Palfinger AG (PAL) Earnings Call Transcript & Summary

Thank you for standing by. Welcome, and thank you for joining the Passenger AG Q1 to Q3 Results Conference Call. Our today's host is CFO, Felix Strohbichler of Palfinger AG. [Operator Instructions] I would now like to turn the conference over to Felix Strobel, CFO. Please go ahead.

Thank you. Good morning, ladies and gentlemen. Welcome to the presentation of our actually very good results of the first 3 quarters of 2023. First of all, let me just say a few words about Palfinger. We are the global market leader for cranes and lifting solutions. We had a revenue of EUR 2.23 billion in 2022, with around 1,700 employees at the moment. What is very special at Palfinger is that we are present in all regions worldwide in comparison with our competitors, which are rather local producers. We're really present in all regions with production sites on the one hand, but what is even more important for our customers with around 5,000 service centers, which creates a real USP for Palfinger customers. At the bottom of the slide, you see the revenue distribution of Palfinger. And what you can see here that for the first time, we have reached now a share of 25% of our revenues in North America. EMEA is still at 60%, and the other regions are at 5% each. What you can see here is the customer segment of Palfinger. And obviously, Palfinger has a diverse product portfolio and is also serving a lot of different industries, which is a good thing as it provides us with a good resilience in a downturn of one or the other segment. About 40% is exposed to the construction industry, then forestry and agriculture with around 15% is also a very important customer segment. Waste management, recycling around 10%. And then we have a lot of smaller customer segments, public sector rental, offshore oil and gas, wind railway. So a lot of applications, different applications we are serving to. And as you can also see, there are quite a few sustainable applications like offshore wind, railway, agriculture, so waste management and recycling. So obviously, Palfinger is also serving here megatrends. Sustainability is, in any case, a very important driver of Palfinger on the one hand in our strategy. On the other hand, also in terms of our daily operations. What you can see in the first column in emissions, you will eventually recognize that the percentage of power from renewable energy sources has come down from around 76% to 61%. The reason for this is that we have not been able to obtain green energy in Romania, where we have the highest energy consumption in the group. So we are looking at how we can compensate this, but this is the reason why we have here a major decrease compared to the last presentation. Of course, next few emissions, safety, health of our employees and of our users and also the focus on governance and transparency are key factors of our ESG strategy. Coming now to the results of the first 3 quarters. So we have an absolute record period in terms of revenue, EBIT and what is the most important in consolidated net result. Still inflation and high interest rates impact the economy worldwide, especially in Europe, which impacts mainly the order intake in EMEA, and I will talk about this in a minute. And last but not least, we have been talking about high inventory levels over the past quarters. We see here that the development is turning into the positive direction, but we still have very high inventory levels on the one hand, due to the still truck delivery liability in EMEA and NAM, but also due to the fact that especially in EMEA, the installation network is a bottleneck. Coming now to the segment sales and service. In North America, we can show a revenue growth of about 30%, and we still see a positive development in earnings. So we always had a target of a double-digit EBIT margin in North America, and we can say that we have reached this goal. Also Latin America shows a solid performance despite of the fact that the market is quite difficult there. In APAC, and I'm not talking about China because there, we don't see any improvement. But in the rest of APAC, we have seen a high order intake for loader cranes, especially and namely in India, which is one of the growth markets of Palfinger in the future. If you go to marine, we have here a tailwind from the oil and gas prices, and this is really boosting also our order intake. So we have a very good development here in Marine Handling Solutions and also in Boats & Davits. Coming to EMEA. Obviously, the order intake is impacted by, on the one hand, high interest rates, which then impact the construction activity. And obviously, as we have more than 40% of customers in the construction industry, this also leads to a lower order intake for Palfinger in the EMEA region. On the other hand, we see a very much improved profitability due to the fact that the price increases which have been implemented over the past years have been fully effective in the first 3 quarters. And then I already talked about the inventory level. So this is mainly in the segmentation service where we still face a high level of finished goods stock. Here, we see the KPIs of the segmentation service. So we see an 18% growth in external revenue, mostly driven also by the price increases, which have become effective. And EBIT has grown over proportionately by 41% to EUR 148 million, and this despite of the fact that the transfer prices from the segment operations have been adapted, which means that this has actually positively impacted the EBIT margin of the segment operations and negatively impacted the EBIT margin of the segmentation services and still, you can see here this substantial increase. Coming on to the segment operations. We see that delivery liability for purchased components is improving significantly and has significantly improved. However, this is not really good news because in the end, this is just mirroring the macroeconomic environment, especially in EMEA. Nevertheless, we had a stable production output in EMEA in North America. However, we have been slowed down by the fact that charges have not been available to the extent we would have needed them. We can also see that the decrease in freight cost is hitting our P&L. The fall in material costs only start to have an impact now in Q3. We have a delay due to the fact