SGL Carbon SE (OTCPK:SGLFF) Q3 2022 Results Conference Call November 3, 2022 9:00 AM ET
Company Participants
Claudia Kellert – Head, Capital Markets and Communications
Torsten Derr – Chief Executive Officer
Thomas Dippold – Chief Financial Officer
Conference Call Participants
Andreas Heine – Stifel
Thomas Junghanns – Berenberg
Richard Schramm – HSBC
Klaus Schlote – Solventis Beteiligungen GmbH
Claudia Kellert
Hello, and very warm welcome to our Conference Call about the Business Development and the Financials of SGL Carbon’s in the first nine months 2022. On behalf of SGL team, our CEO, Torsten Derr, our CFO, Thomas Dippold, Accounting Controlling SGL departments are participating.
We want to present the financials and the outlook on a presentation and answer your questions after the presentation. I will hand it over to Torsten now.
Torsten Derr
Thanks Claudia. Thanks very much. Good afternoon to everyone. I’m talking to you as a CEO of SGL Carbon. And our business model has proven to be resilient in the first nine months. Our sales growth accounted for 14.8%. And EBITDA even is in plus of 25.4%. So you can see, we are still following our margin above volume strategy. And with this, we confirm our guidance which we have raised some weeks ago with sales on the level of 1.2 billion for the full year and EBITDApre between EUR170 million and EUR119 million.
The business was successful, and all of our business units have delivered to this higher profitability and have supported our growth. We have pretty strong pricing power and could forward almost all of the raw material price increases and the energy price increases. And we filled our capacity and also capacity utilization supported our bottom-line improvements. Our markets are strong, and we couldn’t manage our energy challenges so far, very successfully.
Our focus is on growth markets and we will talk about this later on in this talk, which is, for example, semiconductors, renewable energies and e-mobility, and this helped us to have this stable and good figures.
With this opening statement I would like to hand over to our CFO, Thomas Dippold.
Thomas Dippold
Yes. Hello everybody. Also, warm welcome from my side. This is Thomas Dippold, CFO of SGL Carbon and I have the honor and the pleasure to guide you through our development of the first nine months of this fiscal year. On Slide number 5, if you just follow it to some print outs, you can see the overall profitability throughout the course of the year for the first nine months of 2022.
And as Torsten has already highlighted, we were very successful in growing our top-line, our sales reached EUR853.9 million, which is EUR110 million more, or almost 15%, more than at the same time last year where we reach EUR743.5 million. So you see it’s really a quite remarkable step into the right direction as we are growing and apparently our markets that we serve are fairly attractive and successful. If we exclude the translation effects from currency effects, which is mainly the strong U.S. dollar, then our sales would grow by 11.3% instead of the 14.8%, which is still a double-digit growth rate and we’re very proud of that.
When you look at the sales split, then it stays roughly the same. It’s hardly any changes compared to the same period last year. As Torsten pointed out our EBITDA grew by EUR28 million, so we are reaching now EUR136.1 million in our EBITDApre figure compared EUR208.5 for the first time month of the last fiscal year. Again, if we deduct the currency effects in the profitability increase, it would still be far higher than our sales development, currency adjusted our EBITDApre grew by 17.9%, which is a fantastic development and we liked it very much.
So, where does it come from, the key developments? Torsten already pointed out. It’s mainly very attractive business that are growing, and apparently the demand from that is very strong. It’s mainly semiconductor business for graphite solutions business, but also industrial applications, which we see in our carbon fiber business, but also especially in graphite solutions. These markets are growing very strongly, and we serve them very well. And there’s also a product mix effect in there, which boosts the margin quite significantly.
In absolute terms, graphite solutions is growing the most, it’s almost EUR50 million, where the top line rose in graphite solutions followed by carbon fibers with roughly EUR25 million compared to last year, closely followed by composite solutions with EUR19 million. And last but not least, process technology with almost EUR16 million. You see all the four business units are contributing to the strong sales development. If you look at it from a relative perspective, then the two smallest process technology and also composite solutions are growing the strongest and the large ones like Graphite Solutions and Carbon Fibers have merely some single digit low double-digit growth.
EBITDA, on an operative level is positive in all the four business units. Only in carbon fibers, we have a one-off effect with the hedging activities that we conducted in the first quarter with the EUR9 million. If you exclude that, then all the four business units were increasing their bottom line.
