Semperit Holding AG

VSE:SEM

Earnings Call Transcript

[Martin Füllenbach, executive]

Good afternoon, ladies and gentlemen. Very warm welcome from Vienna to present our first quarter 2019 results. As always, with me in the call is our CFO, Frank Gumbinger, who will take you through the financials in a couple of minutes. And afterwards, as always, the 2 of us will be available for Q&A.

It's been almost 2 years or 8 quarters since standing at the helm of Semperit. Therefore, I am particularly delighted to inform you that this is the fifth quarter in a row of increased profitability at both EBITDA and EBIT level, with 3 out of 4 segments continuing to be profitable. So we have done a major achievement as part of our transformation process, but the journey of restructuring obviously ain't over yet. But so far, we stick to our promises and continue to deliver.

As in previous quarters, the Industrial Sector was the highlight of our profitability improvement, as a result of which both group EBITDA and EBIT continue to make significant progress. At the same time, revenues in Q1 were down by 3.6% to EUR 212.9 million, largely as a result of the significant 10.7% decline in the Medical Sector.

In terms of reported numbers -- and please note that there were no year-on-year adjustments due to material one-offs. Group EBITDA was up by 4.6% to EUR 16.5 million, with the 7.7% margin being the highest one in the last 9 quarters. This is a clear evidence that we are on the right track in order to achieve our 10% EBITDA margin by year-end 2020.

Even more impressively, group EBIT was up by 30.8% to EUR 7.8 million, with the EBIT margin improving to 3.7% year-on-year. In terms of profitability, I am proud to be able to report the first positive net operating profit at EUR 3.2 million ever since Q3 2016 for 9 quarters, basically. In this context, I should also mention that we've significantly reduced CapEx. Please note that the EUR 16.2 million included some cash-out spillover from investment projects from Q4 2018. Hence, our key focus points remain consistent. Cost and process optimization, quality improvement and the reduction of complexity are the main strategic pillars of our transformation process. Ultimately, we need to translate them to an increasing profitability and a positive free cash flow.

Let's move on to Slide 4. You have already been familiar with this slide from our previous 2018 year-end results announcement. But more importantly, the trends of the transformation process are further gaining momentum. I've already commented on the headline numbers for group revenue and EBITDA before and would now just like to highlight 2 new developments: Firstly, the 30.7% year-on-year EBITDA improvement for the Industrial Sector, which is indeed outstanding; and secondly, both the group EBITDA and EBIT margins were the highest in the last 9 quarters. All of these are very encouraging developments. And as the CEO of the company, I'm absolutely pleased with the way our employees have responded to such a major restructuring challenge.

On Slide 6, I continue with the operation highlights and start first with the year-on-year revenue development. As in previous quarters, both Semperflex and Semperform were the main contributors of top line growth, increasing their respective segmental revenue by EUR 2.4 million each. In turn, our focus on order and product profitability at Sempertrans led to a revenue decline of EUR 4.3 million or 12.3% year-on-year.

Similarly, our focus on less traded gloves at Sempermed resulted in a revenue decline of EUR 8.5 million or 10.7% year-on-year, and I will provide more details on that in a few minutes.

Overall, group revenue declined by 3.6% in the first quarter of 2019, which was partly a result of external macroeconomic developments and partly a result of our strong focus on quality, process optimization and profitability.

Over the page. While I see now EBITDA development for the Industrial Sector on a quarterly basis, you can clearly see what we are aiming for as profitability on an adjusted EBITDA level has improved by 30.7% year-on-year.

On the next slide, I'd like to share some operation highlights of Semperflex with you. With revenues being slightly up year-on-year, EBITDA was at the same level as in Q1 2018, but still on a very strong 22.8% EBITDA margin level. We managed to increase volumes for hydraulic hoses. However, I should mention that the size of our order book is currently in decline and that competitive pressure continues to rise.

As to Sempertrans on Slide 9, our focus on the quality of order intake has an impact on revenues as volumes declined. However, EBITDA at EUR 2.7 million was up substantially year-on-year, although it includes a EUR 1.3 million profit from the sale of assets from the closed factory in China. Overall, we keep our focus on the successful turnaround at Sempertrans and a stable market environment.

Turning the page, Semperform is moving ahead full steam at all cylinders with the 4% top line increase. Encouragingly enough, we see a continuous development across all business units in terms of both technology and market access. The improvement measures we have implemented in the last quarters show a high degree of effectiveness, and I should also emphasize that the improved order quality has helped to boost profitability. As a result, EBITDA was up by 72.7% to EUR 7.9 million, implying a strong 15.7% EBITDA margin.

