Palfinger AG (PAL) Earnings Call Transcript

Yes. Good morning, everybody here from Austria and welcome to our first half year results presentation. I'm very happy to report again strong results for the PALFINGER AG in the first half of 2024. We managed to increase our profitability despite lower revenue. We'll see the numbers in a couple of minutes presented by our CFO, Felix Strohbichler. What we as well see is still the continued low order intake, especially in European markets, which is mostly driven by the construction business and as well still ongoing high inventories in our network. If you go to the next slide, I also wanted to mention some significant events in the first half of 2024. First of all, we managed to open the site in Löbau, which is a further expansion in our aerial working platforms, which is addressed in a way that we can further grow our business here significantly in the future. It's a part of the plan and the strategy of 2027. As well, what we did, we acquired here a land in Madrid to set up here our new sales and service hub, so far for Spain, which is quite a significant marketplace and Israeli marketplace, which is performing quite well. Last but not least as well, I'd like to mention here that we had our PALFINGER Global Sales & Service Conference in June here in Austria with more than 300 participants from more than 60 countries all over the world. And this was somehow and you see the picture here, Building Our Way Forward. This means here a real international event by making sure that we motivate our dealers and staff. But as well, we managed to present our vision and strategy moving forward and to have a full alignment on our way forward in terms of motivating our network. And I think this happened very well, and we had quite successful and happy dealers visiting us at this conference, making sure that they're fully motivating, driving PALFINGER forward, not only in 2024, but as well in the future. Yes. Furthermore, in the next slide, I think it's also important always to see where do we stand. And here happy to report again that we managed to keep and secure our solid #1 position in the marketplace, especially for loader cranes, but as well many other lifting solutions, which we provide to our customers. As you remember, in 2023, we managed the EUR 2.45 billion net revenues, which is also still quite a significant growth year-over-year, which we've shown last year. This is managed by more than 30 production sites all across the globe and 5,000 service centers. 5,000 service centers means as well that we're close to our customers. We're servicing them properly, and they cannot only enjoy premium products, but as well a premium service. Roughly 12,650 employees. This is the number by the end of the first half of 2024 as well. And later on, we'll reference in our presentation what's happening in the different regions as well as what's expected. Here, we're close to 60% in EMEA. The good news is that we're nearly 30% in North America, exactly 27%, which is quite important to us because it's mostly driven by new product launches, but as well the rollout of the truck mount -- the rollout of the truck mounted forklift. On the other hand, LatAm, yes, it's only 4 points. But here as well, we see positive signs, 5% in CIS and 5% in APAC. If we move to the next slide, I think it's also very important that we can still confirm and reassure not only Europe as well our customers, our dealers about our product portfolio. Here, there is no change. As I mentioned a little bit earlier here, the access platforms, the aerial working platform, which you see here in the middle on the land side is still the portion and the path, where we see further growth and where we're further investing. This was about what we did already in Löbau. On the other product lines, so far, nothing changed. All in common is that we can provide for the entire product portfolio, digital solutions, which is for all of these in common. In combination, if you go to the next slide, with the wide industry diversity, and I think this is also important. Yes, we're depending 40% on Construction business, but still close to 10% on Forestry, 10% Waste Management & Recycling business. I think this as well shows that we're quite resilient to the entire impact coming out of certain businesses and industries. Not to forget about Transport & Logistics. Here, again, the truck-mounted forklift, which is quite well rolled out now in the United States/North America. In the Public Sector, the Rental business as well strongly coming back, Oil and Gas, which is a part of our Marine business. Offshore Wind Cranes still further -- [ wind parks ] that developed offshore, not to forget about fish farming, aquaculture. So it's as well quite important here on the Marine side. If you go to the next slide, and I think it's also important not only to stipulate where do we see it in terms of sustainability. But as well, not to forget that this is the key driver of our operational activities. So on one hand side, making sure that for the living planet, we're all depending on in terms of less emission here. Also just wanted to highlight that we've managed to have more than 80% electricity from renewable energy. I think it's also an important topic, especially in these days when still all the gas supply is still a concern. For the people we touch here in terms of safety & health, I think, it is also important. This is also a part of the KPIs we're addressing here internally that we're -- we achieved here 8.59. And last but not least, as well to be a future-oriented entrepreneur. So to make sure that our employees can as well commit and stick to the values we have. So saying this, I'd like to hand over now at this point in time to our CFO, Felix Strohbichler for his report. Thank you.

