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Edited Transcript of INRN.S earnings conference call or presentation 5-Aug-19 7:00am GMT

Half Year 2019 Interroll Holding AG Earnings Call

S. Antonino Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Interroll Holding AG earnings conference call or presentation Monday, August 5, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Bättig

Interroll Holding AG - CFO

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Conference Call Participants

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* Jorg Schirmacher

Baader-Helvea Equity Research - Analyst

* Michal Lichvar

Bank Vontobel AG, Research Division - Analyst

* Sebastian Vogel

UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the presentation of Interroll Holding AG regarding the half year results 2019. At our customer's request, this conference will be recorded. (Operator Instructions) May I now hand you over to Daniel Bättig, CFO, who will lead you through this conference. Please go ahead, sir.

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Daniel Bättig, Interroll Holding AG - CFO [2]

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Good morning, ladies and gentlemen. My name is Daniel Bättig, I am Group CFO with Interroll since March 2013. Welcome to the 5th live webcast today presenting Interroll's half year report 2019.

Interroll is continuing its growth journey, which is based on innovative products, on geographic expansion and on amended service business. Interroll has launched in the first half year 2019 its new Interroll DC Platform. It has also launched the new Modular Pallet Conveyor Platform, the MPP, and it will launch more products in the future. The new Interroll DC platform as well as the MPP are the fruits out of the extra research and development we have incurred in 2017 and 2018.

Interroll is also continuing its geographic expansion. In Germany, we are well prepared, we are well advanced in the planning of the new plant in South Germany, which will divide the Sorter and the Conveyor business, one separate plant for Sorter, one separate plant for Conveyor. That is the highest degree of specialization in the group.

In the Americas, we are developing a second plant in Atlanta. It's already our fourth plant in the United States. The launch is already in late 2019.

In Asia Pacific, we have concluded our first owned plant in Southeast Asia in Thailand.

We are working on our service business. The share of service is now 10% to 12% of total sales. It was 8% to 10% last year. The ambition is to grow the service to 20%.

When it comes to innovative solutions, Interroll has launched the new Interroll DC Platform in the first half year. The new platform gives customers more options when it comes to the voltage types. So we have added 24 volts, that means customers have more choices and they can save even more on energy. The new solution also gives customers more flexibility in terms of mechanical outputs, power so the range is from high to heavy goods.

So new solution is good for Industry 4.0, for machine-to-machine communication and predictive maintenance. So predictive maintenance means the level of comfort of the customer can be increased because the customer knows what maintenance is needed and when maintenance is needed.

Interroll has also launched in the first half year 2019 the new Modular Pallet Conveyor platform, the MPP. The automatic pallet transportation allows simple planning and flexible design for the customer. Like all the solutions with Interroll, it's platform-based and it's modular-based. It is a great addition to our Pallet & Carton Flow business. First solutions have been handed over in the first half year 2019.

Interroll closed the first half year 2019 with strong sales and over- proportional growth in results and cash flows.

Order intake declined by 7.9% in the reporting currency, by 6% in local currency. All regions showed a decline in order intake. The 2018 year, the previous year, showed exceptional growth in all regions and carried 2 large orders.

Net sales climbed by 8.4% in Swiss francs, by 10.4% in local currency and reached new record levels. Especially strong Conveyors & Sorters, plus 17.5%; and Rollers, plus 7.3%, which also showed record levels.

Results grow over-proportionally. The EBIT grow by 23.3% to CHF 31.2 million, which again shows the high cost discipline in the group.

My favorite figure, operational cash flow was growing by 29.9% to CHF 40.6 million, which is 15.6% from net sales which is due to the higher net profit but also by good balance sheet management and more down payments received from customers.

Order intake, as mentioned, reached CHF 299 million. It's minus 7.9% in Swiss francs, it's minus 6% in local currency. The earlier announced large project order, the repeated order from South Korea, is included in that order intake.

Pallet & Carton Flow as well as Conveyors & Sorters business slowed in the first half year. This is due to the very high previous year. Again, 2018 showed very good performances in all the regions and in all the products. So that means we are only a little bit lower than the very strong record year 2018.

The book-to-bill ratio now 1.15. That means we are coming back now to normal levels after the extraordinary year 2018.

Sales, as mentioned, reached record levels, CHF 260.8 million. This is 8.4% in Swiss francs, 10.4% in local currency. Net sales development in EMEA, plus 6.8%. Especially Central, Western and Eastern Europe were very strong.

