Dürr Aktiengesellschaft (DUE) Earnings Call Transcript

Welcome to the Dürr Conference Call. Ralf Dieter, CEO; and Dietmar Heinrich, CFO of Dürr AG, will present the Dürr Group's figures for the first 9 months of 2020, followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG. Please go ahead.

Yes. Thank you, Lisa, and ladies and gentlemen, good afternoon, or good morning to those of you in the U.S. Welcome, everybody, to our Q3 earnings call. With me today for the first time is our new CFO, Dietmar Heinrich, who joined Dürr on 1st of August. He also took over responsibility for the division Measuring and Process Systems from me as of beginning of this October. Just to complete here the picture, there will be 3 members on the Board of management of Dürr from January 2021 onwards. And I will take on responsibility for Woodworking Machinery and Systems, in addition to my role as CEO. And Jochen Weyrauch, the Deputy CEO, continues to be responsible for the division's Paint and Final Assembly Systems, Application Technology and Clean Technology Systems. Also on the call today is Andreas Schaller from Investor Relations. We start with our slides on Page #3. And as always, our earnings presentation is available on our Investor Relations Internet pages, and I assume that you have it in front of you. And today, I will start with an overview of our results in the third quarter and the first 9 months. Then, I will comment on the performance of our divisions. And after that, I will hand over to Dietmar, who will cover the financials. And at the end, I will present to you our outlook for 2020, including a breakdown by division. Let's start with the highlights on Slide 3 (sic) [Slide 4]. After the downturn in the second quarter, we have seen a strong operational improvement in the third quarter. Order intake increased as the growing project pipeline started to translate into orders. Among others, Dürr could gain a large project from a premium automotive OEM in Germany. And as a consequence, the book-to-bill ratio recovered to 1.01 in the third quarter, and the order backlog only declined slightly compared with the second quarter to EUR 2.45 billion. Sales revenues recovered moderately in the third quarter as industrial production picked up after the lockdown in the second quarter. EBIT improved significantly in the third quarter compared with the second quarter, driven by a higher service share, cost reduction measures and solid project execution. Free cash flow in the third quarter remained strong. And we continue to manage our net working capital and CapEx in a disciplined way and customer payments were again very stable. And our total liquidity reached a new record level of EUR 960 million. We further strengthened our already strong funding situation with a placement of EUR 150 million convertible bond. Meanwhile, we already used part of the money to acquire the Danish solid wood processing system specialist, System TM. And we'll walk about that -- we'll talk about that in a minute. In light of the strong performance in the third quarter, we confirm our guidance for 2020. This, however, assumes that we will not enter into a complete lockdown again, because that would impact revenue generation until the end of the year. Now let's have a look at the overview of the key financial indicators for the first 9 months on Slide 5. Order intake declined by 19%, which is an improvement compared to the first half year as order momentum has resumed. Sales revenues for the first 9 months came in 15% below prior year. And on a quarterly basis, sales revenues in the third quarter were almost back to the level of the first quarter. EBIT before extraordinary effects improved significantly in the third quarter to almost EUR 40 million, even though it still declined in the first 9 months by 63%. The improvement in operating cash flow was due to a major positive swing in net working capital. Slide #6 is a new one in our presentation, and you will find some more in the financial section. Dietmar contributed some new ideas to the presentation, and we hope that you find this new format helpful. The slide shows, on the left side, the development of order intake by quarter since the beginning of last year. And you can clearly see the downturn in the second quarter 2020 and the recovery in the third quarter. In addition, you find the development of the book-to-bill ratio that has recovered to above 1 in the third quarter. And now let's have a look at the regional split of order intake on the next slide. The order intake in China is still strong and above prior year for the first 9 months. In addition, we now see order momentum also building in other regions. We are discussing projects in different regions of the world and could secure a large project from a premium automotive OEM in Germany, and this project is in Germany. And as a result, order intake in Germany grew strongly and is now 21% above the level of the first 9 months of last year. Now let's have a look at the status of our measures to safeguard our future on Slide 8. We made quite some progress in the third quarter. At HOMAG, we reached an agreement to completely close production at the Hemmoor plant by the end of 2020. We also agreed on the headcount reduction at the main site of Measuring and Process Systems at Darmstadt. This will affect about 70 employees. The negotiations with employee representatives and unions in Germany regarding the capacity reduction at Paint and Final Assembly Systems and Application Technology are expected to