Semperit Aktiengesellschaft Holding (SEM) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and a very warm welcome from Vienna. It is my pleasure presenting to you the half year 2022 result of the Semperit Group today. They are, in fact, a great testimony of our operational resilience in difficult times. With me in the call is our CFO, Petra Preining, who will take you through the financials in a few minutes. Afterwards, both Petra and I are available for any questions you might have. Let me start at Slide 3 with the operational highlights of the first half of 2022. The performance of the industrial sector was definitively outstanding, both in terms of its operational excellence and growth across all segments. However, as expected, after the end of the corona-induced special cycle in medical productive class, the negative effect of the decline in the medical sector had a stronger impact. The result of the industrial sector for the first half year were well above the comparable period last year as well as the same period of the pre-corona year, 2019. As we had good momentum in sales volumes and order book levels and this against the backdrop of higher input prices and first signs of an economic downturn. In turn, the prices in the medical sector reverted towards the pre-corona level with the previous massive inventory buildup throughout 2021, now reflected in a lower demand for the entire [ glass ] market. As the war continues into Ukraine and the Russian authorities started to weaponize gas delivery to Europe, we had to prepare for contingency planning in our European sites, and we'll provide you with an update later in this call. At the same time, prices for raw materials remain at an elevated level and supply chain disruption continue after the lockdowns in China during the second quarter. So overall, for the time being, we can say hesitation is tight, but under control, thanks to our great recruitment team. On a very positive note, I am delighted to report our new EUR 110 million organic growth investment into the world's first carbon-neutral host production facility in our Czech Republic factory in Odry. And I will provide you with more details in a minute. At the same time, we inaugurated our new Semperseal U.S. plant in the second quarter and are very excited about these 2 new organic growth initiatives, which we set alongside ongoing inorganic growth efforts. Over the page, let me first elaborate on the planned expansion of our hydraulic hose facility in Odry, as this will be a significant step-up, both in terms of growth and market share for Semperflex. Production capacity will be increased to a total of 200 million meters of hose per year, which from today's point of view, will further improve our position from currently #3 to #2 globally. As Semperflex is now an accelerated growth mode, we feel it is the right time to support future growth through this major investment with CapEx being front loaded between 2023 and 2027, but first operations starting already in early 2025.  But here there is more to be said about this new investment as we outline on Slide 5. From a strategic point of view, we address the issue of supply chain as we will be even closer to our European customers and hence, can ensure faster delivery, while at the same time, reducing carbon emissions and lowering transportation costs. Importantly, from an ESG perspective, the new host production will be powered exclusively by renewable energy. While the overall water consumption at our site in order will be reduced by 30 percentage. As this is the most modern hose production facility in the world, the high level of automation implies not only productivity gains, but also higher quality. In terms of workforce, it requires less full-time employees overall, but also less physical work. Hence, it will be gender-neutral. As a stand-alone operation, the EBITDA margin of the new production facility is planned to reach up to 40%. With this, let me turn to the operational update and start with an overview of the industrial sector on Slide 7. Both in terms of revenue growth and EBITDA improvement, the performance of the industrial sector was outstanding, and this on a continuing basis quarter-after-quarter. The comparison on this chart of pre-corona 2019 revenues and in the second quarter revenues and EBITDA with our latest results in the first half of 2022 show significant improvements in top line growth and profitability. Revenues were up by 39% year-on-year and EBITDA by 64%. The largely driven by high demand and price increase at Semperflex but also supported by Sempertrans given growing demand in the mining industry. I am convinced it is also worth mentioning that, as you can see, especially when comparing the development from quarter 1 to quarter 2 this year, the proactive price increases implemented in order to defend the margins are bearing fruit. On the other hand, having said that, we certainly see a further increased margin pressure in the second half of this year from high energy costs, but also raw materials and transport costs remaining at an elevated level. I will say more on our mitigating efforts on energy savings later on -- but suffice to say here that further sales price increase are most likely to adversely impact sales volume in half 2 2022. Also, when talking about customers' behavior, we expect in the coming months and quarters, higher focus on the working capital management and trust reductions in their inventories.  