Earnings Transcript for RAA.DE - Q2 Fiscal Year 2024

Stefan Arnold: My dear ladies and gentlemen, welcome to our earnings call on the RATIONAL AG half year two figures -- half year one figure sorry, that we published this morning. My name is Stefan Arnold. With me are my colleagues, Nicole Engelhardt; and Tobias Stadler; and of course, our CEO, Dr. Peter Stadelmann; and our CFO, Jörg Walter. Peter will start the presentation in a few seconds. As always, a few hints at the very beginning. You also can see them now on this slide. After the presentation, we then will directly go over to the Q&A. Our colleague Nicole Engelhardt will read the questions that you already sent us via e-mail which then will be answered by Peter and Jörg. We already have quite a big number of questions and we say thank you to all of those who sent them in advance to make us here the live a little bit easier. If we already gave the answer to a question during the presentation or if we already had a comparable question, we then might not repeat the question later on or we combine the questions. And of course, at the end we will make sure that all the questions will be answered before we close the call. One hint regarding the recording of the call, we will send the YouTube link to all the participants after the call, as we do it always and we kindly ask you to not share this outside the organization, as we have here written on the slide. Thank you for that. And before Peter starts the presentation, our last hint from my side. You can see here our disclaimer on the information statements estimates and forward-looking statements given in the call. I am not going now to read this out word for word, but I would like to ask you to take note and to consider this please. You can also find the disclaimer on our homepage at the end of the earnings call presentation. And with this I want to hand over to Peter now. The stage is yours.

Peter Stadelmann: Thank you, Stefan. Good afternoon. Before we look at the key financial figures, I would like to talk about great sport events of this summer

Jörg Walter: Yes. Thank you very much Peter. And also from my side, hello to everybody in this call. So after looking at the sales by region, how is the situation regarding our product groups? And as Peter stated earlier, we have an increased growth rate in the second quarter

A - Nicole Engelhardt: Thank you very much Jörg. Hello, also from my side. And Nicole, and I will lead you through the Q&A session. And we'll start with Peter. Peter, what is your current view on peers and market share developments?

Peter Stadelmann: There hasn't been any change. So market shares and peers are the same.

Nicole Engelhardt: Are you seeing a change in the replacement cycle for combi ovens in mature markets? Is it lengthening as customers delay CapEx?

Peter Stadelmann: We don't see this in our usual reporting. We assume an average life span of 12 years for both our cooking systems

Nicole Engelhardt: How is your production site in China developing?

Peter Stadelmann: We are more or less in plan. And of 2025 start of production is still achievable also here. We want to do it right the first time.

Nicole Engelhardt: Could you tell us the cost of the planned investment in a new service parts center in Landsberg?

Peter Stadelmann: This is around €60 million.

Nicole Engelhardt: Can you give an update on the iHexagon in terms of customer feedback orders et cetera?

Peter Stadelmann: Yes. The interest for the iHexagon is still very big. A lot of requests for tests from new and existing key accounts. We know that, it takes time until this translate into orders and then in sales later on. That's what we always mentioned earlier. And again, as always we put customer satisfaction first. And we want to make sure the iHexagon is perfectly supporting their needs. This takes time and we will give it the time it will take.

Nicole Engelhardt: Your Net Promoter Score is pretty impressive. How could you explain that it is lower in 2024 than it was in 2021 and 2022? I appreciate you take actions to improve. You mentioned the measures already in place. Could you give more details please?

Peter Stadelmann: Yes. Thank you. We are happy again being in the best-of-class segment, even if it's a little bit lower. To be honest, we didn't expected the 2022 value score to go up that much but it did. So that's what it is. The main explanation probably for the lower score is that we -- if we add new customers in younger markets they bring usually a lower satisfaction in those markets. So we had 16% more participants this year. That also could be one reason. For us first of all 2023 there was no NPS. So we do that every second year since it's also putting some pressure on the subsidiaries and the service structure. And after the survey we want to have time to really implement improvements and conclude our actions. That's why we do it every second year. The actions we initiate depend on the specific statements. For instance, late response from a service partners, or a technical problem, like the cover of the plug socket on the iVario, which is not solid enough. So that defines then where we start to improve those things. One end could be our R&D, of course, and the other end then would be that we do more training with our service partners. We also had feedbacks that we need more chef line, availability in some markets, or even more recipes in connected cooking in some markets.

Nicole Engelhardt: Do you acquire further big clients in China besides from KFC?

Peter Stadelmann: No. The key account share in China is high in all segments. That means supermarkets, casual dining restaurants, catering, and so on. But we have no comparable customer like KFC, Kentucky Fried Chicken China. I think they are running now some 10,000 units in China and no other customer is close to that.

