WashTec AG

XETRA:WSU

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the WashTec AG Q1 2024 Earnings Call.At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation.Let me now turn the floor over to your host, Andreas Pabst.

[Andreas Pabst, executive]

Yeah. Thank you. Ladies and gentlemen, on behalf of the WashTec Board, I would like to welcome you to the Q1 presentation 2024.Attending the call with me is my new colleague, Michael Drolshagen, our new CEO of WashTec, who joined the Board already a few days ago on May 1. I am sure you are curious to get a small intro of Michael.So please, Michael, the stage is yours.

[Michael Drolshagen, executive]

Thank you, Andreas and also a warm welcome from my side, ladies and gentlemen.I'm very proud to be part of the WashTec team since 1st of May 2024 and that you get an impression regarding my personal, short introduction of my career in the last years. I started my career at Hella in the '90s -- late of the '90s in sales and at the beginning was in the sales for 30 years and second tier to sell the control units and sensors and part of this technology. Later on, I got the responsibility to be a key account manager for Audi and as well as for Porsche. Due to this contact, I got the chance to move home to Stuttgart and to get part of the Porsche team. And at the beginning, I was in the electric electronic R&D department, developing control units for the 911 Turbo and later on for special projects that we get Cayenne into mass production without [indiscernible] due to the complete network in the car at that time. I moved to production later on and took over responsibility for the 918 Spyder related to our quality, plant, production, fitting and topics related to operation. And later, then the complete aftersales responsibility globally. Due to that experience, Thyssenkrupp asked me to join their team and then moved on beginning of 2018 to Thyssenkrupp and took over the responsibility of the CEO and the Board there and all functions and markets reported to me, except financial, IT and operations. We were very successful at that time, and we moved with the team through corona pandemic time as well as the semiconductor impacts we got beginning of 2022-2023.Since May, now I'm very proud to be part of the WashTec team. And WashTec is [a fuel] that has developed a successful market position in the last years and also sustainable products and service offerings. We have also, in our portfolio, digital platforms and service offerings, and we are consistently expanding this position. With the cross-function know-how we have on board with our employees, we are prepared for the future. And for me, the team, the organization, the strategy and, of course, profitability are the key factors in the next months and years. So I'm looking forward to work together with the team. And of course, with our Supervisory Board and you as investors. And I think the jewel is prepared and let's make a great success story out of it.So thank you very much, and I hand over back to Andreas. Thanks.

[Andreas Pabst, executive]

