NV Bekaert SA

XBRU:BEKB

Earnings Call Transcript

[Oswald Schmid, COO, Interim CEO & Director]

Good morning, good afternoon and good evening to you all. A warm welcome to our webcast which we will have to do a bit differently at this time. Both Taoufiq and myself are bound to work from home, so we will do this webcast from our respective home offices in France and in Germany. But of course, this is just a practicality. There are things that are far more important and critical. Most of all, I do hope you and your colleagues and your relatives are all in good health. But now let's go through the announcement of today.The title of today's press release shows where we currently stand with Bekaert. Our strong Q1 performance positions us well to confront the crisis. This applies to safe working conditions, to customer centricity and to strong cash liquidity. Let's have a look at the highlights of the first quarter. Health and safety is a priority at Bekaert, always and foremost. As of the very beginning of the COVID outbreak in China, we have implemented actions to protect our people and their families. We learned a lot from the Chinese team and applied those and other measures globally during this global pandemic. Our proactive approach resulted in relative few infections recorded among our 28,000 team members.Sales were down 11% compared to quarter 1 last year due to government-mandated lockdowns, customer shutdowns and preventive actions taken by us initially in China and since the middle of March in the rest of the world. We have put effective cost reduction measures in place. The company's liquidity increased by EUR 190 million compared to year-end to a relative safe level of more than EUR 750 million. And thanks to the preemptive actions taken to mitigate the financial impact of COVID-19, our net debt on underlying EBITDA has stayed stable at 2.1, unchanged from the solid level at year-end 2019. This is a result of a strongly reduced net debt and improved EBITDA.Finally, the Annual Meeting of Shareholders approved this morning the dividend reduction to EUR 0.35 and its payment has been postponed to November of this year. We recognize this does impact our shareholders. But even in very challenging times, Bekaert wanted to reward the shareholder for investing capital in our company, and we thank them for their continued trust. Taoufiq will go into further details on the financial highlights later on in his presentation.What market developments did we see in quarter 1 of this year? Demand from tire and automotive markets was hit hard in China due to the outbreak of COVID-19 with a rebound in domestic sales in March. We do see, however, an increasing impact on export-oriented Chinese tire makers. The demand outside of China was severely affected as a result of a 25% drop in car production and reduced road traffic due to lockdowns and homeworking and all together, leading to the large-scale temporary plant shutdowns in the tire and automotive industry, particularly in Europe and in the U.S. Looking at the construction market, we see that we held up relatively well in the first quarter of 2020, with the exception of some delays in the reopening construction sites and the effects of government-mandated lockdowns in Latin America. The demand from agriculture, utility and mining markets was strong across the quarter as these sectors generally considered as essential industries currently appear to be less affected by the COVID-19 pandemic.What has been the impact of the pandemic on our operations in the first quarter? And I first show in here the impact on the 3rd of February. All plants are closed in China, but most of them reopened again on February 10. There were no signs yet at that moment of a real pandemic so all other sites were fully operational. Then the update on the 31st of March when we were impacted about its maximum with lockdowns in India, various countries in Latin America and many site closures in Europe and in North America, either government-mandated or due to our own decisions because of lack of demand or as health and safety precaution.On this map, you will also see a large number of orange site locations, meaning that they were partially affected. We show both the production plants, most of the sites, and also the sales and distribution centers of Bekaert. Today, the situation has improved with the gradual opening up in Latin American countries and India and a further reactivation in Europe. But as you can see, the impact of the pandemic is very significant and challenges all the time. In such times of global crisis, it's obviously critically important to be very focused and to be aligned and deliver on the real priorities.How did we organize ourselves in practice to lead the business for this crisis? Well, we have 8 work streams in place to focus on particular roles and processes, and they are all interconnected and aligned. There is governance and coordination, health and safety, sales and operations planning, procurement is involved, communication, liquidity management and cost actions emerging from the crisis, way of working in the new normal. The focus and delivery of each of the streams changes and further develops as we go through the crisis. In essence, the government and coordination stream is about the overall monitoring and alignment in managing the crisis. The health and safety stream is about determining and monitoring the COVID-19 measures in our plants and offices. Sales and operations planning speaks for itself and is driven by the context with each of the business units. Procurement looks after securing the supplies of critical product, such as raw materials and PPEs, and adequate supply chain monitoring so that we continue to control our working capital well. Communication includes both the external and the internal communication initiatives. Liquidity management and cost actions is about ensuring the company's liquidity in whatever stress test scenario and coordinating the cash cost actions as well as the incentive opportunities.The most recently installed workstream are emerging from the crisis, which is about commercial excellence, practices and tools and having a close look on the market development and opportunities. And finally, the way of working in the new normal is where we realized the old normal will not come back soon. This way of organizing ourselves provides everybody internally with insights on best practices and on the progress on our priorities. But now let's have a look on those priorities. First of all, the health and safety of our employees. As highlighted already, this has been and will continue to be a priority, especially as CRADLE, return to work, policies are being prepared and implemented around the world. At the same level, customer centricity. We stay in very close contact with our customers, so we understand the current and future needs to support them in whatever every possible way. This is where the emerging stronger workstream comes in place, where market information, tools and best practices are shared so that all our sales teams get the support they need and are connected globally to help achieve what the name of the workstream states: emerging stronger. Thirdly, managing liquidity and cost to mitigate as far as possible the impact of the pandemic on our business. It's about strict control on working capital, effective supply chain management, cost management, CapEx control and financing decisions so we safeguard the continuity of operations as well as our liquidity level. I now would like to hand over the meeting to Taoufiq, who will guide us through the sales and liquidity numbers that we have achieved in quarter 1. Taoufiq, please go ahead.

