Earnings Call: Q2 2021

Jul 15, 2021

Today, I'm pleased to present Ulf Linhos and Nicolas Enmaat and Klein Ulvenwig. 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. I'll now hand the call over to Ulven. Please begin. Thank you. We move to Slide 2. First, I would like to say welcome to a web meeting presenting our interim report with my colleagues, Miklas, Executive Vice President and Klein, Business Area Manager for Aligu. Slide 3. Just a glance, Momentum Group is today operating with a decentralized business model, where our 2 business areas are operational independent of each other and our total turnover is around SEK 9,000,000,000 to SEK 10,000,000,000. If we turn to Slide 5, I will give you some highlights from the report. Sales and earnings for the majority of the group's operations developed positively during the Q2 after the slightly more tentative start of the financial year, and the EBITA for the entire Group increased by 38% during the quarter. In the Aligu business area, the integration work between Toulouse and Sverdol continues in order to achieve target synergies and economies of scale over time. The work with the joint product range with new purchasing agreements and the introduction of our own product, brands and the colocation of stores is progressing according to plan. In the Components and Services business area, our work continues with acquisition driven growth and the 4 businesses we acquired during the Q1 of the year are now integrated into the business area and contribute to both sales and earnings development. Many of the group's customers have also indicated that the view that they view the outlook for the rest of the year positive, which gives us hope for continued volume increase. Despite the positive signals we see from customers and suppliers, there is still uncertainty in the outside world and in the group market. There is currently a demand surplus for certain product areas, which in combination with material shortages and global logistics disruption leads to clear price increases in a number of areas as well as in raw materials and transportation. If we go to Slide 6, Klein will give you some highlights from the legal business area. Very good. At Slide 6, you end up at Alego, and we had a growth of some 4% in the quarter and first half year, 3% growth. We see positive sales trends in all markets, but we have to bear in mind that we compare with a period last year heavily affected by the COVID-nineteen. EBITA increased from 122% to 167% and 37%, and the EBITA margin landed on 7 point 7%. The integration of Tools and Solon continues according to plan. 15 stores co located in Sweden and Norway, some 15 more to follow. We have now worked in the chatting together the product offering and that is in place and that will be rolled out starting this autumn. It will take some time, but it will start the rollout. And we continue to look at the logistics operation and in Norway, we've come quite far as we communicated before closing down the retail warehouses. So Page 7 and back to you, Ulf. Thank you, Klein. If you look at the components and services, both sales and earnings development in the business area were positive during the Q2 of the financial year. Net sales of comparable units in the business area increased by 19% during the quarter. The businesses acquired during the Q1 contributed with SEK 70,000,000 in sales. EBITA increased by 47% for the quarter, corresponding to an EBITA margin of 12.6%. For the full reporting period, EBITA increased by 18%. Increased sales, measured for improved efficiency and higher margins and a good product mix contributed to the strong profit development and also the flexibility and mitigate of the price increases. We are already seeing interesting collaboration opportunities between our new companies and our existing operations. During the quarter, a new organizational structure was introduced to strengthen the focus on growth, both organically and through acquisitions. If we slide go to Slide 8. The group in summary, the revenue in total increased by 6% during the Q2, and for the full reporting period, the increase was 3%. EBITA increased by 38%, corresponding to an EBITA margin of 8.4%. And for the reporting period, EBITA increased by 17%. Investigation of the prerequisites was split in the group into 2 separate listed companies, proceeds according to plan and advisory cost affecting the result in the period was SEK 2,000,000. The measures that we have taken continue to make a positive contribution to our earnings development, and we continue to generate strong cash flow. This gives an increase in return on working capital from 29% to 33% for the rolling 12 month period, and the equity asset ratio was 39% at the end of the period. I now hand over to Niklas on Slide 9. He will give you some about the cash flow statement. Thank you, Ol. On Slide 9 then. My name is Niklas Hellmark. I'm CFO at Momentum Group. As I have mentioned these last quarters, we have taken a vigilant approach relating to our cash flow and liquidity situation during the pandemic, making sure that the decrease in revenues was met with the corresponding decrease in working thus contributing to our cash flow. It is therefore very reassuring to see that we continue to show a strong cash flow also in the second quarter when we meet the stronger demand and that's also an increase in our revenue level. This last quarter, our cash flow from operations before working capital changes increased to SEK 308,000,000. Adding to this, an effect from working capital buildup of SEK 37,000,000 means we generated SEK 271,000,000 in cash flow from operations this