SGL Carbon SE

XETRA:SGL

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the SGL Carbon conference call on the Q1 results 2021. [Operator Instructions] I would now like to turn the conference over to Dr. Torsten Derr. Please go ahead, sir.

[Torsten Derr, Chairman of the Management Board & CEO]

Yes, Emar, thank you very much. Good afternoon. Welcome to our today's conference call on the results of the first 3 months, 2021. Thank you very much for joining us. Here with me today in the room is Thomas Dippold, our CFO; and Jürgen Reck from our Investor Relations department. We will try to keep our prepared remarks relatively short. We have more time for the Q&A session. And Thomas, I would like to start with the highlights slide, yes, which is a little bit boring because our business development is as expected, and we are going to confirm the outlook. And I was just kidding because Thomas and me are pretty satisfied with what we did. And you can see on the left-hand side that we received a grant, the so-called IPCEI grant of EUR 43 million, which means important project of common European interest. And the European Union discovered that 27 battery factories, which are planned for the electrification of the automotive industry, you need graphite material. Because without graphite anode material, you are not able to produce EV batteries. And this is why we received this grant of EUR 43 million mid of March. But we had some more highlights, which are listed on the right. Our group sales were 2% down, but this is a pure FX effect. FX adjusted, we are flat, and we were able to compensate all raw material price increases. You know we started the restructuring program. We are on track. We had an expected -- and if you remember our last presentation and expected positive impact of a mutual contract termination, which accounts for EUR 9 million in sales and also EUR 9 million in EBITDA. And I gave you a heads up in our last presentation, some 5, 6 weeks ago. So our EBITDA pre is almost 14% above prior year. Net financial debt is down. We had year-end EUR 286 million, and it went down to EUR 271 million. And on the other hand, liquidity is up. We are now at EUR 168.6 million. Liquidity year-end value was EUR 100 million for the 2. And this gives us a really comfortable situation. And last but not least, we confirm our full year's outlook. And with this -- with those highlights, I would like to hand over to Thomas to give you an impression of our Q1 results.

[Thomas Dippold, CFO & Member of Management Board]

