Wacker Neuson SE (WAC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to today's conference call regarding our results for the first half of 2021. This is Christopher Helmreich speaking of Wacker Neuson Investor Relations. It gives me great pleasure to introduce you to our new members of the Executive Board, Dr. Karl Tragl, CEO; and Christoph Burkhard, CFO, who have taken on their roles on June 1. We are joined by our CFO, Alexander Greschner, in today's call, who I believe most of you already know. If you are not joining us via webcast, you can find the presentation slides for this call at wackerneusongroup.com/investor Relations. Before we start, please note that the entire call, including the Q&A session right after the presentation will be recorded and made available on our website from this afternoon onwards.

Hello. This is Alex Greschner. As mentioned before, I'm today the long-serving EB member in the call. So I'm with the company 4.5 years, responsible as CSO for sales and marketing.

Yes, good afternoon also from my side. It's Christoph Burkhard speaking. I'm the first new participant today. I'm very happy to be on this call today with you. And as you know, I joined Wacker Neuson just a couple of weeks ago, actually 1st of June, as CFO. Before that, I served as CFO at Nordex. And I also worked for Siemens for many years in various positions. I can tell you that my first weeks here at Wacker Neuson have been absolutely great, and I'm very much looking forward to tackling the challenges ahead and also working with you, our investors and analysts, over the coming years.

Hi, everyone. This is Karl Tragl speaking. I also joined the team beginning of June. The first weeks have been very, very inspiring. Wacker Neuson is, for me, a great company with innovative products and highly qualified and motivated employees. Christoph and I have found a great team here. And for us, as new members of the Board, it has been very interesting to learn what makes the company great and what the challenges are. In the past, I was CEO at Diehl in Nürnberg. And before that, I spent a couple of years in the U.S.A. with Alcoa and Arconic. And I know Wacker Neuson's industries quite well from my previous time as CEO of Bosch Rexroth, where I had been in touch with Wacker Neuson many times. I am very much looking forward to be part of the team and to successfully grow the business. As a member of the new Executive Board team, together with Christoph, Alex and Felix Bietenbeck, I would be very happy to engage in a continuous dialogue with you, dear investors and analysts. But now let's get started and dive into our business development of the first half of this year. The first half of the year was a successful one for Wacker Neuson, but not an easy one. We are back in growth mode and have increased sales by 16.5%. This has almost put us back on our precrisis record levels of 2019. We are particularly proud of the rise in profitability that we saw in the first half of the year, not just relative to 2020, but this is also compared with 2019. Despite the massive supply chain disruptions we had to cope with, the company and our teams managed to increase gross profit. This was thanks to the sharp rise in revenue and due to the improved cost recovery in our production plants. Our operating costs are well under control, which helped on the EBIT line. The cost to sales ratio improved by 2.3 percentage points compared with last year and 1.1 percentage points compared with the year before 2019. The result was an EBIT of EUR 100.1 million, which is almost twice the result of last year and roughly 16% above 2019. Looking at cash flows. The first half of the year was also very positive. By almost doubling our EBIT and keeping a close eye on net working capital, free cash flow came in at EUR 133.5 million. The supply chains were certainly the largest area of concern for us. And in fact, they still are, and they will be for the remainder of the year. Demand from the market is high, but supply chains are overstretched and are getting disrupted on a regular basis. We have to be extremely flexible with production to ensure we do not miss out any manufacturing slot. The situation is further compounded by price increases for raw materials and components, as well as increasing shipping costs. And we expect that supply chain problems and input cost inflation will have an even more pronounced impact on the development of our business in the second half of the year.

