Andritz AG

VSE:ANDR

Earnings Call Transcript 2021-Q1

[Operator]

Dear, ladies and gentlemen, welcome to the conference call of ANDRITZ AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Wolfgang Leitner, who will lead you through this conference. Please go ahead, sir.

[Wolfgang Leitner, executive]

Thank you very much. Welcome, everybody, to our Q1 conference call. I hope you are safe and healthy, probably in your home offices. And getting ready for the loosening of the restrictions in connection with this COVID. As always, I would like to start with some more general remarks.

Overall, I think we agree that the world is in the midst of an economic upturn, primarily driven by the U.S., China and also India so far. The effect of that, we've seen rising commodity prices for steel, copper, et cetera. We start seeing scarcity of relevant goods. For example, wood or semiconductors. And we see also and get good messages and news from companies that the order intake is picking up. On the basis of this environment and this development, we achieved, I think, good financial results in the first quarter of '21.

We booked very good order intake of about -- or even more than EUR 1.7 billion, with good developments across all 4 business areas, including hydro and including metals, which in the past shows rather lower the intake figures. And we're lagging behind. Also very important to mention, order intake in service recovered strongly compared to the preceding quarters.

On the revenue side, basically, we have achieved the same level of last year's Q1, which, as you will remember, was only very partially impacted by the pandemic. Despite all the restrictions and challenges with regard to travel, health, et cetera, quarantine, we have been able to proceed on our major project sites, especially in pulp and paper, without major delays, which resulted in a good and stable revenues, obviously.

Service revenue remained rather subdued in Q1. But in light of the good order intake in service, we expect also revenues to pick up in the quarters to come. This good revenue generation, combined with the cost reductions we have achieved, led to a strong development of our operating results, EBITA and the profitability. And again, the earnings development was solid across all 4 business areas, including metals where first positive impact from the operational measures implemented in Schuler last year are reflected in passing -- Schuler passing the breakeven point. It is too early to say that we have sustainably reached turnaround in Metals Forming, Schuler, however, I think things are developing in the right direction, and we will continue to work on this stuff, we can update you on this topic.

So to summarize, we're very pleased with the development in Q1 and expect continued good market environment in the coming months. Let me now go into the details in the presentation.

Starting with Page 3. Starting with the group order intake at EUR 1.7 billion, as I said, strong recovery also in the service business compared to the earlier quarters, revenue satisfactory at EUR 1.5 billion. Service revenue is still somewhat low. Order backlog, EUR 7.1 billion. EBITA is significantly up, pulp and paper, hydro and separation, continued the favorable earnings and profitability performance, and the turnaround of Metals Forming achieved in Q1, but remains to be stabilized. So no complete release of our concerns in this regard.

Profitability EBITA margin significantly up to 7.4%, up from 4.6% in 2020, Q1.

Slide 5. Order intake down 7%, but down from an exceptionally high level of EUR 1.85 billion in Q1 2020 due to some very large orders in pulp and paper. So EUR 1.73 billion, which would give about 6 point -- EUR 6.8 billion or EUR 6.9 billion, if you would multiply times 4, is clearly a good order intake. And you see on the right side that the remaining 3 business areas, metals, hydro and separation show a pickup in order intake.

Geographically, Europe and North America up to 63% share. And emerging markets down to 37%, basically reflecting the large order for pulp and paper in 2020 in the emerging markets or some the emerging markets.

On Slide 6, quarterly development. If we add up the order intake of the last 4 quarters, which obviously have been hit completely and fully by COVID. Order intake has been EUR 6.0 billion. We have seen a decline in capital compared to the high level of churn, I have already covered that. And services are showing a strong recovery, at the lower right-hand side you see the development of order intake in service, down from EUR 690 million in Q1 2020 to EUR 518 million in Q2, EUR 530 million, EUR 620 million and now EUR 700 million in Q1. So a very good pickup in order intake. Service in our accounts, again, is 40% of our total business versus 60% capital.

