Interroll Holding AG (INRN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Interroll Holding AG Presentation of Half Year Results 2021 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Martin Regnet, Head of Communications and Investor Relations. Please go ahead, sir.

Good morning. This is Interroll Holding AG, Martin Regnet, and welcome to our H1 2021 analyst webcast. With me in the room is Mr. Heinz Hössli, our Chief Financial Officer, and I would like to give you a brief overview of our agenda today. First of all, I will give you a short group overview, what has been happening this year, this half year so far, and Mr. Heinz Hössli will give you an overview about the financial highlights in the first half year of '21. Followed by that, we offer you a Q&A. Kindly use the system to send us your questions in writing. We will read them out and answer to you after the presentation. So our group overview, we would like to give you an impression of the material handling market. At the moment, the way we see it, it's a CHF 150 billion market, growing at a CAGR of 4% to 7%. And when we talk about the material handling market, this is the overall material handling market. It includes processes like forklifts, mining, those kind of things, cranes, and those solutions. But when we go into the intralogistics market, we consider this particular market where we are active in as a market volume of CHF 5 billion to CHF 7 billion worldwide, and we consider our market share in the range of 8% to 11% in the field we are active. When we talk about Interroll facts and figures in 2020, we had 2,300 employees, 35 companies. We have 16 main factories. We're still headquartered in Switzerland. We have more than 28,000 customers, and we've been founded in 1959. And Interroll, of course, we consider ourselves as the leading global provider for material handling solutions. When we go into the product groups and look at key figures, and here you see the key figures for 2020, then we see that we have Pallet Handling with 8.8%. Our strongest product group is Conveyors & Sorters. Mr. Hössli will give you the details for the half year later on. And you can also read them in our half year report. The Rollers are at 20%, and the Drives at 29.5%. We give you this point of view because in the annual report, we have a bit of a more clear picture on the product groups because there are some seasonalities in this intralogistics business where the product groups have a little bit a different trajectory typically in H1 and H2. So this is why we give you the overall perspective once more of the year 2020. When we talk about our growth markets, we have a clear focus on a number of interesting industries that have a high growth rate, typically food and beverages, with airports that has been hit by the COVID-19 crisis to some degree but in the long run still has a considerable potential. We have the warehousing and distribution, tire and automotive. We have the courier, express and parcel industry that has been growing with a considerable rate. We have the supermarket solutions, the fashion and retail sector and as well as the industrial manufacturing sector that we are focusing on. Interroll has a very clear platform strategy. Our target is to offer modular, scalable and flexible solutions. We have our 4 product groups: the Rollers, Drives and Controls, Pallet Handling, Conveyors & Sorters. And our target is to clearly deepen this platform, make more processes available with our product platform and enable our customers and end users for faster installation and maintenance, shorter delivery times and the highest product quality. Our growth strategy in general is based on 3 pillars. We have the products, the markets and the service. Our innovative products were quite -- had received quite some additions in the first half of the year. We launched the Smart Pallet Mover in -- and announced it to the market. And in the years before, we had the High-Performance Crossbelt Sorter in 2020, and we had the stacker crane/transfer car extensions for the MPP also in 2020. You might be aware that we also introduced the Split Tray sorter, and we introduced the vertical sorter. The vertical sorter, however, that was in H2. And so this is also an interesting addition to our technology platform that was mentioned before. Our geographical expansion was, to some degree, further concluded, at least in EMEA. We completed our new plant in Mosbach, doubling the capacity for Conveyors & Sorters in EMEA. And this one has been completed at the end of July. It's now in full operation since the beginning of July. We also focus not only on the expansion in terms of buildings, but we also expand in terms of plant digitalization. We make our plants more productive. There have been also activities in our plant in [indiscernible] going on with the new EC5000 production lines that added positively to our productivity. In the Americas, the plant in Atlanta is still active, and we did an upgrade on the local assembly in Brazil. In Asia Pacific, a new factory in China will be available at Q2 '22. And the expansion of the Vietnam and Philippines markets