Earnings Call: Q2 2019

Aug 7, 2019

Good morning, everybody, and welcome to Robit's half-year report analyst and press conference. My name is Tommi Lehtonen. I am the Robit Group CEO since beginning of May, and we have also here Robit CFO, Ilkka Miettinen, who will give one part of the presentation. Good morning. Very happy to give you more insight about Robit performance during H1. I think the headline is, we are moving to the right direction. Efficiency program is continuing, and we are continuing the implementation still throughout the year. Our profitability developed favorably. It's plus EUR 1.8 million EBITDA change. Again, talking about top-line development, sales is at good level, plus 10% compared to Q1 2019. H1 as such is as last year's level. Momentum is supported by very strong, or let's say strong order intake during first half, EUR 46 million. As you have seen from our stock exchange releases, we have updated our Down-the-Hole manufacturing strategy, and we are implementing actions related to that. Through this efficiency program, of course, we are then continuously shifting towards growth company track again. One thing I would like to highlight here is that our new Korean factory is really in a very good state. We are exceeding production records month by month there. We are really in the business plan volumes in our Korean factory. It has been really good development through Q2. As a summary, we are moving to the right direction, and here I would also like to thank all the Robit employees for their dedication and attitude and hard work during the H1. Again, if you look at, let's say, development quarter to quarter, I'd like to remind you that in Robit business, there is no real seasonality between H1 and H2. You can also compare development, of course, quarter to quarter. Of course, this is kind of illustrating quite nicely if you look at quarterly net sales, the turnaround from Q4 2018. First half of this year, we amortized EUR 10 million of loans, and Ilkka Miettinen will give more details about our loan maturity later in the presentation. Cash flow was not on a targeted level, and it was not satisfactory for us during the H1. We are putting more efforts into it right now. Receivables, as such, we have had some good progress related to receivables. Current receivables increased late in the quarter due to the very strong net sales during June. The main area where we need to improve is inventory development. We are working on that and definitely still committed on releasing capital from our net working capital. Halco business model was renewed. As announced earlier, we have basically closed Halco's production operations in Sherman, Texas, and in Brighouse, U.K. This production is moved to our other factories in Chesterfield, U.K., and Perth, Australia. Basically, this will reduce our so-called capacity cost, fixed cost related to production, and our existing factories can produce needed production levels without investments to resources or capital equipment. We have free capacity in Perth and Chesterfield to produce needed volumes for Halco business. Halco business is, of course, developed still based on strong Halco's brand as a standalone business, but now it is basically sales and service operation and engineering company. They have their own products, of course, where there are some synergies with Robit's offering. We estimate mainly capacity cost savings of around EUR 2 million that we will realize fully 2020. As earlier announced, we have an efficiency program that is focusing on four core areas: Robit people, growth initiatives, cash flow, and key processes. Related to Robit people, our resources, we changed the organization even more to clear functional model during May. We adjusted the organization. I believe the new organization allows us to have stability and the structure allows us to grow. Basically, that structure is, I believe, a very clear and simple model for Robit type of a business. At the same time, there has been a lot of emphasis on Robit culture. Robit culture as a sales company and what it means to each and every employee. Additionally, we are focusing on competence development. We feel that competence development is the key area moving forward with Robit's development. If you look at growth initiatives, we have the resources more or less in place. We have added some key resources around the world, local resources mainly from the marketplace, and we are focusing on implementing the area-specific growth plans. You have seen also that in Australia we have invested into new resources and feel that Australia moving forward has great potential for us to move back to growth mode. Cash flow, we have had progress related to receivables during H1 last month. Let's say higher than average sales tied up some capital to current receivables. Related to inventories, we are not happy with the inventory development. So there we are putting more efforts into it and focusing on it with new approaches during H2. Of course, at the same time, the underlying profitability of the business as seen earlier in the presentation, we are focusing on adjusting the cost base of the company. Key processes, of course, when we are working on network, working capital changes, and so on. The key element is that we develop processes to ensure that these changes are sustainable and kind of are built into the company structure. This is continuous work, mainly currently related to inventory processes, order to delivery process, and sales process. Again, looking at the sales in many areas, we are moving, progressing to the right direction. You can see that 4 regions out of our 5 regions are growing between 7% to up to 17%. We can say that we are somehow satisfied with this development, even