SGL Carbon SE

Yes. Thank you very much, Emma.

Welcome to our today's conference call on the results of the first nine months. Thank you very much for joining us this afternoon.

Here with me in the room is our current CFO, Mike Majerus, and also incoming CFO, Thomas Dippold. Both will support me in the Q&A session and also in the presentation.

We will keep our prepared remarks very short as we gave a comprehensive update some 10 days ago. If you have missed our call 10 days ago, there's a replay on our Investor Relations webpage and you can listen to it until the end of this month.

But first, I would like to hand over to Michael and he will guide you through the results of the first nine months 2020.

Yes. Thank you, Torsten.

And first of all, also welcome from my side to this call. As usual, I will walk in more detail to our figures.

And let's start on page 3 with our business unit, Composites - Fibers & Materials, CFM. Overall, we can say that the third quarter was a clear recovery from the very weak second quarter where as you might remember, we had especially in the automotive sector, strong effects in CFM, with four manufacturing site not running in that second quarter due to the automotive customer and the pandemic.

Compared to this, we saw a clear recovery and the EBIT turning substantially positive in the third quarter. In detailed sales revenue, this compared to the nine months of the previous year down in 14%.

This is a combination of the intended decline in Textile Fiber where last year as you might remember, as a situation of the market situation that year, we decided to idle two acrylic fiber lines and decided to convert another acrylic fiber line to the precursor production. That was one effect which of course was planned that we will have decline here.

The other of course, was not planned and that has to do with the corona effect. And that was primarily affecting our market segments, automotive and industrial application.

On the other side, the sales in Wind Energy increased very substantial compared to previous year. As you might remember, one of the problems last year was weak wind business, this year this turned much stronger and increased by more than 60% compared to the previous year and stronger than initially expected.

And the Aerospace remains stable. This is as you know, we are rather small and niche player today in the aerospace business, we're not yet affected from the overall environment in the aerospace in the current year.

But as you remember, our plan is going forward a little bit weaker was the aerospace but for the current year, it was relatively stable. So the EBIT increased substantially, you could see in total we have EUR 10.6 million plus in the nine months.

It was minus EUR 1.8 million in the previous years and nine months. And there are several reasons for it.

One is as I said the substantial improvement in the wind energy sector primarily volume-driven to some extent, also price-driven because we were able to increase prices earlier this year. And the others were our earnings improvement measures primarily in the textile fiber business in Portugal, I already mentioned this and some other activities we set out.

And this was offsetting automotive business where, in the earlier we had EUR 4 million lower earnings contribution from our equity investment, as you know, this is our Carbon Ceramic Brakes joint venture with Brembo, and that was heavily affected in the second quarter by the weak automotive situation. Accordingly, ROCE turned positive and with this let's move to the next page, our other division, Graphite Materials and Systems; in general, this division is late cyclical nature, it means it takes longer until the crisis becomes apparent but it also takes longer to get out of the crisis compared to CFM.

So CFM effect was coming much earlier in the second quarter. On the other side is getting much earlier out of it, as you could see in the third quarter.

GMS has a different situation, it took longer, and clearly the biggest effect was not seen in the second quarter but it was now here in the third quarter that we had increased effect of COVID-19. And in total, this was driving sales down 25% year-over-year and EBIT even over proportion by 55% that is another specialty of this division is a very fixed costs intense division, which means if you have a strong volume growth, you have an over proportionate profit increase, the other way around if the volume is weakened you have over proportionate profit decline and that is what has happened this year.

So, sales overall went down 22% compared to previous nine months. And this is in essence a combination of two factors roughly half-half; one is the expected lower demand in battery and other energy sector due to shrinkage in the supply chain, which we already mentioned earlier this year.

That has nothing to do with corona crisis but the other half roughly, of this weakening is coming from the lower markets due to the corona crisis which were affecting all our market segments with one exception to semiconductor, which was even growing in the nine years was a low double-digit percentage. Now, EBIT already mentioned, this decrease by 52% from the record level in prior year.

The IFRS 15 effect alone is contributing EUR 10 million. How is this?

If you remember, this is revenue recognition standards related to customer specific products, which primarily are relevant for our graphite electrode material business, we had record year in 2019, as you might remember, so therefore, we had strong growth in volumes and also higher prices in the graphite electrode business. And this is under IFRS 15 anticipated revenue recognitions, we had a positive IFRS 15 effect this year it was the other way round, volume declined heavily.

