Ladies and gentlemen, welcome to the presentation of Indutrade AB Q3 Report 2019. Today, I'm pleased to present Mr. Bo Annvik, CEO, and Patrik Johnson, 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. Speakers, please begin.
Good morning, welcome to this presentation. Another good quarter from Indutrade. We start as usual with some broad highlights from the quarter. We can positively say that we have had good order intake and good sales growth in the quarter, also a positive book-to-bill. The demand is remaining or did remain at a good level, but we see that the market is flattening out. Under the surface, we also see a bit more variation between companies and market segments and also geographical markets. 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. 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. 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 SEK 1.5 billion sales on annual level. Great progress in terms of acquisitions as well. If you 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 would say, very good in this type of market. 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 two, and now we are bouncing back to high levels again, which is comforting, obviously. Also, the acquisition effects came in at around 8%, which is also very good. We can perhaps also mention then that we have 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 order intake quite well. Overall, + 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 U.K., 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 two 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. Germany is declining and weaker for us. 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 developments. As I said, we came in at 12.8%, good, stable, high level, and we increased by 12% in the quarter.
Here the organic impact was 1%, perhaps slightly lower than where we would like to see it linked to the organic sales growth of 3%. 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. 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. If we go to the sales situation on a business area level, it's comforting to see that actually seven out of eight business areas had an organic sales improvement.
I think that's good and positive. 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. We have a number of companies providing building components and also flow technology components into those sectors. There are, I would say, actually greenfield facility investments, brownfield renovations, but more importantly, a lot of new production lines being installed, where we benefit from that type of activity. Even if DACH was up 7%, they actually suffered from a weaker German market also. It could have been better, I think we will have that weaker market in Germany for a while, unfortunately.
All in all, a very good situation in DACH and many companies contributing to that. 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 the aftermarket sectors. These sector were good in Finland, in Flow Technology, and also in Fluids & Mechanical Solutions. They were all up around 2%. One could have perhaps expected that Flow Technology would have been even better this quarter in terms of organic growth, because we have some marine-related business in that area, and because of, I would say, positive growth in exhaust 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 medical gas distribution within the healthcare sector. Holding us back, I would say, is also Germany to some extent, and certain project-related business for companies. The net effect organically was 2%, but still okay, I would say, and hopefully can be better going forward. If we take Industrial Components, we have a number of companies in that area in the MedTech segment, and they were presenting good organic growth, I would say. We also saw good organic growth in components for industrial automation in that area. 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 benefiting in this respect.
If we take Measurement & Sensor Technology, we had good organic development, + 6%, 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 quarter three 2018, I will explain a little bit more about why we didn't see better EBITDA development from this organic growth development in a slide here later on. U.K. was also growing with 2%, as I said earlier, our companies in the U.K. are actually experiencing, I would say, that business impact from Brexit. There is more uncertainty, some customers are a little bit more hesitant, I would say. We don't think it's going to be dramatically worse, it's been leveling off a little bit in quarter three versus before, 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. Also, I would say some general impact from a weaker market in Germany having impact on the market in the Netherlands also. If we then switch and elaborate a bit on the EBITDA margin per business area, there are two business areas standing out positively with margin improvements. It's Finland. Finland had a all-time high margin in quarter three, and then also Fluids & Mechanical Solutions, which is also mostly Scandinavian companies, but a bit of mix of technical trading companies and companies with own manufacturing. 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.
We had two business areas with, I would say, flat development on a high level. Industrial Components, as I said, benefiting from Scandinavia, and had favorable performance, possibly from the MedTech sector and these automation components. Little bit weaker development in some cutting tools-related companies where the automotive sector is impacting a bit. Fairly equal situation in terms of flow. As I said, positive contribution from the marine segment, from the water distribution and wastewater treatment sector. Germany a bit weaker and then certain project-related companies a bit weaker in flow. Altogether, still on a good and high level, I would say. We have four areas where we see a little bit of decline. If we start with Measurement & Sensor Technology, as I said, they had a good organic sales growth and overall total sales growth.
