WashTec AG (WSU) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of WashTec AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand over to Dr. Ralf Koeppe, who will lead you through this conference. Please go ahead.

Thank you very much. Ladies and gentlemen, I would like to welcome you to the presentation of the WashTec Group's presentation of the half year and second quarter results of our financial year 2021. With me are my colleagues, CFO Dr. Kerstin Reden; and CSO Stephan Weber. Slide 2, please. I would like to give you a brief overview of the topics for this call. I will start with a short update on WashTec AG topics followed by Kerstin Reden with a comprehensive update on financial figures and guidance. Financially -- finally, we'll have the Q&A session with the WashTec Board. Let me summarize our business model to take everybody on board. WashTec is the world's leading provider of innovative vehicle washing solutions. Our product range includes capital goods such as all types of car washing systems with the associated peripherals and water treatment systems. In addition, we offer our customers the services and chemical consumables required to operate the system. We arrange financing and offer the management of operations if desired. Slide 3. In the last quarter, we have set the foundation for WashTec's digital platform. We have presented this at the Annual Shareholder Meeting. myWashtec is the platform and access point to WashTec's digital offers. Our customers can manage and optimize the operations of their assets. These offers comprise Remote Service, SmartSite, EasyCarWash, SmartCare, our web shop and other operator services, setting a new standard in the carwash industry. Our digital team continuously adds capabilities to the platform that extends WashTec's data-based offerings and smart services. Technically, WashTec has provided access to the database of connected machines via cloud for many years. We have now consolidated this in a modern architecture based on APIs, application interfaces. With this, WashTec is then able to execute cloud services in the carwash markets based on our own platform, myWashtec, but also to generate cloud-to-cloud solutions to our customers and partners. Slide 4. Looking at project progress and the supply chain situation, we experienced a tense situation, which means we spent a big part of our time and efforts and must run extra miles to ensure the progress of our projects and to maintain our ability to deliver our products. Unfortunately, the travel ban to the U.S. has been extended by President Biden's administration for the time being. This puts further burden and requires additional workarounds in some of our German-U.S. projects. But so far, we are doing okay. A big thanks goes out to our employees that are highly motivated in managing the situation, including many of them postponing their vacations. Kerstin Reden will address the supply chain situation in her part as well. I now hand over to Kerstin. Please.

