Stabilus SE (STM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Stabilus S.A. conference call regarding the financial results of the third quarter of the fiscal year 2021. [Operator Instructions] Let me now turn the floor over to Mr. Wilhelms.

Yes. Thank you. A warm welcome from my side to the participants of this call to our Q3 results. We are proud to present you another quarter of good results. From the Stabilus side, we've got here Dr. Michael Büchsner, the Stabilus CEO; Andreas Schröder, Investor Relations; and myself, Mark Wilhelms, CFO to Stabilus Group. We will now go through the slide. Slide #3, both agenda. First point, operational highlights. For this one, I'll hand over to Michael Büchsner, who will take you to the next few slides.

Thank you very much, Mark. Hello, and welcome also from my side to our quarterly call today. We turn it to Page #5 and talking a little bit about the markets and the operational overview and update. First of all, yes, the automotive market versus last year improved massively. So we are at 18.8 million vehicles. This is a plus of 48% year-over-year. So the quarter 3 in our business was indeed a good quarter in terms of sales volume, also compared to last year. However, there was a softness versus the prior quarter, mainly driven by the semiconductor shortage that leads us to the actions. We're still in the mode of flexing our cost, being very cautious in terms of our EBIT recovery measures, as you know, that's what we pursued the last quarter since last year overall. But however, due to the semiconductor shortage and there with an uncertainty in the market and material increases, we, for sure, drive our cost flexibilization measures to a maximum these days. So the demand of automotive customers improved, that's a good sign for us. Also on the Industrial business, we have positive news. We saw, especially in the commercial vehicle and distribution segment as well as in the independent aftermarket and then the e-commerce side, very signs from the market. And we see here a further improvement in the rebound from the corona crisis. So the Stabilus pandemic rules are still in place. Thereby, we take it extremely serious also in times when the infections are going down and vaccination are -- shares of vaccinations are increasing in all regions. We actually have our pandemic rules still in place, not only in terms of the health-related topics, but also in terms of the economics and in terms of our business planning for the coming months. So we still have an extremely flexible production set up in place to adjust our capacities in the best way to the uncertainties out there. However, also a positive sign in terms of our capacities, and you see that on the next coming 2 pages, is our integration of our completely new plant in Pinghu, that's -- where we turn it to Page #6 and #7. And Page #6, you basically see the signing ceremony a couple of years back when Mark did sign the contract for building this new plant we have in Pinghu in China for our Powerise products, you see it on the top right. This building is completely dedicated to Powerise and the massive growth predominantly we see in China, but also in Asia overall, in line with also the other regions. But predominantly in China and in Asia, we see a very good growth in Powerise and that's why we built this completely new plant. So on the bottom of this chart, you see the integration processes was very well perceived by the local government representatives and also by our customers, by the way, who are very, very interested. And the reason being that we, at Stabilus, pursue the trend and also the driving force of -- in direction for the region. So for us, it's very important not only be -- being in China with some local resources in terms of engineering and sales, but we also completely produce our product in China. And moreover, important to us is also that we localize all components and have a very strong supply base along with us in the various regions. That's what made us strong in the past and will continue to make us strong. So on the next page, Page #7 on your deck. You actually see the building from the outside. It's an impressive big building. We've been building up and recently also ramping up with the first equipment out there in Pinghu. And yes, the plant is already, to a certain share, loaded as we speak. And it will be loaded further until '24, '25. It's actually booked with customer contracts. It's not like that we would build the plant for business to come. We got huge business awards from all different regions in Asia, mainly in China, and that's why we continue our expansion plan with this building in Pinghu. So yes, this is kind of the point on a general introduction. Now I would like to go on the financial results leading over Page #8 to Page #9, talking about an overview of our last quarter's number. As I said before, good growth on the Automotive, but also on the Industrial side, and that's why our revenue was EUR 228.7 million versus EUR 147 million in quarter 3 last year, which is a massive growth. So 55% year-over-year growth. The acquisition effect is 0. So it's really an organic growth, minor impact by the translation, but organic growth is by far beyond 50% here -- 56%. And also now in the next quarters, we expect further growth and rebound on the