© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Dear ladies and gentlemen, welcome to the conference call of EDAG Engineering Group AG. At our customer's request, this conference will be recorded. [Operator Instructions] .May I now hand you over to Cosimo De Carlo, who will you lead you through this conference. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen, and welcome to our Q3 earnings call. My name is Cosimo De Carlo. I'm very delighted to guide you through the EDAG earnings call for the first time. I'm here together with my colleague, Jürgen Vogt, who will give you a detailed overview of our financial figures later on.But before that, I'd like to give you an update on recent developments and news within our industry. Let's start with a general overview of the ESP market. Since we've had our Analyst Day on August 22, the overall market for engineering services is developing actually well. Throughout the last weeks, we've had a lot of bad news in the automotive industry and also profit warnings from OEMs and suppliers. But in this context, I would like to emphasize that the business model of our engineering services provided, like EDAG, is currently not affected by the recent automotive news like tariffs and trade war or the WLTP or the business conducts as we are not dependent on the number of cars or parts sold but on the R&D budget of our customers.We see R&D budget at traditional OEMs and suppliers remaining on a very high-level due to technological shift towards the mobility and autonomous driving. Moreover, we still see an increasing number of startups entering the market and seeking for engineering support. We observed an increase in demand for ESPs to enlarge their scope of services in the automotive value chain. This means that there will be an increase in need for complete development capabilities, included the design of production facilities and sometimes even production of small series.EDAG is ideally positioned as we are ready for sale business with our 3 segments Vehicle Engineering, Electrics/Electronics and Production Solutions. We can offer full services starting with design, but international of start design, but more value, until complete development including factory design.In this context, size does matter as work package, we get bigger and the level of this responsibility for ESPs will also increase. Again, another great chance for big EPSs like EDAG to enlarge their market share.In Germany, the demand for engineering services is good, but the overall picture is mixed. While we see good development of some of our German OEMs customers, we also see a lack of business especially with one premium OEM. This leads to ongoing pricing pressure on the German market. We counterbalance this situation with increased business with international customers. In the first 9 months of 2018, international business already accounts for 36.3% of our revenues compared to 26% in 2017.Moreover, we are executing our reinvent program with a focus on efficiency and excellence in operations. The first success of our efforts have been reported on October 16 with increase of our guidance for the full year 2018. Overall, we are on track with our plans for a sustainable and profitable growth.Let me now highlight some of your projects -- of projects of the third quarter this year. In September, we showed up the commercial vehicle show in Hanover. EDAG has presented numerous innovations and received extremely positive feedback from our customers. As highlights, we have presented our versatile chassis concept study called BatteRANGE. BatteRANGE can be adapted to fit various wheel formula, wheelbases and drivetrains. This makes it suitable for just about all commercial vehicle types from the motor coach to the semitrailer truck. If you are interested to learn more on this, I would like to invite you to visit our website where you can find a very interesting and entertaining video.EDAG has won the Automotive Brand Contest 2018 in the category of brand transformation with its quality of projects. I am very pleased about this award, and it shows that we are the first one of the ongoing change in the automotive industry and proactively shaping it.Our startup, trive.me, has enlarged its pilot phase of its app trive.park to 4 car parks in Berlin. With trive.park, you can easily book a parking space, open the entrance barrier with your mobile phone and, of course, pay your invoice with the app. trive.park is currently available in Munich and in Berlin. The app is available at the app store for free.EDAG has also receive the future project from the RIO. RIO is the digital brand of Volkswagen trucks and bus, soon to be the TRATON GROUP, and the first manufacturer-independent cloud-based platform used for the global transport of goods. Our software specialists will be working on the product development of the cloud-assisted platform and related devices. Experience in front-end and back-end development, cloud computing and big data would be employed on this project.For ours, Swedish customer Volvo we had the chance to manufacture the exterior model of the high regarded concept study for autonomous car of the future, called Volvo 360c. Also EVELOZCITY, a U.S.-based e-mobility startup, has contracted EDAG with a comprehensive range of development services. We support EVELOZCITY in the development of a fully connected electric vehicle. In addition to classic engineering, EDAG will also be responsible for a high range of Electrics/Electronics content.And finally, in other good news from Germany, BRABUS Automotive has chosen EDAG to become strategic engineering partner. BRABUS is a general contractor and contract manufacturer for the automotive industry. It independently produces exclusive luxury limousines in low-volume production. Again, EDAG proves that it does not only have a high reputation of the automotive startups and traditional OEMs, we are also able to address new groups of clients in the German market, this is clearly a good sign that we are able to further expand our footprint in Germany despite some negative news about the automotive market in the recent times.So this was just a quick overview on some of our highlights in Q3. Now after being 6 months with EDAG, I'm absolutely thrilled by the high level of competence that we have there. And believe me, there are many more cutting-edge projects that we are currently working on. However, this selection of project shows that we are basically on track with the execution of our strategic growth program REinvent. We have shown in Q3 that we can grow our revenues with existing and also new customers in Germany and internationally. Our innovative strength has been once again proven on the commercial vehicle show in Hanover. EDAG has been contracted in digitalization and Electrics/Electronics projects. Overall, EDAG is definitely the top choice partner for the mobility of the future.Ladies and gentlemen, we will keep a strong focus on our further execution of our REinvent program in the next quarters, in order to sustainably strengthen our market position and to deliver better results.Please let me now pass on to Jürgen Vogt, who will give you the financial details on the first quarter.
