Rational AG

XETRA:RAA

Earnings Call Analysis

Stable Growth and Strong Market Presence Drive Rational's Q1 2024 Success

In Q1 2024, Rational achieved stable growth, reporting a 1% year-on-year sales increase to EUR 286 million, despite previous extraordinary growth rates. North America and Asia led with sales increases of 13% and 18%, respectively. EBIT grew by 7% to EUR 71 million, with an EBIT margin of 24.8%. The gross margin rose by 218 basis points to 58.5%. The company expects mid- to high single-digit sales growth for 2024 and continues its strategic investments, particularly in R&D and market expansion. The proposed dividend remains at EUR 13.50 per share, maintaining a payout ratio of 71%.

Impressive Growth in Key Markets

In the first quarter of 2024, the company experienced robust growth in several key regions. Sales in North America grew by 13% following a noteworthy 41% increase the prior year. This emphasizes the region's significance to the company’s overall development. Additionally, Asia showed impressive growth with an 18% increase, driven primarily by strong performances in China and Japan. These results underscore the growing potential in these markets and the impact of significant orders from major clients.

Strong Earnings and Margin Expansion

Earnings Before Interest and Taxes (EBIT) rose by 7% to €71 million, marking the company's third-best quarterly financial result ever. The EBIT margin improved to 24.8%, higher than the pre-pandemic level of 24% in 2019. The company's gross margin also saw a substantial increase by 218 basis points to 58.5%, attributed to successful price increases and reduced costs of commodities and chemical products.

Continued Investments in R&D

Research and Development (R&D) expenses increased by 11%, reflecting the company's commitment to innovation and future growth. Although a portion of the R&D costs were capitalized last year, leading to a slight distortion in the growth rate, the company continues to prioritize R&D to maintain its competitive edge.

Solid Financial Structure

The company maintains a robust balance sheet with an equity ratio of 79% and a liquidity ratio of 42%. Total assets grew by 8%, surpassing €1 billion for the first time. The proposed dividend for 2023 is €13.50 per share, consistent with the previous year, representing a payout ratio of 71%.

Guidance for 2024

Looking forward, the company anticipates sales growth in the mid- to high single-digit percentage range for 2024, without any planned price increases. The gross profit margin trend from 2023 is expected to continue, with further easing of input prices. An incremental increase in operating costs is planned, aimed at expanding sales activities and strengthening R&D capacities. EBIT is expected to grow proportionally with sales, maintaining the EBIT margin at a healthy level comparable to 2023.

Innovation and New Product Launches

The launch of the iHexagon, a new cooking system, was highlighted as a significant innovation. Combining convection, steam, and microwave energy, it promises to reduce cooking times by 30% or more. Initial responses from trade fairs and selected customers have been positive. However, the company advises not to expect immediate growth from this product as it undergoes testing and evaluation by potential clients.

Expansion Plans

The company is continuing strategic projects, notably the expansion in China, with the start of production expected in the second half or Q4 of 2025. CapEx for 2024 is projected to be around €35 million to €40 million, driven by ongoing projects in various locations including Wittenheim and Landsberg.

Challenges and Opportunities

Despite some challenges such as finding skilled labor in the U.S. and volatility in Latin American markets, the company remains optimistic. North America continues to be a strong market, while Latin America, despite a slower start, shows potential for improvement. The global increase in the number of meals and upcoming events like the European Soccer Championship and the Summer Olympics are expected to boost demand and create new opportunities.

Earnings Call Transcript 2024-Q1

[Stefan Arnold, executive]

So my dear ladies and gentlemen, welcome to our earnings call on Rational's Q1 2024 figures that we published this morning. My name is Stefan Arnold. With me are my colleagues, Nicole Englehardt and Tobias Stadler; and of course, our CEO, Dr. Peter Stadelmann, and our CFO, Jorg Walter.Peter will start the presentation in a few seconds. So, as always, a few hints at the very beginning. So, you also can see them this time on this slide. [Operator instructions] So we already have quite a big number of questions, and I say thank you to all of those who sent them in advance to make us the life here a little bit easier. Thank you.So, if we already gave the answer to a question, during the presentation or if we already had a comparable question, we then might not repeat the question later on. And, of course, at the end, we will make sure that all questions will be answered before we close the call.One hint regarding the recording of the call. So, we will send them around to the participants after the call as we do it always, and we kindly ask you to not share this outside the organization as we have here written on the slide. Thank you for that.So we estimate the call to take less than 1 hour today. And with this, I want to hand over to Peter. Peter, the stage is yours.

