SGL Carbon SE

XETRA:SGL

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the SGL Carbon Conference Call Q1 Results 2024. I am Shye, the Chorus Call operator. I would like to remind you that all participants will be listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Claudia Kellert, please go ahead.

[Claudia Kellert, executive]

Everyone. Welcome to our first quarter conference call. As always, our 2 board members Dr. Torsten Derr and Thomas Dippold will give you more details about our start in the fiscal year 2024 and our expectations for the upcoming months. After the presentation, you will have enough time to answer your questions. Now I hand over to Dr. Derr.

[Torsten Derr, executive]

Thank you very much, Claudia. And I would like to open this conference. Good afternoon, everyone, and Q1 was a good start in 2024 for us with a weak business in carbon fibers that we were able to compensate with strong businesses, especially in semiconductors. Our sales were slightly below previous year. And this was mainly due to divestments, which we had in our site in Pune in India and Gardena in California U.S. in 2023. We were able to increase our profit at EUR 42.1 million, our EBITDA pre exceptions was 5% higher than in the previous year. We were also able to increase our EBITDA margin once again to now 15.4%.

If we come to the outlook, we confirm our guidance for 2024. Sales will be on prior year level EBITDA pre will be between EUR 160 million and EUR 170 million. And with this, I would like to hand over to my colleague, Thomas Dippold, the CFO of our company.

[Thomas Dippold, executive]

Thank you, Torsten. I have the privilege to guide you through the performance, especially of the individual business segments and the business units, how they performed.

Here, as Torsten already pointed out, maybe again, the overview how the composition of the individual business unit, it looks like here on a group level. Sales was down roughly 4%. And we can say 1.2% are coming from FX effects and 0.9% from the already mentioned sale of the business in Gardena and the site in Pune, India. So if you take those 2 effects into consideration, then the sales would have just dropped by 2% rounded on a like-for-like basis and EBITDA, however, is 5% up, which is really a remarkable achievement that we have there. And as you can see, as graphite solutions especially thanks to the strong performance in semiconductor in general and silicon carbide, in particular, now stands for more than 50%. They accumulate for 51.9% of our global sales split and carbon fiber, especially deteriorates to a little bit more than 20%, whereas the other business segments, Composite Solutions and Process Tech more or less stay the same size.

When I come to Graphite Solutions here on Slide #6, when you see sales rather flat. They stay at EUR 141 million. It was the same the year before, after 3 months of the year. However, when you look at the profitability, then you see an 80% increase in the profitability. We now reach 25.9% EBITDA pre-margin compared to sales. And this is thanks to the very strong performance of our semiconductor and there especially in the silicon carbide business. Our segment, semiconductor and LED, as we call it, went up by 34% year-on-year, whereas all the other businesses, which is industrial, Graphite are not material, but also automotive and chemicals were rather flat, some also weak and deteriorating. And so we have a wash when you come to the sales, the strong performance in semiconductor that's eaten up by the kind of seasonality or global economic situation that we see. So we suffer from the weak performance in Graphite and raw materials industrial business but also automotive in Q1.

We received another EUR 8 million customer down payments for semiconductor and silicon carbide expansion for capacities there which is exactly in line with what we assumed should be the run rate for 2024. And with that, we are very happy with the performance of Graphite Solutions despite the shortfall in some of the traditional segments.

Process Tech on Slide #7, you see the performance of Process Tech. Process Tech went up by 3.4% in sales, now reaching EUR 33 million flat after the first 3 months of the year 2024. This is EUR 1.1 million up compared to the relevant -- the comparable 3 months 2023. We still have our order book, which is well filled. And normally, this takes us for the next 6 to 9 months so for 2024, we don't see a major, major shortfall, at least not in the Process Tech business and this business unit, it should continue as is. However, bear in mind that we also have a very strong parts and service business, which hasn't got a lead time in the projects, as I just mentioned. Book-to-bill is still far above 1. So this should carry us through the year 2024.

We are very happy with the parts and service business, which is really a driver for our profitability and look at the profitability that we show there. This went up by 40%, now reaching 6.9 in after the first 3 months 2024. This stands for a margin of more than 20%. You probably remember that we always said 18% should be the max that can be achieved in this business unit. Now we proved ourselves to be wrong. We reached 21% almost. This is a little bit, yes, you can take it all through the year. There were a couple of one-offs, operative one-offs in the first quarter. But still a very strong performance, and we are very happy with Process Tech, how they are doing at the moment.

