Earnings Call: Q3 2019

Oct 25, 2019

Ladies and gentlemen, welcome to the presentation of Indochreit AB Q3 Report 2019. Today, I'm pleased to announce Mr. Bo Anjek, CEO and Patrick Thompson, 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. Good morning and welcome to this presentation. Another good quarter from Intrades. We start, as usual, with some broad highlights from the quarter. And we can positively say that we have had good order intake and good sales growth in the quarter and also a positive box deal even if it's slightly. The demand is remaining or deep vein at a good level, but we see that the market is flattening out. And under the surface, we also see a bit more variation between companies and market segments and also geographical markets. And we will elaborate more on this further down in the presentation. Also stable EBITDA margin on high level, 12.8%, again, which again is the highest level we had since the IPO. So very good. We also had good cash flow during the quarter, and we are a bit maybe not disappointed, but we would like to see the working capital come down a bit, and we are working very hard and focused on that. So that will come, I'm sure. We have had very good acquisition activity during the quarter. And during this year, in total, we have now made 14 good acquisitions and added about SEK1.5 billion sales on annual level. So great progress in terms of acquisitions as well. If we turn to the order intake on group level a bit more specifically, you can see that we came in, in total, on plus 13%, which is, I'd say, very good in this type of market. And as I said also earlier, the book to bill is slightly positive. More importantly, the organic part of the order intake came in at 5%, and we had a bit lower organic order intake in quarter 2, and now we are bouncing to high levels again, which is comforting, obviously. Also, the acquisition effects came in at around 8%, which is also very good. So you can perhaps also mention then that we had a slight positive impact on the number of working days during this quarter, perhaps around 1% or so impact, I would say. If we then turn to the overall sales situation, it mirrors the organic or it mirrors the order intake quite well, overall, plus 12% and organically also positive at 3%, a bit lower than the order intake, but still very good. If we try to describe our sales in a more geographic market perspective, we can say that Scandinavia has been solid and strong, Sweden, Norway, Denmark and also Switzerland, solid growth organically in the quarter. We also grow in the UK, but there we see a bit leveling off. And I would say, it's mostly, I think, driven by more worries and perhaps not really understanding where Brexit is heading. Then we have 2 geographical markets with more flat development in Holland and Finland. Finland has been flattish for quite some time, and now Holland is added to Finland in this quarter. And Germany is declining and weaker for us. And I think Holland is actually impacted by the neighboring market, Germany, and that's driving Holland to be having more of a flat development for us. Okay. Then we turn page and look at the EBITDA development. As I said, we came in at 4.8%, good, stable, high level, and we increased by 12% in the quarter. And here, the organic impact was 1%, perhaps slightly lower than where we would like to see it mix the organic sales growth of 3%. And I would say the main reason is the Dutch and German market companies and also, I would say, tough references for the MST sector or business area. And we will explain this in more detail when we come to the business area part of the presentation. Acquisitions contributing with 8% and divestments also contributing positively with another percent to the EBITDA. And if we go to the sales situation on a business area level, it's comforting to see that actually 7 out of 8 business areas had an organic sales improvement. So I think that's good and positive. But again, I think it's in place to say that below the surface, we see a bit more variation between the companies and the segments and the markets. If we start with Business Area DACH, we are supported by, I would say, good activity in the pharmaceutical and chemical industry in Switzerland. And we have a number of companies providing building components and also flow technology components into those sectors. And there are, I would say, actually greenfield facility investments, brownfield renovations, but more importantly, a lot of new production lines being installed where we sort of benefit from that type of activity. So even stock was up 7%. They actually suffered from a weaker German market also. It could have been better, but I think we will have that weaker market in Germany for a while, unfortunately. But all in all, a very good situation in DACH, and many companies contributed to that. Then we had a number of business areas who were actually benefiting from good organic development in the infrastructure segment, in water and wastewater, in the marine segment and also in also the aftermarket sectors. And these sectors were good in Finland, in Flow Technologies and also in Fluids and Mechanical Solutions. So they were all up