Earnings Call: Q2 2020

Jul 17, 2020

And gentlemen, welcome to the presentation of the Intuitrade AB for the Q2 Reports 2020. Today, I'm pleased to present Mr. Bo Anvick, CEO and Patrick Jonsson, CFO. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. I'll now hand over to Bill Amberg. Please begin. Good afternoon, and welcome on my and Patrick's behalf as well. We will, as usual, start with some highlights of the quarter. And it's obviously been an extraordinary quarter due to the COVID-nineteen pandemic. Our primary focus has been the health of our employees and at the same time try to manage a significantly weaker demand situation. For those of you who follow us more closely, you know that we are not very much using sort of group policies and guidelines, but this situation has, I would say, demanded clarity and decisiveness to do that. So we have launched, I would say, clear instructions applicable for all companies. And not only because of that, but we can say that we don't have any employees who have been seriously ill or hospitalized due to the pandemic. So that's good news for us. Most companies have experienced a lower demand, but still significant variations between companies and segments and markets. And I would say all companies with sales declines have worked to protect or defend margins in a very successful way. And some of our companies have had favorable market demand, especially in the medtech pharma segments and delivered really great results. And this together have led to an improved EBITDA margin of 13%. We have also strengthened our financial position and improved our cash flow. Patrick will go through that in more detail. And in terms of acquisitions, I would say that the pipeline remains good and we have deliberately delayed projects due to the sort of unstable situation. But I will comment about this more in detail, and it's in general a quite positive situation anyway. If we then turn to the order intake slide, as I said, it's been a decline and large variations between companies and segments and also the business areas. We have also, as I said, then seen a strong development in certain medtech and pharma companies and also in the infrastructure segment, primarily in the Nordic countries. And by infrastructure, it's primarily water and wastewater related for Indo trade. And then we have a large company in the power generation market providing high pressure valves, and they are also experiencing a good market demand situation. In terms of medtech and pharma to elaborate a little bit more on that. We have a growing portfolio, growing cluster of companies, and it's different sort of types of companies. But just to give you a flavor of where we are involved, we have a number of flow companies and some have supported the Swiss pharma industry now with facility upgrades and new machinery equipment installations. Also, I would say, similarly, flow related companies are having a good market situation in Ireland linked to the large biopharma investments in Ireland. So several flow related companies in different sort of segments have experienced good sales or order intake. We actually have some one specific company providing ventilators plus just in one particular geographic market. And then another company supporting with the components to ventilators. And that's, I would say, the customer they have is selling more broad based internationally. And then we have a company providing medical gas equipment predominantly in the UK. And as you understand, there has been a lot of new installations, both in field type of hospitals being built during this time, but also upgrades and additional equipments in normal hospitals. We also have a cluster of companies in what we call single use products. So quite a lot of pharma companies are switching from sort of stainless steel equipment to single use equipment, which is recyclable in order to have more, I would say, efficiency and less manpower linked to cleaning and preparing and things like that. We are also in some markets providing products for diabetes. So as you hear, it's a large number of products. And I would say a handful of our 200 plus companies have a positive COVID-nineteen effect in quarter 2, but not more than that. Most of our companies are exposed to general engineering and some are exposed indirectly to the automotive sector, providing, I would say, components to the production systems. And they have obviously experienced much lower demand. However, we see now that trend wise, those segments are improving a little bit. And I would hope that in the second half of the year, we will continue to see improvement there. The order intake was basically in line with the sales. So book to bill sort of equal there. In total, the growth was minus 1% in order intake and organically minus 5%. And the acquisition effect was +5% and currency was negative 1%. As I said, I think before, there was not perhaps a large difference sequentially in the quarter, but still a slight one with some further improvement towards the end of the quarter. For you who follow this more closely, you probably know that there are some invoicing days differences versus last year. So you have to take that into account, obviously, when you analyze that situation, but a slight improvement towards the end of the quarter. If we perhaps should also say something about potential stock buildups since there has been a lot of supply chain disruptions at the end of quarter 1, early quarter 2. I don't think we have a significant effect in quarter 2 of stock build outs from our quarter. So that shouldn't be a very sort of significant issue hitting us in quarter 3. If we then move to the sales slide, as I said, sales basically in line with order intake. Total growth was +1% here, but again, organically, minus 5%, and acquisitions added another 6%. And if we talk about sales in a geographic perspective to start with, we basically have one market with a positive sales situation