Bystronic AG (BYS) Earnings Call Transcript

Ladies and gentlemen, welcome to the Half Year 2022 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Alex Waser, CEO of group, Bystronic Group. Please go ahead, sir.

Thank you very much, operator. Good morning, ladies and gentlemen, and welcome to our half year results 2023. I'm here with our CFO, Beat Neukom, and we are pleased to walk you through our performance of the last 6 months. Before we start, we kindly take note of our disclaimer. Let me take you through our agenda today. Firstly, I will kick off with a business update, and the progress we made in line with our strategy, then Beat will explain you our financial performance in more detail. And to wrap up, I will elaborate on our outlook, and we'll then take your questions from the conference call. In the first half of 2023, we delivered a good performance, thanks to the realization of the high order backlog, sales at constant rates grew significantly by 10% to a total of CHF 468 million. The group more than doubled its EBIT to CHF 25 million which corresponds to an EBIT margin of 5.4% compared to the previous year of 2.3%. As expected, the customers' cautious approach in view of the economic development led to a decline in order intake of 16.3% at constant rate to CHF 421 million. Because of our solid EBIT performance, the return on net operating assets improved from 6.6% in the first half of '22 to 12.5% in the first half of '23. Also, our operating free cash flow improved compared to the first semester of 2022 to minus CHF 34.4 million. And we continue to have a very strong balance sheet with cash and liquid assets in excess of CHF 280 million and no debt. Our equity ratio at the end of June 2022 was 60.2% increased to 63.4% at the end of 2022 and now stands at 64.5%. Let me share some qualitative highlights about the first 6 months of 2023. I've traveled to China a few weeks ago after the relaxation of the COVID-related restrictions. While from my point of view, China is unlikely to return quickly from previous levels. Bystronic continues to maintain its strong customer relationships in China. For example, through Competence Days at our facility in Tianjin, we are confident in our team in China will be able to reap the benefits of our broad portfolio as soon as the Chinese market recovers. As a continuation from the situation towards the end of 2022, we are experiencing improved component availability. However, certain assemblies such as electronic components and control modules continue to be impacted by supply constraints. Their availability is recovering only gradually. In the past few years, we have seen a substantial increase in the demand for complex automation solutions. In the recent months, due to the current market sentiment, customers started to increasingly combine high-end laser-cutting systems with simpler automation solutions. This enabled customers to be more effectively managing their investment volumes and benefit from faster investment times. This trend primarily affected EMEA and Americas region. Bystronic invested in a competence center automation in Shanghai, with the new sites, the development cycle for automation on automation products has been accelerated, while we increased the capacity on very competitive levels. We have focused on developing automation solutions for mid- and entry-level segments and the trend we are seeing developing strongly. Our service business is strong. And as expected, grew by 19% at constant rates and accounted for 26% of our group sales. Remember, that was 19% just a few years ago. All of our midterm growth drivers are very much intact. We have portfolio offerings across the different price segments, and we are prepared for the trend towards automation and digitalization. Let me further elaborate on this. We made significant progress in our strategic pillars. In the area of Systems, we upgraded our Silver portfolio with a brand-new ByCut Star, a cost-efficient and high-quality laser system ranging from 3 to 15 kilowatt. In our entry-level segment, we continue to expand our D&E portfolio and increase global market reach. Now let me share with you some progress we make in the area of software and solutions. At Eurobase last year, we launched our brand-new BySoft software suite as a modular, scalable and open software platform that can also be integrated with third-party processes and third-party brands. Since then, we have seen a growing demand from existing as well as new customers. We received very positive feedback about the BySoft Suite regarding the ability to integrate third-party brands or machines, the end-to-end process management capabilities at the scalability, allowing our customers to start small and grow over time. The BySoft Suite allows us to offer a full smart factory solution. We continue to see demand for up to 50 projects annually. In our Service pillar, we expanded our service offering. For example, our existing 360-degree Advisor, a health check service product for our customers now available for all product lines. We saw ongoing success in our service contract coverage for new installations, and we hired 20 new service technicians, while the revenue per sales technicians increased. Let's have a look at the regional performance. In general, we do see a normalization of our high order backlog which drives the top line both in Americas with a net sales growth of 29% and EMEA of 14%, respectively. Especially in Europe, we do see restrained customer investment behavior. Northern Europe proved to be somewhat more resilient while the customers in Southern and Central Europe acted cautiously. On the other hand, our Americas region is benefiting from the reshoring activities and has now grown in relevance and represents now 35% of our total sales of Bystronic. Beat will elaborate more on the order intake later in his presentation. As I have mentioned before, we have reinitiated face-to-face customer activities in China. APAC is in solid levels overall compared against the strong first half of prior year. While the largest country Korea is showing softer customer activities, we saw actually Australia developing nicely. With this, I hand over to Beat for the financial review.

