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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen, and welcome to the Grammer AG conference call regarding the Q1 figures. [Operator Instructions] Let me now turn the floor over to Mr. Ralf Hoppe.
Hello, everybody. Hello from Amberg. This is our presentation of the Q1 results 2019. The presentation will be done by our CEO, Manfred Pretscher. And as the host explained, afterwards, you have the opportunity to ask questions. Mr. Pretscher, please.
Hello. Good afternoon as well from my side. So what I would like to present to you is, first, a short summary of the first 3 months 2019. So Grammer started into the New Year on a positive note despite the still challenging conditions facing the automotive industry. In the first quarter of 2019, the group improved its revenue as well as its operating earnings. Overall, Grammer performed as expected and planned in Q1 2019. The group revenues were markedly higher due to the TMD acquisition and the strong commercial vehicle business. Ongoing solid performance of the operational EBIT with a margin of 4.3 percentage points in the first quarter of 2019 is in line with the previous year 2018.As expected, a slight drop in the organic business volumes for the Automotive division was observed in Q1 2019, caused by divergent automotive markets. The start into the new business year has been challenging as expected, especially in the European Automotive segment. On the other hand, Commercial Vehicle markets are, again, performing well. Market developments will be continuously monitored in the next month as various critical, political and economic events could have a significant impact on our business. So switching to the next page. Market development in the first quarter 2019. On the passenger car side, new registrations in Germany stable with the SUVs and upper-class models in demand by the customers. Western Europe with a decline of around minus 3%. North American registrations lower by minus 2%, but stable light-truck segment with a slight plus of plus 1%. Registrations, China is hurting us with a double-digit decline of minus 14%. Trucks. Western Europe growing by plus 6%, with Germany plus 15%, U.K. plus 12% and France of plus 5% means they are performing pretty good. United States, with ongoing dynamic growth momentum of plus 12%, mainly driven by strong heavy-duty class 8 segments. Positive for us as well, the recovery in Brazil is continuing in the first quarter of plus 47%. In China, a light or slight decline of 2%, but a stable heavy-duty truck sales. Other Commercial Vehicle markets. All other important markets, like agricultural, machinery, construction machinery and material handling are continuing to grow as in the previous quarters. Switching to the next slide giving you our information about group revenues. Group revenue reached for EUR 534.1 million as of March 31, 2019. The increase of EUR 79.7 million equal to 17.5% over the previous year is mainly due to the acquisition of the TMD Group effective since October 1, 2018, in the Automotive division. The Commercial Vehicle division posted growth rates in all core markets. The dynamic and very positive development in the Commercial Vehicle division compensated the Automotive division's expected weaker start into the first 3 months. In terms of EBIT, group earnings before interest and taxes climbed by EUR 3.6 million to a total amount of EUR 24 million in the first quarter of 2019 versus EUR 20.4 million in the previous year. This translated into an EBIT margin of 4.5%, which was on par with the high level of the previous year. Operating EBIT margin with 4.3% is in line with total year 2018 profitability, reflecting solid improvement of the operating performance of the group. On the next slide, you will get some information on the net profit and earnings per share. With almost EUR 12 million, group net profit in Q1 2019 was on par with the high level of the previous year. The higher financial result reflects the TMD acquisition financing cost. The tax rate, 30%, remains nearly on previous year's level. Earnings per share correspondingly decreased to EUR 0.95 in Q1 2019. Some information on balance sheet development. The equity ratio was unchanged at 22% as of March 31, 2019. It remained at the same level despite the first time application of the IFRS 16 leases regulation. Net debt increased to EUR 292.5 million. At 89%, gearing ratio stays on a solid level. In terms of investments, Grammer group capital spending amounted to EUR 32.4 million in the first 3 months of 2019 and was substantially higher than in the previous year. This increase is primarily caused by the capital expenditure in the Automotive division, due to the new product ramp-ups as well as for the new GRAMMER Technology Center and the new group headquarters, which is currently built in Ursensollen near Amberg. In addition, new noncurrent leases were recognized as assets from January 1, 2019 under the new accounting guidelines provided by IFRS 16 leases. Capital expenditure in the first 3 months 2019 is -- in this connection, amounted to EUR 6.2 million, with the 6.1% CapEx to sales ratio is, therefore, higher compared to the previous year. Employees, their case, there