Good morning, ladies and gentlemen. As Andreas Klauser already said, we can present quite a strong set of financials once again, and this despite a challenging economic environment, especially in the European markets. As you know, we've 3 segments in our business. I'd like to start with the segment, Sales & Service, which comprises all our activities for sales and also service, not covering operational activities and not covering the separate segment of the Tail Lift division. You can see on this slide, some remarks regarding the development of the individual regions. In North America, we still have a very positive economic environment, especially for service cranes and truck-mounted forklifts. We've seen very high growth rates. And what is even more important, profitability is further increasing in North America to a very good level. In APAC, we saw also good growth, especially in India. It's a very important market for the future of PALFINGER. What is not good in Asia is clearly the situation in China, and we also don't see any indications at the moment for recovery in China. Marine could perform extremely well in the first half year. We've seen around 30% of sales growth. And again, even more important, the significant increase in profitability based on the growth in service as well as offshore and marine cranes. In EMEA, the order intake remained at the low level due to the macroeconomic development and situation, especially in Germany, France and Scandinavia. Construction industry is extremely low, and this is impacting our order intake. In Latin America, we've seen positive signs, and we're positive about the further development of the region, LatAm also for the rest of the year. Last but not least, the topic to mention is that we've started the year with quite some high level of finished goods inventories, and we've set ourselves a target to bring this level down by at least EUR 50 million. Up until now, this has been challenging. We still have high stock levels, especially at our own dealers in Germany, Spain and the U.S.A. This will get substantially better in the second half of the year due to the fact that we're going to reduce our capacities in EMEA over the next month and we'll talk about this later. On this slide, you can see our KPIs for the segment, Sales & Service. So external revenue went slightly down by close to 5%. However, EBIT went up substantially by 30.7%. This is also based on the fact that the transfer prices have been adapted, so you've to look at this always in combination with the segment operations, but a very satisfactory EBIT margin in the segment, Sales & Service of almost 20%. If you look at the order book number, you can see here quite some decrease, minus 22.6% to the -- compared to the previous end of June. However, still a very solid level of more than EUR 1 billion in our order book. The share of our Service business is around 18%, similar level as in the first half year 2022. Coming now to the segment, Operations. Clearly, we've lower capacity utilization in the segment of Operations in EMEA due to the fact that the market is not doing well, and that this also means that we're reducing the output in our factories. We also have reduced our manufacturing for third parties due to the demand and the economic environment. Only in North America, the production output could be increased, especially for service cranes. What does this mean for the financial KPIs of the Operations segment. External revenue, so manufacturing for third parties this is what you see here, has come down by around 20% to EUR 73 million. And profitability has come down quite significantly simply due to the fact that the plants in Europe had a significantly lower capacity utilization compared to the previous year. Coming now to the third segment, the segment, other non-reportable segments, which includes the unit holdings, order activities, the strategic projects we do on the holding level, plus the segment, Tail Lifts now not only EMEA like in the last year, but also including the Tail Lift business in North America. And regarding the KPIs, you can see here the increase in external revenue, which is due to the integration of Tail Lifts NAM. So this does not mean that the Tail Lift business has grown by more than 100%. It's the integration of North America, which could not be readjusted for the last year, simply because of the carve-out, which was quite complex. But what we can see also on the EBIT line that despite of inflation, despite of higher costs, the EBIT number is better due to the fact that Tail Lifts had a positive earnings contribution. Coming now to the group KPIs. Revenue has come down slightly by around 3% to EUR 1.175 billion. If you look at the EBIT line, you see an improvement of around EUR 1 million compared to the record year 2023, which was not only a record year, but an absolute record year. So a very strong performance in the first half year 2024, and this is due to the fact that we had very strong earnings in North America in Marine, also contribution in Tail Lifts, which could compensate and even overcompensate the reduction in EMEA in the first half year. So this led to an EBIT margin of 9.5%, even 0.3% better than in the record year 2023. Coming down to the last line, the consolidated net result also improved substantially even overproportionately due to the fact that we had a very good effective tax rate in the first half year. Regarding investments, you see here in the first half of 2024, a really high peak of EUR 93.8 million. This is due to the fact that we had some major projects, which really hit, so to say, our activation of investments in the first half year. This number will not continue on this level. So we do expect around EUR 140-plus million of total investments for the whole year. So the level of investments will go down by almost 50% compared to the first half. On this slide, you can see the development, especially of the net financial debt in the last line. So it went up around EUR 40 million. This is due to the fact that we still have high inventory levels as already mentioned before. But also we had dividend payments of close to EUR 50 million in the first half year, also including interest payments to minority shareholders and also the high interest rates had an impact on the net financial debt. However, if you look at the key balance sheet figures on the next slide, you can see that every single KPI on this slide improved. Equity went up substantially. Equity ratio went up by more than 1%. Gearing and net debt/EBITDA became slightly better. And ROCE is at a healthy level of 11%, and 1% almost better than in June last year. Last but not least, cash flow in the first half year. Starting from a good profitability, we still had a negative change in working capital, not as per this in the past. But of course, our target is clearly to turn this figure to a positive figure until year-end, which also means that even if -- until now, we've still minus EUR 22 million of negative free cash flow, we clearly expect and also guide for a clearly positive free cash flow until year-end. With this, I'd like to hand over back to Andreas Klauser for the outlook.

