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Edited Transcript of PYT.VA earnings conference call or presentation 7-Nov-19 10:59am GMT

Q3 2019 Polytec Holding AG Earnings Call

Hoersching Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Polytec Holding AG earnings conference call or presentation Thursday, November 7, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Peter Haidenek

Polytec Holding AG - CFO & Director

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Conference Call Participants

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* Michael Reis;Discover Capital;Analyst

* Roland Könen

Value-Holdings Capital Partners Ag - Fund Advisor

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Presentation

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Peter Haidenek, Polytec Holding AG - CFO & Director [1]

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So with regard to the third quarter results of POLYTEC GROUP, I'd like to go through with you through the key figures, mainly of the profit and loss statement, followed by the balance sheet. Finally, I'd like to give some comments on our current, e.g., slightly changed, adapted outlook. And after this, I open the floor to your questions.

Our group sales revenue in the first 9 months of 2019 fell by almost, let's say, only 1.8% to EUR 470.3 million. Thereof and included are EUR 7.3 million of the newly founded company, POLYTEC CAR STYLING Weierbach GmbH. This is a company which consists of the movable and intangible assets of the company, Wayand AG, which we bought from insolvency. This company -- the core of this company is the production of exterior parts for exclusive cars, and it -- since the 1st of September of this year, is included in our Car Styling business unit. And hence, and this being said and bearing in mind that we have been traditionally the #1 in Europe in car styling activities, we can now proudly state that we are the undisputed #1 in car styling activities and through this inclusion, through this very successful M&A deal, have also implemented a deeper relationship with Daimler in the form of AMG and Audi in the form of Audi Sport, means quattro GmbH, which will also very likely lead to further the new product introductions to other historic car styling trends of the POLYTEC GROUP.

What was also included in this M&A deal is a paint facility. The value of that paint facility, which is only 1.5 years old, is around EUR 6 million to EUR 7 million. The purchase value we had to pay is around EUR 3 million. And funny enough, we were about to build almost exactly this kind of paint facility nearby in Austria, Hörsching, and can now avoid an investment, a CapEx of around EUR 7 million and the hard work to get moving with the brand-new paint facility. So this is a huge synergy effect coming with this deal and supporting our status as an undisputed #1 in the car styling activities in Europe.

Moving forward to EBITDA, which amounted to EUR 47.8 million, which equals an EBIT margin of 10.2%, which is only 0.2 percentage points down compared to the previous year. Therein is included 2 different kinds of earnings stemming from the first inclusion. It means consolidation of both POLYTEC CAR STYLING Weierbach GmbH as of September 1, 2019. EUR 2.14 million stemmed from a purchase price allocation effect included in the other operating income, and another EUR 0.5 million are operating earnings, which are due to the EUR 7.2 million revenues included in only 1 month, means month of September 2019. So in total, EBITDA and also EBIT includes EUR 2.64 million of earnings stemming from this newly found company.

EBIT totaled EUR 22.2 million. EBIT margin was 4.7% year-to-date. The earnings after-tax may have come around a little bit disappointing because they reached EUR 14.1 million, and they contain a tax ratio which stood at 26.7% in the course of this year so far, and this is not less than 5.4 percentage points higher or above the tax ratio, which we had at a comparable situation last year. And this is due to the fact that the pretax results, which we generated, were largely generated in high taxation countries, e.g., Germany and the Netherlands, whereas in the previous year, we had some tax losses carried forward to be used, which we don't have anymore this year, but mainly we had a broader spectrum of pretax generating countries, especially also East Germany, which contributed more than this year to the pretax results.

This mirrors an earnings per share of EUR 0.62 -- yes, I forward that far to the profit and loss account, moving forward to some key figures of the balance sheet. Equity has risen very nicely in my eyes from 40.3% to 41.3%. Over the last 6 months, it reached a low after the first half year of 37.7%. And again, it's now already up at 40.3%.

