Saf-Holland Se

XETRA:SFQ

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentleman, to SAF-Holland's conference call on the Q1 2022 results. [Operator Instructions] I now hand over to Petra Muller, Vice President, Investor Relations, Corporate and ESG Communications for introductory remarks.

[Petra Muller, executive]

Thank you, operator, and welcome, everybody, to our Q1 2022 results presentation. This call is also being broadcasted live over the Internet at safholland.com. A replay of the call will be available on our website shortly following the conclusion of this call.

Joining me today are our CEO, Alexander Geis; and the Vice President, Group Controlling, Accounting and Tax, Jorg Wahl. Alexander will start with the development of our regions. Jorg will provide some more detail on our key financials, followed by Alexander again updating you on our guidance and current developments. After this introduction, we will be happy to take your questions.

Please note that management's comments during this call will include forward-looking statements, which involve risks and uncertainties. For discussions of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation and in our annual report. All documents relating to our Q1 2022 reporting are available on our website.

And now without further ado, over to Alexander.

[Alexander Geis, executive]

Thank you, Petra. And good morning, everybody. Thanks for joining our call today and let's start with a short summary of KPIs for Q1 2022.

We started well into Q1 2022 and indeed with EUR 370 million of sales. It was a record quarter for us as already indicated in our call in March, with some quite some headwinds due to the high cost inflation, especially in Europe. Nevertheless, our adjusted EBIT margin reached a solid 6.4%. CapEx ratio was 1.4% and based on the strong business development, our net working capital ratio increased to 15.7%.

And now let's have a look on EMEA business development. The demand for our products was very pleasing and our production sites were fully utilized and still are. We are running on the full steam both in Germany and Turkey. We have seen a very strong trailer OE business, followed by a strong aftermarket and strong truck OE business. Regional Sales increased by 24% to EUR 208 million and FX did not play a major role.

High steel prices as well as high freight and energy costs, which are passed on with a time lag and a very strong impact on the cost of sales ratio, while our SG&MA and R&D cost ratios declined significantly. In total this led to an adjusted EBIT margin of 4.9% compared to 9.6% in Q1 2021. However, based on a more dynamic pricing as of Q2, we expect the margin improvement over the remainder of the year.

Our Americas region performed extremely well driven by a very strong trailer OE business supported by further market share gains in air disc brakes. Also the aftermarket business and the truck OE business showed strong sales growth.

Our truck and bus suspension business in Brazil performed strongly, our production is fully booked and we won some major LTAs with key customers. The launch of the fifth wheel assembly line in Mexico for our North American aftermarket business was successful. And we started production already beginning of Q1. This was a major cornerstone to increase our aftermarket business in North America further.

Regional sales grew by 41% to EUR 127 million and taking FX effects into account, sales grew by 31%. We were able to pass on price increases faster in the Americas since that inflation already happened in 2021 and the teams could act faster than expected.

Also our forward 2.0 program continued to contribute to the good margin development, which was also supported by the successful product portfolio, complexity reduction and the positive product mix. Our adjusted EBIT margin reached a good 7.8% in Q1 2022. And we clearly see that our Americas region is on a good way to get back to old margin levels in the 8% to 9% region.

And now let's speak about another goods development. APAC sales increased by 26% to EUR 34 million. Growth was driven by a very strong trailer OE business in India and Australia, as well as a strong aftermarket business in the whole region. Worth mentioning is also that we have successfully launched new trailer products in India. For example, our heavy duty air suspension and triple the sale of axles fitted with air disc brakes.

China market still struggles with strict 0 COVID-19 lockdowns. Nevertheless, our APAC sales increase adjusted for FX was 23%. Compared to the strong increase in turnover, the cost of sales went down significantly. The lower sales and admin cost ratio also had the margin enhancing effect. In total, this led to an adjusted EBIT margin of 10.1% compared to 1.4% in Q1 2021. And this was the first time ever we reached a double digit adjusted EBIT number in the APAC region.

And now let me hand over to Jorg for a detailed walkthrough of our financials on crude level.

[Jorg Wahl, executive]

Thank you Alex and welcome everybody. As Alex showed earlier, group sales grew significantly by 29% year-over-year to EUR 370 million. This strong performance was especially driven by a very strong trade OE and a strong aftermarket business in all 3 regions.

