Grammer AG

XETRA:GMM

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Grammer AG Conference Call regarding Results Q1 2018. [Operator Instructions]Let me now turn the floor over to your host, Mr. Ralf Hoppe.

[Ralf Hoppe, Head of Strategic Product Planning]

Yes, good day, ladies and gentlemen. Welcome to our Q1 Conference Call. Today, our CFO, Mr. Gérard Cordonnier will present to you the main highlights of the first 3 months of this year. After that, as usual, you can ask questions, of course. Mr. Cordonnier, [ Foreign Language ].

[Gérard Cordonnier, CFO & Member of the Executive Board]

[ Foreign Language]. Ladies and gentlemen, hello from my side, too. I will start with a short summary of the first 3 months of 2018. Grammer had a solid start into the new business year with expected challenges in its Automotive business and dynamic market environment in the Commercial Vehicle segment. Overall, I am happy to say that Grammer performed as expected and planned in the Q1 2018. Group revenue, much high level of previous year despite negative FX impacts. Ongoing solid performance of the operational EBIT with margin of 4.5% in the first quarter of 2019 (sic) [ 2018 ], which is in line with the full year of 2017. As expected, we saw a slight drop in business volume for the Automotive division, but it was compensated by the very strong development of the Commercial Vehicle revenue in the first quarter of 2018. I will come back on the details.We'll be able to offset the current cost burden in the course of the year and achieve a further improvement in operating profitability compared to last year. So we are confirming our 2018 guidance. Very important, as already communicated in March, the situation of the order intake in the Automotive division has not significantly changed in the last month.Since the general assembly last year and the increase of the Ningbo Jifeng holding in Grammer to 25% share. The situation regarding new orders has come down but is still not finally solved. We are trying to convince all of our customers and we are continuing to focus on expanding our business with new and existing customers in all regions.So this was the summary. Now let's start for the Group and first in the market development in the first quarter. We see -- and this's on Page 2, and you see the Passenger Car. First, we have new registrations in Germany of plus 5%, in SUV, sports cars and in the upper-class models, is driving growth. In Western Europe, we have a solid growth of plus 5%. In North America, we have a small growth -- a slight growth of plus 1%. China is further with the high growth of 4% based on strong SUV sales.On the truck side, in the first quarter, we have in the -- in Germany, minus 4% and in the U.K., minus 11%. But we have strong growth in Netherlands, France and Italy. In the U.S. with ongoing dynamic growth momentum, we are plus 17%, mainly driven by strong heavy duty class 8 segment. What's very good is that we see the recovery in Brazil is continuing and the first quarter plus 53%, but still on a low level.China, with double-digit growth, 11% in the first 3 months boosted by heavy duty trucks. However, full year of 2018 is expected to decline versus a very high level year of 2017.In all Other Commercial Vehicle markets, we see that like agricultural machinery, construction machinery and material handling are continuing with a strong growth rate as in the previous quarters.Now what does this mean for Grammer? First for Grammer Group, we have, I would say, a solid start in the first quarter. You see that our sales EUR 458 million last year for the first quarter, we're up by (sic) [ to ] EUR 454 million. That means a small decline of 0.8%, but if we would adjust the FX for the sales, we would be at plus 2%. Yes, and if we look now on the EBIT and operational EBIT, perhaps first on the EBIT margin, you see that we're up by (sic) [ at ] EUR 20.4 million, that means 4.5%. And for the operational EBIT, we are also by 4.5%. That means we have nothing materialized between EBIT and operational EBIT, and we're at EUR 20.5 million.If we look now further our net profit, our net profit is from EUR 14 million at EUR 12.2 million. That means in connection with the FX impact, we can say that our financial results in net profit are on a very good level. And also you see that our basic earnings per share are going from EUR 1.24 to EUR 1 and it's mainly due to the -- corresponding to the decrease from EUR 1 in Q1 2018 to EUR 1 in [indiscernible], including an additional impact due to the dilution effect from the mandatory convertible bonds that happened in Q2 -- in second quarter 2017, and what has no impact in the first quarter 2017, therefore, we see this difference.If we look on our equity ratio. We see that we are going from EUR 351 million to EUR 325 million. That means -- but we are still at 30% equity and that in spite of the fact that we have for the first time, we do have order impact of the application of the IFRS 15 regulation. Therefore, the value is going from EUR 251 million (sic) [ EUR 351 million ] to EUR 325 million.Our net financial debt and gearing, you see that our net financial debt is increasing to EUR 128.6 million due to the financing of the global business activity and resulting from a lower free cash flow in the first quarter, and our gearing is at 39%, which remained a very solid level.On the next page, that means Page 6, you see our investments. Our CapEx, we invest EUR 10 