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Edited Transcript of KARN.S earnings conference call or presentation 30-Jul-19 12:00pm GMT

Half Year 2019 Kardex AG Earnings Call

Zürich Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Kardex AG earnings conference call or presentation Tuesday, July 30, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandre Müller

Kardex AG - Investor Relation Professional

* Jens Fankhänel

Kardex AG - Group CEO & Member of Management Board

* Thomas Reist

Kardex AG - CFO & Member of Management Board

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Conference Call Participants

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* Alexander Koller

Zürcher Kantonalbank, Research Division - 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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Ladies and gentlemen, welcome to the publication of half year results 2019 conference call and live webcast. I'm Alessandro, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication and broadcast. At this time, it's my pleasure to hand over to Alexandre Müller, Investor Relations. Please go ahead, sir.

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Alexandre Müller, Kardex AG - Investor Relation Professional [2]

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Yes. Good afternoon, ladies and gentlemen. I would like to welcome you to our analyst conference call on Kardex half year results 2019.

Today, I'm joined by Jens Fankhänel, the Group CEO; and Thomas Reist, the Group CFO. Please be reminded that the information given during this conference contains some forward-looking statements, which are subject to risks and uncertainties. As a reminder, the slides of today's presentation as well as our media release and the half year report can be found on our website.

On today's agenda, Thomas will start with the highlights and then go through the financials of the first half year, followed by Jens, who will give some more insight into the 2 divisions and finish the presentation with the outlook before we open the lines for the Q&A.

With that, I would like to hand over to Thomas, please.

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Thomas Reist, Kardex AG - CFO & Member of Management Board [3]

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Thank you, Alex. I am now on Slide #4, the highlights for the first half year 2019, and I will guide you through the financials on group level, as announced by Alex.

Kardex Group was able to continue the good results and further -- and significantly increase the volume in terms of net revenues and the EBIT. (inaudible) Kardex Remstar good profits from largely stable market conditions and improved bookings, net revenues, but also EBIT and EBIT margin. Kardex Mlog, on the other side, reported lower bookings, but was able to further increase EBIT and EBIT margin.

As announced in the previous calls, did -- we start to intensify our investments into the supply chain. Nevertheless, the free cash flow is higher than previous year.

Traditionally, we have a look at the development of the key figures over the last 5 years, so period half year 2015 to the current half year results 2019. Net revenues have over proportionally increased. This means that the sales revenue from '18 to '19 has gone up quite heavily, resulting that the compound annual growth rate from previous year's 7.3% has increased to 8.6%. Also, the operating result, EBIT and EBIT margin have increased from '18 to '19 quite heavily. Here, the compound annual growth rate reduced from 18.2% previous year to currently 16%. Despite the higher investment, as mentioned just before, into the supply chain, the cash flow 2019 of EUR 24 million are on the same level than in the years 2017 and 2015.

The equity and equity ratio have both reduced, but only because of the distribution to the shareholders this year was earlier than the previous year because it was in the form of a dividend. And in the previous year, we had a reduction of the nominal capital neutralized by this effect. So by the dividend payment, the equity ratio is slightly above previous year's levels.

I am now on Page 7, the income statement, first portion of the income statement. And there, we have the bookings, which, as mentioned before, are 2.5% below previous year. This is based on the lower order intake of the project business at Kardex Mlog. The backlog, on the other hand, has increased by 11.1%, amounting to $247 million, which means that we have a stable visibility of around 6.5 months.

Net revenues have heavily increased by 17.7%, amounting to EUR 230 million, which is mainly driven by new business function of Kardex Remstar division.

The gross profit has increased by $10.4 million or around 15%. Here, we also see that the gross profit margin has slightly decreased, which is mainly because the share of net revenues of new business, which traditionally has lower margins than Life Cycle Service business, is -- has increased because of the high growth rate of new business.

The operating expenses have increased by EUR 5.6 million, so 12.1%. And there we also see that the share of OpEx in relation to the net revenues have decreased, which means that we have an increased efficiency.

EBIT amounting to EUR 28.4 million has gone up by EUR 4.8 million or 20.3%. Then for the EBIT margin, increasing from 12.1% to 12.4%.