Starting the segment update with Semperflex on Slide 8. There is clear evidence for consistently improving performance quarter-after-quarter, as you can see on the top chart. Top line growth was up by 52% year-on-year and EBITDA by 78%, a record result on the back of not only proactive price increases but also higher volumes and efficiency gains through economies of scale. I'm particularly proud of the consistently improving margins, which make the segment again to the industrial sector's star performer. At the same time, I should mention that historically high order book is now being processed, and we would expect lower absolute levels going forward. On a long-term basis, however, our new EUR 110 million investment is clearly earmarked to continue with our market leadership and high profitability. Turning the page to Sempertrans on Slide 9. We see an expected positive upward trend in revenue and EBITDA in quarter 2 2022 as the mining industry has recovered given higher commodity prices, which led to a large replacement project. These results were achieved despite headwinds from [ steel ] contested board globally, which partially delayed revenue recognition. Looking back over the last 3 years, the order book at Sempertrans is at its highest level, and we managed to improve both top line and profitability. On the back of partial sales price increases, margin were up to 12.8 percentage in quarter 2, 2022, almost 4x the level over the same period last year. Further evidence that our special management attention has paid off. On Slide 10, the market for Semperseal has been more difficult, which limits our pricing power and ability to recover costs. Another part of the explanation is that volumes were impacted by the discontinuation of our Russian sales activities. To give you an indication, in contrast to other segments, sales to Russia, Belarus and Ukraine still accounted for more than 5% of the segment's revenue in the first half of 2021. However, with a better order book and top line growth by 27% year-on-year, also supported by the necessary price increases. The EBITDA margin recovered to 10% in quarter 2, 2022, which is the third consecutive quarter for margin improvement.  As mentioned before, one highlight of Semperseal was the ramp-up of our new production site in the U.S. with the second line following closely in early quarter 3, 2022. The U.S. is a strategically important market for us, and we feel encouraged by the strong local demand for our products. Finally, for the industrial sector, at Slide 11, Semperform achieved a strong top line growth through proactive price increases to offset cost inflation with margins in quarter 2 2022 at 18.3 percentage, well above the same period last year. Going forward, the historically strong order book is encouraging and supports further revenue growth. However, the performance at different business units was a mixed bag, with handrails being stable year-on-year and offsetting the impact of the China lockdown. While demand at special application was higher and the engineered solutions lower compared with the same period last year. Completing the segmental review with Sempermed at Slide 12. From our perspective, the corona-induced special cycle has clearly come to an end. Additionally, we currently witnessed a reversal from the worldwide excessive stockpiling in 2021 and would expect a more normalized situation in 2023. As we expected, resulting from the surplus capacities and consequently formed a strong decline in selling price, revenue were down by almost 50%. EBITDA fell by 9 percentage year-on-year with lower margin of 2.5% in the single [ quarter-on-quarter ] 2 2022, heavily impacted by the strong increase of raw materials and gas prices, while at the same time, higher inflation also drove up [ personnel ] costs. While the order book is still above pre-corona level, we are now looking ahead to a new normal in 2023 and remain committed to our strategic landmark decision, including a separation from the medical sector, as previously announced. Having spoken about the separation of the segments, in terms of operational challenges, there is a major topic, which affects all our segments that I would like to address on Slide 13. The question of energy crisis, be it simply the result of the recent years developments or stemming from the current crisis to the Russian-Ukraine war. Energy consumption has been one of the focus points of our ESG strategy. And it is in its relevance accelerated following the Russian political blackmail of reduced gas deliveries to Europe. You see here 3 blocks of different measures that we apply to mitigate this impact. First, the ambition for more energy efficiency has been a vital pillar of our ESG strategy, 30 by 2030. This not only means the definition of specific measures, but also the accurate reporting design or, for example, also offering internal consulting service for the preparation for worst-case scenarios such as the possible blackout. The second block refers to the processing of the measures as these energy reduction measures are part of the management toolkit, it's regularly reviewing company performance. We can also shift the focus according to changed economic, [ meteorological ] aspect. That gives us a high level of flexibility and especially these days enables us to react to the current development. And finally, very concretely, the alternatives for gas burners have become a more pressing issue to safeguard ongoing production at all of our European sites in case of a full Russian gas stop. Therefore, we have already installed or are in the process of planning alternatives for gas burners at our sites in Austria and the Czech Republic as well as in Germany. With this, I have come to the end of the operational review and hand now over to Petra, who will take us through the financials in more detail.

