Andritz AG

VSE:ANDR

Earnings Call Transcript 2018-Q1

[Operator]

Dear ladies and gentlemen. Welcome to the presentation of the Q1 results 2018 of ANDRITZ GROUP. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Wolfgang Leitner, CEO, who will lead you through this conference.

Please go ahead, sir.

[Wolfgang Leitner, executive]

Thank you very much. Good morning, everybody.

Welcome to the first quarter results of ANDRITZ. If I may summarize the first quarter in a nutshell, then obviously as you have seen, sales and profitability are rather weak. However, we are very confident that this is a temporary effect and we are very optimistic that we can make good over the course of this year what we have [ listed ] in the first quarter. Also this is definitely our intake, we have now the fourth quarter in a row with an increasing order intake that level itself is really good. And we see also for the coming future, for the coming quarters and coming months, quite good project activities. So that we are consciously optimistic on the development of the order intake in the next several months.

And our last but not least, which is reflected in the order intake, Schuler has had some important successes in entering the Asian markets for press lines for the automotive industry, a goal that we have pursued for an activity exclusive [over the years] and that is now realized. Obviously, as we have all said, profitability of these orders is not dramatically good so we have to buy our way into this market, but it's a very important step and critical for the future of Schuler.

So as a summary, if we now move on to the details on Slide 2, sales down 7% compared to the first quarter of 2017. We see with the exception of Separation for all other business areas, sales are down, partially influenced by higher sales -- relatively higher sales in Pulp & Paper, but overall 7% down. Geographic split, as always, very stable, no dramatic changes compared to last year.

Slide 3, order intake. We have overall of minus 2% in the first quarter of 2017, however, this has been a very high order intake. So with EUR 1.53 billion, we are very happy and see that as a very good level of order intake. Hydro has caught up and has a good order intake, it's EUR 435 million, up 40%. Pulp & Paper has a weak quarter, relatively weak quarter in 2018. However, the compare of this quarter in 2017 was EUR 650 million was extraordinary high. If you would multiply that by 4, you'd come to EUR 2.6 billion, which is 30% of our -- what we usually have in this Pulp & Paper business area. So on the average level, our order intake in Pulp & Paper has been quite reasonably good. Maples, up somewhere 6% and Separation also up 12% by region, a very good order intake in Asia, excluding China and other than that I think no dramatic development.

So highlight's certainly in this order intake for this quarter. As a consequence, backlog is slightly down, so 6%, no dramatic changes, no risk of other utilizations in any of the business areas. As we have said, we continue with the gradual downsizing of Hydro. This will continue this year. And with that being in place, we have basically good order intake for all our capacities with auto manufacturing as well as engineering.

On Slide 5, EBITDA from EUR 97 million down to EUR 72 million, minus 26%. The difference comes approximately -- 2/3 of the difference come from lower sales. And as I said, we are confident we can make good [indiscernible] all of that over the of course of this year, and 1/3 of this class is a reduction is caused by some moderately [mid] cost increases in some of the orders predominantly in Maples.

Profitability [line] in Separation is unchanged, and Pulp & Paper is lower and last year high was still at a good level. So overall, profitability is down from 7% to 5.6%. Again 2/3 of the decline in profitability, volume related 1/3, and gross margin related/some cost overruns.

Slide 6, figures again to a few comments on the left side. Financial results slightly negative with EUR 1.4 million lower average net cash, lower interest rates in Brazil and also actually, the cost of the bond for Schuldscheindarlehen has been issued in the middle of last year.

Cash flow negative mostly, or mainly, caused by a substantial increase in net working capital increase in [ DOC ] receivables. Net liquidity down compared to last quarter -- first quarter 2017 substantially, EUR 300 million, about half of that is the timing issue because this year, we have paid the dividend already in March. There is, last year, the dividend has been paid in April. So that explains about half of the shortfall and they're actually caused by working capital increases [indiscernible].

Yes, I think that's it for Slide 6. On the next slide, moving on to the individual business areas. Hydropower, no change in the market. I think all the owners that make life a little bit more difficult than it used to be, like in investments in solar and wind are still in place. We are doing our best, and we see some larger projects in the market. We have booked one in the first quarter. We see a few other larger projects also from the coming quarters. So I would say, last year, definitely should see the low point of the order intake level for Hydro and hopefully we can move up somewhat from that order this year.

