Novem Group SA

XETRA:NVM

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Q3 2022-23 results of Novem Group, which will be presented by the CEO, Gunter Brenner; and CFO, Dr. Johannes Burtscher. [Operator Instructions]I would now like to turn the conference over to Gunter Brenner. Please go ahead.

[Gunter Brenner, executive]

Thank you. Thanks for the introduction. Good afternoon, and welcome, ladies and gentlemen, to Novem's Q3 '22/'23 results presentation and key events.I would like to start on Page 3. I know you would see the Q3 key events. In this quarter, Novem posted solid revenue growth of plus 4.4% under continued challenging trading conditions as we all know. Top line was affected by COVID-19 disruptions in China and extended customer plant holidays in Europe during Christmas time. We all know that the COVID restrictions in China had been almost canceled last year November-December with quite some outbreak of COVID-19 in China.Just to give you one example, we have 800 people in our plant in China, almost 90% had been infected by COVID in a 4-week timeframe. Everybody thankfully recovered very fast and came back to work, but all companies and OEMs had been affected in the same way. So we had some production interruptions all over. And in Europe, as said, we have seen extended holidays over Christmas time. Some of the OEMs did shut down their plants for 4 to 5 weeks.Despite that, we received an adjusted EBIT margin of 11.4% for the quarter, remained stable. The year-to-date adjusted EBIT margin stands at 11.5%. With our high quality of business model as we see it and our resilience of earnings, we see despite the several headwinds, very well-known inflation, call-offs, volatile material cost, energy and freight, we are pretty satisfied with our Q3 result.Very good and very good result in free cash flow. Free cash flow in the quarter stands at EUR 24.6 million, generated largely driven by tooling cash inflow, where we could close some major projects, in example, for BMW and Mercedes. What we also did in this quarter 3, to have a stronger commitment to sustainability.We before stated or we did build trees in our forest here close in our hometown, where we again, as we did the previous year, reinstalled 4,500 trees in Germany, in Eschenbach, together with some local politicians and local TV to, as I said, strengthen our commitment to sustainability. 4,500 trees is exactly what we are using per annum per year in our wood production. So we would like to give this back to nature, to forest.Also ongoing is the discussions with the OEMs on the compensation for the increased input costs. This was -- we had some success in 2022, and we will continue this in 2023. Important also, Novem entered into a technology partnership with a Finnish-based company for in-mould electronics. Here we believe this solution could be implemented sooner or later by the OEMs as a new product, as a new technology. The advantage is that the space needed in the car for a trim part with electronic is much smaller than the current solution.And everybody knows that in the auto industry, space and weight is key. And with this solution, we are much smaller, we have less weight and we can deliver trim parts, wood trim parts, including an electronic function. So to sum up that page, strong sequential financial performance in still difficult and volatile environment.Moving to Page 4, our Q3 financial highlights numbers. So the revenue moved up 4.4%, as already said, from almost EUR 160 million last quarter to almost EUR 167 million in this quarter. Adjusted EBIT, down from EUR 20.4 million to EUR 19 million. And accordingly, the adjusted EBIT margin is 12.8%, down to 11.4%. The margin for the year stands at 11.5%. Very good success in free cash flow, as already mentioned, significantly up from EUR 8.9 million to almost EUR 25 million, EUR 24.6 million in Q3. And we said our net leverage decreased substantially from 1.7x to 1.3x, which is the lowest we achieved ever.On Page 5, financial highlights, year-to-date numbers. Revenue is up around EUR 70 million from EUR 455 million to EUR 526 million, a lot down to tooling, which we will see later. Adjusted EBIT is up around EUR 2 million, EUR 58.6 million to EUR 60.5 million. And the adjusted EBIT margin came down from 12.9% to, as already mentioned, 11.5%. Free cash flow for the year, EUR 25 million almost up, EUR 19.9 million, moved up to EUR 44.9 million. And as already mentioned, net leverage, 1.7x last quarter, down to 1.3x this quarter, best ever, as already mentioned.So this was a quick overview from my side. For more financial details and discussion, I would like to hand over to our CFO, Dr. Burtscher.

