Wacker Neuson SE (WAC) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to today's conference call of Wacker Neuson on behalf of the release of our results for the first half year 2022 published this morning. My name is Susanne Rizzo, Manager Investor Relations at Wacker Neuson. Thank you for taking the time today as Dr. Karl Tragl, our CEO; and Christoph Burkhard, our CFO, will lead you through this call. In the next 15 to 20 minutes, we will present to you in detail the most important events of the first half year from an operational and financial perspective as well as the outlook for the year as a whole. Following this, we will then find sufficient time for a Q&A session. if you're not following today's call via the webcast, the presentation slides are also available for you for download at wackerneusongroup.com/investor-relations. Before we start, please note that the entire call, including the Q&A session, will be recorded and made available publicly on our corporate website in the course of today. But now let's get going with today's session, and let me hand over to Karl Tragl and Christoph Burkhard.

Thank you, Susanne, and good afternoon, everybody. I'm Karl Tragl, and thanks as well from my side for attending our call today.

Good afternoon. This is Christoph Burkhard, and also thank you very much for taking the time for Wacker Neuson.

Ladies and gentlemen, the momentum at the beginning of 2022, which we had the pleasure of reporting in our Q1 call, continued into the second quarter. We can look back on a first half year of strong growth. The significant increase in revenue of around 16% in the first 6 months and 12% in the second quarter. And if the dynamic development of our order intake was so elastic, we would be confident that this positive trend could continue well beyond the current fiscal year. However, as you all know, the global political environment is now creating a considerable degree of imponderability and uncertainty in almost all areas of our daily lives. At the end of 2021, after challenging but nevertheless successful year, we were still allowed to cautiously hope for an easing of the supply chain problems. The Russian aggression war on Ukraine has not only abruptly dashed this hope, but has added to the challenges and escalating energy crisis in Europe and above all, in Germany. In the first half year, we were only able to compensate for the persistently high material and transportation prices and the exploding energy costs through sales price increases in part and with a time lag. Continuing material bottlenecks resulted in machines that could not be completed and had to be reworked repeatedly. This impacted productivity and profitability of our plants. As a result, our earnings before interest and tax fell by 13%, and our EBIT margin reached 8.2%, a decline of 2.6 percent points. But special times called for special action. The availability of raw materials and components, ensuring production capability, is right at the top of the daily to-do list. This [Technical Difficulty] together with increased amounts in connection with our fundamentally very dynamic business development led to an increase in our net working capital ratio to 30.6%, slightly above our strategic target ratio of 30% or less. And despite the understandable decline in our free cash flow and in view of the circumstances, we can be satisfied with our performance in the first half of the year. Let us now take a deeper look at our operational performance in the sales regions. As in the first quarter, the first half of the year also saw significant double-digit revenue growth across all regions. This underscores the fact that Wacker Neuson products enjoy a very high level of trust and demand worldwide. In Europe, our largest sales region, revenue rose by a good 12% in the first half of the year. Once again, the strongest growth drivers here were our home market Germany and the two key European construction markets, U.K. and France, which also contributed double-digit growth. The still dynamic development of the construction industry was reflected here in strong demand for wheel loaders and dumpers. Our rental and service business also continued to develop well as did our high-margin spare parts business. The group brands, Kramer and Weidemann, two specialists for compact equipment in the agricultural sector, once again performed overproportionately well. They grew almost 19% in the first half of the year and remain a key catalyst for our group sales. The Americas posted a full 28% increase in revenue across all sales channels. This trend remains unchanged even after adjustment for foreign exchange effects. The weakness of the euro against the dollar accounted for a good 1/3 of the increase. Adjusted to this, the increase was still around 17%. This development was driven by great success in our efforts to further expand our network of authorized dealers. This places the growth of the Americas on a solid foundation and will ensure our success in the future. In Asia Pacific, the demand for our product in Australia continues to boom. The Southeast Asian markets and India were also developing well. On the other hand, we are confronted with the construction equipment market in China that continues to contract. Strategically, however, we continue to benefit from our Chinese footprint with attractive cost structures in our plant in Pinghu. We are increasingly selling the machines we produce in China to traditional export markets, such as Africa and South America. Overall, the APAC region increased sales by almost 1/3 and contributes now around 4% to group sales. Our strong organic growth and the steadily increasing global reach of Wacker Neuson are based on our commitment to shape the major trends of the construction equipment industry. As in almost every industry, the megatrends of digitalization (sic) [ digitization ] and electrification are driving innovation in our markets. And Wacker Neuson clearly sees itself as a pioneer and a technology leader in this development. As a further milestone in mid-May, we became a key partner in the Sequello joint venture alongside PORR Equipment Services and Umdasch Group Ventures. Sequello is a platform for digitizing construction logistics processes. The digitalization of ordering, delivery and billing processes offers our customers high added value, and we see great potential to create a comprehensive industry solution with Sequello. We are contributing with our know-how, expertise and resources to the joint venture. As a SAP-based platform, Sequello digitizes and simplified processes along the entire value chain that were previously handled in paper form. Specifically, construction companies can, for example, digitally order concrete and bulk materials, such as gravel or cross stone from their suppliers. They will obtain a digital overview of the delivery schedule and carry out all entries up to invoice verification. The integration of further software modules, such as the rental of construction machinery and equipment into the platform is planned. This will enable customers and suppliers to collaborate even more productively, digitize more processes, minimize error and benefit from these savings. Sequello is used via a web application, but can also be integrated directly into the user's ERP systems. For insights into the digital platform as well as for a presentation of our new electric vibratory plates and, of course, other machines in our product range, we would appreciate to welcome you to our stand at the upcoming Bauma Trade Fair, which will take place in Munich from 24th to 30th of October. There, we will focus this year to a large extent the presentation of our digital and electrical innovations. Another important cooperation has been announced by us in mid-June. We reached an agreement with John Deere Construction and Forestry Company, a subsidiary of the John Deere Group, on a long-term exclusive OEM supply contract for mini and compact excavators, including battery-powered machines. John Deere is one of the world's leading manufacturers of machinery for the agricultural, forestry and construction industries. We have been collaborating with John Deere for some time already through our Kramer brand. Through this strategic sales partnership for telescopic handlers and wheel loaders in the agricultural sector, we distribute Kramer-branded machines through the John Deere dealer network. In the new cooperation, we will develop excavators in accordance with John Deere's requirements primarily for the North American market, and we will manufacture them at our plants in Menomonee Falls in the United States and in Linz in Austria. Sales will be made by John Deere under the John Deere brand. Our own comparable machines will remain unaffected by the cooperation and will continue to be offered to the market under the Wacker Neuson brand via our sales and distribution network. We expect the new cooperation to significantly accelerate our growth curve in the medium term with first contributions to sales and earnings in about 2 to 3 years' time. We are currently planning investments in the low double-digit million euro range for the corresponding expansion of production capacities in both plants, Menomonee Falls as well as in Linz. In addition to the purely commercial appeal of this cooperation, we see this agreement as further proof that Wacker Neuson is perceived worldwide as a high-quality partner to the construction industry, with our products, meeting highest customer expectations. After sharing with you these two strategic highlights, I will hand over to you, Christoph, for a deep dive into further financials.

