Earnings Call: Q2 2019

Jul 18, 2019

Ladies and gentlemen, welcome to the presentation of Intertrade AB Q2 Report 2019. Today, I'm pleased to present Mr. Bo Anvik, CEO and Patrick 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 and welcome on my behalf as well. It's Bo Andvik here. We start by looking at some highlights on Slide 2 from the quarter. And we can summarize and say that we have had good and stable demand with a positive book to bill in the quarter. We, however, see some increasing variation in terms of demand between companies, segments and markets, and I'll expand on that later on here. We have had a very good acquisition pace. We have acquired 10 good companies so far this year, and I would say that the pipeline is still positive. EBITA margin is improving slightly, and it's actually the 2nd best quarter too since we became a public company in 2,005. And we are also improving cash flow. However, working capital is still on a high level. If one should rate the quarter on a very sort of overall basis, I would say that order intake and sales is okay ish, profitability is good and the acquisition development is very good. But let's expand on all these points during the presentation. I am sure all of you are keen to hear more about our order intake. So we look at Slide 3 here. And as I said, I still think the market is good, and we basically have a stable situation. But there is more increasing variation between business areas and companies and segments, as I said. It's good to see that we have a positive book to bill. Its order intake is 1% higher than our net sales. But total growth of 6% in terms of order intake is a bit below where we would like to be. And primarily, it's the organic growth, which came in at minus 0.6%, which is the weaker point, I would say. Acquisitions is providing 7%. We have minus 2% linked to divestments, which are obviously the right things we have done there and that currency is impacting by 2%. In the quarter, there is a slight negative impact from working days. I assume you have heard that from other companies reporting as well. For us, we estimate that up to approximately minus 1.5%. So if we account for that and if we also potentially account a little bit negative impact from the larger company we have in the power generation segment, there is perhaps another 0.5% there. So underlying, we have an organically positive order intake also, I would say. We have also analyzed the order intake in a daily rate perspective year over year and also sequentially from the Q1. And those trends on a monthly basis look stable and do not indicate a decline. We had, as you know, an organic development of +5 percent in quarter 1. So going from plus 5% to minus 1% or minus 0.6% is obviously a big step. But I will expand on this a little bit. If we start by dividing our business in, I would say, normal day to day activities and project activities, Normal day to day business is in general still strong, good. We don't see any declines there. And in the trade at large, I would say, provides industrial components to production systems, and these supplies are still ongoing at a good rate. We, however, see less project sales. It's absolutely not a complete stop, but it's impacting here and there more and more. And it's, to some extent, large capital intensive projects in different segments, but also a little bit in general, I would say, less project, less expansion investments from certain customer segments. If we look specifically at segments, I would say that the passenger car segment and also the building and construction segments are clearly weaker. And as you know, we don't provide direct material to passenger cars, but we provide, I would say, products, components, systems to their production systems and toolings and things like that. So some of our companies have seen a decline linked to that. And we have also some companies linked to the building sector. Infrastructure projects are still quite strong, good. Water, wastewater, good. But say buildings in metro areas in the Nordics is weakening and impact to some extent. Geographically, it's primarily Finland, which is a weaker geography. And there, we link ourselves to 3 main segments. We have the machine builders in Sandvik, John Deere, Netso, Malnet, Wartschle. And all of them have had, I would say, high capacity utilization for quite some time, and there is no growth provided into that segment in our business since a while. Then we have larger end users, usually process industries, you can say, like Chimera, store ends and so on. And there we see a decline in the larger projects, as I spoke about earlier. And the 3rd dimension linked to Finland would be the construction area where we see less activity mainly linked to the Helsinki broader area. What we then think going forward from an order intake perspective, yes, we don't think the macro perspective will improve dramatically in the second half of the year. So probably a rather flattish macro development and that also impacts our organic growth capability in a flattish sort of perspective, I would say. Some companies probably have an ability and will improve market shares. And hopefully, we will see some of that. But I would say it's safer to say that it's going to be more of a flattish development organically. However, acquisitions will impact more. In quarter 2, we saw 7%, as you saw. Since we have made quite a lot of acquisitions during the quarter and late in the quarter, we will see better impact from that going forward. And overall, we definitely work towards our broader financial objective of growing 10% per year. That's obviously the ambition for 2019. If we then look at our sales situation, we came in on an overall level at plus 4%. And organically, it's similar to the order intake side, minus 0.7%. And acquisitions also fairly similar, plus 6%. And also here, we have the same impact on the calendar effect and also the power generation related company. So if we account for that, I would say the underlying organic sales would be around plus 3% for the quarter. And going forward, it's basically the similar perspective as on the order intake side, more of a flattish organic development, but with a strong acquisition