[Taoufiq Boussaid, Chief Financial Officer]

Thank you, Oswald, and hello, everyone. Let me first cover some of the details around our trading update and the financial position of Q1.Starting with the rubber reinforcement business. So it's the BU that has been most affected by the impact of the COVID-19 pandemic. The sales dropped by 17% compared to the first quarter of 2019. The Q1 sales volume declined by 20% in China and the U.S., and sales in EMEA and India decreased by more than 10% due to the lower volume and passed on lower wire rod prices.The government-mandated lockdowns and customer shutdowns across the world have forced temporary shutdowns in most rubber reinforcement plants in China that was mostly in February and in EMEA and North America since mid of March. The tire sector anticipated low demand in the second quarter and does not project a rebound to the level of 2019 in the second half of the year.Moving to the steel wire solutions business unit. The sales were down 8% compared to Q1 '19. The combined effect of unfavorable headwinds, which included volume declines, the effect on passed on lower raw material prices and the unfavorable currency movements accounted for a drop in sales of roughly 13%, which was partly compensated by a positive price/mix of 4.6%. The demand was strong in EMEA and China, where volumes increased by 13% and 22%, respectively. Agriculture and utility markets in the U.S. were very strong as well. Some headwinds, though, resulting from the weak volumes in India, up to 38% down. And Latin America, in the range of a drop of 14% as a result of the government-mandated lockdown in place since the middle of March. The closure of the 2 loss-making plants in Shelbyville in the U.S. and Ipoh in Malaysia also contributed in the overall sales drop, and this has allowed us to mitigate the margin-dilutive effect on the business performance.In terms of outlook, we foresee the mandated lockdown particularly in India and Latin America and America should carry on for some time. We also consider that the slowdown of the automotive and oil markets will increasingly weigh on sales volumes in the second quarter of the year. The demand in agriculture and utility market is, however, expected to remain relatively stable.On our specialty business, we have posted a limited sales increase of 1% in the first quarter. The sales were about stable in building products, slightly higher in fiber technology and moderately lower in combustion business. The sawing wire activities recorded lower sales volume due to weak demand from the export-oriented solar business in China. The demand from construction market has remained relatively strong in the first quarter of the year. And the revenue run rate is projected to continue in the second quarter. In fiber technologies, demand from filtration, shielding and conductive fiber markets is projected to continue to offset the strong growth from the automotive market. The business conditions are expected to remain stable at a low level in combustion and sawing wire activities.On BBRG, Bridon-Bekaert Ropes Group, they recorded a sales decline of 2% compared with the first quarter of 2019. The volume decline of roughly 8% was largely offset by an improved business and the price/mix impact, particularly in the rope segment. BBRG main ropes market, which include mining, oil and gas, crane and industrial, have been less affected by the impact of COVID-19 and are generally considered as essential industries. The low demand from automotive markets affected part of the advanced cord business, while demand from timing belt and elevator markets remain solid. BBRG accelerated the implementation of its profit restoration plan to further enhance the business mix with reduced presence in low-margin rope markets and increased revenues in higher-end markets.On the market side, demand from oil and gas markets in the Americas is projected to drop, while other markets are likely to perform relatively well in the second quarter of the year.On a consolidated basis, we recorded a sales decrease of 11%, mainly resulting from an organic volume decline of 10%. The balance of the impact came in from -- which came from -- mainly from currency movement.The consolidated sales breakdown per BU for the first quarter of 2020 is illustrated in the first graph. So on the left, you see RR representing 43%; steel wire representing 35%; specialty business, 10%; and BBRG, 12% of the total sales. On the right-hand side, you see the combined sales breakdown, including the sales of our joint ventures in Brazil. BBA continued to perform well throughout the first quarter and the year, but BMB got impacted by the demand drop in tire and automotive market.The impact from exchange rate was higher at the combined sales level as a result of the strong devaluation of the Brazilian real.We will move now to the liquidity situation, and I will focus on the working capital as a major driver of our cash flow position. So the overall working capital has moderately increased by EUR 35.5 million in comparison with the 2019 year-end position. Inventories overall have remained stable compared to 2019 growth. Accounts receivable and accounts payable have reduced as a consequence of the sales and purchases decreases. We also kept our overall receivables under control, thanks to a higher focus on the collection effort. As you can see, we have been successful in driving a sustainable working capital reduction program, which has allowed us to free up EUR 300 million compared to the first quarter of 2019. This is a major achievement for us, which allows us to post an average working capital on sales of 18.4%, stable versus year-end 2019 and significantly down versus the 22% that we posted back in Q1 2019.Let's have a look now at some additional financial parameters and results. I think that it's important to point out that our liquidity position and balance sheet structure are equally strong and healthy. This is a result of the strong discipline across all the company in terms of managing cost and capital allocation. The difficult decisions that we took last year in terms of restructuring measures implementation, the efficient and successful execution of the profit restoration plan mainly in steel wire solution and BBRG, all this, combined with all the measures that we took to deleverage the debt, are now paying off and do allow us to show a stronger level of resilience to deal with the current crisis. Our current net debt on underlying EBITDA ratio is unchanged from the close of last year at a factor of 3 -- 2.1, far below the 3x multiple at the end of Q1 last year. Needless to say that in the current circumstances, it is a strong achievement.Over the last few months, we have also executed a series of tactical measures to further optimize our cost base and improve liquidity. Oswald has mentioned some of them. The Board has reduced the dividend proposal to EUR 0.35 gross, half of the amount of 2019. This has generated a saving of EUR 20 million. And on top of that, we have postponed the payment to the back end of the year. The Board fees for 2020 were reduced by 10%, in line with the temporary salary reduction of executive and senior leadership team. We have also temporarily reduced the working hours of teams around the world. Next to that, we are taking additional cost and payment actions, and we also continue to tighten the control of the working capital and CapEx spend. Last, but not least, we have also drew down EUR 119 million of additional committed credit lines as a precautionary measure to bring our liquidity to a level of EUR 750 million immediate cash on hand. These actions all together have resulted in a high level of preparedness, which are enabling us to go into the crisis with a very solid position.With that, back to you, Oswald, for the outlook of the second quarter.

