Earnings Call: Q2 2021

Aug 20, 2021

Good morning, everybody, and welcome to our webcast, where we present our Q2 2021. I am Henrik Parevic. And with me, I have Erik Castell, our CFO. In addition to the overall performance of the Bayrama Group, We will also discuss our reporting segments, our 3 subsidiaries. These are Leshophos, A full range supplier of standard and customized industrial springs as well as wire and flat strip components acting globally with majority of sales in Europe. It's HAVIA Cable, one of Europe's largest manufacturers of custom designed cables for customers in telecom, nuclear power, defense, offshore and other industries. And Beatek, which specializes in industrial trading and manufacturing within fluid technology as well as consumables components and machinery to Nordic industrial companies. Baytech is also a platform for acquisitions into new industrial niches. So next page please, straight to Page 4. So I'm happy to report another strong quarter with significant profitable growth. We saw continued strong demand in most customer segments and geographies. Order booking sales increased both compared with previous quarter and last year. Operating result increased significantly versus last year, albeit not quite on the Q1's level, mainly due to the impact of the data intrusion in Habia. Still the 2nd highest result in the group's history. The high level of activity in the industry has put the strain on supply chains, both in terms of raw materials and components. But thanks to our efforts to adjust prices and actively manage inventory and procurement, the impact is limited, both financially and in our customer deliveries. Looking at our subsidiaries. For Lessepsch, order bookings and sales remain at high levels, in particular in the Shutter Springs business area, thanks to strong demand in the automotive aftermarket. For Havya, demand was good with healthy order bookings. However, operations were affected by the data intrusion with impact on sales and operating profits. Here, I would also like to take the opportunity to underline the extraordinary efforts from Javier's management and employees to promptly get the systems back online and always with a focus to minimize impact for our customers. Off of Baytech noted strong demand with high organic growth both in order booking and sales in addition to profitable growth from acquisitions. Finally, on acquisitions, It continues to be a priority for the group. This resulted in 2 acquisitions in the quarter and 2 announced shortly after. In April, Beatek acquired Noxon within Fluid Technology and Novus Systems within Building Automation. In July, an agreement was signed to acquire Shellstrom Engineering Systems, a well managed and profitable company in the field of filling solutions for the fast growing battery industry. Later in the same month, we were happy to announce that Leschette Poche carried out its largest acquisition to date, the Alchemax Group, a leading and growing European manufacturer of door and industrial springs and an attractive platform for continued profitable growth. Next, Page 5, please. Now continuing with an overview of the group's financial performance. And as you are probably aware, significant COVID impact in the last year Q2 2020. So comparables are indeed weaker. However, on the graph on the right, you can also see the development versus the quarter in 2019 for a reference to more normal year. So looking at the performance, we can see that order bookings grew strongly by 60% organically and net sales by 37% organically. The operating result is up significantly DKK297,000,000 with a margin of 14.7%. Moving on to the performance of the reporting segments, our subsidiaries. Next, Page 6, please. Littorforsch, our spring manufacturer, is organized into 2 business areas: Industry, mainly a customized product to a very diversified customer base globally. Shutter springs, Standardized replacement springs sold to car part wholesalers, mainly in Europe. Order bookings for Les Chepos as a group increased organically by 78%, which is a very strong development across the two business areas. Net revenues grew organically by 61%. For industrial springs, the largest business area, the growth was 38%, and it was broad across geographies and customer segments. For Shafter Springs, demand in the aftermarket was strong. And And I want to note that this is also the one business area within leisure portion of Beira Alma with a clear seasonality. And the Q2 is typically the strongest. When you look into the dynamics in the lower middle graph, You will see that we had a very strong COVID effect Q2 last year due to that many workshops in Europe were closed. Instead, last year, there was an unusual peak in the Q3. You can also see a more normal seasonal pattern in the 2019 figures. The operating result for Les Chepos increased to DKK 179,000,000 with margin improvements broadly across business areas and geographies, thanks to high production