Yes. Thank you, Felix, for your report. I think quite impressive numbers, still challenges ahead of us. And if we look what we face here for the rest of 2024, but as well onwards, I think it's important that we've to consider the headwinds in Europe. So we still see quite weak environment, especially in Scandinavia, Germany and France, which is something we can't predict. On the other hand, we see quite positive developments in North America, APAC and LatAm, especially North America is kicking in quite well. Not to forget about the Marine sector. The Marine sector is heavily contributing in terms of EBIT, in terms of profitability. What did we do? Especially in EMEA, we started to adjust our production capacities. So making sure that we're having run rates to satisfy the marketplace, still the orders we've on hand, but not to overstock ourselves nor our dealers. This would mean that, yes, we expect a slightly decline in revenues. The good news is that still on the profitability, we expect to -- up to 20% below the previous year. So this means still in the scope what we've announced some time ago. The focus is clearly to be positive on free cash flow. I think this is important in terms of working capital and as well the investment volumes. We're further reducing spending and costs. So just to make sure that we'll have a good remainder of the year, good results for 2024, but as well maximizing our order intake already for 2025. So filling further on the order book. On the last page, yes, we still stick here to our ambitious financial goals for 2027. We're facing headwinds, no doubt. So this means on one hand side being the #1, the market leader in crane and lifting solutions, achieving the EUR 3 billion, still being the EBIT margin of 10 points and the ROCE of 12%. This concludes my presentation. Thank you for your attention, and I'm handing back to the operator.

[Operator Instructions] The first question is from the line of Markus Remis from Raiffeisen Bank International.

Congrats to the first half year. A few questions. Firstly, to put kind of the implied second half earnings generation into perspective. So when I look at your guidance, I'd say H2 top line pressure should probably be a bit higher than in the first half. At the same time, it will be major earnings and margin pressure. Is that purely a function of the different regional mix, meaning that there will be a higher pressure on the European business and thus kind of the lower or weaker regional and product mix? Or have you baked in also some, I don't know, additional costs related to the capacity adjustment?

So actually, this guidance is not based on significant costs regarding capacity adjustment. But sure the capacity utilization will go down. It will not be possible that all the costs in production will follow the adjustments in the output, which means that the profitability in the segment, Operations in the second half year will suffer. And of course, it's also a question of mix. So the reduction will affect some of the product lines and the regional EMEA, which are amongst the more profitable ones. So this is clearly a mix topic, but it's also a question of capacity utilization. It's not that we've factored in major one-off costs. But for example, in several factories, we'll run systems like paying 90% of the salary, people working 80%. And of course, this does not help in terms of profitability.

