Earnings Call: H1 2018

Aug 3, 2018

Dear ladies and gentlemen, welcome to the conference call of Interval Holdings AG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. May I now hand you over to Daniel Batik, who will lead you through this conference. Please go ahead, sir. Good morning, ladies and gentlemen. My name is Daniel Batrick. I am Group CFO with Interol since March 2013. I welcome you to the 4th live webcast today presenting Interol's half year results 2018. Interol is part of material handling equipment manufacturing, and market the CHF140,000,000,000 in 2017 and growing at the cargo of 4% to 7 percent a year. Material Handling Manufacturing is booming, and the growth is rather at the higher end of the 4% to 7%. Interall is dedicated to intravotristics only. This is the yellow part if you are following my presentation in the webcast. So we have no ambition to go into forklifts or cranes. We remain dedicated to rollers, price, conveyors, sauder, pallets and carbon flow. And therefore, the relevant market for Interol, Interolochistix is CHF 5,000,000,000 to CHF 7,000,000,000 worldwide and Intero is currently holding a worldwide market share of 8% to 11 percent. We continued our growth strategy to further expand global leadership in internal logistics solutions with our key products and services, very successful in the first half year twenty eighteen. All product groups and all regions performed better than in the first half year twenty seventeen. Especially, I want to point out the performance of the service and Camberias business, which was growing 39.7% and also the drives business that was growing 17.7%. But there is also good news from our smallest product group, pallet and carton flow, which we could reactivate in the first half year twenty eighteen. When I am looking at our end markets, courier, express parcel, airport, food and beverage, distribution and warehousing, I do not see any slowing down for the Paim business. So we are focused on very dynamic markets, which allows us to outperform material handling equipment manufacturing once again. We remember the growth rate is 4 to 7% for the average material handling. Interval was growing order intake 32.8%, 27.4% local currency. And we have the special strong growth in the Asia Pacific region with 86.4%. Also, net sales are growing in the group 18.4 percent local currency, 13.4%. So there is a 5% positive currency effect in the first half year twenty eighteen. Results are growing over proportional. The EBIT was up 23.2 percent, reaching 25,300,000 despite increased research and development spending levels. Capital expenditures were growing 16.8%. We mainly see the increase because we are investing in more production capacity to support the further growth. Very strong also operational cash flow, which is up 77.1 percent to EUR 31,200,000 This clearly reflects the projects we have in the pipeline and the down payments we got on these projects. We posted another record order intake of €324,600,000 This is a plus of 32.8%. InterContinues its development from a product to a product solution provider. Looking at the graph, you can see that the project oriented product groups, conveyors and saucers, pallet and carbon flow are together now 56% while the product groups, rollers and price together are 44%. Intake was strong in Asia, 68.4%, but this is not limited to China. We see also Thailand and South Korea growing very nicely. I already pointed out Conveilis and Sorters and Thrifts, which were profiting especially from the earlier announced large follow-up orders in the United States and in South Korea. Book to bill ratio reaches 1.35 while it was at 1.2 a year ago. And we have now a record check backlog, which we will work down in the second half year and which allows us to give a positive outlook for the second half year twenty eighteen. SAES also had a record leverage, euros 240,700,000 or 18.4%. Here, we are developing from a European to a global provider. Net sales increases we have seen in all the regions. In EMEA, 17 point 1% in Americas, 13.3% and in Asia, 39.1%. Here, I want to point out that the billing of the American projects has started, and we will be billing the remainder of the large follow-up order in the second half twenty eighteen. The large e commerce order we got in South Korea, we will only partly build in 2018, while a large part will go into 2019. We continue our strategy to better balance the geographic regions. We want to reach 50% of our business in EMEA and fifty percent in overseas. Currently, net sales reached 61% in EMEA, 26% in Americas and 13% in Asia. We continue our growth strategy in Toronto not only developed from a product to a solution provider and from European to a global company, we also prepare to move from an e commerce to an industry for all provider. So I confirm that we will spend this year €5,000,000 in additional research and development cost as we have announced in 2017. So I confirm the €5,000,000 extra for 2018. We're using this extra money to develop smart service products. We are investing in heavy goods and pallet handling solutions, and we are also working on more specific industry solutions like we have provided for tire and automotive. We anticipate first products coming into the markets in 2019. I already mentioned that we were able to grow results over proportional. Our EBIT reached €25,300,000 This is a plus of 23.2%. As already mentioned that we are spending an additional €5,000,000 on the research and development these years. We have seen that gross margins are getting under pressure this year. So we see increased material levels. But for the time being, this will be manageable for InterOil. We don't see a large negative impact from this. Depreciation is up. Amortization is slightly up. So we have been a little bit better on the EBIT level than the 20% announced earlier in July. Net income reached €18,600,000 This is a plus of 21.5%. The net income margin reached 7.7%. Here, we see a slightly negative foreign currency result and a somewhat higher tax quote, but not in nature in my view. The operational cash flow, as mentioned in the summary, very strong, is reaching €31,200,000 This is a plus of 27.1%. This is the result, the positive result of the higher projects. So we are getting more down payments from our customers. We have a slightly negative impact on the inventory since some of the suppliers are slow in delivering their parts. Our general managers and the subsidiaries tend to build some extra stocks. But as mentioned before, for the time being, this is manageable for Intrar. Also, investment increased. So we are investing mainly in more production capacity to further support the growth in the future. So we have amended our Atlanta plant, which is building sorters and conveyors in the United