Rieter Holding AG (RIEN) Earnings Call Transcript

Ladies and gentlemen, welcome to the Semi-Annual Report Media and Analyst Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Norbert Klapper, CEO. Please go ahead, sir.

Thank you very much. Good morning, everybody. It's a pleasure to talk to you about the half year results 2020, although they are not good, which is not a surprise to you. We have announced that already in late May. I will start with the key messages on Page 2. As I said, we already published in late May that our business has been severely impacted by the COVID-19 virus. And as a result, we booked in the first half year an order intake of CHF 250.7 million. We booked sales of CHF 254.9 million and an EBIT, due to the low volume, of minus CHF 55 million. Before restructuring charges, the EBIT was at a level of minus CHF 46.9 million. Obviously, we implemented a COVID crisis management when the crisis emerged. And our restructuring that we -- restructuring actions that we announced in January are going according to plan. We expect a better second half of the year, and I will come to the reasons for this assessment. At the same time, we continue to implement our strategy because we are convinced that this strategy will still be the right one after the COVID-19 crisis. And I have to announce a change in the group Executive Committee. So now I move on, on Page 3, which gives you some more details on the numbers, comparison between '19 and '20. I would like to focus here on the reasons of the numbers -- reason for the numbers. The low order intake, yes, there was -- as a result of the COVID-19 outbreak, there was a deferral of investments in scheduled deliveries by customers. And what is even more harmful to the retail business is when the mills stop production, and this is what happened in March. There was a sharp decline in demand for wear and tear parts, which we supply out of our Components business group; and for spare parts, which is what we supply out of our After Sales business group. And both were suffering as well as the Machines & Systems colleagues from the crisis. And we see that in the order intake and also in the sales number. The reason is always the same. It is in the Machines & Systems business, the investment sentiment, which was basically 0 when the outbreak happened after the outbreak and the postponement of deliveries. And for the Components business and the aftersales business, it was the fact that the mills had stopped production at a great extent. EBITDA, EBIT before restructuring charges and net profit are a result of the low sales volume. I would like to mention here that we have been able to reduce our SG&A cost line by CHF 10 million compared to the first half year 2019, but this was by far not enough to compensate for the low volume. When we come to the free cash flow line, you see that our free cash flow was at CHF 95 million -- minus CHF 95 million. CHF 55 million out of this went into inventories that we will need for our shipments in the second half of the year. And the net liquidity line needs also some explanations in December. We had -- late in December 31, we had liquid funds of CHF 285 million and a debt of CHF 122 million, which led us to a net liquidity of CHF 163 million. You might remember this number. Now half year later, our liquid funds are at a nice level of CHF 253 million, still a little lower than in December but still high. But we have debt now of CHF 217 million because we drew term loans in March to make sure that we can pay back the bond that we have out there in September. That is why we did that, and this is how liquid funds of CHF 253 million and the debt of CHF 217 million come together to a net liquidity of CHF 36 million. When you look at these numbers, you see that liquidity will not be a problem for retail, even if the crisis takes a lot longer than we expect. On Page #4, you see the order intake by business group, and I already talked about that. It is always the same story behind that, the postponement of shipments, the low investments and on the other hand, the mills, which have been stopped. On this slide, I'd like to highlight the third bullet point on the right side of the slide, the order backlog. The order backlog is still at a level of CHF 490 million, and that is one of the reasons why we are convinced that our second half of the year will be better than the first half of the year. In June 2019, for comparison, we were at a level of CHF 295 million. So we are in a much better position this year. I come to Page 5 now. Page 5, sales by business groups. Same story again. I don't want to repeat it. You see how much our 2 business groups, Components and After Sales, suffered from the market situation. And as I said already, the reason is that so many mills had stopped production because of the low fiber demand, which was a result of the lockdowns. On Page 6, you see the sales development by region. There is 2 regions that stand out here. This is India, where the decline of sales was very high, 73 million -- percent, sorry, 73%. And the reason is that the lockdown in the country basically stopped people from shopping. And we had a different situation in Turkey. In Turkey, we had an improvement compared to 2019. We have to say that in 2019, we were at a very low level in Turkey. And there is -- there was an upswing in the first half of the year, and this is associated with the innovations that we presented in Barcelona. We have additional sales here that we generated due to the fact that we presented the new machines 1 year ago. All right. So that was the overview, the market and sales and order intake. And now I'd like to hand over to Kurt, who will walk you through Page 7 and the following pages.