EMEA and Americas account for more than 90% of our sales. Against the backdrop of the very strong sales performance in the Americas, EMEA sales share went down by 250 basis points year-over-year, while the share of the Americas sales increased by 270 basis points compared to Q1 2021. FX ratio was more or less stable.

While adjusted gross profit increased by 4.5% year-over-year, adjusted gross profit margin came down to 15.8%. Cost of sales were impacted by high cost inflation. Alex already mentioned high steel prices as well as high freight rates and high energy costs. Price increases at our customers and efficiency improvements could not offset a particular high cost increases, especially in EMEA. We've implemented price increases at all our customers and will implement a more dynamic pricing as of Q2 2022, which will provide some offsetting of inflationary costs.

Our adjusted EBIT increased by 7% to EUR 23.5 million. The adjusted EBIT margin went down to 6.4% compared to 7.7% in Q1 2021. Our adjusted net profit went up by 1.8% year-over-year. The financial results increased to minus EUR 2.8 million, driven by unrealized FX losses. The operational adjustment on EBIT level came down slightly year-over-year from EUR 2.5 million in the Q1 of 2021 to EUR 2.4 million this year. Restructuring expenses of EUR 200,000 were on the previous year level.

Adjusted net profit increased by 3.3% to EUR 15 million. The undiluted adjusted earnings per share was EUR 0.33. Reported earnings per share increased from EUR 0.24 in Q1 2021 to EUR 0.29 this year. Let me sort of remind you that we will propose a dividend of EUR 0.35 per share to the AGM in May 2022. This corresponds to a payout ratio of 43% and is in line with our general dividend policy.

Based on a seasonally higher net debt of EUR 210 million, leverage was $1.66 billion compared to 1.58% at end of 2021, which is a very solid financial profile. Equity was up to EUR 390.5 million, driven by the net profit for the period as well as FX differences from the translation of foreign operation. Equity ratio was slightly higher compared to December 2021.

Net working capital went up to EUR 209 million, which corresponds to a net working capital ratio of 15.7%. This was driven by higher inventory to secure our delivery performance as well as higher trade receivables due to high demand. ROCE improved by 390 basis points compared to Q1 2021, mainly driven by higher adjusted EBIT.

CapEx of EUR 5.3 million was on the same level as in Q1 2021. CapEx ratio came to 1.4%. With our disciplined and focused investment policy, we will further improve the efficiency of our plants in Germany and the United States. Capacity-enhancing projects in India, Mexico and Turkey are running according to plan.

Net cash flow from operating activity was negative of EUR 5.2 million in Q1. Net cash flow from investing activities came to minus EUR 4.8 million. Thus our operating free cash flow was down to minus EUR 10 million. We expect cash flow to improve over the upcoming quarters.

And with that, I would like to hand over to Alex again.

[Alexander Geis, executive]

Thank you, Jorg. Now let's have a look on the market expectations for the full year 2022. In the commercial vehicle markets relevant for SAF-Holland, the outlook remains favorable in 2022. Also the somewhat slower growth dynamics of the global economy could have a dampening effect on the global trailer and truck markets in the further course of the year.

The trailer markets in Europe and the U.S., which are important for SAF-Holland, are expected to remain robust according to external industry experts and based on our own market intelligence. We have not seen any major order cancellations in EMEA. And as I pointed out in our March call, our fabs in Germany and Turkey are currently fully loaded into Q3.

The Indian trailer market should grow by 41% according to estimates by SIAM. And also here, we are booked nicely. For the North American truck market, which is important for SAF-Holland, ACT Research expects a growth rate of class 8 trucks of around 12% for the full year 2022.

Based on Q1 2022 quarterly figures and our global order intake, we have decided to raise the forecast for group sales for the financial year 2022 and to specify the forecast for the adjusted EBIT margin. Based on the expected macroeconomic and industry-specific framework conditions and weighing up the potential risks and opportunities, we now expect group sales for 2022 in a range of EUR 1.2 billion to EUR 1.35 billion.