that our contracts are running at least for 6 months. So a lower purchase price only takes 2 to 3 quarters to positively be seen in the P&L. Last but not least, we had in September, the growth breaking ceremony in niche in Serbia for our new production plant. This is a very attractive country in terms of wage cost saves and also the availability of skilled employees is extremely good compared to other European countries, especially also to Bulgaria, for example, or Maribor in Slovenia. Coming to the turnover figure of segment operations. So this is the external revenue only from manufacturing to third parties. And you can see here a decline of 20%, which is, again, mirroring the overall economic development, especially in Europe. But the EBIT could be significantly increased. This is mainly due to the fact that the higher material costs have been passed on in new transfer prices to the segmentation service so that the segment operations is, so to say, on the profitability level where it should be. Coming now to the new segment, non-other reportable segments, we have decided in the second quarter to spin off the Tail and Passenger Lift product line from the global Palfinger organization. This is a very specific product line with specific market requirements. It's a commodity product. There are very little synergies with the other product lines. So due to the fact that this product can was also making losses, we decided to create a new organizational structure to create the flexibility to respond faster to the needs of the market segment and also to turn around the business very quickly. The change in organization and segmentation effects at the moment, only the EMEA business of Tail and Passenger Lift from 2024 onwards, also the North American business. If you look at the time line of financial figures, you will see that we have already adapted 2022, but not yet to 2021 to give you comparable figures for the last year, at least. You can see here the external revenue. So this is now the product in Tail and Passenger Lifts in Europe only, as mentioned before, in EMEA only with an EBIT of minus EUR 48 million. This is a relatively high difference to the year before. Here, we have quite a few one-off effects on the one hand of resegmentation, which is around EUR 3 million, but we have heavy currency effects in the positive direction in 2022 in the negative direction in 2023. And then also holding costs have continued to increase, mainly due to inflation so that we end up with this EBITDA of -48 million. Coming now to the Palfinger Group. It's by far the best Q1 to the Q3 result in Palfinger's history, almost EUR 1.8 billion of turnover, an increase of almost 14%. What is even more important is that the EBIT increased over proportionately by 47% to EUR 165 million, which reflects an EBIT margin of 9.2% and the consolidated net result increased by 71% to EUR 91 million in the first 3 quarters. As mentioned before, we still have faced very high inventory levels, which continues or pressure to influence our net financial debt, which is still at a very high level of EUR 790 million at the half year, it was only slightly higher. So you see only a very slight reduction. However, as already mentioned, we have set here measures to reduce the stock levels and we do expect that the stock will come down significantly over the next 3 quarters, but clearly with a major first step in the fourth quarter 2023. Our equity ratio reduced mainly due to currency effects. So on the one hand, the U.S. dollar and the ruble had quite some negative impact in terms of translation effect on the equity, which also impacted obviously the equity ratio and the gearing. However, we can say that net debt to EBITDA in ROCE have improved, and we are heading towards our target levels here. Last but not least, if you talk about financial KPIs, our free cash flow, we have still a negative free cash flow of EUR 28 million for the first 3 quarters. But what is positive is that it's not the first quarter in this year with a clearly positive free cash flow. So we had around EUR 20 million of more negative free cash flow in the first half year. So it's an improvement now -- significant improvement compared to the half year. The main driver is still working capital. As you can see, the change in working capital in this year is still EUR 113 million, which is still significant, so despite of the fact that we have a very high EBITDA start basis with the change in working capital and also a high level of investing activities of EUR 121.5 million, which is far more than in the previous year. We still have a free cash flow which is negative of EUR 28 million. But again, we are heading towards a positive free cash flow until the end of the year. This is clearly our target to get there. Coming now to the outlook 2023. So we are on track. We communicated already in March that we want to reach a revenue of EUR 2.4 million and an EBIT of EUR 200 million. So we are here on track. We expect to reach EUR 2.4 billion and what is -- of course, more important is that we also expect to reach the EUR 200 million for the full year 2023. The order book coverage gives us the visibility until the end of Q1, which is still a very high and good order book. However, clearly, we see a lower order intake in EMEA, and there is no sign of a market recovery, and there is no indication that the market would change in the short term. The good thing is that the market environment in North America and also in the marine market is still very healthy and positive. Of course, we have increased uncertainties due to the geopolitical developments. I would say the macroeconomic situation will not change the outlook for 2023, but of course, the geopolitical developments are a major retractor nowadays. Coming now to our guidance for 2027. So we keep up our ambitious financial targets despite of the fact that we are in the middle of an economic downturn in EMEA. And it's also important to mention that from January 2024 onwards, the Executive Board will be strengthened by Maria Koller. She will be responsible as Chief HR Officer on the Board level to help us to contribute to these ambitious financial targets of reaching EUR 3 billion turnover from organic growth until 2027 at an EBIT margin of 10% and 12% ROCE. Thank you very much for your attention. Looking forward to your questions.

