Stabilus SE (STM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Stabilus SE, web conference regarding the results in third quarter of fiscal 2024. [Operator instructions]. Let me now turn the floor over to your host, Dr. Michael Büchsner.

Thank you very much. Welcome to our quarterly call today. We have Stefan Bauerreis, our CFO; Andreas Schroder, Investor Relations; and myself, Michael Büchsner, CEO of the Stabilus Group on the call. With some good news for you today, the market is stabilizing for us in the fourth quarter and the first-time consolidation of DESTACO contributes positive to our financials. So, let's go into the details. As expected, we saw some softer call-offs in the third quarter, which we forecasted, and this is mainly driven by our bigger OEMs and also by the electric car segments. However, customer demand is stabilizing in the fourth quarter and therefore, in the third quarter, the organic revenue growth in Asia Pacific was positive 3.2%, organic development in the EMEA, a little softer as expected, 5%, 0.1%, 5.1% negative and in Americas, minus 3%. Also here, softer, impacted by lower quantities, automotive and commercial vehicle sector. However, the consolidation of the stake really drove our sales and we, overall, quarter-to-quarter, have a positive 14.4% sales increase and DESTACO generated EUR 48.8 million in revenues and 19.9% EBIT margin, which is absolutely outstanding given the market circumstances and fully in line with what we forecasted. So, DESTACO integration is well on track, the refinancing of the bridge facility is in preparation, and we see a solid pipeline in our business of DESTACO going forward. On the next page, I'd like to talk a bit about the market environment in the second half for our business. The volume reductions we saw in the second half of the year are for sure impacting our fixed cost leverage, which actually was reflected in our latest guidance release as of June 11, 2024, and this fixed cost flexibilization actions, which we're now taking into account and now executing all over the world. We started them already months ago showing first impact and things are stabilizing. Will for sure overcome these headwinds and then actually carry these advantages in our cost structures in the year to come. So, overall, we absolutely confirm our STAR 2030 goals in spite of this challenging market environments. So, what did we do in detail? That's what you see on the next page to counterbalance these challenges. The counter-measures which are in place are rolled out over the course of the past months and will progress also in the future is flexibilization of our production in all impacted plans. We see this overall softness in sales of 2.5% on a global scale. We've been considering all these effects in the plants, cutting costs down and adjusting our labor for sure. We expanded our efficiency programs, which we started in all the plans to cut down on costs and make a sustainable business model for us and considering push our path for success and we expanded this efficiency programs into the functions. So, also on the functions, we're now adjusting the cost structure in order to improve our operations. The continued automation is also extremely important in terms of counterbalancing our labor cost inflation position. This inflation recovery measures, which we've been talking about over the course of the past months and years, are carried first fruits as well in this year as expected, so we are in negotiations with our customers. All these negotiations are coming to an end and materializing in the second half of this year, we'll see that also in the fourth quarter. So, we will for sure overcome the external headwinds in the coming quarters. On the next page, we'll talk a bit more about the good results we see on the DESTACO side. The revenue growth was good, overall revenue is EUR 48.8 million, EBIT margin, EUR 9.7 million, which equals to 19.9%, which pretty much is in line with last year and also, which is in line with our expectation for the year, and the free cash flow amounts to EUR 7.6 million, 15.6% as a percentage of revenue. It was a very good quarter for us in terms of integration work. Actually, we go to our customers and our customers welcome us with, yes, we know your products from ACE, we know your products from Hahn, now you have a way bigger portfolio as a Stabilus Group. And we are actually touching the same customers than before, but with a nice and good portfolio on the automation side in addition and this is really appreciated by the customer base and is driving good sales for us on the DESTACO side. As a matter of fact, we have first cross sales orders received and actually joint customer visits, which we do