Rational Ag Lndsberg

My dear ladies and gentlemen, welcome to our earnings call on the Rational HE half year one figures 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 email, 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 life 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.

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. The European Football Championship in Germany and the Olympic Games in Paris. Those events become events also with food and drinks. Imagine being in a stadium and not getting any drinks or food. In Paris, only Sodexo hired 6,000 staff to cater 15,000 athletes and more than 10 million visitors. We are happy and proud to be preferred supplier for Sodexo worldwide. There's another happy customer in Germany in the Weltdienst Arena. Built in 2001, the Weltdienst Arena is now an established multi-purpose stadium and home ground of Bundesliga club FC Schalke 04. It had also hosted four European Championship matches. In addition to soccer, stars such as Metallica, and in mid-July, superstar Taylor Swift honored the stadium with their visits. More than 18 million people have now visited the arena since 2001. All these spectators want to be catered for. 62,271 people are on site each match day, and 3,500 guests have to be catered for in the hospitality area. In addition, there are up to 700 business events with catering. Unlike in many stadiums, FC Schalke 04 Arena Management is responsible for all catering on its own. On match days or during concerts, 3.5 to 4 tons of goods are processed in the large areas and lounges of the Weltdienst area to cater for the guests. Managing Director Carbacher and HF Dvoracek currently see two opposing trends as challenges. The pressure from the shortage of skilled workers continues to increase and guests are becoming more quality conscious. Dvoracek is particularly pleased that we did not leave him to his own devices when it came to training. If needed, we show our customers several times how to work with the programs and cooking methods. This makes our cooking systems application really foolproof and eliminates sources of error. Not only practical for Dvoracek, but also a key point in fulfilling the guest's desire. for sustainable use of resources. When we reduce user errors, we guarantee no food is being wasted. Thanks to our cooking intelligence, also less educated staff can fulfill the demand of the more quality conscious football fans. And then the Wembley National Stadium, holy ground to the English and home to the Football Association, The Three Lions. The UCFB shows stars like Elton John, Adele, Coldplay and Ed Sheeran and up to 90,000 fans. They all have one thing in common. At some point, they get hungry. Just like the security personnel, the police, the fire brigades, the press and so on. And they all rely on the delicious food services from the Three Lions restaurants team at Wembley National Stadium. Fish and chips, pizza, nachos are the fastest selling products. Everything is produced in rational cooking systems. The kitchen can send up to 600 chickens in 12 minutes and 150 liters of creamy lobster soup at the same time. Why rational? They like to rely on the efficient use of the workforce on digital solutions like connected cooking, cooking research and technical refinements like my display. This means that the most important dishes can be viewed on the unit display as a picture or icon. The corresponding cooking program is stored. Now just one press of a button and the cooking process runs automatically and according to plan. Steam and heat, not too much, not too little. After all, the 600 chickens ultimately have to look all the same. And finally, talking about sports and stadium hospitality, let's talk about the iHexagon. The iHexagon is the perfect fit for every kitchen where speed and perfect food quality for larger volume is requested. In a town nearby our headquarters, we tested iHexagon in a snacking environment. Results were great. We were able to get an even deeper insight view on use cases. We are looking forward to continuing working together with the ice hockey club there. The football stadium, on the other hand, decided to invest in an iHexagon. We will keep you posted with new developments. And before we get to the key financial figures, let me talk about the most important figure at all for us at Rational. It is customer satisfaction. We want to offer people in commercial kitchens the greatest possible benefit. To check whether we are on the right track, we evaluate customer satisfaction. We do this using the internationally recognized Net Promoter Score every second year. The NPS indicates whether customers would recommend our cooking systems and services to friends or business partners. We run the NPS survey for the third time in 2024. As you can see, our customers are very satisfied with us. We remain in the best in class segment and well beyond the average NPS of peers. What is even more important for us is the feedback we get. This will be immediately addressed in workshops in our sales teams and service teams in order to keep high satisfaction or to increase it in the future. Let's take now a closer look at the figures all together. We start with sales. Let me repeat 2023. There we set a new sales record of 1.126 billion euro and we were able to exceed the previous year sales by 10 percent or by more than 100 million euro. After two years of exceptionally high growth rates after the pandemic, we are returning to our normal growth rate of the many, many years before 2020. Having a look at the annual sales figures, we now turn our attention to the quarters. In the second quarter of 24, sales revenues grew by 6% to around 295 million euros. This is a new all-time high. In half year 2024, we grew by 4% to more than 581 million euro. Let's have a look at the regional business development. Europe, including Germany, remains our largest region, accounting for more than 50% of sales. Due to higher market penetration of combi steamers, the growth rates here are lower than in the overseas markets. Europe, excluding Germany, recorded sales revenues near previous year with 240 million euro. While developed markets like Italy, Benelux, Spain and Sweden did not reach prior year levels, South and Southeast countries grew successfully. The biggest two markets, France and UK, were also above prior year. In Germany, sales fell by minus 4% in half year one. Q1 sales were down 17%. Q2, on the other hand, grew by 11%. This is explained by the reduction of order backlog impacted prior year. After growing by 50% in half year one 2023, mainly price driven, sales in North America continue growing organically by 6% in half year one 2024. Double digit growth rates came from Asia. we achieved our highest growth rate in Asia with plus 13%. We saw a great development in China and in Japan, where big key account and OEM customers placed and realized orders. The smaller regions also contribute to growth, albeit a little bit lower absolute at a lower absolute level. With that, I'm glad to hand over to Jörg for more details.