On Slide #8, you see our continuous problem child in the group - Carbon Fiber, went down in sales, which was somehow expected by almost 10%, 9.6% to be precise and now reaching EUR 57.6 million in the top line. In the meantime, it's not just the wind industry, which is affecting us negatively in the sales, it's also that textile and acrylic fiber suffer.

On the one hand side, regarding the prices because there are some price variation clauses when it comes to acrylonitrile, still on a comparably low level compared to the years before. And with price variation clauses, this also affects our top line. However, it's also the volume that's missing in this unit. And therefore, we intensified our restructuring efforts in the first quarter. We reduced our headcount in our Scottish plant in Muir of Ord in Venice by 83 employees. This has been implemented. We have some restructuring costs, which we show as pre-exceptionals. So this is an exception by EUR 1.8 million that's in there. These are the kind of severance payment that we had to pay in order to make this cut there but this will help us a little bit to compensate the losses with the, yes, fixed costs that are still there in order to adjust that.

When we look at the profitability, this is -- went down by -- I mean, we cannot calculate a percentage because in the first quarter last year, we were still positive. Also thanks to the performance of BSCCB, which is an equity consolidated JV where nobody has control in the prior quarter 2023 in the first quarter, this stands for EUR 5.2 million, the contribution there. And in this quarter, 2024 stands for 4.4. If you take this into consideration then the operative performance of carbon fiber would be minus EUR 9.6 million which is not so good as we all know. But we still stick to our guidance, which we gave for this particular business unit. You know that we have a guidance without carbon fiber and one with carbon, and the difference is exactly EUR 25 million. So this is apparently supposed to be the performance of carbon fiber. And we still stick to that, that for the full year, we can achieve that.

Slide #9 shows the performance of Composite Solutions, already indicated when you remember our last call when we gave our guidance that 2024 will be a rather flat year or declining year for them when it comes to top line but also bottom line. How is that? We knew already that we will lose in Q1, a contract, a very favorable contract, which we like very much with the U.S. American automotive customer. And this OEM terminated the contract that we had there. And therefore, we suffered some downturn in sales by roughly 7%. We now reached EUR 37.1 million sales in this business unit. And we could compensate quite a bit of the shortfall of this contract. However, the other effects we will see in the upcoming 9 months where we don't have this contract anymore.

The good thing is we could somehow keep the profitability on the level as we had before. So sales drop and EBITDA drop go hand-in-hand with 6.8% that means in the end that on a lower level, we could keep the EBITDA pre-margin at 14.8%, which is really a fantastic achievement by this business unit.

What helps us there, lower energy cost helps us. They are not so energy intensive. But with that savings, they still could compensate on higher costs for salaries but also raw materials that they have been confronted with. But also the focus on higher-margin business but also some price initiatives that will help us to stay on the same margin levels even on a lower level, which we anticipated already when we gave the guidance.

Last but not least, our last segment, which we always show here, which is corporate, which stands for all the nonoperative fields and areas that SGL Group has. In corporate, you see a decline in sales. Why is that? When we decided to sell Gardena and Pune, we put these entities as kind of held for sale and we showed the sales contribution from the beginning of 2023 onwards as corporate in order to keep the businesses and the business units are clean, so to speak.

And their contribution in Q1 2023 can't be compensated in 2024 for that, we anyway have a downturn of roughly EUR 3 million that's coming from that. And with that, that, to a large extent, explains the sales drop that we have here in this nonoperative business unit. And this also goes in line to a large extent, with the EBITDA contribution. We had EUR 5.9 million negative in the first quarter 2023. And in 2024, we are down at minus EUR 1.7 million. Where does it come from? We have significantly lower provisions for our short-term incentives. And Q1 last year also included the operating losses from the sale, from the sale of the sites that we sold.

This was the operative performance so to speak of top line of the P&L, but also then the EBITDApre when we go a little bit further down our P&L, and we have a look at the net results here on Slide #11, then you see that our net results dropped from EUR 15.2 million to EUR 12.6 million. Why is that? There are 3 effects that go in 1 direction, one is going in the other.

