Ladies and gentlemen, welcome to the Momentum Group AB Q4 reports 2019, 2020. For the first part of this call, all participants will be in listen-only mode, and afterwards, there'll be a question and answer session. Today, I am pleased to present CEO, Ulf Lilius, and CFO, Niklas Enmark. Please begin your meeting.
Thank you. First, I would like to say welcome to our web meeting, presenting our financial report for our financial year 2019, 2020, together with my colleague, Niklas Enmark, Executive Vice President and CFO. If we move to Slide 4, I will give you some highlights from the quarter. The COVID-19 pandemic had limited effect on the group operations during the fourth quarter. It mostly affected the two last weeks in March. The industrial market in Norway continued to display a stable performance during the fourth quarter. In Sweden and Finland, we could sense a little bit weaker sentiment in some customer segments. We continued to improve our efficiency and profit, which resulted in an increase in EBITA of 10% to SEK 91 million, compared to 83 previous year, as well as improving our cash flow.
The corona will affect the group during the coming months, and actions are taken continuously to mitigate the negative effects. Decentralized responsibility with increased coordination within TOOLS and Swedol in three countries are in focus for the coming financial year. The group's financial position is strong, so at the same time, we're continuing to evaluate attractive acquisition opportunities in the business area, Components & Services, in order to strengthen our position. Move to Slide 5. The end of the fourth quarter was characterized by somewhat lower activity among customers, not only due to corona, but trends varied significantly between different customer segments and product areas. We had some negative effects on sales of winter workwear due to the relatively mild weather. In Norway, the demand for in the oil and gas sector remained favorable, which is an important customer segment for us in that country.
In total, for the quarter, we continued to improve our EBITA margin, as well as in percentage and numbers compared to last year. This was mainly due to increased cost margins and efficiency actions taken. Since the spin-off, we have managed to increase EBITA every quarter, which is—this is the thirteenth consecutive quarter as we improve EBITA. We move to Slide 6. I'll give you some headlines on Business area, TOOLS and Consumables. As you can see, all of the operations in this business area noted a negative effect on sales during the end of March, even if the effect of total revenue during the fourth quarter of financial year was relatively limited from corona. The relatively mild winter had a larger negative effect on sales of the winter workwear.
For the business area, TOOLS and Consumables, the sales decreased by 3% organically during the quarter, but we had a stable demand in Norway and Finland, but of course, then weaker than normal in Sweden. If we look TOOLS Norway, they continued with the favorable trend, primarily in the oil and gas sector, construction, civil engineering, as well as public administration. Expansion and commissioning of logistic functions for TOOLS Norway resulted in extra cost of approximately SEK 2 million for the operation during the quarter. As a total, we have spent SEK 14 million for building the new logistic hub, and it's now complete, and it's being continuously optimized, and the share of direct deliveries to end customers is gradually increasing.
The revenue for TOOLS Finland rose by 1% during the quarter, compared with the preceding year, and we had an increased sales primarily to small and medium-sized customers. There was a positive trend in all product groups up to the end of March. The personal protective equipment business acquired from Lindström Group contributed to revenue and earnings during the quarter. The sales for TOOLS Sweden decreased during the quarter compared with the preceding year, partly due to the enduring cautious attitude among industrial customers, and this could be seen even prior to the effects of the corona pandemic. At the end of the March, we also had, of course, lower sales of winter clothing.
The efforts to increase profitability, including increased cost efficiency, sales promotion, changes in purchasing, are proceeding according to plan, and that contributes to a higher gross margin and lower cost in TOOLS Sweden compared with the preceding year. In total, we improved the result in TOOLS Sweden compared to last year. The sales in the group niche companies within workwear and promotional products was, of course, negatively impacted by the weaker demand, both for promotional products and winter clothing due to the mild winter, but the earning continued to be stable. If we move to Slide 7, Components & Services. The sales in Components & Services business area increased by 3% during the fourth quarter of financial year.