Thank you very much, Karl. Well, against the background of the multiple challenges we were confronted with during the first half year, we believe that we can still be satisfied with our performance. However, the challenges created by the general economic and political environment are not becoming less. I'm not telling you anything new here. The global pandemic, the steadily worsening energy crisis, the far above average capacity utilization in the transport sector and the associated price increases, supply chain problems and material bottlenecks and, of course, the war in Ukraine. As a result, input costs are still rising. Our logistic costs have multiplied in some cases, as can be seen here in the chart based on international container rates. Our material costs are still at a high level. And of course, the sharp rise in inflation will also have an impact on our personnel costs. These are all factors negatively impacting our business performance and profitability. The fact that we can still halfway cope with all these challenges demands a maximum degree of flexibility from us and above all from our employees. And it's remarkable what our team has achieved here over the past 6 months. And on a positive note, due to our good market positioning and the high quality of our products, we will be able to pass on parts of these cost increases to the market through price increases. In addition, as part of our strict cost management, we have succeeded in continuously improving our operating cost structure. Now as already mentioned by Karl, at the beginning of the presentation, we recorded a significant increase in our net working capital in the first half year. The reasons for this are, on the one hand, increased receivables which stem from our dynamic business development. But furthermore, there was an increase in inventories of production-related input materials, which is necessary in the current environment of supply chain problems in order to fill as many as possible of our planned production slots. In addition, we recorded a significant increase in unfinished machines as a consequence of the strained supply chain situation. And we continue to experience a big variety of missing parts basically on a day-by-day basis. This altogether caused further negative free cash flow amounting in total to minus EUR 124 million and a net working capital ratio of 30.6%, which is slightly above our target of 30%. In line with our overall view on the expected developments in the second half of the year, we are confident to stay at or below our target level of 30% net working capital at the end of the year. Now looking at our net debt and leverage. EUR 211 million of net debt and a debt-to-EBITDA ratio of 0.7 at the end of June represents continued strong and very solid financial levels of the Wacker Neuson Group. And just recently, we were able to strengthen our financial base by reaching agreements with our core partner banks on a long-term committed credit line at attractive conditions. Accordingly, our existing credit lines were extended from EUR 150 million to EUR 300 million. Wacker Neuson, therefore, remains well prepared in the current volatile environment to leverage all the opportunities that still exist in the market to continue on its growth path. So with all this information at hand, let me finally elaborate on our outlook for the full year 2022. As already mentioned earlier by Karl, the general mood in the European construction equipment sector remains at a high level. At the same time, however, there are growing concerns as to whether this will remain the case in the months and quarters ahead. And against the backdrop of the current economic and political risks, we too are, therefore, bracing ourselves for difficult times and prefer to be positively surprised in retrospect rather than being caught on the wrong foot. At the moment, we can certainly draw some confidence from our significant order backlog. In addition, being already halfway through the year, many of the imminent risks have either already materialized or have become more visible concerning the remainder of the year. On the other hand, and despite the fact that we have been relentlessly and quite successfully working on implementing price increases, there are certain limits to our ability to pass on price increases to our customers. Now balancing those two effects and assessing the likelihood of the remaining risks and opportunities for H2 has led us to the volume conclusions. In view of the continuing strong demand, we expect sales of between EUR 1.9 billion and EUR 2.1 billion for the full year. However, the difficult supply chain situation and continuing pressure on prices for materials, energy and transport will most likely continue to have a negative impact on our earnings performance in the second half of the year. On the other hand, price increases implemented from the third quarter onwards will have a positive effect on our profitability. So as a consequence, taking into account the course of the business to date, the prevailing conditions and the opportunities and risks arising for the Wacker Neuson Group, we have narrowed our EBIT margin corridor for 2022. We are guiding now an EBIT margin between 9% and 10%, instead of the previous 9% to 10.5%. And with this, we would like to open the Q&A session.

And I would like to hand over to the operator to explain the Q&A procedure.

[Operator Instructions] The first question comes from the line of Charlotte Friedrichs from Berenberg.

The first one would be, if you could please give us the split volume versus price now for the second quarter or first half year? And then the second question would be around the outlook for H2. How much of an uplift to the gross margin are you expecting here from price increases that you mentioned taking effect from Q3 onwards?

Karl speaking here. Could you please explain the first part of the question, volume and price? Could you explain that?

Your revenue, what was the split between volume growth and price increases that you've seen in the first half or second quarter?

Yes, we need to take it from the price increases that we have recorded so far. And I think you can calculate about 12% on the revenue H1, Q2 price increases.

And Charlotte, what was the question about the part of the second half of the year?

Yes. Basically for us to understand what the moving parts are would you expect for the gross margin OpEx in the second half of the year?

We just can say as much as that we will see an increase in our gross profit because the more and more -- the first, in sense, it was not affecting the total volume, but it was just on the list prices on individual model prices. The more time we have in the year, the more of that we can implement, so this will increase. On the other hand, we are confident that we will battle on the cost side and the material cost side. So this will give us room for increasing the gross profit.

The next question comes from the line of Alexander Galitsa from Hauck.

I'd like to ask on free cash flow. So after first half of the year, you're down EUR 120 million. Could you just confirm that you would expect to be around about breakeven or even positive for the full year? Because if I look at it correctly, your net working capital guidance implies quite a significant release in the second half. And then obviously, second half should be at least as strong as the first one. So yes, that pretty much puts you well into the positive territory for the full year.

Alexander, Christoph here. Well, you know that we are not guiding free cash flow, but I would certainly confirm that we will see an improvement on the free cash flow side towards the end of the year. But I cannot confirm here that we will get into positive territory. I think that's rather a street call. It remains to be seen because -- well, you know that the increase in working capital, of course, is one of the main factors that influence the free cash flow. Yes, we will become positive. But against the background of the current supply situation, and as we have just explained, we will, of course, prioritize our ability to produce. And certainly, we will -- as mentioned, we will strive to get below 30%. But I cannot confirm that it will be of a dimension that we will get into positive territories with free cash flow. This really remains to be seen.