Wacker Neuson SE

XETRA:WAC

Earnings Call Analysis

Wacker Neuson focuses on adaptability amid market challenges

Wacker Neuson's first quarter 2024 revenue was approximately EUR 593 million, down 11% year-on-year. To address lower sales, the company implemented targeted sales measures, production adjustments, and cost-saving strategies. These steps improved the EBIT margin to 6.2% from 5.1% in Q4 2023. Despite mixed regional performance, with Europe down 9% and a weaker North American market, the company remains committed to its Strategy 2030 and expects positive sales developments throughout the year. Guidance for 2024 remains confirmed, anticipating further inventory reductions and improved cash flow dynamics .

Navigating a Choppy Market

Despite an economic downturn that has lingered since the second half of 2023, Wacker Neuson Group is steadfast in its commitment to respond to market challenges effectively. In the first quarter of 2024, the company reported revenues of approximately EUR 593 million, marking an 11% decline year-over-year. The CEO, Karl Tragl, underscored that while the figures might seem discouraging, they are part of a proactive strategy that the team is employing to adapt to these turbulent conditions.

Strategic Actions to Counter Declining Sales

To mitigate the adverse effects of the current market, Wacker Neuson has launched several strategic initiatives. The first initiative involves enhanced sales measures aimed at increasing revenues through innovative financing options for both new and used machinery, enabling faster turnover of dealer inventories. The second action included a reduction in production output, a necessary step in response to the oversupply in dealer warehouses. The last measure focuses on identifying cost-saving opportunities to offset higher costs from underutilized production facilities. These strategies are expected to enhance profitability as the company maintains operational flexibility.

Mixed Performance Across Markets

Regionally, Wacker Neuson saw mixed results in sales performance. While markets in Austria, Switzerland, and Poland experienced growth, overall sales in Europe declined by about 9%. Meanwhile, North American markets faced challenges due to full dealer stocks, leading to subdued demand. The agricultural sector showed relative stability, while the compact equipment segment experienced positive momentum, particularly for products like dumpers and skid steers. In the broader context, although the business environment remains volatile, the company is positioning itself to be ready for any potential uptick in demand during 2024.

Financial Health and Working Capital Management

Wacker Neuson's net working capital ratio increased from 33.9% in Q4 2023 to 38.7% in Q1 2024. This change reflects lower revenue levels and a rise in absolute trade receivables, which increased by EUR 40 million. The company’s focus on cash consciousness among customers has led to longer days of sales outstanding, affecting overall trade receivables. To normalize this ratio, increased sales and clearing of dealer excess inventories are critical. Improvement in these areas is directly linked to the company's free cash flow performance.

Outlook for 2024

Looking forward, Wacker Neuson remains optimistic despite current challenges. The company confirms its revenue and profitability guidance for the year, anticipating that more aggressive sales actions will lead to increased revenues in the latter half of 2024. CEO Karl Tragl stated confidence in the expectation of reduced dealer stock leading to higher ordering rates. However, achieving higher margins depends on ongoing improvements in both top-line sales and operational efficiencies.

Strategy 2030 and Sustainability Commitment

As part of its long-term vision encapsulated in the 'Strategy 2030', Wacker Neuson continues to emphasize sustainability. The company aims to reduce CO2 emissions by 50% by 2025, relative to 2019 levels, having already achieved a reduction of about 40% as of 2023. Product innovations such as their new zero-emission telehandlers and advanced compact machinery reflect this commitment, highlighting Wacker Neuson's proactive approach to both environmental stewardship and market leadership in equipment segments.

Earnings Call Transcript 2024-Q1

[Peer Schlinkmann, executive]

Good morning, everybody, and welcome to the quarterly earnings call of the Wacker Neuson Group. My name is Peer Schlinkmann, Head of Investor Relations and Corporate Communications. Thank you for joining today on the occasion of the release of our first quarter 2024 results.

As usual, we will now present our latest results to you that were released this morning. First, we will show the operational and financial results of the first quarter 2024 and give additional insights on the recent developments. Following this, we are happy to answer your questions in a Q&A session. If you are not able to follow today's call via the webcast, the presentation slides are also available for download at wackerneusongroup.com/investor-relations. Please note that the entire call, including the Q&A session, will be recorded and a replay will be made available on our corporate website by the end of the day.

And now I would like to hand over to our executives, Karl Tragl and Christoph Burkhard, who will, as usual, lead you through this call.

[Christoph Burkhard, executive]

Thank you, Peer. This is Christoph Burkhard, CFO of the Wacker Neuson Group. Welcome, everybody, to our earnings call, and thank you for joining.

