Saf-Holland Se

XETRA:SFQ

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the SAF-Holland SE conference call regarding the Q1 2021 results. [Operator Instructions] Let's now turn the floor over to your host, Mr. Michael Schickling.

[Michael Schickling]

Yes. Good morning, and welcome to our Q1 2021 Analyst and Investors conference call. This morning, we have published a full set of numbers as well as the presentation slides used in this call. Your host today will be Alexander Geis, our CEO; and Inka Koljonen, our CFO. We will start with the presentation, followed by a Q&A session. I now would like to hand over the microphone to our CEO, Alexander Geis.

[Alexander Geis, CEO & Chairman of Management Board]

Thank you, Mr. Schickling. Good morning, ladies and gentlemen. A warm welcome to our Q1 2021 call. This is Alexander Geis, and together with our CFO, Inka Koljonen, we will be explaining you how your SAF-Holland performed in the first quarter of this year. Our presentation consists of our highlights presented by me, followed by our financial performance explained by Inka, and the future outlook for the remainder of the year done by myself. Please, let's get started on the next page with our main KPIs. In the upper left corner, you can see that we came in with EUR 286 million versus a EUR 283 million the year before. Sales performance was mainly driven by the APAC and EMEA region. Due to structural cost-cutting measures in all regions, combined with a higher gross profit margin, and our adjusted EBIT increased from 6.5% Q1 2020 to 7.7% now in Q1 this year. Due to the rebound of markets and steady demand, our net working capital ratio increased from 13% to 14.4% in the first quarter. This inventory buildup and filling of supply chain is the main reason for a breakeven in regards of operating free cash flow. And last but not least, our CapEx ratio was 1.9%. It was a bit lower than in Q1 2020. Some more details to the group performance on the next page. Starting again with the upper left, our sales increased by 0.8%, adjusted by FX, sales increased by 5.6%. Worthwhile to mention that despite increased OE sales, we maintained a high aftermarket share with roughly 27%. And speaking of our adjusted EBIT margin of 7.7%. The main drivers are the structural work we did in 2020. And as I explained before, an improved gross profit margin. I am also happy to report that we are done with restructuring now. In Q1 2021, our restructuring costs were only EUR 200,000, what is only less then is our PPA. But Inka will speak about this later on. Now let's take a look how the regions performed on the next page, please. Sales in EMEA came in with EUR 168 million, which is a 7% increase compared to last year's quarter. Adjusted by FX, the increase was 9.4%. As a reminder, our OE business in Europe is 90% plus in the trailer business and less than 10% in the truck business. And the trailer builders are not much affected by the semiconductor shortage, and are sold out already into summer or winter depending on the trailer application. We, as SAF-Holland, are booked out in our 2 German and 1 Turkish plants already until autumn. And beginning of April, we moved the biggest axle plant for -- here in Germany from a 2-shift operation to a 3-shift operation already. And beginning of May, the other 2 plants, the other one in Germany and the other one in Turkey, also from a 2- to a 3-shift operation to fulfill the demand of our customers. In the meantime, we do have a good mix of small, medium and big customers. And also further increased our axle market shares. So I'm confident to further increase our sales in the remainder of the year. EMEA's adjusted EBIT reached a solid 9.6% in Q1 '21, and we are confident to be able to counterbalance also the material price increases in Q2. On the next page, we speak about Americas. And here, our sales came in with EUR 90 million, which is a decline of 14.2%. Or adjusted by FX, still a decline of 5%. The main reasons are the cleanup of loss-making products and product lines. And unfortunately, the 2 winter storms we had in Texas in February, where we lost nearly 2 weeks of production. Truck business, which includes the fifth wheels and truck suspensions, is running very well. And in the trailer business, we are now adjusting our strategy to a much better customer mix, means we are focusing on medium and small trailer builders rather just focusing on the big 5. And results to come will be risk mitigation, product packages to all customers, and higher margins. The work we did last year is paying off. And thus, as you can see, the adjusted EBIT margin increased from a 3.9% last year to now 6% in Q1 2021. APAC on the next page, please. And here, the good news upfront. We don't burn any money anymore in APAC. Sales increased from EUR 21 million to EUR 27 million in Q1, which is an increase by 28%. Or adjusted by FX, a 32% increase. Our adjusted EBIT margin came in with a positive 1.4% versus a negative 2.4% the year before. Main drivers were the volume increases in India, good performance in Australia. And our China business is now trending in the right direction. And also here, worthwhile to mention, no more restructuring to be done in APAC. And here, I would like to pause for a bit and hand over to Inka.

