Burckhardt Compression Holding AG (BCHN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the presentation of our half year results. I'm here together with Rolf Brändli, our CFO. Before we start, 2 topics for housekeeping. First, during this call, we will exclusively focus on the half year and the guidance for the full year. The market developments and longer-term topics will be covered in our Capital Markets Day at [ 1:00 p.m. ] Swiss time this afternoon. Second, there is a disclaimer on Page 2 of this presentation, which I will assume you have read, and with this, I will move directly to Page 4. Key highlights and market development. We had a strong half year with a new record order intake following a strong financial year '21. With these dynamics, we are fundamentally positive about the markets, [ about ] the company, about our ability to transform, which will be the topic of the Capital Market Day this afternoon. Moving to Page 5 and the highlights on the financial side. We had, again, an exceptional increase in order intake, strong growth of sales, EBIT and net income. On order intake, we established a new record with CHF 707 million for the half year, which is a growth of almost 57%. It comes, first, from continued positive dynamics in the Systems market. And again, with the same keywords like I mentioned during the financial year '21, it's about solar panel-related applications. It's about LNG-related applications and it's about hydrogen for mobility and energy, for which we had a very large order in the U.S. Concerning sales, we had a strong growth of 25%, which comes from the orders of the past years, going to CHF 335.8 million. EBIT has increased over-proportionately by 35%, leading to an EBIT margin of 10.6%, which is an increase of 0.8 percentage points compared to last year. Here, both divisions developed very well, increasing their profitability and both divisions benefited from something that we will continue to see in the next years, which is the operational leverage on the SG&A expenses as the sales are growing. Net income increased by 37% and earnings per share slightly higher, 37.7%, leading to an earnings per share of CHF 7.23. So this is really on the financial side, a very strong half year. And we also had other highlights, which I'd like to mention on the next page. First, in a team, my successor as Systems Division President is now in place since one month, joining with a wealth of experiences from global industrial companies. Here, I would like to mention the great job done by the Systems Management team who has delivered very strong results for the Systems Division in an [ ad interim ] solution since -- in the last 6 months. That shows really the strength of our bench. On digitalization, we made further progress with 2 of our digital services. First, UP! Remote Support, which I mentioned before. It's commercially launched since 6 months and it's gathering successes. We had several instances where with the tablet, which you see on the picture, the customer. This is a picture of the customer that you see here. A customer can call one expert -- the best expert in the world from broadcast. And this expert can solve problems very quickly in the cases where it's urgent or in cases where travel is not possible. The second service is UP! Predict which is based on artificial intelligence. Here we can predict in advance when the component is likely to fail. And we had pilots running on ships with BW, who is one of our customer. And they've been really convinced and now they are rolling out this solution on other ships. Then moving to hydrogen. Already in the first half year, we have won more orders than in the full year '21. This shows that the market is growing fast, then our strategy is working. In particular, we have won a very large order for liquefaction plants in the U.S. We have won orders for the largest green hydrogen project in the world in China. And we have [indiscernible] won orders for HRS who is building fuel stations in France. Finally, corporate responsibility. I'd like to mention here the further progress made by our teams on defining the KPIs and the targets for our 8 material topics related to sustainability. And the fact that important rating agencies have increased our rating after the publication of our sustainability report for the year -- financial year '21. Here, we still have a lot to do, but with these new ratings, we are now clearly above the industry average. Moving to the next page and looking at the outside world, the environment remains challenging, and we continue to define any [ demand-mitigating ] actions. Energy cost are soaring, but they are actually a very minor part of our own costs. This is not a problem. So what we do is to define energy savings measures, mitigating actions in Europe, especially in Switzerland, in particular, in case of potential scenarios of energy shortages. Then the challenges are in the supply chain and logistics continue, just like I reported in the financial year '21. And we continue to mitigate them by passing on the cost to customers, by realizing some savings on some materials which are starting to decrease and by diversifying our supply chain. Finally, as we [ explained ] in June, the exit out of the Russian market is not a major issue for revenues because we have typically only 2% to 5% of our business there, but we have to get out of existing projects, which we could not deliver due to sanctions. This created one-off cost, and we have made further provisions for a total of CHF 10 million in the first half year. Moving to the markets on the next page. Here, we'll say more during the Capital Markets Day this afternoon. But briefly, we still have the same 3 keywords, which explain our exceptional order intake. LNG solar panel-related applications and hydrogen for mobility and energy, and we expect them to continue in the coming years as the world needs more secure and more sustainable energy sources. Here, these [ tricky ] words that are driving the 4 first lines in this table. Now a few words about the amount of our orders in hydrogen because I know you will ask the question. We already communicated that it started in financial year '20 with CHF 5 million to CHF 10 million order intake. In financial year '21, I reported that we had between CHF 30 million and CHF 50 million order intake. Now in financial year 2022, we expect CHF 80 million to CHF 100 million, and we have already more than half of that in our order book by the half year. Then refinery market is going okay, but actually, we have to prioritize our efforts and resources, so we didn't win so many orders in this segment for the first half year. And the last one, gas gathering and processing continues to represent only a very small proportion of our orders. Putting now the order intake figures in the historical perspective on Page 9, we see that during this half year, we have established a very high new record. This half year is actually higher than any full year in the company history until financial year 2020 and is 57% higher than the half year of 2021, actually, 59.5% if you put it net of currency effects, which were negative and acquisitions, which were slightly positive. Looking now, our Division Systems had an amazing growth, again, of 75% of orders, driven by exceptional large projects in the 3 applications mentioned before. Service Division had also a very strong growth of about 19%, which is broad-based in terms of business types and geographies. So in summary, we had market, which is continuing at a very good pace. We have won most of the large orders in this market. And with this, we have a very high backlog. And looking ahead, we are now fundamentally positive about the markets, about the company and about our ability to transform indefinitely of the short-term developments, and we'll say more during the Capital Market Day this afternoon. With this, I would like now to hand over to Rolf Brändli, who will go deeper in the financials.

