Good day, ladies and gentlemen, and welcome to today's Kardex AG telephone conference to present the 2018 half year results. Today's conference is being recorded. At this time, I would like to hand the call over to Mr. Edwin van der Geest, Investor Relations. Please go ahead, sir.
Yes. Hello, ladies and gentlemen. Welcome to our conference call. I hope you have found all the information on the website, the press release, the semi-annual report, and the access to the presentation. I hope you are all ready so that we can start. I would like to hand over to Thomas Reist, who will start the presentation. Please, Thomas.
Yes, hello to everybody. Also, welcome from my side. You see on the slide, the agenda. The introduction on the financials for the half year close will be done by myself. I will hand over to Jens Fankhänel, the CEO, in regards to the division reports, the outlook, and at the very end of the call, the Q&A session. First of all, the highlights of the first half year 2018. I will guide you through these highlights and later on the financials on group level. Kardex Group could increase volume and profitability at high growth rates as in the recent years. The market environment is very positive. Both divisions could profit from this positive momentum and further strengthen their strong market position. Kardex Remstar and Kardex Mlog reported double-digit growth rates on bookings and EBIT level, and both divisions further increased their EBIT margin.
Free cash flow is slightly below the net profit, but on a solid level. The tax rate is in the communicated target range. Before we have a look in the details of the half year close, I would like to share with you the development of the key figures over the past five years. First, net revenues. There we see that net revenues went up and with a higher rise than in the past couple of years, only beaten by the change from half year 2014 to half year 2015, and this leading to a compound annual growth rate of 7.3%. The operating result, EBIT and EBIT margin, show that there is an accelerated growth. EBIT rose higher than in the past couple of years, and so also the EBIT margin. The compound annual growth rate here is at 18.2%. Net cash flow from operating activities.
There is here an up and down. It seems like a pattern, but it isn't. There is no pattern for this up and down, but we are influenced by project status and the prepayments from customers. This might still go up and down in the future for each cut-off date. Equity and equity ratio. The equity has increased by CHF 9 million. Equity ratio slightly went down compared to the last two years, but this is only because the balance sheet extended. I will give further details later on. Let's dig into the half year closing results, the income statements. On bookings levels, we see that bookings went up by 17.6%, where the main contributor was new business from both divisions, leading to a very high order backlog. Order backlog went up by 32% or EUR 54 million to a record high level of EUR 222 million.
There we see that the visibility has increased from five and a half months to almost seven months. Net revenues went up by 9.2% and gross profit margin went slightly down by 0.3% just because the marginal costs went slightly up. In absolute figures, the gross profit went up by 8.4%, or in other words, EUR 5.4 million. The OpEx rose under proportionally by 4.1%, leading to an EBIT of CHF 23.6 million. This is an up compared to previous year of 18% or CHF 3.6 million. Also, the EBIT margin, as already mentioned, went up by 0.9% points to an EBIT margin of 12.1%. The financial result is EUR 500,000 better than previous year. This is based on lower exchange losses than in the previous year. Here on this slide relevant is that the tax rate is within the target rate range, 26.1% went slightly up compared to last year.
As you remember, based on the US tax reform, the target range has decreased to around 26% compared to last year, where we had a target range of 27%. Result for the period of CHF 17 million has significantly increased by 21.4% or CHF 3 million. The balance sheet. As mentioned earlier, the balance sheet has extended. This is based on the seasonal rise of the current assets. Current assets went up by CHF 22.8 million or 11.3%. This is mainly because the cash position went up. Just remember that the reduction of nominal value happens just after the half year close. This cash position goes up and up until the half year close, and then we pay dividends.
The cash position increased by roughly EUR 16 million or roughly 14%, and counterpart on the equity and liability side of the balance sheet is equity, which also went up by CHF 70 million or 12%. Please consider, as in the previous years, the reduction of nominal share value happened at the 3rd July this year, so this is reducing the cash position in Q3 by roughly EUR 24 million. Cash flow statement. There we see that the net cash flow from operating activities is below previous year with CHF 19.4 million, despite the fact that in the same period of time, the net profit increased by CHF 3 million. This is purely due because of the higher net working capital level.