[Peter Stadelmann, executive]

Thank you, Stephan. Good afternoon, ladies and gentlemen. Before we look at the key financial figures, I would like to present some highlights of the first quarter 2024. It is always a highlight for all of us to meet our customers in person at trade shows.In the first quarter, we had the opportunity to do this twice at major German trade fairs. After a 4-year break Intergastra took place in Stuttgart at the beginning of February. The leading trade fair in the Norga took place in Hamburg in March. Both trade fair stance were well attended and the highlight of the Hamburg stand was, of course, the world's first presentation of the iHexagon to invited customers.The iHexagon is the first and only cooking system combining 3 sources of energy, convection steam and microwave on all 6 trays intelligently. It speeds up cooking times by 30% or even more. Let me explain to you again how we market the iHexagon.In the first phase, it will be introduced in the U.S.A., U.K. and Germany, where we present the iHexagon 2 selected customers, which are usually chain customers. Their standard procedure with new equipment is to test it at their or our laboratories with their ingredients before they do field tests in selected restaurants. After positive outcome, they decide on a rollout.This again, could take several weeks, months or even longer, depending on the business model and the resources for installing and bringing up to use new equipment. For this reason, dear analysts, please do not expect the iHexagon to create instant additional growth within the next weeks or months.Right at the start of Internorga, Rational received a prestigious future award in the technology and equipment category for its eye care system or to dose. These new options for all table units allows customers to store solid agents in cartridges in the unit. With it, they save agents, reduce plastic waste and enjoy benefits of easier use.One of the criteria for the 5 strong jury was that the innovation had to offer a new and intelligent solution and set new standards in the market. The judge is based their decision on the fact that eye care system out to dose makes life easier in the professional kitchen, eliminates work place hazards and produces less waste than our taps.Let's now have a closer look at the figures together. We start with sales. In 2023, we set a new sales record of 1.1 million to EUR 6 billion, and we're able to exceed the previous year sales by plus 10% or by more than EUR 100 million.After 2 years of exceptionally high growth rates after the pandemic, we are returning to our normal growth rate of the many, many years before 2020. Having looked at the annual sales figures, now we turn our intention to the quarters. Please note that at least for the first half of 2024, to compare quarters of '24 to '23 will be of limited meaning. This is due to the out-of-balance order and delivery patterns due to the shortages, long delivery times and price changes.Initially, the growth of 1% to EUR 286 million in the first quarters may not seem very strong. That's why we need to put it into perspective, 2022 and 2023 showed very strong growth figures of 34% and 25%, respectively.Q1 2022 was positively impacted by subsidies due to COVID-19. Q1 2023 was positively influenced by the reduction in the order backlog. The impact in Q1 2023 totaled to EUR 45 million. The takeaway is, the lower growth is to be explained not by diminishing demand, but by out of balanced order and delivery behavior in the last years.The potential is still huge. We see the long-term growth trend intact. The compound annual growth rate of 8% from '19 to '24 confirms this. This chart shows the quarterly development of order intake, the left light gray column, quarterly revenue, the right dark gray column and consequently, the development of our order backlog, the red line in the years 2019 to 2023.In 2019 and 2020, order intake and sales were balanced with an order backlog of around EUR 70 million. Our delivery times at that time were around 1 to 2 weeks. Due to the difficult supply situation for raw materials and electronic components, our delivery times in the second quarter of 2021 onwards went up significantly.As a result of this end of announced price increases incoming orders skyrocketed. By the second quarter of 2022, our order backlog had risen to a record level of EUR 430 million. It took until the third quarter 2023 to get the order backlog down to normal levels.In the fourth quarter last year, we are finally seeing a full normalization order intake and sales are at the same level and the order backlog is stabilizing at around EUR 120 million. Now we, again, can guarantee our usual short delivery times. And with the help of our very flexible and lean production process, we can produce a delivery in urgent cases at short-term notice, if necessary, within 2 days.Q1 2024 was confirming our view of a sustainable order backlog level of around EUR 120 million. Let's take a look at the development of our product groups. The iCombi and the iVario product groups were impacted with quite different situations during the supply crisis.Let me start with confirming our previous statement, the iVario is back in growth mode. Sales revenues grew by 7% to EUR 31 million. We often highlighted that the iVario was particularly affected by supply restrictions with CPUs in 2021, but had no restrictions in 2022. Therefore, we were able to convert the high order backlog from 2021 into sales in '22 and reported an outstanding sales growth of plus 69% in Q1 2022.Without supply restrictions, this high sales growth would have been spread over the 2 years, 2021 and 2022, especially France, Scandinavia, but also Japan sport growth for the iVario. The market potential is unchanged, very high. This is also shown in the growth of order intake. iVario order intake in Q1 increased by 17%.The product group iCombi successfully defended its high prior year figure with EUR 256 million in sales revenues. Having in mind the growth rate of 30% in Q1 2023, it is still impressive to maintain such a high sales level. Let me hand over to Jorg for more details and insights.

