WashTec AG

XETRA:WSU

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Michael Drolshagen, executive]

Ladies and gentlemen, on behalf of the WashTec Board, I would like to welcome you to the Half Year Earnings Call Presentation 2024.

Attending the call with me is my colleague, Andreas Pabst, our CFO of WashTec. After 90 days, I can say with a smile on my face that the decision to go to WashTec was absolutely the right one. Why did I choose WashTec? Firstly, I had the feeling end of February that there's a high commitment from Board of Directors and, of course, from my 2 colleagues in the Board, Andreas and Sebastian, but also that there are strong corporate values as well as long-standing employees with a high level of know-how on one side and, on the other side, new kids on the block who bring new ideas into the team.

Secondly, the company itself has a huge market localization with a diversified customer portfolio, strong technical products with the ability to scale business and all in the organization as well as in the investor I met so far are long-term oriented. Last but not least, thirdly, and for the employees, attractive and international locations.

My first 30 days, I traveled around to understand the washing market and, of course, WashTec, meet employees and got a deep insight into our day-to-day business and our processes. Another focus point was -- or is our organizational structure and our strategy and, of course, our values and culture. The goal after 90 days was to develop a clear strategy and coordinate it with all stakeholders. In order to implement the strategy and processes, the team must be defined, responsibilities determined and the organizational structure implemented simply, clearly and ambitiously.

We finalized these with all those involved like Supervisory Board and direct reports in July and will implement them in the coming weeks. I'm therefore looking forward to the next 90 days working with this great team on the operationalization of our joint strategy. So let's take a look behind the scenes of the planned measures. Next page, please.

WashTec's strategy remains based on the 2 pillars of customer care and regional focus on North America and Europe. As a team, we have analyzed this strategy and refined it further. Our equipment forms the basis and is an enabler for our overall business model. In terms of the equipment itself, we are in the start-up and ramp-up phase of our SmartCare and SoftCareSE.

In our new cooperation model, the region provides support for our strategy and its operationalization in order to further develop and expand our unique selling points. From our point of view, these are our digitalization strategy, but in this area, not only this, but everything that revolves around the customer journey and operator services. We have introduced measures in this area in recent months and have made already some progress.

Another is our consumables area with our current certified chemistry. This has huge market potential. And finally, our service, which is our core in Europe, in which we will continue to expand and professionalize and gradually brings its expertise also to North America. Next page, please.

As of September 1, we are further developing the organizational structure of WashTec. To this end, we are expanding our business lines concept. For example, we are introducing our business line equipment, and our business lines will receive full P&L and get allocated the budget for defined scopes. For example, the development budget or the installation budget for the equipment.

The functions are service and/or solution providers are responsible for personnel. And as before, with this new organization, we will develop the company from our product focus to our one integrated WashTec company. As described, the regions are the project enablers for our business and, together with the functions, are responsible for the processes and personnel, and together with the business lines for the projects. This organization is very, very cost intensive and will take WashTec to a new level here. In order to continue to be innovative in future, for example, the pre-development budget is excluded from this and is controlled by an Advisory Board consisting of Divisional Management and the Executive Board. Next page, please.

Let's talk about the most important points in Europe. As a first step, we will offer our equipment in fuel. For example, we will continue to expand the ramp up of SoftCareSE and manage the launch of SmartCare. In addition, we are increasingly focusing on subscription models and Total Care in Europe and are also taking this into account in our future organizational structure. In order to become less dependent on market fluctuations, we are continuing to work on projects that both make our costs variable and bundle our unique selling points.

And who hasn't experienced it? And for me, as I always said, you are standing at the petrol station and think you need to wash your car again. And while you are filling up, the first person comes and stands in front of the car wash, then the second, and sometimes also a third one. And you think to yourself, and I always think to myself, that the car isn't really so dirty that you have to wash it immediately. But it's true that constant washing means you can wash quickly with very good washing results.

So we have to change mindset from the end customer, constantly washing keeps the car more clean than washing it every 6 or 8 weeks. And this is where we want to support our operators and turn the customer journey into a good field experience and, for sure, with sustainable products. Next page, please.

And in Europe, with our new entry level model, the SoftCareSE, who wouldn't want that for pretty much the same price as the previous model, a system with more content and even better washing experience? Only with full cloud integration do you have to go for our top model, the Smart Care, which is currently being ramped up. Next page, please.