Going further to Page 8 now, second portion of the income statement. Here we report the financial result, which is EUR 400,000 less favorable than last year. This is only because of the slightly higher exchange rate differences or losses than in the previous period.

The tax rate with 26.3% is within the communicated bandwidth. Result for the period amounts to EUR 20.2 million, so up by EUR 3.2 million or 18.8%. The net profit margin has also increased slightly from 8.7% to 8.8%. On the balance sheet, we see that on the level of noncurrent assets in comparison to the situation at the beginning of the year, we have invested, so the noncurrent assets has gone up by EUR 3.1 million. The gross investment was around EUR 6 million, and we invested mainly in our factory in Bellheim. This is around EUR 3 million. And around another million in our IT operation. The current assets have gone down mainly because of the cash and cash equivalents, which went down by EUR 9.3 million,same applies for equity. Equity has gone down by EUR 6.5 million, and both relate to the earlier distribution to shareholders amounting to EUR 27.6 million.

Liability side, we see also that liabilities have gone up by around EUR 7 million. This is mainly a seasonal effect, which means that the payables and deferrals go up in the running year. Very important to know, still we have no interest-bearing debt on our balance sheet and same applies for goodwill.

Page 10, we have a look at the cash flow statement. This is compared to the half year situation 2018. There the cash flow from operating activities has gone up by EUR 4.5 million, which is mainly because of the higher net result and also despite the increased net working capital. The net working capital went up compared to last year and which is a consequence of the lower bookings at Kardex Mlog and the missing prepayments or a portion of the prepayments which we received from project business of Kardex Mlog.

Net cash flow from investing activities, here we see that the investing activities has gone up compared to the last year. As mentioned before, we are investing mainly in our supply chain and the capacities there. The free cash flow amounting to EUR 17.7 million has gone up by 13.5%. And here we see the net cash flow from financing activities. Here we see the dividend payments or the distribution to you or to the shareholders represented by the EUR 27.6 million. As a result, the cash position has gone up -- down, sorry, has gone down by EUR 9.3 million.

Thank you for your attention. I would like to hand over to Jens Fankhänel for the view on the divisions and the outlook.

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [4]

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Good afternoon, everybody. This is Jens speaking. Welcome to our call conference on our half year closing.

And as usual, I'll start with the Kardex Remstar division, which shows another positive half year in 2019 with continued high bookings in most regions. North America and Europe, as you can read on the right, are the main contributors. So quite some success in North America, and Europe being a stable contributor. Not mentioning Asia and Middle East means that these 2 regions have not been to our satisfaction in the first half of the year mainly due to the economical conditions in these 2 regions.

Net revenues with a double-digit growth compared to the same period last year. All in all, 19%, pretty successful. That was driven both by the high backlog at the end of '18 as well as some portion of the bookings that already turned into net revenues. Order backlog further increased. And the net revenues show a higher gross profit margin due to the -- sorry, reduces the gross -- there's a reduced gross profit margin due to the higher portion of new business in this half year. So slightly reduced gross profit margin. We continued investments into the R&D and our portfolio, product portfolio solutions as well as in remote services to improve on our customer relationship, customer loyalty.

Thomas already mentioned the investments in the supply chain to increase capacities and efficiencies, something we talked about at the end of last year that some of those capacity cost hit us hard. We are maturing the first stages of investments, and we will continue with those. I will talk about it a little later when we come to the outlook.

So with the picture of 19% net revenues. We achieved an EBIT of EUR 27.4 million, which is also a EUR 19.1 million increase on previous year's numbers. And a very healthy continued good margin of 14.5%.

We go to the next page. We see the development of these key figures over the last year 5 years. And we see the one thing I would like

to highlight here, which I already mentioned, is the sales mix. In the first half, at the right bottom part of the page, where Life Cycle Service now equates to 29% of the overall revenue; and new business, 69%, up by 2% -- or down by 2% compared to the previous half year, last year in 2018.

Next page brings us to Kardex Mlog. Kardex Mlog is a slightly different picture. When we look into the first 6 months, heterogeneous picture, I would call that. On one hand, the bookings are well below previous year, 42% lower than during the same period of last year. I don't want to make too many excuses, mostly related to cyclical project business. And what you also see, specifically in the geography that Mlog is dealing in Germany and parts of Europe, the decision processes at our customers are starting to take longer and longer. I think we all read about the expectations to the market, and that's now reflected in the higher-volume project -- business projects. And customers decide a little later or substantially later than we've seen it, say, 12 months ago.

