Interroll Holding AG (INRN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Interroll Presentation of the Half Year Results 2024 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Heinz Hossli, Chief Financial Officer. Please go ahead, sir.

Thank you for the introduction. Good morning, ladies and gentlemen. With me is Julia Weinhart, our Head of Communications and Investor Relations. We welcome you to our Half Year Results Presentation 2024, and we are glad that we have so many participants this morning. The agenda of today, I will first show a quick group overview, then the financials of the first half year '24, followed by Q&A live. For organizational purposes, we decided not to offer the chat as written questions. Interroll is playing in a niche in the material handling equipment manufacturing market in the segment of internal logistics solutions even though the entire material handling equipment manufacturing market was about CHF 200 billion and is expected to grow at an average CAGR of 6% until 2030. Our relevant market is estimated CHF 6 billion to CHF 8 billion worldwide. Our market share is between 8% to 11%, pretty much stable. Here is not much which has changed in the first 6 months of '24. The only change is really the number of employees around it now 2,300. At year-end, we had around a number of 2,400. All the rest remains stable. What some of you might have seen today in the ad hoc and this is not really in here in the presentation is the acquisition of our agent in India. This is brand new. This is also why it's not reflected on the slide. We just signed this on July 31, late afternoon, and the closing will be expected also quite fast. This slide shows the industries we focus on. Also here, there is no change. E-commerce is, for us, not an industry, but it touches many of the shown industries, especially customers using an omnichannel strategy like in fashion but also now in food. The markets with a special focus in '24 are the ones which are highlighted yellow. Our business model remains unchanged. Our customer in the center, we focus to be close to our customers and provide them proven state-of-the-art technology with our product platforms. The end-user marketing approach gets us close to the ones using the equipment for many years. And in best case, they already specify Interroll when they request a quote from a system integrator. In addition, we received valuable input about their pain points for possible product improvements. Here, you can see our 4 product groups, all based on platform strategy, nothing new. Our motto is here also modular, scalable and flexible, and this also remains in place for the future. On the innovation side, we showed that the LogiMAT in April '24, the small wheel vertical crossbelt sorter, this compact sorter allows on a very small footprint to be operated, and this opens new possibilities with limited space to put a sorter in place. Now I come to the financials of the first half year '24. And I would like to start with a summary. We stated during our media conference in March '24 that we believe that the downturn has bottomed out in Q4 '23. And that we were unable to foresee when the market will rebound and then we see positive signs in the industry. Today, we can confirm that overall, our order intake bottomed in Q4 '23. And in the first half of '24, we saw a rebound in product sales, which partially mitigated the absence of bigger projects. The order intake decreased by 5.1% compared to the first half year '23. In local currency, it's a decrease of 1%. Foreign exchange effects had a strong negative impact. EMEA shows an increase as the product business is recovering with Americas and Asia Pacific declined. On sales, we have a decrease of 3.5%. And in local currency, we grew by 0.1%, so basically flat in local currencies. Also here, foreign exchange effects had a strong negative impact. EMEA shows the growth. Americas, a slight decrease and Asia Pacific, a strong decrease. I'll come into more detail in the coming slides. The EBIT increased by 4% to CHF 29.9 million compared to CHF 28.7 million a year ago. This results mainly from favorable raw material prices and the high cost discipline. The operating cash flow is CHF 16.2 million compared to CHF 75.2 million a year ago as the net working capital increased in the first 6 months. Now here the chart with the order intake and the comparable last 5 years, the order intake shows a decrease to CHF 286.5 million compared to the prior year period. The growth in the product business rose of 8.4% and drives of 12.4% as well as the cyclical Pallet Handling of 26.4% could only partially mitigate the decline in conveyors and sorters by minus 25.5%, but it needs to be considered that this product group showed a very strong order intake in H1 '23 due to some strong project orders in Americas. The book-to-bill ratio is 1.16 compared to 1.18 a year ago. Coming now to the sales. The sales decreased by 3.5% to CHF 247.4 million. In local currency, the sales were with plus 0.1% flat. Except drives with a growth of 5.2%, all product groups have decreasing sales, but also in sales, sorts and conveyors is strongly underperformed compared to the previous year. Looking at the sales development by region, it shows a diverse picture. As mentioned before, EMEA shows the growth, Americas a slight decrease in Asia Pacific, a strong decrease. The strong decrease in Asia is partially explained by the big project in South Korea invoiced in the first half year '23. As a result, the shares of the 3 regions changed considerably compared to last year. EMEA gained 5 percentage points and now represents 60%, followed by Americas with 31%, gaining 1 percentage point and Asia Pacific with 9%, losing 6 percentage points. The long-term target ratio of Interroll remains unchanged with 50% of sales coming from EMEA and 50% from the other 2 regions. The EBITDA increased by 2.8% to CHF 41 million. This results mainly from favorable raw material prices and our high cost discipline. The EBITDA margin increased from 15.6% to 16.6%. The EBIT increased by 4% to CHF 29.9 million as the absolute amount of depreciation and amortization was basically equal compared to the previous year. As a result, the EBIT margin increased from 11.2% to 12.1%. Between the EBIT and the result, we had a positive financing result from interest income and foreign currency gains, and it was burdened a bit by slightly higher tax ratio. The result increased by 8.5% to CHF 23.9 million and the result margin is 9.7% versus 8.6% in the previous year. The operating cash flow decreased significantly to CHF 16.2 million, mainly due an increase in net working capital, especially in work in progress and accounts receivables. This is not unexpected as the net working capital was reduced to the maximum in '23, resulting in the best ever cash flow of the group. Even though we continue to invest in modernization of our production sites, the gross investments, including the IFRS 16 lease, which are capitalized of CHF 8.5 million are considerably below previous year's value of CHF 17.1 million. The free cash flow amounted to CHF 11.1 million. This chart shows the positive long-term development of return on equity and return on net asset. There is always a half year effect from seasonality visible in the first half year. In addition to that effect, the very strong equity ratio of 73.9% is negatively impacting the return on equity. The chart reveals the strategic long-term perspective since the last major crisis in 2008, 2009, Interroll has driven forward its globalization and expansion into new markets as well as the expansion of its technology platforms and massively strengthened its market position with a balanced mix of measures. We boost the productivity while always keeping an eye on cost. We have done our homework during the good times, underlined ourselves even more closely with our customers and their needs through our business model with the end-user approach. As soon as the market fully recovers and the new phase of growth will start, both KPIs should continue the long-term development with moderate increase year-over-year. Now I come to the outlook. From the EMEA region, we see that the ongoing challenges in the project business may come to an end. Following the rebound we are seeing now in the product sales. In the Americas region, we also foresee continued growth in product sales. In the APAC region, we predict, in general, a slower recovery. With our innovative product platforms and production capacities, we are very well positioned in our regions to meet future demand and ready to seize opportunities when the market fully recovers. In the medium term, we believe that all fundamental trends for global demand for material flow solutions remain intact and have strengthened increasing the demand for further automation. For the next 6 months, we expect overall, more of the same than really a strong rebound might change. But what we can see from today's point of view, we expect really more of the same instead of a big change. As in the previous years, also the complete half year report is published on our web page as an online report and reached with multimedia content. We invite you to visit our website to have a look and we would be delighted to receive your feedback to Investor Relations. With this, I'm at the end of my presentation, and we would go over now to Q&A. Thank you very much.