is also ongoing. We also see high potential in Australia and New Zealand for further market growth. Regarding the service business. Our new service organization has been set up. We communicated it to the market. We have a warehouse now in South Germany that supports our growth in the service activities. We do see attractive retrofit opportunities with the high number of sorters that are installed in the market, and we will develop new service packages that are enabled by digitalization. Here's also a clear overview how this innovation in practice looks like. We completed our sorter platform and expanded it by quite some new solutions in the last 2 years. On top, we have the High-Performance Crossbelt Sorter that offers a very high throughput and is flexible regarding the size of goods and up to 50 kilo can be transported, and this gives a technological edge to companies that really have a high focus on throughput and performance. If we see the middle segment, our horizontal and vertical sorters that are proven are still in the market. Nonetheless, we introduced a new type of vertical sorter, and this one will also add to the portfolio. The customers now have different options, can use different systems. Most relevant markets for us in that segment, e-commerce, fashion and distribution, but not only. In our basics segment, we added the Split Tray Sorter. This is a particularly interesting solution for fashion and textile and distribution. And we excel here with short delivery times, integrated controls. Our controls family is being expanded by our center of excellence in Linz. And the economical investment is also suitable for smaller operations. Regarding the Pallet Handling. There has been also some interesting developments been ongoing. We added the Smart Pallet Mover. You might have seen it in the media. It's already, before market launch, it is the winner of the IFOY Award 2021 in the special category. We also won the Red Dot Design Award with it. This one is particularly interesting for the flow of pallets in the manufacturing plants. And here, we have a very clear solution and -- to increase our footprint in the manufacturing industry when we talk about pallet flow in the manufacturing industry. The Modular Conveyor Pallet Platform is also successful in the market. We added the stacker crane before. And what we also did is the zero-pressure accumulation that is now possible with our Modular Pallet Conveyor Platform. This provides a unique selling point in the market for pallet flow. Our dynamic storage continues to be successful. There are some interesting projects in the market. And this is a proven solution with up to 50% space and energy saving. When we talk about our global lifetime service, as mentioned, this is being rolled out. We see this as a long-term task for us to expand this. In the short term, we started with Europe and have a separate service organization, which is a profit center now. And we focus here in the first steps on spare parts and refurbishment, logistics, parts packages, parts pooling. Also, non-Interroll material can be handled by our service organization. And in the short and medium term, we want to increase the maintenance and installation services to global customers. We are able to provide more value add for the installation period. We are able to provide supervisors. We are capable of on-site repairs. We have service contract, service level agreements. And we focus on the topic of preventive maintenance. In the longer-term future, we also see considerable potential for consulting support, also for training courses. As you might be aware, we have the Interroll Academy. This can also be used for customer trainings, which are already being done today, but we can upgrade this for the future with an even extended and deepened program that will provide value add to the customers. Focus here is also on retrofit and upgrades, optimization of the planning and realization period and for the ramp-up/operation support. In the first half year, we had also a change in group management. Mr. Ingo Steinkrüger, our new CEO, is on board already since the beginning of May. So we had a very good starting period. And you might be aware, we communicated that in the past, we still have our active Chairman, Mr. Paul Zumbühl, who stepped down as CEO end of April and is our active Chairman. And both are working as a team in the period over the next months. And we also communicated that this is to have the long-term strategy in place and to fulfill it for the years to come. We also did some changes regarding our corporate responsibility. We announced during our general assembly in May 21 that we will have a road map on ESG reporting. And our objective is to have a fully GRI-compliant ESG report with the report on financial year '22. That also means that we will increase our efforts in the compliance management system that we will have a more in detail reporting on KPIs in that regard and that you can expect a full ESG report by 2023 when we report on the year 2022. So thank you very much. At this point, I would like to hand over to Mr. Heinz Hössli for the moment.