million, that means we decreased by EUR 1 million, it means a ratio -- a CapEx ratio of 2.2%. And the repartition in the different divisions, we have 27% in commercial, 84% (sic) [ 48% ] in Automotive and 25% in the Central Services. In the Central Services, it's mainly due to the fact that we have started the new customer -- construction of our new technology center and Group Headquarter in Ursensollen and we have included it in the first quarter, EUR 2 million. But 2.2% CapEx, to say, it's only slight below our then previous year, but it means not that we will mainly decrease our investment legacy.The next point is the headcount evolution or the number of employees is increasing against prior year March, March-to-March from (sic) [ by ] 836 employees. This increase is -- was starting also in the second half of 2017 in order to staff our plans for the upcoming product launches. We have a lot of new launches and we have to staff our plans.The ratio of our best-cost and high-cost country is stable, we're are by (sic) [ at ] 71% against 70% in best-cost countries. That means that we are keeping our good level.Now let's have a look in Automotive. First of all, what we see was for us, expected. It's nothing special, that means the Automotive division posted a decline in revenue in the first 3 months of 2018 as a result of [indiscernible], changeover and the corresponding timing difference of phase-downs and subsequent ramp-ups. This timing effect is the main reason for the reported decline in the NAFTA region. The revenue -- this revenue decline from EUR 335 million to EUR 313 million. That means, EBIT -- FX adjusted minus 5%. This revenue decline is not linked to order intake in relation with our shareholder situation. It's only due to a shift in the different production [indiscernible] what was foreseen. We expect that in the course of the year, this timing effect between Automotive changes will ease out and the Automotive division will be able to post a modest organic growth as projected for the full year of 2018.If we are looking on the EBIT side, you see that we have an EBIT margin of 3.1% and operational EBIT margin of 3% or EUR 9.5 million. That means that the operating EBIT in the Automotive division came to EUR 9.5 million in the first quarter failing short on the strong previous year and the operating EBIT margin stood at 3%, like I say, which is part of the full year 2017 profitability. Lower volume compared resulting in lower labor productivity and lower process efficiency and uncovered development and project cost impacted operating performance of the Automotive division in this first quarter. And in connection with this, action plans in place to make up Q1 shortfall and to boost productivity and efficiency in the Automotive division during the course of the year, but there we don't see any issue.I am very happy to show you the development of our Commercial Vehicle. We have very strong performance. We have first in revenue an increase from EUR 134 million to EUR 153 million, that means an increase of 15% and FX adjusted, an increase of 20%. That means also there, we have the positive development was driven by rising sales volume in the agricultural machinery, construction, material handling and truck market as well as beginning of recovery in Brazil.If we look on the EBIT side, you see also there a very positive trend. Our EBIT margin for 9.9% and operating EBIT margin 10.2% against 9.3% last year, and also we are growing from EUR 12.4 million to EUR 15.7 million. I think we are very proud from this result, but it's not the end of the story.And okay, I would say that driven by higher volume, operating EBIT improved by more than 25% to the EUR 15.7 million and the operating EBIT increased strongly.So now what are for us against for the Grammer group the -- in the -- at the Page 10, what are the market outlook for 2018? That means for the next 3 quarters. We have, first of all, the worldwide car production and what we see there is we see that in Europe, we have further growth of 2%; U.S., plus 2%; Brazil, plus 14%; China, plus 1%, that means the total of the world plus 2%.In the truck production, we see that Europe, plus 2%; plus 9% in the U.S.; plus 13% Brazil, but on a lower level; minus 15% in China. And in total, we have minus 3%, but coming from a very high prior year.Agriculture and machinery noted we have our different sources, and what we see in general is that for us, what is very interesting is that we see a positive trend for Brazil. We see also in the U.S. a further growth and in China stabilization. In the construction area, we have the same tendency. That means, the year will grow its way.Now what is our outlook 2018? I am very happy to say that we confirm what we have said after the first quarter, that means further increases in sales and profitability are expected. That means to remember you, our outlook is that for Grammer sales revenue last year EUR 1.79 billion. We will -- our outlook is EUR 1.85 billion. In operating EBIT margin, 4.5% last year, we will be around 5% for this year, and our ROCE was last year, 11.5% and will be higher end of the year. So okay, this doesn't include any special cost in connection with our shareholder structure. That means I have a very short summary. First quarter was as expected, and we are starting the year in the right way to achieve what we have foreseen in our outlook.Thank you very much for your attention. And now, your questions, please.