In the North America market, our clear goal is to become competitive in terms of washing time. To this end, we are focusing on the mini tunnel and the further development of our choice wash combined with Smart Care to smart choice. The aim is to offer a better rush -- sorry, the aim is to offer a better wash result with the same wash time as the competition. This is also our declared goal in Europe. In the U.S., we will continue to implement our learnings from service and chemistry and roll them out state by state. In North America too, data is the new gold. And we will provide our customers with professional support here. In terms of sustainability, we are starting with water and energy. Next page, please.

We also see opportunity to increase our market share in the U.S. by further expanding our sales activities. Not only in the area of equipment, but also in the area of service and consumables with a focus on chemicals. To this end, we have already sent our first experts to America to strengthen cooperation in both directions and launch further activities. So we already started to bridge North America with Europe and to learn from each other.

And it is particularly important to keep the focus on the U.S. We have therefore taken a close look at the different countries and will implement state by state by state concept for all our business line products.

So thank you very much for your attention so far. And now, I would like to hand over to Andreas for the exciting figures for our first half year. Thank you.

[Andreas Pabst, executive]

Thank you, Michael. Hello, everybody. Good to speak to you today. I really enjoy. On this first slide from me, you see our main KPIs for the first 6 months. To summarize this table, we are doing better more or less in each line than last year. The only drop of bitterness is that the slow revenue start from Q1 continues in Q2. But in respect of net income, we are 11.5% ahead of last year.

Let us now look a little bit closer to the figures. WashTec generated revenues of EUR 220 million in the half year ended June 30, 2024, EUR 16 million or 6.8% less than prior year. The main reason are lower equipment sales, especially in direct sales business and in key account business in North America. Currency effects had no material influences on the revenues in the first 6 months.

Despite the lower revenue, WashTec increased gross profit in the first half year from EUR 63 million to EUR 66 million. The gross profit margin increased accordingly from 26.7% to a respectable margin of 30.0%. How did we achieve this? First, the price increases, which we did in the past years, now fully kick in. The average price per rollover unit is higher.

Second, we are profiting from low material prices, especially in terms of metals like steel. Third, we worked on our production costs, and our labor costs per rollover are currently lower than last year, despite salary increases. And finally, the efficiency programs, which we started last year and continued this year, also contribute to the gross profit as well as to the full EBIT. As a result, Group's EBIT for the first 6 months rose from 7.8% to EUR 17 million. Last year, we only had EUR 15 million. The EBIT margin improved from 6.5% to now 7.6%.

And remember, in the first quarter, we reported about one-off items of around EUR 1 million. If we take this into consideration, the overall EBIT margin for the first 6 months would already be around 8%. Following the increase of EBIT, we also can report that our net income and earnings per share are 11.5% higher than prior year. And also, our equity ratio is by 120 basis points above prior year.

Our free cash flow of EUR 20 million for first 6 months is impressive, EUR 40 million higher than last year. But here, we should dig a little bit deeper. In January 2023, we acquired our U.S. production facility and in 2024, we got a refund from capital tax payments from intragroup dividends. At the end of this reporting period, we have 1,698 employees, which is 78 employees below last year. In this figure, you can see on the one-hand side that we are still very restrictive with expenditures. On the other side, we need to admit that currently, especially in service in some countries, it's not too easy to hire good new service technicians.

Now let's proceed with the previous quarter -- second quarter. As already mentioned, the slow start in 2024 continued in the second quarter. Revenue fell by 6.1% to EUR 119 million from prior year EUR 127 million. Main reason is the weak key account business in North America. But again, based on the aforementioned reasons, WashTec could increase gross profit margin from 27.8% to now 31.1% in the second quarter. Improvement of gross profit, cost sensitivity still in place, and no material one-off items in Q2 led to an increase in EBIT by 16.2%, a really good development. And consequently, WashTec's earnings per share for Q2 comes in at EUR 0.56 plus 22.6% above prior year Q2.

As always, I want to give a short overview of the long-term development of revenue and EBIT for the last 5 years, for the first half year, as well as for the second quarter. The figures are shown on this slide. In general, I do not want to compare too much to 2020, as this was the COVID year. Given the overall timeline, we are revenue-wise on the level of 2022 for 6 months as well as for the second quarter. But our EBIT margin compared to 2022 is much higher, 7.6% versus 5.9% for first half year and 9.7% versus 7.0% in the second quarter. EBIT and EBIT margin is now increasing the third year in a row. Steady, we are climbing back to the double-digit EBIT margin.

Coming now from the long-term development to our revenue split by region. In Europe and other regions, revenue in the first 6 months came to EUR 185 million, which is on prior year level of EUR 186 million after adjustment of our former Chinese subsidiary, which we sold in December 2023. The weak first quarter, which saw difficult market conditions, particularly in the direct sales business and the weather-related fall in car wash volumes in the chemical business could nearly catch up in second quarter, where our business performance stabilized with revenues of EUR 100 million, Q2 2023, we had EUR 101 million, without China, EUR 99 million.