On the one hand side, we have some nonrecurring expenses with EUR 2.4 million. EUR 1.8 million out of that is the restructuring cost that I just mentioned that we had in Scotland in order to adjust our workforce to the reduced quantities and capabilities that we have there because we idled a couple of lines. We have higher taxes that we paid because we make especially profits in countries where we have to pay taxes. This is EUR 2 million and which is lowering our compensating there, our net financial result, yes, our financial result is better than last year was EUR 1.3 million. And all in all, these effects then for roughly EUR 3 million. This is exactly why the net result went down by EUR 3 million.

This is, I mean if you follow us and SGL for more than 3, 4 years, I know that this was maybe not given before to us there, and I started. But this is another positive quarter. I think it's now the 12th or 13th consecutive quarter, leaving out any impairments and that we have positive net results on a quarterly basis. And the same is also true for our free cash flow, which you see here in the middle of this slide. It is positive again with roughly EUR 6 million. It's lower than last year where we had EUR 10.4 million. But you have to bear in mind this is also highly affected by customer down payments and repayments, which we already do. So -- but it's still positive despite all the heavy CapEx that we do. I think it's another good result and another good quarter for SGL.

And we could do that by keeping our net financial debt roughly on the same level. Our leverage ratio remains at a very healthy 0.7 which I think is super good. Our equity ratio, thanks to the strong performance of the net result went up by almost 1 full percentage point. We are now reaching 42%, which is also very good. And the ROCE remains with 11.4% on the level that you know from us, which is, I think, also a very good KPI that we can show here.

On the next slide, #12, we would like to give you a little insight on how we invest in this year. I think when you heard our last call when we gave our guidance for 2024, you became aware that we would like to invest a lot of money in 2024, especially in the ramp-up of our capacity for silicon carbide. And here on this slide, you see what we did in our first quarter, we invested almost EUR 24 million, whereas our depreciation level is EUR 13 million. So it's almost double that we invest, with our own cash flow, so to speak, our operating cash, this is -- we will stick to our rules that we would like to invest maximum our operating cash flow so that in the end, our free cash flow remains slightly positive. This is our guiding principle, how we would like to do business. And everything that comes on top are we already -- use customer downpayments that we received and this is what we do here. And the first EUR 10 million already go -- are being invested there. So as you see for Graphite Solutions, a big chunk of our CapEx is in Graphite Solutions. And we use that for capacity expansions in Bonn and also for our U.S. site in St. Marys, but also in Meitingen where we just installed a second[indiscernible] line.

The other businesses like Process Tech and Carbon Fiber, same as Composite Solutions use only very little CapEx in the first quarter. We concentrate on Graphite Solutions. And as you all become aware, I think we had a highlight slide last time when we were talking about our JV that we have with Brembo or BSCCB on KV with them, as we call it. We have to invest into a new production build in Meitingen and the first EUR 6 million have been already paid out for that. We're making very good progress with this building. And later this year, this should be up that we can also install all the infrastructure and then subsequently also the machinery to start production somewhere in the beginning of 2025.

And with that go to the next section where we come to the outlook. And I hand back to Torsten who will to guide you through the next slides. Thank you.

[Torsten Derr, executive]

The headline is semiconductors drive our growth and our profitability. And this slide gives you an overview of our largest business unit, GS. And you can see here in this slide, the business units by segment in which we are active. And you can see in brackets the share of business segment of the prior year. And on the left lower side, you see battery materials, and we are a little satisfied with battery materials. And this is a business unit where we produce graphite powder which is used as an anode material in EV batteries. And you know that we are under strong competition in this segment from China as well as our customers are. The total European battery industry has disappeared or under strong pressure. And most of the batteries are imported from and produced in China. And as the Western competitors are under pressure or are disappearing or stopping their investments, this has a negative effect on our business, just to give you a heads up here.

Fortunately, we were able to compensate the losses with a growing semicon business, which is now above 50% share of the business unit, GS, and you see a dive on the right-hand side. If we now take a closer look, you can see the share, first of all, of the semicon business was growing from quarter 1 to quarter 1 last year to this year from 44% to 51%. And within the semiconductor business, we saw heavy growth of the silicon carbide business, which grew quarter-to-quarter by 33%, so quarter 1 year last year to quarter 1 this year. And as Torsten mentioned for this silicon carbide business, we were able to get another EUR 8 million customer down payments for additional increase of our capacity.

