Earnings Call: Q1 2020

Apr 27, 2020

Ladies and gentlemen, welcome to the presentation of Indotrade AB for the Quarter 1 Report 2020. Today, I am pleased to present Mr. Bo Henrik, CEO and Mr. Patrick Johnson, CFO. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. I will now hand you over to Bo Amrik. Please begin. Good afternoon and welcome on our behalf as well. We will start as usual with some highlights from the Q1 and are obviously quite happy with the overall outcome, starting with strong organic order intake and also a positive book to bill. And we will elaborate on that quite a lot further on. We see quite large variations between company segments and markets and have done that for quite some time. We are actually having a record high Q1 EBITDA margin at 12.4%. We actually had a record also last quarter 1 in 2019 at 12.3%. Percent. So it was good to beat that even if it was slightly. We are also improving the cash flow in the quarter quite dramatically in a positive sense. And we have also strengthened our financial position, which we will talk a bit about. And also have started the year with a very high acquisition activity. We have acquired 6 good companies during the quarter. And last but perhaps not least, the effect of the COVID-nineteen during the quarter in total is quite limited or has been quite limited, but more sort of dynamics movements below the surface, but we will obviously talk a lot about that as well. But if we start with the order intake, so as I said, on an aggregated level, very strong for the quarter. And again, then quite a lot of variation between companies and segments and also the business areas. The book to bill was good and strong at 109%. So we came in at plus 17% in total, very good numbers. And perhaps even better organically, we grew by 7%. Acquisitions was plus 9%. The currency had impact of 2% and then divestments minus 1% there. So all in all, very positive numbers. And we should all remember that Q1 last year was also strong in terms of organic growth. I think orders were up 5% and sales 6%, so strong reference also. It's probably relatively interesting to start by commenting a bit on the corona or COVID-nineteen situation and the impact on the demand side. And we have actually had positive impact from certain companies in the medtech and pharma segments. And just to give you a few examples of what type of companies products we are dealing with here. So we have one company providing equipment for medical gas to hospitals, super relevant in these days and they have had a very strong order intake growth and yes, it's been actually very important to manage the situation. So they have even had support from the U. K. Military in order to get their equipment out to different hospitals in time. We also have complete products for anesthesia and ventilation sort of applications. And we also we are also making components to anesthesia and ventilation products at the certain company. We make packaging and bottles for pharmaceuticals. We have chromatographic columns or tubes, which are essential for vaccine development. So as you hear, a number of different type of products, very interesting businesses, and they are all doing good. We have also quite unique company in terms of the brand name or the company name in Piedenungsund, Sweden. There we have Corona Control. That company is, however, not linked to the COVID-nineteen situation. They are providing valves to the process industry, and they have had that company name for about 3 decades. So not linked to this situation, but a little bit interesting. The MD of that company has both been on radio and in several newspapers. So he's happy at least. We have also had some issues in terms of companies providing products to the general manufacturing industry, automotive industry, aerospace industry and so on. So we have a cluster of tooling companies, for example, with quite negative order intake. In quite a lot of the countries we are operating, the construction segment have been low, not least in the U. K, where it's more or less been a standstill since late March, you can say. So all in all, I would say a limited effect from COVID-nineteen on order intake, and it will most likely be more negative in quarter 2. But I will elaborate more on that down the line in the presentation here. So that was on order intake. If we turn page and look at the net sales situation, also very positive versus Q1 last year, total growth of 14% and gladly plus 3% in terms of organic growth. Similarly to the organic order intake situation, acquisition grew by 9% and the currency had an impact of 2%. So if we try to look at sales in a more geographic perspective, we can say that we have actually had some positive development in parts of Scandinavia, primarily Sweden and Norway. I would say Denmark and Finland has been more flattish for us in quarter 1. And we have seen more declines in the Netherlands and in Germany. And Switzerland, I would say, is slightly positive. U. K, all in all, is also flattish. But if you look at our business area, U. K, they