Nicole Engelhardt: Where would management aim to end the backlog at year-end all else equal? Is the visibility on business expected to be better or worse in half year two?

Peter Stadelmann: €120 million are a very comfortable order backlog level. So we are used to that level.

Nicole Engelhardt: Is it fair to assume that iCombi unit growth was flat in the quarter? Are there any initial iHexagon sales to report?

Peter Stadelmann: iCombi unit sales are flat. They are slightly below prior year. In case of the iHexagon, we received initial orders but we do not disclose or comment on quantities yet.

Nicole Engelhardt: Now comes a rather long question, a couple of questions in one. Could you give some color on sales development and outlook in North America? Could you please elaborate on the performance in the Northern Americas region in Q2 2024? And how satisfactory the plus 0.5% growth in the quarter was for you? Also second quarter 2024 Northern America sales were lagging other regions in terms of growth. You seem to be outperforming peers. Would you agree to that?

Peter Stadelmann: Yes, but we have to put the growth rate of North America into perspective. First maybe let me address the competitor's question. Competitors figures do not indicate combi-steamers only. It is always a package of several product categories. That is the case for our huge North American competitors ITW or Middleby. But also, Ali or even Unox, they have a brighter range than we do. Some of them they have the full range of equipment for commercial kitchens. We globally only provide combi-steamers and the iVario, and both markets are highly unpenetrated. We believe in the law of focus and specialization. If you do less, you are more successful. That might explain overall our outperformance in general independent from short-term volatility. We expect overseas regions to grow in the lower double-digit percentage range in the long-term. After the extraordinary development in recent quarters, this is normal. North American Q2 of the previous year grew by 57% just as a background information.

Nicole Engelhardt: What is the order trajectory from the mentioned large orders from Asian customers for the rest of the year?

Peter Stadelmann: We saw the two big effects in half year one. That's overlapping orders from Chinese key account customer. You probably guess who it was. And strong orders from our Japanese OEM customer. Both effects will cool off for the remainder of the year. Next to this there is always recurring sales with these big customers.

Nicole Engelhardt: Why have you now separated North Asia from South Asia? Should we factor in a change in sales focus here?

Peter Stadelmann: Asia North is Japan, China and Korea. Asia South is the rest. The reason for changing is rather due to change in internal reporting where these two parts are now reported separately.

Nicole Engelhardt: LatAm came back with 11% year-on-year growth in Q2 2024 after a strong second quarter last year. Is this just a blip or is there a broader return of customer demand levels?

Peter Stadelmann: LatAm is known to be a volatile market. We are happy with the current development and we have a strong team supporting us there.

Nicole Engelhardt: Do competitors in the US reduce prices from previous high levels?

Peter Stadelmann: So far we did not see any price reductions.

Nicole Engelhardt: Do you see kind of sustained demand decline in any region?

Peter Stadelmann: No, we don't.

Nicole Engelhardt: Which factors drove the strong growth in Asia North?

Peter Stadelmann: Main driver was strong key account and partner business in China and Japan.

Nicole Engelhardt: Thank you, Peter. Now, I'm going to ask you some questions Jörg. You expect for the whole year a sales increase in the mid to high-single-digit range. Will you catch up in half year two 2024 after sales increase of 4% in half year one 2024?

JörgWalter: Yes, we noted already in our press conference in March, we expect the bigger part of the growth in the second half.

Nicole Engelhardt: What are the FX effects on revenue/EBIT in Q2 alone?

Jörg Walter: On the sales side, it was more or less neutral. And when we look at the currency result, it is around €2.2 million negative, which comes mainly from valuation effects. So it's not realized yet.

Nicole Engelhardt: Did you see better gross profit margins versus Q1 2024 in both product lines? Was the quarter-on-quarter increase in gross profit a function of operating leverage or rather a function of a further reduction in certain input costs?

Jörg Walter: The improvement of the gross margin mainly comes from the material side. So especially the purchasing cost for stainless steel and also chemicals they stabilized in the first half 2024 and we expect cost to stabilize on the current level. And that means that basically that goes into the COGS for both products. So basically also the iVario and the iCombi are equally affected.

Nicole Engelhardt: What is your outlook for the gross margin in half year to?

Jörg Walter: We expect the gross margin to be on the Q2 level.

Nicole Engelhardt: Depreciation was up about 9.4% in Q2 2024 versus Q1 2024 plus 17.2% year-on-year. Is there a specific reason for this? Although, we know that CapEx is up but it looks in line with expectations.

