EDAG Engineering Group AG

XETRA:ED4

Earnings Call Transcript 2021-Q1

[Cosimo De Carlo, CEO & Member of Executive Board]

Thank you very much. Good morning, ladies and gentlemen, and welcome to our Q1 earnings call. I'm here together with my colleague Holger Merz, who will give you the financial details on the first quarter later on. As usual, I would like to give you an update on our market environment at the beginning. We are experiencing a positive trend in our market since Q3 2020 and as we have already shown in our full year 2020 call on March 24. The trend is backed by an intensifying recovery of the global automotive market. Despite continued interruptions by chip shortages, the remaining uncertainties about the further development of the corona pandemic, global OEMs and their suppliers are posting strong results. This development transfers into an increased number of requests for quotations at EDAG from international, but also domestic customers. But it's not only about RFQs, we are also having a very strong start into the year 2021 with a better-than-expected January and February, where we were posting revenue and results above our internal expectations. We have won several new projects from international, but also from German customers. Against the background of the order intake development in April, this trend will continue in the second quarter. On the other hand, restraining effects from the corona restrictions and, of course, the chip shortage remain present. Concluding, we can say that the prospects in our market environment clearly brighten up, although a higher level of volatility remains. We are becoming more optimistic about the second half of 2021 as we see that the market environment is getting better, and our cost base is now much lower than last year. This will help us to further improve earnings. Let us get a bit more in detail at the next slide, where we show the key highlights of the first quarter. Looking at our Q1 numbers, The first impression may be misleading as revenue are down by 18.9%. So let me elaborate a little further on these numbers. First of all, the first quarter of last year showed only minor corona effects as the pandemic was just about to begin, so we do have a very tough comparable basis. Moreover, in the last year's Q1, we had double-digit million in revenue from a small series production project included which only had a low value-added. The lower number of employees compared to last year as well as the effect of the cyber incident mid of March this year lead to a decrease in revenue. So against this background, the figures appear in a different light. Moreover, and this is clearly a highlight, we managed to remain profitable with EUR 1.4 million revenue adjusted EBIT on this lower revenue level. We have even improved our margins in Vehicle Engineering and Electrics/Electronics compared to last year's Q1. Our performance and savings measures are fully effective here. Overall, we were on a perfect way to post the third improved quarter in a row. With the cyber incident at mid of March, the recovery was interrupted for the moment. Without this incident, we would have posted a strong recovery in earnings. Holger will give you the detailed figures in a minute. Looking ahead to the upcoming quarters, we are becoming more optimistic. First of all, our operations are back up and running since the second week of April to almost 100%. It is likely that we can even catch up a lot of the project work, which had to interrupt based on the cyber incident. Although we expect some incident-related costs to occur in Q2, there should not be any major revenue losses ahead of us from now on, especially if we take the catch-up effect into account. Moreover, the order intake in January and February was very strong and clearly above our expectations. With a total of EUR 204.4 million, order intake in Q1 was significantly higher than the previous quarter. Particularly, pleasing is the Production Solutions generated an order intake of EUR 29.8 million after EUR 25.9 million in last year's Q1. So order intake was up by 15%. This indicates that the market recovery is also about to start in this segment. We have optimized our cost base and are thus more efficient than ever before. We are continuously investing into our portfolio of services and the skills of our employees in order to be the leading engineering service provider to the global mobility industry. The groundbreaking ceremony of EDAG's new Smart Test Lab, which recently took place in Munich, is again an example of our continuous improvement of the range of our services. So ladies and gentlemen, with this optimistic outlook, please let me pass on to Holger Merz, who will provide you with the financial details on our first quarter. Please, Holger.