are down, but we actually have some U. K. Businesses in Business Area Flow and also Measurement and Sensor Technology. So all in all, I would say U. K. Is also flat. So a lot of flat, positive in Sweden, Norway and negative in the Netherlands and primarily in Germany. And if we look at segments, obviously, the MedTech and Pharmaceutical segments are positive. I would say water, wastewater, parts of infrastructure has been positive. Power generation has been positive. So it's more general manufacturing, automotive, aerospace and most geographies in terms of construction. However, in Sweden, construction has been okay ish, I would say. So that's some comments on the sales situation. Then if we turn to EBIT A, it's also, as I've said before, been very positive, and we had an increase of 15%, resulting in a margin of 12.4%. Again, record level, very good. It's a slight increase from quarter 1 last year, so 2% organic, 10% from acquisitions, divestments adding 1% and currency 2%. And the organic development was held back by the COVID-nineteen outbreak. And I'll try to explain a little bit an underlying perspective on the situation. We if we take the organic part there, plus 2%, we have actually released an earn out of approximately SEK 15,000,000 into that number, and that's been accounted for in Business Area Measurement and Sensor Technology. So it's a positive one off there. But we have also had actually quite a lot of positive or negative one offs. So for example, in measurement and sensor technology, we have a number of sites in Asia. We have a very large double site in Sri Lanka. We have a site in Malaysia. We actually have one in Wuhan, China, the epicenter of the COVID-nineteen outbreak and also in South Africa. So all in all, these sites were initially at the time of the outbreak closed by authorities. We couldn't we didn't have permission to run manufacturing in those sites. And that involved a bit more than 700 persons who were on our payroll, and we didn't get any We have also had a high acquisition activity, as I said, with 6 acquisitions in the quarter. So we have, I would say, one off acquisition related costs in the quarter here. And also we have some companies in the measurement and sensor technology area where there has been customer shutdowns. So there, they haven't been able basically to receive orders or invoice. So that's offsetting the positive earn out release to a quite large extent. Apart from that, I would say that those business areas where we are a bit more heavy in terms of own manufacturing is then having a bit of a negative mix impact because sales have gone down and we have had certain costs in these areas, primarily the area we call Fluids and Mechanical Solutions, very much a Nordic based business area, but actually having some export businesses and also the U. K. Quite manufacturing heavy and to some extent DACH and Benelux. So we say we report organically plus 2%. And yes, there is an earn out release, but also quite a lot of one off for extra costs. So underlying, they are perhaps not fully even, but more or less taking out each other, I would say, slight negative impact. So that was my comments on EBITA. We can answer any questions linked to this later on in the call. If we then turn page and talk about each business area and the organic sales situation, you can see on this chart here that 4 out of 8 business areas had a positive development. And again, that's linked to a difficult benchmark from last year. Would say the strong growth in Benelux, Flow and Industrial Components are all supported by companies, as we have said, in the medtech or pharma sectors. And in Benelux, the large valve company we have there linked to power generation has also been a strong contributor. DACH is a little bit special. We have actually had good project business from the Swiss process industry, but also been negatively affected by Germany in that area. But all in all, DACH anyway had a positive growth, which was very good to experience. And then we had decline in Fluids and Mechanical Solutions, Measurement and Sensor Technology and U. K. And I spoke a bit about that already. But that's mostly then linked to general manufacturing, automotive, aerospace, some construction related segments. So fairly understandable. In Finland, we have more or less a flat situation, slightly negative. And we actually have some companies who had a bit of a negative effect linked to some of the strikes, which we experienced during quarter 1 in Finland. We have service people who couldn't visit the sites and we couldn't invoice that type of work during that time. So a bit of declining sales linked to that. So that's sales related comments per business area. If we talk about the EBITA margin per business area, again 4 out of 8 are increasing the margin in the quarter. Flow DACH Industrial Components, again then mainly driven by positive organic sales, again linked to Healthcare or MedTech and Pharma related segments, primarily I would say. In Finland, we have very good cost control, cost conscious MDs of the companies and