Thank you, Michael. I'm really looking forward to work with you and increase our business together.Now let's come to some wash take business news of the first quarter 2024. This time, we would like to focus on 2 new offerings, the new entry machine and the new mini tunnel. First about the new entry machine. What you see on this page is our rollover product permit offering. Some of you might be familiar with the rollover product pyramid shown here. On the left one, you can see our current offering. Our top product, SmartCare at the top, followed by some SoftCare variance and as an entry model, the EasyWash. Recently, we analyzed again in deep what is a specific need for our customers at the entry level and we created a new entry machine with higher functionality. Based on our platform, the ramp-up period was quite short, and we can go live with this new type already in May, and EasyWash will be phased out. As the price will be very competitive and functionality improved, we are sure to increase our numbers of sold units with this new machine. Our sales team is very confident with this new offering. In respect of our digital offering, it is worth to mention that the new entry machine will not fully participate in our whole range of digital offering. Basis for our full digital offering is and will be our products, which you can see north of the red line in the right pyramid. On the right side of this page, you already can get a first impression of this new entry model.If you would like to have a deeper look at it, then visit us at the most important fair in Europe, the UNITI, which takes place in Stuttgart, May 14 to May 16. It would be a pleasure to see you there. And for sure, you will also see some of other new offerings like our wheel washer or you can get some intro in the digital offering.But not only in rollover segment we come up with new offerings, also in North America, we have something new for the tunnel business. As you know, Mark VII, our North American company is very successful in C-stores or fuel stations with our in-bay automatic or rollover product offering. There are more than 23,000 sites around North America. But as often communicated, there has been some change in the market over the last years. Tunnel car wash turns out to be more and more the preferred solution in the market. One of the main reasons for this is that the throughput of cars is higher. With our SL1 tunnel, we have really a good solution for the customers. We are expanding our advertisement and sales to be better recognized as tunnel supplier in the market, but we can do more. To our expectation, there is currently a new upcoming market segment. Between rollover and tunnel, there will be, in future, the so-called mini tunnels or short tunnels. As already given by the name, this product is shorter than a regular tunnel, but allows a higher throughput than a rollover. On the bottom of this page, you can see a sketch of such a mini tunnel. We made some detailed analysis of rollover car wash sites and see a potential of 1,500 to 2,000 rollover wash base, which are suitable for the change to many tunnel systems. And also the business cases from the operator's perspective is quite impressive. With a 2.5 times higher investment, the payoff period is only 1.3 years. The number of car washes can be increased up to 30 per hour. So this new offering is a clear win-win situation for the operator and for Mark VII. On the right side, you can see the transfer from an in-bay automatics to a mini tunnel system to get a first impression. Or what would be even better, visit us at the ICA, the largest carwash trade fair in USA from May 13 to May 15 in Nashville. You can get all information there about this good new offering from WashTec Mark VII.Let us now come to financials for Q1 2024. On this slide, you can see our main KPIs for the first quarter. To summarize all the figures in one sentence, WashTec had a revenue-wise slow start in 2024, but managed to increase slightly EBIT margin from 5.0% to 5.1% despite one-off expenses. But let us now look a little bit closer to the figures. Revenues are again north of EUR 100 million. But with EUR 100.8 million, revenues came in by 7.7% lower than Q1 2023. If you would take out FX exchanges, then we would be at a similar level, exactly minus 7.9%. The decline results mainly from lower sales of equipment, particularly to key accounts in North America. But also chemical business could not achieve prior year's numbers. Despite the lower revenue, EBIT in the first 3 months amounted to EUR 5.1 million, which is EUR 0.4 million below last year. The EBIT margin increased slightly from 5.1% compared to 5.0% last year. At this point, it is worth to mention that we had to book one-off expenses in the amount of around EUR 1 million in Q1 '24. Those one-offs relate to the change on the CEO position and expenses for cost optimization of new product generation. Without that one-offs, the EBIT would have been around 11% higher than last year, and the EBIT margin would have been around 6%.So in general, profitability is moving in the right direction. What have been the relevant levers for this positive development? One important topic is our improvement of gross profit, EUR 29 million in Q1 2024 compared to EUR 27.8 million in Q1 last year. That goes along with an increase of the gross margin from 25.5% to 28.8%. We already last year implemented efficiency programs notably contributed here. The fall in material prices supported this positive development. Another important topic is the functional cost with some of research and development expenses, selling expenses and administrative expenses amounted to EUR 24 million in the first 3 months of the fiscal year. Last year, it was EUR 23 million. The increase is nearly totally attributable to the mentioned one-off expenses. Without these, the functional costs are at the same level as last year. You see, we keep our cost sensitiveness.If we now have a glimpse at our free cash flow, we see a significant increase from EUR 1.9 million last year to now EUR 9.3 million. This needs to be explained a little bit more in details as within this development contradictionary topics are included. On the one hand side, our net operating working capital increased relatively to December 31, 2023, rising by 7.7% from EUR 84 million to EUR 90 million. The higher net operating working capital compared to the prior year-end, mainly related to the usual rise in inventories due to the start of the business in the first quarter. This was, on the other hand, partially offset by a refund of capital gains, tax prepayments. In the second quarter of 2024, this effect will be neutralized by a capital gain tax prepayment due to intragroup distributions. Part of the free cash flow is the cash outflow from investing activities, which is at EUR 1.4 million in the first 3 months was a significant EUR 9.7 million lower than the prior