On Slide 8, the numbers, as we've said already, order intake up substantially from EUR 309 million to EUR 435 million. Sales slightly down more or less the same. EBITDA slightly down [further] and EBITDA margin, 6.1% after 6 months, 2% in last year.

Then moving on to Pulp & Paper, Slide 9. Good market environment both for pulp -- very high pulp prices and also for brown paper and also for power boilers, our biomass power boilers. So overall, good market environment.

And if we look on Slide 10, then you may say that this is not really reflecting the order intake. But again, Q1 2017, with EUR 650 million has been exceptionally high. So the EUR 457 million this year are reasonably good order intake. And I would say, we are confident that this year, at least the next 1 to 2 quarters, should be good quarters in order intake for Pulp & Paper.

Just I think yesterday, or a day before yesterday, has been released that Mr. Putin [indiscernible] getting some pulp mills in Russia as to avoid having to export the work and missing the value-added that could be created by converting it into pulp. So that could be support to one or the other pulping projects that are active in Russia and where we are also involved. And also in South America, there should be what has been published at least 1 pulp project go ahead this year in Chile. And I think also for next year, in spite of the consequences of the merger between Fibria and Suzano. Also for next year, I would be confident that there is at least 1 pulping project going ahead in South America. And biomass is quite active especially in Asia also where we had a very good position. So overall, as I said, we are reasonably optimistic on the order intake.

Slide 11, Metals. Metals forming, I have already said important successes for in telling press lines for the new automotive markets in Asia and in China, as in Asia outside China, and in China, Metals processing unchanged, you all know how the thing [in the state] looks like so that certainly have limited upside potential.

Slide 12, order intake, up 6%. Sales down with the confidence of a lower intake during the last few quarters. And EBITDA margins substantially down, both caused by low sales but also by some cost of around Schuldscheindarlehen before.

Slide 13, Separation. Continuing good developments in the liquid/solid separation part of this business area. So we have a good order intake and see good project activity so we are optimistic that Separation continues on its way up from both with regards to order intake, but also with regards to profitability. Sales profitability typically have a peak in the fourth quarter so that will take another 2 quarters until that would be visible. But order intake should continue on a very good level.

On Slide 14, you see the numbers. Order intake up 12%, sales up 8.6% and profitability basically unchanged at 4.6% versus 4.7%.

In conclusion, on Slide 15, the outlook. We see good project activity and see Hydro on a safer level, higher level compared to last year. Pulp & Paper, we see good project activity. Metals, simply, the Schuler part we see continuing project activity as well as Separation so that our guidance stays unchanged and that we expect sales comparable to 2017 and solid profitability.

So much my summary, and I look forward to your questions.

[Operator]

[Operator Instructions] We've received the first question, it comes from Jack O'Brien of Goldman Sachs.

[Jack O'Brien, analyst]

A couple of questions. Firstly just on the Metals. Could you just, I kind of need a bit more detail about the cost overruns which obviously had a quite a big impact from profitability and how we should be thinking about those cost overruns in the context of the year? Would we expect those to continue into the coming quarters? That's the first question.

[Wolfgang Leitner, executive]

Yes, if I may answer it directly. I would say, the projects where we had this cost overruns are very advanced so they should be basically finished, I would say, in this quarter, second quarter. And then we know whether there's anything else coming up or not. And we are currently in the final stages of completing direct and starting up. But on the overall profitability, keep in mind, as I've said with the substantial part of the order intake increase of Schuler comes from this new market. The other margin definitely is lower. So there may be some continuing pressure on the Metals margins in the next, I would say, quarter, 6 quarters probably here. Not on this level, as we see in this quarter, but we'll have some, I should say, diluting effect on the coming quarters which hopefully should be within the 1 percentage point range on profitability.

[Jack O'Brien, analyst]

Okay. And just on the hydropower market, you've been, I guess, somewhat cautious on for the last years...

[Wolfgang Leitner, executive]

On the [auto parts]?