Net working capital compared to the beginning of the year, went down by CHF 2.6 million, but not as heavily as in the previous year, where net working capital position went down compared to the beginning of the year by CHF 7.7 million. Main position there is the accounts receivables, which again decreased by CHF 5.7 million this year, but in the previous year, this position decreased by CHF 9.4 million. Net cash flow from investing activities is slightly below previous year, despite the fact that we have spent more for CapEx. We had roughly CHF 2 million more CapEx than in the last year, but the executed acquisition was at the lower value. Result in free cash flow amounts to CHF 15.6 million, so CHF 3.5 million below previous year's free cash flow. Thank you for your attention. I would like to hand over to Jens Fankhänel for the division reports and also for the outlook.
Thank you.
Can you flick forward, please?
Yes, sorry.
Afternoon, everybody. This is Jens. I would like to talk about both divisions. First, to start with Remstar as usual. Remstar had a fairly positive first half in 2018. You can see that all the way through down the P&L, starting with the bookings, where we could record double-digit bookings close to 20%. Most regions have contributed to that, as you can read, is North America, Asia and all of Europe. Very few exceptions in Europe. Some countries where we did not see the growth as indicated, but most of Europe did contribute also to the growth. If I do not mention Middle East, Africa, where we continue to see some political and economical turmoil and therefore not developing in line with our own expectations. That's really the only region where we did not see the growth as expected. Revenues, net revenues and profitability did improve further.
Net sales or net revenues, the 13% increase year-on-year, slightly below the bookings. Same pattern as we did report for the financial year and closing 2017. We did experience some capacity constraints in the organization, both in the supply chain as well as in the field. In addition, we did see a similar pattern on our customer side, where customers had to delay projects because of their own capacity constraints. That in combination did contribute to a slightly lower increase in net revenues compared to the bookings levels. That together leads to a, what I call record high order backlog by the end of June with CHF 160 million, which gives us a fairly good visibility into the second half of 2018. Lifecycle Services did defend its net revenue share of close to 30%.
As you all know, we are targeting close to 30% or 30% net revenue share for our Lifecycle Services as our backbone and longer term income stream, and we managed to achieve that as well. Remstar did continue to invest in research and development, more on the development side, continuation of our Vertical Buffer Family development, but also some improvements to our other existing product portfolio as well as into software, our Kardex Software Solutions. We did start, as promised, to invest a little bit more careful into our supply chain, but in line with the bookings and net revenues development. With all of that, I think it's been called strict cost management. We managed to increase the EBIT margin further from previous years, 14%-14.5%, or CHF 3.3 million more EBIT by the end of the first half year.
On the revenue split, it's also to be mentioned, and you will see that on the next page, that the net revenue development took another good step with a growth rate over the last years of 7.9%. The right-hand side shows the operating result, the EBIT and the EBIT margin, as already indicated, CHF 23 million over CHF 20 million last year, same period. The sales mix, the net revenues mix below shows that we managed the Lifecycle Services with 30%, 31% to be correct. The new business with CHF 107 million or 67%, and the only slightly conservative number or the not-so-good development in line with our expectations is the OEM business, where we saw some stagnation. We did not manage to secure more partners in the course of the first six months, and therefore, the development of our OEM business is below our own expectations.
I think that concludes it for Remstar. If we go to the next page, we will see the Kardex Mlog division. Kardex Mlog managed to increase the bookings by almost 10%, CHF 15,049,400 to be exact, bookings levels for the first half year. Net revenues, however, have been below previous year's levels by 4%. That's mostly related to bookings principles we are applying, POC contracts, work in progress, where we expect closing of these projects and therefore an increase in net revenues in the first two months of the second half of the year. In July and August, these net revenues will pick up in the new business side. Gross profit margins increased, partially due to the net revenue mix, but also to better cost control in the projects. We have an under-proportionate growth of OpEx levels despite our increased investments into the sales organization.
All of that leads to an improved EBIT margin of close to 5% or EUR 1.8 million. If we then go to the next page, that's the development over the years. We can see the already reported fluctuation in net sales, I would say, a little bit up, a little bit down. That's mostly because in 2016, we cut back a bit, and since then, we are on a cautious growth path for the Mlog division. You can see that also on the EBIT margin development, this is 5% with the exception of 2016, the best first half year of Mlog over the last five years. The sales mix, the net revenues mix from below. We can see the Lifecycle Services. I would like to pick on the Lifecycle Services with CHF 17 million over CHF 13 million last year, same period.