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, went up from 1% in the first quarter to 6% in the second quarter. And this is basically also the situation that we see for both product groups, that means both product groups contributed to this positive trend. In the case of the iVario, after returning to the growth mode in Q1, we could even accelerate our rate in Q2, so sales in Q2 grew by 15% and which resulted in higher sales by 11% for the first half year. iCombi grew 3% in the first half 2024 and with a growth rate of 5% in Q2 alone. And having in mind that the growth rate in the first half 2023 was 27% due to working down the high order backlog, the iCombi in this year successfully defended its high prior year figure. Let's move on to the development of earnings. EBIT grows over proportionally in relation to sales by plus 10% to 149 million euros in the first half year. This is the best half year result that we have ever achieved. So a new record for us. Looking at Q2 alone, the EBIT was 78 million euro, which translated to an EBIT margin of 26.4%. When we look at the long-term development since 2019, you see here on the slide, we achieved in this year with an EBIT margin of 25.6%, already a margin level that is even higher than the pre-pandemic level. Now, on the next slide, we see more details about the margin development. First of all, as always, besides Yeah, the basis for a good EBIT is a good sales development. So you see here sales grew by 4%. But besides that, with the main driver of the good earnings was the favorable cross margin situation. We were able to increase the cross margin, cross profit margin by 2.8 percentage points to 58.9%. And this reflects basically two effects on one hand. we were able to implement our price increases for our own products in the market following the reduction of the high order backlog last year. And then secondly, at the same time, we currently benefit from example from the easing of the commodity markets. Basically, chemicals are on a lower level. Also, the alloy surcharge is on a lower level. The operating costs, on the other hand, rose at a slightly higher rate than sales by plus 77% to 190 million euros. We recorded the highest increase in R&D expenses where we grew by 24% and thus continue to invest in the future of Rational. However, you have to keep in mind that around 3.9 million euro of the R&D costs were capitalized in the last year, in the first half last year, The percentage change of the R&D costs without this effect is on a lower level. It's on around 11%. So overall, you see that we have a quite positive earnings development, and with this development, we are quite happy. Again, a short look on our quite solid balance sheet structure. There was no change in Q2. So after paying our dividend in May with around €154 million, our balance sheet remains very solid. Our equity ratio is at 75%. Our liquidity ratio, that is bank deposits and short-term investments combined, is at 38%. And in absolute figures, that means that cash and cash equivalents, we have on the balance sheet of around €350 million. in these two line items, other assets and liquid funds. Compared to the end of the second quarter last year, the total assets grew by plus 10% or 87 million to 940 million. And this was mainly due to an increase of long-term assets by 22 million euros. And the rest is the higher liquidity we already talked about. and that we didn't distribute to our shareholders. So, and that brings us already to our sales and earnings guidance for 2024. We stated earlier after Q1 and also after the full year figure publishing of the full year figure, after a quite volatile last three financial years, we expect 2024 to be just a normal year for us. And that means with regards to sales, we expect sales growth in the mid to high single digit percentage range without any planned price increases for our products. For our cross-profit margin, we expect the trend of 2023 to continue and we expect our input prices to further easy. That's why we now state that we benefit significantly from a better cost situation in the cross-profit. On the other hand, looking at our operating cost, we are planning a slightly over-proportional increase in our operating costs That is, as we said, expansion of our sales activities, the strengthening of our R&D capacities. And then on the other hand, we will continue our strategic projects. We already talked about road to China earlier. So this is one of the investments project. So overall, we expect EBIT to grow slightly faster than sales. and thus we expect an EBIT margin slightly above the previous year. Yeah, and with this outlook, we are at the end of our presentation, and we are now starting the Q&A session. I hand over to Nicole.