As pointed out, we increased prices at our customers beginning of the year and will see more dynamic pricing becoming effective from Q2 onwards, especially in the EMEA region. Therefore, we expect a gradual recovery of the margin profile in the EMEA region over the upcoming quarters. The margin in the Americas region is on the right way to achieve old margin levels of 8% to 9%, and the loss of the Russian business is also incorporated in the full year 2022 guidance. Having said that, we currently expect our adjusted EBIT margin for the full year 2022 to be in a corridor of 6.5% to 7%. CapEx ratio should be between 2% and 2.5% of sales.

And with this, we close our presentation. Thank you very much. And operator, please open the Q&A session. Thank you.

[Operator]

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

[Philippe Lorrain, analyst]

Philippe Lorrain here from Berenberg. A question around the top line guidance. So I think from the press release that you assume that there's going to be really stable demand for your products for the remainder of the year. You mentioned as well in the slides dedicated to the guidance that you take into account the loss of the Russian business in your guidance now of EUR 1.2 billion to EUR 1.35 billion for the full year sales.

I was just wondering how does it come together with the fact that you are probably going to benefit from FX rates as well and the appreciating dollar, which means that you could register a tailwind of about 3%, if I do some correct calculations on the base of last year's adjusted sales. And this should basically provide a tailwind of EUR 30 million, EUR 40 million perhaps to your sales. So the low end of the new guidance range seems to be very low.

So what do you pencil in there in terms of volume versus price taking into account the fact that you raised prices as well? And the high end seems to be more reasonable and perhaps slightly even conservative.

[Alexander Geis, executive]

This is Alex speaking. Thank you very much for your question. Well, if you take everything into account, which -- what you just said, if you -- I would like to divide or if I'm dividing the answer to your question into 3 different regions, okay?

In the APAC region, there should be a very stable sales coming in, specifically because we are driven by India as #1 contributor to our sales in Australia or the Pacific is very stable. So here for the remainder of the year, I'm quite optimistic that we see very strong sales increase. But this is the smallest region we have with only roughly 10% of total sales.

If we then go to the Americas, I'm very happy that our restructuring over the last couple of years pay out now. We are gaining more market share, specifically in the trailer. We are ramping up or further ramping up a shift for the air disc brake trailer axles in Americas. And also here, of course, as you said rightfully, FX should help a little bit to increase the sales converted to euros.

For EMEA, we remain a little bit cautious because we see a very high cost inflation coming in, not only from us, from steel, but also flat inbound, outbound. Now with the COVID lockdowns in China, the supply chain could be interrupted a little bit in our industry, not so much for us because we changed a lot of suppliers already some years ago from China back to East Europe or to Turkey and India. So we are relatively independent from the supply chain from -- coming from China, but others might be.

And other components, which the truck and trailer manufacturers use to build their vehicles, also raise prices significantly. So we stay a little bit cautious for the remainder of the year. The demand could slow down a little bit specifically in the EMEA regions. So we discussed our guidance, and we want to be on the safe side to also make sure that we're going to reach better guidance.

[Philippe Lorrain, analyst]

Yes. Okay. I understand the cautious stance, especially in EMEA, but to me it sounded like there might be more than the EUR 1.35 billion actually due to the price increases, of course.

[Alexander Geis, executive]

Well, our next update is in summer. Then hopefully, we can speak about this one. But for now, I'm seeing the quarter one, we are fully booked for Q2 into Q3. Specifically for EMEA, we would like to remain cautious.

[Operator]

And the next question comes from Nicolai Kempf, Deutsche Bank.

[Nicolai Kempf, analyst]

I want to brought the APAC region, which actually had a very good start in the year. Can you just highlight how sustainable this figure is? And whether you think that this can come down over the next quarter or this kind of the -- these earnings levels kind of stable until the end of the year?

[Alexander Geis, executive]

Alex, again. Well, basically, what we did in the last 2 years, we did our homework, we closed a lot of smaller subsidiary, which were loss-making. For instance, Thailand, Malaysia and some others. We still have some legal entities in liquidation. So they will be closed by end of the year or middle of next year. So we basically did our homework, and we have now 4 remaining operating legal entities, which is Australia, I'm very happy with this performance and this should go on for the remainder of the year.