Sure. Okay. Very clear. Can we maybe touch the topic of capacity adjustments because in the report it reads further adjusted capacities, I think the last time we talked about a topic you indicated and 15% capacity reduction in Europe? Is that still the base scenario? Or are you already prepping up steeper reductions?

No, as Felix mentioned before, luckily in terms of regions we've, we can manage as well the same work equipment in North America to LatAm, whilst Europe is still heavily suffering, which kicks in here on the profitability, especially Germany and Scandinavia. But it's still this 15%, the band, we can drive it. We just not as well to protect our key workforce, which is significant to PALFINGER and its technology. So I think it's quite well under control, but we need to make sure that we flatten it out that we're not overstocking ourselves, having running full speed and then looking what's happening next year. It's more or less as well already protecting 2024, which still certain challenges won't go away.

Okay. On that topic, I mean, you've got pretty diverse and large production footprint. It's kind of the streamlining of that production footprint we need to take out smaller plants or whatsoever, is it something that you're actively pursuing now in a phase, where there is probably a bit -- a better opportunity than in the hay days, where demand was rocketing?

Good question. I mean, I can tell you we're further optimizing and looking at any kind of options. But here, we did not take yet any final decision, but we're further optimizing. We're looking heavily in efficiency. So this means as well that when the output is going down, the run rates are going down, capacities are reduced, it's more optimizing the efficiency.

Okay. So no plans for -- to take out single plant or whatsoever? Could you hear me?

Yes. Please go ahead.

So there are no plans to take out individual sites just to get it straight? Hello?

Ladies and gentlemen, please stay with us. The line for the management seems to have disconnected. Please stay with us while we reconnect. [Technical Difficulty] Ladies and gentlemen, thank you for your patience. We've the management connected. MarKus Remis, we request you to please ask your question again.

Yes. So just to confirm it, there are currently no plans to take out individual sites of your production footprint?

Absolutely right. When there's a slowdown in the marketplace, you can do certain things in a better way than when you've the high time, so optimizing efficiency, yes.

Okay. Very clear. And then the last question, if I may, relates to the order book. You kindly showed the development in Sales & Services, almost down a quarter, year-over-year. Can you shed some light how that figure would look for the EMEA region and maybe -- but on the other side, North America, so just to get an idea of the level of pressure in Europe?

So we don't disclose here numbers for the individual regions, but of course, the order book for North America is substantially longer than the order book for EMEA. This is a matter of fact.

Yes. Okay. Very clear. And the last one, the effective tax rate. You've pointed that out, it was very low. Is there any kind of indication you can share with us for the full year? Any tax rate you've in mind?

Well, for the full year, it will go up again. I think now we're below 19%. That will go up to roughly 23%, which is still quite a healthy level.

The next question is from the line of Patrick Steiner from Kepler Cheuvreux.

Congratulations on the strong first half. Two questions remaining from my side. Firstly, the order intake seems to be flat to slightly declining since Q2 2023 according to my calculations. How should we think about order dynamics for the rest of the year in terms of regions and product type? This would be the first one. And the second one, how much of the current order book is for '24 and how much is for beyond for '25 or '26?

Well, I think what we can tell here. If you can see here it's quite important, as Felix mentioned earlier, so the run rates in North America, LatAm and as well on the Marine sector is quite positive. So here, and especially considering the Marine sector, we've already orders, which are fully covering -- which are partially covering the first part of 2025. North America as well. EMEA, we're still working with certain kinds of practical actions in the marketplaces. And here I can tell you, as we said, very big concerns certainly about Scandinavia, Germany and France, but very positive development in markets like Spain, Italy, Greece, as well Portugal. So the Southern part of Europe is by far performing better. In terms of total numbers, yes, it's not the same amount of numbers which we usually see from Germany, but we can offset in combination with North America. So more or less, it's a mixed bag. And as Felix mentioned earlier, we can't here disclose any further numbers related to the region or product lines.

So should we think about order intake in Q3, Q4 to stay flat or decrease further a bit? And do you think that.....

I'll call it flattish overall, whilst we might see still a slowdown in Germany and a further increase in North America, but overall flattish.