Hello, this is Alex Greschner again. I would invite you now to take a brief tour around the globe and start with you in Europe to review our H1 sales development. And as you see overall, we did have positive developments in all 3 main regions. Europe, in the middle here with 79% of our group sales, by far the strongest region. We have a 17% increase on the construction sector. It was mostly in Germany, Austria, where we could grow again. And if some of you may recall from a high base also in the COVID year last year, these were 2 of the outperforming countries already a year ago. If we go into Southern and Eastern Europe, again, we could record on a double-digit growth based on a lower situation coming out of last year. And last but not least, in Europe, you may recall our restructuring program in the north of Europe, Scandinavia, where we switched into distribution business. We had also there a double-digit growth and can say the restructuring successfully -- is successfully done and fully in operation. In the U.K. as one of our main markets in the construction equipment world in Europe, still our product benefit of the innovative dumper -- dual view dumper that we introduced before is still paying back on us. So we are also there on a quite successful path to grow. In Europe, beside construction, a very important portion is also the agriculture part, which is now representing roughly 30% of our European revenue figures where both our partnership with John Deere and also our independent brand, Weidemann, are strongly developing with a year-on-year growth of more than 40%. If I take you to the west, into the Americas, you will recognize that, yes, we are growing. We are not yet back on the precrisis level. If we look into the currency adjusted value of growth, we look into 18% that we were able to grow in the first half of the year. I think the promising part in the Americas is Q2. After Q1, we still reported a rather flat development in Q2. We were able to grow 44% in the Americas all over. In North America, we are, let's say, fully back on track in developing our dealer network, working with the larger rental companies. And we can also say that the order intake with all these customer groups is on a promising level. In Latin America, South America, we also, as you recall, went through a massive restructuring. And also there, we have positive developments compared to last year overall countries despite some of the Latin American countries are still quite deep in the COVID crisis and facing still lockdowns even on construction sites. Then bringing you to the eastern part of the world into Asia Pacific. And really from the growth perspective, the highlight of this first half of the year, a big portion of this 50% growth compared to last year is coming from Australia where the revenue, especially due to new dealer development, but also to a specifically tailored product portfolio, the major steps forward. And besides revenue, a very, I think, positive signal from Australia is also the profitability development that we could register in this first half of the year. China is the largest market in Asia Pacific, but also one of the largest individual markets around the globe. It's still well difficult as a domestic market, still under a lot of pricing pressure. And in the second quarter, exposed to the period between their two 5-year plans. So the domestic market there is not getting easier on us. But as you recall, we started with the beginning of the year to push on export business based on products coming from our Chinese facility, where we have really first good successes in Africas, in Asia Pacific and once again in Australia, where the products immediately gained acceptance and a good position in the market.

Thanks, Alex. This is Christoph Burkhard. And with that, let's take a closer look at our cash, debt and liquidity situation. As Karl already indicated, we have also seen quite a successful quarter for our group in terms of cash. Free cash flow came in at EUR 133 million. And you saw -- I guess all of you saw that this is including a fixed short-term deposit in the amount of EUR 100 million. This was primarily attributable to our EBIT doubling and our efforts to keep net working capital at a reasonable level. And the sale of long-term receivables also helped to push up our free cash flow number. At the end of Q2, the net working capital ratio was significantly lower than the prior year level. And at roughly 27%, we reached our strategic target to stay at least at 30% or below 30%. Now this is definitely a good message. Still the current structure of our net working capital and particularly the structure of our inventories suffer from the situation that we face and that Karl and also Alex were hinting at, namely great demand, meeting disrupted supply chains. At the moment, our stock of finished machines is too low. And at the same time, however, we had to build up stocks of unfinished machines due to a lack of parts and components. This situation is certainly not ideal as it means that we are tying up capital and are not able to realize additional sales. Moreover, we have to rework unfinished machines. And therefore, touch them more than once and to get them out of the factory, which does not help our productivity. Our aim, therefore, is to create a slightly larger buffer for raw materials and components to prevent stocks of unfinished machines reaching these levels again. Looking at net debt, we can report a low figure of EUR 79 million, which leads to an EBITDA multiple of only 0.2. And keeping in mind that we paid our dividends in the amount of EUR 42 million and also spent roughly EUR 20 million on our share buyback program in Q2, we believe that this is a pretty solid development. Our investments in H1 were still below the planned target and below the period average. And that is certainly due to the fact that we delayed some of our projects and our plans, as we shifted all our focus entirely on serving our customers and getting the machine shipped. We still expect CapEx for the year to come between -- ranging between EUR 100 million and EUR 110 million. And having said this, please keep in mind that free cash flow development in the second half of the year will certainly, by far, not be as strong as in the first half. You certainly need to take the -- let's say, a little bit lopsided investment pattern into account. And then please let me finally say a few words about the status of our share back program. I mentioned that we have invested around EUR 20 million in buying back our own shares in the first half of the year. And as part of our share buyback program, we aim to buyback up to 3.5% of capital stock, but we will not spend more than EUR 53 million. The treasury shares are to be used primarily as possible acquisition currency or to serve participation programs for employees and members of the Executive Board. And with that, back to you, Karl.