Industrial side as well, so positive outlook as well. We see this rebound, by the way, in all regions of our business. The adjusted EBIT margin of EUR 30.9 million is way better, for sure, than last year with EUR 5.7 million. As you know, back then, we also could highlight a very positive EBIT margin last year despite of having the biggest crisis of 100 years, we've been able to generate EBIT margin and profit, even in the most difficult times last year. But this year, we have 440% better than last year even with EUR 30.9 million EBIT margin. It's very strong and stable business setup and this leads to an EBIT margin of 13.5% in quarter 3 2021. Yes, in terms of profit. The profit is at EUR 15.9 million, which is also almost twice as much as last year comparable quarter, and the profit margin is 7% for the last quarter. Yes, in terms of cash flow. Cash flow -- adjusted cash flow was at EUR 30.3 million, so very good pull-through here. Last year, we had a cash strain due to the heavy investments we also did as you've seen in the plant in Pinghu, for example. However, this year, in the last quarter -- quarter 3 financial year 2021, we could pull-through to a very nice cash flow -- free cash flow, thereby EUR 30.3 million, which leads us to a net leverage ratio of 0.6x, which used to be 1.2x last year. And with a net financial debt at EUR 112 million. So let's talk a bit about the forecast. Also here, we could get a little more precise. Yes, we could further tighten the window of our forecast because we saw in the last quarter good positive signs out there. Things are further stabilizing. Sure, there are clouds on the sky and we'll talk about them like semiconductor shortage and material price increases. However, we could further narrow down our window for a forecast from EUR 900 million to EUR 950 million sales. We are now more precise on EUR 930 million to EUR 950 million, so a very tight corridor. Also in terms of the margin, we could further stabilize it on the upper end of the guidance we've given last time when we spoke. So last time, we gave a guidance corridor of 13% to 15% EBIT margin for the year, and we can also tighten that, narrow that down to 14% to 15%. So a lot of numbers, I'll just repeat the outlook, again, before I hand over to Mark again. So the forecast for the year is between EUR 930 million and EUR 950 million in sales. And the EBIT margin is in the range of forecast of 14% to 15%. So thank you very much. After this introduction, our operational highlights and the key financial highlights, I hand over back to Mark to talk a little bit more in detail about these numbers.

Yes. Thank you. Now let's move to Slide #10, which basically shows in a graphic form what Michael just talked about. And this is kind of doubling what was said, I'll move forward to Slide #11, which shows 9 months figures, i.e., the time October 2020 through to June '21; 9 months, 3 quarters of the year are behind us now. In terms of sales, we are currently at EUR 708.1 million. It is 22% organic growth -- 22.1% organic growth, pretty strong, but eventually against a year that was not a good one. The corona year was a big issue for everybody in Automotive and Industrial segment. Moving over to the right-hand side, we see the adjusted EBIT numbers. First 9 months over EUR 100 million EBIT and margin of 14.3% over these 9 months. That compares quite nicely to the outlook margins that Michael Büchsner just mentioned, it's 14% to 15%. Typically, our fourth quarter is a strong one. So we are having good reasons to be confident that it will work out, although one always have to warn about the issues of big shortage, related customer shutdowns and therefore, revenue losses -- unexpected revenue losses on our partner. Taking a look on this Slide #11 bottom left-hand corner. Last year's 9 months profit, 3% or EUR 18.1 million. This year, we are well, well stronger with almost 8% profit margin in the profit of EUR 56.2 million. In terms of cash flow, Michael had mentioned, last year comparator quarter was a little bit negative. The full months last year delivered almost EUR 15 million cash flow. In this year, we are now at EUR 81 million, with chance to come into a nice area of 3-digit-million positive cash flow by year-end. Now moving forward, taking a look at the results by operating segment. That is via the interim Slide #12, you come to Slide 13, which takes a look at the European numbers. European organic growth, 51.5%, resulting in a revenue of EUR 117.3 million. Now quite clearly, that is strong compared to last year. But compared to the year before, where we had delivered EUR 124.5 million, there's still room to do more, which eventually is due to the lower Automotive production compared to '18-'19 and the hiccups related to the shutdowns. Worthwhile to note is also that on the current 3 quarters numbers, you see that industry is EUR 65.2 million sales in the total of EUR 117 million. So Industrial is 55% of the total European sales. Milestone share typically heads on the margin. Moving to the right-hand side of this slide, vehicle production in Europe, Middle East, Africa, which will summarize under EMEA was at 4.7 million units, is 83.6% more than last year. Our own revenue grew by 50.2% in terms of numbers, about 51.5% in terms of organic growth revenue. Within that one, the Automotive