In North America, revenue in the first 6 months fell significantly by 24% to EUR 37 million compared to EUR 49 million of last year. The pure revenue stream remained in Q2 with revenues of EUR 20 million compared to EUR 27 million in Q2 2023. Both the direct sales business and the key account business were down in the first 6 months, mainly due to the lower order backlog at the beginning of the year and the weak level of order intakes received from key accounts in the first quarter. Orders received increased in the second quarter compared to the prior year. The growth came in particularly from the direct sales business, whereas key account remained significantly down.

On the next slide, you see our regional EBIT development. In Europe, EBIT rose significantly to EUR 16 million in the first half year, whereas without China, we had last year EUR 2 million less, mainly due to the prior year price increases and lower material prices. This also applied to the second quarter, where we had no one-offs, EBIT increased by 29%.

North America, the EBIT number for the first 6 months was with EUR 0.2 million, tightly positive, after EUR 1.3 million last year. Given the significant reduction in revenues, we only could achieve this due to the measures implemented last year to increase profitability in this region, and we continue with those programs also in 2024. In the second quarter, EBIT fall relatively to the same period a year earlier from EUR 0.7 million -- fall to EUR 0.7 million from EUR 1.6 million.

So summing up our results in North America, we clearly admit that we cannot hesitate to work hard on further improvements here. As Michael already said, we have sharpened our strategy for North America. Furthermore, we increase our local content in R&D, manufacturing, et cetera. Also, we took some personnel actions. With [ Uber ], we had hired a new managing director. The European entities will support its personnel, especially in tunnel business and so on.

Moving on to the revenue performance by product on the next page. At EUR 183 million, equipment and service revenue in the first half year was down by 6.8% on the prior year's figure of EUR 197 million. As in the first quarter, this is mainly due to the weaker sales of equipment, particularly to key accounts in North America.

Chemicals revenue fell from EUR 37 million in the prior year period to EUR 34 million, mainly due to a weather-related fall in car wash volumes, primarily in the first quarter. In addition, the prior year, we acquired major customers in connection and booked some extra revenues in connection with their initial stocking. In the second quarter, revenue fell by 6.1% to EUR 190 million from EUR 127 million prior year. This is primarily due to the weak key account business in North America.

This slide now, 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 30%, whereas prior year, we only had 26.7%. I already gave some explanations on this. Research and development expenses were higher than prior year, at EUR 7.7 million. Last year, EUR 7.0 million. As was already mentioned in the last call, this is mainly related to additional activities to speed up the exploitation of market potential in Europe and North America.

Administrative expenses at EUR 10.3 million were higher than prior year, where they were EUR 9.0 million. The increase was mainly due to the one-off expenses in connection with the change of the CEO and expenses for cost optimization of the new product generation. The total amount of one-off expenses was around EUR 1 million. Next page, please.

Now, let's spend a little bit of time on some non-P&L figures. First, net operating working capital. This figure decreased relatively to June 2023, significantly by EUR 14 million or 14% to now EUR 84 million, as inventories and trade receivables are lower. Relatively to December '23, the figures increased slightly by EUR 1 million or 1.1%.

Second, free cash flow. I already gave some explanation about this, so no need to repeat here again. Third, net financial debt. This figure decreased compared to prior year's figures by EUR 16 million. And last but not least, the equity ratio. Following higher net income, the ratio climbed by 1% point from 23.7% to 24.9%.

Let me now give you a little bit more insight on our order intake and order backlog, the next page. As you know, due to competition reasons, we do not show detailed numbers for those KPIs. But to get you an overall feeling about the general development of order backlog, this slide might be useful. The order backlog of 2020 is indexed with 100%. You can see, compared to that point in time, order backlog increased significantly to 175% in Q2 2024. Taking our seasonality into consideration, it's important also to compare Q2 24 with Q2 23.

In our half year report, we stated that the market as a whole improved in the second quarter compared to Q2 '23, and orders received were again above the prior year period. In total, over the first 6 months, however, orders received were down on the prior year due to the weak first quarter.

Due to the second quarter improvements in order received, the order backlog at the end of June was at the same level as 1 year earlier, 175% compared to 178% based on the indexed figure of 2020. But it's worth to mention that the general market conditions in some countries are still very challenging. Whereas we had very good order intake, for example, in Germany, we still are not confident with the level of order intakes in other regions like North America. So overall, we are confident with the order backlog for the total group. But still, hard effort is necessary in some regions.

