Kardex Holding AG (KARN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the business update conference call 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, thank you very much for opening the conference. Ladies and gentlemen, thank you for having time on short notice. We believe it was the right time to give you a business update before we are going to publish the -- our semiannual report in a bit more than 3 weeks from now. We will -- we published a press release this morning, and I hope that you found the short presentation we put on the website. I'm going to ask Jens to go quickly to the -- through the slides before we start after that, in a couple of minutes, the Q&A session. With us is also Thomas, but now I'm handing first over to Jens to go quickly through the presentation. Jens, please.

Good afternoon, everybody, also from myself. What we want to start with is Slide #1, just a review of what we presented in March after our full year closing, we called it pre-corona, although in some parts of the world corona was already known. What we reported then and what we put out as an outlook was a solid backlog that we took from 2019 into 2020, which supported a good start of the year. We also explained in some detail that Kardex Remstar, already in Q4 last year, experienced a slowdown in its markets, not all of the markets, mostly in Europe. We said that Kardex Mlog would expect results approximately in line with 2019 also for 2020. And most of all, we said we are looking fairly cautiously on to 2020 given the market uncertainties that we already saw even without corona happening. However, as we believe in the intralogistics industry and our position in the market, we also made clear that despite these uncertainties, we would continue our much-needed strategic investments in supply chain, technology, digitalization to prepare for the future despite, exactly what I said, the uncertainty in some markets. So allow me to take you now to what happened since. We all, I think everybody around the world experienced something that not many, I would say, if not nobody, did have on their radars called corona and the impact that corona was driving. Some markets came almost to a complete halt, to a complete stop. And so it doesn't come as a big surprise that also we did suffer some extent from that. What you see here is we, fairly straight away in March, April, saw a heavy negative impact in Europe. We are traveling around minus 30% compared to previous year. The U.S. followed a little later, I would say, 4 to 6 weeks later the effects of corona and the impact on the economy started to kick in, and we saw that. So we're traveling approximately 20% on the previous year. Asia, as we know, was hit first, so Q1 was very bad in Asia, but we had a slight recovery since then. And so we are 15% -- approximately 15% below previous year's numbers. Industry segments where we are most affected is the traditional industry segment which is with a lot of production and assembly, like mechanical, electrical -- electronics, machinery, automotive. We are -- we saw less impact in other segments like wholesale, retail, warehousing, e-commerce and also government solutions because the U.S. government keeps spending on solutions in their facilities. Fortunately, we did have very little to none project cancellations from our books, so we could continue. But we did experience some delays at customer sites due to shutdowns and similar type of behavior. That also had an impact on our life cycle service business where, much to our surprise, but effectively, like we did as well as Kardex Remstar, we've been locked out from customer sites, we did not get access to customer sites, so we could not deliver, install or even service, mostly in March and April, which did have an impact on net revenues in the life cycle services business. So all in all, we believe -- and I mean, we are in the closing stages for the first half of the year that Kardex Remstar will show bookings at approximately 30% below previous year's numbers and net revenues of about 10% below previous year. I'd like to share an internal view, what did we experience internally and what did we do internally. I think like almost any other company, we did enroll a protection concept. Employees in most of the countries were locked out from the market, had to stay home and as well the central functions. So we, from day 1, had to enter into a new situation, new to all of us where everybody was working from home. I think the good news was that Kardex, not just Kardex Remstar, but Kardex as a company was prepared for that in a sense that our infrastructure was intact. We did use video conferencing and sharing of that in a remote way before the crisis. So that actually gave us a head-start into the situation, and we've been able to work continuously despite new challenges to all the employees working from home with all the challenges on top of the normal business stuff. Good news also, our supplier network and the supply chain has been intact. We've been able to continue running our factories wherever possible in shift systems, where people could come to the factories. And so throughout the crisis, for the last month, we've been able to manufacture and deliver from the company point -- from the factory point of view. Service teams and admin staff had to implement short-term work, as I explained before, due to incapability to actually visit customer site. And now due to the lack in order intake and bookings, the order backlog