Semperit Aktiengesellschaft Holding (SEM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Sandra, the Chorus Call operator. Welcome, and thank you for joining the Semperit AG Holding conference call following the release of the report on Q1 2021 of the Semperit Group. [Operator Instructions] I would now like to turn the conference over to Martin Fullenbach. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and a warm welcome from Vienna Results presentation for the first quarter of 2021. With me in the call today is Petra Preining, who returned to our Executive Board team as CFO on Monday and who will take over this responsibility for an expected period of 1 year. So Petra will take you through the financials in a minute before I finish with the outlook and some highly relevant strategic focus areas. As usual, both Petra and I will then be available for questions and answers. As you might have seen, we have condensed the Q1 report in its volume, so you get a better view of the truly relevant topics. This also goes in line with our corporate strategy to become a more lean and agile company. Consequently, we would propose to hold a very efficient and productive call today, where we focus on our introductory remarks only briefly on the key developments over the last 3 months. I'm fully aware that the comparables to the same period last year are not straight forwarded, notably when comparing the lockdown periods and the amount of working days in various jurisdictions. This is also the reason why we continue to show the 2019 numbers to a year which still -- which was still an unaffected and very good year as a comparative basis. And we want to leave sufficient time for Q&A at the end. Ladies and gentlemen, I would like to start by saying that this has been a truly great first quarter, the best quarter since the beginning of the new Millennium at least. And it makes me personally very happy and proud to be able to present such a record results to you after 4 years in this exciting company. And what I also can say right away is that we can confirm the outlook we published on March 15 this year. At that time, we informed the market that we would expect the operating result in 2021 to significantly exceed the EBITDA of 2020 and provided an initial guidance of EUR 395 million. Despite the headwinds from raw materials, both in terms of prices and the availability, and bottlenecks for container shipment in recent months, we feel hugely encouraged that we can maintain this very strong outlook. So let me start with the key highlights at Slide 3, where we compare Q1 2021 revenues, EBITDA, net profit after tax and free cash flow with the periods in 2019 and 2020. Two main observations here. Firstly, top line growth was mainly driven primarily by the exceptional demand and high prices in the medical sector, which translated into a record operating results also supported by the recovery in the industrial sector. At this point, I would like to mention that notably, first signs of component shortages, higher raw material prices, and limited container availability started to emerge at the end of last year, and this trend also continued in Q1 2021. At the same time, sales prices for medical gloves reached a plateau at the end of the quarter, so that this business is now starting to be driven by volume and operational efficiency, where we have stepped up significantly in recent months. And the second observation is, both bottom line profits and free cash flow are not only a result of the high EBITDA but also the previous restructuring efforts and recent more strict cost-saving measures. As the CEO of the company, I am even more proud about this more recent development as it not only shows the resilience of our business model, but also progressive growth and a strong capability to generate free cash flow. Starting with the operational highlights on Slide 5. I guess the numbers for a year-on-year comparison of group revenues and EBITDA speak for themselves. This is not only the best quarter, at least for this Millennium, but also the 13th consecutive quarter of improvement in operational EBITDA, which, as you remember, has been our major benchmark KPI to enhance profitability. While we are fully aware that the exceptional EBITDA margin of 37.8% is largely due to the outstanding performance of the medical sector, let me reassure you that we will make everything possible to keep the business running full speed on all cylinders. In this context, I'm also very pleased to see first signs of economic recovery of the industrial sector with revenues up but continuing pressure on margins. Looking more closely at the industrial sector on Slide 6, we can clearly see that it has gone through the trough in 2020 due to the pandemic and is now an economic rebound with evidence provided on the 2 charts for the both -- for both revenues and quarterly EBITDA. The EBITDA chart shows both a seasonality effect with stronger quarters traditionally in Q1 and Q2 but also improvements in Q1 2021's EBITDA, although we are still not quite at the pre pandemic level of Q1 2019, which had a truly strong performance. From our perspective, despite the headwind coming from raw material prices and logistics, the 15.9% EBITDA margin for the industrial sector in Q1 2021 is very encouraging as it is exceeding the previous 13% target by 2024, which we had originally announced with our industrial rubber strategy in January 2020. Turning the page and starting with the segmental analysis for Semperflex, the 2 key highlights here are: firstly, the strong 17% year-on-year revenue increase due to better order intake, on the back of positive market sentiment and significantly higher demand. And secondly, the underlying profitability being in a visible recovery modes with the EBITDA margin of 22.5%, coming close to the pre pandemic level in Q1 2019. At the same time, I'm very positive about the order book going forward, with a major step-up in late 2020, leading to much higher levels if compared to last year. On the next slide, Sempertrans is clearly in a more difficult situation given its exposure to the mining industry, but also its footprint in India. The top line was impacted by sluggish demand and continuing supply chain disruptions, leading to a 9% decline in revenues year-on-year. In turn, while EBITDA was still not at the previous year's level, there was a material uptick compared to Q4 2020. On a positive note, higher raw material prices led to an increasing replacement business in the mining industry, while at the same time, we also see first improvements in the project pipeline, although the impact of this will not be felt before the second half of 2021. Semperseal on Slide 9, we report now as a separate segment for a full year and can equally see a seasonality factor with strong Q1 and Q2 periods. In this case, the focus on specialty products in industrial markets and the full consolidation of the German M&R business helps to improve top line growth by 16% year-on-year. Let me note here that results have also improved on a like-for-like basis, even without the upside from M&R. More importantly, the strong EBITDA improvement resulted in the operating margin exceeding its pre pandemic level of Q1 2019, although this was arguably reported on a pro forma basis. Going forward, we are very encouraged, not only by market share increases but a strong order intake. Finally, among the segments of the industrial sector, Semperform's revenue was almost at par with Q1 2020, with first signs of recovery, notably at the [ hand raise ] and SES businesses, but margins remained under pressure. The important thing to explain here is that the traditionally higher-margin business for sheave liners and ski foils in the skiing tourism industry came largely to a standstill. As a result, the corona related lockdown with the skiing season in Austria this year being reduced to local visitors only. With lockdown conditions for sporting events being relaxed today as we speak, we hope to be able to catch up with maintenance of skiing lifts over the summer. Again, on a positive note, order intakes are improving with the order book exceeding the level of Q1 2020. Regarding Sempermed on Slide 11, we have probably become accustomed to the exponential growth charge for revenue and EBITDA over the past year, but I would like to make a few key observations going forward. Firstly, raw materials headwinds, both in terms of prices and availability, combined with global supply chain disruptions, notably in container shipping, have led to an inventory buildup and reduced our operating cash flow in Q1 2021. Secondly, against this backdrop, we managed to improve EBITDA and the operating margin further on the back of operational efficiency gains and production output running on full capacity. And thirdly, for examination and surgical gloves, we completely booked out for 2021, while at the same time, bookings for 2022 are almost completed. So to answer any questions on the future separation from this business, we are still in profit maximizing mode and are cashing in, while the extent of corona-induced demand continues. However, prices reached a plateau at the end of the first quarter, and global supply chains remain difficult. Still, at this point, I would like to emphasize that this development has been clearly anticipated by Semperit management and is reflected in our assumptions for the full year development and consequently also anticipated in our guidance calculations. And with this, I would like to hand over to Petra to take us through the Q1 2021 financials.