and that's Switzerland. So as I said, quite a lot of investments in new facilities, upgraded facilities, new equipment where we have been benefiting with flow components, I would say, in general. Also some other things as well, but that's been the driving part. Then we have a segment of Scandinavian markets, Norway, Finland, Denmark, fairly stable, perhaps slightly, slightly negative, but sort of good market development in this difficult situation in these three countries. And then I would say, Holland, a little bit worse. And then Sweden, almost 10% decline, not quite. But by far, the worst sort of markets countries for us has been Germany and the U. K. And the U. K. Is obviously linked to more of a full shutdown, difficult for a lot of companies to conduct business. And in Germany, I would say it's mostly driven by an automotive industry, which was also more or less shut down in April and opening up slightly in May and onwards. If we look at what's sort of driving sales, it is clearly the medtech and pharma segments. And when I looked together with Patrick and others at the 10 companies we have with most invoicing growth or sales growth, it's I think 7 of them are medtech or pharma related. And then there is some infrastructure and some obviously, the large company into energy and gas related energy, but also actually a company benefiting a lot from the wind power market. Then we turn page again and talk a bit about our EBITA development. So despite the challenging demand situation, EBITA grew during the quarter and we came in, as I said, at a high number in our terms, 13%. The total EBITA growth was 5%, organically a reduction of 2%. But I think that's quite good considering the organic sales decline was 5%. We still came in at only minus 2%. Acquisitions have been accretive and added 8% and currency was negative with 1%. And now I'm basically repeating myself a bit, but the margin improvement came a lot from the medtech and pharma segments and also the power generation in the Benelux added and then also infrastructure, as I said before. Many of our companies have used temporary layoffs. And in the beginning of May, we had around 1500 employees furloughed. And towards the end of the quarter, we were down to around 1,000 employees. And we have approximately 7,000 400. And we have permanently laid off a bit more than 200 at this time period. Now several of our companies are basically assessing the situation for the fall and those who think the order intake and sales development still will be very challenging are planning for more permanent layoffs. So that number will stepwise increase in quarter 3 here. I also think we have been very good or our companies have been very good in reducing their overhead expenses. And I would say a clear majority of the expense reduction is not related to any government support, but rather other type of decisions, actions they have made in their individual companies. If we then look at the different business areas and their development in the quarter, as I said, large deviations. Obviously, all of them were having some effect of the pandemic, but some more than others. The strongest development in terms of sales was in the Benelux area. And again, that was driven by our valve company in power generation. But they also have a medtech or several medtech companies who have supported the growth in that area. And the largest decline was in the U. K, as you see in the slide, minus 25%, 26%. And that's basically driven by the broad lockdown in the country, affecting basically all businesses and not least infrastructure and construction was basically halted completely for large parts of the quarter. We also have some companies working in the aerospace segment in the U. K. And that's also been halted very significantly, unfortunately, because those companies are actually enjoying very good business in that segment. Also Business Area Measurement and Sensor Technology on Fluids and Mechanical Solutions noted large declines and particularly in companies exposed to general engineering and automotive. As I said, we don't supply any direct material to the automotive, but more components and equipment. In measurement and sensor technology, we, for example, have a couple of companies providing leak detection equipment for heating and ventilation type of applications for passenger cars and construction vehicles and things like that. MST, which is short for that business area, they are also a bit more, I would say, dependent on CapEx related decisions at their customer base. And there's been quite a lot of delay in project starts to safeguard cash flow pandemic impacted business area of Flodagh and Industrial Components in Finland negatively as well, but a few segments compensated In flow, I would say again, MedTech and Pharma segment compensated also to some extent the Marine segment. And again, the DACH segment was supported by the Swiss Pharma Industry. In Finland, it was more infrastructure and energy, which provided positive growth. And in Industrial Components, it's again mostly medtech and infrastructure. If we look at the EBITA margin per business area, it's actually great to see that 5 out of 8 business areas increased the EBITA margin. And if we disregard any type of government support, It's 4 out of 8, which are still improving their margin and one being Benelux, where there is no government support at all, are basically flat. So 5 plus 1, 6, only 2 having actual decline, and that's the U. K. And MST. And if you take away the government support, it's also the Fluid and Mechanical Solutions business area. And I think we have already elaborated on the reasons. It's very much driven to what type of segments you have in your portfolio mix. And then MST and U. K. Are basically only more or less only company owned products and owned manufacturing. And it's been difficult in these circumstances to offset the shortfall in sales with the equally large cost reductions in direct