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Edited Transcript of RSL2.DE earnings conference call or presentation 8-Aug-19 8:00am GMT

Q2 2019 R Stahl AG Earnings Call

Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of R Stahl AG earnings conference call or presentation Thursday, August 8, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mathias Hallmann

R. STAHL AG - Chairman of the Executive Board, CEO & Interim CFO

* Thomas Kornek

R. STAHL AG - Head of IR & Corporate Communications

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Conference Call Participants

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* Richard Schramm

HSBC, Research Division - Analyst

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Presentation

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Thomas Kornek, R. STAHL AG - Head of IR & Corporate Communications [1]

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Thank you, Barbara. Ladies and gentlemen, welcome to the Investors and Analysts Conference Call of R. STAHL on the occasion about today's Q2 2019 Earnings Release. My name is Thomas Kornek, and I'm Head of Investor Relations and Corporate Communications here at R. STAHL. I am happy here to have with me today Dr. Mathias Hallmann, our group CEO, who will lead you through our presentation today. The slide deck is also available under the Investor Relations section of our website, www.r-stahl.com. Before we begin, allow me to point you to our safe harbor statement, which you will find at the beginning of the slide deck. Let me now hand the call over to Dr. Hallmann.

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Mathias Hallmann, R. STAHL AG - Chairman of the Executive Board, CEO & Interim CFO [2]

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Thank you. Dr. Kornek, and also a warm welcome from my side. I'd like to point out or I'd like to point your attention to today's agenda on Slide #3 of the slide deck. I will start my presentation today with a brief summary of the second quarter 2019 and then go deeper into the financials before concluding with an update of our outlook for this year. Afterwards, of course, I'm more than happy to take questions in the Q&A session. For those of you who are also interested in the first 6-months of the year, we have added respective key financial data to the Appendix.

As summarized on Slide #4, we had a challenging second-quarter with sales down to EUR 65.5 million, which is minus 7.1% year-on-year. Our sales were negatively affected by the implementation of the new ERP system at our Waldenburg site, which led to a temporary supply bottleneck in June. Meaning that, sales shifted from the second to the third quarter, and we also saw a very strong recovery in sales in July. Nevertheless, our cost improvement measures and a strong focus on profitable sales drove nice efficiency gains and our EBITDA pre-margin in the first-half of 2019 improved to 9.8% of sales, also benefiting to a certain extent, from our new accounting rules under IFRS 16. Overall, that leads to the result that we can lift our guidance corridor for the EBITDA pre for 2019 to a range between EUR 28 million and EUR 30 million. On top of that, our balance sheet was strongly affected by IFRS 16 and a higher pension -- and higher pension provisions from declining interest rates, which lowered our equity ratio to 20.7% to June 30, and become -- the comparison from December 31, 2018 was 27.3%. But on the other side, we still see a very healthy net debt level of around EUR 3 million by the end of June, excluding leasing liabilities. And we, therefore, continue with a very healthy financing structure within the business.

Let's switch to Slide #6. We -- what we see is that we had a nice development in our Central region, where we could grow our sales to around 2% and again, a nice development in Americas. We are after the -- a strong restructuring, we now see the fifth quarter with a year-on-year revenue increase of about 4% in the current quarter. Germany was mainly affected by the supply issues with respect to the ERP software, but we also have, in that comparison, the delivery of a big order in the second quarter 2018, which heavily brought up sales 1 year ago. In Asia, we see a healthy development of the business, even with that decline of roughly 10%, because this is the result of the strong focus on our profitable business. And we walked away as we discussed several times, we walked away from big projects where we basically exchange money but see no profitability for the company.

On Slide 7, you see that in the first and the second quarter, we see solid order intake amid higher focus on profitability. And a normalized order backlog, since the peak in 2017, which illustrates improvement in upfront order clarification as well as a much better control of our production and logistic processes.

Let's move to Slide #8, and discuss our income statement. What -- where we benefited from in the second quarter was a strong increase of the other operating income. We benefited from a reversal of provisions of big project orders where we could manage the project risk much better than expected, so that we see a significant increase in that. Our cost of materials basically illustrates our lower sales. Personnel costs are slightly up, that reflects the typical annual sales and salary increases. We are expecting an improvement of that in the second-half of the year, but would expect that we remain a little bit higher than in 2018. Our other operating expenses are much lower as a result of efficiency gains. We had significant lower cost for contracted labor, fewer exceptionals for restructuring and some positive impact of IFRS 16. Overall, IFRS 16 contributed EUR 1.7 million to the EBITDA in the second quarter.

