Semperit Aktiengesellschaft Holding (SEM) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome from Vienna to our results presentation for the third quarter and first 9 months of 2020. With me in the call today is our new CFO, Gabriele Schallegger, who will present the financials in a few minutes. Gabriele has started just over a month ago, and I'm very pleased to have her on Board of our executive management team. Before anything else, I would like to expressly point out that 2020 has been an absolutely outstanding year for Semperit in terms of earnings so far, even in view of the difficult circumstances that affect us all. Given recent market euphoria following the announcements about upcoming new corona vaccines, let me make our position absolutely clear. Firstly, we may have considerably benefited from the huge demand for examination and surgical gloves in the corona pandemic. But at the same time, the market should not lose its sight from our significant improvement of the industrial sector. In the next few minutes, I will provide hard evidence of the continued progress we have made in the industrial sector despite the headwinds of the corona induced global recession. Secondly, until the pandemic is properly contained by large-scale vaccination campaigns in all parts of the world, and we expect this to happen in 9 months at the earliest, the tremendous demand for our specialty gloves will continue for some time. This may have been somewhat underappreciated by the market so far. Starting with the highlights at Slide 3. We can now say with increasing confidence that the restructuring process has not only made a material impact on the performance of our industrial sector, but is also gathering pace. At the same time, in the context of the current global developments around the corona pandemic, there is no doubt that the market recovery will take longer. Similarly, our previous effort in enhancing operational efficiency at Sempermed came timely and precious to further leverage the positive impact from the sudden demand for our specialty gloves. As I said before, we are still riding on the wave of outstanding demand and exceptional market prices, which we expect to last well into 2021. Furthermore, and this is important for our new industrial strategy, the corona pandemic has, in many ways, helped to accelerate the transformation process. And at the same time, we were able to implement strict and additional cost measures. As to the headline numbers on the right, I think they speak for themselves and provide Gabriele with the best possible start as the new CFO. Top line revenue for the first 9 months of 2020 was up by 0.8% year-on-year to EUR 657.2 million. And more importantly, EBITDA almost doubled to EUR 118.5 million over the period. Even more significantly, adjusted EBIT tripled to EUR 92.6 million year-on-year, while reported EBIT even reached EUR 159.5 million. This was largely due to the reversal of the Sempermed impairment despite the Sempertrans impairment as we had announced at Q2 2020. Other key factors were further operational improvements in the industrial sector and of course, the price and demand situation in Sempermed, which I will talk about in a minute. Bottom line, and after a number of quarters of net losses, we are extremely pleased to be able to announce a positive net profit, both reported and operational as well as strong improvement in free cash flow generation. This, combined with strict cost control and CapEx containment, brought us in a comfortable liquidity position on the back of which we now plan to repay the hybrid capital within the next 6 months. As the corona pandemic has impacted our lives dramatically in recent months, let me take a small step back and update you first on how we have managed to navigate through the storm since we had last reported in August. First, when I took the helm at Semperit more than 3 years ago, I made it absolutely clear that the health and safety of our employees is crucial and on top of my CEO agenda. In this respect, the corona pandemic has been an extraordinary stress test so far, and I'm very pleased to report that we have been successful in containing the infection rates in the workplace and continuing production. While infection rates have increased in recent weeks, we have stepped up all our efforts to maintain the highest level of sanitation and have continued to enforce social distancing rules, including an increased working from home rate. Our particular efforts have been focused on the clusters around our production sites in Belchatow and Odry, but also in Kamunting in Malaysia, where we have restricted areas for social contacting. As to supply chains, both the industrial and medical sector faced bottlenecks, though for different reasons, leading to capacity constraints and price hikes. Notably, Sempermed, on the back of an overheated market, enjoyed extremely high demand for nitrile and natural latex, while at the same time, finished goods supply for exam gloves had to find alternative replacements. Also the industrial sector is now facing rising raw material price levels, but as Q2 prices saw quite a drop in the increase, it's still in an acceptable range. In addition, there are bottlenecks for container availability in certain regional clusters. Overall, we managed to navigate well through global supply chain constraints and disruptions so far, and we're riding on the wave of exuberant demand for hygienic equipment. During the process, market prices continued to rise, and there is no end to this price rally as we speak. At this point, I would like to underline what I said in my introduction. From today's perspective, we would not expect any changes in the next 9 months before a more large-scale corona immunization across the globe has started. What is more important in this context is that we see a clear change in customer behavior towards more hygiene that will last longer than COVID as an immediate and fast reaction to the corona outbreak. On the back of this new development, we have a number of new clients who started ordering our specialty gloves. Irrespective whether the availability of a vaccine can be accelerated in the coming months, we have a full order book for 2021. As to current market conditions in the industrial segments, in the wake of the global recession, they clearly faced lower demand and reduced order books with market recovery being at different speed and scope. With the second wave of the corona pandemic gathering pace in Europe and other parts of the world, we sense a much higher volatility in customer sentiment, which complicates project planning and budgeting. Having said that, we can clearly state that the corona pandemic has not only stressed tested, but also accelerated our restructuring process with previous progress in efficiency enhancement and cost containment taking now a more long-term nature. Particularly, the industrial segments have become more resilient, as you will see in the numbers in a few minutes. On the back of this development, we were able to upgrade our EBIT guidance for 2020 on November 6 for the third time in a row, which we expect now in the range of EUR 230 million to EUR 255 million by year-end. With the slide over the page, you are familiar from half Year 1 results call, and we want to update you on the different speed and progress of implementing our new industrial strategy. Customer intimacy, product diversification and innovation and digitization remain key elements of our industrial rubber strategy going forward. The new developments include the fact that we have postponed working on the separation from the medical sector by at least mid of 2021. In turn, we had originally expected a much faster market recovery in the