around 2%. And one could have perhaps expected that flow technology would have been even better this quarter in terms of organic growth. Of course, we have some marine related business in that area. And because of, I would say, positive growth in exposed gas cleaning and ballast water treatment, We also benefit actually quite good in terms of those businesses, but it's a fairly still small part in the bigger picture of flow. We also in flow saw a very good development in terms of distribution within the healthcare sector. But holding us back, I would say, is also Germany to some extent and certain project related business for companies. So the net effect organically was 2%. But yes, still okay, I would say, and hopefully can be better going forward. If we think industrial components, we have a number of companies in that area in the medtech segment. They were presenting good organic growth, I would say. We also saw good organic growth in components to Industrial Automation in that area. And Industrial Components, I would say, overall is a collection of good technical trading companies in Scandinavia, and Scandinavia held up well organically for us. So that was sort of benefiting in this respect. If we take measurement and sensor technology, we had good organic development, plus 6%. But it came from a number of larger project deliveries for a large number of companies in that area. They actually had a very good quarter, also Q3 2018. And I will explain a little bit more about why we didn't see that EBITA development from this organic growth development in a slide here later on. UK was also growing with 2%. But as I said earlier, we or our companies in the UK are actually experiencing, I would say, that it's an impact from Brexit. There is more uncertainty and some customers are a little bit more hesitant, I would say. We don't think it's going to be dramatically worse, but it's been nodding off a little bit in Q3 versus before, but still good level, positive level. The only decline was in the Benelux area. And I would say the predominant reason for that was that we saw lower sales of valves for the power generation sector, But also, I would say, some general impact from weaker market in Germany having impact on the market in the Netherlands also. If we then take a page and elaborate a bit on the EBITDA margin per business area. There are 2 business areas standing out positively with margin improvements. It's Finland. Finland had an all time high margin in quarter 3. And then also Fluids and Mechanical Solutions, which is also mostly Scandinavian companies, but a bit of mix of technical trading companies and companies with own manufacturing. But these two areas had good organic growth in many companies, I would say, complemented with good cost control, good cost efficiency and also completed some divestments and had positive effects from that. Then we had 2 business areas with, say, development on a high level. Industrial components, as I said, benefiting from Scandinavia and had stable performance positive from the Metac sector and these automation components, a little bit weaker development in some cutting tools related companies where the automotive sector is impacting a bit. And fairly equal situation in terms of flow. As I said, positive contribution from the Marine segment, from the water distribution and waste water treatment sector. But Germany, a bit weaker and then certain project related companies, a bit weaker in flow. But altogether, still on a high level, I would say. Then we have 4 areas where we see a little bit of decline. If we start with Measurement and Sensor Technology, as I said, they had a good organic sales growth and overall total sales growth. But I would say it's mostly product mix and project sales related reasons for the lower EBITA margin development. And they came from a very high level of just below 20 percent in quarter 3 2018 and now almost 17%. So it's still on a good level. But yes, certain negative mix impact and project impact in the quarter here. It's still an area with positive growth opportunities where a lot of, I would say, mechanical related companies need more intelligence and this business area can provide that going forward. U. K. Also had a slight negative development, touching in at over 15%, which is still a very good level. And as I said earlier, I would say characterize it by a little bit more uncertainty in more companies than before linked to Brexit there. Then we have 2 areas left to comment on, and it's DACH and Benelux. And holding DACH back is, I would say, some companies with larger sales to the German market. And then we have a pharmaceutical related company with sales in North America. And this situation with opiates in North America is basically putting a wet blanket under development for them right now there and have been so for a while. So we'll see if that eases up in the next coming quarters here. But currently, it's been or having a negative impact on DACH's EBITDA performance. And then the Luxe, it's primarily again then these high pressure valves to the power generation sector impacting a bit negatively. And then some companies who have lower, I would say, sales due to a