This is the second biggest one. The biggest one we have is India. I'm very happy with the infrastructure projects, which are now started or underway with the big ring roads being built. You have new legislation, which popped in that if you have on your trailer air suspension, then you are allowed as a fleet owner to load 10% more than normal suspensions, which is good for us because we are one of the few companies offering heavy-duty air suspension for that market. And with our very high market share of like 55% in axles for India. We did see -- well, we have a really good base and as I said, we are fully loaded in India and also started exporting again from India, which is a good thing.

Also here, I would tick the box through the remainder of the year. Another smaller subsidiary we have is in Singapore, which is taking care of Southeast Asia. This is a quite stable business. China is the big question mark. Our industry already went down significantly in the second half of 2021 due to the construction drop. And also now with all the coverage shutdowns internally in China the demand is slowing down further. The good thing is here that we don't have a lot of market shares in China. But of course, we are still not happy with our performance in China. But all -- overall, I have good faith that the sales will stay like in Q1 for 2022. And if we can manage to keep the double-digit margin up, I would love to see that, but I have high hopes that we will in that ballpark.

[Nicolai Kempf, analyst]

Okay. Sounds good. Maybe just a follow-up on China. I know it's not that important to you in terms of the market. But I think you already said that the risk is probably here that further lockdowns could impact the supply chain for EMEA. Is there also risk for supply chain impacts within the APAC region or is vary local by local each market by now?

[Alexander Geis, executive]

It's relatively local by local. Let's start with EMEA. As I said before, we already started to shift sourcing activities from China to other areas, specifically in our European region. The reason is that China, in my point of view at that time, was not really competitive if you add the really high outbound freight on top of the sourcing costs of our components and a relatively long way until the components find the way to Europe before we talked about 5 to 6 weeks lead time from door to door using sea freight. Now we're in the ballpark of like 12, 15, 16 weeks. So you cannot really count on that sourcing activities. We shifted back to East Europe, Baltic states, Turkey and India, shorter waste and good supply.

So from this perspective, checkmark on the European facilities, and we didn't see that much impact on our shifts. So we managed somehow in the team's contracts to them, to their performance. They really managed to get all the components in so that we could produce everything in time or relatively in time.

And for APAC, China does export but not much to the APAC region. So basically, our plant in India, Pune, is for local leads. For the Indian market, we do a little bit of exports nowadays, but we would like to fulfill all the demands for India. Australia gets mainly the parts from the U.S. and from Europe, since it's European and U.S. manufacturers driven. So basically, China for us is mainly for China, and we do a little bit of export to the U.S. but also to Mexico.

[Nicolai Kempf, analyst]

Okay. Understood. And maybe just my last question. So the main pushback we get from rest of world markets, and that's got -- have good names, is the fear of recession next year, either in Europe or the U.S. Do you see any signs of a slowdown or potentially from customers being more cautious on orders?

[Alexander Geis, executive]

No. For sure, for North America, I don't see that at all. I was, some weeks ago, at the TMC, business trailer show in the U.S. All the trailer manufacturers I met, all the big CEOs of the big 10 guys, big 10 trailer manufacturers and truck manufacturers. They're really optimistic, positive in the truck build. They still lack the semiconductors. So they want to build all their trucks, but they cannot because of missing semiconductors.

The trailer manufacturers, they now started to open up the windows, the order windows for Q1 and Q2 next year. And they are now trying to further increase the capacity, the capacities they have with a lot of, let's say, activities being shifted to Mexico since the workforce is available there. So they are in really good mood. And the freight volume increased significantly due to the online ordering after COVID also in the U.S.

In EMEA, we also see a strong increase in transportation volumes. But here, we have to see how the market reacts after this big inflation push. Specifically after the invasion of Ukraine, everybody was shaken. Metal prices up, flat still up. Everything is basically going up. Energy costs, you all know this. We want to stay cautious for, let's say, the last quarter of this year and how 2023 will be I honestly don't know. But even if the market would be dropping by 15%, 20%, we still would be at a very normal good year because this year is an exceptionally good year for our industry so far.

[Operator]

[Operator Instructions] And the next question comes from Jorge Gonzalez, Hauck & Aufhauser.

