EDAG Engineering Group AG

XETRA:ED4

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Cosimo De Carlo, executive]

Good morning, ladies and gentlemen, and welcome to our call. I'm here together with my colleague Holger Merz, who will give you the financial details on the first 9 months of 2023 later on. As usual, I would like to give you an update on our market environment at the beginning. The International Monetary Fund has updated its world economic outlook on October 10. With this update, the IMF states that global economic growth has slowed down and recovery is marked by important divergences between advanced economies and emerging markets. For the current year, the IMF still expects the global economy to grow by 3%. For Germany, however, the IMF expects a recession in 2023 comparable to most of the German economic research institute. Looking into 2024, the growth expectations have been slightly revised. The IMF lowered the forecast from 3% growth to now 2.9% growth. One of the key reasons is that inflation in developed industry remains at an increased level. Correspondingly, the IMF expects interest rates to remain higher for longer. Now let's go one step deeper and look at the automotive market. During the first 9 months of the year, the automobile sales are up on a year-over-year comparison, especially Europe and the U.S. markets see a robust increase in sales, whilst the Chinese market growth has significantly slowed down compared to the previous year. However, overall sales volume still remains well below the pre-COVID years. Global battery electric vehicle sales keep growing disproportionately. The beef market is currently dominated by Chinese players, while German OEMs still have to catch up. For established, especially general ones, this is a challenging situation, define themselves juggling with multiple demands. On the one hand, there has to accelerate product innovation and shortening development times in order to catch up the new market participants. On the other hand, they have to make sure to generate enough cash by rationalizing investments and optimizing margins. So what does this development means for engineering service providers like EDAG. As already stated during our last call, we continue to face the market environment characterized by various challenges and high volability volatility. This means that some of our German customers are currently reprioritizing their development plans. They are focusing on products, which are close to the start of production. In this project, we continue to see a very high need for our services. Moreover, the trend towards bigger projects continues. For us, this means that we are in discussion about potential complete vehicle development project, which would secure utilization for a big chunk of our resources. On the other hand, we are experiencing that project ready to products we start of production is in a few years to currently have a lower priority. We observed that some of these projects are shifted and in some very limited cases, we even saw project cancellations. Overall, efficiency and agility are essential for us to keep up with the rave changes in the market. Our results in the first 9 months of this year clearly underline that the either group is able to offer the right services and to benefit from the current market environment. So let's move on to the next slide, where we show the highlights of the first 9 months of the current financial year. Our 9-month revenues are up by 6.5%, which is well in line with our full year revenue guidance. The Electric Electronics segment is outperforming with a growth of 16.7%. This underlines our success in transforming the EDAG Group towards a fully digital service provider that offers casmed solutions for the software defencard of the future. Looking at the Q3 revenues, in particular, with record sales level, which is about on par with the previous year's third quarter. This is fully in line with our communicated expectations as we had an extraordinary strong Q3 last year, where we posted a revenue growth of almost 20%. Our adjusted EBIT is up by 9.6% to a total of EUR 41.1 million. The margin level at 6.5% and all of our segments are profitable. This sector we are able to lift our margin disproportionately compared to our revenue growth. Holger will elaborate a little bit more on this in a few minutes. The earnings per share are up by 11.9% to EUR 0.94 after 9 months. So we are thus generating value for our company, but of course, also for our shareholders. Further to our financial highlights, please let me also comment on 2 nonfinancial topics in this third quarter. First, in this year's ranking of the top IT automotive service provider in Germany by automotive IT Magazine, we were able to move up a couple of places and position YedaGroup higher again. I'm very proud about this achievement as it once again underlines our success in transforming our company towards a full digital service provider. We are effectively addressing our customers' software and digitalization needs and are thus able to grow our revenues disproportionately, but only in the automotive, but also in the industry. We will continue to follow this track and further build up our competencies and capabilities in the software and digitalization area in order to be a leading partner for our global customers. Secondly, in times of a shortage of skilled workers, company are called upon to invest more in the training of young talent in order to meet their own demand for qualified specialists. Moreover, companies have to position themselves as attractive employers as the competition is intensifying. Again this background, we are proud that with the beginning of the training year 2023, 126 new young trainees decided to start this career at the EDAG company. This clearly underlines the EDAG Group attractiveness as employer and keep us confident that we can attract enough talent for our future growth ambitions. So overall, ladies and gentlemen, within the first 9 months of the year, our financial figures are developing fully in line with our expectations. We are adapted to a challenging environment and make sure that our performance is continuously improving. We are absolutely confident to reach our financial targets in the current year, and we keep pushing very hard to generate sustainable value for our stakeholders. So far from my side for the moment, please let me now pass on to Holgamers, who will provide you with the financial details on our 9-month figures 2023. Holger?