Jörg Walter: Yes it's not the general CapEx level, but as we also stated during the call or during the presentation in the last year we have capitalized R&D costs, especially for the iHexagon and the IKEA auto door systems or the products that we launched in the second half last year. And now we have the normal depreciation for these capitalized costs and that was -- is the reason why the capital or the depreciation value is going up.

Nicole Engelhardt: Sequentially for Q3 assuming even a high-single digit year-on-year growth would imply only flattish sequential development. Could you please provide some color here?

Jörg Walter: I'm not quite sure whether I understand the question right. So in pre-COVID times Q2 and Q3 they were more or less on a similar level. And now we expect Q3 that it's more or less a little bit on a higher level compared to Q2.

Nicole Engelhardt: It was stated in the pre-close call that growth is expected in the mid-single digit range or the high-single digit range. What can we expect for the fiscal year 2024? Where do you expect most of the acceleration to come from?

Jörg Walter: Yes you already realized that in our outlook we basically went back to the original range. The reason why we were looking at the pre-close call had a little bit of reduction was the effect that we had still in the months of May and June an order entry on a lower level. Now July is again better already. And therefore, we are again a little bit more optimistic. But in the end it shows that for us we still operate in volatile times and also in volatile markets. And that means with our low order backlog as we know we need to work in all the sales for Q2, Q3 and Q4 through a good order entry. There is also some let's say unvisibility really to judge whether it will be 5%, 6%, 8%, 9%. It's really depending on the different markets. What gives us a positive trend is that the iVario is back on the growth mode with a double-digit digit sales growth rates. And also the overseas demand is still on a high level. And that's why we are still quite optimistic for the second half of the year.

Nicole Engelhardt: One question regarding your EBIT guidance. What does upper part of the current forecast range mean?

Jörg Walter: That means we said it plus one percentage point against the actual year figure for the full year last year. So actually was 24.6% and that means we go up to 25.6%.

Nicole Engelhardt: How significant will the impacts from alloy charge and freight costs be? Also we have higher comparisons for gross margin in the second half.

Jörg Walter: Yes, we see that we have a stabilization on the COGS on the Q2 level. And also that means when we talk about the freight costs they are well on a lower level compared to last year certainly but we don't see them dramatic falling. There might be some upside at the nickel price as earlier indicator for alloy surcharge was coming down. The personnel costs they might not increase as expected due to more difficult hiring situation. So that are the most important effects on the second half year EBIT margin.

Nicole Engelhardt: If 2024 EBIT margin would be at 25.6% that means half year two margin will be 25.6% same as half year one but lower than Q2 at 26.4%. What will be the key reasons to have the lower margin by quarter? Will there be increased OpEx investments in half year two?

Jörg Walter: Yes, we are still aiming to hire more people for our sales processes and the investments are also in more customer activities. That is one topic. Then we have less capitalization to the balance sheet of the R&D costs. That means we have a higher cost effect there. Also, we have a yearly wage increase that starts from July. So we had an average increase of our wages on a worldwide scale of around 3% to 4%. And then also we have some sales mix. So, as you know the sales profitability of all the areas are not the same also when it comes to our own subsidiaries. So there are a lot of factors why we expect the second half of 2024 to be a little bit lower than Q2, but in the end be on the same level as of the first half year.

Nicole Engelhardt: Do you expect to hold the EBIT margin of 25.6% for the whole year?

Jörg Walter : Yes, that's what we had just in the guidance. So we said above last year and we just explained that would mean up to 25.6%.

Nicole Engelhardt: Will the iVario grow now the sustainable higher rates?

Jörg Walter : Yes, that's what we expect. I mean, the market demand is unchanged and our expectation is that we have a double growth rate compared to the iCombi due to the early stage. We think that is realistic.

Nicole Engelhardt: Thank you Jörg. Now two questions for you Peter. What is your outlook for the markets in North America, Latin America, Asia and Europe?

Peter Stadelmann : We expect in the long-term double-digit growth for the overseas regions for Europe including Germany rather mid-single digit. For this year, of course, a little bit lower and a little bit higher than in half year one.

Nicole Engelhardt: What is the outlook for the gastronomy industry in your markets?

Peter Stadelmann : All over still a positive view on out-of-home business. People need and want to eat and go out. There is a shift between customer groups still ongoing. So we see that they go for more snacking for cheaper offerings for more retail cash flow dining and less classic gastronomy. And the number of meals being served out of home is still growing. Don't forget the sustainability impact. So we are converting traditional equipment into modern innovative iCombis or iVarios using much less energy much less water offering better ergonomic jobs and creating healthier food.

Nicole Engelhardt: Now a question on cash flow for you Jörg. Operating cash flow was strong in Q2 2024 outpacing EBITDA growth in the quarter. Could you elaborate on the elements of improvement here?

