Elringklinger Ag

Ladies and gentlemen, I welcome you to our earnings call in the second quarter of 2023. We have already published preliminary quarterly figures on July 11th via an ad hoc announcement, and with today's publication, we confirm them. Over this earnings call, I aim at providing a more detailed look into the results from the second quarter. And first, I will start with some headlines on the second quarter, then discuss the financial figures and close with a few forward-looking remarks on the current financial year. At the end, you will have the opportunity to ask questions and I am pleased to answer them. First of all, the second quarter saw improvement in important macroeconomic conditions when compared with the situation a year ago. Global GDP was slightly in the black, mainly driven by China and India. However, macro challenges such as inflation and restrictive monetary policy cut the economy in other regions such as Europe. Inflation generally lost some of its dynamics in the first half of 2023, but it is still above the 2% target of the ECB. Last week, the ECB and the Fed each implemented yet another interest rate hike. At the same time, supply chains are more stable than one year ago, We are also seeing a stabilization on the raw material side. And when it comes to market price developments of several key raw materials that we are using in production, in addition, energy costs are down on the prior year, which is also visible in our margins. Both international vehicle sales markets and global vehicle production saw a marked upturn in Q2 compared to the previous year. Light vehicle production benefited from improved supply-related factors as well as the low prior year base. Production recovery in the key regions like Europe and North America and Asia-Pacific was reflected in the double-digit percentage growth rates. In China, production output picked up significantly after manufacturing activities there had been severely affected by lockdowns due to the pandemic in the previous year. As with our successful start into this year with the Q1 figures, we're able to improve sales and earnings performance visibly in the second quarter of 2023. Sales revenues increased to 467 million euro. That is an increase of 9% compared to the second quarter of 2022. Given that global light vehicle production rose by 11.2% in the first half, organic group sales were on market level in the first six months of 2023. Adjusted EBIT came in at 24.8 million euro. Adjusted EBIT margin for the group was 5.3% in the second quarter of 2023, which is a strong improvement compared to the 0.4% adjusted EBIT margin in the prior year Q2. With the sales growth, the working capital level was also elevated on the previous year while the net working capital related to sales remained flat at 28% on Q1 and the second quarter of 2022. Operating free cash flow was in positive territory at 3.7 million euro as in the prior year Q2. With net financial debt at 380 million euro, the ratio of net financial debt to EBITDA improved visibly compared to the end of June 2022. And given the good first half of 2023, we confirmed the outlook for fiscal year 2023 as well as our midterm outlook. The second quarter was also a successful one for Erwin Klinger in terms of nominations. We received significant orders that were also disclosed via official announcements, starting with the classical business areas we received new business in areas resulting from a strong market position. For example, an order for a valve cover for a global OEM, including a volume in the double-digit million-euro range. Second, transformation is continuing as originally classical business units use the know-how for e-mobility products, and they generate substantial new business. For example, we have just announced last week an order for metal battery housings to be used in commercial vehicles and city bus applications. This order will be executed by the Metal Forming and Assembly Technology Business Unit, formerly Shielding Technology. Additionally, we have received a serious production order for battery housing components from a major global battery manufacturer. Third, there are new mobility products to be supplied by our e-mobility business, Driving Transformation, of the group. For example, we received a high volume order for cell contacting systems for the BMW group's new class. This order has a term of several years and will ramp up from 2025. And orders in 2023 also included a large volume series production order for the supply of bipolar plates by Elwin Klinger Plastic Omnium EKPO. These orders confirm the path of transformation chosen by Erwin Klinger and be sure there's more to come. On slide number four, you can see that nominations like these move us forward on the path of transformation. In total, the nominations which we have received since 2021 for applications in the new drive technologies amount to a total volume of around 2.5 billion euros. Nearly two-thirds of the nomination volume relate to our e-mobility business, which includes the units drivetrain, battery technology, and fuel cell technology. In these units, we offer future mobility products like fuel cell stacks, bipolar plates, and other fuel cell components. We have the joint venture EKPO fuel cell