also had some benefits from new acquisitions there. And the weak organic sales development was the main driver, I would say, for lower EBITA in Fluids and Mechanical Solutions and MST and UK. And I'm repeating myself here, but again, linked to businesses selling into the general general own manufacturing and have had lower capacity utilization and hence some extra costs here. I would say several companies have introduced short term or temporary layoff programs during March and also continued in April. So I would think that we have a bit more than 1,000 persons now involved in programs like that, and it might increase a little bit going forward. And in addition to that number, we also have those who were a bit locked out, as I said, in Sri Lanka, Malaysia, China, South Africa, approximately 700 persons there. So that's also been affecting the EBITA margins in those primarily in MST. But as we have, I would say, stated several times, our MDs are really cost conscious. They are taking fast decisions, and I think they are managing the situation in a really positive and good way. So those were my comments on order intake, sales and EBITA, both on group level and business area level. Some brief comments on the acquisitions. You have obviously seen these acquisitions as we have released them 1 by 1 when they happened. So all in all, 6 really good acquisitions in quarter 1 adding about SEK 400,000,000 on an annualized basis. We have also actually done some add ons, which we haven't press released, and so also some activity like that. We have also divested the only remaining business we had in Russia, Mison FD Rus, which we also had extraordinary general assembly shareholders meeting about in February. So that project is now also finalized, which is feeling good. And management bought that company and are now running that. Okay. I think I stop there, and we can come back to this later on. And then I leave the word to Patrick to comment on the financials more in detail. Thanks, Bo, and hello, everyone. So let's dive into the numbers a little bit more and look at the key data summary first. And as Wouter said then, we had a strong order and sales development in the Q1 with orders up plus 17% and invoicing or sales up 14%. Book to bill was good, plus 9%. Gross margin was very stable during the quarter, pretty much in line with last year, I would say. And here it's important to remember that we have a lot of trading companies and they of course have that they have a headwind, the Swedish and the Norwegian companies than as the krona, both the Norwegian and Swedish are really low. They are working in a headwind, but still we managed to keep them the gross margin stable. So I think that's good. EBITA margin increased then to 12.4% versus 12.3% last year. We saw an increase in the finance net of 19%. So that's slightly higher than the profit increase then. And the main reason for this is the high acquisition pace then, the last year and also beginning of this. And also interest rates are slightly higher, so that's also impacting slightly. Tax cost up 17%. The underlying tax rate is, however, I would say, in line with last year, but we have some more nondeductible expenses in this quarter compared to last. Earnings per share up 11%. On the return side, return on capital employed is 18% compared to the 21% last year. So that's slightly lower. And actually, IFRS 16 impacts around 1 percentage point. That might be you might feel that is strange then. But we always calculate these on a rolling 12 month basis, which means that we don't have full impact in last year's Q1 number. So the only comparable to this year's numbers is quarter 4 last year then. There's 1 percentage point of the increase related to IFRS 16. And the other main reason, I would say, is also here then the increased acquisition pace. And also, we have somewhat higher working capital also than compared to on a rolling 12 month basis compared to before. Cash flow, really strong for the quarter, dollars 4.21 and that's up 151% versus last year. And that I will elaborate a little bit more on the next slide. Net debt EBITDA is 2.2 versus 2.0 last year, so that's slightly higher. But I would say that it's still relatively in line with what we have had then as an historical average. So let's move on and look at the cash flow then. As I said, strong $421,000,000 And Q1 is normally seasonally weak quarter, which I hope you can see them from this slide. And that's because we normally have stock buildups during this part of the year. And also, of course, then customer payments are slightly lower from the invoicing around Christmas, New Year, etcetera. So the main driver for the increase, it's a better development of the working capital than what we had Q1 last year and also the better result, of course, impacts as well. Still, we are not at the level where we should be on the working capital. So we're still slightly high. So we are working with our companies on that. So that's still an improvement potential long term, I would say. On the other hand, I would say that it is now