Sales to the pulp and paper, steel, and automotive segments remained generally positive during the quarter, despite negative effects on demand due to the customer actions to mitigate the COVID-19 effect. We also had a positive development for our companies working with service and repairs during the quarter. Measures to improve cost efficiency and customer cultivation had a positive effect on the contribution rates, and the operating profit rose during the quarter. The profit rose by 23%, and the margin was 13.7% for, and for the financial year, the business area increased the revenue with 5%, the operating profit by 15%. This is the best performance year since the spin off, and also in the history of the company, which was founded in 1997 by merging several companies.
Focus on the business area, Components & Services during this year will be continued focus on profitable growth, both organic and acquiring. We go to Slide 9. I give you some of the financial year. Yeah, as for all of companies, of course, the financial year was characterized by somewhat lower activity among customers, but trends varied significantly between different customer segments and products. It is nevertheless encouraging to see the revenue growth in Norway, where demand in oil and gas sector remains favorable. It is also positive that our acquired businesses have contributed by around 4% to revenue growth so far. The corona had limited effect on revenue for the whole year, but of course, a negative effect at the end of March, especially the last two weeks of March.
The operating profit for the financial year includes items affecting comparability of SEK 14 million, and its cost arising from the acquisition of Swedol. Adjusted for these items affecting the EBITA rose by 6% for the whole year. Additional extra cost, which I mentioned of SEK 14 million, just pertaining to the expansion of the logistic function into Norway. Of, as I mentioned, SEK 2 million arrived during the fourth quarter. This also had a negative effect, but now we are ready to go. Thanks to our focus initiatives, our cash flow from operating activities strengthened during the quarter and reporting periods, even adjusted for IFRS 16 effect. As you also can see, and we released this morning, the board of directors proposes that no dividend is paid out for the financial year due to the current situation with COVID-19.
We will continue to focus on improvements, both in efficiency and profits, including to mitigate the effects of the corona. We also have a full focus on speed in the merger of TOOLS and Swedol, as well as acquisition-driven growth in the business area, Components & Services. We move to Slide 10. Niklas will give you some of the cash flow.
Thank you, Ulf. As we have expressed before, we have a strong focus on cash flow in the group, and this is the last two years, we have worked diligently with working capital optimization to increase focus on performance measures, but also by doing specific investment, for instance, in the buildup of the logistics hub in Norway, as Ulf mentioned.
Over these last two years, we have also reduced our CapEx level in fixed assets, basically halving the level from two years ago to the current level of SEK 18 million for the full year, of which around SEK 2 million is related to intangible assets. The route to improved working capital come from a number of activities, spanning from inventory management, such as adjusting the ordering points to negotiation of customer and supplier agreement. Over the course of the year, we see that we have managed to increase our days of payables outstanding, somewhat increasing the positive spread that we have between supplier days and customer days. Also, our inventory turnover is just [under] four times.
During the year, we had a positive contribution from working capital changes of SEK 18 million, of which inventory related was SEK 15 million, and during the last quarter, we had a positive contribution of SEK 32 million from inventory reduction. For the full year, we then recorded cash flow from operating activities of SEK 505 million, compared to SEK 230 million the year before, of which around 105 million SEK was attributed to the fourth quarter. Also adjusted for the transition to IFRS 16 effect, as Ulf mentioned, that was approximately SEK 212 million plus for the year, we were able to increase the cash flow from operations.
Looking at our cash conversion, that is cash flow from operations, including net investment in relation to EBITDA, we stood at 84% for the year, up from 65% last year. I would also like to comment on our cash flow from financing activities, as you see here. As you know, our Q4 report is excluding the effects of the Swedol acquisition, which is consolidated as per April 1st, and that is with two exceptions. First, our financial position is affected by the fact that we had a drawdown on the term loan for the cash offer in March, increasing our liquidity and financial debt momentarily, increasing both by close to SEK 1.2 billion, as you can see here.