Net debt, gearing, not satisfied with the increase, of course, from the beginning of the year when we started the year with a net debt of EUR 101.8 million are now at EUR 163.3 million. What has contributed to this? First of all, we have a very steep CapEx execution in the course of 2019, so far, makes our EUR 28 million. And you probably followed my earlier remarks in the previous calls that we have a budget, a CapEx budget of close to EUR 50 million. I put in the brakes, of course, as the CEO of that group, but cannot avoid that vast majority of that CapEx budget will be executed due to the fact that the majority of those CapEx portions are due to new start-up productions of new products for our customers. Please bear in mind that we have to invest into South Africa to start with Daimler, the C-Class production that we are up and running for Volkswagen Truck, e.g., MAN, to build around 80% of the exterior of the driver cabin of the new truck generation of MAN. So these are huge projects, which cost the EUR 28 million of CapEx, but also, it pushed our working capital to a real high record level and so working capital had been increased EUR 17 million. We had to pay the cash purchase price for our M&A deal, which makes out almost EUR 11 million. And, of course, in May, we paid out the dividend payment of close to EUR 10 million. And, of course, we have an insufficient internal cash generation in the course of 2019, if I compare it to the years 2016 and 2017. And again, the total combination of those 5 factors I mentioned now led to the net debt of 163.3% (sic) [EUR 163.3 million] and coming from here to a gearing of still healthy 0.67.

Moving on to the currently, and as I previously said, slightly to moderately adapted outlook. From our current perspective, we state today that our group sales at the end of the year will amount to approximately EUR 650 million. There will be most likely included EUR 27 million due to the inclusion, and then the 4-month inclusion, so 1/3 of a year inclusion of POLYTEC CAR STYLING Weierbach GmbH, and EBIT will be most probably total around EUR 35 million. And on top of the EUR 2.14 million purchase price allocation effect which is already included at third quarter stage, and the EUR 0.5 million of operating earnings already included, we will see most likely another EUR 1.5 million of operating earnings in the fourth quarter. So at the end of the year, we will have most likely a positive income earnings of EUR 4.14 million due to the inclusion -- 4-month inclusion of POLYTEC CAR STYLING Weierbach, and these numbers are included in our projection when we say that we most probably will total around EUR 35 million at the end of this year.

Our negotiations, we discussed this broadly in previous calls concerning our outstanding claims, claims against customers, predominantly but not solidly due to deal crisis-related and WLTP-related issue, also some other issues, have progressed very nicely. I have to say we feel a fair amount of satisfaction given the status of those calls. They are largely dealt already, but to some extent, they have not yet been mature enough to justify a booking of -- IFRS booking at the third quarter level. So we await another portion to be included in the fourth quarter. I can anticipate your question, how much exactly that might be or might become, and I'm afraid I'm not in the position to answer any questions on precise numbers on the deals we have dealt already and will finalize very soon with various OEM customers. This is included in the deal we have drawn with those customers.

We also spoke about further a positive one-off effects from capacity adjustments. These capacity adjustments are ongoing but have reached already a rather mature state, and they include a disposal of real estate as well as the disposal of movable goods. If I'm talking about movable goods, you can imagine that after finally closing 2 plants, which we have done in Germany, in Weiden, predominantly, but also Cornberg, that we have quite a bit of machinery left behind. And we have international audience, which is interested in buying those machinery part-wise for very fair pricing and valuation. Again, we have come already quite far in those negotiations, have not finalized them yet. And, of course, there is some doubt if we will finalize these talks in the fourth quarter or early next year.

On top of this, I also mentioned the disposal of real estate. This is on one-off, not a production haul, but an inventory haul at the production location, Ebensee, Austria, and we are about to sell one of these hauls to a neighbor. And also, this deal has matured quite nicely. And if all of this will get mature too early, I have decided to go on holiday with my family skiing, winter skiing, earlier than I originally planned, which means -- that could well mean that the EUR 35 million are too low. But let's wait and see. Today, and this is also the background for probably total around EUR 35 million. I think that a part of it will be realized in the fourth quarter, and another part we will give us some headroom, give us some improvement early 2020.