I would say it's mostly product mix and project sales-related reasons for the lower EBITDA margin development. They came from a very high level of just below 20% in Q3 2018, and now almost 17%. It's still on a good level, but 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 area can provide that going forward. U.K. also had a slight negative development, but came in at over 15%, which is still a very good level. As I said earlier, I would characterize it by a little bit more uncertainty in more companies than before linked to Brexit. We have two areas left to comment on, and it's DACH and Benelux.
Holding DACH back is, I would say, some companies with larger sales to the German market. We have a pharmaceutical-related company with sales in North America. This situation with opiates in North America is basically putting a wet blanket on the development for them right now there and has been so for a while. We'll see if that eases up in the next coming quarters here, but currently it's having a negative impact on DACH's EBITDA performance. Benelux, it's primarily, again, these high-pressure valves to the power generation sector impacting a bit negatively. 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, we have added about SEK 1.5 billion in annual sales and around +8% impact. It's also very good to see that actually seven of eight business areas have been involved in acquisitions. It's a fairly good balance across the group in terms of acquisition impact. We think this will continue in a good level for the remainder of the year and the beginning of next year. We bought four good companies in the quarter here. A Norwegian company called Finisterra, involved in, I would say, instrumentation for measuring humidity in different industrial applications. We bought a company in Holland or in the Netherlands called the Sensor Group, 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 and biosensors, in industrial labels and so on and so forth. Last but not least, also a company in Finland providing valves for the process industry, high-quality valves. We have also made two more acquisitions after the close of the quarter. A company in Switzerland called Uniska, providing high-quality transportation systems. Another company in the Dutch market, a niche manufacturer of sensors for geotechnical measurements. For example, groundwater level sensors and infrastructure vibration sensors. The last four are actually what we call add-on acquisitions. An already existing Indutrade company is taking responsibility for this company and will integrate and develop them in their clusters going forward.
With that, I leave the word over to Patrik to comment on the financials.
Thank you, Bo. Hello, everyone. Let's start with an overview of the main key data. Quarter growth for orders and sales was +13% and 12% respectively. Year to date, +10% for orders and +9% for sales. We continue, as Bo said then, with a positive book-to-bill. Looking further down to the gross margin, it is stable both the quarter and year to date. The Swedish trading companies, as you know, they have a challenge with the Swedish krona. I think they really do a good pricing job then versus their customers. I think the margin shows that they are doing a good job. EBITDA margin stable at 12.8% and, as Bo said again, it is the historically high quarter three margin.
There is a large increase of the finance net, but roughly half of that increase relates to IFRS 16, and half is due to the increased debt level, and also a little bit higher interest rates as well. Tax increased to 7%, which 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% also last year. Excluding IFRS 16, the return on capital employed is actually 20%. Operational cash flow was SEK 534 million, which is a high and good level. However, the improvement versus last year is actually related to IFRS 16 reporting changes, and I elaborate a little bit more on that further on. On the net side, net debt EBITDA at 2.3.
That's an increase versus last year's 2.1. Again, excluding IFRS 16, it is 2.2. It's a slight negative impact. That's the summary of the key data. We will move on and dive in a little bit more into the IFRS 16 effects. They impact both balance sheet, P&L, and KPIs, as you know them. You see here the year-to-date effects. A relatively big impact on the balance sheet. SEK 842 million in the opening balance. Now it's up to around SEK 900 million. As you see the different impacts in the different lines in the P&L. You see also the impact on net debt equity, + 13 percentage points then. Remember when you calculate the impact on different other measures for them that, for instance, return on capital employed is calculated on a rolling 12-month basis.
The impact comes gradually during the year. An impact in Q3 is almost one percentage point, and it will be slightly more negative than in quarter four because of the 12-month rolling calculation. Moving on, looking at the cash flow. It came in at SEK 534 million, and that's an increase of 13%. That relates only, I would say, to IFRS 16 changes. The level as such is a high level and at a good level, even though 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 the customers.
We are working very much with our companies to reduce the levels, but I don't expect large reductions in short term. Stable and strong good delivery service, they are keys for our companies. It's important that we don't jeopardize that on that journey. Regarding stock reductions, it's important to know that we don't really see big risks or downside on the profit side 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 absorptions. That, I think it's important to note. Yeah. 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.
