SGL Carbon SE

Yes, Stuart. Thank you very much.

Can you please move on to Page 3 of our presentation? Yeah, welcome to SGL Carbon's conference call for investors and analysts on the results for the first half year and the outlook for the full year 2020.

I'm hosting this call together with our CFO, Michael Majerus. We will also be sharing the Q&A session at the end of our prepared remarks later on.

Since this is my first call as the CEO of SGL Carbon, I would like to take a few minutes to share with you some information about myself, my management style and what my first thoughts are after 10 weeks at SGL Carbon. I was born and raised in the northern German city of Bremen, where I also studied and completed my PhD in chemistry.

I started my professional career at Bayer as a laboratory manager, and in total I spent 10 years at Bayer in various roles, followed by another 10 years at LANXESS in different operational and administrative positions. Most recently, I was CEO of SALTIGO, a subsidiary of LANXESS AG, which manufactures precursors for pharmaceuticals and agricultural products.

Overall, I have 23 years of experience in technology-focused industries, of which 15 years were with P&L responsibility. SGL Carbon and I are a good fit, because I know how to manage technology-focused businesses, with an appropriate cost structure and a clear focus on market requirements.

Please move to the next page. Over the last 2.5 months and even prior to that I took every opportunity to learn everything I could about SGL Carbon.

Due to Corona, the process of getting to know the company was, of course, very different from what I imagined it would be. I had hoped to have seen most of the sites by now, but instead, I talked to many, many people in person over the phone and also via video conference.

My first impression is that SGL Carbon has many strong points. Some of which are listed here.

But you know as well or even better as I do that SGL has repeatedly disappointed capital markets expectations and that COVID-19 and its aftereffects will be a new challenge we all have to deal with. Essentially, SGL Carbon's profitability level is too low and we have to identify how we can lift our earnings.

I also get the feeling that the administrative structures and the processes are a bit over-engineered for a midsized company like SGL Carbon. Next Page please.

To address this I have developed, over the years, very simple but clear principles for how I manage businesses entrusted to me. This is business first; keep it simple; deliver on promises; and act fast, think different.

These guiding principles will help me and the organization to focus on change. Over the next month, I will explain to you that what these principles mean for managing SGL Carbon.

Next Page. COVID-19 forces all of us to review our past assumptions.

After COVID-19 we might face new business normals. We are in the process to analyze our business market by market.

What I can say right now was the electronics industries and the Asian markets have already recovered, Automotive might take a bit longer, and aerospace is expected to need 4 to 5 years to reach 2019 levels again. Our new planning will be available in Q4 2020.

And this may or may not have an impact on our strategy going forward. But independently, from market developments, SGL will have to improve its setup.

I would like to simplify the structures and streamline the processes. We are already analyzing the cost structure of every function every business and every site.

Based on these findings, we will identify measures that will lead to increased and sustainability profitability. Some measures will include much more direct P&L responsibility in the business.

Other measures focus on right-sizing and cost optimization of corporate functions providing services to the business. Our goal is to achieve long-lasting financial stability and financial success with SGL Carbon.

We will keep the capital markets informed on our progress. But for now, I would like to hand over to Michael to present the figures for the first half year 2020.

Yeah, thank you very much, Torsten. And first of all, also welcome from my side to this conference call.

As usual, I will go through the [indiscernible] financial. And at - on the Page 8 with our Composites - Fibers & Materials, CFM.

As you might remember, the start in the year, to the first quarter was quite good, so we were able to turn around the business from negative first quarter to positive first quarter in this year. However, then came corona, starting with the lockdowns in March and CFM was heavily affected due to [indiscernible] to the lockdown measures [indiscernible] Germany as was our customer related and here mainly due to the Automotive customers visibly [very poor] [ph] because half of the [operation roughly] [ph] is Automotive business.

And so this was a significant effect. So what are the main figures?

The sales was down in the second quarter by 22%. EBIT was negative however is slightly negative.

And as you can see accumulated, we still have a slightly positive EBIT, which is more remarkable, because the company was heavily affected with our joint venture, Brembo. The 2 factors, one was, of course, that the Italian site is situated in Northern Italy, which was, as you know, the hotspot for the coronavirus.

