SGL Carbon - 1H 20 results and new CEO - comments
All,
SGL Carbon were weak as expected. However, the group is now confident enough to reinstate its full year guidance, withdrawn in April during the period of the coronavirus crisis. This guidance is now set at a revenue decline of 15-20% for the full year. Operating EBIT is expected to be slightly positive. We feel that the outlook may not be as bad as what investors expected, especially in light of SGL’s significant exposure to the auto sector. Indeed, it is “only” around 10% lower than the pre-covid guidance.
The long patience of SGL’s investors started to wear thin in 1H 19 as the weakness of the key auto sector combined with continued disappointment in the cost cutting front. Since then, the coronavirus impact hit some of SGL’s key end-demand sectors (autos, aerospace) especially hard. With the aerospace strategy now impacted by the coronavirus, the new CEO needs to both chart and properly present a credible route to value creation.
Unfortunately, the previous management had no track record of presenting anything that holds up to scrutiny. Therefore, a major change of direction is required. The five-year plan presented earlier this year would not have produced sufficient CF to pay for the necessary CapEx even before the pandemic.
Key takeaways:
- 1H 20 Revenues -19% yoy; EBITDA “before one offs” -40% yoy.
- 1H 20 FCF EUR+24.3m vs EUR-19.1m in 1H 19, thanks to a significant reversal of the usual seasonal patterns in working capital, and a significant reduction in capex. Management notes that the working capital improvement is related both to specific actions to reduce requirements, and to an overall contraction of business activity.
- CFM outlook for 2020 – -10% yoy revenues decline, vs stable yoy revenues pre-coronavirus.
- GMS outlook for 2020- -20% yoy revenues decline, vs “high single digit decline” pre-coronavirus.
- Autos and aerospace have been the main drivers of the revenue weakness, with other segments (semiconductors, wind energy…) performing well.
- Capex to be reduced to EUR60m from 70-80m pre coronavirus. Management sees maintenance capex as EUR30m so the other half is growth capex.
- New CEO explained his initial impressions of SGL – sees strong shareholder support, technologies and exposure to structurally growing sectors, offset by excessive administrative overhead, complex processes, track record of disappointing expectations.
- The CEO notes that a company with EUR1bn of revenues probably should not have a full large corporate set up over 29 production sites.
- The strategic review is expected to be concluded by mid Q4 20. At this point, the new CEO is considering all options.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano