Wacker Neuson SE (WAC) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to the Quarterly Wacker Neuson Group Earnings Call. Thanks for joining today on behalf of the release of our full year 2023 results. My name is Peer Schlinkmann, and I am the new Head of Investor Relations and Corporate Communications of the Wacker Neuson Group, since December 2023. My team and I are very much looking forward to identifying our communication with the financial community. As usual, we will now present our latest results released this morning to you. First, we will show the operational and financial results of the year 2023 and give additional insights on the recent developments and outlook for 2024. Following this, we are happy to answer your questions in the Q&A session. If you are not following today's call via the webcast, the presentation slides are also available for download on our website at wackerneusongroup.com/investor-relations. Please note that the entire call include the Q&A session will be recorded and a replay will be available on our corporate website by the end of the day. And now I would like to hand over to our executives, Karl Tragl and Christoph Burkhard, who will, as usual, lead you through this call.

Thank you, Peer, and welcome on board. And this is Christoph Burkhard, CFO, Wacker Neuson Group. Welcome, everybody, to our 2023 year-end earnings call, and thank you for joining again.

To all, a warm welcome from my side, and thanks again for joining today's conference call. I am Karl Tragl, CEO of the Wacker Neuson Group. The past financial year once again impressively demonstrated our guiding principle. Nobody is perfect, but the team can be. Our global teams demonstrated how experienced and motivated employees can achieve great results even with challenges increasing during the year. I am proud of our teams, and I'm proud of our company with a long history going back more than 175 years. Our customers, suppliers, business partners and investors can rely on this continuity of experience and resilience, now and in the future. As usual, let's start with the details of our key financials. The Wacker Neuson Group once again grew significantly last year and increased profitability at the same time. With revenue growth of roughly 18% to EUR 2.655 billion, we are looking at the strongest year in terms of revenue in the history of the Wacker Neuson Group. Our earnings before interest and taxes, EBIT grew with 35% year-on-year, even more dynamically. In total, we generated EUR 273 million with an EBIT margin of 10.3%. Neutralizing the two one-off effects from first half year 2023, the like-for-like EBIT margin of approximately 9.3% is still above the 9% margin of the year before. This was achieved in an economic environment that became increasingly challenging over the course of the year. After a very dynamic development in the first half of 2023, recessionary trends became increasingly apparent in many business areas. In the second half of the year, these developments were accompanied by weakening demand in the construction industry. However, Wacker Neuson does not only serve the building sector, but also the infrastructure and modernization segments of the construction industry. And thanks to continued growth in the agricultural and municipal equipment markets, Wacker Neuson Group was able to achieve its targets for 2023. In addition, rental and aftermarket services complete our product offering on a sustainable basis. And with our innovations, we create new growth potential, particularly supported by our continuously broadened zero emission product portfolio. Now looking at the fourth quarter of 2023, we must acknowledge that with an EBIT margin of 5.1%, the performance did not meet our expectations. The significant slowdown in production output led to a decline in gross profit, which could not be fully compensated by cost savings. In parallel, we already took a whole series of measures in the areas of direct and indirect production costs, as well as SG&A adjusting to the economic slowdown. Let me now give you some insights on the development of our revenue by regions. The regional perspective shows that in 2023, our most important markets, Europe and Americas were supported by a strong order book generating again, significant double-digit percentage growth, as the year before. In the EMEA region, our revenue increased by roughly 18%, amounting to around EUR 2 billion in 2023. With a share of 76% of total revenues, EMEA again proved to be our key market. Business with Kramer and Weidemann compact equipment for the agricultural sector continues to develop dynamically. And for the most part of 2023, it has been relatively unaffected by the deteriorating economic environment. The Americas region continues to be another important growth driver for us. Our revenues once again increased in the double-digit percentage range in the past financial year, rising by roughly 21%, and thereby exceeding the mark of EUR 0.5 billion. Again, it was the U.S. and the Canadian market, they had shaped our growth in the region, thanks to the strong demand across all sales channels. Authorized dealers, independent light equipment dealers, as well as key accounts showed a sustained high level of interest in new machines and rental equipment. However, in the second half of the year, the demand of the North American market also weakened, triggered by overstocking of our dealers. As recognized in the course of 2023, the Asia Pacific region remained on a negative growth path with roughly 9% decrease year-on-year. This is driven, in particular, by the weakness of the Chinese and the Southeast Asian markets, combined with a high price sensitivity in a declining construction market. Nevertheless, we stay positive as the Australian market remains our region's sales drivers. We are continuing to pursue our strategy there, expanding our dealer network and partnerships with independent rental companies, as well as strengthening the demand with the product portfolio tailored especially to the local needs. And now I will hand over to you, Christoph, to give us some more insights on financials.