[Oswald Schmid, COO, Interim CEO & Director]

Thank you, Taoufiq. Indeed, we have been able to safeguard a strong financial position that should enable us to enter the storm. Juan Carlos Alonso and his team are combining insights on market expectations from different angles and sources, among which the Oxford Economics' corona watch reports. From those sources, we are looking at the baseline scenario being the most likely scenario at a certain moment and as well at the worst-case scenario.The current baseline shows the global GDP construction of 3.3% year-on-year in 2020. And as you can see on this slide, Q2 is showing the biggest impact. Recovery will start in quarter 3 and be in effect overall by the end of this year. Automotive markets and -- are most affected with recovery to 2019 levels not expected before mid-'21. Agriculture, construction, utilities and consumer goods, on the other hand, show faster recovery during 2020.In the worst-case scenario on the next slide, worldwide GDP would drop by almost 11% in 2020. The decline would continue in quarter 3, and a return to pre-COVID-19 levels would only come in late '22. Automotive remains most impacted with a slower recovery, not before '23. Construction would, in this scenario, also get heavily impacted. Agriculture would remain the only sector without significant impact. So these scenarios give a very different picture about the impact and duration of COVID-19 pandemic in our markets. Only the future will prove the real scenario we will be dealing with. But in any case, we do have to prepare for the worst.We project Q2 sales to markedly decline in different sectors that are relevant to us. While the magnitude of the impact of the COVID-19 pandemic on the global economy has become visible, its duration remains highly uncertain. We, therefore, have no visibility on a full year impact on our markets and on our businesses. We, therefore, will continue to apply strict control on costs, working capital and capital expenditure. But once again, the actions we have implemented in 2019 and in the first quarter of 2020 have made us strong and more resilient to cope with several challenges. We are convinced that our strong liquidity positions, combined with other measures we have implemented and continue to implement, puts us in the right position to weather the crisis.I also take the occasion to share with you that the Annual General Meeting of Shareholders that took place behind closed doors this morning has approved all agenda items. This included the appointment of 2 new independent Board members in replacement of 2 other Board members whose term ended and who sought no reelection for a new term of 4 years. So I'm happy to announce that as of today, we welcome on the Bekaert Board of Directors Ms. Henrietta Fenger Ellekrog, Danish national with an international executive career in human resources; and Ms. Eriikka Söderström, Finnish national who has a strong financial background built up in various international operating corporations.With this, I would like to open up the lines with the analysts for the Q&A sessions.