Dürr Aktiengesellschaft (DUE) Earnings Call Transcript

Welcome to the conference call of Dürr AG. I will now hand over to Mr. Dieter, CEO of Dürr AG.

Yes. Thank you, Ms. Moore, ladies and gentlemen, good afternoon or good morning to those of you in the U.S., and welcome, everybody. With me on the call today for the first time is Mr. Andreas Schaller, the successor of Mr. Dielmann, and our new Head of Corporate Communications and Investor Relations.

Thank you very much. Happy to be here.

We are a good week earlier with our earnings calls than originally planned. And this has 2 reasons. First of all, we are resuming our guidance as announced already last time for the current year, with new targets; and secondly, this guidance includes a new efficiency program focusing on the automotive business in Germany and Europe. The first half report will be published as originally planned on the 6th of August, but without an additional conference call. But if you have any questions regarding the half-year report, Andreas and his team is happy to give you the answers to the questions you have. Today, we start -- begin with our key messages, followed by an overview of the first half results, some financial details and comments on our division's performance. Let's first look at the big picture on Slide #3. The COVID-19 pandemic had an impact on order intake and profit and loss was largely as expected. We should have reached the trough in Q2 and have seen increasing incoming orders since June. Despite the COVID-19 impact, we achieved a strong cash generation driven by continued solid customer payments, and as a result, we reached a new record level of total liquidity. Now that this business seems to have stabilized, we feel more comfortable resuming our guidance and have set new targets for the full year. While reviewing the expected business development over the next months and quarters, we came to the conclusion that demand development in the automotive sector in Europe will continue to be subdued in the near to midterm as markets are saturated better. As a result, we decided to take additional improvement measures in Europe, mainly affecting the division's PFS, APT and MPS. We discussed these measures with the Supervisory Board yesterday. And then we give you the details of -- at the end of my presentation before we talk about the outlook. Now let's have a look at the overview on Slide 4. Order intake declined by 23% in the first half, which is a bit better than expected as we benefited from a strong order momentum from EV manufacturers in China. Incoming orders in China overall were more than 60% above prior year's level, resulting in a high utilization of our capacities. The order backlog declined by EUR 264 million since year-end '19, to EUR 2.5 billion, which is still the high level. Sales revenues in the first half came in at 14% below prior year, and revenue recognition in Europe was weak, whereas we experienced strong sales realization in America and Asia. Despite the impact of COVID-19 on sales revenues, EBIT remained positive for the first half. EBIT before extraordinary effects declined by 78% to EUR 23.7 million in light of lower sales and less high-margin service business. And despite the negative impact of the pandemic on sales and EBIT, we recorded a strong cash flow and a positive free cash flow in the first half of this year. The net financial status came in at minus EUR 121 million after paying the dividend in Q2, which is only EUR 22 million below the leverage at year-end 2019. As a result of the decent cash flow, our funding situation is very solid, and our total liquidity, including time deficits, reached a new record level of EUR 904 million, together with available cash credit lines, which sums up to a total available funds of EUR 1.75 billion. In light of the expected development of the automotive business in Europe, we have initiated additional measures for capacity adjustments and efficiency improvement in Germany and the rest of Europe. The measures will focus on the divisions PFS, APT and MPS, and we expect additional runoff to EUR 35 million to EUR 45 million in the second half of 2020. In combination with other efficiency measures we have already started, mainly at HOMAG, we expect the lowering of the cost base by about EUR 60 million from 2021 onwards. The one-off for the efficiency measures in the U.K. in auto business are also reflected in the new targets we set ourselves as we resume our guidance. Let's turn to Slide 5, and have a look at our results. Now as mentioned, incoming orders and sales declined in the first half by 23% and 14%, respectively. EBIT before extraordinary effects declined by 78%. The improvement in operating cash flow was due to a major positive swing in net working capital. On Slide 6, you can see that the order intake reached almost EUR 1.5 billion in the first half, and the decline compared with the prior year was largely driven by the automotive business. Regionally, China continues to be strong, with incoming order growth in automotive, in technology systems and also in HOMAG. Especially, orders from Chinese EV manufacturers increased and delayed up more than 40% of the incoming orders for automotive in the first half. Order intake should have reached the bottom in Q2, as you can see on Slide #7. The momentum has clearly improved soon, and we expect the second half of the year to be better than the first half. Page 8 sets out our earnings performance, and as expected, it was hit strongly by the lower sales and the decrease of our spare part business, in particular, in the automotive business due to low capacity utilization and plant shutdowns. On top runnings were burdened by difficulties in customized sales and by valuation allowances of EUR 5 million under IFRS 9, both due to COVID-19. We have taken various measures to cut costs, including the reduction of overtime, short-term growth and selective capacity reduction. In addition, we are able to lower all live costs by 8%. All in all, however, this was not sufficient to make up for the loss of sales. Our reported EBIT of EUR 6.6 million included