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Ladies and gentlemen, welcome to the Parker Norton Group Q3 Earnings Call. My name is Christopher Helmreich of Investor Relations. Joining me in Munich today are Dr. Karl Tragl, our CEO; and Christoph Burkhard, our CFO. Over the next 10 to 15 minutes, we will present the results of Q3 '21 and provide an outlook for the remainder of the year. You will have the opportunity to ask questions right after the presentation. If you are joining us via webcast -- if you are not joining us via webcast, you can find the presentation slides for this call on our website, wackerneusongroup.com/investor relations. Before we start, please note that the entire call, including Q&A, will be recorded and made available on our website this afternoon. Now let me turn the call over to our CEO, Mr. Tragl.
Thank you, Christopher. And also from my side, a warm welcome to our business updates. Let's start with a brief summary of the third quarter of 2021. We continue to deliver a strong performance in Q3. Despite ongoing and very challenging supply chain situations with a lot of uncertainties and repeated disruptions, we managed to grow faster than initially expected. This is mainly thanks to the excellent collaboration between our global teams, our suppliers and business partners. Sales increased by 18% year-over-year, which brings us very close to our precrisis levels. In Q3 and the first 9 months of the year, we were only around 2% below our figures for 2019. Nevertheless, our growth was curbed by material shortages and missed production slots, although we did manage to avoid longer-lasting production shutdowns. If we look at profitability, we are proud to have achieved an EBIT margin above 10% in the first 9 months despite the mentioned various difficulties, which Christoph and I will come to in a moment. During -- turning to the third quarter, let me first say a few words about our gross profit. Gross profit and the gross profit margin were up year-over-year, thanks to a strong volume increase. However, the margin came under increasing pressure in the course of the year 2021. After reaching 27.3% in the first quarter, it fell to 26.8% in the second quarter before settling at 25.8% in the last -- now in quarter 3. The reasons are increasingly severe impacts on our productivity from supply chain disruptions and the rising prices for raw materials, components and shipping. We expect these effects to continue and become even more severe in the coming fourth quarter. As you would expect, we can also see a similar trend with the EBIT line. EBIT for the quarter nearly doubled year-over-year, resulting in an EBIT margin of 9.7%. Compared to last year's quarter 3, we benefited from increased sales volumes and strict cost control. The cost to sales ratio with regards to SG&A and R&D costs improved by 3.2 percentage points versus the prior year quarter. However, profitability is slightly weaker than in the first half of 2021 due to the increasing impact of supply chain disruptions and input costs. Despite these disruptions on the supply side, our net working capital ratio is still on track at 29.7%. With strong operating cash flow and CapEx, once again remaining below our projections, free cash flow came in at EUR 52 million in quarter 3. The free cash flow for the first 9 months of the year totaled at EUR 186 million. Now let's take a look at business development per region. Europe again reported strong growth with a plus of 17% for both the third quarter and the first 9 months of the year. In the construction sector, Germany, Austria and Switzerland once again proved to be very robust. Business developed even more dynamically in United Kingdom and France. In addition to this, we achieved major double-digit gains in Southern Europe and Eastern Europe. In some cases, however, the baseline for comparison here is weak due to the coronavirus crisis the year before. Business also developed well in Northern Europe. Revenue with compact equipment for the agricultural sector, which had slowed in quarter 3 2020 is firmly back on track, growing by 23% in the third quarter to achieve a total increase of 17% for the first 9 months. Our business in the Americas is picking up and developing dynamically, fueled by strong sales in worksite technology, excavators and wheel loaders. After restructuring our dealer base in the Americas in 2020, however, sales are still below precrisis levels. Year-on-year growth amounted to 28% for the quarter and 16% for the first 9 months of the year. On the positive side, the uptick in profitability shows that our restructuring efforts have paid off. In addition, we have an internal hidden champion in the Americas, it's Canada. Canada reported very strong growth, with sales already exceeding the precrisis levels. After a very strong performance in the first half of the year, Asia Pacific reported mixed results in the third quarter. The good news is that the exceptionally positive performance in Australia continued in the third quarter, leading to significant double-digit growth. We managed to expand our dealer network and to sharpen our focus on larger independent rental companies here, which led to major orders for tele handlers, excavators and dumpers. However, the positive trend in Australia was offset by developments in China and Southeast Asian countries. China remains challenging as price pressure is high, and our installed base is relatively small. On top of that, the excavator market in China is declining and local manufacturers have excessive production capacities. As a result, we continued to distribute machinery produced at the Chinese plant in our export markets, such as Africa, South America and as mentioned, Australia. And with that, I'll turn the call over to Christoph, who will elaborate on the situation with supply chains before providing insight on cash, debt and liquidity.