[Operator Instructions] Our first question comes from Walter Bamert from Zurcher Kantonalbank.

My first question is regarding the work-in-progress inventory, which went up significantly against the intuition of the order backlog from big projects. So did you speculate here that it will pick up? Or is this reflecting your hope for an acceleration?

Mr. Bamert. Thank you for the question. At the intro, we only produce for orders. So we do not produce on stock. So you can assume that this is a positive inventory, which soon will then also be invoiced.

Okay. Then I see it's against my intuition that you experienced lower sales in rollers while the sales in drives went up. Is that price related? Or is there another explanation you could share with me?

There is another explanation during the supply chain crisis, we lost a lot on drives, especially on roller drives. There is no secret. And we could gain back quite a number of customers, which now by, again, the role it arrives from us, which went into a dual strategy, which bought the most from the competition and now is coming back not into a single stretch again, but they buy now 90% plus from us and keep the second source at a very low level.

Okay. And then in pallet handling, I noticed there that you have project business that grows. Is that driven by the smart pallet mover? Or is it just overall demand?

Not driven by the smart pallet mover. It's driven by the -- the comparable period last year was very weak. So I think this now is an okay order intake. It's not a fantastic order intake looks very good compared to the previous year, but in fact, it's just an okay order intake.

But you would expect a positive trend to continue? Or it's a risky and volatile?

Business is where is the most cyclical product group goes up and down. But at the moment, I would expect that it continues on this level.

Okay. And can you say something on the regional and client diversification in pallet handling?