[Holger Merz, CFO & Member of Executive Board]

Thank you, Cosimo, and good morning, ladies and gentlemen, also from my side. As Cosimo already presented, revenues in the first 3 months fell by 18.9% to EUR 156.7 million. Looking at our 3 segments, we see a mixed picture. Our biggest segment, Vehicle Engineering, was fully in line with the overall development in revenues. Electrics/Electronics was almost stable, whilst Production Solutions was posting a strong decline in revenues. I would like to be as precise as possible to explain these developments to you. At Vehicle Engineering, we had about EUR 14.5 million in revenues from a small series production projects included in last year's Q1. This project has been finished in 2020 and is thus not included in this year's figures anymore. We have reduced our workforce by about 400 employees compared to last year's Q1. The reduction only affects Vehicle Engineering and Production Solutions, and leads to a calculated revenue loss of more than EUR 7 million in 3 segments. Moreover, about 300 full-time equivalents of the segments Vehicle Engineering and Production Solutions were on short-time work during Q1, resulting in a further calculated revenue decline. And finally, the cyber incident lead to a calculated revenue loss of about EUR 11 million. This effect is primarily affected Production Solutions and, to a slightly lower degree, Vehicle Engineering. At Electrics/Electronics, comparably, lower effects occurred. So overall, we have experienced extraordinary revenue effect of about EUR 25 million and another approximately EUR 7 million due to staff reduction. At the next slide, I will explain you the effects on our adjusted EBIT more in detail. Overall, the adjusted EBIT levels at EUR 1.4 million, so we managed to remain profitable despite a revenue decrease of almost 19%. This is mainly due to the efficiency and cost savings measures that were implemented last year. Looking at the 3 segments, we see vehicle engineering, posting an increased margin of 2.9% and Electrics/Electronics posting an increased margin of 4.9%. Production Solutions, on the other hand side, posted a negative margin of 18.4%. The decline is not as severe, as the revenue decline is mainly due to 2 factors. Firstly, the third wave of the corona pandemic hits India currently extraordinary hard. As our Indian subsidiary with about 200 employees works predominantly for Production Solutions, projects had to be shifted from India to other international subsidiaries, but also to Germany in order to keep the project time line. As costs in these countries are significantly higher than in India, project results were negatively affected in addition to the poor utilization in India. Secondly, during the first phase of the cyber incident, Production Solutions was working only to a degree of about 5% to 10%. Whilst, Electrics/Electronics, for example, was still operating at about 50%. The recovery took a little longer as the amount of data in the system that PS uses differs from the other segments to a certain degree. EDAG PS develops production systems worldwide and works on external construction sites. Since missed deadlines can sometimes lead to a major financial recourse claim from customers, for example, for production downtime, additional effort was generated during the 2-week lockdown to obtain the required commissioning data from partners in order to generate project progress to avoid penalties. To give you a better understanding for the overall impact of the cyber incident in our Q1, I would like to point out 2 things. Firstly, in the adjusted EBIT, we have adjusted costs directly linked to the cyber incident, like external experts and accruals for potential claims due to the delayed project deliveries. In Q1, these positions amount to approximately EUR 2 million. Secondly, as previously mentioned, the cyber incident lead to a calculated revenue loss of about EUR 11 million. The corresponding added value is calculated with about EUR 8 million. These losses were not adjusted. So without the incident, our profitability would have been better than in last year's Q1, even on a much lower revenue base. Against this background, we expect all 3 segments to improve margins stepwise over the coming quarters. Let us have a quick view on our expenses. There are 3 points I would like to highlight. Firstly, the share of material expenses went significantly down from 10.5% to 3.9%. This is due to the ended contract for a retrofitting of a small series of vehicles with fuel cell. In Q1 2020, we generated EUR 14.5 million revenues with this project. Secondly, other expenses declined by 1.8 percentage points as a result of our savings program, but also due to lower travel expenses compared to last year's Q1. Thirdly, the personnel expenses quota is not comparable due to 2 factors. As I mentioned before, the small series fuel cell contract with a low own added value is not included in Q1 this year. As already pointed out, at the slide before, personnel expenses include about EUR 8 million loss of own added value due to the cyber incident. Overall, we expect the personnel expenses quota to decrease over the next quarters to a normalized level. Earnings after tax were slightly negative. Here again, mainly based on the cyber incident related loss in added value. The equity ratio decreased to 16.3% due to the net loss in 2020 and this year's Q1. Let's move on to the development of headcount and CapEx at the next slide. So overall headcount decreased by 474 to 7,871 employees compared to the end of Q1 2020. Within the first quarter, headcount decreased by 113 employees, as already indicated in our last call from March. Looking at the number of employees in our 3 segments in Q1, we are posting a decrease in Vehicle Engineering and Production Solutions, whilst Electrics/Electronics on the other hand side shows a slight increase. Overall, we are now at a stage where we currently do not expect any major decrease in the number of employees in near future. As we are expecting a market recovery, it is more likely that we can increase our utilization and take employees stepwise back from short time work. Our CapEx is down to EUR 3.5 million. The CapEx ratio levels at about 2.2% of revenues. After the strong decline in 2020, we expect a stepwise increase in CapEx over the next quarters, but we will remain in our target corridor of below 4% of revenue. At the next slide, we show the development of our trade working capital. On a year-over-year basis, we are posting a significant decrease from EUR 118.7 million to EUR 7.5 million at the end of March this year. Quarter-over-quarter, we are, however, posting a slight increase as trade working capital was negative at the end of Q4. We expect the trade working capital to grow further over the next quarters based on the expected market recovery. Looking at the cash flows, we see a decrease in the operating and the free cash flow mainly due to the negative working capital in Q4 2020. We have already anticipated this development and commented accordingly in our last call. This development is also expected to continue as we build up working capital, which is an indicator for more projects and consequently, better utilization. Before coming to our outlook, Let us have a quick view on our net financial debt. Comparable to the end of Q4, our net financial debt is still significantly reduced on a year-over-year basis. The net debt, including leasing at the end of Q1, was down by EUR 105 million to EUR 130.3 million. The net financial debt without leasing is, in fact, no debt anymore, it is a net financial asset amounting to plus EUR 4.6 million at the end of Q1. In addition, we had more than EUR 162 million of available credit lines at the reporting date. So overall, EDAG remains financially strong, flexible and prepared for a strong recovery. Finally, let us come to our outlook. We have not changed our outlook for 2021 compared to our last call. We still expect a moderate increase in sales in 2021. Based on current estimates, we anticipate a relatively weaker first half of 2021 and a relatively better second half, whereby this assessment largely depends on further pandemic development. In the worst case, sales may stagnate or decline. In both cases, we expect a notable improvement in adjusted EBIT in the positive range as a result of the cost-cutting measures implemented. We continually monitor possible effects on the business and take comprehensive measures to ensure the protection of our employees and the continuation of business operations in the group companies. Ladies and gentlemen, thank you for listening to our report on Q1 figures. We are now looking forward to answering your questions.