Thank you, Torsten. Ladies and gentlemen, Thomas Dippold. Good afternoon. It's my pleasure to guide you through the Q1 figures for 2021 in more detail. Here, on a group level, SGL Carbon, I think we were -- as Torsten already mentioned, we were 2% down in sales, FX played a major role there. And without that, we would have been on the same level as last year. What you can see, where does it come from the development of our former GMS business, which is comprised of graphite solutions and process technology. You know that from beginning of the year, we split the 2 former business units into now 4 business units. And we can summarize that in the former GMS business. In graphite solutions and process technology, we see lower sales because of the late cyclical business that we have there. That means that the industry, especially the industry application, which we are in, they show a slower start into the year, where semiconductors in China and everything, they really are booming so far. But still, those 2 business units are lower in sales compared to last year, whereas our former CFM business unit, the composite solutions and the carbon fibers, they are at least on plan or on last year's level or even above, but we show that in greater detail. EBITDA is very much profitable, and we like that very much. We increased by EUR 4 million from EUR 29 million to EUR 33 million, which is almost 14%, as Torsten already mentioned. There you see the contribution from our restructuring efforts, also the positive effect, which we expected from the contract termination and all the cost savings. That means with less sales or same sales, our profitability is far higher. So we have EBITDA pre-margin now on a group level of 13.6% versus 11.7% last year. I think there was a good start into the new year. Coming to business unit, graphite solution. Here, you can see the downturn in overall sales in the top line of 3%. This is, well, made up of the business and other energy, which is above prior year. Semiconductor is very strong, same with China business. This is all very much in the right direction. But the industrial business is still weak. And we expect a recovery in the second half of the year. The profitability is, therefore, also affected because we have high fixed costs in the business and on the other hand, also high margin. And if the sales do not perform, then you also have very little impact from your savings. We do restructure these businesses as well. But overall, they are quite strong, and the main effect here is also the contract termination, which we expected. For process technology, we see maybe the most difficult at the moment. Our sales went down by 16% from EUR 23 million to less than EUR 20 million in Q1 '21. But why is that the case? Because, I mean, you know that in process technology, we are highly dependent on the chemical industry or petrochemical industry. And with COVID pandemic, all the chemical companies went down also in the top line quite significantly. And they are now really rebounding and recovering. But the thing is that they still have idle capacities, and therefore, we only have maintenance or some exchange business but there are no new plants to be built up at the moment. And this is a bit the problem that we see. Everybody is ramping our production to make sure that we can serve the markets and also the industrial market, which is about to boom in the second half of the year. But therefore, also nobody plays a major part of maintenance. So this business is a little bit under pressure. We expect a recovery in the second half of the year and also the order intake that we see so far gives us some promising views on that. EBITDA, therefore, turned negative from plus EUR 0.7 million to minus EUR 0.5 million in -- when you compare it quarter-to-quarter. Carbon Fibers is maybe -- is continuing to show a strong performance. You know that last year, in our former CFM business unit, we saw a turnaround, a huge turnaround. And this can be confirmed that, this wasn't a single event, but we can repeat that. We have in carbon fibers a clear margin before volume strategy. What does it mean? So for example, when we have sales with very little profitability. And we see that we have some alternatives or we don't think that the business makes sense with very little margin, we just let it go. And we don't do that anymore because it's just diluting our margins. We [ widen ] some risk, and this is something we try to avoid. So you see that our top line was nearly at the same level as before. But on the other hand, our profitability rose by even 35%. Why is that the case? We do continue our restructuring and take a close look at our cost structures. We try to achieve a full utilization of our assets and also, therefore, choose the projects and businesses nicely, which we want to be in. And we have a higher contribution from our BSCCB, that's a carbon fiber [ break list ]. That business is booming again because automotive is really, really taken a strong part in that and automotive also in the top line. That continues to be very strong, whereas wind is rather flat. But this is due to the course that our capacities are limited. And so far, we are playing almost at the full utilization. Last but not least, composite solutions. They achieved the operative turnaround in this quarter. They grew in top line by 24%, and bottom line from minus EUR 0.8 million to EUR 1.6 million (sic) [ EUR 1.8 ]. This is some marvelous development. We expected that. But on the other hand, that we also achieved it is fantastic. Why is that the case? We, on the one hand side, see an overall recovery in automotive business, therefore, this business is booming. On the other hand, we have the first real serious production order for battery cases for electric SUV in the United States. And this business is really a serious production which gives us also some room for productivity improvement for further cost savings and overall, the strong sales contributed a lot to the operative turnaround. In corporate, the development can only be lower compared to the years before. Why is that the case? Because we sold a lot of idle land and buildings last year, which were not necessary for running