Thank you, Fabrice. Welcome to our half year 2022 presentation also from my side. Driven by the very high order backlog that Fabrice has just presented, we have closed half year sales 25.1% above the prior year period at CHF 335 million. Net of currency translation effects and acquisitions, the year-over-year increase was even higher, amounting to 27.5%. The Systems Division contributed to this growth with the sales of 29% and Services with 21%. Then on the next slide, on the back of this exceptionally high order volume over the past 18 months, Systems sales has grown 29% in this first half year period. Gross profit was up 59% as a result of the temporary positive product mix effect and the high-capacity utilization. As a result of the high gross margin and the operational leverage on SGA expenses, EBIT increased by 41.4%, yielding a slightly higher EBIT margin of 4.5% that compares to 4.1% in the prior year period. And that is all despite the one-off costs and provisions that Fabrice has mentioned in the amount of CHF 10 million for Russian projects. The Services Division increased sales by 21%, with growth in all areas, a slightly higher gross margin, together with an operational leverage on SGA expenses have led to a higher EBIT margin of 20.6%. That's 2 percentage points above the prior year period. While the integration of Mark van Schaick, the service company that we had acquired in December '21, has been completed successfully. So Arkos continued to grow in the U.S. downstream business and closed the half year with a positive EBIT. How does this add up to the group income statement? Total gross margin was up 2.5 percentage points despite the higher share of Systems business, which was at 54% of total sales in this first half year period that compares to 52% in the period before. Contributors to that improvement were the temporary positive product mix in Systems and the overall high-capacity utilization. With 16.5% of sales, we had an operational leverage on SGA expenses from the clearly higher sales compared to the prior period when SGA expenses were amounting to 19.3% of sales. In research and development, we continued with higher spendings, CHF 1.9 million above the comparable period last [ period ] with ongoing focus on marine solutions, enhancing compressor solutions for hydrogen applications and the development of digital solutions. Other operating income decreased by CHF 14.1 million. That's mainly due to the before mentioned CHF 10 million of costs and provisions in the [indiscernible] projects. Financial expenses were at a similar level as in the prior year period, while the tax rate stood at 25.2%, that's 1.6 percentage points above the year ago rate due to the higher share of profit in countries with a higher tax rate. Let's have a look at a few selected positions on our balance sheet as per half year closing. Property, plant and equipment remained at prior year level. Trade receivables closed marginally lower year-over-year. However, worth to be mentioned is the reduction of overdue accounts receivables. By September 2022, 33% of the receivables were overdue more than 90 days, and that compares to almost 40% a year ago. This is including the [ quarterly ] improvements in China. As per half year closing, we continued with a positive balance of almost CHF 50 million between advance payments from our customers compared to the invested work in progress in projects as a result of continuously favorable payment continuations that we can enforce in the market. Both the equity ratio and our net financial position closed at the similar level as in the prior year period, net of the dividend payments that we did in July '22. Then [ over ] to the CapEx. CapEx investments for the full year 2022. So that's an outlook, remains unchanged at approximately CHF 25 million. That is [indiscernible] of the level of our current depreciation and amortization. Last, but not least, the glance on our cash flow for the first half of 2022 and the resulting net financial position. Cash flow from operating activities [ are with ] CHF 49 million, CHF 14 million below the prior year period, which at that time included a significant positive swing of advance payments from customers compared to the [ invested ] work in progress. Cash flow from investing activity is mainly for CapEx was at similar level, while cash flow from financing activities closed slightly higher. The higher currency translation difference are mainly related to the translation effect of cash positions in local currency, mainly in China and Korea versus the Swiss franc. Overall, borrowings were slightly higher level, leading to a net financial position that is at similar level as in the prior year period. With this, I give the word back to Fabrice for the [ full ] year outlook.

