Kardex Holding AG (KARN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Kardex Group Publication Full Year 2019 Conference and Live Webcast. I am Alessandro, 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 Edwin Van der Geest, Investor Relations. Please go ahead, sir.

Yes. Hello, everybody. Welcome to our earnings call. Welcome, people here in Europe, and welcome the people on West Coast of the U.S., who had an early start this morning. I hope you all found our press release, the presentation and the annual report on the website. Before we start the presentation with first going through the figures by our CFO, Thomas Reist, and then going through the business and the outlook by Jens Fankhänel, our CEO, I would like to remember that afterwards in the Q&A session, the questions can only be put by telephone, so there is no web service with e-mails that we can handle today. So please all the questions should go through the telephone. Thank you very much. And now I would like to hand over to Thomas to start with the presentation.

Ladies and gentlemen, welcome to this call also from my side. We look back at another very successful year, 2019. And with the tailwind of a strong order backlog of the year, the sales achieved a double-digit growth. Both divisions, the profitability, again, increased significantly. This despite strategic investments in IT as well as supply chain at Kardex Remstar, which has been initiated in 2019. The good results enables the Board of Directors to propose an increase of the dividend payment, which results in a dividend yield of around 3%. The strong balance sheet as well as the available cash position allows enough flexibility and also stability for Kardex' future growth. Now we have a look at the key figures. The overview of the key figures shows that the last 2 years, 2018 and 2019, the growth was -- based on net revenues and operating results, the growth was above average. Over the shown period, the profitable growth was achieved since the EBIT grew faster than the sales. Net cash flow from operating activities, 2019, amounts above the average of the last 3 -- 5 years. But looking back at the previous year, we see a decline of around EUR 3.3 million, which is mainly based on the lower order intake of Mlog and, therefore, result in lower level of advanced payments from customers. Net profit increased 2019 compared to 2018 quite significantly. And the proposed dividend payment of CHF 4.50 is approximately 13% higher than previous year. Now we have a look at the financials 2019. The income statement, we see that the bookings -- at the level of the bookings, the trend of weaker order intake at Kardex Group level continues, with a decline of 6% compared to last year. Nevertheless, the order backlog amounts to EUR 217.8 million, which is still the third-highest-ever reported level. The visibility last year, 2018, was exceptionally at 6.5 months. This went down now to a visibility of 5.5 months, which is equal to the level of 2017. The gross profit margin went up to 36.4%, which is also above the 2017 level, after 2018 being a bit under pressure because of the high capacity utilization. The OpEx went up by 8.9%, which is an underproportional growth. The cost drivers there were IT spendings as well as professionalization of marketing. Both the EBITDA as well as the EBIT grew by almost 20%. The according margins of 14.9%, respectively, 13.5%, are up by 100, respectively, 90 basis points. The financial result is worse by around EUR 1.6 million compared to last year. This is due to higher pension expenses as well as accrued interest for potential litigation. The tax rate went down by 20 basis points to 25.4%, which is mainly based to the high profit share of the U.S. organization. Now having a look at the balance sheet. We see that the balance sheet shows the increased investment activities. On the noncurrent assets, we see an increase of EUR 9.7 million. This includes gross investments of around EUR 16.2 million, mainly for U.S. factory, machines and software. Current assets went up by EUR 15.2 million, which is due to the lower bookings and the according lower level of advanced payments from customers. The equity went up by EUR 19 million and this also the higher payment to shareholders by EUR 3.5 million compared to last year. The equity ratio accordingly went up by 1.5 percent points to 59.4%. This despite the increase of the total assets by around EUR 25 million. It needs to be mentioned here that the balance sheet does not contain any interest-bearing debt or goodwill position with the corresponding impairment risk. The net cash flow from operating activities compared to last year went down by EUR 3.3 million. This despite the better result of periods of EUR 6.6 million, which was fully offset by the lower advanced payment level of EUR 9.1 million. This lower level of the advanced payment as well as the increased accounts receivables led to a higher net working capital going up by EUR 13.4 million. This as well as the increased investment activities led to a by EUR 7 million reduced free cash flow of EUR 30.8 million. Nevertheless, cash on hand increased by EUR 4.4 million to a just before showed level amount of [indiscernible] cash. Thank you for your attention. I like to hand over to Jens Fankhänel.