Thank you, Alex and Christoph. Let us now look ahead to the remainder of the year. As I stated onwards, we stated at the beginning, the first half year was a successful one for Wacker Neuson. Our business was rebounded -- has rebounded strongly. We have already exceeded 2019 levels in 2 of our 3 reporting regions, as Alex explained. And we have seen a sharp rise in profitability. This has given us an excellent foundation to keep us on track, achieving our goal for the full year. But at the same time, as demand for our products continues to develop dynamically, and the mood in both our key target industries is at a very high level. Unfortunately, however, there is no reason to get euphoric. I already mentioned that global supply chains will remain our biggest challenge for the foreseeable future. We must continue to operate our production extremely flexibly in order to lose as few production slots as possible. But we are increasingly reaching the limits of what is feasible for us and for our teams. And in addition, prices for raw materials and components as well as shipping costs have increased dramatically throughout the last couple of months. And we expect both of these factors, supply chain disruptions and input cost increases, to have a greater impact on sales and earnings in the second half of the year compared to the first one. Taking that into account and the overall development of business today, the prevailing conditions and the opportunities and risks, which we are facing, my colleagues and I have narrowed the revenue and earnings guidance, placing it within the upper half of the previous ranges. We project revenue between EUR 1.75 billion and EUR 1.8 billion and expect the EBIT margin to lie between 8.75% and 9.5%. It has been 70 days now since I joined the Wacker Neuson Group. Let me take the opportunity to briefly describe my impressions of the first 2 months. Wacker Neuson is made up of fantastic teams of highly qualified and enthusiastic people. And I want to add that for me, it's always people who make the difference in businesses. The 3 group brands, Wacker Neuson, Weidemann and Kramer are each well received and enjoy excellent positions in their respective markets. All in all, we have everything it needs to deliver profitable growth, double-digit EBIT margins, strong cash and available profits for our shareholders. Felix Bietenbeck, Alex Greschner, Christoph Burkhard and I, we are enthusiastic about our business potential and absolutely committed to seize the opportunities. And finally, Christoph and I are looking forward to getting in touch with you, dear investors and analysts, on a regular basis. We will start our regular Capital Market communication in mid-September once we have completed our first 100 days at Wacker Neuson. Thank you all very much for your attention.

Thank you, gentlemen. We are now happy to take your questions, and I would like to ask the operator to give you the instructions.

[Operator Instructions] And the first question is from Jonas Blum with Warburg Research.

Just 2 questions around your input costs and the supply chain, which you mentioned to be very strained. Just wondering if you could give us a quantification on the negative cost effect you experienced in Q2 and what we should expect for H2 in terms of your P&L impact. And perhaps, it could be also helpful if you could provide us with a split of what sort of factors are weighing on your H2 margins, given that you didn't upgrade your outlook for 2021. And just related to that, in terms of the global supply chain, what's your internal forecast? When will it return back to normal, given that you gave us a qualitative outlook for 2022, which is basically looking for improving margins again?

Thank you for your question. Christoph here. Let's talk first about the impact of the rising costs, right? And well, one thing to start on a more general note, I mean the impact of the rising cost has been limited throughout H1. So we are quite convinced that the input cost inflation will further burden our P&L in the second half. And here, we are talking about mainly cost of raw materials, components and transportation. Then we see impacts coming from the rework of unfinished machines and -- which will basically burn productivity. So all in all, I mean, you saw our guidance. We -- of course, we narrowed the corridor to the upper half. But at the same time, obviously, this means a reduction -- an EBITDA reduction. I think it's fairly straightforward to calculate the cost impact out of that, which will simply probably lead to a reduction of the EBIT as -- basically, as a result of the overall guidance.

Yes, I just wanted to add, Jonas, one data point. We have this, what we call unfinished machines, which we have to take out of the plant because of part missing. Then we have to bring it back, and that's a measure for how good -- how well we are doing in terms of our production plans and how well we are doing with the supply chain. And this is a number which normally is in the magnitude of a few hundreds, 200, 300, and we had a record high in June, where we had 1,500 machines, which we had to take out and which we have to bring now either back to production or which we have on the parking lot, so to say. We have engineers who are fixing some parts and then do a final test and get everything through. So just to give you some number on magnitude, this is what we are talking about.

Okay, understood. And just like your internal expectation when the situation will normalize again?

Yes. This is -- basically for me, I was thinking the whole morning about how can I explain the situation in simple words. And the problem is just it's an up-and-down in the supply chain and getting better and getting worse. And it's always the disruptions completely in between. The problem is just in the first half of the year, we had buffer stocks. We had buffer stocks and our suppliers had buffer stocks. So we had stuff where we could really live from. Now these stocks are really eaten up, teams are tired and flexibility is getting into its limits. So basically, the key question is when does the supply chain lose the disruptions? Disruptions by closing harbors, by Olympic Games in China and other things. And this is really looking into the, call it, the [ glass kugel ]. That's something we can do. But just to say, it's a constant, constant development, which doesn't really get worse, but doesn't really get better. But the positive of the half 1 is something we cannot repeat in the second half. So whoever gets the first sign of improvements, I give a bottle of champagne for that.

Okay. Excellent. And just one follow-up, if I may. Given that there's market forecast now saying that global markets are expected to slow in 2022, but Europe, well, contracting by 5%, Europe expected to stack later. But you're still saying that you expect some sort of growth to happen at Wacker Neuson in 2022. Could you just give us some color on where your confidence is coming from that you can outperform your peers here?

Yes. This is Alex Greschner, again. so the competence is on one part, it's a safe part, it's our order book that is quite promising going also into 2022 already. We are not over -- let's say, over valuating the orders as we have, for sure, a certain risk if things are bubbling up, but it's a very promising situation we have there. On the other side, if we look into our sector, which is also a lot serving into the rental industry, we are still looking back into year 2020 where most of the large rentals chains did not fulfill their CapEx requirements. So they are catching up this year, but they will continue to catch up also next year. And last but not least, the positive signal for next year for us is obviously the agriculture sector where we are in a growth mode and where we have still, let's say, wide spots, room to grow with both brands. So looking forward from today. It's a positive signal for us. And if we speak about numbers, if it is in a high 1-digit level, 5% to 10% growth, I think, it's a reasonable estimate for coming year.

The next question is from Aliaksandr Halitsa, Hauck & Aufhäuser.

I was wondering in terms of top line, when one compares first half of 2021 versus the 2019 first half, you basically made EUR 20 million sales less than in 2019. So basically, round about on par with this year. Now your guidance basically implies that you expect in the second half to be around about EUR 100 million below the level that you achieved in H2 2019. And in this context, I was just wondering whether you could provide us with some color or give us some sense of how much sort of lost manufacturing productivity have you really factored in, in your full year outlook given that you even specified it to the upper end.

Maybe the first of 2 answers to your question. The first is 2019. Again, in 2019, you may recall the best quarter ever in Q4 '19, which was due to a massive sales of our rental fleet at that time as well, further on big sale on North American inventory, which unfortunately is not available this year. And this is, I think, in comparison, one reason why we are more cautious looking forward into the second half of this year. And I think the second part that we carry on is what Karl mentioned earlier. The 1,500 machines in unfinished goods inventory is, on one side, a kind of a saving account. If we get the parts, we will turn it into revenue. But right now, it's kind of a revolving volume. If we turn machines out of it, new machines pop into it. So it is part of the supply chain issue we have. But our aim is for sure that we can reduce the 1,500 machines to a certain point. And they represent, if you speak in euros, something between EUR 30 million and EUR 40 million of value.

Okay. That's helpful. And then maybe I'd like to clarify on -- in terms of North -- or Americas region performance. You have had -- let me quickly check, in Q1 this year, you had 70 -- roughly EUR 70 million of sales. And on that, you generated EUR 6 million of EBIT. Now in Q2, you basically have EUR 20 million more than in Q1, yet EBIT has been pretty much at the same level. If you could sort of provide any color into the dynamics that play out there?

