WashTec AG

XETRA:WSU

Earnings Call Transcript 2022-Q3

[Operator]

Dear, ladies and gentlemen, welcome to the conference call of WashTec AG. At our customer's request, this conference will be recorded. [Operator Instructions]

May I now hand you over to Dr. Ralf Koeppe, who will lead you through this conference. Please go ahead.

[Ralf Koeppe, executive]

Thank you. Ladies and gentlemen, on behalf of the WashTec Board, I would like to welcome you to the Q3 presentation 2022. Attending the call with me is my new colleague, Andreas Pabst, CFO of WashTec, who joined the Board on October 1; and my colleague, Stephan Weber, Chief Sales Officer. As you know, Kerstin Reden, former CFO of WashTec, has left the company due to personal reasons what we fully understand and support. We wish Kerstin all the best and thank her for her valuable contributions.

Next slide, please. I will now hand over to Andreas for a personal introduction.

[Andreas Pabst, executive]

Thank you, Ralf. Welcome, everybody, also from my side. My name is Andreas Pabst. I'm 49 years old. I live in a small town close here to Augsburg together with my wife. We both have 4 children. A little bit about my professional background. I started in management and administration. Then started my professional career at KPMG where I made the tax advisor exam. Then over different public listed companies [Technical Difficulty]

[Ralf Koeppe, executive]

On this slide we show our ESG program for economic sustainability, leadership in sustainable car wash. We released an energy saving product offer for our JetWash product addressing the installed base of our customers. This contributes to our goal of resource efficient operations and offers great value to equipment operators. JetWash sites are commonly operated with treated water. By changing the setup from warm to cold wash, our customers can save up to EUR 2,000 per year. Our chemicals are already optimized for cold water use and we can offer a product upgrade, including chemicals, to help our customer to achieve energy savings.

Slide 8, please. A final slide in the WashTec update section. We have 2 first installations of new products in the U.S., which is the SmartCare U.S. has a full specification machine with a key account customer and the AquaPur Modular has been working for North America. AquaPur Modular water retreatment system is now available as a UL approved version. WashTec increases the product range and can now offer its own water retreatment system in North America contributing to a better customer outcome.

Slide 9, please. I now will hand over to Andreas for the presentation of Q3 results 2022.

[Andreas Pabst, executive]

Thank you, Ralf. Please move to Page 10. On this slide, you see our main KPIs for the third quarter. For the third quarter, group revenue was EUR 118.6 million, up by 6.6% year-on-year. This is a new all-time high for the third quarter. This growth was supported by good key account business, our price increases and our growth in the U.S. accomplished by the tailwind we got from a U.S. dollar FX rate. On an FX like-for-like basis, our revenue growth in Q3 2022 was 2.7%. Now let's look at the EBIT. In Q3 2022 our EBIT comes in at EUR 9.7 million, which is clear below last year's number. EBIT margin is 8.2%. As explained in calls before, it is true that this is mainly a result of the timing gap between material, logistics and energy price rises on the one hand side and our own price increases, which we did in the first half year and further to come. Ukraine war, following energy crisis and continued lockdowns in China leads to further shortage on purchase market followed by significant price rise.

We react on it with additional price increases for our products. But due to the fact that WashTec's conversion to cash cycle meaning the time between order intake and revenue recognition takes 4 to 6 months, the latest price adjustments are not fully recognized to the P&L yet. But we see in Q3 here already some impact. EBIT margin Q3 is 1.2% above EBIT margin in Q2. As in all the months ago, we at WashTec take high priority on our delivery capability and we were successful in doing so. We were able to fill all the delivery obligations also in this quarter. But this causes on the other hand, higher safety stock and on the other side, more flexibility in the production process is needed, which for sure leads to some inefficiencies and creates additional cost. Our customers are facing similar problems too for example when they do not get necessary materials or craftsman to do the installments in their facilities so that we can bring our products in.

But once again we on our side managed our delivery obligations quite well and fulfilled every single order. For the third quarter, free cash flow after lease payments was positive at EUR 7.6 million after a negative EUR 1.0 million in Q2 2022. Looking now at the development by product category on the next page that is Page 11. Our machine and service business increased by 8% in third quarter. This is the strongest quarter for this segment in the last 5 years. The special key account business contributes to the revenue growth. Direct sales remain on a solid prior year level. Revenue from Chemicals in Q3 was EUR 12.0 million, a drop by 3% year-on-year. After a strong first half year, Chemicals revenue was slightly down on the prior year. Long heat waves through July and August in Southern Europe, summer drought in France with car washing bans and unfavorable car wash weather in September led to a fall in wash numbers with a corresponding effect on Chemical revenues.

