Kardex Holding AG (KARN) Earnings Call Transcript & Summary

Yes. Thank you very much, operator. Hello, ladies and gentlemen, welcome to our conference call. It's the second time in this month. We were here just on July 8 with the business update. Now we can present you the full set of half year figures. I hope you have also find all the documents on the website, the semi-annual report in the presentation, which is also shown online. So let's go through the figures. We start with Thomas, who will begin with the presentation. Thomas, please?

Thank you, Edwin. Hello to everybody. Highlights of the first half year 2020. As almost every company on the world, also Kardex was hit by the corona crisis, and this is most visible in the order intake of Kardex Remstar, a bit less visible in the net revenues, but also there we have traces of corona. Mlog was less affected happily, but we come later to this view in the view on the divisional results. We stick to the strategic investment programs as we believe in the growth potential of the intralogistics industry. Let's have a look at the KPIs of the first half year. Net revenues have gone down, but they amount to roughly 6.5% above the 2018 level. The compound annual growth rate also came down from 8.7% as per year-end 2019 to now, 5.1%. The operating result, EBIT is EUR 24 million now on the level of 2018, and EBIT margin is above 2017 level. Also, the compound annual growth rate went down from 14.4% as per 2019 to 7.5%. The net cash flow from operating activities is very high with EUR 26 million. The main effect there is that the accounts receivable has gone down based on the lower volume. Equity and equity ratio. The equity amounts to EUR 153 million. This is more or less on the level of 2018, and the equity ratio amounts to 57.8%. The income statement here, we see the impact of the coronavirus. Almost on every level, we have to report a minus at the end as a difference compared to previous year. On the bookings level, this minus amounts to 16.6%. The order backlog went down by 14.5%, EUR 210.9 million. This represents a visibility of roughly 6 months, whereas last year, we reported visibility of roughly 6.5 months. So visibility went down by 0.5 a month. Net revenues, as explained before, a bit less affected by minus 9.5%. GP margin, happily, is more or less on the same level with 34.6% compared to last year with 34.9%. On the OpEx level, you see that we were able to reduce the OpEx. We have there some initiatives on cost-cutting initiatives. We could not travel because of the travel bans and we had partial hiring freezes announced. This reduced the OpEx by 7.5%. The resulting EBIT amounts to EUR 24 million. This is a down of 15.5% or EUR 4.4 million. The EBIT margin amounts to 11.5%. This is roughly 1 percent point below previous year. Further down the income statement, you see that financial result is also less favorable than last year. We had a negative effect in foreign exchanges, mainly based on the currency Swiss francs and British pounds. On the other hand, we had a positive onetime effect or 2 onetime effects on the tax level. Therefore, the tax rate went down heavily to 24.3% compared to last year with 26.3%. The result for the period amounts to EUR 17.1 million, also here, a down of 15.3% or EUR 3 million. Whereas net profit margin amounts to 8.2%, which is not significantly below previous year. If we look at the cash flow statement. There, we see that net cash flow from operating activities went up, some EUR 26.3 million, as mentioned before, this is a plus of EUR 2.4 million. Main effect is the reduced net working capital. There, mainly the accounts receivables went down heavily. This represents a plus of EUR 9.9 million. On the other hand, investing activities went up. So we spent EUR 10 million more than in the last period, EUR 16.3 million. This is mainly because of the investments in U.S. factory. So the investments in the supply chain and infrastructure amounts to EUR 12.5 million. Then we spent EUR 1.8 million on the ERP systems and EUR 2 million on acquisitions. The free cash flow, the resulting free cash flow amounts to EUR 10 million. We also spent a bit more in regards to financing activities, so dividend payments compared to last year went up by EUR 5 million. The resulting cash grain amounts to EUR 24.4 million. Having a look at the balance sheet compared to the year-end 2019. There you see the investment activities. So the noncurrent assets went up heavily by EUR 11.8 million. Then the current assets went down, mainly because of the cash drain, but also because the accounts receivable went down. And as a result, the total assets have decreased significantly to a level of EUR 265 million, representing a minus of roughly EUR 25 million. The equity ratio, as mentioned before, roughly 58%, higher than in June 2019, but lower as per year-end, where we reported 59.3%. Always what I mentioned here at this time, do not forget that on our balance sheet, there is no goodwill or relevant interest-bearing debt. So no such risk on our balance sheet. Thanks for your attention. With this, I would like to hand over to Jens Fankhänel.