[Jack O'Brien, analyst]

On the hydropower, it's been a market which has been somewhat challenging and obviously you [indiscernible] to 2017 potentially being the trough. Can you just give a bit more detail what sort of what you're seeing in terms of perhaps tendering activity, greenfield opportunities versus brownfield opportunities? How we can think about that order intake developing from here on, let's say, 1 to the 3 of you?

[Wolfgang Leitner, executive]

Yes. I mean, the main factor that's influencing the hydropower market is a boom in solar and wind. Either 1 or these 2 electricity resource is adding in the range of 60 gigawatt per year now, that's combined about 3x what hydropower used throughout the year. And that's obviously much of an impact because there's not [ fully a growth ] of electricity consumption is not as big. The cost have come down both for solar and wind so they are competitive, and we see auctions taking place in South America where investors are willing to sell long-term solar electricity for $30, slightly above $30 per megawatt hour, which is extremely low and makes actually hydropower new investments, not really, or not, not profitable. We have also to keep in mind that in Europe and to certain extent also in this day in North America, the low-cost opportunities by the bar has been invested already. So what is now open for investment is slightly more remote, slightly [indiscernible], slightly higher cost or requiring a slightly higher distance to connect to the region so that the electricity is consumed. That does have an impact. On the other hand, China has a big project underway to connect remote areas with solar but also with hydropower electricity production to the coastal areas. The electricity is definitely needed, continues to be needed, which is again by the bar. And so we see, as always, it's gray. As we have said already last year or before in our midterm plan, we assume a somewhat lower level for hydropower, not dramatically, but we don't think we can get up to the old levels, and we have started to adjust to that some 2 years ago already and we will continue to do that also this year so that we are not concerned about the profitability but may see -- may not see the peak order intakes that we have seen in some 3, 4, 5 years ago.

[Jack O'Brien, analyst]

Okay. Perhaps just want to finish on the guidance. So we see operating profit during the first quarter was a bit down for the reasons you've given, but just checking your -- I understand it correctly, that you still feel you can sort of make that up in the coming quarters to meet your sort of stable profitability year-on-year, is that fair?

[Wolfgang Leitner, executive]

Yes. Keep in mind that last year we had some special FX in profitability in the range of about EUR 30 million roughly. So whether we can, we'll have similar FX this year based on that. But other than that, I think we should be in the range, nothing will be exactly there, but in the range of last year.

[Operator]

The next question is from Sven Weier.

[Sven Weier, analyst]

I'm here from UBS. Just on the EBIT bridge for the first quarter again. You mentioned those one-off costs and lower sales, but it is also fair to assume that last year in Q1 you had a mid-single-digit one-off in there so we should keep that in mind as well? And you also mentioned digitization expenses, which I was also curious about. If you can maybe give us some more color to the effect for Q1 and how you see that developing for the full year? That would be the first question.

[Wolfgang Leitner, executive]

As for the first half of the question, yes, there was a smaller one-time effect in the first quarter that in that year so that also explains part of the smaller part of the difference. In the second part, I think I didn't understand.

[Sven Weier, analyst]

I think you mentioned in your presentation also digitization expenses, which probably is also a bit of influence on the year-on-year EBIT, I guess?

[Wolfgang Leitner, executive]

Yes. If I could pass on to Mike to comment here.

[Michael Buchbauer, executive]

Yes. We are [indiscernible] people say that it's moderate to do. I think what it's best related to, I think we are quite advanced in this higher [indiscernible]. Not only airports but also product that we have in the market. We are hiring more than 50 engineers in the U.S. to staff the orders we have received for our optimization software but obviously, they have to be trained for 9 months so that obviously costs us in the range of EUR 2 million or up to EUR 3 million. So that's definitely some effect from that. So I think it's one of the many smaller effect that have limited negative impact on Q1 margins, yes.

[Sven Weier, analyst]

And then for the nature of the cost overruns again, because it was quite an interesting co-incidence because one, I don't say I had a cost for run in Q1 for the first time in a while. So can you describe modern nature of the cost overrun again? Is it a sub-supplier that was causing the issues? Or is it more your fault? And maybe some more color on that.