Thank you very much, Alex, and thanks, everyone, for joining us today. I will now walk you through the financials of the first semester 2023, where most of our key performance indicators after 6 months have improved year-over-year. Order intake has reached CHF 421 million, and I will elaborate, as Alex said on the -- on one of the next slides. Our net sales in H1 2023 of CHF 468 million. This represents a growth of 9.7% on a constant exchange rate basis. Our Service business grew strongly with 19% and shows that our investments in this area are demonstrating success. The CHF 123 million represent 26% of total net sales. As Alex mentioned, supply chain tensions are gradually easing. We are able to work down the order backlog and generated systems net sales of CHF 346 million, a growth of 6.8% on a constant exchange rate basis. On the top line, we had significant unfavorable FX translation impact of CHF 29 million due to the strengthening of the Swiss Franc. Our EBIT and EBIT margin in H1 2023 more than doubled to CHF 25.3 million or 5.4%, respectively. The net result for first half 2023 was CHF 19.8 million compared to CHF 7 million a year ago. And our operating free cash flow improved to minus CHF 53 million to minus CHF 34 million, and the return on net operating assets increased from 6.6% to 12.5%. Now let me elaborate on the order intake and the trends and developments we're seeing by region. Overall, there has been a softening in order intake on a very high base H1 2022. Just as a reference, H1 2022 was the second highest semester in the history of the Bystronic after H2 2021. In the light of the broadly weaker development of the economy, customers already started to exhibit restraint in H2 2022. In particular in the EMEA region. This trend also continued in quarter 1 and in quarter 2, 2023. On the other hand, the Americas region has grown in relevance, especially due to the efforts to localize production. There is a strong trend towards automation and digitalization in the American market. Sequentially H1 -- H2 2022, there is an increase in order intake. For us, the U.S. market is more profitable than China, so the reshoring activities bring a positive mix effect. Our investment in the U.S. is demonstrating success. Compared to the pre-COVID 2019 levels, order intake in 2023 is about 50% higher. In China, we have seen some favorable development after the relaxation of the COVID-related restrictions, but order intake remained flat compared to the second semester last year. As Alex mentioned, APAC had a very solid first half of 2022 and is now normalized from the buoyant levels. Until recently, markets such as South Korea benefited from government investment programs. We see that customers will place their orders once more clarity on future programs is available. An additional impact to our order intake was the unfavorable development of the Swiss franc. So about 1/4 of the year-over-year decline was attributable to the change in exchange rates. To sum up, Bystronic continues with a high order backlog of more than CHF 350 million on June 30. We do see a continued strong demand from customers for service and software. Now looking at the P&L. The EBIT more than doubled to CHF 25.3 million from CHF 10.5 million in the same period a year ago. The EBIT margin stood at 5.4% compared to 2.3% in the previous year. And the net result improved from CHF 7 million to CHF 19.8 million. On the one hand, the higher sales volume contributed to the significant profitability enhancements, while on the other hand, the implemented price increases as well as operating cost saving measures made an impact. In particular, the material growth has improved year-over-year by 1.1 percentage points and compared to the second half of last year by almost 6 percentage points. It is the combination of the price increases we have taken, less discounting, a favorable mix, and we also see sequential improvements on the sourcing cost. Despite inflationary pressure on salaries, globally accounting for about 2 to 3 percentages and the continued investment in the service organization, our personnel expenses basically were flat year-over-year, also because there were selective reductions of about 4% in other areas. The operating expenses were flat compared to the first half of 2022. Reduction of fixed operating expenses compensated the volume-related variable costs such as higher installation costs and sales commissions. Looking at the cash flow. Our operating free cash flow year-over-year improved to minus CHF 53 million to minus CHF 34 million. In the first 6 months, our inventories have increased mainly to work down the remaining high order backlog and the buildup of some safety stock. Softening in the order intake leads to a reduction of advanced payments from customers, which amounted to about CHF 12 million in H1 2023. The increase in other current assets is related to accrued income from larger solution projects and increases in prepaid expenses to benefit from better sourcing conditions. Capital expenditure amounted to CHF 6.7 million and is lower due to the timing of some projects. Usually, we would spend about 3% of net sales for CapEx. What I can say in general about the phasing of the cash flow is that the second half usually has a higher cash flow than the first half of the year. So we expect to see a significant improvement for the full year 2023. This concludes the financial review, and I'm happy to hand back to Alex.