The net revenues based on the very good backlog at the end of 2018 are 11.8% above previous year. With Life Cycle Service to continue to grow and providing a very good backbone to our business, increasing its share on the revenues mix, which then will lead to an improved gross profit margin level and with that in a managed cost. In the fixed cost, we report a better EBIT in absolute numbers but also in EBIT margin numbers with EUR 2.4 million or 5.9% EBIT margin overall.

Next page. Effectively, the same summary like for Remstar. The sales mix. At the bottom part, you can see that the Life Cycle Service is up by 4% on the net sales mix, and the integrated subsystems are down by the 4%. And that, in itself, provides for the better gross profit margin that we are happy to take.

Last not least, the outlook. Pretty short outlook, as you are used to from us. Next page. Overall, for the second half of the year, we continue to see a positive development for the group. We see a heterogeneous market, however, that demand for efficient intralogistics solution with partial slowdowns in certain countries and also in certain industry segments, which we all read about since a few months.

Kardex Remstar, we expect solid development for the second half of the year, both of bookings and net revenues. Market for Remstar solutions is still pretty healthy, and we also carry a substantial order backlog and that should provide a very substantial base and solid base for the second half of the year.

Kardex Mlog, we are a little more cautious as probably everybody can understand and did assume so. We are looking forward to some reduced volume expectations for the new business side of things, which we can partially compensate by another good performance in Life Cycle Services.

For Kardex Remstar, Thomas already talked about the investments we've made that we initiated last year and that came into our balance sheet this year. Now we're talking further investments into the Remstar supply chain by now having made a decision of building other manufacturing facility in the U.S. We are in the early stages of getting that started, and we will report on the progress in the final year closing conference, and I'm pretty confident that we can report on a good progress there as well. We will also invest into our IT, internal IT to improve internal efficiencies.

So overall, we believe that despite these market conditions everybody sees and we're also suffering from in some regions, we're still looking into a positive revenues and EBIT outlook for the second half based on the very strong order backlog, which almost secures most of our net revenues for the second half.

Thank you for your attention. I think I'm supposed to hand back to the operator, who will collect your questions that we will then hopefully be able to answer. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michal Lichvar from Vontobel.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [2]

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I would have 2 main questions. Mainly, firstly, just coming back to Remstar and the dynamic growth there. How sustainable is this? Or is it coming more from kind of a pent-up demand that you had because of the supply chain issues and capacity bottlenecks? And that would be my first question. And then the second one, just in terms of the U.S. plant, if you could give us maybe some more details about the plans that you have there? Are you going to rent the space or build up an assembly facility? How much capacities are you planning to get? How much people will you hire? Do you already have some idea regarding this?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [3]

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Okay. Let me start with the first one because you've not just asked 2 questions, Michal, asked as usual, a few in one sentence, which makes a little more difficult. I try to recollect all of them and I try to answer those step after step. First question was, how sustainable is this development at Kardex Remstar? I mean you see a difference if you look at the Remstar numbers of net sales growth, 19%, versus bookings growth, this 7-point-something percent, 7.5%. So I think to answer your first question, I wouldn't count on a 19% increase year-on-year, if I was you, for the full year because we see a certain slowdown, as I said, in certain regions, which cannot be fully compensated by the likes of North America and Europe.

So without giving you a clear guideline on what total number there will be, I would suggest that it is sustainable in the single-digit numbers that I would suggest, single-digit percentage numbers given what we're seeing in terms of bookings that we're experiencing. We've also gone slightly more selective in terms of bookings. So we're not taking projects at any cost or lower margins, which means there is market, but it's market that we don't want to take in as an order intake. So sustainability, I'm pretty confident that we are -- that we have established a strong sales team out there in the world, which will help us sustain bookings growth, but as I said, most likely in the ranges of our first year result. Okay?

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [4]

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Yes, that was quite -- yes.

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [5]

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Second, I believe, was about the manufacturing in the U.S.?

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [6]

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Yes, exactly.

