Earnings Call: Q2 2021

Aug 10, 2021

Welcome to Robit's half year report analyst and press conference. My name is Tommi Lehtonen, and I'm Robit's CEO, and we have also here Arto Halonen, Robit's CFO. First, let's run through highlights for H1. Top-line records both for net sales and orders received. Q2, 12.7% net sales growth, and orders, we are really happy with 23.1% growth, and orders EUR 26.5 million. EBITDA development continued to the right direction. Naturally, this is still our focus area and continue to do a lot of actions to drive our EBITDA towards our strategic targets. Top Hammer business, excellent growth, 22%. It was really the driver of our business during first half of this year, and of course, really happy for the execution also. Factories were delivering record amounts of products throughout the first half. Down the Hole sales growth 3.1% and behind our targets. Inventory growth supporting increasing customer demand. We decided to prioritize customer service levels beginning of this year, looking at the challenges related to containers and logistics globally. At the same time, Top Hammer growth was fast, so we wanted to secure that growth. Also we saw raw material cost increases, and we were hedging that development with higher than normal raw material purchases. So this was a conscious decision to invest into inventories to maintain our customer service levels at the target level. Top Hammer production capacity increase investments are moving ahead as per plan, and these are up and running before end of the year. We concluded our new loan agreement, and we are really happy with the new financing solution, and it supports well Robit's plans moving forward. We started to work to reinforce Robit's sustainability roadmap, and we will tell more about this when we have our capital market days, September this year. Strong quarter 2 took our first half numbers into double-digit growth. So net sales 10% growth and in fixed currencies around 11%. Again, Top Hammer the driver. EBITDA improvement continued, now 7.2% for first half. Of course, we have still long way to go in this area and lot of actions are already ongoing to improve our profitability. Operating cash flows negative, driven by the decision to invest into inventories and securing the target customer service levels. Cash flow before changes in net working capital was EUR 3.6 million positive. It's again, a figure that we follow. It shows the cash flow from, let's say, driven by the profitability without net working capital changes and good development there. Equity ratio now 44.2. Arto will open that more in detail in his part of the presentation. So steady development and record numbers for quarter 2 during H1. Let's look at the net sales development per area. Strong first half for our Americas market area. This was really driven by easing of the COVID situation in North America, and a lot of the work we've done during actually last one and a half years started to realize with our major distributors in North America and strong growth in U.S. and Canada and Mexico. If you look at EMEA area, good growth in our largest sales area, driven by actually good development in the Nordics market, Finland, Norway, and again, Southern Africa also, strong development there, of course, against also challenging comparison period during Q2. East area continued with 10% growth. There it was now this time driven mainly by the mining segment. Construction piling projects were a bit slower for the first half, impacting partially also the Down the Hole development. Asia, challenging start of the year. Multiple reasons, COVID being one of them, but we are back on track and actually the last months the trend is positive there. We will recover Asia market back on growth track. Australasia, small growth, small steps forward in Australasia for H1. Now we move to the details for financials, and Arto will go from here. Thank you, Tommi. As Tommi mentioned, we made record net sales in Q2 so far in Robit's history. Net sales grew 12.7%. Currencies had not that big impact on the top line on the quarter, and growth in fixed currencies was 12.6%. EBITDA continued to develop positively, and we had a fifth consecutive quarter where we improved EBITDA to the comparison period. All in all, the EBITDA for the quarter was EUR 1.9 million. EBIT for the quarter was also positive, 1.8%, and a clear improvement from comparison period. All in all, the profitability was driven by the increased top line and also the tight fixed cost control. We had negative impact on the profitability due to the increased logistics costs. On the other hand, the global increase in the raw material prices did not have major impact on the H1 profitability as we had anticipated and hedged kind of our position with increased raw material purchases during the turn of the year already. Net working capital increased and reached EUR 41.7 million. As Tommi mentioned, a lot of it is coming from inventory increase where we made decisions to secure availability and improve availability of our products to support the growth, especially on the Top Hammer side. On the other hand, the challenges in the logistic market and the container shortages that the market is facing caused longer delivery times and then as a result, also, the capital was tied into inventory longer times and increased the inventory levels. As a third factor, let's say higher than normal raw material purchases at the turn of the year still had impact on our inventory levels at the end of the quarter. Receivables increased to EUR 24.2 million, and this was primarily due to the increased net sales in the quarter. We continued positive development on the cash flow before changes in net working capital, and this shows kind of the continued trend of improvement in the underlying profitability. The