Palfinger AG

VSE:PAL

Earnings Call Transcript

[Felix Strohbichler, executive]

Good morning, ladies and gentlemen. A warm welcome to the presentation of the results of the first quarter of 2023. And I'm very happy to announce that this was not just any first quarter, it was the best first quarter in the company's history, which we can present today. One of the reasons why it was such a good quarter was that the price increases we have implemented over the past 2 years have become fully effective during Q1. And we've also seen an improvement in the supply chains, which helped us, of course, to reach the high output.

What is also a very important topic for us, of course, is North America is the growth market, the most important growth market for PALFINGER. And in Q1, we have the CONEXPO at Las Vegas, a very important show or the most important show in our industry for the North American market. We had a lot of customer meetings, a lot of products on display, a lot of product demonstrations and a very good feedback.

And what I also would like to mention here is that we are going to open a new headquarters for the North American market near Chicago at the end of Q2, which will help us to really bring together the whole management team of North America to achieve our strategic goals for this region.

Let me just go back a little bit on a high level to briefly talk about who is PALFINGER at a glance. As you all know, PALFINGER is the #1 in our industry. We are a global market leader with around EUR 2.23 billion of turnover in 2022. We are present in all regions worldwide, 31 production sites, and what is even more important, around 5,000 service centers. This is one of the key USPs of PALFINGER because we have the best service coverage worldwide with people, trained technicians, with spare parts availability, et cetera. So this is a very important topic to mention here at the very beginning.

We have, in the meantime, around 12,000 employees. And if you look at the revenue distribution, you can see that EMEA in Q1, has still even increased the share to more than 60% due to the fact that the price increases have become effective and the product mix in EMEA was quite good. North America, 23%; Latin America, CIS and APAC around 4% to 5%.

On this slide, you can see the customer segments we are serving. Construction is clearly the key customer segment with more than 40% of the share in terms of revenue, but also forestry agriculture with around 15%, waste recycling with more than 10%, our key customer segments for PALFINGER. And then we are quite diversified with quite a few other industrial segments, like railway, wind farms, agriculture and fishing, which are clearly growth markets and serving megatrends. And then, of course, we are also serving into the public sector, rental sector, oil and gas, and we are even serving the passenger ship industry.

This is a very important slide for us because it underlines that we are highly committed to sustainability. We have already implemented around 2 years ago a sustainability council to ensure that business strategy and sustainability strategy are merged together. So the sustainability council consists of key managers of the most important functions like PLM & E, purchasing, production where we have the big levers in terms of sustainability. And it's absolutely clear for PALFINGER that we need to make sure that our business itself is contributing to reducing CO2 emissions, that we make sure that our employees, but also people who are using our products or who are around our products are safe and healthy, that we foster diversity and qualification of our people, and of course, governance and transparency is a key value for PALFINGER.

Just to underline how important CO2 emissions are for us, you can see that we have, in the meantime, already 76.6% of energy from renewable sources. This is the maximum we can get at the moment because in some markets, it's just impossible to get 100%. In order to further push this beyond this point, we are investing heavily into photovoltaic groups in many of our sites and in many of our factories.

Coming now to the KPIs and the results of the first quarter. Let me start with the segment Sales & Service. As you know, we are segmented in 2 segments. On the one hand Sales & Service, on the other hand, Operations. And we have also the Unit Holding.

In the segment Sales & Service, as I mentioned before, we have seen a very good development in EMEA due to the fact that the price increases took full effect during Q1, and we also have a good product mix with, of course, a positive effect on revenue and earnings. North America remains a strong growth market. We had also in the first quarter, again, a very high order intake for service cranes. We see still a very high demand for the new truck-mounted forklifts in North America remains strong, and we are expecting a lot from this region.

APAC also shows signs of recovery in China. So this is not yet booming, but we clearly see an improvement there. And what is really very good to see is that China is now picking up quite substantially. We saw high order intake for loader cranes in India, and we are evaluating intensively how to intensify our footprint in India and eventually to get more local content to be able to even better serve the market in India.