industrial sector, but are now facing a slowdown in our organic growth ambitions due to the current developments around the coronavirus. On the positive side, the recovery of the North American market supports our plans to further expand there through a new regional hub strategy. In addition, our strengthened liquidity position provides us with the opportunity to consider new growth options through M&A projects, though we will prioritize along clearly defined investment criteria, a convincing strategic rationale and synergy potential for bolt-on acquisitions. Starting with the operational highlights at Slide 7, both charts nicely summarize our key message for the first 9 months of 2020. In terms of revenues, top line pressure in industrial was largely offset by the strong revenue growth at the medical sector, implying a 0.8% year-on-year increase for the group as a whole. In turn, EBITDA and EBIT margins improved further as our comprehensive restructuring effort continues to pay off. I'm particularly pleased about the strong 18% EBITDA margin, which could be more than doubled year-on-year. Turning the page and looking specifically at quarterly EBITDA development for the industrial sector in 2018 to '20, I would like to make 2 observations. Firstly, despite ongoing top line pressure and seasonality factors in Q3 and Q4, we can demonstrate resilient margins on the back of restructuring and increasing operational efficiency. Secondly, and this perhaps puts our restructuring effort in an even better light. When benchmarked against the broader European economy and other industrial peers, we have clearly managed our business in a very competitive and resilient way. We are, in this context, also in the lucky position to have a very low exposure to automotive and aerospace business that currently definitely puts pressure on some of our competitors. As the CEO of the company, I therefore feel not just vindicated for having started this transformation process in time and successfully driven it forward. I'm even more confident that we will not only weather the storm of the current pandemic well, but that we can also make good use of it in the medium-term to position our company even better. Over the page and starting with the operational update for Semperflex, the combination of the global recession and the corona pandemic resulted in a 17% year-on-year decline in revenues. In addition, the size of the order book decreased over the period under consideration. In terms of profitability, however, EBITDA was more robust, declining by 11.4% year-on-year, but as you can see from the chart on the top, comparing well against Q3 2019 with a 24.5% EBITDA margin in Q3 2020 despite increasing price pressure. What helped our presence in the sector during the quarter was the successful launch of high-end houses for OEMs, pre-warming units, and we also gained supply share wins, particularly in North America. When looking at Sempertrans on Slide 10, significant CapEx cuts by global mining companies after the corona-affected lockdown led to a 12.6% revenue decline over the first 9 months of 2020. The fall in demand is also reflected in the order book, notably the reduced order intake in Q2 and Q3 2020. As we had reported at the end of the second quarter, the consistently negative market impact from the corona crisis burdened EBIT. As a result of the cloudy future prospects, we had to make a EUR 19.9 million impairment, reducing reported EBIT to below 0, but also operational EBIT in the first 9 months of 2020 declined by 37% to EUR 5.8 million. While results at Sempertrans over the period were essentially driven by highly unfavorable external market conditions, management continues to keep a close eye on operational efficiency, lean production and further cost reduction. On the next slide, at our newly reported segment, Semperseal, top line pressure resulted in revenues down year-on-year by 9.5%. While the construction sector was among the first to feel the impact of the corona outbreak, we can now see a speedy recovery, partly through state-sponsored infrastructure programs. In comparison to other peers, Semperseal was not particularly exposed to the automotive -- automobile and aerospace industries dragging down sales as well. Our order book in Q3 2020 recovered strongly due to customer intimacy. In this context, we received good customer feedback for ensuring supply security at the full product range. In addition, we continued introducing new innovative products like the GREEN EVO STAR, a highly environmentally friendly sheeting. In terms of profitability, EBITDA over the first 9 months of 2020 was down by 4.7%. However, the EBITDA margin of 13.1% was above the comparable period last year, which is another sign of our restructuring efforts paying off. As part of the transformation and restructuring process, a workshop in the Czech Republic is to be closed. Finally, on the industrial segments, Semperform at Slide 12 is a good example for market recovery taking longer than originally expected. For example, ski lifts had to be closed at an early stage of the corona outbreak and this continues for the new skiing season, which impact our business, on the one hand, maintenance of ski lifts, and on the other hand, demand for ski foils. With reduced market activity having already started in late 2019, mainly affecting our order intake of special applications, revenues at Semperform were down by 10.2% year-on-year. The order book was equally down, aggravated by the corona impact, but we see first signs of recovery. For example, demand for our handrails business in China has recovered much faster than expected. Similar to other industrial segments, EBITDA was lower over the 9 months period by 3.6%, but margins were stronger and improved by 1.4 percentage points. On a comparable basis, the higher margins, both at Q2 and Q3 2020, despite being in the middle of the corona pandemic, are a clear sign of our restructuring process gathering pace and provide stronger confidence going forward with a recovery largely expected in the second half of 2021. And before I turn to the other sector, just a quick glance towards the upcoming months. We definitely see the pressure that we anticipated earlier to be slightly less severe. On the other hand, however, the recovery that we see coming down the road is going to take longer and will be of different speed for the different segments. As to the medical sector on Slide 13, the chart on the top speaks for itself, both in terms of market-driven top line growth, including higher market prices and underlying operational efficiency improvements in recent quarters. Please bear in mind that against the previous period of overconsumption and underutilization, quality issues and price pressure, we can now run the business with full capacity and top-quality products. The latter helps to respond to an unprecedented level of market demand with our order books for examination and surgical gloves being now already fully booked out for 2021. Hence, our expectation that the phenomenal production output at historically high levels will continue for some time, which appears to be somewhat underappreciated by the market. Both efficiency improvements and high market prices led to a significant increase in EBITDA and margins with comparative numbers against the same period last year being up by a huge multiple. While it is difficult to forecast how sustainable this margin development will be, we can certainly claim to have put the Sempermed business in much better shape, being lean, more efficient and highly profitable by now. With this, I have finished my part of today's presentation, and I'm happy to hand over to Gabriele to take us through the financials. Please, Gabriele.