Yes. This is Christoph here. As you have rightfully spotted, we had in the quarterly statement for the first quarter 2021, we had an incorrect technical allocation basically of the intersegment consolidation effect. And that was due to a technical change in reporting. And I think that led to the effect that you were just mentioning. And what we will do, when I say we, we as the new management team, we'll take now a close look at the current segment reporting regarding the profitability per region and basically the intersegment allocation. And as you know, the currently reported numbers are before consolidation, which we believe adds only little value to the overall understanding of the segments, and we're going to basically decide on how we will continue with the segment reporting in due course. I hope that this explains a bit those numbers.

Yes, that makes sense. And then maybe lastly, on gross margin development, again, looking into Q2 as opposed to Q1 this year. Again, a similar situation. You basically have, what is it, around about EUR 60 million in additional revenue. The gross margin has been -- has declined a little bit even by around about 0.5 percentage point. If you could provide any color again in terms of dynamics that play out there?

If we maybe start with the gross profit effect versus 2020. There was -- if you recall, there was quite a heavy impact by COVID-19. We're looking at an improved cost recovery at the production plants year-on-year. But of course, at the same time, we have been facing material bottlenecks and increased input costs. So it is really the combination here of the volume effect year-on-year. At the same time, the -- in 2020, we had the impact by COVID-19.

Okay. I was just, I guess, referring more or less on sequential development in terms of sort of cost of goods sold as a percentage of sales that we have seen market increase. As is typical, given your seasonality that in Q2 is you have more sales, but I was just surprised a little bit not seeing sort of any leverage effect there, that the gross margin in Q2 would be higher, especially since you mentioned that in H1, you probably haven't seen as much of the impact of higher prices. That's what I was wondering.

Aliaksandr, let me try to understand your question correctly. You're asking about why the top line doesn't develop further in a positive way. And this is basically the effect which I tried to explain that in the first half and especially in this quarter, we could compensate some of the external effects and the productivity effect by using buffer stock, for instance. This way keeping up the revenue. Next 2 quarters, we are not sure whether we are -- we are fearing that this isn't possible anymore. And if the disruptions stay the same, we will not be in the same way able to make revenue as this first half. This is what I understood.

[Operator Instructions] The next question is from Charlotte Friedrichs, Berenberg.

Three for me. The first one would be on pricing. Can you give us an update on where you are now with price increases and if you have any further ones planned for the second half of the year? Then secondly, on Q3 current trading, can you give us an idea of sort of the quarterly phasing that you expect now in Q3 versus Q4 or perhaps using 2019 as a benchmark? And then finally, on the unfinished machines. Am I understanding correctly that it's quite difficult at the moment to estimate when you'll be back to a normal level, is that correct?

Charlotte, this is Alex. Talking about pricing, the answer is yes. No, obviously, it's the time also to enforce pricing on the market. That means we were able to bring in the efficiency in the first half of the year as an initial step that was indicated in January 1. Immediately in March, as we informed also during last call, we announced another price increase effective 1st of July, which is also taking place. And due to the lead time and order book we already announced some weeks ago, the increase -- the next increase, becoming effective on 1st of January 2022. So we move 3 steps. We are continuing to increase prices to cover as much as possible that we face from the material side and transport side at this stage. Coming to your third question before I come to the second. The third question, the unfinished machines. It is -- like you described, it's still, to some extent, unknown. It is, on one side, as I said, a kind of a savings account. If we get all the parts, we will turn it on to revenue. But again, it's not clear how much is coming back into this from -- by other parts missing. So right now, we are struggling to bring it down to a dramatically lower level. But we are not negative towards the end of the year to increase or improve that situation. Your second question, may you repeat that, please, for me? There was a question Q3, Q4 you asked specifically, and I didn't fully get it.

No, of course. The question was about the quarterly phasing. So how we should think about, say, the revenue margin development now in Q3 versus Q4? For instance, do you expect Q3 to be sort of the more -- the quarter more affected by the supply chain topics? And do you expect an easing in Q4? Or do you think that's going to be pretty similar in terms of the impact?

I think I can only say so much looking back into the years I'm with the company. Q3 for us is typically affected somehow due to the summer holidays in the group. So Q4 is for us a stronger quarter, typically. Also because it's in normal years, the quarter where we are settling out of the rental fleet, where we are turning more used machines into sales, so we expect Q4 normally at a higher level, also on profitability compared to Q3.