Good morning, ladies and gentlemen. Also a warm welcome to this webcast from my side. I will now go through the financial highlights, and I start with the summary. The global recovery from the shock of last year's COVID pandemic continued in the first half of 2021. Based on a very strong market demand, our order intake increased by 60.1% and all regions show an increase. The currency effects did not play a large role and are only minus 0.9%, whereas they played quite a big role a year ago. Sales increased by 16.7%. And also here, all regions show an increase. In local currency, the sales increased by 16.4%. And the same, like with the order intake also here, foreign currency effects did not play a big role. The EBIT increased by 39.5% to CHF 45 million compared to CHF 32.3 million a year ago. This, thanks to the top line growth, a favorable mix of the realized sales, together with the high cost discipline. The operating cash flow decreased by 44.5% to CHF 25.3 million compared to CHF 45.6 million a year ago. As the top line growth has increased the net working capital in general, but even more because we increased our inventory as a countermeasure to the unpredictable supply chain disruptions to build up safety stock. The order intake shows an impressive picture. Our product business, Rollers and Drives, did very well and the project business in Conveyors & Sorters and Pallet Handling did even better driven by a very strong market demand. The book-to-bill ratio is 1.55 compared to 1.13 a year ago. And the order backlog as of June 30, 2021, is at record level. Also, the sales show an impressive picture. The sales of the products business, Rollers and Drives, did well, but even better did the project business Pallet Handling, which a year ago was the units which suffered the most. Conveyors & Sorters have the lowest growth rate but the highest order backlog as those projects have a longer lead time. And also, if you compare to 2020 full year figures, you could see that sorters and conveyors did very well already last year. Looking at the sales development by region, it clearly shows that the sales growth comes from all regions and from all product groups. Even though the sales growth rates are not equal, the shares of the 3 regions remain unchanged to previous year with EMEA with 60%, followed by Americas with 27% and Asia Pacific with 13%. The long-term ratio of Interroll remains unchanged with 50% of sales from EMEA and 50% from Americas and Asia Pacific. Due to the seasonality, we can already now say that this change, what we have seen last year that Americas has grown, this will also be the case end of '21. So we'll go towards the 50%. Not yet reaching the 50-50 but clearly making a big step forward to this 50-50 target. The EBITDA increased by 29.3% to CHF 56.3 million, thanks to a higher top line with a favorable margin from the product mix combined with continued high cost discipline. The EBITDA in percent of sales increased from 18.7% to 20.7%. The EBIT increased by 39.5% to CHF 45 million as the absolute amount of depreciation and amortization was almost equal as in the previous year. Also, the EBIT in percent of sales increased from 13.8% to 16.5%. Between EBIT and results, we had a slightly negative financing result from foreign currency loss and the higher tax rate. The result of CHF 33.4 million is a plus of 40.4%. And in percent of sales, the result is 12.2% versus 10.2% in the previous year. The result margins in the first half year of 2021 are on all-time record level for the first half year. In the second half year, the margins are expected to be lower due to the change in product mix and the overproportional sales from project business in Conveyors & Sorters and Pallet Handling. The operating cash flow decreased strongly in absolute terms but also in percent of sales. The operating cash flow decreased by 44.5% to CHF 25.3 million and in percent of sales from 19.6% to 9.3%. The main driver is the strongly increased net working capital, especially much higher inventories and work in progress as well as trade receivables. Despite the continued stringent trade receivables management, they increased due to the growth in the top line. As outlined before, the growth in inventories relates to our countermeasure to the unpredictable supply chain disruptions where we decided to strategically build up safety stock as well as to the increased work in progress. Nevertheless, reacting to the supply chain disruptions is a short-term move. And as soon as this time is over and it goes into a new equilibrium with sustainable supply chains, we return to lean inventories. Our principle of cash is king remains. Also out of a position of strength and following the management's long-term view, all strategic investments into capacity expansions are going forward as planned. In the first 6 months of 2021, our investments were CHF 32 million compared to CHF 26 million a year ago. This led to a negative free cash flow of minus CHF 5 million. This chart shows the very positive long-term development of return on equity and return on net assets. There is a half year effect from seasonality visible in the first half year of 2021, which is not unusual and was similar in previous years where the return on equity was 15.8% and the return on net asset was 19.5% in 2020. So the '21 value show another increase in value creation. Interroll is generally optimistic for the second half year of 2021 due to the strong order backlog but also the challenges on the raw material and semiconductor side. We remain, and there is also a risk of further price increases on some components, reduce -- remain overall cautiously optimistic for the rest of the year. Based on its strong market position, its innovative products, available capacities for growth and the fast-growing end markets served, e-commerce, courier, express, parcels, food and beverage, distribution, but also industry, Interroll sees significant long-term potential.