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [7]

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The fact that we call that manufacturing tells you it will be a factory. It will not just be a assembly hub or something we did in the past. We decided for a factory that, in the early stages, will manufacture elements in a percentage of our total product portfolio. So we will not start with the full complex product portfolio that Kardex Remstar is having. It will start with one product family only and only limited product configuration.

Reason being that, a, we want to ramp it up in a seamless and smooth and highly efficient way. That's number one. Second, we don't want to bring all the complexity of the Kardex Remstar portfolio into that facility, and we will support that with more sophisticated logistics, which is maybe what you call in the automotive industry. Same in uptown concepts where we have base units that we manufacture in Europe, in the factories. We send them over, and we complement them with local manufactured parts or sourced parts to make it a full shipment to our customers. And after that, we will monitor how things develop both in the U.S., in North American market and decide whether we add products or not. So that was an attempt to answer the second question.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [8]

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And just maybe a follow-up in terms of capacities and how much -- how many employees are you planning to hire. You mentioned that there is some difficulties to hire skilled personnel in the U.S. And how much this would add to the sales once this factory is finished?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [9]

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The last one I can answer. It doesn't need to add sales, it has to shorten delivery times and be closer to the market. That's the prime target. It's not necessarily linked to immediately adding sales. It will be an answer to reflecting the current sales development -- revenues development that we experienced over the last years and to get closer to the market and the customers. Start with step one. It will also enable us to manage growth that we expect over the next years still to come. So that's the main reasons to actually decide for that manufacturing facility.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [10]

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And then one additional question. Should we expect in second half of the year or in 2020, some additional investments or costs on top of the guidance that you gave at the beginning of the year?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [11]

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Yes. I know Thomas would like to answer this.

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Thomas Reist, Kardex AG - CFO & Member of Management Board [12]

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So (inaudible) done, so I would like to take over this -- yes, so I would like to take over this question. Yes, we guided already based on the year-end closing call that we will increase the investment level this year. We guided there that we will come up to a CapEx level of EUR 15 million to EUR 16 million. Currently, we count that we will even be higher in terms of CapEx that we will hit or be close to EUR 20 million by the end of the year. This depends a bit how fast our suppliers are in terms of delivering the machines and facilities, but we expect that we will be higher than the guided EUR 15 million to EUR 16 million. OpEx, yes, we will have some project cost in terms of our supply chain strategy in the U.S. and same applies for our -- the IT investments we have, mainly Jens just mentioned before. Does that answer your question?

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [13]

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Yes. Yes.

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Operator [14]

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The next question comes from [Yor Kroona] with AWP.

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Unidentified Analyst, [15]

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This is [Yor] (inaudible) from AWP. Could you give us an example for your investments on your supply chain and the bottlenecks that you mentioned in the periods before?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [16]

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Yes, I can. Most bottlenecks have been -- we've been experiencing, when it's purely related to supply chain, it's been in our Bellheim plant. The bigger 1 of the 2 in -- I'm talking Remstar, the bigger 1 of the 2 facilities in Remstar world. We've invested into bending, cutting and end-of-line assembly equipment in Bellheim, which actually -- and then we invested -- with each investment, you will also improve efficiency of the handling processes. So that should put some relief to the operation. And in addition, then this product no longer being manufactured here, but in North America, that will put further relief on the factory in Bellheim. And with these 2 main streams of investments, we should get back into, what I call, a normal capacity range and no longer suffer from overcapacities, which cost us quite some money last year. Is that the -- what you expected as an answer or do you need more?

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Unidentified Analyst, [17]

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Yes. No, that's okay.

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Operator [18]

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(Operator Instructions) The next question comes from Alexander Koller from ZKB.

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Alexander Koller, Zürcher Kantonalbank, Research Division - Research Analyst [19]

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Could you tell us a little bit more about the seasonality within the first half of the year? So how was the development in the second quarter of the year in your bookings?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [20]

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Well, that's a simple one. There is a different seasonality when you go to Life Cycle Services versus new business. Life cycle Service is usually extremely loaded in the first quarter, and that has to do with contracts, the customer contracts, service contracts that normally are renewed in the first part of the year, January, February. So there, we usually -- they have a very high hockey stick, just in a different order that we experience normally in the new business.