though our ambition level is even higher than this. We feel that there is potential to have even more growth in these areas. So it's a fair job. We can do even better compared to H1. Then we can see Australasia drop, which happened through H2 last year. There, of course, we kind of fell into a new level through H2 last year and currently H1 this year, we have stabilized on that level. So we are more or less stable and again, we have invested to new resources, and we feel that we can move back to growth track also. In Australasia, our target setting is that we start to see some growth during H2 there. Mainly compared to H1 levels. Overall, I think this is a good indication if you look at different regions that have very different types of business environments, very different types of local markets. Robit's underlying capability to grow is proven that we can grow at the same time in 4 different regions. As a summary, again, we are moving to the right direction, and now I will hand over to Ilkka, who will give more details about our financials. Thank you, Tommi. Welcome on my behalf also to this press conference. As Tommi said, we are moving to the right direction in the profit and loss also. It's not visible at the first half year net sales at the moment, but the result is improving clearly throughout the different levels of profit and loss. What we can see in this graph is that we used to have a kind of declining trend almost 6 quarters, 5 quarters in the past. Now we have improved our net sales top, meaning top line, in consecutive 2 quarters throughout the first half of the year. So we have gained the moment, at least we can see that we have gained the momentum to go again on a correct track EBITDA was improving. Of course, we had some one-off cost there, adjusted by EUR 1.2 million during the first half. This is reflecting to the restructuring of the DTH business environment that we are streamlining the business model and the manufacturing model, especially in there. Saying that, also the EBIT was pressed by EUR 1 million, which is relating to the same equation that we are refreshing the manufacturing footprint in DTH. We are closing the Halco Brighouse facility or restructuring and unifying that with the Chesterfield operations in U.K. That's why we have impaired the facility leases by EUR 1 million there, which is kind of one-off cost. In net working capital, as Tommi said, we have also taken steps which is not yet visible on an absolute level of the net working capital, because that seems to be rather static at the moment. If we look at the last 12 month, which is the same case in the last 12-month net working capital ratio, it's not visible there yet. If we annualize the last quarter, 3 months net sales to the net working capital level, the ratio is improving in 2 quarters, during the last 2 quarters, which you can see from the orange line that it hasn't happened in the past 2 years or 3 years in that respect. So in that case, we also can see that we are moving into the right direction, managing the inventories and receivables at the same time. As Tommi said, we have certain areas where we know that we need to improve a lot, which one is the inventory management, but not losing the availability. We need to have the balance with the availability and the inventory levels at the same time to serve our sales force in the field. All this relates to cash flow. As Tommi said, this is not on a satisfactory level, which is of course the equation of the operating performance and the net working capital as a whole. We had the good sales performance throughout the second quarter, which is, of course, increasing the accounts receivable level, as Tommi said, which will be converted into cash during the second half. But the most critical thing is that we can manage the inventory levels in a correct way so we have the right products in the right places, not losing the availability at the same when we are optimizing the inventory levels. That's one of the most critical things that we are still implementing throughout the second half of the year. Capital structure. The net debt is still rather low. We are not in debt in that sense, but what we need, of course, the EBITDA level needs to be increased considerably. But also in that respect, we can see that we are moving to the right direction. Not in a big jump yet, but we know that there are improvement track that we can serve the debt with the plan what we have at the moment in place. Equity ratio is still strong, as you can see. But all this is summarizing that we still have the timeline that we can improve our performance, that we can be profitable and interesting company again. Reflecting to the loan maturity, we have some 27, 28 million senior loans at the moment, which are to be amortized throughout the following 2 years. Next, we are planning to amortize roughly EUR 7 million, which needs the improved efficiencies, EBITDA to support the loan amortization, what we have planned, including also the working capital improvements at the same time. 2020, the plan is that we need to renegotiate the EUR 17.8 million loan, which was also the original plan, that that should be renegotiated 2020. This relates to the acquisition of the businesses in 2016 in Australia and U.K., and that's something that we need to already prepare at the moment, that we need to have the evidence that we can renegotiate the loans. Once they are due and not consume the cash flow that we need to have. We know that we need to have some cash flow to improve the performance in certain areas and for the growth. That was briefly the financials, and now I hand over again to Tommi, please. A quick summary. Again, we are moving to the right direction. Efficiency program is