Rieter Holding AG

Ladies and gentlemen, welcome to the semi-annual report media and analyst conference call. I'm Moira, the chorus call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Norbert Klapper. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen. Thanks for being with us this morning for the presentation of Rita's half-year results. I jump right away on page two where we have summarized the key messages. In the first half of 22, Rita booked an order intake of almost 870 million and we have an order backlog of more than 2.1 billion Swiss francs. Sales, we booked 620.6 million sales. sales could have been significantly higher. We will talk about that today because we had pre-produced deliveries in the three-digit million range, which we needed to postpone until the second half of 2022. EBIT came out at a loss of 10.2 million and a net result of minus 25.2 million. And the three major reasons are significant cost increases, which we could not compensate, additional costs in connection with the compensation of material shortages, mainly development costs, and acquisition-related expenses. It goes without saying that this loss is way below our expectations and ambitions. We have launched an action plan to increase sales and profitability in the second half of 2022. Two main pillars are important here. We have a program to compensate cost increases as much as possible and of course also a package which is supposed to secure sales realization from our backlog in the second half of 2022. We also have news today on the RITA site in Winterthur. We have started the sale of the remaining land here in Winterthur where we are today. And last but not least, we have an outlook. We will give you an outlook for the second half of 2022. I move over to slide three, which shows you the order intake development. Order intake without acquisition is significantly above the five-year average. You see this in my slide here, five-year average, 570 million. And without taking the acquisition into consideration, we have been close to 700 million in the first half year 2022. The reason for this development is the regional shift of demand and the success RITA has in this environment. The regional shift of demand continues. There is two dimensions to it. There is investments in spinning capacity outside China, and there is investments in the competitiveness of the Chinese spinning mills at the same time. Both come together, both coincide. This is what we see in the market, and Rita has set up the right way to benefit from this. However, we expect a normalization of order intake, which will be driven by the long delivery times of the equipment suppliers and the global challenges that we all know about. COVID is still there, inflation and the impact, the potential impact on consumer spendings and on financing of investments. That is the important things that we are looking at today when we talk about challenges. The order backlog at a record high level of 2.1 billion Swiss francs and the cancellations at a rather low level, which tells us that our customers hold on to their investment projects. They see the opportunity which will arise when the markets recover. On the next slide, page number four, We give you an update on the reasons where the success in the market is coming from. You see the first block here under the light green headline market. We already talked about that. This is the regional shift which continues in the spinning industry. The investments outside China in combination with the investments into the competitiveness of the Chinese mills which are supposed to stay in China. We also have an update on the country ranking on the next slide. I will come to that in a minute. The second issue is, of course, as important, and this is Rita's technology, our technology offering, which targets at the value proposition of the lowest cost per kilo yarn, which is what our customers are looking for. This is obviously the right answer to the current energy cost challenge that our customers are having today. The technology leadership in terms of energy consumption of our machines is very important in this environment and it gives our customers a competitive advantage that we can benefit from. And we also discussed the system dimension of this boom of the success of Rita in the market. You know that we have completed the ring compacting system by acquiring the automatic winding machine. The order intake for complete ring and compacting systems gains traction. The completion gives our customers a competitive advantage, and this is also true for us, in particular newcomers. see the benefit of buying complete systems from RETUS. And the regional shift which we experience at the moment implies that there is a relatively high share of newcomers in this business. I'm coming to slide number five. As I promised, this is the country ranking. In terms of order intake, you see on the left-hand side what we had over the last 10 years in 2011 to 2020, China being number one, followed by Turkey, India, Uzbekistan, and the United States. We already talked about the financial year 21 earlier. You see that the picture has changed, Turkey being number one, India, Uzbekistan, China, Pakistan, USA no longer being on the list. And we have the same top five countries we had in the first half year of this year, but the ranking changed a little bit. India became number one. And this was driven by the automatic winder orders that we sold in India. So India number one, Turkey number two, China, Uzbekistan, Pakistan. If the Americas were a country, they would have been on number three on that list. That tells you that the regional shift not only takes place in Asia, It also takes place in Central America. Customers who are investing in Central America are targeting the U.S. market. On the next slide, we have a little update on our last exhibition, on our last trade show, which took place in June in Istanbul. And the discussions we had in Istanbul confirmed the market sentiment that we had heard before. from customers. It was the first time that we presented the automatic winder under the Rita brand. And customers told us that the gold rush in the spinning industry is somewhat over. However, they hold on to their investment projects. They are confident that investments will pay off when markets recover. This is why we see such a low cancellation number. Page number seven, sales. As I said already, my sales grew significantly compared to last year. However, sales could have been a lot higher. We had to postpone shipments, pre-produced deliveries in the three million digit range to the second half of the year due to missing material. And the material was mainly missing as a consequence of the Shanghai COVID lockdown in March and April 2020. the Shanghai COVID lockdown led to a situation where many of our suppliers were not able to ship what we had ordered to our plants, in particular to our Chinese plant, and at the same time the port of Shanghai was congested, so shipments did not go out. You can see an indication for the order of magnitude of these pre-produced deliveries which we had to postpone in our inventory build up between December