[Inka Koljonen, CFO & Member of the Management Board]

Thank you, Alex. So good morning from my side. It's Inka Koljonen speaking. And I would like to continue with the investments. As you know, our CapEx guidance for the full year was about 2.5% of sales. Year-to-date, we are at 1.9%, which is normal since the CapEx expenditures do not occur on a linear basis. So the full year guidance is valid, and will be achieved. If we look at the absolute numbers, due to the sales increase versus previous year, we will be spending additional EUR 2 million to EUR 4 million in absolute terms versus last year. The focus of this additional CapEx spending is efficiency improvements and further optimization of the production processes at the German and especially also in the U.S. locations. Then let's have a look at the net working capital. Here, the gray bars are the 2020 numbers and the orange bars are the 2021 numbers. You see the net working capital ratio in Q1 is at 14.4%, which is higher than previous year rate of 13%. Main driver here is the basis for the ratio, which is the sales of the last 12 months, which were now lower than the year before due to the pandemic. Nevertheless, it's clear that in a boom phase, and in the revenue growth phase, we are building up net working capital versus the end of 2021 -- 2020, sorry. Main reasons here are the tightness in the supply chain, the raw material availability and also the higher costs of the inventories. So at the end, it's our conscious management decision really to secure delivery performance and invest into inventories. And at the end, it's really a growth-driven increase of the net working capital. If we look further into the year, then definitely this ratio will be decreased going forward, coming back to a more normal level towards year-end. Then on the next page, the cash conversion rate. This is clearly the math. So we see that the cash conversion rate is affected by the net working capital increase, and is going down to a level of about 30%. Here also in the course of the year, there will be a significant improvement, which is already expected for Q2. Then our leveraging ratio. On the next page, please. Balance sheet structure has further improved, which is a very positive development. Here, we see the development of the net debt-to-EBITDA ratio in the past quarters. And you see that we are clearly coming down from the peak in the pandemic where the ratio was at more than 4x to a level of 2.25x, which is clearly within our range of 2x to 3x, and represents a really healthy balance sheet structure. Our focus going forward will be to keep and further enhance this ratio, but it's clear also that this financial profile provides us further flexibility for future growth, which is mainly targeted in the organic area. So with that, I would hand back to Alex to provide a view of the outlook.

[Alexander Geis, CEO & Chairman of Management Board]

Thanks, Inka. Ladies and gentlemen, how we see the markets developing in 2021, you can see on Page 13, please. Starting on the left chart with Europe, you can see new now truck, plus 22%. Of course, we have to see how the shortage of the semiconductors will be developing in the remainder of the year. Trailer with a strong plus 20%; North America truck, plus 42%; trailer, also plus 42%; South America, with a strong 30% plus in truck; trailer, plus 16%. China, a little bit of a mixed picture. Truck with still a little bit of a decline from minus 5% to minus 10%. Trailer nearly on the same level with 0 to plus 5. And last but not least, booming India at the moment with truck, plus 114%, and trailer with 182%. So to summarize that, as you can see, a significant rebound in North America and India, and also higher volumes in Europe and South America and China with declining truck volumes. We have to see how that develops in the rest of the year. And on the next page, we come to our guidance for 2021. And as you have seen on the pages before, we already delivered a solid Q1 in 2021. But given the sickness standards like the COVID developments in India, the slow vaccination speed in Europe, the raw material and supply chain challenges, we would like to remain cautious with an unchanged guidance and sales to be in the range of EUR 1.050 billion to EUR 1.150 billion and adjusted EBIT margin to be around 7% of sales. And as Inka already mentioned, CapEx to be at around 2.5% of sales this year. And on the next page, I would like to summarize as follows. So we are benefiting from the upswing in Europe, Brazil and India based on our leading market positions. And as I mentioned before, the U.S. trailer business to follow shortly to a new strategy. Our structural cost-cutting measures, bearing fruit and are sustainable. We focus on a disciplined approach to manage accelerating customer demand and working capital investments, and a further deleveraging is expected and can be expected and material price increases are already included in our full year guidance. Dear ladies and gentlemen, we did our homework in 2019 and 2020. EMEA performs very well. Americas is back on track with an upside potential. And APAC is going into the right direction with more to come. Thanks for your trust in us. And I think we are open for questions now. Thank you.

[Operator]

[Operator Instructions] And the first question comes from Philippe Lorrain of Berenberg.

