Wacker Neuson SE

XETRA:WAC

Earnings Call Transcript 2023-Q1

[Ingo Middelmenne, executive]

Hello, everybody, and welcome from my side. This is Ingo Middelmenne from Investor Relations. Thanks for joining our call on behalf of the release of our latest business results again. Today, we will be presenting to you our Q1 2023 figures as released just this morning.

In the next 15 to 20 minutes, we will present the most important events of the first 3 months of 2023, as usual from an operational and financial perspective.

Following this, we will jump right into a Q&A session. If you are not following today's call via the webcast, the presentation slides are also available for you for download at wackerneusongroup.com/investor-relations.

Please note that the entire call, including the Q&A session will be recorded and made available publicly on our corporate website in the course of the day. That's it from my side.

I'm now handing you over to our executives, Dr. Karl Tragl and Christoph Burkhard, who will lead you through this call.

[Christoph Burkhard, executive]

Thank you for the introduction Ingo. This is Christoph Burkhard, CFO of Wacker Neuson. Welcome to our management call today, and thank you for taking the time.

[Karl Tragl, executive]

Ladies and gentlemen, welcome and thanks for joining from my side as well. I'm Karl Tragl, CEO of Wacker Neuson Group. I think you all agree that the economic environment remains both challenging and exciting for all of us. Economic and political changes occur almost on a daily basis, demanding high level of attention and the ability to adapt quickly. We are, therefore, although more proud that Wacker Neuson has once again developed so dynamically in the first quarter of the new fiscal year 2023. And that overall, we are coping well with this challenging environment.

So at the start of our call, I would like to extend my sincere thanks to our highly motivated and passionate team of employees all around the globe who stand behind this great development as well as to our customers, suppliers and business partners for their trust into our products and into our company.

As already mentioned, Wacker Neuson Group had a successful start into the year 2023. Compared to the first quarter of the previous year, our group revenue increased by 28% to EUR 667 million. This growth is based on robust order intake, resulting in an order book that remains close to last year's record levels.

All sales regions continue to contribute to this growth, with double-digit growth rates in Europe and Americas. This shows that due to our product mix, Wacker Neuson is less dependent on the economic cycling of the housing construction sector. This is primarily due to the fact that our machines to a large extent, are used on nonhousing construction sites, for instance, in infrastructure modernization, landscaping and agriculture.

Our EBIT margin in the first quarter was at 13.2% and thus significantly higher than 1 year ago. First of all, this is due to the fact that last year's price adjustments are taking now full effect. Additionally, as you know, a positive onetime effect impacted our earnings. Here, a sale of fixed assets was completed in January, which led to an extraordinary contribution to earnings of around EUR 15 million.

One issue that continues to demand our full attention in day-to-day business the governance of supply chain. Although we perceive a certain relief of the situation in the first quarter, we are still a long way to go to get to a normalization of the situation. On the other side, we also perceive an increasing price sensitivity among our customers.

Our net working capital ratio of 30% in the first quarter was at the upper end of the strategic target range. We continue to expect certain fluctuations in this respect, and our inventory levels will continue to be a decisive factor for this ratio in the future course of the year. Nevertheless, our free cash flow in the first quarter improved significantly compared to the previous year and was at minus EUR 17 million.

Let us be clear, we will keep a strong focus on our net working capital development, but we generally had to maintain higher inventories of production relevance and parts for continuing growth in the quarters to come. The growth of our group continues to be driven by all reporting regions. Accelerated growth in Europe and America compared to the previous quarters is a particularly striking illustration of our strong momentum and our continued good order intake.

In our core markets in Europe, we grew by 22% year-on-year, achieving a revenue of EUR 504 million. This growth was driven by consistently good demand in all submarkets with our home market Germany showing particularly positive growth.

On the product side, demand for excavators, wheel loaders and telehandlers, in particular, increased noticeably. This positive development is also reflected in the continued high demand for compact equipment in the agriculture sector under the brands, Kramer and Weidemann.

The Americas region again performed well in the first quarter. Revenues increased by 57% to EUR 143 million. The U.S. market, in particular, saw a surge in demand compared to the previous year. Demand in Canada and South America also developed positively. We continue to succeed in attracting new authorized dealers in North America, thus creating a broad basis for future sustainable growth.

In Asia Pacific, revenue increased by 7% to over EUR 20 million. Here, [Technical Difficulty] markets continue to show double-digit growth, above all the Australian market. We continue to score in this market with products that are specifically geared to this region. And we are keeping independent rental companies in focus.

