Palfinger AG (PAL) Earnings Call Transcript & Summary

Hello, and welcome to the full year results 2020 call. My name is Rinkel, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Andreas Klauser, to begin today's conference. Thank you.

Yes. Thank you, Rinkel. good morning from the PALFINGER world in Lengau, Austria. It's a beautiful day, and I think seeing the numbers, which we will present for 2020, but as well, the outlook for 2021 should make sure that everybody should as well smile at the end of this press conference. Just a couple of notes here in terms of key facts we have. I think we can report here that we had a solid profitability and a strengthened balance sheet even in the crisis year. The COVID impact, yes, was massive in 2020. We overcome it partially last part of 2020. We see further stabilization of the market, and we are looking positively into 2021. As well, I'm happy to report here that our COVID task force, which was implemented in an early stage, March 2020, did a really great job, actions defined and as well they carried out. The actions which were implemented worked quite well and helped us to come back on track and to be fully operational as quick as possible. Yes, the challenge for 2020 was, as well, quite well accepted. The challenge which came out of the COVID -- out of the COVID crisis per se in terms of health and safety, but as well in terms of profitability and business. If you go here to the next slide. PALFINGER, and I'm happier to report, is very well positioned globally. And here are some of the key figures. EUR 1.53 billion net revenue with more than 10,800 employees. Here, you recognize there was already a reduction which we had to implement last year, beginning of this year. The business is driven based on 35 production sites and 5,000 worldwide service centers. Here, I'm also happy to report that we managed to keep all our services up and running even during the COVID time. So no customer -- no business partner was suffering out of this that we couldn't get the right service, the right answer, the right contact into PALFINGER. In terms of revenue spread here, 60% EMEA, over 20% North America, 3% LATAM and 14% between APAC and CIS. Here, the split is roughly 8% APAC and 6% CIS region. As well, in both regions, quite positive business development. Why did we go -- overcome this crisis well and here I will ask you to go to the next slide, Page 5. Yes, we are crisis resistant, thanks to sector diversity and here you see just some of the key sectors here where we are in as well in terms of some examples. So the construction business, still one of the main driver, was luckily not suffering that much. We got some investment support here from different governments, especially on the Austrian side, the European side, which worked quite well in terms of telecommunication, like the platforms which we are building in the U.S., we could participate here in the growth of the marketplace. So all in all, thanks to the sector diversity, we managed quite well to overcome the crisis and to become even more resistant than in the past. If you go to the next slide here, Slide 6. Yes, we are innovative, and this innovation helps us to keep our leadership up and that we can further expand, and here you see just a couple of examples in terms of products. On one hand side, the loader crane, marine handling solution, the working platform, as I mentioned already before, which we especially designed here for the U.S. -- North American market. And on the other hand, as well, further expanding in solutions. Part of it is the so-called turnkey solutions, but overall solutions which we are providing to our customers to solve and fix their challenges and their problems. If you go to next, Slide 7, and we further invested as well in PALFINGER 21st, our corporate incubator. And I think this is very important that we did not draw back from this investment. We did not draw back from this kind of approach. We are shaping the future with new technology and new business approach, new business solutions, which we are finding. And here -- and I think everybody is quite well aware at this call that STRUCINSPECT, bridge and building inspection plays here a major role in this strategy. It is the first result of PALFINGER 21st. Also happy to report here that we got a couple of awards awarded here in 2020, not only the Austrian state prize, as well in other countries, we are very well recognized as the leading technology in this kind of business. If you go to the next slide, sustainability. Sustainability, as you know, is as well in the historical DNA, very well recognized of PALFINGER and as well in future. So we are here further looking forward in terms of the strategy 2021 onwards. And it's not only, let's say, in terms of ideas and thoughts behind and to have this sustainability drive as an action item, now we are as well reflecting this in our KPIs. And here just mentioned a couple of things; being a responsible employer, to have sustainable products, as well eco-efficiency in terms of production, and to be a fair business partner. And referencing here to the fair business partner, I think doing fair business in a partnership -- in a real partnership helps a lot and we have seen this even during the COVID crisis, but as well at the cyber attack that our business partners, our suppliers, they are real partners and helped us to overcome the situation in a short time -- shortest time possible. If you go to the next slide, in terms of COVID and some of you might have heard this already on our quarter announcement, which we had -- a meeting which we had. Yes, we managed quite well to overcome COVID-19. We had here a task force implemented based on the learnings we had out of China. And then we had 3 major packages. One was related to health and safety. The other one was related in terms of communication and production, operations management, but even more important here for this kind of auditorium to optimize our liquidity. And I think we will see later on as well in the numbers, which Felix Strohbichler will present, quite well done. And all the actions we have taken here really have showed a significantly positive result. On the other hand as well, to make sure that we have quite strict cost control, because there's really a local support from the Austrian government in terms of short time work, which worked quite well. And yes, last but not least, really to make sure that the health and safety of our -- well-being of employees is ensured. If you go to the next slide, 2020, here a landmark year, I can report. It's quite important besides the COVID-19 task force, the crisis management as well to announce here that we managed to acquire the second largest PALFINGER dealer, a Swedish company, Hinz, which is as well covering in the future the entire Scandinavian territory. On the other hand, that we completed our restructuring in the SEA segment and is now fully integrated in the GPO. And last but not least, I'm also very happy to report here that our PALFINGER World Tour, which was the first digital launch and global event we had under the concept "Challenge Accepted" to stay connected to our customers, to stay connected to our network, even to virtually launch new products. And with this kind of activity, we even became here the benchmark in the industry. Others are following that you launch products digitally and you do not need to go to a trade show physically. Saying this, I think it's -- now it's really important to see how this is reflected and how this was reflected in our numbers for 2020, what's the outlook, and I'm here handing over to our CFO, Felix Strohbichler.

