SGL Carbon SE

XETRA:SGL

Earnings Call Transcript 2018-Q1

[Jurgen Kohler]

Okay. Thank you very much, Jasmine for introducing this call. Ladies and gentlemen, thank you very much for taking the time today to join our group conference call. We are going to discuss the result of the first quarter 2018, and give you an outlook for the full year. As always, we have here we with me today, our CFO, Dr. Michael Majerus. He and I will share the talk, and then later the Q&A session.Let me state here, right at the beginning of the call, that this first quarter is impacted quite substantially by various onetime effects, structural changes, extraordinary accounting effect, which make the financials a bit more complicated, but I'm sure that Michael, later will explain specifics to you in more detail.Q1, as I said, in general, is impacted by the acquisition of the remaining shares in the former joint ventures, with BMW Group and Benteler, SGL ACF and Benteler SGL as well as we have high positive onetime effects relating to the initial adoption of IFRS 15. Slightly more than half of the sales growth of 22% are due to structural effects, which is again the acquisition of the joint venture shares in SGL ACF and Benteler SGL and the divestment of our shares in SGL Kümpers. And also the initial adoption of IFRS 15, which essentially impacts only GMS.The organic growth is driven mainly by the market segments mobility, chemicals, industrial applications and digitization.Our group recurring EBIT more than doubled to EUR 21 million; in the first quarter of last year, we had EUR 9.6 million. This includes also onetime effects from a land sale in Canada, which is the divestment of former graphite electrode business and the initial adoption of IFRS 15. Like-for-like, the EBIT in Q1 2018 amounted to EUR 11 million or a 15% increase year-over-year.In terms of the nonrecurring items, the full consolidation of SGL ACF required an adjustment for the fair value of our proportionate shareholding as of the date of the acquisition, which led to positive noncash earnings contribution of EUR 28 million to the EBIT after nonrecurring items.The solid first quarter 2018 and the positive onetime effects allow us to slightly increase our guidance for the net income 2018, which I will address later.And strategically in this first quarter of 2018, we have essentially completed the value chain in our business unit Composites Fibers and Materials with the acquisition of the remaining shares in SGL ACF and the sale of the shares in SGL Kümpers. You will recall the Benteler SGL acquisition already occurred in 2017. Let's now move on to the details of the first quarter financial. With that, I'm handing over to Michael.

[Michael Majerus]