[Johannes Burtscher, executive]

Thank you, Gunter. And also from my side, a very warm welcome to everyone. I'm pleased to take you through the group results now in more detail.First to the topline revenue, Page #7. As already mentioned, we posted a growth of 4.4% for the quarter under revenue with EUR 166.9 million. Again, like in the previous quarters, we saw a Forex impact in this quarter of 4% as such. And this translates to EUR 6.6 million. So if we had constant Forex rates, the revenue line would be lower by EUR 6.6 million. As always, this is to a very large extent attributable to the strong U.S. dollar that strengthened over last year.If you further break it down into Series and Tooling. Series, we posted EUR 147.4 million. This is up 1.2% compared to last year. And as Gunter already alluded to, there was a certain impact, especially in the last month of the quarter with extended customer plant holidays. As an example, we saw, on a selective basis, like the 5 series BMW, ending on the 15th of December and coming back on 16th of January. So this is quite a long period of Christmas customer holiday. Another example in Mercedes-Benz E-Class, Mercedes in Sindelfingen, they came down on the 17th of December and restarted on the 9th of January.So again, this needs to be seen on a selective basis, but this was an impact in the last month of the quarter. And the other impact, which was also mentioned before, the disruptions that we still saw in China relating to Corona, especially in the last months of the year in this Q3.If you look at LMC, we can take a growth rate that is here stated at 4%. So the numbers reported were 21.8 million light vehicles produced compared to 20.9 million a year ago. By the way, this source is posting the highest growth rate, IHS, as an example, showed 1.4%. So reading from the numbers, and this is our constant interpretation is that there is a catch-up impact in the lower segments of the car industry. And in this quarter, this actually meant that there was a performance of those segments, vis-a-vis premium as such.Nonetheless, the overriding assumption, the premium segment we are in is always superior still holds true. Also on a year-to-date basis, LMC confirmed 10.4%. So for the 3 quarters under review, while our overall turnover grew by 15.6%. So still a clear outperformance in comparison to the overall market. But I think this is important to put into equation.Like in the last 2 quarters, we also had a strong Tooling closure with a number of important projects, almost EUR 20 million. As you all know by now, the realization of Tooling is sort of aperiodic and depends on the technical progress of projects in the quarter under review, we closed, in particular, 2 significant platforms, BMW X8 and the Mercedes-Benz C-Class. So also here, like with series, a fine sequential development, pretty stable over the last 3 quarters.And this leads to an LTM revenue perspective, EUR 685 million. So it's increasing again sequentially and compared to the last quarter, we are sort of approaching the EUR 700 million mark, which we also see attainable for the current financial year.Let's go to the adjusted EBIT. As we heard at EUR 90 million for Q3 with an 11.4% adjusted EBIT margin. Yes, the first thing to mention and to reemphasize is that we still have this continued headwinds from higher material prices, in particular, energy costs and freight, again, relating to [indiscernible] chrome-plated parts and also including significant price increases of 2 distressed suppliers that are currently under insolvency proceedings. So this is also part of swallowing still that impact of increased prices.In particular, if you look at energy, energy costs increased now to 2.3% of operating performance. So this is almost 0.5% higher than a year ago. And the same is true for freights that are around 0.5% in terms of operating performance higher. So there is not yet a revision of and the reversal of the trend. We have on and off steel price increases and the pressure is still on. Obviously, as we all know, there was a certain relaxation from the energy sector, especially through the various governmental decisions we saw in that last quarter, especially in Germany.As Gunter already mentioned, we were also successful in Q3 with price compensations. We started in our Q2 with first compensation payments being posted and this continued in the last quarter, and we see this also going forward, not only into Q4, but also the year to come as inflation will be part of our life also going forward. And this resulted in that 11.4% adjusted EBIT margin, as we said last time, confirming that we see this very stable as a sideways development.And not to forget to mention, with the relatively high Tooling content, there is obviously a certain dilutive element in our earnings as the Tooling business does not yield the same profitability as the Series business, which is pretty obvious. And in the last 12 months perspective, we are now at EUR 82.8 million. So this is a slight decrease over last quarter, but on a stable basis, as already mentioned before.On the next page, Page 9. This is undoubtedly the major highlight of Q3, we had an outstanding free cash flow for the quarter as we could see a number of very significant Tooling payments following the closure of such projects. And this resulted in a significant overperformance compared to previous year of EUR 15.6 million.The operating cash flow provides the most -- the majority of this positive variance, EUR 10.6 million. If you break that down, this is lower receivables once again because of Tooling payments. So a big chunk of this relates to Tooling receivables paid by the customers, higher profit. But then also, on the other hand, noncash income, and this is also relating to noncash foreign exchange revaluations, especially with our U.S. dollar hedge contracts. So this is the major driver for that strong free cash flow.On the other side, actually, payables saw a reduction. And also, here at the same time as we saw that major inflow from Tooling payments, we had already an outflow through advanced payments to Tooling makers and, again, signaling that Tooling is an active part of our business. And with a forward going perspective, very important because of new business to come.So this is in relation to our operating cash flow, investing activities that was only half of last year. So providing that other EUR 5 million