Dürr Aktiengesellschaft

Welcome to the DUR conference call. Dr. Jochen Weihrauch, CEO, and Dietmar Heinrich, CFO of DUR-AG, will present the DUR Group's figures for the first quarter of 2023, followed by the Q&A session. I will now hand you over to Adriel Schaller, Head of Investor Relations of DUR-AG. Please go ahead.

Thank you, Sergei, for the introduction. Ladies and gentlemen, good afternoon and good morning to those of you in the U.S., Welcome, everybody, to our Q1 earnings conference call. With me on the call today are our CEO, Jochen Weihrauch, and our CFO, Dietmar Heinrich. They will present the results of the first quarter, as well as the outlook, and we'll be happy to answer your questions afterwards. As always, our earnings presentation is available on our investor relations webpages, and we assume that you have it in front of you. Please be aware of our disclaimer regarding forward-looking statements on slide two. And now it's my pleasure to hand over to our CEO, Jochen.

Please, go ahead. Thank you, Andreas, for the short introduction and a warm welcome also from my side to all participants on this call. As usual, I will start with a review of our performance in Q1. After that, I will briefly comment on the performance of our divisions before Dietmar will go into more details regarding the financials. At the end, we will have a look at the guidance for 2023 before we enter our Q&A session. The highlights of Q1 are on slide four. After the record order intake for the full year 2022, we achieved a new quarterly record in Q1 2023 with just under 1.5 billion euros. This was driven by several factors. First of all, we received large orders for automotive and immobility production equipment. The demand from OEMs to refurbish capacities is strong and newcomers are expanding their capacities. Order intake for environmental technology has increased significantly in North America as investments are being done for industrial infrastructure. In addition, we received the first order for solvent recovery system for battery production in the USA. Last but not least, the order intake of HOMAG recovered after week Q4 of 2022. As a result, the order backlog grew to 4.4 billion euros, which is a new record level, too. The composition of the backlog is shifting more towards automotive and environmental. The backlog at HOMAG is declining, but coming from a very high level. Sales revenues are up 12% year-on-year to more than 1 billion euros. The book-to-bill ratio stands at 1.44. EBIT before extraordinary effects reached 42 million euros, and the related margin was 4.1%. Q1 is seasonally the slowest quarter in terms of earnings. Compared to the first quarter of last year, Profitability was impacted by a lower service share and the German inflation compensation payment for tariff employees that was done in January. In addition, last year's Q1 benefited from lower material costs as we could still work from stock that was purchased in 2021. We expect margins to improve in the coming quarters as projects with better prices or higher margin backlog are executed. Free cash flow was solid in Q1, supported by the strong order intake and corresponding prepayments. Based on the results of the first quarter, we confirm our outlook for 2023. On slide five, we see the key financial indicators for Q1. Order intake increased by 5% compared to the old record level achieved in Q1 2022. Sales revenues grew by 12%. Both order intake and sales revenues include small negative foreign exchange rate effects that were not relevant. EBIT before extraordinary effects dropped by 6%, and the margin declined from 4.9 to 4.1%. I already explained the reasons for the decline in the highlights. Net income was lower by 22%. The larger decline is due to the fact that last year, we had a positive extraordinary effect of roughly 5 million euros related to legal case at Hikuma that was decided in our favor. Finally, free cash flow was solid at 44 million euros. Last year, we had an extraordinarily high cash flow, reflecting lower inventories and high prepayments. With the 44 million euros in Q1, we are well on track to reach the full year guidance. Let's look at the order intake on slide six. We already mentioned some timing effects when discussing the lower order intake in Q4 of last year. Some automotive orders moved and were realized in Q1. Customers of Hallmark were very cautious in Q4 due to the uncertainties around the potential recession. Sentiment has stabilized and order intake grew compared with Q4, however, compared to last year's record figures, it stood at a lower level. On the margin side, we can see a clearly positive development in order intake with improved margins, especially for services. On slide seven, we see the geographical distribution of order intake. We received large automotive orders in Germany and the rest of Europe, as well as in the US. The declines you see in China and North America are due to a base effect. Order intake was very strong in both regions in Q1 of last year. Demand in the rest of Asia was mainly driven by India, where we received the larger automotive-related order. All in all, we had a strong start for order intake, and we clearly benefit from our global setup. We would typically show a slide on sustainability at this stage of our presentation, but we have shifted that to Ditmar's sections when he will talk about the green shul shine that was issued in April. Our sustainability report will be published in June, and I will present some highlights, some of the highlights to you during our half-year earnings call. Now, let's have a look at the divisional development. We start with paint and final assembly systems on slide nine. order intake reached a new record level with more than 600 million euros. This was driven by large orders in Europe, China, and North America, and the pipeline continues to look strong. Sales revenues came from a low previous year level and grew by 16%, but still have upside potential when looking at the full year guidance. A lot of projects are currently in an early phase, and we expect revenue generation to increase over the coming quarters. Projects in an early phase are also part of the reason why the EBIT margin before extraordinary effects was still muted into one. In addition, the service