Thank you very much, Martin. I'm very happy to be back on board of the Executive Board team and also looking forward to actively shape the ongoing transformation of the company and support the realization of the industrial strategy. Very much in line with Martin's operational overview on each segment, I will keep my comments brief to focus on the key developments. When necessary, I will go into a little more detail on the figures to explain the underlying trend. Let's start right away with Slide 13 on revenue growth by segment, which shows 2 key developments. Firstly, the medical sector is still an extraordinary growth mode, adding almost 150% in revenues to the pre pandemic level last year. And secondly, last year's development of the industrial sector has been turned around and is now in recovery mode, with 2 of the 4 segments, Semperflex and Semperseal, achieving 2-digit growth rates year-on-year. Overall, the industrial sector has grown by 7% compared to the same period last year. This represents a revenue surplus contribution of EUR 8.5 million in Q1 2021 and is very encouraging, considering where we had started in the middle of the first lockdown in March, April 2020. Over the page, we can see how significant revenue increase translated into strong operating profit, with the major trends I've just described for each sector, still very much valid. Firstly, the EUR 115.4 million revenue increase at Sempermed converted into EUR 100.5 million EBITDA improvement, which explains the staggering 54.6% margin. And secondly, both Semperflex and Semperseal also achieved an increase in operating profit, with margins coming close or even exceeding those at pre pandemic Q1 2019, as Martin has just explained. While being fully aware that this level of operating leverage might not be sustainable forever, we are extremely encouraged by the strong and resilient operating margins in the industrial sector. These are not only a sign of economic recovery, but also that our restructuring efforts have resulted in a more efficient organization. On the next slide, I think the 3 charts just speak for themselves. These record high margins for EBITDA and EBIT are way above the targets announced in January 2020. As Martin said before, we will write on this success rate as long as it lasts. On the end -- on one hand, it has helped to improve our balance sheet structure, and on the other hand, it provides the necessary cash to enable and comfortable cash pillar for our transformation steps and look ahead for new strategic growth. And over the next few slides, I will talk about headwinds, starting with working capital management on Slide 16. Compared to Q4 2020, all 3 components of working capital have increased significantly but in very different ways and for very different reasons. Most notably is the ongoing inventory buildup, which most manufacturing companies face right now given the global supply chain disruptions and logistical problems. Searching raw material prices have contributed to increasing inventories. In our case, we are confronted with an unusual amount that's put in transit at Sempermed as we are struggling to get sufficient containers for shipment, which increases overall transport time and has an impact on operating cash flow. In terms of higher trade receivables, this is a direct result of higher revenues. The same applies to trade payables, where we have gained more leverage due to higher business volumes. We are fully aware that the current situation is not ideal for efficient working capital management, with straight working capital getting closer to our 22% cap of the last 12 months revenue, but let me reensure that the entire team at Semperit works very hard and diligently to reduce the current level notably. Turning the page to Slide 17, we present the components of the free cash flow development compared to the same periods in 2019 and 2020. Important to mention is that operating cash flow is still more than twice as high than previous periods despite what I've just said about working capital development, notably inventories. Cash flow for investment remains under control, even though it has included money market funds. As a result, free cash flow is now at an increased level, providing financial flexibility and firepower for future strategic growth. In terms of CapEx, we have spent EUR 10.2 million in Q1 2021, which is largely maintenance CapEx. However, as we have flagged before in March, for the full year 2021, we would expect this to rise more significantly with year-end 2021 CapEx plan to be about twice as high as 2020. Moreover, investment cash flow includes a EUR 20 million investment in money market fund shares that principally can be readily converted into cash. But if for the moment, set aside as our day-to-day cash commitments can perfectly met out of the current cash flow inflows. At this point, I would also like to mention what other topics will affect our cash flow this year. Besides the CapEx plans, we have already repaid the remaining hybrid capital of EUR 30 million, which is already reflected in our numbers. And of course, we had recently in May, the payment of dividend at again approximately EUR 30 million. And also roughly EUR 80 million Schuldschein loan will be repaid in the second half of the year. Finally, in terms of the financial profile, I would recapitulate that we have managed to improve our balance sheet structure and kept our continuing focus on free cash flow generation. Just to provide some evidence, cash and cash equivalents are now at EUR 154 million. This is after having repaid the final EUR 30 million tranche of our hybrid in late March, and further reducing our net debt in total to EUR 15.3 million by the end of Q1 2021. Similarly, our equity ratio is now at a very strong 45.8%, well above the 43.5% at year-end 2020 and our own target of above 30%. With this, we have strengthened our financial framework as announced at the strategy update in January 2020 and can now thoroughly focus on future strategic growth. This provides the right moment to hand over to Martin again to elaborate future -- further on our strategic focus areas.