[Karl Tragl, executive]

Dear, all. A warm welcome from my side, too, and thanks again for joining today's conference call. I am Karl Tragl, CEO of the Wacker Neuson Group.

Just 6 weeks ago, we presented our figures of the successful year 2023. On this occasion, we were able to give you a first impression of our start into 2024. The economic situation has remained subdued since the second half of 2023. As expected, our results for the first quarter of 2024 were, therefore, also characterized by lower sales. However, we have started to adapt to the current situation in recent months. The entire Wacker Neuson Group is highly focused, responding to current market challenges in the best possible way.

In summary, there are three main actions that we have implemented in a targeted manner, and we will continue to do so. First of all, we are actively implementing additional sales measures to increase our revenues. This includes, for example, the offering of various forms of financing for new and used machines in order to turn dealer inventories faster while supporting specific end customer needs. Secondly, we have adjusted our production output downwards in response to the change in demand, and the fact that both internal and external dealer warehouses are overstocked. And thirdly, we have identified cost-saving measures across the group, in particular to offset current higher cost of underutilization in our production plants. These measures will increasingly support our profitability while maintaining operational flexibility. We expect further positive effects from this as the year progresses.

Despite the fact that we are currently facing a tough market environment, I would like to take this opportunity to thank all our teams at Wacker Neuson Group, who are, as always, committed to our customers and dedicated to deliver the best products and solutions. We are convinced that this will lead to accelerated sales in the course of the year. This gives me and my colleagues on the Executive Board every confidence that we will continue on our long-term growth path and achieve our strategy 2030.

Let us start with the key financials for the first quarter. Our revenue for the first quarter was around EUR 593 million, down approximately 11% year-on-year. Earnings before interest and taxes, EBIT, amounted to EUR 36.9 million, resulting in an EBIT margin of 6.2%. In a year-on-year comparison, we have to bear in mind that the first half of last year was characterized by high end user demand, accompanied by restocking from dealers after supply chain bottlenecks in the year before. In a quarter-over-quarter comparison to the end of 2023, where our EBIT margin stood at 5.1% in Q4, we see already improvements of our gross profit and EBIT margin, thanks to the implemented cost-saving measures.

Development of the revenue in our regions showed a mixed picture. In Europe, although some of our direct sales markets like Austria, Switzerland and Poland continue to grow, we saw a decrease in sales of about minus 9%. This development has to be seen in light of a strong prior year quarter that was driven by high demand from dealers, as already explained. This also best describes the situation of the market in North America and Canada. Obviously, these markets are still at a low level due to full dealer warehouses. Even though there are clear signs for a need of more end user machines, demand is weaker due to a slower economy and a delay in interest rate cuts.

In the agricultural sector, we see demand rather stable compared to the construction industry. Looking into the year-on-year sales development of our business areas, we see a mixed picture as well. Whereas all products in light equipment saw a decline, especially driven by the American markets, our products in the compact equipment segment showed some positive momentum in demand, especially for dumpers, skid steers and telehandlers. And rental, spare parts and services developed rather solid. While business environment remains volatile, we stay focused, implementing the right measures, both on the sales and on the cost side to be ready when market demand will pick up in the course of 2024.

I will now hand over to you, Christoph, to give some more insights on our financials.

[Christoph Burkhard, executive]

Thank you very much, Karl. As usual, let me give you some more details on the development of our net working capital in Q1 2024 and our expectations for the remainder of the year. The annualized net working capital ratio in Q1 2024 increased from 33.9% in Q4 2023 to 38.7%. Just as a reminder, annualized means taking the revenue of the specific quarter times 4 as the calculation basis for the net working capital ratio. And maybe just to add a like-for-like comparison with the full year number 2023. If you would take now the last 12 months and calculate the working capital ratio, we would look at a ratio of 35.6%. I think that puts everything a little bit more in perspective.

But nevertheless, now to the combination of the two effects that led to the increase. Firstly, the lower revenue level in Q1 2024 compared to Q4 2023, hence leading to a lower annualized revenue basis and thus increasing the percentage value. Secondly, net working capital increased also in absolute numbers by EUR 40 million compared to year-end due to higher trade receivables compared to end of 2023. Inventories instead remained basically unchanged at the same high level. And maybe here, just a remark concerning the receivables. That is a combination of seasonal effects plus -- well, let me put it like that, we have an overall higher cash consciousness, of course, looking at our customers. I'm not necessarily talking about an increase in overdue receivables, but simply, there is more focus on cash, therefore, leading to, on average, higher number of days of sales outstanding. And that, of course, increases the absolute number of trade receivables.