growth, which gradually will increase in quarter 3 and hopefully also quarter 4. If we then turn page and look at our profitability, as I said, it was good and stable margin level came in at 12.5%. Organically, it was slightly negative, and that is primarily then linked to that. We had a slightly negative organic sales. But acquisitions are accretive and contributing with +8%, so that's a positive effect. And the divestment part effect is fairly significant, minus 3%. And that's mainly due to a nonrecurring divestment loss, which we can expand on a little bit later as well. Also here, we had impact from the weaker power generation business, and that is probably impacting on 0.5% basis, I would say. I'm still optimistic that we will have a good profitability for the full year. We had a good gross margin development as you have seen where we actually improved to 34.4 percent, earlier 33.6 percent. So good pricing activity from majority of the companies. So I think we will see a positive good development in terms of profitability also going forward. If we look at the next slide, and we have the different business areas and the organic sales information here, you can see there is quite some variation, as we have said, also on the business area level. Very positive to see that the U. K. Is expanding and growing and developing greatly, I would say, even though we would say that Brexit is impacting a bit more than in quarter 1, primarily in an order intake perspective. It's on an overall basis in the U. K. Still marginal, and hopefully, it will stay that way. And it's situations where we have exporting companies in the U. K. Where some of the customers have perhaps dual sourcing. And for, I would say, safety reasons in a supply perspective, they might favor the source, which is not on the U. K. Then. There have also been some pre buy effects. But as we have said earlier, it's still marginal. We have, I would say, really well positioned great companies in the U. K. And those niche positions are developing well and the business area is doing good overall. Also flow had a very positive development and it's basically organically driven. It's a good overall business climate is okay. And the MDs in the companies are eager to improve and have agendas to improve organically and working hard on that. They still see a little bit lower project opportunities, but yes, good development in organic growth for also Flow. Business Area DACH was basically supported by mostly, I would say, Swiss or the Swiss process industry, they had some new installations of facilities, production lines, and we were able to support those expansions, changes in a positive way organically. If we take SMS, that's a bit of a mixed picture. They had a good growth in terms of filters and hydraulics, but they also have a cluster of companies linked to the general industry and there they actually saw a bit of a decline. They also have a business linked to the infrastructure segment, water and wastewater, which is stable and good. So overall, quite stable for them. Measurement and Sensor Technology, more of a growth opportunity area for us, had a, I would say, setback linked to the biggest company in that area have a fairly large North American business. And that business was weak, soft this quarter. We haven't lost market share. It's the customer base there, which is not growing right now. It's probably not going to improve dramatically. Short term, it might take a couple of quarters. So we will see a lower effect also going forward to some extent there. But also a lot of positive growth in several companies in that area with several companies having all time high situations and so on and so forth. So this is more a single effect rather than a broad business area issue. Benelux looks very, I would say, weak on the slide here, minus 14%. That's basically all linked to this power generation situation. So if we exclude for that, there was a positive organic development in Benelux. Finland, we have spoken about basically fewer investment related projects. And actually, also that's the situation for industrial components. Industrial components had a very good quarter 2 last year, and that was based on some good order intake linked to larger projects, which didn't come through this quarter. So that's basically the explanation, business area. If we then turn to Slide and look at the EBITA margin perspective for the business areas, you can see that 5 out of 8 are actually improving and the strongest development we see in the U. K. And the flow technology area. And that's linked to better sales, favorable mix and also good cost control, I would say. So they stand out very positively. It's actually also very positive to see that Finland, despite lower sales, is actually improving the margin. And that's linked to some divestments we have done, but also that they are having very good cost control and actually decrease in expenses in certain companies. So very well managed in Finland. And the Benelux decline is mainly again then used to the power generation segment. Otherwise, most of the companies there are stable, good in terms of profitability. Measurement and Sensor Technology maintained a good level, but then again decreased slightly linked to the situation primarily in North America in one of the companies there. Fluids and Mechanical Solutions and DACH are both improving slightly, mainly related to acquisitions and divestments. So structural activities, the main drivers there. And in terms of industrial components, basically the same explanation as in terms of sales. Strong reference in Q2. I think they were at 12.8% then and now 12.2%, which is still a rather good level for industrial components. So missing some of these larger projects, which they benefited from a quarter ago. But again, overall, 12.5% good level and positive in terms of keeping a good level for the remainder of the year. If we then turn to Slide 2, look at the acquisition situation. We're obviously very happy with that development. We have now made 10 acquisitions okay now this year and adding around SEK 1,200,000,000 in yearly sales effect and having a 7% impact on overall net sales. And yes, we are very we are positioned very favorably. Our