along with our new colleagues from DESTACO and this is really welcome to our customers, as I said. We also see first savings on the procurement side as we streamline our volumes, streamline the supplier base and actually having joint supply negotiations as we speak. Important to us is for sure the IT landscape. So, we are pursuing the path of migration of IT services and actually are setting up and decoupling DESTACO from their previous ownership and attaching them to our systems along the line. We rolled out the code of conduct to the entities and actually are working on cutting the costs down where we can, also when it comes to the transition service agreements, which we are actually ahead of time in terms of executing. And, we achieved a very successful initial consolidation of the business itself, the numbers are coming together and they are developing in the way we wanted them to develop. A particular highlight, we'll see on the next page, a particular highlight actually is the conveyor belt business. The conveyor belt business is extremely important. You basically are progressing and push the materials, the work pieces from one to the other place in a fully automated assembly line with such a conveyor belt, it enjoys really good growth rates. One of these contracts can be in the hundreds of thousands of euros and it's a prime product, which we sell to pharmaceutical and medical areas and actually enjoys good growth rates also in the consumer goods side and personal care. So, it's used for packaging, life science, mobility, whatnot, and actually, it's a product which is good for DESTACO because it's demanding high precision. It's leading edge amongst the competitors, and it's actually integrated in assembly equipment in all industries and driving, therefore, also our growth of the future. This is just one example of the wonderful product portfolio of the DESTACO Group. On the next page, we talk a bit about the financial position. And, I will basically give you a general overview before I hand over to Stefan to talk a little bit about the regions. For sure, these numbers are in an overarching scheme of the DESTACO integration. So, the revenues did rise by 14.4% from EUR 306.5 million to EUR 350.7 million. Organically, yes, it has been a soft quarter for us, mainly driven by some of these bigger OEMs, as stated. M&A effects, however, 17.4% up in terms of sales, and there was also a FX impact, which we consider in these numbers. The M&A effect, what was DESTACO mainly, is EUR 48.8 million and the Cultraro effect, EUR 4.6 million. Predominantly, still growing in Asia Pacific, offset by a little less volume in EMEA and Americas. Also, when it comes to the adjusted EBIT margin, we ended the last quarter last year, so the third quarter in financial year '23 with EUR 41.9 million and now we are at EUR 43.1 million, so a growth of 2.9% year-over-year, quarter-over-quarter. And the adjusted EBIT margin was for sure to a certain impacted by these lower sales of the automotive side and commercial vehicle side, but in an absolute term, offset for sure by the positive development of the DESTACO Group at all. High profitability of DESTACO was, for sure, a major point of our consolidation. Please also consider that there was kind of an integration cost effect of EUR 2 million for the past quarter, to do this integration predominantly on the IT side. When it comes to profits in million euros, EUR 21.7 million was the number for the third quarter in the year 2023 and now we are up to EUR 24.3 million, so an increase of 12% year-over-year in terms of the project profitability and profit margin. We are extremely healthy still on the cash flow side. However, you see here one effect, which actually is effect carrying forward from last year. Last year, we had an extraordinary payment of a EUR 6.2 million tax payment, which actually did not occur this year. If you netted out by this number, we're well on track with our EUR 37.9 million and actually are on a good ratio in terms of our free cash flow in our business. So, these are some detailed numbers and on the next page, you see them in an overview. For sure, these numbers are also in light of our DESTACO integration. Because here you see on the upper line, the revenues are up in Americas, 21.8%; EMEA, 8.5%; Asia Pacific 13.8%, and this is largely driven, for sure, by the DESTACO integration. Predominantly, in Americas and in EMEA somewhat counterbalanced a bit by the softer sales of the automotive sector and the commercial areas. EBIT margin is in the same way driven then to the extent we've been discussing by DESTACO. And here, we go into the details of the different regions on the next couple of pages, and I would hand over to Stefan, please.