Thank you, Karl. Now let me start with a brief deep dive into net working capital in 2023. A key topic, which significantly influenced all financial KPIs displayed on this slide. And the question is, which were the main prime forces behind the working capital development in 2023? Now when specifically analyzing the development of the respective inventory categories, and I mean, we said raw materials, good transition, work in progress and finished goods. We do see a buildup of raw materials until the middle of the year 2023, subsequently declining again basically down to the levels at the end of 2022, corresponding to the economic slowdown. In contrast, we do see a steady growth of finished goods in line with the revenue growth. However, remaining at constant high levels throughout Q4 despite the weakening market dynamics. And this is a typical pattern of a year where dynamics quickly changed from growth to consolidation, leading to a wave going through the value chain from raw materials eventually to finished goods. And since all market participants have been facing the same rapid development, everybody, including the dealers were confronted with the slowdown in demand, leading consequently to temporary high stock levels of finished goods towards the end of the year. While the inflow of raw materials got cut down quite quickly. On the other hand, the improving supply chain environment in combination with focused actions, back to a very significant reduction of the unfinished machines back to normal levels. I guess, recall we had this topic quite -- a couple of times during our quarterly calls last year. And we were able to reduce the number of unfinished machines down from record levels of more than 1,600 in July to around 450 at the end of December 2023. So we ended with a mixed picture. Certainly, we would have liked to finish with a [ blank or zero ] free cash flow. But eventually, we could not fully absorb the sudden demand dynamics with our working capital management, eventually leading to a minus EUR 25 million free cash flow. At the same time, the successful and fast reduction of our unfinished machines also contributed to the temporary increased finished goods position. But despite this fact, our net financial debt position, as well as our leverage below 1. And our constant strong equity ratio remained stable at very decent levels at the end of 2023. And in this context, maybe I read one comment from my side towards 2024. I expect that everybody in the industry, including us, will remain quite busy throughout the first half of the year 2024 to get back to normalized finished goods stock levels due to the mentioned market dynamics spilling over from financial year 2023 into 2024. Now some words about our dividends. Continuity in delivering attractive shareholder dividends is one of the pillars of our financial policy at Wacker Neuson. Again, we achieved a year with strong growth, as Karl already explained and our group reached new milestones in both revenues and EBIT. And based on this performance, we want our shareholders to again participate in our results. Therefore, we will propose a dividend of EUR 1.15 per share for the past financial year at the Annual General Meeting, which will be held on May 15, here in Munich. As this corresponds to a payout ratio of around 42% of our earnings per share, and marks an attractive dividend yield of 6.3%, based on 2023 year-end share price. And with respect to you, Karl.

Thank you, Christoph. At the end of our presentation, let's talk about our guidance for 2024 and our Strategy 2030 implementation. Based on the volatile political and economic developments at the beginning of 2024, we expect the current financial year to be characterized by a higher degree of uncertainty compared to the past year. As mentioned, we already prepared our company for a weaker market environment. Many business associations in our core market, Germany, are pointing to a recession in industry segments that are important for us. We need to further keep our production and sales activities as flexible as possible, to enable the Wacker Neuson Group to successfully stay on track despite low visibility. Our focus right now is geared towards the short-term sight and dynamic adaptation to demand changes. But of course, we always have the long-term development of our company in mind as well. We have the right people, the spirit and dynamic to deal with the challenges ahead of us. After 2 years of strong growth supported, among other things, through our solid financial position, we are highly convinced that the Wacker Neuson Group is well positioned and equipped for the tougher times ahead. In a nutshell, fiscal year 2024 will be a year of consolidation. A year which aside of all challenges also offers opportunities to further improve operational structure to increase our resilience and to build a strong foundation for future growth. For 2024, we expect revenue to be in the range of EUR 2.4 billion to EUR 2.6 billion and the EBIT margin in the range of 8% to 9%. Our goal is to reduce our net working capital ratio back to around 30% by the end of 2024. And we also aim to invest around EUR 120 million. Before we conclude the presentation, let me remind you of our Strategy 2030, which we presented for the first time in the summer of 2023. Let me point out that despite short-term impacts, the Wacker Neuson Strategy 2030, with its 10 levers for growth and profitability remains our North Star guiding our way. We are highly convinced that after 175 successful years of Wacker Neuson Group, we have set the right course for the years to come. We are investing in our future and help to preserve our planet for the next generations. In the course of 2024, we will therefore not only work on the further implementation of our strategic goals, also present further details of our sustainability strategy. Nobody is perfect, but a team can be. This is our guiding principle to reach EUR 4 billion revenue by 2030 and an EBIT margin of more than 11%. We remain confident about our future business development, and we look forward to continuing our journey of profitable and sustainable growth together with you. Thanks for listening. We are now ready to start the Q&A session, and we are very much looking forward to answering your questions.