So, therefore, negative IFRS 15 effects. And this swing alone is accounting for EUR 10 million of the earnings decline.

And, as mentioned, in line with the sales revenue of almost all other market segments recorded lower earnings compared to the prior year period with two exceptions, one is the semiconductor where as I said we had still growing revenue. And the other is the automotive and transport, the reason here was that we were investing into manufacturing hold last year in our manufacturing site in Poland.

And we had to ramp of course last year, and of course this year, we were in a stable production state. And that was the reason why despite weaker revenue earnings wise we could stabilize the sector here.

So far GMS, let's head on page 5 and look at our corporate. And here, it's important to remember that this is heavily affected by one-time effect.

We came to an agreement with the company Showa Denko, as you might remember Showa Denko we acquired in 2007, our former graphite electrode division and part of that graphite electrode production more precisely, the so called nipple production was located in Meitingen, so they were producing there and of course, employees, they had a long lasting rental contract with us because the buildings and the ground they belong to us, they were not sold to Showa Denko and the business and the machines. Now they decided to leave the site and we had to find agreement, or they find an agreement and we were of course compensated for this several years of rental contract, also Showa Denko has some obligations for removal for environmental things.

And all this was settled now with a payment of roughly EUR 23 million in total, out of this EUR 18 million will be paid now in the fourth quarter. But the earnings effect of this was already recorded here in the third quarter because the contract was signed in July.

And the earnings effect is EUR 8.5 million. This is in essence the present value of the long-lasting rental contract, which is affecting both revenue and EBIT.

And that's all the reason why you can see here the revenue is increasing to EUR 27 million and the main - or percentage wise 14%. As I said, this is affected by the Showa Denko agreement and the earnings effect accordingly is also here effective.

And as such, the EBIT as reported is now only minus EUR 13.6 compared to the minus EUR 18.5. However, if you take this out and do one-time effect from Showa Denko, you will see here that the operate - so called operating recurring EBIT is without onetime gains of minus EUR 20.6 million compared to the minus EUR 18.5 million.

So this is a slight deterioration primarily due to the fact that we had some consulting costs related or restructuring projects and the service provided to the buyers of old performance division requested lesser service. So far with regard to COVID, now let's head on the page 6, look at the total groups P& L.

Revenue went down by 18% is a combination of the developments, and primarily mentioned was GMS and CFM. The EBIT, of course, it's also combination of the effects mentioned loads now down 38% to EUR 33.9 million.

The net financial result is improved substantially from minus EUR 32.6 now to minus EUR 23.4 million. There are several reasons for this; one is the absence of interest expenses for the old convertible bonds, which we paid back early last year.

Another reason is lower interest expenses for pension and account here, and another important element is we had a negative one-time effect in the amount of EUR 6.3 million from, I already mentioned early, we paid productions of the convertible bond in the third quarter of 2019. And the net result as you can see here, of the minus [349].

This is of course not yet including the impairment charges, which we mentioned in our ad-hoc release in the amount of EUR 80 million to EUR 100 million because this will be booked in the fourth quarter because it was a subsequent event compared to the third quarter. And another thing which is not yet booked here is of course the provision for restructuring we said in our ad-hoc, that we will have in total EUR 40 million restructuring costs and somewhat more than half of this will be accounted for in the fourth quarter.

This is, of course, not yet included in these figures. Now let's have a look at the Group balance sheet on page 7, equity ratio went down 25.6%.

There are primarily two reasons for that; one is the change in discount rates leading to higher pension obligation and correspondingly lower equity and the other foreign exchange effects primarily related to the change between US dollar and euro also negatively affecting our equity. That's the main reason for 25.6% also this is of course not yet including the impairment charge and restructuring provision.

With this, we will have at the year-end definitely a figure somewhere below 20%. As I said not yet included, liquidity very positive development and that is I think the most important thing in current times even up further EUR 166.8 million compared to the end of last year figure EUR 137 million.

There are several reasons for that. One is, of course, the reduced spending overall in the group, was of course reduction in working capital, but also some funding effects already appear here in.

What is also worth to mention there are still more to come in the first quarter what this will be tackled later in the outlook. Yes, net financial debt decreased to EUR 262 million, whereas the free cash flow was EUR 43.7.

