SGL Carbon SE (SGL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the SGL Carbon Investor and Analyst Conference Call. [Operator Instructions] I would now like to turn the conference over to Torsten Derr, CEO. Please go ahead.

Yes, Stuart. Thank you very much. Can you please move on to Page 3 of our presentation. Yes, welcome to SGL Carbon's conference call for investors and analysts on the results for the first half year and the outlook for the full year 2020. I'm hosting this call together with our CFO, Michael Majerus. We will also be sharing the Q&A session at the end of our prepared remarks later on. Since this is my first call as the CEO of SGL Carbon, I would like to take a few minutes to share with you some information about myself, my management style and what my first thoughts are after 10 weeks at SGL Carbon. I was born and raised in the Northern German City of Bremen, where I also studied and completed my Ph.D. in Chemistry. I started my professional career at Bayer as a Laboratory Manager. And in total, I spent 10 years at Bayer in various roles. Followed by another 10 years at Lanxess in different operational and administrative positions. Most recently, our CEO of Saltigo, a subsidiary of LANXESS AG, which manufactures precursors for pharmaceuticals and agricultural products. Overall, I have 23 years of experience in technology-focused industries, of which 15 years were with P&L responsibility. SGL Carbon and I are a good fit because I know how to manage technology-focused businesses with an appropriate cost structure and a clear focus on market requirements. Please move to the next page. Over the last 2.5 months and even prior to that, I took every opportunity to learn everything I could about SGL Carbon. Due to corona, the process of getting to know the company was, of course, very different from what I imagined it would be. I had hope to have seen most of the sites by now. But instead, I talked to many, many people in person over the phone and also via video conference. My first impression is that SGL Carbon has many strong points, some of which are listed here. But you know as well or even better as I do, that SGL has repeatedly disappointed capital markets expectations. And that COVID-19 and its after effects will be a new challenge we all have to deal with. Essentially, SGL Carbon's profitability level is too low and we have to identify how we can lift our earnings. I also get the feeling that administrative structures and the processes are a bit over engineered for a midsized company like SGL Carbon. Next page, please. To address this, I have developed over the years very simple but clear principles for how I manage businesses entrusted to me. This is business first, keep it simple, deliver on promises and act fast, think different. These guiding principles will help me and the organization to focus on change. Over the next months, I will explain to you that what these principles mean for managing SGL Carbon. Next page. COVID-19 forces all of us to review our past assumptions. After COVID-19, we might face new business normal. We are in the process to analyze our business market by market. What I can say right now while the electronics industries and the Asian markets have already recovered, automotive might take a bit longer and aerospace is expected to need 4 to 5 years to reach 2019 levels again. Our new planning will be available in Q4 2020 and this may or may not have an impact on our strategy going forward. But independently from market developments, SGL will have to improve its setup. I would like to simplify the structures and streamline the processes. We are already analyzing the cost structure of every function, every business and every site. Based on these findings, we will identify measures that will lead to increased and sustainability profitability. Some measures will include much more direct P&L responsibility in the business, other measures focus on rightsizing and cost optimization of corporate functions providing services to the business. Our goal is to achieve long-lasting financial stability and financial success with SGL Carbon. We will keep the capital markets informed on our progress. But for now, I would like to hand over to Michael to present the figures for the first half year 2020.