Thank you, Andreas Klauser. Good morning, ladies and gentlemen. I'm happy to present to you now the financials of the year 2020. 2020 was a difficult year with COVID. Despite of this, we are happy to be able to present a very solid profitability and a very positive development, especially on the balance sheet. We have now 2 segments since we integrated, as Andreas Klauser mentioned, the former segment SEA into our 2 remaining segments, Sales & Service on the one hand, and Operations on the other hand. I would like to start with the segment Sales & Service on Page #13. As you can imagine, the effects of COVID-19 were felt across all product lines, across all regions in 2020. Especially, in Q2, we had lockdowns. We had weeks of almost no order intake because there was no visibility also in our customers' businesses. And this, of course, affected our turnover and results in 2020 in Sales & Service. However, we could reduce the effect on our earnings by short-time work, cost-cutting measures. And we think that figures we can present here are quite good. Starting from June, we saw a recovery in order intake, and this also was visible in sales and results. If you go to Page #14, you can see that the external revenue of the segment Sales & Service decreased by 12% to EUR 1.44 billion. However, what is key in such a year is that the profitability remained at a very stable level at 8.2%, only being slightly down from the record year 2019 despite of the decline in sales. If we then go to the segment Operations, 2 pages further, Page #16. Of course, the impact of COVID-19 was even more dramatical than in Sales & Service. Obviously, we have a lot of structural cost assets in the segment Operations. We had the lockdowns in Q1, which closed down the factories for about 2 weeks. We used this time to really bring up our factories to a very good standard in terms of safeguarding health and safety of our employees to make sure that we could ramp up very quickly thereafter and get back to good utilization levels. Actually, also with the improvement of order intake in June and July, we also increased our utilization in the second half of the year. And towards the end of the year, we reached again very high levels of utilization in our plants. A very important event in the segment Operations in 2020 was the introduction of S/4 HANA in 8 EMEA operations plants. So this was the biggest step in our project to implement S/4 HANA globally all over the world. So with this step, 1,200 users started to work in our standardized S/4 system and this worked quite well. If you now jump to Page #17, we see the figures here for Operations. The first-line, external revenue, I always have to highlight, is not really representative because this is only showing the external turnover. So what we produce in our factories for third parties, is only third party manufacturing. The main driver for segment Operations is, of course, what is produced for our internal customer, the segment Sales & Service. So this is, of course, by far, the biggest part of output, which is going into our internal segments and service and not to external customers. So the external revenue for third parties was down by almost 20%, went down to EUR 90 million. And as I said, the effect on profitability is overproportional in Operations and, therefore, went down quite dramatically to EUR 4.2 million in 2020. If you then go to the unit Holding, Page #19. This is more or less the headquarter with projects -- global projects, which are allocated here. So this is a pure cost position and due to the fact that you really cut cost delayed projects in 2020 to be cautious in the COVID environment, you can see here the effect in the cost which went down by about EUR 7 million in the segment Holding from EUR 29.4 million to EUR 22.5 million. If you now go to the KPIs of the group overall, Page #21, you see that the revenue decreased by 12.5% to EUR 1.53 billion. Despite of the decrease in turnover, we could achieve a profit of EUR 100.3 million. If we would have reported this only a few years ago, this would have been an absolute record year for PALFINGER. And I think in the circumstances of 2020, this is quite a success. Of course, this success didn't come automatically. We took comprehensive actions across the board to cut costs, to make sure that we used all possibilities to keep up the profitability level as much as possible. The consolidated net result, as a consequence, went down from EUR 80 million to around EUR 50 million in 2020. On the next page, #22, you see the development of net investments over the past 5 years. And obviously, PALFINGER has still quite some -- still some great investments in 2020, EUR 68 million. But this level was significantly down compared to the years 2018 and 2019. This was an intentional reduction of the investment volume in 2020, just to be cautious in the COVID environment. Of course, all the planned investments are not canceled, but will be now -- will now happen in the years to come, especially year 2021. So the net investments in 2021 are expected to be actually the highest in the history of PALFINGER. Page #23 is my favorite slide. It shows our net financial debt development, which went down by EUR 129 million in the COVID year. So decreased the net financial debt from EUR 525.6 million to EUR 397 million. This is the lowest level of net financial debt since 2013, if you take out the effect of IFRS 16, which is more or less a bookkeeping effect. But if you compare apples and apples, it's the lowest net financial debt since 2013. What is also good to see is that the average maturity on our financial liabilities is still 4 years in the future. So we are very well balanced in our financing structure. And the interest rate and financial liabilities went once again substantially down from 1.69% to 1.53%. What you can also see on this slide is a decrease in equity. The reason for this is a pure translation effect, so we had about EUR 29 million of effects due to FX rates. So 1 year, this goes up and 1 year, it goes down in 2019. We had quite some effect from ruble, U.S. dollars, NOK, et cetera, and this decreased the equity. On Page #24, you can see our balance sheet KPIs. And as you might recall, we set ourselves a target to reach a 40% equity ratio, a 70% gearing ratio and net debt-to-EBITDA should be at the level of 2. In 2020 in the COVID year, we managed to reach our targets. We are actually very close to 40%. So we are now at the target level here. We could go below the 70% in gearing and also with our -- a level of 2.10% in net debt to EBITDA, we are very close to the target level. So this shows that the very good stability of PALFINGER has further substantially improved in the year 2020. On Page #25, you can see our cash flow statement. And obviously, we started with a lower profitability in the top line. And nevertheless, the free cash flow is not only the best in history, it's by far the best free cash flow in the history of PALFINGER. We had, in the record year 2019, a free cash flow of EUR 112.4 million. In 2020, we could achieve EUR 173.3 million in free cash flow. The driver for this was, on the one hand, the change in working capital, as you can see, improved substantially our working capital in 2020. If you now say, yes, but you did less turnover. So it's automatically the case. This is not true. Q4 was not that far away from Q4 2019. So we improved towards the end of the year quite a bit our turnover development. And the change in working capital is to the largest extent due to optimization of inventory, receivables, payables. The second important factor for the cash flow is the change in cash flow from tax payments. Here, we used the possibilities of several countries to evaluate tax payments. So this is not an effect to stay, obviously. So this is just delays to the future, and we will have to do these tax payments in 2021. If you then go down to the line cash flow from investment activities, it looks like we would have invested more in 2020 than 2019. This is not true. If you recall, the net investment slide. In practice, we had a special effect in 2019 with the divestment of 2.5% in our cross shareholding with the Sany Group company, which brought in $28.6 million and which decreased, so to say, this figure to this level. In reality, we decreased our investments substantially. And this was also an important factor to have such a good free cash flow. If we then go to my last slide, Page #26. As you know, we had a significant event after year-end 2020. We were faced with a cyber attack on the early morning of January 25. PALFINGER was targeted by global cyber attack. It affected our IT infrastructure in all major sites worldwide. What we did was to set up immediately a task force to shutdown systematically all systems to isolate the infected service, and we were able, within only 2 weeks, to ramp up all our production and assembly plants again. What is important for you to understand is that there was no data stolen, there was no money withdrawn. There was a decryption of server taking place. We could -- so we could manage this and we are now back into operation, and we do not see any lasting effects from this except that we have now speeded up our efforts to even further improve our cybersecurity. In order to clarify what is the impact of the cyber attack, we did an ad hoc announcement, which you probably have seen. And we communicated that the Q1 2021 should show even higher revenues than Q1 2020, when we had EUR 393 million of turnover. However, the EBIT margin will be below the level of the prior year, which was 8%, simply due to the fact that we had some one-off effects linked to the cyber crisis, which hopefully will be covered in the future also by the insurance we had made about 2 years ago. With this, I would like to hand back to Andreas Klauser for the outlook for 2021.

