SGL Carbon SE

Raj Junginger - Head of Investor Relations Jürgen Köhler - Chairman & CEO Michael Majerus - CFO

Okay Clea. Thank you very much for starting the call today.

Ladies and gentlemen, thank you once again for taking the time and effort today to participate in our call where we're going to present and discuss the 2017 first quarter results of Sgl Group. We'll also update you as usual on the progress of our transformation process and provide a few project highlights.

Together with me here is our CFO, Dr. Michael Majerus, who will guide you later through the financial details of the first quarter.

We had a good start into the year 2017 with a strong first quarter result. This actually confirms the execution of our transformation and our growth strategy and we can also confirm the full year outlook as we published it already in March 2017 and we presented the results of the previous year.

Group sales of SGL in the first quarter 2017 improved substantially by 15% to €216 million up from €188 million in the first quarter of 2016. This was driven by our market segment's energy, digitization, industrial applications and textile fibers.

You might recall that in March we introduced to you the new market segmentation the lean SGL to you going forward. Recurring group ended, recurring means, our two business are two divisions composites, fiber materials and graphite materials and solutions, improved more than proportionately to sales by 50% to nearly €10 million.

This is up from €6.4 million in the previous year. The free cash flow from continued operations improved to minus €32 million.

You might recall in the first quarter 2016 we had minus €48 million. We're also beginning to harvest the first dating from project CORE.

Again, as you might recall, CORE is an initiative to streamline corporate services and functions through the now smaller SGL. project CORE will generate savings over the next two years to come, savings in terms of headcounts and indirect costs and CORE is also an initiative to reorganize SGL.

Now let me give you a few highlights from the business -- businesses and I will start with composites, fibers and materials. On April 3, we concluded, we closed the sale of our small carbon fiber plant in Evanston, Wyoming in North America.

That plant was sold to our competitor Mitsubishi Rayon already in December 2016. In March of this year, we presented our products at the so-called JEC here in Paris.

This is actually the world's largest trade fair for composite materials. This fair today in Paris recorded highest participation ever in its history.

We showcased products and our engineering portfolio of the new life and application center. Actually, we use virtual reality technology with [them] to guide the visitors in Paris through our [Mike] facility.

In particular, we presented very novel, thermoset and thermoplastic materials solutions. This is a solution toolbox for the automotive and aerospace industry.

These materials however can only be -- also be used for the industry and many other industrial applications. Another highlight in the first quarter was that we renewed our commitment at the Technical University in Munich.

Here we are financing the chair of carbon composites, which to our knowledge is the only chair worldwide that exclusively focuses on carbon composites. This chair for us serves as a bridge between fundamental R&D and carbon composites to the practical applications and solutions mainly again in the automotive and aerospace industries.

On the graphite side, graphite materials and solutions. In the battery segment, we are accelerating a capacity expansion in our Morganton site in North Carolina, North America.

This follows the very strong demand growth for graphite anode materials for lithium ion battery. I think we already highlighted this development in our last conference call.

In the solar industry, we see actually a technology shift from multicrystalline to monocrystalline solutions. In simple terms, the monocrystalline solution is higher purity, but a little more costly material.

The good thing for us is monocrystalline solutions requires more isostatic graphite and stealth solutions, So this actually plays into our cards and helps to grow our businesses. Another important development for us is a publicly funded research project here in Germany.

It is called Redox Wind. The largest stationary battery will be connected to the wind power turbine.

I think the size is two megawatt and we are the only graphite producers here delivering felt and electrode solutions as a one stop shop. This is not a lithium and hand battery.

This is so-called Redox flow battery. Long story short, graphite materials are not only used in lithium-ion batteries, but in many other battery applications as well and we're well-positioned to serve those solutions as well.

Now, I'm already handing over to Michael for the financial details of the first quarter. Michael, please go ahead.

Yes, thanks very much, Jürgen and first of all welcome also from my side for this call and let’s start on Page 6, with the development of our business unit, composite fibers and materials. As you can see, sales revenue increased by 14% to almost 94, compared to the 82 in the first quarter last year.

