SGL Carbon SE

XETRA:SGL

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the SGL Carbon Investor and Analyst Conference Call. [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. Thank you very much, Emma. Welcome to our today's conference call on the results of the first 9 months. Thank you very much for joining us this afternoon. Here with me in the room is our current CFO, Michael Majerus; and also the incoming CFO, Thomas Dippold. Both will support me in the Q&A session and also in the presentation. We will keep our prepared remarks very short as we gave a comprehensive update some 10 days ago. If you have missed our call 10 days ago, there's a replay on our Investor Relations web page, and you can listen to it until end of this month.But first, I would like to hand over to Michael, and he will guide you through the results of the first 9 months of 2020.

[Michael Majerus, CFO & Member of Management Board]

Yes. Thank you, Torsten. And first of all, also welcome from my side to this call. As usual, I will walk you more in detail through our figures. And let's start on Page 3 with our business unit Composites - Fibers & Materials, CFM. Overall, we can say that the third quarter was a clear recovery from the very weak second quarter, where, as you might remember, we had especially in the automotive sector strong effect in CFM, with 4 manufacturing site not running in that second quarter due to the Automotive customer and the pandemic. Compared to this, we saw a clear recovery and the EBIT turning substantially positive in the third quarter. In detail, sales revenue, as compared to the 9 months of the previous year, down 14%. This is a combination of the intended decline in Textile Fiber, where, last year, as you might remember, as a situation of the -- market situation that year, we decided to idle 2 acrylic fiber lines and decided to convert another acrylic line to the precursor production. That was one effect, which, of course, was planned that we will have a decline here. The other, of course, was not planned, and that has to do with the corona effect, and that was primarily affecting our market segments, Automotive and Industrial Applications.On the other side, the sales in Wind Energy increased very substantially compared to previous year. As you might remember, one of the problems last year was the weak wind business. This year, this turned much stronger and increased by more than 60% compared to the previous year and stronger than initially expected. And the Aerospace remained low. We are rather a small niche player today in the Aerospace business, so we were not yet affected from the overall environment in the aerospace in the current year. But as you remember, our plan is going forward a little bit weaker with the Aerospace, but for the current year, it was relatively stable. So the EBIT increased substantially. You could see, in total, we have EUR 10.6 million-plus in the 9 months, it was minus EUR 1.8 million in the previous year's 9 months. And there are several reasons for it: one is, as I said, the substantial improvement in the Wind Energy sector, primarily volume-driven but to some extent, also price-driven because we were able to increase prices earlier this year; and the others were our earning improvement measures, primarily in the Textile Fiber business in Portugal, I already mentioned this; and some other activities we set out. And this was offsetting the Automotive business where, [ in the -- earlier ], we had EUR 4 million lower earnings contribution from our equity investment. As you know, this is our Carbon Ceramic Brakes joint venture with Brembo, and that was heavily affected in the second quarter by the weak Automotive situation. Accordingly, ROCE turned positive.And with this, let's move to the next page, our other division, Graphite Materials & Systems. In general, the -- this division is late-cyclical nature. It means it takes longer until the crisis becomes apparent, but it also takes longer to get out of the crisis compared to CFM. So CFM, the effect was coming much earlier in the second quarter. On the other side, it's getting much earlier out of it, as you could see in the third quarter. GMS is a different situation. It took longer, and clearly, the biggest effect was not seen in the second quarter, but it was now here in the third quarter that we had an increased effect of COVID-19. And in total, this was driving sales down by 25% year-over-year, and EBIT even overproportioned by 55%. That is another specialty of this division. It's a very