Kontron AG | Financials: Q1-2022 | Hannes Niederhauser, CEO

Good afternoon and a very warm welcome from Austria. My name is Hannes Niederhauser, I am the CEO of S&T AG, the company listed in the German Tech DAX as well as the SDAX. I would like to give you a short overview of our Q1 results. First, an overview of S&T: S&T has 6,000 employees, revenues last year amounted to 1.34 billion euros, and for this year we planned 1.5 billion. We are running at an EBITDA ratio of close to 10%. Most of our business is in Europe—87% of our revenues, 8% in the US, 5% in Asia. Among our 6,000 employees, 5,500 are located in Europe. The main country with the most employees and the most revenues is Germany. We work in two areas of business. Historically we started as an IT service provider, and around eight years ago we started to do firewalls for machines, which was the birth of our IoT business. Today, two-thirds of our business is IoT, one-third is IT services, and we are currently in the plan to focus on IoT business and divest our IT services. As an engineering-driven company, of our 6,000 people, two-thirds—4,000—are graduated engineers. I wanted to tell you something about our Q1. Let's talk about the highlights, but there are also lowlights. The highlights: we had 12.1% growth in revenues in Q1 versus last year, and a 14.9% improvement in net income versus last Q1 2021. All those increasing revenues were organic growth. We have a very strong order entry, our book-to-bill at the moment is at 1.31. For example, in Q1 we had 435 million of order entry versus 330 million of revenues. Last year we had 1.34 billion of revenues and 1.75 billion of order entries, so we have a very strong order entry these days. Just in January, we won the two biggest contracts in our history to control smart trains: one is with Deutsche Bahn, and the other was with Trains for Greater Paris SGP. Together, a volume of 170 million, and this is not the full contract—there's more to come. In December, S&T had been targeted by various short sellers with a high short-selling rate, plus a short report. This topic had been completed with some forensic investigations which we did via Deloitte, and also our unmodified audit opinion for our year 2021. So we acted, and all the allegations had been shot down by the auditors. As another result of that attack, starting May 2nd, a new Chief Compliance Officer joined S&T. For 2021, we will pay a record dividend of 35 cents, which is a 2.4% dividend yield—quite a high number for a technology fast-growth company. And the divestment of the IT services, what I mentioned before, is on target. We still plan to sign it early Q3. What are the bad things? In Q1, we are still impacted by the chip shortage. We have meanwhile 108 million euros of orders which had been requested by our customers urgently, we couldn't deliver based on missing chips. So 108 million is a quite high number. We paid 8.2 million from spot market brokers with various chips, and only 7.1 million we could recover from our customers, so that burned our EBITDA by 1.1 million and our cash flow was burned by increasing inventory to overcome the chip shortage. Another problem is the North American entity, which is just 7-8% of our revenues, but it's suffering in the avionics market. Our biggest customers and biggest business in North America is avionics, and as you all know, after the pandemic, avionics is still not back to the business it had before. The last problem we're suffering is the Russian war. We had some fixed losses. S&T is doing 5-6% of business in Russia, and yes, we're impacted by that, but not major. Our Q1 KPIs: we did increase revenues 12%, gross margin 3%, EBITDA 4%, EPS 12.5%, net income 50%. Cash flow and the cash itself were burned by the chip prices, but we will finish the year again with a reasonable cash flow and around a range of 780 million euros, and the cash will go back to 300 million. 200 million is a nice number which lets us sleep well. Business model: S&T is acting mainly in Europe with a focus on industrial and medical markets. High-speed trains, very strong telecom is a focus for us because machines will be connected with 5G in the future, so 5G is a major driver for us. Software itself and also the manufacturer, with the service business—you see here in dot-dashed line because it's our target to sell this division—with close to 600 million of revenues at 10% EBITDA. I mentioned before already: our strongest situation at the moment is in the order intake, particularly the IoT business in Europe has book-to-bill of 1.4, so it's growing significantly. This is a market which is even the world market growing at 1.16, but at the moment it's going faster. The whole company is at 1.31 book-to-bill, as the services are only 1.09. We have a 1.44 billion backlog which covers almost all revenues for the rest of 2022, and we have 3.3 billion of design wins in the pipeline which will give us growth for the next two or three years. S&T has totally more than 3,000 customers, and the main customers account only for 2-3%, like medical respirators, a telecom provider from the UK, and several train companies all over Europe—for example, Network Rail, technology from Japan, or SNCF in France. I would like to say something also about the war in Ukraine which impacts S&T as well. In 2020, we decided to stop the investment in Russia and former Soviet Union, but this year we planned to step out of Belarus and Moldova totally. We had last year 6% of revenues and 4% of EBITDA in these areas, so it's not a major part of S&T, but still it is a part, and we think that this will reduce by around half this year because we decided to step out of these countries gradually. From 14 companies in that area, we want to reduce to two. End of last year, all our assets—meaning equity and receivables—amounted to 30 million; currently it's 20 million; by the end of the year it will be less than 10 million. So we step out. Major Russian engineers—40-50 of them—we transferred to Europe. And what will be the impact this year? In Q1 we already had to take fixed losses and realized losses for this reduction program. What I just mentioned: we accrued 4 million euros, which are not lost yet, but we accrued that. That's all done in Q1, so we do not see any further impacts for the future from Russia. But generally, by the end of the year, Russia exposure will be less than half of the beginning of the year, and we could partially compensate by additional wins in defense and cyber security. For example, we got a 30 million cyber security contract. Russia impact is minor; it will not impact our guidance of 1.5 billion revenues and 10% EBITDA for 2022. Our targets: as mentioned, guidance unchanged: 1.5 billion at 10% EBITDA. Then we have an Agenda 2025; we would like to have 2 billion of revenues at 260 million of EBITDA. This number is based after selling IT services and including M&A of IoT companies where we want to buy instead of this. Within 2030, S&T should become a company with over 15% EBITDA, a pure IoT player on a variety of services with a lot of smart technologies and different markets. We are still going ahead with M&A in this market, and if we talk about the brand—by selling S&T, which is a synonym for IT services—we will change, or we did change our name in the last shareholder meeting to Kontron. So S&T will disappear from our name card. Thank you for listening to us, and I wish you a nice day.