In 2017, we saw a delayed development of refurbishment projects in the first half, whereas in 2018, we managed to get more revenues from the refurbishment side in. We also managed to increase the standard services, and that led to an exceptional 47%, I would call that exceptional 47% net sales share of Lifecycle Services. Also due to the fact that the new business, as already indicated, came in at CHF 17 million and not as expected, maybe at CHF 20 million-CHF 25 million that we would otherwise have seen. That brings me to the outlook. Already did give some indications for the outlook in the descriptions of the first half year. Overall, I think we are looking very positive to the second half of the year. We see a continuation of the positive development. We base that optimistic outlook on two things.
One thing is obviously the continued global trend of growing demand for efficient intralogistics solutions. The market environment so far does not change, which gives us some momentum also from the market. The second thing is we see that also on a regional distribution. Most of the markets that did perform well in the first half of the year, we also see performing well in the second half of the year. Third, we also look on a very healthy and very strong order backlog. Which should support quite a good net revenues development in the second half. For Kardex Remstar, that will drive the net revenues and also should generate pretty good bookings for the second half. For Kardex Mlog, it will mean a continuous improvement process, net revenues increase, and also a very strong focus on profitable growth.
The whole organization, but mostly Kardex Remstar, will continue to invest into its supply chain to eliminate the current capacity constraints. We will also continue to add people to the organization to bring talent in, but also to close some capacity gaps when it comes to the organization itself. We should also continue to invest into our IT infrastructure in order to continue our path of operational excellence, improving the internal efficiencies, and do that with regards to longer-term improvements on our profitability levels. We expect similar levels of investment into our R&D in both of our two divisions to improve our technology base and continue the sales success. All in all, we expect that we will come in within the communicated financial target ranges by the end of the year. With that, I would like to close and hand back to Edwin for the Q&A session.
Thank you very much.
Yes, thank you very much, Thomas. Thank you very much, Jens. May I ask the operator now to start the Q&A session, please?
Certainly. Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, to ask a question, please press star one. We will pause for just a moment to allow everyone to signal. Thank you. We will take our first question today from Charlie Fehrenbach from AWP. Please go ahead.
Hello, gentlemen. Thanks for taking my questions. Does the bottleneck in your supply chain slow down your growth in a way? The second one would be, could your business be affected by the escalating trade dispute between U.S. and Europe and Asia in a direct or in an indirect way? Thank you.
Yes, thank you, Charlie. I think it is Jens that's going to answer both questions.
Yes, I will. The first of all is the capacity constraints. So far not, I would say. If we lose, the answer would be given if we consider lost projects, where we lost because of extended lead times. What we see is extended lead times from order intake to delivery to the customers, which sometimes is a competitive disadvantage. We did lose some, I think we losing in the normal loss ranges so far because some of our competitors have similar type of capacity constraints. It's not just us, it's also our subcontractors, suppliers, who do have these things and they supply partially also to the same competitor levels that we are having. Does it impact it? It may by a few percentage points, I wouldn't think that it's substantially impacting our growth expectations.
However, that will not last forever and that's why we investing into the supply chain in order to compensate or eliminate those capacity constraints as fast as we can so that we, in the end of the day, are back on even levels with everybody who can supply within shorter lead times. Second question, trade conflicts. So far, we do not see any impact. I think that partially it's because we're selling regional. We do not export, for instance, from China to other parts of the world. All of our machines are still coming to the majority of its composure from Germany, and therefore, we are not seeing any constraints from the U.S. I think that's what you're mostly talking about for equipment that's coming from Europe. Hasn't touched our industry yet.
What might happen is, but that's a thing that we are watching, is the weakening of the Chinese currency, the yuan. Not sure this is going long term, but that's part of the economic war that we are seeing. That might impact, to some extent, the import into China, because obviously customers will buy more expensive than they otherwise would do. That's the thing we are monitoring for the portion of our business where we export from Europe into China and how much that would effectively impact our business locally in China.
Thank you very much.
Does that answer your question?
Yes. Thank you.