Main reasons were here higher sales in the market segment in industrial applications, especially for carbon fiber composites and textile fibers, which is however driven primarily by higher oil prices based on raw material prices, which had initial positive effect on selling prices and on the other side, all of the market segments automotive and wind energy increased revenue, aerospace was on good level, however we had very strong billing in the first quarter last year, so that on year-over-year level it was somewhat lower. If you look at the EBIT side as already indicated in the full year's guidance, we are here on a stable level year-over-year.

This is because the positive operational effects are somewhat offset by the high expenses through Lightweight and Application Center the built up, which is done last year and is now fully on the expense side this year. The temporary effect in the first quarter was however that due to very fast increasing raw material prices on timing basis, we were not able to product this 100% over to the customers.

So therefore, for this quarter, we had some negative margin effect here on this side. On the other side, the operational performance in industrial applications and in automotive however improved here also profit so that those effects are little bit offsetting each other.

Now let's move to our other division Graphite Materials and Systems. As you can see here, revenue increase was even stronger with 18% to now $121 million and it was driven by all segments with the exception of chemicals, highest effect of those coming from our graphite and materials for lithium-ion battery, which had a very strong growth even somewhat slower than we had planned.

However also the segments solar, semiconductor, LED and industrial application showed good increases in revenue. The only segment here is chemicals, where we still see low CapEx spending in the chemical industry and even on lower-level then in the already with previous year.

So, this is a little bit offsetting. The other effect however, in essence of course the other segments by far overcompensated this effect, so that we had the 18% increase.

Also, EBIT increased percentage wise by 21% now to $8.5 million, also here of course battery and other energies. So, the graphite anode material is the main driver for this profit improvement.

Nevertheless, all the other segments; LED, automotive, transport, solar industrial application in line with the higher revenue was a contributor to higher profit. This was partially offset by the lower order intake and revenue from the chemical business.

Now let’s have a look on Page 8 into our corporate. Here we see a slight improvement.

So, EBIT improved from 8.4 now to 6.8, negative of course, since this is a cost center primarily and the reason for this percentage wise high improvement of 19%, other cost savings as a result of project Jürgen already eluded to and by the way we have here little bit simplified to name and make it shorter so it's called corporate T&I anymore, but only corporate. Now on Page 9.

Let’s have a look at full income statements on a year-over-year comparison. Revenue Jürgen already mentioned it increased by more than 15% in 2016 based on development I just mentioned in the two business division.

As a consequence, EBITDA improved from 18% to 22% and EBIT from 6.4% to 9.6% including nonrecurring charges which was just a slight effect it improved from 6.6% to 9%. Net financial result is on a compared level was minus 40, little bit better than last year due to the lower impacts from pension provisions and this leads to results from continuing operations before income taxes of minus 5% compared to almost minus 9% in previous year and the income tax and other non-controlling also improved from minus 8% to minus 1.7%.

The reason for this development is that in the first quarter of last year, we had a tax impact write down of deferred tax asset, which influenced beyond the normal tax rate, this figure which did not reoccur this year this year again. Very positive development you can see in the result from discontinued operation, this was a loss of almost $10 million in the first quarter 2016 and now turning to a profit of $6.5 million.

There are the two reasons for it. One is that the graphite business is operationally improving year-over-year.

The other reason is that the operating losses of our graphite electrode business are not showing up in this -- in the current year due to the fact that as we mentioned already with our yearend statement the impairment, which we booked in December is already reflecting the anticipated losses this under closing as a consequence of course, they do not recur here in our income statement. And the bottom line attributed to the shareholders of the brand company improved from minus 26 to €300,000.

Now free cash flow as this was already briefly mentioned by Jürgen, you can see here it is of course as usual negative in the first quarter because we usually have seasonal working capital increase in the first quarter. However, if I compare to my use of the company clearly lower, than usually in the first quarter and that is of course driven also here by the improving profits of the company.

