ElringKlinger AG (ZIL2) Earnings Call Transcript

Yes. Ladies and gentlemen, hello and good afternoon, and thanks for being available on such a short notice today. I would now like to give you a summary of today's ad hoc release also explaining the rationale behind the announced transaction and its financial implications. I will comment on the revised outlook for fiscal year 2024 as well was published today along with the release. As you have already seen, we published an ad hoc this morning, let me briefly summarize the release. Today, we have signed an agreement on the divestment of 2 ElringKlinger subsidiaries in Buford, Georgia, in the United States and Sevelen in Switzerland. Closing is expected for Q4 of this year. The acquirer is Certina Group, a German industrial holding company. And as a result of this transaction, impairments in the mid- to high double-digit million euro range will be booked in the third quarter of 2024 relating to reclassification on the balance sheet according to IFRS 5. Additionally, with today's release, the fiscal year 2024 guidance was revised. I'll comment on the new guidance at the end of this presentation as well. Let me elaborate the strategic rationale behind the transaction. On Slide 3, you see the light vehicle production forecast by S&P Global Mobility until the year 2030. While the demand for all electric vehicles was subdued over the last months and expect that global light vehicle production showed itself sluggish in 2024 so far. The overall trend to electrification is intact. S&P Global Mobility expects this share of all electric and fuel cell vehicles to rise from around 15% this year to 42% by 2030. At the same time, the share of hybrid and pure ICE vehicles taken together will decrease from 85% to around 58%. This ongoing industry transformation requires significant investments to remain competitive, especially in heat shield business and particularly in Europe and North America. However, these CapEx would be lacking in other business areas of the ElringKlinger Group. Therefore, we assess the ElringKlinger product portfolio thoroughly. Based on market expectations, we continue to conduct lower reviews of all our product groups to determine their potential for the future. That includes a comprehensive and integrated strategy for our sites worldwide. As part of SHAPE30, our mission is to shape and focus the ElringKlinger Group along the 5 success factors. The transaction announced today is ultimately part of our SHAPE30 strategy and to be more precise part of our success factor #1, product transformation. And with our transformation strategy, we aim to achieve a better profitability level in the group, particularly in the OE segment. This will contribute to meeting our midterm targets that we have lined up. You may remember this slide from previous presentations. In the OE business, we expect cash flow from the ICE business to decrease over time, while e-mobility cash flows are expected to rise with the book business ramping up. As a reminder, over the past 3 years, we have received nominations for known ICE applications of more than EUR 4 billion. We see limitations to an increase of enterprise value, however, measures are taken in such noncore areas. As you all know, several steps have already been realized like the termination of production at one of the German sites and the discontinuation of business activities in the area of engine testing services. Now the divestment of 2 group entities, which was signed today, continued this way of group transformation. These 2 plants mainly produce shielding products for thermal and acoustic management in vehicles. the revenues generated by the 2 plants amounted to around EUR 175 million in the fiscal year 2023. At year-end '23, around 650 employees work there, and this will be deconsolidated by the day of closing, which is expected to take place even in 2024. As a result of this transaction, a reclassification according to IFRS 5 leaves the noncash impairment in the mid- to high double-digit million euro range, and it is recognized in the third quarter of 2024. As usual, at this time of the year, any interim figures are preliminary and unaudited. Finally, I will briefly elaborate on the revised guidance for fiscal year 2024. The Management Board has conducted a review of the fiscal year 2024 guidance. The group is now expecting in organic terms. The revenue level slightly below prior year when the group generated EUR 1.85 million. Previously, the group expected a slight organic growth. In the light of the known cash impairment ROCE is now expected significantly below prior year's level, which stood at 5.6%. Previously, the group expected around 6%. With regard to operating free cash flow, the group forecast a slightly positive figure previously expected approximately 2% of group revenue. That said, I'm happy to take your questions.

Our first question comes from Christoph Laskawi with Deutsche Bank.

