Elringklinger AG

XETRA:ZIL2

Q2-2025 Earnings Call

[Thomas Jessulat, executive]

Yes. Ladies and gentlemen, I welcome you to our earnings call here on the second quarter of 2025. Today, I will walk you through the detailed results of the second quarter. With the publication of today's figures, we reaffirm our guidance for 2025 as well as our medium-term outlook as outlined in the annual report published in March.

As always, we'll conclude the presentation with a Q&A session, and I look forward to addressing your questions. And before we begin, I am pleased to welcome Isabelle Damen as our new Chief Financial Officer. She joined us on August 1 and brings a wealth of experience and fresh perspectives to our leadership team.

With that, I would now like to hand over to Isabelle Damen for a brief introduction.

[Isabelle Damen, executive]

Thank you for the warm welcome. It's a real pleasure to speak to you today in my new role as Chief Financial Officer of ElringKlinger. I officially joined the company last Friday, August 1, and I'm truly excited to be part of this journey. ElringKlinger is a company with a strong foundation, a clear strategic direction and a deep commitment to innovation and sustainability.

I'm proud to now contribute to shaping its future, especially at such a dynamic time for the industry. In my role, I will be responsible for the areas of finance, IT and legal and compliance. These areas are critical to ensuring transparency, financial strength and a long-term value creation. And I look forward to working closely with the team to further develop the Group.

Before joining ElringKlinger, I held CFO positions in several international industrial companies, where I gained broad experience in financial leadership, transformation processes and capital market communication. I'm confident that this background will help me to support ElringKlinger's continued development and strategic goals. I'm very much looking forward to engaging with all of you, our investors, analysts and further stakeholders and to building a strong open dialogue in the quarters ahead.

Thank you, and I'll now hand back for the continuation of today's presentation.

[Thomas Jessulat, executive]

Yes, Isabelle, thank you very much. Driving forward, the implementation of our SHAPE30 transformation strategy remains a key priority. Since its launch last year, we have made substantial progress in reshaping the ElringKlinger Group and further steps are already underway. One such milestone was the divestment of 2 group entities aimed at sharpening our strategic focus and streamlining the product portfolio.

Another measure is a streamlined program, which aims to reduce personnel costs. The program is progressing with good acceptance at this point. Coming now to the financial highlights. With an adjusted EBIT margin of 5.9% in the second quarter of 2025, we are well on track to deliver on the margin guidance for 2025. In addition, our organic sales performance during this period has been relatively strong, exceeding both the underlying market trends in our core region Europe and the prior year second quarter figures on an organic basis.

At this year's Annual General Meeting in May, the dividend of EUR 0.15 per share was confirmed by the AGM as proposed by the Management Board. In addition, Dr. Sabine Lutz was newly elected to the Supervisory Board of ElringKlinger.

Let us now turn to the detailed financial figures for the second quarter of 2025. The order situation is mainly influenced by 3 factors. First, it reflects the challenging market situation. Production figures are expected to fall this year in the core regions of North America and Europe with manufacturers producing fewer vehicles. This trend is visible in the order book. However, there are 2 additional factors when comparing the quarter under review with the previous year's second quarter with the previous year.

On the other hand, prior year's figures include orders from the 2 group entities that were divested with effect from December 31, 2024. And on the other hand, currency effects had a reducing impact on this year's figure. As a consequence, assuming stable exchange rates and adjusting the previous year's figure for the 2 divested entities, order intake fell by 3.3% from EUR 339 million in the second quarter of the previous year to EUR 328 million in the quarter under review. If both effects were taken into account, the decline from EUR 365 million in Q2 2024, which means including the 2 group entities to EUR 296 million in Q2 2025, which means including the headwind from exchange rate movements would be more significant.

The same logic applies to the half year figures. Adjusted for both effects, this metric decreased slightly by EUR 5 million or 0.6% from EUR 770 million to EUR 765 million. Order backlog, which comprises customers aggregated, and yet unrealized short-term call-offs amounted to EUR 1.40 billion at the end of the first half. The figure of EUR 1.249 billion posted at the end of the previous year's reporting period included the backlog of the 2 divested group entities. Currency effects were also a factor in the quarter under review. Excluding M&A effects and assuming stable exchange rates, order backlog fell by 1.8% from EUR 1.101 billion to EUR 1.81 billion.