The Chinese market, however, is proving to be really difficult and actually declined in the first quarter. Nevertheless, our local presence there remains advantageous for us because our Chinese affiliates is serving as an export hub for the entire region.

Those of you who know me better may know that my heart truly beats for customers. Therefore, at this point, I would like what I have to share with you a few impressions of CONEXPO 2023, the largest construction trade show in North America. This year, well over 2,000 exhibitors once again made their way to this trade fair. The steady rise in visitor numbers underscores the importance of this trade show, which also has a special significance for us Wacker Neuson because we have made again important new contexts, and we could strengthen our existing ties.

BatteryOne, the battery alliance, serving across manufacturers zero emission products was, of course, also represented with stands from Wacker Neuson, Bomag, and Dynapac. And that is why we are very pleased that in addition, MultiQuip, an important player in the U.S. construction market presented itself for the first time at a trade fair as a new manufacturer also supporting BatteryOne.

We are very confident that BatteryOne will continue to grow in the future and that more manufacturers will choose to join this common part. This will be an important lever to speed up the use of zero emission equipment at end customer sites.

I now will pass over to Christoph, who will give you his view on the figures of this first quarter.

[Christoph Burkhard, executive]

Thank you, Karl. Now let's come to the topic of net working capital. In the context of the overall environment, we are satisfied with the current level of 30%. Nevertheless, we acknowledge that our strong revenues in Q1 gave us some tailwinds here. Inventory turn rates still show room for improvement. However, at the same time, we are happy to build up some inventory now for improving our availability towards our customers.

You might remember that a year ago, our product availability due to the interrupted supply chain was much worse. The amount of total unfinished machines as per today is slightly below 1,700, showing a stable picture since year-end. So our main task for the months to come will now be to further stabilize our inventory management, hence to also further reduce the amount of unfinished machines and eventually to avoid any overshooting in H2.

This leads us directly to our free cash flow of minus EUR 17 million in Q1. This is quite an improvement compared to the EUR 68 million -- minus EUR 68 million in Q1 a year ago. However, the entire organization is working on further improving our free cash flow, the main lever obviously being the mentioned working capital management.

Last but not least, our actual net debt position amounting EUR 258 million and the corresponding leverage of 0.6 are in the usual very solid territory and basically unchanged compared to year-end.

Now if you look at the macro picture, we do see, on the one hand, a slight easing of the input cost inflation. This is displayed on the chart on the presentation for container rates, but also happening in other areas. Equally, compared to a year ago, the overall supply chain situation has improved. But as you can see on the chart, the level of late deliveries has been stagnant over the previous months, still not being ideal.

I've just mentioned the development of our unfinished machines, and this development since year-end, more or less exactly reflects the general status of late deliveries since January. As already mentioned previously, we also sold a logistics location in the Greater Munich area that was no longer required for our business operations. And this resulted in a one-off EBIT effect of about EUR 15 million, contributing a bit more than 2 percentage points to our EBIT margin in Q1.

And last but not least, the expansion of our production in Serbia is developing according to plan. The ramp-up of the production is running with a high pace. We are very happy how this project has developed so far.

[Karl Tragl, executive]

Before Christoph returning to the outlook, I would like to talk a bit about something that fills us over at Wacker Neuson with particular price. These days, we are celebrating the 175th anniversary of our company, was started as a small blacksmith shop in 1848 has now evolved into a successful global group.

[Technical Difficulty] have always been known as highly innovative. We are uniquely successful in bringing product solutions to market that our customers appreciate and that they're highly regarded for their quality and reliability. After our production facilities were largely destroyed during World War II, the company decided to rapidly internationalize just a few years after the war, and established in the U.S. a subsidiary as early as 1957.

This lays the foundation for a globalization strategy that has been very successful up to this day. And the experience we have gained over the past decades will ensure our success in the future. With our innovations, we have revolutionized the industry several times, reinventing ourselves time and again and continuously developing our company.

Therefore, we would like to take this opportunity to thank you all once again to thank you, our employees, our dear customers, our business partners and you, our investors. Your continued belief in Wacker Neuson strengthens our company immensely. We look forward to having you behind us as reliable partners in the future.

[Christoph Burkhard, executive]

Now let me conclude with the outlook for the year. Overall, we are receiving neutral to positive signals from the sector indices relevant for us. At the same time, the supply chain situation is still showing a mixed picture. On the one hand, we have been noticing slightly falling input costs for some weeks now. On the other hand, parts availability and logistics are still not back to steady state.

Our order backlog remains at historically high levels and customer demand is still intact. Nevertheless, we continue to see an increased risk of economic slowdown in the second half of the year, combined with increasing price sensitivity on the customer side. So even though we have started the new year with very good momentum. We remain cautious and the mentioned risks for H2 have been considered in our guidance.