generally lower market activity impacting a bit by Germany, I think. If we then comment on our acquisitions so far this year, It's been great. We have bought 14 companies, really good companies, and we have added about SEK1.5 billion in annual sales and around plus 8% percentage impact. And it's also very good to see that actually 7 out of 8 business areas have been involved in acquisitions. So it's a fairly good balance across the group in terms of acquisition impact. And we think this will continue in a good level for the remainder of the year and the beginning of next year. We bought 4 good companies in the quarter here, a Norwegian company called Finisterra involved in, let's say, instrumentation for measuring humidity in different industrial applications. We bought a company in Holland or in the Netherlands called the Sensor Group, or basically providing sensor for industrial automation in the Dutch market primarily. We bought a very interesting company in the U. K, making custom made drying and curing systems for a very broad range of application areas in industrial print, biosensors, industrial labels and so on and so forth. And last but not least, also a company in Finland providing valves for the process industry, high quality valves. And we have also made 2 more acquisitions after the close of the quarter. A company in Switzerland called Unisca providing high quality transportation systems and another company in the Dutch market, which manufacturer of sensors for geotechnical measurements, for example, groundwater level sensors and infrastructure preparation sensors. And the last 4 are actually what we call add on acquisitions. So an already sort of existing industry companies taking responsibility for this company and will integrate and develop them in their clusters going forward. With that, I leave the word over to Patrick to comment on the financials. Thank you, Bo, and hello, everyone. Let's start with sort of an overview of the main key status. Total growth for orders and sales was 13% plus 13% and 12% respectively. And year to date, plus 10% for orders and plus 9% for sales. And we continue at both of them with a positive book to bill. Moving further down on to the gross margin, it is stable both the quarter and year to date. And the Swedish trading companies, as you know, they have a challenge with the Swedish krona. So I think they really did a good job, pricing job them versus their customers. I think, yes, the margin shows that they're doing good job. In the same margin, sales at 12.8%. And as we said, again, it is the historically high quarter 3 margin. There is a large increase on the finance net and but roughly half of that increase relates to IFRS 16 and half due to the increased debt level and also some little bit higher interest rates as well. Tax increased to 7%. That means that the underlying tax rate is basically the same as last year. Earnings per share, up 8% for the quarter, 9% year to date. Return on capital employed, 19% compared to the 19% last year, also last year. And excluding IFRS 16, the return on capital employed is actually 20%. Cash flow. Operational cash flow was CHF 534,000,000, which is high end group level. However, the improvement versus last year is actually related to IFRS 16 reporting changes, and I'll elaborate a little bit more on that further on. On the net side, net debt EBIT GA at 2.3, that's an increase versus last year, 2.1, but again, then excluding IFRS 16, it is 2.2. So it's a slight negative impact. So that's sort of a summary of the key data. And we will move on and dive in a little bit more into the IFRS 16 effect, the impact both balance sheet, P and L and KPIs, as you know them. You see here the year to date effect. And so relatively big impact on the balance sheet, SEK 842,000,000 in the O2 balance, and now it's up to around SEK 900,000,000. Euros And so you see the different impacts in the different lines in the P and L, and you see also the impact on net debt equity, plus 13 percentage points then. And remember, when you calculate the impact on this and other measures to them, but for instance, return on capital employed is calculated on a rolling 12 month basis. So the impact comes gradually during the year. And the impact in Q3 is almost 1 percentage point, and it will be slightly more negative than in quarter core because of the 12 months rolling inflation. So moving on and looking at the cash flow. And it came in then at SEK 534,000,000, that's an increase of 13%. And but that relates only, I would say, to IFRS 16 changes. But the level as such is a high level and that's a good level even though that the increase is IFRS 16 related. Working capital, as Bo mentioned, still on a slightly high level, and that is due to that many of our companies have increased their inventory during last year mainly to ensure delivery service and availability for their customers. And we are working very much with our companies to reduce the levels, but and we expect large reductions in short term. And the stable and strong good delivery service, they are key for our companies. So it's important, but that we don't jeopardize on that journey. Regarding then stock reductions, then it's