The other effect you see in the balance sheet, that's not here in the cash flow, and that is the increase in equity due to the registration of the issue of shares, also at the end of the March value, that close to 1.5 billion SEK. If you turn to page, Slide 11, you see some selected performance measures. And as Ulf mentioned before, our profit expansion, measured on EBITA level, was 10% for the fourth quarter. For the reporting period, EBITA increased by 6% to 338 million SEK. This means that Momentum Group, from the listing in 2017 up until this quarter, has been able to increase its EBITA each quarter compared to last year.
Looking at the drivers of the increase in EBITA margin over these last three years, about 1 percentage point comes from gross margin increase and approximately 1 percentage point from reduction in cost of sale. Our financial position is strong. As I mentioned, the effect from the Swedol acquisition is netted in our operational natural position, which stood at SEK 166 million at the end of the year. In relation to EBITDA and adjusted for IFRS 16 effect, our net debt to EBITDA stood at 0.5 by the end of the year. This will, of course, change after we consolidate Swedol, which I will come back to.
Cash and cash equivalents, including unutilized granted credit facilities, a total of SEK 1.8 billion, of which close to SEK 1.2 billion was then restored for the acquisition of Swedol that closed on first April. Related to our other external financial objective, our return on equity was 16%. The equity asset ratio stood at 48% at the end of the financial year. Our internal profitability ratio, profit over working capital, was 28% for the last 12 months, measured on EBITDA, and increased for the business area Components & Services, thanks to the increase in margin, whereas the profitability dropped somewhat for the TOOLS and consumable side due to the decrease in profit margin.
Coming back to the Swedol acquisition, this is of course, a very important acquisition for us, that will have an impact on both operational and financial metrics. We also, of course, understand, that this is of interest for you, and to understand what the impact on our, on our P&L and balance sheet will be. What we are currently doing is to consolidate the Swedol business in line with what we expressed in the offer document released in December, this includes done a preliminary PPA, refinancing of debt, et cetera. The new business area will be reported externally for the first time in the interim report for the first quarter of this financial year, which will be published on July 16th, 2020 .
In addition, we have also decided to report the new business area, as well as the group's pro forma financial information for the preceding year, the, the ones that we have just reported on, in a separate press release ahead of this report, in the beginning of July.
Niklas, if we move on to Slide 13. For some of you that have followed us since the spin-off, we have had our focus in three main areas: change and improvement initiatives and TOOLS, continued development and establishment of niche offerings in current operations, and as a third, acquisition-driven growth strategy with focus on niche acquisitions. Over the course of the, these last three years, we have concluded 11 acquisitions with some SEK 650 million annualized revenue in line with those focus areas.
We're happy to see that the acquired units add a lot of energy and new opportunities to the group. We will continue with our initiative in M&A, also going forward post the Swedol acquisition. As I mentioned, we have a strong financial position, and we're increasingly building a good pipeline, not at least in the business area Components & Services, where we see we will focus a lot of our M&A activities going forward. So Slide 14. In mid-November, we took, as you know, a strategically important step through the offering for Swedol. Together with TOOLS, we are creating a stronger partner in the market. We are confident that the combined, the combination of TOOLS and Swedol complementary customer focus, sales channels, will help our two companies to become an even stronger and more attractive business partner together.
Together, we will be able to strengthen our product range, procurement channels, and logistics solutions. We will be able to increase the proportion of own product brands and develop an even better service, offering new digital solutions. The merger is logical from an industrial perspective, and will create favorable opportunities to continue to generate value for our owners. If we turn to Slide 15. Yes, we will now adapt our three main focus areas in the short to medium term in order to take the next step in our development. As number one, of course, the integration and merger of TOOLS and Swedol in the business area. The ambition is to improve the EBITDA margin of the new business area to 10% over time from the 6.5%, which we have as a baseline, rolling September 12th, 2019.
The second focus will be continued development and improvement of efficiency and profit in all group companies, as well as we mitigate the COVID-19 effect. As Niklas mentioned, we have, we have been able to increase our gross margin and lower our cost of sales percentage. The third, as I have mentioned, the acquisition-driven growth strategy within business area Components & Services to build it even stronger, both in revenue and EBITDA margin. I will give you some final words before we open up for Q&A. As we, at Momentum Group, put another financial year behind us, a third as an independent company, it is an entirely different group that we one we started the year with.
