Palfinger AG (PAL) Earnings Call Transcript

Ladies and gentlemen, welcome to the IR call of PALFINGER AG. I'm Moritz, Chorus Call operator. Today's hosts are CEO, Andreas Klauser; and CFO, Felix Strohbichler of PALFINGER AG. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Andreas Klauser, CEO. Please go ahead, sir.

Yes. Good morning here from Salzburg. Welcome to our Q3 earnings call. I think it's important that you see some of the highlights, so we are on Slide #1. Despite the difficult conditions, we can really present strong results for the entire year and as well for the first 3 quarters. What is here the key topics, what are the key highlights. First of all, high profitability despite lower revenue. I think this is something we will recognize later on in the numbers Felix Strohbichler is presenting. Yes, still the market is weak, especially in EMEA. So we have a continued low order intake in the core markets. And on the other hand, our focus is clearly to working on a further inventory reduction, both on components and as well also equipment. If you go to the next slide here, we are having some significant trends in the first couple of 3 quarters. First of all, we have the IAA Transportation that we managed. In September, we managed to show some product highlights as well digital innovations like PALFINGER CONNECTED plus+, which was really quite well received in the marketplace. And not to forget and some of you might remember here, our truck-mounted forklift, which we launched 2 years ago in North America, and now [ we are rating ] new products as well in EMEA. We got quite good customer feedback related to the product and its performance. On the other hand, we are already hitting an important point, which will be as well further explored and explained later on. The marine business, we have been presented the SMM Hamburg, which is a major fair, major trade show here in September in Hamburg where we are showing our marine products and marine solutions. And here again, quite a positive mood with our customers, but as well in the overall market expectations. Here, we launched quite successfully marine crane for quite heavy loads and which was very much very well received in the marketplace. On the other hand, we are still cutting some deals like here, just to mention one, slipway systems here for Singapore Defence, which is an overall contract of more than EUR 60 million. If we go to the next slide. Here, some remarks to our PALFINGER overall numbers. Yes, we're still managing -- keeping our #1 position here in crane and lifting solutions based on the revenue, which we achieved in 2023. Currently, we are having 12,550 employees at the end of Q3 2024. The revenue distribution still again here, North America further growing; EMEA roughly 58%, but here we expect a reduction. And all the other areas, LATAM, CIS and APAC are still at the 5% level. In terms of product, I think this is also quite important always to see where do we sit in terms of our product offering and product portfolio. There are no major changes, just to mention the wind cranes on the marine side, which is as well and again, taking off for our offshore solutions where we are supplying offshore turbines. And here as well, business is positive coming back. While we are still managing good results, and I think that the key factor here is really the resilience we have through industry diversity. I think this is really key here to mention again, yes, we still have a big portfolio which is covered in the construction side. But all the other businesses are further growing here, just to mention as well railway, logistics business and as well the entire marine business where you will see the numbers later on. All in all together, sustainability is a key driver at PALFINGER. And here, we are as well happy that we can report here quite significant improvements of all our ESG KPIs. It's not only about the planet that we are working on. We are still getting 80% energy out of renewable energy. Energy is not only important for our sustainability setup, but as well in terms of being independent from other energies/gas. For the people we touch, also very important here to report that we have more than 25% already in terms of international employees at headquarters. The accident rate further improved as well as significant changes. And last but not least, to look forward in terms of employees. And here, I'm also happy that we really managed to get strong commitments out in the marketplace in terms of our values, that people are really understanding and our employees are understanding. PALFINGER forward, PALFINGER stands and as well our vision and strategy that we are currently working on. So I think now it's important to see some more details on the numbers, and I'm handing over here to Felix Strohbichler, our CFO. Please, Felix.

