Rieter Holding AG (RIEN) Earnings Call Transcript

Ladies and gentlemen, welcome to the media and analyst conference call and live webcast. I'm Myra, the chorus call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Bernhard Jucker, Chairman of the Board of Directors. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Thanks for joining our conference call. As you could see from our announcement this morning, today, we are not only informing about Rieter sales and orders last year, but also about an upcoming change in the company's management. For this reason, I am attending this conference call today together with our CEO as an exception. Our agenda today starts with the presentation by Norbert Klapper, the CEO; and Kurt Ledermann, the CFO on Rieter's publication of sales in 2022 followed by a Q&A part. Subsequently, I inform you then about the change in Rieter's management. Having said this, over to you, Norbert, please.

Thank you very much, Bernhard. Good morning, ladies and gentlemen. Thanks a lot for having dialed in. I will lead you through the presentation now. And as Bernhard said, followed by a Q&A session, which relates to the publication of sales and orders. I jump to Page 2 of the presentation, where we have summarized the key messages. Sales of CHF 1.5 billion in the financial year 2022 and almost CHF 900 million in the second half of the year. By these numbers, we exceeded our forecast, which we had communicated in October. The reason why we were able to exceed the forecast was that we made progress on material supply, debottlenecking, and that helped us to generate sales from the backlog. My second statement here is EBIT around 2% expected for the full year. Well, this is not great looking at this -- at the volume that we have been -- that we turned into sales. However, we have to see that in the first half year, we had reported a loss of 1.6 percentage points, a negative EBIT margin. So we were able to compensate that and generate a profit. My third statement here is order intake of CHF 1.157 billion and an order backlog of CHF 1.540 billion. The order intake of CHF 1.157 billion is -- means that we have not generated a lot of order intake in the fourth quarter. When you do the math and you -- as we look at what we have published in October, you see that our order intake in the fourth quarter was slightly below CHF 60 million, which is, of course, very low. And the reason why the order intake was so low is twofold. Number one is new orders, which coming in are at low levels at the moment based on the geopolitical uncertainties that you're all aware of, financing costs have increased for our customers and that makes investment cases less attractive. And of course, we have lower textile consumption around the world, and that also has a negative impact on the investment sentiment. In addition, we had cancellations and a significant amount of those cancellations had been triggered by Rieter. They were part of the what we call backlog improvement -- backlog margin improvements. We approach customers who had contracts with us with a very low margin, and we negotiated with them to cancel these orders. My fourth statement you see at ITMA '23. You know that ITMA '23 is coming up. It's very important for Rieter, and we have prepared a set of good innovations that we will show there and our preparations are on schedule. Number 5 here is implementation of the action plan to increase sales and profitability. We will continue with that because it's not over yet. It has improved. The situation has improved, but it's not over yet. You hear this from many other companies. And so we will continue to work in it, and I will come to that point later in the presentation. And we -- last but not least, we have an update here on the site -- the Rieter site that we are in the process of selling. The process is making good progress. So the update will be part of the presentation. All right. The key messages jump in from the key messages to the Page #3, sales by business group comparison year-over-year. You see the big jump that we made compared to 2021. In terms of sales in 2021, we had missed the CHF 1 billion mark. And in 2022, we exceeded the CHF 1.5 billion mark. And as I said already, we exceeded our forecast. The reason is that we made progress on the material supply debottlenecking. And what I would like to mention here is that in the fourth quarter, we generated sales of more than CHF 520 million. This is a great performance of the Retail team. It was a huge effort that was required to achieve that in the current situation. But the retail team did an outstanding job in turning backlog into sales in the fourth quarter. The next slide is Slide #4, sales by region comparison year-over-year. On this slide, we see that we had growth in all regions across the board, but we see differences here in the growth rates. The growth rates in Asian countries, in India, in Turkey and in Americas -- in the Americas are exceeding or have been exceeding 3%, which is, of course, a lot. We also saw growth in China, but only at 25%. And that tells us that the growth has 2 dimensions. We see the regional shift of demand away from China in the high growth rates in the regions outside China. And at the same time, the investments of our customers in China to stay competitive. I can report to you that I was in China in November. Unfortunately, before they drop the quarantine rule, so I had to stay in quarantine for 8 days. But I attended a customer's event in -- at Rieter, China. And it was pretty clear that many customers had joined this event because they are thinking about investing. They know if they want to stay competitive in China against yarn imports from other countries, they have to invest. And I guess we will see that going forward. Coming to Page #5. Here, we have a comparison between half year 1 and half year 2 in terms of sales. I already mentioned that we had almost CHF 900 million in the second half of the year. I told you already about the challenges that we were facing. The order backlog had to be executed at a much higher cost. The shortages in material supply caused extra