On Slide number 6, as usual, you see the development of our largest and biggest business unit, which is Graphite Solutions. They show a very strong third quarter and after the first nine months of this year, they’ve reached EUR382.5 million in the top line in sales, which is 15% higher than the EUR332.7 million, which they have achieved in the first nine months last year. This is an increase of EUR50 million or if the — you take the currency out, especially the U.S. dollar, then it’s still 9.4% growth that we see compared to last year.
Bottom line the growth is 24.4% now reaching EUR84 million compared to EUR67.5 million last year, and we could increase the EBITDA margin from 20% to 22%, this is a very strong achievement that we see there. And where does it come from? In principle, all the markets that Graphite Solutions is serving are continuing to grow, especially the semiconductor and LED market is growing with a growth rate of over 40% compared to last year. And in the semiconductor market, especially the silicon carbide business is growing the strongest.
Industrial applications also contribute but on a far lower level compared to the semiconductor business and especially the silicon carbide system. And in the bottom line, our guiding KPIs EBITDApre, we see with higher sales and a good product mix as we shift some capacities, especially into the semiconductor business and the high relative capacity utilization. This is what boosts the profitability. And we’ve already said, we’ve been fairly successful in passing on all the raw material prices and energy costs to our customers who apparently have a strong demand for the product, and are also willing to pay higher prices in order to get it.
Slide number 7, Process Technology, our smallest business unit is growing, the strongest 24% up in the top-line, and now reaching EUR77 million in sales is really a strong growth that we see they’re. Also, currency adjusted, it’s still higher than 20% growth that we see there. We have a very strong odor intake, which we saw beginning of the year or also end of last year, and some six to nine months later, it all converts into sales.
And this is exactly what we’ve acquired at that time with a strong sales team, and now it materializes also in sales, also, a good development. Book to bill ratio is still 1.4 for the first nine months of the year. So this also indicates that our order book at least for the next six to nine months is pretty solid. And we think we can continue with that stable development for quite a while.
When it comes to profitability, we can clearly show the improvement that we’ve always been targeting for. We now reach EUR7.5 million in our EBITDApre for the first nine months of the year 2022. And as we promised, we almost achieved a double-digit margin when you look at the 7.5 compared to the EUR77 million there. This is where the business simply should be. It’s a niche business for the chemical industry, plant building business. And they should achieve a double digit margin and we came very close to fine this year.
Again, what is driving the good profitability? It’s a higher utilization rate, we focus on higher margin business and we are also again in this project business very, very successful in passing on higher raw material costs to our customers. And especially in the third quarter, we were benefiting from some declining and decreasing steel prices in the last few months.
On Slide number 8, you can see the development of carbon fibers. In our top-line, they grow by almost 10% to EUR269 million compared to EUR244.7 million at the same period of time last year. Currency is only a half a percent in there. So it would have been 9.5% growth without any translation effects. And I think as we have to compensate the so called BMW i3 take or pay contract, which expires at the end of June, I think we were fairly successful especially in the third quarter to compensate these capacities with wind business. And with that we were able to grow the business even further as it was in the first six months of the year.
We see a high customer demand, especially in the wind and industrial business there and we can simply sell all the products, all the fibers that we produce into the market. And that also helps us as our production capabilities fully load it and we can sell that into the European Union, but also on a worldwide approach. And last but not least, also in Q2 the higher final delivery, especially to BMW with the i3 contract, we’re very supportive in driving the sales.
When we come to the bottom line to the EBITDApre figure then we see a slight deterioration from EUR43.8 million last year to EUR42.7 million in this year, which is 2.5% down. But please bear in mind, in the first quarter we had aforementioned special effects from the hedging of the energy derivatives with EUR9.2 million, which guaranteed that we could produce on a digestible level throughout the course of the year. And this was very beneficial for us as we had — haven’t had to shut down any production facilities. We were able to produce and make use of the hedged energy and this helped us very much to run our business.
We have some tailwind from currently lower prices for our main raw material, which is acrylonitrile which we have to pass on through to our customers only with a time delay. And last but not least also worthwhile mentioning which is also contributed into the EBITDApre of carbon fibers, our equity result from our joint venture that we have with Italian break company, Brembo, and the short name for it is BSCCB. Their earnings are also in the carbon fiber business, and they’re also EUR2.1 million higher than previous year. So this also contributed quite to that — good development.