This being said, I thank you very much for your audience, for your patience. I'd like to open the floor for your questions now. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Roland Könen of Value-Holdings.

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Roland Könen, Value-Holdings Capital Partners Ag - Fund Advisor [2]

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My first question would be on your guidance of the EUR 35 million. Of course, I understand that you don't want to speak about the amount you would like to receive from your customers. But looking at the operational business, operational performance in Q4, and we look at the Q3 performance, you reached in Q3 just 4% EBIT margin. If we adjusted for the (inaudible) it's just 2.6% EBIT margin. It's a very low number. So what is your assumption for Q4? Is there another operating leverage? Or how to get there? Or we could do it one by one.

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Peter Haidenek, Polytec Holding AG - CFO & Director [3]

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Yes. First of all, please allow me to correct you slightly. It's not so that I do not want to talk about detailed numbers. I'm obliged not to do it by the contracts we have signed, so I ask for your understanding, and again, if that would not be the case -- and you know me quite a while, I'm rather open if it comes to details and getting you more better understanding on the numbers.

This being said, yes, the third quarter was a really disappointing quarter when it comes to the operations. Included in the third quarter were the 2 holiday, summer holiday months, July and August. Normally, it is the case that 1 of this month is the deep, deep holiday, and the other month is a slight holiday month. In previous years, it had been -- the deep month was July, then it moved to August; and August, July was a better month. This year, it was so that 2 months, July and August, were deeply depressed holiday month. It seemed that the customers at a broader spectrum tried to get rid of inventory. And hence, they restricted the takeoff rates more dramatically than we could ever anticipate it. Could not anticipate it because the numbers we have seen in our order systems were significantly better, so that was compared what they did, what they executed towards what they before that, that gave into our ordering system was really disappointing.

What we see now in the fourth quarter is, again, a rather healthy order numbers on the level of the previous year. But please bear in mind, the previous year was not a good fourth quarter, so what I'm telling you is that this fourth quarter might be matched. This is my best guess at the moment, again, due to my numbers in the order system. We also think that this should be sufficient or a little bit more than sufficient to improve the EBIT and EBITDA rate, so that could create a situation with a bit of luck in hand that the third quarter of 2019 will, at some point of time, looking back, will mark the deepest point of this recessionary dent we feel to be in right now. So yes, we're looking at an improved fourth quarter. We are also looking at improved numbers in our order systems going towards 2020. But a bit, it was so this year that -- it was like an ever-rolling system. You got better numbers in the order system, were not executed. Then order system was improved again, not executed. And this is the kind of insufficient rhythm, which we have worked through in the ecosystem of our OEM clients and first-tier supplier.

I'm very much of the opinion that this is not an intention of our customers to behave like this, but it is due to uncertainties of sales activities at the end-consumer desk. And yes, so this is how the year so far went ahead. We do see some slight improvement. We do some more tangible improvement in the beginning of the next year. But at the same moment, we feel that, that is not executed yet, and there's a big question mark left behind those current numbers, which give us some perspective where we are going to but not a secure projection of what it might become.

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Roland Könen, Value-Holdings Capital Partners Ag - Fund Advisor [4]

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Okay. Second question would be on dividend. If you reach the EUR 35 million EBIT, I guess, earnings per share would be roughly plus/minus EUR 1. So what will be the implication on your dividend? I know it's really early to talk about it, but you know investors like stable dividends. Or do we see the level of 2015, where your EPS was around EUR 1, EUR 1.10?