at our factories has substantially reduced compared to our year-end numbers. And therefore, we had to start introducing short-time work in both the Kardex Remstar factory since April, May, which we expect to continue for a period of 3 to 4 months, at least, for the reasons we already explained. Page -- Kardex Mlog, first, the market side again, customer behavior. I have to say much to our surprise, customers' ordering activities have been relatively unaffected. However, we also accounted to the fact that Kardex Mlog reported very low order intake in 2019. So some of the stuff we have seen in Q1, specifically speaking, has been due to delayed projects from Q '19 -- Q4 '19, which then have been awarded to us in the early stages of 2020. In addition, we also saw a healthy recovery in our refurbishment business, services business compared to previous year. So overall, Kardex Mlog saw a healthy order intake in the first half of 2020. Also, like in Remstar, we did not have any project cancellations, but some delays at customer projects. Access restrictions to customer sites for our service people really only happened during the first 2 to 3 weeks of the lockdown in Central Europe, and then we've been able to visit these sites again. So this had a very limited effect on net revenues in the service business side. And we did actually look into [ then ] by the pattern between Remstar and Mlog is so different. And the main reason is that most of these Mlog installations are kind of mission-critical to the logistics of our customers, whereas for Kardex Remstar, some of these installations are not necessarily called business- or mission-critical and, therefore, to actually shut us out from installations was a little easier for the customers to decide. Overall, half year estimates for Kardex Mlog, bookings of 70% plus compared to previous year, which is almost comparable with the first half year 2018. And net revenues will be around 15% less than previous year. This is mostly due to the new business side of things and refurbishment, where we started with a relatively low order backlog or projects that will last into the second half of 2020, and therefore we'll see full revenue recognition in the second half of 2020. Over to the internal side, same as for Remstar, protection concepts rolled out employees in the organization mostly working from home or as an alternative where home work was not possible, we applied shift systems. So we actually split the teams, some of them in the morning, some of them in the afternoon, with sanitation in between to protect as much as we can, both the employees but also the business. Service technicians, I already talked about. Therefore, some short-time work for these guys. Supply chain, similar to Kardex Remstar, well managed and the factory being able to supply, to manufacture and deliver. The unfortunate situation when we started preparing for a potential contingency situation, given the uncertainty in the market, was that we initiated a lot of internal checkings and step forward to light a need for an impairment. You can read that low single-digit million with an according impact on the EBIT. That was the actual negative thing with Kardex Mlog apart from the other relatively stable business development. That brings me to the last page, which is the adjusted outlook for 2020. I think everybody who looks out to the market will understand that this is a very first step, that there is a lot of uncertainty still in the market, so whatever we have to declare here is under the assumption that there is no second wave with corona, number one. And second, that is also under the assumption that markets will slowly start to recover. We called it a rebound. To what levels is very uncertain. It's very difficult to judge. We're making a best guess. So I mean, everybody will understand that this is a little challenging for all of us. If you look into the group's half year estimates, bookings, minus 15%, mostly affected by Remstar; net revenues, minus 10%; and the EBIT margin, in the order of minus 2% points down compared to previous year. Kardex Remstar's low order backlog that we're experiencing today will most likely result in significantly lower net revenues and profitability in the second half of the year. Therefore, contingency plans have been prepared already for Kardex Remstar, and we will need to implement those if the markets will not start significant signs of recovery in Q3. So we're giving ourselves another good 2 months before we effectively have to decide about restructuring, reorganization and further cost-cutting on and above of what we already have initiated. Kardex Mlog is less affected in the operational business. And with the current order intake, with the current backlog that we are having in Kardex Mlog, we're expecting a steady outlook for half year 2, which is good news. And overall, if you look beyond the crisis, we strongly believe in the intralogistics industry and we believe that smart and automated intralogistics industry will continue to be a key success factor for our customers and, therefore, will return to a solid growth rate in the midterm. And therefore, we also, for now, decided to continue with our strategic investments into the supply chain technology and digitalization to really prepare ourselves for the future despite the current and already reported uncertain market situation. And with that, I would like to close for now and would like to hand back to Edwin and most likely the expected Q&A. Thank you.