Thank you, Norbert. Welcome, and good morning from my side. I start on Page 7, with EBIT before restructuring charges. The first half year 2020 ended with a loss on the EBIT before restructuring level of CHF 47 million compared to last year's loss of CHF 1.6 million. With CHF 48 million, the lower gross margin was the biggest contributor to this deviation. The volume effect on the gross margin accounted for CHF 44 million out of this CHF 48 million. The divisional mix shift to more machines and systems with a below-average margin added another negative CHF 11 million. Overall, Rieter saw a reduction of the gross margin of 1.9 percentage points from 27% to 25.1%. The other income expenses before restructuring were CHF 6 million lower than last year. This is mainly due to the higher income in 2019 from the sale of real estate in Germany and India as well as the reduced income from export incentive schemes, which are volume-based. The cost-cutting measures already mentioned by Norbert and implemented in the half year -- in the first half year contributed, among other things, to a reduction of SG&A expenses of around CHF 10 million. On innovation, however, Rieter did not compromise. Consequently, R&D expenses did not decrease, actually, even increased slightly despite the market situation. Rieter intends to forge ahead with this strategy in the coming months with a view to strengthening its market position for the time of this COVID-19 pandemic. I'm going to Slide 8. The COVID-19 pandemic led to a market situation where demand for the goods and the services of all 3 business groups decreased significantly. This exceptional market situation gave rise to losses in all 3 business groups. The business group, Machines & Systems, is affected by the deferral of investments and deliveries by customers and posted sales of only CHF 120 million, a drop of CHF 100 million compared to the previous year's comparable period. Combined with the ongoing innovation program, Machines & Systems recorded at the EBIT level before restructuring a loss of CHF 40 million. At the same time, the demand for wear, tear and spare parts declined sharply due to the suspension of production in many spinning mills around the world. This is reflected in the low sales of the business group's Components and After Sales and as a consequence, in an EBIT loss for both business groups. I'm on Slide 9 now. Rieter has implemented comprehensive crisis management. Priority is being given to protecting employees fulfilling customer commitments and ensuring liquidity. The necessary measures to protect employees have been implemented worldwide, and the order backlog is being processed largely as planned. The liquid funds to repay the bond due in September 2020 are on Rieter's balance sheet already. In January 2020, Rieter reported on structural changes in Switzerland, Germany, the Czech Republic and the Netherlands. This restructuring program is being implemented as planned. In addition, Rieter has introduced 40% short-time working in Switzerland and Germany for the third quarter of 2020. Similar measures will be implemented worldwide within the scope of the available legal options. The decision regarding [ better ] to apply for an extension of short-time working for the fourth quarter of 2020 will be made in September. Now a few words on the balance sheet on Slide 10. Rieter's balance sheet is solid. Liquid funds are above CHF 250 million. The repayment of the CHF 100 million bond in September was prepared in due time, and the funds are included in the just-mentioned CHF 250 million. Hence, the current financial debt increased accordingly. Depending on the situation in the financial markets, Rieter may consider issuing a bond at a certain point in time but is not under pressure to do so. Rieter expects a strong second half of 2020 in terms of sales based on the order backlog of around CHF 490 million. The increase in net working capital of CHF 47 million is in line with the plan to fulfill these customer commitments in the coming months. The equity ratio dropped by almost 10 percentage points to 38%. Besides the effective lower shareholders' equity, this is also due to the increase of liquid funds and financial debt for the repayment of the bond mentioned before. The balance sheet was stretched for some CHF 100 million. Without this effect, the equity ratio would remain above 42%. With this, I pass the word on to Norbert. Thanks very much for listening.