And the other reason, our German site was here affected by the shutdown of the European automotive customers. So therefore, we think they managed, like reasonably through the crisis, if we look into the cumulated figure for the first half year, revenue was down 15%, strongest decline was in our market segment Textile Fibers, but this was not a surprise, this was due to the capacity reduction we initiated already last year.

We took out 2 acrylic fiber lines out of production and convert another one to precursor production. So therefore, this sales reduction was expected.

The corona related negative development, as already mentioned, took place primarily in the Automotive and, of course, to some extent in the Aerospace. However, as you know, the Aerospace, is by far not that big compared to the automotive, our business.

We complete - other development was on the Wind Energy sector. Here we got significant increase our revenue.

We doubled this compared to the previous year's figure, and this was also stronger than initially expected. And in our large market segment, Industrial Applications was relatively stable.

The EBIT, as I said, was affected by the slight loss in the second quarter, cumulated nevertheless was roughly €2 million positive, despite the fact that we had in total €4 million lower at equity contribution from our joint venture, this is 50% of the net [indiscernible] some share in this joint venture. And this is shown here on our EBIT line.

The ROCE was negative. You might now wonder how come that was a positive EBIT, you have a negative ROCE.

This is a more technical point, because we always calculated on the last 12 months and as you've noticed certain - especially, fourth quarter last year was highly negative, and therefore, this is still in the cumulated figure. And that's the [reason] [ph].

Now let's move to next page, our other division Graphite Materials & Systems, GMS also - they were affected by the corona pandemic in the second quarter. Also here we had several legally related shutdowns in India, in Italy and in Spain, especially - and also, some - business from our customer coming from the corona situation.

So in the second quarter revenue was down by 23% and EBIT down by 47%. As you might remember, a GMS, as it was our fixed cost [instant] [ph] structure and, of course, lower volume is over-proportionately resulting in lower profit.

If you look at the cumulated figure for first half year, sales was down by 21%. This related to declines in all your other segments except Semiconductors, which was continuing to grow in double-digit rate.

EBIT also for the cumulative 6 months was more than proportionately affected, down 51% from the record level of the prior year. One effect was coming here from IFRS 15 that is something I alluded to already last year as new revenue recognition standard for customer-specific products, primarily related to our Transport and Automotive business.

Last year we had a positive effect in IRFS. This year, was declining, where we had a negative effect.

And this alone contributed to €9 million profit erosion year-over-year. And as I said, rest is money related here to the lower sales in all the other market segments.

Automotive & Transport however was stable. The reason here was that we had to ramp up process last year.

So we were not on optimal cost level. So, therefore, we could improve it this year so that we could compensate the overall market situation.

Now, let's move to Corporate, not much to report here. Also, here sales revenue declined by 21%.

That has however nothing to do with corona. The reason was that we had to bring services for divested business in the last year, which faded out this year, so that is the main reason here.

And EBIT was stable on year-over-year. Now, with this I will look at the next page on the total group figures.

Revenue overall declined by 19%. EBIT went down by 71% to €10.8 million.

And net financing result improved [depends each year,] [ph] it improved from roughly minus 19% to roughly minus 16%. In essence, 3 reasons or 2 reasons for it.

The first one is the absence of interest expense for the 2015/2020 convertible bonds, which was repaid already last year as you might remember. And lower interest rate for pensions in the current year.

On the other side, we had a negative effect, which was however over-compensated by the 2 positive effects mentioned. That was the negative fair market valuation of the redemption option of the corporate bonds.

The reason is that this option currently has no value, because refinancing with new bonds would result in significant higher interest rate, and therefore, the value of this option is [currently zero, that's the reason for it] [ph]. And, in essence, as a result of all this, we had lower net result in total minus €14 million compared to plus €10 million in the previous year.

Now, let's move on to cash flow on the Page 12. As result declined, on a year-over-year comparison, cash flow strongly improved.

You can see it here, cash flow from operations increased from €15 million to almost €41 million. Main reason is here, development of working capital.

Normally, we have a significant build up in working capital over the first 6 months; this year, where it was a stable situation, which was, of course, partially driven by intended measures from our side. However, it's also partially driven also by the overall market environment and declining sales.