are some significant changes. The number of employees at the Grammer Group rose to 15,011 from 13,123 1 year ago. This is primarily attributable to the acquisition of the TMD Group. Compared with December 31, 2018, the number of employees rose by 354 from 14,657. And this goes in line with our sales increase. The ratio of low-cost and high-cost countries remains stable at 70%. Coming to the Automotive division. Revenue in the Automotive division rose substantially by EUR 64.4 million from EUR 313.9 million to EUR 378.3 million in the first quarter 2019. The increase resulted primarily from the acquisition of the TMD Group. As a result, revenue in the Americas climbed from EUR 47.1 million to EUR 134.3 million. It was also partly influenced by our organic growth in the ramp-up after the model changes as projected. Europe, or EMEA, remained by far the division's largest region in terms of business volumes despite decline in revenue in this region from EUR 213.2 million to EUR 192.1 million due to the weak market conditions. As widely reported, the first quarter of 2019 was influenced by the still challenging conditions in the automotive industry and the related general slowdown in sales by passenger vehicle OEMs in Europe, in particular. IFRS EBIT in the Automotive division came to EUR 12.3 million in the first 3 months of the year, thus exceeding the previous year of EUR 9.7 million.This figure was affected by a positive currency translation of EUR 1.7 million. Accordingly, the division's EBIT margin came to 3.3%, surpassing the same quarter of the previous year of 3.1% despite the customary post-acquisition depreciation. Operating EBIT reached EUR 10.6 million versus previous year of EUR 9.5 million. We will closely monitor the market and economic development in the next coming month. Comprehensive action plans are already in place to make up earnings shortfall and to boost productivity and efficiency in the Automotive division during the course of the year. Commercial Vehicle division. The Commercial Vehicle division recorded rising sales volumes in nearly all core markets in the first 3 months of 2019. The division posted an increase -- a significant increase in revenue in the Commercial Vehicle divisions and came to a value of EUR 160.5 million. This positive development was driven by rising sales volumes in the agricultural machinery, construction material handling and truck markets as well as the continuing recovery in Brazil. Overall, all core market segments showed the many dynamic development in the first quarter. Commercial Vehicles business in China continued to expand with revenue in Americas achieving the highest percentage increase of 11.5%. This is followed by EMEA, the revenue rose by 9.5%, and Asia Pacific with an increase of 8.5%. Driven by higher volumes, operating EBIT improved to EUR 16.8 million. And the operating margin remained at the level of 10%.Market outlook for 2019. The global passenger car market will continue to be challenging in 2019. For Europe, no significant growth or even no growth, but a slight decline in car production is forecasted for 2019. Sales of SUVs will continue to grow, favored by customer preferences. Overall, the market is expected to stabilize. Heavy trucks, commercial vehicles, revenue expectations for China, the largest truck market are influencing the world market as a whole. In 2019, there will probably be a decline of minus 10% in China. But Grammer will continue its young growth story despite this for sure.This market downturn in Brazil has come to an end, and growth of 10% is expected for 2019. The truck markets in Europe and in the U.S. are expected to grow each by around 6% in 2019. Agricultural machinery industry. Our key customers expect a good economic situation for agricultural machinery to continue at the high level with increases being forecasted in North America and Brazil in 2019. Other segments. Other markets such as construction machinery and material handling should continue to post robust growth in 2019. This is also confirmed by the expectations of our customers. However, Jungheinrich has recently given a first cautious sign about future world market development. From our outlook for 2019, Grammer expects the market environment to remain challenging and volatile, especially in the automotive market. We are also expecting that the global economy is losing momentum and that the challenges facing car manufacturers and correspondingly the suppliers, will continue to increase. Accordingly, we will take targeted countermeasures and strengthen our competitive position. For 2019, we forecast a moderate increase in revenue in the core business areas and expect revenue growth in the group, including the TMD Group, to more than EUR 2.1 billion. We expect EBIT to rise significantly above the figures for fiscal year -- compared to fiscal year 2018 of EUR 49 million mainly driven by lower exceptional expenses, our TMD integration and a better cost base. We forecast the operating EBIT to exceed the level of fiscal year 2018 and thus, a further increase in the operating EBIT margin. Furthermore, the ROCE is to increase above 2018 level. So that's the main information I would like to provide you. So now we'll open for questions.
