Ladies and gentlemen, welcome to Momentum Group AB's Q2 report 2019, 2020. Today, I'm pleased to present Chief Executive Officer Ulf Lilius and Chief Financial Officer Niklas Enmark. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a Q&A session. I will now hand over to the speaker. Please begin.
Thank you. Could you please turn to slide 2? First, I would like to say welcome to our web meeting, presenting our interim report for our first six months of the 2019-2020 financial year, together with my colleague, Niklas Enmark, Executive Vice President and Chief Financial Officer . We turn to slide 4, we will go through some highlights during the quarter. The industrial markets in Sweden and Norway continued to display a stable performance during the Q2 of the financial year. In Finland, we could sense a little bit weaker sentiment in some customer segments. Also, we continue to improve our efficiency and profits, which resulted in an increase in EBITDA of 11% to SEK 80 million, compared to SEK 72 million previous year, as well as improving our cash flow.
Decentralized responsibility with increased coordination in conjunction with acquisitions is the focus for the rest of the financial year in order to improve EBITDA compared to last year. Slide 5, please. As I mentioned, the overall business situation has been quite stable, and we have increased operating profit in the quarter, even though the revenue decreased slightly for comparable units in local currency. In general, the business noted a more restrained customer activity, especially in August, and it looks like the holiday period was more extended than usual. Some of this was compensated for in our figures in September, but we feel that the activity level among customers is characterized by a more cautious attitude than before the summer.
I'm pleased to see the positive earnings trending to Sweden, created by efficiency gains as well as gross margin improvements, and the integration of the acquisitions made in Momentum Industrial has helped to increase their sales as well as their earnings in the quarter. Our operating margin increased compared to last year, and the profit increased by 10%. In EBITDA figures, it was 11%, and the corresponding EBITDA margin was 5.6% compared to 5.3% preceding year. Next slide, please. For the business area, TOOLS and consumables, the sales decreased by 3% organically during the quarter, mainly due to the business's increased focus on selected customer groups and product areas, even though acquisitions contributed. We have had a stable demand in Norway, but the start of the quarter in July and August was weaker than normal in Sweden and Finland.
The revenue for TOOLS Sweden decreased during the quarter compared with the preceding year, mainly due to a weaker start to the quarter than normal in July and August, as well as the business increased focus on selected customer groups and product areas with higher profitability. Order intake in September was favorable compared with the preceding year, and the improvement activities intended to increase profitability, including increased cost efficiency, improved sales promotion, and changes in purchases are proceeding according to plan and continue to contribute to higher gross margins in the operations compared with the preceding year. If you look in Norway, the revenue for TOOLS Norway increased somewhat during the quarter, with a favorable trend primarily in the oil and gas sector, as well as increased market shares.
Efforts to restructure the logistics function by establishing a regional logistics hub in Riddarnes continues, resulting in slightly higher costs for the operations during the quarter. In Finland, the revenue remained largely unchanged during the quarter compared with the last year. The development of the industrial market in Finland remained sideways during the quarter, and the business continued to prioritize customer cultivation in combination with robust cost control. The integration of the personal protective equipment business acquired from Lindström Group has contributed to sales and earnings. The restructuring work in Gigant is proceeding according to plan and gradually contributing to a reduction in cost and improved operating profit in the unit.
The group's niche companies within workwear and promotional products together generate revenue of approximately SEK 350 million yearly, and it contributed positively to the group's earnings performance during the quarter.
All in all, for the business segment, the operating profit rose by 12% corresponding to an operating margin of 3.3% for the business segment. Components and services, next, slide 7, please. Sales in the components and service business increased by 3% during the Q2 of the financial year. Momentum Industrial noted favorable revenue growth in all product areas and services, with a high activity level among many existing customers. Added by the acquisition of ETAB for the quarter Momentum, operating margins was around 13%. For the business area, the operating profit rose by more than 12. The focus of the business area, components and services during this year will be profitable growth, both organic and acquired. We turn to slide 8, and we can go through the reporting period.
The aim for us within the group is to create increased shareholder value over time by giving each business better opportunities to develop based on its own conditions. The first six months of the current fiscal year have been no exception. The reporting period has been eventful, and our development has been positive. With the spin-off, we have continued to take an important step in the improving journey for long-term sustainable profitability, and earnings performance has been positive every quarter. Momentum Group as a whole, EBITDA has increased by 6%. At the same time, we have improved our operating cash flow through the activities implemented to optimize the group's funds tied up in working capital.
But of course, we have more to prove in the future, and that is what we will continue to work for, with focus on decentralized responsibility in conjunction with increased coordination, primarily within the tools business. If we turn to slide 9, my colleague, Niklas, will give you some comments about the cash flow.