reputation in the market is very good, very positive. So when we reach a situation and meet potential sellers, we have a very high closing rate based on what Indo Trade has done over the past many years. So that's benefiting in a very good perspective. The pipeline is still good. We are right now still in a number of projects in different phases. And I'll say we would be surprised if we wouldn't close another couple of acquisitions this year still. So very favorable and good outlook in terms of acquisitions. The positive development is not linked to that we have changed our perspectives in terms of price levels or valuations. We are keeping that on the same level as we have been for the last couple of years. So I would say important to mention that if anyone had worry about that. Then I leave the word over to you, Patrick, to expand a bit on the financials. Thank you, Bo, and hello, everyone. Yes, let's go through a little bit more in detail on the financials, and we start with the key data summary table, maybe repeating a little bit what Bo said. But anyhow, total growth for orders and sales was plus 6% and 4%, respectively. Year to date, both are at +8%. Continued positive book to bill, important to mention, and it's actually even slightly stronger than last year. Gross margin is an important KPI measurement for us, and it improved from 33.6 last year to 34.4 for the quarter. And the main improvement is organic. So that's very well done from our companies then working in a slightly tough environment with the weak Swedish krona. That's well done, I would say, working with price management in a good way. EBITA margin improved slightly then to 12.5 percent. Year to date, we are at 12.4 percent. There is an increase in the finance net, as you can see, and roughly half of that relate to the IFRS 16 implementation and half of it is due to our increased debt level that we'll talk about a little bit later. Tax increased also some then, up 18%, and that's partly due to some non tax deductible items we had in the quarter related to the divestment loss that Bo talked about earlier. And also last year, we had some positive one offs on the tax side related to the reduction of the Swedish tax rate, which you might remember as well. So those are impacting tax the tax breach then versus last year. Earnings per share, basically flat versus last year in the quarter, but up plus 9% year to date. Return on capital employed, 20% compared to the 2019 last year, and the improvement mainly comes from the fact that last year's calculation included the restructuring of the Sanddome Soren Group as the return on capital employed measurement is always on a rolling 12 month basis. Cash flow improved really good in the quarter and partly it's due to a relatively low reference, low level last year. But I would say that the level this quarter is actually good also. So it's not only the reference that makes the improvement. This is a good level this year, and I'll come back to that as well. Looking at the debt situation. Our net debt EBITDA is at 2.5, which is an increase versus last year's 2.2. And here, as you know, then IFRS 16 plays impact. So if you exclude that, it would be at 2.1%, which is then lower than last year. And when you look at the debt situation and the debt KPIs, you need to remember that quarter 2 is a seasonally high quarter with a dividend. So all in all, it's a normal level that we see on these KPIs. If we move to the next slide. And here, you have some details about the IFRS 16 effect then, and the numbers are year to date numbers or closing balance or the first one is the opening balance, the net debt impact of the IFRS 16 opening balance. Closing balance is actually around SEK 8 80,000,000, so that's higher. Then impact on the P and L, finance net minus SEK 10,000,000 year to date, depreciation increased with SEK 140,000,000, which means that you get an EBITDA impact of plus SEK 10,000,000 and then an EBITDA impact of plus SEK 150,000,000. If you then calculate some KPIs and look at the net debt equity, the IFRS 16 has an impact then, of course, and it actually increases that measurement with 14 percentage points then end of quarter 2. And when you calculate then the impact on other measurements, you need to remember then, as I talked about earlier, that return on capital employed is always calculated on a rolling 12 month basis, which means that the IFRS 16 effect will come gradually during the year and the full impact will not be seen until year end. It's important to remember. So leaving IFRS 16, looking at cash flow. And as I said, cash flow increased. And I think also and you can see that clearly from the chart, it's also strong level then for the quarter. And the main driver is, of course, the underlying good high operational result, and we only had small working capital increases during the quarter. That gives the good level we have then. And the low level last year, it was mainly quarter 1, but also quarter 2 was slightly lower last year. It was explained by the increase of the working capital that we had to do then last year to safeguard delivery service and manage the high capacity utilization that we still have. So working capital is still on a slightly high level and due to these circumstances. And we are working on that. But short term, it will be tough As long as we have longer lead times from suppliers and high capacity utilization, we will struggle doing big reductions in the working capital, I would say. So shifting slides again and looking at the earnings per share, and that is basically flat in the quarter. But for year to date, it's up 9%. And the quarterly development, that mainly relates, of course, then to the slightly lower increase in the operational result compared to what we have seen on the recent quarters. And in combination with the increases in finance net I mentioned and also the tax rate change that makes the EPS development in the quarter relatively flat. Then zooming out and looking at the long term trend, we are still have a really strong development, 3 5 year EPS development. They are 12% 16 percent up per year. So that is, of course, strong development that we are proud of. Moving on to the debt side, and that has increased from very