of positive variance and adding up of EUR 10.6 million and the EUR 5 million leading to this strong outperformance of EUR 15.6 million in Q3 this year compared to previous year.On the last 12 months perspective, this is also a very pleasing number of now EUR 19 million free cash flow for those last 12 months and again, showing a very, very strong improvement over the last quarter.On the following page, we look at capital expenditure. Also here, sort of a sideways development, EUR 4.7 million. A year ago we had EUR 4.5 million, which is in line also with our calls in the last 2 quarters. We have the majority of capital expenditure for projects or for growth CapEx. That is the majority and the prime focus as we are careful and pretty cost-conscious on maintenance CapEx.And again, according to where the projects are to be launched, we see the majority of CapEx in the major plants in Langfang in China, which was this quarter, the most important element for capital expenditure, last time it was Queretaro in Mexico. So this forms the CapEx expenditure for this last quarter. On an LTM basis, we are at a little above EUR 20 million, and this translates to around 3% of revenue as a CapEx ratio.Working capital on Page 11, decreased quite significantly, almost by 10% to EUR 137.1 million. I'm sure you are now not surprised that the major driver for the reduction in working capital is Tooling, Tooling net because of the major Tooling payments from our customers. So moving from EUR 76.7 million a year ago to EUR 62.7 million. So here, also the major parties relating to the receivables that show an inflow. But at the same time, we also had a cash outflow for Tooling payments.So when we look at the bar chart at the bottom, moving from Q2 to Q3, you see that almost EUR 20 million difference in Tooling net. So this is the net of receivables from Tooling payments of customers, but also at the same time, advanced payments of Novem to Tooling makers. And this explains to a very large extent, the movement in working capital, which was pleasing, except perhaps inventories.But again, this is part of our general approach to the still prevailing supply chain disruptions that we keep on-purpose excessive safety stocks. So in order to be able to mitigate any disruptions if and when those occur. But that's in line, I think what we have presented and constantly explained throughout the previous quarters. And that in a nutshell explains briefly the total working capital development.On the next page, we are on 12, our Capital structure, we see a net debt position of EUR 150 million, so a significant reduction over last year. And as Gunter already mentioned, we are now at a net leverage ratio of 1.3x adjusted EBITDA. This is the record low, the lowest ever since the post-IPO refinancing. So also here, the trend is continuing and has continued as we always explained during our calls here.With regards to the capital resources, perhaps the cash liquid funds further increased to EUR 132.4 million. So this is a steep rise over last year, where we stood at EUR 73.9 million. Nonrecourse factoring stood at EUR 38.2 million. Again, this is almost in line with the number we saw 1 year ago. So very positive, very stable development here. And in the environment we are currently operating in, this is, I think, a strong signal to have a very healthy balance sheet and capital structure of the company.With that, I would then like to move forward with the results by operating segments. So first, once again, by revenue, this is also pretty much in line with previous quarters where we see a quite clear overriding headline with Americas doing very well with strong buy on sales, Asia recovering now with the new situation after the COVID-19 restrictions being relieved and Europe still an area with issues, with concerns with the geopolitical circumstances and the majority of supply chain disruption.So this has not changed perhaps in certain areas, even further pronounced. Americas had a very strong development here as we can see. Once again, also America is the segment within Novem benefiting the most from ForEx in terms of top line, but still also with this high concentration of SUVs on the American continent. And therefore, when we look at this improvement over last year, EUR 51.5 million to EUR 61.9 million, the majority of the growth coming from Americas, both in relative and absolute terms. Asia moved sort of sideways.As we discussed last time, we saw a quite nice impact from the launch of the BMW X5 also being produced in China here, but that could, in this quarter, sort of neutralize and offset the lower numbers with some other platforms, but Asia was stable and in Europe. So a certain sideways development. But again, this was also a quarter with strong project closures for Europe.But clearly, yes, the overall situation is still challenging in Europe, in particular with the call-offs that are fluctuating and that provides some headaches in terms of running out our operations smoothly and efficiently. And this obviously translates to a certain extent into our profit numbers by segment, by region. And it's not surprising that the big major contributor here again is Americas with a very strong bottom line, EUR 7.1 million compared to last year of EUR 5.5 million. So this is a very strong improvement in the Americas region. Asia dropped from EUR 3.4 million to EUR 1.8 million.So here, it is the issue with the disruptions in the last month of December and also the certain change in the product mix that we saw in Asia. This had a certain impact on profitability in this quarter. And then back to Europe, where we have a certain decline from EUR 11.6 million to EUR 10.2 million. And also here, the drivers relating to inflation and inefficiencies.So when we quote these factors, they relate to a large extent to Europe. And when it comes to inefficiencies, it is the way of running our plants in Europe effectively and this is, to a large extent, negatively driven by the volatile call-offs, but also the high illness rates and fluctuations that we had because of the still not so stable demand environment we have in Europe. So that's the picture on our performance, revenue and EBIT by segments.And that concludes the presentation, and we would then open the Q&A session and ask you to come forward with your questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Alexandre Raverdy with Kepler Cheuvreux.