extraordinary expenses of EUR 17 million compared to last year's EUR 12 million. Around EUR 8 million was spent on efficiency measures. We would find a detailed overview on Page 30, 31, and 32 of the send out in the Appendix. Now let's move on to Page #9. Net financial status at the end of June was at minus EUR 121 million. This is, as I said already, EUR 22 million lower than at the beginning of the year, and EUR 56 million lower compared to the end of March. Considering the impact of COVID-19 on earnings and the dividend payment of EUR 56 million in Q2, I think this is a very good development. And as you can see from the chart, net working capital improvement by EUR 86 million was an important driver for the strong cash flow development. And by comparison, in the first half of 2019, net work capital deteriorated by EUR 162 million. This long swing is also reflected in the operating cash flow and free cash flow development. In the first half 2020, we achieved a positive free cash flow of EUR 44 million after a negative EUR 181 million in the first half last year. Let's take a closer look at net working capital on Slide 10. All in all, net work capital management improved strongly compared with last year. While contract assets declined compared with year-end 2019, contract liabilities remained at a relatively high level due to solid customer payments. We continue to work on orders and delivery improvement towards the end of Q2, with customers reopening the production. And for the second half of 2020, we expect net working capital to increase again due to the recovery of the order intake, but we will manage this very tightly. On Slide 11, you can see work in process in comparison to billings. The balance is very favorable at minus EUR 79 million. In other words, the net payment overhang of our customers has increased to levels that is better than what we consider to be the normal of between minus EUR 50 million to plus EUR 50 million. Just a quick look at ForEx rating on Slide 12, and with a volume of EUR 7 million, I think this is not meaningful. Let's move to Slide 13, and have a look at some key financial items. Equity declined to EUR 956 million since the beginning of the year, mainly due to dividend payment and negative foreign exchange rate effects. At the same time, cash increased by EUR 82 million to EUR 744 million. Our total liquidity that cash and timed deposits reached a new all-time high of EUR 904 million. Together with the cash reliability of EUR 850 million, we arrive at total funds available of EUR 1.75 billion. This compares with EUR 450 million of maturities in the next 12 months. Consisting of, first, a corporate bond for EUR 300 million issued in 2014. Second, a tranche of EUR 32 million of the Schuldschein loan issued in 2016. And third, a financial loan of EUR 100 million. On Slide 14, you can also see that these upcoming maturities are well covered with cash and free credit lines, and that our liquidity headroom is very comfortable. The midterm maturity profile is well balanced and leaves enough flexibility for further financing instruments. Let's move on to our division overview, starting with Page 15. Please remember that prior year's numbers were adjusted at the Automotive Filling and Automotive Testing systems business was transferred from Measuring and Process Systems to Paint and Final Assembly Systems division as of January 1 this year. Order intake in Paint and Final Assembly Systems dropped by 28.5% to EUR 400 million in the first half. The decline was partly due to timing effects as Q1 '19 included an extraordinary large venture [ order ] in North America, while in Q1 '20, the large venture project was postponed to come in later this year. Income in Q2 were comparable to the level of the prior year. However, the regional dynamics were quite different. While Europe and North America were clearly impacted by COVID-19, we saw a strong order momentum from China, including some large projects from local TV manufacturers. TVLT in the first half and in the second quarter was positive despite a sales decline of 16% and 17%, respectively. This is a result of our cost reduction efforts, and the positive effect from the FOCUS 2.0 optimization program. Overall, the project pipeline in the automotive industry is starting to increase again. Turning to Slide 16. In the Application Technology division, order intake declined significantly in the first half and in the second quarter by 37% and 47%, respectively. After a weak April, orders improved in the subsequent 2 months. This recovery should continue in the second half as the project pipeline improves in the automotive industry, as already mentioned. Sales declined by 19.5% in the first half, and EBIT was impacted by the disproportionately decline of the high-margin service business due to underutilization and temporary shutdown of paint house. And EBIT includes EUR 1 million up to EUR 3 million, mainly due to the shutdown of the loss-making Karlstein site. Clean Technology Systems continue to perform well despite COVID-19. And as you can see on Page 17, order intake improved by 3.8% in the first half, driven by strong demand from pharma, chemicals and battery manufacturing. The project pipeline is well filled with a book-to-bill ratio of 1.2. And sales revenues in the first half were 1.2% below prior year, but improved in the same quarter, and should further accelerate in the rest of the year. And the operating EBIT was impacted by corona-related various claims in order execution, but remained fairly positive. And reported EBIT includes PPA effects and one-offs for the closing of the Goldkronach production site, totaling EUR 5.2 million. On Slide 18, you can see that the order intake of measuring process systems declined significantly in the second quarter. This was due to weak demand from the automotive and aviation industries and from power plants. Orders of high-margin standard machines in the automotive declined specifically. And prospects for the second half should be better as the project pipeline in China and Asia has been improving recently. Sales revenues declined