fixed cost-intensive division, which means if you have a strong volume growth, you have an overproportionate profit increase. But the other way round, if the volume is weak, you have overproportioned profit decline, and that is what has happened this year. So sales overall went down 22% compared to previous 9 months. And this is, in essence, a combination of 2 factors, roughly half-half: one is the expected lower demand in the battery and other energy sector due to shrinkage in the supply chain, which we already mentioned earlier this year, that has nothing to do with the corona crisis; but the other half roughly of this weakening is coming from the lower markets due to the corona crisis, which were affecting all our market segments, with one exception, the Semiconductor, which was even growing in the 9 years (sic) [ 9 months ] with a low double-digit percentage.Now EBIT, already mentioned this, decreased by 52% from the record level in prior year. The IFRS 15 effect alone is contributing EUR 10 million. How is this? If you remember, this is revenue recognition standard related to customer-specific products, which primarily are relevant for our graphite electrode material business. We had a record year in 2019, as you might remember. So therefore, we had strong growth in volumes and also higher prices in the graphite electrode business. And this is, under IFRS 15, anticipated revenue recognitions, we had a positive IFRS 15 effect. This year, it was the other way round, volume declined heavily. So therefore, we had a negative IFRS 15 effect, and this swing alone is accounting for EUR 10 million of the earnings decline.And as mentioned, in line with the sales revenue, almost all other market segments recorded lower earnings compared to prior year's period, with 2 exceptions: one is the Semiconductor where, as I said, we had still growing revenue; and the other is the Automotive & Transport. The reason here was that we were investing into manufacturing hold last year in our manufacturing site in Poland. We had to ramp up costs last year, and of course, this year, we were on a stable production state, and that was the reason why despite a weaker revenue earnings-wise, we could stabilize the sector here.So far GMS, now heads -- let's head on Page 5 to look at our Corporate. And here, it's important to remember what it's heavily affected by a onetime effect. We came to an agreement with the company Showa Denko. As you might remember, Showa Denko acquired in 2007 our former graphite electrode division. And part of that graphite electrode production, more precisely, the so-called nipple production was located in Meitingen. So they were producing there and that -- of course employers there, they had a long-lasting rental contract with us because the buildings and the ground still belong to us. They were not sold to Showa Denko, [ only ] business and the machines. Now they decided to leave the site, and we had to find agreement -- or they find an agreement, and we were, of course, compensated for this several years of rental contract. Also, Showa Denko has some obligations for removal for environmental things. And all this was settled now with a payment of roughly EUR 23 million in total. Out of this, EUR 18 million will be paid now in the fourth quarter, but the earnings effect of this was already recorded here in the third quarter because the contract was signed in July, and the earnings effect is EUR 8.5 million This is, in essence, the present value of the long-lasting rental contract, which is affecting both revenue and EBIT, and that's also the reason why you can see here, the revenue is increasing to EUR 27 million. And the main -- or percentage-wise, 14%, as I said, this is affected by the Showa Denko agreement, and the earnings effect accordingly is also here affected. And as such, the EBIT, as reported, is now only minus EUR 13.6 million compared to the minus EUR 18.5 million. However, if you take this out and the onetime effect from Showa Denko, you will see here that the so-called operating recurring EBIT is, without onetime gains, minus 20.6% compared to the minus 18.5%, so this is slight a deterioration primarily due to the fact that we had some consulting costs related to our restructuring projects and the service provided to the buyers of our old Performance division requested lesser service. So far with regard to COVID, now let's on the Page 6, look at the total group's P&L. Revenue went down by 18% as a combination of the developments primary mentioned with GMS and CFM. The EBIT, of