Last but not least, what has continued in Q1 is not satisfying delivery liability for trucks and this causes delays in installation of our products. And in the end, this causes still a high inventory of finished goods. And unfortunately, we do not yet see the trend of improvements in terms of finished goods inventory due to this effect. If we go to the KPIs, you can see the external revenue increased by around 25% to EUR 544 million. EBIT went up by more than 150% to EUR 41.8 million, with an EBIT margin of 7.8%.

If we then go to the segment, Operations. We have a high output, particularly in the EMEA production plants, as I mentioned at the very beginning, also due to the fact that the supply chains have started to stabilize, not yet on the level where we need the supply chain stability, but it's substantially better than the year before. In North America, however, we have been slowed down due to chassis availability, especially for aerial work platforms. We had difficulties to get chassis from the suppliers. And hopefully, this is going to be sorted out in the second half year.

Also a positive effect, only a slight positive effect with some counter effect was the decreased raw material prices faced slightly in Q1 compared to the last quarter of last year. And as I mentioned, in segment Sales & Service, we have a very high demand for the truck-mounted forklifts in North America. And this is why Steyr Automotive takes over the assembly of our truck-mounted forklifts for the North American market starting September 2023 in order to enable us to push the output and to serve our customers in the North American market. What I also want to mention here is that Martin Zehnder, our former COO, resigned about 2 weeks ago. And the Supervisory Board is now searching for a successor for Martin Zehnder.

If you look at the KPIs, you can see that external revenue. So what we do in terms of manufacturing for third parties remains still at the high level. Just compare Q1 2021 and you can see the steep increase in last year. And even if this year shows already some slowdown in several industries, we have still a very high output for third parties. And also, if you look at the EBIT, it's still remaining at this high level at around EUR 19 million.

Coming then to the unit Holding. You can see here an EBIT of minus EUR 12 million. So this is showing that we are continuing our future forward projects, and we are still investing here. If you compare to Q1 2022, you might get the impression that we have significantly increased here the expenditures. This is not true in Q1 2022. There was an effect from group postings, which were pushed on to the local level. So we had a COVID bonus last year, which was booked on the group level, and this was a positive effect, so to say, in the unit Holding in the first quarter. So the expenses were more or less on a similar level as in Q1 2023.

Let me come now to the KPIs of the group. Revenue went up to almost EUR 592 million, an increase of almost 22%. The EBIT -- the best EBIT in the first quarter ever, EUR 48.9 million, which is an EBIT margin of 8.3%, so completely back to pre-COVID levels. If you look at Q1 2021, you see that in 2021, the first quarter showed an even better EBIT margin. The reason for this was that in Q1 2021 we have increased our prices, expecting cost increases, but the cost increases did not yet kick in, so there was kind of a tailwind effect in Q1 2021. But Q1 2023 clearly shows that all the cost increases have been passed on to the market.

On the next slide, you can see the level of investments and what we have communicated already over the past years that we have ambitious goals. These ambitious goals require heavy investments. And in Q1 2023, you can already see this trend and this trend is going to continue. On this page, you see on the one hand, the development of our financial liabilities and also our net debt. I will talk about this also when we come to the cash flow. So obviously, the supply chain situation, especially for trucks, has not yet led to a decrease in working capital and net debt. I mean, further up on the one hand, we have this development; on the other hand, very high investment as you have seen on the slides before. So in total, we are ending up now at the end of Q1 with a net debt of around EUR 640 million. You also see that the remaining term debt is about 2.8 years at around 3% of interest. In the meantime, in April, we issued a promissory note loan, which is ESG-KPI linked of EUR 150 million. So this, of course, will push out the terms, the remaining terms on average, but will also increase the average interest.