The Americas, plus 22.4%. Here, the high demand from courier-express-parcel, food and beverage and airport continued.

In Asia, we have seen a minus 13.3%, but in that region, we are anticipating out of the large South Korea order from 2018 as well as 2019 strong billing in the second half year 2019 and also 2020.

The share, net sales total: EMEA, 60%; Americas 30%; and Asia 10%.

Results growing over-proportionally. The EBIT reached CHF 31.2 million or a plus of 23.3%. The management is very much focused on better purchasing as gross margins worldwide are under pressure. However, we had less research and development costs compared to previous year as mentioned in my presentation at the beginning now the DC Platform and the MPP are rolled out. The EBITDA reached CHF 43.5 million, which is a plus of 22.4%, the EBITDA margin reaching 16.7%, last year 14.8%. Depreciation is up, amortization is slightly up. So the EBIT reached CHF 31.2 million, which is a plus 23.3%. The EBIT margin reached 11.9%, very strong; previous year, 10.5%. So the results are within the range as announced earlier.

Net income reached CHF 23.1 million or a plus of 24.2%.

There was a slightly negative foreign currency result, however, this result is very decentralized and we are engaged in local sourcing so there is not much transaction risk in the group. However, we are exposed to translation effects, of course.

The tax core growth is somewhat higher. There's a negative onetime effect, but we are confirming the ordinary tax rate, the range of 22 point -- to 24% so we are not anticipating any major negative or positive effect out of the Swiss tax reform.

Operational cash flow, one of the highlights for me, reached CHF 40.6 million or a plus of 29.9%. There's a higher net income, higher depreciation and amortization on the one hand side. On the other hand side, more down payments received from customers, which gives us that operational cash flow of CHF 40.6 million or a margin of CHF 15.6 million (sic) [15.6%].

Investments in the first half year a little bit down. So we have mainly concluded our first plant in Southeast Asia, the new facility in Thailand.

Better results, lower investments, fresh -- free cash flow is up to CHF 29.6 million (sic) [CHF 29.2 million], that's a plus of 62.6%. The margin here reached 11.2%.

The return on net assets as well as the return on equity are much stronger than the first half 2018. The return on net assets reached 18.1%; last year, 15.6%. So it's a plus of 2.5%. Return on equity reached 16.3%, was 14.2% a year ago. It's a plus of 2.1%.

And I want to point out in this graph that the equity was CHF 128 million in 2010. Now after the first half year 2019, the equity reached almost CHF 282 million. So we more than doubled the equity over the time period discussed.

Interroll is well positioned and looking with confidence into the future. However, less project backlog for Sorters & Conveyors business as well as Pallet & Carton Flow indicate that the business dynamics may slow down in the first -- in the second half year 2019. However, the long-term goal to outgrow material handling equipment manufacturing at least by 50% in growth is intact.

This, ladies and gentlemen, concludes my presentation today. I will be now open to your questions. So we start with the written questions first. But to do that, I'm handing over now to the technique to allow that.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Daniel Bättig, Interroll Holding AG - CFO [2]

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Good. So I will always read the questions, and then I will answer them.

I'll start with the first one. Looking at H2 '19 trends, do you still expect to see a negative order intake growth in H2? And could we assume to see a comparable absolute EBITDA level versus H2 2018?

And another question. 2020, you mentioned strong growth prospects for the future. Looking at the currently tougher environment, do you currently still hope to see top line growth in the next year or would you regard it as too tricky?

As mentioned before, we are well positioned. We are looking with confidence into the future. There is a lot of bidding in the business. So in the first half year, we could replace 1 of the 2 big orders from the previous year and we could make up the second almost with a lot more small to midsized orders. So we are welcoming, of course, the big orders, but we are not fully relying on them. So there are many small to midsized projects that are tendered right now.

Ladies and gentlemen, more questions for us in writing? Still open to take your questions.

Then we are open for questions over the phone. So if you don't want to write, but if you want to call in, I'm now open for questions on the phone.

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Operator [3]

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(Operator Instructions)

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Daniel Bättig, Interroll Holding AG - CFO [4]

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So I have now one more written question. What end markets are performing better at the moment?

So Interroll has 4 end markets. This is courier-express-parcel, which is heavily driven by e-commerce, e-commerce is still very strong. A lot of the logistics and postal companies are preparing for the next peak time, which is October to year-end 2019. We're also seeing a lot of airport activity going on and also food and beverage is showing a lot of interesting bidding ongoing.