Thank you, Karl and Christoph for the presentation of the full year results 2023, and comments on the recent developments as well as the outlook for 2024. I'm now asking the operator to explain the Q&A procedure to you.

[Operator Instructions] The first question is from the line of Stefan Augustin with Warburg Research.

I have actually a couple of questions, I hope to bring them one after the other. The first one is if we would extrapolate the margin from Q4, your outlook for 2024 is quite a bit better. So what are the main ingredients for this margin improvement on a sequential basis from Q4 on, if it is not the top line development. Could you give us a little bit of insight here?

Yes, Stefan, Christoph here. Let me answer your question. What happened in Q4, I tried already to -- a little bit to explain it in my speech is that we had quite a change in dynamics from growth to, lets call it, consolidation. And it was a fairly rapid change. And then, of course, we adjust it as quickly as possible to that change. But it had some temporary consequence in terms of our production utilization. So we were clearly confronted with underutilization costs in Q4. You can also see that directly when you look at the reduced gross profit margin. But that's not something that will follow us throughout 2024 because, of course, we took a lot of measures now going into 2024, adjusting the production capacity to our expectations, to our guidance. And of course, on top, we took a whole series of cost adjustment measures going beyond the pure cost of sales topic, including SG&A. So all in all, this is a -- there is a couple of reasons that I tried to explain that you should not take simply the Q4 margin forward as an indicator.

Okay. And if I look at your first statements for 2025, it says you expect a slight increase in the margin of the -- if I recall that correctly, I think 2025 is and also the start of the Deere cooperation in the U.S. And with the coming back of the market I expect actually a little bit more positive statement here. So is this, let's say, cautious due to the uncertainties we see around? Or is that -- or is there a reasoning or we should not be expecting a to dynamic improvement of the margin in '25 over '24, when the market comes back.

Well, I guess we are all well advised to be a bit cautious when we go beyond the 1-year guidance horizon. But there is no specific reason to -- beyond being simply -- beyond dealing with uncertainty, Stefan. There are no specific reasons why we should be overcautious in 2025, certainly not, if that helps.

Good. And then finally, a little bit, can you outline what's happening at the order intake front right now? Some comments would be quite helpful here.

Order intake situation. Maybe let me start with something that also we find a bit surprising in terms of geographic differences because against the common perception actually, we are doing okay-ish and maybe even a little bit better than in Q4, in Europe and specifically in the DACH region. Whereas in the U.S., we are doing a bit weaker than expected. So dynamics in the U.S. is lower actually than what we see in Europe currently. And that certainly has also to do with temporary overstocking in the U.S., which burns a bit the demand.

And how does agricultural equipment look like?

Yes. I would say the mood in the agricultural industry is still very positive because all the trends and all the need for improvements there in food and everything is still increasing. It's the same effect there, as Christoph described for construction in U.S. is that our agricultural dealers are just simply overstocked, the whole year 2023 for the whole industry, also for our competitors was just giving more product, more machines into the market, and then ready good to sold to end customers, to end users. And therefore, also the agriculture dealers are overstocked and are showing a similar effect as we see on the other one. It's not as severe because it's less concentrated industry. It's on a broader base, smaller dealers, more end users and farmers. And so we are confident that it will be not as much affected and as long affected as the construction segment.

Operator, do we have anyone else in the line for asking questions or...

[Operator Instructions] There are no further questions at this time. I hand back to Peer Schlinkmann, for closing comments.

Ladies and gentlemen, as we can see, there are no further questions from your side. Therefore, we have come to the end of our conference call. As usual, if you have any further questions, please do not hesitate to contact me or the whole Investor Relations team via phone or e-mail. Please be also aware that we will update our financial calendar continuously once we have set a new date for our roadshow activities, during spring and summertime. You will find out our Financial Calendar also on our website. If you would like to meet us in person, please let us know. We would be happy to catch up. Thanks again for joining our call. We wish all of you pleasant Easter holidays. Have a great day.

Thank you very much.

Thank you very much. Have a great day.