[Operator]

[Operator Instructions] Our first question is from Marc Tonn, Warburg Research.

[Marc-René Tonn]

A couple of questions. First would be -- and thank you very much for the very precise and open statements as regards to the impact of the cyber attack. I think that's very helpful for us to get a better understanding of the underlying progress you have made. And my first question would be, looking at revenues and what we should now expect for Q2 going forward, when we add back the -- about EUR 11 million which you have lost in Q1 due to the cyber attack, I think we would have been at EUR 167 million. And now you say you're mentioning catch-up effects, which you may see in the second quarter going forward. Should we expect revenues to improve above this number in Q2 already? Or is there any, let's say, other impact we should still keep in mind that there is still some potential short flow from the cyber attack. Although I think you mentioned you are back to almost 100% or basically some burden from working days, which we should have in mind here. I think I would take the other questions one by one after that, if that's okay for you.

[Cosimo De Carlo, CEO & Member of Executive Board]

Okay. Yes, it's okay. So Marc, I'll take the first question. As I said during the call, we are becoming increasingly optimistic about the development of the performance in the next quarters. So we expect a revenue increase in Q2 because we see, in our numbers, in productivity, we see in the project, in the order intake, so we have an increasing optimism about the next quarter. So we are expecting an increase in revenue.

[Marc-René Tonn]

Perfect. And this would, let's say, also be -- I think that we could take from the order backlog, I think. I mean when we look at this number, it has some -- say, some implication, let's say, I think -- it's always difficult to say, okay, it takes to, say, 3, 4, 5, 6 months, whatever, to convert this to revenues because I understand there are projects of different, let's say, durations included there. But we also could take this from, I think, the good order backlog, which as -- I'm sort of right, is even slightly up on last year's Q1 number. That's correct, I think, isn't it?

