Wacker Neuson SE (WAC) Earnings Call Transcript & Summary

Hello, and good afternoon, everyone. Welcome to the Wacker Neuson Group Fiscal Year 2021 Earnings Conference Call. This is Christopher Helmreich speaking of Wacker Neuson Investor Relations. With me in Munich is our CFO, Christoph Burkhard; our CEO, Karl Tragl, is connected via phone. Over the next 10 to 15 minutes, we will present the results of fiscal 2021, give you an insight to our acquisition of the Enar Group and provide an outlook for 2022. You will have the opportunity to ask questions right after the presentation. If you are not joining us via webcast, you can find the presentation slides for this call at wackerneuson.com/investorrelations. Before we start, please note that the entire call, including the Q&A session, will be recorded and made available on our website in the afternoon. Now let me turn the call over to Karl Tragl and Christoph Burkhard.

Thank you, Christopher, and good afternoon, everyone. This is Karl Tragl. Thank you for joining us today. Before we get into our business routine, let me say a few personal words. The Russian war against Ukraine is going on for 5 weeks already. We are following these terrible events with deep shock and dismay. At Wacker Neuson Group, we strongly condemn the military actions and the violation of the territorial integrity of Ukraine. Our heartful thoughts go to our Ukrainian and Russian colleagues, our customers and business partners in both countries and to all people in Ukraine. We hope every day that this horrible war will end soon and that peace is restored for all people. But even in difficult times, we have to move on. So let me share our financial year 2021 with you today. I'm proud to say that the Wacker Neuson Group delivered strong results in 2021, despite the many difficulties we had to face. So I can say, nobody is perfect, but a team can be. Over the past year, our colleagues across the Wacker Neuson Group provided impressive proof of just how true this statement is. While the pandemic continues to have a challenging impact on working conditions and was demanding a great deal of energy, adaptivity and resilience from our colleagues, we were at the same time hampered by overstretched and repeatedly disrupted supply chains. Our employees worked tirelessly to get as many machines as possible into our assembly lines despite all the obstacles and get them delivered to our customers. I would like, therefore, first, to offer our sincere thanks to our colleagues all over the globe for their extraordinary commitment throughout this challenging year. I would also like to thank our customers and business partners for the loyalty and the trust they place in us. Fiscal year 2021 results exceeded our expectations with revenue up 16%, driven by dynamic growth in both construction and agriculture. And we could have grown even stronger if it weren't for the massive supply chain disruptions which we were facing throughout the year. However, despite challenging supply chain situations, we managed to avoid extended production shutdowns even in the fourth quarter. Productivity, however, was impacted by the required additional planning and additional rework efforts. In conjunction with sharp rises in material, components and transportation costs, gross margin decreased quarter-by-quarter over the year. Nonetheless, we achieved a remarkable rise in operating profit, up to EUR 193 million. The positive volume effect and strict cost control helped us to exceed even the 2019 EBIT level. But to note, earnings in 2021 included a positive net effect from the reversal of allowances for doubtful receivables in the amount of EUR 13.5 million. The year before, 2020, value adjustments in the amount of EUR 33.3 million had a negative effect on earnings. And good news also on the net working capital side. The net working capital ratio reached 26.7%, which means that we are well in line with our strategic goal of keeping it below 30% of revenue. However, we are still not happy with our inventory structure. Christoph will add some more details on this subject later with his explanation. For the second year in a row, free cash flow was exceptionally high. In 2021, it came in at EUR 264 million before fixed term investments, while CapEx remained below our projections as our priorities were fully focused on keeping operations up and running in difficult times. I would like to thank you, our shareholders, for your continued support and loyalty. We want you to get an appropriate share of the group's profit also in fiscal year 2021. Together with the Supervisory Board, we will thus propose a dividend of EUR 0.90 per share through the Shareholder Assembly Meeting in June. Now let's take a look at business development in the regions. Europe performed exceptionally well with a plus of 15% already exceeding the precrisis levels of 2019. In the construction industry, our home markets, Germany and Austria, were the main growth drivers. In the U.K., we benefited from high demand for compact equipments. At the same time, markets in Southern, Eastern and Northern Europe, which were badly hit by the corona pandemic in 2020, recovered as well. Business with agricultural customers of our Kramer and Weidemann brands again developed particularly well. Also, the agricultural business hardly suffered any drop in sales in the previous year. Remarkably, it still achieved growth of 15% in 2021. In the Americas, business with dealer customers and rental companies experienced an upswing with accelerated growth, particularly in the fourth quarter. I would like to give you just one example for that. We launched a great new product for the North American market in October 2021. You can see it here on the slide. This is our new SM100 utility track loader, which complements our skid steer loader offering. It demonstrates very nicely how Wacker Neuson focuses on customer needs. As a result of our Voice of Customer surveys, our team in U.S. developed this low-maintenance, high-productivity machine from scratch. It's versatile and maneuverable. It's weighing less than 1,500 kilogram and fits easily through doorways and gates with an overall width of just about 90 centimeters. It's the perfect solution for inner city gardens and smaller yards. We manufacture it at our U.S. plant in Menomonee Falls. The SM100 has already received excellent customer feedback, so additional models are already in development and planned to be launched soon. And there's another very good example in North America. It's our hidden champion, Canada. Business in Canada developed in an extremely positive way, particularly for agricultural wheel loaders and excavators and was 2021 above precrisis levels again. In Asia Pacific, on the other hand, we continue to face a difficult market environment, especially in China. The excavator market in China is declining, local manufacturers have excessive production capacities and, as a consequence, there is tremendous price pressure. But there are also business opportunities in Asia, which we grasped. Australia and New Zealand are developing very nicely in 2021, resulting in strong double-digit growth. Our team there managed to expand the dealer network and sharpen the focus on larger independent rental companies, which led to major orders for telehandlers, excavators and dumpers. And meanwhile, our affiliates are able to source the high-volume excavator models from our plant in China, especially configured for the Australian market. This should further accelerate the business growth. Now Christoph has some more positive messages for you.