Thank you, Ulf. My name is Niklas Enmark, I'm Chief Financial Officer at Momentum Group, and as Ulf mentioned, we have a strong focus on the cash flow, with the ambition that the cash flow generation in our existing businesses can and will support our continued growth through acquisition on small to mid-sized companies, but also to fund our development-oriented investment. Positive to note, our cash flow from operations increased to SEK 128 million in the last quarter, with a positive release of working capital.
The reporting period, this number amounts to 202 million SEK. Comparisons to last year is, of course, somewhat holding, as we this year have positive effects from accounts changed accounting principles, in total 122 million SEK plus for the period and plus 67 million SEK for the last quarter. However, also adjusted for this, we see that we had a positive cash flow from all operating entities for the period, which marks somewhat of a change from historical periods where we normally have a weaker cash flow for the first half of the year, but just last year. If you turn to page 10, you can see some selected key ratios, and as Ulf mentioned, our profit expansion measured on the EBITDA level was 11% for the Q2.
For reporting period, EBITDA increased by 6% to 155 million SEK, compared to 146 million SEK the previous year. Related to our other external financial objective, our return on equity, that stood at 18% and measured on a rolling 12-month basis. Looking at our internal profitability ratio of profit over working capital, that reached 25% for the period, and this ratio is based on two components, basically, the EBIT margin and our working capital turnover, both of which was at the level of five, for the period. And as you can see, we have also added the EBITDA levels and the EBITDA margins in the table.
This is, of course, due to the fact that as we continue to grow the acquisition, EBITDA, EBIT level will be increasingly affected by amortization of acquisition-related immaterial assets. Our financial position is strong, with operational net loan liabilities of SEK 349 million . The increase during the year is due to dividends paid during the period, but also due to acquisition. As a note, I can also just comment that the financial net loan liability in the table includes the effect from IFRS 16 adjustments, whereas our operational net loan liability does not. Handing over to you, Ulf.
Thank you, Niklas. If we turn to slide 12, I will take you through the focus in the short to medium term, and this is the same three key elements that we have focused on since the spin-off.
Of course, as market conditions vary, we have to adapt and adjust our operations accordingly, which is facilitated by our close cooperation with our customers. Our overriding focus is still concentrated on change and improvement, initiatives and tools, continued development and establishment of niche offerings in current operations, and as a third, of course, acquisition-driven growth strategy with focus on niche acquisitions. If I give you some comments on the first one, change and improvement in tools. Of course, we are focusing on changing and improving tools, but streamlining sales by focus on increasing the number of customer visits. In our offering, we are moving against the core assortment as well as purchase direct from producers due to the development of logistic capabilities.
In logistics, we have established a center warehouse for tools in Sweden and Finland, and we are now implementing a regional hub in Oslo that will serve primarily as the first agenda 50% of our sales unit in Norway. The fourth initiative is to continuously adapt our local presence. We will continue to optimize our local presence for tools in the Nordic to change and streamline local sales outlets, focusing on industrial customers. Our customer focus is primarily against industry, civil engineering and construction, and the public sector. This means that we also adapt the assortment for these customer segments and our logistics setup.
This will enable us to a clearer and cost-effective logistic offering and purchasing, as well as the sales effectiveness. We will continue to work with focus on decentralized responsibility in conjunction with increased coordination, for example, logistics and purchasing.
The second one, continued development of establishment of niche offerings. Of course, we will continue to strengthen us in our concept within occupational health and safety, primarily in tools, and the workwear companies, and increase operational safety for industrial customers in Momentum Industrial, which was also concluded by the acquisition of ETAB. So if we turn to page 13, Niklas will go through some of the acquisition we have made since the spin-off. Right. And as a third cornerstone of our strategic focus is to envision them to grow the group through acquisitions.
From the start, as a separate company, our efforts have been dedicated towards a selective M&A strategy, with a purpose to support the transition of TOOLS, broadening of our offering within existing businesses, and to add new interesting and profitable companies to the group. If you, as you see on page 13, over the course of these last two years, we have concluded 11 acquisitions with some SEK 650 million in annualized revenue. If you turn to page 14, you see that this acquisition can then be put into the strategic focus areas that we work with. And supporting the first strategic focus, change and improvements in TOOLS, we have made the acquisitions of TOOLS Knutling in Sweden, and also TOOLS Lervoll in Norway, Lervoll being one of the remaining partners in Norway.
In line with our second strategic focus, continued development and establishment of niche offerings in current operations, we have made some acquisitions, and the last one was done, as we've mentioned, the acquisition of ETAB, a market-leading player within industrial hydraulics in Sweden. We have also started building a new group of companies working in the field of workwear and promotional products through niche acquisitions of TriffiQ within mark and return process, and also a couple of months back, Company Line, which together with our own previous company, Mercus, is now near SEK 400 million in revenue with good profitability. We will continue to work with our initiatives in M&A. We have established a strong pipeline of 50+ companies, where the ambition is to have ongoing discussions with a handful of candidates at any given time.
