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Edited Transcript of WAC.DE earnings conference call or presentation 7-Nov-19 10:59am GMT

Q3 2019 Wacker Neuson SE Earnings Call

Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Wacker Neuson SE earnings conference call or presentation Thursday, November 7, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Katrin Yvonne Neuffer

Wacker Neuson SE - Head of Corporate Communication & IR

* Martin Lehner

Wacker Neuson SE - CEO & Member of Executive Board

* Wilfried Trepels

Wacker Neuson SE - CFO & Member of Executive Board

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Conference Call Participants

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* Charlotte Friedrichs

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Jonas Blum

Warburg Research GmbH - Analyst

* Marc Gabriel

Bankhaus Lampe KG, Research Division - Research Analyst

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Presentation

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [1]

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Hello, everybody. Welcome to our conference call Q3 2019. I will start with a short overview about the key figures, and then I will hand over to Wilfried, Wacker Neuson's, CFO, to give you more details on the financials.

So let's start with our key figures. On the left side, you see the development in Q3. And on the right side, on the top 9 months year-to-date. So on the top line, we see still very positive development in Q3, plus 12% compared to last year, year-to-date, plus 14%. That's, I think, a very positive development also in Q3 is continuing. Even if the environment is becoming more challenging, we are still able to have double -- to achieve double-digit growth. While we are not satisfied with development on the EBIT side, you see in Q3, we are 4% behind last year, year-to-date, only 4% above last year. We expect it's much more. The reason for that, we will go into details in a few minutes. Also, still what -- where we want to be is on the operating and free cash flow side, year-to-date free cash flow is minus EUR 203 million in high negative figure, we are still working on reducing our working capital. But also here, we explain in a few minutes what our actions to bring this down to reasonable levels.

Yes and on the bottom line, you see, because of this negative free cash flow, increasing inventory and also receivables, our net working capital ratio increased to 48.1%, far above our target, which is still valid to bring these -- the net working capital down to 30% or even below. And days inventory outstanding 22 days higher than last year. And also because of this negative free cash flow, our liquidity ratio is down to 54%.

Now I will hand over to Wilfried, he will give you more details on -- about the financials.

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [2]

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Yes, good afternoon. First of all, about the revenue and earnings situation. The revenue in Q3 increased nicely by 12.4%. We have had strong growth in all of our reported regions. And again, we see just a very sustainable above-average growth for our compact equipment in the ag business, plus 23%. Then we come to the gross profit development. The gross profit increased under proportionally by plus 3.5%. And on the other hand side, revenue reported falling by 12.4%. So this is a quite disappointing situation. We lost gross profit margin of 2.2 percent points.

We reinforced the CapEx in production programs, which impacted productivity significantly in the production plans. And the expected increase in profitability in the U.S. was not realized within the plant timeline. Unfavorable product and customer mix for new equipment sales came on top, and this is with regards: number one, to the growth in the U.K. and Asia, where our gross profit margins are below average, and technically, we have seen an increase of the key accounts business, where volume beats margin. Number third here, what we are going to report is the EBIT. The EBIT is consequently because of this development in gross profit of 3.8% behind, and we lost 1.5% margin. So the positive message here is that operating costs increased below average, their share of revenue decreased by 0.7 percent points. Negative is that the decrease in gross profit margin could not be compensated. I quote here, last year, we reported 9.9% EBIT margin for Q3. Here you see now in our income statement on the left-hand side at the bottom, 10.1%. And this change is due to -- a change in accounting is the reason for this development with respect to valuation of raw materials and components. The key word here is material overhead. The effect is EUR 0.8 million.

The earnings per share are down by 5.1%. The financial result is compared to prior year, negative EUR 1.6 million. The major part is due to higher net debt, which is EUR 1 million roundabout. And the minor part is due to the initial application of IFRS 16 and the effect is round about EUR 0.6 million.

The tax rate decreased slightly year-on-year to 28.6%, and this is due to higher percentage of capitalized deferred tax assets on current losses. And the basis here for is a better planning, which we are now doing here.

