of the revenue. Can you give us some flavor on how much was the price increase in the period, please?

Well, this is a really tricky question, which we do not really want to answer because we do not display our material cost increases nor do we display our price increases on the sales side. But I can tell you it was heavy. I'm already working for some years here in that industry and with the company. And I've never seen such inflation like we have seen, especially in the second half of 2021. And we see a strong headwinds, especially in Q4 because this is the peak of the all-time high cost prices, steel, scrap steel, flat steel was very high in Q2, Q3 were all the suppliers and also us needed to fix the supplies for the last quarter. So this is a big burden, as I mentioned already twice now in my presentation, but this goes on for the whole industry.

Please allow me a follow-up then. Your backlog for next year, is then including a solid price increase, I understand for the pass on the cost that you are commenting for the fourth quarter?

Well, with the majority of our customers, we have so-called or contracts with clauses -- steel inflation clauses. This goes mainly for the North American sales, basically, already the increases in Q1, Q2 and now especially in Q3 and Q4 will be paid back in the first half year of 2022. So whatever we see as a price increase coming from raw materials, we will get back in Q1 and Q2 next year. On the trailer side, it's a little bit different. Yes, there, we also have contracts, but they also have a time delay. And of course, we, as a company, we as a group, we are not capable of swallowing any price increases or the majority of the price increases. And we are in talks. We were in talks with a lot of customers already, and we needed, unfortunately, to increase the prices. Which put a burden on both our customers, of course, but the whole industry, but also we are still in negotiations with a small portion of customers when contracts are coming up next year. Yes. But of course, we are trying to pass on as much as possible to our customers. And they, of course, have to pass it on to their customers, which are the ultimate buyers of trucks and trailers in our industry.

The next question comes from Harald Eggeling from ODDO BHF.

Two questions, please. First one would be, if you could elaborate a bit on your market or product strategy in China, how it's going on, please? Also with respect to sales generation? The second one is basically on your Turkish plan. I think the lira is pretty much in favor of you for the time being. And I'm not sure if I missed if you said something how big the capacity expansion will be, please?

Okay. I would like to take the China question. Of course, you know that we do not report single sales or profitability on a single entity, which we have now. We did a lot of plant consolidations over the last couple of years. And now we are purely focusing on air disc brake, axles with air suspension. So there are new laws in place since the beginning of 2019 and beginning of 2020. So we are focusing purely on the segment of dangerous goods trailers, so to say, tankers, silos, and here, we are getting more sales in, and we finally have the right products in air suspension, air disc brake. So this is the main focus. And the other focus, of course, we have a heritage of landing leg production. This is what we are continuing there. We have a dedicated assembly line and production line for landing legs. This is for both for the domestic Chinese market, but also for the export to other regions of the world.

Yes, regarding the Turkey question, I mean, the plant in Turkey is definitely a core factory for us in Europe, next to our facilities here in Bessenbach. And at the end, of course, we make our volume and footprint decisions based on the competitiveness of the plants. And here, Turkey is very well positioned within our network. I would say the development of the Turkish lira is a further plus at the moment. But at the end, we don't make our footprint decisions based on, I would say, short-term exchange rates fluctuations. But yes, at the end, at the moment, that helps on top.

And maybe in addition from my side, in terms of production capacity, we already decided in the second quarter to further invest into Turkey. So we ordered new robots for the Turkish plant. So one is arriving in April, which will increase our capacity by another plus 25%. And another one is coming middle of the year, which helps to increase another 25% because, as I mentioned before, Turkey is booming again. Everybody wants to order air disc brakes and our suspension, which is the lightest in the industry. So we are happy that the customers trust us. That is why we took the decisions already some quarters ago to further increase our Turkish plant there.

One follow-up, but I guess most of the production of your Turkish plant there it's for the export business, right?

No, not necessarily. Turkey is very bullish and strong and good market. There was a huge shift over the last couple of years towards air disc brake, and this is what we manufacture, mainly in our Turkish plant. So we have a broad customer base also in Turkey.

At the moment, there are no further questions. [Operator Instructions] One question comes in from [ Houma from Sacoma ].

Yes, I had 1 question for my side is regarding development expected for your margin in 2022. Given the fact you announced that you tried to pass on price increase to your customers at the moment, but not really sure to be successful or not. I'm just wondering if for the moment, you were confident in order to maintain a decent level of margin for 2022, given the environment in [ supply ] and raw material that we have at the moment, please?

Yes. So I mean, it's really too early to give any guidance for the margin for next year. You know we will do that when we report our full-year results. Nevertheless, our midterm margin guidance of 8%, which has been communicated about a year ago, is valid. And please be aware of one topic. Yes, for the 9 months, we are at 7.7%. And at the same time, we are still guiding towards approximately 7.5% for full year. And this implies that in Q4, we will have margin headwinds. So I would kindly encourage you not to just continue with the current margin for Q4, we will see the peak of the material price hit in Q4. So this is not being conservative at the moment. We have preliminary October figures, which also show this. We are not -- we are in the same boat like all other players in the industry, and we will see the material price hit also in Q4. But then, of course, expecting to ease up in the course of next year. And here also, we don't know more than any others. We were expecting, and everybody was expecting the shortages to ease up already end of this year. It's not happened yet. So let's see, and I think that this should happen then towards the first half year of 2022. But we will provide them more information and clarity in due time.

There are no further questions right now. So I pass back to Petra Muller.

So thank you, everybody, for joining our today's call, and we are happy to talk to you again when we release our annual report next year. So have a nice day and stay safe and healthy. Goodbye.

Thank you.