Thank you very much, Karl, and good afternoon to all of you from my side as well. Let me start with the financial highlights and the key focus areas from the CFO's perspective in the first half of 2022 on Slide 15. Firstly, I fully agree with Carl's assessment that we have achieved an outstanding performance in the industrial sector, and this despite the adverse external market shocks, but faced at the same time, the end of the corona-induced special cycle at the medical sector. With this in mind, proactive working capital management remains one of the key focus areas as cost inflation continues. This is one of the areas where we can make a difference as the company's top management. That is the case in terms of proactive pricing policy and cost reduction measures. The special attention we paid to is to ensure stability, the quality of the order book and protect margins. Given macroeconomic developments and the strong U.S. dollar, cash management and U.S. dollar investments is another major area, which keeps it busy in what I carefully monitor. As you might know, regarding FX impact, we had U.S. dollar long on group level. The bottom line, we therefore profit from the strong U.S. dollar on one hand, operationally, but as well to early and smart investments in U.S. dollar funds. In addition, let me point to another important aspect for me as the CFO. We have gone through a massive restructuring program while facing a once in a lifetime global pandemic. We still maintain a strong balance sheet despite significant cash outflows for investment, the dividend payments to our shareholders in 2021 and 2022 as well as debt and hybrid capital repayment. In many ways, this balance sheet and high cash position should help to weather the storm, while also supporting our strategy at the same time going forward. As to the outlook and first signs of an economic downturn, we confirm our guidance for 2022 as provided in March. And this is under the recessionary scenarios in Europe by the end of this year. High energy prices with increasingly limited availability and the continuing impact of geopolitical conflict on supply chain, including the possible Taiwan impact. Karl will elaborate further on those impacts when going into details about the outlook.  With this short introduction, let me turn to the financials and start with revenue development in the first half year of 2022 on Slide 16. While we are very pleased about each of the Industrial segment achieving a double-digit top line growth. Revenues declined at Sempermed at EUR 194.4 million or 49.5% year-on-year. All 4 industrial segments reached an aggregated growth of 38.9%, which on a stand-alone basis, is a very impressive top line development against declining market conditions. On a group level, the outstanding performance of the industrial sector accounted for 65% of group revenues in the first half 2022, could not fully offset the significant decline at Sempermed, a very different revenue composition compared with last year. When then looking at the same bridge chart for EBITDA on Slide 17, it becomes clear that despite the excellent performance of our industrial sector, Sempermed's profitability suffered compared with the great performance of the previous year. In terms of the industrial sector, Semperflex achieved a EUR 20.6 million year-on-year improvement in half year with a strong 27% margin, while on Semperseal suffered a small decline in EBITDA. Among the other industrial segments, Semperform also achieved a double-digit margin of 15.4%, while Sempertrans and Semperseal came close to 10%. On an overall base, I would like to mention again that the strong U.S. dollar additionally supported our results. Our group EBITDA margin is still at the comforting 13.2%. It is, of course, way behind the 37.5% achieved in the first half 2021, which is another sign to what extent the corona-induced special cycle at Sempermed has affected the group's overall profitability. The pendulum from the special cycle at Sempermed is now swinging back and will weigh on the expected results in the second half of the year. When looking at the moving parts of operating performance at Slide 18, it becomes clear that declining price effect at the medical sector had the most significant impact, which was only partially offset by the higher sales prices in the industrial sector and the higher volume effect. On the other hand, taking another point of view, if you simply plank out the external market effects on the sales prices in the medical sector, we were clearly able to improve the result year-on-year and mitigate the negative cost impact. On aggregate, the price and volume effect on sales accounted for a negative EUR 90.2 million, while all the other factors reduced first half 2022 EBITDA by a further EUR 82.1 million. Cost of materials, energy and logistics are largely external factors. Although in each case, we were trying to make a significant difference. Over the page, we are consistently tracking key financial KPIs over the last 4 years, and it simply becomes obvious that A; 2020 and 2021 have been exceptional years, which is difficult in terms of like-for-like comparison. And B; Earnings in the first half 2022 are still significantly above those at pre-corona level in 2019. At the same time, the free cash flow is lower compared to the same period of 2019, largely due to working capital effects and the reduced operating cash flow following the reversal of the corona-induced special cycle at the medical sector. One point to mention in this respect was the tax payment of EUR 32 million, being clearly higher in the years before for the Sempermed-induced exceptional good result in 2021. This is, by the way, also staying at this level until the end of this year. In turn, CapEx is at an upward trend, both due to higher spending for growth and maintenance. On Slide 20, you can see the quarterly CapEx development. The largest share for the medical sector comes from the value maintaining investment in P7. On the other hand, we have also recorded increasing levels for the industrial sector, where, for example, Semperseal received a high CapEx in 2021 and 2022, given the ramp-up of the new production site in the U.S. However, going forward, growth investment in the new host production facility in Odry will show up more visible. Overall, we now expect CapEx in 2022 to be above the level of the previous year with EUR 28.4 million in first half 2022 comparing with EUR 18.8 million over the same period last year. And once again, forward-looking, we are seeing now an increasing share of growth projects. Turning the page to free cash flow at Slide 21. The strong decline in operating cash flow due to the reversal of the COVID-related special cycle in the medical sector becomes obvious. On a pre-tax basis, the operating cash flow was impacted by inventory buildup and by the tax payment amounting to EUR 32 million, which clearly exceed last year's level 2. At the same time, the investment cash flow increased due to higher CapEx, resulting in a negative free cash flow of EUR 5 million compared with a plus EUR 167 million over the same period last year. [ Fiber ] adjusted on a pre-tax basis, free cash flow in the first half 2022 was in a positive and amounted to EUR 28 million compared with EUR 183 million last year. As I had outlined before, working capital management is one of the key priorities for me as the CFO. And the chart on Slide 22 underlines this clearly. Despite our consistent effort in managing working capital on a tight and efficient basis in previous years, current economic circumstances, notably supply chain constraints, but also higher costs for raw materials and components has resulted not only in higher inventories, but also trade receivables, [ just the straight ] payables. Thus, we have proactively decided to accept this in order to safeguard ongoing production. The comparable for 2021, 2022 clearly shows that the war in Ukraine accelerated previous cost inflation and supply chain disruptions since the start of 2022. With Q2 2022 going for the first time in 3 years to above 20% trade working capital as a percentage of last 12 months revenues since our successful optimization efforts. This is still below our general long-term ceiling of 20%, 22% that allows for different eventualities. However, I also want to clarify that we do not see this current level as our target ratio going forward, but a strong focus and work on this to reduce it again. Finally, I'm delighted to be able to present another quarter of a very strong balance sheet with a net debt to EBITDA continuing to be below 0, a net cash position of EUR 106 million instead of a net debt and an equity ratio of 57.4%. In terms of liquidity, we had cash and cash equivalents at EUR 193 million as of June 30, 2022, and unused credit facilities of EUR 90 million. In addition, the corporate [ June ] time loan amounted to EUR 87 million at the end of June, while paying back the nominal value of EUR 34 million already in July. In May, we paid EUR 1.5 dividend for 2021, amounting to a total payout of EUR 30.9 million to our shareholders. With this, I have come to an end of my part and hand back to Karl for final remarks.