course, is also a combination of the effects mentioned, low, it's now down 38% to EUR 33.9 million. The net financial result has improved substantially from minus EUR 32.6 million now to minus EUR 23.4 million. There are several reasons for this. One is the absence of interest expenses for the old convertible bond, which we paid back early last year. Another reason is the lower interest expenses for pension in the current year, and another important element is we had a negative onetime effect in the amount of EUR 6.3 million from already mentioned early repurchase of the convertible bond in the third quarter 2019. And the net result, as you can see here, of the minus EUR 3.9 million, this is, of course, not yet including the impairment charges, which we mentioned in our ad-hoc release, in the amount of EUR 80 million to EUR 100 million, because this will be booked in the fourth quarter, because it was a subsequent event compared to the third quarter. And another thing which is not yet booked here is, of course, the provision for restructuring. We said in our ad-hoc that we will have, in total, EUR 40 million restructuring growth and somewhat more than 1/2 of this will be accounted for in the -- also in the fourth quarter. Though it is, of course, not yet included in these figures.Now let's have a look at the group balance sheet, on the Page 7. Equity ratio went down 25.6%. There are primarily 2 reasons for that: one is the change in discount rates leading to higher pension obligation and correspondingly, lower equity; and the other are foreign exchange effects, primarily related to the change between U.S. dollar and the euro, also negatively affecting our equity. And that's the main reason for 25.6%. Also, this is, of course, not yet including the impairment charge and the restructuring provision. With this, we'll have at the year-end, definitely a figure somewhere below 20%. As I said, not yet included. Liquidity, very positive development, and that is, I think, the most important thing in current times, even up further, EUR 166.8 million compared to the end of last year figure of EUR 137 million. There are several reasons for that: one, is of course, the reduced spending overall in the group; also of course, reduction in working capital; but also some funding effects already here in. What is also worth to mention, there is still more to come in the fourth quarter, but this will be tackled later in the outlook.Here, net financial debt decreased to EUR 262 million -- whereas the free cash flow was EUR 43.7 million. So why is the decrease in net debt lower than the free cash flow? The answer is in the last line. There is an offsetting effect primarily with the lease liability -- with repayment of a lease liability in the amount of EUR 13.5 million and a payment for discontinued operations. So the net sum of this is decreasing then the net debt position. Now on the next page, you see the free cash flow, already mentioned, very positive. And free cash flow now from continued operations from -- EUR 43.7 million compared to the minus EUR 9.6 million. So the reason for this: one, as already mentioned, the working capital effect and the improved net working capital management; the other is, however, also that we substantially reduced our capital expenditures. You can see it here, it was only EUR 33.2 million in the 9 months compared to more than EUR 50 million in the 9 months before. And that was the main driver for the improvement in the free cash flow. And the discontinued operation, the minus EUR 2 million, this is a tax payment related to the new owner of the -- to company which belong to the graphite electrode business, which we sold, that was a tax related to the time when we were the owner of that business. And the last year's EUR 9.8 million, This was also a settlement of an old topic, this was a settlement payment to the buyer of our HITCO Aerostructure business.Now on the last Page #9. Just a reminder, as I said, those figures do not include 2 things: one is the restructuring provision, as we said, in total, EUR 40 million cost, roughly 1/2 -- more than 1/2 of this will be recorded in the books in the fourth quarter; and the other is a noncash impairment charge in the amount of EUR 80 million to EUR 100 million, primarily due to the weaker outlook in the Automotive and Aerospace industry, which earnings-wise, cannot be compensated by the better outlook for the Wind Energy sector. So far from my side, [indiscernible] 9 months. And with this, I hand back to Torsten for the outlook.

