Interest in STPRAU from distressed credit investors has been heating up since Q2, with S&P’s September 2021 report (which flagged Profil’s operational challenges) leading to a sell off in the bonds (later amplified by poor Q3 results), down to lows of 78.7:

The coincidental timing of the RCF announcement, a week ahead of results, will muddy the picture for buysiders attempting to play the semiconductor / supply chain recovery story in the name. With weak Q4 numbers expected due to little improvement on the key negative drivers highlighted in our coverage of Q3 results, the question is whether the new RCF gives investors confidence to look through shorter term top line and input cost woes to a late 2022/H1 2023 recovery. 

Playing the upside

In a strong automotive market, Profil has demonstrated it can hold its own in the European segment against major competitors Cooper Standard and SaarGummi. A competitive pricing structure has helped the group build an impressive order book, consisting of both incumbent OEMs and challenger Electric Vehicle (EV) manufacturers (Tesla, Rivian). Analysts need only look at Q4 20 numbers for evidence of this, where Profil generated €90m+ in sales and a gross margin of over 18%. Tesla’s Brandenburg factory is expected to come online in H1 22, clearing local hurdles and providing a key top line growth source for the company, as the EV manufacturer continues to gain share in Profil’s customer base. OEM and Geo splits as of 9M 21 are below:

However, the healthy margins seen in Q4 20 will be difficult to revive even in a recovery scenario. Although OEM manufacturing activity may recover by late 2022 / H1 23, the input cost picture (Brent Crude, Carbon Black, EPDM) looks to be more stubborn, and Profil’s apparent limited hedging activities will deepen this pain. The company was already at a gross loss in Q3 (-€4.6m gross profit), and input costs have only deteriorated further since (more information below). 

For a deeper look into the mechanics of Standard Profil’s business, our initial write up ahead of the Q3 numbers can be found here, and post Q3 results follow on piece here.

Top line remains suppressed

Looking on to Q4, of Profil’s key customers that have reported production data for the period, numbers look to be relatively flat vs Q3, still impaired by continued semiconductor shortages. VW’s October-December delivery numbers remained low, with a particularly poor month in October (~600,000 deliveries, down 33.5% YoY). Ford’s Q4 wholesale units also remained roughly in line with Q3, at 1.1m (down 11% YoY).

No material improvements

Versus Q3, the input cost picture looks even more bleak. Crude prices have continued to climb, up ~25% vs September 30th, with Carbon Black up ~20% over the same period. EPDM prices have somewhat stabilised however (although still elevated), when using a Synthetic Rubber Index (which includes Ethylene Propylene) as a proxy for pure EPDM price.

Mexico mayhem over?

One morsel of upside may lie in the fact that the ramp up issues plaguing the company’s new Mexico plant will hopefully be in the past, with a €9.7m hit to EBITDA realised across Q2 and Q3. September numbers showed “substantial improvement”, meaning we expect little EBITDA drag from Mexico in Q4.

Q&A prompts - need to knows:

Liquidity - RCF a cure?

Looking to this Friday’s conference call, the obvious elephant in the room will be disclosure of terms of the recently signed Credit Suisse €30m RCF. Interest costs and whether the facility was ultimately further syndicated to a Hedge Fund/other third party more willing to bear the Balance Sheet risk are other points for clarification. Cash burn for Q3 was €36.1m, with total liquidity at €74.5m (€47.5m in unrestricted cash, €12m in committed local lines and €15m in unused factoring lines).

Capex cuts - where are we at?

Stated plans to reduce Capex have so far been unsuccessful, with net Capex up from €7.7m in Q2 to €9.8m in Q3 (predominantly a result of a €1.6m increase in replacement Capex). Q4 is guided to be roughly in line with Q3, bringing the FY number to below €40m. Providing that growth Capex remains suppressed, steady state Capex (defined in Profil’s reporting as maintenance and capacity improvement related Capex) will likely fall back in line, helping to reduce cash burn.

Will OEM’s care to pain share?

Perhaps the key point however, will be obtaining further details over the success of the OEM “pain share” initiative, aiming to pass on a portion of Profil’s soaring input costs and restore a semblance of gross margin health. As of Q3 21, 26% of clients were signed on to “pain share” deals, involving either product prices being indexed to commodity costs or lump sum payments to remedy input cost fluctuations (with this option needing constant quarterly renegotiation). Management had stated a target of having 50-60% of clients signed on to such deals by year end, but were adamant upon questioning during the Q3 conference call that specifics regarding success of these negotiations remain undisclosed. Given that investors would hope several of these negotiations have now concluded, more clarity on this point will be a vital signal.

Profil’s major OEM customers have largely been able to protect gross margins to a much higher degree than their suppliers (E.g. VW’s Q3 YTD gross margin of 18%), leaving some wiggle room for mediation. Although OEM’s are not in the business of serving free lunch, the collapse of Profil, and further supplier concentration is certainly not in their interest either. Management’s claim during the Q3 conference call that attempts to negotiate “pain share” agreements are an industry wide concern holds validity – some OEM willingness to protect relationships with existing suppliers in the midst of ongoing supply chain woes is practical, and as stated, investors will have to press management for a much clearer picture on the success of these negotiations. 

Sponsor dynamics - tied hands?

Lastly, more visibility over the flexibility of sponsor Actera Group ($3bn AUM) to provide support in the event of any potential liquidity crisis will be welcome. Actera acquired Standard Profil in January 2013, and bearing in mind late life cycle fund dynamics, may be unable to commit more capital at this stage.