Yes. Thank you, Felix. So what the year 2020 and as well the beginning considering the cyber attack was really a significant hiccup. But let us look forward. Let me share with you, on Slide 28, our 2021 targets based on a good order book. And I think this is really important to report that we are having good order coverage on most of our product lines. And saying this, the target is quite clear. We expect for 2021, a EUR 1.7 billion revenue, 8% EBIT margin. So good positive numbers. And I think when we look afterwards into Q1 in a couple of weeks, I think this should be already the starting point -- a good starting point for 2021. As well, we are further continuing to reverse our cross-holding agreement with Sany. So as well here to have a clear split between the 2 different activities between Sany and PALFINGER. Also, I'm happy to report that we will have a record investment volume for 2021 of over EUR 100 million. Yes, it is driven by the subsidies we are getting here from different governments like the Austrian government, and we are anticipating here investments, which were anyway planned in this time frame of the next 2, 2.5 years. Also happy to report that we will use and we will see additional synergies and potential of synergies here to further integrate our standard systems, our production systems in terms of digitalization. I think this is well the past, we will further continue to go. And last but not least, as well, the dividend proposal, which we will give to the Supervisory Board of EUR 0.45 per share as well to show stability and that the performance of PALFINGER is really strong and as well is recognized and reflected in the earnings our shareholders really can have. If you go to the next slide, 29. It's really, we want to remind everybody at the call here about our 2024 targets. Very clear, the EUR 2 billion revenue, 10% EBIT over the economic cycle and 10% growth in terms of economic cycle as well. And to remain in the #1 -- #1 position, the market leader in crane and lifting solutions globally. And saying this, I want to conclude at this point here, our presentation. Thanks for your attention, and we are very happy to receive further questions from you.