be finalized in the fourth quarter. This includes decisions on the future of sites such as of Ochtrup and Wolfsburg, and the reduction of headcount in Püttlingen and Bietigheim-Bissingen. Outside of Germany, we also made progress and negotiated capacity adjustments in Spain in the automotive business. All in all, the number of employees has been reduced by 312 since beginning of the year, and we booked EUR 10 million restructuring charges in the third quarter. In total, this sums up to EUR 19 million for the first 9 months. And to summarize, our optimization and capacity reduction measures are on track. On Slide 9, we give you an overview of restructuring charges booked and expected as well as information regarding the realized and planned cost reduction. In the first 9 months, we realized EUR 5 million in cost savings and expect a similar amount for the fourth quarter. Most of the restructuring charges are expected to become in the fourth quarter with about EUR 38 million to EUR 48 million. And for 2021, we plan to lower the breakeven point by EUR 60 million, as announced already in July. Adjusting the cost base is important, but at the same time, we continue to strive for profitable growth through acquisitions. On Slide 10, you'll find some information about our most recent acquisition of the Danish company, System TM. It was founded in 1977 and generated sales of around EUR 30 million with 130 employees last year. System TM is a specialist in systems for solid wood processing and strengthens our position as a system partner for sustainable construction using wood. We believe this is an interesting growth market as wooden elements are expected to play a more and more important role in construction, considering the increase in commitment to reduce the carbon footprint. The acquisition was closed at the end of October. And now let's have a closer look at the divisional development. We start with Paint and Final Assembly Systems on Slide 12. Order intake in the third quarter increased by 9% year-on-year, driven, among others, by the already mentioned large order from a premium automotive OEM in Germany. While sales revenues in the third quarter declined by about 24% year-on-year, we recorded a relatively strong EBIT. This was driven by several factors, including cost savings, a catch-up of service business and solid project execution. We recorded about EUR 1.4 million restructuring charges in the third quarter and expect the major part to come, as already mentioned, in the fourth quarter. Let's turn to Application Technology on Slide 13. Here, we also see a recovery of order intake, sales revenues and EBIT in the third quarter after the downturn in the second quarter. Order intake in the third quarter reached a level above the first quarter, and we recorded, among others, a large order from a Chinese EV manufacturer. The service business started to recover as automotive suppliers had resumed production in June. This clearly drove sales revenues and EBIT margin. We recorded restructuring charges of EUR 1.2 million in the third quarter and, similar to PFS, the major part will come in the fourth quarter. Next is Clean Technology Systems on Slide 14. This business continues to be very resilient. Despite the corona pandemic, we recorded increasing sales revenues and EBIT in the third quarter and the first 9 months of 2020. EBIT margin in the third quarter even reached a new record level since the Megtec/Universal acquisition. After 2 strong quarters, order intake in the third quarter was a bit slower, but we do not see this as a trend reversal and expect continued solid demand for environmental and battery systems going forward. All in all, we are very happy with the development in this division. Moving on to Measuring and Process Systems on Slide 15. This division is not only impacted by the pandemic, but it is the only unit in the group facing some negative consequences from the transformation towards EV cars. However, we saw an improvement on low levels in the third quarter. Demand shows signs of recovery as the business in Asia and China returns. Management was very fast to agree on the necessary capacity reduction measures in Germany. And consequently, we recorded EUR 3.9 million restructuring charges in the third quarter. The EBIT margin on the third quarter improved compared with the first half of 2020, driven by already implemented cost reduction measures and the recovery of the service business. Finally, let's look at Woodworking Machinery and Systems on Slide 16. Overall, the impact of the corona pandemic is less pronounced than in the automotive business. Order intake of the third quarter increased by 41% compared with the second quarter. And there are signs of revival also of the large volume system business. Sales revenues of the third quarter benefited from increasing service business and the reopening of our customer plants after the lockdown. And in the fourth quarter, however, we expect sales revenues and EBIT to be impacted by the weakness of order intake in the second quarter. And the optimization measures at HOMAG are on track, but they will take their time. A quick look at the service business we can have on Slide 17. The diagram on the left shows the recovery of the service sales in the third quarter in absolute terms and as a percentage of group sales. service margins are on last year's levels. Clearly, the catch-up of the service business had a positive impact on EBIT margins in the third quarter. So now I hand over to Dietmar for the financials.

