Elringklinger Ag

Ladies and gentlemen, hello and good afternoon. I welcome you to our earnings call today on the third quarter of 2024. As usual, I'll provide a detailed look into the results from the third quarter. First, I will briefly highlight some key developments from the first nine months of 2024, including the transaction to group companies that was signed and announced one month ago. I will present and discuss the financial figures of the third quarter and close with some comments on the remainder of fiscal year 2024. At the end, as usual, you have the opportunity to ask questions, and I am pleased to answer them. To start with, implementing our transformation strategy, Shape 30, is our focus. After publishing the strategy earlier this year, we have taken significant steps forward in transforming the AK group further. And more is on the way. One of these steps is the divestment of two group companies in order to focus our product portfolio. I will comment on the transaction and its financial implications in a moment. In fuel cell technology, our joint venture EKPO unveiled the new NM20 stack module at the International Auto Show Transportation. The NM20 is EKPO's most powerful fuel cells module yet, delivering 400 kilowatt with a high level of efficiency. The stack's power density has been significantly increased compared to the previous stack generations. This technology platform being supported by the Federal Ministry for Digital and Transport, as well as the Ministry for Environment, Climate, and Energy sector of the state of Baden-Württemberg, within the first wave of the IPSE hydrogen program. In our battery business, we are driving forward the series production of cell contacting systems, and that is visible in our nine-month e-mobility business unit revenue, which has more than doubled compared to the first nine months, of 2023. We're also expanding the global footprint of the battery business by establishing a new battery center in the United States. Precisely, it is located in Easley, South Carolina. According to the plan, we'll begin to manufacture in mid 2025. In April, We performed a symbolic groundbreaking ceremony for the construction of the new logistics center at the northern side together with Minister President Kretschmann, the Prime Minister of the State of Baden-Württemberg. We're expanding the current production area and increasing capacity for production lines and logistics. At the same time, we have a strong footprint in the classical business. It provides the relevant free cash flow and therefore works as our backbone of our transformation. Our strong market position in the ICE business helps us in case of softer transition regulations into new mobility. Last but not least on the financials, with an adjusted EBIT margin of 5.1% in the first nine months, we're well on track to deliver on the margin guidance for 2024. Besides very good order intake, sales revenues in organic terms were marginally up in Q3 despite weak global light vehicle production, which contracted by 4.6% in the third quarter. Aaron Klinger's outperformance was mainly thanks to strong aftermarket business and the ramp up in serious production and battery technology. Yeah, ladies and gentlemen, as part of Shape 30, our mission is to shape and to focus the EK group along five success factors. The first one is product transformation. Erring Klinger is in the midst of transformation, and transformation is in full swing. Already today, Erring Klinger has received a significant nomination volume for known ICE applications, including nominations for products across the transformation portfolio. It is part of this success factor to analyze the individual product groups not only from a technological but also from a market perspective and derive strategic conclusions for our localized network. The success factors have one common goal in mind, to enable the group for further growth, particularly in the new technologies and to enhance the group's profitability structure. Coming now to slide number four, which also refers to the divestment of the two group entities. While free cash flows from the ICE business are expected to decrease over time, we expect e-mobility cash flows to rise with the book business ramping up. Beyond this shift towards e-mobility, the Aaron Klinger product portfolio is being assessed on the basis of a comprehensive market analysis. We constantly examine our current setup, how best to meet customer requirements. As we go deeper into transformation, we implement e-mobility. further steps. Where we see known performing assets, however, measures are taken in known core areas. As you know, several steps have already been realized, the latest being the divestment of the two group entities in Switzerland and the U.S. Let me briefly elaborate on this. On slide number five, we have summarized the key facts regarding the transactions. As we have published on October 7th, we have signed an agreement on the divestment of two Erwin Klinger subsidiaries to Certina Group, a German industrial holding company. Closing and respectively deconsolidation is expected for the fourth quarter of this year. The two subsidiaries in Beaufort, Georgia, in the United States, and Sevlin, Switzerland, represented around 10% of group sales in fiscal year 2023. At year end 2023, around 650 employees worked there. These two plans mainly produce shielding products for thermal and acoustic management in vehicles. There are several financial effects related to this transaction. First, Given that the subsidiaries make up around 10% of total balance sheet assets, there's some streamlining to the group's balance sheet. Second, as a result of the investment, impairments of €58.1 million were booked in the third quarter of 2024 relating to reclassification on the balance sheet according to the IFRS 5 standard. Third, in the midterm, we expect an improvement of annual group earnings by a low double-digit million euro figure. Yeah, coming now to the financial figures of the third quarter 2024, starting with orders and sales, now on slide number seven. Order intake in the third quarter was strong, amounting to 481 million euro. This represents a significant increase of 28% compared to the prior year Q3 or plus 37% when assuming stable exchange rates. The positive development was primarily driven by projects in the e-mobility business unit. In the first nine months, auto intake was up as well by 110 million euro or 9%. As a result, order backlog at September 30th, 2024 was sequentially up and also higher than one year ago. Compared to September 30th, 2023, order backlog was up 0.8% in nominal terms or 3.9% adjusted for currency effects. Sales Reviews revenues in the third quarter of 2024 grew