labor. And we have also wanted to safeguard competence in some areas and see if the market is bouncing back and hence we could then start ramping up quicker again. But as I said before, several of these companies are now assessing the situation for the second half of the year and will most likely lay off more employees unfortunately on a permanent basis after the summer here. We also had some unfortunate situations early on in the quarter, for example, in Asia, where some governments basically shut down our facilities and offered no financial support or anything. So that was some extraordinary cost we were having to take linked to those decisions. Then if we turn our focus to acquisitions, we haven't, as I said, made any acquisitions in quarter 2. We started out the year in a great way with 6 acquisitions, great companies, all developing well and being accretive and positive to the group. But we have a lot of projects ongoing, but we have deliberately decided to slow down the project and really make sure that when we make the acquisitions, they can be accretive fairly early on and supportive to the group. So I don't feel that we have missed any opportunities. We have rather delayed the processes, as I said, deliberately. And hopefully, in a couple of months or so or quarters, we will see more of a catch up effect where several acquisitions are finalized in a shorter time period. We have, however, divested a company in Russia or only remaining company in that market, and that we have communicated before and also explained the reasons for. So by that, I leave the word over to Patrick, and he can present the financials in more detail. Thank you, Bo, and hello, everybody. So let's dig into the financials slightly more then. And as noted earlier, then total growth for orders and sales was minus 1% and +1%, respectively, in the quarter. Year to date, we are at +8% and plus 7%, thanks to a very strong Q1, which you remember, I guess. Order intake was in line with invoicing in the quarter, so a book to bill of €100,000,000 Looking at the gross margin, it continues on a relatively good level, I would say, from an historical perspective, but slightly lower than last year, both in the quarter year to date. And the change is primarily mix driven and relates to a slightly less favorable mix of companies and products compared to what we had last year. EBITA grew 5% in the quarter, and the margin improved to 13% versus the 12.5% last year accumulated. EBITA has grown 10% and the margin to 12.7% versus 12.4% last year. Further down in the P and L, finance net, a relatively large increase. And there is a slight increase in the borrowing rates following changes on the market and also financing fees for our we have now slightly larger facilities that impact somewhat. But the main increase this quarter is, however, more one time related currency differences relating to our internal funding transactions. Basically, half of the increase relates to that and is nonrecurring really. Tax costs up 6% in the quarter and 11% year to date. There's a slight increase, and it's mainly caused by more nondeductible items. EPS up 1% in the quarter, 6% year to date. On the return side, return on capital employed at 18% versus 20% last year. So and 0.5 percentage point of the decrease versus last year actually relates to IFRS 16. And as you know, then the measurement is always calculated on a 12 month rolling basis, which means that at Q2 last year, we already had sort of half a year impact in the measurement. The other main reason behind the decline is the increased acquisition pace the last year. And even though we didn't acquire anything in Q2, we are we have then on the last 12, 18 months acquired more and that initially lowers return as intangibles in the balance sheet increases. Cash flow was really strong in the quarter and increased with 65% to NOK 806,000,000, and I will elaborate on that a little bit more on the next slide. And following that, net debt EBITDA also improved then, and that came in at 1.8% versus 2.5% last year. So let's shift to the next slide and look at the cash flow development. And it was, as I said, very strong, grew with 65%. And the increase is mainly driven then by better working capital development and also, of course, a slightly higher result. And if I elaborate on the working capital development, last year, we had a slight increase in the working capital, and this year, we have a slight decrease. Again, that gives you a relatively big delta. And the decrease this year is mainly related to receivables reduction following the slightly lower sales. Inventories, they are still on a high level and intentionally, I would say then, to ensure a good delivery service and availability for our customers. And so we've chosen not to push that hard in this quarter. And I think I believe that this has actually supported some market share growth for many of our companies. So we move to the next slide and look at earnings per share. It grew 1% to 302 from 302 to 305 and but that increase then is lower than the improvement in EBITDA, as you recognize. And the EBITDA improvement was partly offset by finance net and the tax that I talked about earlier, but also increased amortizations of intangibles. And that relates also then to the higher acquisition pace that we've had then for the last 12, 18 months. And if you zoom out and look at the more longer term perspective, the 3 year 5 year increase in our 4 quarter rolling earnings per share is 13% 14%, respectively. And last but not least, looking at the debt situation. The net debt declined during the quarter to EUR 5,700,000,000 versus SEK 6,400,000,000 last year. And the decrease comes from, of course, the strong cash flow I talked about, but also in combination then with that we have delayed acquisitions and that no dividend was paid out for this year. The net debt equity ratio decreased to 72% from the 99% last year, and that the 72% is a low level for Q2. And