year. Remember, prior year, this item included around about EUR 10 million for the acquisition of the site occupied by our American subsidiary. Equity amounted to EUR 89 million as of March 31, 2024, whereas end of 2023, equity was EUR 86 million. Compared to the 2023 year-end figure, the equity ratio increased from 31.6% to 33.9%. The equity ratio also increased compared to March of the prior year where it was 31%. So overall, equity ratio is a solid number at WashTec.In respect of employees, we had end of March 2024, minus 91 employees -- 91 employees less than end of March 2023. Overall, 1,694 people work at WashTec.Now let's spend some time on our long-term development. On this slide, you see our 5 years development of revenue and EBIT for the first quarter. As you know, in general, first quarter is the weakest for WashTec. And as already mentioned, revenue-wise, we had a slow start in 2024. Nevertheless, also in 2024, we were able to come in with a revenue number north of EUR 100 million, the third year in a row now, which is an increase of 15% since 2020. Impressive is our EBIT development. Starting with EUR 1.7 million in 2020, we now have collected EUR 5.1 million, including the one-offs. The EBIT margin rose from 1.9% to 5.1%, something we can be proud of.Coming now from the long-term development to our revenue split by product. Revenue from equipment and service reached EUR 84.5 million, down by 7.2% year-on-year. This is mainly driven by weaker sales of equipment, especially with key accounts in North America. Revenue from chemicals was EUR 14.9 million, down by 10.8% versus prior year. The main reason for this are a fall in car wash volumes due to the bad weather conditions, especially in the first month of this year. If you look at our revenue split, we see that following our core strategy, we are able to expand our aftersales business. Service chemistry and others now amount to more than 50% of our total revenues.Before we now come to the discussion about the revenue and profitability of our regions, I need to explain a small change we made in our financial reporting. As you know, we sold our Chinese subsidiary in December 2023. WashTec will focus on Europe and North America. As a result of this, we made the Asia-Pacific region part of the Europe region and renamed the region to Europe and Other. So from now on, we will report only 2 regions. All prior year figures have been adapted accordingly. In Europe and Other region, revenue fell by 4.9% in the first 3 months from EUR 98 million to EUR 84.6 million. The fall in revenue could be observed in all product segments and is primarily attributable to the weaker sales figures for equipment. The market conditions are still difficult, particularly in the direct sales business. In Chemistry, we were not able to repeat the excellent prior year, mainly because of the weather-related fall in car wash volumes. Revenue in North America is at EUR 17 million in the first 3 months. This is significantly down on the prior year by minus 21%. The main reason here is lower volume of key account business, and you certainly know that our key account -- non-key account split in North America is more in favor of key account. But I can assure you that we are very close with our main customers and business relationships are in good shape.Moving on to the EBIT performance by regions on the next page. EBIT in Europe was EUR 5.7 million in the first quarter, same number as last year. That means we manage despite weaker revenue to keep EBIT at the prior year level, thanks to lower material prices and cost measures. At minus EUR 0.5 million, EBIT in North America is in the first 3 months, lower than the prior year with minus EUR 0.3 million. Nevertheless, we are happy that the measures implemented already last year to increase the profitability in this region helped us now. We are going on and expand our efforts here. This was the main reason why the EBIT drop was only EUR 0.5 million despite the significant fall in the revenue.This slide, our EBIT bridge shows some more details to explain the EBIT development compared to the prior year. As already explained, despite lower revenue, we were able to achieve a better gross profit margin, which is now at 28.8%, whereas prior year, we only had 25.5%. I I already gave some explanation on this. Research and development expenses were higher than prior year at EUR 3.8 million, last year, EUR 3.5 million. The increase mainly related to additional activities to speed up the exploitation of market potential in Europe and North America. Administrative expenses at EUR 5.6 million were significantly higher than the prior year, where we had EUR 4.3 million. The increase was mainly due to the one-off expenses in connection with the change of the CEO and expenses for cost optimization in the new production generation. The total amount of one-offs was around EUR 1 million.Let's now have a very short glimpse on these more balance sheet-related figures. First, net operating working capital, meaning the trade revenue, receivables plus inventories minus trade payables, minus prepayments on orders coming at EUR 90 million, which is far below Q1 '23 number. Compared to the year-end 2023, where we had EUR 84 million, there's a small increase of EUR 6 million, which is the usual rise in inventories due to the start of the business in the first quarter. On the second key figure, the free cash flow, I already gave some explanation. So coming to the third key figure, net financial debt, shows a good trend declining from EUR 45 million end of Q1 '23 to now EUR 35 million end of Q1 2024 as we reduced our interest bearing loans. About the EBIT ratio, already gave some explanation.So coming now to our guidance. In terms of revenue, EBIT and free cash flow, we had a mixed first quarter, low revenues, but good EBIT and free cash flow. Orders received were lower in the first quarter than in the prior year quarter to the drop in demand in market as a whole. Due to the lower orders received, the order backlog ends at end of March also fell below prior year figure. But if we look at the sales funnel and the qualified sales funnel as a forecaster for future revenues, we see a higher number than last year. So our main task is to convert this funnel into sales. That means a lot of work ahead for 2024, but currently, we are optimistic to make it. We look at optimistic but cautious in the future and keep our guidance with revenues at plus/minus 3% of prior year level. And due to our measures, we expect an increase of EBIT in mid-single-digit percentage range. The free cash flow should come in between EUR 30 million and EUR 40 million.Finally, let me guide you to our financial calendar. You see, our next event is the Annual General Meeting, May 14. This was it from the financial side.Now after short break, we will be happy to answer any questions you might have. I hand back to the operator. Thank you.