by 14.3% in the first half, and EBIT was driven by low sales, underutilization, a weak service business and an already addressed margin weakness in the special machinery business. Let us now look at Woodworking Machinery and Systems on Page 19. Business with the furniture industry was less impacted by COVID-19 compared with the automotive business. Nevertheless, order intake declined by 16.5% in the first half. Demand in the system business declined more strongly compared to the larger and more stable single machine business. In China, order intake increased by 13%. We expect the market recovery in China to continue and are improving our market position with the acquisition of HOMAG China Golden Field. Closing of the transaction is expected for the second half. And the optimization at HOMAG is on track with a focus on harmonizing IT infrastructure and processes, and the implementation of the new production system and the subindication and modularization of products. Thereby, we align the foundations for strong EBIT improvements over the next year with a target margin for HOMAG of 9% in 2023. Slide 20 shows the development of our service business in the first half. Service revenues declined by 16% and reached EUR 441 million, contributing 27% of goods sales. The service business, including Technology and Woodworking Machinery, remained relatively strong with only a single-digit percentage decline, in contrast to the Application Technology and Measuring Process Systems with strong declines. The sales margin was only down slightly. Service sales should improve in the second half as automotive production increases again. Now we come to the additional efficiency and improvement measures that I mentioned at the beginning. We came to the conclusion that demand development in the automotive sector in Europe will be subdued in the near to midterm. Markets are saturated, and we expect only a limited number of new automotive plants to come. Together with the ongoing upgrade in service business, this is not enough to fully utilize our current capacity. And as a result, we decided to take additional improvement measures in Europe, focusing on the divisions PFS, APT and MPS. We plan to reduce capacities in Germany and Western Europe, which will affect about 600 employees. This comes on top to 200 trucks we already cut at HOMAG, APT and CTS in the current year. And details of the additional measures will be discussed in the following weeks, and we expect to book additional restructuring charges of EUR 35 million to EUR 45 million in the second half 2020. As a result of the measures, we target a lowering of the breakeven point by EUR 30 million in 2021. As we have several efficiency improvement measures going on at the moment, we have created an overview on Slide 22. Here, you can see that the charges we have taken -- are expecting to take per year in the lower part of the chart and the cost savings in the upper part of the chart. In Q4 '19, we announced efficiency and production improvement measures at HOMAG, and we booked restructuring charges of EUR 37 million. These measures are expected to yield savings of EUR 20 million in 2021 onwards. Early in 2020, we announced further measures, including closures of sites of APT and CTS in Karlstein and Goldkronach, yielding savings of EUR 10 million from 2021 onwards. And the charges for this together with further one-offs for smaller restructuring measures amount to EUR 22 million in '20. In [ total cost ], the new efficiency measures in Europe [ about on the pay is ] flat. All in all, this sums up to the restructuring charges of between EUR 57 million and EUR 67 million in 2020, and to savings of around EUR 60 million in '21 on that. We see the effect the amount of roughly EUR 80 million realized at the specialty effect level of between EUR 75 million and EUR 85 million this year. We believe that this is an important step to strengthen our profitability in a sustainable way and reach our midterm goal of 8% EBIT margin. After talking about costs, let's have a quick look at the market developments before we come to the outlook. On Slide 23, you can see the projected development of light vehicle productions in 2027. The expectation is that we will return on a growth path after the coronavirus. However, it will take us until '23 before reaching the earnings of last year. As the business has stabilized, we are resuming our guidance and present new targets for 2020 that you can find on Slide 24. We expect order intake of EUR 3.1 billion to EUR 3.4 billion; this reflects a recovery in the second half. Sales revenues should reach a level of EUR 3.2 billion to EUR 3.4 billion. It is our clear goal to report a positive EBIT margin for the full year. Before extraordinary effects, we target an EBIT margin of 2.5% to 2.8%. And operating cash flow for the full year is expected at between EUR 78 million and EUR 120 million. This implies a weaker development in the second half due to an expected increase in net working capital as order intake recovers. But we will manage this very carefully, but we are finally -- but we will finally will end up -- and where we will end up depends also a lot on the business dynamic at year-end. We have cut the capital expenditure target to EUR 75 million to EUR 85 million. As a result, free cash flow should come in around breakeven. And the financial status at year-end is expected at between minus EUR 180 million and minus EUR 230 million due to the buildup of net working capital. In summary, let me point out that we are financially well positioned to safely weather the COVID-19 crisis and its effects. And with the measures started since last year and announced today, we have laid the foundation to accelerate margin improvement and to come out of the crisis stronger than we entered it. With our innovative and resource-efficient product portfolio, the increasing number of projects in the e-mobility sector and the huge potential at HOMAG, we are very optimistic about the future. Thank you very much for your attention so far. Now I'm very happy to answer any questions. And I hand back to Ms. Moore.

