Q2 20/21

Oct 23, 2020

Ladies and gentlemen, welcome to the AdDeck Presentation for the Q2 Reports. For the first part of this call, all participants will be in a listen only mode and afterwards there will be a question and answer session. Today, I am pleased to present Nicholas Stenberg, CEO and Marlene Enersen, CFO. I will now hand over to Nikolas Stenberg. Please go ahead. Yes. Welcome, everyone, to this presentation of our Q2. First, some highlights. All in all, a stable report, slightly better than consensus, so good work from our analysts. We ended up with a sales decline with 7% in the quarter to a large extent relating to COVID-nineteen and especially the very tough headwinds in scrubber business. Varying business climate, but generally, we saw a gradual improvement in the end of the quarter. The margin of 11.2% is well approved in my opinion and a good proof that our portfolio gives certain hedge in times like this and also that our focus on cost management has been efficient and balanced. We have also kept a good pace on acquisitions so far, and we see an increased inflow of projects. Looking into sales, we could see organic growth fell with 10%, while we added 6% from acquisitions. Of the 10% organic sales loss, our estimation show that approximately 8 percent is related to COVID-nineteen. And the majority of the organic drop is relating to scrubber. As I said, we had a very tough headwind from last year. If we take the scrubber effect aside, organic sales dropped with approximately 3%, and the negative effect in Q2 was less than in Q1, which means that the underlying markets have picked up gradually this quarter. And clearly, the scrubber headwinds affect us more than COVID-nineteen. Strong markets for us this quarter, primarily energy sectors, where we have had very good development, Also market for fiber installation and telecom has been good. In addition, we have some positive effects on sales in medical and electronics relating to the increased demand in Q1 due to COVID-nineteen. This demand we see have dropped quite significantly this quarter. OEM sales to Mechanical Industry and Special Vehicles was weak, but clearly improved in the end of the quarter. So a positive improvement in the cyclical areas. From a geographical point of view, negative scrubber effect relates primarily to Norway and Finland. That's where we have the units working with the scrubbers. Apart from that, we think it's been rather stable in Finland, reluctant in Norway, good improvement in Sweden and positive in Denmark with the wind power as the main driver. Markets outside of Nordic, tough conditions, DACH, Benelux, U. K, still affected by restrictions, but at least we saw good improvement here as well. So month per month, a slow summer, but a very strong September, where overall demand was in line with last year's September. And that trend also continued now the 1st weeks of this quarter. The order stock is okay, I would say, entering into the coming 6 months. It has decreased a bit, but again, it's been okay. What we can see is that it's a bit shorter visibility in the order stock than we are used to. And it's clear that there is if customers normally can give prognosis and longer orders are now looking at a bit more short term. And that's primarily on the OEM side. So CapEx related projects is still a bit slow. The large drop in scrubber sales also had a significant impact on the EBITDA and also on the margins, considering the good incremental margins we had Q2 last year. I will talk more about that under Industrial Process, but the weak scrubber sales amounted to a significant part of the negative EBITDA development, which you can also see in the graph on this picture that Industrial Process has a large part of that. But again, if you take out the scrubber drop that gave us some extra margin last year, Underlying performance is overall quite good, I would say. And again, to keep 11.2% considering the situation is good. Apparently, we've had a strong focus on cost management, significantly less furloughs. We have approximately 800 employees affected by furloughs end of Q1. And now as you can see, it's 260. So we have changed focus concentrating more on long term efficiency measures, and we have reduced about 200 employees, most of them this quarter. So the effects of these measures will start to kick in during coming quarters and especially looking into 2021. So very good work from our teams and also general good cost awareness, of course, in the group. But it's important to know that our focus is always on long term profitable growth. So we are always considering what measures to take, and we have more actions in pipeline to increase productivity, if necessary. Some short words of the different business areas. Automation, stable development, tough comparisons, but good contributions from acquisitions, but also stable organically. It's clear for automation that it's the companies outside of the Nordics that has the toughest situation. And also as I indicated before, automation and also components are the ones that are affected most by this shorter looking on the order side and that the CapEx related projects are still on the slow side. But we have good positions in automation, and it should be room for growth going forward. Improved margins, as you can see here as well. So a good product mix and good cost control. Components, moderate negative effects from COVID-nineteen, some positive effects from medical that's kept up a little bit the drop in special vehicle and engineering sector, which improved