cost as well, and we had expenses in connection with the acquired businesses. You know that we closed the transaction, the last part of the transaction with Saurer in -- by the end of March this year. The countermeasures. We already talked about that as well, price increases. We had started with price increases in 2021 in the first half year. And we see the impact now in what we generated in terms of sales in the second half of last year. Improvement of backlog margins. I talked about the cancellations already, but we also renegotiated contracts with customers to get additional money. Alternative technical solutions were important to be able to ship, to be able to make the installations in the field, but they cause, of course, additional R&D for efforts -- significant additional R&D efforts. And we did cost reductions wherever possible. We -- of course, we try to find every option here to reduce our costs in order to make money on the sales. So the result of what we did is EBIT margin in the first half year minus 1.6% and we turned it around, and we were able to generate an EBIT margin for the full year, and we expect it to be around 2%. Coming to Page #6, order intake by business group year-over-year. You all know that we had a record year in terms of order intake in 2021. However, what we see this year in the last year 2022 is in the investment sentiment, which is impacted by the geopolitical uncertainties by higher financing costs and by low consumer spendings in important markets. One point is important here, and I guess you are waiting for this information, the capacity utilization of the spinning mills globally. And based on our monitoring, we can say that we are below normal levels at the moment. From a global point of view, the average capacity utilization of spinning mills is 80%. And at the moment, we are at 65%. So there are 15% missing. And of course, we see that in the order intake in our Machines & Systems business, but also in the business in new components and for -- of components and also after sales. There are no exceptions. The 65% of -- that 15% are missing is a reality across the globe. It is the fact in China, and it's also the effect of in China. We might see a recovery in China after Chinese New Year. You are all aware of this discussion, yes. COVID coming to an end after Chinese New Year about -- after an additional infection wave which will hit the country, we would see how we -- what the development is going to be, but it might well be that the Chinese domestic market will recover after Chinese New Year. Order backlog at year-end, Page #7, you see here the comparison between 2020, 2021 and 2022. 2020 was at rather low levels, CHF 560 million and jumped up -- the order backlog jumped up by the end of 2022. One, we had CHF 1.8 billion. And now by the end of 2022 CHF 1.5 billion. Order cancellations are below 10%. We talked about the fourth quarter already. Backlog margins have been improved. The price-cost ratio is better now and the implementation of the action plan that we have launched to increase profitability will continue, a close calibration with suppliers to get as much of the bottleneck material as possible, develop alternative technical options to compensate the bottleneck, to substitute the bottleneck material, price increases, improvements in the backlog margin, we talked about that already. Coming to Slide #8, which gives us an indication about the cost development for our business. We see 2 comparisons here that we have already looked at -- in 2022, the Container Freight Index Shanghai to Rotterdam and the aluminum price. Just indicators on how costs are developing for retail. You see this unbelievable development in the Container Freight Index. We were coming in January 2020 from USD 2,000 per container. We just -- we went up in 2022 in January to almost USD 14,000 and now we're back to USD 2,000. This is important for Rieter. It sounds like a minor issue containers. But when I was in China, I was also looking at our distribution center. And we talked about that in strong months, Rieter is shipping 500 containers from China to the world per month. And if you have to do the math and you calculate that you paid USD 2,000 more per container that means that you have extra cost of CHF 1 million in 1 month only for containers. So it is important for Rieter, it has an impact. And the second comparison that we hear is aluminum, unfortunately, the -- we are not back to normal yet with aluminum. But the good part of the message is that it doesn't increase anymore, yes? It's going rather down. We looked into the numbers yesterday. At the moment, we are at USD 2,635 per ton. This is not the level we had in 2020 and '21. However, it doesn't increase anymore. So the risk on backlog margins seems to be manageable from this point of view. Let's look into the presentation on Slide 9. Here, we have an update on ITMA. As you expect, we will continue to present innovations that we have worked -- have been working on over the last couple of years. Focus, as always, cost per kilo yarn, raw material consumption, energy consumption, automation, system integration through digitization will be important and recycling. We had a very good trade show in India before Christmas where we had -- we presented our capabilities in terms of handling recycled fibers. And readiness you were there, right? The feedback was overwhelming. Our customers were coming to see what we can do. And this is a big thing, and we are very happy that we have been able to make good progress on that. And on my last slide, on Slide #10, we have an update on the sites on the Rieter site that we are in the process of selling. You know that we have started the process. We do it professionally as always. We have done this before in English that way, it really went well. So it takes some time to go through such a process very happy with what we have on the table now, and the negotiations have started. We expect to close this transaction in 2023. We don't know yet by when, but we are confident that we can make this work in 2023. All right. So far, the presentation. Do you have questions?