Okay. Good afternoon, everybody. Typical format, I'm going to quickly go through the division, starting with Remstar, followed by Mlog and then, last but not least, a short outlook as much as we can say at this stage -- at this point in time. Kardex Remstar division. The main driver for our booking decline over the first 6 months of this year, the 26% down, mostly allocated or attributable to Europe where we saw a sharp decline. It started in China as expected or in Asia, and then the decline happened in Europe. And 2 months later, it also reached the U.S., North America. So we saw the wave going across the world. And this is now resulting in 26% down on bookings. Net revenues good -- order backlog that we started the year with resulted in okay net revenues. The main difference to the first half year in 2019 was the partial access restrictions that we had with customers who did not allow us on site. So this had a negative effect on net revenues that could have been realized, but we were not able to access customer sites, so we had to put projects on hold, service on hold, like many other companies as well. So net revenues down by 8.4%. Gross profit, a little better than in the previous year period with 38.1% versus 37.9%. The main reason here is efficiency gains in the supply chain. I would also rather call it the elimination of the previously reported capacity costs. So our supply chain in the first months went back to, I would say, a normal temperature. And therefore, margins achieved in the supply chain were slightly higher than in the previous year -- period when they had the capacity issues and therefore extra cost to cover the volumes then. And the second thing is also the net revenues mix between service and new business, which also helped secure the gross profit margin. EBIT, EUR 25 million as opposed to EUR 27 million. Almost in line reduced with the net revenues. And this is mostly because we continued with our investments in the strategic programs. ERP landscape, digitalization and the U.S. manufacturing. We did not stop that on purpose because we believe in the necessity to doing these things to actually make Remstar fit for the coming future and the upswing in the market. And therefore, we decided to continue, and did not put a complete stop on these projects. So EBIT decreased almost in line of net revenues. I already mentioned, an EBIT margin was 14.4%, in line with our target ranges. Next one. The key figures, we can -- I think they are now more a summary. The CAGR now is 6.5% due to the decline in net revenues. CAGR on the EBIT margin, down to 8.7%, which is also due to the reduced number in the first half. And the revenues mix, you can see it on the lower side, there is a slight shift towards Life Cycle Services. In terms of percentages, 30% compared to the 29% last year. The rest remains relatively unchanged. Next one, Kardex Mlog. Kardex Mlog, as Thomas has already mentioned in the -- in his introductory comments, showing a slightly different picture. Bookings were up by 54% -- 55% compared to the first half of 2019. Everybody who was in the call the last year knows that the bookings, specifically in the first half year last year were extremely low. And therefore, one has to neutralize that. And therefore, this is bookings in line with our expectations for Mlog, I would say. They already started picking up in Q4. Some orders shifted into the first half of 2020, and therefore, we were able to achieve the 44%. And that goes for new business as well as for our refurbishment projects and service. Order backlog slightly increased, giving us a better visibility for Kardex Mlog. Net revenues, slightly lower than first half last year with 15%. Reason being that due to the lag in order intake last year and the relatively low order backlog we took into 2020, the revenues were affected. And also to some lesser extent than in Kardex Remstar, we had site restrictions as well where we were not able to actually conduct the projects or provide the services, and therefore, this had an impact as well on the net revenues. Gross profit, you see the 17.1% opposed to the 20.9%. I would say, a normal gross profit if it wasn't for the valuation adjustment that you see on the right-hand side, impacting the overall profitability. And that goes through all levels from gross profit to EBIT. And therefore, we see the lower gross profit margin, which we believe and we know is a one-off effect, and it should help bring Mlog back to normal levels because the operating margin itself before that write-off was very well in line with our expectations. EBIT with EUR 0.2 million, way too low, we know that. But this is the same effect that I just explained in terms of valuation adjustment. All right. The comparable figures. Net revenues on the left-hand side, I already mentioned, affected us lower than the first half of 2019. EBIT also affected by the one-off valuation write-off and then the net revenues mix. We see the same healthy pattern with 50%. So half of the business being the after sales work, which is pretty healthy to also support Kardex Mlog's business model, and it shows the right efforts are made to secure this business, never mind what the new business does. Next one, the outlook. As usual, pretty cautious and qualitative outlook only from our side. What's very clear is, and I think we made that statement already 2 weeks ago with our publication then, the impact of the global corona crisis will be reflected in our full year results. That is unrealistic to assume that we will recover from that so quickly. So we see that Kardex Remstar's order backlog that we currently are having with a lower visibility than at the same time last year will result in significantly lower net revenues and profitability in the second half of 2020. Kardex Mlog less affected because they have this higher order backlog, and we also expect them to go back to normal operational profitability. And therefore, we believe that Kardex Mlog will deliver a second half in line with our expectations. So a steady outlook for half 2 for Kardex Mlog. Intralogistics, we keep repeating this, but we should also be aware that intralogistics is a key element for our customers, logistics costs. And therefore, we believe that this intralogistics industry will return to solid growth rates in the midterm. It's shaken up like every other industry these days. But we believe that intralogistics might come out a little faster than other, let's say, more traditional industry segments once the rebound is to be seen in the market. And we, therefore, also decided to continue also in half year -- in the second half year with our strategic investments in the supply chain, technology and digitalization so that we are really ready for the future and not miss boat when the markets rebound is back. And that is it for now. And I guess, I hand back to Edwin, and he will run into the Q&A. Thank you.