Thank you, Martin, and a very warm welcome from my side as well. Indeed, I feel very privileged to be part of the executive management team at such an unprecedented moment, both for its challenges due to the ongoing corona pandemic, but also the great inspiration when seeing how well the restructuring process has already proceeded. I have been through many challenges in my professional life before across different industries and geographies, and I want to be an active part of the team with a very hands-on approach. My focus will be on tangible financial results, continuing, not only with the transformation of the finance and IT department, but also helping to reshape the entire organization. Making the company fit for the new digital age, which we see right now unraveling and accelerating during the corona pandemic, implies for me to scale up our newly gained efficiency drive at the entire group level. And if I can add to this, my very personal perspective, I feel extremely positive about this assignment, and I'm highly motivated to address the new opportunities in further advancing Semperit going forward. So starting with the revenue analysis at Slide 15. We show very much a tale of 2 different developments. A year-on-year top line decline of all 4 industrial segments being more than offset by strong growth at the medical sector during the first 9 months of 2020. While Martin has already provided the operational background for the top line decline in each industrial segment, I would just make 2 main observations. First, all except Semperseal suffered a 2-digit percentage decline in revenues, which is unprecedented by scale and clear evidence for the severity of the external market shocks we are currently going through. Second, the traditionally strongest revenue generator in the industrial sector, Semperflex, has also suffered the heaviest top line pressure, down by 17% year-on-year, which has naturally suppressed the total revenue contribution from industrial. While there is not much management can do about a sudden decline in industrial demand, the huge disruption in supply chains and not least the numerous lockdowns across the globe, I want to focus now on those elements where we can make a difference starting with EBITDA analysis at Slide 16. Here, you can see what extent top line pressure has translated into EBITDA decline for all industrial segments except Semperform. The severity of year-on-year EBITDA decline was most pronounced in absolute numbers for Semperflex and Sempertrans. More importantly, however, the EBITDA margin for all industrial segments remains at competitive 2-digit numbers, notably Semperflex at 24%, but also Semperform at a very solid 20%. This, we believe, is a strong indication for our restructuring effort further enhancing operational efficiency. In turn, the strong EBITDA increase at Sempermed shows to what extent this business is both volume and price driven. As the new CFO, I will also keep a close eye on spending at the corporate center. And in this respect, I'm very pleased to see a significant year-on-year reduction. Over the page on Slide 17, we show the summary table for our key financials for Q3 2020 and the first 9 months of 2020. I will focus now on the lines below EBITDA. As Martin had briefly mentioned before, earnings after tax had a staggering increase from minus EUR 34.1 million in Q1 to Q3 2019 to plus EUR 137.3 million over the same period this year, a big element of which was the reversal of the impairment that Sempermed announced at the end of Q2 2020. But it implied also higher profit contribution from the medical business, which at group level naturally led to higher taxes. As management had already explained the impact of deferred taxes in the previous quarter, suffice to say here, the tax rate reverted to a more normal level in the isolated Q3. Earnings per share reflect a strong underlying profit increase, largely driven by Sempermed, but also an increasingly resilient industrial sector. Turning the page, proactive working capital management remains a focus point of the company's finance organization and has naturally gained growing importance since the corona outbreak, given the disruption of global supply chains and delays in customer payments. So I'm very pleased to report that we not only managed to reduce inventories in Q3 2020, but also managed to slightly reduce trade receivables versus Q3 2019. At the same time, having the benefit of high credit insurance coverage for trade receivables during the pandemic. Overall, our trade working capital as a percentage of sales remains below the 22% target. Cash remains king in my philosophy as the new CFO. And in this respect, I think the chart on Slide 19 speaks for itself. The strong improvement in free cash flow generation is clearly a result of all the restructuring efforts management made in the past, but rest assured, I will not leave a store untouched to make further improvement. Strict CapEx control will continue going forward. And from today's perspective, we anticipated CapEx by year-end 2020 to be well below EUR 40 million. This is a combination of further CapEx reduction during the year, notably in the wake of the corona pandemic, but also some element of maintenance CapEx being moved into 2021. Finally, on Slide 20, we present balance sheet details and then list all the efforts in further strengthening our financial position. Most importantly, in the middle of the corona pandemic, we managed to increase the amount of cash and cash equivalents by EUR 16 million since 31st December, 2019 to EUR 157 million as of 30th September, 2020. In terms of securing additional liquidity, we agreed to more flexible undrawn credit facility of EUR 75 million. At the same time, net debt was reduced by EUR 60.8 million since year-end 2019 and amounts now to EUR 12.7 million in total. This implies net debt-to-EBITDA multiple of 0.1x compared with 1.1x as of 31st December, 2019 and is well below our covenants. Finally, the equity ratio is at 47.4%, well above our own target of higher than 30%. As to the hybrid capital, I should mention that we have not only refrained from the remaining EUR 20 million tranche in July, but also repaid the first tranche of EUR 20 million in Q3 2020. Given our strong liquidity position, we are now in a position to plan to pay back the remaining amount of the hybrid within the next 6 months. With this very positive note, I've come to the end of my part of today's presentation and hand back to Martin for his final remarks and the outlook for 2020.