[Jorg Walter, executive]

Thank you, Peter, and also from my side, hello to everybody in this call. Peter explained earlier that on a year-on-year basis, we maintained a higher sales level of last year with a growth rate of 1%. And looking now at the regional split and the sales development, this shows 2 different developments.First of all, in Europe, including Germany, our largest regions, we see a sales decline compared to last year. However, comparing against the Q1 2022, we see in the case of Europe, a good average growth rate over the 2 years of 8% per year.In Germany, we still see also in the 2-year fuel sales decline. This is because Q1 2022 was exceptionally high. One reason also was, we did a price increase from 1st of April in 2022. And therefore, also we had a lot of iVario order selling in that, that also explains what Peter just showed on the slide before.So, in total, with the EUR 30 million sales that we are seeing this year for Germany, they are in line with our expectations. Now, the second development that we see is in the overseas market, double-digit growth rates once again came from overseas region. Most importantly, the growth for us continues to be in North America, where we are able to grow our sales by 13% after we already had a high growth rate of 41% the year before.And this once more underlines the importance of North America for our overall business development. And looking to the right side to the East, also Asia had a double-digit growth rate with plus 18%. Both of the biggest markets here that are China and Japan were performing very good.In case of China, the high sales was still due to the delivery of a special order from a large key account that we were talking about in the Q4 last year. And in case of Japan, we had the situation that our OEM partner was placing high orders.Let's move on to the development of earnings. EBIT growth over proportionally by 7% to EUR 71 million, our third best quarterly financial result ever. And what's important here on this slide, when we look at the long-term development since 2019, we achieved in this year with an EBIT margin of 24.8%, a margin level that is even higher than the pre-pandemic level in 2019. Here, the EBIT margin was only, so to speak, 24%.Now, looking at the P&L in more detail, the main drivers of the good earnings development was the favorable gross margin situation. We were able to increase the gross margin by around 218 basis points to 58.5%. This reflects 2 effects. On one hand, we were able to implement our price increases for our own products on the market following the reduction of the high order backlog.And at the same time, we benefited, for example, from declining prices for also charges and for chemical products in our COGS. Operating costs, on the other hand, rose at a higher rate than sales by 5%, 5%, however, is a good number to EUR 5 to EUR 95 million. We recorded the highest increase in the R&D development or in R&D expenses where we grew by plus 11% and thus continue to invest into the future of Rational.However, one has to keep in mind that around EUR 1 million of the R&D costs were capitalized in the last year in Q1. So, the percentage change of R&D costs or the increase is a little bit lower when taking this effect into account.Overall, we are quite happy with the development of our earnings situation. Now, you all know our solid balance sheet structure, and there was really no change in Q1 with an equity ratio of 79% and the liquidity ratio that our bank deposits and short-term investments combined of 42%. We remained at the same level than in the end of the year 2023.Total assets grew by 8% to now for the first time over EUR 1 billion, and that was basically because an increase of equity, so nothing really special here. Yes. And about our dividend policy and our dividend suggestion to the General Assembly next week, we already talked also about in the last call, our long-term dividend policy to our shareholders is approximately 70% of earnings per year.Last year, we paid out EUR 13.50 per share. That was a normal dividend of EUR 11 and a special dividend of EUR 2.50. And for 2023, we are now also proposing a dividend of EUR 13.50 but this is including the, let's say, special dividend of last year so we can maintain the high dividend and represent a payout ratio of 71%.Yes, that's about the dividend. And now, we look at our sales and earnings guidance for 2024. After the quite volatile last 3 financial years, we expect 2024 to be a completely normal year for us, we are optimistic and expect sales growth in the mid-to high single-digit percentage range without any planned price increases for our products.For our gross profit margin, we expect the trend of 2023 to continue and expect our input prices to ease further. And I think we saw that already, we realized in Q1. On the other hand, we are planning a slightly overproportionate increase in operating costs, also that we saw in the Q1 figures on the one hand, for the expansion of our sales activities and the strengthening of our R&D capacities.And on the other hand, we are continuing our strategic projects, first and foremost, the road to China project. Overall, we expect an increase in EBIT roughly proportional to the development of sales and thus we will maintain the EBIT margin at the good level of 2023.Yes. And with this outlook, we are at the end of our presentation. And now, we're starting the Q&A session. I hand over to Nicole.