On Slide 7, revenues, stable practically and metals down as a consequence of lower intake last year, the rates are slightly up in pulp and paper, stable. If you look at the share of the service business, in the 4 business areas. We see pulp and paper down to 41% from 51%. So this is nothing negative or nearly nothing negative from service, but reflects the pickup in capital revenues, as a consequence of executing these large orders. Metals stable at 25%, hydro gradually increasing to 35% and separation 51%.

Slide 9, order backlog down from the peak of EUR 8.1 billion, roughly EUR 7.1 billion, still a very good order backlog and good visibility and also load for our -- both our engineering departments and our factories.

On Slide 10, probably the most beautiful slide. Up -- EBITA is up from EUR 70 million in Q1 2020 to EUR 111 million, up 58%, very good development in all the business areas, continuing high profitability, even somewhat higher in pulp and paper, 9.7%. Metals, minus 3.7% to plus 2.8%, hydro -- basically comparable for both the old metals part and Metals Forming. Hydro, up from 5% to 6%, not quite where we would like to have it, but it's clearly an improvement. And a very good and excellent development in separation, more than doubled from 4.5% to 9.5%.

So to be honest, we are very satisfied with that. And I think that based on this, this really has been a good quarter and makes us optimistic. And I would hand over to Norbert Nettesheim, our CFO, to take you through the next few slides providing some details on the financials.

[Norbert Nettesheim, executive]

Yes. Thank you, Dr. Leitner, for handing over. Good morning to all of you who are on the call. Looking to the P&L, and starting with that nearly all our numbers improved. You see it on the slide, starting with EUR 111 million EBITA, EUR 151 million EBITDA. If you adjust the depreciation, which is also significantly higher than last year. And then reduced by the other financial elements, the IFRS 3 amortization, we get to a EUR 96.4 million EBIT or more than EUR 40 million better than last year.

The financial result is a little bit worse than in the first quarter of the last year due to a onetime effect. Here, we have an extraordinary dividend to be shown according to IFRS, similar to interest, to a minority shareholder of the Diatec issue where we took over the complete company now, and we had to pay a dividend to the minority shareholders. EBIT of EUR 84 million, doubled and with a lower tax rate compared to last year, where we still had 31% now at a 27.5% expected for this year. Relates to this EUR 61 million net income, which is clearly a doubling of our net income and has now led us to a 4.1% net income margin, which is now certainly in the range which is more satisfying than in the last 2 years.

Looking to Page #12, cash flow. Also, nothing really exciting. Starting with EUR 61 million in net income, adjusting the tax and the interest and the noncash relevant items lead to the EUR 139 million gross cash flow. Also, based on the better operational profit and the better net income significantly improved compared to last year. Then a small downturn, increase in net working capital, which add up some cash, the amount of EUR 36 million, but it is a normal process in this capital business. In some periods, you also have here a decrease. And this adjustment of taxes and interest leads to the EUR 69.3 million operating cash flow, which is compared to the net income and cash conversion rate, again, bigger than 1, and is also from our point of view, satisfying.

And this is then also the basis going to Page 13 for the development of our liquid funds. Here on the summary page, the lines -- the first lines have been explained, but not in detail. Just wanted to emphasize, still careful on the capital expenditure side, which is EUR 32 million, which is a little bit lower than the average in last year. This leads them to liquid funds of EUR 1.6 billion. Here, you need to have in mind that payment of the dividend is included in this number and also an out-payment of more than EUR 30 million for a company which we acquired in France, which is called Laroche and which belongs to the nonwoven division, which we have in our company.

Net liquidity, EUR 365 million, still a very good base for further activities and further investments.

So that's all from my side. Let's go back then to Dr. Leitner.

[Wolfgang Leitner, executive]

Yes. Thank you very much. On Slide 15, we start with the pulp and paper business area. Yes, I think everything is positive there. Again, the order intake lower than the EUR 1.1 billion last quarter -- last year's quarter, that EUR 850 million excellent order intake, excellent profitability, also containment on cost and on the employee side. And yes, I think we have covered everything on pulp and paper already.