And it’s had some negative timing effect vis-à-vis payment this was a timing effect if you look at payments and repayments this was reimbursement, which was cut off thing because we had the payments in December and the reimbursement in January. So therefore, here also a slight negative effect I think that was roughly $4 million impact, which has nothing to do with the negative effect of the operational performance.

So, capital expenditures on a low level as already mentioned, cash flow from other investing activities plus five so that it was a cash flow of minus 31.5 and discontinued operations you can see not only profit wise improved but was also cash flow wise improved. Here’s important to say that that graphic electrode in this line is of course included because we could only impair it on a earning side not on a cash flow side of course.

So, you see that also our efforts with regard to improve new business model of graphic electrodes is shown here in this figure. Now balance sheet equity ratios slightly increased despite almost new result due to some currency effect, especially the stronger Polish złoty compared to the euro to increase our equity ratio now from 17.5 to 18.

Liquidity was almost $300 million, which is of course more than sufficient to expect the operation cash outflows and we expect of course with the closing proceeds of more than $200 million. As already mentioned, we’ll use this money to exercise our call auction for the corporate bond, which is in amount of $250 million and repurchases.

And the remaining cash and proceeds from the sale of our cathode business will be more than sufficient to meet January 2018 maturity of the convertible bond issues 2012, which is another $240 million. In addition, once we have repaid the corporate bond, we will have a further $100 million available under the loan, so even in case the closing of the cathode sale would shift to maturity to date after the maturity date of the convertible bond, which have financing to repay this convertible bond and financial debt is of course reflected towards negative cash flow deployment due to the increase in working capital as already mentioned.

In addition, as also we mentioned that we had a $9 million special effect which was the last instalment of the purchase price for the structure division of to the buyer. Now so far, some details on the financial side and with this I hand back to you for the outlook.

Okay. Excellent.

Thank you very much, Michael. Let me now move on to give you an outlook on the full year 2017.

I will start with our division composites, fibers and materials. In terms of sales we will see a slight increase compared to the previous year.

This is particularly driven by higher carbon fiber demand for industrial applications. We will also note a slight increase in sales in our market segments, automotive and textile fibers.

In textile fibers, it is as usual related to our raw material cost, which is a pass-through item. This positive development will partially be offset by lower sales in our aerospace segment.

As we said before, we had a very high, unusually high level of invoicing in the U.S. in the first quarter of last year.

We see upside potential on the textile fiber side driven by the oil price development. This will have of course no EBIT impact I used the word pass through.

However, the oil pass development is very dynamic, as you know like the oil [pass was positive] in the last two weeks. As of yesterday, we've seen a recovery.

So, we have to observe observe and see where it's going to end up. In terms of EBIT, in CFM, we'll end up close to our 2016 level.

The very positive impact of higher capacity utilization will be offset by the ramp up cost for our Lightweight and Application center in Meitingen and somewhat higher depreciation as we had converted a textile fiber line in Portugal to produce and that line is now in full operation, which leads to higher depreciation. In terms of EBIT for CFM the first quarter will be the strongest during the course of the year 2017.

The high utilization rate that we enjoyed in the first quarter, we will not see throughout the full year. There will be maintenance shutdown and other activities in the midyear and again the impact, the positive impact on the high invoicing levels in the first quarter in U.S.

aerospace market will not to repeated. For the nonrecurring effects and the closure of the divestment of our Evanston fiber site on April 3 which is actually a second quarter event will lead to a negative earnings affect from some cumulative currency translation differences on the fixed asset side.

This would amount to negative impact of approximately €6 million. However, in the second quarter we would record a positive cash inflow of course on the book value level because of that divestment.

Let's turn to graphite materials and systems, also here we will see a slight increase in sales driven by our market segments battery, LED, semiconductors and industrial applications. The same applies to the solar site, which will actually record a significant increase in sales to our improved positioning and product portfolio what is in the space.

I explained the situation with the monocrystalline and polycrystalline technologies earlier. This however will partially offset by our market segment chemicals, which does not develop as expected, CapEx spending in the chemical industry is still on a very low level.

You see a strong EBIT improvement for GMS from the higher capacity utilization and the cost savings that I mentioned before. We will be getting very close maybe even achieving our group minimum RC target of 15%.