Coming on to next slide to the business development by region and business segments. First of all, revenue was EUR 337.6 million, plus 10%, also for FX effect is almost 10% above prior quarter 3 '18. And we have seen here, also in the last 3 months, a continued above-average growth in England, France, Germany, Austria, Czech Republic, Spain and Italy, and we were gaining, in particular with dumpers, reloaders, telescopic handlers and compaction technology market shares. The revenue generated, again, to be underlined with Weidemann and Kramer, the branded products, we achieved plus 23% in the ag sector. The EBIT looks a little bit different to last year, also the development when we look at the margin, the EBIT was clearly lower than prior year at EUR 36 million. Quarter 3 2018 was 47.9%. And this is due to, among other things, a drop in productivity. And we have seen also a certain effect in consolidation. And I have to say a few words more to this here. We have changed our strategy that we keep inventory in the production companies instead of delivering all the stuff to the sales companies. And here, we see, therefore, a certain swap between the region. Europe and the consolidation, we find that in our quarterly report on Page 15, and this is the intercompany profit elimination. So we are decreasing the inventory in the sales companies, which has a positive effect on the intercompany profit elimination. Coming now to the revenues in Americas, also here, top line fully intake plus 18%, almost plus 13% FX adjusted. We see a continued strong growth in worksite technology, especially here with generators and the light towers. We have gained significantly market shares here with compact equipment, which we import from Europe. But the EBIT is not what it should be. It improved versus the prior year. We are now in the quarter of minus EUR 1.9 million compared to minus EUR 3.6 million but this is clearly behind our expectations. And it is still affected by cutbacks in production program and initial difficulties in rolling out new processes in U.S., especially also in the area of logistics. The revenue in Asia is plus 32%, also the same number FX adjusted. And we need to state that despite the rise in revenues, the earnings did not improve, as you can see, due to a strong price pressure in China among other things. And also, an indication for this, the pricing pressure is that also the sale of equipment to OEM partners is also below our planned figures. Coming now to -- on the next slide, to inventory, we see bit and trade receivables and trade payables. So we see here EUR 663 million, a quite disappointing number here. And we need to say that the target still for the end of the year is to become this number down below EUR 600 million. We have a couple of measures in place for the moment, but also in direction to the year 2020. We have for the production significantly adjusted. So for example, we are doing a 4-day week in December, and we are closing one plant on the 6th of December this year. Furthermore, we have this change of strategy, which I already mentioned that we are keeping the inventories in the production companies instead of delivering it into the sales companies, and we have here a very clear responsibility on the managing directors who are producing the stuff worldwide. And third point, which I would like to mention is that we have done the analysis phase with a lot of workshops to implement a new software tool from SAP. This is IBP. IBP is an automated alignment of sales and inventory and production plan, and we will start the implementation January, and we are hopefully going to start in June live with this program. In the meantime, we have developed other tools, which are giving us much better transparency for the development of inventories. This is in place since last week, so that we are not further blind here until we have IBP in place.

The second point I would like to mention here is that we are still keeping our target for next year to achieve 125 days of inventories to reduce the significant high number of 173 days today. And this would mean roundabout for 2020, end of 2020 that we have a target inventory of EUR 500 million. Last not least, a word to the unfinished machines that wasn't issued during the year. This is not longer a big issue. We have seen on the top roundabout 1,000 machines. I reported end of June, 690, and we are now down to 500 units, and our internal target is to limit these numbers of machines to 3-days production output. Coming now to the trade receivables. Also here, the development is not in our favor. We see 78 days, and the explanation is still the same as it was in the other quarters. We have higher numbers due to a higher share of sales with higher payment terms in the U.S. We hope that we are able to install a new financial facility here to helping finance this kind of sales. And if we are able to bring this in place during the next couple of weeks, we hope to bring the accounts receivables down by around about EUR 40 million, which would get us then down to 70 days instead of 78 days. Then on the last words to the trade payables. Also, the actual situation here works against us. We have 2 developments. 1 development is, of course, that we have had a prior year level effect where we were financing the prebuy engines stockbuilding and the other point is, which I need to mention is that we are, of course, reducing the material inflow of raw materials and components. Coming now to the free cash flow, which is a clear consequence out of this development. First of all, the -- sum of inventories, trade receivables and trade payables and net working capital, was almost EUR 900 million as high as it's never was, was 48% of sales. We see still a very severe situation here. It's clearly the outcome of what I've told you on the slide before. And we reported in our outlook that we will be significantly above prior year to be expected for the end of the year. So what does it mean? We believe that we are able to bring that down by 100 million or EUR 120 million in roundabout. And that -- then at the end of the year, we would have net working capital in percent of sales of roundabout 41%. The cash flow in (inaudible) over to the free cash flow. I said last time when we met and reported Q2, I said that we want to achieve a red 0 for the free cash -- for at the end of the year. Due to the development in the third quarter, we cannot reach our targets of a balanced free cash flow at the end of the year 2019. So where we -- where will we come out depending on the development of stock and accounts receivables. I'm estimating for the end of the year, free cash flow, which is now above EUR 200 million, that this will be at the end of the year, minus EUR 40 million or probably minus EUR 50 million, we will see. On the next slide, there we see the consequences of this high net working capital, the net financial debt and gearing jumped to EUR 530 million, respectively, 42%. We are hoping to bring that down to EUR 360 million at the end of the year, so that we come out with a gearing of probably 30%. When we look on the right-hand side of the slide, you see almost 2.0 regarding net financial debt to EBITDA. We hope to bring that down -- up to the end of the year to 1.5, which is absolutely not our target. Our target is that we will achieve next year. Again, numbers, which are around 1. The equity ratio where we have always been proud to have it at roundabout about 70% is decreasing, of course, by this financing situation, which I have reported, and we are now down to 54% as a consequence. And just to remind you, the IFRS, the first application of IFRS 16 has roundabout 1 percent point impact. So this is not significant. The most of it is clear operational products here. On my last slide, you'll see the share development. Also here, I would say not so much to report about this. You know the numbers, and I have already talked about the dividend payout, which happened in May, beginning June. So there is nothing specific to discuss. And I would like now to hand over back to Martin, who will talk about the outlook for 2009.