On Slide 16, metals. We see, obviously, the effect here on the cost reduction, restructuring measures that we have taken in the last, actually, years. Order intake is EUR 429 million, reasonably good order intake, very good order intake, substantially above the revenues of EUR 316 million. EBITDA margin from minus 0.7% to 5.9%. EBITDA margin, 2.8% after the loss of minus 3.7%.

We see also in nonforming part, a very good order intake. And as we said, positive profitability in both subsegments of this business area, Schuler continues to see declining costs. Also, declining workforce that will continue for at least 1 more quarter, so then it will probably slow down towards the end of the year for the second half of this year and then for next year some remainders to be seen. But basically, by midyear, we probably have seen the vast majority of cost reductions. Which then the effect should be then seen from then on in the quarterly income statement also. Yes, I think that's it for metals.

Next, Slide 17, hydro. Good order intake without any large order being booked. There is still hope for large orders, but I'm not going to be more specific on that, taking into account the experience we have made on waiting for these large orders. And yes, revenue up 6% and profitability, EBITDA 8.8% and EBITDA margin [indiscernible] as we think best profitability of the industry, at least outside China, Chinese companies, we don't really understand.

We have also published today, I think a new order for Australia for Kidston, which is a pump storage, very interesting project in a mine, basically, shows that pump storage is still active. And that we most likely will see more of that in the future. You also see on the last line, the table the effect of the cost containment and action measures there. So employee number is down from 7,200, to 6,770.

And finally, separation, stable order intake, but good project activity going forward. And slight 5% up in revenues and profitability, a lot improved thanks to costs, very strict cost containment, cost reduction activity, EBITDA margin up from 7% to 11.7%, and EBITA 4.5% to 9.5%, very good development. We are happy with the business area, we see good opportunities for both growth and continued good profitability and look forward to develop it further.

To conclude to the outlook on Slide 20. Pulp and paper, good project activity, both from modernizations and new brownfield or greenfield mills. Obviously, the mood of our customers is good due to the high pulp prices and high demand for various board and tissue grades, nonwoven, very active, continues to be very active. You will remember, last year, we doubled the order intake for nonwoven roughly from EUR 250 million to close to EUR 500 million for all of 2020. And we see also pickup in demand for service activities.

Metals Forming, good Q1. We see a chance that this will continue in Q2 but it is -- continues to be a rather shaky market, battery-powered cars, mobility continues to be important. Also, not to the extent we have seen in -- this was fourth quarter, I think, last year or full year, even full year for Schuler were 1/3 was coming from -- with electromobility. So I think on the good side is that also the non-electromobility activity has picked up somewhat. And hopefully, will stay the same.

Metals Processing, again, very high steel prices, therefore, a good mood with our customers and pickup in project activity. Hydro, stable to the downside. So no risk of going down further. Some midsized large orders are on the horizon for the next very few quarters. And so we see no concern and some hope for a pickup in order intake and separation has covered a very good market situation in several of separation segments, including the environmental area, and therefore, we continue to be optimistic there.

And finally, Slide 21. Our guidance, we expect group revenues to be slightly below the 2020 level of EUR 6.7 billion in 2020. We expect an increase in the reported EBITA compared to 2020, which showed EUR 392 million. And depending on the revenue development, the adjusted EBITA for nonoperating cost expenses, we expect to be approximately stable year-on-year. So the baseline of adjusted EBITA for 2020 was EUR 471 million.

Currently, we do not see any very significant capacity adjustments, but we will continue to do optimizations. And we certainly would further optimize the cost situation we are in. It will be our goal and our challenge to mitigate the desires to increase the costs in light of more active optimism in the market, but we'll do our best to do that. And so we are cautiously optimistic for the remainder of this year.

Thank you for your attention, and we look forward to your questions.

[Operator]

[Operator Instructions] And the first question received is from Sven Weler of UBS.