it's important to know that we don't really see big risks or downside in other profit than when we work with the stock reductions because most of the stock increases is related to purchased items. And reducing them will not lead to big ground absorptions that I think is important to note. Yes. Moving on to earnings per share. EPS grew with 8% in the quarter, and that improvement comes from the stronger operational profit, of course. But it's somewhat offset by increased amortizations of intangibles and increased financing costs. And those 2 are both related to the increased acquisition pace and natural from that perspective. Looking at the APS development over longer time, over the last 5 years, we have managed to increase earnings per share than 15% per year. Important to note. Yes, moving on to debt. Our debt net debt level has increased with approximately SEK 2,000,000,000 that may look a little bit dramatic. But here again, the IFRS 16 impacts a lot. And half of this increase actually is very similar to IFRS 16 and half related to the increased borrowing related to the higher acquisition phase. Remember also the reference last year, we had a relatively lower acquisition pace. So that's why it also looks maybe more dramatic than it is. And the KPIs, net debt KPIs, commenting on those a little bit, 91% net debt ratio. And if you exclude IFRS 16, it's on 78, and that is pretty close to where we were last year. And if you compare it to preceding years, it's maybe lower, I would say. Maybe good to repeat also when you talk about that situation between quarter 2, strengthen the long term financing of the group with a new SEK 3,500,000,000 revolving credit facility, 5 year credit facility. And all that together, I would say that the debt levels ratios, they are normal and the balance sheet remains strong, and we are in a good position for further growth. And with that, I'm ready, and I think we're comfortable. Thank you so much. Talking a bit about our business model, we think it's a successful model. We have used it for 41 years basically, and it's built on developing the companies we already own and acquiring new strong good companies. And we feel that this will be able to continue for quite some time going forward. We are very long term oriented, and we definitely think that in terms of the size of interest rate based on this model and doing so maybe in the next 5 to 8 years depending on the business climate. And the development dimension is, I would say, mostly driven by our passionate entrepreneurs we have in our businesses, and we try to support them in a number of ways. And I will come back to that. Commenting a bit quickly on the acquisition side. As I said, we have now a great year. We still have a number of projects in different phases going on. And we have a high caliber team here centrally, and we also have, I would say, very experienced persons out in our different business areas making acquisitions. We are done with our succession in the management team, and we have left, I would say, most of the hedge to ordinary divestment activities and restructuring. So it's full focus on business development going forward, and I think we can scale up now in terms of this in terms of a capability perspective. And I would say that each business area should be able to make 2 to 3 acquisitions per year without us taking more risk or buying less quality type of companies or anything like that, basically continuing as we have done successfully over the years. And coming back to the development I mentioned, we have a number of strategic initiatives, which we have had now for a while. And I appreciate focus. I'm not going to launch any new initiatives. We have much more to do in terms of those we have here. So we focus a lot on people, developing people based on our values and based on the culture we have within the trade. We have now, I'll say, Indo Trade specific programs to do that. And we are set right now building an Indo Trade toolbox. Our people in the different companies can benefit from in everything from digitalization to value based pricing, purchasing and so on. We offer certain tools to benefit from. We are also engaging in active knowledge sharing and we try companies in the group to meet and share experiences on market sectors or product areas, perhaps also geographies like faraway markets. And last but not least, we are engaging very much, I would say, in sustainability. We see that as a clear business opportunity for us as a group and for the individual companies we have. And I would say we are already good at sustainability and now taking steps to become even better. By that, we'll try to summarize the quarter 3, and we have created what we see as the key takeaways from this presentation here. Stable level of earnings on a high level and order intake and sales grew organically, 5%, we said order intake wise and 3% sales wise, so a good perspective. And then this, I would say, at a high level, good level, but it has flattened out. And the outlook is that it will, I would say, continue on the level we see right now. So fairly flat outlook and increased variation between the companies and the segments. So a dramatic difference