Indeed, Karl, thank you. Good afternoon, ladies and gentlemen. This is Christoph Burkhard, and a warm welcome also from my side. I would like to share first some highlights regarding cash flow and net cash with you. Our gross cash flow almost doubled compared to the previous year. The reasons here were significant increase in earnings and the preterm receipt of receivables. Operating cash flow was lower than prior year, and this is because we had reduced our net working capital significantly in 2020. But in 2021, however, we still managed to keep our net working capital in absolute numbers on prior year's level despite all the supply chain issues and our strong growth momentum. As we postponed some projects due to our increasing daily efforts in operations, our investments came in at EUR 82 million. This was below our projections and, of course, also supported our high free cash flow of EUR 264 million before fixed-term financial investments amounting to EUR 115 million. The large amount of cash sitting on our balance sheet pushed net financial debt into the negative range, meaning that we have now a net cash position at the end of 2021, slightly positive with EUR 0.8 million. However, just to keep this in perspective, this is obviously a snapshot. And as mentioned, we are planning to further proceed on our growth path, and that implies that our net working capital in absolute terms will increase. Also, we want to make substantial investments into areas enabling further growth like our zero emissions portfolio and the expansion of our production capacity. And additionally, M&A remains a topic high up on our agenda. Now on to our share buyback program. We launched our first ever share buyback in fiscal 2021 and concluded it on November 19. A total of 2.1 million shares or 3% of share capital was bought back. The amount paid was EUR 53 million. The treasury shares are to be used primarily as potential acquisition currency or to service participation programs for employees and members of the Executive Board.