On Slide number 9, you see our last operative business unit, which is Composite Solution. There we also see a strong growth and it’s mainly driven by our very strong Automotive business there. The sales now reached EUR111 million, which is a plus of 20.5%. With currency adjusted, it would be 15.3%. And last year, we were below EUR100 million just reaching EUR92 million. So we see a strong top line development. A lot of projects and ramp ups were started with automotive customers, be it in Europe, be it in North America, and also our price initiatives where we want to pass on all the raw materials were also successful. The customers accepted our requests, and that — this also boosted our top line quite significantly.
Our bottom line benefited even more, you see there some 62.6% increase coming from EUR9.1 million last year for the first nine months of the year and now reaching EUR14.8 million. This is of course a very strong development, and — but you have to bear in mind and you could see the comment on the right side and at the very bottom of this slide, there is a compensation payment in there which is a kind of a one-off effect we have negotiated with one of our OEM automotive customer, a compensation payment for the — as a kind of breakup fee for project which hasn’t been conducted in a proper way. And we received a one-off payment of EUR3.7 million in the first half of the year. And if you deduct it and just look at the operative performance and the run rate which we have in composite solutions, then it would be a little bit above EUR11 million. This is now the real like for like figure that you have to take into consideration. It would still be a good 10% margin, which is not so bad for our automotive business and we are happy with the development that we see there.
On Slide number 10, I would show you how our bottom-line, our net result, but also some balance sheet figure and some ratios look like and how they have developed. This is exactly what Torsten and myself have always promised you that we try to fix not just the P&L, but also the balance sheet. And I think we’ve been showing some great progress also in that. When you look at our net result, it went up by EUR28 million now reaching EUR70.6 billion after nine months of the year. This is really a remarkable increase coming from EUR42.6 billion at the same period last year.
Our equity ratio rose by more than 10%, 10.9% to be precise, and now reaching 37.9%. I think this is a very healthy equity ratio that is showed there. What is contributing to that, on the one hand side, the strong operative performance. On the other hand, there are higher interest rates, which affect the pension provision. And last but not least, as you know, we have placed the convert beginning of September, and there’s also a kind of equity portion in there that also goes straight into the equity. And all the three, four effects contributed currency — not to forget, to the increase of 10.9%, coming from 27% to now almost 38%.
The net financial debt remained almost stable. It went up by roughly EUR3 million in order to grow the business as we did, but also to finance all the working capital that we need in order to secure and to guarantee our growth. Our leverage ratio, the way the banks calculated has reached a very healthy 1.3. It has been at the same period of time or at the year-end, 1.5. And last but not least, our royalty has reached for the first time since quite a while 10.3%. And we’re also very happy with the development at year-end last year, our royalty was 8%.
And with that, I would like to hand over back to Torsten, who’s trying to tell you a little bit about the outlook, but also the challenges ahead of us.
Torsten Derr
I would like to talk a little bit about energy. And as you can imagine, currently no shortage of gas or electricity has hit us. But we used the time to prepare for it. And if you look at our risk exposure, the risk exposure is mainly in Europe, and our biggest gas carrier is our site in Lavradio, Portugal and there we feel pretty safe, because Portugal receives the natural gas from North Africa, from Algeria and Morocco and there’s plenty of gas and we don’t expect availability problems there.
So if a gas scarcity should happen, Germany would be affected where we operate five sites in total. There are three small sites: Wackersdorf, Willich, and Limburg, they don’t have huge energy exposure so the risk falls into our main and large production sites in Bonn and the second, in Meitingen. And together we disclose this figure last time we have around 100 gigawatts of natural gas demand. We used the time to prepare for it. In Bonn we will install propane gas tanks and you will fuel burners to have the option to switch from natural gas to propane.
And you can see on the picture on the right hand side, picture out of my team. And this is our nice 1.5 million litre oil tank. And we have already filled this tank completely with oil. And in times of gas scarcity, we could switch from natural gas to oil. And we feel pretty well prepared and we could digest lower gas allocation of 10% to 20% with our preparation measures. To most of our new sales contract we added an energy clause. So if price increases should happen in energy, we could directly forward it to our customers.
What we like very much is the announcement of the German government because you see our risk is mainly in our two sides in Meitingen and in Bonn with the gas price kept and the electricity price kept, we feel pretty well prepared for next year. So this about energy. I would also like to talk on the next slide a little bit about resilience and our markets and you can see on the left hand side our split into the main markets we deliver in. And we have colored three of the markets in petrol colors. This is mobility, which accounts for roughly 30%, energy 12.4% and digitization roughly 16% of the market.
