In a two-hour plus conference call this afternoon, Standard Profil management took over an hour of questions from anxious analysts. Costs are increasing, orders have reduced, and inventory build-up is worsening the group's working capital dynamic. Discussions regarding a new RCF are still ongoing, and liquidity remains a concern for the Germany-based trim business. Quarterly EBITDA was just €2.7m – dropping 84.7% YoY – and leverage increased by 1.3x to 4.6x. Full year guidance for EBITDA is now €40-45m, and a “substantial” market recovery not expected until H2 2022.

Since Q3 results landed late last night, the group’s €275m 6.250% SSNs have dropped from around 83.5 to 80.6 (a YTW of 12%), recovering from lows of 78.5 mid-morning. 

Revenues fell 17.4% Q3 vs Q2 to €67.5m, reflecting the sharp reduction in Q3 production figures for key clients as semiconductor shortages continued to plague the OEMs. In hindsight Standard Profil’s hopes of a flat Q3 expressed in the August call may have been misplaced.

Given that its sales are booked through Electronic Data Interchanges (EDIs), orders are non binding and can be revoked at very short notice, meaning that drops in OEM production numbers hit Profil’s orderbook with no lag. EDIs are a difficult metric to use in predicting realised revenues, so it’s perhaps puzzling that management were so “badly surprised” by the drop in volumes Q2 to Q3 given the reduced production of its key OEM clients. Management disclosed that they saw a serious collapse in their orderbook, losing around a third of total orders in Q3. 

Current customer concentration is below:

However, management were right to signal a move away from LMC forecasts as a predictor for Light Vehicle output numbers, which were revised down no fewer than six times since May 2021. Moving forward, management sees production numbers flat until the return from the Summer production break next year, taking a more bearish view than LMC projects.

Cost conundrum

Input cost issues deepened from Q2 to Q3, with force majeure letters still coming through from suppliers (refer to our previous report for breakdowns of key input cost inflation). Here, management were adamant that specifics regarding the success of pass-through negotiations with clients remain undisclosed, a change in tack from Q2 where a more relaxed approach was taken and specific data was promised for Q3. This is of course understandable with negotiations ongoing, however the abrupt change may be indicative of the uphill battle Profil faces with customers that carry significant pricing power in the sector. Negotiations are on a case by case basis, with management only offering that the “majority” of clients now had “pain share” deals agreed. These either involve product prices indexed to commodity costs (26% of clients from 20% in Q2 now signed on to this strategy, with hopes for 50-60% by end year), or via lump sum payments to remedy commodity price fluctuations, paid upfront each quarter (needing constant quarterly renegotiations). 

There were also ramp up issues from the Mexico plant, and a deeper hit to EBITDA of €4.6m (vs €3.3m in Q2). The majority of these additional costs are said to be behind the company however, and September numbers are showing “substantial improvement”. Management does not provide plant level financials, and would not disclose the potential EBITDA uplift that the Mexico plant can provide moving forward. One area where management were able to ease investor concerns was FX. Cash held in Turkish Lira is now negligible, a relief given the recent sharp devaluation of the currency. 

The collapse in top line combined with deepened cost pressures pushed Profil to a negative gross profit (-€4.6m for Q3, vs €9.9m in Q2). Although sales fell 17.4%, cost of goods sold were virtually flat, held up by heightened raw material costs. Normalised EBITDA was barely positive at €2.7m, bringing LTM leverage up 1.3x to 4.6x.

RCF unsigned

Management were keen to demonstrate some progress on RCF discussions, with HSBC appointed as new “Hausbank”, and stated interest from two unnamed banks to provide the facility. Questions remain around the hold up, and management tempering expectations with “hopes” of securing an RCF by year end. Unconvinced by remarks regarding RCF progress, questions then turned to the liquidity picture. 

Cash burn for Q3 was €36.1m. Plans to cut Capex have not been altogether successful, and net Capex increased from €7.7m in Q2 to €9.8m in Q3 (mostly the result of a €1.8m increase in replacement Capex). Management project FY Capex of below €40m, giving Q4 guidance of ~€10m or below, depending on whether replacement Capex increases were one off.

In order to reduce financing costs, management has also sought to limit its factoring lines, with €15m used and another €15m available Q3. In addition to €12m in committed local lines available, total liquidity stands at €74.5m (including €47.5m in unrestricted cash). Although we asked for clarification on the stance of sponsor Actera regarding a potential equity injection, this question was not answered during the Q&A session. 

Negative working capital dynamics are also a growing issue, with clients able to cancel orders with little repercussion whilst Profil orders its inputs (notably Brent crude, Carbon Black and EPDM) in advance. In difficult market conditions, this results in excessive inventory buildup. Cutting inventories, management’s stated goal, is therefore sensible, but may hinder the ability to ramp up when LV production returns in the back end of H122.

Upside unsealed

The lagging production of major European OEMs has a silver lining – accelerating the diversification of Profil’s customer base (including Tesla and Rivian) with healthy new business awards of €30.9m in Q3 (€72.5m YTD), 30% of which is for EVs. This not only stands Profil in good stead given the electrification of the sector, but could help to circumvent the long established buying power of major European OEMs.