Well, so what is the conclusion from that also going forward? Predominantly two things have to happen now in order to kickstart a sustainable downward trend of the net working capital ratio. Firstly, our sales numbers need to pick up again. Karl has already mentioned our activities around sales promotion measures. Secondly, our dealer customers need to clear their excess inventories in order to place new orders. Both will, over time, reduce our finished goods inventories, which is the crucial working capital category currently burdening our overall net working capital.

And of course, this stagnating net working capital position has direct repercussions on our free cash flow performance. Once the described dynamics concerning the reduction of finished goods is starting, our free cash flow performance will immediately improve. And this is what we are expecting to happen over the next months to come. And last but not least, our net debt position has consequently gone up slightly since year-end, while our equity ratio remained unchanged at a sound 57%.

And with this, back to you, Karl.

[Karl Tragl, executive]

Thank you, Christoph. Before concluding our presentation with the current outlook, I would like to give you a brief update on the implementation of our Strategy 2030. While we are facing a challenging market environment currently, we remain confident in our ability to deliver on our Strategy 2030. This slide shows you the big picture, so to say. The next 2 slides go into more details. Let me start with our 10 strategic levers. We will provide you with frequent milestone updates and further information on those levers in our coming earnings calls as well.

Today, we want to give you an overview of the progress we have made in the last year 2023 and show you what we have planned for the coming years. As you can see, we were able to successfully achieve progress in all 10 areas and set green check marks in 2023. Let me highlight three milestones, which we have completed in the last year. First of all, we are happy that we continuously bring new zero emission products to the market. And I'm especially proud of the introduction of our first zero emission telehandler in 2023.

Another one in the Americas market, we successfully expanded the lineup of utility track loaders by the launch of 2 new models. In total, we are now manufacturing 3 utility track loaders at our production plant in Menomonee Falls, Wisconsin, which are currently sold in United States and Canada through our dealer network. The European market introduction is about to come. And last but not least, we have been successful in reducing our carbon footprint. Some time ago already, we have set the target to cut the CO2 emissions Scope 1 and 2 of the Wacker Neuson Group by 50% until 2025 compared to the basis year 2019. And as you can see, we have already achieved a reduction of about 40% in 2023. This shows our strong commitment to sustainability, where we will set additional climate targets in the near future.

On this slide, we want to highlight some business achievements in the first quarter of 2024, this year. First of all, we successfully launched a new generation of combustion engine and battery-powered rammers at the beginning of this year. DireX, our internal brand-name, our new battery-powered electric DireX drive enables efficient compaction with a long battery run time. All our zero emission rammers and plates are operated with an exchangeable Battery One, which also fits on selected competitors' products. These new compaction products will strengthen our market leadership in light equipment.

In our business segment, compact equipment, we extended the product lineup of Dual View Dumpers. Main specifics are the extension of our payloads, now offering up to 12,500 kilogram, while keeping the compact design and Dual View operating concept. This Dual View operating concept allow us to rotate the panel by 180 degrees in order to enable unrestricted visibility, particularly in confined working spaces. In the field of Aftermarket & Services, we entered into 2 new cooperation, the Open-S Alliance and Clean System. As you might know, our key motivation is to focus on customers and their needs. That's why our attachments division has stepped up its collaboration with those 2 technology leaders in the field of excavator attachments. We will soon be offering products that comply with the Open-S and Clean System standards.

Ladies and gentlemen, we have reached the end of our presentation. And as usual, we will conclude the call with an outlook for the Wacker Neuson Group and its markets. The supply chain situation has continued to ease over the last months, although transportation costs have increased since year-end. This was mainly driven by the uncertainty in the Red Sea as the shipping attacks of the Houthis have caused delays and rerouting.

The CEMA business climate index for the agricultural machinery industry in Europe continues to be rather negative. In numbers, the majority of the survey participants still expect their revenues to decline in the single-digit range overall in 2024. The CECE Business Climate Index for the construction industry, to be noted, moved sideways in April. Expectations in the European market are showing a stabilization and more optimistic outlook, but still on a low level. Expectations for North America and low regulated markets like India, on the other hand, are already positive on average. We expect increasing revenue in the course of the year once our dealers have clear excessive stock. In addition to that, we expect our sales actions to gain traction in the months to come. Therefore, we confirm our revenue and profitability guidance for the full year 2024. At the same time, we will continue to execute our Strategy 2030 in order to drive Wacker Neuson to the next growth phase.

Thanks for listening. We are now ready to start the Q&A session, and we're very much looking forward to answering your questions.

[Peer Schlinkmann, executive]

Thank you, Karl and Christoph, for presenting the first 2024 results and for commenting on the latest developments and the update on our 10 strategic levers of our Strategy 2030. Ladies and gentlemen, we are now ready to move on to the question-and-answer session. I hereby ask the moderator to explain the Q&A procedure. We are looking forward to your questions.