[Cosimo De Carlo, CEO & Member of Executive Board]

Let's say the order book is good, and then we have order intake -- is continue to be very good also after March. So we have a good feeling. And of course, we know where the impact of this order will be in terms of revenue. Of course, mainly we work with long-term projects, but we know already that we have a good feeling about 2021 because we know when this order will become revenue. And so we have a positive effects, positive impact also in 2001 (sic) [ 2021 ] immediately.

[Marc-René Tonn]

Then next question would be, when we look at the personnel expenses per employee, and as far as my calculations are right, I think, let's say, almost 15,200 for the first quarter. Although as you said there was still some positive effects from the short-term work in Germany, I think EUR 3 million overall, which we're supporting here. I think cost per employee are up quite significantly on the levels we've seen, particularly in the second half of last year. Is there anything special in here from any kind of provisioning for vacation or bonuses or anything like that, which we should have in mind? Or in other words, will this number increase in the quarters ahead? Or is -- there's a EUR 15,000 run rate at cost per employee, that we should work with for the quarters ahead as well?

[Holger Merz, CFO & Member of Executive Board]

Maybe there are some FX with severance payments, but I think all the severance payments we accrued in last year's figures. And so there should be no bigger impact. And I don't know how you calculated. If you have to take it -- you calculate it with FTEs. Then there's a better figure. I think in the presentation, we presented headcount and maybe that's a mistake, and so we have no bigger impact and you can't really compare our structure year-over-year basis, which I already explained in the call. Because last year, we had a higher sales because of the fuel cell project. And also because of the cyber effect, we lost approximately EUR 10 million value-added and EUR 11 million sales. And so you have quite another basis, but we have no special effects in Q1 in our figures. We have more short time work, yes, that's right, but no other impact.

[Marc-René Tonn]

Perfect. Then coming back to the cyber attack, and you mentioned that you have provided for some potential claims you may receive from customers. Can you assure that now, let's say -- I think you mentioned that, but just to be 100% sure, yes, now you seem to be back on track. So we should not expect that there any shortfalls from here on from what you can see today? So now it should work out from here?

[Cosimo De Carlo, CEO & Member of Executive Board]

Yes. Yes, Marc. So our operations are almost fully up and running since the second week of April. Our IT is working together with external specialists to fully restore the systems and also to build up an even more secure, let's say, working surrounding. During this phase, we had a very trustful and transparent communications with our customers. So we informed them at a very early stage. We also received a very positive feedback about the fastness of our recovery and, of course, about our transparency. So I think we take -- this also feedback is a confirmation that we have taken during this cyber attack, all the right steps. And now, we are viewed by our customers, let's say, with a high level of trust. So we try to make out of this incident, of course, the best out of it and, of course, prepare the company for the next development.

[Holger Merz, CFO & Member of Executive Board]

But to give you also some costs, yes, we will also have some additional costs for external experts in Q2 as the recovery process in the forensic investigation is still ongoing. We expect cost of roughly EUR 1.5 million, but which we fully adjust in the figures. As Cosimo pointed out, we are almost fully back up and running since the second week of April. So for the first April weeks, we still have some loss in value added. But on the other hand, we will be able to catch up some of the work which had been interrupted. So the overall effect on the operating side will compensate.

[Marc-René Tonn]

Perfect. Then just one final question also, let's say, a little bit more specifically with the numbers. So the D&A expenses were down, both compared to the fourth quarter but also compared in a year-on-year comparison. Is it there something which is, let's say, reflecting a bit less spending from the past years that we should think going forward? Or was that, let's say, something which also is reflecting lower revenues in some, let's say, volume-related D&A may have been lower in the first quarter? I think, overall, D&A was at about EUR 9.4 million. Last year, Q1 was EUR 10.9 million. Or should we work with the EUR 9.5 million as a rough indicator for the quarters ahead?

[Holger Merz, CFO & Member of Executive Board]

Yes. What we already said that our restructuring program which we implemented last year is still ongoing. That means our expenses are very low compared to last year. And I think we had to reduce our cost because we made less sales. And I think we want to keep this momentum also for the whole year 2021.

[Operator]

We have a next question by Jan-Erik Schmidt.