[Sven Weier, analyst]

Yes. The first one is on the order intake. And Dr. Leitner, basically, when I take what you said on the outlook on the pipeline, it sounded like hydro could be improving sequentially. The Schuler business, I think on the pulp side, maybe there's at least 1 greenfield project still in the pipeline. So I was just wondering you see the chances for a record order intake this year? Because if I take Q1 times 4, I'm already slightly under EUR 7 billion, record was EUR 7.3 billion in 2019, and with all the momentum statements you made and nothing bad happens, so to speak, that doesn't seem to be impossible in my view. That's the first one.

[Wolfgang Leitner, executive]

You're starting with an unfair question. I mean the EUR 7.2 billion that we achieved was a year with several large projects going ahead and a very good market share of us. I think it would be too much to expect that.

Yes, I would really say we are cautiously optimistic. The atmosphere is good, but we all know that a good and high pulp price may facilitate the decision to proceed with the project, but it cannot create projects because projects -- to create projects, it takes years. And they are also basically on a fixed schedule because they need to wait until the plantations have grown sufficiently, et cetera, et cetera. There may be some bridging, yes but -- so no, I would not encourage you to assume a record order intake for this. I think it's -- I mean, I can never exclude anything, but based on what we know now, we would be surprised if we would exceed this record order intake.

[Sven Weier, analyst]

And the hydro project you announced today, is that a Q2 order? Or was that already booked in the first quarter? Because it sounds like relatively sizable one.

[Wolfgang Leitner, executive]

Yes, so it will be booked in Q2.

[Sven Weier, analyst]

Okay. The second point is just in terms of the earnings development. And sorry if that is again a maybe unfair question, but I mean, look, on metals it seems that the turnaround is going a bit faster than we all expected. You also said that the service business revenues will catch up in the remainder of the year on the back of the strong orders. And you're now already up EUR 40 million -- more than EUR 40 million year on year-on-year, and you're still guiding flat. So would you say that there, the risk is more skewed to the upside given the momentum, especially on service?

[Norbert Nettesheim, executive]

Yes, yes. Basically, you also said there are more savings to come on Schuler, right, in Q2. So it's only in H2 where things flatten.

[Wolfgang Leitner, executive]

Keep in mind that we still do some short work weeks in especially Germany, which is where we know is the majority of Schuler's employees. So we need this reduction in workforce to be able to phase out -- phase down and then phase out the short work weeks. So we see already this effect of personnel reductions in the form of benefits from the short work weeks.

[Sven Weier, analyst]

And on the hydro side, the -- I mean the restructuring there seems to be going fine as well, going by the margin development you have?

[Wolfgang Leitner, executive]

Yes. Yes. There we have some ongoing, let's say, ideas or projects. And -- but it's moving into the right direction, yes.

[Sven Weier, analyst]

And my final question, Dr. Lietner, is just when we look a little bit more structurally on the Schuler and the hydro outlook. I mean, obviously, this year, in hydro, we have maybe a bit of a bouncing from a low level. And then Schuler maybe cyclical recovery, but how do you look at both businesses structurally beyond this?

I mean on hydro, do you see this? What you see on the pump storage side, I guess there, you probably have a good visibility in terms of project lead times. And you think that's the beginning of a more structural recovery also in the business? Or -- and this order today is maybe representative of more. And also on Schuler, what's the scope there of something beyond just the cyclical recovery?

[Wolfgang Leitner, executive]

I mean, we continue to be favorable and optimistic on hydro. I mean, the long-term trend with having so much coal-based electricity capacity in the world, having -- and relating that to the discussion of electromobility and relating that to the discussion that hydrogen might be the next wave of renewable or carbon-free energy. I cannot imagine that the world will leave hydro power on the side and will not continue to develop it.

So I think we should see the bottom and have seen the bottom in the last few years, driven by this increase in wind power and the related decrease of electricity prices. But longer term, I think everybody needs hydro. And if we would -- as I said, if electromobility plus hydrogen take off as everybody is expecting, then you need more green electricity for the production of hydro. And then let's not forget hydrogen production is, I think, less than half of the efficiency of anything else. So a lot will be needed. And therefore, we continue to be optimistic.