And in all of these three markets, we see pretty strong growth and we have to pick that. On the right hand side the main markets we are delivering into and the most important is electro mobility. And according to our estimates, the EV market is growing with a CAGR of 28%. And our mobility segment with several products will benefit from this.
Also, our carbon fibers goes into wind turbine blades, which are reinforced with carbon fibers and this is driven by the offshore wind energy market again, double digit CAGR of 15%. And we have photovoltaics and this is driven by our business unit Graphite Solutions, we produce a lot of graphite parts, which are used to produce solar cells and the photovoltaic market globally is assumed to grow with a CAGR of 8%. So, you see the markets which drive our growth are growing at a very healthy growth rates.
At the top right hand side, you see SIC Semiconductor, and SIC stands for silicon carbide. And this is a new type of semiconductors which go into power electronics and I will talk about this more later on and this market is growing with 34% CAGR in the next 10 years. And we took this figures from [Yul] consulting company, which is analyzing the SIC Semiconductor market and is the most used source for the growth of this market. And this goes into our digitization field and will also boost top line and bottom line of our business unit Graphite Solutions. I will come to this later.
On the next slide I can give you a little hints how we go into the markets, electromobility, and these are just a few examples we are very good in the production of battery cases in electric truck and the U.S. is delivered exclusively with our battery cases. We have leaf springs, which are carbon fiber or glass fiber reinforced spring systems, especially in the EV segments and we produce brake disc reinforced with carbon fibers.
And these are also driven by electro mobility. And usually you think you don’t need that strong brakes in electromobility, but they accelerate so fast and you have to take the acceleration away with break test that I will break test, will not lose the job and this is why our break test segment is growing above average.
In the renewable energy segment we already talked about solar cells where we produce equipment for — we produce carbon fibers, which go into wind — into the blades of wind turbines. And we are among the largest producers of the so-called gas diffusion layers, which is a main component of a fuel cell system. So, you see we are pretty well positioned here. In semiconductors, we produce equipment for the production of chips, and also for the production of silicon carbide as well as LEDs, we talk about this on the next slide. And we also supply robot companies with carbon fibers you need, for example for robot arms light and reinforced parts. And we also supply the aerospace market. So, you see strong market, strong products and this drives our groups.
Now, I talk a little bit about Silicon Carbide, which goes into power electronics, and please look in the pictures in the middle, in the silicon carbide markets. There is EV chargers and a wall box, which you may have installed at home, contains at least one inverter produced with silicon carbide parts. Bidirectional charges have two inverters inside. Mobile charges, for your mobile phone or for your computer, use silicon carbide. You need for photovoltaic and wind inverters which converts AC into DC produced with silicon carbide.
The most important part is a main inverter which is included in every electric vehicle, which is very beneficial if you use silicon carbide instead of silicon. Why is it better to use silicon carbide inverters, because efficiency is much better. You have at least 10% less power losses. So, you can charge the car with less power. The weight is at least 50% lower. You can build an inverter based on silicon carbide at reduced size and have reduced cooling requirements.
So you see there are very important arguments why silicon carbide will grow, because the markets will grow like EV or solar and the adoption rates of silicon carbide in those markets will grow from currently around 5% to 50% at the mid of the decade. So, there are two cohorts which drive our markets.
So, on the right hand side you see picture of our products and you have to understand what is the role of SGL in the silicon carbide market? We are not producing chips, we are not producing silicon carbide, but we produce graphite parts and some of them are depicted here. For example, crucibles which are used to melt silicon carbides, we produce heaters, which are used to bring up the temperature above 2500 degrees C. We produce graphite, rigid and soft cells for isolation. And all those parts are used in devices to produce silicon carbide chips. And we are the only one stop shop in the industry, which can deliver all those graphite parts in a very high purity grade and this bit — our business, our graphite business is increasing with the silicon carbide markets. More about this we will disclose beginning of this year or beginning of Q2.
So, to summarize what we said, SGL Carbon is well prepared despite a lot of uncertainties. Yeah, the overall market conditions are still with very low visibility how everything is going forward. If you watch the gas prices and the electricity prices, it’s like to be on a roller coaster. Currently, it’s a pretty low, but we expect much higher prices at the end of the winter in Q1. The energy prices in Europe will stay high despite the current status, and we are very happy about countermeasures, especially of the German government.
The availability of gas is still uncertain. And you have seen we prepared for everything, we have this oil tank and propane gas things in our sites in Meitingen and Bonn. Yeah, how our customers will behave is still a little bit blurry. I think at least a mild recession in Europe is still very likely. What does it mean for SGL?
