Semperit Holding AG

VSE:SEM

Earnings Call Transcript

[Operator]

Ladies and gentlemen. Thank you for standing by. I am Yasmin, your Chorus Call operator. Welcome, and thank you for joining Semperit AG Holding conference call following the release of the report of the first quarter 2018 of the Semperit Group. [Operator Instructions]

I would now like to turn the conference over to Martin Füllenbach. Please go ahead.

[Martin Füllenbach, executive]

Good afternoon, ladies and gentlemen, and a very warm welcome to our first quarter 2018 results call today. As usual, I'm here with my CFO, colleague, Frank Gumbinger, who will take you through the numbers later on.

Before getting into details, let me take this opportunity and briefly reflect on my first year at Semperit, because it's going to be my first birthday in some days upcoming. When arriving at the company, I found, and it's an important message, a lot of dedicated staff members with excellent know-how about our technologies, materials and processes, but more importantly, I didn't find anything why this group should not become successful again.

And now 1 year later, I'm basically happy to see the sky brightening up for Semperit Group. The measures we took since starting our restructuring and transformation process are definitely beginning to show a first impact. EBITDA has strongly improved at a year-on-year comparison, but a positive first quarter must not disguise the fact that we haven't achieved a full turnaround yet. However, what I can say today is that our transformation process is gaining momentum.

Therefore, I would like to share with you some first findings, observations and specific initiatives. Let me start with the current states of our restructuring and transformation process. And in my brief overview, I'll add more substance by providing specific examples from initiatives in operations, sales and procurement and SG&A because those 3 are the key areas we identified as being crucial to put the organization back on sustainable and profitable growth. This should ultimately lead us to an EBITDA margin of 10% for the group by the end of 2020, which requires an EBITDA uplift of EUR 50 million to EUR 70 million and sets, in our view, a fairly challenging target.

In terms of operations, the key initiatives we took are the increase in output and overall equipment efficiency while, at the same time, reviewing our production footprint. Crucial for our operations is also the need to reduce waste and scrap as well as the total cost of quality, especially the letter was, for me, an eye-opener at the early stage of our strategic review, and it's definitely something I'm going for every time I see operations in one of our sites.

As to sales initiatives, we're aiming for more volume growth in new regions and new markets while applying, for the first time, a price differentiation by region. I strongly believe that the underlying challenges to redefine our understanding and education of customer benefit and value while leveraging our brand across the globe.

Finally, some examples in procurement and SG&A worth emphasizing are the effort to establish a more sustainable customer-supplier relationship that we haven't had so far, to optimize compound chemicals and to increase efficiency in back-office and IT. Again, let me make it absolutely clear that the portfolio adjustment and growth initiatives can only be implemented after the successful completion of the restructuring process.

Turning over the page, at Slide 4, we summarize the newly shifted responsibilities between our board members since March 2018. The major step is a very clear focus in terms of ultimate responsibility for the industrial business sector, led by myself, and the medical business sector, headed by our chief operations, Michele Melchiorre.

In terms of other core initiatives in our transformation process, I took the lead in pricing and SemperMOVE10. This is how we call our restructuring program. The 10, obviously, for the 10% EBITDA that we're aiming for. Furthermore, I'm now in charge also of legal, and Michele is responsible for world-class manufacturing. And at the same time, Frank Gumbinger is now in charge of procurement in addition to all the finance sectors and the traditional areas of responsibility of a CFO.

With this clear and dedicated set of responsibilities, each of us is now personally in charge of implementing major strategic pillars of our restructuring process. By separating board responsibilities by business sector, upgrading the importance of pricing and changing the responsibility for procurement, we feel strongly to be able to unleash the full potential of future profitable growth. At this early stage, however, it also demonstrates the complexity of our homework that hasn't been done for a very long time.

Finally, on Slide 5. The early findings of our strategic review have clearly identified Semperflex and Semperform as strong contributors to profits, cash and innovation in our industry sector. In addition, Sempertrans has undoubtedly a potential to become a successful industry player on a sustainable basis and to contribute strongly in the future to the profitability of the group. In turn, Sempermed remains the key focus area of restructuring as it is still not profitable on a sustainable basis. While we have completed previously committed investments, including a latest state-of-the-art plant, we will not commit any further growth CapEx and just keep the necessary maintenance in 2018.