[Ralf Hoppe, Head of Strategic Product Planning]

Okay, thank you very much, Mr. Cordonnier. And now, I would like to ask the host to open the lines, please.

[Operator]

[Operator Instructions] And then we have a question from the Mr. Tonn.

[Marc-René Tonn]

Just a couple of questions from my side. Firstly would be on the Brazilian market. We see this -- a strong recovery there, as you mentioned clearly from a very low level. Perhaps you could give us some details in qualitative terms, what that means for perhaps your business in terms of earnings in this specific market. I think it was one of the most profitable markets probably in the past and where we stand right now. And what might be the potential if the recovery may be maintained? That would be my first question. The second question would be on material costs, we've heard it from, let's say, a couple of suppliers, that there has been some kind of an issue in the first quarter. So am I expecting it to remain an issue in the course of the year? Some fear that tariffs on pre-materials may even add to the cost increases from that side? Perhaps some remarks on your side on the development there, that would also be helpful. And thirdly and lastly my question would be on the mix in the Commercial Vehicle segment, which was very strong in the first quarter with the margin operationally being double-digit. What is your expectation for the business mix in the remaining 3 quarters? Should we expect profitability to remain broadly on that level? Or is there anything which should make us even more optimistic? Or if that's a bit more pessimistic with regards to the remaining 3 quarters?

[Gérard Cordonnier, CFO & Member of the Executive Board]

Okay. First, Brazil. It's clear that Brazil, it was very important in the past to us. We saw some sign end of last year that Brazil was coming back. It's a kind of confirmation in the first quarter, but it's too early. You remember last year, I say that we have breakeven. Meaning, we are building up on this breakeven organization with an increase of volume. That means, I would say, it's the optimal situation to be right structured. But I think after 3 months, it's too early to say in which direction we will go, but it's clear that we are going up in sales and also in profitability. But we will come back, I would say, when we have the confirmation after the second or the third quarter. Concerning the material costs, I think [indiscernible] material, its cost, it's clear that we have also in general some handicap this year due to the fact that we start the year, especially in steel and in plastic on a high level. That means, if you remember last year, we have an increase in these 2 areas instead of a decrease, and we could not re-invoice everything to the customer. That means we start with, I would say, a higher level than 100%, and we have to decrease under 100% because we are further giving price decrease. That means that it's clear they have an impact in the first quarter and it will have an impact in the first half year, but it's something that we have also -- that we know. And we have put special program and special activity in our purchasing department, first but also in connection with the engineering and optimization of our material cost in our product.