Slide 9 shows a reconciliation of the EBITDA to the EBITDA pre, meaning our -- basically, our exceptionals or restructuring costs. What we see is that restructuring charges came significantly down from EUR 2.6 million to EUR 1.2 million. There was a slight slowdown in our severance expenses, but we had a major improvement in our expenses for legal and consulting costs, which came down from EUR 2 million in the second quarter of 2018 to roughly EUR 700,000 in the second quarter of 2019.

Slide 10. So key data of our cash flow statement. We have a slight improvement of cash flow from our increased profitability. Prior year was heavily affected from strong working capital improvement. We could, again, reduce our working capital slightly, but an improvement of EUR 7 million in every quarter is not possible. Nevertheless, we continue the path of reducing working capital, especially driving our lean programs in our operations area. Cash flow from investing activities in the second quarter 2018 included cash collection from property sale. And so that was affected with EUR 400,000. And what we also see here is the positive impact of EUR 1.6 million on free cash flow from IFRS 16 in the second quarter.

Let's switch to Slide 12 to our outlook. We started the year with an outlook for the EBITDA range of EUR 26 million to EUR 29 million. There was some impact of IFRS 16, which should come up -- come out to EUR 6.8 million over the year, and we expected an improvement of EUR 4.7 million from the improvements in the business. With the outlook we have right now, and the sales increase in the third quarter and the continuation of our efficiency measures, we are listing this now to a corridor of EUR 28 million to EUR 30 million for the full-year. Based on what we see for the business right now, sales we expect in the range between EUR 275 million and EUR 280 million.

With this, I have reached the end of the presentation, I'd like to thank you for your attention, and I would like to open the line to take questions.

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Questions and Answers

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Thomas Kornek, R. STAHL AG - Head of IR & Corporate Communications [1]

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Operator?

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Operator [2]

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I beg your pardon...

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Thomas Kornek, R. STAHL AG - Head of IR & Corporate Communications [3]

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If you could, please remind the participants?

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Operator [4]

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Yes. I was on mute there. (Operator Instructions). We will take our first question today from Richard Schramm from HSBC.

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Richard Schramm, HSBC, Research Division - Analyst [5]

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Yes. I would like to learn a bit more about your order book and the project pipeline. You see as incoming orders you have in total, been fairly stable year-on-year. So it's kind of stabilization, but not yet signs for recovery, quite obviously. So what underlines your optimism for the second-half? Is it, obviously, more cost sides driven? Or do you also see a chance that the top-line might contribute to this better development on the earnings side as well?

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Mathias Hallmann, R. STAHL AG - Chairman of the Executive Board, CEO & Interim CFO [6]

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Mathias Hallmann, again. Thank you for the question. The optimism basically comes from 3 factors. You're actually right that we see some improvement in the order intake, but it's not the big volume. But if you look into the details, the order intake is much more healthy than what we had in the past. So the margin structure is better because the amount of projects went back and the projects we booked has a much better margin structure than before. The second factor is definitely that we are pretty successful in the implementation of our efficiency program, and we do expect further efficiency gains. And the third factor is definitely that, besides the rather flat development or negative development in the second quarter, we are optimistic to see stronger sales in the third and in the fourth quarter of the year. First, looking in our order backlog, but secondly, also looking in our pipeline, what's out in the market. And so that drives our optimism.

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Richard Schramm, HSBC, Research Division - Analyst [7]

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Okay. And maybe a question also then on this -- on being more selective on order book. And you mentioned, is this -- the problem is overcapacity in the sector, obviously, solved? Has there been a certain consolidation in the sector? As I can remember that there was mentioned the past, some pressure from competition, which had been, obviously for volume to fill idle capacity, and which was, of course, then negative for the pricing environment. So has this situation eased here? Or is there still the risk that competitors might put pressure here on pricing, especially in the project business?

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Mathias Hallmann, R. STAHL AG - Chairman of the Executive Board, CEO & Interim CFO [8]

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Again, there are multiple answers to that. I still see significant overcapacity in the industry. And there was definitely no consolidation. So overcapacity is still there. I -- what I also see is that the industry probably learned from the years behind. And the extremely aggressive pricing the industry saw 2, 3 years ago, doesn't take place right now. And I do personally know 1 player which definitely acts differently, and that's R. STAHL. And I think it was not only the competition, it was also us driving down the prices. And we rather adjust our capacities than again, jumping into that battle because there's nothing to win in that.