by 0.1% organically to a figure of €441 million. This solid development could be achieved under challenging market conditions, especially in the mobility market overall, as well as the commercial vehicle sector. According to S&P Global Mobility, the global light vehicle production in Q3 contracted by 4.6% compared to the previous year. Coming to the sales mix on slide number eight, Erinklingen has a balanced distribution of sales among the business units, while the original equipment segment makes up 73% of group total sales of 323 million euro. In the third quarter, OE revenue decreased year over year, reflecting the challenging market conditions mentioned before. Within the OE segment, the battery technology sales increased significantly due to contributions from a serious production project ramped up at the Neufen site. The sales of the e-mobility business unit increased from around 14 million euros to around 35 million euros in the third quarter. From January to September, e-mobility sales more than doubled. On the prior year figure, it amounted to 64.3 million euros. In addition, the aftermarket segment once again performed strongly and increased sales by around 14% to €84.9 million between July and September. In regional terms, Germany and the rest of Europe recorded growth despite a soft market, while revenues in the Asia-Pacific and North America regions contracted year over year. Besides currency effects, changes in call-off volumes relating to individual series production projects for EVs and a sluggish commercial vehicle market were main drivers for this development. Coming to slide number nine, EBITDA improved by 7.3% in Q3 compared to the prior year figure and amounted to 51.2 million euros. Adjusted EBIT stood at €23 million in the third quarter, resulting in a margin of 5.2%, slightly better than in the previous year. Compared to the prior year Q3, on the one hand, the lower contribution margins due to the revenue decrease contrasted with lower expenses for certain key raw materials, as well as for energy and logistics costs on the other hand. The first nine months adjusted EBIT stood at €69.5 million with a margin of 5.1%. In terms of adjustments, differences between reported and adjusted EBIT comprise the known cash impairments related to the transaction as well as minor restructuring expenses. Mainly because of these known cash impairments, earnings attributable to Erwin Klinger shareholders were significantly below the prior year figure. As a result, Earnings per share in Q3 2024 were in the negative as well. The main focus of our CapEx continued to be on the e-mobility business unit in the third quarter of 2024. Precisely, CapEx were directed at specific customer projects such as serious production ramp-ups for battery technology at the Neuven plant in Germany. Year over year, CapEx were slightly up on the prior year figure it amounted to 18.6 million euro in Q3. Therefore, the investment ratio capex in relation to group sales increased from 3.7% to 4.2%. Networking capital amounted to 503 million euro as presented on this slide. Networking capital including the reclassified items were slightly up on the prior year figure. And this is due to a number of different factors, like a high revenue in September, ramp up in the prototype production in battery technology, and expansive business in the aftermarket. Operating free cash flow in the third quarter fell short of the prior year figure, mainly due to higher funding requirements for networking capital with the drivers for that as just mentioned. Regarding financial leverage, the net financial debt level remains on a low level with a very solid net debt to EBITDA ratio of 1.7 as of September 30th, 2024. For comparability reasons, financial liabilities are presented, including the reclassified items here, and amounted to €350 million by the end of Q3 2024. Coming to the segment performance on slide 11. Overall, the OE segment generated sales of €323 million in the third quarter of 2024. Within this segment, we had a strong sales development in the e-mobility business unit, while other business units saw less revenues than in the prior year Q3. and this can be attributed to the mentioned impact of changes in customer call-offs related to electric vehicles and the soft commercial vehicle sector. The adjusted EBIT margin of the OE segment continues to contribute roughly neutral to group earnings. The aftermarket segment continues to successfully implement its growth strategy. Sales amounted to €84.9 million in Q3, adjusted EBIT, amounted to 19.1 million euros, corresponding to a margin of 22.5%. Revenue of the engineered plastic segment stood at 32.8 million euros in the third quarter. Regarding segment earnings, higher staff costs associated with the transformation contrasted with an improved material cost ratio in Q3 due to a marginal year-on-year decline in prices for high-performance plastics. Adjusted segment EBIT was €9.7 million, which corresponds to a margin of 11.3%. Let me now provide some remarks on markets and the short remainder of fiscal year 2024. Coming to slide number 13, there is a mixed picture for the projections of the main automotive market. According to S&P Global Mobility, the final quarter of 2024 is expected to be globally weak, especially in Europe. In the latest release from S&P from October 2024, global light vehicle production is expected to contract by 2.2% in 2024 and will grow eventually by 1.3% in 2025. Compared to the July release of S&P, the projections are now more cautious for 2025, and we'll have to keep both eyes on the market development over the next couple of months. Coming now to slide number 14, the outlook. Generally speaking, the economic and industry environment remain very challenging. In addition to increasing geopolitical tensions, including trade policies like customs measures, this is also attributable to macro developments such as sluggish economic growth, as well as the mentioned industry-specific factors such as soft demand for EVs and weak live vehicle production. In the context of the transaction mentioned before, we have reassessed the outlook for 2024 and we anticipate revenue to be slightly below the previous year's figure in organic terms and expect operating free cash flow to be within positive territory. In the light of the known cash impairments, ROSI is now expected significantly below prior year's level, which stood at 5.6%. At the same time, We have maintained the projection of an adjusted EBIT margin of around 5% of group revenue for 2024, and we are well on track to deliver on that guidance. Regarding the other indicators, the 2024 outlook is confirmed as well. That all said, I'm happy now to take your questions. Thank you much.

