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Edited Transcript of NOEJ.DE earnings conference call or presentation 10-Aug-22 12:00pm GMT

Q2 2022 Norma Group SE Earnings Call Maintal Dec 7, 2022 (Thomson StreetEvents) -- Edited Transcript of NORMA Group SE earnings conference call or presentation Wednesday, August 10, 2022 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Annette Stieve NORMA Group SE - CFO & Member of the Management Board * Michael Schneider NORMA Group SE - CEO & Chairman of the Management Board ================================================================================ Conference Call Participants ================================================================================ * Andres Gujan Carnot Capital AG - Partner & Portfolio Manager * Ingo-Martin Schachel BNP Paribas Exane, Research Division - Research Analyst * Nicolai Kempf Deutsche Bank AG, Research Division - Research Analyst * Philippe Lorrain Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Dear ladies and gentlemen, welcome to the conference call of NORMA Group SE regarding the presentation of the half year report 2022. At our customer request, this conference will be recorded. (Operator Instructions) May I now hand you over to Dr. Michael Schneider, CEO of NORMA Group SE. Please go ahead, sir. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [2] -------------------------------------------------------------------------------- Yes, thank you very much for the introduction. Ladies and gentlemen, welcome to our analyst call Q2 2022. You all saw our Q2 reporting, and you also 2 weeks ago, our profit warning for 2022 that we had to reduce our margin expectation for the running year. We will come back to that topic later. And of course, to point that out at the beginning, we are not happy about that development, but we will come back to that later. Let us first come to the Q2 figures 2022, and I flip to Page 2 of our presentation that was distributed. In terms of sales, we increased our net sales to EUR 318 million, which is an increase of 12.9%, and an organic increase of 5.3%. Our adjusted EBIT of EUR 22.3 million, it is a decrease versus last year by 38%, and we show for the second quarter an adjusted EBIT margin with that of 7%. The referring net operating cash flow is at the level of EUR 26.4 million, while the equity ratio is, at the end of Q2, 44.7%, and net debt at EUR 382.8 million. We had our Annual General Meeting on May 17, and all agenda items were approved by the AGM, and we also decided -- the AGM decided to have a dividend of EUR 0.75 per share. As mentioned, we have an updated guidance. We keep our sales guidance unchanged, which is medium to high single-digit organic growth in sales. Our EBIT margin of around 8% with a previous expectation of around 11%, and a net operating cash flow of around EUR 60 million, which was previously around EUR 100 million. If you go to the next page, Page 3, to see the topline development in Q2 and H1. We had advance development in the first half year 2022 that shows an increase of 9.5%. The top line increase in net sales by 12.9% to EUR 318 million in Q2 '22 compared to EUR 282 million in Q2 last year, mainly it's referring to Americas. We had a good -- very good development in sales in Americas and a positive currency effect. In terms of organic growth, as mentioned, 5.3% in Q2. The performance in Americas was very strong. EJT sales increased to EUR 168 million with an organic growth of 0.7% due to a strong Americas business, but almost being offset by a weak development in China business in APAC. Our Standardized Joining Technology sales increased to EUR 147 million, showing a strong organic growth of more than 10% -- 10.5%, mainly based on the U.S. Water business and even the APAC region. While currency effects in terms of translation effects is that EUR 21 million or 7.5% in Q2 '22. With that development, and this is shown on Page 4, we have a regional split that shows now 46% of our sales in Americas, 40% in EMEA, and you see the reduction of the share in sales in EMEA coming from 45% last year to 40% now and a ratio in APAC of 14% of sales. And we see also for the regions, the sales development for the first half year, meaning in Americas, sales in the first half year, EUR 290 million, which is an increase of nearly 27%. The EMEA sales in H1 2022 decreased slightly by 3.7% to EUR 246 million. And in APAC, sales increased slightly in the first half 2022 to EUR 87 million, meaning an increase of 2.9%. If we take a deeper dive into the regional sales, which is shown on Page 5, we see, for EMEA, an organic decline of 1.1% in our Engineered Joining Technology business in the second quarter, which is mainly due to weaker automotive business, which is also related to the Russia-Ukraine crisis and partly compensated by positive pricing effects. The Standardized Joining Technology in EMEA declined by 3.3% in Q2 due to lower volumes and partly also compensated by a higher pricing. In Americas, we saw an organic growth in Engineered and even Standardized Joining Technology. In Engineered Joining Technology, we had an organic growth of 13.4% in the second quarter, which is mainly driven by a very positive pricing. And in the Standardized Joining Technology, which also includes the Water Management business, we have a strong double-digit organic growth of 14.9% in the second quarter, which is mainly related to the U.S. Water business growing more than 20% -- 20.7% in the first half of 2022. In APAC, we have a different picture in EJT and SJT. We had an organic decline of 13.4% in the Engineered Joining Technology business, mainly due to the difficult China business, which is mostly based on the COVID-19 impact and the lockdowns in China, which were hurting the second quarter significantly. And we had a strong organic growth of 