technologies, battery systems, battery modules, and battery components like the cell contacting systems, and Last but not least, electric drive units and components. In addition to our e-mobility business unit, the originally classical business units have also won significant orders for e-mobility products as outlined before. All in all, you see that Elring Klinger is successfully pursuing the process of transformation. Coming now to the financial figures. starting with orders and sales on slide number five. Considering the recent large-scale nominations in battery and fuel cell technology, it should be noted that order intake and backlog only comprise the order book recording the short-term orders by customers placed as part of their scheduling arrangements, not the nomination volume over the respective remaining contract periods that is yet to be executed. Looking at the recent development of order intake and backlog, the order situation returns to normal levels. After the order intake showing pent-up demand related to the coronavirus pandemic in previous quarters, the order intake in the first half of 2023 was roughly on par with the pre-COVID levels. Currency effects only had a slight impact on order intake in the second quarter of 2023. Against the backdrop of relatively high revenue and low order intake, order backlog also changed. Order backlog stood at 1.35 billion euro, and this was below the high level of the previous year, but above the average of the past years, and also significantly above the pre-COVID figure at the end of 2019. Sales performance was significantly improved. We increased sales in Q2 by 8.8% to 469 million euro. Given currency headwinds of 8.8 million euro in the second quarter, there is organic growth of 10.9%. Looking at the first half of 2023, revenues amounted to 956 million euro, up by 91 million euro, or 10.5%. Aaron Klinger Group recorded organic sales growth of 11.5% in the first six months, which is on par with the development of global light vehicle production over that period. On slide number seven, we see the sales performance of the different segments and business units. The original equipment segment is on track for growth, with nearly all business units increasing revenues in the second quarter of 2023. Lightweighting elastomer technology, being the largest business unit, increased sales to €149.3 million. Metal sealing systems and drivetrain components as well as metal forming and assembly technology were able to report higher revenues than in prior year's second quarter, now amounting to €126.4 million and €73 million respectively. The e-mobility business unit reported sales of 10.9 million euros in Q2, which is up against the figure of the first quarter of 2023, but lower than the 14.1 million euro in Q2 2022. Coming now to slide number eight. In the second quarter of 2023, the group expanded revenues in all regions. Let me elaborate on the three main regions. The rest of Europe, being the region generating the highest revenue within the group, recorded the strongest growth with revenues that increased by 16.4 million euro or 12.7% to 145.8 million euro. Adjusted for currency effects, the increase was even pronounced at 14.6%. In Germany, revenues were up 6.5 million euro or 7.4%. Sales in the Asia Pacific region amounted to 83.9 million euro, that equals around 18% of group sales. And adjusted for foreign exchange effects, revenues in this region were up 12.3% in the second quarter. In the region comprising North America, revenue grew by 8.3% to 120 million euro in the second quarter of 2023, Foreign exchange effects on revenue in North America were only marginal. Let us now have a look at the earnings on slide number eight. After a second quarter last year that was primarily influenced by energy and material cost inflation, the effects eased in the quarter just ended. And therefore, we could record a significantly improved EBITDA for the group, amounting to 46.8 million euro after 26.7 million euro one year before. Adjusted EBIT in Q2 2023 amounted to 24.8 million euro with an adjusted EBIT margin of 5.3%, markedly better than last year's Q2 with 1.8 million euro and a margin of only 0.4%. Growth in the group sales, again translated into visible earnings growth. And in terms of adjusted EBIT, the positive effect of operating leverage was €13 million compared to Q2 of 2022. Concerning raw materials, the positive effect of €11 million is now a big step towards the cost level from 2021 and first and foremost to the effective negotiation results of our sales teams. For energy and logistics, the purchasing situation was better than in 2022 as I have previously mentioned. Further, ramp-up costs of the strategic future area of fuel cell technology, as well as in a new plant in North America, totaling €2 million, affecting the adjusted EBIT in Q2. Net finance costs in the second quarter was minus €5.3 million. And given the hike seen in market interest rates, interest expenses were higher than a year ago, resulting in higher net interest expense. In addition and contrary to Q2 2022, exchange rate developments led to a lower net foreign exchange rate result, and taking net finance costs into account, earnings before taxes in Q2 amounted to 11.4 million euro. After deducting tax expenses and