Moving on to the performance by region in the third quarter on Page 12. In the third quarter, we saw moderate revenue growth by 2.7% in Europe. We saw the continuation of the slight weakening in the direct sales business we know from Q2 whereas revenue in key account business remained strong. The weather related decline in Chemicals, which I already mentioned, slowed down the growth in the third quarter. EBIT with EUR 9.8 million was below prior year by EUR 1.7 million, but it was on the same level as in Q2 2022 where we had lower revenues. This was a result of all the effects we already mentioned for the group EBIT development. Europe, nevertheless, showed a double-digit EBIT margin of 10.8% in the third quarter. WashTec North America. Revenue in North America was EUR 27.6 million, up by 24%. All product segments contributed to the positive trend. The machine and service segment, the direct sales business made a particular large contribution while key account business was slightly down.

In line with the trend across the group as a whole, this region was also negatively impacted by cost increases. Because of the significantly larger share relating to key accounts for which a price adjustment could only be implemented from June 2022 in conjunction with a higher material cost share, it was not fully possible to offset these effects with the increase in revenue. So the EBIT comes in at breakeven whereas we have negative EBIT in Q2 2022. In APAC region, third quarter revenue of EUR 4.7 million was equal to prior year. Revenue was impacted in particular by these prolonged lockdowns in China and resulting in a lower result. Coming now to the results for the first 9 months. On Page 13, you can see the development of revenue, EBIT and free cash flow from 2019 to 2022 for the first 9 months of the year. For 9 months 2022, group revenue was EUR 338.6 million, up 10.5% year-on-year, a new all-time high for 9 months.

Even at constant exchange rates, the revenue growth in the first 9 months was 7.6%. All product segments contributed to this revenue growth. Partly through the implemented price increases, the equipment and service segment improved significantly compared with the first 9 months of prior year. Looking now at EBIT development. EBIT was EUR 22.6 million, down by EUR 10.4 million compared to last year. As already mentioned for the development in the third quarter, it was mainly caused by time lag between material price rises and our own price increases as well as by normalization of the business activities like trade fairs and travel after the years impacted by COVID-19 pandemic. EBIT margin was 6.7% after 10.8% last year. Compared to Q2, the company could increase EBIT by 1.2%. Cash flow development was impacted by a significant increase in inventory due to safety stock in regards to uncertainties on the materials market.

The next slide shows more details to explain the EBIT development compared to prior year. As you can see, the main impact is coming from the gap between recognized price increases and the rise of material related cost. Selling expense increase is mainly driven by volume related increase of freight costs. In addition, there was an increase in trade fairs, which were not incurred in the prior year due to the pandemic situation. For example, WashTec was this year presenting its products in fairs in the U.S., in Stuttgart, in Bologna and in Madrid. Let's have a look at revenue by product category on Page 5. Revenue from Equipment & Service reached EUR 290.9 million, up 11% year-on-year. The growth in this area was mainly driven by the significant increase in the North American region, but also other regions developed positive compared to prior year. Revenue from Chemicals was EUR 43.5 million, up 14% versus prior year. This came mainly from first 6 months of the year.

As I already mentioned, Q3 for the Chemicals was a weak quarter due to weather conditions. Moving on to the performance by regions on Page 16. Revenue from Europe was EUR 265.4 million, up 5.6% year-on-year mainly driven by key account business. EBIT is at EUR 24.1 million, which is a 9% EBIT margin. Compared to last year, the development was impacted by already this quite effect. Material prices and availability as well as additional cost in regards to securing our delivery capabilities. Higher sales volume and the ability for fairs led to an increase in selling expenses. As mentioned, in Europe we were at fairs in Stuttgart, Bologna and Madrid. In October, we presented our products with good response in Paris. On the next page, North America. American revenue was EUR 71.4 million, up 38.4%. In U.S. dollar terms, revenue increased by 22.4%. All product and customer segments contributed with double-digit growth.

The region generated a loss of EUR 1.2 million, which was mainly caused by the lag between material price rises and own price increases especially for key account business. In addition, earnings were negatively affected by a significant increase in health insurance fee. Next slide. APAC, our smallest region. Revenue in that region is overall quite stable. The positive development in Australian market is counteracted by poor development in China where we have impacted the continuous lockdowns. EBIT is slightly positive. Coming now to our main balance sheet KPIs on Page 19. Net working capital went up due to an increase in inventory with regard to the safety stock. After cash cycle KPIs like DSO and DPO, we're mainly stable. This fact impacts also our cash flow development and in the consequence together with the dividend payment, an increase in the net bank liabilities. Equity decreased mainly to the EUR 38.8 million dividend payout. Compared with the 2021 year-end, the equity ratio decreased from 36.9% to 27.0%.