Finally, on Slide 11, the Medical Sector continues to be a major challenge as the competitive environment remains difficult, especially in the North American health care sector. In this context, the 10.7% top line decline was mostly the result of the reduction of the natural rubber exam glove business. At a year-on-year comparison, EBITDA was down by minus EUR 2.3 million as we faced 4 quarters of negative EBITDA in a row. Having said that, operation improvements are beginning to show positive effects, and we remain absolutely determined to turn the business around.

And with this, I hand over to Frank to take us through the financials.

[Frank Gumbinger, executive]

Thank you, Martin, and also a very warm welcome from my side. I start the overview of financials and profitability at Slide 13. As Martin said before, we have no adjustments this quarter so we show reported numbers throughout this presentation.

With our strong focus on increasing profitability, it is very pleasing to see higher margins at both group EBITDA and EBIT. As a result, bottom line, we achieved a positive net profit of EUR 3.2 million.

On the next page, before we have a look at EBITDA, just a short recap on the top line. Slide 14 shows that the revenue declined both by Sempertrans and Sempermed, this time exceeded the revenue improvements by Semperflex and Semperform, resulting overall in a 3.6% year-on-year decrease in group revenues. Despite the drop at Medical Sector, Sempermed revenue still accounts for 1/3 of our group revenues.

On the next slide, I will show you the EBITDA bridge by segment. There is a much more robust figure as all industrial segments are profitable and in this case, exceeding the combined EBITDA decline of Sempermed and the Corporate Center. Both Semperflex and Semperform achieved strong EBITDA margins of 22.8% and 15.7%, respectively, resulting in a 7.7% group EBITDA margin for the first quarter 2019. At the same time, we realized a decline in EBITDA at Corporate Center. We had some group-wide transformation projects, which are accounted for in Corporate Center alone. That's the reason why EBITDA at Corporate Center was around EUR 7 million, above our usual run rate of about EUR 5 million per quarter.

The next slide presents the continuous improvement on EBITDA by quarter since 2017. This is now the fifth quarter in a row where we can show consistent improvements in operating EBITDA. To make like-for-like comparable, please note that we have adjusted -- or used adjusted EBITDA numbers in the previous periods where applicable. Please be also aware about the seasonality factor in the third and fourth quarter, which are generally weaker. So more or less, we are front-loaded in the first half of our year.

Over the page on Page 17, we show the combined growth and maintenance CapEx by quarter for each segment, which previously committed to growth investments being reduced in 2018 already. CapEx in Q1 is about 1/3 lower in comparison to Q1 2018 and includes some cash spillover from 2018. However, we are generally in line with our plan to significantly reduce CapEx in 2019.

On Slide 18, we present our working capital development by quarter, which is, also for me as a CFO, of highest importance. At Q1, all parts of the trade working capital have slightly gone up, but this is not due to a seasonality factor. Overall, trade working capital as a percentage of the last 12 months revenues ended at 21.2% in Q1 2019, which is well in line with our target.

The analysis of our balance sheet at Slide 19 shows that we continued to have a very solid cash position, both cash and cash equivalents having increased from EUR 120 million to EUR 140 million at the end of the first quarter 2019. At the same time, we managed to reduce net debt by EUR 17 million to EUR 96 million at the end of Q1, implying a net debt/EBITDA ratio of 2x compared with 2.4x at the end of 2018. Again, this puts us in a good position, not only with respect to our covenant but our -- over our own financial framework. In this context, equity ratio has continued to be above 30% target at 41%, but also please bear in mind the support from the EUR 130 million hybrid capital.

Let me finish my part of the presentation with reiterating the key components of our financial policy at Slide 20. Our focus still remains. The major target is to reach a 10% EBITDA margin at group level by the end of 2020, run rate 2021. Clearly, this needs to be underpinned by a strong capital position, tight working capital management and also prudent CapEx spending.

And yes, with this, I would like to hand back to Martin. Thank you very much.

[Martin Füllenbach, executive]

Thank you, Frank. From previous quarters, you shall be familiar with the essential parts of our management agenda 2019, which is summarized on Slide 22.

Having presented the Q1 2019 results today and being already in the middle of the second quarter, let me outline the following key messages. After a long period of profit decline, group performance has bottomed out by year-end 2018. Q1 2019 results have shown improved profitability in the Industrial Sector, while the Medical Sector still remains challenged. Management remains committed to our 10% EBITDA margin by 2021. And at the same time, we will reduce CapEx for 2019 to around EUR 40 million, half the amount of 2018.

We are strongly encouraged by the first quarter 2019 results and expect free cash flow to break even or turn positive in 2019 while further improving EBITDA.

And with this, we have come to the end of our presentation, and Frank and I are now available for any questions you might have.

[Operator]

[Operator Instructions] The first question comes from the line of Markus Remis with RCB.