[Unknown Executive]

Okay. So now I would like to answer the question regarding Commercial Vehicle development in the next couple of quarters. Yes, you are right. The Q1 development both in terms of revenue, but also in terms of profitability was very, very promising, positive mix effect, our probable segments developed nicely in the first quarter. We don't see a significant change that we adopt. We also have the impact starting what we have announced last year that so, for example, Shaanxi in China that we start in March and now the volume is increasing. We have on the -- Caterpillar, a contract we start end of last year, it is increasing. That means we have lot of contracts in place to improve our mix and bringing up this profitably.

[Ralf Hoppe, Head of Strategic Product Planning]

So for the second quarter, we don't see significant change. So we also see a solid development also in our order situation, the commercial vehicle side. Third quarter there's seasonality for the margin in the third quarter because of the shutdowns in summer, will be lower compared to Q1 and Q2. And also remember that the recovery, both agriculture, also Brazil already started in the summer or late summer 2017. So the base effect quarter versus quarter or prior year quarter won't be that significant as in the first quarter. But overall, we are still very promising, very optimistic for the total development for Commercial Vehicles. So we definitely expect a higher profitability margin full year 2018 compared to full year 2017.

[Marc-René Tonn]

When having talked about, let's say, the sequential dynamics, also the question would be on the Automotive business. I think some issues on the ramp up situation on Q1 a bit from development, revenues from development contracts. Is that already improving in the second quarter as well? Or is it more geared towards the end from your perspective if it's there?

[Ralf Hoppe, Head of Strategic Product Planning]

It is starting to recover, the situation is starting to develop, positively it's starting to recover already in the second quarter. But the entire, let's say, the entire Q1 shortfall will be compensated throughout the entire year. But we already see a better situation in terms of the timing differences, phase down versus ramp ups already in the second quarter.

[Operator]

And then we have a question from Mr. Lemonnier.

[Sebastien Lemonnier]

Three questions. Your guidance is for 5% EBIT growth -- EBIT margin, sorry, and you already achieved 4.5% inQ1. Given the contribution from Commercial Vehicle, I was wondering if you can give more details on the type and business dynamic Q2, Q3? Because if we see they have a firm level in terms of business mix, I'm just wondering if it could an upgrade in your EBIT margin? That's the first question. Second one is what is currency behind your sales and EBIT margin target? Because in a few weeks, we have seen like a lower level of U.S. dollar compared to Europe. So just wondering how is the situation compared to when you stated your guidance? And lastly, can you update on your possible acquisition?

[Ralf Hoppe, Head of Strategic Product Planning]

Okay. I'll start with the foreign exchange exposure. So basically our guidance both in terms of revenue and also on EBIT, of course, is based more or less on current foreign exchange valuation meaning the foreign exchange ratios we've seen in the first quarter to remain reasonable stable throughout the entire year. So no dramatic changes of the current foreign exchange valuation. And so we are pretty safe in terms of our guidance here. In terms of the margin development, please remember that we also have to recover and compensate the shortfall in the first quarter.

[Gérard Cordonnier, CFO & Member of the Executive Board]

Yes, just talking to this subject. It's a big advantage for Grammer to have these 2 pillars, that means the pillar of Automotive and the pillar of Commercial Vehicle. And you see that in the next quarter, we will have -- the Automotive will increase due to what we explained, timing delay and all these things. And on the other hand, in the third quarter, we will have some seasonal effect in the Commercial Vehicle. That means, in totally we have to compensate. And therefore, we cannot increase our 5% guidance, but we are convinced and we confirm it that we will achieve it. The third point...

[Sebastien Lemonnier]

My question is like, as Q1 Auto business has been weaker than the rest of the year, so it should be like operating leverage. And if Commercial Vehicle stays strong, with good margin it should be like a positive margin mix effect, I guess, compared to last year, that's why I'm asking about the probability maybe to upgrade your EBIT guidance?