Going now to the next slide. Here, you see some balance sheet KPIs, equity ratio at 33.6%. So stable equity, went up significantly, but in the end due to the fact that also debt went up, no change in equity ratio and gearing net debt EBITDA, of course, are impacted by the fact that net debt is on a high level. Growth is stable at 9.6%.

If we then go to the cash flow statement, we see still a negative free cash flow due to the further increase in inventories and due to the high level of capital expenditures. So you can see that in Q1 2022, we had already an effect of minus EUR 50 million. And again, in Q1, we had another minus EUR 30 million. So what we do expect is and what we can already see that stock levels and inventory levels in operations are coming down. However, in finished goods inventory, we still do not see the positive trend due to the fact that truck deliveries are still very unstable. And unfortunately, we have a counter effect also on the operations side, which is the increase in cost. Yes, we see some decrease in raw material costs. But on average still, there is a lot of cost going up in many components, which still leads to increasing values in many components and also an increase overall in the stock levels driven by inflation.

Let me come now to the outlook for 2023. So we have a very high order backlog. Still even if the order intake, especially in EMEA, is lower than it used to be over the last quarters, we are still on a high level with the order backlog. So we have a good visibility up to Q4. And this was also the reason to be more precise on our guidance for the full year, which we communicated recently, and we said we do expect a revenue of more than EUR 2.4 billion and we target an EBIT of EUR 200 million. Of course, the geopolitical developments remain a factor of uncertainty. But based on the preconditions we have today and based on what we can influence, we have the best starting position to reach this guidance. And as you know, we have also changed our financial targets. We pulled forward the revenue target, the EUR 3 billion of revenue to 2027. And we want to reach this together with an EBIT margin of 10% and a ROCE margin of 12%.

Thank you very much for your attention. I'm looking forward now to your questions.

[Operator]

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

[Markus Remis, analyst]

Congrats to the results. The first one relates to the growth momentum. Actually, I would be interested to get a sense of the top line growth in North America in the first quarter. And if you could also give some indication on the growth trajectory for the full year? And related to that, I'd be interested to get a sense of the European momentum, specifically asking about the volume side. So are European volumes down or flat at the moment?

[Felix Strohbichler, executive]

Thank you for your question, and thank you for the congratulations. So first of all, in EMEA, we had a very high output due to the fact that the supply chain stabilized in the first quarter, so we had a good output and we had a good mix. In North America, we had the problem that we didn't get the chassis we needed, and this led to a lower output in North America. So the growth momentum, despite of the fact that the North American market is booming and in Europe, we see a certain slowdown in order intake, clearly the growth was coming from EMEA in Q1 due to the fact that the supply chain was stabilized.

So if we now look further into the remainder of the year, North America should pick up as soon as the truck and chassis supply is getting better. This is expected in the second half year. For EMEA, we can see, due to the high order book, that still we expect some good months to come. Of course, with the lower order intake, we are now reducing our order book. But for the rest of the year, we don't expect a major impact from this because we are more or less booked out.

Of course, what is interesting then is what is the further development in terms of demand, in terms of order intake for 2024. For this, of course, we don't have the crystal ball, but we are positive in terms of infrastructure, a lot of things that are going on. And even in terms of housing, we don't believe that this is going to remain at this low level where it is today for a long time. But of course, this is uncertain to a certain extent. 2023 is more or less in a shape where we see a little risk here.

[Markus Remis, analyst]

Right. Okay. Point taken. And then on the inventory trajectory, you provided some granularity. I mean, what kind of the trajectory we should think of over the course of the year. I mean, trucks chassis supply, that's probably something where visibility is very low. But I mean do you see the scope for a reduction over the coming quarters?

[Felix Strohbichler, executive]

Yes, we see already a reduction in operations. So the -- and if you look at stock, you have to look at the number of components, so to say, because the value is another topic. So we see already that we are reducing the stock levels in operations successfully. Unfortunately, due to the cost development, there is a counter effect which eats up a major part of those savings in terms of inventory. So yes, inventory and operations is going down, but not that dramatically, simply because of the inflation effect.