Normally, new business is end loaded, pay loaded and the Life Cycle Service is front loaded. So that is a quite normal. And from then on, you have quite a similar and a regular, consistent pattern in Life Cycle Services for the remainder months of the year. So they probably change 5% plus/minus, give and take, by the months. It's a little bit subject to the customers to which projects you take in and so that's Life Cycle Service. New business was pretty similar. The development in new business, if I take Q1 and Q2, has been pretty similar. So there is no cooling down yet to be seen. So the distribution of new business bookings pretty late.

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Operator [21]

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The next question comes from Sebastian Vogel from UBS.

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [22]

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I have 3 questions. And the first one would be on the FX impact on Remstar top line. It would be great if you can give me a number there. And the second one is on Remstar again, with regard to the gross profit margin. As you mentioned, the mix was certainly one aspect that was putting pressure on gross profit margin. However, if I go back to the full years 2015 and '16, the share of new business was almost the same level or even higher, while your gross profit margin was also higher. So a question would be, what has changed in H1 this year compared to 2015 and '16? And the last question would be a follow-up to the CapEx side. The additional CapEx that you were alluding to, is that something that comes on top of the previous guidance? Or is that just something that has been pulled forward what would supposed to be taking place something like in 2020 or 2021?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [23]

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Thomas, you want to start with the last one? And then I step in with the other 2.

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Thomas Reist, Kardex AG - CFO & Member of Management Board [24]

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Yes, sure. CapEx question. The mentioned CapEx between EUR 15 million to EUR 20 million, this is true for the year on the review, so 2019. So we count not additionally to invest EUR 20 million, but that the total investments, so the CapEx will be around EUR 20 million, for this and also for next year. Does this answer your question number 3?

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [25]

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Yes, that helps.

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Thomas Reist, Kardex AG - CFO & Member of Management Board [26]

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Jens, can I take over the question number one as well?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [27]

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Yes, you can.

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Thomas Reist, Kardex AG - CFO & Member of Management Board [28]

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The FX impact on top line. This is not relevant. So on top line level, we have -- it comes to 3% to 4% impact in terms of FX, which is phased out in -- when you go to profitability levels.

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [29]

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There was 3% to 4% drag or support on the top line?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [30]

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Sorry, say it again. Didn't hear it.

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [31]

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That was 3% to 4% drag or support?

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Thomas Reist, Kardex AG - CFO & Member of Management Board [32]

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(inaudible).

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [33]

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Positive or negative.

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Thomas Reist, Kardex AG - CFO & Member of Management Board [34]

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Yes, yes. Correct.

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [35]

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Now the gross profit question. Nice one. You are right, your observation is correct. When we talk gross profits, we have to differentiate what we call integrated gross profit margin and we have a commerce margin. Let me explain the difference. The commerce margin is the one that we experience on any sales order in the field in our sales and service entities. That's what we -- that's a different reporting for us than the integrated margin. Start with the easy one, which is the commerce margin. The commerce margin has been held stable. That's what we can get from our customers. That's the positive side of it. When I talk about a slightly reduced gross profit margin, I'm talking about the integrated margin, which is made up of the commerce margin and the margin in the manufacturing. So they add up, and if I take these numbers, then they are slightly reduced, which tells you that we, as we reported before, still experience capacity issues in the factories. And this -- that drags down the manufacturing margin, hence also the integrated margin.

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [36]

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Got it.

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Thomas Reist, Kardex AG - CFO & Member of Management Board [37]

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Understood or -- and that's what we're trying to counter with the investments.

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [38]

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Got it. And one last follow-up question from my side. If I'm looking on OpEx per sales within Remstar. If I'm calculating it correctly, for -- in the first half, it was something like 25.8% for first half year. That was particularly low, if I entered correctly, that actually was one of the lowest in my model, actually.

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [39]

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Yes, that's correct.