Coming now to our guidance. I gave some details on current order intake and order backlog. Some orders kick in later than expected. We need to work hard to make sure that those orders turn into revenue in 2024. But overall, as of today, we still believe we will achieve our guidance in all terms. That means we expect 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. Free cash flow should come in between EUR 30 million and EUR 40 million.

My last words are related to our next event. We will have on November 6th the next call for the quarterly statement of the first 9 months. Hope that you join again. This was it from the finance side.

Now, after a short break, we will be happy to answer any question you might have. I hand back to the operator.

[Operator]

[Operator Instructions] And the first question is coming from Stefan Augustin from Warburg Research.

[Stefan Augustin, analyst]

And the first 1 is actually on the key account business in the U.S. Can you elaborate a little bit on where your current discussions are with Circle K, let's say, if maybe drawing a couple of possible scenarios that could develop over the next half year or so, depending how things work out. That would be the first one. And the second one is, if you could elaborate a little bit on the data that the pricing side and pricing part of the negotiation, possibly it has a split between the key accounts and direct sales. So that would be the first part.

[Andreas Pabst, executive]

Could you repeat the question? Because I didn't get the link between Circle K and what will happen in the next 6 months.

[Michael Drolshagen, executive]

I can jump in, Mr. Augustin, just ask the question once again, if I did not get it right, maybe it was a little bit tricky. Mr. Augustin, if I understood you right, you are referring to the current topics without -- which 1 of our main customer is Circle K. And it's probably known in the market that this customer has fiscal year, which is from May 1 to April 30. And with big customers, in general, we have a tender business. That means we have a contract with them which lasts 3 or 4 or 5 years. And so it is with Circle K as well.

And obviously, it is the case that our current tender will end at the fiscal year for Circle K this year, so meaning it ends April 30. And there was a request for a quotation from Circle K to us and probably to some competitors to hand in our pricing for the next tender. This has been done. We were happy that we were asked by Circle K. I think we made a good offer to them. But it is also key to understand that there will not be any decision today or tomorrow. Because they need to prolong from their view the tender starting from May onwards next year.

So having said that, I cannot tell you any, by the way, for customers, I would not tell too much details. But there is nothing to explain right now what is the effect of it. I think overall, we have a good pricing with Circle K. We have understood their problems, especially in North America, where they are really keen and interested in our new offering with the short tunnel. This is a great opportunity for us as well. And yes, let's see what's coming there. As of today, starting of August, it's nothing which we can say really.

Does this answer the question?

[Stefan Augustin, analyst]

Yes, that already goes very much in this direction and possibly then for your understanding, if I phrase it that way. For example, if Circle K would push out any decisions for until the rest of the year or would not give any clarity over the next 6 months. Would that lead to a, let's say, special moves on your side? Or should we prepare for something like that? Or is that completely out of the ballpark?

[Andreas Pabst, executive]

From my financial point of view, I really think that we have a good relationship to Circle K. We have made a good offer. And I strongly believe that we will get a bigger portion of this new wallet of orders. If I really have to look in the future and everything is [ black ], then it is a bigger portion of our North American business. This customer, that would hurt us if we would get no orders. But once again, I do not believe that will be the case. I don't think it's thinkable.

[Michael Drolshagen, executive]

And in addition, as I mentioned, we are working heavily on being prepared in future to have our fixed costs more variable. And to react if something happened like that faster to be than to adapt our cost structure to that, and then also to look for new opportunities in the market, which there are plenty, especially also in the U.S. So, our focus and our strategy is to bring our business in the next years to a wider customer range. And not to forget our key customers, but also to be part of a bigger community in future.

[Operator]

And the next question is coming from Alexander Galitsa from HAIB.

[Aliaksandr Halitsa, analyst]

I have a couple, maybe first on the North America region. If you could maybe provide some more color, how do you explain the weakness that we currently observe beyond the Circle K topic? And how does your performance in this region stack against the broader market? That would be the first one.

[Michael Drolshagen, executive]

Okay. The first visit I did in the first month was North America, and it's 2 things that are very obvious there. One is in the U.S. that washing time is key for success. And our current machine or current equipment is not competitive in that area. So we started immediately 2 topics. One is floor tunnel, which we, Andreas and I already mentioned, so that we bring speed and, with speed, wash numbers for our operators. And with a good wash result and there is not enough space.

We want to combine the current U.S. machine with our new SmartCare machine out of Europe, best of two worlds. It's a very good wash result, but also to speed up the process there that we can offer our customers a better wash result in a competitive time. And that takes around 12 to 18 months, probably. And then step by step, for the smart choice. 12 to 18 months and tunnel, we are we are faster back in the business within 12 months to -- and we have already started that business with some customers here.