Thank you very much, Cosimo. Good morning, ladies and gentlemen. I would like to start with an overview of the key financial highlights of the first 9 months 2018. They show after a strong H1 that we continue to be on the right track. Revenues in the first 9 months were up 10.7%, all 3 segments. Vehicle Engineering, Production Solutions and Electrics/Electronics showed a positive development. On top of this, growth in the third quarter, July to September, was not caused by acquisitions, but was clearly organic growth.This is why we decided on October 16 to increase the revenue guidance for 2018 to growth of at least 8% from the former 6% to 8% guidance for the year 2018. This means, at least, revenues of EUR 775 million in 2018.The adjusted EBIT was EUR 37.8 million, an increase of more than 40% compared to the previous year. The margin went up from 5% to 6.4%. The 3-months' period mainly from July through September showed a performance of 7.7%, the best quarter since the end of 2015.The order intake was up by 9.7%. Overall, strongest performer was Production Solutions with 35%, Electrics/Electronics with 31% was also a very strong performer. Vehicle Engineering was almost at the particular high-level volume of last year.Another important event was that the secured long-term financing for EDAG. We have successfully placed the promissory note of loan in the amount of EUR 120 million that is transaction. We took advantage of the favor of the market in order to secure financing for the next 10 years. This will reduce also the interest cost in the future. EDAG is now financially well prepared for further -- for the dynamic growth. So far the highlights of the reporting period. Let us now go into the details.Revenues in the first 9 months were up by 10.7%. The revenue growth has generated -- those are generated by all of our segments. Weak engineering was up 8.6%, benefiting from new international customers, especially in the field of electronic vehicles. Production Solutions was even more successful internationally with a growth rate of 27%. Electrics/Electronics was up at 4.1%, in the quarter July to September, at 11.8%, a very strong performance.On the next page, we see the revenue by region, as Cosimo has already indicated, our growth in revenues is very strongly driven by international business, the share of international revenues has increased from 26% in the 9 months 2017 to 36% this year from EUR 138 million to EUR 214 million. This was a variety a velocity of other customers has helped to develop this -- helps to develop this strong performance.As for the adjusted EBIT on the next page, we have outperformed our revenue growth with an increase of almost 44% to almost EUR 38 million. Again, all of our segments show a positive development. The adjusted EBIT margin levels at 6.4% after the first 9 months of 2018, Vehicle Engineering was at 6.8%, Product Solutions at 6.6% and Electrics/Electronics at 4.4%.Let me give you 2 more comments on the adjusted EBIT. In the quarter Q3, July to September, EBIT margin was at 7.7%, which will be the strongest quarter in 2018. We expect the last quarter to be below the 9-months' margin of 6.4%, because of the working day situation in December, some, not all, of our clients will stop working, already at the 14th of December, so we only have 10 working days with these clients. Despite the facts, we have managed to significantly increase the adjusted EBIT margin, we are still not at a satisfactory level. We continue to work hard on a further step-by-step improvement of our margin profile. The goal is to grow profits faster than sales, qualified growth.Looking at the expenses we have here. The total cost structure breakdown in percentage of the revenues. We have managed to get down our personnel expenses by 3 percentage points. However, we had to hire more external engineers, so the expenses for external revenues have increased by 2 points, but on the basis, overall the personnel costs, if you combined these 3 points went down from 74.2% to 73.2%, 1 percentage point.The next page, earnings after-tax, development of earnings after tax and equity. Earnings after taxes were up by 67% to EUR 20.4 million. This is a much stronger growth compared to the adjusted EBIT and caused by lower interest cost. The EPS after 9 months is already at 8 point -- EUR 0.82. The equity is almost up to EUR 150 million from EUR 145 million the year before. The equity ratio decreased, reasons because of a larger balance sheet, went up from EUR 440 million at the end of September 2017 to EUR 530 million. The reason is our shareholder -- our borrowings of EUR 120 million of the full time value which increased the balance size. We are paying back a shareholder loan -- we were paying back the shareholder loan in this -- in the current week. So at the end of the year, the balance sheet should deflate again, so our equity ratio will increase by the end of the year.On the next page, we see the development of the headcount and the CapEx and the investments. Headcount increased to 8,600 employees. With our continued growth, we expect headcount to further increase, especially outside Germany. The CapEx slightly increased to EUR 15.5 million. CapEx ratio still is in our target limit of 2.4% of sales.Looking at the cash flows, we see a slight decrease in operating cash flow from EUR 25 million to EUR 20 million this year. Free cash flow on the other side is up 18% to EUR 5.2 million.Net