On Schuler, it's probably a philosophical question, which type of cars we will drive in 5 years, in 10 years, in 15 years? But again, Schuler is benefiting both from conventional cars and from hybrid cars double and from battery cars also nearly to the same extent as with fossil-fuel-driven cars because the only difference is the powertrain and solar, a very little -- very, very low percentage of revenues of Schuler has been related to this powertrain -- production of parts for the powertrain. And therefore, long term, we are not concerned.

And we are very confident that Schuler is clearly the market leader, and we are also optimistic that with the cost reduction we have done, with the restructuring we have done, Schuler is now much more competitive than it has been over many years. And therefore, I think we should -- we have a good -- we have good reason to be confident that we can continue to improve the profitability of Schuler.

[Operator]

The next question we received is from Andreas Willi of JPMorgan.

[Andreas Willi, analyst]

My first question is on project execution in pulp, particularly in Latin America. You mentioned that it's progressing according to plan, but obviously, the situation, particularly in Brazil, is still quite difficult. Maybe you could discuss a little bit the risks around that. Are there also extra costs you're incurring in terms of travel, quarantine restrictions. What's the risk there in terms of completing large projects on plan and on cost?

The second question, you mentioned the positive sentiment around some of the customers in the metals area, steel prices going up. What's your own situation on the sourcing side in terms of protection with hedges in the projects, but also the availability of critical components, electronic semiconductors, particularly maybe in some of your automation-related businesses?

[Wolfgang Leitner, executive]

Okay. I mean, COVID and then South America order execution, we must be really grateful to our employees who are hanging in there, who are -- will continue to work, obviously, under difficult circumstances. We do everything we can to support them. These sites are -- they do thousands of tests per day sometimes, to make sure that they can contain the risk. So far -- I mean, there are many, many challenges.

I don't think I've said everything is according exactly to plan. There are obviously certain deviations and changes. But all I can say is that it's reasonably under control. And so far, the effects on these projects are limited. And obviously, now we have another wave in Brazil. We are struggling with another wave in India with our offices and our factories there, but we just received today an update from our company there, one of our company there that, yes, it's difficult, but it's under control, and they are optimistic that in the second half of May, it should have peaked and should be declining again, whether it's true or not, nobody knows today.

So many, many challenges, including transportation from China, which is a big challenge. And that leads also to the second question you had, availability of goods, challenging for sheets -- metal sheets, steel sheets and plates, delivery times of 6, 8 months, which used to be from inventory we need to have an eye on price increases. Also transportation costs from China have gone up substantially.

I think what is unclear so far is whether that will continue for, I don't know, a year or it will continue for 2 or 3 months or 4 months and then flatten out again. So this, we monitor that very closely. And on the cost estimates side in new projects, we clearly take that into account and do not assume that this is purchaser's market. It's in several segments becoming a seller's market. This chip constraints so far have not had any impact on us.

[Operator]

[Operator Instructions] And the next question is from Sebastian Growe of Commerzbank AG.

[Sebastian Growe, analyst]

The first one would be on net response more than on the orders side. You had obviously very strong orders in quarter 1. The question that I would have is if you could comment a bit more on the pipeline and also especially on the margin quality, the order backlog.

And if you may also comment on the situation in Metals Processing, in particular. I would assume that with the very high steel prices, that are allowing better margins for your customers that might also allow a bit of an uptick eventually in the margin profile for you, hopefully, at least. So any color on that would be much appreciated.

[Wolfgang Leitner, executive]

Yes, Metals Processing has, I would say, over-proportional order intake in Q1. There's still some -- there's good -- continuing good project activity. But we cannot expect this continuation is on the same level like in the first quarter, but we expect a good year in order intake for Metal Processing. And Schuler is -- yes, we hope to basically continue on this level or nearly on this level.

Again, visibility for the second quarter is reasonably good. Thereafter, I think, remains to be seen. So I think Schuler, we -- in all respects, we see -- we're happy with Q1. We see short-term good activity, but we continue to be cautious how it really will develop.