Coming now to our guidance. As you know, we adjusted our guidance in the middle of the year and let me make it short. The figures in Q3 '22 give us confidence to believe in our adjusted guidance. We see a revenue increase for full year between 10% to 12% and an EBIT ratio of 8% to 9%. But let me remind you what has also been said at half year's call. Like many companies, we currently face supply chain challenges on supplier and on customer side. In addition, the situation in regards with the gas deliveries in the remaining months of the years increase the uncertainty for the outlook. Our top priority continues to maintain lead times and avoid business interruptions. We have managed this quite well so far and we will do our utmost to do in future. Our guidance assumes that we do not face any significant business interruptions. As I was saying, maybe finally, let me guide you right to our financial calendar, which is on Page 22. You see our next event is the Equity Forum in Frankfurt. We, Ralf and myself, hope to see you there.

This was it from the finance side. Thank you. Now we are pleased to answer your questions.

[Operator]

[Operator Instructions] The first question comes from Alexander Galitsa. Please announce your company name before asking your question.

[Aliaksandr Halitsa, analyst]

It's Hauck & Aufhäuser. I have a couple of questions maybe starting with Q3 and then implications for the full year guidance. Could you somehow quantify how much is the revenue effect you're having from the delayed or potential delays in installations that you have seen in Q3? That's number one. And then with regards to the full year guidance, earlier you upgraded the sales guidance target which now requires acceleration in Q4 after we have seen some weakness with Chemicals. And also we hear about construction delays that potentially impact the revenue recognition or the timing of revenue recognition. Could you just provide some more color from today's standpoint how the situation looks like and what gives you really confidence that this acceleration that you need in Q4 is actually within reach?

[Ralf Koeppe, executive]

Just a question before. Was the call transmitted rightly? Because I got some emails from participants that we did...

[Aliaksandr Halitsa, analyst]

In the beginning like in the first couple of minutes, I was put on standby so I heard music playing. So I had to really redial in and then it went all right.

[Ralf Koeppe, executive]

Okay. So to all, I apologize for that. We will clear that with the service provider. And I will now start giving first indication to your question, then hand over to Andreas. First of all the guidance, as we said, has a range in the revenue and if you remember, the revenue range has a lower and upper band and especially that has been chosen because we saw some -- always have tracked supply chain issues, which we manage actually quite well. But we have now an increased problem at the customer sites that those customer sites don't get the sites finished and we literally have to go manually through our production book to see whether the sites can be completed and installations can be made. Those delays can be sometimes 1 week, 2 weeks or could be then 2 months; that depends.

But we see some shift and we of course are working hard to have a good closing at the end of the year. We know that in the last years we had good runs in November and December so we're very confident about this. But it's additional work, we have to invest to do the installation planning, to get the revenue recognition as planned and also the production program is adjusted to that. And at the end last 2 weeks, we will have prepaying -- we have to produce prepared machines like the last year so we have a sufficient gap for the installation teams to react. That's the current situation. Andreas?

[Aliaksandr Halitsa, analyst]

And then maybe a question on -- if you could -- a little bit more broader maybe. If you could discuss sort of the customer dynamics that you're currently seeing particularly in the context of the revenue decline in Q3 you have noticed in key accounts in North America I believe. So is there kind of a seasonality to it or is this really sort of a trend of sorts? And maybe building up on that also if you could give any color from today's standpoint, how do you see really individual regions developing going into next year?

[Ralf Koeppe, executive]

For the individual regions, let's say somehow the impression of how and where the market is leading, I can hope can hand over to Stephan Weber. But first of all, we are talking about revenue recognition and the delays generated are due to these problems on the installation side. And we have the same, which is coming back from North America. They have the same in North America as in Europe. So we see the similar problems or let's say the similar management activities to get this revenue recognition. Now Stephan?

[Stephan Weber, executive]

So the question was regarding the order intake. I didn't get you correctly. [Technical Difficulty] the order intake issue.

[Aliaksandr Halitsa, analyst]

What are the customer trends?

[Stephan Weber, executive]

The customer trends. Okay. We look at the customer trends that still need to be described. I mean the entire situation whereby prices are rising everywhere has of course created some uncertainty, I would say, with the direct customers. That's very obvious. Regarding key accounts, largely those that are exploring, in other words the upstream customers do have very good revenue streams. So at this point in time also have good cash situation so they invest more than we have anticipated we have to say and also we are increasing our share in the key accounts at this point in time. So we have on one hand a little bit of hesitancy. There's a very good funnel that we see in direct sales not even declining.