actually a slight protection shield also when we note some disruptions in global supply chain. So that's actually something good that comes out of these slightly high stocks. So move on and look at the earnings per share. The quarterly earnings per share then grew 11% to 3 point 22%, which is a good development, but it's slightly lower than the improvement in EBITA. And the reason for that is that you have a slight offset by increased amortization of intangibles and the financing costs. And those come from, as I talked about before, a lot about come a lot from the higher acquisition pace that we've had in the last year. 3 year 5 year increase in the quarterly EPS, strong numbers, plus 14% and 19% then per year on average. And finally, the debt side. The interest bearing debt end of Q1 increased to SEK 6 €500,000,000 approximately. And the increase also here comes from the higher acquisition pace the last year and also beginning of this. And the ratio net debt to equity ratio is 85 versus 76 last year, slightly higher than the 2 last years. But I would but if you go back further 2 years, it's basically in line with what we have seen. If you talk more broadly about the financial position, I would say that we already when we moved into this year had a strong financial position. But given the uncertain situation, we've worked even more with the situation here and try to strengthen it further. And in the beginning of April, we prolonged all our short term term loans. And we also actually put the new SEK 750,000,000 credit facility in place. So if you take all these actions in consideration, then our remaining short term funding is roughly SEK 1,400,000,000 and our long term unused credit facilities is 3.3%. So it's relatively big headroom in that. So by that, I think I end and leave over to Bo again. Thanks. Thank you, Patrick. So then we have a slide trying to comment on the overall impact COVID-nineteen had in quarter 1. We have already spoken a bit about this, starting out with minor disruptions in the supply chains. So we have obviously some companies who buy product components, raw materials from Italy, and there has been some problems there in getting product and having delayed products. They need to find second sources if they didn't have that before. Also some disturbances from Spain, France and also China. And apart from customers or suppliers being basically restricted to from working there. We have also had some issues with transportation costs, not least air transportation has been extremely expensive and also transportation times have been an issue. Containers have been in the wrong harbors geographically and so on and so forth. So some disruptions from this will continue to some extent into quarter 2 here. And we have also had production disturbances. I spoke about our sites in Sri Lanka, Malaysia, China, South Africa, where basically the governments have locked us out without financial support. Then if we take our more normal operations in Europe, there's obviously from time to time been higher sick leaves situations. And also in order to manage this situation, a lot of the companies have introduced new distancing roles among employees. So for example, perhaps they are usually running a normal day shift. They have now introduced 2 shifts in order to have fewer persons per square meter in the assembly area or similar. On the positive side, we have spoken about the medtech related companies, pharma related companies. So they have obviously had a really good order intake impact. And in general, we have seen some customers building safety stocks linked to the strains in the supply chains. Very difficult to assess how much that is, but rather limited, I think, overall. Country and customer lockdowns, some of our companies have had and still have customers in lockdown. The automotive industry is starting up now, which is great because they have huge impact on the overall, I would say, business situation in Europe. But it's at very, very low levels to start with the 1st weeks here, so very minor impact Yet, aerospace is another area where it's been basically complete lockdowns. So we have companies who have experienced that and are experiencing some of that. As I said, we are using temporary layoffs when necessary, and it's basically up to each individual MD to take those decisions and follow the regulations in each country linked to this in a good way. And now we have a bit more than I think 1,000 persons involved in those types of programs. Perhaps ending then stating that the business model we have, the culture we have, the agility in the trade house is managing this in the best way ever, I would say. Also then commenting a bit about our segment portfolio our segment portfolio structure. On this slide here, you see our 4 largest segments. And we categorized that in general engineering, 19%, construction and infrastructure 17%, and that's much more infrastructure than construction for Indo Trade. And Healthcare in total, 13%, and that's Medical Equipment or pharmaceutical or biopharma related businesses. And