[Sebastian Growe, analyst]

All right. Okay. The second question is on margins and particularly on the mix part. I think in metals, we are seeing great volatility. You've been alluding to the end situations with the B segment, having carried very low margins. I think -- sorry, I don't remember, correct me, that should have phased out by now, to just understand really what the quality of the margin in quarter 1 is concerned and how it can continue from here.

I think the answers that you gave to Sven's question would rather signal you are really confident that you can stabilize it at those 2%, 3% level. Is that the right thinking? Or was there any sort of particular positive tailwinds from mix in the first quarter? That will be my interest here.

[Wolfgang Leitner, executive]

No. There were no special effects in the first quarter. I think the quality of the backlog is unchanged basically. And we have, in the case of Metals Processing, we have 1 or 2 projects that are not fully resolved and represent a certain risk. We hope to finalize that during this year. And Schuler here is, I think, I can only repeat what I said, has been a good quarter. But would be definitely too early to say that this is now stabilized on this level. And there is only way upwards from here. I think we need 1 or 2 quarters more to feel confident that this is sustainable. And obviously, medium term, it should not be sustainable, that should be improvable.

[Sebastian Growe, analyst]

Yes. makes sense. And the last question is on service. Orders have apparently coming back to pre-COVID levels, which is obviously quite a good development here. However, the revenue is still trailing behind, about 4% down year-on-year. What are you seeing currently on the service environment in particular, and especially in pulp and paper, where it seems to be a bit soft. So if you could comment on that, that would be appreciate it.

[Wolfgang Leitner, executive]

Yes. We would expect a -- I mean, definitely, we expect a pickup in revenues because we have seen a pickup in orders. As travel restrictions, access restrictions to mills, et cetera, fade out, we would expect additional demand because there has been some pent-up demand regarding shutdowns and so on. So you cannot do it indefinitely. So -- plus the good atmosphere on our customer side price-wise, and also volume-wise, we would expect a pick-up there, yes.

[Operator]

The next question is from Daniel Lion of Erste Group Bank AG.

[Daniel Lion, analyst]

I would like to follow-up to some extent on what has been asked already. And maybe start with the services business, pickup that is not expected going forward, restrictions are expected to be lowered or -- yes, cut immediately or cut fully. How do you expect, from current point of view, the dynamics of the services business to pick up? Do you think second quarter will already show a substantial improvement? Or is it rather back-loaded for this year? How is your current view on this?

[Wolfgang Leitner, executive]

No, there is no reason to expect too much of a backlog situation. And as I said, we can argue whether these restrictions are loosened up sufficiently in Q2 to any significant effect, there is in Q3 and Q4, but I think we expect the gradually stabilizing of the current order intake and maybe gradually a further pickup.

[Daniel Lion, analyst]

Do you see differences in terms of regional pickup in services? Is the U.S. already picking up now?

[Wolfgang Leitner, executive]

No real strong geographic differences, I would say. I mean, clearly, South America is COVID-wise under pressure, Europe is much more under control. China definitely is under control, though China historically and traditionally, is not very important for our service business. So I would not see any dramatic geographic difference.

[Daniel Lion, analyst]

Okay. And then the second one also related to profitability. Now usually, first quarter, our profitability is definitely not about one of the strongest quarterly point of view in the fiscal year. So would you really expect going forward to see profitability, again, fall below this level that we've seen now in the first quarter? Or should we actually think that this should be more or less the, say, the floor in terms of profitability already.

[Wolfgang Leitner, executive]

We expect today, you cannot change our guidance. So the guidance is what it is. And it's realistic and we -- and I've also said that based on Q1. There may be slightly more upside than downside, but in the end -- for the full year guidance, yes. But it's Q1 behind us, so a lot can come as we go. And yes, the guidance is what it is.

[Operator]

As we received no further questions, I hand back to Mr. Leitner for closing remarks.

[Wolfgang Leitner, executive]

No closing remarks other than thank you for your attention. And I look forward to seeing you or hearing you at least in July, at the end of July where we publish our half-year results. Thank you very much, and stay healthy. Bye-bye.

[Norbert Nettesheim, executive]

Thank you. Bye-bye.

[Operator]

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