[Jan-Erik Schmidt]

Just a couple of questions on the incident, I mean the cyber attack. So you mentioned there's another EUR 1.5 million in Q2. Can we expect further cost along the line? Is there some sort of increased cost structure now due to, I don't know, maybe increased IT spending? So what's after Q2?

[Holger Merz, CFO & Member of Executive Board]

Hardly to predict, but I think with EUR 1.5 million, it's -- we think it's, yes, enough for the forensic investigation. And what we're seeing, yes, we will maybe have some additional investments into our IT infrastructure. But that's normal investments. And as I said during the presentation, we do nevertheless not expect our CapEx ratio to surpass 4% of revenues for the full year.

[Jan-Erik Schmidt]

All right. Okay. And then on the revenue side, I think you mentioned that for Q2, you expect higher revenues. And is that just including the catch-up effect of the EUR 11 million of revenue lost? Or would that be even without those EUR 11 million kind of like the growth towards EUR 170 million of revenue in Q2?

[Cosimo De Carlo, CEO & Member of Executive Board]

Let's say the effect is both. Of course, we have a recovery effect of match. But also, I would say, without this recovery, we see, as we said before, a very good momentum in the increase of revenue. So of course, part of it is this a catch-up, but I -- we are talking about something which is structural, not only related to the catch-up effect.

[Jan-Erik Schmidt]

All right. Okay. Okay. And then utilization, can you give a rough indication of what the utilization looks like across the different segments and especially given the COVID situation in India, with the 200 employees, they are not expected to kind of like do any work in Q2? Or what's the situation there?

[Holger Merz, CFO & Member of Executive Board]

Yes. Yes, first of all, and this is the good news. For the next month, we expect an improvement of the utilization because we have a good -- a very good order book and we see that we have less short-time work. We -- yes, if I compare it maybe to the, yes, first quarter 2021, we expect for the -- yes, second quarter in 2021, a very low level on short-time work. That means better utilization, better prospects.

[Jan-Erik Schmidt]

All right. And you said that...

[Cosimo De Carlo, CEO & Member of Executive Board]

For all 3...

[Holger Merz, CFO & Member of Executive Board]

For the all 3 segments.

[Cosimo De Carlo, CEO & Member of Executive Board]

For all 3 segments, of course, we have very strong demand globally. So the order intake is increasing in every segment. Also, as I said during the call, also for Production Solutions, we had an increase of order intake of 15%, let's say, in the first quarter. So it's a good momentum. But of course, we assume that the India effect, which also last during the second quarter. But of course, if we take this effect globally, India, it's about 200 employees compared to the rest of the group is, of course, the effect limited. In any case, we see that the pandemic will -- affect of India, unfortunately, would also affect the Q3, especially for these countries. For the rest of the countries worldwide, since we are -- as I said, we are almost on track everywhere. As Holger said, we expect an increased utilization over the next weeks and months.

[Jan-Erik Schmidt]

Okay. All right. And short term, those EUR 3 million included in your numbers, is that like normal short-term work? Or is that COVID special kind of like government support kind of short-term work? Because I think you use short-term work just kind of like to compensate for low utilization even kind of like before COVID, right?

[Cosimo De Carlo, CEO & Member of Executive Board]

Yes. It's both. Of course, we use short-term work in Germany, of course, using the low that are last year. Of course, it's a COVID-related or non-COVID-related is -- we are using the normal means that the government is, let's say, put in a disposal for the companies in Germany. In the other countries, we do not have any effect, let's say.

[Jan-Erik Schmidt]

All right. Okay. And then lastly, on the working capital side, I mean, we've seen quite a reduction. And you mentioned in the call as well that it's going to increase given increase in order volume. Just kind of like what's a rough number that this could kind of like normalize back to?

[Holger Merz, CFO & Member of Executive Board]

Normally, we say that working capital of approximately 20% of revenues on the full year is a normal base. But as you know, last year, we had a very, very low, even negative working capital and that's the situation why we compare everything to Q4. And that's also the reason why our cash flow -- operating cash flow and all the free cash flow, will get negative in 2021 because we had such a very good cash flow and all the working capital, low working capital in Q4. That means it's, yes, moves a little bit because we ramp up our projects. And although we got some prepayments last year, as you can see in our consolidated financial statement, and so we have to work on the project. And that means that our working capital will increase and also to the new project which we receive, our working capital will increase. And that's a good news, I would say.