States. And we are about to build our own premises in Thailand that will be our 3rd regional competence center in the Asia Pacific region. So also free cash flow, very strong with EUR 18,000,000 in spite that extra investments we are making. We are continuing to creating value. RONA reaches 15.6%. Return on equity, 14.2%. This is 1% up compared to last year. And we are able to create that value despite the increased research and development expense. As you know, it's not the tradition of the house to make a concrete guidance. But still, we want to give a very positive outlook for the second half year twenty eighteen. We can do so because we enjoyed a very good performance in half year 1, and we have a record quarter intake. For the time being, I see growth drivers unchanged for the second half year twenty eighteen. And also long term, in our industry, as mentioned before, no of the end markets serviced by Intralor, we see weakness for the time being. A quote from Mr. Alexander Koehler from ZEP KV. Do you notice bottlenecks in the supply chain? As mentioned, some of the suppliers have difficulty to keep the time lines. So our general managers in the subsidiaries tend to order extra stocks. So for the time being, it's manageable. So nothing that is not good for our further growth journey. I quote Michel Inouen from Credit Suisse. Can you explain the drop in gross profit margin versus the slight increase in EBIT margin? Yes. Intraral is working on its productivity. So all the sites are measured on the productivity. So we are constantly working. We are trying to improve also on the fixed cost side. And I think also in first half here, we have done a good job to increase productivity in all the sites worldwide. We're waiting for new questions at the moment. Ladies and gentlemen, more questions for us. I quote Michel Michlar from Vontobel. Can you give us an update on the fashion and tire industry? Yes. Interall is moving in sales to industrial sales. We have formed up specialized sales team focusing on dedicated industries. As in your question, there is industry phase established for tire and automotive. There is industry phase in place for post and logistics for airport. So we are building more and more specialized teams, which can tie in closer with the needs of the customer. So far, we are very automotive, and we have now just started with e commerce and fashion. I'll go back to a question of Michael Linon from Credit Suisse. Why the drop in gross profit margin? The drop in cost margin has many reasons. There's not a single reason. So as mentioned by me in the presentation, on the one hand side, there is a higher cost for raw material. So it seems some supplies are short, raw material prices tend to go up. Furthermore, I want to point out that we grow now over proportionally in regions where in regions in overseas, in Asia Pacific and in North and South America, where we are not enjoying the same gross margins as in Europe yet. I'll quote Mark Potter from South Hau again. Have you been able to convince new integrators? Or is the existing business done with the common ones? Actually, we see many, many new system integrators coming into the market. So in the past, typically, system integrators were located in North America, Western Europe or Japan. But nowadays, we see many small to midsize system integrators, especially also in the emerging markets like the Philippines, in Malaysia or Indonesia, which are very interesting to enter all. As you can imagine, if you create an established integrator like Siemens, for instance, then they will be pushing their solution. But if we can work with a small to midsize system integrator, we have more influence on the technical solution that comes into place. And we have also more possibilities when it comes to commercial terms. So there are many new system integrators we work with. I quote Thomas Brown from Itunes Group. Do you have any public targets around the move from e commerce towards an Industry 4.0 player? For the time being, ecommerce is still growing very strong. So we don't see a slowing down of the e commerce trend. So we are building industry for all to procure that next megatrend for us. But I think that e commerce will be the driver for us for many years to come. I quote Michel Lischlof from Vontobel. Do you still expect seasonally stronger Page 2? There is some seasonality with intraoral since 3 years, I would say, since projects in the saucer and conveyor business picked up over proportionally. So typically, logistics and postal companies are ordering their sorters and conveyors for the next Christmas business. That means these companies have ordered in Q1 or Q2 of 2018 the equipment that needs to be ready by Christmas 2018. This is why we see the order intake so much stronger than the 1,000,000,000. Typically, in the second half year then, the 1,000,000,000 is very strong because we have then built this order and the conveyors. We deliver them to the customer. They're typically ready by October and then build. So there is some seasonality. A full to Marc Poser from Farfau AG. Could you comment on the open positions? Do you find the right people? And at what cost can you onboard them? Is there already a salary inflection observable? In certain countries, there is salary inflation. It's probably no surprise. You may have heard that from other industrial group. There is certainly some salary inflation in China. We see that also in Germany and in Eastern Europe. So for the time being, we are able to recruit the experts we need. I think it is in some instances helpful that Interol is at rather peripheric locations. So in Germany, we are in Zincheim or in Kerkhofen. So there, we are in many instances able to attract local talent, which are not willing to commute to Hamburg or Frankfurt. I forgot Michel Wissler. Do project related segments, conveyors and saucers, panel and carton flow, offer lower gross profit margins. As you know, we are not disclosing our margins product group by product group, but there is no large difference between the segments. And our product segments, the rollers and the drives, they have to sell their products at the profit, the conveyors and sawter, pallet and carton flow. And sawters and conveyors, pallet and carton flow, again, have add their engineering and value add it and then selling it at a profit to the customer. There seems to be no further questions. Then I say thank you to all of you. And of course, I'm still open. Should we have any more questions today or somewhere in the near future, please drop me a line or call me at my office in Switzerland. You'll find my contacts at the last slide of the presentation. Thank you very much. Hope to see you soon. Hope to talk to you soon. Goodbye for now. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.