taking into account known controlling interests, the share of the net income attributable to our shareholders amounted to €2.4 million. Therefore, earnings per share amounted to €0.04 in Q2. On slide number 11, we take a close look at CapEx networking capital and operating free cash flow. At €17.4 million, capital expenditure on property, plant and equipment was up from prior year Q2. Among others, CapEx flows were directed at manufacturing facilities for new SOP ramp-ups planned within the global production network. In addition, CapEx included projects aimed at aligning the product portfolio with the e-mobility market as part of the transformation. The investment ratio stood at 3.7% in the first quarter of 2023 after 3.2% in the first quarter of the previous year. Given the strong sales growth and the period under review, accounts receivables expanded year on year in view of cost inflation, as well as the tense situation seen for some raw materials, inventory was adjusted accordingly. Irrespective of this, inventory levels also expanded in view of the group sound order situation. Networking capital totaled €529 million at the end of Q2, expressed as a percentage of revenue for that 12-month period, its share was 28%, slightly up from 27.9% a year earlier and flat on the Q1 2023 figure. Regarding operating free cash flow, less capital was required for inventories and trade receivables than in the preceding quarter, and therefore operating free cash flow was a positive territory at 3.7 million euro, comparable to the prior year Q2. Slide number 12 now shows the net debt. The group was able to reduce net financial debt by 2.4% or 10 million euro year-on-year to now 380 million euro, despite the higher funding requirements for the group's operating business, in terms of net working capital. The net debt to EBITDA ratio was 1.9 as of June 30th, 2023, markedly reduced from 2.5 one year earlier. Let me now turn to slide number 13, showing the performance of our segments in terms of sales and adjusted EBIT margin. As mentioned before, the OE segment continues its growth path, both sales and earnings were improved compared to the prior year Q2. And this mainly reflects the fact that the group was better able to absorb negative cyclical and sectoral factors such as elevated energy and material costs in the second quarter. The adjusted EBIT on the OE segment was positive at 3.4 million euro. Sales were up 6% compared to Q2 of the previous year. The aftermarket segment successfully continued its growth strategy in a very strong business cycle and delivered again an outstanding EBIT result. Already from a high revenue base, the segment managed to expand earnings compared to the same quarter of the previous year, now amounting to 75.6 million euro. The aftermarket business generated an adjusted EBIT of €19 million and an adjusted EBIT margin of 25.1% in the second quarter. The engineered plastic segment was able to expand revenues by 2.5% to €32.7 million in Q2. As regards to earnings, a combination of higher staff, material and energy costs exerted pressure on the segment performance compared to the same period last year. Adjusted EBIT amounted to 2.5 million Euro from April to June 2023. Having said this, let me provide some remarks on the market in the current financial year. As I have already outlined in the beginning, the car market and thus light vehicle production is influenced by several geopolitical and macroeconomic factors. economy is expected to see weaker growth of 3% in the current year, according to the latest estimates of the IMF. Despite an improvement in the first half of the year, strict borrowing terms, inflation, and supply-side conditions that are not yet considered entirely stable, together with geopolitical uncertainties, continue to pose considerable risks for the automotive sector. According to recent projections, by S&P Global Mobility. The global light vehicle production is expected to grow by 5.3% to 86.7 million vehicles this year, still below the pre-COVID figure of 89 million vehicles produced in 2019. While the projections were lifted compared to the April projections, the most significant increase in production is likely to have occurred in the first half that just ended. The second half of the year is expanded to trend sideways on a global scale after a strong first six months of 2023. Against the backdrop of the general uncertainty and volatility still evident in the economy, Erring Klinger confirms the guidance for 2023 on the basis of its first half results in current market assessment. Accordingly, We continue to expect its organic revenue growth in 2023 as a whole to be significantly above the rate of change in global light vehicle production. As for an adjusted EBIT in 2023 as a whole, the group expects a margin of around 5%. The outlook for the remaining key indicators is also confirmed as well for the medium-term targets. Now, having said all this, I'm happy to take your questions. Thank you very much.

At this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star and one or the touchstone telephone. If you wish to remove yourself from question queue, you may press star and two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time.

Our first question comes from Akshat Khaker from JPM.