WashTec AG

XETRA:WSU

Earnings Call Transcript 2019-Q1

[Operator]

Dear ladies and gentlemen, welcome to the WashTec Investors and Analyst Conference Call. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Mr. Jaeger, who will lead you through this conference. Please go ahead, sir.

[Axel Jaeger, CFO & Member of the Board of Management]

Hello, everyone. My name is Axel Jaeger. I'm the CFO at WashTec. With me are my colleagues, Karoline Kalb, Stephan Weber and Sergej Wolodin. I welcome you to our quarter 1 conference call subsequent to our Annual Shareholders Meeting that took place this morning in Augsburg. I will guide you through our presentation.We will start with a brief view on our business model that shows why WashTec is well positioned in the market. We then move on to the Q1 key figures, development and compare revenues, EBIT and free cash flow to prior year's first quarter. Next slides will be the development of revenues and EBIT by regional segments and by product segments. This will be followed by a look on our Q1 P&L statement and balance sheet as of March 31, '19. We will review the WashTec share performance and have a look at our current guidance 2019. So please move on to the first slide. All around clean cars is the main topic and slogan of our annual report 2018 and for the fiscal year 2019. We know how to clean cars. That is what we do best and where our know-how and experience is. We offer a broad portfolio of solutions through direct sales and key account customers accompanied by a sustainable product offering, and sustainable is nowadays important.Water reclaim systems, green chemicals like our Nordic Swan labeled chemicals and to optimize processes in the wash bay or tunnel when it comes to dosing, pressure and temperature are very strong sustainability arguments when we approach our customers. We have a strong and fast responding service force in the field and we do have a truly global approach to carwash since we see customer needs, technological developments and customer habits regarding carwash in all major regions, that means in Europe, North America and Asia Pacific.Next slide. Here, you see our Q1 2019 results, revenues, EBIT and free cash flow. In general, the start into fiscal year 2019 followed somehow the seasonal pattern we saw in the past, with the exception of 2017 due to a large bulk order from a key account, but that is already well known. Revenues are at prior year's level. Direct sales had a strong start in fiscal year 2019. However, expected key account revenues were postponed and are expected to come with a certain delay in the course of fiscal year 2019.Since we invested heavily in headcount in areas with direct customer contact, the number of employees in service and sales increased over the months in fiscal year '18. Therefore, our personnel costs are based on the increase of 55 headcounts compared to Q1 2018. That leads at current revenue levels to and is the main reason for our lower EBIT in Q1 2019. After all, order backlog is above prior year level, and we are confident to see more key account revenues as we proceed through the next quarters of this fiscal year.Next slide, please. Here we see the results by regional segments, revenues and EBIT. Europe is still and unchanged the most important region for WashTec. Revenues in Europe increased by 2.3%, and there's still room to grow in this region. Most of the service and sales force headcount was added in Europe. Combined with the delay in key account revenues mainly in Europe and North America, this was the main reason for the lower EBIT compared to Q1 '18.By the end of Q1 '19, North America is catching up. Revenue-wise, however, due to a lower, i.e., delayed key account business, Q1 revenues are lower than in fiscal year '18. Moreover, some regions in North America faced a harsh, extremely cold winter where no installations could be done due to very low temperatures and frost. Besides of this, North America is, as already communicated, intensely working on internal process improvements.In APAC, the revenue development is driven by the positive business development in China. Revenues are higher compared to prior year. Australia is still in a turnaround situation and constantly working on improvements of performance and processes.Next slide, please. Q1 results by product segments. Product-wise, revenues in machinery and service and in chemistry increased compared to Q1 '18. Direct sales business had a strong start in Q1 '19. Key account business is delayed and expected to gain momentum in the next quarters. Revenues in Operations business and others were below Q1 '18 due to some equipment sales to customers which are now operating the acquired equipment on their own, which is part of the business model of operation business and others.Next slide, please. If you see our profit and loss statement, we had a moderate start with a positive outlook for fiscal year '19. Revenues and gross margin remained at a stable level compared to Q1 '18. Overall, direct sales had a strong start in 2019. However, expected key account revenues were postponed and are expected to come with a certain delay in the course of fiscal year '19.The personnel expenses are driven by the heavy investment in headcount in areas with direct customer contact. As mentioned before, we increased the number of employees in the service and sales areas, so to say, in areas that have direct customer contact, and this increase was quarter-on-quarter by 55 headcounts. That leads mainly at current revenue levels to the lower EBIT in Q1 '19.Depreciation increased mainly due to reclassification of expenses from other operating expenses to the depreciation line based on first-time adoption of IFRS 16 as of January 1, '19.Next slide, please. When it comes to the balance sheet structure, balance sheet total increased as of March 31, '18, due to the preparation for a constantly increasing business volume in the course of the coming quarters of '19. Additionally, the first-time adoption of IFRS 16 as of January 1, '19, increased the balance sheet total. This, the first-time adoption of IFRS 16, was the material reason for change of the equity ratio from 40% to 37%.Goodwill, as most of you know, [ bond ] in Europe is still unchanged at EUR 42 million. Net operating working capital development was due to the preparation for increasing business volume in the coming quarters.Next slide, please. WashTec share performance. Since mid of March, the WashTec share performance is gaining momentum again. We do have relatively stable value-oriented shareholder base and WashTec is a company that is value orientated and managed. Our current dividend payment at EUR 2.45 per share has an attractive dividend yield of considerably more than 3%. In total, our dividend payment for fiscal year '18 summed up to EUR 32.8 million. That means that is approximately the same level like our free cash flow by the end of fiscal year '18.Next slide, please. We see our guidance 2019 and the guidance end of March is confirmed for the fiscal year. At group level, we do see a significant growth of revenues and EBIT. And just as a matter of form and I trust you know it, significant means more than 5% growth, slight means between 3% and 5% growth and stable means 0% to 3%.Next slide, please. We have a brief look on our financial calendar. As mentioned, today was our General Annual Meeting in Augsburg. Yes, any question?