Thank you, Rolf. We'll now conclude with our guidance for the full year on Page 19. Overall, I mean, there are clearly still challenges in our supply chain, but we are confident that we can fulfill our guidance announced in June, which is CHF 720 million to CHF 760 million for sales. And an EBIT margin at a similar level at financial year '21. We will provide a lot more details about future market developments, their dynamics, the fact that they are changing, as you've seen in the past 18 months, and this is going to continue with different scenarios. We'll talk about that this afternoon in the Capital Market Day at 1:00 Swiss time. You're welcome to join online or to join us in Winterthur where there will be a factory tour organized at the end of the presentation. This closes our presentation, and I would like to open the floor for questions and see if maybe already questions have arrived.

I see that's still -- we'll check one question after the other. So we go through, I see first the question [ Alessandro Foletti ] regarding your sales outlook for 2022. Can you please indicate the expected split of sales between new machines and services? Rolf, do you want to take that question? Little split between Systems and Services for the full year.

For the full year, we have not guided on a sales split. We have a lot of new machine projects with 18-month delivery schedule. So these are still uncertainties. We cannot predict exactly when these projects will be invoiced or we did not provide a sales split, and we will also not do that in the [ second half closing ].

Second question regarding the margin outlook also from [ Alessandro Foletti ]. I am surprised that you don't seem to profit from operating leverage given the outlook of a stronger H2. I should expect a much higher margin. And probably you mean for H2. Am I wrong? So do you expect a stronger margin, do we expect a stronger margin in H2?

No, the full year outlook remains as is that comes together with the first question to split between the 2 divisions. What we have clearly indicated is that we had a temporary very profitable or a beneficial margin mix within the Systems Division that is not expected to continue in the second half. Therefore, we have remained on our full year guidance with a similar overall EBIT margin. So we can really, at that point in time, not give more details between the splits of the divisions and the exact margin split. I hope you understand it.

Then the next question is from [ Alessandro Foletti ]. You mentioned that you won all large orders. Can you please specify in which segments? Are we talking hypers or everywhere? They were very large orders in the 3 segments I mentioned. Indeed, we won several hypers related to solar panel production. We also won very large orders related to LNG carriers. And we also won one very large order in hydrogen for liquefaction plants in the U.S. So in these 3 segments. We actually won the orders, which were on the market, and this is why it was exceptional. These orders were here. They all came in the first half year, and we won all of them basically. So we -- the market continues fundamentally to develop in the direction of these 3 segments. However, there will not be such exceptional orders every half year, and this is why we are prudent with the growth going forward. From [indiscernible]. Congratulations on strong results. Is solar growing on the high prior year base, CHF 150 million indeed last year? I think on the half year to half year, probably, yes. And I can't say [ how ] it will be for the full year. But compared to the first half year of '21, we had more orders for solar panels this half year. What has held back the margin at [ SERV ] in 1H 2022 compared to 2H '21? Higher sales and no one-off. Rolf?