Thank you, Kurt. We are on Page 11 now, continued implementation of the strategy. You are aware that in the recent years, we have pursued the strategy based on the cornerstones of innovation leadership, strengthening the Components and spare parts business and adjusting the cost structures as needed. We have reviewed the strategy in the light of COVID-19. We were convinced before that the strategy is the right one, and we are convinced that the strategy will be the right one for the time after the pandemic. So we move on. In June 2020, we have received the building permit for the project Rieter CAMPUS. Depending on the market situation, construction work will begin in the first half year of next year. CAMPUS, just to remind us of it, comprises a new Customer and Technology Center as well as an administration building on 30,000 square meters at the current site in Winterthur, and this project is the key element of our innovation strategy. I'm moving on now to Page 12, where we see the rationale for our expectations for the second half of the year. We expect a stronger second half of the year due to 3 reasons. Number one, we have an order backlog of around CHF 490 million. Some of it goes into 2022 -- to '21, sorry. But not all of it will be booked this year as sales, but there is a high proportion which we expect to turn into sales. We have an improved cost base. You saw what we have done so far and what we are doing in addition now in Q3. And what is very important is we see signs of market recovery. Let me explain that. What does that mean? We monitor capacity utilization at more than 600 spinning mills around the world. And at the beginning of April 2020, the proportion of mills that -- which were in production was around 40%. So 60% of the mills were idle. By the end of June this year, the proportion of mills, which were in production, had improved to 80%. So only 20% were idle. And this improvement tells us that the market is picking up again, and this is why we are confident that the second half of the year has a good chance of being better than the first half of the year. However, the level of uncertainty and the low visibility remains at a high level of uncertainty and the low level of visibility remain to be there. So we don't give an outlook for the full year. And there is one more thing I would like to share with you. We have a change in the group Executive Committee. It is a change that is going to happen 1 year from today because that is the agreement that we have. Mr. Liske, who is the Head of the Business Group's Machines & Systems and a member of the Group Executive Committee since 2015, has decided to leave Rieter. He will pursue a career opportunity in a different industry. And the Board of Directors wishes to express its gratitude to Mr. Liske in advance for his many years of valuable service and his major contributions to the further development of Rieter. We will announce details about his succession when time has come. Thank you very much for your attention, and we are open for questions now.

[Operator Instructions] The first question comes from [ Ardent Nobler ] from ZKB.

No, I don't have questions.

We take the next question from Christian Arnold from MainFirst.

I have a question on the outlook, which is rather unspecified. But nevertheless, maybe we can talk a little bit on that. I mean you are based on the backlog and on the signals you get that we have some improvements. So talking about the backlog, I mean, here, we have the large Egyptian order, right, this CHF 210 million. And I believe like 2/3 about will be only due in '21. So I wonder, is this backlog enough to have a second half being breakeven, assuming that -- what we have seen so far in June, so that we have the same magnitude of activities in the spinning mills? Would that be enough to, yes, have a breakeven result in H2? And the second question I have is the development of the different business units. And so with this 80% activities, is it a fair assumption that, let's say, the Components and the After Sales businesses should be clearly in black figures? And yes, that will be my questions for the moment.

Well, you know that the breakeven of the company is around CHF 800 million sales. I guess we can say it has improved due to the changes that we made on the cost structure. But let's say, this is the ballpark figure. So for the second half of the year, to be breakeven, we would need sales of around CHF 400 million, right? And the backlog and the signals from the market tell us that this is doable. We don't know whether it's going to happen. There is a lot of uncertainties here, postponement of shipments, which we saw in the first half of the year. If that happens again due to a second wave, we will have -- we might not see that number, yes? So that is why we don't give an outlook. The level of uncertainty is too high. But from what we see today, a sales level of CHF 400 million is not out of reach. And of course, you need a good Components and After Sales business to -- or a decent After Sales and Components business to get a breakeven result out of the CHF 400 million, yes, because in the business group mix, the margins of the Components and the After Sales business is higher than the margins of the Machines & Systems business. So it has to work. In a couple of ways, the absolute figure has to be in the right dimension and the business group mix as well. Again, level of uncertainty, very high. This is why we don't give an outlook.

And maybe just to add on the order backlog, you rightfully mentioned the Egyptian order. And the total is CHF 210 million, but in the order backlog, there is only CHF 165 million of this.

Next question comes from [ Dominic Velke ] from [ NZZ ].

Well, I'd like to ask you about the mills. You've mentioned, I think, that only 20% are now still idle. However, how about utilization there? What's the anecdotal, maybe evidence or -- you have? I mean, how busy are these mills? And second question, maybe just, I mean...

So shall I give you an answer to the first question?

Sure. Yes, please.

In early April, according to our observations, the capacity utilizations of the mills that we monitored was around 30% on average.

30%.

