Ladies and gentlemen, welcome to Momentum Group AB Q2 report for 2020. Today, I am pleased to present Ulf Lilius, Niklas Enmark, and Clein Johansson Ullenvik. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. I will now hand over to the speakers. Please begin.
Thank you. First, I would like to say welcome to our web meeting, presenting our interim report for our first six months, together with my colleagues, Niklas and Clein. If we move to slide four, I will give you some highlights from the report. The COVID-19 pandemic have had a continued effect on the group's operations during the second quarter, together with weak summer months. The group sales in July was down 14%, in August, 11%, and in September, -7%, so it recovered gradually during the quarter. Actions have been taken to mitigate the negative effects of lower demand in both business areas, where Business Area Components & Services managed to maintain a stable profit development during the period.
The integration between TOOLS and Swedol continues according to plan, and the restructuring reserve for the coordination of stores and product assortment amounting to SEK 97 million affected the operating profit for the quarter. The pandemic will likely continue to affect the group in the coming months, and we carefully follow the developments and take actions accordingly, even though the group's financial position remains strong. If we will move to slide five, I will now hand over to Clein, who is responsible for TOOLS and Swedol.
Thank you, Ulf, and welcome to business area TOOLS, Consumables, Workwear, and Protective Equipment. I think we communicated quite well the logic in the merger between TOOLS and Swedol. We can come back to that during the question session if you want, but we are now in one organization. We are a quite big and complex organization, a little over SEK 8 billion turnover, four countries, Sweden, Norway, Finland, and Estonia, some 200 locations, 2,300 employees, a lot of concept brands, Swedol, TOOLS, Grolls, Univern, a lot of own brands. In the clothing side, we have Doncare, Castor, and Balance. We have Award, Ampro, and others in the TOOLS side, and we have nine subsidiaries, so it's quite a big organization.
It's been an incredibly intense period since first of April in the integration activities, and it's been gone well, in a good atmosphere, and everybody's working in nice harmony. So since first of October, we are now in the same organization, and we also carved out the strategic cornerstones necessary to run this business forward. One key thing for us to achieve what we desire to achieve is that we have a common IT structure, ERP system throughout the organization, and those activities have been started. And in Q1 2021, we will start with Finland. Finland is first out, and one a year will follow Sweden and Norway. We also already moved together, co-located our sales efforts in Kalmar, first out, and two more during the rest of the year.
The consolidation of suppliers is an ongoing activity. We're talking about hundreds and thousands of articles, and we're talking about thousands of suppliers. So it's quite a big activity, but it's been started, and it's running according to plan. We will also launch our own product brands in the TOOLS system, where we already this autumn will launch Gesto shoes into the TOOLS system. The consolidation of the logistics centers in Norway is ongoing according to plan. Just a few headlines on the financials. We have a decrease in top line. We are hit by the COVID-19, but as we write, we are not satisfied with our own efforts on top of that, so we need to do more.
We have a drop in EBITDA, which is, of course, mainly affected by the top-line drop, but also some costs related to taking home products and shipped out by before. And integration is moving on as we said, and yeah, I think the integration project is running along nicely, and I hope you have a lot of questions when we come back later on. So now to move to slide seven, and you, Ulf.
Yes, thank you, Clein. Well, as I mentioned before, the main focus for this business area is to grow through acquisitions. We're looking for companies working within the MRO, OEM business, as well as industrial service and production. Acquisitions candidates should be able to achieve long-term sustainable profitability and growth for us. So if we move to slide eight, I'll give you some highlights about the business area. The sales in components and services decreased in total by 13% during the second quarter, of course, affected by corona, as well as I mentioned before, weaker summer months, but demand from industrial customers recovered gradually during the quarter. The company specializing in service and repairs, as well as in pneumatics and hydraulics, continued to display stable development during the whole quarter.
To further strengthen our market position in service and maintenance, the Swedish industry, we signed an agreement to acquire SKF's spindle service operations in Sweden during the quarter. Measures to improve cost efficiency had a positive effect on the contribution ratio and operating profit during the quarter. Focus of the business area is now, during this year, will be continued focus on profitable growth, both organic and acquired.... If we, in slide nine, I give you some just wrap up about the group. As I mentioned before, the general demand was affected by the customer's restraint and caution in all markets in the Nordic region, but with some variation between different customer segments and countries. In total for the group, net sales decreased by approximately 80% during the reporting period compared with the previous year.
Measures previously taken for increased efficiency and increased margins have resulted in stable earnings trends for the components and services, which exceeds the previous year with an EBITDA margin of over 13%. EBITDA for the tools and supplies business area decreased by 18% during the period compared to the previous year. In total for the period, EBITDA decreased by 14%. The group's cash flow from operating activities was strengthened during the period, and we continue our focus on decreasing funds tied up in working capital, and that will take us to slide 10, when I will hand over to Niklas Enmark, who will talk a little bit about the cash flow.