At the same time, a thorough SWOT analysis is in progress as we fully realize that fierce competition for market share has put enormous pressure on our margins. To be absolutely clear, in our current setup, we are not able to reach the level of profitability of our top 3 competitors. With the existing asset base, we would need to invest heavily to achieve higher economies of scale, and as a result, our current analytical focus [ sees ] on both the business model and capability evaluation and operational execution. At this point, I want to be very clear that the key focus of our restructuring and transformation process is in achieving the target profitability throughout all segments by the end of 2020, and this will be a key feature for future portfolio discussions.

Let me now come to the first quarter results 2018 and start with a short overview on Slide 7. Top line growth has declined year-on-year by 3.7% to EUR 221 million, taken into account the closure of the French plant last year. However, I'm really delighted to report that both EBITDA and EBIT have grown significantly at a year-on-year comparison after adjusting for the one-off positive effect from the joint venture transaction in Q1 2017. The improvements were largely made for successful initiatives in procurement and pricing. Earnings after tax, unfortunately, still remain negative.

While we had faced an extremely high and unusual volatility of raw material prices in 2017, I should note here that price volatility for rubber has now moved more towards a sideward trend in Q1 2018. Prices for carbon black, wires and some other raw materials are still increasing though. In turn, we faced tight competition for some of our raw material supply.

Let me now quickly provide you with the operational review for each segment, starting with Semperflex at Slide 8. Semperflex has been our best performer among the 4 main businesses. On a year-to-year comparison, Semperflex achieved a 9.9% top line growth to almost EUR 59 million and improved EBITDA by 17% to EUR 13.7 million. I'm particularly pleased about the 23.4% EBITDA margin at Semperflex, which is a reflection of higher volumes translating into higher profitability. But this is also a result of the recent capacity ramp-up for hydraulic hoses in the Czech Republic. In turn, following the closure of the French plant, Sempertrans face a 16% decline in revenues to almost EUR 35 million, which was aggravated by a decrease in sold quantities and volume. This was mainly driven by a change in product mix. EBITDA year-on-year decreased to EUR 0.5 million while the EBITDA margin for the quarter remained stable at 1.4%.

I should also mention that the global conveyor belt market is about to recover as we are now facing, again, longer lead times due to a large order book with an increasing profitability through the orders received. Overall, I'm pleased that in comparison to Q4 2017, our profitability improvement at Sempertrans show first indications of a successful business transformation.

Over the page at Slide 9, Semperform has achieved an encouraging volume development, mainly due to strong European demand with year-on-year top line growth of 4.7% to EUR 47 million. EBITDA resulted in an almost double-digit EBITDA margin of 9.6%. Overall, the business performance improved in this segment compared with Q4 2017.

In turn, Sempermed faced a 10.3% year-on-year decline in revenues to EUR 80 million as a result of fierce competition with regards to sales prices and supply of our raw materials. Please note that we consciously decreased sold volumes as a result of change product and customer mix, and I should also mention the increase of our own production share as a result of the full ramp-up of our new plant in Malaysia. Despite EBITDA turning positive to EUR 1.4 million and the 1.8% EBITDA margin for the quarter, we're still not satisfied with the operational efficiency at Sempermed. As I said before, this remains the key focus area of our management agenda, and we have started a thorough strategic review of the business model and capability evaluation as well as operational execution.

Now over to Frank to take us through the preview of the Q1 2018 financial performance. Frank?

[Frank Gumbinger, executive]

Thank you, Martin, and good afternoon from my side as well.

Let me start with a brief overview of our Q1 2018 results on Slide 11. Martin has already provided some details on the top line development and profitability of the group, and I would just like to point out that the 7.1% EBITDA margin for this quarter is going into the right direction. Having said that, EBITDA is still not strong enough. The bottom line still shows negative earnings after tax. And if you look at quarter 1 2017, please bear in mind and take into consideration that the Q1 2017 EBITDA contains a positive one-off effect out of Sri Trang venture transaction, which is important to know and to understand, especially if you want to compare Q1 2017 and '18 on an operational level.

So let's move to Page #12. Page #12 summarizes year-on-year revenue developments by segment, which clearly illustrates why Semperflex and Semperform remain the core elements in our Industrial Sector, given the significant revenue growth by both. Martin has already touched on the product mix of Sempertrans as well as a decrease of volume and revenue as a result of new products and customer mix at Sempermed. This resulted in lower revenues in each business. However, the double-digit year-on-year decline rates in both segments makes it also clear that we are still at an early stage of our SemperMOVE10 process.