[Operator]

Thank you. [Operator Instructions] The first question comes from Stefan Augustin, Warburg Research.

[Stefan Augustin, analyst]

The first one would be actually a bit more on the demand picture in North America. And going forward, you have made a couple of explanations with the sales funnel and the qualified sales funnel. Is there a major difference between Europe and North America with respect to that? And is it, let's say, overall that the qualified part is okay, but there is something, let's say, from the overall order and the order backlog that now is down in the market or how should we view this development that we see here over the last quarters. That would be my first question, and I take every question one by one.

[Andreas Pabst, executive]

Okay. Let's say it that way. So in North America, we are depending more on some key accounts than we do in Europe. The mix is there a little bit different. What we see in North America is that we are very -- I would say, good and I'm comfortable with the non-key account business and order intake, which we have there. But nevertheless, the key account order intake currently is not at the stage where we would like to have it. But you also need to understand that we have some really big customers, and we are in very close contact with them, and we know that there will be something going on. So we are looking somehow positive in the future as well. But it is true that in the first quarter, especially key account business in North America was below expectations.

[Stefan Augustin, analyst]

The next one would be then on the new entry-level machine. Is it that I need to view this that -- I mean, one part is not to offer a client the digital services. The other one is that do I let's say, need to have the imagination that this entry-level machine is also not, let's say, having sensors and providing data for your platform. And I mean that looks like a little bit something that is not so expensive if it would be the case, but obviously, it would lower probably the potential of the digital platform. So can you help me a little bit there and probably also a little bit with the idea, how much is, let's say, the entry-level machine that you or let's say, that part that you tackle there versus your overall equipment in numbers?

[Andreas Pabst, executive]

First of all, you know that we do not give numbers for sold units by product type, yeah. Please, we keep it that way. But what is important to understand here. So the entry machine is a machine which you can think about, which we sell to a car distributor, for example, if you bring your car to repair and then the car is washed somehow. So those machines will also in the future will have a digital connection. So we got the data of the machine, what is a machine doing and we can do some remote service. That is what we kept. But the digital offering, which we offer for the customer will not be able with that machine. So that is the difference, yeah. With all the other proceeds, we will do this.

[Stefan Augustin, analyst]

And last one is to Mr. Drolshagen. So I mean, it is probably a little bit difficult to ask you on everything that happened in the first 5 days. But let's say, what is your first impressions, and what do you plan to do first in over the next couple of months?

[Michael Drolshagen, executive]

Yeah, I got a deep insight in the last weeks already as long as it was compliant. And so I got the feeling of the team. I'm very proud of the team. I think we have really good players where we can build on the next month. I'm also deeply involved in the U.S. market, and we see there some difference between U.S. and for sure, Europe, also what the customer expectation is. This is currently lower than the European customers regarding cleanliness and so on. And this is also where we have to respect this also in our technology and machines. And therefore, we are thinking now also in modular platforms, which we are going to implement in the next months and years. And this is something where I focus on. For sure, in the first 30 days, I have to get familiar with all the processes with the employees and with the daily business as well as I have to get in contact with our internal and external stakeholders, for sure. Last but not least, also, I got the impression of the culture and where I think I can give them my personal feelings and understandings what culture means for me. Then based on this, I'm going to discuss our strategy together with the Board and for sure, with the Supervisory Board. If we have to adapt this or if it's great. And with that, I want to get a deep insight in all the processes and the organization because organization and strategy influences each other and how to get organization, which is cost sensitive on one side, but focused on technology, customers, new things and to implement this very fast on a standardized modular platform, which we can sell properly to our customers, which means we have to individualize our customer projects and products, what our customers can recognize. But behind that, we have to standardize that we get the cost improvements also into our EBIT margin and our numbers. And last but not least, then, the next 180 days is to focus on implementation in the most important projects and topics.

