Andritz AG

VSE:ANDR

Earnings Call Transcript 2022-Q1

[Michael Buchbauer, executive]

Yes. Good morning, everybody. Welcome to our Q1 '22 ANDRITZ conference call. It's a pleasure for me to welcome you on behalf of the ANDRITZ Executive Board. I hope all of you are safe and well.

Before we start with the presentation by our CEO, Joachim Schönbeck; and our CFO, Norbert Nettesheim, let me please give you some rules and procedures. [Operator Instructions]

And finally, this meeting, as you may see, this is recorded. We will provide a replay on our website and basically all the presentation is available on our website.

So much about the basics, and now I would like to hand over to Joachim to go ahead with the presentation. Joachim, the floor is yours.

[Joachim Schönbeck, executive]

Utmost pleasure to host you for this -- in this call for the very first time and to inform you, fortunately, what's the development of the 3 first months in this year. You definitely will -- might miss my predecessor, Wolfgang Leitner, and I'm trying hard to come up with him, but you return me afterwards.

You might be concerned about this change in the CEO office. But I can assure you that it's a change in this period of continuity and long-term profitable growth is and will remain our key strategy.

I'm also -- and you know that as you look to ANDRITZ very carefully, Wolfgang handed over the company to us in an excellent condition and I think we are well prepared for the future challenges that we have and I think the numbers we present show that.

Before we are starting to look to the results, let me make some short general remarks. It's definitely, I should say, an unusual quarter on the long perspective, at least I was, unlike others who all have foreseen everything. I was completely surprised by the Russian invasion of Ukraine. And I think that the impact on the long run we -- nobody really knows. I think in the short run, it is, at least from ANDRITZ' side, it's contained. You can be sure that we will stick to our embargo and export regulation rules. We have controlled the business we have on hand in Russia and Belarus and also in Ukraine. And everything you can see in the numbers like that.

Looking from Europe, we might believe that COVID is something of the past. Everybody who watches pictures from Shanghai has seen the empty roads. You may recall many of us have spent many hours of their lives in traffic jams. This definitely is a concern as we don't know what will happen and how the COVID policy in China will develop, if we will face another big national or [ partial shutdown in China. That definitely will affect not only hundreds, but many other areas of our economy.

We see the supply chain disruptions, which, on the one side, result in higher prices, but also availability of critical materials is definitely an issue and also we are not completely unaffected here in ANDRITZ. You see that we have rather slow development of the sales, and there is a clear combination with that.

And for the first time in 40 years, we see inflation only the old people like myself still can remember, and that's also something that we, at the company, has understood also. I think the other parties in the economy need to get used to, yes, and definitely does not make it more easy to make the projections to the future.

So -- but if we look back, we are more secure if you look to history, if we know -- can we have the next page, please. If we look to the -- we'll start with this, yes. We will look to the -- yes, I hope you can see it now. So we had a very good development in the first quarter. We had extremely high order intake, EUR 2.6 billion after the EUR 2.8 billion in the last quarter and quarter of last year. This is a second very good quarter. And we are up in all business areas. I would say Hydro is sharply up. Pulp & Paper is very high compared to year-on-year comparison. But also Metals and Separation developed very favorably. This all comes up to a record order backlog of EUR 9.4 billion and that's also the main -- one of the reasons why a sales drop in Russia and Belarus will not impact us on the long run because the good order intake definitely provides upside potential for us.

Group revenue was EUR 1.5 billion, only slightly increased. This is definitely impacted by the disruptions in the supply chain. But here we definitely will convert steadily the backlog into the initial orders.

EBITA at EUR 122 million with an EBITA margin of 8.0%. This is, we would say, for our first quarter, very good as all 4 business areas increased. Their earnings and profitability, very good still in Pulp & Paper and Separation. But also Metals, which has importantly improved so that the restructuring really shows it delivered its fruits, and the Hydro margin is also up on a quarter-on-quarter basis.

If we look in more detail to the last quarter, you see Pulp & Paper up 31%; Metals up 17%; Hydro, 166%; and Separation 32%. That's really good, 50% in total.