between Q3 and Q4 in that perspective. Q4 is always, I would say, in terms of December, something to note. We don't know how that will play out. And we will obviously try to do whatever we can to deliver, I would say, stable and good in December, but sometimes some customers are shutting down early and want to watch their operating capital and things like that. I would say that's the only comment I have in terms of the outlook for quarter 4. I've already said a high pace on acquisitions, and I look very positively on that also going forward. And hypothetically, right now, if we were to enter a recession, which I don't say we are, I think we can manage a recession as a group in an agile and flexible way. We are an aggregation of a lot of small and middle sized companies, and they are close to the customers and also have autonomy to make the right type of decisions in situations like that. And we have a stable platform, great leadership team and great team in our companies to manage this in a great way going forward. So now that we end the formal presentation part and say thank you to our side and open up for any potential questions. Thank you. The first question comes from the line of Johan Dahl from Danske Bank. Please go ahead. Yes. Hi, Benoit and Patrick. Just on the on your general assessment of market demand and your outlook, I'm just curious to understand the last quarter, I think you had sort of flat quarters and you were quite clear that you saw fairly optimistic offerings. This time orders are clearly better and growing year on year, but is it to indicate slightly more cautious of it? What actually leads to that judgment? Is it more of a macro call? Or is it what you're hearing from customers not yet visible in orders? Or how would you put it? But as I said, when I summed up here, I think the business climate in we are experiencing right now is not very different from a couple of months ago, And we don't expect it to be very different in the remainder of the year either on, I would say, broader level. And then between quarters, it can differ a little bit in terms of how some project related companies benefit any impact from their businesses, I would say. So yes, we were flat, I would say, in quarter 2 in terms of organic growth. And now we are a bit up. And maybe it's better to look at the average between the 2 quarters and say that, yes, so it's a fairly flat market, but some of our companies are, I'd say, benefiting from positive project orders still. And overall, that leads then to some positive organic impact. Is the Energy Valves business, is that sort of the primary factor behind the growth in orders organically here in Q3? It's not the primary, but it's adding, well, again, positively organically, which is very good to see. And the sentiment we have right now is that, that will continue to be positive in Q4. Got you. And can you say anything regarding potential effects of this toolbox that you've introduced in the trade? You talked about management succession being done, focused on business development. These other initiatives that you've driven, what should we expect from that and when? It's more, I would say, stepwise fairly slow performance impact perhaps, but still positive impact. So it's very difficult to translate that to numbers, I think. But we will, over time, improve competence. So hopefully, we will be better at pricing. Hopefully, we will be a little bit better at purchasing. And hopefully, we will benefit a little bit from learning from each other in a market sector perspective and so on and so forth. So not any very significant impact on a country basis, obviously. But year over year and in the next couple of years, I'm sure it's going to have smaller impact on both growth but even more, I would say, operational results. Okay. Finally, on the inventory side, yes, I clearly, you don't seem concerned about it. But if where would you like to be given where the market is right now in terms of inventories, I. E. What's the delta sort of that you're aiming for in sort of a couple of quarters ahead? And what is the sort of profitability impact of it? You're clearly saying it's low, but can you provide any more sort of guidance there? Well, we don't have sort of a target or optimal level on where it would be then. But if you look at the total working capital as we define it internally, it has increased then year over year with 16 percent, but a lot of that is actually related then to acquisitions and currency. So underlying, the organic growth is 5% year over year. And that, if you that corresponds to 200,000,000, euros 250,000,000 and much of that, I would say, is related to inventory. And I guess that's sort of one perspective on looking at it. That is sort of at least what we want to long term reduce, not too long term. Okay. And I guess investors were high last year as well. And any sort of guidance you can give on the profitability impact of production? That's difficult. I don't want to give a guidance. I mean, remember that around 60% of our companies are trading companies and also the manufacturing companies, they are to a large extent assembly workshops and a lot of input materials bought on sub suppliers. So I