The capital expenditure was another reason. You see, we had negative €34 million last year and this was only €20 million.

And, of course, in the crisis, it's important to keep liquidity and that was also the reason that we lowered CapEx and pushed back some expenditures to preserve liquidity in the current uncertain environment. And as a consequence, our free cash flow from continuous operation improved from minus €10 million to almost €27 million.

The free cash flow from discontinued operation was slightly negative, minus €2.3 million. This is related to tax payment of the divested graphite electrode business for time periods, where we were the owner of that business.

And the previous year figure, the minus €10 million, this was the final settlement with the payoff of our former Californian Aerostructures business from HITCO. Now, let's move to balance sheet on Page 13.

Despite the overall situation of corona, the balance sheet ratios remain solid. You can see equity ratio is almost unchanged with 27.3%.

The small loss was almost compensated by the slight reduction in the total assets. Total liquidity even improved.

That's, of course, also [thanks to justification] [ph] which I already alluded to and is, of course, in current time very important. We can see liquidity improving from €137 million end of last year, now to €154 million end of June.

Net financial debt also improved from €288 million to €276 million. The reason that it did not improve in the amount of the liquidity, is that we had a counter effect.

It's just the repayment of lease liabilities, an amount of €11.6 million, and the payments for discontinued operation; and this 2 reasons why liquidity development is greater than the change in the net financial debt. And leverage ratio, as a consequence, increased now to 3.03.

So far for my side. And with this I hand back now to the outlook and to Torsten again.

Yes, please move on to Page 15. Thank you very much, Michael.

From the very beginning of the COVID-19 pandemic, SGL Carbon had 2 clear priorities: first was preventive measures to protect the health of our employees, their families, and also our business partners; second was to see our company in the best way and as safe as possible through these difficult times. I think we had been very successful, which implemented COVID-19 guidelines considering the high number of 29 production sites around the globe.

We had only a very few SGL Carbon employees being positively tested for the coronavirus. Due to customer production stops, the CFM sites in Wackersdorf and Willich as well, as Austria has reduced their production and introduced short-term work.

The 2 production sites for carbon brake disc of Brembo SGL JV are running again. Remaining sites of SGL Carbon in Germany, USA, UK, France, Portugal, and Poland, we're able to largely maintain production and delivery of products without interruption, although, it's different degrees of capacity utilization.

To counteract the effects of the interruptions in the supply chain, and their resulting lost work time, SGL is utilizing personnel measures such as short-time work, reduction application and overtime. Administrative employees work largely out of their home offices, to date, most of us are back in the office, but continue with social distancing rules and very, very limited travel.

Moving on to our guidance for the full year 2020. Next page, please.

Like many other companies, we had suspended our guidance early April given the uncertainties around the pandemic. Even today, 4 months later, the news flow continues to be dominated by COVID-19 and the global economy is fragile.

However, given the nature of our business, mostly in GMS, where the production pipeline is 4 to 6 months, outlook for the second half of the year is becoming more and more concrete. We, therefore, introduced at the end of July, a new guidance for the fiscal year 2020 based on certain assumptions, which first and foremost exclude the impact of a so-called second wave of infections and associated major lockdowns.

Next page, please. As usual, I will begin with the reporting segments and then provide an outlook for the group as a whole.

For CFM, our Composites business, we anticipate sales revenues to decline by approximately 10%. This is mainly driven by COVID-19 related weaknesses in automotive and earning improvement measures in Textile Fibers.

In Textile Fibers, we have implemented a number of measures in the second half of last year. In particular, we idled 2 textile fiber lines in started conversion of 1 textile fiber line into a precursor production.

Compared to our pre-COVID-19 guidance, where we had guided for stable sales, we see a weakening in all market segments, except wind energy, which has grown even stronger than we initially anticipated. For operating recurring EBIT, we still expect an improvement over last year's loss of approximately €8 million.

We now anticipate close to breakeven level, which is not far away from our pre-COVID-19 guidance when we forecasted a slightly positive recurring EBIT. This is because we were able to limit the negative effects from COVID-19 related sales losses with measure such as short-time work and spending cuts.