[Operator Instructions] We have 4 questions coming from Daniel. I will read the question one by one. Hi, everybody, here are my questions. Can you please explain the EBIT swing of the Operations segment 3Q versus 4Q? Is it fair to assume that revenue in the Operations segment is generally lower in 4Q as clients focus on working capital or does it simply take longer for the component business to recover versus product business?

So just to make sure that I understood the question correctly. So you were asking for EBITDA of the Operations segment? Or are we talking about EBITDA development in total?

Operations.

So let me just jump here a little bit into the details, but I'm not sure if I really got the point here. So you state that the development of the EBITDA in Q4 why it is different from the other quarters? So actually, in practice, we had, in Q4, some write-offs of intangibles, which led to a higher depreciations in Q4 compared to the other quarters. And this was an impact here if you look at the EBITDA development over the quarter. So we had, on the one hand, over the year, and I would have to look now into the individual quarters when it happened. On the one hand, write-offs of intangibles, which were brands. This was, however, taking place in the segment Sales & Service. So this was not in Operations. This is -- I'm a little bit wondering why you refer now to Operations. In operations, we had also some effects, write-offs of intangibles in terms of activated development cost that is in the segment Operations. However, what you can see in Operations as well is that you have major write-offs, of course, depreciation and limited investments. But this is more or less the overall development of depreciation, amortization in 2020. If I may comment on this like that, I cannot now go into detail in terms of EBITDA of the individual segment Operations in Q4. I'm not sure if I get the point you want to reach here.

The second question is working capital development is very strong, even further bolstering the gearing reduction. How sustainable is this WC level as of year '20?

So yes, we decreased the working capital substantially, as you have seen in terms of cash flow, we could generate about EUR 70 million. The main effect was coming from optimizing finished goods, but also receivables and payables. We -- especially at the receivable side, we're very cautious as we couldn't assume if customers would be heavily impacted by COVID, if we would have bankruptcies. So we managed this also very tightly. And we are going to keep this level relative to turnover. So we have not done onetime optimizations. These are optimizations on the working capital side, which are here to stay also for the coming year. However, of course, with our target to grow turnover in absolute figures, working capital will further increase.

We have the third question. What are you seeing in your marine business? It seems that cruise operators are already gearing up to restart their business. What do you see in terms of pent-up services demand?

In general, I think, yes, we expect cruise business to come back, maybe less capacity but more ships. Yes, the pipeline is booked quite well. Some of the construction sites had to shut down in terms of COVID impact since the workforce was not able to participate in the shipyards. This is considered, and in general, we believe that in the near future, this business will restart again. In general, marine business and our services, we are restarting currently since we make sure that we have vaccination for our service personnel, which can then go out and continue on the activities.

The fourth question is, any details on the economic impact of the cyber attack? How can you make sure you reduce the risk of a successful attack going forward?