[Operator Instructions] The first question comes from the line of Markus Remis with Raiffeisen Bank International.

Congratulations for the results. First question relates to Europe. And I would be interesting to get a sense of the magnitude of the downturn here. So I mean we got numbers from your prior year. I mean is the order intake decline comparables? Is it the 25%, 30% plus in Europe?

So the weather intake is something where you need to be careful when we compare it against 2022 because 2022 was an exceptional year. So it's better to compare the order intake, I would say, to a normal reasonable year like 2019. And if we do this in EMEA, we have a reduction of around 25% to 30%. So this is from a sustainable market level, the reduction we see at the moment. However, we also have to say that it's extremely volatile. So we had, for example, a very good month in August, and then it's down again. So it's very difficult to predict. But what is quite clear is that in the construction industry, an upturn is not inside at the moment.

And then to my follow-up question. Is there any granularity that you can share regarding the product groups or various countries in Europe? Or is that pretty much comparable across the board?

Well, we have some product groups where we are not impacted at all. So if you look at the sectors, which I've presented before, it's clearly the timber industry, which is diverse at the moment. So the timber prices are quite low. There is much lower demand for pulp for paper, carton or packaging, but also for fiber, for application. Then in construction, much less team base needed. So this is the main driver why the timber industry is at the moment diverse. If we then go to construction industry, it's not such a uniform picture. On the one hand, we have still markets like Spain, Portugal also Italy, which are performing quite well. You have Scandinavia, which is extremely bad, especially Sweden with also a deterioration in currency is at the moment, more or less that. So there is almost no activity happening in Sweden at the moment, also Denmark and other northern countries are very modest. And then we have other applications like, for example, in recycling, where there is very limited impact, wind cranes, marine cranes, the whole marine segment, still very positive also in Europe. So again, it's not the uniform picture. It's mainly the construction and the timber business, which is not good. And if you look at construction, you even have different segments, for example, everything which is infrastructure is still quite good or is actually very good. And those construction companies focusing on infrastructure are extremely well booked. For example, in Austria, for example, these companies are doing exceptionally well. Of course, smaller players, mainly focusing on making smaller houses, family houses, this is really -- there is a major downturn, and this reflects also our product mix. So for example, for larger grains, we still see a very good demand because this is not a typical application for material handling. It's more the 20 to 30 meter ton range to the middle class of grains, which is the most impacted by the downturn in construction industry in EMEA.