quarter and SEK486,000,000 for the first half of the year. Our cash for the rolling 12 month period amounted to approximately SEK 1,200,000,000 corresponding to cash conversion adjusted for effects from IFRS 16 of approximately 135%. Coming back to the working capital changes this last quarter, we see sequential development compared the Q1 with a buildup of accounts payables as well as inventory. Adding to this for the Q2 was the increased level of accounts receivables attributed to the increased level of revenue. Effects from IFRS 16 contributing to depreciation impacted operating cash flow by SEK 92,000,000 for the quarter and SEK185 1,000,000 for the 6 month period, which is then reduced by the same amount in the cash flow from financing activities. As I mentioned before, our level of CapEx is higher today than before the Sverdrol acquisition of the CapEx during the period. The largest part has been attributed to the finalization of the Erbrug Logistics facility as well as all adaptations and IT related investments in business area are legal. If we turn to Page 10, you see some selected key ratios for the rolling 12 month period. Our top line revenue stood at approximately SEK 9,400,000,000 for the last 12 months. This means that compared to pre pandemic levels, basically than in March of last year, we have lost approximately close SEK 300,000,000 in turnover. Despite this, our EBITDA level is close to pre pandemic levels and our EBITA margin is higher. This in turn is due to the hard work increasing our gross margins and also good cost control during this period. Also, we have been able to generate good cash flow from operations, which here also can be seen in terms of the increased return on working capital, both through increased EBITDA margins, but also from the fact that our working capital turnover has increased close to 5x. And I'm especially pleased to see that we have increased our inventory turnover as well as our positive net between our days of payables and days of payables outstanding during this period. Our financial position continues to be strong. Operational net loans liabilities amounted to approximately SEK1.3 billion at the end of the quarter In relation to EBITDA and adjusted for the effects from IFRS 16, our net debt to EBITDA stood at SEK1.7 billion by the end of the period. Cash and cash equivalents, including unutilized forensic credit facilities, totaled SEK1.4 billion end of the period. Related to our other external financial objective, our return on equity was 12%. This measure is, of course, affected by the restructuring reserve of NOK97 million during last year, of which NOK76 million is remaining at the end of the period. And as Ulrik mentioned, the equity assets ratio is strong with 39% at the end of the period. Coming back to Jules. Thank you, Niklas. If we go to Slide 12, I give you some focus on the short to medium term, and then Klein will come in and give you some information about the legal. So our 3 main focus areas in the short to medium term in order to take the next step in our development is, of course, the integration and merger of tools and so on in the business area legal, as well as always continued development and improved efficiency in all our units, as well as to mitigate the demand surplus for certain product areas, which in combination with material shortages and global logistics disruption lead to clear price increases in a number of areas as well as in raw materials and transportation. And the third and importance of Components and Services is the acquisition driven growth strategy. We have a strong financial position and we are increasingly building a good pipeline in this business area, where we will focus on our M and A activities going forward. And I will get back to this later on. So if we go to Slide 13, Maarten will give you some information about Aligu. Thank you. And then we are back at Aligu. We have now carved out the core values, and they are being implemented throughout the business area. And it sounds perhaps fluffy, why do you talk about the core values, but it's a very important cornerstone for us building this company that we have the core values in place and everybody in each and every entity is working with that, the management team as well. We have handbooks working with the core values, really defining who we are going forward. So now we have the most important cornerstones and pillars in place, mission, vision. We will detail the strategic objectives in the beginning of the autumn, but and the core values together gives us a good foundation to build on for the future. We are continuing to the preparations of a new ERP system for our tools in Sweden. And after that, Norway will follow. Everything is moving along nicely. During the quarter, we had quite an extensive ISO certification process. Some 160 entities were audited 30 days, and it's actually 9,001,14,001, So Sweden and Norway now in its in total are will be under the same ISO umbrella. Local integration of stores and sales forces continues as planned. Smart services are being rolled out. We see an increasing demand from our customers for these types of services. And as I mentioned before, consolidation of supplies and product ranges are ready for rollout And the rollout of proprietary brands from the original Sverdorn is moving on nicely into the tools system. So Slide 14 and back to you, Ulrik. Thank you. Yes, as mentioned, the main focus of the business area is to grow through acquisitions. And with more than 100 years of continuous development as our corporate culture, we're looking to more businesses that possess a number of important characteristics