Yes. Thank you very much, Mr. Pretscher. And now please open the lines for questions.
[Operator Instructions] And the first question is from Marc Tonn, Warburg Research.
Just a couple of questions from my side. First one would be on the Automotive division. You already mentioned that TMD was one of the key drivers. I would -- the question that I would like to ask whether you could give us kind of the split about, let's say, organic growth excluding TMD. How much TMD contributed? And perhaps what was the effect of FX in the first quarter? Secondly, on the same issue. When we look at operating EBIT, I think you always mentioned that TMD will be more margin-accretive, at least operationally. I recognize that you have not adjusted for the PPA in the operating EBIT or in EBIT. Perhaps you could give us some feeling there on how we should think about profitability on an operating level for TMD? What perhaps the PPA effect was there? And how the, let's say, old or organic or heritage business went in this first quarter? Second question would be on -- is there any kind of corporation which you have -- was there now a new major shareholder? Is there anything you could share with us at this stage, whether there's any update compared to what you have said in March in this regard? And thirdly, I think you haven't provided details for order intake now for the first quarter. Just if you can confirm that the stabilization of the order activity from your key customers has continued after, let's say, the change in your shareholder structure?
Okay. Let's start with the question about the corporation committee. Mr. Pretscher, please?
Yes. So on the corporation committee, you know that we have several projects with our main shareholder. And the programs are running as we have planned, so this concerns to find productivities and synergies in terms of purchasing and as well in terms of production processes. So I cannot disclose much more. Only I can pass the message that all the projects we have defined together with our major shareholders are running according planning. Concerning the order intake, so we are staying at around EUR 300 million, which is full in line with our planning and is, in average, nearly the same value of what we have achieved in previous years or in last year. So in order intake, everything is fine.
Okay. Now I will try to answer the questions regarding the sales development. Let's start with the foreign exchange impact. Overall, for the first quarter, we had a positive foreign exchange impact in sales, translation impact of around, give or take, EUR 6 million, EUR 7 million, approximately EUR 5 million positive in Automotive and the rest in Commercial vehicles. Regarding contribution of TMD, the first quarter sales of TMD contributed with approximately EUR 69 million to the Automotive revenues. That means without TMD, so automotive core business, so to say, organic development like Mr. Pretscher explained, due to the situation, especially in Europe, the Automotive division would have reported a decline in sales of approximately 2% to 3% in the first quarter compared to the fourth quarter of 2018. Profitability, the operating EBIT is including the PPA depreciation, so we did not exclude PPA, purchase parts allocation, in the operating EBIT. The PPA amounts to a quarter, as reported or explained in the past, is approximately EUR 2.5 million per quarter. About TMD profitability, you are right, TMD profitability is above group profitability. That's why we -- that was one reason why we acquired TMD. However, because of, let's say, they are still in the integration phase, we have first integration activities, specific integration activities in North America. We are putting together the sales and engineering department, for example. The, let's say, the core profitability of TMD is not there yet at the expected levels. But it will develop positively over the next couple of quarters.
And just -- but looking at it -- including all PPA effects, it's still, let's say, at least contributing positively to the Q1 quarter.