Yes. Thank you, Jürgen. And first of all, welcome from my side to the participants of this call. As usual, I will walk you through the figures, and start with the business unit CFM on Page 5. As you can see on the slide, revenue increased by 23% to EUR 115 million in the first quarter, which is currency-adjusted even 26%. However, the majority of this increase is not coming from operational development, but changes in the consolidation scope. As you know, we closed the acquisition of the former Benteler joint venture in December. Benteler, so far was accounted for at-equity, which means that no revenue was included in our figures, but only the proportionate 50% of the net income as at-equity result has changed now. In this year, we've 100% consolidated Benteler joint former account into our joint venture with all figures in the profit and loss starting with the revenue that's one effect. Second effect is, as you also know, we closed transaction with BMW, acquiring their share in the joint venture, first in Wackersdorf legally. Although with regard to Moses Lake, however, the financial transaction will take place at the latest after the end of 2020. Nevertheless, since Moses Lake is only supplying to Wackersdorf, we are accounting wise already regarded as the full entrepreneur so therefore we consolidated 100% of the full former joint venture structure with BMW, which so far was already consolidated, but only proportionally was our 51% shares, so therefore additional 49% coming here also in our revenue.On the other hand, we also had, in January, the closing of the sale of our majority share in SGL Kümpers. As a consequence, this company was fully consolidated before. It was only that the minority part of this result was then at very late line in the income statement and deducted afterwards. This has now changed. We are not a shareholder of this company anymore, so therefore it is completely out of our profit and loss with the exception, however, that we still are supplying material to the company that is what you see on the second bullet point, so we are still selling carbon fibers to Kümpers. With regard to this, it's been included in our revenues. So this, in essence, is the structural change, what we call here in the report in our shareholder desk, the amount EUR 8 million is the structural effect, and this is due to vast majority of this effect. Nevertheless, we also had the operational improvements, and this you see in the third bullet point. This, looking at our market segments stem from the industrial applications, the automotive and the aerospace sector whereas the market for textile fibers was below prior year.The recurring EBIT increased by 18% now to EUR 9.3 million. Highest earnings growth was here in the market segment automotive, however, this is mainly driven by the full consolidation of our former joint venture with BMW. And this increase was partially offset by lower earnings contribution from the wind energy and industrial application.In the wind energy, of course, 2 factors, combining each as a one. We already described withdrawal from the joint venture with Kümpers. The other factor also was operational, I mean, the business was weaker this year. And the market segments aerospace and textile fibers were on prior year's level. So far with regard to CFM.If we now turn to GMS. We see here, sales revenue increased by 15% although this is currency adjusted even higher, 19%. Here we do not have the structural change effect as we have in CFM. Here we have another special accounting topic, which is what Jürgen already mentioned, the initial adoption of IFRS 15. Those are new standards for revenue recognition and this is especially in our referral note, due to business GMS effect because we have now and earlier revenue recognition than we had it in the past according to the former standard and that was the effect we had at the end of first quarter. That's according to the old standards, some of the business was left in inventory. According to new standards, we have changed this from inventory to receivable already booked here, revenue in this, and that had an effect of approximately EUR 12 million.We expected this effect temporarily will decline over the remainder of the year because this will more normalize than we expect from today expected for the full year. We will later come to this in the outlook, a single digit effect, despite the effect, it is very difficult to predict because in the end it all depends on the inventory situation at the 31st of December. But that is here the accounting effect, but even taking out, it will remain, of course.We have here also operational growth and this is driven primarily by the recovery in the market segment chemicals, but also by double-digit growth in our growth market segments LED, semiconductors and automotive. The battery segment volume wise benefit from higher demand, but this was value wise offset by prices and currency effect. This business is mainly billed in Japanese yen, and this had a unfavorable development on year-over-year comparison, so that is negative value impact, and that is also the reason why we have the 4 percentage points difference between the 15% increase as it is, and the 19% as it would be on a comparable currency exchange rate basis.We were not able to meet in full the demand for the segment solar, as we increased our delivery to customers from the semi-conductor and LED segments, because this was for us the -- was a financially more attractive option. And industrial application remained on prior year level.Recurring EBIT almost doubled now to EUR 16.8 million, was here, of course, the IFRS 15 had an effect not only on revenue, but also on our EBIT level, which is EUR 5.5 million.From today perspective, we expect here a low single-digit range of amount to remain, and this is primarily due to the price developments in the graphite and all the material that we expect a slight positive effect for the remainder of the year.Adjusted for this effect EBIT increased by 33% mainly due to the improved results in the market segments chemicals, semiconductor, solar, and industrial application.The only market segments where we did not have an increase was the automotive and transport segment and the battery and other energy, Jürgen already explained development, primarily on the exchange rates, but to some extent also to higher raw material cost. So far with regard to GMS. Now let's move over to Corporate. Corporate, the sales in revenue increased from roughly EUR 1 million last year now to EUR 8 million. This is not that we're doing operational business here now in our headquarter. It's all here. In the end, change in the consolidation structure because we are still providing services to our graphite electrodes and the cathodes business, which endorsed -- actually now have closed last year in October and November. So accounting wise, those business are now third parties from us, and therefore those services, which so far was in our group