Earnings Call: Q2 2020

Aug 6, 2020

Welcome to Robit's first half year 2020 analyst and press conference. My name is Tommi Lehtonen. I am the CEO of Robit, and I have here with me Arto Halonen, who is the CFO of Robit. I will give first part of the presentation, then Arto will go more to the details in numbers, and then we will summarize the outlook, and then we have questions and answers session at the end. First of all, we had growth in a very challenging market environment. Of course, the COVID-19 restrictions and lockdown impacted some areas more than others, but at the same time, impact is clear also to our business. While we look at our first half sales development in fixed currency is 6.7% growth, and during Q2 5% growth. While the market demand clearly dropped, we are really happy with our top-line development in these challenging market conditions. This is really, if you look at different market areas, actually the mix change was quite quick, so number might look pretty stable, but inside the number there is a lot of movement. We had some markets that had a quick reduction in sales because of mining lockdowns, but we were able to compensate these drops with our longer-term growth initiatives that realized during the quarter. So actually the market mix change during the quarter was quite quick and rapid. At the same time, while the market mix changed, some of our normal key mining markets dropped because of the full lockdown situation, so the mines were closed. Naturally, we had a pipeline of materials moving to those markets, and at the same time we had growth in other markets. That put a bit of pressure on our networking capital and inventories during the quarter. The market mix change was quite rapid. Of course, on a positive side, these are long-term customers, mining customers in the lockdown market. So we believe that most of the sales will come back to us when the markets open and operations start. We saw a positive development already during June, but the key markets are not at the same pre-corona level yet. They are probably mining markets around 70% operational level compared to pre-corona levels. So we believe that we have natural flow return of business from our existing customers in those markets where still have some limitations in operations while of course we push to still continue to grow in other areas. The situation was really polarized, so some markets' operations continued almost normally. Then you had some with limited problems, and then we had some markets with full lockdowns, like in our case, South Africa and Peru, as you see from the report. At the same time, we were able to effectively and fast implement cost savings, fixed cost savings, and those were already helping us a lot during the quarter. And of course, partially we have two levels of savings. We have savings that are planned as normal process of our cost improvement initiatives that are longer-term savings. And then we had also savings from normal travel entertainment costs that are not of course happening due to restrictions. Overall, I am very happy with the organization, how we adapted to the COVID-19 environment. We found new ways of working with the customers, using all the modern remote negotiation tools and so on. Even with the more technical issues, we were able to support customers remotely in many cases. At the same time, of course, these travel restrictions mainly limit some of the new technical support needs that are between the countries. Our business is mainly supported by local organizations. So either it is a Robit organization in the country or it is our partner distributor who is selling in the domestic countries. Those actual sales efforts are not so much limited by the fact that there is no travel. It is mainly for these more demanding technical support requirements and so on where the limitation comes. We are still able to continue to develop our business even with these travel restrictions. Mainly business is done on a domestic level with the customers by our own people or distributors. Again, net sales increased 4% with actual currencies and 6.7% with fixed currencies. If you look at the quarters and realizing that we are in this clearly lower demand quarter and we are able to achieve still more or less the highest quarter during the last few in the recent history, clearly we feel that this is a really good result from that perspective. Top hammer business is developing very well, while still we are a bit behind on the down-the-hole business side where we see the drop related to also Australia and maybe more North America during the quarter due to the COVID-19 situation. Adjusted EBITDA improved slightly, and we had a negative mix impact during the quarter. So the market mix was clearly negative. So the new business we got was from a lower market price level areas compared to the business that we have in the lockdown markets. Mix was clearly negative. We are happy with the cash flow development. Cash flow, okay, first half was EUR 400,000 negative, at the same time EUR 1.8 million improvement from last year. We follow this cash flow before net working capital changes operating cash flow, which is kind of the cash from the profitability, and it improved clearly to EUR 2.9 million during the first half. In our EBITDA figure, anyway, we have a lot of non-cash, like non-realized currency impacts and so on and so on. So this operating cash flow before net working capital shows kind of underlying profitability development probably more clearly. Equity ratio is 45.5% and Arto will go more into the details of the balance sheet in his part of the presentation. So if you look at sales development, again, quick mix change during the quarter, and it is starting from the best one, CIS East. A very good trend continues. We have a strong team there, and we see 43% growth. Mining construction activities as such, not impacted in this region, but traveling was restricted, so some new customer acquisition is a bit more challenging in this environment. But again, good trend continues. This growth was mainly from mining segment, and we are really happy with that. Strategically important, more continuous business compared to project business. We grew mainly in mining in CIS East area. Then we look at our biggest region, EMEA, and again, we are happy with this development. 