Thank you. My name is Niklas Enmark, CFO at Momentum Group. As we have expressed before, we have a strong focus on cash flow in the group, not least during the turbulent times we have seen during this financial year, the emphasis has been on securing a strong liquidity situation and making sure that we don't take any unnecessary customer risk. This is, of course, even more important now, when we are a larger group after this acquisition and with a higher CapEx level than before. Looking at the cash flow from operations, before changes in working capital, that amounted to SEK 459 million, and as we stated in the report, the restructuring reserve of SEK 97 million has no impact on the cash flow.
During the period, the reduction in working capital amounted to SEK 138 million, of which inventories was 112. Thus, it's positive to see that the actions taken during the year have had an effect on the inventory level. This resulted then in the strong cash flow from operating activities for the reporting period, as we've mentioned, which amounted to almost SEK 600 million . Looking at the effects from accounting principles, IFRS 16, that impacted operating cash flow by SEK 208 million, of which SEK 122 million in the last, compared to SEK 122 million in last year.
During the period, CapEx stood at about SEK 101 million , the increase mostly related to the logistics of the group. Turning to page 11, you see some selected key ratios. First, let me highlight that some of these numbers are shown, including the Swedol acquisitions for comparability reasons. Our top line revenue stood at approximately SEK 9.3 billion the last 12 months, including Swedol. This basically means that we have been losing approximately SEK 200 million per quarter in revenue compared to last year, which is then related to the effects from COVID-19, and the demand side restraint from certain customer groups, as we had mentioned. Despite this, our EBITDA margins have been kept on level, only 1.2 percentage points below last year.
This is turning due to the fact that we have decreased our cost base with some SEK 160 million compared to last year, like for like, out of which SEK 150 million is personnel-related expenses. Our financial position is strong in relation to EBITDA and adjusted for this accounting principle effect, our net debt to EBITDA stood at approximately 2.4 by the end of the period. Cash and cash equivalents, including unutilized granted credit facilities, total approximately SEK 1.1 billion at the end of the period. Related to our other financial objective, our return on equity was 10%. This measure is, of course, affected by the restructuring reserve as this quarter. The equity to assets ratio was 38% at the end of the period. Going back to you, Ulf.
Thank you, Niklas. If we turn to slide 13, as you can see over the course of these last three years, we have concluded 12 acquisitions with some SEK 4.3 billion in analyzed revenue in line with our strategic focus areas. We're happy to see that the acquired units add a lot of energy and new opportunities to the group, especially the last merger and acquisition of Swedol. If we then turn to slide 14, we have now adapted our three main focus areas, and we, of course, as we speak about the integration and merger of TOOLS and Swedol, is one and the most important one. The second is, of course, to continue to develop and improve all of our business companies, as well as mitigate the COVID-19 effect. And as number three, acquisition-driven growth strategy with business area components and services.
We will continue with our initiatives in M&A, also going forward post the Swedol acquisition. We have a strong financial position, and we're increasing and building a good pipeline in the business area, where we focus a lot of our M&A activities going forward. If I should give you some final words before opening up for Q&A, as we, Momentum Group, put another quarter behind us, it's actually the 14th as an independent company, and it is an entirely different group than one we started with, and we will continue to grow and right-size our businesses in order to reach our financial goals. Please open up for Q&A.
Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. Again, may I remind you that if you wish to ask a question, please press zero one. Our first question comes from the line of Karl- Johan Bonnevier of DNB Markets. Please go ahead.
... Yes, good morning. It would be great if you could start off to get a little better feel for the geographic development and the challenges you see in the different markets and within, say, the growth challenge you saw in the quarter.
If you look at the business area I'm representing, it's been especially tough in Norway, and as we've communicated, its larger customers, and especially in the industrial sector, have had the toughest time. Small and medium-sized customers have shown a great resilience, and as in for many other businesses, we can see that is reporting. So it's the same picture for us, larger customers focusing on the industrial side.
When you look at those larger customers, it's more their demand level than that they have, say, shifted toward competitors, so to say, or something like that. So they have maintained, so to say, your share of wallet or something like that in this market?
Both, but I mean, mainly their demand. But as I communicated, we are not happy with our own efforts in the market. We need to do more. Bear in mind, we are in the middle of a gigantic change of our business, reorganization. We are forming a new business area. But as we speak, I think we need to do much, much more in the market.
When you look at this, the monthly pattern you mentioned, Ulf, as well, the 14, 11, seven, is that... Say, if you had been fully focusing and been able to do, say, a market kind of development instead, how do you see your performance being as an index score towards the market, or how should we see it?