Thank you very much, Petra. And let me now complete the presentation with our management assumptions and outlook for 2022 at Slide 25. While we can still point to an outstanding performance of the industrial sector in the first half of 2022, we clearly see clouds darkening in the second half of the year through escalating geopolitical conflicts, not just the Russian aggression in the Ukraine, but also China's war games against Taiwan. With all the economic implications for searching energy costs, continuing supply chain constraints, high inflation and a strong U.S. dollar. While the second half of the year is seasonally weaker, and we have a number of planned regular maintenance stop, it is designed of contracting economic activities, combined with the looming energy crises in Europe that lead us to confirm the outlook for 2022 as originally published in March. In addition, Sempermed remains under strong pressure, given not only the reversal of the excessive stockpiling, but also continuing uncertainty with regards to volume and price normalization. While we have talked in great detail about our mitigating efforts today, we work currently on the assumption that market dynamics are most likely to differ from previous supply and demand projections, given that cost inflation is accelerating throughout the industry and growth is most likely to slow down even further. Against a potential decessionary scenario in Europe and perhaps even the U.S. in 2023, we have prepared not only with a strong balance sheet and high cash position, but also a more slim, agile and efficient organization, which should help to weather the storm. With this, we have come to the end of our presentation, and Petra and I are now delighted to take your questions.