Well, for half year, even in the Services Division, we do have different product mix, situations where we have more spares, less spare parts. Spare parts being [ bought ] in the mix with the highest gross margin, obviously. So there are fluctuations, I think, with this half year closing where we could reach more than 20% EBIT margin. We're well on track also for the full fiscal year to remain above the 20% level on the bottom line.

Then a question on advance payments, which seem to have not risen that much despite the strong orders. Can you comment?

Well, I tend to disagree with that statement. We have CHF 174 million advance payments compared to CHF 136 million in the comparable period in the prior year. This fluctuates every day. I think more important is the delta between the advance payments and what part of that advance payment amount is invested in work in progress. And there we are at the similar level of CHF 50 million that is over-financed, so to say, by customers because of this strong [ auto-momentum ] where you typically have initially high amount of advance payments. We've not yet that much money invested into work in progress.

Next question from Barbora Blaha. Do you have enough capacity for the high order intake in the SYST Division? Also given the capacity utilization was already very high now. Or will you need to spend more on CapEx? With the current order intake, and we have indeed a high-capacity utilization. However, we still have some capacity available in Switzerland. And if you come for the factory tour, you will see that we have in one base [ still ] some capacity. We have still capacity in Korea for these LNG carrier orders. Here, we have -- having a small CapEx to extend the offices, but the factory is good enough. And we also have capacity in the U.S. for these large orders for liquefaction plants. So with this, for the next 12 months, we are well -- we have this capacity, small debottlenecking CapEx, but nothing major. That's part of the CHF 25 million CapEx that Rolf has mentioned before. Now, we'll talk about it this afternoon. If the market would continue at that pace, then yes, in the next 18 months, we will need to look at where is it coming in terms of segments, in terms of countries and we'll have to consider additional CapEx, if that continues at that level, but that's not our expectation so far. As we said, that's exceptional, and we can deliver that for now. Question from [ Dominic Sanchez ]. What are your expectations for the order intake? Will it remain as high as in the first half? And here, very clearly -- I'm sorry, but we don't guide on order intake. And one of the reasons is because there are some large projects in the market. And the timing of them depends on their financing. They may come in half year or not. They may be delayed by a few months. And we may win them or lose them and it makes a huge difference in order intake. So this is why we cannot guide on order intake for the full year. What we are saying is that the first half year was exceptional. Next question from [ Dominic Sanchez ]. What is happening to your former Russian activities? Have you simply closed them down? Or is there anybody acquiring them? There, we were actually having a very light operations. We had 3 employees who were actually not our own employees, who were hosted by another company. We didn't have any presence really in Russia. We were delivering projects out of especially Switzerland. So now we stopped deliveries but we don't have anything to sell. We don't have a business to sell. And we have taken care of these 3 employees. And now we don't have any operations there anymore. Checking if there are some more questions. That does not seem to be the case. Let's wait a few more seconds. So I don't see any questions. So again, I really invite you to join our Capital Markets Day this afternoon. We'll really spend the time to explain where we are, where we stand as a company; how our markets are developing strongly towards applications, which supports the transition towards more secure, more sustainable energy sources. We'll present our new targets for 2027. The strategy to reach them. And the whole team will present how they want to reach these goals. We'll present our new purpose, and at the end, we will offer a factory tour, if you're here with us physically and -- or we'll also have a couple of sessions for Q&A this afternoon. So you can also prepare -- keep your questions for them. With this, I would like to thank everyone for participating. And hopefully, we can talk later today at the Capital Markets Day. Thank you, everyone. Thank you, Rolf.

Bye-bye. Thank you very much.

Bye.