We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the queue, you may press star and two. Participants are requested to only use headsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Mark Renaton from Warburg Research. Please go ahead.

Yes, good afternoon. Thank you for taking my question. First one would be on e-mobility and the revenue run rate. We should expect that, I think, in the third quarter, quite a nice sequential increase to $35 million from the previous quarter. Is it, let's say, around $35 million? Let's say also the level we should look forward to until the mid of next year before the contract in the U.S. is ramping up. And perhaps you can give us some indication what you would expect, let's say, perhaps for e-mobility revenues next year, if that's possible, or what we should expect, let's say, if all these contracts you have, let's say, in your books have ramped up what this may mean in terms of Second question, also within the OE segment, I think, I don't know whether I got it correctly, I think lightweighting and in elastomer technology, there's a rather steep decrease in revenues, whether this is, let's say, solely due to weaker demand from the commercial vehicle industry or whether there are any other contracts we should be aware of that may have been, let's say, run out or whether this is just, let's say, a more cyclical issue of lower demand. Second question, the other question would be, When looking at the minorities, and I think it's always, let's say, a bit difficult, but getting a feeling on, let's say, the ramp-up cost you may face still within EKPO, I think the second quarter and also the third quarter, there was just limited elimination within the eliminations line. Does it imply, let's say, a more stable earning situation or is it, let's say, more, let's say, another kind of, let's say, accounting effect? And what would you expect for next year in terms of ramp-up charges, e-mobility in total, and then e-GPO in specific when compared to this year, let's say, incremental headwind, incremental tailwind? That would be very helpful. Thank you.