share was low, but the order intake for service looks quite strong, which should support the coming quarters. Backlog margins further improved. All in all, we are on a very good track based on strong demand and improving order backlog margins. Let's turn to application technology on slide 10. Similar picture here. Order intake reached a new record of well above 200 million. Revenues grew at a comparable pace, like at PFS, and the service share temporarily declined after a strong Q4. EBIT margin before extraordinary effects declined due to weaker service share, but in absolute terms, EBIT showed a slight growth. In a nutshell, Also at APT, we have seen a seasonally weak start that was impacted and that is valid for all divisions by the inflation compensation payment in January. However, demand is strong for equipment and service, and we expect a solid improvement going forward. Next is clean technology systems on slide 11. We experienced high demand in Q1, especially driven by orders for air purification technologies. We also received the first order for solvent recovery equipment for battery production in North America. Germany and the U.S. were the main contributors to revenue growth in Q1. Service sales were growing stronger than equipment sales. Margins improved year on year as higher material costs are now better compensated by price increases. Still, there is upside potential. At the moment, some project delays and temporarily higher R&D costs due to our investment into battery production technology have an impact on the margin level. With strong demand and a focus on solid project execution, we are in a good way to improve results over the next quarters. On slide 12, we can see the summary of developments at the measuring and process systems divisions. Order intake was close to the high level of the prior year. Demand was driven by Europe and US, while the start in China was slow. Sales revenues recover, but are still impacted by restrained availability of electronic components. The procurement processes have been accelerated to further improve the situation. The EBIT margin came down a bit due to a temporary lower service share. All in all, we see a very solid demand environment and expect revenues and margins to continue to recover. Last but not least, let's take a look at HOMAC on slide 13. Water intake reached 353 million euros, which is an improvement compared with the 288 million euros of Q4 of last year. The comparison with the first quarter 2022, of course, displays a major decrease given the extremely high record order level back then. Demand for new equipment and services was still low in China and Europe. We look forward to the trade fair Ligna that will start on May 15th at Hannover in Germany. It is the largest trade fair for woodworking equipment in the world. We'll present our latest machines and systems and talk with customers about our ideas for the next innovations. At the end of the zero COVID policy, we expect the Chinese market to pick up during the coming months. Revenues remained at about the high level of the past quarters of around 400 million euros. Compared with Q1 2022, EBIT grew in absolute terms while the margin before extraordinary effects came down slightly. This was mainly due to a lower service share in revenues and higher R&D costs as we were preparing to present new equipment at the LIGNA trade fair. After a solid start into the year, we expect margin improvements over the coming quarters. At the same time, we're carefully observing the development of demand and work on improving the flexibility in engineering and production between furniture and wooden construction. Now let's move to the service business on slide 14. The first quarter, service sales were just about at the same level of last year. Due to the overall higher revenue level, the service share of revenue came down by three percentage points year on year and reached 28%, like in the last two quarters. Service margins were better than last year, and the order intake for service looks quite strong. mainly driven by automotive. At HOMAG, we still see upside with respect to service orders. And now, Dietmar, hand over to you for the financials. Thank you, Jochen, and a warm welcome to everybody also from my side. I start with slide 16. In the first quarter, we saw a strong order intake, revenue growth in line with the guidance, still muted margin development, and a solid free cash flow. Let's have a look at the financial details on the next slide. On slide 17, we can see the revenue development over the last five quarters. You can see the typical seasonal development, which is very well visible when you look at 2022 with a weaker Q1 and a strong finish in Q4, when many projects typically come to an end. Q1 this year reflects still some constraints from the supply chain and a relatively low service share. Both should improve as we go forward. Regarding the geographical contribution, we can see that the Americas gained share, which is not surprising as auto intake has improved a lot during last year. China and Europe gave away a bit of share. The overall distribution reflects a solid geographical diversification. Let's move to profitability to EBIT on slide 18. Again, you can see the seasonal development in 2022. However, with a dip in Q2, mainly due to the lockdowns in China. This year, the Q1 EBIT before extraordinaries came in below last year. Jochen already mentioned the most important factors. a lower service share compared with last year, a higher material cost level as we could still consume cheaper material bought in 2021 in the first quarter of 2022, and the inflation adjustment payments in Germany that were done in January. In addition, we had higher overhead expenses due to sales commissions and research and development spendings. However, sales growth outpaced the overhead cost increase. We expect earnings momentum to improve going forward as we will increasingly execute higher margin projects from the backlog. Nevertheless, we will stay vigilant regarding the demand development, especially at HOMAC, and have prepared precautionary measures in case that demand turns out to be lower than expected. On slide 19, we can see the free cash flow development. Last year, we had a very strong contribution from net worth and