WashTec AG
XETRA:WSU
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Dear ladies and gentlemen, welcome to the conference call of WashTec AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Axel Jaeger, who will lead you through this conference. Please go ahead, sir.
Welcome, everyone, to the WashTec Q3 2019 Conference Call. My name is Axel Jaeger, and with me are my colleagues, Dr. Blaschke, Dr. Koeppe, Mr. Kalb, Mr. Weber and Mr. Wolodin.First, we have 3 slides to show you what happened most recently in the WashTec world. Then we will start with the key figures, revenue, EBIT and free cash flow and move on to the segment results by region and by product. Afterwards, we will look at the P&L and balance sheet structure, followed by the guidance for fiscal year 2019 and measures i.e., cost reduction measures and improvement program, plus further targeted activities for sustainable improvement that have been and will be taken to support WashTec development from fiscal year 2019 onwards.Next slide, please. What you see here is pictures from the Equip Auto Paris & the ICA Amsterdam. We presented our carwash solutions at Equip Auto Paris, pictures at the left side of the slide; and at the ICA in Amsterdam, pictures at the right side of the slide. We have dedicated and highly motivated teams on both carwash fairs. Overall, both trade fair presentations of our carwash solutions in Paris and Amsterdam have been quite successful and WashTec made a convincing impression. The pictures from the Equip Auto show, our new machine, the SmartCare, that is currently field tested. The picture from the ICA, bottom right at the slide, shows a typical engine's module to a carwash tunnel. This is our unique linear technology and the Smart entrance gantry.Next slide, please. WashTec received the German Brand Award. WashTec scored well in 2 categories in the competition for the German Brand Award. WashTec is a winner in the Industry, Machines & Engineering category and received a Special Mention in the Brand Innovation of the Year category for EasyCarWash. For the fourth year in a row, the interdisciplinary panel of expert of the German Brand Award selected companies that are pioneers in the world of brands. Only the best are honored for outstanding innovative achievements, consistent brand management and sustainable brand communication. We are proud that our consistent brand and communication strategy has been acknowledged in this special way. The awards from the German Brand Award confirm that WashTec is one of the best company brands in the industry. The companies are nominated by the German Brand Institute, its brand scouts and expert committees. A total of 1,250 participants from 19 countries applied in 2019.Next slide, please. Here, you see on the left side, the introduction of the MaxiWash Plus package. WashTec is expanding its truck and bus product portfolio to include the MaxiWash Plus system. For our customers, this type of MaxiWash is fully equipped and available at highly attractive terms. The complete package of the MaxiWash Plus feature extensive equipment and a full-service offer. On the right side, you see a picture that directs you to our new EasyCarWash homepage. WashTec has launched a website dedicated to carwash customers interested in learning how easy it can be to have and, so to say, always clean car. Under this website, you will learn what EasyCarWash is all about, and what benefits come along with having a carwash subscription. For those customers, which are already convinced EasyCarWash users, the website also offers tips, answers to the questions within an FAQ section.Next slide, please. Here, you see our Q1 to Q3 2019 performance. The development of revenues, EBIT and free cash flow in the first 9 months of this year was mainly driven by lower key account sales due to the uncertain global economic situation in the first half of this fiscal year. Direct sales showed a double-digit growth rate, but could not fully compensate for the lower sales to key accounts. However, we expect key account business to constantly improve in the fourth quarter. Order backlog as of September 13 (sic) [ September 30 ] is still above prior year. Headcount is still 13 above prior year. As a consequence and due to a general increase in labor costs that occurs based on collective labor agreements, personnel expenses increased from EUR 102 million to EUR 107 million as of September 13 (sic) [ September 30 ]. EBIT decreased mainly due to lower revenues, a different revenue mix regarding products and personnel expenses set us still above prior year. Free cash flow decreased due to lower EBIT. In Q3 2018, we had a cash-in from a sale of assets to one of our customers from the Carwash Management business that increased last year's free cash flow compared to free cash flow as of September 13, 2019 (sic) [ September 30, 2019 ].Next slide, please. Here, you see our results for the first 9 months by region. Revenues in Europe are at prior year levels. Revenues are driven by good direct sales on one side and low key account sales at the other side. Revenues in North America increased based on a good development of direct sales in the third quarter, double-digit, and