transaction, which we, of course, netted them, are now external services and a part of the revenue that's the reason for the increase here to EUR 8 million. And the increase in the EBIT from the minus EUR 6.8 million to the minus EUR 5.6 million is a positive onetime effect.We sold a piece of land in Canada, and received formerly in euro, and this was partially offset by higher cost of the implementation of our new operation management system for the new SG&A to improve here our business model in the manufacturing sector, and also was the fact the we could not pass all the cost to former PP activities, which now have been sold, is of course a process, where we have some stepwise functions in the remaining costs, which we, of course, step-by-step will reduce, but it cannot only be done entirely at the same time in some point.Now if we move to Page 8, and look at the whole income statement for the group. Revenue increase is as already explained. And EBIT in total now at EUR 20.5 million, which leads to in ROCE EBIT base now of 5.2% compared to 2.8%. The nonrecurring items, this is the next accounting topic, you see in the line EUR 26.7 million, although this is something which needs to be explained. This is coming from the acquisition of our joint venture with BMW. This has not only the effect in the operational figures as you have seen before in the profit and the normal EBIT due to the 100% consolidation, but was a onetime effect coming from the so-called purchase price accounting or purchase price allocation. Because this is an exercise which has to be done and you have to compare the purchase price with the book value and then define if there is a difference. What is the source to form the difference, whether this is tangible, immaterial which will help us, that is called as purchase price accounting, and the interesting thing is, since this is not just an acquisition of a company where we had 0% stake in, but a company which we already had 51%. The accounting treatment is that you applied is a valuation, which you've paid for the 49% to the 100% of the share, and the difference related to the own 51%, this is regarded as an income or loss in the new profit and loss account. In this case that is a positive effect of roughly EUR 28 million.On the other hand, we will have now also noncash relevant amortization of this purchase price attributable, which is roughly EUR 10 million per year, and roughly EUR 2.5 million was expected this year, and there were some remaining positive effects from the Benteler purchase price accounting, so that the net is left here on the amortization was EUR 1.4 million. So that the net effect from the EUR 28 million plus from the onetime purchase pricing accounting into minus EUR 1.4 million purchase price accounting amortization is the EUR 26.7 million, onetime effect we see here. And this leaves then to a total EBIT of EUR 47.2 million. Now if you look into financial results, this has happened, positive is as expected. The reasons are, I think, were known. As you know, we paid back the -- early redeemed the EUR 250 million corporate bond last year, and we, of course, on time paid back the first convertible bond in the amount of EUR 240 million, in January, this year, and that has led to significant reduction in our negative financial result. That's the reason here from getting it from minus EUR 14 million to minus EUR 7 million in total. Therefore, we have a result from continuing operations before income tax, an amount of EUR 40 million plus which was minus EUR 5 million in the previous year.Income taxes are slightly higher, was minus EUR 3.8 million and the result from discontinued operations is -- was also small. Negative onetime effect of minus EUR 4 million, and so, in essence, we had therefore consolidated net result for the shareholders of the parent company at plus EUR 32 million. So far with regards to the income statement.Now let's move to the free cash flow on Page 9. So cash flow from operating activities improved from roughly minus EUR 32 million last year now to minus EUR 15 million. Main driver is, of course, the improved operational result as already described. Capital expenditures were a little bit higher, was EUR 8 million than the EUR 4 million before, but big effect here, investing activities, onetime effect due to the acquisition of the Wackersdorf site from our BMW joint ventures in Bavaria. Purchase price here was EUR 23 million, which was paid in the first quarter. On the other side, we had cash influence from the sale of a piece of land in Canada at EUR 3.9 million. And for the sale of our share here of the Kümpers joint venture in EUR 2.4 million, and the net effect is the minus EUR 16.8 million. You can see here in the line cash flow from other investing activities, which leads to a free cash flow from continued operations of minus EUR 40 million and the cash flow from discontinued operations as plus EUR 63 million. Those were the final purchase price payments from the acquires from the graphite electrode and the cassette business, in both cases, of course, as usual, there was a mechanism defined in the contracts that the final purchase price would be determined based on the so-called closing date balance sheet. And those were agreed upon and that led to additional positive cash inflow of roughly EUR 63 million for us in the first quarter. So far with regard to cash flow. If we now move to Page 10, our balance sheet. Equity ratio improved from EUR 29.6 million to EUR 33.5 million. This is mainly due to the positive net result as already explained, an amount of EUR 32 million. In addition, the adoption of IFRS 15 as well as IFRS 9 which is a new regulation with regard to the balance sheet treatments of our accounts receivable and the provisions of bad debt had in total here positive onetime effect of EUR 13.8 million which was not touched in the income statement, but directly moving into the opening balance sheet, in the equity of our balance sheet of year 2018. And on the other side, we had a slight negative effect from currency effect on the equity of minus EUR 4.5 million primarily due to the weaker US dollar. Total liquidity decreased to EUR 165 million down from previous year EUR 382 million. Main reason is, of course, the payback of the convertible bond in January, in the amount of EUR 240 million on the other side, and of course, the payment of the Wackersdorf facility, EUR 23 million which I already mentioned. On the other side, we had EUR 62 million inflow year of the payments for this whole division. And the increase in net financial debt reflect, of course, on the one time the reduced liquidity and on the other side the now full consolidation of the financial debt on our former joint venture with BMW, which is not financed by external payments, but from BMW, but in our balance sheet now at 100% leverage as financial debt. So far from my side.With regard to more details on the figures, and for this, I give back to you, with regard to the outlook.

