In the Third Quarter Earnings Call for 2024, ElringKlinger AG (ticker: ZIL2) disclosed a mix of strategic divestments and financial results amid a tough automotive sector. The company signed agreements to divest two subsidiaries, which are expected to close in Q4 2024. Despite a global dip in light vehicle production, ElringKlinger's order intake surged by 28% and E-mobility sales more than doubled. The company anticipates a challenging remainder of the year with a slight dip in organic revenue but aims to maintain an adjusted EBIT margin of 5%.
Key Takeaways
- ElringKlinger signed agreements to divest subsidiaries in Georgia and Switzerland, impacting 10% of 2023 group sales.
- Q3 order intake increased to €481 million, while sales revenue saw a marginal rise to €441 million.
- The E-mobility unit's sales grew significantly, doubling year-to-date figures to €64.3 million.
- The company forecasts a challenging market environment for the rest of 2024, with organic revenue slightly below the previous year's figures.
- Capital expenditure in Q3 focused on E-mobility, totaling €18.6 million, with an investment ratio of 4.2% relative to group sales.
Company Outlook
- ElringKlinger expects the economic climate to remain difficult, influenced by geopolitical tensions and a sluggish automotive sector.
- The company projects a 2.2% contraction in global light vehicle production for 2024, with a modest recovery in 2025.
- Anticipated E-mobility revenues for the next year are estimated between €60 million and €80 million.
- The SHAPE 30 transformation strategy aims to refine the product portfolio and enhance profitability over the next 2-3 years.
Bearish Highlights
- A decline in global light vehicle production by 4.6% has affected the overall market.
- Organic revenue for 2024 is expected to be slightly lower than the previous year.
- Mid-double-digit start-up losses are projected for E-mobility for the full year.
Bullish Highlights
- Order intake showed a robust increase, indicating strong market demand.
- E-mobility sales more than doubled, highlighting growth in this sector.
- The aftermarket segment is expected to maintain a sustainable margin above 20%.
Misses
- Sales revenues only increased slightly by 0.1% in Q3 2024.
- The divestment of subsidiaries is expected to impact sales and results in December.
Q&A Highlights
- The company is exploring further divestments of nonperforming assets as part of its SHAPE 30 strategy.
- The breakeven point for the E-mobility segment is projected around 2027.
- No major decisions have been made regarding further optimization of the product portfolio.
ElringKlinger is actively adapting to a dynamic and challenging automotive landscape, with a clear focus on growth in E-mobility and operational optimization. The company's strategic direction, including the divestment of subsidiaries and the anticipated breakeven in E-mobility by 2027, reflects its commitment to navigating through current market difficulties while positioning for future success.
Full transcript - None (EGKLF) Q3 2024:
Thomas Jessulat: Yes. 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 9 months of 2024, including the transaction to divest to group companies that was signed and announced one month ago. Then 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 EK group further and more so 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 cell module yet, delivering 400 kilowatts with a high level of efficiency. The stack power density has been significantly increased compared to the previous stack generations. This technology platform is 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-Wurttem-berg within the first wave of the IPCEI hydrogen program. In our battery business, we are driving forward the serious production of cell contacting systems and that is visible in our 9 months E-mobility business unit revenue which has more than doubled compared to the first 9 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 Barden-Wurttem-berg. We're expanding the current production area and increase in 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 9 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. Our [indiscernible] outperformance was mainly thanks to a strong aftermarket business and the ramp-up in serious production and battery technology. Yes, ladies and gentlemen, as part of SHAPE 30, our mission is to shape and to focus the K Group along 5 success factors. The first one is product transformation. ElringKlinger is in the midst of transformation and transformation is in full swing. Already today, ElringKlinger 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 drive 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 #4, 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, ElringKlinger products portfolios 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 further steps where we see nonperforming assets, however, measures are taken in noncore 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 #5, we have summarized the key facts regarding the transaction. As we have published on October 7, we have signed an agreement on the divestment of two ElringKlinger 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 Buford, Georgia in the United States and Sevelen, Switzerland represented around 10% of group sales in fiscal year 2023. And at year-end 2023, around 650 employees worked there. These two plants 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 divestment, 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. Yes. Coming now to the financial figures of the third quarter 2024, starting with orders and sales now on Slide #7. Order intake in the third quarter was strong, amounting to €481 million. 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. The first 9 months, order intake was up as well by €110 million or 9%. As a result, order backlog at September 30, 2024, was sequentially up and also higher than one year ago. Compared to September 30, 2023 Order backlog was up 0.8% in nominal terms or 3.9% adjusted for currency effects. Sales revenues in the third quarter of 2024 grew by 0.1% organically to a figure of €441 million. The solid development could be achieved in challenging market conditions especially in the E-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 #8. ElringKlinger 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. 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 [indiscernible] site. The sales of the E-mobility business unit increased from around €14 million to around €35 million 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. 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 color volumes relating to individual series production projects for EVs and a sluggish commercial vehicle market were main drivers for this development. Coming to Slide #9. EBITDA improved by 7.3% in Q3 compared to the prior year figure and amounted to €51.2 million. 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 9 months, adjusted EBIT stood at €69.5 million with a margin of 5.1%. In terms of adjustments, differences between reported and adjusted EBIT comprised the noncash impairments related to the transaction as well as minor restructuring expenses, mainly because of these noncash impairments, earnings attributable to ElringKlinger shareholders were significantly below the prior year figure. As a result, earnings per share in Q3 2024 were 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 [indiscernible] plant in Germany. Year-over-year, CapEx were slightly up on the prior year figure and amounted to €18.6 million in Q3. Therefore, the investment ratio, CapEx in relation to group sales increased from 3.7% to 4.2%. Net working capital amounted to €503 million. As presented on this slide, net working capital, including the reclassified items was 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 unit business in aftermarket. Operating free cash flow in the third quarter fell short of the prior year figure mainly due to higher funding requirements for net working 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 1.7x as of September 30, 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 corresponding to a margin of 22.5%. Revenue of the Engineered Plastics segment stood at €32.8 million 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 #13, there is a mixed picture for the projections of the main automotive markets. According to S&P Global Mobility, the final quarter of 2024 is expected to be globally weak, especially in Europe. 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 #14, the outlook. Generally speaking, the economic and industry environment remains very challenging. In addition to increasing geopolitical tensions, including trade policies like customs measures, is also attributable to macro developments such as the sluggish economic growth as well as the mentioned industry-specific factors such as soft demand for EVs and weak light 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 impairment ROCE 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.