We are still open for your written questions or phone questions.

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Operator [5]

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We received some questions via the phone. The first one is from Jorg Schirmacher from Baader-Helvea.

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Jorg Schirmacher, Baader-Helvea Equity Research - Analyst [6]

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I have a few. Maybe on the growth per product group, we saw here the first half '19 major driver was the Rollers and also particularly Conveyors & Sorters. Pallet & Carton Flow was negative. Can you maybe shed some more light on what happened in Pallet & Carton Flow? Why were these major orders not replaced? Did you lose them to competitors or are customers reducing their CapEx?

And also a follow-up on that. Do you expect a recovery in Pallet & Carton Flow given your recent introduction of the MPP? I see that the order intake was -- in the first half '19 was negative 20% year-over-year.

Second question would be on the current trends in terms of net sales and order intake. How did the June and July develop? What is the current feeling you see from customers' current trends that you expect going forward.

And then, thirdly, on the guidance, I'm aware that you are guiding for growth above the market of 4% to 7%. That points to high single-digit growth. Are you able to quantify this a bit more? And what needs -- what would need to happen that you reach, let's say, low double-digit organic growth for the full year and do you think this is possible?

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Daniel Bättig, Interroll Holding AG - CFO [7]

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Okay, thank you very much for your 3 questions. So I start with Pallet & Carton Flow. Pallet & Carton Flow is the smallest product group. That means it has a strong impact expressed in percentage if a mid- to large order is recorded or not recorded.

As mentioned before and also pointed out by you, we anticipate very good momentum from our new solution, the Modular Pallet Conveyor Platform. Of course, the impact of that new solution, we will only see in 2020 when it is rolled out in all the regions and when we see the full year's impact.

Then June and July, you know that we are not giving a concrete guidance. We have pointed out in our communication that in the first quarter, we were very strong. That indicates that in the second quarter then we have seen the business slowing a little bit.

But that brings me also to your third question. As pointed out, last year, all the regions were outperforming and last year we were enjoying 2 large orders. There is still a lot of bidding on the way and it's not entirely clear whether there will be a second large order or not. So we say in our guidance, in our long-term guidance that we want to outgrow material handling -- in the long term, we want to outgrow material handling by 50%. And at this point of time, we think that this goal is intact.

Ladies and gentlemen, we are still open for your questions.

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Operator [8]

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The next question received via the phone -- we received some more questions via the phone. The next one is from Michal Lichvar from Bank Vontobel.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [9]

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I would also have 3 questions. Maybe first one regarding APAC, my impression was that the kind of declining development in sales and orders, this was mainly because of the timing of the large project, but do you also see some impact maybe from the macro slowdown? So that would be my first question.

Second question, can you give us a bit more color behind this strong growth in service sales? What has happened? Did you invest more into service personnel? And I'm quite surprised that you see such a strong impact already so soon after announcing that this is a kind of a strategic priority for you.

And then maybe last question regarding a bit of accounting. I saw that in your statement that you've seen a very strong positive impact from movements in work in progress and finished goods? This was unusually high. Can you maybe explain what has happened there? Is there any one-offs there? Or is this just kind of a normal way of the business?

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Daniel Bättig, Interroll Holding AG - CFO [10]

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And I start with your first question, which was about Asia Pacific. Yes, the timing is very much driven by the large South Korea orders. Not everything from the 2018 order is billed out. So the billing of the 2018 and 2019 order, a lot of that billing is still to come in the second half year '19 and in 2020. I want to point out that our Asia Pacific region is not only driven by China. China is about half of the business in that region, but Interroll is also very strong in South Korea, obviously, and Interroll is also very strong in Thailand and want to further grow in Southeast Asia.

Regarding the service question. In the last 12 months, indeed, we have done a lot to push our service business. We made it a strategic topic so we have given more effort, we have invested in more people, also in more management to build a new business model in service. We have added more service locations. And as mentioned in my presentation, we have developed a DC platform, which will allow proactive service, and as you see, this is already showing results.

Your observation in the balance sheet, yes, work in progress and finished goods is very high. Again, this is linked to the many projects that we are -- have gotten and on which we are now working. There is a certain seasonality with Interroll that, especially many customers in the logistics and postal business, they are ordering in the first or second quarter. We are building them their solution and we bill it out in the third and the fourth quarter. That also means that then in the third and the fourth quarter, then the work in progress, together with the advance payments received by customers will go down, which then also will help to bring the book-to-bill ratio to a normal ratio.