The majority comes from North America and Europe, not so much from the emerging markets. We had a new greenfield pulp mill ordered from us in China where the customer decided to place the orders for all technological islands with us. Hydro received second part of a large, I would say, group of contracts from a customer in Mexico. And in Metals we received a very -- an order for a huge galvanization plant in the U.S., first-time customer, and we are very happy that we secured that order.

Go to the next one. As I said, revenue only slightly increased 2%. It was basically flat in Pulp & Paper, Metals went up by 13%; Separation by 10%; Hydro even dropped. So it's -- I would say it's -- it is in the first quarter and it will remain a challenge for us to put the sales down, yes, and supply chain and logistics are definitely today's challenges of the daily project execution.

So Service business in the, yes, other chart, total revenue by business area. You see that we increased, coming back in Pulp & Paper, back to the 15% that we had been 2, 3 years ago. Metals still very, very low and I would say there's lots of potential for us to grow, which would also favorably stabilize the earnings, the profitability. In Hydro, we have...

[Unknown Executive]

They're saying we're going to offset inflation, but...

[Joachim Schönbeck, executive]

Growth. And in Separation [indiscernible].

So the order backlog has now really, really climbed. It's up 32% from last year with the majority of the backlog in Pulp & Paper and in Hydro and I think that is something we are not surprised of.

We go on. The earnings and also the profitability increased if we compare it on a quarter-to-quarter basis. That's from dropped -- increased by 10% in the first quarter. And if we -- and it increased by 4%. If we make an adjustment for the nonoperated profits, there is a small earning from businesses that we have divested.

If we look to the EBITA margins in this area levels, you can see Pulp & Paper slightly increased 9.9%. Metals increased rather sharply, 4.6% and 4.0% adjusted. So the right track continues. Hydro also increased to 6.8%. And Separation, we are stable at 9.5% EBITA margin. I would say, for the first quarter, we really were unhappy with this performance.

So I would hand over to Norbert. He will give you the details on the financial side.

[Norbert Nettesheim, executive]

Yes, good morning to all of you who are on the call. As practiced already in formal calls, I'd like now to have to dig a little bit into depth with regard to the financials. This slide you know, and it's fortunately this quarter a pretty unexciting slide. So more or less normal development from the EBITA down to net income. The regular amortization, which we have out of the former acquisitions slightly increased due to currency reasons because we also have amortizations from Xerium in U.S. dollar and this is the reason for the increase in the amortization.

Financial results slightly improved. Pure interest results, EUR 2.5 million better than in the past. It's the major driver for this improvement.

And with regard to the tax rate on a quarterly basis, you know that we use expected average tax rate, which is somewhere in the middle of between 26% and 27% for that year. And that's the reason for this tax number.

It leads then to the EUR 70 million net income, which is 4.6% compared to Q1 in the last -- in the quarter of last year. Also here, the same improvement as we see in the operational numbers.

To mention -- we'll stay on that slide, please. To mention is that the EUR 70 million net income turns into EUR 158 million total income due to the very favorable currency developments and very high OCI of EUR 87 million, which leads to an equity portion of EUR 21.4 million. And now, let's say, with this effect, we are safely above the EUR 20 million, but admitting that half of this improvement comes from a tailwind in the OCI from interest and from exchange rate effects.

So next slide is the cash flow with EUR 72 million net income, normal development. What has to be mentioned and pointed out in this quarter is a very sharp increase in cash flow, driven by net working capital. So we received following this huge order entry significant amounts of down payments as it is in our business that you get early in the projects. You are usually cash positive by the early down payments from customers, which created tremendous tailwind in working capital development in the first quarter, leading to operational cash flow of more than EUR 200 million. And after CapEx, which is on a pretty normal level, EUR 188 million free cash flow.

This next slide, please, then turns exactly into this development of our financial position. So it's a continuous improvement of the net liquidity situation, achieved EUR 900 million compared to the EUR 700 million end of the last year. And what we have to mention here when you look at the gross liquidity, as mentioned here, we did already due to the fact that we are sitting on this huge amount of cash. We paid back another portion of our loans, EUR 58 million, which then also will show up in the interest income in the upcoming months. So overall, a well-filled treasure box so we are ready to go as soon as we see any investment opportunities to start it and to execute it.