Starting with sales and its organic change on Slide #5. Operating within a challenging environment, ElringKlinger recorded revenue of EUR 408.3 million in the second quarter of 2025. This corresponds to a year-on-year decline of 8.2%. We have faced challenges from currency and M&A effects this quarter. The 2 entities in Switzerland and the United States whose sale was finalized at the end of 2024 had contributed revenue of EUR 44.1 million in the second quarter of 2024. This means the relevant basis for a year-on-year comparison would be EUR 400.9 million.

Additionally, revenue was diluted by currency effects equivalent to EUR 14.1 million or 3.2%. Excluding currency and M&A effects, revenue grew organically by EUR 21.5 million or 4.8% in the second quarter of 2025. This represents a stronger performance than the overall market, which according to S&P Global Mobility data grew by 2.6% globally and declined by 1.7% in Europe during the same period. The sales mix on Slide #6 will explain the organic growth in more detail.

Among the segmental revenues, the Original Equipment segment is the largest one, making up 67% of Group total or EUR 276.9 million of sales. In the second quarter of the year, segmental revenue declined compared to prior year's quarter, reflecting the divestment of the 2 entities in the U.S. and Switzerland and the challenging market conditions.

Within the OE segment, e-mobility revenue more than doubled due to the ramp-up of a large-scale serious order of cell contacting systems. E-Mobility sales increased from around EUR 17.7 million to EUR 40 million in the second quarter of 2025 and now represents 10% of Group sales, which underlines the ongoing transformation of ElringKlinger.

The Aftermarket segment once again performed strongly and increased sales by 12.7% to EUR 95.5 million. Regionally, growth was recorded in Asia Pacific, South America and the rest of the world, while revenues in Europe and North America declined year-on-year. In addition to currency effects and the sluggish market environment, the main driver of this development was the divestment of the 2 entities in the U.S. and Switzerland.

Adjusted EBITDA of the Group rose slightly to EUR 50.2 million compared to EUR 49.8 million in last year's second quarter. Adjusted EBIT was able to recover over the last quarters and exceeded the prior year level. As a result, adjusted EBIT reached EUR 24.2 million, which corresponds to an adjusted EBIT margin of 5.9% and is in the quarterly review even above target level for the full year of approximately 5%. The adjustments include exceptional items of EUR 17.9 million in total due as a first point to the streamlined program to structurally reduce personnel costs with an amount of EUR 5 million due to the insolvency of one of the Group's customers of EUR 9 million and due to the measures taken as part of the SHAPE30 transformation strategy of EUR 4 million.

So all in all, the Group recorded a reported EBIT of EUR 6.3 million, corresponding to a reported EBIT margin of 1.6%. One of the key drivers of the improved adjusted EBIT was a positive effect of strategic measures taken in 2024, including the divestment of the 2 plants in the United States and Switzerland. However, in Q2 2025, adjusted EBIT was affected by higher tariffs, which had a dampening impact on earnings.

And let me say that at this point, the tariffs may also the influence business in the future, not only directly but also indirectly. Overall, neither the introduction nor the level of further burdens can be reliably estimated today due to the high degree of volatility. In Q2, the company was able to reduce the R&D ratio to 5.4%. And in absolute terms, R&D expenses slightly declined from EUR 24.9 million to EUR 22 million. This means the company remains well within its target corridor of 5% to 6% of Group revenue.

In the second quarter of 2025, ElringKlinger's net working capital amounted to EUR 417.4 million and with a net working capital ratio of 25.2%, the Group is moving closer to its short- and medium-term target of keeping the ratio below 25%. This reflects ongoing efforts to optimize capital efficiency and strengthen operational flexibility.

Following elevated expenditures around the turn of the year in Q4 2024 and Q1 2025, CapEx normalized in Q2 2025 amounting to EUR 26.3 million. The CapEx ratio for the second quarter of 2025 stood at 6.4%.

Yes, ElringKlinger is continuing to sharpen its strategic focus and to align its activities for enhancing profitability. As part of its transformation, the Group is laying the groundwork for sustained growth in new drive technologies, an area where it has already secured major series production contracts such as for cell contacting systems. The goal remains clear: to generate more than 50% of Group sales from non-ICE applications, meaning internal -- non internal combustion engine applications by 2030. This is what CapEx is used for.

