Robit Oyj

OMXH:ROBIT

Earnings Call Transcript 2023-Q2

[Arto Halonen, executive]

[Audio Gap]

In the second quarter of the year, we saw sequential improvement to the first quarter of the year, but we fell behind our targets. Orders received declined by 14.2%, reaching EUR 22.8 million. Net sales improved from quarter 1 by 11.4%, but decreased by 21.4% to a very strong comparison quarter. The decline in constant currency was 17.6%.

During the quarter, we saw weaker demand in the Construction segment, especially in Asia and Europe markets. In the mining segment, the market demand remained stable, but we were not able to compensate the loss of the sales from the Russian market.

Our comparable EBITDA reached 6% of net sales and was 1.5% [indiscernible]come quarter was very strong from last year. We are progressing with our cost savings program, where we are targeting EUR 5 million cost savings to the 2022 baseline, out of which 2% to 3% we target to have impact and materialize during this year. In this program, we are focusing on fixed cost savings, sales from the sourcing actions as well as the footprint on the factory and supply side.

And as a part of these actions when it comes to the factory footprint, we have decided to close manufacturing in our Australia manufacturing unit and production from that factory to other Robit supply hubs in the world. We estimate that this closure is finalized end of quarter 3, beginning of quarter 1.

Also, our cash flow from operating activities improved, reaching EUR 3.4 million and it was driven by the reduction in the net working capital, where we continue to implement actions on that front to continue on the similar path. If you look at first half numbers, the net sales decreased by 19.2%. In constant currency, 16.8%. We saw a decline in the businesses.

In Top Hammer Geotechnical decline from the East area was the main driver in Top Hammer also the decline as a result of the lower market activity in Asia impacted the topline. In Down the Hole, the decline was driven by Americas and Australia. The comparable EBITDA from first half reached 3.3%. Profitability was impacted especially by the low utilization rate in our Down the Hole production. Hence, also the kind of the decision footprint.

Also, we still saw increase in the raw material cost, which we were partially able to compensate with the price increases. And also we had currency headwinds during the first half of the year as well as in the second quarter. On the ESG side, many of our KPIs and targets moved to right direction, especially pleased on the systematic work that has been done to improve the safety -- health and safety in Robit, and we saw positive development on that front.

EMEA continues to be our largest region. The development within the EMEA area was mixed. We saw some positive development, especially in the Northern Europe due to winning some new customers earlier this year. On the other hand, we had a bigger reorganization in the Southern Africa organization and that impacted the business development activities in that region during the quarter, but now we have a very good and strong team in place there, and we are geared up for continuing to deilver growth from the region.

Americas. Net sales dropped by 20.5% during the first half of the year. The development of, let's say, the new sales opportunities progressed slower than anticipated. Also, there are some -- with some larger key customers, we saw lower consumption of our products to, for example, strike or then kind of operational-related issues and that impacted our sales in the region as well as that some of the, let's say, larger distributors in that area still were reducing their inventory levels during the first half of the year, impacting then also our net sales.

In Asia, the sales declined by 27%. And as mentioned already, the market activity in that area was lower. Asia region for us is, let's say, more heavily focused on Construction segment compared to our other market areas and that had a bigger impact in that area. In Australasia, the development was relatively flat. Top Hammer contained to develop well in the Australasia region, but in the Down the Holesegment we didn't perform as well.

We progressed with systematic actions on the ESG front. I said we -- in the safety side, we continue to implement, let's say, stronger safety culture into the organization. We continue to shift the focus of the safety work to more proactive work rather than reactive work, and we saw some improvement on the LPI obviously, still the rate is too high and the work continues on that but already now some positive development.

Also, in this training hours on the consultative sales, one of our key KPIs and, let's say, enabler of future growth as well and, let's say, sustainable our products on that front, we recorded a good number of training hours. The CO2 emission intensity is 10% or 11% below our baseline of 2020, but still the result is not as good as it was in the comparison period of first half of 2022.

Although our emissions reduced in absolute terms, in relative terms, they increased compared to the first half of 2022. I'll hand over to Ville for more details on financials.

[Ville Peltonen, executive]

Thank you, Arto. So just to recap the key financials. Net sales declined in the second quarter by 21.4% from the strong comparison period and declined by 17.6% in constant currency. So we got some negative impact from currencies as well. The adjusted EBITDA declined to 6%. And also there is the negative impact from currencies.

In the second quarter, it was somewhere around EUR 0.4 million. EBIT percentage in the second quarter declined to 0.2%, and the result for the period was minus EUR 0.7 million. We continued the positive development in the net working capital due to our fee-for-service program that we are running and the net working capital totaled at EUR 43.2 million. So a significant decrease from the comparison period, but still not at the level that we are aiming at.