Okay. This is with regard to cash. And then on the next page, you have this slide where you have the summary on all the financial numbers. Most of them are mentioned yet very impressive. All are significantly better except sales where we are a little bit behind. But Joachim explained already there are some regular project-related situations where we are in an early phase with less POC sales on the project in the engineering phase. But there are also some minor, let's say, postponements due to materials.

But overall, I would say the material and supply chain effects showed up in this number with a few double-digit millions, but not in a really tremendous way that we have to get some sweat on our foreheads from that. So we assume that we will make up in the next quarters, and also then the sales will reflect what we guide to you that it's -- in over the whole year, we expect that sales will be significantly -- will be over this EUR 6.4 million of last year.

So everything else is said. You can read. And if you have questions, you can raise later on. That's for the financial part.

And having now the new team on board, we decided that I also do the summary for the divisions, so the next 4 slides are also mine. But Joachim could pass it to me because nearly everything is said and I cannot mess up anything anymore. So that's the reason why he gave me the chance to present that.

Starting with Pulp & Paper. Order intake, as already mentioned. Maybe here as an additional information, this EUR 216 million increase is EUR 125 million from Service and this is, from my point of view, the most important -- more important -- some of the most important messages in Pulp & Paper, that the Service is completely out of this COVID period now and that it's a Service absolutely back on track and have a very, very satisfying order intake in Service, in Paper and this drives later on then also profitability.

With regard to sales, same situation. Also this increase in sales is more or less with an increase in Service, but a slight decrease in capital and this then is the explanation for the increase in the EBIT margin with a higher Service portion. The EBITA margin in Pulp & Paper becomes then better as compared to the Q1 last year.

The reasons for the numbers have been explained. China orders, Service orders and so there's nothing more to say, I would say.

Going to the next one, Metals. The increase in order entry is mostly from Metals Processing, where we received a nice order on a complete line in North America. Metals Forming is on a normal level as expected. Nothing really important to mention there.

With regard to the revenues, it's more or less equal coming from Forming and Processing. Profit impact comes from Metals Forming. Here, we clearly see that we are now have -- can earn what we did in the past. We see all these restructurings. So Metals Forming now is also stable, above the 4%. And with the increase of sales, which are expected there, the past up to the normal 6% to 7% level, which we expect is clearly to be seen, and we will realize it in the next quarters and years. So that -- this can be considered as done.

In the headcount number, you see that reduction of people, which is 300 from Schuler. Yes, this is clearly this restructuring topic, which now shows up in the number. 300 out in Metals Processing and that's a slight increase in numbers -- in headcount due to the order backlog, which we have to execute there.

Next one is Hydro. In Hydro, in order entry you see this effect from a huge set of orders, which we received from a Mexican customer's refurbishment and modernization of, I think it's in total, 9 plants, which we have to execute over the next years. So very, very favorable development. Also pushed order backlog up to safely over the EUR 3 billion, which secures the sales in Hydro in the next quarters and years, certainly.

People went down 300 -- 277 in Hydro, which is also clearly the effect from that small adjustment, which we did in several units. So in the combination of higher backlog and less employees, we are sure that we will deliver in Hydro also the expected 7% margin, which is our target for the next quarters and years. So that's Hydro.

And last but not least, the smallest in the group -- still smallest in the group, Separation. With the classical Separation business and the feed and biofuel business, both developed well, equally shared.

And with regard to revenues, it comes more or less from feed in this quarter. Totally very, very favorable, and let's say, also satisfying development. 9.5%. Certainly, over the year, we will see here hopefully, again, some double-digit profitability hopefully, as far as we see it.

So that's from my side the details, and I pass back to Joachim who will continue with the outlook.

[Joachim Schönbeck, executive]

Yes. So I think I would like to confirm our financial guidance for 2022. We will -- we see an increase in group revenues compared to last year. We see an increase in reported EBITA compared to last year as well as an increase in net income.