Yes, Jens, thank you very much. So I hope this was a good warm-up for the Q&A session. We are now starting. May I ask the operator to start the process of the Q&A?

[Operator Instructions] For the moment, there seems to be no questions from the phone.

Okay. Ladies and gentlemen, then I hope we gave you significant -- but I think now there are questions coming in. Operator, may I ask you again whether there are no questions? Otherwise, we would...

The first question comes from [ Rooney York from AWP ].

[ York, Rooney ] from AWP. Can you clarify what your outlook for the year is now? And I mean, with all uncertainties you see and the recovery unclear, but can you just repeat what you're expecting for the full year?

Yes, [ York. ] Edwin speaking. So we can really not give a guidance for Remstar for the second half of the year. This is really dependent on how the order income will develop over the coming 2 months. We mentioned that if it's not we -- I mean, we are expecting a recovery, but if it's not coming, then we have to act. But really no view on that for now. For Mlog, we see actually, as said in the beginning of the year, quite a steady result from a turnover and profitability point of view for this year. That's all we can say for now.

The next question comes from Sebastian Vogel from UBS.

Can you hear me?

Yes.

I got 3 questions. The first one, I mean, you mentioned a couple of times the March and April. I was wondering if you can shed a little bit more light how the operations have developed over the time between April and end of June. That would be the first question. And for the second question on Mlog, I was wondering if you can shed also a little bit more light there on the sort of industries where you have seen most of this growth coming in the order intake side of things. And the third and last question, you mentioned a couple of cost measures and like short-term work. And so I assume the short-term work has definitely helped you already in the half year. But I guess, there are also a couple of other initiatives. I was wondering if you have -- if you will -- if you see them that they have already helped in the end of the first half. Or do you expect them mostly to help you in the beginning of the second half of 2020?

As always, Sebastian, this is Jens. It's a little difficult to remember all the 3 questions in one. Can you repeat the first one, please? And then -- and we take it step by step, would be nice. Thank you.

Of course, no problem at all. And the first one is you mentioned earlier on a couple of times the March and April or the development until March and April, I was wondering if you can shed a little bit more light what happened between April and end of June.

Now if you elaborate on the bookings development.

Pretty much, Jens.

It's different by region. As I said, I started with the smaller one, the Asian-Pacific region. We saw a big slump, fairly big slump in Q1 as we expected, with the crisis. And a slight recovery, mostly in China, a little bit more in the other countries in this region in Q2. But it's not substantial increase. It's not like a huge increase where we can also call it probably the rebound. It's cautiously monitored. But we're expecting, if nothing else happens again, that these countries should emerge earlier from the situation than maybe other regions. Europe, pretty quickly affected and still a little bit in disarray. So I would say, fairly equal quarters when I look into Q1 and Q2. And the U.S. has really seen a drop from April, March on. Sorry, from April, May on -- excuse me, April and May, mostly in May, where we started dropping. Outlooks are a little better now for the next 2 months, but that's sometimes a typical sales situation that the expectation is higher than the delivery. So that's why we're so cautiously looking into July and August, whether the projected rebound will actually happen.

Understood. And second question was related to Mlog. I was wondering if you can shed a little bit more light in the sort of industries that were the source of this growth of order intake. If you can pinpoint them -- if you can pinpoint at some of them, that would be great.

Yes, maybe here, Sebastian, I can comment. There is not really one industry especially, it's actually quite a balanced order income. There is not a huge order, an extraordinary order. It's really actually quite broad. And as Jens mentioned in the presentation, you remember last year we had a big drop in order income. These projects were not gone. At that time, there was these recession fears and orders in the pipeline did not materialize. They have materialized now. I mean this is actually what happened. A lot of the orders from Half 1 2020 should have been orders from 2019. But it's not a specific industry nor a specific order size. It's as usual, it's a mix. I mean there are always changes, but there's not really a specific mix change. Unless, Thomas, you would like to...