end of the quarter, as I have said. Margins, not so good now this quarter relating to product mix, but also currency effects and also increased transportation costs. Components have had some difficulties to get components home in a normal manner. So it's expensive to fly home things nowadays. Energy continue to have a positive market situation, had a good increase this quarter, stable margins. And it's still infrastructure products for the grids that was particularly strong. And the underlying potential on that market is still very good. The speed of installation seemed to slow down a little bit, and that is not due to lack of demand. It's lack of installators to have time to make the installation. So that is actually the bottleneck. We saw only marginal negative effects for Energy this quarter, but and that's for the OEM customers like cable installations and stuff like that. But yes, it's a positive sentiment in those sectors end of quarter. Industrial Process then, it's you have to focus on scrubber to understand the development in Industrial Process. Last Q2, approximately onethree of the business area sales was scrubber or almost SEK 300,000,000 in sales. And now 75% of that sales is gone, which means that scrubber headwind certainly was very tough for this business area. And it will continue to be tough going forward. Our view at this point is that sale of scrubber will be quite flattish on this level the coming quarters. So it will gradually get better in 2021, of course, I mean, from a comparison point of view. On the positive side for Industrial process industry stable and especially forest industry doing very good. So that market seems to be having a good time. So strong project stock also in 2021 on that side. And actually, if you take scrubber equation out of Industrial Process, demand was in line with last year's quarter for this business area. The loss in margins, as you can see here, is to majority the incremental margins we had last year. I want to point out here that we have deliberately waited to do too much cost cutting in these segments because we wanted to see where the scrubber market would go. But now with the lower sentiment that we have now, we will make further productivity measures in Industrial Process. Finally, Power Solutions decreased 9%, primarily Special Vehicles, very important segment for Power Solutions with a heavy sales decrease this quarter. And it's primarily the big OEM customers in forest mining and trucks that has been quite slow. But we have seen a good development the last 6, 7 weeks. Other segments in Power Solutions, stable, I would say, all in all. Margins a bit weak to be Power Solutions, and that is the strong margins we usually have in Special Vehicle. But it should be room for improvement here since we expect that vehicle market will pick up. So summarizing the period, sales decreased of 6% and 7% of the organic drop is COVID. And the strong headwinds of scrubber, that is that's the main reason why it looks like it does. Okay. Looking into acquisitions. We have been quite active, as you have noticed. We completed 3 in the beginning of this year, and then we took a little break to see due to the uncertainties, of course. But after summer, we decided to open up the flow again and finalized 4 in beginning of September. So we are welcoming very nice companies into the group like ELCSTM, interesting automation situation and BruceCard with unique solutions in gas detection, to mention a couple. And also, we have done 2 more deals now beginning of October. So we can keep up activities. I would actually say that the inflow we have at the moment of acquisitions is better than normal. So we have the great position to be able to prioritize among companies that we believe have the best opportunities. Yes, over to you, Marlin. Yes, thank you. Financial position, some highlights from the Q2. Consistently good cost discipline. Cash flow is still stable, and we have comforting headroom in credit facilities. Profit over working capital decreased to 51% due to decrease in profit mainly. Strong acquisition pace, but key financial indicators are still in line with last year. Considering the fact that we are exposed to market segments hit hard by the pandemic and have few exposures to initiatives being boosted by it, we predicted this quarter to be weak. The summer period in the Nordic mechanical industry and among customers is usually slow, and this summer was highly likely to be worse than normal. As Niklas said, July and August was slow as expected, then we had a very good month in September. The outcome was overall a proof of the ability to act and adjust. Our ambition is to adjust our costs to an expected new normal revenue level going forward with a resilient and consistent margin rather than pumping up margins temporarily. This means that we combine short term opportunities to save cost with long term cost reductions, always considering our ability to maintain our capacity. Each company in affected segments has a consistent plan with activities to adjust according to the situation. As a result of the development and according to these plans, we have, during the 1st 6 months, already laid off approximately 200 persons or 8% of the workforce. We have had very limited positive effects on our profits from governmental support measures in the quarter. We believe that given the very tough comparisons regarding the margin from last year's Q2, our organization has done a very good job meeting up with a margin of 11.2%. Going forward, we expect our actions taken