[Holger Merz, executive]

Thank you, Cosimo, and good morning, ladies and gentlemen, also from my side. As Cosimo already mentioned, revenues after 9 months are up by 6.5%. We are thus growing into our full year revenue guidance as the comparable base in the second half of the year is getting tough. We have communicated this fact throughout the last calls. So this development is fully in line with our expectations. Let me elaborate a little further on our 3 segments. Our biggest segment, Vehicle Engineering, was up by 3.2% after 9 months. This is a robust growth in a challenging environment. Looking at the Q3 numbers, you will see a slight decline of 4.9% compared to last year's Q3. The quarterly decline can be explained by another project mix with more material content in last year's Q3. We expect vehicle engineering growth to normalize in Q4, so there's nothing specifically to worry about the Q3 numbers. Electric Electronics continues to outperform with a growth rate of 16.7% after 9 months. In Q3, EE posted a robust increase of 8.3% on a very tough comparable basis as last year's Q3 showed a growth of 27.5%. Overall, we expect this segment to continuously outperform in terms of revenue increase. But based on the tough comparables in the second half of the year, the full year growth rate is expected to be below the 9-month figure. Production Solutions post revenues on par with the previous year's 9-month figures. Here, please keep in mind that after the first 6 months of this year, Production Solutions was still posting a slight revenue decrease because of some project delays in the first half of the year. In Q3, revenues already increased by 1.2%. For the full year, we expect production solutions to show a positive revenue growth. All in all, revenue growth is robust and fully meets our expectations from the beginning of the year. At Q4 is a quarter with seasonally less working days, full year revenues are expected to meet above the midpoint of our guidance. We have concretized our guidance accordingly, and I will comment on this at the end of the presentation. Meanwhile, let us move on the next slide, where we show the development of the adjusted EBIT. The group adjusted EBIT leveled at EUR 41.1 million, a sound increase of 9.6% compared to last year. The corresponding margin levels at 6.5%. Looking at the segments, we see Vehicle Engineering posting a very good margin of 7.1% and thus slightly exceeding last year's numbers. The increase is owed mainly to a good utilization and a stepwise handover of increased cost to customers with the conclusion of new contracts and of course, a good completion of expiring projects. Electrics/Electronics posted a solid margin of 6.8%, slightly below last year's numbers. Here, the decrease is owed to the continuously high grow rate. We are onboarding most of the additional staff in this segment and on top of this, entering new fields of expertise. In a nutshell, growth cost margin. As we want to further increase our market share in this segment, we keep preferring growth over margin at least for the next few quarters. Production Solutions, on the other hand, doubled its margin year-over-year and is now posting 2.8%. This is continued success of the transformation of this segment. Overall, margin development after 9 months is very satisfying for me. I'm absolutely confident that we will achieve our full year target and posting a margin slightly above the midpoint of our guidance. Corresponding to the development of our adjusted EBIT, earnings after tax are up to EUR 23.6 million. Please keep in mind that we had some negative adjustments of the EBIT in Q1 as we receive payments from an insurance. As a consequence, the EAT growth disproportionately compared to the adjusted EBIT. The EPS after 9 months stands at EUR 0.94, which is an increase of EUR 0.10 over last year's figure. The total equity is up by about EUR 12.5 million. The equity ratio has increased accordingly, now standing at 23.4%. Let's move on the development of headcount and CapEx at the next slide. The total headcount at the end of the reporting period increased by 466 to 8,712 employees compared to the end of September 2022. As Cosimo already stated at the beginning, we have welcomed 126 new trainees in the third quarter, which is underlying our ability to attract talent even in times of serious competition. We continue to expect the van talent and the corresponding higher level of fluctuation to be one of the most important sector of success for the coming years. Only those companies who can attract sufficient talent and keeps the fluctuation under control will be able to profitably grow the business. We continue to implement further HR tools and measures to make sure that we are at the forefront of recent developments and thus outperformed our competitors in the seed of recruitment and retention. Looking at our CapEx, we are posting a slight year-on-year increase to EUR 18.1 million. The CapEx ratio level at 2.9% of revenues and a substable. At the next slide, we show the development of our trade working capital. As we carried out in our last call, the growth in our overall business and especially with our traditional OEMs lead to an increase in working capital. There are mainly 2 reasons. We have a slight increase in trade receivables because of growing sales volume. And the second reason is that we have a decrease in contractual liabilities due to less business with start-up customers and more business with our traditional OEMs. This results in less upfront payments in our balance sheet as these cannot be enforced with traditional OEMs. Accordingly, our trade work in Delta by the end of September is up to EUR 171.5 million. At the next slide, you will see that we can manage our cash flows pretty well under these circumstances. Compared to the previous year's figures, the operating and the free cash flow have decreased, but not as much as the trade working capital has increased. The outflows could be counterbalanced mainly by our increased profitability. Operating cash flow after 9 months was at a negative EUR 9.9 million, while free cash flow was at a negative EUR 27.7 million. For the full year, we are targeting a balanced operating cash flow, well in line with our communication of the previous quarter. However, the final figure will be depending on our customer and project mix in the fourth quarter. Let us continue with the development of our net financial debt at the next slide. On a year-over-year basis, the net debt, including leasing at the end of the Q3 was up by about EUR 55 million to EUR 261.5 million. The increase in working capital played the major role. The net financial debt without leasing is up accordingly to EUR 81.9 million. The net gearing at the reporting date was at 51.3%. At the reporting date, we had about EUR 77 million cash on hand and more than EUR 105 million of available credit lines. Overall, our financial position been very solid. Finally, let us come to our outlook for the full year 2023. After 9 months, with solid results and the well-filled order book, we have narrowed down the corridor in our guidance. We expect further growth and a stable earnings development for the 2023 financial year. These estimates are, however, subject to considerable uncertainties which arise in particular, from the effects of ongoing geopolitical disputes as well as inflationary development, energy price and wage cost development as well as the availability of sufficiently qualified personnel. Revenue is now expected to grow by around 5% to 6%. The adjusted EBIT margin is now expected at around 6%. Ladies and gentlemen, concluding, please let me state the following. Following strong growth in the first half of 2023, we are now progressing into our revenue guidance for the full year. We see that our customers, especially in Germany, are focusing on development topics that are due for market launch in the short term. For longer-term projects shortening the time to market is becoming increasingly important. Even if this development can lead to short-term shifts in projects, the long-term trend of growing R&D outsourcing are unbroken. We can now benefit disproportionately from our experience with automotive startups and a very ambitious development schedule and transfer our knowledge to projects with traditional OEMs. We are, therefore, the EDL partner, especially when it comes to complete vehicle development projects with short development cycles. Against this background, we are absolutely confident that we will achieve our goal for the full year 2023. Moreover, we are also targeting further organic growth for the period afterwards in order to create sustainable value for all our stakeholders. Ladies and gentlemen, thank you for listening to our report on our 9-month figures. We are now looking forward to answering your questions.