Thank you very much. And now we'll guide you through over the next couple of minutes over our main segments, the regions as we are reporting them, starting like normally also with the region Americas. So, here on the revenue side, our revenues increased from EUR 109.9 million by about 21.8% to EUR 133.9 million. Always that includes the DESTACO sales, which leads to an increase of 24.5% included in that number. And, as Michael already indicated, we have here a decline in our organic growth, that will mean Stabilus, excluding all the M&A activities which you hear in that region is almost the DESTACO acquisition. So, we have there a reduction by 3% in the organic growth. That is one of the major topics we are faced with. And you know with our last, let's say, actualization of our guidance, we also indicated that it's mainly driven by the automotive, OEMs and commercial vehicle side and that is also what we can see here in Americas. Overall, we reacted, I think, very good in that quarter already because it's not only declining from an organic perspective, 3% in sales, but we also started significantly in adjusting and flexing and make cost flexibilization wherever we can. So, for example, here, in the region North America, we were able to reduce the number of wages, by 155 people, which is a reduction of 7% just in that quarter. And even the temporary workers, we reduced because that is the easiest and the fastest way to reduce it and to make it a contribution of the cost flexibilization of 67 people to around 55%. So, that shows you that we really take, really much care the flexibilization of our costs. Nevertheless, there is, and that is what you can see here in our adjusted EBIT figures. On the one side, a very good increase on the one side from EUR 11.6 million to EUR 15 million. But also here, we have to say the major portion of the increase here is coming out of the first-time consolidation of DESTACO and organically, we have here despite all those measures that we took over the last weeks in terms of flexibilization of our costs, an organic reduction on the EBIT side of 14.6%. Where does that come from? And I just want to give you also some information about our major market segment here in the region. For sure, there is a reduction from our major customers, also on the e-mobility side and the bigger costs, which obviously, in a lot of cases, have the Powerise system wasn't even place. So, that is also something that we see an overall reduction. That causes also the fact that we are lower in terms of our own growth in revenues compared to the IHS numbers because here, we clearly have to say that currently, we are really much impacted by the mix of car produced, that is hurting us but I think we got the right answers in flexibilization of our cost basis. If we then go to the next slide, please. We see an overview about EMEA. So, in EMEA, obviously, the picture is quite similar. Here, we have even a reduction in our organic growth, which is higher than in the Americas. It's by minus 5.1%, which goes in line also with the reduction of the IHS figures, which produce cars, which is about 5%. So, that goes hand-in-hand with that development that we can also see here. Also, in Europe, knowing that it is due to existing levels as often a little bit more difficult to adapt also your own cost structure. We already started to get in cost flexibilization and also, we're able to reduce the people in our product mainly talking here also about temporary workers, but also wage wages only at least we were able to reduce 1%. The TAMs, we reduced 26 people also to react on that reduced number. Overall, the adjusted EBIT reduced here by about 5.2%, that is also a very deep organic reduction due to this negative organic growth that we see. And here in Europe, that is not only the car with automotive OEMs, also here, quite frankly, significantly impacted by commercial vehicles which have a downturn of 11.6%. So, here, that is not only in the automotive business, but also industrial business impacted and exactly in those market segments, as we announced that in our last message about this reduction of sales that we see on the outlook and on the commercial vehicle side. But I think we found good solutions and good first steps. We are not yet at the end of all that, but the measures are starting to show first positive results and also here, when we see the development within the quarter, so there is obviously a positive trend also within the different months of the quarter in terms of the profitability. Nevertheless, the downturn has to be managed with cost flexibilization, that is what we are doing. If we then continue to reach in APAC on the next slide here, that is the region where we obviously also from an organic perspective, are growing. So, here, we have an organic growth of 3.2%. Now, you would probably say, okay, we are used to get higher organic growth rates than just 3.2%. That is correct and we said here from this perspective significantly with high inventories compared to the last quarter to this quarter that our customer had on hand. Now, we see there after this quarter, a very much, let's say, normalization also in that perspective. And also here, the sales numbers within the quarter, starting for the auto OEM business to recover step by step. So, here, we see even within the quarter, a certain trend of improvement. And, as Michael said, of at least that good stabilization of those reviewed sales that we saw and from that lower perspective, step-by-step, we come back to grow again. So, at the end, despite of an organic growth, we nevertheless had the biggest reduction in the adjusted EBIT margin, we just were able to realize a 13.2% compared to the 16.8% of last quarter. Where has it come from? That has from as we already indicated, mainly about a significant reduction in sales on Powerise. We already explained the high level of inventory that we had and in addition to that, our customer has on other hand, not on our side. And, in addition to that, we are preparing our future growth also there by the start of new production lines, which are on the way being implemented and being set up in APAC and mainly in China. Just talking also about the power lines that we have and other smaller relocations we're doing where we had to train people significantly and waited some extra costs, but that will contribute and will pay back over the next quarters with coming back to a quite good growth. So, within the quarter, we already see quite positive development from month to month going forward. So, obviously, here in that quarter, April and May were the worst month in terms of the sales. In June, then now starts slightly to recover and that is also what we see for the next month to come. And that are the reasons for this development in our adjusted EBITDA. If we then continue, then, we come to the development of the different market segments. And with those market segments, Michael, I hand over back to you.