financial debt situation, the net financial debt as of September 30 is slightly up at EUR 124 million compared to EUR 120 million the year before. You can see in this chart or we will -- the leverage went down from 2x adjusted EBITDA to 1.8x adjusted EBITDA. As you can see on this chart, we had a higher level of financial debt at September 30, due to the new borrowings at EUR 208 million, but we also had a significant higher cash situation with EUR 85 million compared to EUR 15 million a year before. By the end of the year, debt should come down a lot, because a lot -- or many of our customers pay in December. This will also improve our leverage further.The same impact we also will have at the trade working capital, have a positive impact by the end of the year, the customer will pay in December. Other customers will pay in December. The level we had at the end of September was at EUR 174 million, a little bit higher than the year before. The level will come down to around to around 22% by the year-end, that is our best estimate at this point.Concluding, let us now come to our outlook for the year -- full year 2018. As Cosimo De Carlo already pointed out at the beginning, our overall market for engineering service providers is fully intact. The demand for engineering service remains high and offers many opportunities for further growth. We are focusing on the execution of our strategic growth program, REinvent. And are confident to reach a sustainable growth in revenues and margins, meaning qualified growth, profit should increase faster than sales.Based on the goods development on the first 9 months, we have already increased our revenue guidance for 2018 on October 16. For the full year, 2018, we expect revenues to grow at least by 8% and an adjusted EBIT margin of approximately 5% to 7%.Ladies and gentlemen, thank you for listening to our report on our 9 months' figures. We are now looking forward to answering your questions.
[Operator Instructions] The first question is from Marc Tonn, Warburg Research.
First question from my side would be regarding the order intake, which to my understanding for the first 9 months was basically on par with the revenues. And we've seen very strong growth this year. And that you could just give us some indication on what we should expect. Is it beyond the fourth quarter in the light of this order intake? Whether this is a more seasonality? And you're expecting nevertheless, a decent outlook for 2019? Although, there is order intake and then revenues are more running on pars? This would be the first question. Second question, I think we have seen a very remarkable and strong increase in the profitability at the Electronics -- Electrics/Electronics division. Perhaps you can shed some light on how we should think about this division going forward with, let's say, obviously revenues now increasing at a faster speed year-over-year. Whether the margin should thus remain on a higher level or what you would see, as say, potential drawbacks there, that would be my second question, for now.
Okay. I will answer the question. This is Cosimo De Carlo on the phone. So concerning the order intake, as you said, we are running on a very high level of order intake with plus 9.7%. What I can realize, you know our business, we have a strong seasonality in this kind of business, but nevertheless, the first 9 months run quite well. And as you can imagine the fourth quarter is a very important quarter for defining the order intake for next year. As I can say to you, we are at very good level. We are now discussing with many customers. We have many opportunities that we are confident that we can transform into order intake at the end of the fourth quarter. The second question concerning to E/E. Yes, exactly the good performance of -- extraordinary performance of E/E is something what, as we said -- as I said also during my meeting on the 27 of August, it's, let's say, our main focus at the moment whether we do expect an increase of the performance of this unit. This unit is running quite well at the moment, we could successfully, let's say, increase the number of customers for this unit in the last 4, 5 months in order to differentiate our portfolio and to differentiate our customers. And this is exactly the effect of this positive numbers in Q3. Of course, we are expecting to continue on these trend. We are focused a lot on all 3 segments especially E/E. And we are focusing on continuing in growing, in this segment in terms of revenue and, of course, in terms of profitability.
The next question is from Gerhard Orgonas of Berenberg.
Maybe just a question on Production Solutions, which for me was a positive surprise as well. It held up quite well, I had the impression that you had this big Mexican order at the beginning of the year, and maybe that would phase out, and we would come down a little bit over the second half of the year. So can you -- could you please give me a little bit more detail? Is this still related to those orders? Or did you find new projects here?
Generally speaking, I think, this -- we expected that this Mexican business will go down already in August. But we saw or we have further opportunities with this client, also going into the next year, maybe not the volume we have seen in the year 2018, but part of the business is secured in this year and also plays into the next year.
And the next question is from Christoph Laskawi, Deutsche Bank.