[Operator]

So first question comes from Yasmin Steilen from Joh. Berenberg.

[Yasmin Steilen, analyst]

I have 2, if I may. So the first one on carrier. So we have seen news from Volkswagen, let's say, plan to cut headcount at carried in the magnitude of 2,000 according to the press releases. So could you please share some light on the impact on EDAG, i.e., in terms if you consider taking on some of the software engineers and what could be the impact also on the order intake from your side? And then the second one, just looking at your guidance, your adjusted EBIT guidance of 6% doesn't look very ambitious after the 9 months numbers. So at the midpoint of the year narrowed guidance you expect around 4.4% adjusted EBIT margin. So could you explain a little bit more in detail your underlying assumption for Q4, please?

[Cosimo De Carlo, executive]

Okay. Thank you for your questions. Yasmin, I will take over the first one, concerning carried. As you know, of course, we may not like to comment on single customers. In any case, I will try to elaborate a little bit about the context. I mean as we call this as you've seen also in the recent months, we had, first of all, direct to highlight some aspects we already aligned during the call. First of all, we see at the customer side and also Holger stated during his presentation, that our customers, especially the German ones, are prioritizing short-term sofa production towards a long-term start-ofproduction. So we do see that in terms of products where the setup production is very close, then there is no impact on the work that we're doing. The mainly impact we perhaps see and we had some small project cancellations only for projects concerning long term. So that's for me, not a big risk. We have to consider also that in the last month, we at -- I would say, the last 2 years, we had to handle to juggle with the churn rate, which was not so satisfying for us because we had many customers hiring our people. So this -- the recent news of carriers that could be for us an opportunity to make sure that we can keep our talent and not lose our talent to our customers. Secondly, I think in terms of projects, even if, let's say, one customer decides to lay some people, the project has to go on, especially the project with a very short-term production. And in this context, we are always seen as an accelerator of the development as innovator. So we always take the opportunity, let's say, to accelerate in the development with our customers. And third point I'd like to mention to you is the fact that if you consider the cost structure of an engineering service provider towards the cost structure of I think using engine service provider, we can guarantee acceleration on the research and development. On the other side, we can be an opportunity also for our customers to reduce their R&D costs. That's for the first question.