utilization. Next, Page 7, please. Now to Hovian, our specialty cable manufacturer. PABE has not organized into business areas. However, Sales to nuclear power, defense and offshore customers are usually strongly project related, and this can create volatility, and that's why we show the dynamics of these customer segments down on the left. As mentioned, demand was good in the quarter with order bookings amounting to DKK242 1,000,000, up organically by 33%. Net revenues declined by 11% organically, and the operating result reported was 0 in the quarter. Revenues and operating results were negatively affected by the data intrusion. It resulted in a loss of production also negative product mix since, in particular, the most sophisticated products need full system support during the whole manufacturing process. This event is covered through the group's cyber insurance. In the results, the Exchar's direct costs have been offset by expected insurance compensation, less a deductible of DKK 1,500,000. Now once systems were back, production output has been fully ramped up to catch up and also unmeet demand. And this continues into the autumn after the quarter. Next, Page 8, please. Beatek operates in 2 business areas, fluid technology and industrial products, mainly within trading but also manufacturing. Further, it is a platform for acquisitions into new product and business areas. Thanks to continued strong demand, organic growth in order bookings amounted to 43%, And net revenues grew by 52%, of which 28% was organic. Operating result increased to DKK 24,000,000. And in the quarter, 2 companies were acquired. Nokxon, within wastewater treatment, is reported into fluid technology and has an annual turnover of approximately SEK 70,000,000. Enola Systems within building automation is reporting into industrial products and has an annual turnover of approximately €50,000,000 The impact on operating results from these recent acquisitions is offset in this quarter by transaction costs. And regarding acquisitions, I will come back shortly with some positive events after the quarter. Next, Page 9, please. I will now hand over to Ulitja to further comment on the financials. Thank you, Henrik. Please go to Page 10, which is a very busy page, but it includes a summary of the quarter and the year to date first half of twenty twenty one. And I would like to highlight a few things that I have not in addition to what Henrik has already mentioned. We had an operating margin of 14.7 percent in the 2nd quarter and 15.7% in the first half. This is a very strong start for the year 2021. Cash flow in the quarter was good, but of course, we had an impact from the Higher operating capital as we have higher accounts receivable due to the higher sales. And as you can see from the key ratios, We have a strong balance sheet. And also, if I would like to add, After the recent acquisitions that we have made and announced, this impact is not visible in the numbers, but our balance sheet remains stable, so we continue to have room for acquisitions. And additional information is also then that we have increased our revolving credit facility From DKK 300,000,000 to DKK 800,000,000. Please move to Page 11. And here we have the bridges that show the development of order bookings and net revenues in the quarter. And both items then have a headwind of 4%, and the acquisition impact is from the Bayutech acquisitions. And as you can see, the level of organic growth is high. And of course, we have, as Henrik has already mentioned, The comparables from last year is then heavily affected by the COVID-nineteen pandemic. And order bookings were strong in all of our companies, while then the net revenues For Javier, it was lower than last year, but then Leju Foch and Velitec had a Strong net revenue development. Please move to Page 12. Looking at 2 bridges showing the contribution from the different segments on net revenue and operating result. And as mentioned and as you can see on the charts as well, Lettrefoche and Beitek had very strong net revenue development, which then also resulted in good operating result development for the quarter. And so we talked about before, we then have a zero result in Javier, which then resulted in CHF 13,000,000 lower and then last year. And all of these things then led up to the SEK 197,000,000 operating profit for the Q2 2021. Please move to Page 13, which then are same Bridges, similar bridges as the one we looked at on the previous page. These ones depict the development In the first half twenty twenty one compared to 2020 first half. And here we see also then a Strong contribution from Leche Force and Beitek and in both in terms of net revenues and operating results, Whilst then, Haubia is lower than last year. And even though we did have a zero result for the 2nd quarter, For the first half, it's only EUR 3,000,000 that Javier is behind in the first half year perspective. So I think that is a Good thing to keep in