Good afternoon, everybody, also from my side. As always, I'm having the duty to -- and pleasure also to report on both of our divisions. I will start with Kardex Remstar. Kardex Remstar looking back to -- overall, very good year, last year. We had new business with very strong bookings in the U.S. So our plans -- our strategic plans to enhance our footprint in the U.S. has shown very good results. This was partially countered by a slowdown in demand in Europe and in Asia, especially in half year 2. So overall a bookings increase of 1.9% over 2018. LCS, our Life Cycle Services, reported double-digit growth again, which shows that some of our programs to actually leverage on our customer base and installed base are coming to fruition against the market. Double-digit growth is a very successful achievement. Based on backlog that we started with in 2019, our net revenues increased strongly with 12.9%. And this was also due to the fact that we were able to somehow eliminate, at least to a partial extent, our capacity constraints that we've been reporting about in our Bellheim factory. Very dedicated investments have allowed us to lower these constraints, and therefore, also turn backlog into revenues, especially also in the second half of the year. The OpEx increased. We did invest into the organization, into our IT, as Thomas already mentioned, and also in our people development. We took more people on board. We also developed people. We provided training. And all of this led to slightly increased OpEx underproportionately, again, compared to the net sales growth, and that then led to an EBIT of EUR 61.4 million, an increase of 20.4% over the previous year and a very good EBIT margin of 15.6%. All the financial KPIs are, therefore, well in line with our targets and our communicated target ranges. Next page shows the development over the last years. Continued success. Net sales 12.9% up, EBIT 20.4% up, which means we met our own target of profitable growth, EBIT margins and EBIT to grow faster than the net sales itself. Revenue mix, down below on the left side, we show a pretty stable net sales mix between new business and Life Cycle Services. New business has picked up in the last year and, therefore, it looks as a minor reduction in Life Cycle Services share, but this is in the digits, in this decimals, 29% as opposed to 28%. On the right-hand side, we see reflected what I mentioned before, which is the geographical split. Asia Pacific and Middle East and Africa not being able to regain speed and, therefore, only growing in the averages, whereas the U.S., North American market overproportionately grew in 2019, and that shows the new geographical split of 23% in North America -- sorry, in Americas compared with the 20% in the year before. It's been asked a lot of times about our plan for the investment in our U.S. manufacturing plant. Here's some more detailed information about location. Number one, we chose in a supported process, Lexington in South Carolina. Main reasons was vicinity to harbor, to landing ports coming in with products from Europe, then proximity to university and colleges because we want to also win talent over there. And we believe that Lexington or South Carolina does become or will become a very strong labor base as well, and therefore we opted for that location. Some key figures. You see there is a total investment of approximately USD 20 million, both for building and equipment, 16,700 square meters. Main focus will be in this factory in the beginning to produce standard lift systems, vertical lift modules. Plus you want to use this facility as a logistics hub for products coming in from Europe and maybe some stock programs to be faster to the market to our customers in the U.S. Project's running well. We are in the erection phase for the project itself, and we expect start-up operation in the second half of 2020. Next one is our other division, Kardex Mlog. Kardex Mlog, if we were to eliminate the bookings for a minute or for a second, is also looking back to a successful year. However, bookings in Kardex Mlog pose some concern for us and also maybe for you guys. They've been heavily affected by delayed customer decisions in Q3 -- until Q3. I think we've been reporting on that already in the half year call. So that trend has unfortunately continued into Q3. Has a little changed in Q4, where some much-needed decisions have been made in -- on our customer side. So that was a healthy Q4 in terms of order bookings and also a continued trend and may pick up already in the first month of 2020. LCS, Life Cycle Services, also for Mlog, based on growth programs that we have implemented for Kardex Mlog in the Life Cycle Service area, have grown with double-digit increase. Net revenues also is solid. We call that rather a solid growth with 4.2% over the previous year. And EBIT and EBIT margin, based on very strict cost management also in our Mlog division, we were able to increase again by 9.8% or a relative EBIT margin of 7.1%. Financial KPIs also in the upper part of our target ranges and our guidance. Kardex Mlog, the key figures, very short summary, also here, profitable growth. EBIT growth faster and better than the net sales growth. Revenues mix, still very healthy. If we look into a almost 50-50 split between service and new business. And the geographical split, it shows a minor increase in areas outside of Europe -- sorry, outside of Germany, but this is really more of a spot check of a yearly consideration. It's not yet the result of a true geographic expansion. Which brings me to the outlook for 2020, which, for the last years, is the most difficult one for me to give. I have to confess that. And I think none of you will be surprised about that. On one hand, we still have a very solid backlog -- order backlog that supports a strong or sound start into 2020. But with all the things happening around us, there is a lot of uncertainty. So we see some slowdown in bookings in Kardex Remstar. It started in Q4, and it continues in the very -- in the first 2 months in 2020. So that raises some concern. On the other side, Kardex Mlog, with the reported bookings in Q4 and the first 2 months of 2020, provide us with some complement or with some trust that Kardex Mlog could end up with similar results like 2019, which I believe would be a great achievement given the current circumstances. So overall, we are fairly cautious with the outlook for 2020, just because of the market uncertainties that we are surrounded with. Nevertheless, we decided with our Board of Directors also to continue with our investments in supply chain, technology and digitalization because we strongly believe in this market, we strongly believe in the intralogistics market and we strongly believe that these uncertainties will cease to exist, they will disappear, and we want to be ready to pick up business as soon as customers decide again. We don't want to then ramp up our business again. And therefore, we, for now, decided to continue with our investments. And that really is it for me for the outlook. And I would like to hand back and hand over to Edwin.