10% growth in these challenging conditions. That was a mixed bag. We have some areas and countries where business basically stopped due to lockdowns, and then we were able to grow nicely in some other markets because of our longer-term growth initiatives. Again, we believe when this COVID situation will ease off gradually, the business will come back from these lockdown markets to us. We have underlying growth there related to that. Americas as such, was quite heavily impacted by COVID-19. Some of the key markets were in full lockdown, many mining closures, and also even construction part of the business was quite heavily impacted. This negative development is mainly COVID-19 related in Americas. Asia, fairly flat development there also. It is a mixed bag. We have countries like Thailand where the market is actually booming in quite good shape, while countries like Philippines and Indonesia are more or less in a kind of a really difficult situation where there was almost no business during the quarter. So very mixed bag. We are really happy with our development. Australia market as such, continued as normally. We have had our challenges as you know. We are working on those, trying to get back on right track. We had a bit of growth from Q1, so we had a small increase from Q1 to Q2, I think something like 15% growth. Of course, we continue to work on getting back on growth track in Australia. Again, as a summary, we are happy with the top-line development, where in clearly a challenging market environment, we were able to grow still quite nicely in fixed currencies, 5% during the quarter and 6.7% during the first half. All right, Arto, more details about the numbers. Let us have a bit closer look on the financials. As Tommi mentioned, we were able to grow in challenging environment. If you look growth from Q2 2019, we grew 1.1%, and in fixed currencies 5%. Also, there was 3.6% growth from the Q1 2020 numbers, which was, let us say, the last quarter before the COVID impacts really hit. On comparable EBITDA, we improved to 4.5%, from 2019 Q2, 3.3%. Also on comparable EBIT percent, we improved from -4.1 to -1.4%. Of course, still there is much to improve. Basically, what helped us in improving the profitability was this timely implemented fixed cost savings. Then with those, we were able to compensate the negative impacts that this unfavorable market area mix caused on our profitability, and also the exchange rate fluctuations in the quarter had a negative impact on our profitability. All in all, despite this, we improved both on the EBITDA and EBIT figures. Net financial expenses were EUR 1.8 million. Majority of that is related to unrealized exchange rate losses from the subsidiary loans. Networking capital as a percentage of sales remained at 43% level. During the quarter, the quite rapid changes in the market area mix as the COVID impact on some markets was negative in terms of the sales, had a negative impact also on our inventory levels as sales dropped, but still we had the pipeline of supply coming into those regions. On the receivables side, I think we made very good progress during the quarter to improve the healthiness of our receivables. So there was a small growth all in all on the receivables, but that kind of growth came from the current receivables, and the collection of receivables progressed well during the quarter. On the cash flow side, the cash flow before changes in working capital, that developed favorably also in Q2, and if we look the H1 all in all. This is a kind of reflection of the underlying profitability all in all, so this development is very positive, the right direction. Also, the cash flow from operating activities during Q2 was positive EUR 0.8 million compared to the minus EUR 1.6 million during Q2 2019. All in all, the Q2 2020 cash flow was slightly positive and good in this business environment. In the balance sheet, we have a goodwill of EUR 5.1 million. We conducted an impairment testing at the end of the quarter, and as a result of the test, there is no need for impairment of the goodwill, so that is on a solid path. Inventories and receivables increased by EUR 40,000, so it's a kind of very limited increase from Q2 2019. As said, we had this negative impact on inventories from the market area sales mix. Total interest-bearing loans and utilized credit limits, they were EUR 37.9 million and include EUR 6.2 million of IFRS 16 liabilities. Regarding capital structure, our net debt at the end of the period was EUR 25.2 million, a slight decrease from end of Q1, and equity raise solid 45.5%. During the quarter, we renegotiated our loans with the main financing bank. As a result of the restructured loan, our next installment will be end of this year, EUR 2 million, and then we will have amortization of EUR 2 million every six months. Our bullet loan and the rest of the amortization on the main loans we have will expire in June 2022. We have also agreed a covenant for the next checkpoint in end of this year, when the net debt to EBITDA ratio can be maximum 4.0. Then we return back to our original covenants, where basically the net debt to EBITDA ratio can be maximum 2.5 and the equity ratio minimum 32.5%. Tommi? Okay. Thank you. Quick summary and outlook. Again, we are really happy with the performance related to the top line. We were able to grow in a really challenging market environment. At the same time, we have the organization, people, and infrastructure currently existing to continue to develop towards our long-term financial targets. So we are really comfortable with our current structure for achieving our long-term financial targets. Due to that, we are moving to this kind of a more continuous company development mode under three themes, which are, of course, growth. We still have a lot of potential to capture. We have capability to grow. Market is there. We have a lot of room for growth. Profitability, okay, fixed costs, we are on a fair, strong level currently, good base, again, maintaining the structure for growth. We continue, of course, the normal competitiveness development in a systematic way. We have a lot of potential also there for improvement. Then