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Peter Haidenek, Polytec Holding AG - CFO & Director [5]

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Yes. I will start my answer -- my precise answer with the disclaimer, if you allow. The disclaimer is I have not yet talked about it with my CEO or my core shareholder. So -- but I have decent and detailed thoughts about this myself. First, is -- and this is very important to me, we have that range, that we have a payout ratio in between 20% and 30%, and we should come along with the 30% at least. So that's a minimum, in my personal perspective. I personally would feel that if it might be the case that we'll fall slightly below the EUR 1 mark that we increase the payout ratio above 30%, at least slightly. That could hint probably to a EUR 0.30 payout per share. But again, these are just my thoughts. But once, for sure, we will have a decent dividend, and we will, in this kind of situation, pay out at least the 30% payout ratio.

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Roland Könen, Value-Holdings Capital Partners Ag - Fund Advisor [6]

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Okay. Next question would be on your truck business. I was -- the truck development in Q3, minus 22% in sales. Normally, the truck supplier have stable sales in 2019, and will -- might be -- have decreased sales in 2020, looking at the order intake figures of the OEMs. But could you give some reasons why you started in Q3 with decreasing sales?

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Peter Haidenek, Polytec Holding AG - CFO & Director [7]

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Yes, you're absolutely right. EUR 32 million of sales in the commercial vehicle area compared to the 41.1% we could generate in the third quarter, only in that third quarter of last year, that marks a 22% decrease, which is hard to take. If I put myself back to the last call after the first half year, I had no clue that this setback would become so significant. What I already included in my remarks was that the second quarter was much weaker than the very good first quarter. So we saw already a certain weakness. But this weakness was in the low 1-digit percentage figures. And so my best knowledge at that point of time was that we will have a deterioration further on going ahead, but I never thought that it would make out 22%, to be honest. That was very sharp. This is due to the market situation, mainly in Europe. You know that, especially in our truck segment, which makes out about 30% of our total group revenues, we rely heavily or more heavily than in other segments, especially in the passenger car segment on the European market.

And you mentioned some OEMs, and it is so that if you take the 7 existing commercial vehicle companies in Europe that we are bound to those -- is more strongly bound to those who lead the top of the deterioration. That's exactly what happened. I don't want to mention any names, of course, but you can look at the stats yourself, and Paul Rettenbacher will send them to you if you need some assistance. We do have the stats and you will see the names. And so the correlation of that kind of top deterioration list in a negative way to our sales was unhealthy. And hence, it made out the 22%.

Going forward, we do not necessarily see it continuing that sharply. But on the other hand, cannot rule it out. So this is a negative factor from my side going forward. Whereas in the passenger car sector, which makes out around 60% or almost 60% of our total group revenues, there, we have seen a slight improvement in the third quarter, but also on already negatively impacted figures at the previous year's level. So on a lower level, we could beat that lower level from last year. And again, we do see the chance that we can keep up with this also in the fourth quarter and improve this trend starting already in January.

This is due to our order system today. So in a way, we do have low numbers in passenger cars, but tendency seems to be improving. We do have still sufficient truck turnover if you take year-to-date numbers. There, we are up 4.6%. So improvement still of 4.6% at the end of the third quarter, whereas it was a 7.9% improvement at the end of the half, the first half. In between that happens is minus 22%, of course. So we are still in the positive year. But I think this market segment, commercial vehicles, gives us some headache going forward.

We read the nonautomotive markets improved quite nicely. We have an improvement of 16.5% year-on-year -- year-to-date. We do not see anything which could break that trend. And we have very nice talks and negotiations with further clients in the customers -- in some customer areas. So this is improving quite nicely. In total, and if I also take into account that the contribution by the newly found POLYTEC CAR STYLING Weierbach GmbH will be around, I would say, in truth, at least EUR 50 million next year. And taking all these trends and all the concerns into account, I feel that we can, in 2020, definitely beat the 2 previous years. And again, including the EUR 50 million or even more from POLYTEC CAR STYLING Weierbach can come up with a nice improvement of our top line and also -- which also would contain the ability to improve our margins, our EBITDA and EBIT margin. This being said, I also anticipate, and this is included in the EUR 35 million that the year-to-date EBIT margin will improve throughout the fourth quarter, throughout the end of the year.