[Nicole Engelhardt, executive]

Thank you, Jorg. I will start with the first couple of questions for you, Peter. You mentioned a great success at trade fairs into gastro and Internorga, what does that mean? What is the amount of orders?

[Peter Stadelmann, executive]

We have targets for leads and Cooking Life registration generated for each trade shows. And for both shows in Germany, they were overachieved, and some of them will lead into orders in the future.

[Nicole Engelhardt, executive]

How is the response on iHexagon so far? Any initial ideas on orders received? Any major pushbacks made by customers?

[Peter Stadelmann, executive]

Response to the iHexagon was great. Looking forward to presenting it at the NRA in Chicago later this month. We received first purchase announcements from customers in Germany, where 2 months ago, we introduced the iHexagon at Internoga.No major pushbacks by targeted customers.

[Nicole Engelhardt, executive]

Could you please speak about the U.S. business in the Northern Americas region? Was growth in line with your expectations? Did the U.S. exhibit faster growth compared to the other countries?

[Peter Stadelmann, executive]

Yes. We had an outstanding growth in the last quarters. The single biggest country for us now is U.S. with 18% of sales. And we see sometimes challenges in finding new salespeople, lack of skilled labor, like in many jobs. But our expectations for 2024 are very positive and unchanged.

[Nicole Engelhardt, executive]

You already alluded to Latin America being behind expectations in the Q4 call. Could you please elaborate on the dynamics and outlook for the region for the next few quarters?

[Peter Stadelmann, executive]

Yes. Latin America is known to be more volatile than other regions. If you ever travel to that region, you understand why first quarter was somewhat weaker than expected. April looks more promising. Slower 2024 start for us has no impact on our full year expectations.

[Nicole Engelhardt, executive]

Was the strong Asian growth, again, a function of China predominantly? Was the 18% year-on-year growth rate ahead of your expectation in Q1 '24? Are there any large orders, executions in the quarter we should know about?

[Peter Stadelmann, executive]

It was impacted by China and Japan. Yes, it was above our expectations, and it includes our big Japanese OEM partner, putting in a big order, also due to longer shipping times with regard to the Red Sea situation, and we had some large orders fall into one single quarter.

[Nicole Engelhardt, executive]

Which factors drove the strong growth in North America and Asia?

[Peter Stadelmann, executive]

It's still, I know that's boring for you to hear. It is the big open potential, which is in penetration rates of iCombi steamers, which are below 10% in those regions. And, for us, also includes quite promising economic developments in those 2 regions.

[Nicole Engelhardt, executive]

Would you please be so kind to speak about the mix in the iCombi segment? It appears that it must have been good considering the strong gross profit margin.

[Peter Stadelmann, executive]

Indeed, it is a slight volume decrease in the iCombi product group, but comparison was very strong.

[Nicole Engelhardt, executive]

iVario was back to growth, however, not yet double digit. Will this come in Q2? Was iVario in fine with your expectations in the first quarter?

[Peter Stadelmann, executive]

Yes, it was in line with our expectations. In general, we expect double as fast growth for the iVario compared to the group growth rate. So, we're looking forward to the development in this year.

[Nicole Engelhardt, executive]

Would you please be so kind to speak about volume growth versus prices in Q1 for the iCombi and iVario lines?