I will therefore welcome all of our new Swedol colleagues to the Momentum Group, and I'd also like to extend my deepest thanks to all the dedicated employees across the entire group for your hard work during the 2019, 2020 financial year, and also to our customers and business partners, as well as you investors, for your continued confidence. We look forward to continuing our development and improvement journey together with all of you. So please open up the Q&A.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. So once again, that's zero one to ask a question, or zero two if you need to cancel. We have one question in the queue so far. That's from the line of Karl-Johan Bonnevier of DNB Markets. Please go ahead. Your line is open.
Yes, good morning. A couple of questions, if I may. If I look at your last slide, looking at the focus areas going ahead, obviously, there is a lot of questions regarding Swedol, how you see that integration and how that potentially can balance the challenge on COVID-19 that you see out there for the moment. So if you take it in a bit, so integrating Swedol, do you see a lot of costs that is supposed to hit the profit and loss account during this year? I haven't seen any guidance for that historically.
So I didn't really. Yes, Karl-Johan, did you ask how the business area, how we mitigate the COVID-19 and how we could be effective?
No, no, let's start with, say, the integration of Swedol. How, what kind of cost do you relate it to that, looking at the current year?
Ah, okay. Now I understand you better. As we have put up the project, and we have working in some work streams. So we have a customer offering logistics and IT, and then, of course, supporting activities. But in every work stream, we are now looking into, as you ask for, how long time will it take us to get out the synergies, to get us to 10%? How much will it cost, and will we have some investment? And that work will be progressed and presented in June for the board. So we are not ready of this work, and that is, of course, due to the COVID-19 effect.
We have not been able to meet and greet physically as we would like to do, but we have web meetings and digital meetings every day.
When you look at, yeah, I know, it's hard to. So basically, in June, we should be able to, or when do you believe that you can communicate something to us in the market?
Yeah, in the first quarterly report, then we're ready to release.
Okay.
Yeah, it's up to the board, of course, what they want and like to release, but we will be ready to shoot in the first quarterly release.
Excellent.
So then-
We wait that way with great interest.
Yeah. In July.
Yeah, mid-July.
Yeah.
When you look at the COVID-19 impact, you indicate that you had a bigger impact coming up towards the end of the quarter. Could you give us some sort of idea about the kind of challenge you now face here in, say, during April or since the quarter ended? How many employees that you might have in this kind of short-term employment programs or something that gives some color about the challenge you are trying to mitigate for the moment?
Yeah. I was along 2008, 2009, in the group. In the group at that time, we lost, for the whole year, 10% in sales in the Components & Services, and we lost 25% of sales in the other business segments, TOOLS and supplies. At that time, the group halved the EBIT, losing that amount of sales. So our ambition is to mitigate around that sales numbers in 10% and 25% in both business areas. And our challenge or our aim actually is to not lose any EBIT. That's our aim. But of course, that's the guide.
That's an interesting indication. But if so, if you feel that you are seeing something for the moment that averages down 20%, and you feel that you still have the cost flexibility to meet that?
Yes, that's correct. As I said, between 10% and 25%, the sales decrease is very much alike 2008, 2009 at this time. We, of course, have meetings every week where we're looking at the sales figures, and we do mitigating effects. Of course, in Norway, they had this flexibility to release people or, or shorter, go down in work time. In Norway, we saw it very early due to the effect of closing schools and childcare. Now when we have this possibility in Sweden, we use that as well, and we use it in Finland. I think we have more flexibility to mitigate the effect than we had 2008 and 2009.
So-
We will do everything to do profit protection, but not to destroy the future of the company.
As you know, Gregory, if you look at the cost base that we have, the largest asset and also the largest cost that we have is the personnel, then, of course, and thanks to what you two did this change in sort of view, especially in Sweden, I mean, there are more easy and more short-term possibilities to, of course, reduce the personnel costs. And that is basically what we have focused on, short-term work and et cetera, et cetera. But basically what we are doing is, of course, that we are looking at each item in trying to see if this is nice to have, or need to have, in relation to this mitigation effect that we are working with them.