At this point, I would like to give you an overview about our half year report 2021. It is now available fully online and digitalized on our website. We have quite some features added here. We have a quick report, a chart generator and PDF downloads, which you can use. And we, of course, would like to provide you a better usability and more quick access to the data than you had in the past where we only published a PDF. So we would like to kindly invite you to use this digital experience and visit our website. We are also open, of course, and welcome to have your feedback. A pre-announcement we would like also to make here is that from 10:00, we will publish a video of Mr. Heinz Hössli about the half year figures '21. And here, you can, in short, again, have a quick look in the video format on the half year '21 for Interroll. At this point, I would like to inform you that we're now going to the Q&A session. And we already received a number of questions. We will proceed like this: Each question will be read out and then the answer will come. Please note that if we receive questions as a double, that we will focus on answering one question only. We would like to invite you to ask further questions if you still have one. Thank you very much.

And the first question, I would like to hand over now to Mr. Hössli.

Thank you. The first question is from Mr. Sebastian Vogel from UBS. In the past, your change in inventories seemed to have followed your weak P&L position rather closely but not in first half year '21. Can you remind me of the reason? What you have seen in the presentation points already out to what it is. We had a very strong demand also in project business. We have a very strong order intake in the project business. And in the project business, we have much longer lead times. And therefore, we also have a buildup of WIP. The second question, also from Mr. Sebastian Vogel. Is there anything that speaks against the reversal of the WIP position in your P&L in second half year '21? From today's point of view, with its very strong order backlog, we clearly also see that we will have WIP going into the next year. So this reversal will not take place. We will most likely stay with quite a considerable WIP position going into next year. The next question, also from Mr. Sebastian Vogel. Can you share your view on price increases that Interroll has done year-to-date and if there are additional rounds planned later this year? Yes. The first one is we did one price increase -- one extraordinary price increase beginning of June. And this -- normally, we do only one price increase beginning of the year. And now due to this steep price increases in raw material, we consider, but we have not yet decided what we do. We will do one increase beginning of January or we do one increase later in the fall, but we will definitely not do 2. So it's increase beginning of January or an increase later on this year. Next question also from Sebastian Vogel. When do you guess new or other operating expenses will normalize as a percent of sales? We see that for this year, we still see that the costs will remain underproportional. This is also what we did when we decide for the price increase. We did not go out with a heavy price increase. We clearly said we will absorb one part as we are a long-term thinking company. We see our relation to our customers also in a partnership. And we also said from the beginning that we can compensate a one part of this material price increases with underproportional fixed costs. The next question, also from Mr. Vogel. What sort of CapEx do you plan for financial year '21, '22? This stays what we have communicated already many times. We communicated that our investments for 2020 to '22 will be CHF 150 million, and there is no change. Next question, also from Sebastian Vogel. How sustainable is the material increase in our payable days seen in first half year '21? The material increase in the first half year '21, what we have seen, there is a small portion in, but we had the first month, so we benefited clearly from purchasing on still lower material prices and the full hit of the higher material prices, we will only see in the second half year. The next question from Mr. Walter Bamert, Zürcher Kantonalbank. Order intake Asia looks lagging to the other markets. Do we have to worry about this? Is the market or the products or Interroll were just temporary? The -- what -- the situation in Asia is indeed different to Europe and Americas. We have a very strong sales on our products, so Rollers and Drives. But we missed bigger projects, and then this has immediately a big influence on the sales. Next question, also from Walter Bamert. Sorters was weak in revenues but strong in orders in first half '21. Is this seasonality, clients waiting for new products? Or is there a different explanation? Now the explanation is clearly seasonality. It is also why the second half year for Interroll is always stronger than the first half year on the top line, and especially sorters and conveyors is going into holiday sales. So it's a Black Friday and Christmas sales, and so this has to be already installed the customer side always before the date start. And this is why second half year is stronger. Next question, also from Walter Bamert. Work in progress was elevated end of first half year 2021. This is due to missing components or just timing of orders? Now as I mentioned in my presentation, there are 2 different elements. One is clearly the buildup of a safety stock on materials, which has increased inventories, but then the second one is also the hefty increase compared to a year ago in work in process, which is the execution of orders which are still not invoiced to clients. Next question from Emrah Basic, Baader-Helvea. Do you see the second half year '21 book-to-bill ratio to go down to pre-pandemic levels? We see -- we will see that this will go down, but we don't expect to pre-pandemic levels as the markets are really strong and the demand is strong from the market. But we expect that the level from this 1.55, what we have shown after the first 6 months, will go a little bit down. Next question, also from Emrah Basic regarding global lifetime service. What means longer-term future in years approximately? Here when Martin Regnet talked about where we want to go with the service, we talked about midterm. Midterm for us is the range of 4 to 5 years at least.

And if I may add, we pursue the target to have service as approximately 20% of overall share of our turnover.