Thank you, Petra. And let me now conclude with the outlook for 2021 and some highly relevant strategic focus areas, which are on our management's agenda. First, as I mentioned right at the beginning, I'm very pleased to be able to confirm our EBITDA guidance of EUR 395 million by year-end, despite all the raw materials headwinds, supply chain disruptions, and reaching a price plateau we had talked about earlier. This is testimony of both operational efficiency gains during the transformation process, but also our growing business confidence for the rest of the year. We had delivered in full year 2020 as well as in Q1 2021, and we will continue to deliver going forward. As to the strategic focus areas, we have further advanced in our industrial rubber strategy implementation and at the same time, introduced strict cost-saving measures, both in major service functions and through FTE reductions. As you have seen a few minutes ago, revenues in the industrial sector are up, but we still face margin pressure in some of the segments, given ongoing lockdown conditions in Europe in Q1 2021 and the different speed of global economic recovery. Another major strategic focus area, cash position and hence, evolving capital allocation priorities. To start with, as Petra has just outlined, we have done our homework and strengthened our balance sheet with a very strong 45.8% equity ratio and an almost 0 gearing ratio. At the same time, we have repaid the remaining tranche of our hybrid and paid the first dividend since the last 3 years. With this, we feel not only able to meet all the cash requirements for 2021 but also to have sufficient financial flexibility to finance future strategic growth, which is the ultimate hallmark of our new industrial strategy. Finally, I should also mention that we are just in the middle of developing -- sorry, a comprehensive future ESG strategy on which we will update you in due course. And with this, we have come to the end of our presentation and are now available for any questions you might have.