Yes. Thank you very much, Stefan. And EUR 350 million is the number. EUR 350 million is an outstanding quarter for us in terms of our sales for quarter 3, 2024. Sure, it was, as we said, and the software impacted by the automotive business and the commercial vehicle business share, which you see here all to the right. However, whenever the automotive business is a little soft, the independent aftermarket shows positive trends with 4% here, that's what you see. And, for sure, overarching is the development driven by DESTACO, also our shift to a balanced portfolio between auto and industry. This is something you see here on this pie chart on to the left because our automation sector did increase up to 17%. And it's coming from a couple of percentage points only. Just to remind you, we had always 3% to 5% of automation in our portfolio with our products from ACE and Hahn predominantly. And now we are expanding in a great way up to being a company driven by 2 major businesses, automotive and industry. And this drives our portfolio in terms of a stable business going forward. On the next page, we talk about our net debt ratio. For sure, with the payment of DESTACO, buying DESTACO, we lifted up to 2.8x. So, we now have a net debt of EUR 703 million, which we already could reduce over the course of the past quarter. However, our goal for the future is to stay below 3.0 as of September 2024. As we already stated in that conjunction, we're in discussions with our bank to actually prolong our loans and actually working on our bridge facility to basically turn it into a more solid financing going forward, that's in midst of the discussions. On the next page, we see our net working capital. Our net working capital ratio is now at 20%, which is a good number at all, considering that we did integrate also DESTACO in these numbers. Per definition, DESTACO has some higher net working capital driven by their business model. Key is for this business model that they have parts on shelf because whenever customers need their products, they are embedded into fully automated processes. They require and request DESTACO to carry some of these materials in their inventories, which is basically driving these numbers. It's just an indicator of a very good relationship to the customers because whenever the customers need our parts, they are there, and this for sure drives on a short midterm somewhat our net working capital for these business-related components of automation equipment. On the next page, we see our development at the end of the investments. Our CapEx rate we are in the range of 5% to 6%, historically. And, this is something which we know over the course of the last 2 quarters, increased a bit because we actually invested in our new technology, DA.90, so, door actuation systems, one of the bright future businesses we have on hand. Now, as you know, we got good business on hand, we sold more than 200,000 sets of our door actuation systems in the current year year-to-date and we continue to invest in that area for radar systems and also for the development of door actuation system. This is, however, a short-term basis investment so we expect our investment ratio to the CapEx ratio be in the range between 5% to 6%, this 6.1%, 6.2% are driven by these upfront investments for these new technologies. However, we expect that to ease over the course of the coming quarters. With that, I would like to talk a bit about the outlook. Our outlook and the guidance of June is between EUR 1.3 billion, up to EUR 1.35 billion in terms of revenue and 11.7% to 12.3% in terms of adjusted EBIT margin. And, we confirm this latest forecast, considering the current revenue of 3 quarters of EUR 969.6 million in terms of revenue and an adjusted EBIT margin of close to 12% with the 11.9%. We feel comfortable and will achieve our guidance, which we published on the 11th of June this year. With that, I would like to highlight the key takeaways of this presentation before we open up for the Q&A session. We took all the right measures to increase the robustness and the sense of our business model, that's for sure. We are sticking to our 2030 STAR initiatives. We are offsetting the current headwinds with the activities we have on hand, be it automation, cost cutting, flexing activities, that's what's contributing in a short and midterm to our success. However, we also are fully in line with our STAR 2030 initiatives and long-term strategy. Considering the DESTACO initiatives, it's full-on track in terms of integration. First success is, for sure, a successful quarter with EUR 48.8 million in terms of sales and an EBIT margin of 19.9% as expected and fully in line with our expectations for the year. And, with the current revenue of EUR 9.6 million and adjusted EBIT margin of 11.9%, we feel absolutely confident to reach the guidance for the full year 2024. And with that, we will open up for questions.

[Operator instructions]. The first question comes from Akshat Kacker of JP Morgan.