Thanks, Ralf. Hello to everyone. We were very pleased with the result of the second quarter. We saw strong recovery, especially in Europe, predominantly driven by direct business. Let me start with some details on performance in the second quarter before I then turn to the half year results. Please move to Page #6. For the second quarter, group revenue was EUR 110 million, up 25% year-on-year. This is the highest revenue WashTec has ever generated in a second quarter. All main product segments developed positively with a large contribution from our direct customers. As a result of the strong revenue performance, Q2 EBIT increased to EUR 14.5 million, over 3x the results we delivered in the second quarter in 2020. EBIT margin was 13% driven by high-capacity utilization, efficiency measures implemented last year and ongoing low costs in some areas such as travel. For the second quarter, free cash flow after lease expense was EUR 10.3 million, up 2% year-on-year driven by strong earnings. In addition, we managed to keep working capital development under control. Despite the ramp-up of production volumes, working capital did not result in significant cash-out as we were able to balance the increase in inventories and accounts receivables by higher payables and higher advanced payments. Looking now at the development by product category on Page #7. Revenue from machines and service was EUR 95.4 million, up 27% versus prior year. The main driver of this development was our direct business. Key accounts started to come back with strong order intake in spring. However, it will be the second half of the year before order intake translates into higher key account revenue and key accounts contribute more to total revenue. Revenue from chemicals in Q2 was EUR 13 million, up 20% year-on-year. Moving now on to the performance by region in the second quarter on Page 8. We saw a very strong recovery in Europe. Revenue was up 33% year-over-year, and EBIT reached nearly 4x the level generated last year. Looking at North America, the corona-driven declines in business occurred in the second half of 2020. Last year, Q1 and Q2 were still relatively strong from a revenue perspective. At the same time, key accounts only came back towards the end of Q1 and Q2 2021. This explains why we faced 4% decrease in revenue in North America in the second quarter. In contrast to key accounts, however, our direct business continues to be up compared to last year. Despite the revenue decline, EBIT from North America increased 43%. This once again demonstrates the success of our comprehensive restructuring measures taken last year. Revenue from APAC increased 12% with a stable, slightly positive EBIT contribution. To highlight the performance in the second quarter in 2021, please -- we added an extra slide. Please move to Page #9. EUR 110 million in revenue represents a record for second quarter, exceeding Q2 performance in 2018 and 2019. And that was before the worldwide economic recession induced by the coronavirus. Coming now to half year results. The recovery in Q2 helped us to offset the relatively [indiscernible] (8:53) into the year. On Page 10, you can see the development of revenue, EBIT and free cash flow from 2018 to 2021 for the first 6 months of the year. For H1 2021, group revenue was EUR 195 million, up 11% year-on-year. This is a significant recovery though not yet up to the revenue levels delivered in 2018 and 2019. Q1 2021 was still impacted by the corona crisis in January and February in contrast to last year. Further, we have rather a severe winter at the beginning of the year. Looking at EBIT development, EBIT was EUR 18 million, up 246% compared to last year. EBIT was close to profitability levels reached in 2018 despite lower revenue. And EBIT performance was certainly better than in 2019. EBIT margin was 13%, exceeding the 12% EBIT margin delivered in 2018. Cash flow up very positively. We generated free cash flow of EUR 14.2 million, up 48% year-on-year. 2021 H1 cash flow significantly exceeded free cash flow generated in prior years. Apart from improved working capital, I'd like to add here also that we were still pretty cautious with investment and spending in view of the continuing uncertainties. We expect to see a catch-up effect here in the second half of the year. Let's have a look now at revenue by product category on Page 11 for the first 6 months of the year. Revenue from machines and service reached EUR 166 million, up 12% year-on-year. Revenue from chemicals was EUR 26 million, up 8% versus prior year. Moving on to the performance by region on the next page, Page 12. Revenue from Europe was EUR 163 million, up 16% year-on-year. This is not yet back up to the pre-corona levels but shows a strong recovery. The good performance in Europe was driven by direct business. EBIT from Europe was EUR 17 million. This represents a margin of 11%. Continue with North America, next page. Revenue was EUR 29 million and not yet on prior year level due to the key account business. Quite the opposite here with regards to EBIT development. EBIT was EUR 0.6 million compared to a loss in 2020. The highest -- to highlight the success -- these highlights once more, again, the success of the restructuring measures taken last year. Looking at APAC on the following page. Revenue was slightly up but not yet on prior year level. EBIT was significantly up, and that is also the result and driven by restructuring exercise last year. Coming now to our balance sheet KPIs on Page #15. Net working capital went down to active management. And in particular, receivables decreased due to the collection exercises we did here. And also, advanced payments went up, what helped us here. Equity ratio decreased to ratio of 30.1% due to dividend payouts. Net revenue -- net debt was EUR 16 million as of June 2021, positively impacted by strong earnings and cost management. Closing now with our guidance. We increased our guidance about 2 weeks ago. We now expect revenue to increase at least 9% and forecast to generate an EBIT margin of around 10%. In view of the second quarter result, this might be perceived as conservative. However, like many companies that was -- what was already mentioned, we currently face supply chain challenges due to shortage of raw materials. Lead times for parts have increased significantly as well as material costs. This leads to higher costs and also to production inefficiencies. Our top priority continues to be to maintain lead times and avoid business interruption. We have managed this quite well so far. We monitor the situation development very closely, and we're constantly on measures to reduce the impact. There was no significant impact in the first half of the year. However, we expect to see an impact starting Q3 and probably also be stronger in Q4. With that, I'd like to open the floor for questions and answers and thank you for your attention.

[Operator Instructions] We have our first question. It's from Eggert Kuls, Warburg Research.

Congratulations to the strong Q2 figures. Unfortunately, you have these supply chain issues. Otherwise, I think also the second -- the future for the second half would look rather blight -- rather bright. But anyway, regarding your margin in Q2, I was a little bit surprised how much it was. And I wonder if you could provide us with the amount of money you have saved from lower -- yes, from costs in connection with the corona restriction. So fares and travel and so on. So this is the first question.