Yeah, we have done our restructuring program and we will successfully completed by end of this year, and this spring us in a very good cost position to mitigate all which is coming from the world around us. You have seen that our focus is on growth markets where we already have foothold in, and we will bet on very attractive markets with two digit CAGR growth rates. And we will do targeted capacity expansion exactly in these markets.
Our financial base has been strengthened, Thomas already talked about it. And we have, for example, refinanced our convertible bond some weeks ago. Now our equity rate is around 40% and we feel pretty well prepared with this.
Having this said, I’m going to conclude our prepared remarks and we would be happy to answer your question if there are any. And I would like to hand back to you, Claudia.
Claudia Kellert
Thank you. Now we have time for your questions.
Question-and-Answer Session
Operator
The first question comes from Andreas Heine from Stifel.
Andreas Heine
Thanks for having the chance to ask questions. I ask them one by one. I have quite some other way to go back to the line to allow friendly competitors to ask — also question. I would like to start this the sales guidance, I have no problem with earnings guidance, very good to track. If I look on the sales guidance, it basically means that you have another acceleration into Q4. Usually I would assume the Q4 is a weaker quarter, this December being only half months. Could you explain why you are at about 300 million in gross rate and has to get close to 350 to get to 2.1 billion if my math is right. So what is sequentially driving another growth in this particular project?
Thomas Dippold
I think we’ve shown a very strong Q3, which was already been anticipated at the beginning of September, when we rose our guidance for the second time of the year, when we said it’s no longer be EUR1.1 billion, but instead EUR1.2 billion. So far, we have reached EUR853 million. And you’re right, there’s still a lot to come into fourth quarter. Maybe we don’t meet 1.2 billion, literally, but at least we’ll be closer to the EUR1.2 billion instead of the EUR1.1 billion, which we have guided previously.
And as you’ve already said, the earnings is totally in line with what we have described so far. When you look at the quarters, especially in our biggest business unit Graphite Solution, then they are growing steadily quarter by quarter. And we also expect a strong fourth quarter with them. But as I said, the sales guidance, maybe we will not meet the EUR1.2 billion literaly or — but we definitely will be closer to the EUR1.2 billion instead of the EUR1.1 billion. And that was also the reason why we rose our top line guidance when we adjusted our last guidance in general.
Andreas Heine
And then coming to your cash flow statement. For quite a number of companies, networking capital was up considerably mainly price driven. My understanding is that we had also quite a strong volume growth. So going into Q4, there we see quite a number of companies doing a lot of inventory management in light of a weaker business next year. How do you see your own networking capital trend in Q4? And what does that mean for the cash generation on the full year base? And maybe linked to this, could you give an update what you’re factoring was at the end of Q3?
Thomas Dippold
Yes. I think we are not alone when we try to manage networking capital at year-end, and you’re completely right. On the one hand side, we are growing with double-digit figures, which also means you have a lot of receivables that materialize and then there’s a time like we have some valuation issues with higher raw material prices. And when you grow, you have to buy higher raw materials first. And I think we’re all well aware of the cash conversion cycles that we have in our business when you do graphite.
And as Torsten has described it, and especially when you want to have super purified graphite for our customer, mainly for the silicon carbide industry, this means that you have to produce and buy it from pitch and coke and you have to bake it and then you have to graphitize it and then send it to the sites where we do all this purification, send it to the customer and then finally get paid after a couple of weeks. The cash conversion cycle is really quite long. And this is driving our networking capital.
However, of course, we’re trying to manage it, especially in order to secure our cash flow by year-end. I think we’re on a good way to do that, and I think we are confident that our cash flow will be quite a bit higher at year-end as it is right now on a Q3 basis. Maybe also as an indicator you mentioned factoring at half year, after six months of the year was roughly EUR46 million and now it’s only EUR39 million. So it has declined by EUR7 billion, so this is also an effect on our working capital.
Andreas Heine
And then one question, again, on the balance sheet. Pensions, I would have assumed to come down in history again as the interest rate was going up considerably. And you have given them a sensitivity in the last annual report. But what we have seen in the first half did not continue to increase rate, would you explain why that was?
Thomas Dippold
Yeah, very good question. The interest indeed, went up. On the one hand side in Germany, from 3.2% to 3.7%. And we have the same effect or even a stronger effect in the United States, where we also have quite an amount of pension liabilities. There, the interest rate went up from 3.7% to 5.2%. So this is really a strong increase.
