Grammer AG

XETRA:GMM

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen. On behalf of Montega, a warm welcome to today's earnings call of the Grammer AG following the publication of the Q1 figures of 2024.We are delighted to welcome the spokesman of the Executive Board, Jens Ohlenschlager; as well as the CFO, Jurate Keblyte, who will speak in a moment and guide us through the presentation and the results. [Operator Instructions] We are looking forward to the presentation. And having said that, I hand over to the Senior Vice President, Investor Relations, Tanja Bucherl.

[Tanja Bucherl, executive]

Thank you very much. Good morning, everyone. Also, I would like to welcome you to our today's conference call regarding the first quarter of 2024. As said already in the next roughly 30 minutes, our Executive Board members, Jurate Keblyte and Jens Ohlenschlager, will provide you with an overview and some details of the first quarter of this year. Afterwards, as usual, there will be a short Q&A session where you are very much welcome to ask us any question you might have. And with that, I would like to hand over directly to you, Jens. The stage is yours.

[Jens Öhlenschläger, executive]

Thank you, Tanja, and good morning, everyone. My name is Jens Ohlenschlager. I'm the spokesman of the Executive Board at Grammer. Thank you for your interest in our company and on behalf of our entire team, I welcome each of you joining us today for the presentation of Grammer's Group business result Q1. We appreciate your interest in Grammer. We are excited to share with you an overview of the business performance in Q1 2024.I will begin with a brief overview of the most important developments. Global economic development was mixed. Chinese economy grew surprisingly strong in the first quarter compared to the same period of the previous year, for this growth was government investment and exports, while real estate prices continues. The U.S. economy proved remarkably resilient and stable at the start of the year. In Europe, the weak economic development of 2023 continued in Q1. Grammer [ were to ] navigate within this difficult environment and also external economic factors influenced our business performance.Revenue decreased by EUR 32.5 million to EUR 556.6 million. Operating EBIT dropped from EUR 13.9 million to EUR 2.4 million. This unsatisfactory development was mainly driven by the decline in revenue, higher costs caused by underutilized equipment capacities and higher start-up costs at the manufacturing side in the U.S. Negative effects from currency translation also persisted.To address these challenges and drive efficiency and profitability in 2024, a Top 10 Measure program with focus on result improvement was initiated, which we had already presented at the annual press conference on March 28. The Top 10 program already pursued in Q1. However, the main result improvement effects will become visible over the year.Now I hand over to my colleague, Jurate Keblyte, who will take you through the key figures and the contribution of the 3 regions in Q1.

[Jurate Keblyte, executive]