our businesses as we do it. And therefore, when we sell the businesses and get the cash, therefore, we can no longer rent it. And this is what happened. So we are missing some rental income, which were shown as sales under corporate. And also, when Showa Denko left because they were in our plant in making it and they used also our maintenance services and other corporate functions and site services. As they moved out and therefore, had a down payment or compensation, which they paid. With that, they, of course, don't do no longer take these services and therefore, we can -- we will have less sales. This is anyway not our core business. So this is not a harm to our business. And we make sure that we try to adjust our structures accordingly. You see still a drop in our EBITDA compared to last year of roughly EUR 3 million. This has 2 reasons. On the one hand side, we have a positive one-off effect in last year, where we charged out some final service invoices, which were meant for the prior year. And on the other hand, we have a onetime effect, a negative onetime effect in this year with higher consulting expenses, but this is just in Q1, and this won't repeat in the coming months. Overall, we do see some savings, and -- but there's still some further restructuring to come in order to get this also shared service functions back in track. When we go further down, in our bottom line, then you see that in Q1 2021, we really made it to show operative net result, which is like, we have a turnaround of EUR 10 million compared to last year, plus [ EUR 6 million ] now versus minus [ EUR 4 million ] last year. This is a marvelous development, and this really shows all our efforts that we put in, in order to turn around this company. We are also very happy with the free cash flow. There, you have to bear in mind that the calculation -- the way we calculate the free cash flow has changed in 2021. This is also explained in our shareholder letter, but just as a remark. According to IAS 7.33, you have the choice to show the interest either in the operative cash flow -- operating cash flow or in the financing cash flow. If it's in the operating cash flow, then, of course, it also affects the free cash flow. If you put it into the financing cash flow, then it's below the free cash flow. In the end, you can just spend the cash flow once, but it's just for where do we report it? We decided to do it the other way from 2021 onwards. We adjusted the prior quarter accordingly. And we now show the paid interest in the financing cash flow, and therefore, the free cash flow is accordingly higher. Still Q1 2021 is lower than the Q before. Why is that the case? In prior year, Q1 2020, we received the first part of the dividend from the joint venture BSCCB already in Q1, which was EUR 5 million. And for Q1 2021, this is scheduled to be paid out now in May, so it's in the second quarter. This is the difference in Q1 2020 was in, and in 2021 it is -- Q1 2021, it's out. But after the second quarter, it should be on the same level, and we don't have the difference. As Torsten already mentioned, net financial debt went down by EUR 15 million or 5%. This is also, I think, a good remark. This is where we play close attention to. We focus on our cash, and this is what we continue also in the months to come. Here is the overall P&L on the next slide. And what I like the most on this slide is the further you would go down the P&L, the better the figures get. So when you look at EBITDA pre versus Q1 last year, we have a difference of EUR 4 million. In EBITDA pre, you have a difference of EUR 6 million. When you look at EBIT, you have a difference of EUR 11 million. And the results from continuing operations, there you have a difference of EUR 13 million, which we improved. This is a marvelous development because we also show that we have less and less exceptional. You know that we also -- how we define exceptionals, also positive effects can be attributed there. We are very open with you and very transparent that we really show only the one-offs or the nonoperating cases in exceptionals, be it positive or be it negative, there should be any dilution when you see EBIT pre, then you just see our operative performance accordingly.And then you have a result of continuing operations of EUR 10 million. Of course, we also have to pay higher taxes unfortunately than last year. And this is the reason why the net result then is EUR 6 million and prior year was minus EUR 4 million. Now coming to the balance sheet on the next slide, and you also see some further improvements there. Our equity ratio rose to 20.4% versus 70.5% at year-end. Now why is that the case? On the one hand side, which placed the lesser part of it, the positive net result. But -- and this was exactly also the impact we had last year in the other direction. Now we see higher interest in the long term, which also affect our pension payments, and therefore, this goes against the equity. And it helped us that the equity ratio went up, same with some positive FX effects, all sum up together is almost 3 full percentage points that our equity ratio improved. Our liquidity is up by EUR 27 million and now at EUR 168 million. Net financial debt went down by EUR 15 million. And therefore, our leverage ratio, net debt-to-EBITDA, is at 2. And the ROCE improved from 3.1% to 5.6% also a good development, which we try to stabilize and to further improve. On the next slide, I show you the free cash flow. It declined slightly, as I just told you. And here in the middle of the slide and the cash flow from invested -- other investing activities, you see the difference, which I mentioned before. In Q1 2020, they are the EUR 5 million the dividend from BSCCB and this year, it's just EUR 0.6 million. This is a dividend from other minority joint ventures that's in there. But that's more or less the difference. Our cash flow from operating activities is higher than last year. Why is that? we have a higher EBITDA, and this could compensate even the increased working capital by EUR 6 million. So we are also very happy with our free cash flow development. Having said that, I hand over to Torsten to present you the outlook for the rest of the year.