to meet the decline in short term savings, and actions prepared will be adapted according to the development of demand and sales on the market, keeping up a good resilient margin as well as keeping our competitive edge. Cash flow. We have had a stable cash flow so far. A few highlights worthy to address and illustrated in the graph. Our profit has decreased these last months, but the development of our working capital has been positive compared to last year. We have seen a slight increase of inventory during the period due to exchange rates, somewhat expensive transportation costs and the caution among our companies by bringing home goods to prevent delivery problems and consequent delays to customers. We have to monitor and act on this obviously, but at this point, we worry neither about this nor any insecurities among customer receivables. We see here in the graph also that our acquisition pace has been high. Profitable working capital at 51%, mainly negatively affected by the decline in profit, as I said before. We follow our equity ratio leverage and gearing closely. And even though we have made several acquisitions, we are still able to remain in line with last year. As we can see here, we are always speaking in the Our gearing is stable over time even though it's not a straight line. It's reasonable level of around 1 given the circumstances, we believe. So all in all, high readiness for further adaptation to circumstances, consistent cost discipline with the ambition of resilient and stable margins as well as cash flow going forward? So network for growth is a way how we talk about how we can power our companies by AdTech. And when I took on the role as the CEO, I said that we should focus on getting as much out of the network as possible. So we implemented the concept of co creation, meaning not seeking cost synergies, but to encourage companies to cooperate. And the cyber attack last year gave us a push in this direction when companies shared a lot of experience over Teams and other digital channels. And now with the pandemic, this has really helped us in the digital transformation that the pandemic has speeded up, obviously. So we have increased ambitions here, moved sales courses from Ad Tech Business School into digital forms, online webinars in different topics. And we have also initiated weekly lunch presentation to share fruitful experience like digital sales tools, etcetera, between the companies. Of course, we want to come back meeting our customers. That is very important. But since the environment has changed, we will adapt accordingly. So very good initiatives here. This picture, most of you have seen before, showing our organization structure and how we cluster the companies. Why I want to push this picture now is to just give the feeling of that when having this organization structure really helps us in situations like this to have very good focus and close contact with the companies. So we don't have to make like general cheese slice decrease or Osthuvelsprinsip in Swedish. Instead, we can focus on cost cutting costs where necessary, but we can still focus on growth on other areas. So I have very high confidence in our decentralized model and our organization. So a summary before going into Q and A. Gradual recovery, long term cost reductions to replace short term savings, very good pace on acquisitions and good opportunities ahead, strong balance sheet, and we expect a continued recovery. But of course, there is some uncertainties still out there. And scrubber will be, as we predict at the moment, still on the low level. Yes. So let's open up for questions. Thank And our first question comes from Marcia Klang from Handelsbanken. Please go ahead. Your line is now open. Hi. Thank you for taking my question. You mentioned 9 acquisitions so far this year. Can you talk about the margins at which these acquisitions come into the group? Are they EPS accredited? And why is the inflow better now than usually? Okay. So sorry, the first question, was that on the margins in the companies? Yes, of the acquired companies. Okay. So I mean, we don't go in explaining the margins in any specific company. But all in all, I can say that the margins are improving our average margin in Adtech. And on the second question, yes, that's a very good question actually. I think one reason is that organization, For example, by splitting up automation last year, we could lift up some new team members. So we have more people being out looking for acquisitions. So I think that's my best answer to it. But yes, it's just a very happy situation. And then a second question, maybe it's early for you, but you mentioned that you waited with cost cutting in industrial processes and you will make further productivity measures now. Can you give us any guidance on the quantity maybe? No. It's difficult to go into that, I would say. But I mean, to put it like this, we have had, as you know, very, very strong growth last year. Part of that growth on top, we could do without increasing too much fixed cost, which means that we got that very, very good incremental margin. That is not possible to reduce fully. So we will see a little bit reduced margin from that perspective. But I don't want to go into headcounts and stuff like that, but we will make productivity measures. Thank you. That's all for me for now. Thank you. Okay. If there appear to be no further questions, I return the conference to the speakers. Okay. So not many questions. So with that, we say thank you for listening and have a nice weekend. Thank you.