[Jurgen Kohler]

Okay. Thank you very much, Michael. For the outlook, let's first turn to business units beginning with Composites Fibers & Materials. You will see substantial increase in sales by 25%. This is, as you can imagine, mainly driven by the acquisition of the former joint ventures with BMW and Benteler, the aforementioned structural effect. Accordingly sales in the market segment automotive were more than double, however, sales with the wind, energy industry should decline by approximately 1/3 due to the sale of our SGL Kümpers shares and lower customer demand in that industry.Sales to the market segments aerospace, industrial applications and textile fibers we expect to be on prior year level. Like-for-like that means excluding currency and M&A effects we expect mid-to high single digit growth rate in this division. And in sales, we will see no material impact from the initial IFRS 15 adoption.For EBIT before nonrecurring items, EBIT will also improve substantially here, again like with sales, no impact from the initial IFRS 15 adoption. EBIT is positively impacted by the full consolidation of the former joint venture with BMW. Higher volumes are however partially offset by negative currency effect and somewhat higher development expenses for our Lightweight and Application Center in Meitingen. In terms of full year, we expect the highest quarterly earnings to have been achieved in this first quarter already due to our very high capacity utilization as well as some extraordinary shipments for specific customer projects.Let me move on to graphite materials and systems to our GMS division. Here like for CSM and for the entire group many special-effects that Michael has described for the first quarter are also affecting the full year. We will see a slight increase in sales which caused bonds to currency adjusted mid-to high single digits sales growth, which is driven by the market segments LED, solar as well as automotive and transport. For semiconductors, chemicals, industrial applications we expect sales to be on prior year level. Of course, we have a strong volume increase in the market segment battery, lithium-ion batteries and other energy, which is, however, offset by price and particular by currency effects, as Michael said, the Japanese yen is impacting us here.And as opposed to CFM, in GMS, we will have a single-digit million euro positive impact from the initial adoption of IFRS 15. The EBIT improvement, again before nonrecurring items will slightly outpace the sales growth. We will see higher capacity utilization and that will partially compensate the adverse currency effects as stated above. The high ROCE based on EBIT of 12% of the previous year should be achievable again in this business unit in 2018. In Corporate, we will see slightly higher expenses due to the lower cost allocations to the former Performance Products business unit, and we will have some higher consulting fees driven by the introduction and development of our new operations management system, which will lead to a standardization alignment of our plant management systems, and the new European Data Protection Directive, which becomes effective at the end of this month drives some external consulting costs as well. On top, we have general cost increases specially wages, especially here in Germany. This is partially -- positively offset by one-off income as Michael said from the land sale in Canada, in the first quarter. Taking all this together, are continuing with SGL Group. In general, we will see a further improvement in our P&L statement. Full year group sales will increase by approximately 10%, corresponding to a mid-to high single-digit growth rate like-for-like. This means excluding currency and M&A effects. In addition to that, we anticipate a single-digit million euro positive impact on the group sales from the adoption of IFRS 15. Group recurring EBIT will increase at a slightly faster pace than sales, due to various effects we have. We expect volume increases. We have, of course, the additional earnings contribution from the full consolidation of SGL ACF. We will harvest further cost savings from our project core initiative, which by and large would come to an end at the end of this year. This positive effect will be partially offset by adverse effects from currencies, raw materials and the described personnel cost developments. In addition, in terms of EBIT, we also anticipate a low single digit million euro positive impact from the adoption of IFRS 15. Our net results for continued operations will improve to low double-digit euro million amount due to various effects we have, of course, the improved operating profit. We will have, as Michael stated, for the first quarter, lower interest expenses because we paid back the corporate bond prematurely in October of last year, and we repaid the maturity of convertible bond in January. This is, of course, a little bit offset by the high interest expenses for the full consolidation of the net debt provided by BMW for our former joint venture. And we have some positive impact from nonrecurring effects in the first quarter as mentioned already several times in this presentation.Moving on with the group outlook. CapEx will increase compared to prior year to a level of about EUR 15 million to EUR 25 million about our level of depreciation. This broad guidance reflects the flexibility that we are required to have in the timing of individual investment opportunities. And our level of depreciation increases due to the full consolidation of the former joint ventures to about EUR 65 million before purchase price allocations. However, we stick to our midterm guidance of an average CapEx requirement at the rate of depreciation. But at this stage, we believe, the CapEx requirements are front-end loaded in our business plan. The total free cash flow for the group will reach a “black zero.” The free cash flow from continued operations will improve significantly, but remain negative, in the low to mid-double-digit range mainly because of our described CapEx level and the cash outflow for the acquisition of the Wackersdorf site of our former joint venture with BMW. By contrast, the free cash flow for discontinued operations will reach positive mid-double digit range due to the payment of the final installments of the purchase price for the divestments of our graphite electrodes business and our cathodes, furnace linings and carbon electrodes business.In terms of the balance sheet, it is obvious that net debt at the end of 2018 will all substantially increase because of the effects of the full consolidation of the former joint venture with BMW. However, our balance sheet targets, we will continue to meet the equity ratio above 30%, gearing at or below 0.5 and the leverage ratio at or below 2.5. This now ends the prepared part of our call. Thank you very much for your attention. And we would now like to open the Q&A session of today's conference call.