On the next slide, I want to use this slide to explain you again the strategy and the setup of our company. First of all, this strategy, we focus on growth markets like semiconductors and e-mobility. And we try to be innovation leaders, quality leaders and achieve high margin in every segment which we operate. And our setup is very simple. We are a portfolio company, and we are structured in business units. And all business units are independent companies in the company with an own profit and loss statement. This makes it very simple for us to do bolt-on acquisitions or divestitures in this setup.

If we now take a closer look to this picture, you can see here our 4 business units: Graphite Solution, Process Tech, Carbon Fibers, without BSCCB, this is very important and Composite Solutions. And it shows the development in the EBITDA pre-margin which is the main KPI, which we use in our company. You can see that GS, Graphite Solutions developed very nicely and reached peak performance in the quarter 1 this year. Process Technology did a very, very nice development, now above 20%, as Thomas pointed out, driven by parts and service business with a very, very good margin. And we are also very positive here for the outlook for this year and also the period to come. Very good order intake, which we see.

And on the right-hand side, Composite Solutions also develop from negative margin to a very stable positive margin around 15%. If you compare these 3 business units, which reached highest margin, highest absolute EBITDA highest turnover and compare this with CF, Carbon Fibers, you see a downward trend in margin and also pretty high losses in the quarter 1 this year. And this is the reason why we explained to you last time that we explore all strategic options for this business. Either we fix it ourselves or we find a better owner for this business, and this is what Thomas and me are exploring right now. And hopefully, next time, we can give you more detailed info about the status of this project.

With this, I would like to close my remarks and would like to hand back to Claudia.

[Claudia Kellert, executive]

Thank you. Now we will have enough time to answer your questions, and the moderator will give you some more details how to set up their technical details.

[Operator]

We will now begin question-answer session. [Operator Instructions]. The first question comes from the line of Andreas Heine, Stifel.

[Andreas Heine, analyst]

Yes, you highlighted that you haven't done any impairment. I was saying this, I have to say, from the Carbon Fibers. So if you haven't done this, you expect in your strategic options that you would at least get from the outside the value as much as your book value? That's my first question. And secondly, also on the carbon fiber. Well, you had a loss of EUR 10 million in the first quarter, EUR 25 million is the guidance for the full year, and you haven't changed this. So I guess you have reasons why you expect coming quarters to be better. The cost savings is certainly positive, but probably not enough to get there. Maybe you can share what your thoughts are. And on the down payments, you have collected and shown this again, how much you have collected '22, '23 and at the beginning in '24. And for the full year '24, could you give us an indication how much the net down payments will be? So how much will you incrementally collect? And how much is what you have to pay back?

[Thomas Dippold, executive]

Andreas, this is Thomas. You are 100% right. And as I said, if there's no impairment that apparently means that our business case, which, by the way, we have ordered the figures by end of March, so since end of March, we only have 6 weeks that passed by -- nothing has happened in the meantime. So you have seen in our annual report that we have very little headroom when it comes to Carbon Fiber. That means apparently our value or the value in use reflects, to a large extent, the discounted cash flows that we have in this business unit, and this has been audited, and we still, yes, believe in this business case.

And also the course of the year 2024, how we have focused so far in the first quarter is exactly in line with our planning. So this is also what we can show to the one or the other interested party in this business that, yes, we have a bad time right now. But this is also expected and the better times, as Torsten also pointed out, are ahead. And the wind market will recover and also some other businesses will show up.

This would only be our business case. We don't know what others might use the fiber for. This is exactly why we test the market and why we do that. But there's no need at today's perspective for an impairment, and this is the reason why we didn't do that.

Second, you mentioned the weak Q1, I already indicated that we somehow anticipated that because we compare also to rather good first quarter 2023. So this explains the deviation to a large extent because in Q1 2024, if you add 2023 to serve that, if you remember the call that we had exactly 1 year ago. We believed that the wind market was only delayed and will catch up late Q2 and then later in the year.