Yes. Thank you very much, Torsten. And first of all also welcome from my side to this conference call. As usual, I will go through the market financials. And let's start on the Page 8 with our Composites - Fibers & Materials division, CFM. As you might remember, at the starting of this year, the first quarter was quite good. So we were able to turn around the business from negative fourth quarter to positive first quarter in this year. However, then came corona, starting with the lockdowns in March and CFM was heavily affected due to several things. One were, of course, to-date the lockdown measures [Technical Difficulty] partially by Germany as was however customer related and here mainly due to the Automotive customers [indiscernible] because it was half of the [Technical Difficulty] roughly is Automotive business. And so this was a significant effect. So what are the main figure? The sales was down in the second quarter by 22%. EBIT was negative, however, only slightly negative. And as you can see, accumulated, we still have a slightly positive EBIT, which is more remarkable because the company who was heavily affected was our joint venture, Brembo. The 2 factors, one was, of course, that the Italian side is situated in Northern Italy, which was, as you know, the hotspot for the coronavirus. And the other reason, our German site was here affected by the shutdown of European automotive customers. So therefore, we think they managed like reasonably through the crisis. If we look into the cumulated figure for the first half year, revenue was down 15%. Strongest decline was in our market segment, Textile Fibers, but this was not a surprise. This was due to the capacity reduction we initiated already last year. We took out 2 acrylic fiber lines out of production and convert another 1 to precursor production. So therefore, this sales reduction was expected. The corona-related negative development, as I already mentioned, took place primarily in the Automotive and, of course, to some extent in the Aerospace. However, as you know, the Aerospace is by far not that big compared to the Automotive, our business. We complete -- other development was on the Wind Energy sector. Here, we got significant increase our revenue. We doubled this compared to the previous year's figure and it was also stronger than initially expected. And in our last market segment, Industrial Application was relatively stable. The EBIT, as I said, was affected by the slight loss in the second quarter, cumulated, nevertheless, was roughly EUR 2 million positive, despite the fact that we had, in total, EUR 4 million lower at equity contribution from our joint venture. This is 50% of the net [Technical Difficulty] share in this joint venture and this is shown here under our EBIT line. ROCE was negative. You might now wonder how come that was a positive EBIT, you have a negative ROCE. This is a more technical point because we always calculated on the last 12 months. And as you know, the third and especially fourth quarter last year was highly negative, and therefore, this is still in the cumulated figure. And that's what we expect. Now let's move to next page, our other division, Graphite Materials & Systems. GMS, also they were affected by the corona pandemic in the second quarter. Also here we have serval legally related shutdowns in India, in Italy and in Spain, especially and also some weaker business from our customer coming from the corona situation. So in the second quarter, revenue was down by 23% and EBIT down by 47%. As you might remember, GMS, as it was our fixed cost infrastructure and of course, lower volume is over proportionately, resulting in lower profit. If you look at the cumulated figure for first half year, sales was down by 21%, and this related to the declines in all market segments. We expect Semiconductors, which was continuing to grow in the low double-digit rate. The EBIT also for the cumulated 6 months was more than proportionately affected, down 51% from the record level of the prior year. One effect was coming here from IFRS 15. That is something I alluded to already last year, it's a new revenue recognition standard for customer-specific products, primarily related to our Transport and Automotive business. Last year, we had a positive effect in IFRS. This year was declining where we had a negative effect. And this alone contributed to EUR 9 million profit erosion year-over-year. And as I said, the rest is mainly related here to the lower sales in all the other market segments. Automotive & Transport however was stable. And the reason here was that we had to ramp-up process last year, so we were not on an optimal cost level. So therefore, we could improve it this year so that we could compensate the overall market situation. Now let's move to Corporate, not much to report here. Also here, sales revenue declined by 21%. That has, however, nothing to do with corona. The reason was that we had to bring services for divested business in the last year, which faded out this year. So that was the main reason here. And EBIT was stable on a year-over-year. Now with this, I will look at the next page on the total group figures. Revenue overall declined by 19%. EBIT went down by 71% to EUR 10.8 million. And net financing result improved. You can see here it's improved from roughly minus 19% to roughly minus 16%. In essence, 3 reasons or 2 reasons for it. The first one is the absence of interest expense for the 2015/2020 convertible bonds, which was repaid already last year as you might remember and lower interest rate for pensions in the current year. On the other side, we had a negative effect, which was, however, overcompensated by the 2 positive effects mentioned. That was the negative fair market valuation of the redemption option of the corporate bond. The reason is that this option currently has no value because a refinancing with new bond would result in significant higher interest rate. And therefore, the value of this option is currently 0 that's the reason for it. And in essence, as a result of all this, we had a lower net result in total minus EUR 14 million compared to plus EUR 10 million in the previous year. Now let's move on to cash flow on to Page 12. As results declined, on a year-over-year comparison, cash flow strongly improved. You can see it here, cash flow from operations increased from EUR 15 million to almost EUR 41 million. Main reason is here, development of working capital. Normally, we have a significant buildup in working capital over the first 6 months. This year where it was a stable situation, which was, of course, partially driven by intended measures from our side. However, also partially driven of, also by the overall market environment and declining sales. The capital expenditure was another reason. You see we had a negative EUR 34 million last year, and this was only EUR 20 million. And of course, in the crisis, it's important to keep liquidity, and that was also the reason that we lowered CapEx and pushed back some expenditures to preserve liquidity in account of uncertain environment. And as a consequence, our free cash flow from continued operation improved from the minus EUR 10 million to almost EUR 27 million. The free cash flow from discontinued operation was slightly negative, minus EUR 2.3 million. This was related to a tax payment of the divested graphic electrode business for time periods where we were the owner of that business. And the previous year figure the minus EUR 10 million. This was the final settlement with the payer of our former Californian Aerostructure business from HITCO. Now let's move to balance sheet on Page 13. Despite the overall situation of corona, the balance sheet ratios remain solid. You can see equity ratio is almost unchanged with 27.3%. The small loss was almost compensated by the slight reduction in the total assets. Total liquidity even improved. That's, of course, also thanks to [Technical Difficulty] which I already alluded to and is, of course, in current time very important. So we can see liquidity improving from EUR 137 million end of last year now to EUR 154 million end of June. Net financial debt also improved from EUR 288 million to EUR 276 million. The reason that it did not improve in the amount of the liquidity is that we had a counter effect. It is just the repayment of lease liabilities in amount of EUR 11.6 million. And the payments for discontinued operation and this 2 reasons why liquidity development is greater than the change in the net financial debt. And leverage ratio, as a consequence, increased now to 3.03. So far from my side, and with this I hand back now to the outlook and to Torsten again.