[Operator]

[Operator Instructions] The first question is from Aliaksandr Halitsa, Hauck & Aufhäuser.

[Aliaksandr Halitsa, Equity Analyst]

I'd like to ask on the outlook for European region. As far as I remember, with the full year results, you were quite optimistic with regards to the growth you were seeing in Europe. If I'm not mistaken, you were making remarks that the range of 3% to 5% looks even conservative at that point of time.So I was just wondering, did this softer Q1 performance with sales in Europe increasing by only 2% year-over-year knock down your confidence in any way? Or is it more or less business as usual if one kind of adjusts for the delayed business with key accounts? And yes, how confident that you would be able to generate sufficient growth in the remainder of the year to get to the upper end of the range?

[Axel Jaeger, CFO & Member of the Board of Management]

Yes. For Europe, our guidance is slight increase in revenue which means, as you mentioned correctly, between 3% and 5%. Given that we, first of all, invested in our service and sales force and added more headcount; and secondly, given that we see or we expect that key account revenues will come in the course of the next quarters, we are still confident that for Europe, we can make our guidance as communicated with the annual report '18 and confirmed by now. Main reason is key accounts are coming in the next month. The orders are delayed. And we have more people in the field with direct customer contact to push, especially in Europe, and we still see growth in Europe.

[Aliaksandr Halitsa, Equity Analyst]

And then I'd have a follow-up on this issue with, yes, postponed business with key accounts. Does it only relate to Europe? Or does it also have to do with North America?

[Axel Jaeger, CFO & Member of the Board of Management]

Can you rephrase the question for me?

[Aliaksandr Halitsa, Equity Analyst]

Yes. The key accounts business you refer as -- yes, that you have seen delays in the key accounts business, if that's only Europe region or does it also impact North American region?

[Stephan Weber, Chief Sales Officer & Member of Management Board]

This is Stephan Weber speaking, the CSO. It's in general the case. I would say it weighs a little bit heavier in the U.S. due to the sheer size of the business and the sheer weight also of the key account business, but it's overall on trend that we see for this first quarter. But we don't call it a quick trend for the year because we have no signs as of now that the so-called discussed and agreed volumes were not coming.

[Aliaksandr Halitsa, Equity Analyst]

Okay. And that's the -- just the last one. If you could somehow quantify roughly what is the shortfall in -- then in Q1? And what is the general split on the group level between the direct sales and also key accounts business?

[Axel Jaeger, CFO & Member of the Board of Management]

Yes. The general split overall is roughly 60%, roughly 55% to 60% direct sales and 45% to 40% key account, overall on group level.

[Aliaksandr Halitsa, Equity Analyst]

So direct 55% you said roughly, if I understood?

[Stephan Weber, Chief Sales Officer & Member of Management Board]

Yes.

[Axel Jaeger, CFO & Member of the Board of Management]

Yes, yes, yes. I meant -- what I said was from total revenue overall, it's roughly 55% to 6% -- 60%, sorry, direct sales and 45% to 40% key account sales overall.

