Palfinger AG (PAL) Earnings Call Transcript & Summary

Good morning, everybody, and a warm welcome to PALFINGER AG's roundtable dedicated to the ad hoc regarding Russia topic. The CFO, Felix Strohbichler, will share a few insights, and then we will have an extensive Q&A. A few side notes. We will record this roundtable. [Operator Instructions] With all this in mind, I will now hand it over to Felix. It's all yours.

Thank you. Good morning, ladies and gentlemen, and thank you for joining this early morning call. Let me, first of all, go back a little bit in history to explain what happened yesterday in the Supervisory Board meeting of PALFINGER AG. As you all recall, PALFINGER from the beginning of the war had a very clear policy not to sell the entities for a low purchase price or to throw the entities away, but to keep the entities and to hope for an end of the war and to be able to recover control and to completely again, include those entities in our group organization. Of course, we had to ring-fence the organization. We stopped all deliveries. We did stop any transfer of know-how, money, et cetera, in order to comply with sanctions. And we also, of course, made organizational measures to make sure that the ring-fencing is solid and established, which means mainly that we had guidelines in place, which clearly stated what must not be done in order to comply with sanctions. What happened at the beginning of this year was that the Russian entities of PALFINGER got on to the U.K. sanctions list. It was not possible for us to find out exactly reasons, but it's a matter of fact. And since then, we also started to think about what could be ways to protect ourselves in case we run into problems. We did not really face any challenges so far due to the fact that our entities are on the U.K. sanction list. But still, we always had in mind what could happen if this will lead also to U.S. sanctions, if there would be further requests from eventually customers in the Defense segment to further get more distance, so to say, to our Russian entities. And this is why we also evaluated ways what we could do in case need be. And one of the measures was that we created a holding for the Russian entities in the last quarters, which is in the meantime, already in place. As you all know, in the last years, the situation with Russia has rather become worse. We see hybrid warfare and escalation is more likely than de-escalation at the moment. And our hope that the war will end soon and that we will get back to normal, so to say, in our relations with Russia becomes rather unlikely, at least in the short and probably even in the midterm. In the Supervisory Board meeting yesterday, we discussed, as always, the risk portfolio of PALFINGER and the top risk or one of the top risks, as you can imagine, is always the setup in Russia. What does it mean? What are the options? At this occasion, I also presented the legal structure implemented. And in an extensive discussion in the Supervisory Board, the decision was taken that we do not wait until we get under pressure to change something, but we rather want to proactively strengthen the ring-fencing by implementing a legal structure, which lifts our ring-fencing to the next level. So today, it's organizational ring-fencing by guidelines. Tomorrow, it will be a legal structure in between of PALFINGER AG and the Russian entities, which is -- which creates the impossibility for PALFINGER actually to give directions to the Russian entities. So today, it's clearly regulated by guidelines. Tomorrow, it will be legally even impossible. So this is the major change, which we decided to implement. This still means that PALFINGER is the owner of the Russian entity. So we don't give the entities away. There is obviously no cash impact, but what changes as we give away in our control and as you all know, there have been a lot of discussions in the past why are the Russian entities still fully consolidated. This is the case because according to IFRS, we don't have any choice not to fully consolidate. But now with this step of clearly establishing a legal structure, which makes it impossible for PALFINGER to give any directions to the Russian entities, we also have to change the accounting method and also the valuation. So first of all, we now talk about discontinued operations according to IFRS 5. And this means that we have a onetime impact of -- in the valuation. Before it was simply the assets as they were in the books, and there was no way to devaluate them. The only possibility would have been in theory if there would have been an impairment test not covering long-term assets. But now we have to look at what is the fair value of the Russian entities. And if you look at what you get if you sell an entity, which is on the U.K. sanction list, it's towards 0, so to say. So we have a clear statement also from specialist lawyers telling us that probably you only get 5% of your assets if you would sell Russian entities today. So this means if we apply this, it's a devaluation or a write-off, actually a write-off of EUR 135 million, which will be shown below EBIT. So it's a separate line, results from discontinued operations. And we also have foreign exchange reserve of around EUR 45 million today, which means that the value of the assets does not change every quarter with the FX rate, but it's recorded separately in the so-called foreign exchange reserve. And this foreign exchange reserve only can be recycled, which means actually shown in the result after implementation of the new ring-fencing structure. This structure has been decided. It's likely to be implemented within the next 12 months. So it's discontinued operations. The EUR 135 million will be shown already in Q3, but the EUR 45 million will only be shown after implementation or with the implementation of the new structure. What this means is that in the future, EBIT revenue of the Russian entities will not be included anymore in the consolidated group results, and this will apply from Q3 and already year-to-date, you will see that the turnover number of Russia will go out and also the EBIT, but the EBIT for Russia is 0. So this is not an impact. But obviously, there is an impact from the revenue. There is one more effect I would like to highlight today. We have not yet communicated on this, and it's not ad hoc relevant, but it's also adding to the picture because last week, we have signed a contract to dispose of a noncore asset. You might recall that a few years back, we have carved out the Tail Lifts business of the global PALFINGER organization because there are almost no synergies. And we also communicated that in case there is an interested buyer with a reasonable purchase price, we would be willing to look into this. This has been the case. We have signed now a binding pre-agreement to sell of course, subject to closing conditions, which have to be fulfilled, but it's very likely that in the fourth quarter at the latest in Q1, this entity will also -- this transaction will also be closed. And this also results in the fact that revenues and EBIT from Tail Lifts will be shown under discontinued operations for the time being now. And after closing of the deal, obviously, the Tail Lifts numbers will be done because the entity is disposed of. It's a similar effect. So we have now, as I said, results from discontinued operations, which adds something to the EBIT around 2.7%. There will be a negative effect due to the delta of purchase price and book value, a single-digit million amount, which is still open due to certain factors, which will impact the net profit or the net income. So this is the second topic. The third topic I would like to talk about is, obviously, we also made a guidance regarding Q3 in our ad hoc statement. We mentioned that we expect around EUR 120 million. We also had communicated at the half year that we are targeting to exceed the numbers of the previous year for the full year. So we had a quite steep hockey stick in mind, which we still have in mind. However, due to the fact that the situation in Germany, in the Middle East, in the U.S. has not changed and not improved since our last communication, it's increasingly challenging to compensate for the shortfall of the first half year versus prior year. So from today's perspective, it will be rather difficult or rather unrealistic to exceed the prior year's numbers. So this is also what obviously has been understood with this message that we have a delta of around EUR 10 million compared to Q3 year-to-date of the previous year. This was a lot of information in a very short period of time, but I think it's important to summarize where we are at, and I'm now open and welcome your questions.