For finished goods, unfortunately, we have seen an even further negative development in Q1 due to the fact that we have even more output, but trucks are not much more reliable -- are not coming in, in a much more reliable way than they used to come in. So here, we do expect that this is getting better at the latest in Q3. But at the moment, the situation is still unchanged. So we do not yet see -- I mean, we are talking out about the first quarter, and this is only a few weeks ago at the end of the first quarter. But at the moment, we do not yet see that the supply of trucks is getting better. And at the moment, we do not see any reduction in finished goods inventories, unfortunately. So we expect that also in Q2 this will not be substantially better. We hope that in Q3 and we will see an improvement.

[Markus Remis, analyst]

Okay. And then taking all that together on the group level in value terms, so your balance sheet position inventory from the Q1 level. I know it's difficult, but would you say that this should actually have been the peak?

[Felix Strohbichler, executive]

It should be the peak. However, it could be that in Q2, we see it at a similar level and I would expect then a reduction in Q3 and especially in Q4. But again, this is to a certain extent crystal ball. But as we can see from the car industry, for example, where deliveries have stabilized at a certain point, I would also expect that deliveries get better on the truck side.

[Markus Remis, analyst]

A final question then on the holding cost, please. I mean, EUR 12 million loss in the first quarter, EUR 15 million in the fourth quarter, EUR 10 million in the third quarter. I mean, that looks like it's going to end up somewhere at, I don't know, EUR 45 million, EUR 50 million for the full year. Is that something you would kind of confirm?

[Felix Strohbichler, executive]

This is a range which is realistic. Yes. So it's about EUR 10 million plus per quarter, so this is correct. And as I said, don't look at the Q1 of the last year because this was distorted by a special effect.

[Operator]

And our next question is from the line of Daniel Lion from Erste Group.

[Daniel Lion, analyst]

I would like to start with the cost increases. Can you give us an overview of how much of the business benefit from the dynamic pricing now in the first quarter and by how much you raise prices?

[Felix Strohbichler, executive]

So it's not the uniform picture because we introduced dynamic pricing, especially in the EMEA markets, not all over the world or in different variations, so to say. So we're talking mainly about EMEA markets, and we talk here about the majority of the turnover, but also not 100%. And it has kicked in, I would say, on average in February. However, we also still see some cost increases. So in reality, dynamic pricing is following the cost development. And I would not expect a major tailwind now in the second quarter. But of course, the good thing is that dynamic pricing is now fully effective, whereas in the first quarter, it was only partially effective. So there is still a slight positive effect to come from dynamic pricing in Q1.

[Daniel Lion, analyst]

Q2, I mean. Effect in Q2 then is slightly positive?

[Felix Strohbichler, executive]

Yes.

[Daniel Lion, analyst]

Yes. I have just figures for February. Do you happen to have already the figures for March for the PPI? Because in the end, when I look at the development, it seems that you have some 2% or slightly above 2% room for increasing prices in order to match the PPI. Is this correct?

[Felix Strohbichler, executive]

I don't have the figures of March. I think we have all the same figures because this is an official source. The PPI is still going up. It's a matter of fact that on average, it's going up, I think, by 0.8% or so per month which is reflecting the actual cost development also of PALFINGER. And this is then also reflected in the invoice prices of the existing order book. So if now the PPI is going up, again, by 0.8%, let's assume in March, it means that in May we will also add those 0.8% to the existing order book. So this is the logic how it works.

[Daniel Lion, analyst]

Okay. So it's really automatic. So it's not like you do it manually depending on demand patterns or plans?

[Felix Strohbichler, executive]

No, it's like this. Our customers receive an order confirmation with a QR code, they can open up the PPI and then they can calculate, so to say, what is the price they will be invoiced from today's perspective. Of course, this will change until 2 months or so before final delivery. And...