Absolutely. Yes, absolutely.
Just a follow-on question. You mentioned that, that financial result -- I think you alluded that financial expenses were weaker year-over-year due to the TMD division, quite naturally. I think it was a number of minus EUR 5.3 million in the first quarter. Is that a run rate we should assume for the year as a whole, around minus EUR 5 million a quarter? Or is it leveling off a bit in the next few quarters? Or is it just...
No. This reflects -- you are right, this reflects the purchase price of TMD. And for the interest expenses, you can assume a run rate between EUR 5 million and EUR 6 million over the next couple of quarters. Yes.
Next question. Christian Ludwig, Bankhaus Lampe.
Also a couple of questions from my side. First of all, in your shortened version of the quarterly report, I couldn't find any cash flow figures. Could you give us an idea of what your operating cash flow was for the quarter? And then as a follow-on, what do you believe that the full year target for cash flow is going to be? I saw that your CapEx will be significantly increased year-over-year due to the investments into your new headquarter. So maybe you could adjust a little bit for this very specific expenses for the headquarter CapEx and the normal CapEx, give us an idea where we should be at year end. And the second question would be on your ramp-up of the seating business with this very big global U.S.-based American excavator company. Could you give us a quick update where do you stand there? Is the ramp-up going as planned? What should we expect as a revenue contribution this year?
Okay. Mr. Pretscher, the Caterpillar contract?
Yes. Caterpillar contract. So Caterpillar is running as expected. So there is no major -- or there is no negative message to pass. So we are completely in line with our plannings together with Caterpillar.
Yes. And you can see it in the development of the Commercial Vehicles business, especially...
And the sales.
And the sales development. You can see a very positive development in our so-called [ other ] business, which includes the construction business, especially in North America as well. In terms of cash flow, after 3 months 2019, our cash flow has developed positively compared to the first 3 months of 2018. Operating cash flow before investments reached minus EUR 2 million compared to minus EUR 24 million last year. So a positive development because of the improvement in our EBIT, improvement due to depreciation, of course, and also improvement of our working capital. Free cash flow after investments because, you're right, we have significant higher investments, also due to our construction of the headquarters and technology center. After investments, free cash flow reached minus EUR 28 million in the first 3 months of 2019 compared to minus EUR 34 million in the first 3 months of 2018. In terms of, let's say, cash flow target, we are still targeting for, of course, a very positive free cash flow. At the end of 2019, it will be definitely in the mid double-digit area.
And as a follow-up. What number should we include in the model for the headquarter CapEx this year?
Include around EUR 25 million.
Okay. And just one final question, sorry. Is there any major order that you are expecting this year, like, let's say, the C class 2 years ago. Anything of that magnitude that is due this year?
No. No, no, no.
No. Not in that magnitude. There are a couple of, of course, we call it must-wins, very important projects for us but not in the magnitude of a global C class platform compared to your example.
All we can say is that we are currently in discussion with some of our major customers to regain some business we lost in 2017. So if you talk about the C class business, you know that the C class -- and let me say the consult for the C class is applied as well for the GLC. So on the GLC, the new one will be started in the next coming 2 to 3 years, and there is a chance that we can regain a part of the volume. So for this, we are still in negotiations with the customers. And we will see what will be the outcome. So in principle, all the order intakes are running quite normal.
Next question. Harald Eggeling, ODDO BHF.
One question. Basically you touched some kind of earnings improvement program in automotive and spoke of some countermeasures. Is this basically the same? And could you probably shed some light on this earnings improvement program? For instance, by touching Slide 7, you speak of low cost country ratios. And the text below, for instance, sounds like you would like to increase the ratio of best cost countries. Or is there further things planned with TMD or with the Chinese? So if you just could elaborate a bit more on that, please.