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

Yes. Thanks very much, Michael. And I will repeat quite a lot of what Michael said because we are already in November. So I start on the next slide, please, with our reporting segment, CFM, our carbon fibers, and make it short. Sales revenues will decline by approximately 10%. And as Michael said, there are 2 reasons for that: first, automotive, which is a pandemic effect; and second is Textile Fibers, which was driven by us. I'll come to this later on. This was compensated by higher sales in the Wind Energy segment. And we run certain lines at capacity because the demand is pretty high. Recurring EBIT will return to a slightly positive result. And here is Textile Fibers again. We idled 2 Textile Fibers lines, and we can switch the energy supply over to a more favorable system, which brought us quite a lot of savings in Textile Fibers. And second is the Wind Energy segment, where we were able to increase prices. Next slide, please. This is our second reporting segment, which is GMS, or our graphite business. There, we have pretty bad business, and all sales revenues declined by 20%, with one exception, which was Semiconductors. This is area of focus and still growing. Recurring EBIT will be reduced by at least 50%. This is due to the high amount of fixed cost in the business.Coming to Corporate. Michael already said that the major driver for substantial deterioration of operating recurring EBIT is the loss of a service business, which we rendered to -- for our former PP activities, which we divested last year, and this could not be repeated this year.Coming to the next slide, the group outlook. All that means that, on group level, our sales will decline by 15% to 20%, and we will have a slightly positive full year operating group recurring EBIT. Earlier this year, we started to explore additional funding measures, and all of them were successful. The biggest was a compensation agreement with Showa Denko, which boosted our EBIT in -- and also sales in Q3 2020. We disclosed on October 30, the impairment charge for our CFM business and also restructuring provisions on the announced restructuring, and this will lead to a negative net result guidance of minus EUR 130 million to EUR 150 million. Our CapEx is -- will be still on a level of EUR 60 million. And with all this, we are able to confirm our guidance for the year-end 2020 net debt to stay on the forecasted level, which is an increase of the mid-double-digit million euro amount compared to year-end 2020, and this is due to the USD 62 million purchase price payment for our assets of SGL composites in U.S. We are able to keep the guidance unchanged because we expect to balance the lower expected operative earnings with additional funding measures mentioned above. And consequently, we continue to expect a comfortable liquidity position, as liquidity was strong at EUR 167 million at the end of September and more cash is coming, mainly in Q4 this year. In addition, we still have EUR 175 million undrawn syndicated loan facility.Next slide, please. Then on October 30, we presented our restructuring project. And on the left-hand side, you see our new operating model. We already reduced the number of corporate functions by 50% from to 20 to 10. We introduced clear responsibilities and a rigorous consequence management. And we also are going to change our monetary incentive system on a cash flow basis. On the right-hand side, you see our restructuring program. We expect more than EUR 100 million recurring EBIT improvements, which we will have valid at the end of 2023. We have 500 individual measures, and this includes more than 500 headcount reductions.Next slide, please. To summarize what we said, the operational performance after 9 months is in line or maybe even slightly better than we expected in the guidance by mid of this year. We launched substantial earnings improvement measures, and we also announced the impairment charge between EUR 80 million and EUR 100 million. As we cannot foresee how long the pandemic will take place, we completely rely on internal self-help measures. We focus on securing financial headroom and stabilize our operational performance. Having done this, we are going to reduce our net debt level, and we'll go for selective investments, and having done this, we go back into the growth mode. We will provide an update on our strategy by end of Q1. The same holds true for the guidance for 2021 and the updated 5 years' plan.This concludes our prepared remarks. Emma, I would like you to -- I would like to hand back to you, and please open the Q&A session.

[Operator]

[Operator Instructions] The first question comes from the line of Christian Obst with Baader Bank.

[Christian Obst, Analyst]

I have 4 questions, please, smaller ones. In the report, you mentioned that there are 2 tranches for the Showa Denko payment. The second one is due on February 21. Can you give us a guidance, what do you expect there? Is it the EUR 14.5 million, which is the delta between EUR 8.5 million and EUR 23 million? Or is there a completely different calculation? Then on Textile Fibers [ deeper ], when do you expect a breakeven there on Textile Fibers alone? You talked about some kind of special income, cash in from divestments. Is there a further planned sale of real estate on the agenda? Will it come in Q4 or in the next year? And the last one more on the product side. The battery enclosures, can you give us some kind of an idea of the order size currently? And what do you deliver? In the report, you mentioned that you are -- investment focus, the CapEx focus is to increase capacity there. What kind of capacity is that?