No, no, that's exactly what I wanted to say.

Yes. And your third question was?

Third question was cost measures. Yes. Cost measures initially in Half 1.

Yes, exactly. The cost measure included in the actions we have brought up since corona hit us and the industry. So Jens mentioned it already quite a couple of times that we have been in short-time work in both divisions, in Kardex Mlog as well as in Kardex Remstar. Kardex Mlog only for a very short period of time. So in March, April, we were in short time for the service technicians and for some administrative people. And at Kardex Remstar, we also included the factory later on. So both factories are on short-time work currently, and we expect to continue here in the next couple, 3 to 4 months to go. What we also included is a hiring freeze. As many other company, we stopped hiring for the time being to see what the future brings. And we were also very cautious in all the cost measures. So we did not complete cost cutting, so the strategic investments continue. We are very cautious by spending the money, that's clear. One good thing about corona is that travel cost has gone down dramatically, so we are not traveling, therefore no costs. And we also could do is reduce the provision for the variable salary. So we have positive aspects influencing the P&L, if you will, and we have included some measures already.

And then Sebastian, we can add more details when we discuss the semi-annual results in 3 weeks from now.

Understood. And one last follow-up from my side. In the initial prepared remarks about Remstar, also with regard to the sort of industry split, you mentioned that, of course, the traditional industry suffered the most and you saw less effect on warehousing, picking and e-commerce. I was wondering, should that have not been a little bit more positively impacted by the -- all this demand for e-commerce? Do you have seen something in that regard?

Not really because some of these companies can't react that quickly when it comes to a demand increase. I don't know by how many percent. The only chance they're having is if they want to keep continuing delivery is add people. So any installation that we will provide or anybody else will provide takes a certain while to actually be implemented and be productive. And that's why it -- you're either there or you're not, you know what I mean? If you don't have a system in place, it's hard to implement in no time. But what I'm sure about is that this will be thought through at these companies much earlier now. If they see a continued demand from online, they will maybe more diligently consider the need for investments, and that might drive demand in this industry more than before.

The next question comes from Tom Buri from VV AG.

I have 3 questions. My first question would be what's the reason for a one-off revaluation of Mlog's inventories?

Okay. Thomas?

Yes. Yes, sure. Human failure, very short answer.

Okay. Then second question. As you continue to invest in the supply chain technology and digitalization, does this mean that CapEx will not be cut back and will be around EUR 25 million for the current year?

That's me, again. It's not to be expected. What we for sure do is hold -- is continue with the strategic investments, but not all of the EUR 25 million are strategically. So we review currently what are the CapEx plans, and it might be that it's a bit lower. It's not the full EUR 25 million we expected before. But this, we have to follow up.

Will there be clarifications in the midyear results?

Exactly.

Okay. And the third question was the acquisition of Robomotive, which was announced in May. Can we expect further acquisition of this kind during this year?

Maybe.

We hope so.

We can expect a lot. I thought I can -- Okay. Also in Kardex. Excuse the joke.

[indiscernible] Sorry.

Excuse the joke. Maybe not a time for such a joke. And we are working on similar type of things, yes, in order to add complementary technology to our offering to actually put ourselves into a better position in the marketplace for some of the industry segments that we want to develop.

The next question comes from Edward Donoghue from One Investments.

I apologize if some of the questions might be slightly naive, at most, new to me. Just talking about China, can you give an idea of what the sequential trends, bear in mind, went in first, came out first, to give us some kind of idea how that actually developed? And going back to your comment with regard to sales leads for the July, August period. If you look back at the sales leads that you had from your teams with regard to the China-Asia footprint, how did those actually materialize versus the expectations?