[Ralf Hoppe, Head of Strategic Product Planning]

Okay. For the time being, definitely we see it is too early to say that we still have 3 quarters to go. So please let us first, let's say, compensate the shortfall in the year, Automotive business second quarter, hopefully continue the promising development in the Commercial Vehicle business. Our main goal is to achieve our guidance, given -- as is stated for today. So this is what I can say.

[Gérard Cordonnier, CFO & Member of the Executive Board]

With -- concerning our acquisition, M&A activity, I know Mr. Lemonnier, you will be not happy with my answer, right. I can assure you that we are working like hell to make it concrete, and something will come. I can't say more.

[Operator]

And now we have a question from Mr. [ Clues ].

[Unknown Analyst]

So just a short question. Could you give us some more information about your order intake development?

[Ralf Hoppe, Head of Strategic Product Planning]

We can give you a couple of more details sure. As you know, as Mr. Cordonnier also explained, the situation has calmed down since the last AGM and since the subsequent increase of the stake of Ningbo Jifeng in Grammer. However, the entire situation is still volatile. Not every customer is fully convinced. However, in the first quarter, we have seen a higher order intake number compared to the first quarter 2017. But this is also no surprise because as you know, before -- shortly before the AGM last year, all of our customers were very conservative, very reluctant to give us the orders. So as the situation has improved, not 100% but improved. So we see also here higher total number of new orders as we basically planned for the first quarter.

[Gérard Cordonnier, CFO & Member of the Executive Board]

To be complete, Q1 first quarter of last year was EUR 250 million and first quarter of this year is EUR 350 million. That's as foreseen.

[Operator]

And there are no further questions at the moment. [Operator Instructions] And then Mr. Rothenaicher has a question.

[Peter Rothenaicher, Analyst]

One question regarding your cash flow development. So you had a very strong increase in the first quarter. You mentioned this has to do also with some increasing work in progress and new projects. What are you expecting for the upcoming quarters? Is -- do you expect to see here normalization? And what is then your view for the free cash flow for the entire year?

[Ralf Hoppe, Head of Strategic Product Planning]

Yes. Q1 cash flow, especially free cash flow was weaker compared to the other quarters as usual. The situation will be improving in the next couple of quarters. As we already said in our Analyst Meeting in March, including the additional investment for our new headquarter and technology center, we do not expect very positive free cash flow for the entire year. So flattish free cash flow after 12 months, including all investments, the additional EUR 20 million investment for the technology center. This is basically the -- our target.

[Operator]

And Mr. Lemonnier has the last question.

[Sebastien Lemonnier]

Sorry to add on the acquisition. Can we -- can you just share a bit what are the main topics of discussion regarding the acquisition? And based on to date developments, what could be the probability to achieve it in the coming weeks or months?

[Ralf Hoppe, Head of Strategic Product Planning]

Yes. We can always say what our main criteria for our M&A strategy is, and this is also valid for this one. Basically, it's enhancement of our regional footprint, enhancement of technology and enhancement also of profitability. These are the main criteria, the main 3 factors, and this is valid for all of our M&A activities. That's all we can say, unfortunately, for the time being.

[Sebastien Lemonnier]

Good. The question was like, is it a valuation topic? Are you in exclusive discussions, or are there any other topics there?

[Ralf Hoppe, Head of Strategic Product Planning]

Please understand that we are working very hard on fulfilling our M&A strategy, but this is all we can say so far. Sorry.

[Operator]

[Operator Instructions] Then we have no further questions.

[Ralf Hoppe, Head of Strategic Product Planning]

Okay. Thank you very much for your participation. Thanks for your questions. Yes, have a good day, and goodbye from Amberg.

[Gérard Cordonnier, CFO & Member of the Executive Board]

Bye-bye.

[Operator]

The conference is no longer being recorded.