Inventories decreased to 42.8%; receivables to EUR 21.3 million, sorry; and payables decreased to EUR 20.1 million. Net working capital percentage of the sales from the last 12 months was 43%, declined 3% from the comparison period. [Audio Gap] was EUR 1 million and the operating net cash flow at EUR 3.4 million.

Cash flow from investing activities was EUR 0.1 million and from financing activities, minus EUR 0.2 million. So the net increase in the second quarter was EUR 3.2 million. So focus for second half of the year, continue to strengthen our distributor network in the high market potential areas. Focus will be, for example, in some of the African countries as well as in North America, where we are identifying and introducing new distributors.

Also strong ramp-up support for recently appointed distributors during the quarter [indiscernible] with a Brazilian company called [indiscernible] that will be representing Robit in, let's say, very high market potential area. And we are very excited about that cooperation and work in close cooperation with them. Also, we'll put high focus naturally on scaling up and further increasing our sales activity in all regions.

Net working capital, cash management, that's a second focus areas. We continue the implementation of Fit for Service program and we have very specific target setting, very specific actions, especially for reduction for the second half of the year to bring the net working capital to the levels that we target.

We continue to implement the cost-saving programs where we are targeting this EUR 5 million saving from the 2022 baseline and one key action in that saving programs will be winding down the manufacturing in Perth, Australia during the second half of the year. Our financial targets, long-term financial targets remain intact, [indiscernible] annual growth and comparable EBITDA 13%.

And in June, updated our guidance for the year, and we expect our net sales to be between EUR 90 EUR to EUR 100 million and comparable EBITDA between EUR 3 million to EUR 6 million. Thank you. And now we are ready for some questions.

[Operator]

[Operator Instructions]

[Unknown Analyst]

All right. Yes, [indiscernible] couple of questions for me. First, regarding this savings program of this EUR 5 million total, how much of that will be EBITDA impacting?

[Arto Halonen, executive]

You could say that majority -- vast majority of that is EBIT impacting. More. Over 90%.

[Unknown Analyst]

[indiscernible]

[Arto Halonen, executive]

SP1 Well, we are targeting to complete the actions on that by the end of this year. And let's say, you should see a majority of that during '24.

[Unknown Analyst]

Okay. And then regarding this [indiscernible] how much of that, if any, was visible over the first half of this year?

[Arto Halonen, executive]

Well, we saw some improvement from that already first half of the [indiscernible] year to be EUR 2 million to EUR 3 million. It was, let's say, a smaller part of that estimated impact that we saw now first half of the year. It will be more realizing in the second half of the year.

[Unknown Analyst]

Okay. And then regarding your guidance, it seems that you aim at second half sales of between EUR 44 million -- EUR 54 million. But that's okay, but then the EBITDA margin would be [indiscernible] from 3% to 8%. What is there in your profitability that you still can't foresee more accurate [indiscernible]

[Arto Halonen, executive]

Yes. Obviously, well, there's always uncertainties. And as you know, we work with, for example, very short backlog. Backlog is kind of no mix item. We don't necessarily have that business at hand that we are going to, let's say, deliver during the second second half of the year. And still, during the last quarter, we saw kind of the realized raw material cost for us increasing and the trend starts to turn down as based on today's facts that we have at hand. But still, it's -- the impact will come gradually from that aspect. But there's always some uncertainties, especially, given that we are very -- we're working with very short backlog in it.

[Unknown Analyst]

Okay. Then before I let others [indiscernible] questions could you describe in the first half or second quarter sales. What were the price and volume impacts in the sales decline? I mean what is -- how much different is pricing vis-a-vis the situation [indiscernible]

[Arto Halonen, executive]

If you look at quarter 2 to quarter 2 impact, there is positive impact from pricing. But it is not a kind of a major impact from the price side because we did -- maybe you recall that we did early kind of pricing actions last year, second quarter of last year, and we actually saw a quite good impact already in the comparison period. There is positive from pricing, but we are not talking about any more kind of in big percentage.

[Unknown Analyst]

Is it a mid-single digit or in that...

[Arto Halonen, executive]

Yes, ballpark you could say it.

[Unknown Analyst]

Just a question on the [indiscernible] Australia. First of all, if you could give any more color on what are your plans there regarding the assets that you have in place? What are the balance sheet values of those assets? And what are you kind of forward plans for those and what kind of type of would we expect to see?

[Arto Halonen, executive]

Yes. Let's say, the balance sheet values from Australia relatively low if you compare to our total balance sheet given that machinery is not old, but it's not new either. So the kind of the impact on the balance sheet are -- we are talking about less than EUR 1 million. But then of the assets, we are going to then divest. I think as we continue to still manufacture there during the third quarter, the divestments will likely take place then only in quarter 4. And we expect to also [indiscernible] result some positive cash for the company. Some of the assets we might use in the other factories, but that will be a smaller part of the, let's say, the total machinery we have in Australia.