Thank you, Andreas. Good morning, ladies and gentlemen. I'm happy to present again a set of good financial KPIs for the first 3 quarters of the year 2024. Let me start with the segment, Sales & Service, which comprises, as the name is already telling us, all activities related to sales and service. On Page #11, you see some highlights regarding the individual regions, starting with North America. So North America had quite a strong development over the past years. At the moment, we see some slowing down demand due to the upcoming election. However, we expect that independent of the outcome of the election, North America has good fundamentals and should come back relatively quickly to normal levels of growth and good development. In APAC, we also see a good economic environment, especially in India. On the other hand, in China, there is no recovery in sight. Andreas Klauser has already mentioned several times that marine is performing very well. So we have seen a significant growth in service in offshore cranes, which led not only to significant increase in revenue, but more importantly, also to a very good profitability of the activities in marine. In EMEA, the core markets, especially in Germany, remained at a low level; also Scandinavia, in the south of Europe like Spain, Italy, et cetera, we still see very healthy levels of activity. Also in LATAM, Brazil and Argentina are on course for growth. Very important is also the issue of finished goods. We have been reporting now over several quarters that the inventory levels are high, especially in our own dealers in Germany, Spain and in the U.S. due to the installation bottlenecks. But what we have seen now in the past weeks is that really, the inventory levels now begin to decline, which we also then see in our KPIs regarding cash flow. On Slide #12, you see the financial KPIs for the segment Sales & Service. So revenue reduced by around 4.6%. Profitability EBIT went up by 17%, but this is also linked to lower utilization is reflected in the Operations segment and not in the Sales & Service segment. More important on this slide is the development in terms of order book and service business share. In the order book, you can see that we had a decrease of minus 27% compared to 1 year ago. However, it's still a very healthy level of order book with almost EUR 1 billion of orders in hand, which is for sure something which gives us a good starting point also into the year 2025. The service business share has gone up from 15.5% to 17.4%. You could argue that we've already been there in 2022. However, the reality is that in 2022, we had some time lag in implementing price increases for equipment, which was not the case for service. So the increase from 2023 to 2024 is a real increase, and we expect here much more to come in terms of our share of our service business in the future. Coming out of the segment, Operations, we clearly have seen now some adjustments of capacity already in the past quarters. Also, the revenue from third-party production due to the overall economic environment is reduced. And of course, this has also some impact not only on the sales to third parties, but also on the overall profitability of the segment. On the other hand, we also have capacity expansions in other parts of the world like in Latin America, thanks to the high order intake in Brazil and Argentina. And at the moment, we are also working on establishing a strong supplier base in Mexico to optimize cost and also to prepare for further growth in North America, where we want to reach 1/3 of our revenue within the next years. On Page #15, you can see the KPIs of the Operations segment. So the external revenue from the sales to third party is reduced by around 17% and profitability went down by 65% due to the lower capacity utilization, which is fully reflected in these numbers. If you then go to the segment, other non-reportable segments, it's kind of a difficult name, but it includes in the end the holding, the former holding unit and which includes strategic projects and also the tail lift segment, which is too small to be reported separately. So on Page #17, you can see external revenue outlook. It increased because in the previous year, we just had the European part of the tail lift business included. Now it's also the North American part. So in total, we have here around EUR 83 million of revenue in the first 3 quarters, Europe and North America tail lifts. And the EBIT has substantially improved, especially also because we have seen now a positive earnings contribution from tail lifts whereas we had some significant losses in the first 3 quarters last year within tail lifts. Coming now to the overall situation of the PALFINGER Group on Page #19. You can see that the revenue decreased slightly by 3% and the EBIT also slightly by 3.8%. So this looks like nothing would have changed, but the reality is that we had a substantial reduction in the EMEA business, which is historically the core of PALFINGER. And this decline in EMEA could be almost 100% compensated by the improved earnings in North America in marine and with the improved earnings of tail lift. So even if the numbers look almost the same, the content and what is behind really shows that PALFINGER has a very strong resilience due to the fact that we are present in a lot of markets, that we have a broad product portfolio, which allows us to compensate weaknesses even in the core market, EMEA, to a large extent. On the next slide, you can see the level of investments. So here, you can still see a high level of investment also in 2024, driven by onetime projects. This will go down now in the remainder of the year, not going down, but not increase that much anymore. So we will not reach the level of 2023 in 2024. For 2025, we expect a lower level of investments. But at the moment, we are really in a cycle with a lot of one-off projects we have to invest in. On the next page, you can see the development of our net financial debt. So it has gone up again from EUR 719 million to EUR 759 million. This is due to the fact that we still have high inventory levels, as already mentioned before, also high dividend payments and very high interest cost of around EUR 40 million for the whole year, and this led to this increased financial debt. However, we are on track to bring this down over the quarters to come significantly. If you look at the remaining term debt, it's more than 3.5 years and the average interest debt at almost 4% is at a very high level. We have around 50% of fixed and 50% variable financing, which means that all the interest rate cuts, we do expect in the coming quarters will lead with a 50% impact of those cuts also an improvement of our interest. On the next slide, you can see our balance sheet KPIs, which are very solid. As always, equity has improved by around EUR 45 million, equity ratio at healthy 35% % and also the other KPIs on a solid level. But of course, our target is clearly to bring down net financial debt to improve net debt/EBITDA and also gearing. Last but not the least, let me come to the cash flow statement. As you can see, in Q3, we ended up with a slightly negative free cash flow of minus EUR 2 million. If you look at year 2023 at the same point in time, we had around minus EUR 28 million, and we ended up at the end of 2023 with plus EUR 46.5 million. So we had an improvement of around EUR 70 million in the fourth quarter. And also for this year, we do expect that the change in working capital, which is still negative for the first 3 quarters of 2024 with EUR 56.3 million should be at least neutral so that we end up with a free cash flow, which should be even better than in the previous year and even by a margin. So clearly, a significant improvement of the free cash flow in Q4 expected. With this, I would like to hand back to Andreas Klauser for the outlook for the full year.