Thank you, Jens. Good morning, and welcome to our presentation also from my side. I will start with an overview of the group figures and then move on to the 3 regions. So first of all, revenue in the first quarter fell by 5.5% on year-to-year to around EUR 557 million. Adjusted for currency effect, the decline in revenue was 2.3%, a little bit lower. Looking separately by product area, automotive makes overall stable or, in other words, stagnating compression. However, there has been a lot of movement within the regions. EMEA decreased by 7.2%. AMERICAS remained flat with plus 0.9%, while APAC increased by 10.1%, in line what Jens has said, the surprisingly positive development in APAC. We will, however, come to this in more details afterwards.However, all regions remained below expectations for the Q1. And all of those developments leading to an overall revenue in Automotive of EUR 369 million, which is only 1.4% plus compared to previous year on a fixed adjusted base.In the higher-margin business of commercial vehicles, revenue fell by 13.7% or EUR 29.7 million, biggest portion of it being attributable to EMEA. Adjusted for the currency effect, revenue was down by 8.7%. And as a result, commercial vehicles now accounts for around 34% of the total revenue, bringing us temporarily away from our targeted 40% of the revenue share for commercial vehicles.As a result of the revenue drop, especially in commercial vehicles, EBIT decreased over proportionately from EUR 11.7 million in previous year to EUR 3.9 million in this year. Volatile capacity utilization, transfer cost for the commercial vehicles business within the U.S. as well as currency translation effect have been stressing the result. In addition, while the impact of the Top 10 Measures, as Jens already has mentioned, not yet taken full effect. Adjusted for positive currency effects of EUR 1.5 million, operating EBIT reached EUR 2.4 million, which represents a margin of 0.4% only.So moving on to the overview of employees since the third quarter of 2023, we report the employees, including the temporary workers to provide more accurate picture. This number has decreased compared to Q1 2023 by 3.1% or 505 employees. In AMERICAS, this has been approximately 240 employees or 4.9%. That have been reduced, while revenue remained stable. The reduction here is the result of the P2P after profitability program, with reduction of the SG&A staff and also positive impact from the reduced fluctuation of blue collar employees.In EMEA, the headcount decreased by 7.1% and 591 employees, while the number of blue collar reduced mainly due to the decline in revenue. The number of white collar employees increased slightly as a result of high order income that we need to ramp up in the upcoming quarters.In APAC, a strong use of leased workers has been utilized, or has been effective to manage the current revenue growth. And in addition, also own employees were recruited to also cope with strong order income in the upcoming ramp ups. From the overall increase here of 316 employees, 190 were leased workers and 126 owned employees. In Central Services, few people were added to improve -- yes, for the improvement program and also due to increase of regulations.Moving on to capital expenditure. We can see that we have increased to EUR 23.9 million or 66% compared to previous year, which is in plan and includes EUR 7.9 million for assets from rental and lease agreements that were capitalized in accordance with IFRS 16.Looking by region, EMEA accounts for EUR 6.6 million here. This is nearly 27% more than previous year. And these investments were primarily supporting new product launches in Eastern Europe. And in Germany, we continue to have the modernization of our commercial vehicles plant. In APAC, we have nearly tripled our investments to EUR 12.4 million. And this, however, includes EUR 7 million for leasing or space extensions in Changchun, Beijing and Shenyang, where we are continuously having high revenue development.In AMERICAS, investments decreased slightly from EUR 3.1 million to EUR 2.6 million and accounted mainly for renewal of different equipment in Brazil and Mexico. Central Services with EUR 2.3 million have been investing mainly in the already known projects that we have been reporting over the last quarters, being the new seat generation for commercial vehicles as well as 2 big digitalization programs, production -- product life cycle management and manufacturing execution system. This number is slightly below previous year, which was EUR 2.8 million, but in line with the plan.Now let's take a look at working capital, free cash flow and net debt. Working capital has reduced significantly to EUR 153 million. We can here report a solid progress in management of inventories and overdue receivables. In addition, the long [ gain ] of accounts payables has contributed in Q1 to achieve as a result.With this positive contribution from working capital, we have also achieved significantly improved free cash flow, reaching EUR 40.2 million compared to EUR 8.7 million in the previous year. Accordingly, also the net debt decreased from EUR 401 million at the end of the year to EUR 371.6 million at the end of March.On the next slide, we have also an overview of equity leveraging gearing metrics. Equity remained stable compared to the end of 2023, while the ratio has slightly deteriorated due to increase of total assets.Equity was affected by negative net profit. But on the other hand, the positive OCI, other comprehensive income and capital measures in China have compensated for it. Main item in OCI was actual gains from pension plans amounting to EUR 2.1 million, and while equity injection into relatively new Grammer Harbin plant and takeover of the remaining 50% of joint venture shares from FAWSN in Changchun, have contributed with EUR 3.2 million positively to equity. Leverage remained stable at 3.2 [ turns ], and gearing improved further to 118.5%.Now, let's turn our attention to the regions. And we start, as always, EMEA being our biggest region in the headquarter, generating more than 50% of the group's revenue. Here, we have achieved a revenue of nearly EUR 290 million, representing an 11.9% decrease compared to the same period last year. According to IHS, automotive production in EMEA fell by 3.3% and in Germany by 11.2%. So Grammer was also unable to escape this decline by 7.2% and being somewhere in the [indiscernible]. It is also worth mentioning that the revenue of EUR 157 million in Automotive is 19% below 2019, which is in line with the statistics of EDA for German production.Very painful is also the sales drop in the higher-margin business of commercial vehicles adjusted for a fixed revenue [ plummeted ] here by nearly 13%, leading to a significant EBIT drop. EBIT margin is down from over 5% over the last quarters to only 2.3%. Requiring severe measures since quick recovery of the market is not expected. And as Jens has mentioned, we have started with this already from the beginning of the year.Turning to APAC. The revenue increased slightly by 3.3% to EUR 121 million compared to previous year. So surprisingly strong is not really seen here, especially since we have been expecting even a higher increase. Adjusted for currency effect, we see also a high increase. This is 9.7%. It means that vehicle RMB leads to a weaker appearance in euro and also to a weaker contribution to the overall group results.Automotive revenue increased by 10% to EUR 86.3 million compared to previous year. Adjusted for currency effects, it's even more. It's 16.5% and equivalent of EUR 91.3 million if we would have used the same FX rate.This -- as I said already, the overall volumes remain, however, behind expectations. Especially American and European OEMs have lost volumes to local OEMs, which grew at Grammer with 38% compared to previous year and are now reaching more than 45% of the overall Automotive revenue from Grammer China.At the same time, commercial vehicles revenue decreased by 10% to EUR 35 million. Adjusted for currency effects, the revenue decline was less -- significantly less, only 3.8%. However, also here, pretty painful. FX impact here is quite different because approximately 20% of the commercial vehicles revenue in APAC is generated in Japan, which contributed also by the half of the revenue decline in commercial vehicles.As a result of this unfavorable development in product mix in the revenue, EBIT declined also by EUR 2.1 million to EUR 9.3 million. And also here, the already [indiscernible] FX translation effect and the ramp up of the new plant in Changzhou have contributed to the margin drop, which we expect to recover throughout the year.Turning to AMERICAS. The revenue here amounted to nearly EUR 160 million, which is on the same million as previous year. Adjusted for currency effects, it's a slight growth of 3% to an equivalent of EUR 164 million. Automotive has accounted for a slight increase of 0.9%, or we can say were stagnating at EUR 129 million, while commercial vehicles decreased by 2.5% to EUR 30.6 million.Also here, adjusting for currency effects, Automotive appears slightly better with 2.2% growth, while development commercial vehicles look significantly better with a plus of 6.4%. 40% of commercial vehicles revenue in AMERICAS is generated in Brazil, where we saw a recovery of approximately 14% compared to previous year.EBIT in AMERICAS accounted for EUR 6.4 million and improved compared to previous year -- to last year. This improvement goes, however, [ slow ] than targeted also due to these external headwinds and continuing restructuring expenses. External headwinds to repeat it, is already mentioned, the FX effects, but also the volumes that have been in general behind expectations.In addition, we have been hit by the 3-week strike at Audi in Mexico. That also has reached our plant. The restructuring measures that are not adjusted as one cost even in the operating EBIT comprise expenditures for the transfer of commercial vehicles production [indiscernible] the U.S. from one plant to another, including SAP implementation as well as ongoing temporary costs for consultants and lawyers.We can see that the measures are taking effect and having operational impact in AMERICAS. Nevertheless, we continue to validate further restructuring options and opportunities, potentially also divesture of functional plastic plants, former TMD business.And now handing over back to Jens to give us a few words about the outlook and the...