[Operator]

The first question comes from Stefan Augustin from Warburg Research.

[Stefan Augustin, analyst]

I have actually two at the beginning and then one a bit broader probably or this is rather a discussion. The first one is, can you comment a little bit on the current pricing situation and how that looks like? And the second one with respect to the order intake. Is it fair to assume or if you say the order intake is on a lower level? Is -- when we look from the orders into the expectations for Q2, we still see, let's say, the book-to-bill below 1, and we should still be cautious for the top line for the second quarter. This is then rather going into the third and fourth quarter when your sales improvement measures come up. Is that the way we should look into it?

[Karl Tragl, executive]

Stefan, Karl speaking here. On the pricing side, as I tried to explain, it is currently less an issue of list price or, let's say, the machine price. It's rather supporting dealers and end customers and users with financing support, because that is where we can add value to the market, and that's where we are at the moment, supporting that. And this is basically a positive signal that general market prices are still stable and up.

On the order intake, we have seen now for some time a lower order intake. However, with also sales now getting lower, we are approaching, obviously, from the bottom towards the 1 book-to-bill, and we have still some order book, which for perhaps 1 or 2 months still can support us. So overall, that's the reason why we expect an increase of sales in the course of the year, as you have said, with the new products, which I have explained with the financing support, the sales actions we are taking. And overall, that's why we are believing in a upticking step by step in the course of the year.

[Stefan Augustin, analyst]

Okay. And then maybe a little bit to understand the current setup a little bit better. So from the statement that we do, let's say, or implement additional sales measures and that we have, let's say, an inventory that we want to reduce also with the sales measures and your statement that you have reduced production, I just wanted to know, do we -- or, let's say, how should we view the setup currently? Do we need a bit more top line and the sales measures so that, let's say, the whole organization and the production setup is -- has an optimized capacity utilization? Or are we -- or have we reduced production and capacity utilization to already where the current end market demand level is, and we will have additional upside if the sales measure works? So just to better understand where is Wacker Neuson positioned right now compared to what we have right now in the market?

[Karl Tragl, executive]

So I will describe it again, coming back to the 3 directions, which I have explained: the top line sales actions, the production reduction and the cost adjustments to compensate underutilization. And it's a simultaneous set of actions, which we have started already end of last year. So we -- in the first place, every additional order helps. That's the reason why we start with our sales actions. Also in our internal communication, every order helps and every order helps that our dealers can clear their stock or our own direct sales network and clear their stock. So this is why we start always with let's start with the sales actions. But we know that this will take some time to work. And therefore, we have continuously since quarter 3, quarter 4, we have reduced our production volume. And as I said, we have adjusted. However, we could not compensate completely, but the cost actions will also improve.

So basically, the better we can drive up revenue, the faster we can clear our own stock as well. And that's basically the relationship which we are focusing now in the coming months because, as I said, production-wise and cost-wise, we have adjusted.

[Stefan Augustin, analyst]

Maybe a bit of follow-up here. So if I look at the current sales level, we are -- let's say, if I multiply that by 4 on the lower end of the guidance range, while the margin is yet a bit to follow up. So if everything would stay where [indiscernible] is right now, the cost measures simply lift you also to the lower end of the guidance range, so the 8%?

[Karl Tragl, executive]

Okay. So let me start, again, Stefan, with the answer. As you have said, the current status which we have would bring us to the lower end of our guidance range. But due to the fact that as soon as there is more clearance on the dealer stock, sales will pick up. And sales picking up will drive us further in reducing our own inventories and will further drive up our profitability. That's the reason why we are confident that we will stay in the range. The speed and the timing of the year, that's what we have to see. But on the direction, we are absolutely clear.

[Operator]

[Operator Instructions] The next question comes from Alexander Galitsa from HAIB.

[Aliaksandr Halitsa, analyst]

Yes. Just was wondering whether you could elaborate on these additional sales measures, specifically whether this involves using your own balance sheet or you have any other programs in sight?

[Christoph Burkhard, executive]

Alexander, this is Christoph. No clear answer, no. We are not using our own balance sheet here. We do that in the usual format and with the usual collaboration with our banking partners.

[Operator]

At the moment, it seems like we have no further questions. So I would like to hand over back to you.

[Peer Schlinkmann, executive]

Thank you, operator. Ladies and gentlemen, as we can see, there are no further questions left from you. That brings us to the end of our conference call. As usual, if you have any further questions, please do not hesitate to contact me or the entire Investor Relations team by phone or email. If you would like to meet us in person, please let us know or check our website and financial calendar for all relevant roadshow dates in the coming months. We look forward to meeting you.

Thank you again for joining our call, and we wish you all a wonderful spring. Have a great day.