Thank you, Ralf. Good morning or good afternoon also from my side. Let's have a look at the financials. On Slide 19, you find an overview of the key financial indicators. We recorded a strong earnings recovery quarter-on-quarter and a solid free cash flow. Now let's have a closer look at these development on the following slides. On Slide 20, actually, we cover sales revenues. Third quarter sales revenues increased by about 6% quarter-on-quarter, but declined by about 18% compared to a strong base in the third quarter of last year. All divisions contributed to the sequential improvement, and Clean Technology Systems even posted an increase year-on-year, as Ralf already highlighted. From a geographic perspective, solid project execution in the Americas and Asia played an important role in sales revenue generation in the first 9 months, while the contribution from Europe, including Germany, declined. Let's move on to EBIT on Slide 21. EBIT recovered strongly in the third quarter compared with the second quarter. The diagram on the right side shows a bridge for EBIT from the third quarter 2019 to the third quarter 2020. Remarkable is actually that more than half of the gross profit decline could be compensated by savings in overhead costs, especially in SG&A. And on the other side, investment into strategic R&D projects, like digitalization, were not impacted. Excluding extraordinary effects, EBIT declined by 38%, and thus much less compared with a 58% decline when including extraordinary effects. The increase in extraordinary effects reflect the additional restructuring measures taken this year, as they have been explained by Ralf in one of the earlier charts. Now let's have a look at the free cash flow on Slide 22. Compared with 2019, free cash flow development in 2020 has been much less volatile and positive for the first 9 months at a level of more than EUR 100 million. The diagram on the right side explains the development of free cash flow for the third quarter 2020 compared with the third quarter of last year. The decline in earnings before tax was actually overcompensated by a better development of net working capital and lower CapEx spending. The decline in earnings before tax reflects also an increase in provisions, adjusted in others, due to the uncertain environment in the COVID-19 pandemic. In addition, lower tax prepayments due to a weaker earnings outlook contributed to the free cash flow improvement. On Page 23, the development of net working capital plays an important role for cash flow. Let's have a take -- let's take a closer look actually on this slide. Net working capital in 2020 has been relatively stable and at a lower level than in 2019. Customer payment continued to be solid despite the pandemic and contract liabilities remain above prior year's level. The days net working capital remain in our target range between 40 and 50 days. As a consequence of the solid cash flow development, our net financial status has improved quarter-on-quarter, as you can see on Slide 24 on the left, reached actually a new record level of total liquidity of EUR 960 million and maintained a low gearing. Our net financial status includes leasing liabilities of about EUR 96 million. All in all, this results in a comfortable liquidity headroom, as shown on Slide 25. Upcoming maturities of about EUR 450 million in 2021 are well covered by available funds of about EUR 1.8 billion, including cash and cash equivalents, money market deposits and available cash credit facilities. The overview on this slide does not include the recently issued EUR 150 million convertible bond that matures in 2026 and that we will explain or that I will explain in some more detail on the next slide. And this is on Page 26. In the box on the right side, you can find some details regarding the convertible bond issuance. And I would like to explain some of the rationales that have been behind issuing a convertible bond. First of all, we wanted to increase our financial flexibility, considering interesting M&A opportunities and in light of the upcoming maturities in 2021. We want to continue to invest in profitable growth, also during the pandemic, while remaining on a solid funding base. With the convertible bond, we diversify our financing instrument and leverage the increased share price volatility of the past month to reach a relatively low coupon. We believe that the profit growth potential that we plan to unlock with further investments will render this financing instrument attractive for both equity and fixed income investors. And with that, Ralf, I would like to hand back to you.