We have told you in the past that we will seize M&A chances opportunistically. The Enar Group is just a great opportunity. So let me say a few words regarding this bolt-on acquisition, which we recently announced. Enar is a leading manufacturer of light construction equipment specialized in concrete compaction. It manufactures its products in the Spanish city of Zaragoza and employs around 130 people. In 2021, sales were around EUR 22 million. Why did we acquire Enar? The concrete compaction market is a very attractive growth market. Enar enjoys a healthy market position with a particularly robust presence in Europe and Latin America. At the same time, Enar distributes its products through sales channels, that are not the focus of our Wacker Neuson brands, for example, tool stores for professional users. That means that the acquisition will give us access to new customer channels without cannibalizing our own products. We will continue to address the market with these differentiated sales channels because we believe that this is the ideal way to expand our offering. Therefore, we will manage Enar as an independent brand. Subject to regulatory approval, we expect the transaction to be closed in the first half of this year. Now let's take a look at our supply chain. You all read it in the newspapers every day. There's basically no easing insight regarding the disruptions to supply chains. In contrary, with the war in Ukraine, new problems have emerged. And due to the spread of the Omicron variant, suppliers still struggle with staff shortages, as we do as well, due to illness or quarantine. With the rising share of late deliveries, the [Technical Difficulty] planning becomes an ever-increasing challenge. While the number of unfinished machines stood at around 1,800 at the close of the year, we have surpassed this number now by -- and we are looking currently at around 2,200. The necessity to rework these machines and touch them more than once to get them out of the factory obviously has a negative impact on productivity and as well on profitability. We have to operate our plants extremely flexibly here. However, production schedules cannot always be adjusted at short notice. The biggest challenges here are primarily linked to workforce planning when trying to avoid drop in production slots, canceling complete shifts or organizing rework at weekends. Now looking into the next months, there are also initial positive signs. Suppliers have invested in additional capacities, which might eventually lead to an easing of the disruptions in the quarters to come. However, we remain very cautious here. Now let's have a look at the input cost dynamics. Prices for raw materials were already on record heights in 2021, and the increase continues -- and additionally, we are also facing skyrocketing energy prices. Container prices are stagnating, but unfortunately, on a very high level. Now what do we do about it? Well, we already informed you last time we spoke about our price adjustments of 2021, which add up to around 6% realized price increase. In response to further rising input costs, we have implemented another price increase of 6% for compact and 4% for light equipment, being effective February 1. Taking into account, however, that our order books are very filled -- very well filled, we do not expect to see a substantial effect of this increase until late Q3. Going forward, we need to further adapt our pricing to the volatile world we live in. Therefore, we have decided to introduce a dynamic pricing model from Q2 onwards. That means that price lists will be reviewed every 6 months. Additionally, we will introduce an energy price adder that will be reviewed on a quarterly basis. In this way, we should be able to respond more quickly to above average increases in input costs. Now what are our expectations for 2022? Well, it will certainly be a lot [ healthier ] that in fact is sure. And I guess you all have seen our guidance that we published on February 9. We expect our revenues for 2022 landing between EUR 1.9 billion and EUR 2.1 billion. EBIT margin is projected to be in the range of 9.0% and 10.5%. For the net working capital ratio, we expect the value of below 30%, in line with our strategic objective. And coming to CapEx, we plan investments of around EUR 100 million. Now let me make a few comments on how we initially assess very high level the development within the financial year 2022. When we issued our guidance in February, we already expected the first half of 2022 to be particularly difficult. Actually, we already communicated that even in during our Q3 call, and it still holds true. So although we see a good start to the year on the top line with market demand on high levels, pressure on margins has continued to increase. Input cost inflation has accelerated and price adjustments cannot be realized without a time lag. Q1 gross margin, therefore, will most likely remain on the low level of Q4 2021 with a corresponding effect on EBIT. However, we expect profitability to gradually pick up again over the coming quarters. As mentioned earlier, there are initial signs on the supply side that give us hope for an improvement of the stability of material supply. Secondly, we are working hard to narrow the gap between input cost inflation and price realization. I've just mentioned the instruments that we are now applying. And last but not least, the seasonality of our business should provide us with tailwinds from the second quarter onwards. Now our guidance for fiscal 2022 was published before the beginning of the war in Ukraine. And what does this potentially means for us as a company? Well, in Russia, we generate about 1% of our global revenue. That was the number for 2021. And we don't have operations in Ukraine, and therefore, it's even much less than that. Therefore, we do not expect a significant direct impact here on sales. However, the war would have significant impact on both the availability and the prices of materials and components, and various suppliers are, of course, affected by that fact. And nobody really knows and can seriously assess today how significant this impact will be. Nevertheless, against the background of the continuing robust demand, very limited visibility of potential effects resulting from the war in Ukraine, we decided to confirm our guidance because it is still the best estimate we have as per today. Our success in 2022 will depend on how well we will be able to translate orders into sales given all the obstacles we have already described here. And it will also depend on how well we managed to compensate the increasing input costs, on the one hand, through strict cost control, and on the other hand, through price realization on the market side. Our teams will give their best also in 2022 to make our customers happy to minimize production outages and to respond swiftly to any other upcoming challenges with the aim of being able to look back at the end of 2022 to another successful year. And with that, we are very happy to take your questions now.

Thank you. We will now enter the Q&A session. I would like to ask the operator to give the instructions.

[Operator Instructions] And the first question is from Martin Comtesse, Jefferies.

I'll start with 3, if that's okay. The first one is, I think, the obvious one. Could you give us a bit more feeling for the different segments, so to speak, agriculture and construction. What does the demand impact look like? Or what's the first signals that you've gotten since the beginning of the year? Is it fair to assume that agriculture momentum is being down stronger than construction? That's the first one. Second one would be on the balance sheet. You've got a pretty cash-rich balance sheet now, and you've already signaled that with the Enar acquisition that you are open to M&A. Can you give us more guidance on how we should think about the use of cash going forward, more share buybacks, higher divi or more M&A? And the last question would be on your net financial results. You had quite a tailwind from FX gains, around EUR 9 million in '21. Can you just help us what currencies were driving? Was it mainly the U.S. dollar? And is it fair to assume that you're going to see headwind going into 2022 here?