Yes. Please move on to Page 15. Thank you very much, Michael. From the very beginning of the COVID-19 pandemic, SGL Carbon had 2 clear priorities. First was preventive measures to protect the health of our employees, their families and also our business partners. Second was to see our company in the best way and as safe as possible through these difficult times. I think we had been very successful with the implemented COVID-19 guidelines, considering the high number of 29 production sites around the globe, we had only very few SGL Carbon employees being positively tested for the coronavirus. Due to customer production stops, the CFM sites in Wackersdorf and Willich as well as Austria has reduced their production and introduced short-time work. The 2 production sites for carbon brake disc of the Brembo-SGL JV are running again. The remaining sites of SGL Carbon in Germany, U.S.A., U.K., France, Portugal and Poland were able to largely maintain production and delivery of products without interruption, although at different degrees of capacity utilization. To counteract the effects of the interruptions in the supply chain and the resulting lost work time, SGL is utilizing personnel measures such as short-time work, reduction of vacation and overtime. Administrative employees worked largely out of their home offices. Today, most of us are back in the office, but continue with social distancing rules and very, very limited travel. Moving on to our guidance for the full year 2020. Next page, please. Like many other companies, we had suspended our guidance early April, given the uncertainties around the pandemic. Even today, 4 months later, the news flow continues to be dominated by COVID-19 and the global economy is fragile. However, given the nature of our business, mostly in GMS, where the production pipeline is 4 to 6 months, outlook for the second half of the year is becoming more and more concrete. We, therefore, introduced at the end of July, a new guidance for the fiscal year 2020 based on certain assumption, which first and foremost, exclude the impact of the so-called second wave of infections and associated major lockdowns. Next page, please. As usual, I will begin with the reporting segments and then provide an outlook for the group as a whole. For CFM, our Composites business, we anticipate sales revenues to decline by approximately 10%. This is mainly driven by COVID-19-related weaknesses in automotive, and earning improvement measures in Textile Fibers. In Textile Fibers, we had implemented a number of measures in the second half of last year. In particular, we idled 2 Textile Fiber lines and started conversion of 1 Textile Fiber line into a precursor production. Compared to our pre-COVID-19 guidance where we had guided for stable sales, we see a weakening in all market segments, except Wind Energy, which has grown even stronger than we initially anticipated. For operating recurring EBIT, we still expect an improvement over last year's loss of approximately EUR 8 million. We now anticipate a close to breakeven level, which is not far away from our pre-COVID-19 guidance when we forecasted a slightly positive recurring EBIT. This is because we were able to limit the negative effects from COVID-19-related sales losses with measures such as short-time work and spending cuts. The earning improvements in Textile Fiber and price increases in the Wind Energy businesses will also contribute to the year-over-year earnings improvement. Next page. Moving on to the reporting segment, GMS. Here in GMS, we now expect full-year sales revenue to decline by approximately 20%, driven by weaker demand in all market segments except 1 segment, which is Semiconductors, where we expect revenues to remain more or less on last year's level. Comparing the new against the pre-COVID guidance, when we were anticipating a high single-digit percentage decline, the deterioration is coming from weaker demand in all market segments, except Battery & other Energy. You know that GMS is a business with a high fixed cost base. Accordingly, there is a more than proportional impact on EBIT. This is now expected to decline by at least 50% to the approximately 20% decline we were guiding for before the pandemic outbreak. The guidance for the reporting segment, Corporate remains unchanged to the pre-crisis view. We continue to anticipate a substantial decline compared to 2019, which was boosted, as Michael said, by services provided to the former PP business. The current year will also incur some additional consulting costs, mostly related to the cost and business analysis I had outlined at the beginning of this call. Next page. All this means that on group level, we expect full year sales to decline by 15% to 20% and a slightly positive full-year operating group recurring EBIT. Earlier this year, we started exploring additional funding measures. Some of these projects have been successfully completed. Some are quite far advanced. From these, we anticipate a positive onetime low double-digit million euro gain in group recurring EBIT. We presume this will be booked mainly in the third quarter of this year. Accordingly, we are able to more or less confirm our pre-COVID-19 guidance for the net result, which was a low double-digit million euro loss despite the substantially lower operating result. We continue to pursue conservative free cash flow management. CapEx will be reduced to approximately EUR 60 million coming from EUR 70 million to EUR 80 million planned before the pandemic outbreak. We are also able to confirm our pre-crisis guidance for the year-end 2020 net debt, which we expected to increase by a mid double-digit million euro amount compared to year-end 2019. The increase in net debt is related to the USD 62 million purchase price payment for SGL Composites USA. We are able to keep the guidance unchanged because we expect to balance the lower expected operative earnings with additional funding measures mentioned above. Consequently, we expect a comfortable liquidity position at year-end 2020, in addition to the still undrawn EUR 175 million syndicated loan facility. This completes our prepared remarks. I would now like to hand back to the operator for the Q&A session.