Three questions from my side, please. The first one on Powerise. When I look at the business in North America, the slowdown looks to be quite pronounced sequentially. Could you just give us more details of what's happening in this region? Is this OEM specific where you have been hit by a negative customer mix on inventory reductions or lower volume expectations or are you seeing lower take rates across the board from all of your customers in North America? That's the first question. The second one is on inflation and cost recoveries. If you could just help us by giving more details on, what have you already achieved this year in terms of your negotiations with customers as well as suppliers? And how should we think about the pickup in margins in Q4 versus Q3? That would be helpful. And the last one is on the industrial business. Could you just give us some more flavor on end market demand across different business segments? How is the order index looking like? Are we looking at sentiment that is tracking out across different end markets? And what does that mean for organic growth going forward?

Thank you very much, Akshat, for your questions. I'll start with the Powerise question, talk a bit about inflation and then industrial business before I also hand over to Stefan for his comments. But talking a bit about Powerise in North America, absolutely right and the business in North America in terms of Powerise was a little softer in the past. So, this was caused by higher inventory of this particularly car fleets in the industry, right? If you see the big producer for electric cars, the big factories, some of them which have been shut down for a number of weeks because of high inventories of these top-notch upper segment, electric vehicles, right? And, due to the fact that we are the major supplier for electromechanical devices, we were impacted by that. By no means it was a reduction in take rate. So, the take rates are up to the levels they have been in the past, and they continue to be on that level. We see that on all electromechanical devices, not only on the Powerise side but also on the door actuation side because comfort features are a way to differentiate from others, and that's why customers continue to put electromechanical devices for comfort in their vehicles, be it tailgate opening systems in automatic weight or door actuation systems. So, actually, it was driven by higher inventories to a certain share driven by the D23 and by the big producer for electric vehicles. And it was driven, as I said, by higher inventories because some of these OEMs have been working beyond the 100 days in terms of vehicle inventory on the upper segment fleet and this is something which they wanted actually to ease towards the summer period. And that's why some of the calls were softer in the past quarter, and this is something which will reflect in the second half of this year. So, it's all in our numbers as we speak. In terms of inflation and cost recovery from customers. We saw in terms of inflation predominantly for sure labor inflation over the course of the past 2 years, we also saw inflation on side of the material side but however, this is coming down as the economy gets softer. The predominant work we do currently is in terms of labor inflation recoveries in our plants and also still some cost recoveries, inflation recoveries from customers and suppliers. Just to give you there some flavor, in terms of inflation on the labor side, we've been seeing globally in the last 2 years, yes, 5% up to 10%, 11% inflation per year on the labor side, pending on the region. In the low-cost countries, it was a little higher in terms of percentages. If you take, for example, Germany, we was in the range of 4% to 5% for the U.S. in the range of 6% to 8% depending on the location. And this is something which we have been counterbalancing with automation equipment, pulling automation equipment in place. Stefan mentioned the par lines, which is a powerise, automated line, that's what it means with par line. The par line is now up and running in all regions, we built it up throughout this year to make us more independent from labor because these lines are producing the last generation and final generation, the current generation of our Powerise fully automated. Then for sure, in terms of inflation cost recovery from customers, some of the customers owe us money from the past 2 years. And this is why we are in discussions with these customers because typically, these negotiations, they take a long period of time. We've been greatly increasing our sales price, as you know, in the magnitude of 4% to 7%, depending on the business, whether it be automotive and industrial business in the last year already. And some of this stuff is carryover, was also carry over in the discussions, so we've been managing also here positive trends in terms of customer negotiation, which we'll see in the fourth quarter this year materializing. In the same way on the supplier side because due to the fact that some of these materials are now not in inflation, but in a deflation mode, we are still in discussions with the suppliers and also see here the one other percentage points depending on the commodity coming up. So, what does this mean for the rest of the year? And this is what I meant with confirming our guidance, which we did hand out on the 11th of June this year, with the current EBIT margins we have on hand, plus also with the EBIT margin development with these initiatives, we feel comfortable to reach our revised guidance for the year, which is in between 11.7% up to 12.3% in terms of EBIT margin. So, before I hand over to Stefan also in terms of industrial business and end markets, I would say it's all in the scheme of early this year when I say construction equipment and agricultural equipment still in a stressful environment. This is coming to an