Yes. Thank you, Dietmar. First, let's have a quick look at market developments before we come to the outlook. And on Slide 28, you see a recent update of the project development of the light vehicle production until '27. Compared with the projection of July, the downturn in 2020 is less pronounced at 74 million compared million units previously. The projection for 2027 has increased slightly. However, it will still take us until '22 before we return to the levels of 2019. Looking at the furniture market on Slide 29. The picture is similar. And after the downturn in 2020, a solid recovery of market volume by 8% is expected next year, reaching a level close to the peak of the last investment cycle at around EUR 4.1 billion is projected now for 2023. The first signs of start of a new investment cycle are becoming visible. Now let's look at the Dürr Group's outlook for 2020 on Slide 30. We confirm the outlook given in July. However, this clearly assumes that we will not see a major lockdown affecting production and project execution at our customers until the end of the year. And on the next slide, we provide, as promised, a breakdown now of the divisions. The breakdown by division covers order intake, sales revenues and EBIT margin before and after extraordinary effects. Now what do the numbers tell us? We are expecting a further improvement in order intake in the fourth quarter. And sales revenues in the fourth quarter should further increase, especially in PFS, APT and MPS as we realize more equipment sales. For Woodworking Machinery and Systems, however, we expect the weak order intake of the second quarter to result in lower sales revenues and EBIT in the fourth quarter. We expect fourth quarter EBIT and EBIT margin before extraordinary effects to reach a level of somewhat below the third quarter despite higher sales. And the reasons for that are, first, the expected EBIT declined at the WMS division. A lower share of service business compared with total sales as a growth is mainly driven by equipment sales. And third, temporary margin pressure coming from projects gained during the time of low order intake levels at the beginning of the year. With respect to cash flow and net financial status, we are clearly ahead of the target after the first 9 months. However, as uncertainties remain high and net working capital development can be very volatile, we are cautious and stay with the guidance given in July. In conclusion, let's summarize on Slide 33. We have seen strong operational performance in the third quarter as well as a solid development of cash flows. Our total liquidity is at record level, and we continue to strengthen our portfolio with the acquisition of System TM. And we confirm our guidance and remain positive for the future despite the current second wave of the pandemic. Recovery will come, it will just take a little bit of time. Thank you very much so far for your attention. And now we are very happy to answer your questions, and I hand over to Lisa.

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

And my first question would be on your acquisition of System TM and the growth ambition you have in solid wood processing with [indiscernible] revenue target as a separate segment and so on. What does it take for you to reach, for example, this revenue target? Will you deploy more capital there? You have issued convertible, does it mean that you see more M&A opportunities in this area? And is it ultimately your goal to be also the market leader in this segment? I think there are few strong incumbent competitors. Do you strive to be #1? Or is it just a segment where you want to be a strong #2, strong #3?

Thank you, Mr. Schachel, for your question. First of all, System TM is linked to our WEINMANN business we have already in HOMAG, which is about a EUR 40 million to EUR 50 million, plus this EUR 30 million to EUR 40 million. So in total, it's about EUR 60 million to EUR 70 million we have today in that field, and we want to grow that, not far in the future, to a EUR 100 million business. There are also maybe further acquisition opportunities of smaller companies around that, but that's not at the moment on the plan. It has to develop over the time. Whether we won't become #1 in the market, that's always our goal. But I think we are in a very good position in this business. Just to remind you, and not to remind you, but we talked last year about. Last year, we got a large order of EUR 30 million in America for providing a full range of production equipment for solid wood construction elements, where we also linked partners in to provide a customer the full process chain. Our part of that was about EUR 10 million, the rest we bought from other companies and integrated it. So I think we have a strong foothold in that industry. And we are very optimistic about the future of this.