On the corporate side, we will see some higher expenses. This is due to some nonrecurrence of positive one-time effect that we had in the first quarter of last year.

This was mainly the land sale that we had in Malaysia. Like for like, we'll see a flat development and if you're asking of graphite electrodes and cathodes, yes, we're still providing services to these two entities.

However, should they leave SGL, this will be compensated by savings from our four initiatives. Taking this all together we are expecting all major financial KPIs of SGL to improve in 2017 compared to 2016.

Full year group sales will increase with a high single-digit percentage. Group recurring EBITDA and EBIT will increase more than proportionate to sales, which is expected volume increase and the initial realization of cross-savings.

The net result for continuing operations will be close to prior year level at a mid-double-digit million-euro loss. The prior year as you know include a positive effect from the sale of the Evanston site in December, which will not reoccur and we'll have in 2017 higher net financing result related to the planned early repayment of our corporate bond.

That bond matures in 2021, but we record it earlier. This will lead to a faster write off of the capitalized refinancing cost and of course we will have to pay an acceleration fee through our bondholders which we have to swallow.

CapEx will increase compared to the previous year, but at most we will reach our depreciation and amortization level. Discontinued operations will improved significantly.

I am not repeating here what Michael said. He gave the reasons already.

Free cash flow for the remainder of 2017 is expected to be more or less breakeven. Net debt at the end of 2017 will be substantially lower than compared to the end of last year because of the cash proceeds we will realize from the graphite electrode divestment and potentially also from the divestment of cathodes furnace linings and carbon electrodes.

Of course, that depends on the timing and the closing of that transaction. This already concludes the financial outlook.

Please allow me to give you a quick update on our performance products and disposal -- transaction process. For graphite electrodes for the sale to the Japanese competitors Showa Denko.

We had received antitrust approval from the authorities in Germany, Japan and Russia already. And merger clearance process in the United States of America is ongoing.

We are in a so-called Phase 2 process here. The execution plan that we had developed together with Showa Denko for the time period between signing and closing is progressing as planned as scheduled.

This includes also steps for the post-merger integration process. So, we remain confident to close the transaction during mid-2017.

In terms of the divestment of cathodes, furnace linings and carbon electrodes, very detailed information package had been distributed to a mid-double-digit number of interested buyers now a low double-digit number of indicative bids, we received early may and we are able to start Phase 2 of this process now, with the certain selection of bidders. Looking at those figures, the number of interested parties, we continue to expect the signing in the second half of 2017.

Now this ends the prepared part of our talk and Mike and myself, we're now happy to receive your questions.

Yes, good afternoon gentlemen. Just two questions this time from my side.

First of all, you had very strong first quarter which was 15% sales growth, but I assume you also benefited from working days effects as we had only a few public holidays, especially the automotive, production was quite high. May you can quantify the extra tailwinds and what was the real organic development, because we should probably expect some revival in the second quarter.

Secondly, are there any let's say, obstacles for the U.S. authorities that they had not yet approved or gave merger clearance for the sale to Showa Denko?

Maybe you can help me understand, are they concerned, are you in deep discussions or this is just a normal process which takes longer in the U.S. than in other countries?

Thank you.

Yeah, this is Michael Majerus. With regard to the first questions, we have to come back to you.

We don't have this year available I guess inputs for you. You're right there is some effect on the working, but I wouldn't -- but I think if you look over year-over-year comparison, I think the more relevant effect is that the first quarter last year was relatively low quarters.

So, I think in essence, this is the main effect especially on graphite and node business started relatively weak and they're pulling weight early last year. This year, we mentioned just the opposite is very strong growth.

So, this is the main driver but we will quantify this and come back to you. The other question related to the DOJ process.

So, the second, the white one, so we are in a normal process. It takes so -- and we have no negative indication.

However, it is relatively lengthy process. We have several 10,000 documents to screen and most part is post buyer and the seller have to provide all the documents to Department of Justice and you have to understand that as our documents luckily and vast majority already in English, Japanese documents aren't.