[Jan-Erik Schmidt]

All right. Okay. All right. There's no factoring in the working capital, though?

[Holger Merz, CFO & Member of Executive Board]

No. No factoring.

[Operator]

Our next question is by Katharina Werner, Deutsche Bank.

[Katharina Werner, Research Analyst]

Great. Thank you. So as we had already asked a couple of good questions, and my one would be on your guidance. As you start with a really positive optimistic tone, but you didn't change your guidance. Can you elaborate a little bit on this, how this fits together?

[Holger Merz, CFO & Member of Executive Board]

Yes. Okay. We kept our guidance from, yes, our guidance from 4 weeks. We don't want to change it right now because the corona pandemic is still there and there are also some uncertainties, and we will see how we come through the corona pandemic. And we are quite sure that we will provide a guidance in the next earnings call in August. But right now, it's not the right time to change the guidance.

[Cosimo De Carlo, CEO & Member of Executive Board]

Perhaps it's too early. We want to be sure. As I said, we have -- you're right, we have -- we try to share today an increased optimism and that's really the situation we have. So we will wait for the numbers, Q2 numbers, in order to have a clear visibility about our performance in the end of the year. And we -- as Holger said, exactly, so probably we will have this discussion during the Q2 earnings call.

[Katharina Werner, Research Analyst]

Okay. Great. And maybe the last question on the semi shortage. So do you also see already effects from that on your business? On your order intake?

[Cosimo De Carlo, CEO & Member of Executive Board]

Excuse me, can you -- I didn't get the first part of the question, sorry.

[Katharina Werner, Research Analyst]

Sorry, I said the semi shortage, if you already see some effects or some impacts on your business.

[Cosimo De Carlo, CEO & Member of Executive Board]

Oh the parts, the chips. Yes, yes. So yes, there is a certain volatility because of that. To be -- that's the fact that we see the customers are moving, let's say, short term. To be honest with you, this, of course, a part of the restraints of the market. On the other side, we see the market -- the development market, let's say, moving in the right directions. So I don't see a direct effect on that. It could be later on if this shortage will become more and more important for our customers, perhaps they will have effect on their, let's say, performance and perhaps they will decide to postpone some projects. But as of today, we don't see this effect. On the other side, on the contrary, We see a very good momentum in the investment in research and development. And of course, in the new technologies, And that's the reason why we are optimistic today because we were investing in the last month a lot in these new technologies. And now we have taking fruit about our investments -- of our investments.

[Operator]

[Operator Instructions] Our next question is by Erik Schmidt.

[Jan-Erik Schmidt]

It's me again. Just a quick follow-up on the adjustments. So -- because I think your guidance is on adjusted EBIT, right? Just wondering what you're kind of like going to adjust for further down the year. So I think we have about EUR 2.2 million adjustments in Q1, which are mostly related to the cyber attack, right? The EUR 1.5 million? Or what is this EUR 1.5 million that is other adjusted?

[Holger Merz, CFO & Member of Executive Board]

Okay. What we already adjusted is the, yes, external costs for the experts which helped us for the containment and which are doing the forensics. And we accrued some potential penalties due to the delays of project deliveries. And these 2 positions amount to approximately EUR 2 million. And we think we have in April and in May, additional costs for the investigation containment and forensics of about approximately EUR 1.5 million.

[Jan-Erik Schmidt]

Which are going to be adjusted for? So the total adjustments are going to stand at roughly EUR 3.5 million for the full year? Or are there further adjustments going to come?

[Holger Merz, CFO & Member of Executive Board]

Yes. No, for the full year. For the full year, yes.

[Jan-Erik Schmidt]

Yes. All right.

[Holger Merz, CFO & Member of Executive Board]

From today's perspective, we expect EUR 3.5 million.

[Operator]

[Operator Instructions] There are no further questions, and so I hand back to you.

[Cosimo De Carlo, CEO & Member of Executive Board]

So thank you very much for our side, from my side and from Holger. Thank you for listening to the call and looking forward to the next call at the end of August. Thank you very much, and have a good day.