Do you want -- Kerstin, go ahead.

Eggert, [indiscernible] or shall we answer?

Oh, okay. Yes, please answer the first question, then we could...

So first, I wanted to say, yes, we have supply chain challenges, but so far, we managed pretty well. We just want to say that we probably will have an impact here on costs. I mean we also have, of course, measures like price increases, things like that, but it takes some time until they become effective because we already have a pretty high order intake, just to clarify that here. So with regards to the very pleasant performance in Q2, a lot is also driven by actually efficiency gains. So we had a high utilization of the factory, but we didn't increase the production personnel and also the service personnel to the same extent. So of course, then, we have a higher efficiency here, and we could see this pretty well in the second quarter and it was good to see. And this is then also driven by measures we took last year. Travel is also, of course, a factor that helped us, but it's also definitely the efficiency gains here.

So -- okay. Yes, my question was -- because it would be helpful to calculate the margin in the second half of the year because your efficiency gains will persist. And so the savings from the corona restrictions will probably disappear or hopefully disappear over the course of the second half. So -- but I understood that the impact was minor compared to the efficiency gains. Is that right?

Yes. That's correct.

Okay.

I just want to say -- sorry, just to help you a little bit here, the impact in the second half of the year, of course we are talking a lot about that and doing a lot of actions. So we foresee a maximum impact of 1% on EBIT margin. That's...

And the second -- and the...

For the full year.

For the full year from the supply chain issues and -- or from -- okay, I see. Okay. So -- and yes. Of course, if you have supply chain issues and, in addition, higher material costs, so always the question is, of course, about the possibility to raise prices for your products. What is your view on that?

Of course, we are working on all measures. That is also something we already worked on. However, it takes some time. You always have a delay here because you have the order intake, and you can't change retrospectively the prices.

Okay. So this means a positive impact from higher prices will only occur next year?

It will offset part of the increase. And partly, we will also see an impact this year but not a complete offset.

Okay, okay. Good. And my last question is, you spoke about possible delays because of restrictions to flights to -- do we say, America? And...

Extra efforts, yes. Now the problem is, as you know, from a production point of view, we're looking at the platform. And therefore, when you introduce a platform, you would, of course, take over people to start assembling the machine over there. Now we have to send the first machines as -- our entire machine not to disassemble, to speed up in the sense of to recover some time. This is very unfortunate because, as I said, Europe has opened, U.S. has not. And now we have to deal with the situation. So it's just the extra effort we do. And if you have seen the slide carefully, you have seen already that prototypes and machines are existing for the project and that we have now to go from there into the transfer.

Yes. And I've also seen that you have -- you are more optimistic for the second half of the year with regard to North America driven by key account orders. So...

Just to explain, the figures for revenue is due to the later impact of corona in the U.S. as compared to Europe last year, yes.

okay. So okay, that's fine.

The U.S. market is doing fine.

Maybe from -- sorry?

The U.S. market is doing fine...

Yes.

From the order intake point of view and so on. So that's not a worry.

Our next question is by Aliaksandr Halitsa, Hauck & Aufhäuser.

I'd like to understand better a little bit the European development. In Q2, you basically added EUR 20 million incremental revenue. I'd like to understand how broad based is this development. You mentioned already that it's mostly direct sales. But is there a high concentration in any specific region? And what drives this strong demand if you can please clarify.

Well, I think we should give the question to Stephan Weber.

Yes. Hello. Hello, yes, from my side. I mean it's a pretty balanced picture, I would say. Overall, I would say compared to previous year, we see, of course, revenue -- steep revenue increases in particularly Southern Europe, France, Italy, Spain, where due to corona, we were unable to deliver machines in that period of time. And in the middle of May until June, there was more or less a lockdown, in a sense, that not even installations were possible. So the order backlog was there, but we couldn't install. As such, we couldn't invoice. And this effect, we don't see. So we see a little bit of a proportional part in those countries where we had the strong restrictions, which is basically Austria, Italy, France and Spain. All other countries, I would say it's pretty balanced in all the countries where we have seen a strong order intake and as such also a stronger backlog and a stronger revenue.