Yeah, thank you for your question. What we see here in the e-mobility ramp-up is, in fact, a self-contacting system here in Neufen that is ramping up right now. On an annualized basis, I would expect something in the order of a mid to high single digit amount on a monthly basis so that would be something that would be somewhere you know between roughly speaking 60 and 80 million euro again on an annualized basis going into next year so that gives us some more contribution in the same time as of course we are ramping up other battery projects as well So there is a little bit of overlap situation here, but generally speaking, of course, we have more contribution coming in now into the battery business that is to some extent compensated by efforts here to ramp up You know, not not all, but also in particular or a new location here in South Carolina on the segment. Lightweighting is a little bit of product and and and and platform mix, let's say. What is in particular here playing a role, that is applications that we have lightweighting applications for e-mobility applications. Because the way e-mobility we report as the business units here that are operating in e-mobility, but of course we've got a lot of lightweighting applications here in there as well. And in the overall mix, The most dominant factor here is the lower development here in applications for electric vehicles, essentially. Okay, ramp-up costs at EKPO. This is something we are working hard here on improving our cost situation. There is ramp-up activity here, of course, but we try to minimize here the impact to the group. From a sales perspective, I'd imagine that we have slight improvement going into next year with an improved exposure here to startup expenses. I hope I answered your three questions all right. Is that okay? Thank you very much, Jeff.

So the next question is from Asghar Kakar from JPM. Please go ahead.

Thank you, Akshat, from JPMorgan. Three questions from my side, please. The first one on your European footprint. You have mentioned that you have been looking at your operations and cost optimization, and we have now seen increased announcements from companies in Europe looking to take cost actions. Could you just give us more details in terms of what we should be mindful of when thinking of in the next two to three years? How should we be thinking about cost restructuring over and above what you have done with your shielding technology business? The second question is on the auto OE business. When I combine your comments on higher organic growth going into next year, probably slowing input cost inflation, but on the other hand, still facing high labor inflation in many parts of the world. How are you thinking about the margin development for that segment going into 2025, please? And the last one is a modeling question. Could you just help me reconcile the working capital movement between the cash flow statement and the balance sheet, specifically when it comes to the change in inventories and accounts receivables? Because when I compare both those statements, it looks like there is a change in other assets that I cannot really explain. So some help there would be very helpful. Thank you.

Yeah, thanks for your question. Number one, when we look at the footprint, this was your first question, we look at all different strategic factors here at Elring Klinger. We look at product portfolio, we look at the asset performance in the group, and we of course look at the footprint. in terms of size and, let's say, fit of locations that we have. When we look forward, this was your question, two to three years into where we will be arriving, I think we will, for one, we will arrive at a group with a simplified structure. Number two, we will have a group that will have a different margin profile relative to today because of the actions we are going to be taking. And three, we are going to be improving on the balance sheet structure in order to achieve a better return on capital. So those are the things that we do within our program Shape 30. And we'll focus on that very much. And like you say, it is not something that will end with the activity this year. But nevertheless, we'll be taking some more significant steps in the short term. But going into 2025, expectation is we'll work more in 2025 on the optimization And that will bring us in a two- to three-year timeframe, and this is our target, to what we give out today as our midterm target in terms of profitability, for one, and also return on capital. In regard to your question to cost inflation, in particular labor inflation, this is in fact a matter. We have been, and we are still in a period where there is a low market growth or no market growth, and there is more like a flatter development of our top line. So in that regard... When we talk about repricing through new projects, this has been a matter. Going forward, we see also a little bit more projects on ICE applications, yeah, which gives us a good opportunity here to also do some repricing on projects. And overall, further growth, yeah, in particular, on e-mobility should give us a better profile in terms of our cost base, which we do not want to expand very much, with a higher top-line level associated with the contribution margins. So on the working capital, let me say, on a very general basis, we have, of course, some impact. from the transaction here where we need to be detailing a little bit more with our Q4 figures on a like-to-like basis. Generally, I would expect a little bit more improvement in Q4 relating to working capital. And when you refer to individual positions, Then we see in particular developments here when you look, for example, at inventory, we see increases in regard to positions in aftermarket based on the growth that we have here in this business unit. But on the other side, we have also much more activity now in regard to new equipment that comes in and tools in particular. that go into inventory as part of working capital. And what you refer to, I think, is some specific items that are growth-related that you find here in this position. So that is basically my answering to your three questions. Is that answered by that?