Thank you very much, Karl, and good afternoon, everyone. As Karl said, we were able to perform better than expected in the third quarter despite the stresses and disruptions in our global supply chain. Nevertheless, the overall situation is still very demanding. And I would like to give you a more detailed overview of the current situation on the supply side. In the graph shown here on the slide, you can see the percentage of on-time deliveries in our inbound trade. Unfortunately, as you can see, on-time deliveries have not been the standard for quite some time now. On the contrary, the trend in recent months does not look good and is affecting us in several ways. Firstly, we have to operate our plant extremely flexibly and increasingly reaching our limits here. Production schedule cannot always be adjusted into approaches and the challenge here is primarily to bring into workforce planning. Stopping production slots or canceling complete shifts at short notice has an immediate negative impact on productivity, on costs and eventually on profitability. Secondly, we are experiencing ongoing challenges with our inventory management. Our inventory structure has further deteriorated over the last 3 months. Our stock of finished machines decreased further, while work in progress continued to grow, more than doubling since the beginning of the year due to missing parts and components. In our H1 call, I explained that we have to rework unfinished machines and touch them more than once to get them out of the factory. And this inevitably will have a negative impact on our profitability in Q4. Therefore, one of our key focus areas within the Executive Board is the constant alignment of market demand, production planning and the supply side. Moving forward, it is vital that we manage the balancing act of keeping our net working capital at a reasonable level while at the same time, ensuring maximum delivery capabilities. And our target is to sustainably increase our resilience against supply chain disruptions. What you can also see on this slide is that shipping prices too were very high in the third quarter. And as you also know, prices for raw materials are skyrocketing. Whereas in the first half of the year, we were still able to draw in part on existing stocks and fixed price contracts, but the price increases are now increasingly impacting our income statement. Now let's take a closer look at our cash, debt and liquidity situation. As already indicated by Karl, the first 9 months of the year have shown a very solid cash generation. Free cash flow is up to EUR 186 million, with Q3 coming in at EUR 52 million. Our investments in Q3 came in below our projections as we postponed some projects due to our increasing daily efforts in operations. And we do now expect CapEx for the year to amount to around EUR 90 million after around EUR 50 million up until now. And despite the situation in our supply chains, we succeeded in keeping a firm grip on our net working capital ratio at 29.7%, it was just within our strategic target range of 30% or below. And finally, looking at our net debt, we can report a low figure of EUR 48 million, which leads to an EBITDA multiple of EUR 0.2 billion. And now a short update on our share buyback program. As you know, we aim to buy back up to 3.5% of capital stock, not spending more than EUR 53 million in total. And as we have communicated previously, the treasury shares are to be used primarily as potential acquisition currency auto service participation programs for employees and members of the Executive Board. As of September 30, we had bought back around 1.5 million shares, corresponding to EUR 36.6 million, representing 2.2% of share capital. So we are well on track here. And with that, back to you, Karl. Thank you.
Thank you, Christoph. Let's look ahead to the remainder of the year and into the year 2022. Our customers continue to rely on our products and solutions. We continue to see very high demand in the majority of our end markets, with China being the only exceptional presence. Our order backlog for the group is significantly above average historic levels. The mood in construction agriculture is very positive. Even though in the CEMA and the CCE business perimeters has softened recently, a development that is also related to the stage of the global supply chain. According to CEMA, the European Association for the agricultural machinery industry, 45% of companies surveyed expect to experience production downtime in November due to missing parts. A further more than 80% of mechanical engineering companies surveyed by the German Engineering Association, VDMA, expect to see noticeable or serious disruptions in their supply chains. Given that material reserves across our group and supply chains have been depleted, we expect now production outages in the fourth quarter with a more pronounced impact on sales and profitability. Production downtimes will increase, and we will have to rework a lot of machines with missing parts. Additionally, costs for raw materials, components and transportation are continuing to rise. As the safety net by existing price agreements and supply contracts increasingly shrink, material price increases in quarter 4 will have a greater impact on profitability than in the recent quarters. In light of our group's strong development in the first 9 months, my colleagues and I have raised our sales and earnings guidance for the year. The revenue range is now set at EUR 1.775 billion to EUR 1.825 billion and the EBIT margin corridor in the range of 9.3% to 9.7%. Looking ahead to 2022, the challenges in the supply chain will certainly not disappear. They will continue to place high demands on our plant flexibilities and our forward-looking intelligent warehousing, as Christoph already explained. At the same time, we will continue to face rising input costs, which we will try to offset with internal efficiency and cost measures as well as through price increases already implemented in 2021 and further ones announced for 2022. But the fundamental trends of our markets are still very positive. Demand for new infrastructure and infrastructure renovation is high, and there's a lot of money and liquidity in the markets out there. Market forecasts for Europe and the Americas are positive, and we have an excellent up-to-date product range that will help us win further market shares with all of our 3 brands. And with that, we're happy to take your questions. So Christopher, please.
Thank you. Thank you, gentlemen. Yes, we're now ready to enter the Q&A session, and I would like to ask the operator to give the instructions. Thank you.
[Operator Instructions] We have our first question from Charlotte Friedrichs, Berenberg.
Three questions, if I may, please. Firstly, on the quarterly savings, would it be reasonable to assume that Q4 is now one of the most hit quarters in terms of the supply chain tidiness? And then as we move into next year, the price increases start to take more effect and increasingly offset raw material price pressure. Second would be a bit more commentary on the free cash flow. Are there any special items that you expect in Q4 that would change the picture from what we saw in Q3? And then finally, a bit more qualitative. Can you give us an update on the feeling that you have about potentially over ordering of your customers or pull forward effects on that side.