Yes. Thank you very much, Jens. Thank you very much, Thomas. We are now ready for the Q&A session. May I ask the operator to take over. And please remember, you can only put your questions by phone and not, as in beginning said, via web. That's not possible today. Please, operator.

[Operator Instructions] The first question comes from Charlie Fehrenbach from AWP.

Could you give us maybe a short overview about your activities in China and how affected you are by the coronavirus maybe also over the supply chain, how many factories you have there, how many employees?

Thanks for the question. This is Jens again. China, dual answer. Easy one is effective -- or that the effect on our supply chain is relatively little at that stage, simply for the reason that we -- on -- from a procurement level, we are relatively low in volumes, the things that we source from China. And therefore, for now, the impact of -- on our own supply chain and our capability to produce is relatively low. The impact on our market performance, i.e., how much we sell into the market with our Chinese sales organization, that is clearly to be seen. It's actually a dual hit now. Number one, for the whole of the last year, China was on a -- I would say, on a deceleration path, if I may say it in a most polite way. And that affected investments in China anyway. And now this is effectively -- additionally affected by corona and the impact almost stands still of some of the markets in China. And therefore, we obviously see booking levels drop in China for the moment -- for the time being. Overall -- yes, does it -- is it enough?

Yes.

The next question comes from Michal Lichvar from Vontobel.

Congratulations to strong results in 2019. I would still -- I know that you are cautious about the outlook, but I would still try to get a bit more color then there given your order backlog, which gives you visibility of 5 to 6 months. What do you see there for the first half of 2020? And what is actually the quality of the order backlog? Could you keep these margins that you've seen in 2019 intact? That would be my first question.

Yes, Michal, this is Edwin speaking. As you know, since we have a good backlog and we -- if you listened to Thomas, 5.5 months of visibility, you can expect that there will be a good first half year. But take into account that we have started and -- actually quite a substantial investment program in people and in the supply chain, which you will also see in our half year results. More is difficult to say for the moment. Will that be enough or...

Yes, just maybe a follow-up on this -- the substantial investments. When do you actually expect this to kind of kick in on the positive side, meaning further growth, for example, in the U.S.? Or is this coming kind of gradually, and we've already seen it in 2019?

Jens, maybe?

Yes. As I said, Michal -- this is Jens. As I said before, the growth in the U.S. was overproportionate compared to our other regions. So this is effectively the result of our previous investments into the sales organization, into the market, mainly '17 and '18. So growth programs in the U.S. now coming into play. It's also supported by the good market environment in the U.S. So if you talk to U.S., the slowdown there is very minor for now. So I expect they can keep the momentum. Elections may affect it towards the later part of the year. So far, we don't see much of that. The investments we are talking now is mainly into other regions and also, as I said before, into the manufacturing plant in the U.S. That will come into play, into start of operation, as I said, half year 2 of 2020, and then there will be a well-managed ramp-up process for this factory. So I think effects in terms of capacity, delivery to market, these type of things will earliest be seen in 2021. For now, this year is an investment year for us, where we really get ready for more things to do. We, in parallel, develop with our local team further growth plans for the U.S. which is a little too early to talk about, but this is what we're planning, how could we leverage our position in the U.S. and how could we become an even stronger market competitor in the U.S. But that's part of the discussions of the strategy, and then we will report as soon as we have made first steps over there.