and that can contribute to our future development. Acquisition targets should be able to achieve long term sustainability, profitability and growth and have a committed and proven management with the willingness to improve in a decentralized environment based on simplicity. If we go to Slide 15, and what I told you, we have 3 we have gone from 2 to 3 main focus areas. We focus on components and services, technical services and specialist companies. And based on this strategic focus, we have so far been able to add 5 interesting businesses with a total turnover around SEK 300,000,000. After the last acquisition, the business area has now had a substantial turnover in both our focus areas, components and services and then also the Specialist business. The acquisition pipeline continues to look interesting for further development, and hopefully, we will be able to travel in the Nordic to meet companies after the summer months. So if you go to Slide 16. Yes. And of course, in addition to the priorities of the operations above, we have a new group management that Steve will announce, but to investigate the possibilities for splitting the group into 2 separate listed companies. And of course, the purpose is to strengthen each business area and achieving its ambition in the best way and thereby creating increased shareholder value. And the Board intends to provide additional information of the results of the assignments during the financial year. So if we now turn to Slide 17, we go over to Q and A. We have a question from the line of Karl Johan Bonniewer from DNB Markets. Please go ahead. Yes, good morning. Very encouraging development in Coutu. Congratulations. A couple of questions on your outlook statement, Ulf, where you obviously sounds very positive that nice impact that normally have on your operation if you get volumes going. But I know what kind of nice impact that normally have on your operation if you get volumes going. But you had 2 disclaimers there, one being the supply chain and the other being, say, the escalating inflation of your input of goods, so to say. How do you see being able to cope with those and balance the challenge, so to say? In I will answer for Components and Services, and then Frank will take Allego. Well, Components and Services, we are continuously have an outlook of what kind of products do we have in stock, what kind of product is running. So what we did here or a couple of months ago, we purchased up our stock with SEK 30,000,000, SEK 35,000,000 in order to be first in line with our suppliers. And then also, we continue to have a special task force that are sourcing products all over the world to meet the characteristics of our customers. But also then, of course, we're handling the price increases by increasing our prices ourselves. But we still see that it's a big tailwind on the demand even during the summer. So you can give us some notes about the legal plan. Yes. I mean, we've said even if it's frustrating if you have stockouts in certain products, especially if there are private label ones, that's really, really annoying. But no customer it's we can always provide the function. So it's one brand, it's out of stock and there's a problem in the supply chain. We can always provide the same function, the same product with a different brand. So it shouldn't affect customers. It's annoying, especially if it's a high margin product, but we will keep the customer safe. We can always provide the function they require. And as per the inflation question, we are big fans of inflation and we have a good history taking advantage of that. So inflation is good as long as you manage to push prices further in the value chain and have a good history of doing that. So we see that as some positive thing to answer it. Sounds promising. Just on that note, I'm not sure if that affects you too much, so to say. But obviously, all the clients, I guess, also see this supply chain challenge. And I've heard suggestion that there might be, say, now an over inventory building up in the customer level on trying to take early deliveries and so on to be able to meet these potential challenges. Is that something you have seen as well that might say if things normalize, then Mike suggests that we should also have a headwind from a normalization there? Yes. Go ahead. You start. No, you start, Rod. Okay. Yes. For the Components and Services, a lot of our product is stock cheap at our customers. And of course, during the 2,008, 2009 decline, they really lowered the stock and they have not increased it so much than it was that time. And then also during COVID-nineteen, everybody is taking down their stock. So we see also a buildup of our customers and we also see a demand from OEM customers, which we normally don't serve. They're also calling and trying to get products from us. I think the question is more related to your business. So we are in things that need to be consumed quickly, and I have not seen any new stock buildup. So I think that the question is more related to the components business. So it sounds logical. And Klein, coming back to the updates you gave on the integration, it seems like you are back a little more on even more on track now than you might have been in Q1 and obviously seeing the benefit from volumes coming back, so having a very nice margin impact. But if you look at the integration process, I took your answer to the last question a little that you are still running slightly behind on own brands. And maybe also if you could give some sort of color on what kind of client feedback you have got from this kind of, say, integration work, so where you have