When looking at the year-on-year EBITDA bridge by segment at Slide 13, the overriding topic of higher volumes translating into higher profitability becomes evident for Semperflex, where an almost 10% top line growth resulted in an approximately 17% improvement of EBITDA. Semperform's 4.7% top line growth produced a slightly lower EBITDA with a lower margin. Despite the significant revenue decline rates of 16% at Sempertrans and 10% at Sempermed, we managed to slightly improve EBITDA at Sempermed compared with adjusted EBITDA in Q1 2017. The very low single-digit EBITDA margin at Sempertrans is still far off from our own ambition to reach the 10% EBITDA margin for the whole group by the end of 2020. Equally, in corporate, we managed to keep a tight lid on cost as this is always a stretch at a time of a major restructuring going forward. The run rate of approximately EUR 5 million per quarter remains unchanged.

Given the scope of our current restructuring effort, we feel that a more useful measure for our performance is provided by presenting EBITDA and EBITDA margin, which you can see at Slide 14 for the period since Q1 2017. In footnote 1 on the slide, you can see the explanation of the details of our adjustment in 2017, starting from: the positive one-off from the joint venture transaction, as mentioned before, including the impairment of Sempermed; the restructuring expense for the French plant; the IT valuation adjustment; and last, but not least, the tax audit expense in Austria, as already mentioned in our Q4 call last time. Having said that, we are still fully aware that the 7.1% EBITDA margin at Q1 2018 remains below our 10% group target by the end of 2020.

Over the page at Slide 15, we show quarterly CapEx overview by segment. The focus of our spending has now shifted towards our growth ambitions for Semperflex and the mixing department with leather representing a huge part of the figure shown for Sempertrans. Our expectation for 2018, CapEx adds about EUR 80 million, remains unchanged. About EUR 50 million of that will be spent for growth, and the remaining EUR 30 million for maintenance CapEx.

So let's move to Page #16, and you can see the development as a component of our working capital. We faced a buildup in both inventories and other trade receivables compared to Q4 2017, which is usually the case in Q1 in comparison to Q4 but also partly because of raw material price increases, especially for the industrial segments. At the same time, we've reduced straight payables by around EUR 4.4 million, but still resulting in overall increase of trade working capital as a percentage of last 12 months' revenues of around 20.9%. There's clearly much room for improvement in working capital management and, especially, inventories. In this respect, we will keep a close eye on the quarterly development.

Let me complete my performance presentation with the analysis of our balance sheet and the significant reduction in net debt. The latter is down by around EUR 99 million since the end of December 2017 to a more comfortable EUR 63 million as of end of Q1 2018. This resulted in a net debt-EBITDA multiple of 2.9x compared to 1.6x 3 months ago. Please be aware that we have drawn EUR 130 million from our hybrid capital in March 2018, as a result of which, the equity ratio increased to almost 44% compared with 33% at the end of 2017. Other major developments in our balance sheet includes a 29% increase in cash and cash equivalents to EUR 214 million since the end of December 2017 and the significant reduction of liabilities to banks, down from EUR 57 million at the end of December to EUR 8 million at the end of Q1 2018.

So let me now hand back to Martin to complete our presentation with our management agenda in 2018, and thanks for your attention.

[Martin Füllenbach, executive]

Thank you, Frank. As I had mentioned in my introduction, our transformation process is gathering momentum. In this respect, our key focus is clearly on SemperMOVE10, which is at the heart of our management agenda 2018. For this purpose, our most important initiatives to reach a group EBITDA margin of 10% by end of 2020 are summarized again at Slide 20. And as the CEO of the company, I have taken a personal lead and commitment to bring Semperit back to operational excellence and profitable growth.

In terms of investments from today's perspective, we estimate CapEx at the amount of EUR 80 million for 2018, with approximately 50% being earmarked for Semperflex and [ demixing ] expansion. At the same time, we would like to remind you that we cannot exclude significant one-off charges as a result of our restructuring effort, even though there were none of them in Q1 2018. With this in mind, the outlook remains suspended for the next few quarters.

Finally, let me emphasize here that driving our restructuring program, developing and transforming the organization as well as preparing Semperit Group for the future are the key priorities on my CEO agenda.

Ladies and gentlemen, we have come to the end of this presentation, and Frank and I are now available for any questions you might have.

[Operator]

[Operator Instructions] The first question comes from the line of Matthias Pfeifenberger of Deutsche Bank Vienna.