[Operator Instructions] The first question is from Walter Bamert from Zürcher Kantonalbank.

May I ask you for 8 figures, which help me to do my analyst work, which would be the growth rates for orders and sales adjusted for currency and acquisition effect for the group overall and for the 3 business group, please?

Yes, I can provide you with numbers, but I will call you back off the call to detail now.

Okay. Then a question probably for the CEO. You have now the Autoconer in your offering. And you also highlight that the system approach is very important. How is it selling the Autoconer? Is it as part of complete systems? Or is it rather that it's a stand-alone add-on to existing installations at your client side? What is the percentage of system sales of Autoconer relative to stand-alone sales?

When we have to say that we are in the process of ramping up our system offering, we have generated the first system orders in connection in particular with newcomers who are entering this business. They are very interested in buying a complete system. But so far, we -- the number of single machine -- single machine business still exceeds the system business. I expect this to change over time.

Would you dare to make a guess where we stand with the sales?

No. No.

Do your clients like the Autoconer being offered by Rieter?

Yes, they do. Yes, they do. We are very happy with the order intake for this business -- in this business. It's going in the right direction. But as I said, at the moment, we still have a higher proportion of single machines compared to the number of machines that we sell into systems. But this is sensitive information I cannot share it with you.

The next question is from Christian Arnold from Stifel Schweiz AG.

First question would be on the order cancellations. You were talking that these have a level of around 5% back in October, I think when we talked last time, and now we're talking below 10%. The first question would be, are we talking here only about third-party order cancellations? Or does this include cancellations triggered by Rieter?

As I said, there is a significant amount of cancellations that we have triggered. It was part of the -- or is still part of our effort to clean up our order backlog. So we have approached customers who had contracts with us with low margins and we try to either negotiate higher prices or canceled the contract in accordance with the customer, and that is what we did. And this is part of the numbers -- that is included in the numbers that you see in the communication today.

So it's part of the below 10%?

Yes, it's -- last time somebody called it the washout. It's part of the washout, yes. Was that you, Christian, the washout?

Yes. Yes. Yes.

The washout.

And that will be my next question, the washout. So thinking about the order backlog of this CHF 1.5 billion, how much washout do you still have to do? Will it -- will that be finished in the first half? Or asking differently, how much of the CHF 1.5 billion order backlog has not satisfying margins?

I mean, that depends on cost development. If aluminum, for example, goes the same way that logistics costs will go, we will be ready very quickly. If that doesn't happen, we will -- it will take longer, but I'm confident that we will be able to manage this and to accomplish the washout during the course of the year.

During the year or during the half year?

During the year.

Okay. And maybe my last question would be on the EBIT margin development. I mean it goes hand-in-hand with the question before. But nevertheless, if I calculate it correctly, the H2 EBIT margin was around 4.5%. We had negative EBIT margin in the first half. So was this a linear progression in the second half? And could you tell us about the exit rate when it comes to EBIT margin? So where did you stand at the end of the year?