progressing, and implementation naturally will continue throughout the year. Operating results are developing favorably. Of course, we expected better speed in this area, but anyway, the trend is positive. Of course, working on making it even stronger, as you can see from our actions. Sales order intake developed globally, positively, and stabilized in Australasia. Again, Australasia, we have new sales resources in place where we expect to see some results during the H2 of this year. Down the whole business production strategy sharpened as shown earlier in the presentation. As a summary, the outlook for Robit's target markets stays positive. As you know, we have mining and construction-related target markets and mining as such is a stable market in consumable business. Capital business very volatile, consumable business extremely stable, growing around that 2%-3% per year. When we look at the construction markets, the construction markets that are important for Robit, let's say the outlook for H2 is positive. Of course, construction by nature is fairly volatile on a local level. Let's move into questions and answers part, and please go ahead with the questions. Yes, this is Tom Skogmo from Carnegie. A couple of questions from my side. First on net working capital. I would like to understand this inventory situation, because last year, I think you blamed the high inventories on building up the new factory in Korea and a lot of inefficiencies, moving production. We do not really see the improvement on that line. What are the reasons at the moment? You should have a smoother setup. Yeah, I think it is still in our business, as you know consumable business availability is critical where we are balancing related to growth and availability of the products at the same time to the inventory level. Simply, the efforts we had were not strong enough during the H1 to correctly balance inventory reduction to availability. Some markets for us, as you see, are growing fast. Sometimes you need to invest a bit in advance to inventories to serve the customers. But at the same time, I am saying that we feel that we can do much better job in that area, and we are putting a little bit different approach on it and feel that we can still release cash from inventory. To summarize, we were not able to achieve those processes on those different sales units to achieve reduction while we were growing with sales in some areas. Then I would like to ask about your guidance. You talk about EBITDA profitability being negative, but you have all these charges, so there is a difference between EBITDA and EBITDA adjusted. Do you want to comment on guidance in terms of EBITDA adjusted? No. At this stage, we don't want to guide more than what we have done. EBITDA reported will be at a loss, but EBITDA adjusted could still be possible. We don't want to speculate more than we have guided, of course, at this stage. We focus on, of course, you have seen naturally, we focus heavily on the actions, improving the profitability. But at the same time, when we updated our latest forecasts and saw a big risk that we don't meet the guidance, we were forced to do. Do you plan any more charges for the second half? We announced some restructuring-related costs. I think we quantified them EUR 600,000 related to employee reduction during H2. EUR 600,000 costs in H2. I would like to look at this sales development by geography that is looking quite nice outside of Australasia. I just wonder if you feel that it's on a sustainable path in these growth regions or if the Q2 and H1 numbers were boosted by larger one-off deals. We could see negative numbers in the second half or the third quarter, any of these regions where you're growing. Yeah, we have a very stable business, which is the mining business as described earlier. That also grew quite nicely during H1 in many areas. That is giving us stable growth. Our project business was quite active, and it can be volatile in some areas, but of course, the share of that still is not that big. I would say maturity of the sales development is very much on a sustainable basis coming from distribution development and our increased business in mining. How large share of sale come from projects? Project business. Roughly rough figures, we can say that the scale is around EUR 15 million. During? Annualized level. On annualized level. So that's the scale. That's not the exact number. could you give some comment about profitability by the different product segments? Are you already out of the woods, in the DTH, or and then you have We don't have a situation where we would have a product offering or group which is clearly more or less profitable than the other. There is no big differences between the offerings. Of course, there's an indicator that we have done the conclusion of the DTH business to unify the units. That gives some kind of indication that we are not happy with certain product range profitability at the moment or efficiencies at the plants. Yeah. These cost savings of 2 million EUR, that's not the P&L impact. Perhaps half of that is the P&L impact next year, 1 million EUR saving next year and 1 million EUR P&L saving 2021, or? No. We estimate that actually those savings should be realized fully next year. Actually, maturity of the savings are related to the so-called capacity costs, so will impact our gross profit. Fully already next year, basically. Yeah. Okay. Mm-hmm. All right. Thank you. Yeah. Hi, it's Antti Vasanen from SEB. Just still coming back to the inventory situation that was discussed earlier, and I got the sense that you weren't really satisfied on the development on the first half. Could you comment a little bit how you balance between growing the business, which obviously ties up