I would say the general outlook I already covered and the war in Ukraine and these regional activities is definitely taken into account. And what comes from China we will put into our forecast once we know it, and we will inform you accordingly. Thank you.

[Michael Buchbauer, executive]

Many thanks, Joachim and Norbert. Now we are to the Q&A session. [Operator Instructions] I see that Sven Weier wants to ask a question.

[Sven Weier, analyst]

Just first of all, Mr. Schönbeck, wishing you all the best for the new role. But I guess the Pulp & Paper numbers speak a clear language here. And my first question is if you could comment a little bit on the order pipeline from here, right? Obviously, we had a very strong Q1 now on orders in all the divisions. But I was just wondering how you evaluate the existing pipeline, whether there was maybe some prebuying, or yes, maybe some more cautiousness now in the coming quarters. But that's the first one.

[Joachim Schönbeck, executive]

We had -- I would say the majority of our backlog definitely is on a fixed price basis as that is the -- what is customary in our industries. We have now started to change that. We started already in quarter 4 last year, continuing this year. But it's a difficult process and there is definitely, I would say, a part of our order backlog where we have been not forecasting the material price developments correctly, which is now facing some challenges. We are addressing that. I think we now have a clearer view.

We also have a rather clear view that the material prices will not come down very soon, yes. We also realized maybe a bit ahead of the European Central Bank that the inflation is nothing that will go away by itself. So I think we are quite well positioned there. But it's, for sure, it is a challenge but also all our customers understand that.

[Sven Weier, analyst]

So the good execution you had in Q1 actually, it's also so that is something you would have in mind for the rest of the year.

[Joachim Schönbeck, executive]

Yes.

[Sven Weier, analyst]

And I think the first part of my question was then also when you think about the order intake pipeline with clients, I mean, are you still seeing the same level of activity? Or you see any slowdown there in decision-making from your clients?

[Joachim Schönbeck, executive]

There, we see a slowdown. There is a slowdown in the Eastern Europe market and in Russia, yes. But on the other side, this immediately triggered investment ideas in other parts of the world because Russia, which still has the largest wood results in the world, yes, is basically a no-go for many of our customers. But they need hardwood, yes. They need short fibers and so they will -- there is an investment. So I would say the current project pipeline is still solid. And long-term perspective, the return perspective is not that bad.

[Sven Weier, analyst]

And the last question I had was that I saw you are now starting to get into carbon capture. I saw you have a pilot project with a German cement maker. So I was just wondering if you could provide us with some little more color on your plans in that very specific part.

[Joachim Schönbeck, executive]

Yes. We see that carbon capture is a significant topic for many of our customers. Especially the ones in the steel industry, they are very interested in that. But we also see a huge potential for carbon capture in the Pulp & Paper industry because that's the only green -- or one of the few sources of green CO2, yes. And together with our activities in hydrogen electrolyzers, you can take these 2 parts well together to form e-fuels. And there is a huge demand on that, to have fully green e-fuel. So that's for us, definitely one of the very interesting and challenging areas, yes.

We have a good set of know-how internally, both for these electrolyzers and for the carbon capture. We have a carbon capture pilot plant in our laboratory. So I think we are looking forward, and we see a very good response from customer side.

[Michael Buchbauer, executive]

Thank you, Sven. Thank you so much. Then we have the next question from Daniel Lion from Erste Group.

[Daniel Lion, analyst]

Do you see any changes in CapEx patterns, especially related to the energy-intensive industries you're supplying through Pulp & Paper in the end? Given the geopolitical tensions now related to energy and since potential risks to being short of energy going forward, is there any change in investment patterns that you might see?

[Joachim Schönbeck, executive]

I'm not sure I fully understand your question. Well, let me tell you what we see on the energy market. We are -- in the energy market, we are only exposed to renewable energies and we see a continuing strong demand on that. We have -- you know that we are very active in the Japanese market, where the biomass boilers are used for electricity generation. At least from my knowledge, they're the only country who is really going big time in that direction. But we also learned the discussions to do the same now started in Germany, where biomass boilers are only considered so far for district heating. But I think we -- our technology is well set up and prepared to go into -- to go also into electricity from that.