I mean all I can say about that, Christian, is there are, of course, 2 dimensions here in terms of EBIT margin improvement in the second half of the year. Number one is obviously, it's the volume, right? Not a surprise, yes. But number two, I can confirm that we were able to increase gross profit in the second half of the year. And it was a significant improvement. So it goes -- there is 2 dimensions and they both contributed to the improvement.

The next question is from Charlie Fehrenbach from AWP.

A question maybe to Bernhard Jucker or Norbert Klapper maybe. You allow the assumption that the departure of Mr. Klapper is to be seen in context with the weak order intake. Could you may give a short comment on that? And my second question would be -- could you may give kind of an outlook on to the development in 2023, maybe not in figures but in a qualitative way?

Thank you. So I can assure you that my departure has nothing to do with the order intake. I've seen in retail high order intakes and I've seen low order intakes, and that doesn't make a difference to me. No, I'm with this company now for 9 years. It's time for a change. And it's time for a change for me. It's also time for a change for the company. So I guess it's the right decision. And the order intake has nothing to do with it. Outlook '23, yes, it's -- was predictable that you would ask this question. You know that we will give an outlook in March. What I can say about '23 is the following. Number one, we will continue with our program to increase gross profits and to be able to ship the backlog and turn it into sales. You saw that we were successful with that in the second half of last year, and I have no reason to believe that this is -- that this will not work in 2023. The second thing I already mentioned, this is the Chinese market. The Chinese market is depressed at the moment by the COVID pandemic. In terms of consumption, I had the chance, as I told you, to get some firsthand information and look into this myself, and I can tell you Chinese consumers -- Chinese consumption is heavily impacted by COVID. And then there is a couple of things that will happen in '23, which might be positive. Number one is the election in Turkey has been pulled ahead. We will have the reelection in May and of the election in Turkey is always a reason for customers to wait before they take decisions. And ITMA will happen in June. This is also a reason why customers hesitate to place new orders. They wait for the new machines that will be presented at ITMA. This is all going to happen in the first half of 2023. So we will talk about that when we make our outlook statement in March.

The next question is from Sebastian Vogel from UBS.

I've got 3 questions. I will ask them one by one. The first one, coming back to the order intake weakness in systems. You mentioned a couple of reasons like cancellations, financing, consumption driven. Can you sort of give us a rough ballpark what of these factors was the main driver? Or have all of them sort of equally contributed to this? Or what are your expectations going forward in that regard?

The 3 issues I mentioned were financing costs. It was consumption. And I told you that consumption is an issue at the moment. We see it at the -- and when we look at the capacity utilization and the uncertainties, where this is a broad thing, yes? When I look at yesterday evening's news on the war in Ukraine. I mean it's not helping. And for sure, it is not helping. And I had the chance in China to meet with the Chinese customer. And he told me why people are not consuming. And he had a very, very easy way of looking at it. He said Chinese are not consuming because of COVID. The U.S. is not consuming because their warehouses are full and they have a stock level, which needs to be sold off first. And the Europeans are not consuming because of inflation. That was his pattern. And I guess he might not be that wrong with that. So I guess the uncertainties and the consumption -- in the weakness in consumption, they are really important at the moment. Financing cost of customers make investments less attractive unless you can pass on the additional cost to your customers. And that is what our customers will do and we'll try to do. And as soon as they see that this is going to work, they will -- this reason will go away.

Got it. The second question would be on these renegotiations and the resulting cancellations that they came with some extra costs?

The cancellations?

Yes.

Yes. Yes. In some cases, we have to tell the customer, okay. We pay you a small amount of money if you agree with the cancellation, yes, but it was not significant. We are not talking about big numbers.

Okay. Got it. And the last one in the press release also with regard to the management change. You mentioned also that Mr. Oetterli need to be on the Board of Directors. But of course, I assume there will be some concerns on the government side of that one, how would you think about these concerns?

I would like to ask you to wait for Bernhard Jucker's statement on that, and he will address this issue.

The next question is from Ivan de Bruyne from Finanz und Wirtschaft.

I'm not sure now if I got it wrong, if Bernhard you could after this discussion, telling something about the new CEO? Or can I ask already something on it?

Yes. No, no, please wait. Bernhard will make a statement and then we can talk about it.

Okay. Then I will ask later on.