So in Q1, we kind of produced all the way through and put some of the inventory on stock, which we now sold off. So the inventory level of carbon fiber went down quite a bit. This is also the reason why we had to idle a lot more lines than we currently, we anticipated that, but in comparison to last year, a lot more capacity has been idled. This is also the reason why we adjust the workforce, this one-off. But with the running costs we have right now, we are very confident that we can keep our guidance in this business unit.

And your last question referring to the customer down payments, we always report what we have received in a quarter, and this was EUR 8 million. I already said that this is more or less in line with our expectation for the full year. But please accept that we don't disclose a real figure for the full year because it's always up for a negotiation and Torsten already said that in Silicon Carbide, there is a certain bumpy road at the moment. We will certainly come to that. That at least the outlook in e-mobility is a little bit dilutive at the moment. And therefore, also the willingness of granting down payments is maybe something that we have to have some discussions on that. But at least with what we have seen and received in Q1, we are fine.

[Operator]

The next question comes from the line of Dario Dickmann, HSBC.

[Dario Dickmann, analyst]

Yes, I've got a question about your corporate guidance for the full year of a significant decline from the minus EUR 17.4 million in Q2 '23 with roughly EUR 1.7 million in Q1. Is this something we should expect down the road significantly in second quarter? Or is this more of a run rate we could expect going forward?

[Torsten Derr, executive]

Well, Normally, normally. The EUR 5.9 million that we've seen last year in the first 3 months of the year is certainly something which was exceptionally high as a loss, because it also incorporates the operating losses from the sites of Gardena and Pune. Normally, we have a run rate of minus EUR 4 million to minus EUR 5 million on a corporate level. And this should be the normal run rate for the upcoming months and upcoming quarters for 2024. This is a normal thing, and we don't expect a major deviation from that.

[Dario Dickmann, analyst]

Okay. And maybe also on carbon fibers. In the first month of the second quarter, what can you see from a pricing perspective, especially from acrylic fiber and textile fiber. Has there been some further deterioration? Or...

[Torsten Derr, executive]

Apologies for that, but we talked about the beginning of August when we publish our H1 results, but please allow us that we give a consolidated view on the second quarter by -- when we talk about that, we don't want to talk about April pricing now for carbon fiber. I think that's far too detailed.

[Operator]

The next question comes from the Line of Tom Junghanns, Berenberg.

[Thomas Junghanns, analyst]

I have a question with respect to the graphite business and here, in particular, with respect to the battery business, you mentioned that you are currently struggling in this business here with, yes, we see no material you deliver. And my question was what is your strategic plan for this business? Are you thinking about divesting this business or shutting it down?

[Torsten Derr, executive]

This is Tors. No, we are checking all possible options here. What we see, we are bound with our business to Western battery makers and they are really having a tough time. And we see volume reductions for our graphite powder from quite some players. And this leads to underutilization in our assets in Poland. And of course, we reacted to that. We reduced workforce due to cost cutting program to mitigate the cost effects a little bit. But we have to see if this is sustainable. You can see how little the share of graphite powder was, and we are operating [ a lab ] in Germany and 2 plants in Poland for this marginal turnover. And this is why we are laying our cards currently, and we are thinking about what to do with this business, but nothing to announce yet but we are unsatisfied with the decline of that business.

[Thomas Junghanns, analyst]

So can we assume that this business is loss-making given the underutilization?

[Torsten Derr, executive]

Yes, it's loss-making. But you see the sales share is so low that it was pretty easy to compensate with other good running businesses.

[Thomas Junghanns, analyst]

Okay. Got it. And 1 question with respect to your CapEx guidance. You guided for EUR 150 million in CapEx for full year 2024 and reported EUR 24 million in CapEx in Q1. Do you think that you will still achieve this EUR 150 million in CapEx, and this is maybe a little bit backloaded?

[Thomas Dippold, executive]

It is normally backloaded. You're 100% right. If you now really reach EUR 150 million by all means, let's see. Sometimes it's not all us, but also on the suppliers that we have to involve and they also have some lead times, which we sometimes don't like, but we also don't want to push it too hard because otherwise, you just pay double the price if you just want to have it right now.