[Jorge González Sadornil, analyst]

I was also going to ask a little bit on your view for next year. But maybe as you have just answered, can you give us a little bit of insight regarding the end clients that you have at this point? We have seen that transport between Italy and Germany have decreased for industrial goods. Is this something that worries you? Or is the rest of end clients -- and the rest of end clients is still strong? And if it's not a concern at this point?

[Alexander Geis, executive]

That's a heavy question. Let's speak about APAC, India. Just that India, I see a checkmark also for next year because of the huge infrastructure programs going on and everybody is investing in trucks and trailers. In North America, also said I'm quite optimistic that it doesn't drop next year because you have so many projects also in the U.S. or North America going on that I'm quite confident that it will stay on high level.

In Europe, please reconsider we are in a market with a very high demand, okay? In the first quarter, we had not only the high sales we ever did. We also had the highest numbers of axles being produced in 1 quarter. This is absolutely a record quarter for us. Despite the first week of January, nobody was working because we had still the plants closed.

Also the Q2 will be another good, good quarter for us in terms of qualities. We are running all the shifts in both Germany and in Turkey. And specifically in Turkey, we are further ramping up the capacity with the installation of some more fully automated welding robots. We have now installed and in operation a friction welding machine, which was brought back from China to India. It was a used one. We did remanufacture this one. And now we are able to also friction well in Turkey, which is a big step to a fully autonomous plant we have in Turkey.

Well, we have a relatively high demand now. And as I said, we are an extraordinary inflation time. After this Ukraine invasion, everybody really -- the prices went up dramatically. And I think that the industry now has to swallow that and this combined within a relatively high diesel prices. While some weeks ago, diesel was at EUR 2.30, EUR 2.40, now it's around EUR 2, it's still very high for all the freight for orders. I would assume that some of them also remain cautious, and maybe they wait what's going on, but we already see a plateauing of the, let's say, the prices for flat steel, for scrap steel, rubber and all the other materials. So it's not further going up, which is, first of all, a good sign. And maybe in the next couple of weeks, months, it's stabilizing going back a little bit, which would be -- which would give the market even higher confidence to reinvest and buy trailers and trucks.

And also from a truck build perspective in Europe, please keep in mind that they are not producing under full steam since they also don't have all the semiconductors for their production. So they have a lot of orders on hand, but they cannot produce and cannot ship out to the fleets because they have missing parts. So we stay, as I said before and repeat myself now, we stay cautious for EMEA. For the other regions, APAC and North America, we are quite optimistic. Also for South America.

[Operator]

And the next question comes from Roland Konen, Value-Holdings.

[Roland Könen, analyst]

Also congrats to the Q1 figures in this times. Just one, just an add-on question on your Q1. Is sales adjusted on FX? Could you split the sales increase in volume and price effects?

[Alexander Geis, executive]

Well, in FX, we can split that. Jorg?

[Jorg Wahl, executive]

Yes. I think for FX, we do have this. The FX effect for this quarter was -- the FX adjusted sales growth was 24.5%. So roughly EUR 9 million. This is the FX effects on our sales performance. Talking --

[Alexander Geis, executive]

Yes. Okay. So FX, as Jorg mentioned, it's EUR 9 million. Basically, we don't talk about our price increases because we want to display the conditions. So be with us that we are not displaying that. But given my speech before, in Q1 we did some price increases, some more are coming, our adjustments are in the coming in Q2. And I hope this answer helps you somehow.

[Roland Könen, analyst]

Okay. So more volume-driven than price-driven and in the next quarters, maybe more price driven than volume driven, just --

[Alexander Geis, executive]

No. It will be -- it will remain volume-driven. We are a volume company. We are fully booked. We're happy about this. It's volume-driven. But of course, the pricing will have an impact, but we are not talking more than it's volume driven.

[Operator]

And it looks like we haven't received further questions at this point. I will hand back to Petra Muller.

[Petra Muller, executive]

Thank you, operator, and thank you, everybody for joining our today's call. This concludes our Q&A session. The next SAF-Holland call will be on the Q2 results and is on August 11th. Thank you for joining us today, and goodbye.

[Alexander Geis, executive]

Thanks, everybody.

[Jorg Wahl, executive]

Thank you.

[Operator]

Thank you very much for participating in this call today. We wish you a great rest of the day and for the next time. Goodbye.