could catch up to last year's revenues as of September 13 (sic) [ September 30 ]. We expect a positive development of revenues in this region during the last quarter of this fiscal year. Order backlog in North America is double-digit above prior year. Development of revenues in Asia Pacific is twofold. Australia is still in a turnaround situation and working to get back on track. Development of revenues in China is unchanged, positive. In general, order backlog in Asia Pacific did increase compared to prior year levels. EBIT in Europe is still below prior year. Main drivers are the nearly flat development of revenues, still higher level of headcount in direct area and a general increase in labor costs due to collective labor agreements. Cumulative EBIT in North America is still negative, but catching up. Compared to the second quarter of fiscal year '19, EBIT development in the third quarter of fiscal year '19 was considerably stronger. Third quarter revenues were catching up to prior year levels and initiated efficiency measures are coming more and more into effect. The main driver here are direct sales. EBIT in Asia Pacific is due to low level of revenues in Australia still beyond our expectations. China is doing well, and the target is now to constantly increase profitability levels.Next slide, please. Now we come to our results by product. Machine and service revenues are at prior year level. Key account sales were below expectations, but direct sales were strong. Chemical revenues showed a positive development in the third quarter and could catch up to prior year's level as of September 13, 2019 (sic) [ September 30, 2019 ]. As most of you know, we were able to regain a lost Chemical customer contract in North America. The reintegration of this customer in our North American distribution network is still ongoing and will side-by-side start throughout the first quarter of 2019 (sic) [ 2020 ]. Revenues from other businesses, i.e., the CWM business, were lower as expected due to the sale of asset i.e., wash sites, to customers from the Carwash Management business. We launched our new rollover generation SmartCare at various carwash fairs. This new rollover generation is based on a platform concept and offers numerous smart features. The first test machines are now out in the field to operate in a real-life environment. And we are getting the necessary data to learn and further improve based on the field test results.Next slide, please. Our profit and loss statement. Based on the seasonal cycle of carwash business, we do expect a strong fourth quarter of the year. Gross margin decreased due to a different product and regional mix. The increase in personnel expenses comes from a global headcount increase of 13 headcount compared to last year. The additional headcount are nearly all located in direct areas, such as sales and service. Additionally, a general increase in labor costs occurred due to collective labor agreements. Increase in depreciation is mainly a consequence of the application of IFRS 16 from fiscal year '19 onwards. Right-of-use assets are capitalized, and the depreciation is shown here. Given the lower EBIT as of September 13, '19 (sic) [ September 30, '19 ], WashTec implemented an immediate cost adjustment and EBIT improvement program to reduce other operating expenses from fiscal year 2019 onwards. The announced cost reduction measures started and show initial effects. Additionally, we implemented concrete initiatives to constantly lower personnel expenses, i.e., the actual headcount, on a global scale from 2020 onwards. The aim is to reduce the WashTec headcount to around 1,820 in line with the 2017 structure. These cost and headcount reduction measures will cause additional expenses in the full year 2019.Next slide, please. Our balance sheet. Balance sheet total increased to EUR 271 million. Part of it was the first-time application of IFRS 16 from fiscal year 2019 onwards. Right-of-use assets are capitalized at a value of nearly EUR 20 million. Equity decreased from EUR 95 million to EUR 74 million due to payment of dividends, roughly EUR 33 million. Net operating working capital increased due to increased level of stock. We pre-manufactured incoming orders for machines to make sure to be able to deliver and install as much as possible within the remaining months of the fourth quarter 2019, and as a consequence, turn the orders into revenues. Compared to December 31, 2018, free cash flow development is, besides a lower EBIT and a higher level of net operating working capital, decreasing due to the sale of assets, i.e., wash sites to customers from the Carwash Management business in fiscal year '18. Overall, level of investments in fixed assets is stable.Next slide, please. The WashTec share performance. WashTec has a long-term, value-oriented and stable shareholder base. Given that the share performance during the first 9 months of fiscal year '19 was below our expectations, WashTec is still an attractive business case. We do offer a robust business model with a high share of the -- we are twice as big as our next competitor and do have the largest installed base. We see growth potential in our markets across the regions. The