[Alexandre Raverdy, analyst]

The first one would be on the margin side. So I know you don't disclose any guidance, but could you please give us some indication on the full year margin trend in light of the 9 months that you had? And what you are currently seeing in the last quarter so far? The second question is on the interest income. So I noticed a boost compared to the previous quarters. Could you please elaborate a bit more on the driver? I guess there is some -- there might be some Forex impact, but is there any other driver that I'm missing?And the last question is on the partnership with this Finnish company, whether you could elaborate a bit more on it or in terms of length, whether it's an exclusive partnership, where it brings exactly to Novem and if there is any interest from automakers already or any orders.

[Gunter Brenner, executive]

Thanks for the questions. And I will start with your third question, the partnership with the Finnish company. It's not an exclusivity. So there is a potential other partners for the company, but it's a brand-new technology. And as I said earlier, the benefit is that the electronic part is much, much smaller. In the past, you had the ECU electronic control unit with the electronic components managing the different functions. And this is now included in our trim part, which is basically no additional space needed for the trim part. That's the big advantage.And the interest of the customers is really big. I mean, we have 2 very big German customers. You might know who they are, who have really strong interest. We have not yet received an order, but we are talking now not only since 3 months, but we are talking already since more than 2 years about this new technology. So I really believe that this would find some SOP. The Finnish companies doing the electronics parts only. We would buy that electronic part and include this in our trim part. We would be the Tier 1 to the OEM. So that's the current status on that.