[Peter Stadelmann, executive]

The price increase had a small positive impact. This will diminish now in the next quarters. We had a slightly negative volume impact on the iCombi side and the positive volume impact for iVario and especially for our non-unit business.

[Nicole Engelhardt, executive]

Thank you, Peter. A couple of questions for you, Jorg. The sales in Germany in Q1 '24 are below Q1 '22. Do you have any concerns? And what are the reasons?

[Jorg Walter, executive]

No, we don't have any concerns. We also said in the call that the Q1 2022 was an exceptional good one. Q1, we had a growth of 69% against Q1 2021. And this had to do with the preorders and with the supply chain crisis in Germany, where we didn't have a supply chain restriction in 2022 anymore. And let's say, the German market was preferred delivered. They were able to, let's say, get the first share of the units in their market. That's why the comparison rate is just high.And, overall, we see the EUR 30 million sales on a good level that we have right now.

[Nicole Engelhardt, executive]

Do you expect Germany to return to growth in Q2 as the comparisons getting much easier in the June quarter?

[Jorg Walter, executive]

Yes. So, we expect also Germany to grow, but compared to other markets on a just lower level.

[Nicole Engelhardt, executive]

How do you see the further development of the input prices? Are commodity and logistics costs going back up again?

[Jorg Walter, executive]

No, we don't see that. We see it a little bit with the alloy surcharge. That's a little bit going up right now. But for us, it's still on a low level. So, we see it quite stable, both and also logistic costs on the situation that we have right now.

[Nicole Engelhardt, executive]

In which quarter will the operating expenses ramp up in 2024?

[Jorg Walter, executive]

We are expecting an incremental growth quarter-by-quarter in the coming quarters. So, no special ramp-up.

[Nicole Engelhardt, executive]

What are the reasons for R&D increasing by 11% in Q1 '24? Is this development going forward?

[Jorg Walter, executive]

Well, main reason, first of all, we are investing also in R&D capacity. So, our OpEx in that area will go up. But in this year-over-year comparison that has also to do with what I explained earlier with the capitalization of R&D expenses.Peter talked about out of dose and iHexagon, these were 2 projects that were still running in Q1 last year and part of those development costs were capitalized. And that's why on an year-on-year comparison, we have a higher growth rate right now for the OpEx in R&D.

[Nicole Engelhardt, executive]

Well, the R&D expenses grow more pronouncedly than revenues in 2024?

[Jorg Walter, executive]

Well, that's the same what I just explained. But to also keep in mind that we are expanding our capacity, so the absolute level will also go up.

[Nicole Engelhardt, executive]

Assuming flat gross margin over the course of the year, apart from FX, what will make the EBIT margin lower in the coming quarters? Is it the increasing inputs on direct sales and marketing? Or do you think the fiscal year guidance is a bit conservative?

[Jorg Walter, executive]

Well, first of all, we have our strategic investment projects. This is China. We talked about that, but also our initiatives in digitalization, sustainability, they require a certain cost investment.Also, as we are investing in our sales capacities in the market, this will also drive the in the coming quarters up. And I think that's also important. We all saw that Peter talked about earlier. We are having a little bit of more challenging environment compared to the last 2 or 3 years because we don't have any high order backlog so, for every quarter.Now, we need to get the new orders and to our hand in order to maintain the sales level. That's why we think that our full year guidance for 2024, we can confirm it on this level.

[Nicole Engelhardt, executive]

CapEx was not that high in Q1. How will higher spending unfold this year?

[Jorg Walter, executive]

Well, we are still working to finish our projects in Wittenheim. We will continue our expansion in China and importantly, we have our new service part building that we started in Landsberg. So, this will drive CapEx up. And our expectation is around EUR 35 million to EUR 40 million for the full year.

[Nicole Engelhardt, executive]

How is the development in China going?

[Jorg Walter, executive]

Everything is going in line with our expectation. So, we are expecting start of production in the second half or, let's say, Q4 2025.

[Nicole Engelhardt, executive]

A couple of questions for you again, Peter. How do you see the further development of the wages?

[Peter Stadelmann, executive]

We plan to have lower wage increases, compared to the last 2 years since inflation is coming down to a normal level again.