Very clear. Then I would be interesting to get a sense of the expected pricing into 2024, also against the backdrop of the flexible pricing strategy or regime that you've implemented. So what would be like the base case at the moment.

So what we did, in fact, also due to the macroeconomic environment, also the competitive landscape that we changed for the time being, the approach with the dynamic pricing. So we made it kind of a security net. So only if the PPI exceeds or falls below a certain threshold, prices will be adapted. But at the moment, we provide to our customers stable prices as long as the cost level remains in this bandwidth. For next year, our key assumption is and this is we can see the moment that in Europe, there is no price elasticity. So it's not possible to increase prices at the moment. Obviously, 2 years ago, if there was a price increase of 5%, nobody was asking questions, everybody understood that prices are going up and accepted it. Nowadays, competition is more intense, material costs are going down. So customers do not except any price increases, at least in Europe, which leads to the fact that for the next year, we are faced on the one hand, what is positive in lower material costs, lower freight costs, but significantly higher labor costs. So we assume that this will be around 8% to 9% of an increase globally on our labor cost, and this is around 30% of our P&L. So this is a significant position and we have to compensate for this with the lower material cost with higher productivity also substantial savings on the structural cost side, but it will not be possible to further increase prices. It's rather that we have, in some cases, to react with some additional discounts to win one or the other order.

That is very helpful. Did I get it right, the dynamic pricing as such has been kind of suspended or adapted again.

It's been suspended but what has been kept is the safety net. So what happened to us 2 years ago that the prices rocketed and -- I'm sorry, the cost rocketed and we couldn't adjust the prices in a timely manner to prevent the scenario like this. We have seen the safety net of the PPI in our general conditions.

Okay. And how did your dealers and customers react to it? I mean, like annual changes of the pricing regime might cause some irritation eventually? Or is that not the case? In the end, customers and dealers were never the biggest trends of the dynamic pricing.

So this was actually introduced to protect the margin of driving or do we store the margin of Palfinger. So for customers, it was always difficult to accept and, of course, as competition didn't follow this model our biggest competitor, Hiab or Cargotec had something like this in the general conditions, but never executed it as they had increased prices earlier and to a larger extent, it was not necessary for them to execute it, but it was only possible to really defend this position in a good market environment now as the competition is tougher as the market is going down it's important that we also adjust in our dealers and also customers appreciated this move.

Okay. Final question for me would relate to the basically balance sheet cash flow development. I mean, inventories have been up again sequentially compared to the second quarter. I mean, firstly, is it -- shouldn't it be easier to get trucks in the economic downturn? And how do you think your kind of especially inventory position will develop until year-end. So anything you can share with us regards net debt development and maybe also with the economic downturn kind of shaping up? Are you adjusting your CapEx plan?

So first of all, if you talk about delivery of trucks, yes, it's getting better. But still, we have EUR 25 million of trucks, not units, but euros obviously to EUR 25 million of trucks sitting in our balance sheet. And this is much more than we actually would like to have, but it's the wrong truck. So some trucks come earlier. It's not really the problem that the trucks are not delivered. It's that the delivery liability is bad, which creates a huge problem in the supply chain, especially in the downstream supply chain. So we have to cope with the fact that on the one hand, we have a lot of trucks sitting in our yards. On the other hand, we have also equipment sitting in the yard, but it's not matching. But this is getting better, and we also have reduced the output now in Q4. So we have taken out some production days in October and in December, which will not affect the revenue according to our planning because we want to reduce the stock level. So actually, this will even not hit the P&L simply because we have the priority to reduce inventory levels rather than to keep the output on the same level. So yes, we expect that until year-end, if we see an improvement in the working capital -- it's difficult to say -- to make a promise, but we have of course set an internal target which would clearly improve this figure significantly. And as I mentioned already, our target is to have a positive free cash flow until year-end, and this is only possible by reducing the working capital because everything which is cash flow from investing activities has been decided and has been already implemented months or quarters ago and cannot be influenced anymore in the fourth quarter. So it's purely working capital. And the second question was if we do adjust our CapEx planning for next year, obviously, we're looking into our CapEx and are trying to reduce. It's not just delaying in the end, we need to question our CapEx strategy, and we are doing this or have been doing this already for a few quarters, but it's not such a simple process. Many things have already been started and kicked off -- but in the target is that we will reduce the investments, especially into manufacturing of Palfinger to make sure that we don't need to make investments on a similar level as we have to do it in 2023 in the years to come. But also in the next year, there will still be a relatively high CapEx figure, even if it will be lower than in 2023.