Gas Spring was very strong in this quarter. It is the third bullet point with 83.7% year-over-year and Automotive Powerise, 62.7%. The Automotive Powerise products all come out of our plant in Romania is most of you know in regards to the European region. Strong drivers for the growth or drivers for the strong growth Audi A6, Audi Q2, Audi e-tron, Macan, also in the Taycan. And here you see a list of vehicle lines we are in. So in fact, we are participating nicely from the consumer front to comfort, whether it's ice engines or electric engines. As mentioned before, both Automotive divisions, parts of the Gas Spring and Powerise were impacted by the shutdowns at several OEMs. And what is most annoying to me both -- non-pickup orders reach us at very short notice. So it's very hard for us to adjust the cost structure down because essentially the products have already been produced and it kind of messes up the flow of a highly efficient production center. Taking a look here with second but last bullet point on the right-hand side. On the Industrial business in EMEA, we are up almost 36%, organic growth 37%. Rebound in all markets, in all subsegments here, except Energy and eventually the Aerospace. We still start off on the low orders of the Aerospace, Marine & Rail manufacture. But the market knows you know that is currently a business where one has to hold out and wait for the time to bring new orders. At the same time, our engineers are working. We developed a rather nice touch on product to satisfy needs of our customers or even create them. In terms of EBIT margin, we are now at 13.4% compared likely to last year's 2.3% on growth. Moving forward to Slide #14, we take a look at the Americas region. Americas up by 78.3% in total or 77.2% organic growth. Light vehicle production, I'm now speaking to the right hand side of the slide, in Americas, is at 3.8 million units, which is 149.6% over last year's Q3 number. Our revenue, as mentioned, up by almost 80% organic growth in the Automotive division at 110% and Powerise is 162.6% plan. Taking the corona time, you know the industry, the Automotive industry had a lot of issues in adjusting production to the availability of people to the needs of the market. There was a lot of inventory buildup, inventory reduction at car manufacturers for parts they get from suppliers like us. But also we, on our side, it was hard to adjust the overall structure. Therefore, in certain ways, our revenues in that Q3 are not that comparable -- even comparable to the current one. Talking to the Industrial business, it's again the second bullet point from the bottom, they are up by 5.2% (sic) [ EUR 5. 2 million ], almost 22%. Organic growth here, 32%. In the U.S., we have a hard time in Healthcare, Recreation as well as Energy & Construction for our Industrial segment products. EBIT margin in the U.S., 12.9%. It's a bit lower than we had seen in other quarters. Clearly, they are impacted by the current wave of shutdowns -- short notice shutdowns combined that with our Mexican labor agreement that we need to inform work off 14 days ahead of an unpaid shift. We basically have to find ways to keep the people productive, while at the same time be in line with the information flow to them to ensure we can take unpaid out shifts. Moving forward to Slide #15, we take a look at the APAC region, up organically by 35.2%. Nice close year-over-year. In terms of vehicle production, it is the right-hand side. We've seen a move to 10.3 million unit sales, like 20% over last year. So here our revenue growth compared very nicely towards we've seen in the vehicle production. Moving to see on the right-hand side to the third bullet point, organic growth in Gas Spring, 22.1% comparing to the 20% car production growth in Powerise and 72.3% growth, again, comparing to 20% car production growth. This underlines what we've said every time in the past, Powerise started in America, moved to Europe and now is in Asia, as Asian customers love those products, like, always big automotive OEMs, offer automated or powered tailgate for their vehicles in China, in Asia. Here, you also see a couple of names here. Taking through, specifically nice, is the new Tesla plant in Shanghai, which is coming up to speed, giving you a nice extra volume to load our Powerise plant in Wuhan, it's set up in Pinghu, as Michael had just explained. EBIT margins in APAC, 15.3%, a little bit lower than we've seen last year. In Asia, we are being hit by a raw material price increases and somewhat, let's say, the product mix which is hitting us here at this point and some plant relocation costs also burdening our year-over-year comparison. As we move forward to Slide #16, we take a look by business unit, global view on Industrial, Powerise as well as Automotive Gas Spring. Global vehicle production is at 18.8 million. That is 46.6% (sic) [ 48.6% ] more than last year. Our growth in the Automotive Gas Spring section division is 67.1%. In Powerise almost, 100%. So quite clearly, we are outpacing the overall vehicle production here with products that are in the focus of a lot of end consumer has made us to do better. Industrial business, up by year-over-year, 31.1% and organic at 35.1%. And Michael will now lead you through a couple of details on the Slide #17 that gives insight to our Industrial revenue.