[Markus Remis, analyst]

First question relates to Semperflex and your remarks that the order book is currently declining. I'd be interested in a bit more granularity on that regarding which product areas, which regions. Maybe you can also indicate by how much it is down. And also to clarify, is that on a year-on-year comparison? Or is that sequentially? And do you see that continuing? Or is it more of a temporary issue? That will be the first one.

[Martin Füllenbach, executive]

Markus, thank you for the question. First of all, we will not show the granularity you might want to see here now. But what I can tell you is that the -- what we see is basically a destocking from our customers, and we do see a strong impact in the industrial houses, but this is not yet to be seen as an upcoming recession. So you might have heard already in previous calls that we have competitors bringing production on stream and also a competitor working out of Turkey with obviously significant FX advantages. And all of this basically leads to a destocking in our -- on the customer side with significantly lower lead times of the product. So it's a trend, but more details, we can only issue in the second half of the year.

[Markus Remis, analyst]

Okay. So do you have any kind of idea how long that will continue? Or was that an issue that just started recently, say, at the beginning of the second quarter? Or does this refer actually to a destocking towards the end of the first quarter? So any sense on how far we are down the road with the inventory management of the clients? Or is there any inflection point expected in the coming weeks?

[Martin Füllenbach, executive]

See, we just get orders, and we try to understand our customers' usual order behavior. But I can't tell you when this will basically turn again. That's market dynamics, where we just have to wait and see. But we're prepared for whatever might come up.

[Markus Remis, analyst]

Okay, very clear. And then on Sempertrans maybe, you had this profit, which I think should be adjusted. You said there were no adjustments, but I think it should be adjusted as this is nonrecurring. What's the kind of the revenue outlook here? I understand you're kind of focusing on the profitable order, but EUR 30 million is actually the lowest point in revenues for many, many quarters. Do you think this is the low point? Or can it go further? Because ultimately, this business should have some operating leverage. And just trying to get a sense on kind of to which extent did the top line pressure hit up the apparent progress you're making in managing the cost base.

[Frank Gumbinger, executive]

Well, profitability as cash markings. So we are following profitable orders instead of just utilization of our factory, and that's what we see right now. And other than that, it applies the same. As I've said before, we do see the market only to a certain extent, and everything else is customer behavior and market dynamics that we closely follow up.

[Markus Remis, analyst]

Okay. But should we interpret this level as rather as a bottom or do you see more downside?

[Martin Füllenbach, executive]

Well, what we see in our focus currently is a slightly increasing order intake and sales revenue -- sales volume for the rest of the year. But again, it's up to the market. I mean, we have -- you know the lead times of our business. We're confident with the future business development.

[Operator]

The next question comes from the line of Christian Obst with Baader Bank.

[Christian Obst, analyst]

First of all, I have 3 questions. One is on the cost side. Personnel cost touching approximately EUR 50 million, which is -- seems to be very high despite the fact that you have ramped up your plan and -- in the Semperflex area, increasing wages and so on and so forth. But on the other hand, you have sold businesses, closed down and optimized something. So it seems that the EUR 50 million personnel costs are really at a very high level. What can we expect going forward? Or is there some special included in there? Another question concerning the overall EBITDA development. If we exclude the more or less one-off consulting costs and the EUR 1.3 million from the land sale in China, is the right assumption that the operating EBITDA and EBIT then would be below last year's number? And the third one is working capital. It's really an achievement, it looks like, but is -- trade table is down EUR 30 million year-on-year, while inventories and receivables are only down EUR 10 million. Is there something very special in the table line, what you have achieved? Can you give us some more detail from that?

[Operator]

Mr. Füllenbach, can you hear us?

[Martin Füllenbach, executive]

Just one second. We're just putting together the numbers, okay? Just give us 30 seconds. Thank you.

Okay. Personnel cost is actually increasing also due to a reclassification of leased staff, which was [ classified ] last year in a different position. It's an amount of around EUR 3.6 million. And so -- and there are no any other -- also in Page 20 in our report, you can see it in more details. And in respect of the working capital, let me have just a look on page...

[Christian Obst, analyst]

You have the slides there on Page 18.

[Martin Füllenbach, executive]

Page 18.

[Christian Obst, analyst]

Yes, Page 18, where you have the trade payables approximately EUR 30 million down, while inventories and trade receivables approximately EUR 1 million down on a year-on-year basis compared to March last year. So is there something special what you have achieved in the payables -- on the payables line?

[Frank Gumbinger, executive]

Yes. We have different topics which you should consider. One overall topic is definitely that we last year and the year before had significant higher investment CapEx of around EUR 75 million to EUR 80 million. And as said before, we -- our overall CapEx is around EUR 40 million, which has an impact over on the accounts payables. And in addition to that, for sure, we also try to optimize wherever we can, in accounts payables, for example, to get control or something like this into our payment terms in order to optimize also trade payables in respect of that. And last but not least, you always have a certain closing date effect, but there should not be a significant effect out of this end of March.