Yes. First of all, in terms of damage, as we communicated in our ad hoc announcement, yes, there is an impact in Q1 due to the fact that we lost about 2 weeks of production, which reduces the turnover. Then we also had one-off costs like consultants, ICT recovery teams, quite to a large extent, supporting our internal team to get the problem solved. So this is the one thing. The other thing is that, of course, we paid people normally in this period of time, despite of the fact that people couldn't work. This you don't see immediately as an impact in the P&L, of course. But what's going to happen now is that the first target is really to satisfy our customers, to keep the deliveries we have promised. So we are now working also on Saturdays. We changed the shift model. We are working overtime to make sure that we can recover the 10 days lost until the end of Q2. So in terms of turnover, the loss should be minimal, if any. In terms of EBIT, there is probably a certain loss in 2021, for sure, in the first quarter, but perhaps also in the full year. It is despite of the fact that we have an insurance company. According to experience, some parts of the damage take more than 1 year to get clarified and to get confirmed by the insurance. So this means that I do expect that we perhaps see an impact of a few millions in 2020, which will hopefully be then covered in 2021. But as I said, this is mainly depending on when we get the confirmation from the insurance.

We have a few questions coming from Charlotte. The first question is, can you comment on current trading and order momentum? Do you have an estimate already regarding the impact of the cyber attack? Would the Q1 margin have been stable or higher in the absence of the attack?

Perhaps may just go back to the question before because I think I didn't answer the second part, which was about what did we do to improve our cybersecurity, and I would like to comment on this quickly. So of course, when we were correcting, so to say, the decryption and when we were working on recovering from the attack, at the same time, we worked on improving our cybersecurity level immediately with some fast measures which were implemented more or less at the same time, simultaneously, as recovering from the attack. And what we also did was just to make sure that we place ourselves at the higher security level, we increased our security -- cybersecurity ambition, increased the budget, decided to implement some measures which were planned over the year and the year 2022 already within the next few months. So we have, in the meantime, already increased our cyber security level and will further increase it to a much quicker extent than originally planned. And I would like to hand over to Andreas Klauser for the question regarding order momentum.

Yes, the order book, as I said, the order coverage for Q1 looks quite well in the major product lines. And as well for H1, we are relatively well covered. Especially in North America, the business was coming back at a reasonable level already at the end of 2020 and continues to go positive even as well in terms of our Russian activities, CIS countries. Overall, we can say the order books are good -- covered and well perceived.

The next question from Charlotte is, can you provide an outlook for working capital and CapEx in 2021? Are there any metrics on the former SEA segment that you can share? What do you expect for the SEA business in 2021? And can you comment on the situation in your supply chain and raw material pricing?

So perhaps to start with the question on CapEx. As presented before, we reduced our spending on capital expenditure in 2020 quite significantly. Andreas Klauser has presented our ambition for the year 2024 to reach EUR 2 billion of turnover from organic growth. In order to be able to achieve this, we need a major investment program, we need major CapEx. So everything which was delayed in 2020 has to happen now in the years 2021 and 2022. So it's on the one hand, capacity extension, but not only, it's also investment in digital developments. So it's across the board. It's quality improvements. It's improving the level of painting, quality, et cetera, et cetera. So it's many different aspects, but it's a lot of things going to happen now in the near future. So this is about the planned development of CapEx.

Regarding SEA -- in terms of SEA business, yes, I mean, everybody is aware that oil and gas is still significantly negatively impacted, even difficult to understand since the crude oil price was already hitting the USD 6 mark. But okay, let's see. But you still see positive trends coming out of fish farming, agriculture to see if there's something going on quite well. And here, we are the major -- #1 supplier. As I mentioned already earlier, cruise ship business is expected to come back short, midterm. And the service activities, we are currently restarting, just ensuring vaccination for our service technicians so that they can get out in the different shipyards without being impacted here by any lockdown caused by COVID-19.

Perhaps if I understood, also another aspect of the question, how would have evolved the SEA segment if it would still be there? We do not track and measure it because we have now a new steering model where the segment SEA is included. But if we look at the former SEA companies and add this up and take a rough estimation of the profit, it shows that we make no losses in 2020 in the former SEA segment.

We have our next question from Sebastian. Would you please elaborate on the SEA business turnaround, visibility, orders, market share development, margin ramp up given the optimization work done in the last years?

Yes, before mentioning, I just wanted to come back as well to the question in terms of material cost, supply chain. We -- yes, we are seeing tremendous increases in terms of raw material costs, which is over 1 point but we also want to move forward in terms of price increases, which are planned here into our business, and this should minimum absorb the costs which we see -- the additional costs which we see out to material costs and supply chain. I think this is as well important to mention. And the second question was about...