[Stefan Augustin, analyst]

That looks like a really full agenda.

[Operator]

At the moment, there are no further questions. [Operator Instructions] And we have a question from Alexander Galitsa from HAIB.

[Aliaksandr Halitsa, analyst]

I just have a broad one with regards to the, I guess, market growth in general. If we look between 2023 and 2019, so pre-pandemic, I think your top line grew by less than 3 percentage points CAGR over this period despite the fact that we have seen a strong inflation recently, and also you have had some successes in Chemicals business. So basically, the equipment market hasn't really grown for you that much. Maybe in this context, could you discuss the development you have seen in the individual markets, namely Europe and also the U.S. in terms of maybe market share development? And also how would you -- maybe your best guess if you would like to speculate a bit how the market is going to sort of revert to a stronger growth in terms of installations or equipment over the coming 2, 3 years, whether you have some indications already or is it sort of a wait and see for the moment? And what would you consider to be then ultimately sort of normalized sustainable growth? I think you had this target of 7% out there. So if you could basically discuss those topics.

[Andreas Pabst, executive]

So when I look at the market share, then we rely mostly of our internal data, which is in sales force. I would say in Europe, we have here a quite good databases. And based on this data compared to 2019, I would say that our win-loss ratio is slightly positive over this whole period, meaning that we know all offers in that region where there are replacement of a machine or a new machine. And we know if we win or loss. And if I look at the win-loss ratio, I think we are not doing too bad. So in America, it would say we are doing good. And in North America, honestly, we do not have exactly the same quality of the database. What we see in North America is that there's a lot of tunnels coming in, yes. That is why we are doing this mini tunnel. We see that in terms of our rollover machine and market share to our understanding, there are up to 3 competitors, and we are, I would say, at least #1 or #2. So I would say that the market share is still in a good shape.If you look in the future and the future development and in terms of equipment, I think there it is really important that we all can make the cake bigger, like Sebastian explained in our [Foreign Language] press conference. So in English, it's press conference, which we had in the end of March with all this digital offering, we really expect that there will be more car washes. And if there are more car washes, then there will be more chemistry, more service revenue for us and also the replacement cycle of the machine will be shortened. So that is why we are really focusing on the strict utilization topic and why we believe in the future, there will be extending market.Did that answer your question?

[Aliaksandr Halitsa, analyst]

Yeah.

[Operator]

The next question comes from Lukas Spang, Tigris Capital.

[Lukas Spang, analyst]

My question is about outlook for this year. We now saw the weak Q1 in terms of revenue and you explained the reasons for that. But what is your expectation in terms of the following quarters? I think you, Mr. Pabst also said in some interviews in the past that you want to make the business more equal related to the quarters. So what is your expectation in terms of the next quarters with Q2 going forward, how much back-end loaded will the year be this year?

[Andreas Pabst, executive]

So in general, we currently really believe that we can keep our guidance in terms of revenue. That means plus/minus 3% compared to last year. If you look at the order intake order backlog, that is what I also explained is that we are currently below last year, but we see a very good sales funnel. So now the main task we have for this year is to convert the sales funnel into order intake and order intake into revenue. And it depends a little bit on the speed which we can do this. So my current expectation would be that every quarter we will be better than the quarter before, like every year, and it could be that due to the sales funnel this year is a little bit back ended.

[Lukas Spang, analyst]

Okay. And then the same also for the EBIT?

[Andreas Pabst, executive]

Similar.

[Lukas Spang, analyst]

Every quarter --

[Andreas Pabst, executive]

Similar, yeah. It's important to understand that we are -- on the one hand side, we are very cost sensitive. On the other side, I already explained in the press conference that we want to expand some additional money this year for speed-up some really key programs, which we have on the plate for this year to have even better years 2025 and 2026. But in general, I would say that the EBIT target would follow somehow the revenue target. Yeah.

[Operator]

[Operator Instructions] If there are no further questions from the audience, I hand back to the company for closing remarks.

[Andreas Pabst, executive]

Yeah. Thank you for attending our call. It was a pleasure for both of us. I think so.

[Michael Drolshagen, executive]

Always.

[Andreas Pabst, executive]

Have a good day. Thank you for attending. Bye-bye.