So why is the decrease in net debt lowered than free cash flow? The answer is in the last line, there is offsetting effect primarily with lease liability, repayment of lease liability in the amount of EUR 13.5 million and the payment for discontinued operations.

So the net sum of this is decreasing than the net debt position. Now on the next page you see the free cash flow, already mentioned very positive and free cash flow from continued operation from EUR 43.7 million compared to the minus EUR 9.6 million.

So reason for it one is already mentioned the working capital effect and improved networking capital management. The other is, however, also that we substantially reduced our capital expenditures you can see it here, it was only EUR 33.2 million in nine months compared to more than EUR 50 million in the nine months before and that was the main driver for the improvement in the free cash flow and discontinued operation to minus EUR 2 million.

This is a tax payment related to the new owner of the company which belongs to the graphite electrode business which we sold. That was a tax related to retirement; we were the owner of that business and the last year's EUR 9.8 million, this was also a settlement of old topic as was a settlement payment to the buyer of HITCO Aerostructure business.

Now, on the last page number 9, just a reminder, as I said those figures do not include two things. One is the restructuring provision, as we said in total EUR 40 million cost roughly half, more than half this will be recorded in the books in the fourth quarter of 2020 and other non-cash impairment charge in the amount of EUR 80 million to EUR 100 million primarily due to the weaker outlook in the automotive and aerospace industry, which earnings wise cannot be compensated by the better outlook for the winter energy sector.

So far for my side, quarter to nine months. And with this I hand back to Mr.

Torsten Derr.

Yes, thanks very much Michael and I will repeat quite a lot of what Michael said because we are already in November. So I start on the next slide please, with our reporting segments CFM, our Carbon Fibers, I'll make it short; sales revenues were declined by approximately 10%.

And as Michael said, there are two reasons for that. First automotive which is a pandemic effect, and second is textile fibers, which was driven by us.

I come to this later on, this was compensated by higher sales in the wind energy segments, and we run certain lines at capacity because the demand is pretty high. Recurring EBIT will return to a slightly positive result and here is a textile fiber again, we idled two textile fibers lines, and we can switch the energy supply over to a more favorable system, which brought us quite a lot of savings in textile fibers and second is wind energy segment, where we were able to increase prices.

Next slide please. This is our second reporting segment, which is GMS or graphite business, there we have pretty bad business and all sales revenues declined by 20% with one exception which was semiconductors, this is Asia focused and still growing, recurring EBIT will be reduced by at least 50%.

This is due to the high amount of fixed costs in the business. Coming to corporate; Michael already said that the major driver for substantial deterioration of operating recurring EBIT is the loss of a service business, which be rendered to for our former PP activities, which we divested last year and this could not be repeated this year.

Coming to next slide; the Group outlook, all that means sets on group level, our sales will decline by 15% to 20%. And we will have a slightly positive full year operating group recurring EBIT.

Earlier this year, we started to explore additional funding measures and all of them were successful. The biggest was in compensation agreement was Showa Denko which boosted our EBIT in and also sales in Q3 2020.

We disclosed on October 30 as impairment charge for our CFM business and also restructuring provisions on the announced restructuring and this will lead to a negative net result guidance of minus EUR 130 million to EUR 150 million. Our CapEx will be still on the level of EUR 16 million and with all this, we are able to confirm our guidance for the year end 2020 net debt to stay on the forecasted level, which is an increase of a mid double digit million euro amount compared to year end 2020.

And this is due to the US$62 million purchase price payment for our assets of SGL Composites in US. We are able to keep the guidance unchanged because we expect to balance the lower expected operating earnings with additional funding measures mentioned above.

And consequently, we continue to expect a comfortable liquidity position as liquidity was strong at EUR 167 million at end of September. And more cash is coming mainly in Q4 this year.

In addition, we still have the EUR 175 million undrawn syndicated loan facility. Next slide, please.

On October 30, we presented our restructuring project. And on the left-hand side, you see our new operating model; we already reduced the number of corporate functions by 50%.

From 20% to 10%; we introduced clear responsibilities and rigorous consequence management. And we also are going to change our monetary incentive system on a cash flow basis.