So this may give you some light on what we can see from here. So we are exactly not depressed by what is going on. It's hard times. But please bear in mind that the flip side of this rather dark metal front side is our ability to conduct smart deals like the takeover of the automotive activities of Wayand AG, which are from day 1 accretive with the margin in between 7.5% to 9% EBIT, cash effective also towards the future because we could reach in those negotiations significant price increases, not only reaching backwards, but also reaching far into the future.

So we feel that the business which we bought is a highly secured island, which we included into our group results. There are some more of those potential M&A deals to be done. We feel positioned to do the one or the other in the next few years. And this is also included in that current situation, not only that, that more dark front side as I named it, but also the bright side, which gives us that ability to negotiate and finalize those M&A deals.

And on top of this, I'd like to remind ourselves of the fact that we do get a sufficient support from our customers. They gave us different kind of help. We already received and will receive further one-off payments as a compensation for the restricted take-off they had to execute, unfortunately. Secondly, we have also significant price increases over a broad spectrum of remaining products to be shipped to those customers. Third, we could generate short-term contracts. A short-term contract in our industry is when the tool is already existing, being operated at a competitor's plant. And this competitor may have quality issues to discuss with the OEM, and then the OEM to decide to take his tool because he has the ownership of that tool, and to let it transfer to one of the POLYTEC production plans. This happened multiple times since August of this year and created the situation at one of our major production plant in Northern Germany. It is close to (inaudible), Wolmirstedt, where we had short-term working, where we had closing dates, double closing dates, where we are up and running with a full capacity utilization since September only due to those short-term orders, which were placed or re-placed from our customers from some competitor towards POLYTEC.

We also feel favored in this light if it comes to current nomination situations. So we already were nominated the 1 or the other nomination, where we have been the #1 if it came to the technology, which we presented to the customer but not in price. So normally, in a price-sensitive -- in price-sensitive times, the OEM would tend to favor for the nomination, the best -- the competitor with the best pricing. In these case, if he did not, he gave us the nomination in order to also give us more compensation for our claims. This also happened. And there, where we were abound to a dual supply situation, bearing in mind that around 80% of what we supply to OEMs is single supply situation. But we have the 20% dual supply situations. And there we have given at least 90%, if not 100%, of the available supply. So also there we were favored compared to smaller sources in these double sourcing situations.

So a lot of different measures have been taken by various important customers of POLYTEC to help us through the current situation, to give us some push, and this is also to be seen in light of our product nominations, our recent product nominations in the new tech spectrum, e.g., the electric vehicles, where our new nomination in the different, very prominent segment, be it the MEB, Modularer Elektrobaukasten, platform of the Volkswagen Group, where the first prominent product, the ID.3, being presented at the IAA in Frankfurt this year multiple times, being shipped to the customers in summer 2020. So we are included, not in this car but in all the following cars, the I.D. CROZZ, the I.D. BUZZ. These are the 2 next models being presented at the IAA. So in total, they want to produce 33 new car models on this MEB platform, and POLYTEC is included on that platform with a sufficient spectrum.

The same is true for the EQ platform of Daimler, where the first car is the EQC. Also there, many more product to be followed on this special EQ platform. If we take the Porsche Taycan, very nice car, having sat in it at the IAA, not being able to purchase one, no. However, we are also -- this is not on the MEB platform of Volkswagen. It's a special platform of Porsche, but we are also included in the Taycan. We are included in Jaguar Land Rover, Jaguar Land Rover products. We are included in projects of new kids on the block, new OEMs, like [Sono Motors], [eGo]. And I could follow-up in these terms to give you bits and pieces of our product wins in this new tech area.