I can say something on the region, not on the client, the region which drives this is EMEA and Americas.

But broadly diversified, not just a few.

It's not a big project. It's diversified. It's a various number of smaller projects. There is no big project.

The next question comes from Sebastian Growe from BNP Paribas.

First one would be on the pipeline, if you could comment on the discussions with customers and how these are developing at this point? So specifically, how is the pipeline, the project business progressing would be very much in focus for me? And do you expect that the sequential improvement that we have seen in the H1 period of 24 can continue? Or would you rather think that the converters and sorter businesses kind of as good as it is for now at around good CHF 100 million? And related to that, if you could also comment on your pricing policy and how that compares to competition. And I would have one more around the cost base.

Yes. Maybe first, we see that, as I mentioned on the outlook, we see that this should continue. And clearly, the conveyor and sorts product group will come back as soon as the over investment into e-commerce is absorbed in the markets. And this should be quite soon. But that we now say, yes, we expect it in the second half year, it will be too early. We know that the big integrators, they look positive into the future. They see the projects already. We don't see them yet. And I always said I like to comment when I see it before its only speculation.

But for now, is this rather than what can attrite from the biggest e-commerce company probably in the world that reported yesterday, that is rather than, I think, for same-day delivery capabilities, et cetera, but it's not really the big sort of pick and mortar expansion. That's the right way to look at it. And you would expect if that piece is correct that this would kick in somewhere during '25, do I understand you correctly?

This is what we anticipate, yes.

Okay. And around pricing, is there anything that is worth mentioning when it comes to your pricing policy as opposed to competition, have you raised or lowered prices in certain product categories? And how does this compare to your peers?

So competition is very difficult because there is not really official communication from the competition, what they do. What we hear from the market that quite a few competitors have increased prices. We have kept most of the prices stable for '24 compared to '23, and we decreased 2 product groups or within 2 product groups, we decreased the prices for all the drive and for roles, we have taken the prices slightly down as we have the target margin in place also with this. What we also need again for this year is we knew already that the cost, especially the personnel cost is increasing. This has already been for a big portion of it negotiated for almost 1,000 employees in Germany last year. So this was known. And we have seen lower raw material costs and the strategy that we have in place not to increase the prices, compensate the higher personnel costs with the favorable raw material prices so far works well.

That's actually a pretty good segue to the other area of questions that I would have. Firstly, on the gross profit margin. So apparently, there was very strong at the 64% in the first half. I would assume, however, with the order intake mix that you have taken on board in the first half with a greater share than also of the project business. And whenever the conveyors and sorters might really inflect. But what is sort of the directional trend on the gross profit margin side? I would assume at least that we should see a softer gross profit margin in the second half just because of that very, very mixed composition. Is that the right way to look at it?

For the second half of '24, it really depends if our outlook comes through that we say it's more of the same, then you can expect that this day is also gross margin-wise more on the same level. When we go back into a growth mode, yes, the projects have by tendency, always a lower margin. This would then have a negative impact. But for the second half year, I don't see this happening.

Okay. And then the last one then around the cost base, you lower the gross profit line. It looks like this is relatively stable at around CHF 130 million in the first half on the current revenue level whatever then the right revenue out to count for the second half, I would assume it's probably closer to the order intake that you secured for the first half. But is there any scope for cost cutting? Or would you say that what you can do, you have done already? Or how should we think about any sort of self-help potential at your end?

What you said is a fair statement. No, we already squeezed the lemon quite a bit last year. We continue to this. We deliberately do not reduce the head count. So we have only reduced 10 people. We do not go into a firing mode. We keep the people and the knowledge on board. So much more, you cannot expect that it comes from the cost. The cost is very well managed, and we will have a positive leverage effect when the growth comes back.

The next question comes from Remo Rosenau from Helvetische Bank.

I will come back -- I would like to come back on the statement more of the same. I mean, you still have the seasonality, which means that the second half should still see an improvement versus the first half on the seasonal pattern. And does this statement translate into the conclusion that the second half should be profit-wise comparable to the second half of last year as well? Or is there -- I mean, the margin was better in the first half. So might there also be a slightly better margin in the second half compared to last year?

Thank you for the question, Mr. Remo. This statement, I would say is not what will happen because last year, we had a very strong second half year with a very, very high margin and the high volume. And this year, we have to see that we started the year with CHF 30 million less orders on hand. The currency is also not in our favor. And the second half year will be better than the first 6 months. I think this is given by the seasonality, but also the lag that we have on the order intake and especially on the projects, which have a different cycle than to be invoiced in Q4. I see that the revenue will go up, but not as much as last year.