[Philippe Lorrain, Analyst]

Two questions from my side, one on the market and the outlook perhaps. And also the second one on the product portfolio in the Americas. So I'll start with the one on the market. When you raised substantially your outlook for the trucks and trailer markets, yet you keep the same guidance unchanged. You've mentioned as well that you want to be cautious, especially with regard to the supply situation and the chip shortage and so on and so forth. I also appreciate that FX can have an impact there. And you mentioned that you're fully booked for until the autumn in EMEA, which is just backing beyond guidance so far. But what would be holding you back from raising the guidance on sales at that stage? Is it just the FX development? And what you see on the market in terms of supply situation? Or perhaps the -- there's something else that I don't really understand, especially since you mentioned as well, natural price increases are being included in the full year guidance.

[Alexander Geis, CEO & Chairman of Management Board]

Okay. Philippe, this is Alex Geis. I would like to take that question, of course. Well, we learned our lessons in 2020, let me see -- let me say, due to the COVID circumstances that you could not really plan what's going to happen in the next upcoming months or quarters. We see at the moment, there is no shortage in our trailer business, starting with EMEA, in the trailer business. So there is not much effect on the shortage of the semiconductors. What we might be seeing is -- and what is a little bit tight at the moment is the supply chain across the world. So there is a shortage of sea containers coming from Asia to Europe, but also to the Americas. This is what we are watching carefully. But also the availability of plastics and rubber is getting tighter. Also the material prices are increasing. So we talk a lot with our trailer companies, especially here in Europe. They are watching that very carefully. And this is why we would like to remain cautious because we don't know what's -- maybe there is something popping up in June, July or August. We don't see that on the radar at the moment, but we would like to remain cautious. But as I said before, we increased the production capabilities in our plants. And we are looking forward to a very strong Q2. This is what I can already say.

[Philippe Lorrain, Analyst]

Okay. That -- I think that's a fair point. So just to clarify, the market outlook that you show on that slide, that's not what you use for the sales guidance, and that's also was not what you were using when you were presenting the full year numbers.

[Alexander Geis, CEO & Chairman of Management Board]

Well, it's a combination, of course, we use the guidance, the market developments for the remainder of the year. But we incorporated a safety -- let's say, a safety level for us because we don't know what is going on in the third quarter and fourth quarter. We don't see anything on the radar popping up. But we would like to remain cautious.

[Philippe Lorrain, Analyst]

Okay. Okay. And the safety net has basically -- I mean it's increased just because you start in the year with a relatively strong H1, but you just want to make sure that you reach all the targets.

[Alexander Geis, CEO & Chairman of Management Board]

Yes.

[Philippe Lorrain, Analyst]

Okay. Perfect. And the second question was just on the Americas, and the product portfolio there. You mentioned that you had like some effects that were resulting in the organic sales decline, and that was related to the cleanup of the product portfolio as well as all the rest, like with the winter-related storms and so on and so forth. When should we expect that cleanup of the product portfolio to be finished completely?

[Alexander Geis, CEO & Chairman of Management Board]

Well, what I already at this stage can say that we cleaned up about 50% of our product portfolio in the U.S. Americas is mainly driven -- our production facilities are mainly in the U.S. Canada, Mexico and Brazil, we can put a checkmark behind that. They are running quite well for us. We have a couple of plants in the U.S. and as I said, we already cleaned up about 50% of all the part numbers, which then enables us to really focus on the main parts and the main product groups. This is what we did already. So we are nearly done. And just to give you some examples, specifically in the trailer business, what we did, we stopped loss-making products for trailer applications like bumper tubes, okay? We saw bumper tubes at a loss. And that's high sales, but it doesn't make any sense because we are losing money. And we are refocusing also, as I explained earlier, now on the medium and smaller trailer customers in the U.S. and also Canada. This is what we changed a couple of years in EMEA, and not so much focusing anymore on the big ones rather than now focusing on the small ones because then it's a wider range of customers. And this comes also with a better sales and a better profitability. This is what we have changed already in Q1 now.

[Philippe Lorrain, Analyst]

Okay. That's fair enough. Do I understand correctly that you have as well, like some kind of product portfolio adjustments outside the U.S.? Or was it just like me understanding that?

[Alexander Geis, CEO & Chairman of Management Board]

The main product portfolio adjustments were done in the U.S. Europe, we did that already a couple of years ago. But this is an ongoing process all over the world. But the main drivers we see in the U.S. where we had an inflation of different products, which added a lot of complexity. And so we cut that back now, and we are on a good way to further finish this. And this is also the reason why we increased the profitability in the U.S. Less complexity, more focus on the main product groups, and this is also what we would like to continue in the remainder of the year and the years to come.

[Operator]

We have a couple of more questions. Next questioner is Mr. Jan-Erik Schmidt of LOYS AG.