We, therefore, confirm our guidance for the full year. We continue to expect revenue of between EUR 2.3 billion and EUR 2.5 billion and an EBIT margin between 9.5% and 10.5%. And this includes, as you know, the special effect from the aforementioned asset sales. We also continue to expect CapEx in the amount of around EUR 120 million and the net working capital ratio of around 30%.

That's it from my side, and now back to you, Karl.

[Karl Tragl, executive]

Thank you, Christoph. This is our first quarter results presentation of the new fiscal year. Let's now move on to the questions and answers. We are looking forward to your questions and the lively exchange with all of you.

[Ingo Middelmenne, executive]

Thank you, Karl and Christoph, for the update on Q1. Operator, I'm now handing this back to you to explain the Q&A procedure.

[Operator]

First question is from the line of Tore Fangmann with Berenberg.

[Tore Fangmann, analyst]

First of all, thank you for your presentation. Could you please quantify the expected impacts of the customer sensitivity to pricing? And secondly, could you please also comment on like how the BatteryOne initiative is developing right now?

[Karl Tragl, executive]

Yes. So thanks for the question, Karl answering here. The price sensitivity is just an early indicator. So we don't see really effects at the moment on the big scale. Otherwise, you wouldn't have the result which we had. But we just wanted to be honest that this is an indicator which is showing that, yes, it won't go the way it goes at the moment. So we have to be cautious of the second half development. But as I said, no effects currently. We just see it in our operational sales work on the customer front.

As far as BatteryOne is concerned, this is the idea of major manufacturers in the construction equipment market, mainly Mikasa, Bomag and Wacker Neuson and a few other ones who are joined in a second step, that redefine an open standard where we have swappable batteries, which can be interchanged in between manufacturers' equipment, which makes it much easier for end users and customers to use this battery and to avoid a high complexity of multi-manufacturers battery and charging equipment.

And as I said, it's developing very well in terms of interest of customers and manufacturers. And we are currently working very hard to get into a clear structure with a leading structure with rules and with everything, but this is still under construction, I would say that due to the fact that those companies I mentioned are publicly supporting it is a very strong signal that is going to be successful. But as always, in those issues, there's a lot of work in the background necessary to make the administration of such an alliance working.

[Ingo Middelmenne, executive]

Are there any further questions currently?

[Operator]

Yes. The next question is from the line of Stefan Augustin with Warburg Research.

[Stefan Augustin, analyst]

With respect to your order intake, could you elaborate a little bit from where your sales force would expect rather the next point of weakness to come from? And what is actually still particularly strong going?

And the second one is a little bit more technicality. I understand that correctly with the consolidation at your EBIT line. So your sales in the different regions are already consolidated. So this is the net sales we see while on EBIT, we still have the intercompany shipments, which then are eliminated at the consolidation line. So basically, we have a higher sales level eventually that has been shipped internally to the own distributors than what we have actually seen in the headline sales.

[Christoph Burkhard, executive]

Stefan, let me start with your second question. That's exactly right. This is, as you mentioned, I mean, we have a higher volume if you basically include the intercompany sales, which has to be consolidated at quarter end, but that's exactly right.

[Karl Tragl, executive]

Okay. And let me take the question about the regional distribution of order intake of market situation. That's how I interpret your question. So let me start with the negative ones, as I mentioned, China is declining, but everybody knows that as soon as China opens up an investment program, this might change again. But China is difficult anyhow. North America is still very, very positive. There's a strong growth in the North America also in the order intake.

And in Europe, there are some areas where we see a little bit of softening. But honestly, we cannot really predict whether this is just an ordering behavior of customers who still have very, very long lead times or whether this is really a weakness on the end customer side. Hearing just some negative news from interest rates and housing activity and all that stuff. We are just cautiously observing that. But as I said, it could easily be ordering behavior of customers and might change in 3 or 4 months' time. So summarizing China is very difficult. North America, very positive and Europe, mainly positive with some softening areas.

[Ingo Middelmenne, executive]

So are there any further questions?

[Operator]

[Operator Instructions] We wait some seconds for any further questions.

[Ingo Middelmenne, executive]

Well, it looks like you're all fine with the information we gave you so far. Of course, if you have any further questions after the call, please do not hesitate to contact us. So we've reached the end of today's call. Thanks again for joining, and have a great day.

[Karl Tragl, executive]

Thanks very much.

[Christoph Burkhard, executive]

Thank you. Bye-bye.