The next question comes from Constantin Hesse from Jefferies.

Actually, most of it have been asked, maybe one last one. If you could talk a little bit about the development of the service business? And has there been any change there since you obviously introduced the strategy to try to increase the share of service and the mix of revenues? Any update you could give there would be interesting.

Thank you, Constantin. On the service, yes, we will now, from year-to-year increase a little bit, but this is not what makes the big chunk. Now even if we can increase we came from 10%, we have [ 12% ] now got 13%, 14%. This is a nice journey, but this will not change the overall picture too much.

The next question comes from Sebastian Vogel from UBS.

I have 3 questions. I would ask them one by one. Potentially one of the questions will be repetition because I was thrown out in the meantime. Sorry for that in advance. And the first one would be, and if you can go through the key verticals like airports, warehouse, distribution, food and beverage. And then can you remind me what sort of what the demand trends you see them there individually?

Yes. Clearly, the highlight of the first 6 months is airport business, and its airport business, EMEA. Now we always said that the airport business is waiting until the new scanning technology is approved by TSA in Americas. And what we see now is that the European airports are going forward have invested have now also plays quite a lot of orders with our partners mix detection. And if you travel in Europe, you might have experienced this by yourself. Now you now have no chance to say on an airport, if you go through a new scanner and you can go through with a bottle of water or if you have to throw it in the bin before you go through the security check. So Europe has gone ahead with this. We expect that this will continue. That this is now the start of this wave, which will take many years to come until the airports on a global scale will adopt this new scanning technology. The rest is basically unchanged. No. It's not really an industry where I can say this is really now going good or not good except what I said, everything related to e-commerce is not yet on this level. If we take out this very huge order last year or a few big large projects last year, we got in Americas. Then still, this is also -- its okay. No, it's not that it's a decline, then it's still an increase, small increase over the last year.

Got it. And the second question is, if I look at your end of quarter growth rates in product and versus project and compare that versus the stuff that you have seen in July, was there any sort of development there? Or was it also, as I said earlier, on more of the same?

Can you repeat, I did not get you correctly, end of July, what?

If you compare the growth rate in and orders in end of July versus the end of June or versus the June numbers on project and products.

July is not precise. I don't even know yet. So this is too early. But what I can say is July is always a weak month. This is a holiday month, and this is all every year, a weak month. If this weak month is now better than the last year's weak month, probably yes, but I don't have the figures yet on a consolidated level.

Understood. And if I look back to the margins over the last couple of years, your second half year margins were usually a notch better compared to your first half year margins. Do you see this sort of development could repeat potentially in 2024? Do you see anything that speaks in favor or against that?

Nothing speaks against this, but the margin, like in last year, H2 will not repeat again, this had -- this was on a very high level. But that the H2 will be better than H1. This is basically given by also higher volume.

Yes. Got it. And then one last one, if I may slip it in. How should we think about more on the maintenance side regarding net working capital intensity and the CapEx for the second half of 2024?

CapEx, we continue probably on the same rate like in the first 6 months. But as we are sitting on a lot of cash, if something comes up, which is not planned but makes sense to invest, then we might go over the first 6 months run rate. If not, it's also here more of the same than a big change.

And net working capital intensity?

Net working capital, I cannot touch. Now normally, the net working capital end of June is higher than end of December because end of December, a lot will be invoiced. It is much lower because the projects will be invoiced in Q4. So normally, slightly lower. If this is the case also this year, it depends how it will play out.

[Operator Instructions]

No further questions?

It seems that there are no further questions, sir. Would you like to make some final remarks?

Yes. If there are no further questions, thank you very much for participating at this morning's call, and I look forward to have contact with you in the near future again. And hopefully, we can also then convey positive messages. So the market, clearly, the market will come back. There is no doubt that the market will come back. We are well positioned. We gained a lot of customers back, which we lost due to not be able to deliver during the supply chain crisis. And as I mentioned in the outlook, we are really ready to seize the opportunities and also what we get from the market feedback is that we are quite well positioned. So we need to be patient. We need to wait until the market really fully recovers, but then we are there to harvest. With this, if there are no further questions, I would like to close. If there are questions, let's give 30 seconds. If somebody still has a last question, please now.

There's no questions, sir.

Okay. It seems not to be the case. In this case, I would propose that we close here. Thank you very much for participating, and see you next time.

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