Okay. That sounds good. And then also -- so in Q2, sales basically already reached the pre-COVID level of 2019. I was just wondering, is there any reason why second half of the year should be -- should not be on par with the level you achieved in 2019, for example, assuming again that you will not face any major disruption through a shortage of parts and the likes?

No. Like I said, the restriction is -- what we can deliver, so to say, because we have a little bit of a -- when we compare it to the highs that we had, we had a -- let's say compared to 2020, we had a, let's say, a similar Q1. But compared to 2019 and '18, our Q1 was not where it needs to be in other words and as such also then -- the first quarter, yes. And so the half year is still limping a little bit behind. But as you said, it's a matter of output at this moment, and the output is -- it's not like we -- we are having the orders, like we also indicated in our reporting, that we are sitting on a significant order backlog. So it's a matter of timing when the customer wants to have the equipment. But also there, we see no shortcoming in the system and our output, that we are able to really move to bring the output and also to install the machines because now we are having a heavy installation load towards Q3 and Q4. But like we indicated, I mean, we are forecasting significant growth here, and then we went ad hoc with that. So that indicates that we are close to those performances, likely.

That's very clear. And then if we can briefly switch to the U.S. You expect significant increase in the key account business in the second half of the year. Can you discuss a little bit what are the sort of products that benefit from this strong demand, like is there rollover tunnels, and how much really this platform concept plays a role here?

The platform concept will not play a significant role for this year because as I've already indicated, this is a progress of development. But what we will see is a significant increase in key account business in the second half because the orders have been taken. We had, let's say, a delay from last year. And likewise, in the meantime, I mean, there is more confidence in the market with some of the key accounts. They have placed significant orders with that, which is, I would say, mainly our classic rollover business. However, we are, in percentage, I think, the biggest growth we have seen in the tunnel business. Being a small player in the market -- in a huge market for tunnels, we have been able now, in the meantime, to find the key also to be more successful there, and we are generating significant orders there. We also see there significant growth whereby some of these orders will already go into 2022 because, as we all know, these tunnels, they have significant lead times because many are new builds, and new builds are subject to some engineering and infrastructure measures until they are there. But we are having definitely the highest order backlog in tunnels we have ever seen in the U.S. and also order intake. Does that answer your question?

Yes. Yes, absolutely. Just one clarification. If you could remind me. When we talk about tunnels, so are we talking about the premium machines that you have been testing in Canada and in the U.S. as a pilot?

We have a mix of both. We have a portfolio of 2 ranges, you'll recall, the SL1 and SL2. The SL2 is the one that we import from Germany. That's the one that we have piloted in Canada. And we have a mix of both. So let's say the SL1 is a more traditional product, more American-like, I would say. Not so high tech. And that's also the strength that we have, that we can play the portfolios depending on the demand. And this -- in the meantime, we have, also marketing-wise, put up nicely and will also be the main focus. If and when the ICA show in November will take place, we will focus on the fact that -- because the ICA is a tunnel show more or less for carwash only, we'll focus on the strength that we have 2 options to play in this in other words. So it's a mix of both.

And then profitability in the U.S. First half was breakeven or even more than breakeven on EUR 30 million of revenue. Growth comes in, for the most part, in the second half of the year. And so I'm wondering, if you get back to the 2019 sales level, which would mean roughly maybe EUR 15-plus million incremental sales in the second half, and if one assumes a 25% incremental margin, that would bring you basically to round about EUR 5 million EBIT for the full year in this market, which then would be more than 6% margin, if that sort of makes sense to you?

Yes. I mean, overall, I would say this is -- these are good assumptions, I would say, with the only caveat, in other words, that we are seeing the strongest, let's say, impact on material costs in the U.S. and everything that we will supply in -- so far -- and we have, let's say, taken these orders also at good margins. So that's controlling and peace of mind. However, the final impact of the -- now that we have to deliver these machines but maybe under different preconditions where material prices rises, we have also done already a significant price increase in the U.S. looking forward. So also, this has been done in the meantime. But we are sitting on orders that we basically got at decent margins, at good margins at a time the material costs were assumed. In the meantime, they have risen. And I think that's the only, let's say, uncertainty that we are facing. Other than that, I would say your calculation is pretty much okay.