The first question is from the line of Christian Obst from Baader Bank.

Yes. I have -- in the end, I have 1 question. It's concerning the time line of your review of the company. It's currently under review, of course, you have support from consulting firms going forward. So when can we expect some kind of decisions? This is the first question. So the time frame. And then concerning related CapEx. You are now, of course, driving CapEx down to support your cash flow down to EUR 60 million. So how many of this EUR 60 million is as a kind of growth CapEx included? And then going forward, when you make your -- when you have made your decision concerning the future of SGL, what kind of CapEx do you expect to spend then going forward? But I would assume that the EUR 60 million is far from what you need to really drive growth for the company.

Thank you very much, Christian. I'm going to start with the first question. So I started my job here at SGL 10 weeks ago and direct as detailed in the second or third week, we started with an internal revenue project, which we call [ Bonsai ]. And I always call the full potential analysis. So we look in every segment. We check the processes, the corporate functions, the sites and so on and so on. And we expect results by mid of Q4. And then we will come to the capital markets again. This is also in line with our planning cycle. We are currently -- we just started our budget process for 2021 and also the new 5 years planning. And I think we will come back to the markets with answers for both questions. And I would like to hand over to Michael here for the CapEx question.

Yes, I mean, as you might remember, Mr. Obst, I would have said that we have so bottom line CapEx for maintenance roughly EUR 30 million. So if we're talking about million, you can easily calculate it roughly half of it is maintenance and the other half is growth. And the growth projects are mainly related, of course, to the -- on the GMS division on our fuel cell business, which is nicely ramping up. You remember that we had won a big order from Hyundai for their fuel cell car. So that is the main area for growth on the GMS side. And of the CFM side, we also had a press release that we have won a big order for battery cases for electric vehicles in the U.S., and that's the growth area for investing in the CFM division. And of course, with regard to CapEx of outer year, this will be part of the 5 years plan, Torsten will look on that. So that's too early to answer.