[Jens Öhlenschläger, executive]

Thank you, Jurate, for the comprehensive and detailed presentation of quarter 1 results. As we look ahead to the current fiscal year 2024, Grammer Group is racing for continued challenges amidst the complex macroeconomic landscape. However, let's look on our outlook for 2024. Despite the challenges, we expect revenue remaining stable at around EUR 2.3 billion, and operating EBIT is planned to increase to EUR 75 million in 2024.This earnings forecast reflects the progress we've already made with the Top 10 Measures program. One initiative within the Top 10 is the ongoing effort to turnaround financials in AMERICAS with the aim of improving utilization rates, substantially reducing SG&A expenses and increasing margins in line with our medium-term outlook.However, our forecast for the full year will also depend to a large extent our ability to negotiate agreements with our customers to pass on inflationary cost effects, which are impossible to compensate high productivity increase only. We are confident in our forecast the second half of the year, providing the decisive impetus from the Top 10 Measures.Finally, we would like to share with you some of our product and business highlights in the first quarter. A key focus of Grammer strategy, the Chinese market [ huge ] [ potential is ] seen. We recently launched a new manufacturing site in the city of Changzhou. The $20 million investment was done to produce consoles and armrest for the currently most successful domestic car manufacturer in China. We plan to further leverage our strengths in the region China, increase research and development activities and deepen our [ core ] operations with local suppliers and customers, both traditional and new energy vehicle manufacturers.And finally, let's turn attention shortly to some latest product innovations. Typical day for a forklift driver is tough work and requires a lot of focus. A good seat, it's not a luxury, but is seen essential to stay concentrated and doing the job safely during a long working day. And this is exactly where Grammer seats comes into a play with advanced features like climate control and a maximum of suspension for high comfort, best economic standards and maximum of safety.Last but not least, Grammer makesc progress in growing green, improved CDP rating. Sustainability plays an important role for Grammer. The current CDP rating is giving proof of this. Our environmental performance has improved for the second year in a row and was awarded a B score in climate change and in Water Security. We are proud on the successful team performance and the commitment of all our employees to make Grammer a sustainable company.Having this said, I give back the words to Tanja.