On the right-hand side, you see our restructuring program, we expect more than EUR 100 million recurring EBIT improvements, which we will have valid at the end of 2023. We have 500 individuals' measures.

And this includes more than 500 headcount reductions. Next slide, please.

So to summarize what we said about operational performance after nine months is in line or maybe even slightly better than we expected in the guidance by mid of this year, we launched substantial earnings improvement measures, and we also announced the impairment charge of between EUR 80 million and EUR 100 million. As we cannot foresee how long the pandemic will take place, we completely rely on internal self-help measures.

We focus on securing financial headroom and stabilize of operational performance. Having done this, we are going to reduce our net depth level and we'll go for selective investments.

And having done this, we go back into the gross. We will provide an update on our strategy by end of Q1.

The same holds true for the guidance for 2021. And updated five years plan.

This concludes our prepared remarks. Emma, I would like you to hand back to you and please open the Q&A session.

Yes. Hello.

I have four questions please, smaller ones. In the report you mentioned the two tranches for the Showa Denko payment.

And the second one was due on February 2021. Can you give us guidance?

What do you expect there? Is it a EUR 15.5 million which is the delta between EUR 8.5 million and EUR 23 million or is there a completely different calculation?

Then on textile, when do you expect a breakeven there on textile fibers alone? You talked about some kind of special income cash in from divestments.

Is there further plan for sale of real estate on the agenda and will it come in Q4 or in the next year? And the last one more on the product side, the battery enclosures, can you give us some kind of an idea of the order size currently and what do you deliver?

In the report you mentioned that you are investment focus or CapEx focus is to increase capacity there. What kind of capacity is that?

Thank you.

Yes. So this Michael Majerus, maybe I start.

Come to your first question. Sure, I think we have to differentiate the cash side and the earning side.

So as I said in total, the cash payment will be EUR 23 million roughly in round figures, thereof EUR 18 million will be paid still in this first quarter and the remaining EUR 5 million will be paid in next year that is the cash side of the equation. The earning side that is the EUR 8.5 million and this, so out of these EUR 23 million total payments that will be earnings related component of EUR 8.5 million this is, as I said, the component relating to the rental obligations which were paid in one shot.

That is normal income. And that would have been also income regular over the years it was now anticipated.

And this was since a contract was signed in July, it will be recorded earnings was already in the figures of the third quarter whereas the cash impacts will not come into force in the first quarter of next year. So far this point, then was the - what will in addition come in the fourth quarter and orders assigned is a sale of a piece of land and the building in Northern Germany, where we formerly had our rotor blade manufacturing which a long time ago, we gave up so that is not used by us.

We have the company renting currently this building and they bought it, we already signed the contract by the way last week, it was a business done deal. And we expect here a mid-single digit million euro amount.

And the other thing which is also done deal and signed, we signed a mortgage loan with a bank in Germany related to some buildings and land here and our German manufacturing that will be a small double-digit million euro amount and all this to come in the fourth quarter. So this Showa Denko payment of EUR 80 million, the sale of the piece of land in Northern Germany and the proceeds of the mortgage loan.

And that is what makes us very comfortable with regard to our liquidity position. That is what we said in the ad-hoc, you can see we have 167 orders is now coming on top of this, then of course the EUR 62 million for the payment to BMW will go down, we'll have also some negative cash flow in the fourth quarter due to the CapEx related as usual, it's back-end loaded you could see that we have accumulated only EUR 60 million in CapEx.

Total year's guidance is EUR 60 million, so we can easily imagine that a significant portion is to come. And if you account this together, you can easily calculate roughly our cash position for the end of the year.

So far with regard to debt question and was the battery enclosures, I mean, this is primarily investment, we are making our manufacturing site in Austria for US company who is building electric vehicle in startup production from the customer is scheduled for mid of next year and already, and we have to be ready for this. That's why the equipment is of course, they're already shipped in.

So we need not a new building but a new machine. And the size of that order is in the according to the plans of the customer and it went upstage somewhere in the mid double digit when you figure what it is several years to come and not of course in the first step.

That's roughly and breakeven as a texture fiber, I think that there's something going forward. I would hand over to the CEO and not make any predictions which then later my successor has to stick to, so therefore - yes, and fair not for me to answer that.

So I have a rather fuzzy answer, we don't look at the P&L of our Portuguese assets. We haven't total eight fiber lines there and we already converted two of the eight lines to a precursor the fiber line.