However, we should also see that decisions are delayed on the direct business side, that is car dealers and gas station operators and car wash operators, whereby we do see let's say very good movement on the key account side. We did this already. We've seen this already throughout the year and in the meantime, we can also see that the revenue recognition whereby we saw before in the order intake, which is not [indiscernible]. So in other words, meanwhile see what we already indicated in the Q1 and Q2 call that there is a tendency movement towards key accounts and that's also by the way something that we, consider to be going forward honestly be a similar situation. Does that answer your question?

[Aliaksandr Halitsa, analyst]

Understood. Maybe you could also kind of give color how should we read the slight decline in incoming orders in the third quarter if there is a seasonality or do you see trends building up there?

[Stephan Weber, executive]

I can give you an answer. We were -- let's say to a certain extent, we had a far higher order intake in Q2 and usually due to our very well managed [ summer ] system where we have all the quotation, everything that we have in the system in our CRM system, we are usually very precise in forecasting order intakes for the quarter. And in this Q2 this year, it was for the first time since many, many quarters where we had far more order intake than we anticipated. And if you kind of put Q2 and Q3 together, then we are where we actually saw it.

So in other words, we had implemented a price increase for Q3, but that was just before Q3 so we assume that some of the customers had decided to purchase before the next price increase because we have ongoing price increases every now and then. And also we had some orders in Q2 that we expected in Q3 in the key account side. So overall Q2 and Q3 are excellent and the little bit lower Q3 is really not a trend that we're seeing now. It is more, let's say, the sum of 2 quarters.

[Aliaksandr Halitsa, analyst]

Understood. That's helpful. And then maybe briefly on R&D and digital offering. In terms of R&D expenses, could you roughly provide a guidance what do you expect to spend in the coming years so 2023, 2024? And secondly, I believe with your digital offering, the first machines that were equipped with those features are rolling off warranty in September. I was just wondering if you can provide any color on sort of adoption or renewal rates you're seeing there and how this is developing in general?

[Andreas Pabst, executive]

Maybe I take the question about R&D spend in 2023 and 2024. I think we and the Board are fully aligned with the need to invest in R&D and we do it. But what for sure is important for the next or coming years is growth, it's profitability. So we are investing further in R&D, but we have a very sharp eye on the ROI on it. For very exact data, it's too early to answer that question because we are setting up the budget currently. And for what we are currently doing in R&D, maybe Ralf can add some details.

[Ralf Koeppe, executive]

We had a deep dive in R&D this morning so we have the figures quite well. So first of all, when we look into 2023, probably we have to address more in operational excellence and savings, cost savings in the product that's in preparation and we told you that we had to invest a lot in R&D to be able to deliver. So we will shape the R&D program so we will put that into the scope and are doing this right now. Turning to digital offers. Yes, the digital platform is now 2 years in the way. But not to misunderstood, the digital platform works with all our machines that are connected that is to say it doesn't require the SmartCare. Also the SoftCare platform and even other gadgets are able to be connected by this IoT approach.

And especially what we are now working is to change program in the digital office -- in the back offices of the digital service so that we get this efficiency increases that we know that helps us to become more efficient and to run the service more efficiently. And that's the main focus currently also from the development path. So we also, let's say, have this platform in the U.S. Especially in the U.S., we see a chance to make the service more profitable and to get, let's say, a much more leaner approach to the customer fulfilling our service contracts.

[Aliaksandr Halitsa, analyst]

Okay. Just to clarify, there is no sort of parts of really direct monetization of the offering with various revenue models?

[Ralf Koeppe, executive]

Yes, sure. But let's say the focus currently in 2022 is really in the change program of the sales -- of the service side. And of course we have some developments where we have car wash function where car washes are activated via the cloud. And these activities are also -- these first activities also will give us the possibility to have revenue recognition on both sides. I know that the desire to know what these digital offers will bring us as a revenue and profitability recognition is in the room and we are working on a picture on that. But for the moment, I see it's still too early to come up with a full P&L on the digitalization side.

[Operator]

[Operator Instructions] There are no further questions at this time. Dear speakers, back to you.

[Ralf Koeppe, executive]

So ladies and gentlemen, thank you very much for attending our call. My colleague, Andreas Pabst and I will attend the Equity Forum in Frankfurt. And as I know from our assistant, we have already scheduled quite a few -- actually it's a full program and we're looking forward to meet you. Just get in contact with us and looking forward to discuss further with you. Thank you very much and bye, bye from Augsburg.

[Andreas Pabst, executive]

Thank you. Bye, bye.

[Operator]

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