[Daniel Lion, analyst]

And this really works in both directions, yes?

[Felix Strohbichler, executive]

Not really because the increased prices by 6% and added the dynamic element, so to say, which means that if prices or cost -- if cost is going up by more than 6%, we can pass on even higher cost increases. If the PPI is going up by less than 6%, there is no change. Only if the PPI falls below zero, so this means even not 6%, but below zero, then, of course, in theory, customers could ask for cancellation, which has never happened and which is not in sight, and the cost is only going up. So in practice, it means that at the moment, we are at about, I think, 112 for orders which have been booked in pharma. So it's not 6% price increase, but 11% to 12%.

[Daniel Lion, analyst]

Okay. Okay. But simply, when I look at your guidance for the full year and deduct the first quarter, the growth dynamic, it's really coming back for the remainder of the year. Is this just a conservative view? Or is the base effect really that strong?

[Felix Strohbichler, executive]

I wouldn't say that this is a conservative target. I disagree with this. First of all, in terms of turnover, we are now in a situation where we don't push capacities any further. So we are remaining now on a stable level as the markets are calming down, except for North America and APAC. So this means that there are no further increases in capacity plan for the remainder of the year, at least not significant capacity extensions. We have not passed on all the price increases, and this is reflective. So actually, if you look at the seasonality, what we have guided here, absolutely makes sense from our perspective. I wouldn't see this as a conservative target. And you also have to consider in terms of turnover that the first quarter actually had a very good product mix, for example. So yes, there is some room from pricing. But in terms of product mix, the first quarter was very good.

[Daniel Lion, analyst]

So where does the growth in the end come from? Actually, we would need to compare it to the first quarter in the end because for last year, would you say that you have utilized the same production capacities as you did in the first quarter?

[Felix Strohbichler, executive]

The last year, we had much more supply chain issues than in the first quarter of this year. So even if the capacity was not dramatically different, the output was higher due to the fact that we got our components and less -- yes. So this was the main difference.

[Daniel Lion, analyst]

Yes, that's what I mean when I say it looks conservative because it seems that if you continue to run on this high level and your visibility is, of course, on the first -- until the -- almost until the end of the year, of course, we don't know how the economic environment and demand patterns, how they play out. And if we see cancellations or whatever, yes, but for the time being, it seems that it looks actually rather stable. I'm just a little bit -- PALFINGER, the implied growth for the second until the fourth quarter is 4% top line.

[Felix Strohbichler, executive]

Yes. You have to consider that we have a strong seasonality at PALFINGER. So the first quarter is the second strongest quarter usually. So the second quarter of the year is the strongest and then Q3 is the weakest quarter of the year and Q4 is the second weakest quarter of the year. So yes, it's true that in the second half year, the growth momentum is lower than the first half of the year, but this is simply linked also to seasonality and working days.

[Daniel Lion, analyst]

Yes, but the seasonality was the same last year. So I compared it to last year, not to the first quarter. I'm not extrapolating Q1, of course. So it's really -- it's the comparison, the implied growth guidance year-over-year...

[Felix Strohbichler, executive]

Yes. I would have to look at the development of the quarters. Let me just check, it takes 10 seconds. So looking now at the development of the quarters, so if I look at Q1 2022, we had EUR 486 million of turnover, then EUR 553 million in the second quarter. I mean, what you have to consider is last year, we had the ramp up of price increases. This is not happening this year.

Last year, we had a constant effect from price increases over the quarters, and this is why Q4 was so strong in terms of sales. It was on the one hand also improvement in the supply chain, but especially also the price increases kicked in. Of course, if you now would take Q4 2022, and you take the same for Q4 2023, then I understand where you are coming from because Q4 was so good. What was special in Q4 was also that we had a lot of backlog we could recover in Q4. So there were units which have been produced over the year which couldn't be supplied due to a lack of chips, for example. And then in Q4, we were able to invoice those units because the components came in. So this was not a normal distribution over the year because it was really distorted by price increase effects on the one hand, but also supply chain effects. So you cannot take 2022 as a standard. I would say, not as a template for the typical seasonality of PALFINGER.