And as we have said, also, I mean, we think that what we are doing now is that we are very much working on this on a very activity-based level. So the activities are very much done out there in the operating entities, where they have a good familiarity with sort of the customers and then suppliers and the personnel. So, and I think that our model here with a very decentralized model operation, with strong commitment to safeguarding profits, then that's a benefit for us, as we have seen that the effects have come quite rapidly out in the different businesses. Yeah.
Obviously, since the start of April, now, also, Swedol is part of your, your universe, so to say. When I look back at Swedol in 2008, 2009, they obviously seem to have an even higher resilience than the old momentum operations back then. Is that your impression now that you have taken that over as well, that that is a good resilient operation, even in this kind of market environment?
I mean, it's a bit too early to say that for sure. But I think that if you look at what we are doing in relation to sort of the different businesses, we see that they are basically pursuing the same activities that we are doing.
Mm-hmm.
And that, of course, is very reassuring for us to see that they are sort of on the ball immediately, where they see also some kind of deterioration when it comes to demand. And of course, their setup is a bit different from the two setup, but I think that their resilience is good. But it's too early, basically, to make any sort of strong commitment to where to land. And as we have expressed, I think it, I mean, it's a general conclusion, of course, for every business. I think that the effect will much be depending on how deep this niche will be and basically how broad it will be. So that's the ten thousand dollar question.
When I look at the service operation, obviously very impressive margins in the quarter, and how much is that realization coming out of the acquisition that are not the contribution level where they should be, or is it the old operation that really is the main source for the improvements? It's two things. It's the old operation, and it's the last acquisition of ETAB, which is performing very well, due to the fact it's more hydraulics that we are entering. We are also scaling up that businesses within the old operation, so to say.
Mm-hmm.
So it's both organically, but of course, EBITA is pushing up the margin as well.
Yeah.
And you are also-
Yeah, sorry.
No, no. Just continue.
Okay. Yeah, just to add to what you just mentioned, we have sort of made a commitment to ourselves and our customers that we will keep the business going. And I mean, lots of what we are supplying here are sort of critical components for keeping the production up, from everything to such customers, such as LKAB, mining related to also the vehicle manufacturers. And we are not selling components to the vehicles, we are selling components to the manufacturing, of course, there. And we see that we have been able to keep our part of that sort of contract. We have kept all our businesses open, and we have a very good ability to supply the needs of our customers.
I think that we have made a very strong gain here, that we have sort of hit the point before that it is really materialized. We have been able to keep up our pro-customer promise very much here, even though this last period has been tough. I think it's been tougher to many of our competitors.
Finally, I see in your mission statement or your strategy focus statement that you are still signaling more acquisitions to come in, particularly Components & Services. Is it possible to conclude acquisitions in the current environment, or is it a wait and see over the next maybe one or two quarters before the pipeline can start to bring new targets in?
No, it's not wait and see. We are ready to aim and fire. We, of course, have dialogues going on, but it's harder to meet physical, and that's why maybe it would be lag, but we're d ialogue is ongoing. It's not wait and see.
I think-
I think it's a lot of opportunity that also can arise from this or in this business area for us.
Yeah, if you take a view, say, so say two-four years out, what, what would be, your ambition to, to grow Components & Services into? Obviously, the TOOLS and consumable side is, yeah, an enormous boost from the Swedol acquisition.
I mean, if we look to double the revenue, it normally takes five years, but we will try to double it in less than that. That's our ambition.
Excellent. I'll stop there and allow others to ask questions. Thank you.
No problem. Thank you.
Thanks.
Thank you. Once again, if there are any further questions, please dial zero-one on your telephone keypads now. Okay, there are currently no further questions coming through at this time.
Okay. Thank you all for listening in, and to you who will listen to this later on, please do not hesitate to contact us if you have any questions. Thank you very much. Thank you.