Okay. Fair enough. And then just last question regarding the kind of outlook. In 2019, you said that this kind of bottlenecks regarding capacities, they were lifted. Is this kind of a bit of an extraordinary tailwind that you had in 2019, and you will not see in 2020, kind of, maybe pent-up demand still from 2018 that you couldn't fulfill and then with increasing capacities, you could do it in 2019? Is it -- is this kind of -- this capacity bottlenecks lifting, did it kind of created a bit of a more difficult base for you for 2020?

That was many questions in one. Can you try to slice this into 1 or 2 questions?

Yes. Well, it is 1 question. Just took me quite long to explain. Just this kind of lifting of these capacities bottlenecks. Did it create a tailwind in 2019 that makes your comparison base for 2020 more difficult, because this isn't kind of extraordinary effect that you will not have in 2020?

It was similarly long. But I think I got the question now. The lifting of the capacity constraints into 2019 is not fully lifted. So we partially eliminated our capacity constraints, but they are not fully removed. That's why we also decided for 2 reasons, to better balance our capacity loading to factories with the extra manufacturing plant in the U.S., closer to the market, but also ability to produce, to manufacture. So that will help mostly Bellheim with some of their still experienced capacity constraints. So I would not think that a lot of 2019 net sales had to do with these lifted capacity constraints. Yes, it did contribute to some extent. But others -- I mean, we had a very strong backlog. And then you need to look into the backlog and the revenue mix in the backlog, which needed to be produced on these bottleneck machines and which could not -- sorry, did not need to be produced on these. And that helped a lot as well because we focused on some other product mix also for the division, for Remstar. And that all in all gave a slightly better position, favorable position compared to 2018.

Okay. That's well explained. And last question now kind of a technicality maybe for Thomas. ROCE has declined in 2020. Can you just explain why this was the case because your profitability has increased substantially? Can you just explain what was the kind of mechanics behind this?

Yes, sure. As I tried to explain while going through the balance sheet, you have seen the effect of the advanced payments by customers. These are the effects that the capital employed of -- especially Kardex Mlog went up, and this has a negative effect on the ROCE.

[Operator Instructions] The next question comes from Remo Rosenau from Helvetische Bank.

Coming back once more to the investment program. Your investing -- cash flow from investing activities was EUR 14 million last year, actually only up around EUR 3.7 million from 2018. So on what level would you expect this CapEx to be in '20? And what exactly is still going to happen? I mean you mentioned the U.S. that you still plan to do this and that. Could you elaborate a bit on that and on the level of CapEx?

Remo, here is Thomas. Yes, sure. The guidance we gave last year is more or less the same. We spent in 2019 around EUR 17 million. And in the next 2 years, 2020, 2021, this will go up. We expect a level of around EUR 25 million. Then is -- it will go down slightly by another 2 years to a level of around EUR 15 million and then normalizes on around EUR 10 million. So again, 2 years with EUR 25 million, 2 years EUR 15 million and around EUR 10 million, which will be then the normative level.

Okay. Great. And when the U.S. facility will be coming onstream in the second half of this year, I mean, what will your utilization rates be? I mean how much expansion is it? And Bellheim, as I understood, is still running more or less at full capacity utilization, so let's say, 90% to 95%, right? And however, in the U.S., when the other one is running, what -- how much more capacity you have there?

That's Remo's main question, I think, yes.