Thank you for your question, Charlotte. It's Christoph here. Regarding your first question, this is a straight yes, we would share your view here. That's sufficient for you. Question #2 was on cash flow and concerning special items for Q4. No, not really. We believe that we will see 2 developments here. On the one hand, of course, we will remain cautious on the net working capital side. So the uncertainties are fairly high here, but I wouldn't expect any kind of unexpected swings at that side. Secondly, concerning our investment, as we have just mentioned before, we have slightly reduced the overall investment amount. So of course, you should expect an effect of, let's say, around EUR 40 million on the spend side for investment and then again being counterbalanced by operating business and profitability, obviously. And secondly -- thirdly, you were talking about pull forward effects on demand side, we don't see that currently.
The next question is by Jonas Blum, Warburg Research.
A couple of follow-ups from my side, please. Firstly, just to get a feel about the supply chain bottlenecks in Q3. Could you give us a rough indication what sort of sales potential would have been possible in Q3 if the supply chain disruptions could not happen? And secondly, just around the price increase you mentioned also for '22. Can you give us an indication of what's possible in terms of price increases? And finally, as you already mentioned that your internal assumptions that lie chain bottlenecks also really Q1 '22. I was just wondering that solution is not -- or you're not assuming basically that your suppliers will ramp up further capacity. So is it other factors you're expecting to be sustained in '22?
Thank you, Jonas. We didn't get the third one, but we will start with the...
Yes. Could you clarify the third one once again?
Yes.
Yes, sure. Just around your internal assumptions for in terms of supply chain disruptions. So you don't expect a significant improvement or actually you expect billet. So just wondering that your internal assumption is that your suppliers have one to ramp up capacities?
Okay. So let me try. Karl speaking here. The first question was about material disruptions, what we have seen in quarter 3. As we explained, Christoph and me, they were increasing compared to the previous ones, but less than we had expected. But it's a little bit like running the final mile where you don't know when you're running out of your own energy. So we are just hearing that in quarter 4, there will be more disruptions because now we are really completely empty with all buffer stock and everything and our changes in -- from supplier deliveries. And I think you have seen in our presentation, they are still increasing. So we just see in quarter 4, an increasing disruption with material supply. And I would like to take the third question as well, how do we expect 2022? We expect the first quarter and probably the first half of the year to continue on that level because we still have other issues like Olympics in China and some other issues which are starting in quarter 1. So we expect it's going to continue. And this will definitely compensate capacity increases and improvements there. So we are very cautious for the first quarter or the first half. But we are -- in the second half, it must pay off what the suppliers are doing, what we are doing, we must see an improvement in the second half of 2022. And your second question was about price increases for 2022. So we implemented another increase effective January 1, 2022, of around 3.5%. And which has been announced, which has been told to our customers, but it will only affect a part of our business because already booked deliveries for next year on previous prices will not have that. So if you want to quantify it by yourself, you cannot take it by 100%. But let me repeat it once again, another 3.5% price increase beginning of 2022.
Okay, understood. Just to follow up that in Q3. So if you could just quantify what sort of sales potential you could have achieved without the supply chain bottlenecks. And that's also to fall out on the price increases. So this will basically compensate for the current cost input inflation scenario, right? So you're assuming also that higher input prices will sustain in '22?
Yes. Let me perhaps start with the first one because I missed that. I'm sorry for that. We always measure that as stock of unfinished machines. Those are the ones where we have just a few parts missing. And adding those few parts, we can turn it to revenue and margin. And taking that as a measure, at the end of quarter 3, we are at 1,700 machines, which is around -- a normal level would be around 200 to 300. And if we want to quantify the missed sales volume is around about EUR 50 million sales volume. And the other question about continuing with the material price increases, yes, they are -- they either will stay in the fourth quarter and the first one next year, they either will stay on the level as where they are or they will even increase more.That's one of the reasons why we speed up with efficiency and cost actions and the price increases in the market. How far that balances, how far that will hit our margin and how far that will -- could be overcompensated, it is something time will tell.
Our next question is by Charlotte Friedrichs, Berenberg.
Just a quick follow-up on the chart that you showed about late deliveries. Is it correct that it's about 40% of deliveries now being late? And related to that, what would a normal level be something like 10% or less?
Okay. So I mean, we didn't want to really show the percentages, but if you read it out, yes, that's the number we talk about. And we just wanted to show that this is more -- a little bit more than double what we have seen end of 2020. A normal level, if you would ask our production colleague, Felix Bietenbeck, he would say it must be below 5% because every miss part gives disruption in production systems. And if you would have an automotive like just-in-time production system, you really talk about single digits, more numbers. But I mean, in our case, it's better, therefore, we put in, I think, October, I don't have the chart in front of me, but I think it's October 2020, taking that as a previous level, it has more than doubled.
[Operator Instructions]
So it looks there are no further questions, then thank you very much for participating. And if anything else comes up, please do not hesitate to contact the Investor Relations team. Just give us a call or drop us an e-mail. Thank you very much. Have a good rest of the day. Bye-bye.