Yes. Thank you very much, Mark. So let's dive a little deeper into the industrial revenue sector. As you know from prior meetings, we decided to give much more flavor and more depth in terms of splitting our business and business opportunities into these 4 segments you see here on this slide. And indeed, as Mark already said, we see also a good improvement on our Industrial sector. Mark mentioned 55% of our business being Industrial in Europe. But overall, we could also increase massively our sales compared to quarter 3 last year because we've ended up having quarter 3, 2021 now sales of EUR 99 million actually, which is more, way more, 31% more than prior year's quarter same time where we ended up having EUR 75.6 million at that time. So good growth of more than 30% in the Industrial business for us. So let's go a little deeper into these different segments. So we start with the Industrial business, right? Distribution and Independent Aftermarket are really driving factors here. And we saw good growth rates in the Industrial sector, including the Independent Aftermarket, the e-commerce sector, and the Mobility market, kind of 40% year-over-year with nice revenues and margin impact on to our business. And then also, the mobility factor, which you see here with 28% improved 5% in terms of business share compared to last quarter -- last -- third quarter last year. So with that, Distribution, Independent Aftermarket, Industrial sector in general and Mobility is, for us, a driving factor of the rebound of the economy after the crisis. Also, in terms of Healthcare, Recreation & Furniture and Energy, Construction, we did grow in absolute terms. We did grow EUR 1 million versus prior year's plan, but there's more to come. So why is that? Because on one hand side, on the healthcare sector, there was a little pull ahead last year, as you know, by the corona crisis because there was a huge focus on healthcare equipment at that time. And now the Energy and Construction business is kind of impacted also by the material price increases out there. So it is expected that in the coming quarters, this also improves further as a result of stable or more stable material prices, which I think will anyway talk later on in the Q&A section a bit. So bottom line is huge and very good growth versus last year's third quarter. We ended up having 31% more growth or better sales than last year's comparative quarters, mainly focusing on the Industrial sector, Independent Aftermarket and Mobility, and there is more to come in the other segments. So that's some flavor on the industrial revenue side. And with that, we would go into the sector of the outlook and kind of concluding the presentation with Page #19. I gave it already in some higher level, which is the guidance for the rest of the year at the beginning of this session. So we actually see a guidance of EUR 930 million to EUR 950 million. Adjusted EBIT margin of anywhere between 14% and 15%. This is all based on a light vehicle production of -- yes, improvement of 12% versus prior year, so EUR 82.9 million we see for the financial year '21 versus EUR 73.9 million last year. So our also -- yes, midterm plan considers that we get back to the 90 million produced cars, which we used to have 2 years ago, as you know, in the years '22, '23. That's kind of the assumption of the IHS Markit data, July 2021. And we pretty much follow these assumptions not only for the current year, but also mid- and long-term with our business. So the pandemic situation has an impact on our business like it has on all the businesses out there. The semiconductor supply issue is on top, right? So this is all considered in our numbers. Anyway, the semiconductor issue along with the material price increases we see in the market. They're kind of the wild cards out there for the rest of the year, and that's why we still provide a corridor for the sales and the EBIT margin because there are some impacting factors. Also, Mark mentioned it before, we still see the one or other customer taking out orders on a short notice. And also on the supplier side, the one or other supplier coming along with certain price increases, which we try to offset with our customers as good as we can. However, these are kind of the 2 impacting factors, which still lead us to giving a corridor in terms of sales, revenue and EBIT margin for the rest of the year. In terms of mid- and long-term plan, we for sure stick to what we said before. We massively work on our vision of Stabilus along with the one Stabilus philosophy. So we strive for the best whenever it comes to being a leader in motion applications out there. We still work and strive for an organic CAGR growth 6% per annum. And also our target is still on with 15% EBIT margin. In the past quarter, we also could further pave the ground and having really good progress on our strategies in that term. We are working now on our strategic direction even for 2030 to make sure that we put the right focus on innovation and technology going forward because we strongly believe, and this is also the market feedback we get, not only from Automotive, but also in the Industrial side because only those who work intensively on innovation and technology are the supplier of choices in the future and the partners of choices for development of products in Automotive and Industrial space along with the desired customers. So that's basically the numbers and the flavor for the numbers for quarter 3 in the financial year 2021. And with that, we would open for questions.

