Rieter Holding AG (RIEN) Earnings Call Transcript
January 24, 2024
Earnings Call Speaker Segments
Ladies and gentlemen, welcome to the Media and Analyst Conference Call and live webcast. I am Sasha, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, it is my pleasure to hand over to Thomas Oetterli, CEO. Please go ahead.
Thank you, and good morning, ladies and gentlemen. Also a warm welcome from my side. First, let me briefly address the environment we are facing. The geopolitical challenges, inflation, high interest rates impacted textile demand in the financial year 2023. The entire textile value chain struggled with rising costs and weak demand. The economic uncertainties were particularly noticeable in the demand for new machines, but also for consumables, wear and tear and spare parts, resulting in a low order intake for Rieter. The market remains challenging, but we are confident that our performance program Next Level will help us to mitigate the negative impact of the geopolitical tensions. I'm proud about the performance the Rieter team has achieved in this challenging environment. It is all about excellence in execution, delivering on our commitments with tangible action plans and proper follow-up. Let's start with the key messages on Slide #2. Sales were at around CHF 1.42 billion for the financial year 2023 and therefore, slightly below last year. Nevertheless, this is a solid performance in a challenging market environment. Order intake in the financial year 2023 was around CHF 540 million. There are several reasons why the order intake was low. Let me mention 3 of them. First, the financing costs for our customers have increased and made investment cases less attractive in 2023. In addition, the time needed to conclude a proper financing has increased in the last couple of months. Second, textile consumption was lower worldwide while inventory levels were on a relatively high level at the beginning of 2023. This also had a negative impact on investment sentiment, which was a result of the previously explained low market sentiment in the textile industry. Third, capacity utilization of our customer spinning mills was on a continuously low level, which weighted on demand for spare parts and major replacement investments for new machinery less urgent. Consequently, our order backlog is at around CHF 650 million as of December 31, 2023, but still extends well into the year 2024. We expect a positive EBIT margin of around 7% for the full year 2023. This includes the nonrecurring profit from the sale of the land in Winterthur and the restructuring costs for the performance program, Next Level. But it also shows that we did the right thing with our performance program Next Level and achieved a more competitive cost position in the last months. Let's continue with the sales by business group on Slide #3. Sales in the business group Machines & Systems were impacted by some shifts of delivery into 2024. The business group Components recorded negative sales growth as a result of the low demand for consumables, wear and tear and spare parts. In the business group After Sales, we were able to achieve a 9% growth year-on-year. High negative foreign currency effects due to the sharp appreciation of the Swiss francs impacted sales across the entire group. And now to Slide #4, sales by region. The growth rate in China clearly showed positive investment sentiment of our customers in the local market in an effort to stay competitive. Overall, there was a negative currency effect on sales, particularly in China and India of 9 and 6 percentage points. In these countries, growth would be much higher without these effects. The deliveries to the cotton and textiles holding company in Egypt positively impacted the sales level of the region Africa and we are facing a delay of projects in Turkey due to the impact of the earthquake in February of 2023. On Slide #5, we show the order intake by business group. Order intake dropped by 53% and show the continuation of the low level of the first 9 months in 2023. The slowdown in order intake did not come as a surprise. We have already reported in 2023 that our customers are more cautious due to high inflation and interest rates. The major drop is seen in Machines & Systems. So major projects have been agreed with our customers in quarter 4 2023, but could not be booked at year-end as the financing was not yet finalized and therefore, will only be concluded in the first half 2024. Also in the business groups Components and After Sales, order intake was impacted by lower contribution as many customers are not operating at full capacity because of the subdued consumer demand. Consequently, our customers are requiring fewer consumables, wear and tear as well as spare parts. Our internal evaluation underlines the statement. We have seen that capacity utilization of spinning mills in the financial year 2023 was slightly below 70%, whereas in a normal market environment, we would expect a utilization rate of more than 80%. Let's move to the topic order backlog on Slide #6. Our order backlog as of December 31, 2023, amounts to around CHF 650 million and still extends well into the year 2024. The backlog margins improved due to price increases and cost reductions. Order backlog by the end of 2023 accounts for more than half of a low scenario sales volume. Although we anticipate an upswing for the financial year 2024, we are still planning with a low scenario as indicated in the Q3 2023 investors update. Of course, an increase in sales or a good level in sales and the decline in order intake is not a scenario we are aiming for in the long term. Our focus now is on materializing the project commitments in the coming months. Some indicators give us confidence for the financial year 2024. Our cancellation rate in the reporting period was within the usual range of around 5%. And the number of projects addressed to us is increasing, which gives us assurance that the low point of the market should be behind us. It is a question of timing until final project decisions will turn into order intake and later sales. At the ITMA in Shanghai, which took place at the end of November 2023, I became aware that the confidence of our customers has increased compared to the global ITMA in Milan in June 2023. Also the profitability of our spinning mill customers in India has improved in the last 3 months and turned into positive profitability. Last but not least, we saw some first signs of higher mill utilization in the last couple of weeks with an increased need of wear and tear and spare parts. Now let me talk about the current market situation on Slide #7. Rieter was operating in a challenging market environment due to the economic and geopolitical conditions as well as continuing weak demand. There are signs -- initial signs of a market recovery visible for the financial year 2024. The outlook for 2024 financial year will be presented at the Annual Results Press Conference on March 13, 2024. With this short presentation and I'll close and Oliver Streuli and myself, we are now available for your questions.