[Torsten Derr, Chairman of the Management Board & CEO]

Yes. And for the outlook, I want to start with our restructuring program. And I can say we are fully on track. We started a restructuring or transformation program by mid of last year, and it will be completed end of 2023. This is not one big initiative, we have more than 700 initiatives. And the number is growing. As Thomas said, we are looking for more restructuring options in our company. 60% is already completed or initiated. I confirm the number of more than EUR 100 million savings, where we have more than 50% already initiated. And especially the headcount reduction, where we plan to reduce our headcount by more than 500 FTE. We have 350 FTE, which already left the company and 100 more FTE where the contracts for termination are already signed, but the people will leave later. And more than 50% of the 100 are going to leave the company by end of this year. On the next slide, you see our 2021 guidance, and this is unchanged compared to our prior presentation. Last year, we did a turnover of EUR 919 million. This year, we expect EUR 920 million to EUR 970 million. EBITDA wise, we will grow from EUR 93 million last year to range between EUR 100 million and EUR 120 million. The key drivers are, of course, our restructuring project; the order entry, which is quite good. It's not super duper, but it's quite good. But what makes me happy is the number of inquiries. And inquiry comes before the order and especially in our segments like process technology, where we serve the chemical markets, we have a lot of companies now approaching us. And this is the first step before real order. And of course, we run a margin before volume strategy. We are focusing on EBITDA pre not on turnover. These are the key drivers. Our guidance KPIs, as Thomas explained, are all in our expected corridor. We will have a balanced net result this year. Our free cash flow will be positive with the changes Thomas already explained, and our ROCE will go up. So on the next slide, I give you a heads up BU wise, and I start with our flagship, the graphite solutions with EUR 500 million. This is half of the company. And there, we see a slight increase in sales, but a significant increase in EBITDA. The major growth drivers are semiconductors and LED, especially driven by China, and also graphite anode material for the EV industry. Process technology is stable in sales and EBITDA on a low level. And there, we are waiting for maintenance shutdowns in chemical and petrochemical industry, and this is where I told you, we see quite a lot -- a high number of inquiries, and we expect some improvement there. But heads up for you. If we have an order entry, it takes up to 6 months that we see it in our turnover. So there is a quite long time frame, which you have to keep in mind. Carbon fibers, stable top line-wise, and we expect a slight increase in EBITDA. And I have to say here, carbon fiber has acrylonitrile in the value chain. And there, we saw almost a tripling of this acrylonitrile because the largest producer in Europe, which is INEOS went on force majeure for 4 months now, and they haven't lifted force majeure. We have secured our volumes, but we had to digest those price increases. Volume drivers is wind energy, especially offshore, which is growing tremendously and automotive. And you know we are serving the BMW i3. This is also running pretty well currently. Yes. And composite solution on the right-hand side, you see the battery enclosure, which Thomas already mentioned. And this will go into serial production. And our customer, which is a U.S. customer, I think he has orders for the car where this battery enclosure goes in for almost a year. So utilization is pretty much secured. This is a turnaround story. We see a significant increase in top line, and our EBITDA will turn from negative to positive and drivers, electromobility and lightweight automotion -- automotive. So on the last slide for today, you will see the key takeaways for you. You have seen EBITDA pre 14% up compared to prior year in Q1. Our transformation is on track. You saw on the first slide, we have received 4 weeks ago the IPCEI grant for graphites anodes material for EV batteries. Our liquidity is improved, plus EUR 20 million, and net debt is down by EUR 15 million compared to year-end. And we are going to confirm our guidance. So this concludes our prepared remarks. Operator, would you please initiate the Q&A session.

[Operator]

[Operator Instructions] The first question comes from the line of Wolfgang Felix with Sarria.

[Unknown Analyst]

It's actually [ Angus ] from Sarria on behalf of Wolfgang. I wanted to ask some questions about Lavradio, Lavradio plant. And specifically, how many lines you have operational now and the basic materials they're producing for your external sales versus the kind of internal use stuff? And kind of where it is, EBITDA contribution wise?

[Torsten Derr, Chairman of the Management Board & CEO]

Thank you very much, welcome for this question. Lavradio is a combined plant. We produce a precursor of our carbon fibers, which we produce in Moses Lake and Muir of Ord and they are served by Lavradio and also by an externally purchased precursor fiber from our JV with Mitsubishi. We have 10 lines in Lavradio. And currently, 2 of the 10 lines are used for precursor for carbon fibers and 8 are used for the textile industry, which runs pretty well currently. We try -- or we want to reduce the externally purchased carbon fiber, which comes from Mitsubishi and want to convert further textile fiber lines into precursor. But this needs a good quality. And I have to admit the industry realization from the carbon fiber to finish -- from a precursor fiber to a finished carbon fiber runs better with Mitsubishi. And this is why we decided to take less precursor from Lavradio and puts Mitsubishi precursor in because we need volume. BMW is above plan with its volume and also the wind industry is taking a lot of orders. And you know we lose -- we will lose by mid of next year, the BMW i3 business. And this is why we do as much pre-marketing with industry as possible. And this is why we need volume, yes. If our quality from Lavradio is comparable to the quality of Mitsubishi, where we put all our R&D efforts on, then we will switch over more of the textile fiber lines to precursor and might improve our margin set. I hope this answered your question [ Wolfgang ]?