Those two are both related to the increased acquisition pace and are natural from that perspective. Looking at the EPS development over a longer time, over the last five years, we have managed to increase earnings per share at 15% per year. Important to note. Yeah, moving on to debt. Net debt level has increased with approximately SEK 2 billion, perhaps may look a bit dramatic. Here again, the IFRS 16 impacts a lot, and half of this increase actually relates then to IFRS 16, and half relates to the increased borrowing related to the higher acquisition phase. Remember also the reference last year, we had a relatively lower acquisition pace, that's why it also looks maybe more dramatic than it is. The 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. If you compare it to preceding years, it's even lower, I would say. Maybe good to repeat also when you talk about the debt situation that we, in quarter two, strengthened the long-term financing of the group with a new 3.5 billion revolving credit facility, five-year credit facility. 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. By that, I'm ready, and I give the word to Kristoffer.
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. 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 we can double the size of Indutrade based on this model, and doing so maybe in the next five to eight years, depending on the business climate. The development I mentioned 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 briefly 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 extraordinary divestment activities and restructuring. It's full focus on business development going forward, and I think we can scale up now in terms of a capability perspective. I would say that each business area should be able to make two to three 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.
Coming back to the developments I mentioned, we have a number of strategic initiatives which we have had now for a while, and I appreciate focus, so I'm not going to launch any new initiatives. We have much more to do in terms of those we have here. We focus a lot on people, developing people based on our values and based on the culture we have within Indutrade. We have now, I would say, Indutrade-specific programs to do that, and we are step by step building an Indutrade 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.
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. I would say we are already good at sustainability and now taking steps to become even better. By that, we try to summarize the quarter three, and then 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 grow organically, 5% we said order intake wise and 3% sales wise. A good quarter from that perspective. Demand is, 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.
Fairly flat outlook and increased variation between the companies and the segments. No 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. Sometimes some of our 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 four. I've already said high pace on acquisitions, and I look very positively on that also going forward.
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. We have a stable platform, a great leadership team, and great people in our companies to manage this in a great way going forward. With that, we end the formal presentation part and say thank you from our side and open up for any potential questions.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. The first question comes from the line of Johan Dahl, from Danske Bank. Please go ahead.
Yes. Hi there, Bo and Patrik. Just 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 orders, and you were quite clear that you saw fairly optimistic on things. This time orders are clearly better and growing year-over-year, but you seem 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?
As I said, when I sum up here, I think the business climate 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. Between quarters, it can differ a little bit in terms of how some project-related companies have benefit and impact from their businesses, I would say. Yeah, we were flat, I would say, in quarter two in terms of organic growth. Now we are a bit up, and maybe it's better to look at the average between these two quarters and say that. It's a fairly flat market, but some of our companies are, I would say, benefiting from positive project orders still, and overall that leads then to some positive organic impact.
Is the energy valves business, is that the primary factor behind the growth in orders organically here in Q3?
It's not the primary, but it's adding now again, positively, organically, which is very good to see. The sentiment we have right now is that that will continue to be a positive input before.
Got you. Can you say anything regarding potential effects of this toolbox that you've introduced in Indutrade? You talked about management succession being done, focus on business development. These other sort of initiatives that you've driven, what could we expect from that and when?
That's more, I would say, stepwise, fairly slow performance impact perhaps, but still positive impact. It's very difficult to translate that to numbers, I think.
We will over time improve competence. 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. 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 a smaller impact on both growth, but even more, I would say, operational results.
Okay. Finally, on the inventory side, clearly you don't seem concerned about it. Where would you like to be given where the market is right now in terms of inventories? i.e., what's the delta that you're aiming for if we look a couple quarters ahead? What is the profitability impact of that? You're clearly saying it's low, but can you provide any more sort of guidance there?
Well, we don't have a target or optimal level on where it would be then. If you look at the total working capital as we define it internally, it has increased then year-over-year with 16%, but a lot of that is actually related then to acquisitions and currency. Underlying the organic growth is 5% year-over-year, and that corresponds to between SEK 200 million and SEK 250 million, and much of that, I would say, is related to inventory. I guess that's one perspective on looking at it. That is at least what we want to long-term reduce. Not too long-term.
Okay. I guess inventories were high last year as well, and any sort of guidance you can give on the profitability impact of that reduction?