inventories going forward, and you had good sales growth rates excluding Australia, and then focusing on just reducing the networking capital through inventory management. How do you balance these two issues? Yeah, I would say that we can be honest about our own capabilities as of today. Our inventory management capabilities are not yet on the level where we want to be. Simply, there are areas where we can improve our processes and operations to release money from the inventory. Not all of the inventories can be justified with the sales growth. How should we think that you prioritize between growing the business and managing the cash flow? That is a very good question, and at the moment, of course, both are key elements for our business growth and cash flow. Cash flow, of course, is very important because certainly we need to generate cash. Both are important because if you look at our fixed cost structure as well, capacity cost and so on, to improve our EBITDA levels, we need to drive also the top line, which is of course part of the cash flow. Okay. That is all from me. I would like to ask one more question about the sales funnel in Australia when you have recruited new salespeople there. It is probably still not really seen in the order growth if orders are up 3% on a group level, but that is the big kind of turnaround potential as the other regions are doing pretty well. What do you see and what do you expect? There are different types of target customers that we have in Australasia, mainly in Australia. We talk about smaller contractors and so on, where we can get quicker results typically, and the impact of those opportunities is not like a big step change, but it is more like a gradual change towards through small customer acquisition. Then we have several very large size opportunities on the table that are more like binary changes if those would come true. We are working on large size projects. As you know, in Australia especially, you have customers where the drilling consumables sales is between or requirement is between EUR 5 million to EUR 10 million annually. But okay, those are kind of the cases we are working on. We can't rely on getting them, but of course, there is an opportunity if everything goes right that we get one or two more of those very large size accounts. But this that the time has kind of terminated for this old agreement with the Drilling Tools Australia, I think it was called. Is all the negativity now fully visible or is that business continuing to slide? At least we are working hard. Right now it's a normal customer-supplier relationship, and definitely are very closely working with them. Actually last month, I would see more positive development in the relationship. But if you just think about year-on-year sales development in Australia in the second half, are the comparison numbers already so low that you can stabilize the business to have flat sales in the second half, given what you know about your order book there? Or is the sales just going to continue to slide because of this changed situation with DTA? As I was stating earlier, in Australia, our sales was very stable during H1, on a stable month-by-month level. The other regions were growing. We see no reason, of course, to continue the same work during the second half. But still sales was down, was it 33% in the first half? So I just wonder- That's right. Is it? You can see, of course, sorry to interrupt you can see the development during H2, where the sales dropped. Basically, we saw the decline through H2 in Australia, and I'm stating that we stabilized it on a new level during H1, and we are working on turning the trend. That's the- So it's pretty likely that sales will not fall any more in the second half in Australia, basically, given this. Definitely that is our ambition. Pretty likely is a good wording. Yeah. Okay. Thank you. Yeah, maybe coming back to the outlook comments that you provide us. Could you talk a little bit more about the demand in construction industry? You kind of state that it is a regionally cyclical business, but as a whole demand expected to stay on a good level. Could you provide a little bit more color on where do you see it growing? Where do you maybe see it softening a bit, and Yeah. Nordic countries are important for us as a target market, and the visibility for second half, the activity related to the project and backlog and so on, looks positive. For us, it has been on a good level. Then we have some specific market areas like Korea. We have been quite active in Russia lately and so on, in North America. All of those markets look positive from the sales funnel perspective and activity perspective. As such, when we look at the construction markets where we are active, we don't see any major risks for H2. Again, I've been also a long time in the construction industry, and those changes are quite quick when they happen. But we don't see any kind of indications of risks related to H2. Sorry, those changes are typically local. Yeah. One country goes up, one country goes down. Of course, how to mitigate that is that you are in enough countries. This is the clear peak up in demand in Northern Europe that you are referring here. It's in the construction side or? That was not so much driven by. I have to take some credit and give credit to the Robit team, that that was not so much driven by the market development, more by our own actions. The market in Nordics have been quite strong for a few years now, as probably you know in construction business. Okay, thank you. Any other questions? Any more questions? Okay. Thank you all, and we will come back to you. Is it October? At the beginning of November. Beginning of November to talk about our development during Q3. Thank you