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [3]

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Thank you. So coming to the outlook. You see on the left top -- on the left and the right side, the development of the business indexes for construction. And then the right side for ag. They are coming continuously down, especially in agriculture, it's now already in the minus. So what we see is that the market is getting more and more challenging. We see it also -- we hear also from the supplier side that they are receiving reductions from many OEMs, so market is more challenging, already also in Q3, if you see also the reports from a lot of our competitors, which are slowing, reporting much slower revenues. So the positive thing is that we are still in double-digit growth. And so we feel quite confident that we reach our upper end of our revenue guidance, maybe also slightly above. If we feel quite well. Also, the development, the revenue development in October makes us here quite confident. Now the negative side is what we already released officially that we are reducing our guidance on the EBIT side, down from 9.5% to 10.2% now to 8.3% and 8.8%. So this is really the disappointing issue year, strong growth, but we were not able to realize here also a positive -- a more positive development on the margin side. The issues are -- Wilfried already explained. It's the mismatch of what we have between sales and production alignment, where we are -- have done a lot now in the last couple of months. And as Wilfried already mentioned, a lot of tools and new KPIs are now available so that we are absolutely confident that we get this internal issue in the next couple of months, really in line and now, what we are doing or slowing down also a little bit is on the investment side, what we are expecting our investments roughly at EUR 90 million, maybe also a little bit lower.

Originally, we had planned around EUR 100 million. And if we look on our development also in order income, also we see a slight decrease in order income in the last few months, but it's still single digits, so nothing really dramatic. I think a part of it is also because customers are realizing now that the issues with long delivery times. It's not a real issue anymore. And though they are not so necessary to place their orders such early. So we seen no real fall back or fall of the cliff of some markets. Instead, it's opposite in some sides, in some markets. So for example, if you take U.K., there is already a slowdown of the market in the last 3 quarters, caused a lot of uncertainties, also due to Brexit, but we are still growing here very fast and also above average double digit. So the good message is that I think our products, our offering is still very well received. We are really able to gain market shares. We are -- with our offering really attractive and highly competitive on the market. And the disappointing is that we were not able to turn this also in a strong EBIT results, but as I already mentioned, and as Wilfried explained, the tools are now, I think, really in place, and we will see here a further improvement in the next few months. And last but not least, also in U.S., yes, we are behind our expectations, we -- but we are also better than last year. And -- we expected more that we are pushing here faster the margin development. But on the other hand, we have really changed everything in U.S. in the last 1.5 years. We have brought 2 factories together in one. We have reduced the vertical integration, we outsourced manufacturing to suppliers, we outsourced products. We have sold one product range now what we announced a few weeks ago with trowel business to a company Husqvarna to have more focus on our core products. So I think that everything is done in the right way but the results are lacking behind. But we are still confident that we are going in the right direction. So that was it from our side, and we are now open for your questions. Thank you.