Welcome.
As a reminder, ladies and gentlemen, to ask a question, please press star one.
We will take now our next question from Michael Lichvar from Bank Vontobel.
Good afternoon, gentlemen. Can you hear me?
Yes, Michael, we hear you.
Okay. Thank you. I would have a couple of questions maybe. The first one regarding networking capital, what are your expectations there, and why are you so confident that given the strong growth that you are having, you will be able to reduce accounts receivables further? Also part of this, do you expect your inventories to increase because of these shortages? Maybe you want to create some safety stocks. This would be my first question.
Okay. Thomas is going to answer this, I believe.
Yes, sure. Networking capital, I am not sure whether this was a misunderstanding. I do not believe that we further can reduce the accounts receivables because it is clear whenever we have more net revenues, then the accounts receivables will go up. What I wanted to say is that we have a seasonal pattern. At the year-end, we have normally a rather high accounts receivable position, which we reduce through the half year. This is the seasonal pattern, what I mentioned or what I meant during the call. It is not my expectation that we will further decrease the accounts receivables whenever we have such high net revenues and such high bookings. In regards to the inventories, they have increased already. The work in progress, the WIP has gone up as well as the inventories. We are not sure where the peak is.
We are sure that there is, in a certain point in time, a peak point where it will go down again. This really depends on the capacity constraints, as mentioned Jens, just before. When we'll be able really to reduce these constraints and reduce again our backlog. Does this answer your question?
Yes. Basically for the full year, we should expect negative impact on free cash flow from net working capital.
Correct.
Okay. Another question just regarding your visibility of almost seven months. Could you then give us maybe a more detailed guidance or can you maybe just remind me what are these communicated financial targets that you want to achieve? As far as I understood, you only have targets for the midterm, which is 3%-5%, and that seems a bit conservative for this year.
Yes, absolutely. Just remind that the seven months I mentioned before, this is also including Mlog. Mlog has a different business model, they had always a higher visibility. It used to be nine months. Now it's probably nine and a half, 10 months. Also, Kardex Remstar increased. The visibility increased, that's true. That's correct. You know us. We are quite conservative. If you do your math, if you see how high our backlog is, then one can expect that we will stay above the 3%-5% growth within the next couple of months. Again, we have a visibility of seven months, this is no indication for a long period of time in future.
Yes. For 2018, it's very likely that this will be substantially above the 5%.
From a growth point of view, yes, Michael. From a profitability point of view, I would expect that we are in the target line that is communicated.
Okay. Makes sense. Maybe a small question. I've seen that with Mlog, you also made some revenues in the Americas, very small ones. Is this a start of a new trend, or is it just one-off? I mean, with the trend, you are investing quite substantially into your sales network in North America. Is this kind of indication of these efforts or is it really just a one-off?
Jens, to you.
First of all, it's not a trend. Second, it's not the strategy to bring Mlog into the Americas. It must be one of the existing customers where there was some added activities. I would believe that this is related to services business, spare parts business. None at the top of my head, to be fair. What we haven't done is that is I can really confirm, we haven't changed the Mlog go-to-market strategy. We will focus Mlog still on Europe, adjacent countries, step by step. That's been reconfirmed. It's not the intent to bring Mlog business outside of Europe. Not in a strategic-driven way. Opportunistic with existing key customers, that's a different discussion.
Okay, understand. Maybe last question, just regarding your organic growth. There was nothing mentioned about it. I would imagine that in terms of organic growth, your growth rate was probably even higher than the reported one. Would this be a correct assumption?
Not sure that I understood the question correct, Michael.
Just-
Forex point of view.
Yeah, Forex was probably a negative impact there.
Yes, this is true.
Very minimal. Yeah.
Yeah. This is true. We had a negative FX effect, but it was not dramatic.
Can you give me a number?
Yeah. To be honest, I don't have the number right here.
Okay, that's fine.
It's really not substantial.
Okay. Thank you very much.
Welcome.
Thank you. We now take our next question from Benjamin Barber from Berenberg.
Hi. Thanks for taking my questions. Just a couple of questions from my side. Firstly, on the gross margin for both divisions actually, just looking at Remstar, I noticed it's come down, marginally. I'm just wondering the main reason behind that and also maybe where you see it going in the second half of this year and also into next year as well. Is there still a lot of scope to improve there?