lastly, then the financing more in general, I think when we moved into year, we had already done a strong financing situation. But given the uncertain situation, we put some effort in strengthening it further. And in the quarter, we actually renewed SEK 800,000,000 of short term loans. We prolonged the long term credit facilities we have even longer. And we increased them with also we increased the facilities further also SEK 750,000,000. And after that, if you summarize sort of the position at the end of the quarter, the short term funding was only around SEK 359,000,000 and our long term unused guaranteed credit facilities were $3,000,000,000 So quite a big gap and flexibility for us to act. So by that, I'd say thank you and leave over back to you, Bo. Thank you, Patrick. We have tried to summarize all aspects of the COVID-nineteen situation on this slide. Early on in March basically when this started more sort of seriously significantly for us, We basically had to change the way we work in everything from us as a group management team. We started to meet with a much higher frequency. Our reporting demands to our companies changed from monthly to weekly, not involving everything, obviously, but primarily order intake and sales to be on top of situations and being able to at least assess where we are heading in a quicker way. And this has worked in a great way, I would say. Then we have already discussed the demand situation. So you know what segments we saw more challenges in and where we have seen improvements. We've had some disturbances in terms of supply chains in the sort of April, early May time frames, But then things have improved. And towards the end of the quarter now, it's, I would say, very limited product shortages from manufacturing situations at suppliers. There are still some logistic issues, freight related issues and not least high prices for airfreight. And then we have implemented or our companies have implemented a lot of cost measures. And as I said, the key majority of the overhead expense reductions are from own initiatives and not from the supports. We have used the tool of temporary layoffs or furloughs, actually a great tool because you can keep competence and then ramp up when the market is rebounding. And as I said, initially, 1500 are now down to around 1,000 of our 7,400 employees and about plus 200 have been permanently laid off during this quarter. And the support we have received equals to 1 0.5% of sales, approximately SEK70 1,000,000. And again, most importantly, none of our employees have been seriously ill or hospitalized. Okay. If we turn slide and look at our, I would say, collection of companies, you know that we have 2 basic characters of companies. We have our trading companies, and we have companies with their own brands and proprietary products and manufacturing. And even more importantly, I think in a situation like this, our values driven culture and our model, which is really based on entrepreneurship and decentralization, really shows the benefit. Our MDs and company managements are very agile, quick to decisions, working very closely with their customers and trying to basically defend margins or even improve margins if possible. What stands out, I would say, is that we are learning how to use digital tools in a very fast time. So there's been quite a lot of investment, both in competence development, training, but also basically practically changing everything from home pages to other digital tools to hold efficient webinars and be close to customers even if our sort of fiscal sales force cannot visit customers. And this will have material effect even after the pandemic is over. So I think we will see some efficiency effects based on this in a good beneficial way. So thanks to all great employees in the group. We have a number of strategic initiatives we've been working with for some time, nothing new. We invest a lot in people and talent management. We also invest a lot in knowledge sharing between companies and in what we call an industry toolbox. And this has been ongoing during the quarter and the investment have been quite high actually, not in monetary terms, but in added content and also usage between companies here. So great benefit to have that. And we have continued to basically work with sustainability in a lot of different ways during the quarter as well. And we see that the combination of digitalization and sustainability is really strong in building both customer value and shareholder value going forward. Then if we then summarize the presentation and the quarter, we see lower demand due to the COVID-nineteen, but with large variations between company segments and markets. Where are we heading in the second half of the year? Obviously, very difficult to say, but slightly more positive outlook for the second half of the year than what we had in quarter 2. Hopefully, the general engineering and automotive sectors are stepwise improving at least. And also that countries are opening up in terms of travel restrictions. We'll open up for service and installation type of visits and work in the different process industries we are involved in. So I think some of our companies have actually been held back due to that. I think the building and construction sort of industries, infrastructure industries will continue hopefully to improve. We will most likely, I think, see supported programs in infrastructure and health care from governments in different countries in Europe. Not sure how quickly this will start, but definitely, I think we will see that. And then hopefully, machine builders, OEM type of product builders for forest machines and other type of similar machines will also slightly improve. What might impact a little bit more negatively is that extra COVID-nineteen effect we had for a handful of companies in the quarter. That's basically a onetime effect we had in this quarter. The large company we have in terms of high pressure valves for