Thank you, Gabriele. And let me now summarize and conclude with our outlook for 2020 on Slide 22. With our strategic focus remaining firmly at the industrial sector, we see currently a different speed of recovery, which largely depends on the severity of the impact from the second wave of the corona pandemic, notably in Europe. Accordingly, each industrial segment faces its own challenges, but there are visible, though still somewhat patchy signs, for recovery, though overall later than originally expected. At the same time, our strategy for the medical sector remains proper business execution, while the separation will follow a clear strategic rationale, driven by evolving market prices, the size of the order book and the general market environment. In this context, the exceptional corona induced global demand for our protective gloves faces new challenges of supply and production continuity. Further price hikes are expected well into the first quarter of 2021, and successive price declines are not anticipated, so for the second half of next year to be the best of today's knowing essentially depending on large-scale immunization across the globe. So with all the market euphoria about new corona vaccines, our business outlook for Sempermed remains extremely positive. And we continue to believe that it will contribute substantially to both top line and profit growth of the group in 2021. For year-end 2020, we announced 3 subsequent ad hoc releases since the beginning of July, with the most recent one on November 6, upgrading the outlook for EBITDA to a range of EUR 200 million to EUR 225 million and EBIT to EUR 230 million to EUR 255 million. As a reminder, the comparative number for 2019 was EUR 67.8 million for EBITDA and minus EUR 16.5 million for EBIT. With the scale of support in terms of profits and cash, we feel confident to shape our new industrial identity and build a strong platform for future growth. Taking into account all significant influencing factors, our current planning is based on the assumption that we will be able to maintain the range or even exceed the full year result for 2020 in the coming year. Looking ahead, we will be working on major strategy projects in the coming months to evaluate growth opportunities. With this, we have come to the end of our presentation. And we, Gabriele and I, are now available for any questions you might have.