I have a couple of questions, please. The first one would be on the transaction itself. So you highlight it will be margin accretive in the midterm. Could you comment on the current earnings of the factories on the EUR 175 million of revenues in '23? And then is there any indication on the potential cash in for the disposal to come in Q4 and the size of that? And just on the review of assets overall, should we expect more to come in the near term? So is this just one of a couple of transactions to follow? Or is this basically it for the year? And then lastly, just on the market environment. You took down the organic growth guidance. Could you just comment on which regions or which product groups negatively impacted currently? And do you expect that to persist into next year? Or is it more Q3, Q4 issue for now?

Yes. Thank you for your questions. If I answer your question #1, transaction earnings. If we look at the financial parameters of those 2 group companies, it's approximately 10% of group sales, is approximately 10% of group balance sheet and it is not 20% -- excuse me, 20% of the group's balance sheet and -- it is in a negative way, it is 20% of what we had in EBIT in 2023. Yes. So it's with a negative on the 20% figure on the EBIT of 2023. In terms of the potential cash in, I would expect in a positive case that it could reach a low double-digit figure in terms of cash in. And the next question you asked was, is there more to come in the near term? Well, we have initiated some time ago already Langenzenn as well and an engineering services company and will continue by looking, of course, in particular to reach our framework financial targets, mainly ROCE, but also EBIT margins. And the way we look here as we look at the markets, we look at the product groups and we look at the footprint of the ElringKlinger Group. And there, I can say 2025 will be a very active transformation year for ElringKlinger, yes. And I think that answers your question here. In terms of market environment, I have to say in a general sense, of course, we are heading into a weaker market, into a weaker second half of 2024. That's the case. On the other side, in the group here, we have some good growth in the aftermarket, and we have also in the battery business where volumes start picking up in terms of projects that were delayed in the past. And then also what we expect we expect a deconsolidation of the sales group earlier than December this year. So that has -- and this is really the key for our assessment here if there is a sales and EBIT portion missing for 1 or 2 months, then that has an impact on the group performance here.

Our next question comes from Marc-René Tonn from Warburg Research.

First one would be, you said expect midterm a positive effect from the deconsolidation while already saying that last year, if I got you correctly, you said a 20% negative impact on the EBIT figure, which is stated from that business. Is it due to, let's say, some indirect costs, which you let's say have to carry with you now in 2025 going forward? So from sales costs and admin costs, which will still play a role here? Is that a fair assessment? Or could we even see, let's say, a positive impact already in next year?

Yes. My expectation would be that there is a positive impact for 2025 coming out of that transaction. But in terms of when you say offloading of overhead into the group, it is part of it. But I think it is overcompensating the positive in terms of there's losses going out of the group that is outweighing the other factor, in my opinion.

Is there any tax effect we should be aware of from the, let's say, deconsolidation burden you will have? Is there anything which will be capitalized? Or would it be, let's say, gross like the net figure being pretty much the same on the disposal of?

Well, things when you take a look at the deferred tax positions in the tax rates that we had in the past quarters going back a couple of years. Then part of those high tax rates in the group were stemming from loss-making companies in the group, yes. So that has a tax impact. And in my opinion, the impact would be that the tax rate of the group is heading more to a normalized tax rate that you would expect. In terms of -- maybe as an addition to that, as a special tax impact, I do not see a big one based on this.

Perfect. And from, let's say, the free cash flow guidance, the adjustment, any potential cash inflow from the disposal would be, let's say, on top of operating free cash flow? Do I understand that right?

So that, if there is a positive inflow, that is something -- that's a very technical question, to be honest. I cannot answer that as of yet.

Our next question comes from Michael Raab, Kepler.

Mike Raab, Kepler Cheuvreux here. Can I perhaps get back to the revised guidance of this year as a starting point, just to make sure I really get this right? The revision of the guidance was exclusively owed to the transaction, correct?

Yes.

Okay. So there is no change in the prospect of the underlying operations, okay.

What I'm saying -- excuse me. What I'm seeing is that we have a mix. We have, in fact, a weak market overall, but we have some positive development as well in the aftermarket segment and also in the E-Mobility area. So there is a general and a specific point here.

Okay. So let's say, on balance, and please correct me if -- I take it wrong as well. On balance, the underlying operational situation in the industries you cover does not trigger a change in the outlook, correct?

In the mix, it doesn't.