Okay, very clear. And just on...

And by the way, we don't need to invest. We need to invest in some salespeople because we have some markets where we can be stronger and that we'll be doing in the next step.

Okay. Very clear. On your cash flow, I mean cash flow has been quite impressive throughout this year. And I think that comes after, I think, several years where cash flow was not so great. How would you interpret the recent improvement of payment terms? Or is it just coincidentally, we saw some better payment patterns that you're seeing right now, a structural change in your clients' willingness to prepay, the new CFO or it's just temporary changes and next year is back to normal?

Mr. Schachel, my quick answer would have been because of the new CFO (I didn't thought of it before). But I think...

Yes, right. The main reason -- there are many reasons. I think, first of all, we could manage with our customers. And that was a bigger concern of you guys in the first -- after the first quarter, whether the customers will try to delay payments or reduce down payments. And I think our teams around the world managed very well to remind our customers of contractual obligations. And that was a very strong sales talk we did, and I think the customers all paid. Some of them paid already earlier than expected. So that was a good one. And the other one has to do with the lower revenue, which is also setting some cash free out of net working capital.

And I think your -- were your guidance implies negative cash flow in Q4? Is it just because you don't want to fine tune your cash flow guidance because of the volatility on quarterly basis, anything we should read into this as in that you really expect a weaker Q4 in terms of cash flow?

That's a difficult one. This I give to Dietmar.

Let's be on the cautious side in that regard. But with the expected ramp-up that we see now in fourth quarter in regard to sales, we will have higher receivables. And of course, we don't want to give up what we want to achieve already. But let's be cautious and stay with the guidance for today.

Our next question is from Philippe Lorrain, Berenberg.

Yes, Philippe Lorrain from Berenberg. I just wanted to touch again a bit on your implied guidance for Q4 and the fact that you were rightfully saying in the call already, in the preparatory remarks, that you are anticipating a weaker Q4 EBIT margin. It seems like really it's more the case for APT, MPS and HOMAG. So HOMAG, I get that you are mentioning that you're going to be working on orders that -- on the weaker order intake that you got in Q2. Is the rest of the explanation really just that you're anticipating the service business to be weaker than usual in Q4? Or are there like any other reasons that you are perhaps not mentioning before and that are worth highlighting?

Yes. I think it's not that we expect a weaker service business, but we expect a lower share of service business and a higher share of the equipment business, which is, by nature, less profitable as a service business. And so it's a mix problem, nothing else. And the problem you already described, that because of the HOMAG business is why it has relatively short lead times, and the second quarter low order intake will hit us on the floor in the fourth quarter and some parts of the first quarter maybe.

Okay, understood. Also, can you update us a little bit on the longer-term CapEx ratio target? This year, you're guiding basically for about like 2.4% of sales, and that includes, I think, the right-of-use assets. Last year, that was 2.6% of sales. So what would be the right ratio going forward? And also if you could guide us a little bit on D&A.

The CapEx ratio then directly coming from the investment in the factory would be in a range of 1% to 2% from a long-term view.

So that would be just the tangible, if I understand that correctly?

Again, please?

That would be only the tangible assets?

Yes, right.

Our next question is from Daniel Gleim, MainFirst.

The first one would be for Mr. Dieter. I appreciate the slides you provided from the external parties on the end market trends. I would be interested in what you, from the deal perspective, are seeing at the moment. So if you could talk a little bit about the large order development on the automotive side. What are you seeing currently in the fourth quarter? Has there been any impact from COVID-19? Have you become more or less confident on further large orders in this fiscal? This the first part. And secondly, if you could comment on where we stand on HOMAG, both on the order and sales current trading at the end of October, so we get a better understanding whether this second quarter softer order intake indeed has material repercussions for the current sales momentum at HOMAG. That's the first question.