We're currently establishing our battery hub for the Americas region in Easley, South Carolina. The setup is progressing well, and we anticipate commencing operations in the third quarter of this year. In parallel, we're expanding our battery competence center in Neuffen, close to our corporate headquarters. The logistical enhancements are nearing completion and will provide additional production capacity for the large-scale orders to be ramped up. This expansion is scheduled to go live in Q3 2025.

Furthermore, we are preparing production facilities to support the launch and continued ramp-up of cell contacting system orders. We're also preparing production in China. These measures show that the investments are targeted, and that the transformation is continuing with the start-up of these orders. Importantly, these targeted investments are expected to have a positive impact on cash flow over the medium term as new production capacities come online and begin contributing to revenue growth.

And after significant investment-related cash outflows in the first quarter of 2025, ElringKlinger returned to positive territory in Q2, generating an operating free cash flow of EUR 23.8 million. This reflects the Group's disciplined financial management and the initial returns from its strategic investments, particularly in preparation for upcoming large-scale production orders as well as effects from working capital measures.

Net financial debt slightly increased to EUR 374.9 million, corresponding to a net debt-to-EBITDA ratio of 2.1. As to the end of Q2 2025, Group equity amounted to EUR 659 million, reflecting a decrease compared to the EUR 687.6 million reported at the end of Q1 2025. The equity ratio, therefore, stood at 36.7%.

Coming to the segment performance on Slide 11. Overall, the OE segment generated sales of EUR 276.9 million in the second quarter of 2025. When comparing to prior year's figures, you have to consider a sales contribution of EUR 44.1 million of the divested entities. The adjusted segment margin rose to 1.0%. The Aftermarket segment continues to successfully pursue its growth strategy, recording another increase in revenue. In the second quarter of 2025, sales reached EUR 95.4 million, which implies a growth of 13% compared to previous year's quarter. With an adjusted EBIT margin of 18.7%, the segment once again delivered a strong level of profitability.

The Engineered Plastics segment delivered a solid performance in the second quarter of 2025, benefiting in particular from its diversified industry mix. The segment recorded sales of EUR 35.7 million, marking an increase of around EUR 4 million compared to the same quarter last year. With an adjusted margin of 8.8%, the segment demonstrated its resilience in a challenging market environment.

Let us now take a look at the market expectations and the outlook for the Group's figures. And let me briefly touch on what will determine our actions in the second half of the year on Slide 12. Preparations for the ramp-up of further orders in battery technology required higher investments, particularly in the fourth quarter of 2024 and the first quarter of this year. This will continue to normalize in the second half of the year so that we will achieve a figure between approximately 4% and 6% of consolidated sales for the year as a whole.

The further ramp-up of the first large-scale production order will lead to a continued high level of sales in the E-Mobility division. In conjunction with further measures, this will also lead to a further improvement in operating free cash flow. Once the main construction work has been completed, we'll start operations at our new battery hub in South Carolina. As a result, we'll capitalize the property in accordance with IFRS 16, which will affect financial liabilities. Overall, this will also increase the net debt-to-EBITDA ratio.

Going forward, this ratio will improve again as a result of the planned further reduction in net financial liabilities and the continued increase in profitability. Streamline, our program to reduce global personnel costs will also lead to a structural improvement in earnings in the upcoming years. In conjunction with strict cost management, we're well on track to achieve our full year target of an adjusted EBIT margin of around 5%. Moreover, we are continuing to implement our SHAPE30 transformation strategy. We're analyzing our product groups for marketability and deriving measures to sustainably increase profitability, particularly in the OE segment.

One such decision, for example, was to discontinue the system business for electric drive units while continuing the profitable drive components business. We'll consistently execute this step in our portfolio. The same applies to our location strategy. We'll eliminate unprofitable setups and take the necessary measures to focus on the Group's profitable core business. We have made such decisions for the Thale and Fremont locations, for example.

All these measures serve only one purpose, which is improving the Group's profitability and sustainably increasing its competitiveness for the future. The mixed situation on the markets is set to continue. While China's light vehicle production is on the rise, the markets, Europe and particularly North America are still lacking momentum. However, the strong growth in China is helping to offset the weaker performance in these regions.