Okay. And I have 2 additional maybe one is, again, concerning the review process. You're talking about challenges and it's about complex structures and processes. So of course, you have some experience from the jobs before. And we have seen some kind of reorganization and restructuring within SGL over the last 10 years almost. So where do you mainly see these kind of complex structures and processes? Can you give us some kind of an example here? And the second one is concerning the 2 fiber lines you closed down in Fisipe. They are out forever or do you -- or can you restart these fiber lines going forward?

Yes. I start with the questions for the fiber lines. They were idled. In principle, we could restart, but we took the capacity out of the market and got rid of a business, which was simply not profitable. But this was not the main driver. We are operating this site by a co-gen, so a combined steam and electricity facility and we could optimize the whole energy setup at this site, and this boosted the profit. So the combination of getting rid of unprofitable businesses was a good decision, and this is why we idled the 2 lines. Yes, next question, where I see complexity. The problem is the small size of our company. Our turnover is plus/minus EUR 1 billion. And the complexity starts with a number of production sites. We have 29 production sites. We have a full company set up, and we look -- or we ask ourselves the question, which is the right size of this company? But an answer we will give mid of Q4. Am I missing something?

No.

Okay. I hope, Christian, answered your question.

[Operator Instructions] Next question is from the line of Richard Schramm from HSBC.

Yes. So I would also first, I'd like to follow-up on this review programming you're starting. I mean, as [ Bonsai ], should we expect that it's, as to say, mainly focusing on cutting costs and taking out excess capacity? Or is there also a component to be expected where we should -- the forward strategy, a clear one with, yes, investments and also possible acquisitions to enter markets where you think the company is not yet well positioned? That would be my first question.

Yes. Richard, we look at the full scope. Maybe that's investment in -- we are not focused on taking capacity out. It's more about to drive the whole operations in a better way. But we look at everything. There is cost in, there's spend in processes, complexity reduction, but also the way forward. And we are going to answer this by mid of Q4. We should be through with the analysis then.

Okay. And it's quite obvious that we should be prepared to see some kind of one-off costs related to this, of course, but I think the number for this year.

Can be, but there are also measures where we just reduce spend, which do not need additional cash spends and we will deliver both.

Okay. And then I'm not sure if I missed something, but this one-off -- this positive one-off effect, you signaled for Q3 looks a bit opaque to me. So I have no idea what is behind this wording you have used to describe where this comes from. So can you shed a bit more light on this one?

I will take this question, of course. I mean, to start on a higher plane, I mean we have initiated at the beginning of the year various funding measures with a view, of course, in the upcoming payments to BMW is excitingly developed for their share [Technical Difficulty] And most of this are real estate where [Technical Difficulty] of course, a lot of own real estate, not all of this is used by ourselves. So some has rented out, some is not used. And the complete measure now, which has been completed is -- and that is also published in our half year's report is that we have an agreement with Showa Denko. Showa Denko was renting at our site of Meitingen real estate as our manufacturing holds for the production of graphite electrode nipples. They have decided to go out ahead of however long lasting lease contract. So we had to financially settle this, which will give us not only a small double-digit million cash inflow. But given the nature, that's a big part of this is coming from the net present value of rental income. This gives also part of income. And that's the reason so we will have very small double-digit million income amount out of this low double-digit cash amount. So it will not only be cash amount but as an earnings amount. That was the reason why we've introduced also this new operating recurring EBIT because we want to make sure because this is, of course, a onetime effect. This is not an ongoing operational effort. So therefore, our guidance in the EBIT is taking this out. But on the net income, we have included it because this will, of course, improve overall our figures. And as I said, also in here -- both on the earnings and on the cash side. And that's not the only thing. We are still working on other measures. We do have, as I said, several real estate things we are in process of sales process in various jurisdiction. And that's, in essence, the main reason of what we call the funding measures.

[Operator Instructions] There are no further questions at this time. And I would like to hand back to Torsten Derr, CEO, for closing comments. Please go ahead.

Yes. Thank you very much, Stuart. I would like to thank you all for dialing in and for your continued interest in SGL Carbon. I look forward to continuing our dialogue on a regular base. Have a nice rest of the day until next time. Thank you very much.

Goodbye.

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