population of cars will grow from 947 million worldwide in 2015 to 1,700 million cars in 2035 and to more than 2,000 million cars in 2050. Still 50% of the global regions are handwash-dominated, therefore, giving a strong trend towards sustainable and green solutions, we do see here a strong potential for the introduction of equipment-supported carwash solutions. Taking the equipment-supported carwash markets only, we see -- we still see a lot of room to increase our market share in equipment-supported carwash in every regional segment.Next slide, please. Our guidance 2019, adjusted. We adjusted our EBIT guidance from at least 10% to around 9% at group level. The revenue guidance for North America is adjusted from significant increase to a slight increase, i.e., a growth rate from 3% to 5%. The revenue guidance for Asia Pacific is adjusted from slight increase to stable revenue development. WashTec implemented an immediate cost adjustment and EBIT improvement program to reduce other operating expenses, e.g., noncritical projects will be postponed within this fiscal year. Additionally, we implemented concrete initiatives to constantly lower personnel expenses, i.e., the actual head count. On a global scale from 2020 onwards, the announced cost reduction measures have started and are showing initial effects. The aim is to cut other operating expenses and to reduce WashTec head count turnaround 1,820, in line with the 2017 structure. The EBIT margin of around 9% does not include any such extraordinary expenses. Given that the accumulated EBIT in North America is still negative, we are catching up. Third quarter revenues were reaching prior year levels and initiated efficiency measures are coming more and more into effect. APAC is due to low level of revenues in Australia, still beyond our expectation. Head count has been lowered and structural measures are implemented. The target is now to reach, again, revenue levels that have been achieved in the past, and as a consequence, increase profitability levels.In general, the fourth quarter is expected to be above prior year, although revenue growth will be lower than expected in the first half of the year.Next slide, please. Here, you see our financial calendar. You can meet us at the Eigenkapitalforum in Frankfurt in November. And now we are open for your questions. Thank you very much.
[Operator Instructions] The first question is from Eggert Kuls, Warburg Research.
Mr. Jaeger, I have a question to your announced cost cutting. So if I have accounted it right, then you have to decrease your head count by some 70 people. And you pointed out that the expenses will be already this year. So my question is: Can you provide us with a number, how much it will be? Or is that not possible at the current point of view? And the expenses, will that be made up of provisions or will be the cash-out already this year?
Yes, we are working currently at the special program. And yes, expenses will be provisions, but I don't expect a significant cash-out within this year. And with an estimate of approximately 70 head count, you are pretty good.
So my experience with other companies is that you can account, let's say, some EUR 100,000 per person. Is that somebody you would agree? Or do you think it's too high?
No, I would say it would be at -- let's put it this way, at the upper edge.
At the upper end...
Yes. Because it's a global program, it's not an [ out-scope ] program, the 70 head count appoints to our global organization, and we don't see this, let's say, cost rates per head in every country.
So you see it significantly lower than this EUR 100,000.
I would just say it's an upper estimate, and we are working at the program, but probably the average will be maybe a bit lower.
Okay, okay. And maybe -- so you don't have given the guidance for next year already, but I can remember at the beginning of the year, I think you said you are expecting for the next years, on average, 3% to 5% top line growth driven by the factors you have pointed out during the presentation. But my impression is we are getting more and more economic headwind. And from this point of view, what is your view on next year? What do you hear from your marketing departments worldwide?
I mean, as you know, we are giving our guidance with the release of our annual financial statements, usually in February and March. What I can say is that, of course, there is some kind of headwind. There is some uncertainty in the market. But as I pointed out, we still see growth in the region. We saw some postponements of orders during this year. But what we've seen on the other side is that, for instance, our measures towards fostering direct sales are successful and that we see increase in direct sales, at least in Europe and in North America. In Australia and China, that's a special situation. But it's not significant for WashTec because, as you know, most of our revenues we make in Europe. So yes, there are headwinds. There is uncertainty in the market. But we are optimistic. And of course, our Chemical sales, for instance, they improved quite well. I mean, this year, for the first 9 months, we have EUR 35 million of Chemical sales, and they are above prior year.