The next question is from the line of Lars Vom-Cleff from Deutsche Bank AG.

Quickly staying with your order book and the composition. With regards to the construction industry, is that still on this extremely low level? Or are you seeing first orders from that customer sector coming back?

Yes. As I mentioned, it's a mixed bag even in Europe, yes. So consider my core markets, Scandinavia, yes, it's still down as well France. If I'm considering Spain, which is well in terms of volume, quite important to PALFINGER, we see a heavy increase. So even in Europe, we're having here quite different situations related to the marketplace, whilst North America is performing very well. And as I said, for us as well the Marine sector in terms of profitability is kicking quite positively.

Perfect. And then coming back to what was just discussed. I mean, your order backlog down 23% year-on-year. Is that already worrying you that you won't be able to show revenue growth next year? Or is it too early to say?

That's by far too early to say. I mean, we still have a quite volatile market environment. And -- I think what we all need to learn here that we need to deal with this volatile market environment and approach and apply maximum flexibility. So it's not -- it's for sure something we need to carefully watch, but it's not really a major, major concern, okay?

Perfect. And I assume you're still not seeing major cancellations from your order book like you did in the past, all under control?

We don't see any cancellations so far because as well our dealers as well are more cautious, okay? Because they see already that Construction business, which is an important part of our business is not really growing. And then as I said, considering different areas, in different countries, even a mixed bag. So dealers are cautious. We're cautious, so -- but we also want to avoid that we lose any potential orders. So we've the appropriate sales action in place. And I think looking forward, we're confident that we can manage as well the second part of 2024 properly.

Perfect. And then your net working capital staying on a relatively elevated level. I guess, the reasoning is the same that we also touched on -- in the Q1 call, in some cases, you're missing the trucks, but the crane is already there. In other cases, your end customers are not picking up the ready truck. Or are there any other headwinds you're facing currently?

Well, you named it. I'd say that today, the truck supply is not an issue in terms of -- we don't get the trucks in order to install our equipment. It's rather that we sometimes got too many trucks at once, which have been ordered for a longer period of time, have been delivered due to the fact that the market has slowed down. So we've significant levels of stock of trucks in those product lines, where we also buy trucks. Then we've still the issue of capacity bottlenecks in the installation network in Europe, especially. The reason is that the installation network sees the market calming down. Nobody is investing in further capacities. Nobody is hiring people. So nobody is speeding up, so to say, the pipeline in terms of installation. And the only way how to decrease here the inventories really is to slow down production and to decrease the production output, that's what we're doing in the second half year. And we clearly expect a positive impact on the net working capital based on the fact that we're reducing the output and this will help to empty the pipeline.

Excellent. And then one final question for me before you mute me because I'm asking too many questions. Pricing, are you facing any pricing pressure from your customers given that they also expect truck manufacturers to lower their prices? And then input pricing. Are your input prices still coming down? So the margin is still okay-ish future -- looking into the future. Or is that worrying you because input prices are coming up again?

As again -- again, as we said earlier, yes, the market is under tension, luckily not all the marketplaces as well the costs are further going down in terms of material costs, but as well in terms of, let's say, costs which we managed to reduce already from the beginning of the year. On the other hand, yes, we fight for business. We fight for the volume, but everything, let's say, as well in our numbers and in our forecast, we're currently making today, everything is more or less considered.

I mean what we've to add, perhaps is, and I mentioned this before, in the second half year, we'll see a negative impact from personnel costs. On the one hand, we'll see an increase of personnel costs once again, for example, in Austria. We do expect 4% to 5% of salary increases, which will hit us quite substantially. And then also due to the fact that we're reducing the output, but we cannot fully adjust and we don't want to fully adjust the workforce. This will also lead through additional costs, which will have an impact in -- directly, but then also on the gross margin.

The next question is from the line of Daniel Lion with Erste Group.

I'd like to actually touch on similar topics at the beginning. As we've just heard, to what extent would you -- or do you expect you might need some more aggressive pricing strategies in order to bring down inventory levels and also general inventories in the second half year? Or would you expect that it is really enough to reduce manufacturing for some time?