And the pre fiber line goes or sends fiber to our assets in Muir of Ord, and Moses Lake and we said we are replacing precursor material, which we purchase from externally. So every conversion step increases as the value chain and we don't look at the P&L statement of the particular asset.

The textile fiber business is just to fill the capacity and to dilute fixed costs. So our target is to convert one line after the other to precursor and feed it into our value chain.

Yes, that's completely correct. But maybe looking more for your financial, some indication for the current year and not saying something going forward.

But the textile fiber business has improved significantly compared to the previous year. Previous year we had to be very honest on this, we had a small double digit million loss now we have only a small single million digit loss.

So it's still loss making. But of course we're also working on improving the situation but the real thing is that what Torsten said it's for us an investment which is important for the precursor production.

Do you have so far, a plan for the timeline to convert further lines into a precursor production?

Now, this is not lying 100% in our hands, if we produce composite parts, for example, the carbon fiber is listed. And this forces us also to list the precursor material.

If we had a business with an alternative fiber, we have to continue with an alternative precursor as well. And we do whatever is possible to enlarge our value chain.

Yes. Good afternoon, gentlemen.

I have a question concerning the wind energy business where you mentioned that you have been able to increase prices on such a strong increase of demand. Obviously, this was more or less unavoidable, but how sustainable is this?

Can you give me an idea of how long these contracts are running you have in this area? And if your customers then also might put pressure again on the price level once demand picture turns around?

So how volatile is this? Can you give us a flavor for this?

Thank you.

Yes, since I'm the guy who has the longest experience in this business, maybe I take this one. I mean, this - the wind business is since you only delivered a fiber a small commodity characters, you cannot much differentiate or rather different from our component business.

And as you know, in essence, supply and demand are driving the prices in a commodity business. So I think what is important to remember is that wind energy is not volume wise already today.

The second largest market overall if you look into all types of fibers, including the low tow fiber and for the heavy to indeed already the largest markets volume wise. And there is strong growth.

And the reason for that strong growth is a trend in the wind energy sector, which is more towards offshore intermediates. And the reason is threefold.

One is you do not have problems with a neighbor to get the admission for this. Secondly, you can build a much bigger, those windmills have a diameter of 160 meters even more, which is the magnitude of the cathedral in Cologne will never be able to build such a thing onshore here, and the third it has more winds on the sea.

So that is the three reasons why there is a trend towards those offshore windmills. And the good thing is that's different from the onshore windmills, which not all of them do contain carbon fiber.

Physically, it's not possible to build such windmills out carbon fiber, so all of them need carbon fiber, which is good for us. And secondly, they even need more carbon fiber to get the stability in the rotor blade to avoid it under high wind strikes the rotor blade is bent towards the top.

So that's the reasons behind and different from the low tow fiber, which is going to the aerospace where the price level is much higher. The heavy tow business has been so far not a reinvestment case because the automotive business relatively small and the wind was not very attractive margin wise.

So and as you could see also from us, we have not built additional capacity in that sector so far because economically, this wouldn't have made sense. But on the other hand, the capacity is limited in that sector.

And now with the strong volume goes the supply demand ratio is improving in our side. And that was also the background why we were able to increase prices not to magically also to put this in perspective and the prices still are not very attractive compared to component business, in the automotive sector, even not mentioning the aerospace business, but it is improving.

And so your question is how this will move forward? I think so far, we expect that this trend will continue and that the supply demand ratio should be beneficial.

Of course, no one knows what's going on in China; China for years is claiming to build up carbon fiber capacities. So far, they have not been very successful.

So that is maybe one uncertainty in the equation. But so far, what is foreseeable for us we see that this trend will continue.

But obviously, as you just indicated, the price level is still not such attractive that you would consider expanding this business and take advantage of this growth you see.

No. What makes sense is to fill our lines with this now.

We would not build new manufacturing sites for this but what we are doing is to fill our existing capacity into the sites we do have and that makes sense and we even have reactivated our Ord line and our location in Moses Lake. Because if you have equipment already there, so if you have only to look at additional cost to get them up and running, this is economically still of course attractive and better off not doing this, but it would not be investment case to build a new manufacturing sector.

Yes, Emma, thank you very much. And with this, 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.

And until next time, goodbye.