Okay. So seems you are not that pessimistic for next year.
No, not necessarily. I mean, I mentioned we have still markets that are handwash-dominated. The car population is growing. So no, I'm not that pessimistic for next year.
Okay. So yes, of course, we can account for the number, you would say, from the 70 people you want to reduce your head count. Is that already done by the end of this year? Or is that something which we can expect to happen over the course of 2020 so that the full impact of the savings will only be in '20 -- in '21?
What I can tell you is that the plan will be so concrete that we will be able to have provisions in the financial statements by the end of this fiscal year. Execution will be done, I would say, mainly in the first half of next year to make sure that we see the effect of head count reduction and cost reduction in next fiscal year. But we are now working concretizing the planning and starting with execution end of this fiscal year, beginning next fiscal year.
Okay. And very last question. Your program is also including reducing other operating expenses. What number are you targeting here?
We already worked on this reduction within this fiscal year, especially in the third quarter and now in the fourth quarter. And it is twofold. Of course, you have elements like some projects, standard elements, like travel costs, like entertainment and so on and so forth, that you can reduce, but many of the other operating expenses are bound to the activities of people. So what we expect is that by reducing the head count, we will reduce our other operating expenses because simply less people create, so to say, less cost besides wages.
The next question is from Richard Schramm, HSBC.
I have a question concerning your sales guidance. First, [ the cost guidance ]. [indiscernible] [ I must admit this is -- ] that the guidance provision you have now made with a 9% EBIT margin instead of 10%-plus results from lower sales growth than expected in the second half or in the Q4. But on the other hand, you left your full year sales guidance unchanged at stable. So how do I get this together? Is there now a weakness in the business or not?
Well, it is -- first of all, the revenues from Europe are the biggest part in our revenue figures. So we have now EUR 256 million, revenues after 9 months. What we see is that for instance, North America is catching up. And that they now after 9 months reached prior year's level. So we see that the second half of this fiscal year is getting better and that, at least what we see today, the fourth quarter will be the strongest quarter of this fiscal year. However, we will, as of today, based on the information, not be able to cover the low start in this fiscal year, especially in the first quarter. So we say we will be able to achieve stable revenues in Europe and stable revenues at group level. However, North America is catching up. And in APAC, especially, China is doing well with the revenue development plus a good development in Chemical sales, which are, as I mentioned before, even after 9 months above prior year.
So just in -- well, I'm still not convinced here, but anyhow, leave it aside. Concerning this Chemical sales, you mentioned this gaining back of this big customer. I'm not sure if I missed it, but is this effect already working, and we have seen this already in Q3, where you said that Chemical sales were pretty strong? Or is this still to come? So I'm not sure.
This is -- yes, let's have a few words on this. This Chemical contract is for North America. And this will come because one thing is the delivery of chemicals in North America to the network of our customers plus the production of the chemicals. And managing the delivery of the chemicals to the single site requires quite some knowledge and management. So we are currently organizing for this. We are taking site by site, so to say, in operation, but it will have full effect next fiscal year. We are now, so to say, we regained the contract in the first half of the year, and we're now working on making it happen, organizing the distribution of the chemicals and so on and so forth.
This would mean that 2020, the Chemicals business should also see some tailwind from this site here?
Yes.
Yes.
Okay. And then one question concerning, again, U.S. So maybe I missed it, but as you are already more or less flat on sales with 9 months, but the loss pretty much doubled. So was this attributable to mix effects? Or what was the major reason behind this?
For North America?
Yes.
Yes. First of all, in North America, as we mentioned before, in the first half, we saw postponements of orders from key accounts. And this orders are coming in. Second, we had strong direct sales in this region, and from the beginning of the year, we had some, so to say, efficiency and operational problems in the units that we fixed during the first, second and third quarter. So now what we see is after 9 months, direct sales are strong and the revenue figures are catching up to prior year's level. On an EBIT level, the North America, yes, they are still negative, but they are getting better. If you compare the second quarter 2019 with the third quarter 2019, you can see that the EBIT is getting stronger, given that it's still negative, but it's getting better.