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Katrin Yvonne Neuffer, Wacker Neuson SE - Head of Corporate Communication & IR [4]

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Thank you. So we will now start the Q&A session. And I would like to ask the operator to give a short introduction.

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Questions and Answers

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Operator [1]

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(Operator Instructions). We take our first question today by Jonas Blum from Warburg Research.

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Jonas Blum, Warburg Research GmbH - Analyst [2]

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Just a couple of ones from my side. First of all, like, could you give us -- I mean, I'm aware that you can't give us the guidance yet for 2020. But could you give us some color here on your outlook? What's your impression, especially for Europe, I mean, you said order intake is down a bit. Could you specify it for like certain regions? And also like with regards to your customer mix, should we expect lower margins also year-on-year from that effect? Secondly, I was also wondering if you might have already realized some pressure with regards to customers perhaps trying to renegotiate since they saw your inventory overhang. That's the second one. And the third one, just regards to your North America's business. I mean, when should we expect your operations there to smoothen again in terms of inefficiencies and the cutbacks and also the implementations of new processes? When do you expect this to be finalized? And then should we expect margins to pick up here again?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [3]

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Yes. Thank you for your questions, Mr. Blum. First of all, to the outlook, it's -- that's quite difficult to give a clear outlook for 2020. But what I can say is, actually, the outlook is -- we see it positive also for 2020. As I already mentioned, we have really many products which are received very, very well. One example is, we already mentioned it in the last call is our new dumper concept, the dual view, which really received extremely well, not only in U.K., also in all other markets, we have really a lot of interest in our products. Here, we are not comparable with the competition. We are achieving here good margins. And it is one example. We are still at the beginning in zero emission. We are starting -- beginning next year in Q1 -- end of Q1 with our zero emission excavator in mass production. And also here, the requests from our customers is also quite promising. We have done a lot also in U.S., bringing our products to a more competitive cost base. One example over here also the generator business, which was in the last years before always, and a very low-margin business. And also this has improved significantly. So we don't see, at the moment, a big pressure or increased pressure in prices. It's always -- for sure, always a discussion about prices, especially if we speak about -- if we speak with key accounts. But we had also already negotiations with some key accounts with big construction companies for the -- also for next years to define the contracts and where we have -- we're also able to get some increases here from our customers, not the normal ones, what we get from an end user for sure, but also here, we have -- we get some increases. On the other hand, we see on the purchasing side, really in a big shift last year, one year ago, we had still a very high-pressure price increases. While this really has changed, and we are expecting also budgeting for next year, decrease in purchasing prices, we're already starting to implement the first new price contracts, but we will see the effects not before next year. So here we see a much easier situation now on the supply chain side. And yes, coming to U.S., as I already mentioned, I think we have changed really nearly everything, probably something -- some changes were too fast for the whole organization, though they need some time. We have introduced new systems, warehouse management systems, which we had not before and so on. But we are lagging behind. So what we expect roughly also for U.S., next year is an EBIT margin around minimum 3%. So we are lagging, let's say, probably 12 months behind our expectations. But we are -- the targets are still valid to, let's say, for next year, U.S. roughly an EBIT margin of 3% for the United States.

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Operator [4]

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We move on to a question from Charlotte Friedrichs from Berenberg Bank.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [5]

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I'm kind of leading on from the previous question. Can you also give us an outlook on your operations in APAC? You mentioned that pricing pressure in China is being difficult right now. Do you expect to see any major improvements there in 2020?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [6]

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No, we are here on the conservative side, we expect here no any major improvement in 2020. We see also here improvements that we can improve our cost base because also here on the supplier side, there are some opportunities now to decrease also step-by-step the cost. But we see no major increase growth we expect for next year, a slight negative margin. It's -- will have not the real big impact on our total results. But it takes longer than we expected, and we -- and especially what we have not expected in China was these -- they are -- the prices are in some products not on every product, but in some products really where the market price is heavily reduced in a growing market environment, what is really some kind of unusual, but that was not expected. So we are for next year, planning no significant improvement in China, but we see -- also, we expect no significant negative impact from China.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [7]

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Okay, understood. And then you mentioned a little bit on current trading already, so you've been speaking to your key accounts on 2020. Can you give us a bit of an idea so that seems to be quite positive, the sentiment that you're getting there?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [8]