[Operator]

At the moment, there are no further questions. [Operator Instructions] The next question is from [ Michelle Jan ], HSBC.

[Richard Schramm, Analyst]

Richard Schramm. I have 2 questions concerning the cost increases you mentioned. Is this buildup of headcount now finished? Or will there be some additional adding to the workforce in the quarters so that this effect of a higher cost base will fade out only with a view more towards H2? Or will there be already an effect in Q2 to be visible here? That would be my first question.

[Axel Jaeger, CFO & Member of the Board of Management]

Yes. Maybe I can answer directly. The major, major part of the headcount increase is done by now. This was an investment together with the reorganization of the service, especially in Germany. So there will be not an headcount increase in this field as we saw it in 2018. That's now done, the 55.

[Richard Schramm, Analyst]

Yes. And then, you usually give no figures on your order backlog, you only give some qualitative statements. You only mentioned that it's a higher backlog than the previous year. But due to the delays, I would have expected that a significant increase you would mention here. So how are we to judge on visibility for the next quarter? For example, what do you see? What makes you so confident that these delays can easily made up here in the near term?

[Axel Jaeger, CFO & Member of the Board of Management]

Yes. Nobody says easily, but we still believe we can make it up, yes. The fact is that, first of all, we are still at a very early stage in the year. Secondly, we have a sales funnel that we are live looking at. In other words, we look at what we are pushing in front of us in terms of volume. That gives us additional confidence, plus we have sort of, like we always said in the past, also discussions with our larger accounts of -- as of what needs to be exchanged in the market and what volumes will come from what part of the market.So all these indicators are still on positive terms. So in other words, we are still positive that -- let's put it the other way, we have no signals at this point in time that -- or hints that there might be anything in contradiction to what we have budgeted. And that's why we're talking about a delay for the time being because we cannot see that this will not happen.So basically, neither the order funnel -- or the offer funnel nor the discussions with other larger accounts leads to an assumption that what we have budgeted for the year will not happen. And plus, we need to know that with the short lead time in which we can produce our equipment, we are also not in dire need at this point in time in the year. We still have sufficient time to realize the necessary revenue.

[Richard Schramm, Analyst]

Okay. And maybe just one follow-up here on the North American situation where you claim that especially this harsh weather conditions caused lower sales. When catching up here, is there risk that there will be kind of capacity constraint with additional cost? Or is this a process which can be steered relatively smoothly so that you can, yes, earn your margin on the delayed orders here as expected?

[Axel Jaeger, CFO & Member of the Board of Management]

Yes. I mean, we can't see a constraint as of now. I mean if -- I would say, if -- after Q2, we are confident that our order backlog and our revenue looks -- it has to look different in the U.S. If that would not be the case, then I might share with you that we might towards end of the year face an issue here. But as of now, we are confident and have signals from the market that the situation will improve in order intake as well as in revenue in Q2 to a level that will allow us to make up for all the risk that we have -- we see for the year in quarter 3 and 4.

[Operator]

We have a follow-up question from Aliaksandr Halitsa.

[Aliaksandr Halitsa, Equity Analyst]

I'm trying to understand also the bridge in North America for Q2. So in particular, I was wondering how much revenue did the lost chemical contract contribute in Q2 last year that you will be missing this year? Yes, that was -- would be the first one.

[Axel Jaeger, CFO & Member of the Board of Management]

Yes. Let's put it this way, some good news related to this is -- we announced it today also on the general assembly, fact is we lost the chemical business to one larger account last year. By mid of the year, we lost about USD 3 million in value or close to $3 million due to that contract and have not been, let's say, able to compensate in -- on cost terms what would have been necessary because in these territories, we have other customers that we still need to serve. So in other words, we could not, let's say, straight adjust cost to loss of revenue.However, the good news is that although this business looked like we have lost it for a longer period of time for - in a frame of a tender, that in the meantime, the larger customer has decided that the company has -- that he awarded the chemical business to is not performing to their level, so now we have got it all back and even more than what we had before. So most likely and the way it looks like, I would -- it is fair to assume that everything that we have lost in the second half or in the first half of this year, we will make up in the second half, so we would be at least on last year's level and not having a further, let's say, half year effect when we look at full year of the business because we will -- we lost half year already and -- or we will have lost -- lose half year until June. But from there on, we shall be okay to overcompensate that with extra volume in the second half. So whatever we have lost there in revenue and margin in the Q2 and some of it in Q1 this year, we will be overcompensating then in Q2. So there is some good news as well.