That's difficult. I don't want to give a guidance on that. Remember that around 60% of our companies are trading companies, also the manufacturing companies, they are to a large extent, assembly workshops, and a lot of input material is bought from some supplier. I would say it's smaller, and I can't guide more than that.
Thanks.
The next question comes from the line of Oskar Vikström from ABG. Please go ahead.
Thank you. Yes, I have another question to complement there on Benelux. Others come up now, and I was just curious about what's the timeframe until we can see that in sales, and then how should we view Benelux as a segment, considering the orders are coming up within the valve segment, and then you have Germany dragging down. How should we view that going forward into Q4 and Q1 2020, let's say?
Yeah, good question. We will see better sales and deliveries in quarter four in terms of valves to the power generation sector. As you say, we also see in some of the companies, we see a weaker general market, and which will lead to lower sales for them. Probably a little bit better than perhaps what we saw this quarter.
All right, thank you. Just in terms of also Bo, again, if you could just repeat the margin there? You have a negative effect in Switzerland from the U.S. exposure, and then you have some companies doing more poorly in Germany. I was just thinking, going forward, is this lower level sort of what we should expect going forward given uncertainties in Germany, and then is this also a matter of mix? 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 will probably remain, or the weaker market in Germany driven by the automotive sector and indirectly impacting our companies will remain for the part into next year, definitely, I would guess. This medical sector company suffering a bit in the U.S., I don't think this opiate sort of situation we have there in the U.S. will be solved very quickly. Unfortunately, I think it's going to impact us negatively for a couple of quarters going forward.
Thank you. Just in terms of organic growth for the group, is there any 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 definitely have pricing, but as Patrik said before, we have also had to price because of for currency reasons, I would say.
The main target is to equal that situation out as fast as possible. Then there is probably a little pricing effect, but more of a volume effect than this.
All right. Thank you. Well, that's all I had. Thanks. Thank you very much.
Thank you so much.
Once again, ladies and gentlemen, if you do have a question for the speakers, please press zero one on your telephone keypad. The next question comes from the line of Julius Rapeli from SEB. Please go ahead.
Yes, good morning, and thanks for taking the question. My question regarding the Measurement & Sensor Technology division. You mentioned some larger projects there driving the organic growth in Q3. Nice comeback from Q2 on that side. Should we expect these deliveries to continue into Q4 or the growth rates more like to normalize? Another one regarding your same division. Last quarter, you mentioned some struggles in North America and the market situation there. Any color on that one as well? Thank you.
Thank you. I think it's going to continue fairly positive for that area also in quarter four. On the issues one of the larger companies had in North America is improving. That's good. At the same time, I'd like to say that the margin level we had in quarter three 2018 of 19.5% is a standard level. Yes. We are working towards that, but the mix in that quarter was very good. That's probably a difficult metric.
All right. Thank you.
Once again, ladies and gentlemen, if you do have a question for the speakers, please press zero one on your telephone keypad. The next question comes from the line of Robert Redin from Carnegie. Please go ahead.
Yeah, hi, just one question on acquisitions. Obviously you've done a lot of acquisitions this year, adding SEK 1.5 billion of sales, something like 9% of 2018 sales. You've done a lot. Can 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, six months ago? Is it looking fine still despite the high number of acquisitions year to date? Can be on acquisitions in this sort of slower demand environment. Do you expect to see a slower or better inflow of ideas or possible targets?
Good question. We see a fairly positive outlook in terms of acquisitions. We are in a number of projects in different phases. I would be surprised if there isn't more acquisitions finalized before we close this year. In terms of acquisition opportunities in a more demanding market, that's not positive, I don't think. Those sellers who can sort of avoid of selling in a weaker market potentially affecting their profitability and also the price of the company will probably refrain from doing that. Maybe a little bit less companies in a recession, in a flat market development more as we have it right now, I don't think it's a big difference.
Okay. If market demand is flat, but it's the same, you think, as in a more positive market.
Not a very big difference, at least.
Okay, perfect. Thanks.
Yeah. Thanks.
Once again, ladies and gentlemen, it's zero one on your telephone keypad to ask a question. There are currently no further questions registered. I'll hand the conference back to you, speakers.
We say thank you for listening and participating, and we close the call and wish you a nice weekend. Bye-bye.