Jörg Walter : Yes. We look at the numbers in detail to understand the statement here and we couldn't see it really from the numbers. In our view, the operating cash flow and the EBITDA more or less grow at the same speed. They are in line with each other. Between the line items, we have some impacts but really no clear effect with -- I mean, we have some working capital ups and downs or some accruals ups and downs, especially when it comes to tax payments and tax accruals, but there is not a real, let's say, effect that really explained that as a sustainable development.

Nicole Engelhardt: R&D expenses went up significantly in Q2 reaching more than €16 million. This is clearly more than the usual pattern. Since you're launching the iHexagon, should we understand that these expenses are related to the launch? Or is it there -- or is there anything else you would like to comment on that topic?

Jörg Walter: Yes, I shortly commented on this during the presentation. We had -- this effect is mainly due to the capitalization of the R&D costs in the last year, especially also for the iHexagon. And when we take this balance sheet or balance accounting effect out then our R&D costs are 11% up against previous year. And this just is a normal, let's say, expansion that we do into R&D in order to secure our innovations for the market.

Nicole Engelhardt: How do you see the further development of the logistics cost? Do they increase again?

Jörg Walter : For the coming months, we see rather a stable development of the logistic costs.

Nicole Engelhardt: And how do we see the further development of the wages?

Jörg Walter : For Rational, as I stated earlier, we made this salary round as of July. So, on average worldwide, we increased 3% to 4%. Now looking into the future, we will increase the wages in line with the inflation rate. And so as we see that the inflation comes back a little bit so, we -- but we don't see let's say any special effect from the inflation currently. For our customers, we expect increasing wages. We also had some, I think, news lately that the wages in the hotel and restaurant industry went up significantly. So there this is certainly a factor that is even a good argument to invest in the iCombi or in a iVario.

Nicole Engelhardt: Thank you, Jörg. I have a couple more questions for you Peter. Regarding staffing and sales and marketing, could you provide an update on how you are proceeding here versus plans? And whether or not, this might have an impact on your targeted revenue growth medium term?

Peter Stadelmann: So far, we hired 170 more staff in the last 12 months overall. In sales, we are slightly behind our hiring plan as usual I have to say. So we -- our plan foresees that we find all of them 1st of January what is not realistic. So, we are slightly behind plan there. Our sales people are former chefs and chefs are the missing staff everywhere. So also we are challenged by finding them. Some regions could be slightly affected by that in the short term. We put some countermeasures in place. I think two years ago we increased the number of recruiting staff here in Lansberg, but also in some subsidiaries for instance in the United States. So, long-term growth expectations for us is still intact.

Nicole Engelhardt: Is there any major change in the shareholdings?

Peter Stadelmann: No, there isn't.

Nicole Engelhardt: In Q2 2024 sales grew 6% year-on-year. Would you be able to quantify how much of that was volume? And how much was price driven?

Peter Stadelmann: Main drivers were growth in non-unit business and price increases each around €15 million. Units were stable, but mix effects from customer segments unit sizes and so on was negative with €10 million.

Nicole Engelhardt: During the Q1, 2024 call, I noted that new price increases are not yet planned and that volume growth shall be expected strongest in overseas regions. This is still low market penetration, as well as recurring revenue from cleaners' service parts and accessories. Is this statement still correct?

Peter Stadelmann: Absolutely, yes.

Nicole Engelhardt: Two more questions. What would be the impact of war in the Middle East on your supply chains?

Peter Stadelmann: As long as trade routes are not heavily affected, we do not see any impact. Possible impact could be on higher freight costs and an initial delay when leaving the Red Sea route.

Nicole Engelhardt: Here comes the last question. How much of the growth in Germany in Q2 was driven by reducing the order backlog?

Peter Stadelmann: The effect was in 2023. 2024 numbers were not affected by order backlog.

Nicole Engelhardt: Thank you very much Peter. Thank you very much, Jörg. And I give back to Stefan.

Stefan Arnold: So thank you very much Nicole, Peter and Jörg. If there are now still any open questions, please do not hesitate to give us a call or to send us an e-mail. As always, I now want to come to a few announcement for the coming events. So Monday next week on 12 August we will have another IR follow-up talk as you already know it. So if you have any question arising in the meantime we will then have the opportunity to discuss them then as well. You can find the registration link on the homepage in our IR calendar where you already registered also for this call. The next announcement will be on the 9-month figures 2024 on the 7th of November 2024 with the well-known setup here. And with this I want to close the call. I thank you for your participation, for your interest. Wish you a good time until we meet the next time. Bye-bye and take care.