[Operator Instructions] The first question is from the line of Markus Remis from RCB.

Welcome to the financial markets, Ms. Schallegger. First question relates to the pricing momentum in Sempermed. If you could maybe shed some light on how it has developed sequentially, apparently momentum keeps on building. And when I look at your full year guidance, it also implies to me that we're going to see a major step-up in Sempermed's earnings generation in the fourth quarter. So for the group, you need something like EUR 80 million to EUR 105 million, if I assume, industrials and the holding, and not to kind of contain any surprises in the fourth quarter, this gets me to something like EUR 70 million to EUR 95 million for Sempermed [indiscernible] were doubling. Any mistake in my logic? And yes, is that apparently fully price driven? That will be the first one.

Well, of course, we don't disclose detailed pricing here. I would say it would be a fair statement to take basically that the market prices ever since the outbreak have roughly more than tripled. And as I said before, we still see increasing price levels and expect to last this development, I mean, in the light of today's knowledge, into 2021 as well. But we do not give any guidance on segment levels in this call.

All right. Can I then ask on the topic of logistics. You mentioned it in the presentation. And looking at what Sri Trang has reported a few days ago, they actually mentioned that shipping was prevented because of bottlenecks in the logistics chain. I mean how severe is this topic? Is -- do you observe similar issues like Sri Trang had to endure at other companies? And how much of a terror it could be for you?

Well, I think there's 2 sides to the question. One is the raw material availability per se. And as I said before, this is sometimes really on the edge. So we -- I mean, we keep the supply chain always up, as I said before, but it is definitely a big challenge also looking forward. And the second part is basically getting the raw material on site, which basically affects the availability of containers. And secondly, what we had seen during the hurricane season in Chinese sea earlier this year were just some heavy storms basically led to delays of container ships arriving at their ports of destination. So all in all, long story short, supply chain is up. We're not suffering from any shortage of raw material so far, but it is definitely also a stress test for the supply chain organization and procurement organization of this company.

What's like the safety stock you currently have on in Malaysia?

Well, I'm sure you don't [Technical Difficulty].

[Technical Difficulty] of protection.

We don't disclose that in detail, but it is -- as I said, there are some days where it's on the edge.

All right. Okay. On the question on the hybrid, please. Is -- should we consider the repayment rather as a step-by-step approach? Or do you consider repaying the remaining EUR 110 million as a onetime payment? It might be like a small installments? Or like a one-time payment?

Yes, this is Gabriele. Let me get that. We have announced that we are intending to repay the hybrid within the next 6 months. And depending on the availability of the cash flow, we are going to time out payment.

All right. Okay. Very clear. Last one for me on the material cost ratio. I asked the same question in the Q2 call, the development between kind of revenues 10% up and material cost down 13% in the third quarter, the spread actually widened. Maybe you can provide us a bit of a granularity on the drivers here, to which extent that's actually, like, your internal efficiency measures, how much is price deflation, how much is product mix and other factors?

Yes. This is -- let me take that. With our revenues going up, the -- that has increased the gap between sales and raw material quota. So the reduced rate in Q3 2020 is also driven by the increased sales prices, basically, and consequently, higher revenues of Sempermed. So we are not -- you compare here not just reduce material expenses, but also disproportionately higher revenues. Does this answer your question?