The first one, I'm not sure I understood what -- what do you mean with the sequence of events?

I just want to get an idea of the sequential trends through -- with regard to the China business activity having gone in first the region and actually coming out first. You actually would be ahead of any situation you've seen in other geographies. So to give an idea, actually, how that developed during the quarter. And then the other one was actually just linking that with your comment with regard to sales projections. As sales teams always have a very optimistic view versus the actual delivery and how did that actually -- or is that -- how is that planning out with regard to the Asian region and China?

Okay. The first one, I think we already answered, where we said that they kicked into slump mode first and seem to come out first as well with a slight recovery in Q2. Remains to be seen whether this is a sustainable trend or is it just 1 or 2 months, which are above-average, and then they're dropping back. Which also leads me to the second question. We are currently very careful in also reviewing our sales pipelines and check the validity of all those leads and opportunities in the pipeline. If you take pure numbers, gross numbers, they look fairly promising, but they do not turn into orders at the expected conversion rate. And that is usually a typical sign of either an inflated sales pipeline. Now I don't want to say that. And therefore we look into it to get more clarity on the validity of the offer pipeline entries and expected order date -- order intake date. So it's a little early. I have to apologize for that. But it's a little early to really give a clear indication of, is it an inflated sales pipeline? Or is it really substantial growth in sales pipeline which provides us with more confidence about expected increase in order intake as well?

Okay. That's a fair answer. No, no, that's very helpful. And just maybe going back on that, do you think a number of those sales projections were possibly deferred orders that are coming back or requests? Or actually do you see a greater proportion in new business?

Half-half, I would say. It's -- some of it is clearly deferred decisions. There are people now rebounding. They see their business start picking up and they revitalize these things, reanimate or whatever you call it. And then you obviously also have other customers who experience their strong position in the market. The one I talked about a few minutes ago, where they saw the challenges with their logistics and how little they could cope with the demand peaks they experience, and now they're probably leaning more towards a semi- or fully automated system, they should implement to be ready to serve their customers' demands. So it's really half-half, I would say.

Okay. That's very helpful. My last question was just with regard to Plan B, if the trends that you're hoping for in Q3 don't materialize, how many of the sort of the investment projects or strategic projects could be actually under reanalysis or scope change if Plan B has to be activated?

I would say both of them. For Remstar, we have 2 major ones. And quite obviously, if we go into a different modus -- mode in the company, nothing is sacred. So we need to look into also these 2 projects, one being ERP landscape; and b, is the manufacturing plant in the U.S. And what I'm not implying is that we skip those, but we have leverage to potentially delay things, to shift that investment into other periods. I still believe we need to do both, but maybe with a staggered investment plan and a delayed investment plan. That is more likely to happen to completely shelf those because we urgently need these things in the organization. It's just a matter of how much can we afford to do at what period or what point in time.

Right. And just excuse my ignorance with regard to the North American plant. How advanced are you in that process actually? And has there been any impact from the COVID with regard to that? And when was that due to actually, actually kick in under the normalized plan?

Yes. Building's ready. Equipment is ready to be installed mostly in the plant already. So we did expect -- pre-corona, we did expect start of operation in Q3 2020. Now with the corona kicking in and the travel bans, we are not able to install the equipment and nor are our suppliers, like Salvagnini and others, for the heavy machinery that we are going to put in there. And therefore, we are already on planning to postpone start of operation into early 2021. How early or how late in 2021, that's currently under review.

Where is the plant?

In -- near Columbia, in South Carolina.

[Operator Instructions]

So it looks that there are no new questions coming in. So then I would like to thank you very much for joining our call. I hope we were able to give you a first view after a time where it was -- where it looked, every week, differently. But now it becomes a little bit clearer, and we hope we can give you more insight and more details in 3 weeks from now when we publish our semi-annual report at the end of July, and I hope to hear you again in the call at that time. Thank you very much, and have a nice afternoon. Bye-bye.

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