[Holger Merz, executive]

Question. You asked about our guidance, our adjusted EBIT guidance. We specified this guidance in the -- our earnings call in the first 9 months, we had an adjusted EBIT margin of 6.5% and our former guidance was around 4% to 7%. And now we say, okay, we have only the 3 months, makes sense to make it more narrow this guidance. And we know that the fourth quarter has less working days than, for example, the third quarter. And so we are cautious. And so we think we could keep our adjusted EBIT, and that's why we say, okay, for the full year, we guide adjusted EBIT margin of around 6% and around 6% means also adjusted poins at 4%. It's also in the range.

[Operator]

So next question comes from Marc-Rene Tonn from Warburg Research.

[Marc-Rene Tonn, analyst]

Well. Basically, I have 3 to 4. I would take them one by one, I think. The first one would be, I think we are close to, let's say, the launch of major new platforms of customers. I think when we look at Mercedes MBA or MMA and on the electric part, BMW with my cluster, VW with the SSP and the larger cars. And we should expect probably, let's call it, the relative from these cars are expected to come after that. So the question would be, and I think the variety of models have been one of the big drivers for engineering services providers in, let's say, in the combustion engine world in the past. So whether you already see this in your order intake, admittedly, you said it's more and more on the short-term projects, which are now still being called off, that would be helpful, whether this is something you already see in your order books? And the other question, I think it would take after this.

[Cosimo De Carlo, executive]

Let's make one of -- yes, let's start with the first question. Yes, you are right, Marc-Rene. We know that our customers, especially general ones, are investing in new platforms from that side, of course, to increase efficiency and to reduce their time to market, which is the main challenge they face today towards the Chinese on. We are, of course, participating to these trends, especially in the general automotive industry. Our order intake was very solid after the first 3 months. And I said it a little bit during my presentation that we are also in discussion with many customers for potential derivative development. So full on track. And I think EDAG is, as you said, is the first address when it comes to develop [indiscernible]. So I'm sure I'm confident that we will fully make profit of these tenants on the market.

[Marc-Rene Tonn, analyst]

Perfect. And I think pretty much related to that, as also being regarding order intake, I'm aware that this figure is -- the figure you are saying also say a bit quarter-to-quarter, difficult to judge. But I think we've seen the last 2 quarters, order intake would be try of revenues. Is it something you would expect to convert in the fourth quarter already? Or is it something which will start to grow a bit more and more longer term, I think we look at the ordering which you are splitting.

[Cosimo De Carlo, executive]

Yes. So let's say this, the first 2 quarters were very, very strong. on our side. The third quarter, if you compare -- you're right, it's very difficult normally to make a compared year-over-year for the quarter. If you take the third quarter of last year, we had a very high value because last year, we booked during this time, a very big project. And let's say, it was the fact that the reason why the Q3 order intake in 2022 was very high. I think the Q3 order intake this year was at normalized level in line with our expectation. Now concerning the Q4, will also depend a lot if we receive the order in December or Jan next year. Normally, we have also bid a seasonable effect. I am expecting a solid development of the order intake. Of course, t will depend -- will a big influence on this is if we win big diverse projects that, let's say, we are in discussion with the customers about them or not. But I will expect a continuous development of the order intake, let's say, at the Q3 level, so which is, let's say, normalized level, in line also with our revenue development.

[Marc-Rene Tonn, analyst]

And in order book, it's only a reflection at a specific point in time for us, it doesn't matter when the order comes, maybe also the order can also come 10 days after the quarter for us is also okay because we have to negotiate the orders with our customers. And then maybe we can't book the order in the relevant quarter, and then we book in the next quarter.

[Holger Merz, executive]

Decision ability team that we have to always cope with it's a reflection at a specific point in time only.