And the basis in 2023, would you speaker? Well, you could assume that if you take the figure of the first half year, which was EUR 85 million, if you multiply it by 2, you're roughly there.

The next question comes from the line of Lars Vom-Cleff with Deutsche Bank.

I have 2, and will ask them one by one, if I may. First of all, with great interest, I took note of your first remarks regarding next year's business performance, which I find slightly muted, to be honest. This is just a description of the status quo or shall we rather take your statement as you're starting to manage our expectations, i.e., negative growth or diluting margin being in the cards for next year, especially it's also order intake in EMEA as you say, at a low level, and you just mentioned wage increases of 8% to 9%.

Actually, the wage increase is something we can manage. As I said already, we are taking counteractions and there are also some positive effects, but what is clearly something which we cannot expect is growth in 2024. I think it will be challenging to keep the turnover level of 2023. Please accept that I cannot give now detailed guidance typically with this in the presentation of the results of the year 2023, not today. And by the way, of course, last year, the situation was much easier to predict because we have 9 months of order book ahead of us we had a very stable market environment. Today, we see a huge volatility, not only looking at the geopolitical developments. I also mentioned, for example, order intake in August was quite good, then it went down again. So it's extremely hard to predict. But what we can see is that at the moment, there is no indication that in the coming months, construction industry in EMEA should pick up. So interest rates will remain high, and there is no indication that governments take significant action, of course, there are some cosmetic actions taken and some promises, but will this really change the big picture, I doubt it. I didn't give any guidance for 2024, but the key message is 2024 is somewhat challenging than 2023.

Okay. Understood. And then I have to apologize because I got slightly sidetracked when you spoke about your full year target for the free cash flow. So it would be great if you could quickly repeat that.

Yes. So our target for the free cash flow is to reach a black figure. So at the moment, we are at EUR -28 million. So the target is to cross the 0 line and to have slightly positive free cash flow, this is what we are working on. And as I mentioned, the main lever where actually the lever is working capital stock increase.

The next question comes from the line of Jorge González with Hauck Investment Banking.

I would like to start with, if you don't mind, with North America. The implicit number is quite impressive. And I was wondering if you expect to repeat or this number could be considered as a run rate from now onwards or if you are also expecting some slower performance next year in North America, depending on the different companies of the sector that have different views here. So it will be helpful to know better your view as you are also increasing your market share in the country. Then regarding timber, I was also wondering if you can give us some sensitivity of the potential decrease for next year, if you expect the setup to decrease as I'm not sure the seasonality in Q4 is going to be key for timber and construction and then wait a little bit? Or if you are -- you can already foresee a decrease compared to this year for Timber. And maybe lastly, it will be also interesting if you can give us some reference regarding the volumes you are expecting to do in India, I think that could be quite useful.