And this -- please bear this in mind and somebody who's so deeply involved in the new world, which is created today and which will be rolled out mainly starting next year and following years, deserves in the eyes of our customers, quite a fair amount of push and support, if it comes with the current situation. So we enjoy all this. And therefore, if we take not only that, as I mentioned, dark front side of the metal, but also the brighter -- flip side of that metal, I think we have every right to be positive at this point of time.

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Operator [8]

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(Operator Instructions) The next question comes from the line of Michael Reis of Discover Capital.

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Michael Reis;Discover Capital;Analyst, [9]

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I have maybe one question or two questions regarding Ebensee. You want to sell something. If I look on Google Maps, it looks a bit stuffed there. A lot of forest around that. Are you sure you never will use -- you have to use that hall again, that inventory hall?

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Peter Haidenek, Polytec Holding AG - CFO & Director [10]

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Yes, very sure. Maybe a very quick look back into the history of that plant. This plant in its origins was built and long-term used to produce garden furniture. And this is a total different business model -- has been a total different business model. And they needed a very, very insane, I would say, an insane area to store their garden furniture before the -- in summer or in the early summer or in springtime that was shifted to the vendors and finally, to the buyers. So we never need it. With our automotive-driven and also taking into account our nonautomotive business, which we run there at that plant, we never needed that much of inventory storage. And yes, 100% sure and double proof, we don't need that area. And it tended -- we will not -- we did not offer this in anyhow. But our neighbor, the Austrian Salinen, very traditional company, which used to rent this hall, indeed, for many, many years, and they got a new CEO rather recently. So he came along and asked us if there would be a chance to buy that hall, which again he rented -- or his predecessor rented for many years. And so I thought a moment, "Wait a second, I could use that kind of push this year." And immediately, we started negotiating with him on a very friendly and partnership level. And yes, so that is quite mature. I do not doubt at all that this deal will go ahead. There is a still a question if and how much of it I am unable to book in the 2019 and maybe a remainder into the 2020 accounts. And again, the same is true for the disposal of movable goods stemming from the Cornberg and especially Weiden plants.

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Michael Reis;Discover Capital;Analyst, [11]

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How much are they in the balance sheet right now as of today, the real estate and the movable goods?

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Peter Haidenek, Polytec Holding AG - CFO & Director [12]

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In total, we talk about some EUR 6.5 million.

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Michael Reis;Discover Capital;Analyst, [13]

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That's a lot. Okay.

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Peter Haidenek, Polytec Holding AG - CFO & Director [14]

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And that's what I meant when I said, I'm considering to leave earlier for my winter holiday because I don't need it to live up to my guidance now.

I think -- I mean, in a way, let's talk about guidance. I mean what we said is that on the niveau of the previous year. The exact niveau was EUR 40.1 million. So if I take the niveau and I round it up on full EUR 10 million. I said, okay, the niveau on a rather broad spectrum, my personal perspective was from 35 to 45. What we detailed now is only, I think, a very open secret that we are playing around the lower end of the spectrum at the 35. And this is what we wanted to mark at this point of time, as we felt rather secure that we can live up to this, which does not necessarily mean that we cannot improve this, at least slightly. So this is how you should read our new guidance or adapted guidance, as I mentioned before.

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Operator [15]

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And there are no further questions at this time. I hand back to Mr. Haidenek for closing comments.

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Peter Haidenek, Polytec Holding AG - CFO & Director [16]

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Ladies and gentlemen, thank you very much for your questions, for attending our today's conference call. If there are more questions to be answered, please don't hesitate to contact Paul Rettenbacher or myself. We'll do our utmost best, as ever, to answer each and everything you wanted to know. And please ask again for your apologize -- I apologize, again, for not being mandated to give you more insights on detailed numbers on our claims situation. But please bear in mind that this is sufficient in our eyes that we feel rather well positioned with this at this point of time with our customers. Thank you again for listening and talk to you soon again. Bye-bye.