Thank you so much for the insights, Felix. We are now progressing to the Q&A. [Operator Instructions] We have the first question coming from Daniel Lion. Give me 1 second. [Operator Instructions]

Thanks, Felix, for the intro. Actually, for the time being, I would have 2 questions. The one relating to the EUR 45 million that you already have in your equity related to the FX changes of the Russian assets. How does this affect the P&L after the new setup is implemented? Because I would take this EUR 45 million as actually being already more or less anyway deducted? Or is this a positive impact for the P&L...

Then, let me answer this question right away. So we have in total at the moment, assets of around EUR 180 million in our balance sheet for Russia. This is a relatively high value due to the FX development. And this is split in around EUR 135 million of actual assets for historical FX rates. And the rest is, so to say, the change of the currency. What we have to do is to write off more or less all of EUR 180 million with a few millions left because it's around 95% or so. And we have to do this in 2 steps. The first step is with discontinued operations, the assets have to be written off, but the foreign exchange reserve will only hit the P&L as soon as the structure is implemented. And both effects will be shown below EBIT in a separate line results from discontinued operations. So it's in between of EBIT and net income, a separate line results from discontinued operations. So this year, you will see EUR 135 million plus some effect out of Tail Lifts, which still is not yet clear. Like also the EUR 135 million are not exactly clear. There are still some small variations possible, but in principle, this is the amount. And then you have next year, another effect of around EUR 45 million can also be EUR 30 million or EUR 50 million depending on the FX rates, further impact in discontinued operations, not affecting EBIT. Also this year, EBIT is not really affected. It's only slightly affected because we have to add a small amount of EBIT from Tail Lifts because we had a negative result year-to-date, which now leads to an improvement, so to say, of the EBIT line, but of course, not of the net impact. And next year, you have EUR 45 million in discontinued operations, reducing the net income.