Yes, I like it, Remo. This is Jens here. We could play it on tape. Number one, capacity in Bellheim, ideally, I want to see this plant at 85% of the nominal capacity because this is the most healthy capacity utilization that you could see in Bellheim. Now that's relative to installed capacity. That shifts quite a bit over to the U.S. And I would think that it's very difficult to say how much extra capacity it really adds because it's subject to what type of machines are we producing. We have small machines. We have narrow machines. We have large machines and wide machines. And this carries a different capacity requirement per product. And therefore, the guidance is very difficult to say how much extra capacity are we going to see it in this facility. Currently, we're planning on a 1-shift operation for the U.S. That immediately provides us with the opportunity to go 2 shifts, if we see a severe capacity need for the U.S. operation. So it's really -- there is quite a bit of extra capacity that we're adding to our network of manufacturing. It's -- sorry, I cannot be more specific here without digging down to extreme detailed numbers.

Okay. Yes. Fair enough. That's fine. Then another one, your margins -- EBIT margins have been up another 90 basis points in 2019. Now a part of that, for sure, is also due to lower input costs. I mean we -- last year, every company was complaining big time about the increased raw material costs and how hard it hits them. Then everybody increased prices. I mean a lot of companies did. Then raw materials started to come down and now, of course, nobody speaks about the tailwind about raw material input costs. Everybody is very quiet about that. But it certainly had a positive impact. So could you share with us how much of these 90 basis points are basically tailwind from raw materials? And how much is really internal improvement?

First of all, material costs usually kick in only second half of the year. That's based on our procurement plan. So not the full year was affected. But I mean we do some kind of framework agreements with our steel suppliers, which is our biggest procurement part for raw materials. They normally kick in second half or even only in Q4. So the impact of that on the 2019 result is there, but not substantial. How much is it? That's a difficult one. Alexandre is trying to work something out. Couple of million, I would suggest.

Okay. Okay. Okay. Fair enough. So let's say, majority of the 90 basis points is still not coming from that part, which means...

I can answer your question if you want.

Okay. Okay.

If you look at our revenue mix, number one. Number two, we've been able to also increase our sales prices, so we actually got more. This is also due to our revenue mix. It's no secret that we have a better market pricing in the U.S. And when we have a better market pricing in the U.S. and the net sales share of our revenue goes towards the U.S., then the weighted margins increase. That has -- that had way more effect on our average gross profit than the steel prices.

Okay. Good. But listening to you, that means that you will still have some tailwind in 2020 from the whole raw material development, right?

I would expect so, yes.

Okay. And that will help...

It carries -- it actually carries -- in other words, we don't experience the typical increase at the beginning of the year of material prices. We now -- again, if you remember what I said a few minutes ago about our hedging programs with our frame contracts, we don't immediately benefit from even further decreased prices if there were. But you also would not be immediately affected by increases because we have this (hedging programs). We don't want to speculate on material. That's why we normally go into quarterly or even longer contracts -- supply contracts with our steel suppliers, as I said, the most important element of it.

Okay. Now looking on the margin for 2020, we have several, of course, moving parts in the equation. I mean on the one hand, you have increased capacities, which increases your fixed cost base also somewhat. You need to ramp up the plant, which has probably some negative effect on the margin. Then you have some further improvement measures, as always. So is the best guess that the target is to keep the margins stable?

I don't want to comment on that, Remo. You have to understand that we don't give guidance on that part.

Okay. Good. Then still congratulations on this year results, which were very good.

The next question comes from Sebastian Vogel from UBS.

Can you hear me?

Yes, we can hear you.

The first question would be a bit of a follow-up to my preview to the -- previous 2 asked questions. As you were outlining earlier and also in the press release in the morning, you have seen less bottlenecks, lower steel prices and good sales prices were all contributing to your better gross profit margin. But in terms of percentage, as you said, what -- the better sales price were most likely the most -- or that had the largest impact. But for the 2 others, can you also outline there how much you expect -- how much tailwinds you would have expected to see that has impacted your gross profit positively? That would be my first question.

Sebastian, it's very difficult to give these answers as we -- it's maybe better to discuss it one-on-one than disclosing so many details.

Okay. No problem. Then I would go on to -- with my next question. You earlier talked about CapEx and the plan going forward. If I recall it correctly, you mentioned that you will spend EUR 20 million of CapEx over 2019. However, you just spent EUR 12 million in tangible CapEx and EUR 2 million intangible CapEx. So the gap to the EUR 20 million, is that something that will be likely most be pushed into 2020? Or is that something that, well, we won't see again? Or what led to that?