Yes. Thank you very much, Jens. Thank you very much, Thomas. I may ask the operator to start the Q&A session now.

We have the first question from [indiscernible] from AWP.

Yes. Hello, everybody. You are saying that the long-term financial goals remain the same. And can you be more specific about these goals? Do you mean the EBIT margin between 8% and 16% for Remstar and 4% to 8% for Mlog? Or are there -- are these other goals?

No, this is our communicated target ranges that we for now stick to. I think we see that Remstar has delivered within the range. Kardex Mlog, this is difficult to explain, would have stayed in the range. And we also believe that -- and we are sure that both divisions will deliver similar type of ranges in the future. And I think our ranges are now just really put to the test with a difficult market environment, and this is really the tester. Not that we have been waiting for it, but this is the real test to our communicated ranges that we are really able to stick within those ranges, even in a very difficult environment.

Maybe here just to add to the financial targets are those that are in our investment book, chapter 5.2. It's margin ranges, balance sheet ranges and growth ranges, they're all still unchanged, and they are all over the cycle, as mentioned by Jens before.

We have a question from Sebastian Vogel from UBS.

I got a couple of questions. The first one would be, if I compare your pre-release numbers with regard to Mlog and the order intake, by the time you mentioned that order intake at Mlog would be like something around plus 70%. This number was a fair bit lower, at least on a relative number. I was wondering what has changed in the meantime?

Well, Sebastian, when we published business update, we did was all based on the -- I mean, we only had the May figures available. We are still full in the accountant phase of the June figures. It was just an estimate we did to close this estimate for Remstar, so it became a bit better. For Mlog to see that the order intake is a bit lower, orders were in. But then at the end of the day, whether they are in the first half of the year, second half, it depends on the date of the signature on the contract. And if the signature comes in with a July 1, then it's from second half and not from first half, and that was still a bit unclear when we published in the first week of July. But there are no -- I mean, important to say, there are no specific issues that one-off gains or one-off, it's more an overall, as mentioned before, an overall due to mix cost capacity, et cetera. And in Mlog, we are on track with the orders, as we said, 3 weeks ago.

And the same applies, and I assume also to the EBIT margin because in prerelease you mentioned that the margin could be down by 200 basis points, if I'm not mistaken. Now your just 100 basis points down right?

That's the same thing, Sebastian, at the end. And net revenues came in a little stronger than expected just because we were able to get customer acceptance before 30th of June. And that resulted in net revenues, relative gross profit, which then went through to the EBIT line. So it's really -- sometimes it is a matter of when the same happens at the end of the year, are we able to close out these projects and finally calculate those projects, or are we not. So we had to make a guess. And be in the end of the day, came in a little stronger than we did believe early in July before we had the full visibility on that.