mind when talking about the performance of the different segments. And now with that, I hand over back to you, Henrik. Thank you, Vikram. So we are now on to Page 15. So after the quarter closed, We have several events and on that are interesting to highlight for you. On July 9, Beatek signed an agreement to acquire Shellstrom Engineering Systems. Shellstrom designs and produces equipment for filling, mixing and handling of corrosive liquids and primarily for the growing international battery industry. Shelton sales amounted to approximately DKK35 million with good profitability. The transaction is expected to close during the Q3. Later July, on 28, Les Cheuvreux acquired Alkomix, which I will come back to in more detail shortly. Moving on. On the 29th July, we signed an agreement to divest S and P Friedenberk in Germany, and the transaction has been closed since. SMP was a part of Leisureforce since 2013 and had a turnover of approximately 110,000,000 mainly to automotive OEM customers and agricultural vehicles. The decision followed an evaluation of strategic alternatives and an unsatisfactory profitability. Now for BEYORANA and Leshoposh, This will occur a negative result effect of approximately €60,000,000 not affecting cash flow, and this will be seen in the Q3. And as Elika mentioned, during the quarter, we increased our credit facilities from $300,000,000 to $800,000,000 to cater for the above mentioned transactions. Now coming back to the main event. Next Page 16, please. The acquisition of Alchemax. So we were proud to disclose this acquisition by Lechopoch in the end of July. And I would like to take this opportunity to present Alkemex Group. Alkimx is a leading and growing door in industrial Springs manufacturer. It has its base in the Netherlands. Like Lechseforsch, the focus is on smaller batches and customized products with value creation through technical expertise. It has a diversified customer base and becomes a new platform for continued profitable growth for Les Chepos. Alkermes has a complementary geographical footprint for us, both in its sales but also through production footprint in countries like India, Poland and Czech Republic. So in a snapshot, The revenue of approximately €45,000,000 with good profitability, approximately 3 50 employees and serving 2 main product segments, door springs and industrial springs. We're also positive to continue to develop Alconnex, together with their strong management, remains as minority owners. So we see it appears industrial logic in this acquisition and many opportunities for collaboration and synergies going forward. It is the largest acquisition to date by Les Chefos and will bring significant impact to the profitable growth for Bayer Almat as a group. So next page, 17, please. Finally, in the last webcast, I presented our strategic focus. I would like to reconnect to this in the light of what we have discussed today. In the quarter, we see we report significant profitable growth, both organic and through acquisitions. Our diversified customer base is a strength as demand has increased, both during the pandemic And recent challenges in the supply chain, we have shown on resilience and managed our customer deliveries. Our increased acquisition focus continues. The consolidation on the industrial springs market Thorelechefos continues with the acquisition of Alconex. 3 acquisitions by Beatek discussed today establishes further its role of a compounder within industrial niches. And as As you can mentioned, our financial position remains strong to support acquisitions also beyond these recent events. We are a long term owner, but with the divestment of S and P also shows that if we cannot achieve profitable growth long term, we will take action and also adjust our portfolio of companies accordingly. Finally, a decentralized governance is key to us to empower local management and encourage entrepreneurship, both for our existing and recently acquired companies. So with that, we'll move on to Page 18, please, and open up for questions. So operator, please. Thank And we have two questions in the queue so far. The first is from the line of Karl Magnusson of Nordea. It's Karl from Nordea. A couple of questions from my side. Just first a clarification on how we are cable. Could you just once again please explain how the insurance policies is working? And just one more time also explain the impact on Hawbia's Result in the quarter. Yes, let's start there. Hello, Karl. Okay. To clarify how the cyber insurance work. It has the component of covering direct costs associated with coming back up online with the systems. It also has a component of business interruption covering sort of loss of business during the period. So during the quarter, As I explained, we have taken significant extra cost to manage the situation. We have less the deductible, added back this as our expected insurance compensation. Referring to the business impact, as I mentioned, we are, In the