September update
Auto Partner and Esautomotion first half results
Auto Partner
Sales: Sales amounted to PLN 2,056.8 million, which represents an increase of 15.9%. International sales increased by 15.8%, which is practically the same level as domestic sales.
Sales in terms of Volume outpaced sales growth. This was due to some price undercutting by suppliers, which the company said had nothing to do with increased competition.
Gross profit amounted to 557.2 million (+18% y-o-y). Gross margin on sales was 27.1% compared to 26.7% in the previous year. Gross margin improved especially in Q2 and reached 27.9%.
EBITDA amounted to 161.7 million (-3% y-o-y) with a margin of 7.9% compared to 9.4% last year.
EBIT amounted to 143.5 (-8% y-o-y) with a margin of 6.5% vs. 8.2% in 2023.
The decline in margins is mainly due to two factors. First, the minimum wage in Poland increased by approximately 20%. The other reason is that the Company is investing in the construction of a new logistics center, which will be completed in late 2025 or early 2026.
To address this cost pressure, they will invest in further warehouse automation. In the conference call, they said that margins have stabilized and should improve in the medium term due to increased warehouse automation and the opening of the new logistics center.
Net income was 97.2 million euros, down 9.26% from 2023.
Balance Sheet: The company has reduced its debt from net debt of 262.9 million to 126.3 million as of December 31, 2023. The net debt / EBITDA ratio is 0.9.
The company generated free cash flow of 158.9 million versus 151.5 million in H1 2023 (+4.8%), which benefited from an improvement in the cash conversion cycle from 137 days in 2023 to 130 days in 2024. Most of this cash was used to reduce debt.
Other notes
The company sees a lot of growth potential in the European Union and is considering opening another logistics center outside of Poland (probably in Western Europe). When the new logistics center is available, they expect the pace of international growth to increase.
They emphasized the importance of scale, citing as an example that in countries such as France, they deliver faster than smaller local companies, even though they have no warehouses in the country.
Conclusion
In my opinion, the company's operating performance is as good as we are used to. Auto Partner will not grow its profits this year and they will probably deteriorate slightly due to the fall in margins, but this is something that will be solved in the medium term. The company trades at a P/E of 13x 2023 and with the drop in profits probably around 15x 2024. Personally, I am still confident in the market consolidation thesis and believe that the company can continue to grow in the range of 15-20% with an improvement in margins when the new warehouse is available, which will provide an even greater increase in profits.
Esautomotion
Revenues :Esautomotion reported revenues of 14.09 M €, 27 % less than in H1 2023. The company attributes this drop in revenues to 3 reasons:
An unfavorable economic situation
Geopolitical instability
Destocking. As we have seen in other companies we follow, due to supply chain problems during the pandemic, some companies built up their inventory levels significantly, and now a drop in demand is coupled with customers who are holding excess inventory, causing orders to fall in excess of final market demand.
EBITDA was 2.37M, down 55.8% with a margin of 16.9% vs. 23.7% in 2023.
EBIT was 1.28 M, 72% lower than in 2023.
Margins have fallen more than revenues due to the operating leverage of the business.
Net income was 0.8 M, 77% lower than in 2023, with a slight increase in finance costs and tax rate.
Financial position: The company currently has net cash of 3.49 M, which allows it to easily withstand the current bad situation.
Cash Flow: The company generated free cash flow of 0.465 M .
Other notes
The Company has inventories in excess of its requirements due to the impact of component shortages during the pandemic. Despite the drop in sales, the Company has not been able to reduce inventories as it has had to make financial advances (as a guarantee of the order) to some suppliers. Esautomotion estimates that it will take between 24 and 30 months to normalize inventories. I have to say that the normalization will take longer than expected.
The company commented on its business expectations for the coming months as follows:
“The order book and order intake, which were penalized in 1H24, are showing signs of recovery especially related to the depletion of excess inventories of some major customers. As for the economic situation, it is not prudent to expect major reversals in the short term”
Gianni Senzolo, CEO of Esautomotion :, "We have not lost any Customers, and as in post-2020, we expect to benefit from the whole positive part of the cycle as soon as it starts. We have never stopped acquiring new clients, and from these we expect incremental growth in 2H24 and 2025. The integration with the acquired company Sangalli Servomotori S.r.l. will allow us to strengthen our position in our markets and expand Esautomotion's growth horizon with new sectors."
Conclusion
The results were bad, but we have to be aware that we are dealing with a cyclical company where such declines are common. The decline in sales started in H2 2023 and based on the company's comments, it seems that we could be reaching a bottom. One of the reasons that makes me think this could be the case is the data released by Fanuc, the industry leader. In the last quarter, they reported a 39.5% increase in orders over last year and a 22% increase over the previous quarter. Regardless of the fact that it is difficult to know if we are at the bottom, at least we know that we are not at peak sales.
Personally, I have no position in the company, but I follow it very closely because the CNC market, despite its cyclicality, has very high barriers to entry and good long-term growth prospects. After the fall in the share price and the fact that it looks like we may be at a sales bottom, I think it is a very interesting situation.
Disclaimer: This is not an investment recommendation, but a personal opinion. The author is an investor in the company at the time of writing, so his opinion may be biased.