The earning improvements in Textile Fiber and price increases in the wind energy businesses will also contribute to the year-over-year earnings improvement. Next page.

Moving on to the reporting segment, GMS. Here in GMS, we now expect full year sales revenue to decline by approximately 20% driven by weaker demand in all market segments except 1 segment, which is Semiconductors, where we expect revenues to remain more or less on last year's level.

Comparing the new against the pre-COVID guidance, when we were anticipating a high-single-digit percentage decline, the deterioration is coming from weaker demand in all market segments except battery and other energy. You know that GMS is a business with a high fixed cost base, accordingly there is more than proportional impact on EBIT.

This is now expected to decline by at least 50% to approximately 20% decline we were guiding for before the pandemic outbreak. The guidance for the reporting segment, Corporate remains unchanged to the pre-crisis view, we continue to anticipate a substantial decline compared to 2019, which was boosted as Michael said by services provided to the former PP business.

The current year will also incur some additional consulting costs mostly related to the cost and business analysis I had outlined at the beginning of this call. Next page.

All this means that on Group level, we expect full year sales to decline by 15% to 20%, and a slightly positive full year operating group recurring EBIT. Earlier this year, we started exploring additional funding measures.

Some of these projects have been successfully completed some are quite far advanced. From these, we anticipate a positive onetime low-double-digit million euro gain in group recurring EBIT.

We presume these will be booked mainly in the third quarter of this year. Accordingly, we are able to more or less confirm our pre-COVID-19 guidance for the net result, which was a low-double-digit million euro loss, despite a substantially lower operating result.

We continue to pursue conservative free cash flow management. CapEx will be reduced to approximately €60 million coming from €70 million to €80 million planned before the pandemic outbreak.

We are also able to confirm our pre-crisis guidance for the year end 2020 net debt, which we expect it to increase by a mid-double-digit million euro amount compared to yearend 2019. The increase in net debt is related to the €62 million U.S.

dollar purchase price payment for SGL Composites USA. We are able to keep the guidance unchanged, because we expect to balance the lower expected operative earnings with additional funding measures mentioned above.

Consequently, we expect a comfortable liquidity position at yearend 2020, in addition to the still undrawn €175 million syndicated loan facility. This completes our prepared remarks.

I would now like to hand back to the operator for the Q&A session.

Yes. Hello.

I have - in the end, I have one question. It's concerning the timeline of your review of the company.

It's currently under review, of course. You have support from consulting firms going forward.

So when can we expect some kind of decisions? This is the first question, so the timeframe.

And then concerning related CapEx, you are now, of course, driving CapEx down to support your cash flow, down to €60 million. So how many of this €60 million is as a kind of growth CapEx included.

And then, going forward, when you make your - when you have made your decision concerning the future of SGL, what kind of CapEx do you expect to spend then going forward? But I would assume that the €60 million is far from what you need to really to drive growth for the company.

Thank you.

Thanks very much, Christian. I'm going to start with the first question.

So I started my job here at SGL 10 weeks ago. And directly I think in second or third week, we started with an internal revenue project, which we call bonzai.

And I always call the full potential analysis. So we look in every segment.

We check the processes, the corporate functions, the sites, and so on and so on. And we expect results by mid of Q4.

And then, we will come to the capital markets again. This is also in line with our planning cycle.

We just started our budget process for 2021 and also the new 5 years planning. And I think we will come back to the markets with answers for both questions.

And I would like to hand over to Michael for the CapEx question.

Yeah, I mean, as you might remember, Mr. Obst, I will have said that we have so bottom-line CapEx for maintenance roughly €30 million.

So if we're talking about €60 million, you can easily calculate that roughly half of it is maintenance and the other half is growth. And the growth projects are mainly related, of course, to the - on the GMS division on our fuel cell business, which is nicely ramping up.

You remember that we had won a big order from Hyundai for their fuel-cell car. So that is the main area for growth on GMS side.

And of the CFM side, we also had press release that we have won a big order for battery cases for electric vehicles in the U.S. And that's the growth area for investing in the CFM division.

And, of course, with regard to CapEx of outer year, this will be part of the 5 years plan. [Torsten, will look on that] [ph].