quarter, already ramped up our production to catch up with the customers that did not receive their deliveries during that time. And we are continuing to work on that into the open. Okay. Perfect. And the sales loss in the quarter, as you reported, a negative 11%, I think negative organic growth. What was the sales loss during the quarter owing to the IT attack? I guess you managed To, yes, offset it fully, at least. So if you talk about the sales loss In the numbers related to last year, I just want to reiterate on that, Avia, actually, were not that heavily impacted by COVID in Q2 last year. So we're comparing to fairly normal numbers there. We have not quantified specifically the sales impact. But there are the sales impact comes from loss of production, as I mentioned, During a couple of weeks, it is not it's different for the different factories. Some factories managed to run quite high utilization on through manual processes, whereas as I mentioned, the most sophisticated production, which require full system support throughout the manufacturing, had a larger impact. Okay. And then on that note, then I guess it's fair to assume a more positive margin mix Going forward, I guess that it implies that. So So once again, the mix effect in the quarter, as I mentioned, there is a mix effect due to what I just explained on the more advanced product and also, of course, top line effect in general. Okay. Perfect. And on the chassis springs, of course, strong growth, but you had favorable comparisons as well. But I'm a bit curious to know what sort of The growth looks like at the end of the quarter when you don't have a favorable COVID comparisons. For instance, when looking at LKQ's European division, they reported close to 10% growth in June, for instance. Is that a fair proxy for you as well in At the end of the quarter? The demand was very strong throughout the quarter. And as actually I mentioned also in my CEO comment in the report through the summer. And so of course, when you have you all remember or you remember that in April last year was more or less shut down, so the growth continues to be strong throughout the quarter. Okay, perfect. And also a bit on Payertech. I mean, strong growth there as well, but margin Looked a bit muted at least in the quarter. And especially when considering the strong organic recovery, which seemingly gave a little drop So what is behind that? We have I think the margins are on a similar level. We have some impact from as we mentioned, from acquisition transaction costs. And it is a portfolio of companies. And so the development is very similar to the previous quarter. Okay. Perfect. And the final one from my side is related to M and A. And you have obviously closed Quite a solid amount of M and A year to date, to say the least. And would you say that it is an effect, a catch up effect from The pandemic, if you will? Or would we say that it's partly due to the strength in M and A team and that you're able to follow-up on leads more And maybe even more be more proactive in your M and A approach? I think it's a combination of both. Of course, the M and A market has been quite strong. We have been working proactively throughout most of the pandemic, by the way, and a project Like Alkomex is, of course, a lot of work during a longer time. So it's a combination, Strong market, but also definitely proactive work with the team that we have, both in our subsidiaries and supported by us, the Alma centrally. Perfect. Thank you. Thank you. And we have one further question. That's from the line of Elmer Stam of Erik first question is relating to Lecofors. You have an improved operating margin here both compared to 2020 and 2019. Could you elaborate a bit on the fact here and whether this mainly stems from a good gross margin? Or is it the management of capital operating expenditures? Gloria, I'll mark. Yes, I think the 2 main Components of that is that with a good demand and the very high deliveries, we, of course, get the general good leverage on our production units. And we are also looking back, have a very competitive cost base. Of course, several actions that we're taken during last year is still there and having an impact. So leverage and a very competitive cost base. All right. And then my next question is relating to Javier Cable and this Strong order intake. Could you elaborate a bit on whether this order intake increase comes from Telecom? Or is it from the nuclear offshore defense segment. We've seen, in particular, a strong demand in industrial clients over the quarter, which resembles both of the other subsidiaries we have. So the main uptick is related to the industrial business. All right. And then one question regarding the Alchemax acquisition. I mean, you mentioned briefly some synergies. Could you elaborate a bit what you said do you believe that the effects will come mainly from cross selling or perhaps from manufacturing? What do you believe it will be the dominating