[Marc-Rene Tonn, analyst]

Next question would be regarding your customer mixing. You rightly said that, let's say, probably, let's say, compared to, let's say, 2, 3 years ago, when let's say, a larger amount of larger shale business being let's say, startups or new OEMs. The importance of the German OEMs has increased again. So my question would be with regard to startups. Do you see any, let's say, movement around those companies, let's say, are requests increasing again? Or is this something which, let's say, remains a bit more silent as it has been in the most recent quarters?

[Holger Merz, executive]

Yes. What we can tell you is the financing of projects with startup companies is getting harder for these start-up companies, there are less specs on the market, for example. And so we see that the start-up market is getting a little bit down. But nevertheless, we are also in discussions with some of -- with some start-ups, and we have also in our order book, some projects we start up companies, but in fact, we had a switch from start-up OEMs to, I would say, traditional OEMs.

[Cosimo De Carlo, executive]

Yes. And the project starts, I want to highlight again when we work with them only with upfront payments. So Frans -- and at the moment, we are also in discussion with some startups before doing IPO spec. So I think compared perhaps to the first 3, 4 months of the year, -- in that case, in the period was really almost no discussion. Today, it's a slight, I would say, more dynamic market in terms of startup. So I have the impression that in some cases, some of them are reaching their investment. That could be, of course, let's say, an advantage for us an additional advantage to our development.

[Marc-Rene Tonn, analyst]

Perfect. And the last question, I may on a bit greedy, but let's say, you had a very successful 9-month period, and congratulations for that. But I think when we compare to what, let's say, historically had been planned by engineering service providers in terms of growth and also margins. Perhaps you could let say, give us some kind of updated view where you would see, let's say, going a bit more midterm, long term, what is possible. I think we've now seen a margin, which at 8.5% for the quarter on a sandal basis is they close to the level which was, let's say, was the ambition in the past. Or on the level from the ambition of the past, a very successful development here. When you see the environment in general as a result there was a huge R&D demand for the German OEMs to catch up with competition or to stay ahead of competition where we still are ahead of it. So perhaps your view on, let's say, the next few years, that you would foresee further growth do you let's say, profitability increasing? Or is it just too early to make statements on that?

[Cosimo De Carlo, executive]

It's, of course, in terms of long term is always a little bit tricky to answer to your questions. In any case, I'd like to state that in terms of R&D spend, so which is, let's say, always our main market, I see in the future, we see in the future a big opportunity for EDAG I think we have shown in the last quarters, an improvement every quarter, which is very important. At the end of the day, so we believe that it's possible to increase revenue to increase margin will be, of course, dependent on the ability of our company to increase automation, to increase best cost countries to always have a look at the cost structure and to always make use of new technologies like automation of tax, like artificial intelligence. I think the new technologies give us as engineer service provided the opportunity to reach midterm very high margin. On the other side, we always have to make sure that we continue our growth path for the market that we have a very solid customer portfolio, which is not only dependent, let's say, one customer to customer. That's part of our road map part of our strategy and are quite confident that following this strategy will have the opportunity to increase step-by-step revenue and margin.

[Marc-Rene Tonn, analyst]

Okay. And just one very short follow-up on that one. You mentioned the low cost being -- or best cost being an important building block of this development. Could you give us an update on the amount of the employees, which are currently, let's say, located in best cost countries.

[Holger Merz, executive]

In best cost country, we have approximately, let me count -- approximately 1,200. Pure best country, I would say, 1,200 people.

[Cosimo De Carlo, executive]

Out of our actual workforce. This is one step, Marc-Rene, very important. On the other side, the second step is automation of TASC, which also have an impact on our cost structure. Best cost country is not the only solution. I think it's always the combination between best cost countries, workforce, which is also important for the talent worker. On the other side, automation of that, the use of new technologies like AI will be key for our market, for our industry.

[Marc-Rene Tonn, analyst]

And conversations with a good cost of that.

[Operator]

So thank you. It seems there are no further questions now. We'll wait a few more seconds. So no, and I'm happy to hand back to your host, Cosimo De Carlo for the conclusion of the conference.

[Cosimo De Carlo, executive]

Yes. Thank you so much. Also from my side, thank you for taking your time and listen to call. I wish you a great rest of the day and looking forward to talking to you at the beginning of next year. Thank you so much.

[Holger Merz, executive]

Thank you for your interest, and goodbye.