Thank you very much, Beat. Let's talk about the outlook 2023. We are confirming our guidance for the full year of 2023. In light of the economic slowdown, we continue to anticipate the decline in order intake in the systems business, a growing service business and a higher EBIT with a slightly decline in overall sales. Strategically, Bystronic is well positioned for further growth based on our solid market position and the strong portfolio of systems, services and solutions with software. We remain confident to reach our midterm targets based on our market position and the industry's intact growth drivers. With this, let's move on to the Q&A session. Operator, please move on to the first question from the conference call, please.

[Operator Instructions] The first question comes from Torsten Sauter from Kepler Cheuvreux.

Yes. Good morning, everyone. I hope you can hear me well. I have 2 questions with respect to ForEx. Firstly, assuming that current spot rates hold into the second half. Can you maybe give us a guesstimate what the ForEx headwind is that you're having for your top line into the second half? Could it be 600 bps negative, for example? And then secondly, I'm not sure that's been disclosed in the annual report. But what's your ForEx sensitivity towards the various ForEx, in particular, euro, swiss francs. I mean, in other words, how much would your EBIT, for example, go down if the euro depreciates, say, 10% against the Swiss franc?

Yes. Thank you very much, Torsten. So with regards to the FX development, I can say that we have a high sensitivity on the top line. On the bottom line, much less. So I'll comment on the top line first. So what I expect going forward into the second half is about the same effect that we have in the first half, if everything kept constant. Now with regards to the bottom line, the situation is as such that we have a very good natural hedge on the euro. So the exposure to the euro is very minimal. And on the other hand, against the U.S. dollar, there is an impact, but we have good hedging in place for the remainder of this year. So I don't expect a significant impact, a low single-digit million on the EBIT, but that's probably all you can expect for this year.

The next question comes from Daniel Koenig from Mirabaud.

Can you hear us?

Loud and clear.

Yes. I have a couple of questions. I was wondering how many service technicians do you have in total? That's question one. Then the midterm target, AMADA has issued also midterm target. I was wondering when do you want to achieve your midterm targets? And then I was wondering on the raw materials, your gross margin has improved. I was wondering which raw materials have -- actually were helping at this improvement? And then finally, I was wondering what is happening in terms of market share? Is that improving? Is that going down? Is it stable?

So there were like four questions. I think I noted. The first one is in relation to service technicians. We're actually not disclosing the number of our service technicians. We have a couple of hundred service technicians. So that -- maybe to that part. But adding 20 to it is probably much lower than what we have done in the last 2 years where we targeted 100 service technicians per year. Beat, do you want to go for the next one.

I think I take the next one, which is the AMADA strategic plan. So AMADA has -- if you look at their presentation, I think they have -- from a CAGR -- top line CAGR perspective, they have and we have about a 5% growth, 5% organic growth. So that would confirm also our assumption that we have in our strategic plan. So for us, it is, as we said in the outlook, it really depends, Daniel, on the economic development, right? When we will achieve our midterm targets when does the economy come back and how fast it does come back, that is basically the question we would have. And then the third one was about raw material. Steel price is a component, especially for our vending machines. There, we have seen an improvement, then it can -- then it got a little spike in the beginning of this year, but now it's improving again. On the other hand, it's across the board. I mean, unfortunately, we still do see some increases in certain -- for certain components -- but the -- it's no longer going into the wrong direction, and it starts now turning, but it's not that everything is coming back with regards to raw material prices. There's still certain area where there is an increase in raw material prices. And then the last one?

The last one was in terms of market share, and it probably has a little bit to do with our highly disciplined work that we have done in the first half around discounting. And to be honest, a part of an improved material quote has to do with less discounting. We have been more disciplined around that. I don't think it had a really large impact in the market share. We didn't go for all of the deals, but it's very hard to say, but you can see that basically, we're all in the same type of market. So I'm not sure I can give you an exact number around it. That might actually change in the second half. But we have been disciplined with our pricing, and that has played out and that we feel that is the right thing to do in this type of -- times herein. So we hope we answered this 4-pronged question for you.