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Sebastian Vogel, UBS Investment Bank, Research Division - Director & Sell Side Equity Research Analyst [40]

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I mean you said earlier, you make some investments, so I assume that is not a sustainable level, right?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [41]

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That's a difficult question. It's not so straightforward. So it's -- I would suggest it's well-managed cost still. We carefully look at the cost. That's the easy answer, as you know. Then the sustainable levels is, I believe, when it comes to fixed cost, it should be with the exception of IT investments, which go into our IT cost to some extent. And -- but we still have targets to stay in these ranges, which is effectively always supportive. When you have these net sales numbers, it's a little easier to get to this percentage. But most of these cost that we look at -- not most, half of these cost that we look at are not simply linked to net sales or bookings. I would say it's half-half. Half is linked to net sales and bookings, half of it is linked to nothing. It's just how much you want to spend. R&D is in there, which is a decision at our discretion. We can spend X or Y. IT is in there, admin is in there. So this is all cost that, subject to the economic development, we try to best manage in the interest of profitability. But I'm happy it's so low, relatively speaking. I agree.

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Operator [42]

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The next question comes from [Tom Burey] from VVAG.

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Unidentified Analyst, [43]

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You stated in your press release that the growth in Kardex Remstar was influenced by more selective sales activities. Is my assumption right that you went for more quality orders, missed good margin, instead of quantity orders? Or were you limited in your sales capacity to add on new business?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [44]

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I'm happy you asked this question. I think I mentioned it before in my thing, but let's reiterate that again. We try to be selective in terms of quality of projects we take in. Hence, your question, did we focus on projects with the expected margins? The answer is yes. Are we, however, limited in terms of sales force? The answer is partially also, yes. So some of the...

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Unidentified Analyst, [45]

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So does this mean you could have taken on much more profitable business if your sales force would be big enough?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [46]

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We could have taken on more business in some regions that currently not performing that well, namely, Asia Pacific. I would pinpoint to Asia Pacific, where, as I've said before, the development is not according to our expectations to our full expectations. And I believe with more sales force there, there would have been more order intake. That doesn't relate to the other regions. There I think we are well equipped, and we are rather working on quality and also efficiency of our sales force.

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Operator [47]

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Ladies and gentlemen, there are no more questions at this time.

We have a follow-up question from the line of Michal Lichvar.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [48]

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Just regarding this bottlenecks, do I understand it correctly that now all the issues are solved? And going forward, we should -- we could see a potentially higher gross margins?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [49]

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No. No is the answer to your first part of your question. Because I think is that -- we mastered the first stage of investments, which helps us to some extent in our Bellheim factory, but doesn't provide enough relief for the volumes that we have to handle. So only when we get the U.S. manufacturing up and running will there be a much more significant relief of the Bellheim plant, if we had focused on the Bellheim plant. And then, of course, the expectation is, Michal, that once this is all up and running and in productivity mode that, that will also have a positive impact on the gross profit margins, on the integrated margin, hence the manufacturing margin. But it needs to be done first.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [50]

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And can you share with us what is the time line for the second leg of investments? And what does that actually include?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [51]

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Time line is roughly, I would say, we are on this -- in the early stages. So such a project usually takes 12 to 15 months to go live. So it will come into effect this ramp-up period, second half of next year the earliest.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [52]

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Okay. Can I just have one more question, just regarding your business in North America. Is it fair to assume that now -- or once you build the factory that some of the freight costs would disappear? And this can have also kind of a boost on margins since you have to build the machines here and then basically send it from Europe to the U.S.

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [53]

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I cannot stop you from making assumptions. But return on invest has to come from somewhere. So some of it, yes, some of it will also be helping us to counter competition, which is present with local manufacturing in the U.S. already. So -- and that to some extent, sometimes already has a margin impact. So it's a [bi-fold] discussion again. One is, of course, if everything stayed the same with market pricing and everything, it could have a straight effect on customer pricing, hence also margins. Customers know we are manufacturing locally, so they don't know -- no longer accept their freight charges to be part of their -- of that total cost. So first of all, you have to counter that element. Second, you have local manufacturing against which we compete today and trying to compete with imported product. It may help us countering those to some better extent.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [54]

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Would you say that the -- in North America, the competition is intensifying for you?

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [55]

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The same players, but with intensified efforts, yes.

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Operator [56]

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Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Kardex AG for any closing remarks.

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Alexandre Müller, Kardex AG - Investor Relation Professional [57]

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Ladies and gentlemen, this concludes today's conference call. Our team will always be available for additional questions you still might have. So many thanks again for joining the call today, and have a lovely afternoon. Goodbye. Thank you.

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Jens Fankhänel, Kardex AG - Group CEO & Member of Management Board [58]

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Thank you. Goodbye.

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Operator [59]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.