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Yes. It's -- let's say, it's difficult to answer, still now we really get more positive, in other words, we don't really receive negative signs from our customers. So there they have still a good order book, and they are still willing to buy. We -- in August, beginning of August, we got also the first order from the biggest rental company in Europe. It was the first batch that we already received in August. This was also a surprise for us because normally, we don't get these orders so early. So I think also, this is a positive sign that this big rental key account is already deciding and placing orders beginning August for 2020. So -- but on the other hand, yes, we see every -- we and also our customers here every week, that the environment is getting more and more difficult, that the economic outlook for the -- or industry and globally is slowing down. So there are still uncertainties. But so far, we don't see any market falling from the cliffs or some negative comments from our customers, also the U.S. guys are still confident. So as I said so far, at the moment, we are positive for 2020. Cautious but positive.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

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Okay. And my last question would be around the production reductions that you've mentioned this year, do you think you're also going to need to keep the production a little bit lower than would be possible for 2020 in order to reduce inventories? Or is that not an issue for next year?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [10]

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Yes, we -- let's say, we have now really in Q4. Now we have -- we are with all of our manufacturing plants on the level of what we need for 2020. So there is no further decrease, really necessary in the plants or these organization changes are done. We have -- and it's also a mixed picture. In some factories, we will see no increase next year, in some factories, we still see further increase also next year. So it's a mixed picture. But actually, we don't see any further necessary alignment of production, what we -- what -- because this was already done now financially with the last steps in Q3.

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [11]

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I would like to add some information here. We are in the middle of the budget process now. And as Martin said, we are at a level with the productions, which is sufficient to achieve a further inventory reduction next year. So we have -- keeping really an eye on that production and sales for the budget process is in alignment and that we do not get the same faults as we have done or as we have gotten in 2018.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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Okay, perfect. And about restructuring costs next year, anything big to expect? Or are you now -- you should be pretty much done, right?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [13]

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Yes. We are.

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Operator [14]

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(Operator Instructions) We now move on to Marc Gabriel from Bankhaus Lampe.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [15]

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I have three questions, if I may. First of all, on the unfinished machines, what do you expect here by the end of the year? Currently, you said that it's EUR 500 million so what's the target for the end of the year? That's my first question. Second question is, as far as I can remember, you have already announced some 2 years ago that you would be optimizing the software for the supply chain management systems. So now it comes a little bit surprising that you now have to implement another tool from SAP. So what went wrong here 2 years ago? And the last question is, why didn't you provide the dealership in the U.S. with external debt financing instead of taking over the pre-financing by yourself? That seems to be, at least what you've written that you are now seeking for cooperation with external financing partners. What's here the reason?

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [16]

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Okay. First to your first question on finished machines, as I said, it's not longer a big issue. So 500, or 500 -- 440 could be the number for the end of the year. Regarding your questions, sales and production alignment and the software tools here, the first software tool which we have implemented was selfmade one. And that was keeping production and sales in a certain alignment. But unfortunately, this was not covering the inventory development. So the calculations were really manually done. And that's the reason why we have set up a new thing, which we have now available end of this year, which is now keeping everything together. That means we are starting our balance sheet, and we have then the planned orders from the sales companies in the production companies. We have a plan, the sales and the cost of sales. And so we have the production figures also implemented in this too so that we can now see the development of the next month, and that was not possible before. Possible before was just to see what are the results out of it, but there was not a possibility to make a forward-looking statement, really. And now we have this in place for the next 18 months. So that gives us really the transparent currency, what we need to see where something is going wrong. And we have grilled that down really to products and to assembly lines in the production. But this is much more detailed and the awareness is clearly there to use that. But also, this is coming out of analytics, which is then at the end of the day also, handmade this program, what we are aiming for, what we are looking for is really an integrated system and an integrated system only can be SAP and SAP too because we are basically running SAP in all countries, almost all countries, let's say, 98%. And so this would then mean really an integration. What we haven't had before. So 3 steps, first step, not all information is in there and no forward-looking statements. Now we can say we have everything together. We are able to make forward-looking statements. And the third one will be then integrated software beginning of June next year. Your third question was regarding the dealership financing, yes, we are doing that, but we are growing there quite nicely. That means that when you have payment terms, in some cases, up to 60 months, you can imagine how fast your balance or your volumes, your portfolio, your financing portfolio is growing. And so we need to look for further potential here. So the existing ones are more or less at the end of that capacity. And yes, that's the reason for it.

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Operator [17]

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At this time, there are no further questions in the queue.