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Operator [9]

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There are no further questions in the queue at this time. (Operator Instructions)

Okay. So we have a follow-up question from Mr. Richard Schramm again.

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Richard Schramm, HSBC, Research Division - Analyst [10]

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Yes, the opportunity to ask another question. So if you look to the cost sides, there has been some complaints in the past about rising material pricing and still some companies we have seen reporting in the first half. You mentioned this reason for lower margin development. Do you see this also? Or is materials side not a problem for you at the moment here?

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Mathias Hallmann, R. STAHL AG - Chairman of the Executive Board, CEO & Interim CFO [11]

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Again, there are multiple answers to that. First thing is that we significantly brought down our material costs in comparison to our output. And that reflects the differences in the order structure that we have, typically higher engineering and higher labor content in our orders than what we had 2 years ago. Second thing is that we, in the last couple of months, started to build a global purchasing structure for the company. We do implement strategic purchasing and global supplier management. And from those activities we would expect significant impact, which will definitely help us to compensate for price increases, some from the supply side. And then the next thing is, it very much depends on what you buy. The position when you buy electronics, and in a market where everybody is happy to get product from a buyer side, pretty weak. On the other side, when you go in steel -- stainless steel markets, the buying position is pretty strong. Overall, I think we can handle. And if we see cost improvements on the materials side, we will definitely pass them over into the market.

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Richard Schramm, HSBC, Research Division - Analyst [12]

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So you have the chance to -- as you factor raise your prices accordingly so that you can -- let your customers participate in this price increase that you have, right?

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Mathias Hallmann, R. STAHL AG - Chairman of the Executive Board, CEO & Interim CFO [13]

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Yes, absolutely right. As long as we stay out of these battles for very big projects and we focus on the areas where we can differentiate at the customer side. We have a good chance to pass price increases to our customers.

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Richard Schramm, HSBC, Research Division - Analyst [14]

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Okay. And then another point I would be interested in is the regional picture, especially in light of the current political situation here with this problematic situation in the Middle East. Where do you see at the moment, region-wise, the biggest opportunities for your business? And what are the biggest risks you have?

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Mathias Hallmann, R. STAHL AG - Chairman of the Executive Board, CEO & Interim CFO [15]

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I have to say that I forgot my crystal ball at home. Therefore, it's hard for me to predict the global development. I see risk almost behind every corner because we have too many players in the market, which cannot be predicted. But I also see big opportunities. We went through heavy restructuring in the U.S., we are well on-track in the restructuring of our Asian business. We made very good progress in India and in the Netherlands with our companies. And in many of those markets we still have pretty low market shares, even when we are the technology leaders in many segments. So I think just by doing a couple of things right, we should be able to develop our position and develop our business in the future. And yes, looking at the risks -- yes, and we cross the bridge when we get there.

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Richard Schramm, HSBC, Research Division - Analyst [16]

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So when you mentioned market share gains, you want to signal that you might not necessarily rely on the overall market recovering in volume, but already be fine if the market remains stable and you can grab one or the other more project than your competitors, right?

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Mathias Hallmann, R. STAHL AG - Chairman of the Executive Board, CEO & Interim CFO [17]

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Yes. In the mid and long term, we expect a healthy market development. We definitely expect a growth rate of 3% to 4% in our key industries over the next 5, 6, 7 years. But there will be fluctuations in that. And right now, we definitely don't see that market move because what we see is that customers are starting to delay projects, even when they place the project, they delay deliveries, it's a little bit what we saw 3, 4 years ago. And therefore, if we want to grow in this space, you're absolutely right. We have to increase our market share and that's not only on the project side, that's in the day-to-day business, that's on the MTR side. We have many opportunities to do that. And this is part of our program, of our efficiency program, that we get more reliable, that we get our processes under control and that we deliver better customer service around the globe, just by being reliable and being at the customer with the know-how we have. And I guess, we -- that will pay off in the future.

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Operator [18]

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(Operator Instructions) There appears to be no further questions in the queue. So at this time, I would like to turn the conference over to your host for any additional or closing remarks.

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Thomas Kornek, R. STAHL AG - Head of IR & Corporate Communications [19]

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Ladies and gentlemen, thanks to all of you for taking the time to participate in our today's conference call. We look very much forward to staying in touch with you. And as a reminder, our next Q end will be our Q3 2019 earnings release on the 7th of November. Have a great day, and goodbye.