But I would understand the EUR 135 million anyway is the net asset value of the Russian entities because obviously, EUR 180 million on the asset side, if you want, and EUR 45 million if you really take it very superficially in equity as a negative item. So I don't see...

EUR 135 million plus EUR 45 million. The EUR 135 million go out immediately, the EUR 45 million will follow next year. It's 2x a negative impact. And this is why we communicated it immediately because it's already clear if the structure is implemented, this will follow. It's just not clear what the ruble exchange rate will look like next year. So we can't give you an exact amount.

Okay. Okay. I need to check. And then actually, the second thing you relate to the full year guidance. The EUR 120 million that you guide for the third quarter, this is, I guess, already excluding Russia, right?

Well, Russia is no impact. Russia was, I think, a loss of EUR 100,000 year-to-date roughly. So this is around 0.

Okay. Okay. I understand. And you would wait until the situation obviously clears in order to fully consolidate it again as it was up to now? Or is there any idea -- any different idea with the Russian assets going forward?

No, the idea is still to keep the ownership and not dispose of the ownership, but to give away our control rights in a formal way, which even hinders us to execute any control rights even if we would like to. So for example, it's not PALFINGER anymore to determine a new Managing Director if the Managing Director would leave the Russian entity, the Russian holding.

[Operator Instructions] And we will move on to the next question, which comes from Miro Zuzak. [Operator Instructions]

Can you hear me?

Yes.

Yes.

I have 1 question. So to better understand what's actually happening. So you're saying basically you're giving away control, but you're still keeping the ownership.

Yes.

So -- and still you have a loss from the deconsolidation, right? So basically, you booked EUR 135 million loss, but there is no -- is this an impairment of the assets? Or is this an effect of the deconsolidation?

It's an effect of the deconsolidation, so to say, actually, it's now classified as discontinued operations. And whereas before, the impairment test was, so to say, the measurement if the assets have a value or not. Today, it's the fair value, which means what an external party would pay for those assets minus the cost of disposal. And this is close to 0. So this is a different valuation method, and this leads to this big write-off of more or less all the asset value. It's a change of valuation method, which is actually the reason for this amount.

So there is no corresponding gain somewhere else, right? So it's just a write-off.

It's just -- it's a bookkeeping effect. So we still have the assets, but the assets are evaluated with a different perspective. It's not anymore what has been the historical value is the value covered by the net present value of future cash flows. The question is now what would an external party pay for those entities if we would dispose of those entities.

Okay. And just hypothetically, so if the entity would make a EUR 10 million profit next year, where would this be booked in the equity result?

No, it's not shown in our results. The numbers of Russia will be out of PALFINGER P&L. Of course, we will have some remaining position in our balance sheet for the assets which have not yet been written off, which will be a single-digit million amount. So this would remain and this would be a further risk if everything collapses. But in practice, the numbers are out of our balance sheet. So in the future, you have, so to say, a clean reporting from PALFINGER, first of all, without Russia and secondly, also without the noncore assets Tail Lifts.

And who would make then -- who would get the money?

Nobody gets the money because due to sanctions, you can't get money out of Russia. There is no...

Money stay in the entity...

As it was the case for the last 5 years or 4 years, we never took out any dividends simply because we also wanted to make sure that in case of difficulties, market downturn, which is the case now, the entities need money. They have funds available to avoid any nationalization or any -- not to make the Russian authorities aware of any issues which could lead to consequences. So in the end, we decided let's keep the money there. Let's rather make sure that the entities are stable. We can't get involved anymore. And with the wisdom of hindsight, it was also necessary to do that because as we all see today, the situation in the Russian economy is very difficult.