Yes. If I can then add here something important, Stephan. I suspect Stephan is already a little bit more conservative. Looking more at the cost increases, so the number is very optimistic. So we have really the high increase in steel prices, and we cannot do anything about it. So that would be nice if we see that, but I expect to see here an impact from the material prices before we then can make this offer.

And last but not least, I add some operational thing. With the platform in the U.S., we have the same challenges as in Germany, just on another platform. So we have double efforts, the same efforts we do and run for the maintenance of -- but we can deliver. We have, of course, to perform in the U.S.

Understood. And then maybe, if I may, another 2 sort of topics of discussion. One is, again, material price increases, and I apologize if that has been already answered or discussed. In terms of the impact from, I guess, the current standpoint as you see the situation, what is -- what would you roughly anticipate these price increases to have -- what kind of impact to have on your gross profit in percentages? Is it 1, 2, 3 percentage points or maybe absolute number headwind roughly?

With regards to the full year, we expect an impact up to 1% on EBIT.

Okay. And I think lastly, sort of a little bit more looking ahead, how should one think about the longer-term prospects? I mean when one looks at Q1, it's already at the highest level ever achieved. We know that key accounts returning with orders from, I guess, lengthy period of sort of CapEx starvation. They haven't been placing much. So there must be investment backlog on their side with replacements and also new installations. Then direct sales seem to be performing also well. How the -- sort of one should think about the growth going into 2022, 2023 from -- yes, I guess, from the current base, so to speak? If you have any color on that.

I think just a rough answer then, we can also give to Stephan on the side. You know that the direct business, from a strategic point, has been very clearly focused by Stephan's team with sales excellence. And we see how this pays off in 2019. Also, 2020 decline was less than the key accounts. And now 2021, we see that the market is driven by -- a lot by the direct business. And therefore, we see that growth to be continued in the next years. And of course, we have the, let's say, the key accounts that are back in investing. But with that lag of 1.5 years, of course the whole age of machines have -- is now older. And then, of course, we will see the replacement pressure keeping up in the next years. Stephan, you might want to add some. Thanks, Sandr.

Well, that's pretty much the right answer. I mean we have -- we are now, let's say, back to more or less with the range -- what we consider global key account with a range where we should be compared to -- and that's also the 2018, 2019 levels and with the advantage that all the machines have been -- have grown a year older, or most of them. I mean not that we didn't receive any orders, but some have -- and there was also, let's say, not a balanced performance. Like some were more conservative, some were less conservative. And so we have, let's say, a pretty wide range of reactions by the key accounts. One key account, I mean -- so, like I said, we still have a solid key account business. Not at the level of normal times, but it's not that they didn't replace anything. So in that sense, we have to be also clear there.

That's helpful.

Did I answer your question? [indiscernible].

Yes. Yes, absolutely. No. No, that's helpful. And the very last one in terms of -- if you have an idea of the market share. Have you been able to gain market share in 2021 now that you have sort of the recovery, rebound here? And if so, what are the sort of the main sort of catalysts that allowed you to do so? If -- and maybe in connection to this question, if those digital touch points that you have introduced play sort of an important role in your customer-facing activities.

Yes, do you want -- yes, first? So...

Yes. First of all, I can see very clearly, because we have really very common dashboard, that we are doing well in gaining market share at this point in time, which is very nice, I have to say, also due to sales excellence, I would say, one reason for it. But I would say it's also I think we have been in that -- maybe it's always good when you lose, but you [ have to ask your car ]. That also could help.

I think the remote line is -- for the second -- for a second, Stephan. It's not in our -- it's remotely connected to us. So somehow there's a break. But I might want to add that the key to maintain market share and to gain market share is to keep up the deliveries. That means when we can deliver and our competitors in the market cannot deliver, we gain market share for sure. And I think that's why we take a lot of emphasis to keep and to maintain the capability of delivering the machines.