Looking at the development from the first half to the second half of 2025, according to the latest S&P Global Mobility forecast, we can now expect growth in 2025 compared to the previous year, whereas back in April, the decline had still been forecast. And this rapid shift in projections highlights the current volatility of the market environment. Regionally, China is expected to grow by 10.8% from the first half to the second half of 2025, significantly driving the global forecast of plus 0.4%.

And in contrast, the North American market is projected to decline by 7.9% and Europe by 9.7% over the same period. And this trend in automotive production is also clearly reflected in the full year comparison emphasizing the uneven regional dynamics shaping the global market. While China is projected to see robust growth of 3.8% in 2025 compared to 2024, both the North American and European markets are expected to contract significantly with declines of 3.9% and 2.5% respectively.

And as a result, the modest global growth forecast of plus 0.4% is largely attributable to China's strong performance, underscoring its pivotal role in stabilizing global automotive output amid broader regional downturn. Overall, the automotive market is showing a slight growth of, I said it, 0.4% in 2025. With its strong exposure to the European market, ElringKlinger continues to be affected by the lack of market momentum. However, this is being at least partially offset by the large-scale customer orders and a solid Aftermarket business.

Following a relatively strong first half of the year, we anticipate a weaker second half. Nevertheless, we confirm the outlook provided in the fiscal year 2024 annual report published in March against the backdrop of a volatile market environment. As stated earlier this year, the Group expects organic sales to remain at previous year's level, meaning that sales revenue, excluding the 2 divested entities forms the basis for comparison.

Given the complex environment with a wide range of influencing factors, we continue to expect an adjusted EBIT margin of around 5%, in line with the previous year. Thanks to our strategic measures and revenue contributions, we aim for a medium-term margin range of approximately 7% to 8%. Operating free cash flow is projected to reach between 1% and 3% of revenue.

Yes. Looking ahead, our financial calendar for the second half of the year includes 2 key events: the publication of our Q3 2025 results and our Capital Markets Day. These milestones will provide further insights into our operational progress and strategic direction.

That wraps up my part. I'm now looking forward to your questions. Thank you very much.

[Operator]

Our first question comes from Marc-René Tonn with Warburg Research.

[Marc-Rene Tonn, analyst]

Basically 2 to 3, if I may. First one would be on tariffs, the EUR 3 million negative impact in Q2, probably a pretty large number as a drag on your profitability. Two questions related to that. One is, do you expect some amount of that to be recovered in the second half through price increases, negotiation with customers?

Secondly, when we look at a bit on the, let's say, profitability in the individual segments, is it fair to assume that a large proportion of that was attributable to Aftermarket, where I think the EBIT margin was at least a bit lower than it was in the previous quarters? And if not, what was the reason behind the lower Aftermarket margin in that quarter?

Second question would be on the liabilities from supplier finance agreements in your balance sheet, which I think showed up there for the first time. Could you kind of, let's say, perhaps qualify what was that? Is it some kind of, let's say, similar to reverse factoring or part of trade liabilities figure on how we should look at that, that would be -- could be helpful.

And the third question, perhaps you have these pretty significant ramp-ups now ahead of you in the third quarter and then probably also let's say still ramping up in the fourth quarter for the battery cell connecting systems. And still some way to go with regard to your free cash flow guidance, in particular for the current year, because you could give us some, let's say, how much risk is in there? Or is it, let's say, as usual, often something go wrong with these ramp-ups in terms of, let's say, working capital management or cost overrun or anything like that. But if you could give us some indication on the risk profile there.

And perhaps lastly, on the IFRS 16 effect for the Easley plant in the U.S., could you give us some, let's say, some more quantitative number on the expected effect on the net indebtedness?

[Thomas Jessulat, executive]

Yes. Thank you for your questions. I would start with the first one. Tariffs, in fact, hurt us and they hurt us in a sense that they partially offset the improvements that we have achieved by the sale of the 2 entities last year. If I look forward, then there is a further higher level of tariff to be expected. Is that going to be recovered at some point in time? There is -- from today's perspective, there's really no visibility because when we look at tariffs, its central government driven essentially in the U.S. and it's -- if not impossible, it's very difficult to recover to our knowledge.