[Christian Obst, analyst]

Okay. There was a question concerning if we compare the EBIT and EBITDA with the year before and exclude the external consulting cost and the EUR 1.3 million land sale, so then normally one should...

[Frank Gumbinger, executive]

Sure. No, no, that's correct. But I'd say, end of the day, we target also for an EBITDA margin later on then reported on 10%. And as we now go forward, we currently comment on our EBITDA reported as a 7.7% EBITDA margin.

[Christian Obst, analyst]

Okay. And then I have a last question, a little bit going forward. So you're targeting a 10% EBITDA margin, then let's assume you are going towards EUR 90 million to EUR 100 million EBITDA. What kind of percentage do you -- can expect in a more normal environment to transfer them from that EBITDA into free cash flow?

[Martin Füllenbach, executive]

I -- are you now talking about 2021 or...

[Christian Obst, analyst]

Yes. Yes. Yes. After achieving your 10% EBITDA margin and -- then let's put then assume something like EUR 100 million EBITDA. How much can you then generate free cash flow out of EUR 100 million EBITDA approximately? Rough guess.

[Frank Gumbinger, executive]

Actually, that very much depend on where we are in an investment cycle or not at the end of the day. And based on that we have 4 segments and as always in a certain segment of different investment cycle, we should have opportunities to improve our CapEx. Let's say, if we have around CapEx of EUR 40 million, we should see definitely a positive free cash flow in a lower double-digit euro area, something around that. But we don't further comment on concrete figures about that.

[Operator]

The next question comes from the line of Richard Schramm with HSBC.

[Richard Schramm, analyst]

Two questions, please. One, concerning the Corporate Center, where you commented earlier on that -- this increase year-on-year by around about EUR 3 million mostly due to some certain projects connected to the transformation process. Can you be a bit more specific? And was it kind of onetime thing? Or what should we expect for the year-end here? Because I have in mind that you expected that especially consulting costs would be clearly lower this year. So the overall other line, which was minus EUR 21 million last year, should be lower in the current year. Is it still your assumption? Or should we look more for a kind of stable development here?

And the second point concerning Sempermed. You mentioned that you have further reduced, obviously, unprofitable business here. Can you shed a bit of light more on how much is still left in the volume? We see now here -- or is this process going on? Or will this fade out now in the next quarters? And where do you see really the improvement in the figures because, actually, the results do not give us here a clear indication where an operating turnaround will come from.

[Frank Gumbinger, executive]

Okay. May I answer the first question in respect of the consulting cost? The consulting cost last year for the big restructuring program was not in Corporate Center or only a part -- a small part of it. The other part was -- has been in the segment. So therefore, it cannot be deducted from the Corporate Center, EUR 21 million. And in respect of these additional transformation project expenses, this is also related to some further developments in -- of our strategy overall, but also in respect of finance transformation where we had some further expenses in the first quarter 2019.

[Martin Füllenbach, executive]

The second question on Sempermed is difficult to answer. Our strategy basically, again, follows customer needs. We start to replace traded volumes by own production wherever this fits into customer demand so I can't clearly give you where we are right now. It's possible that this might continue. It's just depending on customer orders and where it does make sense also in terms of profitability calculation. And the second question you had in terms of med was again what?

[Richard Schramm, analyst]

Yes. You mentioned that there is already some...

[Martin Füllenbach, executive]

The improvement, right. I can see -- there's a reason why this is a 36 months restructuring program and not an 18 months or 12 months program because we knew from the beginning that med will take longer. What we do see as an executive about here on a weekly basis are increasing operation numbers in terms of overall equipment efficiency, in terms of the first time right, in terms of quality cost. So I see these numbers getting up, but there is always a certain lag -- time lag between operations getting better and bottom line impact. So that's what you then will see in the next quarters.

[Richard Schramm, analyst]

Okay. And just maybe to round it out, what is currently then the biggest risk you see? Is it from the competitive side? Or is it more from the cost side here that this -- the restructuring process might not develop as expected?

[Martin Füllenbach, executive]

I think, first of all, in doing business, the biggest pressure always comes from customers with the orders placed. And we do see that the cost pressure continues, customers asking more and more for discounts on price, which then basically translates into higher expectations in terms of the operation restructuring, bringing down our manufacturing cost. So that's where we are right now and that is basically, in a nutshell, what we do in our restructuring process here.

[Operator]

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

[Martin Füllenbach, executive]

Ladies and gentlemen, thank you very much, and we're going to reassemble on August 14 for the Q2 investor call. Thank you. Bye-bye.

[Operator]

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