Okay. Thank you. I mean, first of all, our pipeline for larger projects in Paint and Final Assembly and also that in conjunction with APT, we still have some projects ahead of us for the fourth quarter. And as I always said, if we get them all, it would be fantastic, then it will be very good. If we lose them all, then it's not good. We are working on it. We have some good opportunities. So I think that the pipeline here is still there. And that's also in China and it's in Europe. The major concern we have is for America, larger projects, we don't see. But we have midsized projects, we have to get them. So I think the pipeline supports what we want to achieve in the business. On the HOMAG side, I always try to point out that we have 2 business or 3 business areas, 1 is service, but the other 1 is the standard single machine business and then we have the system project business. And we said already that in '19 -- in 2019, the system business was much down compared to 2018 and '17. And we said this will maybe recover end of '20 and '21. Here, we see the trend that is -- that the system business is picking up. We already just yesterday booked a nice system order in HOMAG. And we see that the activity on negotiating and finalizing or discussing larger system projects in HOMAG have very good activity level. So next year, I think there are a lot of opportunities in that field. So I think that, that will stabilize. And the sales development in the fourth quarter is just a temporary effect out of the second quarter, but not a continuous effect. It will be increasing again in the next year.

Very clear. The second question is for Mr. Heinrich. We had one slide showing a step-up in provisions year-over-year. Could you give us a little bit of guidance how that sequentially has impacted the EBIT line for Dürr, i.e., this increase in provisions, how negative was the impact on EBIT versus the second quarter of this year so I better understand what the sequential impact, the dilutive impact could be?

Yes. First of all, the second quarter was significantly influenced by the lower shop load. So we actually had issues in regard of this cost impact on profitability. In regard to what you mentioned and what we showed on Page 22 is that actually we increased provisions due to uncertain environment with the COVID-19 situation. As you can imagine, in the current situation, traveling to the sites, the safety measures on site are getting more difficult, requiring more effort. So we posted certain provisions then in that regard to make sure that actually we anticipate this risk properly.

So maybe phrasing the question differently. How much higher would the EBIT have been if we didn't have a second wave in COVID-19, i.e., without this increase of the provisions versus the normal level? I understand there was always a provision built up irrespective of whether we have a pandemic or not, but what was the increase specifically for COVID-19 in the third quarter?

Yes, it would not have led to an overshooting of the profit level in the third quarter, but it would have been a decent impact of around EUR 10 million.

And do you expect this impact to repeat in the fourth quarter? Or is this more of a one-off in nature for the fiscal?

From today's point of view, we do not expect this to repeat. It was a one-off that we have reflected actually in the project calculations.

Our next question is from Christian Cohrs, Warburg Research.

Just 1 question left for me. If I'm not mistaken, during summer, there had been no summer break holidays or summer breaks in the automotive industry and in the sites. And accordingly, the projects with regards to modification refurbishment were quite down. I think this is a high-margin business for you. Do you expect some catch-up effect? And do you think that this type of business will actually be very strong in the upcoming Christmas season?

You have a good memory, Christian. But some of the plants had a summer shutdown anyway. The asset business is more profitable than equipment business, but also what we see is a lot of competition around those revamped shops, as we call them, because of the loading of the whole market. But anyway, the pipeline for the winter shutdown has increased compared to summer shutdown and -- so there's more. But a catch-up, we don't -- we will not see. We will just delay things and do it next year or end of the year next year.

The next question is from Ingo Schachel, Commerzbank.

Yes. And just a quick follow-up question on the question around the Q4 implied profitability and your expectation of slightly lower earnings. I think Q3, your overhead expenses were quite low. Even selling expenses went down nicely despite good order intake. In your expectation of a weaker Q4, I mean you spoke a lot about utilization, gross margins. How should we think about overhead costs? Do you think a lot of those costs will come back as activity normalizes? Or can they stay as disciplined as they were in the third quarter?