We also see a good market pickup in hydro because the reality check on energy make people understand that hydro is a source of a continuous power generation even if the wind does not blow or if the sun does not shine, yes, has to play a major role, yes, if you really want to reach these zero carbon goals by 2050. So I see there is a changing in pattern, but it's getting more serious and it's getting more realistic. And I believe this plays well for our portfolio.

[Daniel Lion, analyst]

Okay. Actually, I was aiming more on the fact that maybe paper producers, maybe also pulp producers, especially in Europe, could maybe intensify CapEx towards getting away from their gas exposure to Russia. Maybe here increasing CapEx in order to -- as you mentioned, the boilers in order to generate energy to mitigate this effect and this risk going forward.

[Joachim Schönbeck, executive]

Yes. Okay. Sorry. Yes, for sure -- I'm sure there will be these activities. You know that decarbonizing the Pulp & Paper assets is basically one of our innovation road maps we take so that we eliminate carbon-based fuels, which are used. We have solutions to replace these basically in all areas of the pulp and paper mill. And for sure, we will see investments there. I think that is very clear. And that's also part of why we see the market not quite positive.

[Daniel Lion, analyst]

Okay. And could you maybe provide a little bit more detail on -- also on the demand patterns seen in the Metals Forming business? You referred to some delayed investment decisions, obviously, in the current environment. Do you have any feeling how long they are delayed? And when dynamics pick up again, what will be the triggers here?

[Joachim Schönbeck, executive]

We -- it's really -- it's a bit difficult to say. You are watching it probably as much as we do, that production -- that the automotive production drops by numbers. At the same time, the profits, at least of the automotive companies we know in Europe, the profits are skyrocketing because they only concentrate on the high-margin vehicles, yes.

But of course, the investments are driven by volume and the bottlenecks in the supply chain definitely have to be removed in order for them to make -- to go into long-term investments. So we are not too upbeat that this will happen very soon, rather to the end of the year than in the second quarter.

[Daniel Lion, analyst]

Do you see any risk from this delay on your profitability development?

[Joachim Schönbeck, executive]

No.

[Daniel Lion, analyst]

No. Okay. And the last one would be on China...

[Norbert Nettesheim, executive]

Daniel, I had an earlier remark. Usually we get questions on Metals Forming and then immediately, let's say, going to the auto industry. What we have to emphasize a little bit more on is that the portfolio of Metals Forming is certainly centric somewhere -- or concentrated on the auto industry.

But when we look into our plans or the entry plans in this segment, in the auto industry, believe me or not, it's below 1/3 of the expected order entry. And the delay in decisions in the auto industry at the moment is overcompensated by decisions in other industries and it is overcompensated by a very favorable development in Service business.

So the -- we're getting in this restructuring process in Metals Forming, this includes also, let's say, a defocusing from the auto industry more into broader product portfolio and broader market view. And in total, the order entry for Metals Forming in the first quarter was nearly on pro rata yearly budget base. And overall, this is an element out of a lot of elements when we talk about this auto situation. So I wouldn't worry about that.

[Daniel Lion, analyst]

Okay. So can I follow up on this? I have in mind the automotive business at Schuler is roughly 70% of revenues. Do you see this share to decline going forward as you diversify across businesses?

[Norbert Nettesheim, executive]

From my numbers, I see it in that way, but...

[Technical Difficulty]

The portion of automotive industry in Metals Forming will, over the time, decline and not improve and raise. So there are other industries, which will also be a target for sales and for activities.

[Michael Buchbauer, executive]

Okay. Thank you very much, Daniel. Are there any further questions? If so, please just raise your hand on MS Teams because I do not see any more questions.

Okay. Then thank you very much. Pleasure hosting you and see you next time when we announce the Q2 results at the end of July. Thanks so much, and stay safe.

[Norbert Nettesheim, executive]

Thank you.

[Joachim Schönbeck, executive]

Thank you. Bye-bye.

[Norbert Nettesheim, executive]

Bye-bye.