Okay. And then perhaps one follow-up on the price increases with -- including the ones that are becoming effective Jan 2022, how much are you taking up prices now in total?

In total, we talk about total somewhere between 5% and 10%. So if you take the 3 accumulated, this would be the increase that we try to place into the market.

The next question is from Mr. Heimbuerger, Kepler Cheuvreux.

Three questions from my side. First of all, can you give us a free cash flow guidance for the full year and also guidance for net financial debt? Secondly, would you say that due to this price increases, customers are prebuying machines, preordering? And do you see that customers tend to double order machines because of the long lead time in the hope to get the supply quite quickly? And the third one is more on a structural level. Do you see scope for further cost and sales synergies between Wacker and Neuson Kramer? Or are you happy with the current status and operations?

It's Christoph. So I'll start with the first question on the free cash flow and net debt. I mean in general, as you know, we do not issue a free cash flow guidance, but I can give you a few building blocks, which I think are probably plausible and logical. You saw a pretty strong free cash flow development for the reasons mentioned. And at the same time, I talked about the investment still to come, which will be over proportionally high in H2. This is one thing that will certainly slow down our free cash flow development. And therefore, if you calculate, let's say, the remaining cash contribution from our operating business reflected in the guidance and, at the same time, you take into the account the investments, then we would expect a slightly positive contribution still in H2 to the free cash flow. But certainly, not the dimension that we have been looking at in H1. And I think that goes also hand-in-hand with the assumption that our net working capital -- I mean that our ambition for H2, despite all the external factors will remain pretty stable. So all in all, a slight positive contribution for free cash flow in H2, but certainly don't calculate with repeat effect as out of H1. And with respect to net debt, well, net debt guidance kind of unusual. What I can tell you, we are looking at a very decent net debt level, and we continue to do so. It's all going to be then the final number about the cash position. And I think if you take the information from the free cash flow, then probably you have the answer.

Regarding your second question, pricing, prebuy, et cetera. As mentioned before, the pricing announcement we did really early to make sure that they can become effective. So we are not looking into a large number of orders that were placed for next year still subject to old pricing, I would call it. We are probably able to really materialize more than 95% of this price increase announced in both second half of this year and first half of next year. By the early announcement, the second part of your question was how much of these orders are placed, let's say, to secure production spots. I mentioned something of this before. We are not taking 100% for grant. We did a certain risk assessment on the order book to make sure that we are not overestimating or over judging the order book, which is enormous. And this is how we try to assess this and deal with it. And I'm with you, and we know that the large fleet owners are for sure, placing a bit more orders than they really need at the end or they may need if the economy continues as is. But the risk that is coming with this, I think, we did a reasonably assessment on it to make sure that we are not running into a battle here. Third question, let's say, the post-merger integration question to the Wacker Neuson and Kramer Group, I would say this way, we have different brands. And the multi-brand strategy is one important thing in the market and on the sales side and brand side. And specifically speaking about sales channels, we are trying to keep it separate, to keep strong brands out there. And I would say, we call it always behind the curtain. That's where we have supporting services. If you take our spare parts business, if you take our online platforms, this is obviously something we work on continuously to use it for all our brands. But what is visible to customers carries the 3 colors because that is the core of the multi-brand strategy we carry forward.

[Operator Instructions] And we do have a follow-up question from Charlotte Friedrichs, Berenberg.

Just a follow-up on one of the comments that you made about haircutting the order book. Can you give us an idea of how much of the haircut are you taking right now?

If you see the pictures, you would see my haircut, which is very unfortunate. There is nothing unsaid. But we will have a live session coming then you can have a smile on me. But coming back to serious business, I think it's quite differentiated. But if we look on large rental accounts, we really put 20% to 25% up for a haircut, as you call it, to make sure that we are not -- we keep it as opportunities. We take it serious, and we will do everything and be happy to supply and serve. And if all things come together, this will become real by then. But right now, 20% to 25%, I think, is a reasonable haircut, as you say.

And we haven't received any further questions at this point. So I'll hand back to the speakers for closing remarks.

Okay. If there are no further questions, thank you very much for participating. If anything else comes up, please do not hesitate to call the Investor Relations team or just give us an email. Thanks. Have a good rest of the day. Bye-bye.