Okay. So I propose I'm going to start with the market question, and then I'll leave 2 other ones to Christoph. Your question on agriculture and construction beginning of the year, that means, Martin, that you want to know before the Ukrainian crisis. And so to say, at the beginning of the year, for both segments, 2022 was still a very strong demand and already booked in many respects. And also for the beginning of 2023, in both market segments, there was still a strong demand. And then there were signals from market research and other ones which indicated differently negative signals, a little bit downturn signals on the agriculture side, a little bit on Asian and Chinese construction, which is already down on the ground. But so to say, what we can clearly see in front of us, which I will always say is the next 18 or 24 months, we really before the Ukrainian crisis, we didn't see major negative signs. Also, as you had obviously in mind, market research starts to talk about what's then behind that. Yes, Martin?

Yes. Sorry, if I just follow-up very quickly.

Sure.

Basically, as of the beginning of the war, since energy prices exploded and farmers are struggling with higher input costs, is it fair to assume that in this segment, in the agricultural segment and -- the appetite for new CapEx or new equipment has come down since then? Or is it too early to say at this point? Just trying to...

I just -- I would like to describe the situation in the market beginning of the year. The situation is that, yes, there is pressure on manufacturers as well as on farmers, so to say. But the farmers still are struggling to get the machines they have already ordered, and they are struggling to place the other orders which they have in mind. So I wouldn't -- I would say that there is no -- there was no indication in order to say before the war, and nobody knows really at the moment what happens with that now. But for 2022 and at least for the first half of 2023, also in agriculture, the growth mode was still in the market.

Okay. With that, let me answer your other 2 questions. Concerning share buyback program, no, there is no intention currently to have a repeat program. Then on the currency effect, this is rather -- it has to be seen in the context of 2020. We had 2020 -- we had actually in 2020 tailwind -- headwinds and then corresponding tailwind in 2021. So the conclusion from 2021 to 2022 is actually not correct at that point in time. What I can tell you as for now, there is no indication for tailwinds in 2022. It remains to be seen, of course. But there is no obvious indication for now and not resulting from 2021. And with respect to balance sheet, in general, well, my response here, of course, would remain very general. We mentioned that frequently that M&A is very high up on the agenda. Of course, we are prepared. But you need, of course, also a suitable opportunity. So in principle, yes, we have decided to be very -- to keep our eyes very openly and to be active. But that is as precise it can get at that point in time.

No, that's helpful. I just wanted to get a general feeling for how you're going to use the cash. Yes. Perfect.

The next question is from Jonas Blum, Warburg Research.

Just want to follow-up from my side around the balance sheet and then a couple of questions around pricing. Firstly, balance sheet. In the past, you tried to reduce or you basically reduced risk by outsourcing dealer financing. So I was just wondering, given the stronger balance sheet, is that something you're currently reconsidering taking on the balance sheet again? And then just around pricing, you managed the energy adder mechanisms. Just wondering if that works in both ways. So will you sustainably benefit from higher energy prices? Or will it also reduce pricing going forward? And finally, given that you have introduced new pricing mechanisms which will obviously help you compensate for high input costs. I was just wondering how we should read the unchanged FY '22 sales guidance. Do you basically expect lower volumes to be shipped to customers? Or is it just something you've already included in the guidance before?

Let me start with your question around the balance sheet. I mean, you're clearly referring to our APS program. And I can tell you there is no intention to change that because the program has been very thoroughly committed and basically, it's well integrated in our business in the U.S. and also Canada. And it's working quite smoothly. So there is no intention for the time being to change back, and we'll continue with the program.

And if I may start with your second question, Jonas, on the energy adder. The background is that energy -- increasing cost in energy or change in cost in energy is not only driven by singular events, like the war now in Europe, but also driven by climate change actions. And this will go up and down and how countries are restructuring energy creation and stuff like that. That was the reason why we needed to introduce something which is reacting on this very cyclic or very, on a short notice, changing market on the energy side. And this is not only our energy cost. It's reflecting all the energy costs through the whole supply chain because we are mainly assembling, but there are foundries in our supply chain. They are high-energy, which also will have an impact. So that's the background why we took it that way. And to put a dynamic to not always have to overshoot in a way to compensate for the time lag, but to be able to react more precisely on the real need in the background. And yes, therefore, if energy costs will go down, we will adjust it also downwards. Your third question, I have to admit, on sales and sales coming down, could you please try to state the -- I noted it, but I want to make sure that I can answer to the point. Could you please repeat your third question, Jonas?

Sure. So I was just wondering, given those measures you mentioned around pricing, was that something you've already included in the FY '22 guidance? Or is it something that comes basically on top? And consequently, you expect less volumes to be shipped to customers?