It's one for you, Jens.
Yeah, sure. Hi, Benjamin. Gross profit margins, Remstar impacted by two effects. One is margins in the market. In order to achieve the growth, we had to also defend market share to some extent. We lost a bit of margin in the sales organization, so head to head with competition. That's one element of it. The other thing is we usually have been able for the last years to compensate that by the supply chain, economy of scales, and fixed cost degression. With the capacity constraints we are seeing both in our own factories, but also with our suppliers, we could not fully compensate those margin losses in the marketplace, and that led to, I believe it's 0.3% gross profit margin deterioration. Going forward, I think that's going to stay stable.
The only concern we are having right now is the steel price development, so raw material cost to our organization. That's the only but truly substantial number that I'm not so sure about. I think we did secure with hedging, with purchasing contracts the next half year for the steel. It remains to be seen where the steel prices are going. It could go either way. It could go down, as everybody says so far, or it could stay stable. That's the main impact on our gross profit levels going forward. All the other elements, I believe, will remain stable or I would like to see them to improve marginally, in terms of own productivity and also market pricing levels.
Okay, understood. Presumably there's a limited pass-through of steel prices and that you can do.
Exactly. That's pretty much related to a slightly different playing field when it comes to racking suppliers. Very material-driven business where the community of the racking suppliers obviously somehow agrees to pass through material cost. Whereas in our business, it seems to be common not to pass them through. Stable market prices, stable or slightly reduced market prices versus increasing costs on the other side, which you have to somehow compensate for with internal productivity and efficiency gains.
Okay. Understood. That's very clear. Just on the capacity constraints then, you mentioned obviously the investments into that. Can you maybe quantify that in any way and give maybe a timeline when you think these will be lifted in the constraint?
Timeline is easier. The first stage of improvements already kicking in, but to a minor level. We're talking a major capacity increase in our biggest factory in Europe, in Remstar. I think that will become effective earlier next year, in 2019. That's subject to lead times by our own suppliers for new machines. They're seeing the same market demands and therefore their lead times have increased from what was previously between four to six months now to eight, nine months, from order to installation. The next levels are currently under discussion, and that is capacity increases more on local levels, not so much in Europe, to also be able to get closer to the markets.
Okay. If you had to, as an approximation, what sort of percentage capacity increase is that roughly?
That's the harder one, because it's linked to the product mix. You can't get a generic answer as to how much it is.
Yeah
because it's really subject to what we're investing and where. It ranges in the single digit ranges so far. What we have initiated so far, we're talking single digit increases in capacities.
Okay. The last thing on that topic is then the associated cost with that. How much more is there to sort of invest into that?
What you can expect till the end of the year, that we will have roughly CHF 10 million of CapEx all over the group. This might go up slightly in the next one or two years, but this will be more or less the next level of the future CapEx.
Okay. Got it.
Something at six, seven so far. You have to put actually CHF 10 in your model for the next two to three years.
Okay. Understood. Final question, just lastly, more broadly speaking, on the topic of M&A, is that something potentially on the table there, or is that something that's still maybe a kind of longer-term potential?
Jens, would you like, or shall I?
You can.
Well, actually, we are constantly looking at interesting targets, and it's not that we are not doing nothing here and that we cannot communicate anything. I mean, anything I would say here would be a talk information, but be aware that we are really taking care of that we can reinvest our money in the business.
Okay, great.
Nothing specific to communicate now.
Yeah. Sure. Okay. Thanks for your answers.
Thank you very much, ladies and gentlemen.
Operator.
Yeah. As a last reminder to ask a question, please press star one. Star one for questions. Gentlemen, it appears we have currently no further questions in the queue. I will hand back to you for any additional or closing remarks. Thank you.
Thank you very much, operator. I would like to thank you very much for attending our call. As you know, we are open to all your further questions. Just let us know, and be happy to answer them. In that case, I would like to thank you very much also for Jens and Thomas to be with us. I wish you a nice day. Thank you very much. Bye-bye.
Thank you. Bye-bye.
Thank you very much, ladies and gentlemen. This will conclude today's conference call. Thank you for your participation. You may now disconnect.