20% also in the SJT business, also due to positive water business in India, Malaysia and even Australia. Based on these sales development, we see the margin development on Page 6, on an overview. And we see that we have for the first half year 2022 an adjusted EBIT margin of 8.5% and 7% in the second quarter. We saw the weakening adjusted EBIT margin based on external and even internal effects. External effects were high increase in gas and energy prices as we all know and read in the newspapers with a further increase of inflation and ongoing effects of the war in Ukraine. And of course, we also still have the corona impacts, and we saw that especially in the second quarter in China with the risk of further lockdowns in China. And what we saw higher costs in our operations business and our supply chain, which means logistics costs and operations costs are higher than what we budgeted and expected as well as higher IT implementation costs based on these developments in operations and logistics. So the margin for the first half year at 8.5% EBIT margin, meaning for the second quarter at 7%. With that, I hand over to Annette, our CFO, for a couple of more details on the financials. -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [3] -------------------------------------------------------------------------------- Well, thank you, Michael. So then let's have a deeper look to the P&L development, and in particular, to the corresponding margins. The material cost ratio increased by 430 basis points, and the gross profit ratio decreased by also 430 basis points in Q2 '22. This is mainly due already mentioned higher cost, in particular related to the global supply shortages to higher inflation and to effect on the Ukraine war, in particular the additional pressure on our main raw materials, steel and driven here by higher energy costs. Looking to the personnel costs, we see an improvement in personnel costs and in the personnel cost ratio by 70 bps to 25% in Q2 and by 50 bps in H1, respectively. This is majorly due to our downsizing of plants, in particular here in Serbia and Germany. Our OpEx increased by EUR 11.9 million to EUR 50.2 million. This leads to a ratio of 15.8%, mainly due to a higher number of leased workers and IT implementation costs. Consequently, our adjusted EBITDA margin decreased by 590 bps to 11.6%, and our adjusted EBIT margin decreased by 580 bps to 7% in Q1 (sic) [Q2] and to 8.5% in H1. Coming now to our operational adjustments. On the next slide, the message of the slide is that we operation-wise adjust nothing. So our adjustments, we fell only to PPA-related adjustment, which brings us to a reported net profit of EUR 26.7 million, an adjustment of EUR 8.3 million. And by this, an adjusted net profit of EUR 35.0 million. Our EPS refer then reported earnings per share is EUR 0.84. The adjustment corresponding is EUR 0.26, and our adjusted earnings per share is EUR 1.10. If we look to the next slide, we can see here, again, on the one hand, our dividend paid. Michael already referred to that. We paid a dividend of EUR 0.75 per share, which corresponds to around 33% of our adjusted group net profit of the fiscal year '21, and this has been paid in May. So adjusted earnings per share are amounting to EUR 0.44, and we see a corresponding adjusted net income of EUR 14.1 million in Q2. This shows in H1 an adjusted earnings per share of EUR 1.10 and a corresponding net income of EUR 35 million. Reported EPS is, in this case, EUR 0.31 corresponding to EUR 10 million net income, and for H1, EUR 0.84 corresponding to EUR 26.7 million. Referring then to our equity ratio and our net debt. So our net debt increased by 20.2%, mainly due to the dividend payment of EUR 24 million paid in May, and business seasonality, which increases with the higher portion of Water business. Our leverage is showing an increase to 2.5 due to higher net debt and due to the lower EBITDA. Our equity ratio slightly improved from 44.6% to 44.7%. We are based on a very solid maturity profile. I think as we want to mention as well, so our next larger refinancing is due in '26, and we have no potential cost for risk anymore. So solid basis for that. Coming to the net operating cash flow development. Our net operating cash flow is impacted, on the one hand, by the decreasing of our factoring programs by EUR 6 million to EUR 56 million by the end of H1. A lower adjusted EBITDA with a higher working capital outflow leads us to a decrease in net operating cash flow before CapEx of EUR 27.7 million compared to EUR 59.1 million in H1 '21. CapEx spendings have slightly been decreased. We spent EUR 17.9 million in H1 compared to EUR 19.8 million in '21 -- H1 '21. This is resulting to a net operating cash flow of EUR 9.8 million compared to EUR 39.3 million in H1. Coming now to the NORMA Value Added, which is NORMA's long-term strategic target. You can see there that the NOVA is amounting to EUR 4.2 million, which is EUR 17.4 million lower than comparable figure to -- of H1 last year, which was EUR 21.6 million. Yes, by this, I hand over again to Michael. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [4] -------------------------------------------------------------------------------- Yes. Thank you very much, Annette. As I mentioned earlier, we adjusted our guidance for 2022, and of course, we put quickly a task force together regarding our performance improvement program. And so far, this task force defined the basic structure of that improvement program, which is focus number one for the next weeks, months and also for the next year. And this performance improvement program has 3 focus areas as stabilizing measures, especially short term for 2022. We have additional efficiency measures on a midterm perspective to sustainably improve the profit situation on a mid- and long-term perspective. We have structural measures to further increase overall efficiencies with the clear target to pursue our profitable growth strategy for the future in our 3 strategic business units, mobility, new energy, industry applications and water management business. So that these are part of our performance improvement program, where we integrate all of the different measures and programs so that we have one program that will be managed if it's global excellence, get on track, pricing, operations improvements in one integrated program with a focus on operational improvements internally. This is the basis to further stabilize and bring us to a significantly better margin level because if we take the outlook of 2022 as updated company guidance, which we show on Page 14, we have external and internal reasons for these adjustments. You know all the external aspects in terms of ongoing material price increases, inflation even in the second half of 2022, and from our point of view, probably also 2023 regarding gas energy and the subsequent consequences. We still have the war in Ukraine ongoing and not seeing an end, and we have further lockdown risks in Asia Pacific, especially in China. You must say that we have internal challenges as well in increased cost in business operations and supply chain, partly related also to COVID and the consequences. We see that the relocation of the plant Gerbershausen, which we are closing in the course of 2022, to Maintal, Czech and Sweden. It's not as efficient as we would like to have it, and we have in consequence out of that some higher IT costs -- IT implementation costs. So all of that in total, let's do the adjusted company guidance. Unchanged on the sales perspective, EBIT margin around 8%, net operating cash flow around EUR 60 million and the NOVA, NORMA Value Added between minus EUR 20 million and EUR 10 million out of that adjusted guidance for 2022. This gives an overview on the current situation, and of course, as the moderator pointed out earlier, and we like to have it open for your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We take our first question from Philippe Lorrain with Berenberg. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2] -------------------------------------------------------------------------------- A couple of questions from my side, and the first one is more on the organic growth in Q2 and in H1. So if I remember correctly, you told us in Q1 that about 6 percentage points of the organic growth was realized through pricing. Could you give us an update on Q2 and on H1, please? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [3] -------------------------------------------------------------------------------- Yes. Thanks, Philippe, for your question. If you take the first half year of 2022, we had pricing impact overall of plus 7.9% and a volume impact overall of minus 4.2%. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4] -------------------------------------------------------------------------------- Okay. That's perfect. Is there a big difference in pricing contribution within the different regions? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [5] -------------------------------------------------------------------------------- Well, we have in the regions differences according to the business structures. So for example, we have split or the most important impact comes from Americas, where we have 10-plus percent and around 5% in other regions. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6] -------------------------------------------------------------------------------- Okay. Perfect. Then I've got a question as well on the plastics. So are there indexation closes with regard to that specific input? And is it easy to pass through the increase in plastic prices as a result of rising energy prices to your clients? Perhaps, you can tell us a little bit how the sourcing is organized here and how transparent the market prices are? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [7] -------------------------------------------------------------------------------- Well, if we take plastic area in terms of resins, polyamide, we see also price increases, and we are increasing also the plastic material prices, but there is no fixed index. It's a bilateral negotiation with our customers. We have to see that the market overall is a very, let's say, oligopolistic market in 4, 5, 6 suppliers for plastic, for resins, for PA66, PA6. And so far, prices are increasing also for resins in bilateral negotiations with our customers, but not an index. -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [8] -------------------------------------------------------------------------------- That is increased currently. The pressures increased even that the first suppliers, they already started to declare force majeure, and that they will supply clients like us with a lower quantity. They shrink that quantity by 20%. Things like this are happening for the time being. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9] -------------------------------------------------------------------------------- Okay. So I guess -- I mean, I remember the situation in 2018, and you had issues, if I remember 2018, 2019. So I guess like with regard to plastics, which is probably still a good part of your product mix, it's a bit of a mess, and that's where most of the pain is being felt. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [10] -------------------------------------------------------------------------------- Exactly. It's plastic materials, resins, and even still steel. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11] -------------------------------------------------------------------------------- Yes. Yes. But for steel, I guess it's easier to pass that to your customers. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [12] -------------------------------------------------------------------------------- Yes. Yes, exactly. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13] -------------------------------------------------------------------------------- Okay. Perfect. Then it's a very actual topic as well, I guess, especially with regard to plastics and the force majeure. Are there any negative impacts that are to be expected from the drought and low rain and river levels in Germany and Europe? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [14] -------------------------------------------------------------------------------- Yes, that's a good question, Philippe. The low rain and the shipping possibilities, we currently don't see it. But if the drought is going on and the level of water is going down, of course, there might be problems. But currently, we cannot see direct impacts. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15] -------------------------------------------------------------------------------- Okay. Perfect. And then I'll have like one more question for you with regard to net debt as well, but for Annette. How is the feeling regarding the net debt levels, especially with regard to the covenant and the current net debt-to-EBITDA that is about 2.5x? -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [16] -------------------------------------------------------------------------------- So all in all, for sure, we are increasing in terms of leverage. That is majorly caused by the dividend we paid. So what we expect is that we decrease again by the end of the year. So I expect leverage around 2.2, 2.1 , something like that. For sure, for the time being, we are missing EBIT, and on the other hand, refinance, I would say, more expensive raw materials so that it is all about. But I have no worry there. We will delever in the second half of the year. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [17] -------------------------------------------------------------------------------- Okay. Perfect. And then the last one, and I'm back in the queue because all the price increases make the comparison base a little bit difficult. But how much sales would you think that you can deliver based on the current setup and also based on the current pricing situation? So assuming no further price increase and excluding the closure of Gerbershausen. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [18] -------------------------------------------------------------------------------- I didn't get acoustically the last part of your question. Closure of what? -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [19] -------------------------------------------------------------------------------- I was saying, if you exclude as well the closure of the German plants that is going to take place this year? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [20] -------------------------------------------------------------------------------- Where we will -- we transfer the products from that plant into other plants like Germany, Czech and Sweden. And so far, there will not be, let's say, a structural change in sales. It will be transferred to other locations, and the sales will come from the other locations. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [21] -------------------------------------------------------------------------------- Yes. I guess it's just taking some time. But if we assume no further price increases, what would you say is the kind of sales level that you could cover with the current setup in production without having to spend more money on the growth CapEx? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [22] -------------------------------------------------------------------------------- Well, we stick to our guidance, mid- to high single-digit organic growth in terms of sales. So if we take the sales change, it will not be impacted by that. It will not be impacted by that relocation. -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [23] -------------------------------------------------------------------------------- So this relocation has been planned for long and so the decision has taken place in 2019. And since then, we are realizing that what we are suffering now about is that, I would say, the closure -- the closing of, in particular, this plant in the Eastern Germany. So that brings inefficiencies, but there's nothing what we didn't plan. We didn't plan that we will suffer so much in terms of efficiency, but the plan itself, I would say, is truly according in terms of volumes and transformation to other countries is fully according to what we planned. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- We take our next question from Ingo Schachel with BNP Paribas. -------------------------------------------------------------------------------- Ingo-Martin Schachel, BNP Paribas Exane, Research Division - Research Analyst [25] -------------------------------------------------------------------------------- The first one would be on your performance improvement trajectory into the second half. Thanks for already shedding a lot of light on pricing and input costs. My question would be on the internal factors, the plant closure in Thuringia and the IT implementation. Can you give us a rough indication whether it's going to get worse? Or the profit burden in the second half will be higher before it gets better next year? And also when it comes to your profit improvement program, you've not given us any numbers in terms of savings, which is of course understandable. But can you confirm that the mid- to long-term profit ambition after execution of the program would be comparable to the low- to mid-double-digit levels from low to mid-teens levels you had in the past? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [26] -------------------------------------------------------------------------------- Well, Ingo, let's take your second question first. Of course, we want and we will improve our EBIT margin significantly, and of course, we want to be significantly better. And the EBIT margin going into the old direction. This is, for sure, the target. Nevertheless, we have to see that we first have to, let's say, make some homework regarding the relocation from Gerbershausen to Maintal. The challenges are clear, measures are defined, it's a matter of execution. -------------------------------------------------------------------------------- Ingo-Martin Schachel, BNP Paribas Exane, Research Division - Research Analyst [27] -------------------------------------------------------------------------------- Okay. And in terms of the impact of the Gerbershausen inefficiencies? Is it going to get worse in the second half? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [28] -------------------------------------------------------------------------------- If you take the guidance, if you take the level of 7% in Q2, and if you want to go to around 8% for the full year, we need to see a sequential improvement in Q3 for the next step. -------------------------------------------------------------------------------- Ingo-Martin Schachel, BNP Paribas Exane, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Okay. Understood. And on your revenue developments on the EMEA revenue growth rate in the second quarter. I think you have disclosed that there could be a mid-single-digit pricing effect. If I strip that out, it looks like your EMEA volumes might have been down mid- to high single digits and the market that was probably flat when it comes to light vehicle production. How do you feel about your revenue growth rate in EMEA in the second quarter? And are there any particular reasons for potential underperformance, clients not accepting price increases or other factors that contributed to a weaker quarter? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [30] -------------------------------------------------------------------------------- Thanks, Ingo. I think there's not a reason for being weaker than market because if it takes the market and take LMC figures for Q2, I think Q2 showed for the second quarter plus 1.4% in light vehicles and minus 28% for heavy vehicles. And we are, in terms of sales, down 6%. So if you take light vehicles and heavy vehicles, we are roughly in line with market. -------------------------------------------------------------------------------- Ingo-Martin Schachel, BNP Paribas Exane, Research Division - Research Analyst [31] -------------------------------------------------------------------------------- Okay. That explanation makes sense. And then just quickly on the market expectation for the second half. In your guidance, have you incorporated higher light vehicle production in the second half than the first half? Or should your guidance also be achievable, if the legal production only remains flat sequentially? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [32] -------------------------------------------------------------------------------- Well, we are very confident or keen to hold our sales development. In terms of pricing, we see good development. And in terms of volume, it develops as we expected relatively flat in the second half year. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- (Operator Instructions) We take a follow-up question from Philippe Lorrain with Berenberg. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [34] -------------------------------------------------------------------------------- Just regarding the organic growth guidance that you have mid- to high single digits in terms of organic growth. In Q1, you were saying that basically about half of the, let's say, around mid-single digits would be the pricing contribution. Do you update that after H1? Or do you stick to that comment? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [35] -------------------------------------------------------------------------------- Well, we stick to that comment. We have a higher portion in terms of pricing, which comes because the energy prices, gas prices are furthermore increasing. This is what we also reflect in the sales prices. So that -- prices are going, let's say, slightly up while volumes probably are a little bit weaker than what we expected so far. So a different development pricing up, volumes down. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [36] -------------------------------------------------------------------------------- Okay. And would you take that... -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [37] -------------------------------------------------------------------------------- Philippe, that is natural in the business because, in particular, our alloy surcharge, we were pretty successful in cutting down the timing of recharging that, but with a few even not, and these will be invoiced in the second half. So naturally, it has to go up in the second half in terms of pricing as well. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [38] -------------------------------------------------------------------------------- Yes. Yes. Yes. That was basically the take from the full year call and the Q1 call as well that depending on where prices and costs were heading from the prices had to be adapted as well quickly. But just in terms of what would you then say now like basically, it's moving like both ways for pricing up and volumes down by a couple of percentage points. Or is it just way too much in terms of estimate right now? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [39] -------------------------------------------------------------------------------- Well, we have to see how this will figure out. Probably, it's a very volatile situation that -- so that there is no, let's say, fixed answer on that currently. -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [40] -------------------------------------------------------------------------------- At the end, it depends all about inflation. We go so often to the customer as we see inflating incoming prices. So therefore, at the end, the pricing, what we do needs to cover inflation and a portion more in order not to dilute the margin. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [41] -------------------------------------------------------------------------------- We discuss the automotive business with our sales teams, and if you look on the development of the automotive business over the last 1.5, 2 years in terms of material price increases, inflation, et cetera, pricing is getting a normal part of automotive business. 5 years ago, the only pricing initiative was taking prices down. That changed completely. So pricing and giving that part to also OEM customers is part of the normal automotive business meanwhile. -------------------------------------------------------------------------------- Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [42] -------------------------------------------------------------------------------- These are a couple of really interesting remarks that you make actually, Annette, as well with regard to basically using the pricing to keep the margin and not just keep the profit. So you reckon that you face good chances that this is going to be the case over the years now because there is a bit of a change in the automotive sector. -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [43] -------------------------------------------------------------------------------- Sure. So at the end, there is a change. We contact the customer nowadays, it depends on the customer 2, 3 times a year. In the past, we had fixed contracts and -- which gave us already reduction of the price, so that really fully changed even in automotive. And also in particular, also in industry business and water, we did already the 4, 5, fix price increase and that's incredible. But I think if you read each and everywhere in the newspapers and the same do we. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- We take our next question from Nicolai Kempf with Deutsche Bank. -------------------------------------------------------------------------------- Nicolai Kempf, Deutsche Bank AG, Research Division - Research Analyst [45] -------------------------------------------------------------------------------- Nicolai Kempf from Deutsche Bank. My first one would be actually in the short term. We've heard from some suppliers that the OEMs are willing to share costs with them regarding material prices. Can you also confirm this? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [46] -------------------------------------------------------------------------------- Well, if I understood you correctly, to confirm if I'm willing to share costs? Of course, nobody of the OEMs wants to share cost, let's say. Of course, they're tough negotiation with our customers, but I think there are clear arguments in terms of a very transparent material price development, even for steel waste prices and alloy surcharge. So together with them, we see a very good and constructive development that they share that. On the other side, probably in the alloy surcharge area, it's also going in the opposite direction when in the future alloy surcharge prices are going down. So it's a certain partnership, and there is, of course, the trend to share the costs. -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [47] -------------------------------------------------------------------------------- So you can see that at the end, the OEM is taking the responsibility. They are not knocking on our door. They wait until we knock. We have contracts, and therefore, you have to knock. But at the end, if that would be a business problem, then they would stick to their contracts. But they see and they know that there is something to do, but they wait until you contact them. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [48] -------------------------------------------------------------------------------- And at the end of the day, what we see is that we have mission-critical -- small mission-critical part that also our customers need, and we love to deliver these products to them. Nevertheless, also our customers and also we must have fun in selling these products, and this is what we do together in a certain, let's say, business partnership. -------------------------------------------------------------------------------- Nicolai Kempf, Deutsche Bank AG, Research Division - Research Analyst [49] -------------------------------------------------------------------------------- Okay. Understood. And my second one would be a bit more long term because I'm tracking a bit of your equity story currently. Over the last year, you've done very successful M&A, especially in the Water business and give me -- this strategy doesn't work anymore. So how do you shift the perception from being an automotive supplier to more like cap goods name for the capital market? -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [50] -------------------------------------------------------------------------------- Well, Nicolai, we are happy to -- or we are constantly looking in water management targets to be very open, but you also saw our leverage of 2.5 at end of June. So looking into the leverage and looking into the, let's say, macroeconomic risks that we might have and following a more, let's say, conservative financial policy, we have to see what we can do in 2022 or what we can do in 2023. Independent from that, we would love to buy a new water management product target. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- We take our next question from Andres Gujan with Carnot Capital. -------------------------------------------------------------------------------- Andres Gujan, Carnot Capital AG - Partner & Portfolio Manager [52] -------------------------------------------------------------------------------- I have a question on the cash flow. You show EUR 10 million net operating cash flow after working capital and after CapEx. Now the net debt has increased from EUR 60 million, and of course, you paid interest and taxes, but that's only EUR 15 million. So where is the difference? Where has the other EUR 55 million gone to? What's missing? -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [53] -------------------------------------------------------------------------------- Well, at the end -- if you look to the net cash flow, and we refer here to the operating cash flow, we paid the dividend and that is in the net debt. So we paid the dividend roughly EUR 24 million, EUR 25 million, and we are referring in our things here to the operating net cash flow, and that is not considering the finance net cash flow. And therefore, the dividend is the major bulk of it. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [54] -------------------------------------------------------------------------------- And if you take tax and interest, so that's 2 major topics. It's a pure operating cash flow and you have to deduct even tax and interest to come to a certain free cash flow. -------------------------------------------------------------------------------- Andres Gujan, Carnot Capital AG - Partner & Portfolio Manager [55] -------------------------------------------------------------------------------- All right. Yes. So that's EUR 15 million, right? Tax and interest. Plus dividends, EUR 25 million, then we are at EUR 40 million, but net debt has increased EUR 60 million. -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [56] -------------------------------------------------------------------------------- Well, at the end, that's also inflation. We were stepped up in working capital. All this is higher in prices, and we have, for sure, a huge currency impact this year as well. -------------------------------------------------------------------------------- Andres Gujan, Carnot Capital AG - Partner & Portfolio Manager [57] -------------------------------------------------------------------------------- Okay. Okay. But generally speaking, how comfortable are you with your balance sheet? I mean you had a nice organic growth, but you had -- in the end, your net debt is increasing. So what -- and you have a leverage of 2.5. So how comfortable are you facing all these risks that you list from Ukraine to China, et cetera, et cetera? So are you also preparing measures there? -------------------------------------------------------------------------------- Annette Stieve, NORMA Group SE - CFO & Member of the Management Board [58] -------------------------------------------------------------------------------- So as I said, we are -- for sure, we are all the time optimizing our working capital and so on, but at the end, we are in a specific situation. We have to countermeasure inflation. For sure, for the time being, we buy in terms of raw material steel and granules, whatever we can buy in order to secure the lower prices for the time being. On top, in terms of financing, we have an excellent financing for an excellent interest. So we need to refinance in '26. So I'm not at all worried about that at the moment. And for sure, we increased our -- or we optimize our working capital, but the exposure of water management is increasing, and there, we need stocks in order to cope with the seasonal demands of this business. So that is a change currently, but I'm not at all worried about any kind of liquidity on solid balance sheet basis. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [59] -------------------------------------------------------------------------------- And Andres, maybe one remark regarding also in connection with Nicolai's question earlier regarding M&A possibilities. We see that we have a very stable and strong balance sheet position. Of course, we are currently at 2.5. Nevertheless, typically, the second half here -- and this is also what we expect for 2022 is cash stronger. And what Annette pointed out earlier, to go from 2.5 to 2.1 and 2.2, that's fine. And what I mentioned regarding M&A activities, currently, we would be very cautious in doing additional M&A activities based on that conservative financial policy. And so far, we believe that this is a quite conservative approach, and we are -- we do not see risks in our balance sheet. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- (Operator Instructions) It appears we have no further question at this time. I'd like to turn the call back to Dr. Schneider for any additional closing remarks. -------------------------------------------------------------------------------- Michael Schneider, NORMA Group SE - CEO & Chairman of the Management Board [61] -------------------------------------------------------------------------------- Yes. Thank you very much. Ladies and gentlemen, I would like to thank you. We would like to thank you very much for participating in our call. Once again, what I mentioned earlier, we are not happy with our profit warning. Independent from that, we have and are in the process of defining a significant profit improvement program. We have a stable balance sheet. We have good long-term growth strategy, focusing on profitable growth that is intact, and this is what we will do. Thank you so much for participating. All the best for you, and of course, the most important, stay healthy. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for your attendance.