been successful in joining the sales forces and the store structure and different cities? How you've seen volume divide there? Yes. No, in general, all integration activities are going just according to plan. And as per the private labels, yes, there we had an effect as we communicated earlier. There was Sysore Canal and there was so many other lack of containers, I think, that had us to move May launch of the private some private labels into the tool system being delayed until August, September. So there we have a little delay. When it comes to store locations, we are even a little bit ahead of plan and negotiation with suppliers and so forth. So everything is going just according to plan and with a little a few month delay in the private label rollout. And so far, it has the same pattern If you move together 2 shops initially, you have a slight drop in sales and then it picks up again just as when you start a new shop, it starts slow and then it picks up. So we see the same pattern, which gives us high hopes for the future that the remaining 15 shops will develop nicely as well. And any early feedback on tool customers' acceptance of the Zweddle brand names? Yes. We started with the guest of shoes, and we were anxiously looking at the anxiously looking at the development from different perspectives because suddenly you are given even the sales force, as we said, a loaded gun because they're products with higher margins. And can we, as sales force, keep that margin? And it has been rolled out nicely, a well controlled process and has been well received by the customers and had a nice sales development. So the first product range we rolled out had a good start, which is also important, of course, going forward. So it doesn't start with failure, then it will be difficult to come back with other brands, but it had a good start. Excellent. Excellent. And Niklas, just to come back to your reasoning around the working capital. Looking at, say, organic growth coming back now and volumes going up, the supply chain challenges, should we expect, say, the headwind here really coming over the next, say, maybe 2, 3 quarters to then normalize at the new level after that? Or how should we see it? Well, I think you are on the point, Ekko. I mean looking at historical levels, of course, when we have this shift in revenue from sort of the decrease that we have had during the last year, last quarter, we had a slight positive growth. And then this quarter, we had even more growth. Of course, that over time means that we build up working capital. So what we have seen is this sort of traditional pattern that we increase our accounts payables and also the inventory and then we grow our accounts receivables. But I think that from our point of view, we are really sort of working with these questions and trying to manage the working capital. But of course, over time, it's very difficult to grow in terms of revenue with a decreasing working capital situation. So I think that we are going to see a buildup of working capital. But in terms of sort of working capital in relation to sales, that's predominantly what we measure. I think that we can over time continue to decrease that level as we go forward as well. We have seen a decrease over these last years. So I think that we are now below 20%, which I think is sort of a very good level. Perfect. Had a very good move through in the R through RK here of late, and I guess that should continue. And how does it look when you break it down on the 2 units? I couldn't find that in the at least in my early look in the reports. It should be in the report. Yes, you should have it in the report. Rolling 12 months. Rolling 12 months should be on let's just look. Yes, if you have the numbers on top of your head, I'll take them inside. That's perfect. Yes. If you look at Page 5, you have Coral Eagle, it's 29% return on working capital compared to 26% for the corresponding period, 12 months than last year. And on Page 6, you have the 4 components of services, which is down 67%, an increase from 60% the corresponding period 1 year ago. So we see an increase in working capital return on both business areas, which is extremely good in OpEx. But there is a difference there. And in the quarter, Niklas, was there a big release of restructuring SEK76,000,000, as I mentioned. That means that we released SEK11,000,000 during this last quarter. Excellent. And when you now look at the and got dug into this split that has been proposed, have you come across anything that might be a deal breaker, so to say, in the process to date? No, we have not. As I mentioned also before, when we split the company to Babin and Bewing and Momenkl Group, we made a setup that we were not so combined together so that we can eventually make another split in the future. So we took this lesson from the last time. Sounds promising. And understood the idea is still to be back in the second half of this year with more firm details on how it's going to can happen and when it can happen? Yes. Last time, we will continue to work during the summer to try to tie up the loose ends that we have. And then hopefully in the autumn, September, October, maybe we can make some new information about. Makes sense. Looking forward to that. Take care and have a good summer. Thank you. Thank you. Cheers. Bye. And as there are no further questions, I'll hand it back for any closing remarks. Okay. Then thank you very much for listening, and do not hesitate to contact us if you have any more questions. Thank you, and have a good summer. This concludes the conference call. Thank you all for attending. You may now disconnect your lines.