[Operator Instructions] The first question from the phone is from Arnold Christian with Stifel.
Two questions from my side. You commented that you have agreed on major orders in Q4, but the financing was not completed and you will book these orders only in Q1. Can you quantify that? What amount of orders we are talking here about? And the second question would be on Egypt. Have you now booked all the sales of the big order project in Egypt already in '23? Or is there still some sales coming in H1 '24?
Thank you for the 2 questions. Maybe I first start with the shorter one, the second one, Egypt. So by the end of 2024, we were able to deliver 85% of the order. So still 15% are coming in 2024. And I can proudly report that the first spinning mill we have equipped now is in operation and I will visit the customer next month to see the progress of those installations. And your first question, major orders, which have shifted into the first half of 2024, without giving you an exact number, but you might remember that in the investors call in October, I was proudly saying that our quarter 4 will be higher than the quarter 3 and I gave you a range of around CHF 170 million to CHF 200 million. So now of course, we missed that point. And the difference is exactly the amount of the orders we are already -- we already have negotiated. Everything is clear. Everything is fixed. And we just wait that the financial institutes are now closing or enabling us to book the order. So you could say it's roughly in the magnitude of around CHF 100 million.
Okay. And the 15% from Egypt, which are still coming, can you just remind me we are talking about how much sales here?
This was almost CHF 200 million, roughly CHF 200 million.
The total one?
Yes. The total one was roughly CHF 200 million. So…
Okay…
As a good mathematic, I can say 15% amounts to CHF 30 million.
There is a question -- written question from the webcast from Walter Bamert with Zürcher Kantonalbank. If Rieter will achieve CHF 1 billion sales in 2024, what will that imply for the EBITDA margin, 0% or 4%?
Thank you for this question. As we have announced in the mid of the year in July when we were presenting our performance program Next Level, we said that our target EBIT range is depending on the volume. So now in a low scenario, which is around CHF 1 billion, we stay with the 0% to 4%. At the moment, it's too early to specify that more in detail. Of course, we are always shooting maybe towards the upper end of such a range. But there are so many unknown elements at the moment. We don't want to specify more in detail. But what we can say is that we clearly have the ambition to stay positive in our EBIT margin.
The next written question is from, again, Walter Bamert with Zurcher Kantonalbank. Quality of the order book, is it implied the margin in the book now better or worse than at mid-2023?
Happy to take this question. Good morning also from my side. We expect to have a slightly better margin in the backlog in 2023 on the back of operational improvements on the machinery side and also the price level which has been increased over the last 2 years.
The next question is from Foletti Alessandro with Octavian.
I wanted to ask about China. You mentioned that you saw good sales and that is for you an indication that your clients are investing. The news flow from China in general is not very, very constructive now with the government also trying to support even the stock market, et cetera. I have the impression that the consumer there is actually still under pressure. Do you have different indications that maybe the consumers will go back consuming and hence, the spin mills will have better business and then continue investing in China?