Understood. In an earlier part of the presentation, you mentioned the FX impact that was quite unfavorable. And can you be a little bit more precise how many millions were lost on the FX side in the first half, either for the group or for Remstar?

Yes. Boston, this is Thomas. The FX effect amounts roughly to EUR 400,000.

Okay. And one last one with regard to the impairment. Is it fair to assume then if the impairment hadn't taken place at Mlog, then the EBIT margin would be somewhere between 4% and 5%?

Can you repeat your question, please? Sorry?

Assuming the impairment that Mlog hadn't taken place, is it fair then to assume the EBIT margin would have been at between 4% and 5%, at the low end of your range, of your guided range?

It is in the range, yes, if we do not consider this value adjustment. But it would have been at the lower end of the range.

The next question comes from Erwin Dut from Kempen.

Yes. I remember in the preliminary call, you said you were fast on cost. And you said, we're going to wait until end of the summer to see whether we have to go do another round of cost cuts and what we're going to do about ramping up the American facility. Are you still in that wait and see mode to see how orders come in, in the next couple of weeks? Or do you have a bit more visibility in terms of whether you want to move ahead in the U.S. and whether you want to take another look at costs, maybe do another program? And maybe in line with that, maybe you can talk a little bit about how in Q2, the -- on a monthly basis, things have developed from what your exit rates are in June? Whether things have normalized a little bit or whether it is still well below normal levels, and therefore, you tend to look at another cost ramp?

It's a little challenging when it's so many questions in one. I'll try to remember your questions, Erwin. The thing we talked about in the other call as well and we had the pleasure of talking one-on-one the other day. Number one, I would say, we never sit on cost and just wait because we do everything possible to adjust as we go. So certain programs are still in place, certain programs are looked at. And I guess it's fair to say that there is not a one fit all approach for all of Kardex at this stage. Especially not for Kardex Remstar, it will be a more regional local approach where we look into each country, see how the country is likely to develop and what we need to do to meet those developments. This is how we handled it. And this is not a wait until Q3, and then we decide on that. So it's really running in parallel to do the best possible in terms of adjustments, holding out on recruitment, whatever you call it. The Q3 is more of a discussion when we go into a more structural discussion in terms of our supply chain, what capacity do we have to tailor the supply chain to for the foreseeable period. So the rest of the organization is an adjustment on the go -- as we go, I would say. We don't have much more visibility. This is, I believe, your other question. It's up and down right now over the weeks, even not just the months, but over the weeks. Good weeks, not so good weeks. New messages on the U.S., potential second wave, so you see it like everybody else in this market, it's a real up and down challenge right now. So I would not say that our clarity, when it comes to market environment and then rebounds or not, has significantly improved over the last, I would say, 3 weeks. Sorry. And Thomas just mentioned to me, the U.S. factory. We continue to build it. But what we have decided and I think it's been in the information as well, we decided to shift the start of operation in the U.S. to early 2021. Main reason being is not so much the business environment. It's COVID related, simply the fact that we cannot get people into the U.S. to commission these machines that we need because we have bending machines for an Italian Company from Salvagnini, the Italian mechanics cannot travel to the U.S., and therefore, we cannot send our people to jointly commission these machines. So we're sitting on a factory right now. We're having the machines themselves on site, but they cannot be put in operation right now. And therefore, we said rather than wait another week and wait another week, we made a call to push the start of operation, the planned start of operation into 2021.

Next question comes from [ Stefano Camilleri ] from One Investments.

I'm [Stefano] from One Investments. Just a couple from me. So the first one would be, can you give an indication for your July sales rate, maybe for Remstar, if you could be specific on that one? And then the next one would be, could you speak a bit more about maybe the furlough schemes expecting to go forward into the year and how they go into your cost cutting measures?

Number one, we cannot and we do not want to comment on the July bookings yet. Typically, the last week of the month is usually the one where we booked the most during a month. So let's wait and see until we have the results in. The second one, I think I just answered, or I tried to answer to Erwin, unless I misunderstood your question.

Yes. My question was merely about the -- for those schemes. And if you maybe have -- are you going to expect that they will be going forward in the next, say, until December?

Sorry, I did not hear what you said, which scheme?

Furlough schemes, grants given from the government for your work?

Grants? Yes. Yes. Sorry. I didn't know the term, sorry.