But on the other hand, you have to bear in mind in the United States, let’s maybe start with that one. There we have planned — as it is a completely different pension scheme that we have in the United States. Also, from a restructuring point of view, last year we have funded our pensions in the United States. So that means we have plan assets standing right next to the plan to the DBOs. And as the interest rates went up, on the other hand, our planned assets went down because of the poor development of the share prices. So that was more or less a wash. And this was a compensation. This is the U.S.
And here in Germany, we have closed one of our pension schemes, which was as we think a very expensive one. And we had some negotiations with our workers councils in order to set up a new pension scheme. And consequently, they on the one hand side finish and really close a very unattractive and old pension scheme. And some are converted into a new one. And we also consolidated all our pension schemes that are up and running into this new scheme. And by end of Q3, we looked at the trend of our pensions.
Normally you just do that at year-end, but as we went into the new scheme videos, it also is for Q3 already. So in the end, you can say we anticipated some effects that we would only see on the year-end normally when we have all this normal pension statements where some experts look at it. But we already adjusted the trend in the future pensions from 1.5% to 2.1% already and this and also compensates the interest increase that we saw in Germany.
I know it’s complicated, but you’re an expert. I hope I could answer your question.
Andreas Heine
And again, I keep mark to my last question. You have a very strong growth especially in the business for these — silicon carbide business. That accelerated even through the year. You’re going to have to invest significantly to keep that gross, has enough capacity available. In other words, you might be at EUR60 million CapEx this year. Is that going up to a number, let’s say 80, 90 million next year? Would we have to assume that you can continue your gross in the future candidates?
Torsten Derr
Andreas, this is Torsten. I’ll try to answer your question one by one. First, our CapEx remains, the basic CapEx is the same on depreciation level but the customers like our product in the silicon carbide market so much that they are prepared to give us customer down payments. So if we invest already this year, we will do this funded by our customer. This is not one device which we are going to increase or to double. This is a global value chain going from site to site to site. This is what Thomas explained, we produce a green graphite in bonds and it goes on, its baked, graphitized, cleaned, and so on. So it goes through three or four hands, and we debottleneck every site where we have a bottleneck. So this will be a global investment campaign, but not with that big ticket items. So it’s more low cost debottlenecking, which we went so far.
The second effect, which I have to describe is relocation of businesses. LED market is more lower margin, silicon chips, standard computer chips is in the mid and silicon carbide is the highest margin. And we also relocated part of our businesses from LED to silicon carbide and this also accounted for the growth.
Operator
The next question comes from Thomas Junghanns from Berenberg.
Thomas Junghanns
First of all, thanks for taking my question. I have a question regarding the higher energy prices. To what extent your contracts equipped with the energy clauses and how confident are you that you can continue to pass on elevated energy prices also, next year and especially in 2024 when we see this exploration of hedging?
Torsten Derr
Thomas, so we don’t disclose this figures, but some contracts containing this energy escalation clause, which is good and bad. Good, because we can cover the increased energy. Bad is gas prices are declining, like it happens right now, we have to give back the price to our customers. What is much more important for us is the energy hedges we did so far, and we were quite well equipped with energy hedges this year, which is harder in next year because we don’t find counterparties and this is why we enjoy the state programs that much.
This is a much bigger leverage on the margin than forwarding it to customers. As most of our markets are still tight, we think we will be somewhat successful to further pass on energy cost increases if they happen. For example, in silicon carbide, we are more or less sold out currently.
Operator
The next question comes from Richard Schramm from HSBC.
Richard Schramm
Two questions if I may. First, concerning the pricing component, as you mentioned that you’ll have been able to more or less completely pass on the high input cost to your customers. So what was the contribution of this 11% sales increase? If it’s true about the currency sector in the first time months referring to pricing? What is the pricing component in this percent increase — as a rough estimate?
Thomas Dippold
Yeah, it’s a good question. There are many effects that go in there. On the one hand side, it’s margin improvement, we have some mixed effects, as Torsten pointed out, as we shift some capacities from a lower margin businesses, still a decent one, into a higher margin business with — like silicon carbide and so on and then we have the price effect.
In the end, you can take the — let’s say, now we’ve been currency adjusted. We have a growth of EUR110 million in the top line, and I think all three parts, be it price increases or price pass through, be it mix effects but also cost savings, I think the three of the components are roughly at the same level and contribute to that increase. But please allow me to take out the currency adjustment, otherwise it gets very complicated. Otherwise, I’d have to go through side by side.