[Jan-Erik Schmidt]

I just have 3 quick questions. So the first one would be on EMEA. The margin development. So we've seen in Q3 and Q4, really good margins, given a lower sales number. I was wondering kind of like what happened in Q1 that even though we had a higher sales number, margins were a little lower?

[Alexander Geis, CEO & Chairman of Management Board]

Okay. Specifically, in the last quarter of last year, we had a little bit of a mixed percentage OE versus aftermarket. Aftermarket traditionally comes in with a higher profitability or much higher profitability. This is the reason why we had a little bit higher adjusted EBIT margins in Q4. And in Q1, we already saw an increase in OE business, which is a good thing for us. But the lower the aftermarket percentage, of course, that has a mix on the -- an impact on the overall margin. But we came in with a 9.6%, which is still a very good number for us.

[Jan-Erik Schmidt]

All right. So it's just a pure product mix effect, the margin and [indiscernible]

[Alexander Geis, CEO & Chairman of Management Board]

It's a product mix effect, yes.

[Jan-Erik Schmidt]

All right. Okay. And then on the net working capital side, I think you mentioned that due to the tightness in the supply chain, you want to increase it. So kind of like what is the target you're aiming for in absolute terms? I mean, percentage-wise, it's obviously going to decrease or kind of like normalize a little bit just with the increased sales numbers given you're calculating it in the last 12 months. So just wondering like what's the absolute level of net working capital, when you say you want to increase it a little bit to make sure you kind of like have all the supplies you need?

[Inka Koljonen, CFO & Member of the Management Board]

Yes. Sure. Maybe I can take that. So I would say the main increase was really done in the first quarter, when we saw that raw material prices are increasing, and when the situation kind of started to really gain dynamic regarding the tightness. So I don't expect any further, I would say, conscious increase outside of our normal system. At the end, we are not guiding towards an absolute net working capital level. Clearly, towards year-end and in the further course of the year, the ratio will substantially improve. And already in the Q2, we will have a significant improvement.

[Jan-Erik Schmidt]

All right. And the factoring is still, what, roughly EUR 30 million to EUR 40 million, right?

[Inka Koljonen, CFO & Member of the Management Board]

Yes. It is more or less at the same level. So no effect out of the factoring to the net working capital.

[Jan-Erik Schmidt]

All right. Okay. And then lastly, on the leverage. So if we assume just kind of like increase in EBITDA, given the better results throughout the year. I'm just wondering what you're going to do with the cash? You were talking about [indiscernible] the organic growth. So what's the cash usage basically? Is that going to be in some sort of buyback dividends? Or is that just going to be accumulated? Or what's the target there?

[Inka Koljonen, CFO & Member of the Management Board]

Yes. So I mean, I would say, we are looking and evaluating all options. Of course, the primary focus and target is to keep and enhance the good balance sheet structure. So we clearly don't want to come back to the levels where we were. And the 2 to 3x is really a maximum leverage ratio that I think is a good one. At the same time, yes, on a regular basis, we are looking at potential targets. But if they were to go for something, we think that this should really make a difference for us. And also with the multiples being at the moment where they are, it's not that we are running after these expensive targets. So if everything adds up, the timing, the situation and the target, I think it's good to have a flexibility. But really, the focus is on organic growth.

[Operator]

We have one more question. It comes from Mr. Harald Eggeling of ODDO.

[Harald Eggeling, Analyst]

Yes. Basically, I was wondering how you -- what your vision is for APAC region. Basically, I'm wondering what you see as a midterm EBIT margin potential, and how steep the trajectory could be, given that I assume it's mainly OE-driven business at the -- for the time being. So do you see the potential to be in 3 years on group margin level?

[Alexander Geis, CEO & Chairman of Management Board]

Harald, this is a very good question. Of course, what we are not going to do is to guide different regions. But being with the company for quite a while, and see what EMEA was capable of developing, too, and also now seeing that Americas is trending in the right directions. And we already had better margins in the past there. The target is clear for us that a region shouldn't be margin dilutive to the group result, okay? We have a good setup. We restructured the whole region a lot. We closed a lot of companies, loss-making subsidiaries. We have now the spread in Australia. We have a base in Singapore and India. We are the market leader in trailer axles and suspensions. We have now our new setup in China, and this is only one setup now. And the clear target is to be further increase in sales. We have good products, and a good team. So we are ready now. And also this should be coming with a certain profitability. But without guiding anything, it is clear that region shouldn't be margin dilutive to the group.

[Operator]

There are no further questions in the queue. [Operator Instructions] Yes. And we have one more question coming from Mr. Johannes Ries of Apus Capital.