[Tanja Bucherl, executive]

Thank you very much, Jens. Thanks, Jurate, for the detailed information on our first quarter. And with that, we also want to give you now the direct opportunity to ask your questions. So the Q&A session is open.

[Operator]

[Operator Instructions] We will start with the questions from Marc-Rene Tonn.

[Marc-Rene Tonn, analyst]

First question would be regarding the performance at commercial vehicles in the first quarter, which was, let's say, weaker than the previous year. Can you give us, let's say, perhaps some more indication? Was it more related to trucks? Was it more, let's say, forklift or construction machinery? And how would you expect the -- let's say, the development over the year? Will Q2 already be much better than Q1? Or would it be more something which is, let's say, better in the second half? So basically, when are you expecting mix in the company to improve in the course of the year? That will be the first question.Second question would be from the Top 10 Measures. You said you, let's say, already had some first, let's say, a positive effect in the first quarter, probably, let's say, as it is always the case with earnings improvement programs. Things will build up during the year. So when we look at your, let's say, EBIT development, could you give us some indication? Is it really very much back-end loaded, very much Q4 related? Or do we -- let's say, should we expect Q2 to be, let's say, closer to the margin you're expecting for the full year already also, let's say, supported by the earnings improvement program? That will be my two questions, please.

[Jens Öhlenschläger, executive]

Question, what was causing this, yes, substantially drop on decline on commercial vehicle sales. Unfortunately, we have to agree on -- that the entire portfolio of commercial vehicles was causing this drop on the truck side, on the off-road side. Agriculture, construction equipment vehicles, all of them are selling much less compared to last year. And especially in Europe on the truck side, with our 2 major customers we have been faced with a drop of 15% to 20% of their vehicle volumes. So it's not anything you can pick. It's really the entire portfolio, as said, on-road and off-road, which is giving us in all 3 regions problems and resulting in less sales compared to previous year. And this trend already was seen in Q4 and it's continued now also Q1.

[Jurate Keblyte, executive]

We do not see also a quick recovery to come over the next quarters. We are rather, yes, preparing for -- or, let's say, adjusting our capacity.

[Jens Öhlenschläger, executive]

No, it is not the case. And also region China, which was also planned in 2024 to come back to the level of truck and off-road agriculture sales as in the year of 2019 will stay far behind of own plans, which is already reflected in our forecast. So also here, volume [indiscernible] considered also for that [indiscernible] region.

[Jurate Keblyte, executive]

Talking about the Top 10 Measures, since, for example, one of the Top 10 Measures is also a [ hiring freeze ] or some of the, yes, SG&A cost reductions, this takes effect with some time delays. So we are expecting -- also other negotiations with the customers is going to be effective rather in Q3, Q4, the Q2 level being only slightly above the Q1.

[Marc-Rene Tonn, analyst]

One follow-up, if I may, with regards to AMERICAS. And I think you mentioned the, let's say, delayed breakeven, which you'd see in this region. Could you give us some hint on whether you expect that this year for -- and if it is for this year, which quarter may be the one where we see, let's say, positive results or breakeven results for the AMERICAS region?