changes in net working capital then caused the operating cash flow was negative for the quarter. Cash flow from investing activities was half a million euros, and we continued our growth investments in Lempäälä and Korea factories. Now we continue the execution of the investments during the second half of the year, and we will continue to see also the cash flow from investing activities be on a higher level than 2020 when we come to the second half of the year. This graph illustrates well the trend, a positive trend in the cash flow before changes in working capital that continued in the quarter. On the other hand, we also see that typically, we see that the net working capital increases in the beginning of the year, but the situation typically improves when we come to the second half of the year. We continue to have a steady financial position, and at the end of the year the cash and cash equivalent was EUR 9.4 million. When you look the liquidity of the company, it is good to note that at the end of Q2, we had not used our bank overdrafts at all compared to Q2 2020 when EUR 3.9 million was in use. All in all, the liquidity position is very good. The total interest-bearing loans and utilized credit limits totaled EUR 35.1 million. Net debt rose in the quarter mainly due to the negative cash flow from operation and also the investments. Our equity ratio continues to be solid now at 44.2%. In June, we finalized a new financing agreement for totaling 30 million euro loan. At the end of the quarter, we raised EUR 26.5 million of this new loan and used it to refinance old loans worth of EUR 22.5 million and also to repay huge bank overdraft limits. We still have EUR 3.5 million of this loan agreement that remains to be raised at a later stages. All right. Thank you, Arto. Let us jump into outlook and the next steps. Moving forward, what are our priorities? We have been able to sign seven major distribution agreements during the first half of the year, so we have a lot of untapped potential to grow together with our new distributors to new customers. This is definitely our growth priority. If you look at Down the Hole business, we do systematic work to expand it geographically into new markets and new accounts. Currently, we have a record sales funnel of mining opportunities for Down the Hole business and, of course, working hard to find ways to win those cases. Wrapping up Top Hammer production capacity is a high priority for us. You saw good growth rates, and this is needed to maintain the required service levels lead times to support the growth with Top Hammer. Again, we have a strong focus on profitability improvement, and we have done a lot of actions already that will fall through also second half of this year. There is a lot of actions that are realizing moving forward. They are material cost savings. We know that in general, material costs are increasing, but at the same time, we have systematically moved to so-called cost competitive country suppliers that still give us a net saving even in this situation. Pricing optimization, we have done systematic work on this area, and we believe that it will have a clear impact during second half of this year. Fixed cost development, we maintain strict control on this. As we have stated many times, our current structure allows us to still grow minimum 10% easily, and then we start to step by step grow our structure as well. We also continue to focus on our business processes development, especially in the area of order delivery process, which is really critical for us. This is availability business and critical for our customers' operations. Securing reliable deliveries is a core part of our competitiveness, and we are working systematically on this area. Briefly, our long-term financial targets, growth 15% organically and 13% EBITDA. You see our track record. We still have some way to go, but we are trending towards our targets. Now it is 10% growth and 7.2% EBITDA. Certainly working hard towards achieving these targets. Guidance, we maintain our existing guidance where we state that we believe that the impact of COVID is still continuing to reduce, even though we see some peaks in some areas. It looks like construction and mining business is resilient against these challenges, and our customers continue to operate. We see still positively the market outlook. Also, of course, in general, both construction and mining are in a very good, strong cycle, which is supporting the customer demand for Robit products. We still estimate that our net sales will grow 2021, and our EBITDA profitability will improve compared to 2020. Next, it is time for questions and answers. Do we have any questions from the audience here in Helsinki? Yes. Thanks. It is Julius from SEB. Thanks for taking my question. Maybe to kick it off first, relating the East region where you saw another a tad weaker quarter, and then again, you had a really strong H2 last year. Is that usually a back-end loaded market for you guys? What is the project outlook, specifically on these piling projects in going forward? Yeah, Robit really had a strong last year in all of the customer segments, and we were able to grow our business in mining as well as in these large size construction projects. First half, the construction project activity was slower, but we see some, let's say, more positive signs for second half. We have some active cases, and actually we have some smaller size deliveries already in the backlog for this segment. So slightly optimistic looking at the second half related to this segment. All right, thanks. If I may continue, maybe on the pricing situation. In the report you mentioned, if I recall correctly, that you are starting to see some improvements from the price optimizations in H2. What kind of measures are we talking about