[Operator Instructions] And the first question is from Ingo Schachel, Commerzbank.

My first question would be on the very good order intake you had with the Chinese electric vehicle OEMs in the second quarter. Can you tell us a bit more which -- with which products you commercially successful? And I was thinking about specifically the different scopes, such as more final assembly or certain innovations that were particularly decisive factor in the favor of doing key tenders. Or any [ fares ] we should keep in mind with regards to product mix in this part of your revenues for order intake?

These orders remain the paintshop orders, and there was no, let's say, that the technology there, the innovations is what we have today, and those are driven by our digital products. But mainly because in China, those EV companies, we want to produce high-quality painted cars. And the choice for them is limited, since [ IBM ] is out of the game. And we are -- we have such a strong brand and image in China that we are the first choice of that. And I can really say that we got very, very high percentage of the projects which were in the market.

Okay. That's fair. And then maybe on your restructuring program -- or efficiency program, of course, this year, it's probably quite necessary to do something like that, let the other companies in the capital goods sector move from one restructuring program to the next one, and it's almost every year. Whereas I think Dürr in the past has always been regarded as a company that always also finds growth opportunities and then is able to offset some of the market pressure with finding interesting internal growth opportunities, digitalization and so on. I was just wondering how we should think about this efficiency effort. Do you think it's a, let's say, onetime effort? And you have to rightsize certain capacities one time? And then in the years after that, there's going to be a pocket of growth in the otherwise partly cyclical sector? Or do you think it's also an indication of maybe changing the mindset a bit, becoming a bit more cost-conscious, defensive and then less growth-hungry than in the past?