and June this year. We built up inventory of more than 140 million. We have launched a program to catch up on sales realization and the actions are in place. I'm coming to the third reason for the disappointing results. disappointing profitability on page number eight. It illustrates the margin deterioration. And the slide says the following. On June 30 last year, machines and systems, retail machines and systems had an order backlog of 959 million. Over the last 12 months, we realized sales, mainly from this backlog, of roughly 755 million. Between April last year and April this year, cost increased significantly. I have two cost indicators here on that slide which tell you what happened. It's the cost per tonne aluminium and the container freight rate index Shanghai Rotterdam. You see the dramatic cost increase and as a consequence we had to buy material and freight at costs which were significantly above what we had calculated. when we sold the contracts. Kurt will show you the impact on our numbers. And obviously, we have been working on countermeasures for quite some time. You see here what we have done. Of course, the task here is to synchronize price and cost development. This is why we have increased prices in the meantime by 20%. This works very well in the components and after-sales business where we could protect our margins. But for the reason that I mentioned before, it did not work in the first half year for our machines and systems business. Price increases, price adjustment clause for delivery times which exceed one year. Everybody hates it, but there is no way around it. We continue to gain traction with this price adjustment clause. More and more customers accept it, but we have to protect our margin for the future, and we have to insist on this clause, which gives us an extra payment from our customers in case inflation goes on between signing a contract and shipping the material more than one year later. We are in the process of renegotiating the contracts which we have on board. This is, of course, also a painful thing to do. But again, we all know, everybody in the business knows what happened over the last couple of months. So there is a need to do that. And we are in contact to our customers to see whether we can come to an agreement here. And if there is a chance for cost savings, we will obviously take it. Having gone through the margin deterioration picture, I'd like to hand over to Kurt for the key figures of the first half year.

Thank you, Norbert. Good morning and welcome from my side to this call. I start on slide nine with the financial highlights. The first half of 2022 was characterized by a continued high order intake and a significant increase in sales. The order backlog is at a record level. This success in the market demonstrates Reader's technology leadership that was completed with the strategic acquisition of the Winder business. Despite higher sales, the significant increase in material and logistics costs, as well as the expenditure incurred for the acquisition, resulted in a loss. Let me highlight some of the key figures on this slide. Although sales were up more than 50% compared to last year, the gross margin was only increased by 5.4 million. The gross margin decreased from 31% to 21%. Partly because of a negative mix effect, higher gross contribution of the lower margin machines and systems business reduced the margin by 15.8 million. But more important, the margin deteriorated due to the cost increase that could not be transferred instantly into higher prices. EBIT reflects this deterioration of the gross margin. Additionally, two effects impacted EBIT. Acquisition-related costs as well as certain cost increases mainly related to the shortage of material and increased volume. Net profit includes, besides the usual tax and financial result, a one-off charge of 8 million related to the acquisition. When Reiter paid the purchase price back in August 21, the euro exchange rate stood roughly at 1.08. At the moment of the first consolidation of the Winder business in March 22, the exchange rate was at 1.04. This reduction of the euro exchange rate led to this 8 million effect, which is, by the way, not cash relevant. The free cash flow was negative, mainly due to the inventory build-up of 141 million in the reporting period. The inventory increase is related to two factors. First, the high volume and order backlog requires more material, and second, that postponed deliveries due to the shortage of material and logistics. However, despite this increase, networking capital remained negative. In other words, realtor inventory and receivables are fully financed by down payments and payables. Last year's net liquidity of almost 100 million turned into a net debt of 237 million. This decrease of more than $330 million includes $350 million cash outflow for the acquisition in 2021. The acquisition was completely financed by existing cash and additional debt. And finally, liquid funds on the balance sheet remain strong and are above $190 million. Looking at the graph on page 10, there are obviously three factors that contributed to the EBIT reduction from the plus 9 million last year to minus 10 million in the current year. Deterioration of gross margin. Assuming the same gross margin as last year, the additional sales of 220 million would have generated an additional margin of 49.4 million. A negative business group mix effect more gross contribution of the lower margin machines and system businesses, reduced the margin by 15.8 million. But more important, due to significant cost increase that could not be included instantly into price adjustments, the margin deteriorated. Altogether, this effect amounts to 32.5 million negative. Increase in structural cost. The increase in structural costs includes additional costs for compensation of the material shortage. Although structural costs are fixed costs in theory, there is always a volume-related component. These two factors explain the major part of the increase in structural costs. Acquisition-related costs consumed 11.2 million of the margin. These costs include 2.4 million transaction costs the net result of the operational business, as well as the effects from the IFRS acquisition accounting. The structure of the balance sheet on slide 11 did not change dramatically, despite the first time consolidation of the acquired finder business at the end of March 22. Liquid funds remained at high level above 190 million. Net liquidity decreased by 75.1 million, mostly related to the increase of networking capital, namely inventories. This increase in inventories by more than 140 million in the reporting period includes postponed deliveries in the three-digit million range. Networking capital, though, is still negative. I expect a substantial decrease once orders are fully delivered and inventories cleared. The decrease in shareholders' equity by 68.8 million is related to three major factors. The negative net result of the period of 25 million, the 18 million dividends paid in April, and negative currency impacts from the translation into Swiss francs. With this final remark, I turn back the work to Norbert.