As we have mentioned before, we look for profitable companies with a strong local market position that can be further developed. We target companies that have a clear end customer focus in the Nordics. Yes, if we turn to slide 15. Of course, these three main focus in the short to medium term, change and improvements, initiative and TOOLS , continued development, niche offerings, and acquisitions, is to, of course, to reach our financial targets. And it's earnings growth of at least 16% annually over a business cycle. And as Niklas mentioned, we more and more measuring EBITA, due to the fact of the amortization of the companies we buy. Profitability to achieve a return on equity of at least 20%, and that is, of course, combined with the internal target of profit working capital of at least 45%.
Of course, also in conjunction with our dividend policy of 30%-50% of earnings per share over business cycles. So if I will give you some final words before we open it up for Q&As. In conclusion, our Momentum Group's operating margin has improved since the spin-off, and the group's cash flow and financial position are stronger than they have been for a long time. We have a solid foundation to carry out further corporate acquisition and boost the profitability of both our business areas through the improvement efforts we're implementing within the group.
Therefore, we will continue to take action in each company based on their unique situation and opportunity, and our aim for the rest of financial year is for all operations to continue improving their profitability and find the correct combination to reach our internal profitability goal of cost to working capital, larger than 45%. Decentralized earnings responsibility and coordination within tools, combined with customer proximity, remain a high priority in our daily work. So we can turn to slide 16 and open up for some Q&A.
Ladies and gentlemen, if you would like to ask a question, please press zero one on your telephone keypad now. We've received the first question. If you could briefly introduce yourself, your line is now open. Please go ahead. You are currently the only one in the queue. Perhaps you're still on mute?
Okay . Sorry, I didn't pay attention to the announcement. This is Karl-Johan Bonnevier at DNB Markets. So, a couple of questions, if I may. So then if I'm the only one in the queue, I might make use of it, so. Looking at Tools Sweden first, and also this change and improvement program they are doing. Looking at the decrease of 7% in the quarter, how much of that would you say is related to this optimization of product ranges and you walking away from volumes rather than, say, striving to keep everything?
Yeah, I would say most of it, I mean, maybe 80%, but then, of course, you gain some contracts, and you lose some contracts customers in during the period.
When you look at that process for Tools Sweden, is it something that you are now accelerating again, or is it something that is coming towards the end of this pruning that you have talked about?
It's coming to the end, but of course, we have more to do, core assortment, of course, where we get products for the customers that they ask us to get for them.
So if you look at... Just coming back to what I tried to get, grasp an understanding of is the, say, as we saw the most little of an acceleration in the decline in Tools Sweden, again, in Q2, compared to at least what we have seen in the last two quarters.
Yeah.
I guess the feeling was that we were coming towards the end of the pruning, but do you feel that we are taking a next step here, so we should expect this kind of declines to continue as you optimize the product range?
Yeah, some decline, but that of course will help us to increase the EBIT level. I mean, TOOLS Sweden is the company within the TOOLS has made the most accelerating on the EBIT level during the quarter and during the year, so.
Exactly. Yeah, there's always communicating, communication problems, I guess so.
Yeah. Tell everyone, sorry, can I just comment? So as we mentioned in the report, I think one important thing to remember is that we actually saw quite a holiday effect in Sweden the first couple of months, July and August, where we actually had quite low activity level, and that ran back in September time. So we had seasonality effects during this period that was more sort of accentuated for TOOLS Sweden than basically any other company, I would say also. That's true.
Excellent. So if to fully grasp that, then, if we look into the second half of the year, obviously, we don't know where PMI and all those kind of effects will take us. But when you look at the effective measures that they are doing in-house, taking out volumes that you don't feel that you are supposed to do long term, are we coming towards the end of that, or is there still a lot of time to go for it?
We're coming to the end of that.
Excellent. Looking at the inventory hub in Norway, you indicated there was still some excess cost coming in to setting up that structure. But obviously, it was quite a good decrease compared to the effect you saw in Q1 on that. Do you see also going into the second half of the year, are we coming through this, and now it's supposed to be, let's say, more of an efficiency generator than a cost, a short-term cost problem?
Yes. We will close the project at the end of December. The project has been prolonged, and it's due to a couple of reasons. One reason is that we decided to extend with VMI solution and some automatization in the warehouse. We invested in those two things, and that prolonged the project, but it also gives us an opportunity to serve more, a larger region than we were from the beginning. The second is that the Logistic Director and the responsible manager for the logistic hub left the company. We got some new persons in to drive the project.
So now it's up and running, and we will also, of course, during this time, make some adjustment within the ERP, so it will not be possible locally to do some things that they have been able to do before, in order to make them to use the hub.