[Operator Instructions] The first question is from the line of Markus Remis from RBI.

Congratulations on a strong industrial performance. I have a couple of questions, which I would like to take one by one. Firstly, I'm trying to get my head around your full year outlook the same margins intact. Can we be a bit more precise? Does that mean EBITDA will be below EUR 100 million?

Hello Remis, Petra Preining speaking. Thanks for the question. We have, of course, expected this question given that very strong first half. You have to understand that the current market situation is affected by very high uncertainties. This is not only by the known effects given the energy price, but also the energy supply in Europe. So here, we see very high uncertainty in the market. We also ask everybody else, might be affected by a recessionary scenario in the fourth quarter. And additionally, we also, as you know, are prepared to enlarge our portfolio with M&A transactions, which, as you also know, might come at certain costs or on our corporate cost, the corporate cost part might be affected by certain transactional expenses for the second half. I think this summarizes the current situation quite well. Please understand that we cannot go any further at that point. But we definitely will give you an update in Q3.

Okay. But when you say below the EUR 100 million to EUR 120 million range back then existed and you will be below that in the end means I don't know, EUR 90 million, EUR 95 million EBITDA, which I'm actually struggling to reconcile. And of course, I fully get the point of rising corporate costs. I would also not be surprised to see Sempermed again, turning into loss-making territory given the trajectory you've seen on top line and over capacities and so on. But still, I mean, [ lags incredibly strong seal ], which is late cyclical and has long lead times. So I don't see a reason why that should kind of end abruptly, given that it actually has just started to kind of show the benefits of the order intake of recent quarters in the Q2 top line. [ Okay seal ] forms sequentially weaker in the second half, but to me, it seems there's a lot of cushion baked in, also material costs are coming down. I get the point on higher energy costs, but I'm struggling to get to something like EUR 20 million EBITDA in the second half unless Sempermed actually takes a deep dive earnings price.

We have described it in the slide second Mr. Haider has taken it into his notes already. The situation with [ med ] that you just described it is also. It's -- you have to basically understand that in 2021, the market was literally hamstering for glass. So one has to understand that 2021 and 2022, if you like, can be seen as 1 year. So the current situation we see at Sempermed is highly affected by the overstocks we still have in the market, not only us but the entire industry. So here, we see an effect that this will take until -- or will take still some months to be resolved. And because you have touched on the cycle of our industrial segment, you also have to understand that where we see currently and what we are very happy about on Semperflex. Semperflex is an early cycler of the portfolio. So any effect we see, we will see in Semperflex first and then the others to come. You also know that Semperflex is the biggest contributor currently, at least in 2022. So the effect then will also have some impact. But in general, we see as I've said earlier, the effect on the volatility of the market, the gas availability, especially in Europe, the input cost, as described, but as well potential transaction cost of -- then visible in corporate costs in the second half.

Okay. Well, let's leave it here then. On the Med segment, I mean, first question on pricing. In the report, you mentioned the normalization of prices. I mean, is that to be interpreted as like pre-COVID levels? And would you see further downside to prices given the supply-demand dynamics you're describing?

What we currently see is that clearly, a normalization on the ASPs, as we call it, we expect that this will also be resolved. At least it will take till the overstocking is resolved. But as you have seen or read for sure also from our competition, this is a very volatile situation. We also don't know any potential other pandemic effects still to come. But currently, what the -- our expectations are is that we reach the pre- COVID ASPs earlier than expected by the end of the year.

Okay. So you still have market prices above the pre- COVID level then at the moment?

Yes. Yes, we do have.