[Johannes Burtscher, executive]

Taking your other 2 questions, Alexandre. First on the full year outlook. I think we have already given quite some solid guidance. So when you look at the revenue, we see that continued trend over the last quarters. And as I mentioned just before, also, this should continue for our Q4 and leading close to EUR 700 million. So that's what I just want to repeat in terms of growth and market performance with regards to profitability.Also here, we think that we should see a stable further stable development also here with regards to the adjusted EBIT margin. If you look at the last 3 quarters by now, it's actually very stable. And we are trailing around this number of 11.5% adjusted EBIT margin. So I think it's quite well written now on the wall where this should all hit us too. So that's on the full year.In terms of the financial results, I think that's a good question as always. And you already answered the question and hinted into the right direction. We have in the financial results of course, a quite significant impact from Forex revaluation, and this is, to a large extent, relating to the U.S. dollar hedge contracts and also the cash Forex revaluation effects that are in there.When you look at our financial results, also perhaps in the back of the presentation or in the statement, you see EUR 7.1 million of financial results. The interest expenses in the quarter amounted to SEK 2.8 million. So this is in relation to our facilities. The commitment fees that are in there and in the finance income of plus EUR 9.9 million, there is first and above all, the income from -- the interest income from Tooling that was around $800,000 in Q3 and the remainder of EUR 9.1 million is positively relating to his Forex revaluation, why is that so? Because of the dollar that devaluated again. So the negative impact that we saw before, and you still see this in the cumulative representation was sort of partly offset by a positive impact, as we already factored in a much stronger U.S. dollar before that now devaluate.And therefore, we see the positive impact. And yes, this obviously also had a positive effect on the net income due to this positive financial results. So that's happening in deadline interest and financial results. I hope that answers your question, Alexandre?

[Alexandre Raverdy, analyst]

It does.

[Operator]

[Operator Instructions] The next question is from the line of Jose Asumendi with JPMorgan.

[Jose Asumendi, analyst]

It's Jose. Just a couple of questions, please. Can you talk a little bit more around the key sort of positives and negatives that you think will drive the margin in the coming 2, 3 quarters? What are the biggest opportunities and headwinds? And second, can you address a little bit more where we stand on the content per vehicle you are booking on ICE versus VEF vehicles. You still be able to hold up the ASP per car content per car on the electric vehicles that are coming positively with slightly different content versus internal combustion engine. Are you seeing any recent developments there? And how is that influencing your influencing your business?

[Gunter Brenner, executive]

Also content per vehicle, I mean, you are asking about combustion engine versus electric car. And basically, the statements as in earlier times, no difference on those cars. And it is the same. The content per vehicle is from EUR 20, EUR 30 up to EUR 500 per car, and it really depends on the size of the car. If you see, let me say, an A class for Mercedes combustion engine, there is a rather low content, EUR 30, EUR 40, S-Class Maybach can go up to EUR 500. And that's the same as we see with the electrical vehicles. We have taken quite some orders on electrical vehicles also from Mercedes. And here we see same content. Lower cost cars, lower content, higher cost cars, higher content. One thing is somewhat remarkable.As we see in the market some newcomers, such like Lucid in the States or Rivian in the States or even Hongqi, who is a Chinese automaker linked to FAW, this is electrical cars, newcomers and the content here is somewhat higher than in combustion engines and even compared to electric cars in Germany, for example. So there's a lot of wood, and we can easily talk about 50% more content. But the cars, I mentioned, Lucid, Vivian are somewhat high-end cars cost is more than $100,000 I would think about. But the story is exactly the same over the last 10 years, 20 years in Novem, they lower the car, the lower and the more exclusive the car, there is more content.