end. It's more stable than the beginning of the year. However, we see here still an impact of the overall economy in these 2 areas. And then there is, for sure, some dependency on how the elections in the U.S. will go when it comes to the solar business because this pretty much depends on how the solar business will be tackled going forward. We see still very good opportunities in South America. However, also, with the initiative 'America First', we are the only ones now with a newly set up line, which we transferred from Mexico to the U.S. We're the only supplier who is able to produce solar systems and damping system for solar equipment in the U.S., which actually supports the initiative of 'America First'. So, we are wherever the customer is and needs us in the future with the solar systems. However, at this point in time, and this is also something which we see for the coming months, pending on the election, this business is basically stable but on lower levels than we all would love to see. When it then comes to the automotive industry in terms of sectors, the automotive sector is, for us, stabilized. It's a little softer than we expected as announced in the second half of this year. It's, however, stabilized, and we see here a stable business development for the months to come compared to our last forecast we gave in June. In the same way, commercial vehicles impacted by lower demands on the globe early this year, we see now basically flattening out and a stable foundation for the months to come. From our perspective, it will not go further down, it will stabilize on these numbers and also here, we see good progress. As a topic which I would like to highlight is, for sure, DESTACO because DESTACO generated EUR 48.8 million in terms of revenue with an EBIT margin of close to 20%. This is exactly what we've been planning for and they are by far better than their industrial peers with their strong portfolio. They have a wide portfolio of clamping, gripping, conveyor belts, as I highlighted as one of the sales highlights, then they have also in the portfolio, remote handling equipment. And these 4 market segments they have in their subsegment of automation stabilizes the business pretty much. And this is something which helps them to get through a softer market environment, which certainly many others in the market experience, which they are able to soften up and which they are able to maneuver through in an excellent way. Stefan, from your side, anything to add?

I think perhaps to give a kind of flavor on the last question, actually, what you said about the industrial business. And here, nothing to add what Michael said on the DESTACO business. In our former calls of the last quarters, we said that there are some topics where we see a recovery on the industrial business. And there are different ones, that is the independent aftermarket where we obviously see that this will improve. We also, as Michael said, we have this issue about uncertainty about the election in America. Nevertheless, also here, the sale of, let's say, [indiscernible] will now increase out of U.S. production in our fourth quarter. But it would be too early to put out there a really big trend for the next years to come because we have to see what the election will bring and how of everything on that will continue. Nevertheless, those small detailed optimization improvements that we anticipated when we explained the Q2 numbers, they're really starting taking first fruits and this is coming back to normal. Also, when we're talking about the distributor business here also the high inventories, what they build up, let's say, as an own production against inflation that is also now starting getting more and more normalized. This, in addition with a very great development in the aerospace business, which in that perspective, unfortunately, is not the biggest market segment in industrial but there are some topics where there is more than just hope that we have a good developed at the end. And this is what hurts us and what is very unfortunate is with end of May, starting getting, let's say, cancellation, short-term cancellation of commercial retail producers of car manufacturers on the OEMs that they would use the call-offs in a quite significant way, and this is what hurt us. But I think, as I've explained in my words about the regions, we not only talking about, we really started implementing all those measures to flexibilization of our costs. All of us know that this cannot be always on the same day but takes a little bit time. I think we are on a good way, and we will continue not just the activities on automation, what we already started last year, also that in terms of CapEx needs on time on the test will happen. But the cost flexibilization is one major topic we really take seriously, and I explained the numbers overall that we had by reducing 204 people of wages earners and 155 people on temporary workers that shows, and that's just in the last quarter, that shows that we take that really much serious. Powerise North America, and that is, from my perspective, also by it for other regions is, here, we are talking really much currently on the mix. You know we have some customers or especially one customer where we are 100% supplier on e-mobility cars, that is obviously currently was not the best quarter over there in terms of own production. But also here, as I already said, the number is starting to stabilize and therefore, we will not get now on short-term basis back to very, very high growth, but it's a good stabilization. The excess inventories on cars, at least for a proportion should now be reduced in the last quarter, perhaps beginning this quarter, but the next ones to come in the fourth quarter should be almost eliminating this overproportionate inventories they had on that.

The next question comes from Yasmin Steilen of Berenberg.