Okay. Good. I mean on the divestment process, just looking in [ Top line ] for instance, they've substantially scaled back their expansion plans. How difficult is it to find a buyer at the moment? I mean [ Depomed ] could well end up, I guess, in negative territory. I mean just looking at where it was before the onset of the pandemic. I understand you've done a lot of restructuring, but I mean the trajectory definitely points south. So is there kind of interest for the asset at the moment? And if you could remind us of the book value by the end of the first half.

Okay. And may I answer this question. Of course, the industry is in a different cycle than 2 years ago. And from that point of view, the high circle has ended and the current market dynamics in the market for examination, productive class. And so we as Executive Board are evaluating the next steps towards the separation. And please understand, I will not give you a book value for our business. And I think that's it.

Okay. Last question before I get back into the line on the alternative energy sources. What's exactly meant? It seems you've been already quite advanced in the switch from gas to alternative sources. Can you be the alternative for gas burners. Can you be more specific what that means to which extent that is also reflected in CapEx? And then I appreciate the CapEx guidance for the current year. I understand above the prior year. Is that -- or is that already including the -- some spending on Odry on the expansion? Or will that start to kick in as of next year?

So alternative, let's say, energy sources. Our gas burners are creating steam for our operations. And we have early enough decided to switch Wimpassing and Odry in Czech Republic to oil burners combined burners, gas and oil. Of course, [ Vinda ] gas is stopped. We have the opportunity to produce further with our oil burners. So where we are, of course, the delivery of the equipment is a little bit delayed, as you see. But overall, the equipment is installed and beginning September, mid of September, our equipment is ready and in Austria and in Czech Republic. In Germany, we are evaluating all options as we speak and are implementing them as fast as possible.

I'll take the second part on the CapEx, the necessary CapEx in relation to what Mr. Haider said described is, of course, included in the guidance we have already given to you today.

Okay. When you say above the prior year, the EUR 56 million is -- can you be a bit more kind of at least frame it into brackets? Is it 60% to 70% or higher than that?

Above... Yes, apologies, it will be above. It will not be in the amount of tens above, but it will be above.

Next question comes from the line of Christian Obst from Baader Bank.

Maybe first, some kind of clarification concerning your slide deck. So normally, you are providing us with also quarterly numbers, Q2 numbers on the Slide 30, 31. But now we don't have Q2 figures included there in the segmentation. And on Slide 31, everything ended in this 4Q '21. Is there any reason for that? This is the first question. And the second one is; in the report on Page 2, if I combine everything, the EBITDA of the segment, I come out with EUR 78 million, and you have included there EUR 68 million. So there's some kind of a EUR 10 million gap. Maybe can you explain something there?

Mr. Obst. Sorry, we're just baffled by looking at the appendix and realize that we will still owe you that quarterly split. Can you do me a favor? Can you repeat the second part of your question?

When I sum up the EBITDA of the segments on Page 4 in your half year report. So on the first line, the blue line there. So there are some...

[indiscernible] That's corporate.

Yes. But the EBITDA here is EUR 68 million. And when I include everything, I come out with 78. And the corporate [ average ] is minus EUR 15 million in the first quarter?

So we refer to the half year report to the official one, but we will check the numbers, we'll come back to you. In case there's a typo, we'll double check. But the size of it, it sounds like this is corporate. Can you go on to the next question, we'll come back to that.

Coming to the activities in implementing [indiscernible].So you have ramped up new lines and to saying that the prices per glove is still above pre-COVID level. So of course, cost increases and you have to work on these high stocks in the market. But aren't you able to close down your older facilities to reduce the cost level -- so because in the second quarter, you are moving into the negative EBIT territory. And this is, of course, is not a very, very good situation. And so you might have to fight against that. And I think you should close down these old lines.

May I answer this. Of course, we optimize our line loading according to the most modern and most cost effective, let's say, equipment. And this we're doing and of course, we reduce our production cost on this.

That means that you are able to come back towards breakeven on an EBIT level in the second half? Or have you already optimized everything in the second quarter?

Here, we are not giving you a guidance on this. You heard my colleague, Petra about the average selling price, where it is. And therefore, the second half of the year will give us quite some challenges.

But I'm only asking what are you doing operationally with plants in Thailand and Malaysia.