The majority of the price increases have been already announced in the course of the year and also the price increases for Feb -- effective February they were worked out in the third quarter of last year. So it's obviously in our guidance included. What's not included is the dynamic pricing and further additional costs. But the first 2 ones, which Christoph explained, are included in the prognosis.

The next question is from Charlotte Friedrichs of Berenberg.

Three, if I may. The first one is also on pricing. Can you talk a little bit about the customer feedback that you've already received? And also how you're thinking about potentially changing prices for machinery in your backlog? And the second question would be on M&A. Is there any areas specifically that you would like to strengthen if you do get the opportunity for an acquisition? And then thirdly, on components and input materials again. Aside from energy costs, can you give us an idea of whether there have been any changes with regards to the availability of any particular items, since the start of the war in Ukraine, please?

Okay. So let me start and, Christoph, then please add in the end. So your question, how do customers react on this dynamic pricing, I have to say that this is pretty brand new. We introduced it as we are speaking, so to say. So we obviously, on the -- the systematic in general, we don't have a broad representative feedback on that. There are some good examples where customers understand the situation where we are, and there are obviously examples where customers do not understand or do not follow our logic there. So to give you a better answer. We have to wait a few months until we have a representative feedback from the customers. But my general feeling is everybody is in the same situation, wherever somebody is in the supply chain, we are more in the end, but everybody has the same problem [ as to ] our customers. So there is at least always a general understanding before we then get into economical discussions. The second question on acquisition opportunities is, yes, we will -- and hopefully, I answered it correctly. We are still -- we are further open for opportunities, as I said at the beginning or at when I explained Enar. Enar is a very good example where we could make a good contribution to our growth path. And whenever there are further opportunities, we are very open to that. And your third question, how we are affected from the Ukrainian war in our Tier 1. We actually, we don't have Tier 1 suppliers over there. But obviously, we are always, it's raw materials, it's steel, it's other components. So we might be affected then second and third tiers, but we have no first tier suppliers there.

There's maybe one addition, Karl, that just comes up in my mind here. And we do see in transportation, of course, also some kind of obstacles there, be it through the truck drivers, [ truck driving routes, train ] et cetera, there are various impacts.

Okay. Understood. So generally, the supply chain picture is sort of the same, a little bit worse, but there's no major shift?

Yes.

Okay.

That's correct, yes.

[Operator Instructions] There are no questions. Okay, we have a follow-up question at the moment. It is from Martin Comtesse, again.

Just one follow-up question. In terms of seasonality, or call it, phasing. If we look at the different country markets, we've seen in the fourth quarter that we've seen a pretty sharp decline in Asia, we've seen a slowdown in Europe to high single digit, and we've seen a big step-up in the Americas. Can you just help us understanding this momentum in the fourth quarter and whether this is sort of the trend that we should foresee also throughout 2022? That basically, Americas is going to dominate the growth?

Karl Tragl speaking here. Is your question on the market? You're asking a question how the market is behaving?

Yes. So this was your revenue in Q4, right? In terms of Europe, Americas and Asia Pacific. And that was a changed picture in the fourth quarter compared to the first 9 months, I would say. Is that a trend? Or was that just -- did it have some other reasons why Asia was so weak and America was so strong?

I mean, what you're saying is that Europe is basically on a constant growth path and a solid one, and there was no major change over the course of the year. Americas obviously picked up. That's what you explained. This is what we have in our books, and this is partly due to the market because rental companies and other ones were picking up in the course of the year or accelerating how we phrased it. And in addition, we also ramped up our production back again. So this all contributed to an acceleration, clearly growth in Americas. And in Asia, we see this double-sided picture. We have the markets like Australia which are really growing very, very well. And we have China which is getting more difficult month by month due to the reasons which I explained, because of overcapacity, pricing pressure, less stimulus from the government. And this altogether has obviously slowed down our progress in Asia. But you have to view it on both sides, China is the one which is more getting -- which is getting more difficult. The other ones still very well growing.

There are no further questions. I would like to hand back to the speakers for some closing remarks. Mr. Tragl, maybe you could do the closing remarks. I guess, we have an issue with the main line.

We have an issue with the main line? Okay. So yes, obviously, to say, I'm not preparing to the second. Yes. So I missed Christopher Helmreich, if you see. So thank...

We're back. We're back. Sorry, Karl. we just tapped out. So we are now good, currently if there are no further questions?

No further questions.

Well, then thank you very much.

Thank you very much, everybody.

Have a good rest of the day, and please don't hesitate to contact us if any other question comes up. Thank you.

Bye-bye.