[Daniel Lion, analyst]

Okay. Well, then could you help us on the average interest rates post or including now the promissory note loan that you issued? Where would we stand?

[Felix Strohbichler, executive]

I did not yet do the exact calculation, but of course, it will go up if you take EUR 150 million at around, let me say, an average of 4.6%, 4.7% of interest. So of course, this pushes us above the 3%. So I would assume it's solid around 3.4% or so. And of course, we also have rival loans. These are also going up, so probably it's even 3.5% or so. But this is now just a rough case that you can calculate now.

[Daniel Lion, analyst]

Yes. Could you give us an update on at least -- as far as possible on how the Russian business develops? And how the...

[Felix Strohbichler, executive]

The Russian business is stable. Stable means, however, it's less in terms of group revenue and group EBIT contribution because the exchange rate is significantly different to last year. So last year, I think we had, at this point of the year, an exchange rate of about 50% or 55% whereas now it's, I think, around 85% or 90%, and this, of course, makes a major difference. So this is also what you can on the slide with the share of the regions in terms of turnover. So CIS went down from 7% to 5%, mainly due to this effect, but also due to the effect, of course, that we had a major growth now in EMEA. So it was both effects. But in principle, the Russian business itself is stable. So if you look at the ruble values, it's still performing on a good level.

[Daniel Lion, analyst]

Okay. And this is also implied like this as your assumption going forward in the guidance?

[Felix Strohbichler, executive]

We see for Russia that in the last 12 months, there was actually no major negative impact. We still don't see any negative impact or assumption is that we can't expect growth or positive development, but we also don't expect a major negative impact. So our planning [indiscernible] continue on the same level.

[Daniel Lion, analyst]

Yes. Yes. Clear. Makes sense. Last question on your CapEx. You were at EUR 50 million now in the first quarter. Do you see this as a good run rate? Or was the first quarter exceptionally high?

[Felix Strohbichler, executive]

So this was, I would say, still a little bit too high. So the EUR 50 million were also accumulation of factors coming in, in the first quarter. So I wouldn't multiply it by 4. But it's going in this direction, I have to say. So we will clearly spend substantially above EUR 150 million this year. This is our plan. It's actually difficult to say what we will actually really spend because delivery times of machinery, but also for construction, et cetera, are still hard to predict at the moment. So [indiscernible].

Sorry? So last year, we would have planned more than what we actually showed. And in the first quarter, we are showing more than we had actually planned, but it's rather going towards EUR 150 million plus, EUR 180 million than remaining on the level of last year.

[Daniel Lion, analyst]

And this level is likely to remain in place for the next 2, 3 years at least, right?

[Felix Strohbichler, executive]

Yes, we have some major projects in the pipeline. So for example, we are building a plant in Serbia, in Nis. This is one of the major investments and we are also going to make a major investment in Slovenia for a new painting facility, which is around EUR 50 million to EUR 60 million. Both investments will come in, in the next 2 to 3 years. And these are, so to say, one-off investments, which are typically happening every -- for example, a painting facility is an investment once every 15 years. But of course, this will be something which is added to our run rate here.

[Operator]

[Operator Instructions] So far, there are no further questions, and I hand back to Felix Strohbichler for closing comments.

[Felix Strohbichler, executive]

Yes. Thank you for your questions. Thank you for your attention. I think this first quarter underlines once again that PALFINGER is able to show a strong performance. We believe in our targets. We confirm our targets for this year and also for 2027. And despite of the fact that today the economy, especially in EMEA, is a little bit slowing down, we still see that also for the years to come, we have a good growth momentum and can continue our path. Thank you very much. Have a good day. Bye.