[Johannes Ries, Founder]

Yes. This is Johannes Ries. So maybe 2 short follow-on questions. Maybe again on the U.S. market, if I see your market forecast for the U.S. market, which is quite strong compared to your own figures and some measures you mentioned, the reason why you maybe have been weaker in Q1. Is it right to make it clear again that there could be a stronger uptick in the further development of the year, especially in the second half for U.S. business?

[Alexander Geis, CEO & Chairman of Management Board]

Johannes, I will take this question. Alexander here. You are totally right. We have -- we predicted a strong increase in truck and trailer after a massive dip the year before. We are doing very well in the truck business. So the 2 main product groups in truck is the fifth wheels, where we are market leader, and also truck suspensions. So we are fully booked. We have one dedicated plant in Texas for the fifth wheels. In Dumas, Arkansas, there is one dedicated truck suspension plant. We're also fully booked. And we see a strong increase in the second quarter. Hopefully, we can solve the material supply chain because this is really a struggle in the -- specifically in the U.S. now. On the trailer segment, there is also -- the market-wise, it's an increase where we saw a huge drop in the last year. So the drop in trailer was more than in the truck business last year. Here, we were focusing a lot on air disk brake axles. This paused a little bit in 2020. And also what we did in the past was only, as I said before, focusing on the big 5 trailer builders. Well, you are really reliable on those customers. And we changed now our focus on the medium and the smaller ones, which is about 100 to 150 different trailer builders. We have a new team in place, a new head of sales. We also would like to participate in that. We, for sure, will, in the truck business. In Q2, we see already the numbers kicking in. In the trailer business, we have a little bit more to do. But I'm also confident that the team will manage that in the remainder of the year.

[Johannes Ries, Founder]

So for -- maybe a stronger second half, is there are good chances if maybe the shortage of component maybe is not just to -- not a hit. That's maybe a risk. Second question regarding Asia. How optimism -- is your optimism that you can go on with a strong upside. How serious is the situation in China and especially in India, where you have a strong market outlook. But I hear from other sectors, for example, today from technology sector, said, they see a clear hit from the COVID situation there. Is it only a short-term impact? Do you see anything at the moment? And therefore, is there a risk that maybe -- at least in Q2, this could hit you in some regard, especially in India?

[Alexander Geis, CEO & Chairman of Management Board]

Yes. Okay. So we don't see any tendency that APAC will not be developing in the right direction, also in Q2 and going forward, okay? As I said before, we did our homework. And now the teams are working on profitable sales. So I'm confident that we can achieve that and further increase our, let's say, sales numbers and also the margin numbers. In India, we already had a good April. This is what I can say. Very outstanding in May. For sure, there will be a hit, not because we cannot produce. So our team, knock on wood, is healthy. We don't have so many COVID cases. We can produce, but we can see that our customers, specifically in the trailer, but also in the truck business. And India, mainly a trailer gets sold with a truck combined as 1 unit that they have to take out shifts, close productions. So we see that the sales is slowing down in May. We will see how that will be developing into June. What we heard is that a lot of areas, India will be closing now down for 2 weeks, okay? In total, this will hopefully get a release. But we are watching that, but we are confident that we can overcome that. And we are not only selling our engine products made in India into India. We also have a good export business. And this is what we keep running there.

[Operator]

We have one more question. This is a follow-up question from Mr. Philippe Lorrain.

[Philippe Lorrain, Analyst]

Yes. It's just regarding the U.S. market bouncing back on Johannes question. Do you observe as well that cycles there tend to be shorter now. And if that's the case? How are you coping with that in terms of preparation for strong upswing, and also possibly strong and quite fast declines as well?

[Alexander Geis, CEO & Chairman of Management Board]

So first of all, we don't see that the cycles are becoming shorter. At the moment, we are in constant talks with our people there, and our customers also. Well, the cycles are in the U.S. always, let's say, very tough, not as in Europe. The cycles are really huge in the U.S. What we see now is -- order intake, specifically in the truck business is outstanding. We are still capable of dealing with the material and supply chain. But it's getting tough, and specifically getting good workers. So if you have to install a couple more shifts. And while the shortage of workers, blue-collar workers. This is ongoing. And this is tough, I guess, for the whole industry and not only for our industry. We cope with that. We are dealing with that. How this will be developing in the future? I cannot say. But we don't see that the cycles are becoming shorter.

[Operator]

[Operator Instructions] There are no further questions in the queue. I'm handing over back to the company.

[Michael Schickling]

So ladies and gentlemen, thank you very much for your participation and your questions. If you have any further questions, please do not hesitate to contact Investor Relations. Have a good day, and take care.

[Alexander Geis, CEO & Chairman of Management Board]

Thank you, everybody.