[Unknown Analyst]

And.

The goodwill that you have from the Australia business in total?

[Arto Halonen, executive]

That has no impact on this.

[Unknown Executive]

The goodwill was sized in 2018.

[Unknown Analyst]

Then second question is on the cash flow and the working capital going into the second half. I mean we know -- probably know what our EBITDA is going to be, but [indiscernible] the cash generation or the kind of -- will the positive continue? Or are you now kind of flattening out or...

[Arto Halonen, executive]

Well, as mentioned, I think, well, the fact is that today, we have more inventory than we want or what we need to kind of in optimal situation, run the business. So definitely, our target is to free cash during the second half of the year, especially from the inventory. In the other net working capital items, I think we'll see smaller impacts, but we have a potential to, let's say, generate cash from the inventory reduction.

[Unknown Analyst]

And then kind of the downgrade on [Audio Gap] What type of impact does it have on your cost of debt or covenants or things like that?

[Arto Halonen, executive]

Well, we had waiver agreed for our covenant with our financing bank. And obviously, it's the thing that to be closely managed and monitored. But as of now, let's say, the impact that it has was reflected in the, let's say, average interest rate that Ville mentioned.

[Unknown Analyst]

And then on the growth side, if you look at the business that grows to the mining industry and let's exclude the Russia from that kind of impact, what did you see kind of growth terms on the first half. Did you see some of your clients destocking inventories? You grow in the mining business, how does it trend?

[Arto Halonen, executive]

Yes, we had kind of individual key customers that are in our scale is very relevant lower consumption from some key customers. And there is seasonality, there might be destocking happening. There's different reasons between the customers, but if you think broadly, mining sector. The market demand is not a kind of a constraint for us. Obviously, our market share is relatively low. So definitely, we have room to grow a lot in that segment. But now first half of the year with some of our large customers, we saw decline either through the excess inventory [Audio Gap] and in some cases, lower consumption of some of our key customers. And at the same time, we need to be kind of a fair that we didn't have enough new customers that we would have won, let's say, end of last year to compensate for that kind of fluctuations. And that's kind of the number one focus, obviously, for now is to get the sales funnel conversion happening and building that future growth.

[Unknown Analyst]

If you go back 1 year and again, let's exclude Russia from that, would you say that your customer base mining is today wider. So when we see this kind of impact ending and the market returns to growth, then...

[Arto Halonen, executive]

If you look kind of big picture, 1 year back, we have won some customers, maybe we've lost some customers. The net impact is pretty much plus/minus and then we talk about some smaller changes. And definitely kind of where we aim to be is heavily on the plus side. And now first half of the year, we were -- and then given the economic development, some customer-specific development. Therefore, we saw a decline in the sales.

[Unknown Analyst]

And then on the construction side, is it fair to assume that it's still trending down? Are you still kind of working on approach that have been already initiated? And I guess kind of the new business is the tough one right now.

[Arto Halonen, executive]

Yes. I think typically, the projects we work -- they kind of -- they -- with the exception of some very large ones, they are not necessarily lasting long. So we need to kind of turn the project funnel all the time. There are projects, some of them gets delayed, the decision-making and there are less projects and that, obviously, impacts also that the competitive situation in some of these projects is tougher than it was, let's say, 1 year ago or 1.5 years ago as the total market is today small. But I would say kind of that it is definitely lower than when we look 1 year back, and we'll see how long that in that.

[Unknown Analyst]

Okay. Then the final one for me, just a clarification. You have the EUR 5 million cost savings that you're targeting. And on top of that, the impact from Australia wind down? Or is it...

[Arto Halonen, executive]

Included.

[Unknown Analyst]

Could you provide us with ballpark figures, how much of that was minus 21% sales decline? How much of that was linked to cost structure and how much to mining?

[Arto Halonen, executive]

Yes. We don't kind of report or [Audio Gap] but it was kind of just a ballpark, I think in percentage terms, mining is a slightly larger business for us in percentage terms in those segments. It was bigger in the Construction segment, but we saw kind of also decline in the mining. But that was more related to this, let's say, destocking customer-specific issues rather than necessarily the market demand as such.

[Unknown Analyst]

And then coming back to your construction customers. Did you lose any meaningful customers on the construction side of what there was just a matter of their volume declining?

[Arto Halonen, executive]

Yes. In the construction side, if you think of quarry, it's more continuous business, it may be more related to mining as there in that segment is more related just to the production volumes. But then other part of the cost.

[Technical Difficulties - Please refer to the preliminary transcript that will be posted shortly.]