the energy market, I think they sequentially will continue as they have been doing in quarter 2 also for the second half, but they will have more demanding numbers to compete with versus or for 2019 in the fall was a bit better than in the spring time. So the comparison will be more difficult. Short term, there will probably be a little bit weaker July, early August for some customers, longer holiday type of shutdowns perhaps, if they have less of order books and so on. But I think the positive potential effects are larger than the negative ones. And that's why we are slightly more optimistic for quarter 3, at least from September October and onwards. So we said that the EBITA margin improved. The cost management was to defend loss of sales and invoicing and the real margin increase came from health care and infrastructure related companies improving their margins by higher revenues. We have, as I said, seen gradual improvement as countries are opening up. And we are really benefiting from being the type of group we are with really driven entrepreneurs being agile and working very close with the customers. We feel no worry whatsoever in terms of our financial position, and I would be extremely surprised if we don't see some acquisitions in the second half of the year here. So by that, I say thank you, and we can potentially open up for any questions. Thank you. And our first question comes from Yuan Dahl from Danske Bank. Please go ahead. Your line is now open. Yes, thank you. I was just wondering, can you talk a little bit more about this group wide initiatives that you referred to, Bo? I guess it was regarding cost levels in your subsidiaries. So what are you actually targeting with these initiatives? And where what will they eventually result in, do you expect? Well, it's the whole setup we have, as you know, is that all our companies are different and they work in different segments, industries and so on and so forth. So they are basically challenged can be quite different for different companies. Some are working with pricing or some see maybe some niche opportunities to grow volume, some are perhaps experiencing difficulties in terms of gross margin mix wise and then they need to work with their overhead expenses. So it's not really a group wide program with a lot of similar type of activities, but rather more tailored to their specific companies. But there is a very clear demand to defend margin, I would say. And then we have a toolbox on things, how to sort of deal with different situations. And we have webinars internally and things like that. So that's perhaps explaining the situation a little bit better. All right. Also just on the 1.5% of sales you received in sort of government support, to what extent did you have restructuring costs, etcetera, that offset that benefit to Intertrade? I don't know, Patrick, is that something you want to? No. Yes. We did not have any sort of material one offs really in the quarter. And we as Bo talked about, we had some permanent layoffs, but those have not led to any material one offs. But we've also said that our company is then evaluating if they need to go further with the permanent layoffs. And so there that means that it could become something then later on in quarter Thank you. Thank you. And our next question comes from Oskar Bjigstrom from ABG. Please go ahead. Your line is now open. Hi, thanks. Just one question to follow-up on the governmental support. Since the situation is now improving as you're seeing it, should we expect these effects to be completely out of the figures in Q3? Or will they sort of trickle through into the coming quarter here? Or how should we think about that? Since they are sum up to these level we presented on individual company basis, if some companies are experiencing really troublesome invoicing or sales in quarter 3, quarter 4 and there are governmental support they can use, they will most likely do that. So it's not going to disappear completely, I don't think, but the levels will probably be reduced from where we are now. And there are different programs in different countries. So I think in Sweden, for example, I think they can last for depending on what type of support it is, but the temporary layoff program, I think, is for 9 plus 3 months or so. Yes. Okay. Yes, I understand. And another thing I was just thinking about a bit in terms of acquisitions here. Now as things are starting to open up, you mentioned you have a strong pipeline. You have deliberately stayed away from the trigger, so to speak. As we're entering H2 and probably around like Q4, do you think that there will be sort of pent up level of acquisitions that you will execute more frequently than historically? So sort of make up for this period where things have been quiet. It's a bit difficult to guide in very exact terms. But at least to start with, there's going to be normalization, I think, in terms of the numbers. And then if there will be more on top of that, that we have to wait and see it. Yes. Okay. And then just finally, so could you just remind us, if we're looking at Benelux and valves for power generation, in H2 last year, you mentioned that figures were a bit stronger. Do you know could you just remind us how much of growth in H2 in Benelux was derived from that company specifically, more or less, just to get a sense of where we were back then? No, I cannot actually do that right now where I sit. I don't have that number. But I don't think it or several companies were performing fairly okay actually in Benelux in that second half last year. So it was not only driven by any specific company. All right. So it was in general more widely spread? I think so. I hope so. Yes. Yes. All right. Thanks. That was all for me. Thank you. Thanks. Thank you. And as there appear to be no further questions, I return the conference to you. Then we say thank you for listening and participating, and we wish you a great summer holiday eventually. Bye bye.