Let us focus on equipment -- focus on chemicals. There's huge market potential. And we are going to launch in some months, a new market brand in the U.S. for our chemicals. And to get a portion of the huge market there and not to lose focus. We are doing this state by state. So we already defined with which state we are going to start making business and then how we proceed.

And 1 of the major advantages in digitalization in Europe is our service. So we have a great service, and this perfectly trained technicians for our customers. And this, we also want to bring to the U.S. also state by state. And these measures, we deeply believe getting more and more market share in the U.S. market.

[Aliaksandr Halitsa, analyst]

If I may, a follow-up -- yes, sorry.

[Andreas Pabst, executive]

Maybe I can add here that we are also investing in our sales people. So that is probably also can be seen on the map, which was shown by Michael. So you see where we are working together with distributors in North American market. And you also see where we work with own sales reps. And there are some comments on that slide where we are also improving to give more power to our own sales people there. And that also would help us in the near future.

[Aliaksandr Halitsa, analyst]

Understood. 2 follow-ups, if I may, here on the equipment side. If you could just provide some context, I guess. I guess you had initiatives last year to increase the number of units in the tunnel segment in the U.S. And I think you've done quite well going from 10 to around 20. So those machines were not as competitive. You need to do more tweaking on those rollovers to understand that correctly. That's first follow up.

And the second one on the chemicals. If you could elaborate a little bit on how the chemical business will be organized in the U.S. Are those proprietary chemicals? Where are they going to be manufactured? If you could provide any more color.

[Michael Drolshagen, executive]

Okay. To answer the first question, we have to proceed the way because from a cost perspective, we are not as competitive as we should be in the tunnel segment. That means we have to look deeply into make or buy and from whom we are buying the products. This is currently started, and this also affects the design of the tunnel and how short we can design the tunnel finally. And because this is a market segment, which is not new, but not well worked from all competitors and also from us.

That means that we want to bring our customers into the situation to decide if they keep and rollover product or if they move on to a short tunnel concept. If the area [ and rounding ] has enough potential from a car perspective, a number of cars and number of washing numbers. So this is where we want to go in the short tunnel segment from a rollover perspective, we have to bring the digitalization to the U.S. very fast. And this is what I meant with bringing choice wash and SmartCare together to smart choice in the U.S. This is the second market segment we want to get access to.

To your second question, chemicals or chemistry, we have less than 1% market share in the U.S. regarding chemicals in the overall situation. And after 3 months, I am deeply convinced that our chemical gets a unique wash result. And to bring this to the U.S. and to get more and more market share, 1%, 2%, 3%, this is the target. And we want to do this with a new brand name, with a new launch, and then also to focus on salespeople and do the hard stuff in the U.S. And U.S. is a sales-driven market overall. So we have to do it like U.S. people would do it, sales driven with a great product. So we've developed our own chemicals and we bring this to the U.S., our receptions, and then produce them under our own brand name and sell it under our own brand name.

[Aliaksandr Halitsa, analyst]

Is there any rough timeline you have outlined for those initiatives? I mean, where are you currently? I understand that you need to still get the approval for your chemical composition formula in the U.S. If you could provide any color what kind of timeline we're looking at?

[Michael Drolshagen, executive]

We want to announce a new brand within this year.

[Aliaksandr Halitsa, analyst]

Okay. Understood. Then another question I have is on a gross margin that has been incredibly strong in Q2. Just wondering whether you view it as sort of a sustainable base, and then maybe also how does the current spot prices for steel compare to your hedge, and when do you need to renew that?

[Andreas Pabst, executive]

Okay. Maybe that's a question I will take. So I have elaborated a little bit about what is the reason for the gross profit margin. If you now ask if it is sustainable, I would say, yes it is, most of it. So our prices we have in our own hand. We have done our work with the production cost per rollover equivalent. We have done some efficiency topics also in the gross profit influenced KPIs.

But it's also true that we are currently profiting a little bit from a material price decline, and there 1 example is the steel price that helped us a lot. Can we really influence the steel price? No, we cannot. What we are doing is in terms of hedging our steel price, we are currently ordering our steel or our metals with 1 month's term. So in the past when I arrived here, we ordered with 6 months term. So now we are more or less on the market price.

[Operator]

At the moment, there seems to be no further questions. [Operator Instructions] Currently, there are no further questions.

[Michael Drolshagen, executive]

If there are no further questions, then I would thank you for the attention. And we provide all the material on our web page, and wish you a nice day. Thanks so far.

[Andreas Pabst, executive]

Thank you for joining this call. Bye-bye.