Thank you for this question. I'm quite positive about China and our Chinese customers. And there are 2 different, let's say, areas we are focusing. One area is the China for China production because our Chinese customers, they are working in China, but they also have in Southeast Asia certain spinning mills because they are now serving different markets. Within China, usually our Chinese customers are producing yarn for textile demand in China. And having lived several years in China, there is always this topic that, in fact, Chinese have quite a good consume attitude. Let's not forget, we have 1.4 billion people. And in my experience, in textile, the demand is not that bad. On top, for us, we have not been the strongest in this local market. I would say our market share is clearly below our average market share. We have announced in the past we are always aiming for roughly 30% in new Machines & Systems. And so even if the market would not grow too fast, we still have opportunities to grow because our new products, we have shown at the ITMA in Milan and especially also shown at the ITMA in Shanghai, where we invited all the customers to our facilities, there was a very, very good feedback. So I think we do have growth opportunities within China. And then, of course, I also see that the government is supporting the textile industry. This definitely helps because the Chinese spinning mills have to stay competitive compared to Southeast Asia as a lot has been invested in Southeast Asia in the last 2, 3 years. Now the Chinese spinning mills also have to invest to achieve higher productivity, a better yarn consumption, less energy cost, better quality. Otherwise, they become uncompetitive compared to Southeast Asian supplies. So we are benefiting at the moment from this that there is some competition within Chinese customers, whether they produce in China or in Southeast Asia. So I'm optimistic for the Chinese market.
Okay. And the ITMA Shanghai, was that positive? Did you manage to also book orders, et cetera? Or it was more testing and discussing about projects then?
Well, we -- usually, you do not book immediately at such an event the order. But within this amount I have announced before, this CHF 100 million, there was also one large order from China included, which should materialize now in the first half of 2024. Overall, I have to say I was very positively surprised about the mood and the atmosphere in China. And before the ITMA, we made the customer event for 2 days, so we invited all the major customers to our site, showed them all our products. We showed them our new air-jet machine, for example, running at 600 meter per second. We were showing our new ring spinning machine running at 26,000 turns per minute. And the feedback was overwhelming I have to say. So I think it was for us very, very positive.
Okay. Great. And I would like to ask sort of a similar question regarding Turkey because that was kind of a little bit weaker. So can you give an indication about the mood financing availability? And also if the Turkish lira, how that is impacting the business?
So first of all, Turkey has sadly suffered from the earthquake in February. And if you look on the map of Turkey, 70% of capacity was within the earthquake area. So this was of all the...
Of the whole Turkish industry?
Of the whole Turkish industry of the spinning mills, 70% of the capacity was within this earthquake area. So you can imagine what happened to the Turkish spinning mill industry. It was a total disaster. Nevertheless, I think Turkey and Turkish people have shown also in the past that they are very agile in handling such a catastrophe for downturn. So there was a lot of discussions. We were supporting our customers to go back into operation. But yes, it had a negative impact in all our business groups. So as some of the mills have been destroyed, there was no demand for spare parts because the spinning mill did not exist anymore. Now the Turkish government has launched a subsidy program to support the spinning mills for new mills, but also modernizing existing spinning mills, but this takes time. I'm sure that in 2024 this will have a positive impact. But on the other side, the export market of Turkey is mainly the European Union. Turkey is mainly supplying the European Union and the consumer sentiment in the European Union is still not as good as it should be. So deliveries were not that high. But I'm confident for 2024 now with the stimulus by the government, this should help us. Now the last topic about the Turkish lira, I mean, this was a rollercoaster in the last couple of years, but we are supplying the Turkish market in Swiss francs. So we are protected in that market from negative impacts, which could come up from the Turkish lira devaluation.
Right. On the other hand, your machines become more and more expensive for them. So I wonder if that's now with the government behind not an issue then?
This is true. This is true. As a consequence, this is true, but major competition is coming from the European Union and from Japan and then us, from Switzerland. So it's more about the fight we have against the euro because the euro also dropped. On the other side, in a long-term investment, if you think about such a customer, he or she will run our machines for 20 years. So to be technology leader, to have the best value proposition in terms of utilization, in terms of productivity, in terms of energy consumption is overcompensating a disadvantage you might have in the exchange rates.
The next question comes from the webcast. It's from Miro Zuzak with JMS Invest AG. Could you please comment on the cash flow in Q4?
I think this could be answered by Oliver.
Thank you very much for this question. Cash flow was strong in Q4, driven by 2 main elements. One was operational performance. As we also indicated, there's a reason for reaching the upper end of the guidance. And then the second element was a substantial improvement on the net working capital side. And more granularity we will be able to provide at the presentation of the annual results on the 13th of March.