[Unknown Analyst]

I guess -- I mean, is it contributing EBITDA? Is it positive in contribution, I suppose is the...

[Torsten Derr, Chairman of the Management Board & CEO]

Yes. [ Wolfgang ], this is -- we look at the whole chain. There is no reason to look at Lavradio as itself, the only reason why we own Lavradio is the reason is that we want to produce our own precursor, and we look at chains. And the whole value chain is producing EBITDA. And I would say this is 80% of the CF results, which Thomas presented. Yes, but it doesn't make sense to split the EBITDA contribution by plant.

[Unknown Analyst]

For sure. And I suppose the last thing is just on Lavradio. Is there -- I guess I'm trying to get a feel for, do you have plans or is there a certain amount of cost you could incur to bring this up to code? Or is it just you're doing everything you can?

[Torsten Derr, Chairman of the Management Board & CEO]

I didn't get it. You mean improvement of quality about the -- I didn't get the point?

[Unknown Analyst]

Yes. Exactly. Yes. all the -- certain project...

[Torsten Derr, Chairman of the Management Board & CEO]

Yes. Okay. Okay. Okay. [ Wolfgang ], Thomas and me, we want to do things right, and we had a very large R&D department in SGL, and I slimmed it down. But I changed something significantly. I put all the remaining R&D people on Lavradio to improve our precursor fiber molecule. This gets so much attention. Thomas and me get a report almost every week. I'm asking almost every day how each pool rate and all the quality parameters are? We make pressure, and it really gets attention. We put so much R&D efforts on it and made big improvements in the last 6 months. Okay. Sorry, I don't want to overpromise, yes, but we do what we can.

[Operator]

The next question comes from the line of Richard Schramm with HSBC.

[Richard Schramm, Analyst]

Yes. Two questions, if I may, one concerning this strong price increase you mentioned in including material price. So very dramatic tripling. You mentioned that you have been able to broadly pass this on. However, I think there is as usual a certain time gap to bridge. So can you rule out any serious negative effects going forward for the next quarters? Or is there a risk that this might turn out worse than expected over the months to come?

[Torsten Derr, Chairman of the Management Board & CEO]

Okay. Richard, thank you very much for this question. Yes. The market is, as for all raw materials for acrylonitrile, very expensive. And you can see it on the oil price and ACN developed even worse. Now I explained the Lavradio story. We have 10 spinning lines, 8 are for textile fibers, 2 are for precursors. And to pass on raw materials, it's pretty easy for the textile business. Yes. It goes up. And 1 week later with the next year, we can increase the prices. For the precursor molecule, where we delivered the precursor from Lavradio with containing the higher-priced ACN, we give it to Muir of Ord to Moses Lake. There's a longer value chain. There we have a little bit more time spend to pass it on. But on average, it's about a month we need to pass on the raw material price increases. So our guidance, which we gave, has already considered those price increases. We monitor the ACN market pretty closely. We did some forward deals and have several suppliers. And to our knowledge, right now, it is included and can be absorbed by other measures and pass-through of price increase.

[Richard Schramm, Analyst]

Yes. That sounds very comfortable. Another question concerning the execution of orders. I have heard from other companies, but this is more -- the bigger problem than even the supply chain issues. We read a lot about that it's still a problem to execute orders, especially if you have to get access to sites of customers in overseas markets. How do you see this? Do you have this problem as well? Or isn't that an issue for you, and you do not see any dampening effect from the side on your sales volume? Yes.