[Matthias Pfeifenberger, analyst]

A couple of questions from my side. I take them as separately. So the first one is really on your consulting fees. So as I understand, it's going to be roughly -- I don't know, over the 2 years, it's going to be roughly EUR 12 million to EUR 13 million expense in the holding, and then about EUR 7 million, EUR 8 million pushed put into the segments, so, call it, EUR 15 million, EUR 20 million. Do you think that's proportionate in terms of what you are doing? And because I think you have 3 experts in the management board, including a COO, and EUR 20 million is quite a big ticket. And I think that's included in the EBIT, right? So there's no adjustment for that. If I say it's $10 million each year, and I take the EUR 16 million EBITDA in the quarter and I multiply that by 4, and include a little bit of improvement, we're already at EUR 70 million annualized EBITDA run rate. And I think the target is EUR 90 million, and then the restructuring costs will -- the consulting will phase out. It's EUR 10 million. And apparently, you have had tailwinds from the markets. Semperflex is doing well. The rubber price is growing sideways. So probably, Sempertrans will restore profitability because they're hit the most from the lag effect in terms of you being able to pass on the rubber price. So I'm not really sure, is the EUR 20 million not a bit steep in terms of a EUR 10 million underlying improvement from here? Or am I missing something?

[Martin Füllenbach, executive]

Okay. So first, I would like to answer to the topic of the consulting fees. Currently, we see a consulting fee of approximately EUR 3 million per quarter in 2018; and for 2019, there's no decision so far so -- and this is a number for the whole group. There's -- for this restructuring and transformation process, no additional consulting fee in the segment. So the EUR 3 million is a total figure for the whole group. And I would like to get back to you on why we have consultants at all as we have 3 experienced members of the executive board. The complexity of our problems is simply too big, and the problems itself go too deep that we don't feel comfortable enough to basically solve this in a given time frame with the existing management team that we have 1 or 2 level down, very easy.

[Matthias Pfeifenberger, analyst]

Okay, fair enough. So my second question is regarding the hybrid bonds, and I don't understand this exercise, in fact, because you're paying close to 6%. You're simultaneously redeeming your bank loans, I mean, it's at EUR 8 million right now, that have been trading at 2%, 2.5%. And of course, we all understand the leverage doesn't look great, but you could've easily received a waiver for 1 year. And all the banks pretty much know that you're backed by B&C anyways, and I don't know where Sri Trang shareholders should go because of their 1-, 2-year restructuring, which is also showing some fruits already in the first quarter. So isn't that a bit fairly destructive at this stage?

[Frank Gumbinger, executive]

No, it's actually not very destructive at this stage. First of all, we pay for the hybrid capital and 5 point -- 2.5%, and not 6% of interest, and it's actually [indiscernible] in order to strengthen our balance sheet and also our financial ratios. Without having these EUR 130 million of hybrid capital, we would have seen now in the first quarter a net debt-EBITDA ratio of around 9, and there are also cross-default regulations and contracts [ quite ] as usual. And based on this, it's very important to have this underlying backing for our restructuring and transformation phase. That's very important. Yes, last year, capital year, analyzed different options, for sure, and one option was also what you mentioned before and also a waiver process, especially in a time when you don't have the visibility going forward, it can be a very expensive and also time-consuming. And we have analyzed different options and came to the conclusion that the best option is to go ahead with the hybrid capital line to have other financing stability throughout our restructuring and transformation process.

[Matthias Pfeifenberger, analyst]

Okay. And the last one would be on the restructuring itself. I mean, as far as I understand, you've changed the time frame a bit. You've said before there would be an outcome in terms of portfolio review mid of the year or in the second half. Now the prerequisite for portfolio review is basically reaching the 10%. So my question, is the 10% applicable for each single segment or just for the group? So would you be happy with 5% in Sempermed? And because we know the other segments have clear double-digit potential. And also is there -- is it -- I guess, it has become a bit more likely, or correct me if I'm wrong, that you're going to sell anything. I mean, of course, Sempermed remains the big question. But the rest really seems to be remaining part of the group, most likely, right?

[Martin Füllenbach, executive]

I was basically expecting this question. Again, first, the 10% is what we aim for in the current setup on a group level, and in this current setup, we do not go right now into disclosing profitability target numbers of the segment. And the second question, as I tried to explain but maybe I wasn't clear enough before, what we do right now in terms of restructuring is basically that there's no alternative to what we're doing. This is why we put all our emphasis right now on restructuring all of the segments. And along with the profitability growth throughout the next quarters, along the given time frame of this transformation phase until 2020, this might be one of the key indicators for then taking portfolio decisions, which is not the case right now and which will be postponed into the next year, most probably.

[Operator]

The next question comes from the line [ Serban Bechard ] of [ Reischmaud & Co ].

[Unknown Analyst]

Just wondering, you mentioned that there are potentially additional one-off charges going forward then, if you have to deeper restructurings. I mean, given the current capital you have, do you currently rule out the capital increase? Is this still something you rule out?