[Operator]

The first question comes from the line of Sebastian Ubert of Societe Generale.

[Sebastian Ubert, Equity Analyst]

Quick question from my side is with regards to your graphite capacities. You flagged that you have not been able to ship all of your customer needs especially in the solar segment. Is there some bottlenecks that you like to highlight the way you may be also need to invest sooner than later? And the second question is, also can you give us an update please, where are we in terms of capacity additions for graphite powder that goes into lithium-ion batteries in the U.S. and in other areas? Do you also see here the need for another round of CapEx to be ring forward to not run into a similar situation like you're currently facing in isostatic graphite?

[Jurgen Kohler]

Thank you, Sebastian for being here on the call again. Good questions. And in the graphite bottleneck, as you rightfully state, is isostatic graphite which goes into LED applications, in the making of semiconductors and solar cells. Specifically here, it's the coated graphite that we make in our North American facility in St. Mary's in Pennsylvania. We are expanding that facility as we speak. We have launched first expansion already last year. This expansion is being in a ramp up mode and we are commissioning that installation already. And to be prepared for this growth that we are currently seeing, we have already now launched a second expansion with the same technology, in the same location, in St. Mary's. So it's a brownfield expansion. You're asking between the lines, were we caught little bit by surprise? Yes, otherwise, we would have prepared for this expansion, but that's a good situation to be in that as you can imagine helps our pricing strategy. By the way, we believe the competitors have been caught left-footed here as well. The market requires because of the high-growth rates in LEDs and semiconductors more silicone-carbide coated graphite. So to the question, the answer is, yes, we are expanding. The same is true for the powder for the lithium-ion batteries. As we speak, we're ramping up additional capacity in our Morganton facility, and we have launched another round of expansions in our European facility here in Europe, in Poland. Our strategy is to have as much capacity as our customers and the largest customer as you know is Hitachi Chemicals require. So we are in a ramp up to meet their demand of 2018, and we are in discussions what capacity we might need going forward for the next couple of years. And both expansions in coated graphite and in the powder for the batteries, there's a common denominator here. We are expanding at this stage existing facilities though it's not grassroots its brown roots expansions.

[Sebastian Ubert, Equity Analyst]

Okay. And then maybe one follow up with regard to the growth dynamics, you have seen very big growth last year, about 50% in volumes, and I think it was revenue wise more than 30%. Now you talk about that growth has been eaten up by price erosion as well as FX. Can you give us some indication how big the growth was in volumes and what was the impact of FX and cost, was it roughly 50-50?

[Jurgen Kohler]

You're looking at capacities not right now in terms of the 12 month or running year. But compared to 2 years ago, we have probably doubled our capacity for the graphite for the batteries, rough number okay, give or take, double. In order to keep our customers competitive, of course, with increasing volumes, we give some price concessions, which helps us as well, but that is not unusual in this market.

[Operator]

[Operator Instructions] And there are no further questions at this time.

[Jurgen Kohler]

Okay. Then thank you very much everybody on the line for the attention, and for your questions Sebastian. So we're looking forward to talk to you again, when we're going to present in the middle of the year, the results for the first half. All the best, have a great day, and thank you very much.