would say it's smaller. I can't write more than that. The next question comes from the line of Oskar Wigstrom from ABG. Please go ahead. Thank you. Yes, I have another question to complement there on Benelux. So you saw others come in come up now. And I was just curious about what's the time frame until that you can see that sales? And then how should we view Benelux as a segment considering maybe orders are coming up within the valve segment and then you have Germany dragging down. So how should we view that going forward into Q4 and Q1 2020? Yes. Good question. We will see better sales and deliveries in quarter 4 in terms of wells to the power generation sector. But as you say, we also see in some of the companies, we see a weaker general market and which will lead to a lower sales for them. But probably a little bit better perhaps what we saw this quarter. All right. And then just in terms of also back again, if you could just repeat the margin there. So you have a negative effect in Switzerland from the U. S. Exposure. Then you have some companies doing more probably in Germany. I was just thinking like going forward, is this lower level sort of what we should expect going forward given uncertainties in Germany? And then I mean, is this also a matter of mix? So where the growth is coming from this quarter, does that have a generally lower margin? I think not a big mix effect, I don't think. I think the problems in Germany probably remain or the weaker market in Germany driven by the automotive sector and indirectly impacting our companies. We'll remain for according to next year, definitely, I would guess. And this medical sector company suffering a bit in the U. S, I think also will have I don't think this opiate situation we have there in the U. S. Will be solved very quickly. So unfortunately, I think it from the impact was negatively for a couple of quarters going forward. And just in terms of organic growth for the group, is there any like pricing involved here or is this just pure volumes or has prices increased any or could you comment on that? It's difficult to say. We also have I mean, we definitely have pricing. But as Patrick said before, we have also had to price because of for currency reasons, I would say. And the main target is to equal that situation out as fast as possible. And then there is probably a little bit pricing effect, but more of a volume effect, I would guess. Sorry. Thank you. The next question comes from the line of Julius Roquelli from SEB. Please go ahead. Yes, good morning and thanks for taking the question. My question regarding the Measurement and Sensor Technology division. You mentioned some larger projects there driving the organic growth in Q3. Nice comeback from Q2 on that side. So should we expect these deliveries to continue into Q4 or the growth rates more like the normal life? And then another one regarding your sales division. Last quarter, you mentioned some struggles in North America and the market situation there. Any color on that one as well? Yes. Thank you. Yes. I think it's going to continue fairly positive for that area also in quarter 4. And the issues one bigger company had, one of the larger companies had in North America is improving. So that's good. At the same time, I'd like to say that the margin level we had in quarter 3, 2018 of 19.5% is a standard level. Yet. So we are working towards that, but the mix in that quarter was very good. So that's probably a default maintenance The next question comes from the line of Robert Regan from Carnegie. Please go ahead. Yes. Hi. Just one question on acquisitions. So obviously, you've done a lot of acquisitions this year, having SEK1.5 billion of sales, something like 9% of sales. So you've done a lot. But could you comment anything on sort of the pipeline? Have you bought all of the companies in your pipeline? Is the pipeline looking shorter or weaker than, say, 6 months ago? Or is it looking fine still despite the high number of acquisitions year to date? And secondly, on acquisitions in this sort of slower demand environment, do you expect to see a slower or better in flow of ideas or possible targets? Good question. No, we see a fairly positive outlook in terms of acquisitions. And we are in a number of projects in different places. I would be surprised if there isn't more acquisitions finalized before we close this year. And then in terms of acquisition opportunities in a more demanding market, That's not positive. I don't think it's those sellers can sort of avoid off selling in a weaker market potentially affecting their profitability and also the price of the company will probably refrain from doing that. So maybe a little bit less companies in a recession. But in a flat market development, more as we have it right now, I don't think it's a big difference. Okay. So if market demand is flat, it's the same, you think, as in a more positive market? Not a very big difference at least. Okay. Perfect. Thanks. Yes. Thanks. Currently no further questions registered. I'll hand the conference back to you, Stifel. Speakers. I would say thank you for listening and participating. And we close the call and wish you a nice weekend. Bye bye.