[Operator Instructions] And the first question comes from Marc Tonn from Warburg Research.

It will be 3, basically. The first one would be, I think you touched it when you talked about the development in APAC in Q3. When it comes to ramp-up costs, perhaps the new production side in Q4, is there anything we should expect for the margin there to weigh it down a bit compared to what we would see, let's say, in a more say, stable production environment perhaps going into next year? That would be the first question. Second question would be on working capital. I think particularly inventory seems to be a bit higher than it had been in the past. Is this, let's say, more a reflection of what we see from the volatility from the customer call offs, would you say in the Automotive sector? Or is there anything structural that some additional flavor would be helpful here. And thirdly, talking about, let's say, the guidance and the range you provide for the EBIT margin, let's say, for the full year and that's implicitly for the fourth quarter. When you think about, let's say, volumes and potential, let's say, the EUR 20 million range you have for revenues and the raw material side. Is it right to -- and fair to assume that the bigger risk is presumably from the top line development that we had until now been very successful in passing on raw material prices and there may be, let's say, some minor risk, but the larger part is coming from the top line development.

Thank you very much for your questions. So I will answer question 1 and 2 and then Mark will jump in for question 3. In terms of APAC development in quarter 3 and our ramp-up of the new plant, you asked if there is any impact on the margin for the fourth quarter in terms of ramp-up costs. Should the ramp-up costs in place, you would assume that they are in the range of 1% of the EBIT margin of Asia, and they will lead us into the fourth quarter, which is mainly installments, shifting capacities. We've been shifting, as we speak to lines, from one to the other plant back to our plant in Pinghu then. And this actually drives some costs. Also the installments and the ramp-up costs are considered with 1% on the profit side in our forecasted -- in forecast guidance already. So we are good off in terms of that cost, they have been planned for the last year already. And we do not expect any deviation here. The ramp-up goes really smooth. I didn't mention at the beginning, when I've been talking about the new Pinghu plant, it was an outstanding teamwork of the Stabilus team in total, but particularly in China because in difficult times with all these pandemic rules, they established this plant, they have been building this building, they have been negotiating with all involved parties there and they kept the time line in a very precise way. And this leads you also back to the point of ramp-up costs. We are experts in ramping up power point production, Automotive and Industrial production as well. So Powerise ramp-up, Automotive and Industrial ramp-ups, we do in a very detailed way in many places. And that's why these ramp-up costs for the Powerise plant in Pinghu, they are very well considered and they are in a range of 1%, and we do not, yes, foresee or expect any deviation here. When it comes to the inventory figure, yes, they are a little higher. That's planned in that way. So why is this planned in that way? You know this uncertainty in terms of the semiconductor topics. The orders and the ordering behavior of the customer is to certain share volatile. Some of the customers have been taking out orders due to the semiconductor issue on short notice, which would have been impacted our workflow, the quality of products and also the cost position. We, on the other hand, know from these customers that they will, to certain share extend their production after the summer shutdown. So we took the decision to balance this inventory versus a loss in productivity and thereby increase the inventory a bit just to streamline and take a full benefit on our productivity, which is in that term, absolutely the right decision. There are a couple of more weeks to go for us in the current financial year. So we are counterbalancing that as we speak. And for sure, did foresee a little higher inventory level to make sure that we work on maximum of productivity in all our facilities. So for the third question, in terms of the guidance, I would hand over to Mark.