then the energy segment, where we obviously have our larger valves company linked to power generation, but actually quite a lot of business is linked to wind power and other types of energy generation as well. So these 4 are accounting for about 60%, and then we have another 8, 10 segments building up our total business. And as usual, some of them are having more of a challenge, but quite a few also have positive situations. So this broad portfolio is building a natural business cycle hedging, which gives good stability in a situation like this. We had a board meeting in Indo Trade this morning, and one of the agenda items was linked to the dividend and the General Assembly meeting. And there is now a decision from the Board that we will have the General Assembly meeting June 2 this year at 3 in Stockholm. And there are obviously risks linked to larger meetings. So we will try to have a not more than needed involved in that meeting from our side and hopefully not too many shareholders either since we will provide opportunities for voting by post and so on and so forth. But all of that will be informed about rather shortly here. And the Board is also proposing to the General Assembly that there should be no dividend at all linked to 2019 and paid out this year. Okay. Then trying to summarize and underline some of the key takeaways from the presentation here. So really strong and good growth, both organically and structurally in the quarter and record high EBITA margin, but also variation in demand and limited, I would say, total COVID-nineteen effects in quarter 1, but a bit more dynamic movements under the surface. There is very large uncertainty ahead, and it's obviously extremely difficult to give any type of guidance going forward based on this uncertainty. We have discussed what we potentially can elaborate on to help you guys in your situations. And we can say we are obviously tracking our sales situation on a weekly basis now to be on top of things here. And month to date in April, our sales is about minus 10% to minus 20%. But there is still some time obviously left in April, and then you have May and then you have June. So very, very much uncertainty and we will we don't know exactly where we will end up obviously in quarter 2 or at the end of the year. But that's the guidance we can give, and that number is an organic perspective, not sort of the total sales involving structural effects. Again, underlining that we are a diversified business group, Agility is something we really have in our DNA, I would say. So our MDs are working very closely with customers and taking business decisions very rapidly when they see need for that. And in terms of acquisitions going forward, I would say that we are in a number of good and interesting discussions. Obviously, we don't want to finalize a lot of acquisitions when the uncertainty is large. So we are trying to basically pedal the bike as slowly as we can without falling to the ground. But we will see. We are on top of those situation. We don't want to miss any opportunity, but we also want to manage risk in a responsible way. So the whole acquisition situation feels actually very good in that perspective. So by that, we end the formal presentation and say thank you for listening, and we open up for any potential questions you have. And our first question comes from the line of Johan Baugh from Danske Bank. Please go ahead. Your line is now open. Yes, thank you. Did I understand that correctly, Bo, you talked minus 10 to minus 20 for April in organic sales. Was that right? Yes, month to date, those are basically involving up to last week's sales in April organically. All right. This 1,000 people you had on some sort of temporary furlough, do you have any sort of visibility for how long that will be? It's up to every individual MD basically to manage that. So no, I can't really give you any certain guidance on that, unfortunately, but not longer than necessary. All right. Just on the it seems there are some segments like medtech is really growing substantially in the quarter and others being sort of really weak. How is that impacting profitability in your view in the Q1 in terms of mix, etcetera? Yes. Good question. Slightly negative, I would say, on profitability basis. Linked to that, we are having some underutilized assets and quite a lot of people who we pay for, we cannot use productively. And it's not optimal to run any actually company on a super high order intake or sales level. You have to take extra costs for shift structures or transportation and things like that. So slightly, slightly negative, I would say. I don't know, Patrick, if you have any other view than I am. Yes. No, I think I mean, we have, of course, good margins in our medtech business. But I think also as Bo described, we have a decline then in total companies relating to general manufacturing. These type of companies maybe as an average have slightly more fixed costs than others. And so the decline in those makes us drop a little bit more than otherwise, I would say. All right. Just final