Thank you, Felix, here for sharing the numbers with us. I think you have seen that the numbers are progressing, and we are progressing quite well in terms of overall performance. What does this mean for the remainder of the year? I think it's important to mention here that we will continue to see positive developments in the marine sector, APAC and LATAM. This is clearly shown as well in the [ order entry and order coverage ]. Unfortunately, on EMEA, we do not really see the market coming back in terms of the economic environment. In the European core markets, I think there is nothing new. On the other hand, North America is currently a bit weaker than expected, but this is mostly caused due to the U.S. elections, which will end, done in the next couple of weeks so that we expect as well the market coming back. On the other hand, what we will do and what we will manage on our side is to further adjust the production capacities in EMEA to make sure that in terms of run rate and capacity, we are not again running the risk that we might be overstocking so that we have a continued flow as well between operations and as well on the other hand, selling and invoicing our equipment. What do we expect full year in terms of numbers? I think here, it's clear that we might see a decline of roughly 5% versus 2023, which will as well result in an EBIT reduction by roughly 10% versus our record year 2023, but still, we expect quite good results. And clearly, the cash -- the focus is here on the cash flow side by reducing our working capital, as Felix Strohbichler mentioned before. All these actions should again result in a strong overall 2024 result. If you go to the next slide, so no change here as well on our financial goals for 2027. The targeted revenue is becoming more challenging, no doubt. But still what we see, as we mentioned earlier in terms of marine business, some markets which are coming back quite strong. We're still confident that we will get there. What would it mean in terms of absolute numbers, our absolute KPIs? This would mean still maintaining the #1 position here in crane and lifting solutions. On the other hand, coming to this EUR 3 billion revenue from organic growth, again here, no major acquisitions or any other stuff here expected. 10% on EBIT margin and 12% in terms of ROCE. This is the commitment we can clearly stipulate here at this point in time for 2027. I would say thank you for your attention, and I will hand back to our operator. Thank you.

[Operator Instructions] And the first question comes from Markus Remis from RBI.

Congrats to the strong quarter. I have a question related to the U.S. And I mean, you've been comparing the wording from the first half conference call event today regarding the U.S. I was actually a bit surprised to hear you talking about the weakness. What makes you so sure that this is just temporary and election related? Is it the fact that requests are still high, but clients or customers are simply not placing the orders? And is that related to a specific product group? Or is it like a broad-based phenomenon?