I think I dropped out. So like I said [indiscernible].

Stephan, just...

Yes. Can you hear me?

Yes. Can you hear us, yes?

Yes, yes. Because I dropped out somehow. And so...

Yes. Just you take your time.

I just wanted to add here that from -- because we have, in the sports, to analyze when we are winning and losing, and we also take the time to ask why and why not, why we're losing and why we are winning. And that's a good habit. And overall, I would say we manage the prices pretty well. I would say we kept our customers very happy also in service during the crisis. Also with digital solutions, that -- the combination of both has given us the confidence that the customers are -- that we're a good partner to deal with.

Our next question is by Richard Schramm of HSBC.

I'd like to touch 2 points very quickly. One, we read a lot about not only catch-up demand but also kind of yes, surplus demand from customers at the moment, trying to cover -- stretching lead times by increased orders just to be sure that they, at the end of the day, get what they have ordered at least. Do you think your order situation is also affected by this, that there is a bit of, yes, artificial demand, let's say, that customers are ordering a bit of excess just to cope with the current tight supply situation?

It's a very fair question from my point of view. I think we -- I always say, in corona, we have seen this in many aspects. I think the last difference here is that our -- all of our orders are for a specific site. In other words, you don't place orders for something -- we don't have orders in our system where we don't know that it goes to a certain gas station, to those regarding [ Cavill ] or to a certain wash site. So in that sense, it makes little sense to preorder machines. Not even the key accounts. They are all site orientated, that we see -- know exactly where every machine goes. And there's either demand or not. So buffering or hamstring, like we say, hamster buys don't play a role here. I'm actually thinking about this as well, but it makes no sense. Really, we have site-allocated orders. And in that sense, I think that we can ignore that impact.

Okay. And then I would like to run back to the material price issue. I mean, obviously, you are fine for the current year if I take your statements correctly, that you are not worried here at all. And the 1% burden you signal for the full year from the package of supply chain issues is, I think, relatively moderate figure, would be in the area of EUR 4 million to EUR 5 million if I calculate this correctly. But I think the main chunk of this increase might come for the next year. That's the major point. And if I see that, for example, steel prices have tripled over the last 12 months, I wonder what price limits you have to accept when you make your contracts for next year. So will you start negotiating here? Is this a matter you are already starting now? Or will this just take place at the end of the year in the hope that prices might come down a bit again?

I mean -- and as long as there's a shortage, it's pretty tough to negotiate. Sometimes, you're really glad that you get the materials. But be sure, the moment we can negotiate, we will negotiate again. So -- and some say there is -- over the next, I don't know, half year or something, there won't be an impact that we see a decrease again. But at some point, there will also be a decrease again, so -- once the situation has normalized in certain areas. So I don't think that it will stay at a very, very high level. There should be a certain normalization and also the possibility to negotiate and optimize the plan.

But can you tell us, please? How long do your contracts run usually when you buy material components whatsoever?

They are shorter as we have the flexibility to negotiate in most cases.

Yes. But what does it mean in months? Is it 3 months to 6 months? Or is it even only a few weeks?

It's not only a few weeks. It depends.

Depends on the...

There is no general answer to that. So it really depends.

Material you buy. It's really quite the right spend, yes.

Yes. But we normally don't have 2-years, 3-years contracts. I think it's something we wanted to do a little bit more. But at the moment, we don't have that situation quite often.

Okay.

I think just the key is to maintain very close contact to your delivery chain, to your supply chain, and make sure that they know what you need for the next time and then also to find out or measure in prices and costs.

Okay. But is there a kind of escape clause for you that you can push through unexpected price increases to your customers? Or would you have to swallow this by yourself because the customer prices are fixed?

We said that we also focus on those kind of measures such as price increases. However, we also have our key accounts, long-term contracts. In those cases, we evaluate the situation right now.

[Operator Instructions] There are no further questions, so I hand back to you.

So thank you very much, ladies and gentlemen, for attending our call. Please see also our financial calendar 2021. Thank you very much for attending and stay healthy. And see and talk to you later this year. Thank you very much.

Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.