Sorry. No, my fault, I should have explained better.

That's okay. It's fine. As far as I know, this varies by country. Some countries already announced this to at least last until the end of the year. Some even announced continuation in 2021, at least for the better part for the first half of the year. And for others, we don't have any information yet. So for instance, German government, as far as I know, they made sure that this goes throughout 2020 or the whole year. And therefore, we try to, of course, leverage as much as we can and benefit as much as we can from that. But it also goes in line. I mean this only brings us over a certain period of time and what we need to have. This is linking back into Erwin's question. We need to rebound in the Q3 in order to be sure that we don't have to go into structural measures. Because once the subsidies or clients stop, we need to have [ the right and ] tailored suit in terms of capacities to then meet next year's demand.

The next question comes from Alexander Koller from ZKB.

Could you give us an indication of how sensitive costs are to a declining top line? Cost so far was a little bit surprised on the positive side, but profitability at Remstar has not yet declined disproportionately. So is it realistic to maintain this in the second half of the year without major cost adjustment? Maybe a bit light on that.

Alex, this is Jens again. Unfortunately not. And the main reason being until -- let's say, for the better part of the first half, we had a fairly good order backlog. As you've seen, the order backlog that we took into the year, and that helped fill the factories, which is one of our main profitability drivers, as you know. And what we see now in our order backlog, the reduced one is a lower-than-expected factory utilization. And that is exactly what we've been highlighting that we expect a lower margin level for Kardex Remstar in the second half of the year compared to the first half of the year. How much, again, is dependent how quickly we can rebound and refill the factories again in terms of delivery to the customers. And therefore, it's a little hard to predict, but this is where we cannot simply adjust the costs in line with the lower top line. That would necessitate major structural things, like cutting people and else.

And maybe to add, Alex, as Jens mentioned in the presentation, we were also taking in comparison to last year. You remember last year, we had quite a high cost base in the first half year due to the capacity restraints we had. And that's -- so there's also a certain basis effect in the first half that made the figures looking quite good.

We have a follow-up question from [indiscernible] from AWP.

Yes. Sorry, it's me again. You stated that Remstar's traditional customers active in production and assembly were primarily responsible for the decline in orders. And in contrast, there was less reluctance in the emerging areas such as e-commerce, for example. Does this maybe lead to a strategic change with regard to the target customers?

No need to apologize for questions. This is what we are here for. No, it's fine. Yes, your understanding is correct, and this is from our report. This is the traditional industries, automotive, machinery, these type of customers who put a hard stop on some of their investments. In contrary, retail, e-commerce, these type of industry segments did not experience so much. And yes, there is a strategic focus on these things. But what it also needs is the range, the product ranges and the solution ranges to meet these customer demands. And therefore, this is something I think we decided to change the focus for Remstar, specifically in the course of last year, the more focus on these extra segments, the newer segments, but it also needs then products to be redesigned, to be prepared for this, certain solutions to be defined, what we call, stand-alone subsystems so that they can meet these customer demands. And if you really look into more detail in the retail, e-commerce, it's not the traditional retail market. I read an article yesterday that the North American retail market is substantially affected. They're closing store after store these days. So this is not where the dynamics are. The dynamics are in their online channels where certain new things come into play, micro fulfillment centers is the password of the last, let's say, at least quarter of a year, if not half year. And that differentiates again into dock stores. This is an area Remstar does not play in and most likely has challenges to play in because this is fully automated warehouses, as such, with robots in there and everything else. This is not the typical solution portfolio that Remstar is in. And then it goes to open floor, men-used machines, like pickup stations and supported operations, and this is where we have the first successes. There are certain customers in the U.S., but also in the Scandinavian market where we sell more traditional solutions like solutions based on the Remstar. Standard product lines, combined with software, combined with color pick, frame pic, this is typical solutions that are used in emerging companies in the e-commerce market. So we're starting to get some hold of the market, but this is a slow process, as expected.

We have no further questions.

Okay. It seems that we are at the end of the call. Further questions may arise. So please contact us. We are happy to answer them. Now I hope that some of you are going to have some nice weeks of holidays, and I hope to hear you soon in autumn and latest with our full year frequency in March next year. Thank you very much, and have a good day. Bye-bye.