We're trying to optimize it that we fulfill our requirements that we have with the customer who gave us the downpayment, but we also want to spend the money diligently. And therefore, we do a proper planning, also not waste any money. But we will invest a significant amount of money there. If it's in the end, EUR 130 million, EUR 140 million, so be it. But if you really match the EUR 150 million, let's wait and see, but it's definitely back-end loaded in the second half of the year.

[Torsten Derr, executive]

Thomas, what is safe to say, we stick to the EUR 150 million CapEx guidance, and we have projects to spend all of this. And this goes to every almost all of our sites in the world. If we don't manage to spend all the amount, it's due to late delivery of equipment manufacturers or just restrictions in our engineering capacity. But then we will spend it in the first month of next year, yes.

[Operator]

We have a follow-up question from Andreas Heine, Stifel.

[Andreas Heine, analyst]

Additional questions, please, on Graphite. Now if I look on the chart you have on page 14, where you split down the utilization of end market. Then you show a decline in LED and in semi. Is that a falling market here? Or is that due to capacity constraints? So could you have sold more if you have the capacities available? Or is that reflecting the end market? The more traditional markets show a decline, what does your order book tell you, you have visibility of at least half a year, how do we have to think about these traditional markets in '24?

And then lastly, this CapEx spend of EUR 150 million, probably peak in investments this year. When are these capacities really available? We have said already the capacity expansion in [indiscernible] business in Meitingen is already in place. Are there other parts of this expansion projects, which are already available during 2024? Or is that all for growth in '25 onwards?

[Torsten Derr, executive]

Andreas, I tried to answer your questions. First of all, we split in the market segments LED, Semi and SiC Semi. And from a quality point of view, the highest quality goes into SiC Semi and this was where a lot of our CapEx was going to. We invested in cleaning of graphite and in machining capacity that meant we could take a share of the graphite, which we sold in lower quality markets and we clean them up, machines them and sold them into the high-margin SiC business. Everything at the end is coming out of the same green isostatic graphite press, which we operate in Bonn, which we also debottlenecked for some percentages. So it's just a restriction of capacity, and we are able to sell out everything.

What was your second question, Andreas?

[Andreas Heine, analyst]

The more traditional end markets, so you say, industrial application, transport, chemicals, what's your order book like as you have a visibility of at least half a year?

[Torsten Derr, executive]

Yes. I would say it's more or less flat. Our customers are a glass industry, aluminum industry, chemical industry in these markets and automotive. And they are -- they see a little uptake, but this is not good and this is not much. This is something 2%, 3% or 4%. And this is the same we see in our order book. So no big effects expected there.

[Andreas Heine, analyst]

So also no decline?

[Torsten Derr, executive]

No.

[Andreas Heine, analyst]

Because in 4 months cycle, in these traditional market, there is a lack of one or more year we then also following the weaker trends, and that's not what you see in this cycle.

[Torsten Derr, executive]

No. And I would say industrial and also transport is pretty fast. If we see a decline in the end markets, it's pretty fast communicated to us, and we reduce also our production. And the third was a CapEx question, right?

[Andreas Heine, analyst]

Yes. The third was when the various projects you -- to have any impact on the top line and then...

[Torsten Derr, executive]

First of all, we are often asked how many percent is your capacity increase? And this is a very tough question to answer because we have a value chain which goes over 9 value steps. And our EUR 150 million, which we are going to invest this year, our investments in step 7, in step 8, in step 5, and we debottleneck everywhere at various sites in the world, which means that we, at the end, can increase stepwise our capacity, especially in the high-quality SIC market. And the investments which we are doing right now will come on to stream in the course of 2026.

[Andreas Heine, analyst]

Not before we will see much other than this.

[Torsten Derr, executive]

Stepwise, Andreas. Some investments are faster and are all already available beginning of next year, some backloaded at the end of 2026. So the total effect we will see at the end, but you will see a stepwise increase of our capacity in the next year.

[Andreas Heine, analyst]

As you are right now, capacity constraints and shift to mix, there will be more capacity whatever or is available next year so you can grow with your asset base in 2025 against the future. Thanks.

[Operator]

[Operator Instructions].

[Claudia Kellert, executive]

So I can't see more questions. So thanks a lot for your participation. You will find the presentation and also our Q1 statement on the web page. And if you have additional questions, please call the IR team with Jurgen Reck and myself. Thanks a lot, and have a nice afternoon. Thank you, and goodbye.