No, I think what we can say here is, it's overall, the market is caused by the election a bit weak in terms of making decisions. The orders are out, so the inquiries are there. Absolutely, there is no doubt. But the decision-makers are still a little bit waiting now. Is it more Harris? Is it more Trump? And I can just tell you here that generally, the guys who are leading the U.S. economy are very much in favor of Mr. Trump becoming the President, and this is now where they are a little bit waiting and hesitating in terms of signing the contracts, the orders out. So this is a little bit slowdown, and this is overall U.S., whilst the major deals, truck-mounted forklift as well, we are having the orders out where we have some confirmations at least verbally to get these contracts signed and awarded. So overall, the picture looks positive. But currently, the decision-making process is a little bit slower and weaker than we might have seen or we might have expected. On the other hand, this is now in the U.S. economy. This is nothing completely new if you compare it to other years when we had an election in the U.S.

All right. And then from this historical experience, is it fair to say that at the beginning of 2025, the momentum should come back then?

We would expect, yes, that the market is then absolutely coming back within Q1 2025, and that's as well the reason why we were a little bit reducing our capacities to avoid that we are overdoing or overrunning it in terms of production so that we avoid inventory, which can't be sold in a reasonable time frame.

Okay. Then turning to Europe and on one of the slides, you pointed out that production capacities in EMEA will be adjusted further in the fourth quarter. Is that something you're doing incrementally because the market is, how do you say, weaker than expected? So is it coming on top to those measures you've implemented year-to-date? And can you maybe outline a bit the magnitude by which you have adjusted production capacities in Europe?

We just adjusted the run rates to avoid that we are building up inventory, especially as well towards the end of the year, but as well for the beginning of next year since the market is a bit slower. The customers are expecting and still accepting as well lead times and delivery times of 5 to 9 months, which is as well in the entire industry, the average as well considering the chassis we are getting here from our OEMs in terms of trucks. So all in all, this is just matching what we see in the marketplace looking forward and as well what our customers would expect, then it wouldn't make sense here to build up inventory and that we don't get the trucks on time or the customer is not taking -- can't take the equipment over. So this is just I would call it smoothing out, maybe that's the proper wording.

Okay. So you're kind of reducing kind of the shift loads and more of, I don't know, longer maintenance standstill over the Christmas period? And is that what you're hinting towards?

Well, in the end, what is happening in Q4 is something which has been planned now over quarter. So this is not the new measure. We have to communicating now, I think, for the last 2 quarters at least, that we have been constantly decreasing capacity, but slowly not with big steps, no social plans. So this is very smooth. We use the possibilities we have, more vacation, reducing overtime, contract workers, et cetera. So in the end, this is a smooth process in line with what we have been communicating over the past quarters. So it's nothing new. It's just that these measures not take effect. And you can see it in the results of Q4 for the first time with the major impact already in the third quarter, you could see some impact. So you have seen in the first half year, which was stronger than the first half year of the previous year. Q3 was weaker than the previous year, Q3 and the same will apply to Q4. So these are the impacts now of the reduced capacity utilization.

Okay. Very clear. If I can stay for one more question with EMEA. Can you help me understand the dynamics in the large markets like Germany, I think also Scandi that are underperforming? I mean in terms of the year-on-year decline, I mean, are you thinking that kind of the bottoming out or kind of bottoming out is being approached now? Or I mean, how much further downside do you see until demand really flattens out and eventually some replacement demand kicks in?

No, I think we are already hitting the bottom here of the business. So I think we're planning forward, so we don't expect any further major negative impact, but as well, not the market coming back maybe as quick as some people would expect. In terms of housing like in Germany, you know how many apartments you would need. But currently, nobody is investing. What we can see on the other hand, the rates are going down, interest rates are going down. So yes, there is a restart expected and no further decline, but we don't see the market really coming back. On the other hand, the marine business is still progressing quite well. It's just need to make sure that we can get the equipment out as quick as possible since these are long-term contracts. Then as well, Latin America is still progressing quite positive and then as well, the U.S. market kicking in. So overall, we see a quite balanced picture looking forward.