30%. By the end of June, our assessment was that we are getting closer to 60%. But this is not the normal. The normal is around 80%. So we've come quite a way, up from 30% to 60%, yes, but we are not at the pre-crisis level yet when it comes to that utilization.

All right. And the second question would be really, what makes you so confident that you can really just maintain your strategy and that things won't be fundamentally different after the COVID crisis?

We did not see a change in demand patterns based on the crisis. We did not see a big regional shift in terms of capacities. There might be some, but we don't think it will be going very fast. And that is why we think the strategy is still the right one and will be the right one when the pandemic is over.

So the question will be maybe just so textiles or basically will still be made in the same places or it's not that we will have some shift maybe back to Europe or to the U.S. or so then to like -- is being mentioned in other markets, just to -- this national -- renationalization theme or that's not happening in the new industry or...

Yes. The nearshoring, there might be some nearshoring in spinning. I have to make a differentiation here. In textile, there might be a significant amount of nearshoring when it comes to garmenting production. We already see ads in the newspapers of companies who promote their garmenting operations in Portugal, for example. But that doesn't mean that the yarn is being produced in a spinning mill in Portugal as well. So this is why I'm making a difference here. The nearshoring in the spinning business might also happen to a certain extent, but I guess it will not be as significant as we might see in the garmenting.

And last question. Why is that? I mean, why is the garment production coming back to a place like Portugal?

Because the supply chain for the textile chains for the trading -- for the companies, the big brands, yes, is a lot shorter, it's a lot more flexible and they can push their short-term demands very quickly to a factory, which is very close. They react very fast, and the transportation doesn't take too long. We see the same thing happening in the Balkan countries. Garmenting operations are getting started there. And the reason is that the supply chain and the reaction time between the European consumers and what they like and what they don't like, and the garmenting operation is a lot shorter than compared to an Asian-based supply chain.

The next question comes from Armin Rechberger from ZKB.

Well, you say, for second half, a sales of CHF 400 million is not out of reach. So to put the upper end of possibilities, if you have to name a tag on sales capacity for a half year, what would be the number you would tag on this?

I mean you know our sales numbers, yes, and you know our half year numbers for a very long time. You know what we can do if we have to, yes, and if the business is there in half a year. But I mean I can't give you a number here for the second half of this year. The level of uncertainty is just too high.

Yes. I mean regarding your capacity, not -- I mean you restructured a lot, and so I wonder what's your actual capacity now.

The capacity will not be the bottleneck.

But what -- if you have to put a number on your capacity?

I mean, it depends too much on the mix. That's -- if I told you a number now, it wouldn't make -- I mean it would just be true for a certain mix of machines, mix of businesses, mix of countries. It will not help you.

Okay. Then about the equity ratio, what do you expect end of 2020?

I turn to Kurt now.

As I mentioned, the equity ratio was lower because of the CHF 100 million we have on the balance sheet. And of course, if you repay the bonds, then it will shorten the balance sheet and it will immediately jump up. And of course, then it also depends on how the business develops in the second half.

So it should...

[indiscernible]. And we saw quite an increase in net working capital in the first half, which was planned because of the higher volume in the second half. And of course, also depending, of course, how the business will be then in the first half of next year. There will be a reduction of net working capital, maybe, but at least not as strong increase as we have seen in the first half. But once again, this was planned.

Okay. And question regarding the mills. You said you observed them, and 80% of the mills are running. But when I understood the former answer correctly, then of these 80% of the mills, they are only used by 60% now. Is that correct?

Yes, that's correct.

The next question comes from [ Andreas Meyer ] from [ Finance Investment ].

Do you hear me?

Yes, we do.

Can you say maybe something about your development in the markets, how developed your position in the market, your market share? Did it change during this COVID crisis? And what do you expect for the next quarters in this development?

What I can say is that our hit rate, our successful quotations, which were turned into orders, has improved after the trade show in Barcelona. We will also see that in shipments at a certain point in time. However, the market is very low now, yes. So it's nice to enjoy a better market share. But if the total market is so low as in the moment, that doesn't help you too much. So no reason to celebrate, but moving in the right direction, let me put it this way.

The next question comes from Rolf Renders from Helvea.

One understanding about the CAMPUS, which you mentioned, to plan to go ahead, market depending. What should I understand about that?