But I think what we can add to this is that you can expect that our net debt position has substantially improved and the details we will show in 1.5 months.
[Operator Instructions] We have another question, a written question from the webcast from Walter Bamert with Zurcher KB. How big are the imminent orders expected to be financed soon?
I think this goes into the question we already had before. So you could expect that this missing amount in quarter 4 now will come in the first half year of 2024. So this should be around CHF 100 million.
There are no more questions at this time.
No. We do have a question from [ Mr. Vacelli ].
Right. We have a written question from [ Reto Vacelli ] with [ WP ]. Can you give an update on the Next Level program, in particular the job count?
Yes. Thank you for this question. As mentioned before, we announced the program Next Level, this performance program Next Level in our half year investors update. And we said we have, in fact, 4 different elements. One was sales excellence. So to push for a better mix to capture market opportunities, we talked before about China. And you have seen that in our order intake, China was the one which was really supporting us in the growth. We also mentioned that we want to push Net Promoter Score. So we have continued that journey and we are now in constant exchange to measure the satisfaction of our customers. And of course, improving our sales and components share, because at the end, our ambition is that we are much more balanced between new machines and systems and on the other side, more the after sales part of our business. So this, I think, is well on track. Competitive products, you have seen that Oliver mentioned that our backlog margin has improved. This is also because we started heavily to work on our cost position. Then effective supply management. We have told you that for the last 2.5 years, we were struggling to find enough parts for certain components. We had some delays. We had some uncomplete deliveries. I can confirm already now this is [ 20/30 ]. We don't have that anymore. There is no machine leaving our factory anymore with missing material. And then last but not least, the giant structures. So we announced that in the overhead function, we would like or we see a reduction of positions of about 300. And then in the more productive area of 400 to 600 positions, mainly in our manufacturing. And I can say that the program itself is well on track. By the end of quarter 1, 2024, all these structure adaptations will be finalized. And we will then be on the cost level we wanted to achieve in our manufacturing area, but also in our overhead area. And I think Oliver, in terms of restructuring costs, but also in terms of benefits we are expecting we should also be on track.
Yes, I can only confirm this. With regards to costs, we communicated earlier that we expect overall restructuring costs of around CHF 45 million to CHF 50 million. We plan there to land rather at the upper end of this cost guidance, but on track. And with regards to costs, we target to have cost savings after full implementation of around CHF 80 million per year and we are on track to deliver those once fully implemented.
We have another written question from Walter Bamert with ZKB. Any geographical granularity on the order intake?
Well, the -- let's say, the -- if you look on the different areas, you could say that except of 2 areas, we were seeing substantial drops in the order intake. The 2 exceptions are China. I think we talked about that. One element is market driven, but the other element is also that we believe we can further improve our market share there. And then maybe in a much smaller magnitude, it was also Africa, where we had the one or the other good order intake. All the other areas were dropping. So Asia, Southeast Asia, but also India, Turkey, the Americas, Europe, so all those areas were dropping except of China and Africa. If I now look ahead into 2024, and I try to summarize how we see that these markets are developing, the easiest thing is to say it goes from the east to the west. So as indicated before, we see some light in China coming up at the end of the tunnel. So we believe that now after the Chinese New Year, we will see that some of those orders we can now conclude. We are then expecting that India is coming back because I mentioned that before in my speech that the Indian spinners have now a better spinner's margin, which results into a positive net income in the bottom line. And so now they have much more confidence, but also funds available to do investments again. And we saw in the last couple of weeks that the mill utilization in India has increased. So this also shows us that they have found now more customer markets they can serve. In the rest of the world, with the exception of the one or the other, let's say like our project, we are negotiating already since months, we more see that the recovery probably goes into the second half of 2024. So you could say it grows from the east to the west. It starts Far East, mainly driven by China, maybe Vietnam, Indonesia, then it goes into India, Bangladesh, Pakistan is still a little bit shaky, and then it goes to Turkey, Europe and Americas in the second half of the year. That's how we see the market and our order intake opportunities. And I think that was it with the questions.
I confirm there are no more questions at this time.
Well, ladies and gentlemen, thank you very much for attending this call. Thanks from Oliver and my side. We wish you a good rest of the week and we look forward to see you and hear you again on our annual press conference in -- on March 13, 2024. Thank you and goodbye.
Thank you. Goodbye.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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