[Aliaksandr Halitsa, Equity Analyst]

Okay. And this $3 million, it's a full year revenue contribution?

[Axel Jaeger, CFO & Member of the Board of Management]

Yes.

[Operator]

The next question is from Oliver Knobloch, Pictet.

[Oliver Knobloch, Senior Investment Manager and Portfolio Manager]

I have a question due to the introduction of SmartCare in May. Do you think that some customers wait with ordering until the product is actually presented at the trade fairs? Or don't you think it's had an impact on Q1?

[Axel Jaeger, CFO & Member of the Board of Management]

No. Not -- from my point of view, not at all because, see, we are not seeing any slowdown in direct sales which are the individual customers. We're seeing, at the moment, let's say, a delay in key accounts. And with the key accounts, we are in running tender agreements. And tender agreements are always with the specified equipment. So this equipment doesn't fall under any tendered agreements. And all of these tenders are going at least until end of this year or even beyond that.So they would never be concerned, let's say. I don't say that none of the key -- larger key accounts would order one or the other machine as a trial machine out of the new range although not part of the tender, but that had no impact on it. I mean I cannot see any delay there. And plus, we have to be clear that the product, and the market is now aware of that because we're also communicating it like this. It is the absolute premium product. It's not a volume item. I mean for this -- at this stage where it is now, it's the benchmark product. And in terms of revenue, interesting, of course. But in terms of number of machines, I would say it's not significant and has not led to the, let's say, Q1, let's say, delay in order intake that we are facing because we are seeing it in key accounts and the key account has never been part of any of the tender agreement.

[Oliver Knobloch, Senior Investment Manager and Portfolio Manager]

Okay. And the second question, in the U.S., where you had some internal processes not working optimal after the SAP introduction, are these problems now solved in the second quarter?

[Stephan Weber, Chief Sales Officer & Member of Management Board]

No. We are still working on it. I mean we are sending teams over for the business administration process issues, for the ERP system issues. This is underway since Christmas, so to say. And nearly every second week are 2 people over there. And we are in the process of fixing this. But however, we are making good progress, but it's not over now. It will take some time.

[Oliver Knobloch, Senior Investment Manager and Portfolio Manager]

This means -- this still creates additional costs and this is one of the reasons that...

[Stephan Weber, Chief Sales Officer & Member of Management Board]

No. Not necessarily. It's more a matter -- it's not a matter of investment. It's a matter of know-how transfer and sometimes just of showing new people, new onboarded people how the systems work, where they find certain information and how the global processes should be established. So it's not so much a matter of money, it's rather a know-how transfer.

[Axel Jaeger, CFO & Member of the Board of Management]

I mean we do see a significant improvement already, I mean to answer maybe your question, in Q1 in terms of processes and whatever is related to it. The only thing that is missing in the U.S. at the moment is the top line. But processes are a lot better under control. However, to emphasize one more time, we see more potential there than what we are getting now. We are significantly improving towards last year, but there is more in that related basket that we can harvest.

[Oliver Knobloch, Senior Investment Manager and Portfolio Manager]

Okay. And the last question concerning the development in Asia. I assume the losses you produce are solely coming out of Australia. This restructuring of Australia is now also taking some time. When do you think this will turn around into a profitable area?

[Axel Jaeger, CFO & Member of the Board of Management]

I mean the losses in, let's say, in relative terms compared to previous years are, yes, the difference is coming from Australia because we have an improvement in China, a significant improvement. And we have less volume, and less volume in Australia comes with less margin. Australia was always traditionally an area of [ decent ] margin mainly caused or only caused by one larger account.Losing the larger account also had the necessary view at the business setup overall. And we have decided to also restructure our service business over there due to the loss of service customers and to also deploy a new Managing Director to restructure the business.Where are we now? Coming back to your question, we have now the last 2 months seen for the first time since quite some time that the -- this year's order intake was higher than previous year. So we have 2 positive months and more to come the way I look at the funnel. So we are bottoming out, let's put it this way and confident in coming -- I mean it will not be a fantastic year overall in Australia. But overall, it all points in the right direction.And I'm confident that in 2020, this looks a lot different than what we are doing now because what we did is we added people, salespeople on the road in order not to be so dependent on key accounts only and to have a more general order inflow via direct business, which we also did in many other parts of the world, by the way.

[Operator]

As there are no further questions, I would like to hand back to Mr. Jaeger.

[Axel Jaeger, CFO & Member of the Board of Management]

Yes. Thank you, everyone, for your attention, and we are still optimistic for the fiscal year to be a successful one. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.