No. No, no. This is a general project we are running. So this is concerning first productivity improvement and efficiency improvement of some of our plans where we have higher ramp-up cost, which needs to get under control. So these are specific teams working in these programs. And then another topic where we have to strengthen our performance is in the department of purchasing. So as well for purchasing we launched specific programs to improve, let me say, the savings coming from our supplier base. And for sure, not to forget R&D efficiency. I talked about project ramp-up. So R&D efficiencies as well under one of our focus topics.
Okay. One follow-up, please. Is there any kind of time schedule? Is there any plan to see some savings already this year materializing? Or is it topic...
Yes. For sure. So we have set up the program in 2 steps. And in total, we are running 5 specific programs. And we should get the first visible impact by the end of month July, beginning August. This is our planning.
And so to say a linear kind of contribution? Or will it rather be a bit more back-end loaded?
We have to divide it in 2. We have -- in terms of plant productivity, it will be linear. In terms of purchase -- and the project. In terms of purchasing, it will be more by the end of the year.
Next question. Peter Rothenaicher, Baader Bank Munich.
Yes. Peter Rothenaicher. Firstly, on your remark regarding order intake, so you mentioned EUR 300 million as in the previous year. But if we consider TMD, this would mean a decline on a comparative basis. Is this true? Or did you calculate it excluding TMD?
No. You cannot do such a comparison. It's not possible. So we know what is the, let me say, the decision finding calendar of our OEMs. So the OEMs have fixed their decision calender -- decision-taking calendar spread over the whole year. So -- and this is where we have taken -- we know it's a couple of years already, so 2 to 3 years prior to SOP. You know first when the SOP will take place and second, at what time the customer has targeted to take the final decision. So based on this knowledge, we are setting up our order intake target by month-by-month, quarter-by-quarter. And that's why we have in -- or in the first quarter, a lower intake based on the decisions taken by the customers and a significant higher decision-taking ratio in the next coming quarters. What I can tell you is we have, in principle, a calculation formula which just says order intake is roughly 1.25 multiplied by yearly sales. So this is what we are following as a global strategy. And with this calculation formula, we will get an order increase -- sorry, a sales increase -- a yearly sales increase between 5% and 10% per year. And I can tell you that the global target for order intake this year is significantly higher than last year. Last year, we have had EUR 1.4 billion order intake, and you have to assume that we have TMD on top. So TMD sales is roughly spoken EUR 300 million multiplied by, easy to say, is 1.25. We are nearly at around EUR 360 million. So take EUR 1.4 billion plus EUR 360 million, then you have nearly the order intake target we would like to achieve this year, means about EUR 1.7 billion.
But again, the comparison quarter-by-quarter is still difficult because of the targeted acquisitions -- or targeted projects are not evenly spread out between the quarters. So it's definitely in this year, the decision program of the OMs is definitely more loaded -- heavily loaded to the second half of the year.
Okay. I fully understand. So second question is on Commercial Vehicles business. So you had an excellent margin in the first quarter, again, which was 10%. Do you think this is a level you can keep? Or was this the entire year? Or do you expect here somewhat lower full year margin? And on the other hand, what are sales implications? What do you see here for material cost? Is there some challenge, some shortages? And do you suffer here from considerable price increase?
Coming first to the question of stable margin. So our clear target is to stay at least on the same level as we have shown in the first quarter. That means 10%-plus. So 10% is the minimum of what I expect over the year. So that's why -- and the second question in terms of material shortage or material price increase. So that is one of the reasons why we launched a specific program in purchasing to secure our purchasing prices and to avoid price increases. So I cannot tell you today if we have really no price increase. But we try to avoid any price increase even by re-sourcing existing suppliers.
So at the moment, there are no further questions. [Operator Instructions] Mr. Hoppe, there are no further questions.
Okay. Thank you very much, everybody, for your participation. Thanks for your questions. Yes, if you have any more -- or if you need any more information, feel free to contact the Grammer IR team as usual. Yes. That's all from our side. Talk to you soon. Bye-bye from Amberg.
Okay. Thank you. Bye-bye.