I hope this answered your questions. I see we have now some more written questions, so I answer some of the written questions.

Is there any trend to be perceived by OEMs directly and not to have to go through integrators by being selected by the OEMs? Any additional comments on the Brazilian Post?

We are a producer, and although our sales reaches to the end customers, we are only selling to the system integrators and the OEMs. See we are reaching out with all the sales and marketing to the end customer, we want the end customers to know about the good components we have, the good solutions we have, the good service we have. We want the end customer to influence the system integrators or the OEMs so that they specify Interroll.

Brazilian Post, yes, Brazilian Post is very happy with the solution. And of course, we hope that Brazilian Post like many other postal organizations like the Swiss Post, the German Post or the Chinese Post will be a customer that will order with Interroll again.

Then I have another written question. Which industrial end markets are currently slowing? As I mentioned before, we are mainly active in 4 end markets. In courier-express-parcel, which carries all the postal and the logistics business and they are very much driven by e-commerce, and e-commerce is still very strong.

We are in the airport business and in airport, we see many governments investing in the airports. So there is a lot of new airports built in China, but there is also a lot of retrofitting in the United States on the way.

We are also in food and beverage, and in food and beverage, we see a lot of catching-up potential, especially in the Far East. And if I say Far East, I not only mean China, I mean also the emerging markets there, the Philippines, Malaysia and in Indonesia.

We're still open for more questions, ladies and gentlemen, being in writing, being over the phone.

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Operator [11]

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We received more questions via the phone. The next one is from Sebastian Vogel from UBS.

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [12]

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I have a couple of questions. The first one would be on the material expenses, I was looking at it on a percentage-of-sales basis. They're quite high. My question would be what drove this and how sustainable is that one?

The second one would be a follow-up to the work in progress question asked before. I mean, you explained what was driving the current sort of level. However, if I look at last year, there was also some sort of decent order intake in the project business and that position was as a percentage of sales then at least not as high as in H1 '19. So what was different this time?

And I'm sorry for bothering on that one again, but can you just please remind me the large orders you referred to for 2018? Is my understanding right, there was one in the first half and there was one in the second half? That would be my 3 questions.

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Daniel Bättig, Interroll Holding AG - CFO [13]

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Materials -- I'll start with material expense. Yes, as pointed out in my presentation, the whole management is very focused to work on better purchasing. So we have initiated a project to improve purchasing worldwide. So we have established a lease/buy project, and on top of that, we will build a strategic purchasing. So I'm convinced that management will achieve some improvements when it comes to the field of improving material expense.

Work in progress, as I pointed out earlier, is very high. This is very much driven by the large South Korean order, which came in very late in the first half year 2019. So we are anticipating that in the second half year 2019, work in progress will be reduced as we will bill out a lot of the small to midsized projects received. But in the second half year 2019, as pointed out earlier, will also be substantial billing from the South Korean order.

Then the large orders, yes, in 2018, first half year, we had that large South Korean order and also the order intake carried some of the sorters that were ordered by the second large order, which was an American parcel consolidator. That started in May 2018. So it was in the order intake in a lesser degree last year.

I hope this answers your questions and we move on to the next questions, please, being on the phone, being in writing.

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Operator [14]

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The last question received via the phone is from (inaudible) from [ABP].

So we go on with the next question via the phone. It's again from Michal Lichvar from Bank Vontobel.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [15]

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I would just be interested in terms of the MPP, the new platform solutions. Do you see demand coming from more from existing clients or is it new customers kind of addressing maybe new applications and also for you expanding the addressable market for you? That would be my first question.

And then just in terms of your outlook for the second half, you mentioned slowing momentum in sales, what do you expect this would have an impact on your margins in the second half of the year? Can you maybe give us a bit more color there?

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Daniel Bättig, Interroll Holding AG - CFO [16]

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I'll start with the question on MPP. Of course, right now, with MPP, we see excitement with the existing system integrators and OEMs, that's how we start. Of course, we show them the possibility of that Modular Platform and all the flexibility the existing system integrators and OEMs can get. Over time, of course, we also want to attract additional customers. And with that solution, we move in the conveying of heavy goods. So Interroll in the past had limited itself to the small to midsized conveying. And with MPP, we are moving now in new fields, in the field of heavy goods conveying.