[Operator Instructions] The first question comes from Markus Remis from RBI.

A couple of questions, please. I'd like to take them one by one. Firstly, I'd like to understand better which earnings path you have baked in as regards Sempermed. So would you subscribe to the idea that Med in the second quarter to generate a higher EBITDA than in Q1 based on your statements that prices have peaked at the end of Q1 and that we then will only see a gradual grinding lower of the earnings power?

Well, thanks for the question. As you know, we do not comment on quarterly -- future quarterly results. But everything is basically already included in the EUR 395 million guidance that we gave out of the market. The one thing I would like to add is on the price situation out in the Med business where, as I said before, we have reached a plateau. And from this plateau, over the next 18 months, we're going to see declining price levels.

Okay. On the pricing for gloves, I mean, what is the magnitude of the -- speaking about market prices of the decline you currently see on the market? And is there a difference between nitrile and natural rubber?

You're right with your assumption. There is different market dynamics on nitrile gloves than on latex gloves. So they basically follow different speeds on what I said moving away from the plateau that we have reached.

Okay. And anything you can tell us about market prices, where they're heading or what the pace of decline is.

Well, it's always difficult to basically give precise price indications in such a call, and I'm sure you understand it. But the one thing I would like to basically give to you as an indication is comparing pre-COVID, the prices on the average selling price have quadrupled. And basically, that's the plateau that we have reached. That's the average selling price.

Yes. Okay. Yes, sorry to be persistent. Another question on Med. What -- where would you see the earnings power of the division on a pre-corona price basis, assuming that you would have unchanged full capacity and with all the efforts you've made in taking out costs? Anything you can share.

Good question. But I'm not going to share with you. Please understand that.

Okay. Good. I'll try another one. On the supply chain bottlenecks, you've talked about understanding that you actually have been unable to ship at least in the glove segment from Asia to Europe. Is that a major part? Or is that just an occasional event? And adding to that on the transport costs, is the increase, something which has to be borne by the customer? Or do you have to adjust that higher logistic costs?

You're right that it's currently a very challenging tensed situation out in the market with less and less containers available. And if you catch one, it's significantly higher prices. I'll just give you 2 numbers. Pre-COVID, the container from Asia to Europe was at roughly $2,000. And right now, you pay up to $15,000, $16,000 for a container, that is -- I mean, this is exceptional peaks that I just indicated to you. But there is some -- I mean, it depends on availabilities. The question on -- if we hand over those additional costs to customers, always depends on the incoterms with the customer. So again, it's -- I can't go more into detail here because it's, as I said, depending on specific customer incoterms.

Okay. But just an indication, in most cases, is it passed on? Or is it -- what does the majority stick with you?

That is -- I think that's a good assumption, yes.

Okay. Final question then to Ms. Preining -- Mrs. Preining. The term that has been given to your contract about 1 year. Can you maybe shed some light on why this duration? Is it enough time to find kind of a success? Or is there any specific consideration behind the 1-year term?