capital improvements to free cash flow in Q1. This year, the net working capital improvement was much lower and as a result, we see a negative contribution in the bridge. This is somewhat compensated by a higher level of provision that is included in the other line. All in all, we had a solid start into the year and we will continue to focus on a disciplined management of net working capital and CapEx going forward. The latest developments of networking capital in more detail can be seen on slide 20. Networking capital declined slightly and reached €407 million at the end of Q1 2023. On one side, inventories continue to increase, but the rate has come down a lot, and we expect that we have seen the peak in this quarter. On the other side, contract liabilities also grew due to the strong order intake. However, for the rest of the year, we should expect a reduction as order levels will normalize and projects will be executed, meaning that prepayments will be consumed to a larger extent. Days working capital were, once again, better than our target range of between 40 and 50 days. So you can be assured networking capital management will remain high on the agenda in 2023, as we seek to partly compensate a lower level of prepayments expected with lower inventory levels. On slide 21, we can see the positive impact of the free cash flow on our net financial status. Net debt declined to €4 million at the end of Q1 2023. This includes €92 million of leasing liability, so leverage stands at about zero. We are actually very pleased with our solid balance sheet. Nevertheless, we are prudent with our financing and approach and prefer to get prepared early for future financing needs. As a consequence, we issued, as you can see on page 22, a €300 million green shield shine last month, and I would like to mention some of the details on this slide. The proceeds are earmarked for sustainable product innovations and climate-friendly investments. for example, into additional photovoltaic systems and modern low-energy buildings. We issued tranches with fixed and variable coupons and maturities of four, five, and seven years. By that, the volume-weighted average duration of our financing instruments was increased by about a year. The average coupon came in at 4.76%. This is higher than the 2% we reported in December 21, when we issued our last Joule Chime. But I hope you agree that the interest rate environment has changed quite a bit since then. The coupon is tied to our sustainability rating at ISS. In order to stay with the agreed coupon, we need to achieve and maintain a prime status at ISS from 2025. Proceeds were collected on the 20th of April, and I will show you the updated maturity profile in a second. For us, the green should shine was a great success. Demand was very high, and this is best proof that our sustainable finance framework meets the requirements of the market. And now let's have a look at our liquidity headroom on slide 23. We show this on a pro forma basis, including the effect of the 300 million Euro green Schulzstein, but also including the repayment of a 50 million Euro maturity in April. Available funds amount to 1.65 billion Euro. The next financial instruments will be maturing in January 2024. On the right side, you can see the timing of the new maturities of the green Schulzstein. The profile looks nicely balanced over the next year, and as such, we feel very comfortable with our liquidity headroom, which leaves us flexibility to further grow our business. With this view from the financial side, I'd like to hand back to Jochen for the outlook. Thank you very much, Dietmar. Now let's turn to the outlook. On slide 25, we can see the fundamental demand drivers for our business. These have not changed since the last presentation, but we keep them in here as a reminder that demand for just technologies and services is driven by some fundamental trends that we believe are quite resilient. In detail, these trends include the decarbonization of production, the transformation towards immobility, and sustainable construction using wood, the automation of production processes, and the further tightening of emissions standards. All these trends should provide a solid support of our business over the next years. This does not mean that our business will not show any demand cycles anymore. This will still be the case and can be seen in 2023 when we expect a lower demand from the furniture industry. But the swings in order intake should be less pronounced for the group as the dynamics of different business areas balance each other. We believe that we are well positioned with our leading and resource efficient technologies to supply attractive solutions to industry and craftsmanship. On slide 26, we can see the expected growth rate of battery electric vehicle production volumes over the next years. More and more new models are coming to the market Technologies are getting better and the prices are coming down. This should attract additional buyers and continue to spur demand. Let's look on our guidance for 2023 on slide 27. We confirm our targets for 2023. After the first quarter, it's still too early to give more indications where we will end up within these ranges. A lot will depend on further demand development in the coming quarters. On slide 28, we can see the breakdown of the guidance by divisions. There is also no change to these targets. Let me also remind you of our midterm strategy for profitable growth on slide 29. We believe that we can grow with a compound average growth rate of 5% to 6% and reach more than €6 billion of revenues by 2030. We target an EBIT margin before extraordinary effects of at least 8% and a ROSI of at least 25% by 2024 and thereafter. The strategic levers are defined and we focus on execution. Now, let's summarize on slide 31. We achieved a new quarterly record for order intake in Q1, driven by strong automotive demand. Revenue growth is on track. The EBIT margin was impacted by business mix and inflation compensation payments in Germany. Nevertheless, we delivered a solid free cash flow due to strong prepayments. We confirm our guidance for 2023 and expect margins to improve over the coming quarters. Thank you very much for your attention. Now we're happy to answer any questions you might have.