question. There were some one offs you talked about in DACH, what was left in the quarter? And also looking at how you account for your acquisitions here in the first quarter 2020. If you do the math, looking at what you paid for those companies and just annualizing the contribution to earnings in Q1, it seems as if the multiples have gone up to some 10 from traditionally 6 to 7. Is that correct or not correct? Let's talk about one off first. And the DACH, they are not super big. If you exclude those, DACH would still have improved their margins. So that's not the big contributor for DACH. And if you zoom out even more and look at one offs in general, I think the biggest positive one off was the earn out that Bo talked about. But we had a number of smaller negative one offs as well than related to the Asian units we talked about and acquisition related one offs as well. And so if you put all that together, I would say it's maybe only slightly positive on the group total, I would say, maximum 1 10th of a percentage point. So that means that the underlying basically are in line with last year. On the acquisition multiples, I would say it's basically in line with what we have paid before. And if you maybe it's difficult to do the math just looking at the core the numbers available in the report. But if you deduct sort of the earn out amount, because those we don't pay out until the companies perform and grow and perform, you deduct those, I would say that we are not paying more on sort of the companies more than we've used to. So the multiples 6, 7 are sort of still valid for the month that we closed this year. Great. Thank you. Thank you. Our next question comes from the line of Oskar Vikstrom from ABG Sundal Collier. Please go ahead. Your line is now open. Okay. Thank you so much. All right. Just have a few questions to add to that. Firstly, I know you mentioned this inventory buildup that it's hard maybe to magnify just how much was of the growth was driven by it. But could you just elaborate a bit on what segments you're seeing this in more detail? It's not segment specific, I would say. It's a bit spread and it's we customers don't basically say that this order is for safety stocks or so on and so forth. So it's impossible for us to give you any it's more a sense and feeling and not very significant on the overall basis. Okay. So you wouldn't say that it's a big part of the growth we saw this quarter? No. Okay. And this so this month to date, negative 10% to 20% organic growth. Should we assume that this is, let's say, is it the same sort of segments that are suffering as they did in Q1? Or is it a different sort of mix than what we saw this quarter? No, I would say it's more similar than anything else. But it's extremely uncertain. And for example, you can see that UK have had a tougher situation now. If restrictions step by step open up in the U. K, maybe the business environment will improve, they will start construction sites again and need material and so on and so on. So that can obviously improve. It might be very slow or it might be a little bit quicker. We don't really know. So it's very, very difficult to give the guidance, unfortunately. Yes. And just one final thing on acquisitions. So you mentioned that multiples are still at the historical levels. Just out of curiosity, when you find yourself in sort of a slowdown or economic downturn, historically, how has the pricing of acquisitions developed in these times? And is it harder to come to an agreement with sellers? And how is that dynamic? Yes, it's I think mostly so that it's been less projects finalized during those times. And those sellers who have a choice, they usually defer the decision to divest at exactly this time then and wait half year or a year. They know what the company is basically worth in normal times. And perhaps there are a few who really need to sell because of generation shifts or whatever it might be and thereby so it's more sort of less activity rather than lower pricing, I would say. But we I would also say that we are very fortunate in terms of our pipeline and it can potentially be so when we feel that the business environment is stable, there might be a bit of a catch up effect on acquisitions in short term or in short time. So maybe, at least hypothetically, we don't do very much in Q1 or Q2 and perhaps not Q3, who knows, and then quite a lot in Q4 because we keep in dialogue, we keep in contact, we are doing due diligence work and so on and so forth, but we don't want to take risks, unnecessary risks before we know that, that particular company is having a stable sort of next couple of quarters and also that our financial situation is stable and secure. Thank you. And as there are no further questions registered at the moment, I will hand the word back to our speakers for any final comments. Please go ahead. Then we thank you for your attention and listening and say thank you for today, and we keep in touch. Bye bye. This now concludes today's webcast. Thank you all for attending, and you may now disconnect your lines.