here? From a competition perspective, do you have room for high prices and what are your competitors doing? Yeah, these are of course market specific and so on. But certainly when you look at this general market situation where demand for products is growing for everybody, basically this is the moment when suppliers do pricing actions. More or less other suppliers are doing and we are trying to do and optimize them still, find pockets where we can do bigger increases. I would say the pricing related processes and how we do pricing and follow up, we've taken a big step forward and believe that that supports our profitability development. All right. Maybe a last one at this stage from me. A more general question regarding the Down the Hole business. You have seen really strong growth in Top Hammer and the underlying market trends are rather supportive also in the DTH business. So maybe what are the main limiting factors, like limiting your growth at the moment? Because it is primarily coming from Top Hammer at this stage, and that has been the story for the past quarters or so. That is correct. Down the Hole has been more challenging area for us to drive growth. That is a fact. Down the Hole for us consists 2 major part of the business, which is what we call geotechnical part of the project type of business, and then, let's say, the mining related business. In the geotechnical part of business, it is partially related to customer activity, and it is kind of more normal that you see fluctuations in demand, because you may have several larger size projects at the same time. So that business as such is going normally a bit more up and down. Mining for Down the Hole, that is an area where we are behind compared to our plans. But again, as I was stating, we have very systematic processes to work on that issue, and currently, we have a record active sales funnel of opportunities globally for Down the Hole mining. So we are hopeful. Of course, we need to see how we are able to close now these opportunities. But first step is that you are involved and actively involved in the discussions, and then you have to close them. All right, thanks. That is all from me. Yeah, I guess I can continue, Antti from SEB. First is on the growth, and you mentioned the distributor contractors that you have made during the first half. Just a reminder, how does it generally work? How long does it take before you kind of ramp up with these contracts and they are starting to be fully invisible on the P&L? It's a very good question, and it varies a lot because you have some distributors who have sold consumables earlier, and they are kind of replacing existing business when the ramp up can be really quick. Then you have others that are adding on a new product line, and you basically go to new customers, and you start to increase the business customer per customer. I would say it varies from starting up fairly quickly in three months time, ramping up to fair level, to even up to two years that you start to fully see it, utilize the potential. That is really our work, that we actually work on the major end users together with distributors to open our business. Yeah. It starts to kind of roll on its own. Yeah, I guess it varies, but is this kind of a new product for the distributor partners, or are you replacing somebody else or? Yeah, that's 100% correct. It's really specific to the distributor. Yeah. Right now we are happy with the kind of a profile of the new distributors that we have been able to sign that are financially solid. They have a strong product portfolio to the same target customers, so they are able to invest into inventories and so on. We believe that our distributor kind of a profile is moving to the right direction also and supports our growth moving forward. Okay. Then bit of the strong growth, especially on the mining side, and you are purchasing materials ahead of the cost inflation. Do you think your clients have been kind of securing supply and restocking their own inventories of drill bits because they are anticipating you guys and your competitors to raise prices and concerned about the delivery capabilities considering all of the issues with logistics? Yeah, I think our clients also benefit from the material cost increases because they are in the mining business. Certainly, their situation is to maximize production in this situation and kind of output as such. But I don't see them looking at savings in the consumable part by stocking extra amounts. There was some small size maybe during Q2 last year when there was uncertainty of delivery, because still of course, these products are so critical to the production process in a mine that maybe that's a reason for a mine to overstock, to secure that they have consumables to be able to mine. But I haven't seen it that they would react this way to possible price increases. Okay. Then maybe lastly on kind of you mentioned that you are doing some your own internal actions to bring down the purchasing costs, which would offset the commodity price inflation, and then obviously being active in pricing. Would it be fair to assume improving gross margins like for like gross margin? I don't know what the mix is going to be on the second half, but surely your gross margin should then improve for the second half if the material cost goes down, and I guess it's a good environment to maybe raise prices as well. Yeah, its main driver of our actions is to drive our gross margin up. Yeah. That is our main focus and will be the main driver moving towards our strategic EBITDA target. Okay, very clear. Any more questions? Thank you all and thank you for participating to this Robit's half year event. There is also opportunity to send questions afterwards. There is the email address on the screen. Thank you and have a nice day. Bye-bye.