Operator: [Operator Instructions] The first question comes from the line of Marc-Rene Tonn from Warburg Research.
Marc-Rene Tonn: First one would be on E-Mobility and let's say, the revenue run rate we should expect there, I think, in the third quarter, quite a nice sequential increase to €35 million from the two 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 revenue. Second question, also within the OE segment, I think I don't know whether I got it correctly. I think light weighting in Elastomer Technology, that will take 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 it may have been let's say, run out or this is just, let's say, more a cyclical issue of lower demand. Second question, the other question would be when looking at the minorities. I think it's always say, a bit difficult, but getting your 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 to say just limited elimination within the eliminations line. Does it imply, let's say, a more stable earnings situation? Or let's the 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 EKPO and specific when compared to this year, let's say, incremental headwind, incremental tailwind? That would be very helpful.
Thomas Jessulat: Yes. Thank you for your question. What we see here in the E-mobility ramp-up is, in fact, cell-contacting system here in [indiscernible] 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 between roughly speaking, €60 million and €80 million, 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 an 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, not all, but also in particular, or a new location here in South Carolina. On the OE segment, light-weighting is a little bit of product and platform mix, let's say, what is in particular here playing a role that is applications that we have light-weighting 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 light- weighting 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. Yes. Okay. The 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 start up expenses. Yes. I hope I answered your 3 questions. All right. Is that okay?
Marc-Rene Tonn: Thank you very much.
Operator: The next question is from Michael Punzet from DZ Bank. So the next question is from Akshat Kacker from JPM.
Akshat Kacker: 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 are now seeing 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 ElringKlinger 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 movements between the call statement and the balance sheet, specifically when it comes to the change in inventory and accounts receivable. 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.
Thomas Jessulat: Yes. Thanks for your question. Number one, when we look at the footprint, yes, this was your first question. We look at all different strategic factors here at ElringKlinger. 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, yes. 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 2- to 3-year time frame, 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, which gives us a good opportunity here to also do some repricing on projects. And overall, further growth, 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, yes. 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 3 questions. Is that answered by that?
Akshat Kacker: Yes. Thank you so much.
Operator: The next question is from Michael Punzet from DZ Bank.
Michael Punzet: Okay. I have just 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 breakeven for the business. And the second one is on the reconsolidation of your two entities. Will it be relevant for the full fourth quarter or only for 1 or 2 months. Maybe you can give us an indication kind of revenues are missing? And what will be the impact on the profitability or EBIT margin. That's all right now.
Thomas Jessulat: Yes. Thanks for your question here. When we look at e-mobility, then we -- like I said, we see here 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 start-up projects. And therefore, it's a comparable profitability. When we look at a full year, then we have in the mid-double-digit start-up losses here in E-mobility essentially. And breakeven 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-up starting in 2026. So when we look forward, a real breakeven situation in the battery, I would expect that we are going to be there in the 2027 rough plus/minus 1 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 1 month at the end would be missing. It's a December would be missing in terms of sales and results. If this is following this plan that we have. So 1 month is expectation, but things also may take a little bit longer possible.
Michael Punzet: Okay. Maybe a follow-up on your aftermarket 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 to see the margin that we currently see is not really sustainable.
Thomas Jessulat: Yes, 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 is -- there may be some other developments here in the market on the one side. But on the other side, there is, of course, the certain operating leverage than I would expect. So I think it's going to be staying above 20% in a more or less robust way.
Operator: [Operator Instructions] The next question is from [Tobias Williams] from LBBW.
Unidentified Analyst: Yes. Okay. Tobias Williams, LBBW. I have one question. In terms of the SHAPE 30 strategy, you explained to us the reason behind the divestment for the 2 U.S. plants and are there any further investments or the investments planned in the future, especially in the E-mobility or battery sector.
Thomas Jessulat: Yes, I would not exclude that there is going to be more divestments. Like I said, we are looking at nonperforming assets in the group. We are looking closely at the product portfolio. And I think we are taking some significant steps 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 decision taken relative to very big portions of the business, yes. We are looking currently more edge 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.
Operator: Okay. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Jessulat for any closing remarks.
Thomas Jessulat: Yes. 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.
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