Excellent. Then just coming back to say more of a general feeling, obviously, we have seen PMI statistics going down quite dramatically in our space out here, and those numbers are volatile. But how do you see those correlating with your own business sense, so to say, out there, and what you are seeing from customers and in your discussions?
It's mixed. It's more, I would say, sideways feelings we got, but of course, some segments is plus, and some is down. We could feel that, of course, the mining and construction and the automotive has been down, but we could see strong numbers in September. But we could see a small decline in pulp and paper segment, for example, so, and the food and beverage is doing pretty well. So it's mixed. Mixed signals, mixed in different countries, but still it's somewhat sideways from a high level.
When we look at components and services in this respect, I guess they seem to have a fantastic business environment for themselves out there for the moment, looking at the margins levels you are managing to get out of it. And it also looks like your M&A transactions in that space has really come up and now delivered up to their full potential, if you're looking at the Bremer transaction, these kind of things. Is that the right kind of perception of it?
Yes, it is. And also the last acquisition of ELFA, which is a niche specialist within hydraulics, and we have a supplier in partnering up with, who wants us to be doing more of that all over Sweden. So we're also accelerating that partnership with them.
When you're looking at expanding into the other geographies in this space, do you have any new openings there?
Yes, we have actually started to made a geographical expansion in Norway, and we have started in the Oslo area. So we said, "Don't let's start all over Norway. If we can't be good in the Oslo area, we can't be good in Norway." So we're doing it more the Japanese way, taking some local geography, be good, and then we expand from that.
When you look at the Norwegian market opportunity, obviously starting in Oslo, then over time, I guess this area should have the same kind of relative potential as you have seen in tools and consumables for the Norwegian tool chains, yes?
I didn't really get what do you mean by that question?
Yeah. No, if you look, if you look at the long-term potential of the getting Momentum Industrial into Norway in a proper way.
Yeah.
I guess, Tools Norway is the biggest part of the tools chain at this stage. Is it the same kind of opportunity, relatively speaking, than looking at the Momentum Industrial?
No, I would actually say, just as thumb rule, which I know is if you take the Swedish market, the Norwegian market in components and services is half of that due to the industry. And I would say the Finnish market is also half of that, and then you have a little bit less in Denmark. That's kind of the, how we see on the, in general, the market perspective.
Then the final question for me. Looking at the cash flow, you obviously detailed the IFRS 16 impact that, but I guess this kind of business tends to have its best cash flow when volumes are slowing down, and you can optimize the inventory and get payables down and so on. Is that what is happening out there for the moment, or is it something else driving, say, that part of the equation?
No, but you're right, Karl. Well, I mean, in worse times, these types of companies that we represent, of course, have the benefit that we can sort of pretty rapidly change our buying patterns, which have a positive effect on the working capital. I would say that, of course, we are more looking after the risks related to the business environment as of now. So we are not taking sort of huge risks when it comes to sort of expanding, rather the contrary, that we are looking at sort of mitigating a possible downturn in economy.
But I would say that the major impact that we see in the cash flow generation is basically the work that we've been doing in the companies, working with the payment procedures, also actual agreement discussions with both customers and suppliers. That's the main reason, and also working more with optimization of our inventory levels, bringing down sort of the assortment or level, number of articles in the assortments that we have. So it's the majority of the positive impact that we see right now.
Excellent. So it's not a cyclical consideration that is coming into that component yet?
No, I wouldn't say that. That is not the major impact that we see, no. No, it's more internal efficiency measures that we have right now.
And, Niklas, just to finalize, on looking at the acquisition pipeline, if we get a slightly slower business environment now for the next, say, six, 12 months or something, do you think that it's gonna be easier or more difficult to convert that pipeline into, to transactions?
That's a good question. I think, of course, if we have a downward revision on the economy, and that impacts basically the business climate of these companies, then, of course, from our perspective, we would like to take that into consideration when we acquire companies. However, looking over time, of course, the sellers can have a pretty opposite view that they would like to sell based on basically historical performances. So there could be perhaps a sort of a gap related to the view of the company going forward, for like six months before sort of a possible downturn have actually impacting in the numbers and also sort of the perception on the sellers.
So I wouldn't say that it's gonna be easier, rather perhaps the contrary, to be honest, but I think that that would be pretty short time, say, like over six months. Just to clarify, I mean, we are not just looking at the M&A into one sector. We have a pretty broad scope when we look at the M&A pipe. So we are trying to sort of also work with M&A targets in various sectors and various parts of the business cycle.
Excellent. Sounds interesting, and hopefully you can convert a lot of it. Thank you very much.
Thank you.
There are currently no further questions, so as a reminder, if you would like to ask a question, please press zero one on your telephone keypad. We haven't received any further questions, so I hand back to the speakers.
Okay, thank you very much for taking your time to listen to us, and if you have any questions, don't hesitate to contact us. Thank you very much.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.