This is, I think I cannot disclose or cannot pass on to you this information. But you can say it’s one-third, one-third, one-third, for price effects, mix effects, and cost savings. I think that’s that answers the question in the most fair way I can do it.
Richard Schramm
At the end of the day means that there has been also real increase in volume in your business, so it was not only price driven and not only — and currency driven, but has also been a real volume growth?
Thomas Dippold
Exactly. And this is exactly what we did in the past. I mean, you know that we are very prudent and tight on the CapEx side. As Torsten just pointed out when he answered Thomas Junghanns’ question, we’re investing since the last two years on the level of depreciation maximum. And we try to spend the — our CapEx money in the most diligent way we can use it by debottlenecking as we call it, always — we look at the weakest part at the constraint in our value chain, be it in the global value chain, be it in a site, be it in a production line or be it in a simple machine or at some ship. We always look at where is the constraint? How can we overcome it, and this is where we invest in order to maximize our production from what we can do, where we know the customer and where we can produce the product.
So we do not try to make any stupid new things which we maybe have never been done – never done before. This is how we do it. So there’s also a real growth in our quantity that we sell, let’s put it this way.
Richard Schramm
And second point I wanted to touch is the growth areas you outlined here on the chart on page 13. Can you give us an indication what portion of your business you would attribute to these markets at the moment? I assume it’s still relatively low portion and should grow of course, then over the next years but where do we stand at the moment here?
Thomas Dippold
Those source markets, as I said offshore wind energy is a carbon fiber market so it goes into our business units, Carbon Fibers. And EVs is composite solutions. They are the battery cases and so on. And SIC Semiconductors and Photovoltaics is graphite solutions. If you look at the margins of their respective business units, they are above average. This is what I can say, but we don’t disclose margins for specific markets, but they are above average in the respective business.
Richard Schramm
Sorry, I didn’t ask for margin, but a share in sales. That’s what my intention, to get an idea where this business stands at the moment within your product portfolio?
Torsten Derr
Richard, you’ve seen the left hand chart, this shows our market exposure split. So we sell 29% into EV, we sell 12% into energy. This is the average market split of all business units. And part of this is described by the four markets we randomly selected for this presentation.
Claudia Kellert
Richard, do you want to know exactly the growth rate of each market segments or —
Richard Schramm
No, pretty quite simple. So from your 100% sales, is this — let’s say, future gross market. Are they at the moment at 5% or are they already at 10% of your sales? Where do we stand at the moment here? What’s the basis we have to look forward from this growth rates you have penciled out?
Thomas Dippold
For wind energy and our carbon fiber, this is what we can say the Wind Energy replaced the Automotive. And there you have to distinguish between onshore and offshore and especially in offshore, which is growing far bigger than onshore. And especially in our offshore application, this is where they need our graphite parts. And what we can disclose at the wind energy part of our carbon fiber business is next year, almost — it’s roughly 35% to 40% this is what we can say, and a part of it is offshore and this is the larger portion that we have in there.
When it comes to photovoltaic and SIC Semiconductor this is something we don’t disclose, but as I pointed out in the beginning, our semiconductor share and our graphite solution business unit is about one-third and out of that a certain portion is silicon carbide and this is what is growing with 40% year-on-year as Torsten has pointed out. This is the way we can disclose it.
And when you look at electric vehicles and there we have especially our composite solution business unit, they are almost 100% into automotive and surveying especially the electric vehicle market. For sure they’re also doing some aero kit for some sports cars and SUVs, and they also have some leaf springs. But the battery cases, which is an element as this niche business in the electric vehicle part, this is definitely in our composite solutions and it’s placed there as the largest share of our top line. I hope this could answer the question in the way you asked it.
Operator
The next question comes from Klaus Schlote from Solventis Beteiligungen GmbH.
Klaus Schlote
I have a question regarding the anode material for batteries. And as far as I remember, a couple of quarters ago, that was something what was kind of a case where future goals might come from? Where’s the current — what is the current situation there? This business, you’re still trying to get a grip on the market there that someone will buy your powder? Or is that actually given — have you given up on that? Thank you.
Thomas Dippold
Yeah, this is still a strange story. You see all the announcements of the automotive OEMs, which will boost the rate of electric vehicles and they need batteries. Currently, the majority of batteries imported from China or Asia. But a European battery industry is building up and there are 20 to 25 projects, which are announced and some of them raised EUR4 billion money to construct everything.