Yes, perfect. Thank you so much.

Okay, thank you.

The next question is from Michael Ponset from Daisy Bank. Please go ahead.

Michael Ponset. Can you hear me? Yes. Okay. I have three questions. First one is on e-mobility. Can you give us any indication what was the profitability level in Q3? And remind us when you do expect the break even for the business. And the... The second one is on the deconsolidation of your two entities. Will it be relevant for the full fourth quarter or only for one or two months? Maybe you can give us an indication what kind of revenues are missing and what will be the impact on the profitability or EBIT margin.

That's for all right now. Yeah, thanks for your question here. When we look at e-mobility, then we, like I said, now we see here a revenue cycle coming up in particular in the battery business. If I look at e-mobility in the Q3 profitability, it is roughly in line with what we have seen before. Why is that? on the one side we've got some more contribution coming in on the other side we have some more expenses here for our startup projects and therefore you know it's a comparable profitability when we look at it at a full year then we have you know um in the in the mid double digit startup losses here in e-mobility essentially, and break-even when we look at that. There is going to be a continued production here on what we have seen ramping up now going into 2025 and 26. We'll see more ramp-ups starting in 2026. So, you know, when we look forward, a real break-even situation in the battery, I would expect that we are going to be there in the 2027 rough plus minus one year area in regard to that. Okay, in terms of the sale of two group entities here, we expect closing to the end of November so that one month at the end would be missing. It's a December and would be missing in terms of sales and results.

if this is following this plan that we have so one month as expectation but you know things also may take a little bit longer possible okay maybe follow up on your automatic business can you give us any kind of guidance or any idea what will be a sustainable margin level in coming years because i would expect that the margin level we currently see is not really sustainable

From a margin level, I would expect an amount that would be beyond 20%. From a perspective of on the one side that we had, of course, a ramp-up that's been going on, and on the other side, we'll see a higher revenue level. And the higher revenue level we execute through roughly the same organization. So there may be, you know, some other developments here in the market on the one side, but on the other side, there is, of course, the, you know, certain operating leverage that I would expect. So I think it's going to be staying above 20%, you know, in a more or less robust way. Yeah.

Okay. Thank you.

As a reminder, if you wish to register for a question, please press star 1 on your telephone. The next question is from Tobias Williams from LBBW. Please go ahead. Your line is open. Please go ahead.

Hello. Can you hear me now? Okay. I have one question in terms of the shape 30 strategy you explained to us the reasons behind the divestment for the two US plants. And are there any further investments or the investments blend in the future, especially in the mobility or battery sector? Thank you for my question.

Yeah, I would not exclude that there is going to be more divestments. Like I said, we are looking at non-performing assets in the group. We are looking closely at the product portfolio. And I think we're taking some significant step now, but we'll continue in this world to shape the group. And I would not exclude that there's going to be more deconsolidations in the future. But nevertheless, there's not, you know, a decision taken relative to very big portions of the business. Yeah. We are looking currently more at some functional areas, some specific areas. But again, I would not exclude that we will see more divestments in the future eventually. But I cannot comment on anything that's not been decided yet. So please have that in mind.

Okay, thank you.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Jessulot for any closing remarks.

Yeah, thank you all for attending today's call. I wish you a good rest of the year and, of course, happy holidays that are coming up. And I look forward to talk to you again in 2025. Best wishes. All the best to you. Thank you very much.