Yes. I see. So it's mainly through these inefficiencies and kind of extra costs you mentioned in the first half, which still weighs on this result here, right? And this should then be obsolete for 2020 as well?
Okay.
The next question is from Oliver Knobloch, Pictet Asset Management.
I have a couple of business questions. I saw that the U.K.-based Motor Fuel Group has partnered with ISTOBAL to -- and this is the largest independent operator in the U.K. to roll out ISTOBAL business. Was Motor Fuel Group before a WashTec client?
No, no.
No. This is Stephan Weber talking. No, they were not a WashTec client before. And they are not exclusive, or partly a WashTec client. They are not exclusively teaming up with ISTOBAL. Also, we received quite a substantial number of orders from them, but we don't publish this kind of information related to any key accounts. We never publish names and volumes of key accounts.
Then another observation I have done during this quarter was Kärcher announced that they have doubled its carwash rollover production capacity since June. So if somebody want -- even though a much smaller competitor doubles its capacity, I assume they have a reason for that. So is the conclusion that you're currently losing market share in your home market or in Europe, is this the right conclusion?
The conclusion is not right. We know exactly why Kärcher doubled the capacity because they had taken up a larger order in China at prices where we were not prepared to entertain the business, to be very honest. We were involved into the tender. And they just wanted to have some footprint, obviously, in China. They are building these machines here in Germany and shipping them over to China, and that's [ the intent ]. They are still producing in our terms on a low level. Doubling the volume is basically that one order from China. For the time being. Yes?
Okay. So they deliver carwash equipment from Germany to China?
Yes. As they have no production facility yet for carwash equipment in China.
Yes. And then the last question is about North America, or especially U.S. I remember that you had a big SAP project, started last year. And I was wondering how this is going. And this was also a part of the extra costs, extraordinary costs, you have had in the United States this year?
No. We introduced SAP to our North American subsidiary, 2017.
Yes. But I suppose it was not finished.
Earlier, it was introduced. What we did this year is we did education work, but the system was introduced '17, '18. But what we did this year, we had quite some turnaround. This is local staff. And we had a lot of efforts to, so to say, to reeducate the people to bring things to a certain level that they could take the most advantage out of the system and that they learn what the system provides for them, what kind of information.
So this means the SAP in the U.S.A. is now running without...
It's running since '17, '18. It was introduced '17, '18.
Then the next question is from Aliaksandr Halitsa, Hauch & Aufh?user.
Yes. I would have several questions. I put them one by one if it's okay with you. Starting with this program to reduce head count. You already mentioned that it would be probably completed in the first half of 2020. Assuming that you get to the targeted structures, basically in line with 2017 structures, would it be fair to kind of demand from WashTec to generate profitability at the level that we have seen in 2017 on the same sales volume?
Let's put it this way. We're getting back to the 2017 structure. But of course, sales structure or sales mix change, we are putting a clear focus on direct sales. Before, we had, especially in '17, we had more key account sales. And so to say to give a more constant or to create a more constant revenue stream, we are more focused on direct sales. So yes, we have a clear focus on profitability, but the revenue mix will be different compared to 2017.
As far as I remember, the narrative was always that on the EBIT level, it is -- for WashTec, it really does not make much difference whether you have more sales with the key accounts or more sales with direct customers because you basically have lower gross margins on the key accounts, but at the same time, higher margins on individual operators or direct sales, but those have to be serviced more. How would you explain that?
That's right. Of course, yes, if you say, a key account, you have less sales and marketing cost. But on the other side, they have a stronger, so to say, purchasing power. If you have a direct sale, you have more sales and marketing efforts, but maybe more negotiation power. It's just -- I was just referring on the mix, and additionally, of course, we are fostering the sales of Chemicals. That's maybe -- that are the main points that are different to 2017. However, we, of course, have a strong focus on EBIT margin. And that's why we do this program.
So you would agree then that mix really doesn't matter much for the underlying EBIT margin?
Not necessarily. It gives more -- it creates a more constant revenue stream because what you saw in '17, '18 was we had a peak revenue based on key accounts that come in with a large order. And if we do more direct sales, we can give more constant development to our revenue streams and to our EBIT development.