Sebastian, here is Thomas. Yes, there is a push over to 2020, but this is included in the figures I just presented before. So when you...

And what led to this situation?

Well, we were not -- we were altering the machines, but there were some delays. But it was a plan. We are EUR 3 million behind the plan. And this is just a simple shift.

Understood. Then I have another one on Remstar, in particular, the FX impact on the top line. Can you give me a number there, what you have seen in the -- for the full year 2019?

Yes, sure. 2019, we had a positive effect of EUR 4.5 million.

Okay. And one last one. When you described the business in Remstar, you mentioned that you have seen some slowdown in Germany, U.K., Scandinavia and Turkey. This slowdown, was it also leading into cancellation of orders? Or did the orders were just that the activity was going down or you really want -- you saw some cancellation in there?

This is Jens, Sebastian. Straight off the top of my head, I cannot think of cancellations. They didn't place the orders. But cancellations as in -- there may be a few, but in the very, very, very minor per mill areas rather than the percentages.

The next question is a question from Tom Buri from VV AG.

I would have ask you 3 questions. The first one is should we split the CapEx between Remstar and Mlog.

So should we straight away answer the first question, and then you go to your next?

Yes, that's right. Yes.

I suggest we start with the first one. The split between CapEx, Kardex Remstar and Kardex Mlog, was the question, right?

Yes, that's right.

Yes, this is -- here is Thomas. This is -- the CapEx we have is mainly spent on Kardex Remstar. We don't really give it out, but from 9% to 10%.

That's OpEx, yes?

And then the second question would be for Mlog. You said it would be a great achievement to get the sales of 2019. Would this also imply that you can keep the margin at this level? Or would you say that in 2019, the business was the best you can get?

Here's Edwin speaking. If you look at our press release, we say that we expect the same -- I mean, if we don't see big market turmoils, we see the same results, that turnover as well as margin. And be aware that with the margin we achieved at Mlog, you are at the very highest within the peer group. And there are not many companies in this field that have this high margins of above 7%.

Can you -- sorry, before you continue, just can you ask everybody to mute their microphones because we have a lot of background noise here by somebody talking in the background?

Okay. I will go on. Also my third question is regarding Mlog. Do you still think that you are the right owner for this business? Because I see all the CapEx goes to Remstar. So are you considering other strategies with Mlog?

What do you mean other strategies with Mlog?

Yes. To sell it or to bring it together with the competitors.

Which would be the same, right?

Yes.

I'm not playing -- I'm not trying to play...

It depends on the outcome, whether you make a joint venture or...

Yes, that is -- it's a...

Here is Thomas. We got this question very often. Why do we keep Mlog? What is the reason to keep Mlog? And we always have to say, look at the figures. We have more than 30% return on capital employed. We have now achieved 7% EBIT margin, and this is very good figures compared to the peer group. And yes, it is a small division. Yes, it is only Germany, but it is quite a good investment.

I don't say that's a good -- not a good investment, but you have a lot of volatility, as we have seen in the sales and bookings.

There might be volatility in sales and bookings. But if you look at the comparison we have in the presentation over the last 5 years, it's actually -- it's growing by 5% average, and the margins are now at a good level. And maybe to answer the other question, why no -- why not that much CapEx? It's because -- I mean Mlog has enough capacity at the place they are in Germany. They are really -- very good position. So there is not that need for now for big CapEx at Mlog. Whereas, Remstar is global. We are now really setting our footprint in the U.S. And Remstar is really global, and there are -- there is more -- there are more investments needed to really build that business up over the next decade.

[Operator Instructions] The next question is a follow-up from Mr. Sebastian Vogel from UBS.

Yes, me again. I have just 1 follow-up. With regard to the, mentioned earlier, slowdown in Germany, U.K., Scandinavia and Turkey, was there a particular industry where this slowdown was observed? Or was it rather on a broad-based level?

Mostly automotive and machinery. Everybody that's somehow affected also by supply chain issues with China, with everything. And we all know about the automotive industry. The rest, relatively stable.

Ladies and gentlemen, this was the last question.

Okay. Then I would like to thank you very much for participating. If you have further questions, please don't hesitate to call or to write us. I wish you a nice afternoon, and all the best. Thank you very much. Bye-bye.

Bye-bye.

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