I think you should see that July and August was very slow, and due to restraint from visiting and a lot of people having semester home semester, I think if we had a normal, it would not be down those percentage units. But I think September more reflects maybe the new normal.
And that is the speed we should, you see as well, going into October, the first week of development?
I would say around that figure, yes. But of course, it varies between customer segments, between business areas, and also if it's OEM or MRO.
Excellent. And Clein, a lot of questions obviously on the integration project. It would be great if you could help me with some sort of timeline for the key events looking forward. Obviously, you have, say, all the management positions now dealt with on the 1st of October. You have given us the ERP integration for Finland in Q1 next year. What if you could, say, detail other events when you feel that you have come through the store integration process, maybe the salesforce integration process, maybe the logistic systems when you have done the assortment integration, how does it look from a timeline perspective?
We have communicated. It will take some time. I mean, it will be quicker, of course, to co-locate stores, especially in relation to the structural reserve we have set up now. So that will be fairly quick. When you talk about external suppliers, that is, as I said, hundreds of thousands of articles from thousands of suppliers. Of course, you focus on the biggest ones, and they are not thousands, but that takes some time. We need to renegotiate the terms and conditions from our Far East suppliers or other suppliers when it comes to private label, own brands. And then what takes the most time in from an assortment perspective is to get in the own brands into the customers.
So our bigger customers, industrial customers, where you need to have a decision forum somehow to accept a new brand, it's not just to throw a new product into the shops and everything will work. The logistic structure in Norway, we're in the middle of, and it's running well. And in parallel, we're looking at how will the logistic structure be for the BA going forward. We have many central warehouses. We need to find a good way to have an efficient logistic setup. But as I said, initially, the ERP systems will be key to the really efficient organization we would like to be and to bring out the synergies we can see, and then we'll first start out with Finland in Q1 2021.
And then you mentioned Sweden comes the year after, and then Norway to finalize it the year after that, looking at ERP.
Exactly.
The logistics project in Norway, that is something, I guess, that is a little quicker on the timeline, given that, as I understand, Swedol didn't really have a central warehouse in Norway ahead of this.
We had one in the Oslo region, which was when we got from Univern when we acquired Grolls. So we had a central warehouse. But now we are looking into how the logistics setup will be. We have, as we speak, three in Sweden, [hitting back] at Örebro from old Swedol and Alingsås from TOOLS. And we are now looking at the logistics structure for the whole business area going forward. And as you know, we are extending the Örebro central warehouse to bring us a much better efficiency there.
When you're looking at, I guess, the external supplier kind of setup, is that something that should be the majority of it completed within the next 12 months, or is that something that should drag out longer?
... Well, to a great extent, the biggest suppliers we already have an agreement with, and we have a well-established way of working with our suppliers. We have a partnership set up, where we both bring a lot to the table, and that's well established, and these suppliers know what it means to be a partner to us. So the biggest external and most important external suppliers are already signed and ready, but it will take time, of course, because we come to the table with different assortments and different product offerings, and that needs to be harmonized, and that takes time.
Obviously. And then I guess as you now define the restructuring reserve to SEK 97 million, and if it's a specific amount, I guess the looking at co-location of stores, you have pinpointed exactly what you want to do, at least in that leg as well.
Exactly correct.
So if I turn this around, I think, Ulf mentioned it at the previous call, the target of getting up towards 10% in your margins in your business area, is it a three-year process? And listening to how you detail the different kind of actions that I guess will take it up towards those levels, it is still a three-year kind of scenario that we should be thinking about, or do you have some more granularity to it?
So as we communicated with a little disclaimer, who knows what the world and the market will be in post-COVID, but we have a good chance of reaching 10% in a three-year period, yes.
Excellent. And just to ask you as well, Niklas, looking at the strong cash flow, it seems like even with the current ERP structure, you have been able to at least weather the demand perspective quite well, looking at not sitting on the wrong things in the inventories and these kind of things, and adjusting inventory levels to demand, so to say.
Yeah, I mean, we—this is also, of course, a gradual shift. First, what we do is that we turn down the volume when it comes to purchasing, of course, and that's had an effect in previous quarters, and now we see that the inventory levels are falling into it. So we have a reduced inventory now, and that is, of course, something, one of the KPIs that we really monitor, of course. But it's also important to have the right assortment and right stock. So we have to have some a stable good level of personnel that we are focusing on also, of course, increasing sales going forward.
Excellent. And one final for me, just looking at the acquisition potential in components and services, obviously, it's more interesting one in the quarter for the SKF operation. Is there a good pipeline already established there, so we could expect a couple of transactions to happen already in the second half of this year, or is that more of a long-term aspiration?