Okay. Then on the full year guidance, when you say you expect stable revenue based on your definition in the table you have that it means positive or negative deviation of less than 3%, I was just wondering if you can confirm that you expect for 2019 at flat revenues or positive deviation that you do not really expect a decline? Or do you really also have a possibility that they might dip into the negative territory for the full year?
I mean, our -- yes, you are right with the definition of our guidance, but I expect today it's a positive -- that we are on the positive side.
Okay. And then maybe just to confirm with this regained customer in North America, the Chemical customer. So you basically don't have -- you have 0 revenues in Q3 this year from this customer.
We have very -- we have low revenue because the business is catching up. We regained the contract and, as I said, there are a lot of sites in North America, and we are turning or we are starting servicing one site after one site. And site means a carwash device somewhere that we integrate in our distribution network. So yes, we may have had some revenues, but very low, and the share of revenues is increasing over time as we integrate the sites in our logistics system.
Okay. And then if you could talk a little bit more on the development in Europe you're currently seeing. We see that the top line was pretty much flat after half year. Then you are down 5% in the third quarter. And we also see that order backlog in Europe is also down. So I was just wondering if you can share a little bit of a color how do you see the development in Europe.
Well, finally, what we see is in Europe after third quarter, when -- let's -- the revenues are this EUR 256 million below prior year, but our order backlog is still above prior year. So we see in Europe some uncertainty, as I said before, and maybe, as mentioned before, some headwind. But overall, we are still optimistic that we can grow in Europe. And we launched several activities, especially in the field of direct sales on a country-by-country approach to put even now more focus on sales to direct sales customers.
May I just confirm the order backlog in Europe is up year-over-year in third quarter, you said?
I said the overall order backlog is above prior year.
For the group?
Yes.
Okay. And lastly, I think just on the Australia. By when do you expect the turnaround to occur?
I mean, the turnaround in terms of order intake has already taken place. In other words, we have had 5 month in a row now where we have been seeing more order intake than in the previous years. So we are building up order backlog. But due to the delays, I mean, shipping to Australia and [ high-rising ] invoice, there was a couple of months of delays. So in other words, early next year, we will likely see the first impact on the revenue side in all these activities that we are seeing. So turning around in order intake has taken place already, but revenue, I would say, early next year.
The next question is from Richard Schramm again.
Yes. So I have a follow-up on this development in North America. Sorry for that. But I'm still not obviously getting it right. So you have achieved a pretty strong quarter in Q3 of EUR 21.6 million. This was 16% plus year-on-year, although still, you made an operating loss there. And there are some quarters, if you go back a bit to 2017, for example, where at the same sales level, you achieved pretty decent positive results. So what has changed? Is -- the cost base is too high in North America? Or is it still this mix effect which are the moment the problem? And where should we set a kind of breakeven on a quarterly basis here?
I mean, as I mentioned before, we had beginning of this fiscal year, efficiency issues in North America, and we are working since January, February, to fix these issues and to get much higher efficiency and better profitability level. And that's what I mean when I say if we look at it on a quarter-by-quarter basis, in this fiscal year, we see that, so to say, the ship is turning slowly. If you look at Q2 and compare it with Q3, you see it is getting better. Still negative, yes, but it's getting better, and that's mainly due to the efficiency initiatives that we launched and where we work with the local team.
Yes. I understand, but if you are not -- if you are making with EUR 22 million in sales minus EUR 6.0 million EBIT, right? And if we take this EUR 22 million and say that's the run rate for the next year and you would be over EUR 80 million in sales, would that be enough to be positive as you were, for example, in 2017, that you have EUR 80 million in sales and EUR 5.9 million positive EBIT? So that's what I cannot catch together at the moment.
If we could manage next year or if we achieve this revenue level, together with the Chemical contract that will come into effect next year, then I'm confident that, yes, we are getting back to profitability in North America.
And at the moment, there are no further questions. [Operator Instructions] There are no further questions, so I would like to hand back to you, mister.
Yes. Thank you very much, everyone, and have a nice day.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.