[Johannes Burtscher, executive]

On your first question, Jose, thanks for that. I hope this doesn't come across as a 2 boring answer, but we see similar drivers for the margin going forward in the short term. And this means the headwinds we have with material prices, we don't see a change, a reversal of the trend. There are certain on a selective basis, materials, where there is a certain relaxation, but we still have a time where suppliers come forward and to be honest, quite aggressively with price increases.So the heat is still on, and we don't see a change there. The same is true with freight. There are certain ways of freights of carriage and certain roots on this planet that have really come down, being cheaper and less expensive. But on the other side, there are still transportation waste that are very expensive and remain on that level, especially land transport because this has to do a lot with the lack of drivers and capacity. So also here, which is an important part on our cost side, better material weather freights things will continue, at least for the short to medium term.And to be honest, a quarter ago, we just highlighted that energy is the biggest concern. Now it's certainly to a lesser extent, an issue. As I mentioned before, but it is still on a high level. So it's not returning to pre -- whatever crisis we mean in precrisis levels. So also here, we see a certain -- this is my buzzword sideways development. And the drivers for margin will remain. And yes, we are consuming -- we see, we have already factored in the second quarter now in the third quarter, customer compensation payments. This is an obligation for us to keep that discussion going.So our general assumption is, and this is the reason why we said this before that we continue succeeding in demonstrating that this is relevant for us and justified, and we see this also as part of margin protection going forward into 2023. So in a nutshell, we don't see a landline change in terms of margin trajectory, but quite some important levers we still have to work on to protect the current levels. So that's, in general, how we look at our earnings quality going forward, but we also keep our position that we should see a stable development in terms of our Novem's profitability. Hope that answers your question, Jose.

[Jose Asumendi, analyst]

That is very clear. I'm just trying to get to the point, are you going to go back again to become a company that makes sort of the 13%, 15%, 16%, 17% margins? Or are we facing more structural margins in the 10% to 12% -- that's -- I mean you're delivering clearly double-digit margins, which is EBIT, which is fantastic. The question is whether structurally, can you go back to the levels you had in the last years. That's what I'm trying to get to and whether you are seeing maybe an exceptional situation where inflation costs are too high, are you going to benefit from the pass-throughs of pass-through -- incremental pass-throughs to the OEMs in the coming quarters?

[Johannes Burtscher, executive]

Yes. You always answered also, this question yourself. I mean, in the current environment, this is not possible because as you know, we are only able to partially pass through. We don't have automatic pass-through mechanisms. In our contracts, we are certainly in a different position here as perhaps other suppliers in the automotive sector that has not as complex product as we have. So yes, we are not able to pass through automatically and that 14 to 15…

[Operator]

[Technical Difficulty] Ladies and gentlemen, sorry for the interruption. The speakers are now back connected. [Operator Instructions]

[Johannes Burtscher, executive]

I'd rather like to ask Jose whether our answer was full and you have understood what we outlined. I'm not sure.

[Jose Asumendi, analyst]

You sort of left it off at and that the price increases will come a little bit later that there's sometimes like passing on the price increases and that returning to those 14% to 15% margins and then the line got cut off. I think the message was clear, right, that you are sometimes like passing on price increases, and you will be able to recoup those inflation costs a bit more later down the line. That's what I'm understanding. Is that roughly correct?

[Johannes Burtscher, executive]

Yes, almost. It's not only a question of time. As I said before, we are not able to recover everything as not everything can be passed through. And this might be a little different with -- in comparison with other automotive suppliers where they have an automatic pass-through mechanism and not a as complex product as we have. So that's the reason why it is important that this is still an important lever. But under the current circumstances, it's not possible to reach 14%, 15% adjusted EBIT margin, which is our updated guidance we gave a year ago.But what I also mentioned, of course, under a blue-sky scenario, if things change and we don't see these disruptions and the inflation that there should be a path leading us back into that region, but certainly not in the short term as we also cannot see that relaxation.

[Operator]

There are no further questions, and I hand back to Gunter Brenner and Dr. Johannes Burtscher for closing comments.

[Gunter Brenner, executive]

So thanks for listening into our Q3 results. We believe we had a good quarter, specifically on cash flow, as you have seen and looking forward for next quarter and for our next presentation, which is on the 1st of June '23, and then we look forward to present our preliminary results for the full year. Thank you for listening.

[Johannes Burtscher, executive]

Goodbye.

[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.