So that's too early to answer.

Okay, thank you for that. And I have 2 additional - maybe one is, again, concerning the review process.

You're talking about challenges and it's about complex structures and processes. So, of course, you have some experience from your jobs before.

And we have seen some kind of reorganization and restructuring within SGL over the last 10 years almost. So where do you mainly see these kind of complex structures and processes?

Can you give us some kind of an example here? And the second one is concerning the 2 fiber lines you closed down in Fisipe.

Are they out forever or do you - or can you restart these fiber lines going forward? Thank you.

Yeah, I start with the questions for the fiber lines. They were idled.

In principle, we could restart. But we took the capacity out of the market and got rid of business, which was simply not profitable.

But this was not the main driver. We are operating this site by co-gen, so combined steam and electricity facility, and we could optimize the whole energy setup at this site and this boosted profit.

So the combination of getting rid of unprofitable businesses was a good decision and this is why we idled the 2 lines. Yeah, next question, where I see complexity?

The problem is the small size of our company. Our turnover is plus/minus €1 billion.

And the complexity starts with a number of production sites. We have 29 production sites.

We have a full company setup and we look - or we ask ourselves the question, which is the right size of this company. But an answer we will give mid of Q4.

Am I missing something?

No.

Okay. I hope, Christian, I answered your question.

Okay. Yeah, thank you very much for the time being and all the best.

Thank you.

Thanks a lot, Christian.

Yes, good afternoon. So I would also first like to follow up on this review program you're starting.

I mean, [indiscernible] from Bonsai should we expect that it's the same mainly focusing on cutting cost, and to taking out excess capacity or is there also a component to be expected very short see - forward strategy, a clear one with, yeah, investments and also possible acquisitions to enter markets, where you think the company is not yet well positioned. That would be my first question.

Yeah, Richard, we look at the full scope maybe that investment in - we are not focused on taking capacity out, it's more about to drive the whole operations in a better way. But we look at everything there's cost in, there's spend in processes complexity reduction, but also the way forward.

And we are going to answer this by mid of Q4. We should be through with analysis.

Okay. And it's quite obvious that we should be prepared to see some kind of one-off costs related to this, of course, I think the number for this?

Yeah.

Yeah. Can be, but there are also measures where we just reduce spend which do not need additional cash spend, and we will deliver both.

Okay. And then - I'm not sure if I missed something, but this one of this positive one-off effect, you signaled for Q3, it looks a bit [indiscernible] to me.

So I have no idea what is behind this wording you have used to describe where this comes from. So, can you shed a bit more light on this one?

I will take this question, of course, I mean to start on an IR plan, I mean we initiated at the beginning of the year, various funding measures with a view, of course, in the upcoming [payments] [ph] to BMW is [Technical Difficulty]. And most of this are real estate [Technical Difficulty].

Of course, a lot of own real estate not all of this is used by ourselves or some is rented out, some is even not used. And the concrete measure now, which has been completed, and this is also published in our half year's report is that we have an agreement with Showa Denko.

Showa Denko was renting it on site of [indiscernible] real estate as a manufacturing hall for the production of graphite electrode nipples. They decided to go out ahead of however long lasting this contract.

So we have to financially settle this, which will give us not only a small-double-digit million cash inflow, but given the nature that's a big part of this coming from the net present value of rental income. This keeps also part of income and that's the reason, so we will have very small double-digit main income amount out of this low-double-digit cash amount.

So it will not only be cash amount, but once earnings amount that was the reason why we introduced, also this new operating recurring EBIT, because we want to make sure, cost is, of course, a onetime effect. This is not an ongoing operational effort.

So therefore our guidance in the EBIT is taking this out. But on the net income we have included it, because this will of course improve overall figures and as I said also in here both on the earnings and in the cash side, and that's not the only thing we are still working on other measures we do have as I said, several real estate things we are in process or sales process in various jurisdiction.

And that's in essence the main reason of what we call the funding measures.

Thank you very much.

Yes. Thank you very much, Stuart.

I would like to thank you all for dialing in and for your continued interest in SGL Carbon. I look forward to continue our dialogue on a regular basis.

Have a nice rest of the day until next time. Thank you very much.