Okay. Final question. I guess you've amended the wording for the fiscal '24 guidance, but I'm actually more interested in next year already. Not asking for guidance, but just to get your thoughts around looking at consensus forecast for sales, about EUR 2.4 billion, which suggests an increase year-on-year. I mean that -- given the sustained weakness in core markets, that actually looks increasingly challenged from my point of view. Maybe you can share some thoughts on what is needed maybe to get a stabilization into '25. How much -- I think it might be a year of two tail, so to say, weak first half; recovery, second half. Is that something that you would subscribe to?

You described it already, you described it already quite well. So a strong first half, no doubt. I would expect that North America will rebalance first after the election will be done. And then as well, the rules are clear. So I would expect first improvement in North America, whilst Europe is expected only maybe to come back in the second half of 2024. But as I said, we are currently seeing ourselves at the bottom of the curve. On the other hand, yes, we still have markets like Spain and Italy, which are performing quite well. So this is also now in Europe quite a mixed big picture. On the other hand, yes, Germany is an important relevant market to PALFINGER, but we can mostly offset in other areas. But maybe Felix, you would like to add something here.

Yes. As you mentioned, the idea of EUR 2.4 billion, which would be an increase compared to our guidance for the year 2024, which is still significant. We have to consider the fact that now the capacity has been reduced over the last months. It takes time to ramp up. So even if orders kick in, it will be quite challenged in the next year to significantly exceed the revenue of 2023. So I think nobody knows when really the markets will kick in and to which extent. But from today's perspective, an increase of 3% to 5% seems very high and very ambitious given the fact that at the moment, capacity is substantially reduced.

And the next question comes from Patrick Steiner from Kepler Cheuvreux.

It's Patrick speaking. Congratulations on the strong results. Two questions remaining from my side. In the call, you mentioned increased service business share in the first 9 months and your expectation that the service business is expected to grow further, if I heard that correctly. Can you explain to us where you see the service business in the next 3 to 5 years in terms of revenue? And what would be the most important growth drivers?

I think what we can say here is that we really expect doubling within the next 3 years, our service business, which is on one hand related to the marine business where it already started. So the results are already seen on the marine side. On the other hand, we are further developing our spare parts activities. For example, in North America, we have a higher population of products like the truck-mounted forklift. So yes, hand in hand, we will see bigger volumes and higher profitability, which is kicking in. On the other hand, yes, still when the markets are under concern and under pressure in terms of machine sales, our customers are focusing more again on services and spare parts business. So this is well offsetting maybe certain declines we will see on selling new machines.

All right. So if I understood this correctly, revenues to double over the next 3 years. And in terms of profitability, can you expect the same level of profitability at this higher revenue level? Or how should we think about this?

No, it's mostly -- yes, Patrick, it's mostly impacting our profitability. I think this is quite important to mention here and as well gives stability in terms of volatile market environments when we are maybe not taking off, when the markets are not taking off in terms of machinery sales as quick as expected.

Perhaps if I may add to this, we keep up our margin target despite of the fact that price increases at the moment are not possible because there is no pricing elasticity. In order to compensate for this, clearly, the increase of service revenue share is helping us to compensate this and to come to those margin targets.

Okay. Second question, I mean, is it fair to assume that the lower order intake in Q3, which was significantly lower compared to Q1 and Q2, is the result of the lower demand out of North America and that the European core markets have stabilized at this low level? Or did you see a continuation in demand decline in Europe in Q3?

As already mentioned, the order entry is stabilizing. So we are keeping the run rate, which we have seen the last couple of months, so there's no further deviation. What is not anymore there is the big backlog we have as well beginning of 2024 coming from 2023. But now we are quite flat in terms of our order intake.

And the next question comes from Jorge González from Hauck Aufhäuser Investment Banking.