[Jurate Keblyte, executive]

So in the AMERICAS region, we are in ongoing negotiations with the customers. So where we have achieved in 2020 -- end of 2022, beginning of 2023, agreements with the customers on the TMD products. We are still in negotiations with the traditional Grammer products where we have been, yes, also not able to finish the agreements end of 2023. So these are still ongoing. We expect some of them to be closed in Q2, while others will, for sure, persist until Q3. And this will depend or this will have a -- yes, the most significant impact, while the temporary costs for, yes, external consultants and lawyers, they will for sure be required also until end of Q2 and reduction we will see in Q3, Q4. So I cannot give a precise answer, and we expect the turnaround because it depends really on how fast we are able to close some of the measures.

[Marc-Rene Tonn, analyst]

But this is, let's say also, let's say, very much in line with your expectation for the full year in the EUR 75 million operating EBIT...

[Jurate Keblyte, executive]

Absolutely, yes.

[Operator]

We have a follow-up question actually to the EBIT. Can you please give a hint how much of the sequential year-on-year improvement of the adjusted EBIT from EUR 57 million to EUR 75 million will be due to internal measures and how much due to price compensations from customers?

[Jurate Keblyte, executive]

So from the price compensations, we -- this depends on how you look into it, but we do not expect a big impact to come from the price compensations, because the big portion of it has been also, yes, for recovery on the inflation costs, which have -- on the raw materials and components, which is starting to reduce, or has been already reducing. So the compensations we -- will be successful if we can keep them on the same level as we used to have in the previous years. So biggest portion of these improvements are coming indeed from the internal measures.

[Operator]

[Operator Instructions] For now we have one question left in the chat box. Asking, if you sell TMD, what would be the financial impact? Will there be a higher loss on the sale? And what would be the operational improvement in the AMERICAS after the sale?

[Jurate Keblyte, executive]

We cannot give any details on that at -- in current point in time because we just have some...

[Jens Öhlenschläger, executive]

[indiscernible] thoughts about the potential sale at the early beginning of such an initiative. These are just ideas coming out of some brainstorming. So we really cannot at that stage of the idea generating...

[Jurate Keblyte, executive]

[indiscernible].

[Jens Öhlenschläger, executive]

-- to give any outlook on that.

[Operator]

So we'll remain patient regarding this topic. And I would go for some further questions from Marc-Rene Tonn.

[Marc-Rene Tonn, analyst]

Just one quick follow-up on working capital. I see when I look at your cash flow statement that you had, let's say, kind of a very, let's say, decent positive inflow from working capital in the first quarter mainly due to higher trade, trade payables, if I'm not mistaken. You also had, let's say, a positive, let's say, effect from working capital on the cash flow last year and also the year before last year. Is this, let's say, kind of, let's say, a normal working capital improvement program? Or is there anything we should keep in mind from factoring, reverse factoring? Any operations like that, which are supporting here or which may be, let's say, a risk to that being maintained for the year as a whole? Or is it really, let's say, operational management things, let's say, improving on the working capital side on the Grammer side?

[Jurate Keblyte, executive]

Yes. So to give you some more insights, so inventory management and overdue management has been programs ongoing since a while, and we really see solid development here. So overdue management being really at the best level we ever had at Grammer and inventories developing also here into the right direction. On the factoring, we have increased compared to previous -- or the previous year 2022 only slightly the volume. So it's not a big [ chunk ] that was made from here. And these accounts payables is rather temporary effect. We will for sure see deterioration compared to this very, very positive development in Q1 because we are really -- yes, due to our very high order income from last year, this will be having some stress on our refinancing. So we are having a lot of development costs that are compensated by the OEMs with a delay. We have a lot of investments upcoming. You have seen this already in Q1. So this will not remain at this very nice level.

[Operator]

We did not receive any further questions. In the meantime, it appears that everything is answered for the moment. Hence, from our side, thank you very much for your interest and participating.Mrs. Bucherl, I would hand over to you for some final remarks before closing this earnings call.

[Tanja Bucherl, executive]

Thank you very much Also from our side here from our room and [indiscernible]. Thanks for the participation and the interest in our first quarter. But as always, if there are coming up some additional questions or follow-up questions, please feel free to reach out to me directly. And with that, we would like to end today's session and wish you all a good day and a good rest of the week. Take care. Bye-bye.