No. Since the first of April, when I handed over to Clein, I've been working together with Niklas and other people to visiting companies and building up the pipeline. And hopefully, we have a couple of prospects that we could sign in the coming three to six-month period.
If you take the little longer view, like Clein did for getting to the 10% margins in the Swedol TOOLS operation, what kind of size do you think components and services could be in three years time? Is it possible to double the size of this operation to get, let's say, a little more up towards the same level of comparable of doing something similar to TOOLS and consumables for the TOOLS profitability of the group, or is that too ambitious?
My own ambition is to double it in three-year period and above that, but of course, it takes two to dance, so there is a lot of good companies to acquire, but they also need to feel that we are the best fit for them. But my ambition is to close the gap between the turnover between the business areas. And I think, as you say, I think the first thing is to double it, and hopefully, we can do more than that. That's my ambition.
Excellent. Sounds very promising. Thank you very much, and good luck out there.
Well, thank you.
Thank you.
Thank you.
Our next question comes from the line of Mathias Montgomery of Carnegie Fonder. Please go ahead.
Hi, guys. Hope you're all well. Just a few questions, and Clein, if we continue to see a couple of challenging quarters with a weak top line development, and assume that that's followed by a period without any substantial pick up, do you still think the 10% EBITA target within three years time is reasonable, or does that target include a better top line performance?
The line is a bit bad, but what we've said, one disclaimer is the COVID-19 situation, and the other one, which I hope I've been recently clear on, is that we are not happy with our own development. I mean, as we've talked in the board, I mean, the actual integration activities, I'm not so worried about, but the underlying business, what is our traction out in the market? That's what we need to step up and do better. So if we can't come back to the growth track, then, of course, it's a totally other story. I think we are getting into this with a very good self-confidence, and we know how to do it, and we've done it before, but we need to grow.
If a business like this, if you don't grow, you will not be able to achieve those levels.
... That's clear. Thanks. And, and Niklas, could you just come back to working capital improvement during the quarter? Is this sustainable and will continue to improve, or is this as good as it gets?
You mean the working capital situation or?
Yeah.
Okay. Right. Well, I mean, over time, if you—I mean, you have been following us, you see that in worse times, we have a tendency to decrease our working capital, and in better times, we have a tendency to increase the working capital. So of course, the top line is a good denominator of the shifts that we have. But beyond that, of course, what we are doing, increasingly now, is that we are, of course, working a lot with efficiency measures, and that is also, of course, one of the driving factors behind this integration work that we see, that now we have a larger volume, and we have operations that can basically go on each other when it comes to assortment.
So we see that that will also have a positive effect on the inventory levels going forward. So efficiency measures will take down the sort of normalized level, but of course, if we have an increased volume, that everything else will increase the need for working capital.
Mm-hmm. Mm-hmm.
But, you know, when we have our targets when it comes to profitability, working capital, 45%, and that is something that we aim to achieve in basically all of our operations, of course, also going forward.
Mm-hmm. Mm-hmm. All right. Thanks. What's a reasonable annual CapEx going forward after the logistics shuffle is finished?
Well, we haven't sort of disclosed the normalized CapEx level, but of course, what we see now is that we are investing in the Örebro facility, and that will take a couple of more quarters to sort of to timeline. And then, of course, we have, as Clein mentioned, the ERP and everything, and we are... will have an effect on the CapEx level going forward as well. So I wouldn't say sort of an estimate for the CapEx level, but I think that what we are seeing now is a sort of a single effect on the Örebro facility, and that will we will come back to lower levels, but it will be higher than the old Momentum Group, of course, that we had before.
Mm-hmm. Mm-hmm. And just finally, from my, the restructuring reserve, could you just, elaborate a little more? Are you expecting to use it, or is this just a precautionary action?
No, we have identified actions needed to take, be taken, and these are the related costs to take those actions to have a good chance at arriving at the 10% we've set. So it's not a buffer, it's more for actual activities.
All right. Thanks, guys. That was all for me.
Thank you.
May I remind everyone that if you wish to ask a question, please press zero one on your telephone keypads.
We got a question by mail to us sitting here in the middle of the call, and the question was if the new TOOLS at Swedol is more cyclical than old Swedol, and the answer is yes. I mean, the more focused on one customer segment than also larger customers. So the easy answer would be yes, but that's also one of the good things we saw prior to this merger, that we have different structures of customers, and we have different sales channels, and we have different competencies. So the answer is yes, but that's not necessarily bad.
There are no further questions on the telephone lines at this time. Please go ahead, speakers.
Okay. Then on behalf of Clein and Niklas, I would like to thank you for taking your time, and please do not hesitate to call or email us if you have any more questions. Thank you very much.
Thank you.
Thank you.