Thanks for the question. As you know, it's my 13 office today. And I will not comment on any future plans I'm having. There will be a search process anytime soon. But this is all I will add at this very point. Any interim contract is limited with 12 months, as you know, at the C level.

Maybe I can jump in with one additional comment here. The Supervisory Board will run a search process. And at the right moment in time, Petra will decide if she wants to be part of that process or not.

The next question comes from Christian Obst from Baader Bank.

First of all, order intake, can you give us some indication -- order intake by segments? Of course, I think that especially Sempertrans was a little bit lagging there. But nevertheless, can you give us some details down the segments? This would be my first question.

As you know, we don't disclose those order intake details, but the general assumption is as follows: Semperflex significantly stronger than last year. Sempertrans is lower, but with a strong pickup in a moment. And this is long lead projects. So here, it's -- by nature, it's a different business. Semperform trades basically at last year's development. Semperseal due to its high construction market exposure, stronger than last year and Med speaks for itself.

Okay. Then I have a question concerning this money market fund. If I'm right, I find it and other are financial assets or some kind of a long-term asset, shouldn't it be some kind of a cash equivalent and then you are already in a net cash position, right? Or what is the idea behind putting it into the other financial assets, long-term assets?

Thanks for the question. You have to -- there's 2 points you have to note. Number one, the reason, the most important one is that we currently, as I also said in the notes in the speaker notes. We currently have it not included in our liquidity cash management. So for the time being, it's -- we can fulfill our day-to-day payments very easily without. And therefore, it's based on the standard it has to be shown as we show in the Q1 results. That's the regulatory mechanism.

Okay. But in the end, you can divest it from one second to the another, right?

Yes. Correct.

Okay. So in the end, it's some kind of liquidity.

In the end, it's kind of technique, if you like.

Yes. Yes. Okay. Okay. Then you invested in a new line in glove line in Malaysia, is this line currently fully running?

No. It's still in the process of [Technical Difficulty] the completion of T7 that's going to happen in -- and we're going to take it on stream in the fourth quarter.

In the fourth quarter, okay. So this means then you have some additional volume effect on the positive side against the declining price effect, which will further go on in the second half of this year?

Be careful here because the intention of these new lines is to take old lines off stream. So basically, it's a shift of production. So don't expect a significant increase in our production output.

Okay. And then I have a question concerning the -- is there -- when it comes to operations in Malaysia, is there anything possible to increase product over? I think you stated the last -- in the last conference call, as we talked that there is not much more of an improvement to be expected, is that right? So to keep the current operational excellence is more or less the best one can achieve. Is that right?

That is the right assumption, yes.

Okay. And concerning working capital, thank you for all the details you have given. This means that we can also think during the second quarter and going maybe into the second half of this year that we will see working capital to sales in the magnitude well above 20%, at least, right?

This is clearly the aim to improve the ratio [Technical Difficulty] easily mean that 22% is not the level we feel comfortable with. But it will very much depend on the logistics situation going forward, but we definitely aim to reduce this ratio till the end of the year.

And the last one is, when it comes to your customers in the Med business, do you see that they are also building up [ metal sleeves ] any kind of stocks? This is the first question. And then the second one is in areas with high vaccination, be it Great Britain or Americas, do you see there a massive decline in demand?

That's an interesting question. The local buildup of stock depends of the country. So there's countries where we currently do see a build-up of stock, for instance, in England, in the United Kingdom. The NHS has significant -- placed significant orders. So they go on stock, and this is against the vaccination success that they show. It's a mixed picture. It's a little -- it's basically different wherever you look at one at the moment. There's no clear picture at the moment for us.

Okay. That's because this -- that's of course, is very interesting, looking into the future. How people really behave? Do they need more gloves for the entire time? Or do they really draw down everything when the vaccination is done, but it seems a little bit difficult going forward.

[Operator Instructions] There are no further questions at this time. I hand back to Martin Fullenbach for closing comments.

So thank you very much for joining today and for your questions. Again, it was the best quarter of the Millennium, and I'm happy to get back to you on August 19 with the Q2 numbers. Thank you very much. Stay healthy and speak soon. Bye-bye.

Ladies and gentlemen, the conference has now concluded. You may disconnect your telephone. Thank you for joining and have a pleasant day.