synergy of things? As I mentioned, we are We have a fundamentally decentralized governance structure, and the company and the Alkimax group will continue to operate as such. Both the two areas you mentioned are, of course, very interesting. We have we always encourage cross sales between our companies and in particular within Le Chouforsch, of course. We will obviously also look for procurement synergies And also the interesting factory footprint that Alkermes brings to the group with new geographies is definitely on the agenda to see how we can work best together with it. So far, it's only been 3.5 weeks, but we have already launched Several initiatives, and it's a great team to work together with. So we're very excited about this new development and this new company in our group. All right. And also looking at the intense acquisitions that you made recently, how looking forward, how do you believe that this will Affect your CapEx requirements? We as we have Mentioned, we of course, we have we will have a slightly different balance sheet after these acquisitions, but it still supports our ambitious growth strategy also through acquisitions. So quite confident we are that we will not be limited in that part of our strategy by our balance sheet. All right. Thank you so much. And as there are no further questions at all, we've just had one third question come through. It's a follow-up Karl Rakustan of Nordea. A couple of more from my side. First of all, in terms of the chassis spring, so I guess in Q3 last year, you started to Work through sort of the pent up demand right after the pandemic, right? And but of course, this year, you might have even higher car utilization, which might drive a replacement, of course, Station, which might drive a replacement, of course, compared to last year. I mean, could you help us a bit on the Sort of the comparison sort of the dynamic when entering Q3? As I mentioned during the presentation, and you're aware of that normally the Q2 is seasonally the strongest, And it continues also into Q3, whereas Q4 is normally a lower season for the Shasta Spring sales. Generally, what we have seen in these last, what should we say, 18 months is a less normal world. And Looking into the different demand factors for Shutter Springs. Of course, you have this there are some effects from how cold was the winter, and we had a fairly cold winter in Europe, which has driven demand. There is also some remaining effects of this the close down. And a lot of the replacement takes part following your yearly inspection, etcetera. And finally, there is also the growing market of the secondhand cars is underlying and slowly growing. So to foresee what will be the Impact in the Q3 is not we don't go into that. But as I mentioned, we did see a strong demand throughout the summer. So despite the as you said, the comparables are a little bit different from last year, But the market remains strong and the demand remains strong. Perfect. And in terms of cost inflations, that is, of course, a hot topic. And especially raw material side, you seemingly have at least, when looking at your gross margin, handled that quite well During Q2, but should we expect a more material impact going forward for some reason or? This has, of course, been a focus for our companies throughout this last quarter and this half year. We have managed actively both in terms of pricing and inventory. Some parts of our business, some customer agreements, we have indexing in the pricing. In other cases, It's a matter of negotiations. But I think as many companies experience now that Such swings in the raw material prices also, it's very natural that this should be can be compensated also in these negotiations. So I think we managed this well and throughout the quarter, and it has been a high priority for us. Perfect. And the final one is, of course, related to the component issue, which you mentioned as being limited during Yes, the quarter. But have you seen a worsening impact at the end of the quarter? Should we expect any headwinds So which you foresee already in the coming period? In general, For our Bearama group, I think that's what I referred to, both through the pandemic and this last quarter, we are Do not procure so much components. So it's mainly raw materials, of course. But we can see some not impact, but Some delayed delivery time, longer delivery time, especially in the trading areas. But once again, we are Fairly well placed for this with good inventories in the most important products. But yes, is a strain in the demand sorry, in the supply chain. And it's really constant work, daily work for to find But so far, no significant impact on the that we have and we have managed it well. Perfect. Thank you. Thank you. And as there are no further questions on the phone lines at this I'll hand back to our speakers for the closing comments. So thank you, everybody, for attending our webcast, and have a nice day. Thank you very much.