we develop our processes related to digitalization and so on. In this service business, of course, the order-to-delivery process is critical, availability of goods to our customers. So we are working on optimizing our key business processes, mainly impacting availability to the customers and our networking capital. These are our key focus areas. Again, you saw in the big picture, this focus on consumables business helps us through the cycles. Mines, construction operations continue to operate. When the cycle is negative, they stop capital equipment investments while still they need to buy consumables. So this is one of the core elements of our strategy. As a summary, we as a management, we see plenty more opportunities currently than threats in our current environment. We have a lot of potential to improve our profitability. We have potential for growth. We are happy with our current structure. That gives us a good basis to do that. Here, as just a reminder, we still, of course, if you look at the market situation, there is a lot of uncertainty. We feel that it's more positive. Current trend is towards more positive, like the lockdown markets are opening up. They are not at the 100% level yet. They are more like at the 70% level currently, but the trend is positive. At the same time, as we all know from the news, there is a risk for second wave of COVID-19, and of course, we need to follow the situation closely. Okay, all of us individuals and the companies are more ready for this now when we have gone through one of these waves already. We have that experience, how to react to that. Just as a reminder, our long-term financial targets, so we target 15% growth annually and 13% EBITDA levels. Again, we really see more opportunities than threats currently, and we feel that we are well-positioned now with our current structure to develop towards those long-term financial targets. Arto, now it's time for some questions. Yes, Julius Rapeli, SEB. A question on the You mentioned some new orders in the down-the-hole segment. Can you elaborate a bit on those, any geographies or end uses for those? Then a follow-up on your production situation. You mentioned also that you have ramped up the production rates in Australia and plan to do so also in other plants as well. What is the group production utilization rate approximately at the moment for you guys? If I take the first question, Arto, maybe you can take the second part of the question. Related to contracts, we do not want to open up in due detail the countries and so on. But I would say these are significant mining annual contracts that are outside of Australia. Yeah, if I comment on the production, we saw improved utilization of our production units during the quarter, and that is why we have implemented new shifts to increase the capacity. All in all, we continue to do that to be prepared for the growth. But if you look the overall utilization, what is kind of the nominal maximum capacities, what we can get out of our factories, I think we have still there good room for growth. On some areas, we might need some small investments and so forth, but nothing major from that perspective. Right. Perfect. Thanks. Maybe if I can follow up on the cost side as well. You mentioned the temporary cost saving from less traveling and so on. Any chance of quantifying a bit how much it was in the quarter and how much is the part of the long-term cost saving? Arto, do you want to take the travel part? Yeah. I think now on the, really on these low months when this COVID-19 situation has been on, we can say that roughly EUR 100,000 a month is what you can kind of estimate as a ballpark number from the traveling. There is a good chunk of the savings. Outside of that, if you look at our cost base, outside of the traveling, that kind of the Q2 cost level, you can say that that's a sustainable cost level that we are in. Majority of the savings that were realized during Q2, excluding this travel, will be long-term savings. I guess that's all for me for now, at least. You said that you have negative mix impact from change in market mix. Could you anyhow quantify how significant was this? I do not want to give the exact figure because it is a relatively difficult number to give, but it was How would I define it? It was a meaningful impact. I would say that we feel that our underlying profitability development did not go through fully during this quarter because of this mix change. So there is a significantly better underlying profitability when the mix returns, let us say, when the lockdown markets open up. Mining business is also, in the long run, more profitable for you and you prefer to sell mining segment if you have the right one? Market price levels and profitable levels vary a lot between different market areas and not so much between the segments necessarily. But mining for sure is a strategic segment for us. We have focused and grown a lot also during this first half in mining segment specifically, which is of course more continuous revenue. While we of course work on this projects type business all the time as well, but of course this kind of more continuous revenue is more interesting for us. It is just a follow-up on the Australian situation. So, some improvements quarter-on-quarter now, but if you can just, I mean, talk a bit about what are the main challenges at the moment you are facing there and what is, so to say, the timetable for you guys or plan? When are you expecting the volumes to be up? Yeah, to be honest, we would have expected yesterday already. We are not happy with the speed of the development, but at the same time, of course COVID, if only impact that COVID might have had for temporary there is a bit of this you are not able to visit customers and so on when people, companies basically shut down for short time period. Now it's fully open there and the operations are in full speed, actually in very good situation. Currently we are working on several customer cases. We have a lot of tests going and opportunities, and it's all about the speed of implementation for us right now. Opportunity is big, and we are not going to give up. We are going to take it. Thanks. Any more questions? Thanks all, and enjoy the rest of your day. Thank you.