Thank you very much, Jörg. Hello also from my side. I'm 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?

There hasn't been any change, so market shares and peers are the same.

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

We don't see this in our usual reporting. We assume an average lifespan of 12 years for both our cooking systems, the iCombi and the iVario.

How is your production site in China developing?

We are more or less in plan. End of 2025 start of production is still achievable. Also here, we want to do it right the first time.

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

This is around 60 million euro.

Can you give an update on the ihexagon in terms of customer feedback orders, etc.?

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 translates 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.

Your Net Promoter Score is pretty impressive. How could you explain that it is lower in 2024 than it was in 21 and 22? I appreciate you take actions to improve. You mentioned the measures already in place. Could you give more details, please?

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 expect it the 2022 value to 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.

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

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.

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

120 million euro are a very comfortable order backlog level, so we are used to that level.

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

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.

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 America's region in Q2 24 and how satisfactory the plus 0.5% growth in the quarter was for you? Also, second quarter 24, Northern America's sales were lagging other regions in terms of growth. You seem to be outperforming peers. Would you agree to that?

Yes, but we have to put the growth rate of North America into perspective. First, maybe let me address the competitors 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.

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

We saw the two big effects in half year one. That's overlapping orders from Chinese key account customer. You probably guessed 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.

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

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.

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?

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

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

So far, we did not see any price reductions.

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

No, we don't.

Which factors drove the strong growth in Asia North?

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

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 2.24 after a sales increase of 4% in half year 1.24?

Yes, we announced that already in our press conference in March, we expect the bigger part of the growth in the second half.

What are the FX effects on revenues slash EBIT in Q2 alone?

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

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?

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

What is your outlook for the gross margin in half year two?

We expect the gross margin to be on the Q2 level.

The appreciation was up about 9.4% in Q2 24 versus Q1 24, plus 17.2% year-on-year. Is there a specific reason for this, although we know that CapEx is up but looks in line with expectations?

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 Autodose system, so the products that we launched in the second half last year. And now we have the normal depreciation for these capitalized costs, And that is the reason why the depreciation value is going up.

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?

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.

It was stated in the pre-close call that growth is expected in the mid single-digit range, rather 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?

Yeah, 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 double-digit sales growth rates and also the overseas demand is still on a high level. That's why we are still quite optimistic for the second half of the year.

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

It means we set it plus 1% ditch point. against the actual year figure for the full year last year. So actual was 24.6% and that means we go up to 25.6%.

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

Yeah, we see that we have a stabilization on the COX 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 alloys hot charge 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.

If 2024 EBIT margin would be at 25.6%, that means half-year 2 margin will be 25.6%, same as half-year 1, 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 Health Year 2?

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, you know, sales mix. So as you know, the sales profitability of all the areas are not the same. Also when it comes to part of 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.

Do you expect to hold a bit margin of 25.6% for the whole year?

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%.

Will the iVario grow now with sustainable higher rates?

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.

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

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.

What is the outlook for the gastronomy industry in your markets?

All over still positive view. on out of home business people need and want to eat and go out it there is a shift between customer groups still ongoing so we see that they go for more snacking for cheaper offerings for more retail casual 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.

Now a question on the cash flow for New York. Operating cash flow was strong in Q2 24, outpacing EBITDA growth in the quarter. Could you elaborate on the elements of improvement here?

Yes, we looked 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, you 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.

R&D expenses went up significantly due to reaching more than 16 million euros. 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 there anything else you would like to comment on that topic?

Yes, I shortly commented on this during the presentation. 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 markets.

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

For the coming months, we see rather stable development of the logistics costs.

And how do you see the further development of the wages?

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, 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 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 iCombi or in iVario.

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.

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 our plan foresees that we find all of them 1st of January, what is not realistic. We are slightly behind plan there. Our salespeople 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 Landsberg, but also in some subsidiaries. for instance, in the United States. So long term growth expectations for us is still intact.

Is there any major change in the shareholdings?

No, there isn't.

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?

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

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 with still low market penetration, as well as recurring revenue from cleaners, service parts and accessories. Is this statement still correct?

Absolutely, yes.

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

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.

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

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

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

So thank you very much, Nicole, Peter and Jörg. And if there are now still any open questions, please do not hesitate to give us a call or to send us an email. As always, I want to come to a few announcements 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 questions 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 nine-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.