[Martin Füllenbach, executive]

No, no, no. That's maybe a wrong interpretation on that. That's currently not on our agenda.

[Operator]

The next question comes from the line of Markus Remis of RCB.

[Markus Remis, analyst]

A follow-up question on the hybrid capital, please. If you could elaborate why you've taken now such a substantial amount. I mean, why not taking a little less and then maybe draw further over the course of the year in order to save on the interest cost side? If you could elaborate on this. Or might be the conclusion correct that we should expect some, yes, restructuring-related cash-out in the short run? So that would be the first one please.

[Frank Gumbinger, executive]

So actually, it's EUR 130 million out of the hybrid capital total of EUR 150 million is well-balanced in order to achieve a net debt-EBITDA level, which was slightly below EUR 3 million and therefore, there was, anyway, not that much room, and therefore, we believe that this is the right decision.

[Markus Remis, analyst]

Okay. And then, my second question would be on the market, the new market at the new regions you mentioned in the presentation. Have you already made up your mind which regions that would be and for which products and -- yes, have kind of preparations been already launched?

[Martin Füllenbach, executive]

Well, if you see the breakdown of our sales volume, you would find that most of our businesses is predominantly in Europe. I can give you some examples where we're currently developing the new market, which is Sempertrans in Australia, and also starting to Central America and South America. There is no aligned strategy yet, but it's definitely on the agenda to find, basically, a next level of sales strategy, implementing also possibly a metrics where divisions need regions for quicker developed into markets where we haven't been so far.

[Markus Remis, analyst]

Okay. So apart from the trans division, I mean, do you also consider diversifying into Semperflex, which I think is heavily exposed to Europe? Is that also something you have on the agenda?

[Martin Füllenbach, executive]

Yes, definitely. I mean, we're currently -- we're permanently looking into this. But in terms of a consolidated strategic approach, that is something which is on our agenda at a later stage in the transformation process.

[Markus Remis, analyst]

Okay. Very clear. And then, regarding plant closures, I mean, you have quite a diverse production footprint, partly with very -- rather small facilities. I mean, how far are you in the assessment of the plant network? And do you think that over the next 1 or 2 quarters, there will be further closures coming up?

[Martin Füllenbach, executive]

Very, very valid question. As you know, 16 production sites, looking at the given sales volume of EUR 850 million to EUR 900 million, is definitely too much. The process of analyzing the future footprint is still ongoing, and I can't nail it down to a precise time line.

[Operator]

[Operator Instructions] And that next question comes from the line of Sebastian Obst of Baader Bank.

[Christian Obst, analyst]

It's Christian Obst from Baader Bank. I have one question concerning Semperflex. What is the current capacity of utilization? And how much more on the volume side can you produce going forward? And how much will capacity increase with the current CapEx plans you have? This is the first one. And the second and last one, you talk about a decrease of volume and revenue as a result of change product and customer mix at Sempermed. Can you give some more of a detail of what kind of contracts, products, customers you have eliminated? And these are contracts developed to the profitability here, which were loss-making, is that right?

[Martin Füllenbach, executive]

To the first question on Semperflex, we are fully sold out with a lead time to customers of approximately 40 weeks. The lead time is getting better right now because the latest investment in [ ordering ] is coming onstream. But other than that, I hope I got your question right. There is no additional CapEx in Semperflex right now on our agenda. And speaking about Sempermed, this [ reduction ] in profitability and the customer were -- it's -- we did a thorough analysis in understanding volumes and gross margins by customers, and we eliminated those who don't contribute to the success of the business. And please understand, I can't go any more into detail here.

[Christian Obst, analyst]

Okay. Coming back to Semperflex, but the new capacities, which are now ramping up, they're not 100% utilized yet, right?

[Martin Füllenbach, executive]

No, not yet. They are coming onstream one -- I mean, month-by-month. We're ramping up the volume.

[Christian Obst, analyst]

Yes. So how much of volume increase you can generate with ramping up this new capacities up to 100%?

[Martin Füllenbach, executive]

Over the years -- I mean, in a fully ramped up process, this gives us about EUR 20 million total sales.

[Christian Obst, analyst]

Plus, additional to the what you have to 2016 [indiscernible]?

[Martin Füllenbach, executive]

Exactly, yes.

[Operator]

There are no further questions at this time. I hand back to Martin Füllenbach for closing comments.

[Martin Füllenbach, executive]

Well, thank you very much. And I just like to close this session with making everyone aware of the half year financial report, which will be on August 23.

Thank you, and enjoy the week.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.