So first of all, expectation for North America, we all read in the newspapers that a slowdown in North America is expected for 2024. If you look at the market environment for Palfinger, nowadays, we don't see any indication. So we still have a very healthy demand. We still have a high demand for products we have launched recently, like the truck-mounted forklift. We are ramping up the volume for service range, which is a market with delivery times of by far more than 1 year. So yes, the macroeconomic indication from a lot of investment banks is that next year should be a downturn slowdown in the U.S. At the moment, we can't see it. And by the way, we are by far not in a situation in the U.S., like in Europe, that every downturn hits us one by one. We still can expand our market position. We have opportunities, which are only addressed today. So our expectation for 2024 in North America is that we will increase our revenue in North America compared to 2023. And our target is to have EUR 1 billion, depending of the exchange rate. But in the end, it should be possible to above EUR 1 billion of revenue by 2027 in North America. So the market size would allow this. And in case we have a relatively stable market development, which is absolutely realistic. The second question was, is there an impact of the slowdown in timber in 2023. Yes, there is already a slight impact in Q4, but the main impact will be in 2024. On the one hand, there is a need for replacement and there is also the needs to bring out damaged goods out of the forest. So I think people will not be able to wait forever. But as long as the timber prices are that low and the demand for timber is that low, the timber crane demand will be substantially lower. And here, we are talking about a bigger reduction than the 25% to 30% mentioned overall for EMEA. And last but not least, you asked about India. So in India, we have around 60% market share for loader cranes. We also sold quite a few are work platforms. So this amounts for around EUR 400,000 and I think it's a revenue of roughly EUR 10 million to EUR 20 million. I would have to check now exactly. But it's in this range. It's not that huge, but there is a big potential in India. And for 2025, one of the strategic projects we are pursuing is the evaluation of how we will set up the footprint for assembly in India not only to cover the local market in India, but also other low-cost markets on the one hand in APAC in Middle East, but also Africa.

That's very useful. Maybe allow me to make another question, is regarding, obviously, construction in Europe for next year, companies like Volvo, despite they have order intakes falling in the levels of 40%, 50%. Therefore seen scenarios of around minus 5% to minus 15% decrease in volumes only next year. And I was wondering if you also have better expectations for the end of the year in terms of orders. If we take into consideration of some seasonality or some different order intake dynamics due to the dynamic pricing is it maybe you can catch up later on with the demand or how you see the market? Because I'm not sure with the strong growth you have in the last 2, 3 years, clients have been off, or if you think that the economy gradually recovers next year, demand will return strongly, how you see the return of the demand in relation to the needs of your clients as you have conversations with them. That would be very useful.

Yes. So first of all, you mentioned Volvo around 5% to 15% decrease in volume. So Volvo is mainly active, of course, in infrastructure and less in building family houses and small buildings. Of course, their equipment is also needed for these applications, but it's a higher percentage, which is also needed for infrastructure projects. So I believe that they are probably less affected then Palfinger as long as we look at the construction part of our customer portfolio. It's very difficult to predict what's going to happen next year. So I can't give you a guidance -- but I believe that the level of minus 25% order intake, especially related to construction industry. So I'm not talking about the overall portfolio. But I think for timber industry and also for construction industry, 25% to 30% lower need is -- has to be expected for 2024 from my perspective.

The next question comes from the line of Tore Fangmann with Berenberg.

I have got 2. First would be, do you see any cancellations or price renegotiations from customers for the pending backlog, so not for the new orders, but for the backlog that you have already?

No, we don't see any cancellations and no renegotiations. The reason for this is also because the vast majority of all our orders are linked also to an order of a truck and an installation. So it's not just the grain, but there is also a drug behind. So if the customer would now cancel an order, this customer would also have to cancel truck and the installation. And in the end, we see lower order intake, but no cancellations at all. And this is a very big difference compared to, for example, the year 2008 and 2009. In that time, a lot of units were sold without end customer, not with a truck linked to the order, and this is completely different in 2023. So every unit which is sold, not every -- there are always some stock units, but this is very limited. The vast majority of units are linked to trucks and there are no cancellations.

Okay. Perfect. Second would be how is the agricultural end market, especially in EMEA developing, just looking at the latest business parameter for the market. It seems like there's a lot of high stocks in the market and also the agricultural market in Europe is in a downturn.

Well, the agricultural market for us is quite a limited market. So we mainly look at the timber market. So agriculture is kind of a small segment for us. And I cannot comment here in detail on the agriculture segment because this is actually something where we have perhaps EUR 20 million to EUR 30 million of turnover or more, and this is not the heavy impact for Palfinger.

The next question comes from the line of Daniel Lion with Erste Group.

Actually, just one question from my side. Looking at the competitive situation, the competitive landscape, especially in Europe, do you expect here further changes or an improvement of market share in the downturn? And how do you think about potential acquisitions. Of course, your balance sheet is currently stretched, but going in next year, there might be some targets available. And could you maybe update us on the market share that you together with high up hold in Europe?