Your second question about a little bit more light on the results of the second half year. You know that we are not giving concrete guidance; however, we have seen in the first half year that the results were growing over-proportionally. That they are growing within the range we indicated, between the 20% and 25%. And when we say that the business momentum may slow in the second half year, we indicate that likely for the full year, the results will not grow 20% to 25%.

And here I want to point out what we say: long term, the ambition is to outgrow material handling equipment manufacturing by 50%. Meaning, we want to be at least 50% better than material handling equipment manufacturing, and we think right now we are on track

Okay. Ladies and gentlemen, more questions being in writing, being over the phone? Okay, one more. There is one more written question.

Is there any change in the treatment -- in treating of operating expenses since you are moving more and more into the project software space?

There is no change how we treat accounting. We are applying the IFRS rules. We are trying within the possibility that IFRS allows to be as conservative as possible. So we tried to expense as much as possible over the P&L and not putting in the balance sheet, and we want to maintain that strategy within the allowed possibility of the IFRS. We want to be as conservative as possible.

More questions, being in writing, being over the phone?

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Operator [17]

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We received a follow-up question via the phone from Sebastian Vogel, UBS.

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [18]

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I've got 2 follow-up questions. The first one would be on the other operating expense line that has improved quite a bit compared to the other first half of the last years. I was wondering is that just a function of the lower R&D expenses you alluded to earlier?

And the second question would be on the CapEx side. You mentioned that the first half '19, the CapEx intensity was not as high. If I recall correctly, at the full year results, you talked quite a -- yes, in the sense there will be a CapEx uplift that would imply an even stronger CapEx uplift for the second half. You still stick to this sort of guidance you said before?

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Daniel Bättig, Interroll Holding AG - CFO [19]

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I'll start on the other expense, you pointed it out rightly. So there some impact from lower research and development, which in the presentation, in the graph you can nicely see. Interroll in 2017 and '18 had spent an extra CHF 5 million to develop the DC Platform and to develop the MPP and they are now being rolled out. But other expense also shows what we mentioned in the press release that we really have a high -- we are very strong in saving cost, high disciplined when it comes to cost and also CapEx.

On the CapEx, yes, we stick to all the investments we announced. So we will build that second plant in the second half. In the second half 2019, you will see CapEx coming through for the plant in South Germany and you will see CapEx coming through for the additional plant in Atlanta. We are building a second plant in Atlanta, which is our fourth facility in the United States. So CapEx will be higher in 2019. CapEx will be higher in 2020 due to the fact that Interroll is adding additional capacity.

Ladies and gentlemen, we are still open. There are no more questions in writing. Are there any more phone questions?

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Operator [20]

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Actually we have no questions via the phone. (Operator Instructions)

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Daniel Bättig, Interroll Holding AG - CFO [21]

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There is one more question in writing. What is the portion of tire and automotive of total sales?

There are different businesses. We are working with specialized industry management and industry sales teams, and tire and automotive is one of them. We are not disclosing this kind of information. What I can share is that we are very successful, especially on the tire side since we are able to recruit people out of that business and we could come to interesting contracts with tire producers around the globe. This is definitely one field where Interroll can strongly glow. And this is, in general, an avenue that offers a lot of possibilities for Interroll to open itself for more businesses. So we go beyond courier-express-parcel, airport, food and beverage and warehousing. Tire and automotive is one. We can certainly do more in the fashion business, and we can certainly do also more in the food and beverage business.

Another question in writing. You say 2018 was an exceptional year yet consensus expects 2019 revenues to be higher than 2018 and 2020 revenues higher than 2019. Are you comfortable with the consensus?

See, I'm not commenting on the consensus. I leave that to the experts, to the analysts. What we are saying is that we have, long term, the ambition to outgrow material handling, which grows at a CAGR 4% to 7% and our ambition is to grow at least 50% stronger than material handling.

More questions, ladies and gentlemen, being in writing, being on the phone?

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Operator [22]

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There are no further questions via the phone. (Operator Instructions)

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Daniel Bättig, Interroll Holding AG - CFO [23]

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Good. Ladies and gentlemen, it seems that you could place all your questions. Should you have more questions, please give me a call in my office. My office number is at the end of the presentation or drop me a line anytime you see a need for more questions to me.

Then I would say that we can stop here. Thank you very much, ladies and gentlemen, for your very good questions, very much appreciated. And hope to see you soon, hope to talk to you soon. Goodbye for today.

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Operator [24]

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