Then the next question from Mr. Serge Rotzer, Crédit Suisse. Impact on margin in first half year '21, the sales mix versus input costs. The margin was favorable due to the sales mix. But also, as I mentioned before, we still benefited from, at today's level, reduced cost on the raw material. Where do you see a sustainable EBIT margin going forward, including higher depreciation, amortization now due to the new plants? The depreciation will clearly increase a little bit compared to previous year due to this high CapEx spending. The EBIT margin going forward is what we always said, we always said that 2020 overall was an absolute record year for Interroll. And also this cost reduction, what we have seen there, together with the -- in local currency matching the 2019 top line, this cannot be repeated. This was extraordinary. We benefited a lot from the crisis. And we see '18, '19 as a base and then a continuation where we want -- where we also have the target and want to increase the EBIT margin slightly year after year. Then the last question from Mr. Rotzer was just what's the current order momentum for the second half year? We see still that the market is continuing to be strong, maybe not as strong as in the first 6 months where we had this incredible order intake, but the market continues to be strong. Next question from Mr. Walter Bamert. Why do you expect the second half EBIT margin to be below first half year despite higher volumes and the strong operating leverage? The reason is because we will have overproportional invoice sales coming from our project business, so Conveyors & Sorters but also Pallet Handling. And the project business by tendency overall has a lower margin than our product business. And the second one is also that we will have the material price impact in full -- in the second half year, at least for the first couple of months. And we don't expect that this goes down. We expect that material prices have reached the high that they now slowly go a little bit down. We expect really that they come down to a new level early next year. The next question from Charlie Fehrenbach. Growth in second half year will probably be slower than in first half year. Will sales grow in full year, stay double digit? We expect a strong second half in sales. As I mentioned in the presentation, we have the order backlog. The risk, what we see, is really on the materials on the supply chain side that there is a risk that the components will not be available in the market or are available with a lot of delay. But from the pipeline, we see this as a positive momentum what we have. And we see therefore also positive into the full year with a clear message that the result of the risk in the supply chain. The next question from Constantin Hesse, Jefferies. Apologies if you have already answered this during the call, I had technical problems. Okay, let me see this. Can you talk about how the supply chain shortage impact the sales performance in first half year? And what do you expect in the second? I think these questions I have answered now. First half year, we had not the full impact. Second half year, we will have a full impact. And this then clearly had also pressure on the margin side, as I mentioned already before. Next question, Charlie Fehrenbach. You said the margin will be lower in second half year than the first half year. What level do you think is sustainable? This is a question which is quite difficult to answer. We just say we expect a lower margin. And as you might know, we will never give guidance on margin. So this is the statement I can give you. The reason I mentioned before, it is because the turnover mix will change. It comes overproportionally from the project business. Next question, [ Christian Hesse ]. Do you see EBIT margin in the mid- to high 10s sustainable?

[indiscernible]

Yes. But should high -- be 10s. So this question I answered also before. We take as a baseline '18, '19, and our ambition is clearly that this will grow from there, not on the levels like 2020, but we clearly have an ambition to also, in the future, increase and grow our EBIT margin. Next question from Serge Rotzer. Lead times of existing backlog compared to pre-pandemic. Lead times are much longer than compared to pre-pandemic because also, as you can see with the order intake of a plus 60%, this is quite a challenge. And if together with the situation in the supply chain where you have components, where you have -- really have to fight that we will get them, this clearly makes the delivery time longer than pre-pandemic. And also, in addition to this, it's the mix of the projects where we have now projects with a longer -- already planned much longer delivery times due to the size of the project. The next question from Peter Müller, ROC Investment AG. Dear Mr. Hössli, thank you for your information. After such a strong order backlog, why is your outlook not more positive? What are the reasons for your cautiousness? Thank you for your answers. Yes, the answer I mentioned already before, the answer is clearly coming from the supply chain. If we would have everything available what we need to fulfill the orders, then we would be positive. As also stated in our ad hoc from the market side, from the backlog side, we are positive. But overall, we remain cautiously optimistic due to this massive uncertainties in supply chain.

Okay. Thank you very much. At this point, we still invite and encourage you to put further questions into the system. We're still available and are waiting for any further questions from your side.

Okay. There's one more coming in. Question from Mr. Serge Rotzer. Please allow in the future direct questions with the phone.

Thank you, Mr. Rotzer, for this comment. As you might be aware of, we have quite a number of participants. So in order to offer the technological simplicity, we decided to go for written questions in that situation. However, we are always available for you, for phone call afterwards to discuss also questions in person. Thank you. Okay. We are still waiting for any further questions. We didn't receive any further questions for the moment. So I would like to close the session. Thank you very much for the interesting questions, and we look forward to our next interactions with you and our next webcast. Thank you very much, and have a good day.

Thank you very much. Bye.

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