[Thomas Dippold, CFO & Member of Management Board]

Richard, actually, we don't see a big problem here so far. The execution of our orders or the deliveries, be it to our customers or be it within our value chain, which is also widespread over the continent. So far, I think we're handling that quite well. Our logistics department does hell of a job, and we are really focusing very much also on our internal supply chain. Same as Torsten just mentioned from Lavradio to Muir or to everywhere else in the world. We make sure that we handle our deliveries as good as we can. And so, we have no major hiccups there. There might be the case that whereas, for example, in the past, a normal ship delivery would have done in due course with 6 weeks delivery until you go back and forth to Asia, and it might be the case that we have to fly it out in a cargo airplane from time to time. But that's the only difference. We also had that in the past for some speedy deliveries. I think our logistics department and our supply chain does hell of a job there. And so far, this isn't a major issue for us.

[Operator]

[Operator Instructions] We have one further question from the line of Richard Schramm with HSBC.

[Richard Schramm, Analyst]

Yes, it's kind of standard question. Also, in these days, I mean you just rule out that you have negative effects on your -- on our execution, but what about indirect effects? Do you see that customers, especially in automotive, for example, scale back volumes here because they have problems with their supply side and therefore, have to idle for a certain time, for example, production lines? Or are you [indiscernible] to the relevant models for you are not affected by this?

[Torsten Derr, Chairman of the Management Board & CEO]

Yes. This is a twofold answer, I would like to give, Richard. Our sales are pretty good. But order entry is a little bit lower compared to the level of sales we are doing currently. This shows that automotive industry is pretty careful currently and they have no real long-term approach. And they are afraid of the corona thing, which is going on in India currently and it might spread and also the ship scarcity. But in our top line, we don't see any effect right now, but the orders are not that long-term as they were 2 years ago. This is the only difference we see, but top line is pretty good.

[Thomas Dippold, CFO & Member of Management Board]

But we also don't see any cancellations or postponements so far because most of the parts that we deliver now are anyway for special cars or luxury cars when it comes to the carbon fiber product or be it now in e-mobility and they are anyway, booming. So far, we don't see any shortfall there.

[Operator]

We also have a follow-up question from the line on behalf of Wolfgang Felix with Sarria.

[Unknown Analyst]

I just -- it's more of a housekeeping question than anything else. I'm just trying to get an idea of -- I think you had EUR 1.6 million in cash costs for restructuring, which is a little bit light on what we were expecting. That's good thing. But I was just wondering what you're kind of expecting that to be over the next few quarters? Whether you're expecting it to be EUR 6 million, EUR 7 million a quarter for the next few quarters? Or whether EUR 1.6 million is at least run rate for me to use through for the rest of 2021?

[Thomas Dippold, CFO & Member of Management Board]

There must be a misunderstanding. The EUR 1.6 million that we mentioned was EBIT figure. So it's an expense that we show here. It's not cash. Cash out is for sure higher because you know that we provisioned last year roughly EUR 25 million overall for our restructuring project. And of course, with all the severance payment or they are being paid out, of course, accordingly. And of course, a far higher amount is being paid out, which is reflected in our cash flow. This is -- that's it. And -- but the EUR 1.6 million that you mentioned is just a new restructuring payment. In fact, it's the fee that we pay for the consultancy firm and in the due course of the -- that's reflected in there.

[Unknown Analyst]

Okay. So the EUR 6 million to EUR 7 million we had slide is about -- is in the right ballpark [ for each quarter ]?

[Thomas Dippold, CFO & Member of Management Board]

Yes.

[Unknown Analyst]

Okay. My apologies for that.

[Thomas Dippold, CFO & Member of Management Board]

No, it's okay. We are just here to help you.

[Operator]

[Operator Instructions] As there are no further questions at this time, I hand back to Jürgen Reck for closing comments.

[Jürgen Reck]

Hello. This is Jürgen from the IR team. Also, a warm welcome from my side. Thank you all for your participation. Last but not least, I would like to highlight our next dates. Firstly, on May 21, so next Friday, Friday next week, we will have our virtual AGM. The next reporting date is on August 12, where we have our H1 half year results. And if you have any further questions, in the meantime, please do not hesitate to contact us. You will find the contact details and the financial calendar in the Q1 report as well as on our home page. Thanks again, and have a good day.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.