So, every document has to be translated from Japanese to English and you might imagine this takes some time. So, it's just that an administrative process.

And this is Jürgen Köhler speaking. Let me give you a non-financial answer on my CEO view on the working days, we're a global international company, okay.

Of course, just during Christmas, business is slower on our side during Chinese New Year in China nothing happens and for Thanksgiving week in the U.S. it's low as well.

So, I wouldn't expect a major impact although you're right, in the Western Hemisphere, the first quarter has more working days.

Okay. I was just asking because I'm also following the automotive suppliers and we've seen many companies have let's say at least 50% of their sales growth was attributable to working days effect, but also companies like SAF-Holland, so I was just asking that question.

If this is not the case for you even better, then we can make our thoughts with regard to the upcoming quarters. Maybe just also follow-up on the U.S., if the U.S.

is only remaining country which has to give approval on there are also other countries which are still pending?

Oh, the other, so we have already have given to clearance. So, it is the only one left and as I said, there are special reason why this is based on type or the others already have proved it.

Okay. Thank you very much.

You’re welcome.

Yes, hello. Just a short question on possible contract and the entire carbon fiber business you mentioned or highlighted the same in Paris.

Have you Wahlberg was the possible demand you received as the feedback you received from your customers there? Are you going into some kind of new directions there or is it some kind of a normal process of what you're doing currently and can you give us an update on your contract structure, possibly contract in the automotive business and also its maintenance free?

Thank you.

Okay. And again, thank you for being in our call today and of course I’m going to answer your question now.

The Paris composite shows and annual rent it’s a standard item in our calendar, actually it's a standard item of all our competitors, suppliers and customers in each year. So, it’s a regular show.

What we feel, what we can confirm is the interest of the customers have changed. They're no longer talking to customers about selling pure carbon fiber.

They're talking to our customers about selling solutions, about solutions advanced products, about selling tailor-made products to them. And this is actually the reason why we showcase our light and application center and I think the main or the biggest positive results for SGL is that we got confirmation of that trend and I think we are ahead of the curve when compared against the competition.

In times of contract structure, Christian, it's really a mixed bag. We have long-term contracts with some automotive companies and I think you know them.

They are German. We happen in the lint industry in general, annual contract and some of the industrial applications for our short-term fiber, we have annually contract.

On the other hand, there is still a very reasonable sizable spot market for carbon fiber applications. I think here the general answer is the more specific product or solution for customer the longer-term the contract.

Of course, thank you. How much is the current spot market or how is the percentage you are selling as a spot market and one question following by the application center you also mentioned that you have to invest in the ramp-up of the application center, what is the -- what are the expected cost to ramp up this application center in 2017 maybe 2018?

Okay. Second question first, it's low single-digit million figure.

That cost comes mostly from us moving equipment into Meitingen from relocating people into Meitingen and from hiring industry experts. Experts for fiber technology, for textile technology, for automation, for digitization.

So, we are increasing headcount a little bit here in Meitingen. The first question I think I'm disappointing.

I don't have the figure here. What the percentage is in terms of spots sales in our business.

We can try to dig into this. I don't know whether it's easy or not or I really have no feel for that.

Okay then a last one is you converted a line it's dipper and rubbing up your own precursor are you now able to see the entire plant in Scotland with your own precursor?

That is not yet the case. We have actually started precursor line in Portugal which is in full operational 24X7 and that one line of course is not yet sufficient to supply our current fiber production.

Engine we will continue to convert lines as we needed. However today, we are still preferring a dual sourcing strategy and we’re continuing to buy precursor also from Japan.

And what was the underlying cost to convert those lines or the CapEx or related cost for the conversion?

Converting a spinning line is a mid to high single-digit investment figure.

Okay. Thank you very much.

I think from textile a collateral material to precursor.

Yeah. Okay.

Thank you very much.

Okay. Here from Michael and myself, thank you very much for listening and participating in this call today.

I think we’ll be on the line back in mid-August when we’re going to present the results of the first half of 2017. Thank you and have a good day.

Bye-bye.