[Operator Instructions] The next question comes from Tobias Fahrenholz from Stifel.

Couple of questions as well here. First, on supply chain. When do you expect tensions to be gone quarterly-wise, so end of the year or maybe only later? Then second one, you touched on China. I mean tough situation over there. But -- is there anything which yes, provides you a silver line on the horizon, so to say, any data points, any discussions with clients, any potential stimulus programs which could come up? And last but not least, maybe you could comment a little bit on M&A. Has your activity come down here? Has it been stopped? Or is it still some looking around here for potential expansion?

Okay. Well, let's start. Thank you very much for the question, Tobias. Supply chain. So as we said, it has -- the situation has improved. However, we still have a few items, as I mentioned in my earlier speech. We expect this to be in line again at the end of this year. That's basically what we're seeing. We still have some issues and they're painful, but it has improved. The China expansion or the China story is very clear. We don't see really in China, strong signals, there are actually really interesting areas that are booming or they are running very well around battery electric vehicle for copper and mining and industries and things like that. But in general, we all, I think, know the situation there. What I think is the silver lining for us as Bystronic in China is that the plant, especially the one in Tianjin, but also the one in South, which Shenzhen are set up for export. And that's actually helping. So we are still at full capacity in Tianjin and with DNE, our entry-level products, we are very good [ OLED ]. We have just opened the U.S. market for it, and we see a very nice demand. So I think while China as China market is really at a lower level I think what's going on is that we have with our plants also opportunities to deliver products outside. And the third effect that I think we can mention is Bystronic has, in the past, done a lot of work in taking cost-effective concepts and professionalize that from China into the rest of the world and our brand-new competency center automation in China actually has just opened now and we see that this will be for automation, giving us a brand-new platform of products that are very cost effective. So while the market is really where it is currently, we see those three reasons on the two plants on the automation side being actually quite positive, not just for China but for the rest of the world for Bystronic. And the trend toward automation is very clearly continuing. There's no doubt about that. And we need products for entry level for the mid-segment as well as for the highly industrialized segments. And the third question, if I remember that right, was around M&A.Yes. Actually, the appetite is absolutely there. We have looked at 2 opportunities, which, of course, cannot conclude. One of them is interesting for us and the other one, we will decline. So we are continuing building a pipeline of interesting companies because, as I always said, being it in the tooling area, being it in the service area or being in the application side, that's interesting for us, and we are set up to do that. But it always needs, of course, the right opportunity to enter. So Tobias, I hope I have answered your question?

Yes, yes. Maybe one other follow-up, if I may. It was a question about the expansion of the service business. You hire the 20 technicians. So even if the figures is now lower, what's your plan for the full year? And will you stop then the expansion program by end of the year? Meaning that we can finally see some more benefits also on the margin side than from the sales?

Well, thank you for this question. Yes, I think actually, we are reaching about the right level of our own service technicians for everything that we need to do. Remember, those are the same people that install as well as do the service activities. What we're going to see is that we can reduce on the third-party service activities and source that more in -- we will punctually do there or hear a bit more. But I think the biggest part of our growth in the headcount has been down, of course, we will replace where we have changes. But I think we are actually getting close to that volume that we were targeting. I hope that answers your question.

Next question comes from Julien Batteau from Pascal Advisers.

Yes. A couple of questions still left for me. I'm not sure I understood what you said about the supply chain. Do you talk about a resolution in H2? Or you would still expect some problems in the component shortage? And I was wondering if you have managed to have a more robust I think you changed one of the components or at least one of the suppliers. Have you managed to establish a robust supply chain now with them? My second question would be on the cash flow. Last year, the operating cash flow was largely hampered by those large projects delivery missing. I was just curious why is it still -- why is cash flow is again negatively impacting H1? I would have expected some resolution on that front? And if you can give some indication on the full year, do you expect a negative or capital impact again on operating cash flow for '23? And the last one is on the personnel cost reduction. You talked about the reduction of the headcount, which is seeable in H1. Is it annualized already in H1? Or will it be coming gradually in H2 also? And I'm talking about also of course the impact of the reduced personnel expense?