[Nicole Engelhardt, executive]

What is the outlook for the gas genome industry in your markets?

[Peter Stadelmann, executive]

I would say it's slightly different referring to different regions. But, all in all, it is positive since the fundamental trend to more people on this planet to a higher standard of living. And with that to higher spend on out-of-home food is intact.

[Nicole Engelhardt, executive]

What is your sales outlook 2024 for iCombi and iVario?

[Peter Stadelmann, executive]

In total, mid- to high single digit, iVario higher, iCombi, a little bit less.

[Nicole Engelhardt, executive]

And what is your outlook for the markets in North America, Latin America, Asia and Europe?

[Peter Stadelmann, executive]

As I said, it is optimistic, especially for the overseas markets. It might be a little bit differentiated with our view on Europe depending on the economic situation in different markets. But all over, we have a positive view.

[Nicole Engelhardt, executive]

A couple of questions now for Jorg on the balance sheet. Was the sharp increase in accounts receivable in Q1, just a reflection of a strong sales growth at the end of the quarter?

[Jorg Walter, executive]

Yes, it's just a timing by the quarter. So, when we look at the DSOs, they are as expected, currently on a level of around 50 days.

[Nicole Engelhardt, executive]

What percentage of the trade receivables are actually insured?

[Jorg Walter, executive]

This number is very, very stable over the last years. It's around 90%.

[Nicole Engelhardt, executive]

Could you provide any remarks on the lower operating cash flow in Q1 and the expected way forward?

[Jorg Walter, executive]

Yes. I think this quarterly comparison of the cash flow is quite difficult as they are, as you know, certain fluctuation in working capital, so receivables going up, the stock a little bit going up and down. So, I think that it doesn't make sense to analyze the quarters too deep.In general, we have a stable situation that we have a good result or net result with a quite low CapEx number and that will drive our cash flow in the normal area or normal numbers that we saw the last years.

[Nicole Engelhardt, executive]

To what extent is your confidence, especially for Germany and the rest of Europe, backed up by feedback from your dealer network and your key accounts?

[Jorg Walter, executive]

We get mixed feedback from market to market and from segment to segment. But keep in mind that global number of meals is increasing even if some segments are suffering. Others will benefit from that.The demand is there. Projects are planned. Just for instance, the European soccer championship in Germany or the Summer Olympics in France bring new orders for our industry.

[Nicole Engelhardt, executive]

Would you consider Q1 as a good proxy for the year?

[Jorg Walter, executive]

Normally from Q-to-Q, improving, we have improving figures. So, we need to see whether we are already back to the normal this year, but we think we are.

[Nicole Engelhardt, executive]

Okay. We've got 3 more questions and Jorg, the next 2 are for you. Can you comment on mix effects in the quarter? More specifically, can you provide an indication for service growth in Q1?

[Jorg Walter, executive]

Yes. We talked about the different product groups. We already talked about the iCombi, iVario. When we only look at the non-unit business, this grew by 12% in the first quarter.

[Nicole Engelhardt, executive]

What was the magnitude of ramp-up one-off cost relating to the iHexagon-China entry-level stem during Q1? We are estimating a total cost of less than EUR 1 million. A bigger part of that was in Q1, but also already, we had some of these costs in last year.

[Jorg Walter, executive]

Last question for you, Peter. You pointed to large orders received, both in China and in Japan. How does your project larger pipeline compare as of today versus 1 year ago?

[Peter Stadelmann, executive]

It is taking up again clearly since the key account business also was impacted by the pandemic, which is over now.

[Nicole Engelhardt, executive]

Thank you. I have no more questions here on the list. Back to you, Stefan.

[Stefan Arnold, executive]

So, thank you very much, Nicole, Peter and Jorg. I now, as always, want to come to a few announcement for the coming events. So, those of you who did not already take notice next week, there will be our AGM in Augsburg, and we would be happy to welcome maybe the one or the other of you there.On 13 May, we will have another IR follow-up talk as you already know it. So, if you have any question arising in the meantime, we will then have the opportunity to discuss them then. You can find the registration link on the homepage in our IR calendar where you already registered also for this call.And the last announcement is on the H1 figures. So, this will be published on 6th of August with the well-known setup. And with this, I want to close the call. I thank you for your participation and wish you a good time until our next meeting. Bye-bye. Take care.