When we look at the profitability of the segments, then in fact, we've been growing with the Aftermarket in the U.S. in particular. So that is also the reason why here in Q2, we see an impact, in particular here in regard to the U.S. business, but also to further ramp-up costs that are associated with that. And it is going to be offset but it's going to be starting in the second half of 2025 when there is an offset. So there is a higher level going forward to some foreseeable future, but it's going to be at least partially offset because some of the tariffs are not necessarily associated with Aftermarket only, but also with some items here in regard to the OE segment.

Yes, in the second question here, you were asking on working capital instrument that we have reported here in the second quarter 2025, the first time, and this is, in fact, right, yes, this is a reverse factoring tool that we have here in place, which is a little bit over EUR 50 million at June 30. And this is an instrument that will help us to bridge the period where we have to fund a lot of, in particular, tooling, but also other items here for our ramp-ups that are going to be sold off at a later point in time.

And for this purpose, we have implemented this tool here, which has a higher capability overall in terms of financing possibility. And again, this is an instrument that helps us to bring us through this period until we realize a lot of cash inflows from the sell-off of tools and other items here that are associated with the ramp-up of those large-scale orders.

Number three is a follow-up essentially on the same topic. We see still the possibility to reach a positive free cash flow for the whole year despite the fact that we are significantly negative right now. And there is a couple of points to that. There is the one that I was just describing, working capital instruments that will help us to offset some of the tied-up capital for one. Number two, there's going to be a start of production in the second half of the year where our expectation is that we will be able to invoice and offload some of that inventory that we carry. And there is also in regard to the structuring of the Group, there are some other opportunities here that I would, let's say, mention in general.

So there is a chance that we reach it, and we have identified all the individual figures how to manage that. But you're right, when we see delays coming up, which we don't see as of yet, then there is a risk also that if things are going to be delayed, then, of course, invoicing and offloading of those items could be, but it's too early to say that now going into the second half of the year at this point in time.

And I'm coming to your fourth question now. This is your question on IFRS 16. There is leasing liabilities going to be coming on to our statement associated with the right of use and the amount to be expected is somewhere between EUR 75 million and EUR 100 million as an amount that increases the financial debt and will also increase in the short term, the net debt-to-EBITDA ratio until it will come down through positive cash flows for one and also a higher EBITDA ratio here related to the ramp-up of those large-scale production orders. I hope I answered all your questions.

[Operator]

Our next question comes from Michael Punzet with DZ Bank.

[Michael Punzet, analyst]

I have 2 questions. The first one is on the restructuring. Can you give us any idea what we could expect as restructuring provisions in the coming quarters, so for the full year 2025? And the second quarter is on the insolvency of one of your customers. Can you may be shed some more light on what's happened there? And have you taken measurements to protect yourself for such events in future?

[Thomas Jessulat, executive]

Yes. Thank you for your question. Let me start with question number 2. That is a start-up vehicle company that we identified in the past year as a chance to develop ourselves here into battery applications. And typically, we assess, so to say, counterparty risk -- in this case, we have done so as well. But in the very negative market environment right now, this was something that just happened. And that will lead, in fact, to a point where we will further sharpen here product portfolio as a consequence of it.

Yes, to your question number one, restructuring, I mentioned that we target approximately EUR 30 million cost reductions through streamlined program with a maximum amount here, roughly speaking, of EUR 30 million restructuring expenses. This would be the high side of provisions to be expected, the way I look at it right now. But the other items that may be noncash, the provisions for the restructuring is a cash flow item going forward. There may be other noncash related accounting items by deconsolidation of other group companies, but not in a very significant amount as I see it as of today. Is that answering your questions?

[Michael Punzet, analyst]

Yes.

[Operator]

It looks like we have no registrations for any further questions. So I hand back over to Mr. Jessulat for any closing remarks.

[Thomas Jessulat, executive]

Yes. Thank you. Finally, I thank you all for your attendance. As always, if there's any further questions, give us a call, our IR department is happy to answer it. See you or talk to you next time on November 12 for the Q3 figures and our Capital Markets Day afterwards. We wish you a good summer season. Thank you very much.