[Michael Majerus, CFO & Member of Management Board]

Yes, yes. So this is Michael Majerus. Maybe I'll start, coming to your first question. Showa Denko, we have to differentiate the cash side and the earning side. So as I said, in total, the cash payment will be EUR 23 million, roughly in round figures, thereof EUR 18 million will be paid still in this fourth quarter. And the remaining EUR 5 million will be paid in February next year, that is the cash side of the equation. The earnings side, that is the EUR 8.5 million, and this -- so out of this EUR 23 million, total payments, there will be earnings-related component of EUR 8.5 million. This is, as I said, we compound relating the rental obligations, which were paid in one shot, that is normal income. And that would have been also income regularly over the years. It was now anticipated. And this was, since the contract was signed in July, had to be recorded earnings-wise already in the figures of the third quarter, whereas the cash impacts will now come in the fourth and the first quarter of next year. So far, this point, then with the -- what will in addition come in the fourth quarter, and all this is signed, is a sale of a piece of land and the building in Northern Germany, where we formerly had rotor blade manufacturing, which a long time ago, we gave up, so that is not used by us. We have a company renting currently this building, and they bought it. We already signed the contract, by the way, last week, it was done deal, and we expect here a mid-single-digit million euro amount. And the other thing, which has also done deal and signed, we signed a mortgage loan with a bank in Germany related to some buildings and land here in our German manufacturing that will be a small double-digit million euro amount. And all this to come in the fourth quarter. So with the Showa Denko payment, the EUR 18 million; the sale of the piece of land in Northern Germany; and the proceeds of the mortgage loan. And that is what makes us very comfortable with regard to our liquidity position. That is what we said in the talk. You can see we have EUR 167 million, all this is now coming on top of this, then of course, the EUR 62 million for the payment to BMW will go down. We'll have also some negative cash flow in the fourth quarter due to the CapEx related. As usual, it's back-end loaded, you could see that we have accumulated only EUR 33 million in CapEx. Total year's guidance is EUR 60 million, so you can easily imagine that a significant portion has to come. And if you count this together, you can easily calculate what roughly our cash position should be at the end of the year. So far with regard to debt question with the battery enclosures, I mean this is primarily investment here, we are making our manufacturing site in Austria for a U.S. company, who's building electric vehicles. The start of production from the customer is scheduled for mid of next year and already, we have to be ready for this, and that's why the equipment is, of course, there already shipped in. So we need not a new building, but add new machines. And the size of that orders in the -- according to the plans of the customer at the ramp-up stage, somewhere in the mid-double-digit when you figure what it is several years to come and not, of course, in the first, that's roughly. And breakeven with the Textile Fiber, I think that is something going forward. I would hand over to the CEO, and not make any predictions, which then later my successor has to stick to, so therefore, yes, and say, "Not for me to answer this."

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

I have to rather fastly answer. We don't look at the P&L of our Portuguese assets. We have in total 8 fiber lines there, and we already converted 2 of the 8 lines to a precursor the fiber line. And the pre fiber line goes or sends fiber to our assets in Muir of Ord and Moses Lake. And with that, we are replacing precursor material which we purchase from -- externally. So every conversion step increases the value chain, and we don't look at the P&L statement of the Portuguese assets. The Textile Fiber business is just to fill the capacity and to dilute the fixed costs. So our target is to convert one line after the other to precursor and feed it into our value chain.

[Michael Majerus, CFO & Member of Management Board]

Yes, that's completely great. But maybe looking more for your financials, some indication for the current year, not saying something going forward. But the Textile Fiber business has improved significantly compared to the previous year. Previous year, we had to be very honest on this one, we had a small double-digit million euro loss, now we have only a small, single million digit loss. So we're still loss-making, but of course, we're also working on improving the situation. But the real thing is that what Torsten said, it's for us an investment which is important for the precursor production.

[Christian Obst, Analyst]

Do you have, so far, a plan for the time line to convert further lines into a precursor production?

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

No, this is not lying 100% in our hands. If we produce composites parts, for example, the carbon fiber is listed, and this forces us also to list the precursor material. If we had a business with an alternative fiber, we have to continue with an alternative precursor as well, and we do whatever is possible to enlarge our value chain.