[Wolfgang Leitner, executive]

Yes. And #1, is the fact that both of us are showing some cost overruns this quarter is not the effect of the phone calls that we made in Q1. Definitely not, it's also not, in our case, it's not an important piece. I don't know where it is involved. Must be, probably, most likely must be Pulp & Paper, and it's completely unrelated. And I think it's almost seems we start at zero in the first quarter. Any movement, any cost overruns in the first quarter probably will be more visible than usually what happened over the fourth quarter. So that's one of the effects and it's just 2 or 3 orders that we were late in engineering on cost overruns in [ direction ] and some outstanding issues with regard to performance that we still need to resolve and clarify and bring to an end. It's a difficult mixture if certain things cost more [indiscernible] project is more difficult than anticipated.

[Sven Weier, analyst]

And I was just curious because for one, it also sounded a bit like a stretched supply chain right now that everybody has a boom and maybe somewhat...

[Wolfgang Leitner, executive]

No, it's not. These are not -- in our case, no. It's not supply chain, it's a, I would say, it's not at the same time [indiscernible].

[Sven Weier, analyst]

Okay. And is it also fair to say that in terms of the earnings, I didn't see it yet, but what's maybe an impact from the accounting change that this year simply is more back-end loaded in terms of how you recognize the profit?

[Wolfgang Leitner, executive]

No. But the accounting changes had not and will not have any substantial impact.

[Sven Weier, analyst]

Okay. And then on the free-cash-flow effect that you talked about, obviously, understood on the dividend on the working capital, are you there also confident to reverse that by the end of the year similar to the revenues?

[Wolfgang Leitner, executive]

Yes, step-by-step, yes.

[Sven Weier, analyst]

And then lastly, just on Hydro, I'm sorry I was briefly disconnected during the previous question. But did I understand you correctly that regarding the Hydro recovery, we should see that at the moment more as a kind of a lumpiness of orders but last year it was a bit weak this year the timing of the order is a bit different. But structurally, we're not looking at a new major up cycle here in your view given what you just said on the renewables, is that a fair conclusion?

[Wolfgang Leitner, executive]

Yes, I would not see an up cycle. I certainly would hope, and then that's also our best guess, that the lower order intake last year was very low and was [the trouble] for the -- our order intake development. So it should be our basic or average level, it should be definitely higher than last year. But unfortunately, I'm rather confident we will not get them back up to the EUR 2 billion that we had in the Q1 peak year.

[Operator]

The next question is from Andre Finke of HSBC.

[Joerg-Andre Finke, analyst]

Others has been asked. A follow-up on Hydro and your progress in China after you seized that pump storage order in Q3 2017 which I understood it was some sort of a successful reentry into the market. Can you maybe elaborate a little bit on how project in China is progressing and what kind inroads you have made? And then secondly, maybe if you could comment again on M&A pipeline, whether anything has changed from the last call?

[Wolfgang Leitner, executive]

Yes, I mean, this order for a pump storage from last year definitely, it's a first. It's the most sophisticated, most advanced technology for pump storage you can ask, variable speaks. It's a first of this type being built in China and ANDRITZ is stealing it so that definitely is a stand for approval for our technology. It's very good for our reputation in China. In the course of the recent visit of the Austin government and the President in China, we signed corporation agreements, both with the state [indiscernible] and with China [indiscernible] for China and for projects outside China. So we think we definitely have gained a lot of ground over the last 2 years in China and that led to win and to which extends this and materializes in your orders. So obviously, we hope that we can get another pump storage order maybe this year, maybe next year. And certainly hope also that the corporation with this state of hydropower companies outside China, the back of [indiscernible] in China in the Chinese development financing or development support should help us in some of the larger project in South America or in Africa. And the second question is M&A? Yes, we have -- we are looking in some project medium-sized, may be one, somewhat bigger, but all are definitely not mature and nothing where we'd say we see a very high probability that we can think of something. Situation is unchanged. It's high multiples. As we have said before, we have moved up our multiple logic somewhat to be able to participate at all. But we will still -- we have our limits and depending on how these options go, we will decide whether we continue or not. But there are some targets around, yes.

[Operator]

Thank you. As there are no further questions, I would hand back to you, Dr. Leitner.

[Wolfgang Leitner, executive]

Thank you very much, and see you or hear you in 3 months in August. Thank you very much.

[Michael Buchbauer, executive]

Thank you, bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.