What we see, we sample almost every one of them. They analyze our material, do trials with it we get pretty good feedback. But the business is not there. We see ourselves in a pole position as we have contact to most of the players, but we also see that most of the battery projects are delayed.
Klaus Schlote
So, it’s a fill case for future growth, basically?
Thomas Dippold
Yes. And it’s small scale production what we are currently doing. This is the status. And what we see in the future is that the European battery market will be independent, it might be that China close its borders and not that many batteries were exported. And this is why big programs, subsidy programs were launched in Europe and also in U.S. And we see in 10 years from now pretty much independent regions, Europe, U.S. and China, and this will require battery industry to be built up and we see that graphite for those batteries is pretty scarce. And we are I would say, the largest player currently in this field. We have a site in Poland, which could be able to produce up to 20,000 tons of graphite powder for batteries, but currently everything is more or less imported from China.
Klaus Schlote
What is your best guess when this market will take off?
Thomas Dippold
‘25, ‘26, the first capacities are going to open. All the 20 projects which are announced, I would bet on the end of decade.
Klaus Schlote
So your contract with one of the OEMs, when will that happen most likely in this context?
Thomas Dippold
We have no sales contract signed right now, we are still in the sampling phase and in the small series production. But this is nothing we would bet and we need to — large volumes and they will — they might come ‘25, ‘26.
Operator
We have a follow-up question from Mr. Andreas Heine from Stifel.
Andreas Heine
First question is on the industrial part of your business in Graphite and also in Carbon Fiber, you said was very strong. And you said that you have quite some lead time. So that goes back to, let’s say, first half, which looks still pretty good for the industry, which is not the case right now. Do you see already an impact on a slowdown from this end market in your book to bill ratio, and specifically, Graphite in the industrials applications and also in Carbon Fibers?
Torsten Derr
Yes. Still — so we don’t see a disaster in those markets. But what we can see that the order entry is going down, it’s still positive for us. So order entry is still increasing our order backlog, but not to an extent which we have seen two or three months ago. So everything is slowing a little bit down. But we can see in no region and in no specific segment, a real breakdown. Of course, we read the same information as you in the newspaper. But from order entry point of view, we cannot see a significant slowdown right now.
Andreas Heine
And then with the lead time you have, you can be in these end markets pretty safe at least for the first half of next year. Is that fair?
Torsten Derr
I would say so. And our preparation is — this is what I’m trying to explain, we shifted already volumes from the LED segment into silicon carbide power electronics. And we expect a sharp slowdown of the semicon industry and our strategy was to use the mix effect a little bit and shift volumes of markets, which are not that stable into the very solid silicon carbide market. This is our strategic answer to it.
Andreas Heine
Then the second question is on these gas and electricty break idea of German government. As far as I’ve seen it that you are only applicable if you have seen an EBITDA decline by 30%, which, quite frankly, is not what I see I do and I would not expect this for next year. This is for companies having a demand of — having a use of gas and electricity of more than 1.5 gigawatts, which is also value for them. I would assume that you have basically no advantage at all from the gas space. What’s your view and what we can see from the proposals right now?
Torsten Derr
Andreas, we have to check it as the conditions for the programs are pretty, pretty new, we haven’t checked it so far. We will come up with this during our next call.
Andreas Heine
Then the last one, I’d like to add this time is the Wind Energy. So indeed, you are very successful and we could see this with a sharp decline in mobility and strong increase in energy and carbon fibers. This Wind energy, was that all Europe because you said that in this carbon fibers, there was basically no FX effect.
But first question — and I would also be interested better than you have. How broad range of customers do you have? Is this a couple some more of customers, you were able to find for this fast switch from them, the i3 contract to Wind Energy?
Torsten Derr
First of all, so the industry in wind energy is an oligopoly. There are I think seven players which account for more than 80% of the market. And of course, we have contact to all of them and directly or indirectly, we are supplying almost everyone. You see, it’s a global business. Also, our value chain, it’s a global value chain. And this is why the currency effect might be not that big. We have production Lavradio for the first step of the value chain, precursor manufacturing. And the second step was, which is also pretty energy intensive is carbonization, which we do in U.S., Moses Lake. So it’s not a pure European business, and this might mitigate our FX effect. I hope your questions are answered.
Claudia Kellert
Yeah, thanks for your time and interest in our call. Next regular investor call will be on March ’23, where we will report on our financial figures 2022. In the meantime, if you ever got a question, please call the IR team and we will answer your questions. Thanks a lot. Goodbye.
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