[Operator]

[Operator Instructions] The next question comes from the line of Rich Schramm with HSBC.

[Richard Schramm, Analyst]

Gentlemen, I have a question concerning the Wind Energy business, where you mentioned that you have been able to increase prices on such a strong increase of demand. Obviously, this was more or less unavoidable, but how sustainable is this? Can you give me an idea how long these contracts are running, you have in this area? And if your customers then also might put pressure again on the price level once demand picture turns around? So how volatile is this? Can you give us a flavor for this?

[Michael Majerus, CFO & Member of Management Board]

Yes, since I'm the guy who has the longest experience in this business, maybe I take this one. I mean this, the wind business is, since you only deliver the fiber, has more commodity characters, you cannot much differentiate, rather different from our component business. And as you know, in essence, supply and demand are driving the prices in the commodity business. So I think what is important to remember is that there is -- that Wind Energy is, not -- volume-wise, already today, the second-largest market overall, if we look into all type of fibers, including the low tow fiber, and for the heavy tow, indeed, already the largest market volume-wise. And there is strong growth. And the reason for that strong growth is a trend in the wind energy sector, which is more towards offshore windmills. And the reason is threefold: one is you do not have problems with the neighbor to get the [ permission ] for this; secondly, you can build a much bigger, those windmills have a diameter of 160 meters even more, which is the magnitude of the cathedral in Cologne, we'll never be able to build such a thing onshore here; and the third, it has more winds on the sea. So that is the reasons why there is a trend towards those offshore windmills. And the good thing is that different from the onshore windmills, which not all of them do contain carbon fiber, physically, it's not possible to build such windmills without carbon fiber. So all of them need carbon fiber, which is good for us. And secondly, they even need more carbon fiber to get to stability in the rotor blade to avoid it under high wind strikes, the rotor blade is bent towards [ tower ] . So that's the reasons behind. And different from the low tow fiber, which is going to the Aerospace, where the price level is much higher, the heavy tow business has been so far not in reinvestment case, because the Automotive business is relatively small, and the wind was not very attractive margin-wise. So -- and as you could see it also from us, we have not built additional capacity in that sector, so far, because economically, this wouldn't have made sense. But on the other hand, the capacity is limited in that sector. And now with a strong volume, ratio is improving in our side. And that was also the background why we were able to increase prices, not dramatically also to put this into perspective and the prices still are not very attractive compared to component business in the automotive sector, even not mentioning the Aerospace business, but it is improving. And so your question is how this will move forward? I think, so far, we expect that this trend will continue and that supply-demand ratio should be beneficial. Of course, no one knows what's going on in China. China, for years, is claiming to build up carbon fiber capacity. So far, they have not been very successful, so that is maybe one uncertainty in the equation. But so far, what is foreseeable for us, we see that this trend will continue.

[Richard Schramm, Analyst]

But quite obviously, as you just indicated, the price level is still not such attractive that you would consider expanding this business and take advantage of this growth you see?

[Michael Majerus, CFO & Member of Management Board]

No. What makes sense is to fill our lines with this. We would not build a new manufacturing site for this. But what we are doing is to fill our existing capacity in the sites we do have. And that makes sense. And we even have reactivated [ Ord ], we activated in our northern line and our location in Moses Lake because if you have the equipment already there, so if you have only to look at additional costs to get them up and running, this is economically still, of course, attractive and better off not doing this, but it would not be an investment case to build new manufacturing side for this.

[Operator]

At this time, there are no further questions, and I hand back to Dr. Torsten Derr for any closing comments.

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

Yes, Emma. Thank you very much. And with this, I would like to thank you all for dialing in and for your continued interest in SGL Carbon. I look forward to continuing our dialogue on a regular base. Have a nice rest of the day, and until next time, goodbye.

[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.