I think you know me since many years and that you know that I'm not defensive; obviously, I'm optimistic. No. What we -- first of all, we also don't like these measures, but they are necessarily definitely. And what we are doing now is write off through, and that's it. We are not planning to have a next program in 6 or 9 months, if the world is materially changing, yes? And what we are doing now, particularly in the paintshop business, and that's mainly effective changes benefits us more in measure. We knew that -- and we already saw that we have invested too much capacity. Before COVID, we said, "Okay, this demand work could maybe we lose over time, and if we have time to really make this reduction year-over-year without big efforts." But what we have to do now is the same that we anticipated already, but now in a short time, we have to cut it to 3 years as we have originally -- we are anticipating to make more smooth. So basically, it's not only driven by COVID. It's more mostly also driven from a structural point of view. And just to make it also clear, if coronavirus would have happened 3, 4 or 5 years ago, it would be a much bigger problem for us, because the German teams were much involved in the project in the world and the painting business. Hundreds of Germans were in China to help in project. Today, our Chinese organization has become so big and so [ special ] and so skilled that they can do this more or less alone. And we have to get fees from Germany were limited. And if then, we also have a lot of digital facilities now where we can help them without traveling. And I think that's the change. So it's basically the result of the move of the business to globalize into Asia and America. That's it. But we are not anticipating any further program if the world is not changing totally.

The next question is from William Turner, Goldman Sachs.

I have 2 questions. The first one, keeping on -- sticking on the [ parasite ] restructuring theme, your comments on Europe and being skeptical on the growth outlook over the medium-term for Europe, can you just go into a bit more detail on why you changed that view? Because when you look at the Europe order intake and compare it to the Americas or Asia, excluding China, Europe outperformed those markets. And then also -- kind of also Europe, some rumors that I've heard, and I haven't been confirmed, in fact, the Tesla Berlin factory, which I was under the assumption that you were supplying the paintshop to, has gone to one of your competitors. Can you please comment on that, too, if possible?

To the last one, normally, we don't comment on specific orders. But in the Berlin project from Tesla, we are delivering the paint robots, yes? And the same process has been awarded to a competitor, and that's fine because that's -- it's not fine, but it's what -- how competition goes. But the business in America, we told we have an [ engine ] new paintshop also, a new paintshop in discussion in America, as you know, in the same company. We are very keen to get that. The midterm interest -- I mean in Europe, as you know, let's say, additional capacity needed. But for sure, also in the next year, the paintshop's getting old, and there will be foundry projects. But we -- that couldn't agree on that, and we basically have calculated this business out of brownfield and [indiscernible] shops will be not sufficient to keep the [ people or building ] we have onboard, and therefore, we took that measure.

Okay. Sure. Great. And my other question is on the gross margin, the contraction you saw in this half, it's even larger than what you had in the financial crisis and then sales declined by a much greater amount than what's experienced in this half. So I was wondering if you could go into a bit more detail on the moving parts there. Does that have anything to do with the pricing of the backlog that you're currently executing? Or is it more due to the loss of services? And is any kind of -- is any element of that temporary and you'd expect to recover quite quickly in 2021?

Look, just to talk out about the venture business and with the margins and the new orders are good because we have improved our cost positions. So from the margin point of view, we are better particularly than the financial guidance over the last year has been our competitor made in same pricing. The main effect on our EBIT is from the service business, which is particularly the EBIT are highly profitable. And this will come back, that's for sure. We saw already recovered in June. And because the only part last year which is really, let's say, linked to production volume of the OMS is the spare business of APT and in some part of PS business as much. And then the same side of that. And lately, particularly a lot of their parts, which have to be placed very regularly. And then the plants are shut down or going from 3 shifts to 1 shift, the decline in service revenue is very linear to that. And this is now coming up again. And so we see that as an input. That's a temporary effect.

The next question is from [ Nicolai Kent ], Deutsche Bank.

[ Nicolai Kent ] here, Deutsche Bank. You mentioned that the China momentum was pretty positive throughout Q2. Would you expect it to continue in H2? And also next year, how sustained do you think is?

Thanks for this question. The pipeline in China is still very good also for the second half. And -- a lot of it, but also not only with EVs, but also the existing areas, these proxy projects because all those pensions go over there. For China, we have -- whether it's next year, this is not foreseeable yet, but I can only do this pipeline from today for the next -- the pipeline is wanting a lot of discussions about projects that really comes into orders is if you can look at in 6 months, let's say, a few, and I would say that in China, we still have some good opportunities. But we also have opportunities elsewhere out in the U.S. and even Northern Europe, there are some opportunities that will be awarded this year; we know that in the second half. So I'm a little bit optimistic. Farther out '21, that's too early to say.