I would have a couple, and like to go through them one by one if okay with you. The first one is on growth actually, also thinking into 2019. You raised top line guidance this year 2 times, I think, and show very decent momentum. Now the question is, the base becomes tougher. Thanks to the strong growth this year. And the question will be, are there any project phase-outs we would need to be aware of in the next year? Do you think that market conditions can actually improve in Germany, aside from only the international-driven growth? That's the first question.
Let say like this, as I communicated in August, we foresee a market increase of about 4% to 6%. And I note a further increase -- revenue increase for the next year is more than the market average. So we are basically on track this year with these assumptions, and this will continue also in the next years. According to me, as you said before, so, of course, a good impact on this is the good development of the international business. On the other side, I don't believe that the German market will decrease in the revenues, because as I said in the beginning, let's say, our market is R&D outsourced. And even if you have a German customer so, let's say, OEM, Tier 1, facing some difficulties at the moment, nevertheless, our main market share is the spending R&D, and they will increase in the next years. Because even in German customers an obliged to increase the R&D spend -- or to optimize their R&D spend in order to be successful in the future. So we will continue on this growth path. I think, it's a necessary, and I think it's really my intention to continue on this track. And to be always better than the market average, which I define as 4.6% in August this year. The international business should grow more than the German business, but nevertheless, the German business should also increase.
A follow-up question on that. And I totally agree that the OEMs need to improve their R&D spend and make it more efficient. And in order to do that, we have seen several headlines on corporations like BMW and Ford and others as well. Do you think those corporations could lead to, at least, a stagnation in the market, since a couple of OEMs combining their efforts more than double spending so to say? And do you think this could dampen pricing to some degree, as you need to -- in case the market volumes come down to some degree, you would need to see more engineering service providers, basically bidding for those projects. And coming back to the situation that we have over the last 2 years that underutilization leads to pricing pressure in the industry?
Okay. So I think that cooperation on the market, it's a must for everybody, it's a must for our customers, OEM, it's a must for Tier 1, it sometimes also I see also the environment and development of our market as ESP also that is dynamic on this context. I was never -- I always said also during my call, of my meetings, I not expect the price to go up. I expect the further consolidation of the market, in terms of OEMs and in terms of ESPs. I think that all these changes, let's say, using a common platform, let's say, making use the same money for the same objective can be transforming to an opportunity for us. Because on that side, efficiency it's always a must on our side. So we need to be also very efficient. It's our job, exactly like our customers have to do. We need to increase our efficiency. And on the other side, this cooperation can bring us in a very good situation because we know the work of the OEMs -- of different OEMs quite well. So we can play a leading role in, let's say, reaching different customers together in order to have the most efficient product.
Okay. A question on the specific customer, which you refrained to mention by name, it's Audi. But the change on top of the R&D division. I would expect that them coming back to the market tendering volumes which have been expected, essentially for the second half of this year already, is further pushed out. Do you already -- or do you see discussions picking up with the company pointing to some improvement in H1 next year? Or should we consider that customer being on hold and more or less as a black box when they come back to the market?
To be honest with you, let's say, we are still at Audi situation, which is on hold since we don't have a clear picture about the future strategy of this customer. I think even if the request of the market for this special customer was reduced, let's say, in this year, and also starting from beginning -- from the end of last year, I see an improvement for our side, also in some specific areas, which are, let's say, a must for the future to develop. I think even if you have a global feature, we discussed, which is, let's say, not a rising star, nevertheless, this customer is still investing in future technologies, and we are part of this future development. So I cannot now imagine, let's say, the situation this customer to change very rapidly. So I don't have a clear picture at the moment. Nevertheless, let's say, we are very ready, let's say, in case this customer could speed up in terms of research and development. And until now, we could compensate and even accelerate the lack of business with this customer with other customers which are very interested to our portfolio.
Understood. But are revenues with Audi still falling on a quarterly -- year-over-year comparison by quarter? Or is it essentially flattish now?
Jumped a little bit compared to last year, jumped a little bit.
Okay. Last one would be a housekeeping question, more or less. The free cash flow in Q3 was not that great. I think largely related to working capital outflows. You already commented that you would expect Q4 to improve. Is it complete reversal of the trend that we've seen in Q3? Or is there spillover expected into Q1 next year?
I think -- we think that it should improve by the end of the year also compared to last year. Since, I think, December is the deciding month. So sometimes we even don't have an operating positive cash flow until the last quarter. So we think this should reverse by the end of the year.
There are currently no further questions. [Operator Instructions] We haven't received any further questions. I hand back to the speakers.
So thank you very much for your interest and taking our -- participating in our call. If you have further questions, please let us know. Also you can either contact us directly. Cosimo or myself, Sebastian Lehmann, here from Investor Relations.
From my side also many thanks for your patience, for your attention. And I wish you a very good day.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.