low levels last year and also in the beginning of this. And the increase has 3 components. First one we talked about, IFRS 16, that adds close then to SEK 900,000,000 to the debt level. So it's a rather significant impact. Then the increased acquisition pace is the 2nd driver and also logical, of course, the high acquisition pace we've had increased the level. And then the dividend, which is seasonal in quarter 2. So zooming out and the net debt ratio is then 99%. But if you exclude IFRS 16, it's 85%, which is basically in line with last year and maybe even lower than the quarter 2 numbers we've seen earlier in this time chart. So I would say then, all in all, debt levels and ratios are normal for the quarter 2, and the balance sheet is still strong. Important to mention, I think, also is that we managed to strengthen our long term financing further in the quarter with a new 5 year rolling credit facility that we managed to put in place together with the banks. And then we also issued a new 5.25 year bond. So all that together makes our long term financing secured, I would say, in a very good way. So I think I end there, and I leave the word over to Bo again. Thank you. Thank you, Patrick. Then we can take a look at our business in a segment, market segment perspective. Just perhaps to reiterate a little bit on that, we have a multi segment base as a company and very little dependency into single segments. On the slide, you see our 4 larger segments: general engineering, 19% of sales construction infrastructure, 17%, and we are heavier on the infrastructure side. And Energy segment, 12%, Health Care, 11%. And then we have a number of other segments. And this is, to some extent, a bit of a business cycle hedging. When one segment goes down, maybe there's more stability or even growth in another one. We've seen that in the past related to Indo Trade, and I think it's still true also going forward. If we change slide and look at our strategic initiatives, just want to underline that all of them are developing well and good. In the trade, it's very people oriented, very values driven, strong culture in a positive sense. And we have started a number of talent management initiatives, which are very welcomed, I would say, by our company's MDs and key people. So that area is a good development for the group as such. As an owner, we are increasing our activity in terms of sustainability. And in quarter 1 now, we have had a very elaborate training program for all our MDs of our subsidiaries, a mandatory program. And now they have been obliged to start to work on their materiality analysis for their specific companies. And as that is done, they will define KPIs and start to measure progress in this area. So we are taking this seriously, and we have a professional approach. And I would say it's developing well. The knowledge sharing dimension is also gaining traction. So we see more and more dialogue between MVs, between companies, where they benchmark and learn from each other, discussing markets, technologies, products and things like that. And we recently had a large MD conference. We have that once per year, and it was super atmosphere and a lot of candies there. Also, the toolbox is making more and more progress. And here, we basically have general sort of improvement areas where companies can get competence in terms of pricing or purchasing or working capital management and things like that, which is necessary for any company to improve on from time to time. So good progress in terms of this and appreciated by the MDs and a little sort of top down push, rather pull from below. But on sustainability, we have a clear ownership, I would say, demand. That concludes sort of the presentation. And if we go to the summarizing slide and talk about the key takeaways, we then repeat that there is still a good and stable demand, but we see increasing variation and perhaps adding then that the organic growth dimension is weakening and perhaps not improving for the remainder of the year in any dramatic way. However, profitability was solid in the quarter, and we are remained positive in terms of that also for the remainder of the year. Really high acquisition pace and good opportunities also going forward with a positive pipeline. We are a diversified group. Our companies are agile, flexible, and they can take their own business decisions. So rather than wait for any instruction from the head office, they go ahead and work on improvements immediately when it's needed, I would say. And we have a very stable platform in place now. All management positions are in place with great people and very positive about that. So with that, we end the formal presentation, and we open up for potential questions. Thank you. The first question comes from the line of Johan Dahl from Danske Bank. Please go ahead. Yes. Hi there, Patrick. I was just wondering, can you this shift you're seeing in your project business, how would you expect that impact the inter trade looking forward? Or alternatively, sort of talk a little bit about the mix here, the size of these two various activities and the earnings mix in those areas? It's a bit actually difficult to be specific because it's very different for different companies, I would say. But what you have seen in this quarter, I think, is, if I generalize, likely to be fairly similar for the next couple of quarters. Not a dramatic decline from this level. And in terms of profitability, say the project business is usually a little bit lower profitability because it's perhaps some sort of competitive tendering, if I say so. So again, generalizing slightly lower profitability on the project business than the normal business. How much do you estimate that is, the total in the trade portfolio? It would be wrong, Bobby. We haven't calculated that you want. I it's absolutely, definitely less than 50%, but Less than what? Less than? Less than half, absolutely. Yes, yes. Yes. All right. And just a second question. I mean, if you look on inventories and just look on how that has progressed in the last looking just Q2 in the last couple of years, I mean, it seems very elevated. How are you actually addressing this? I mean, we heard, Patrick, that you see a continued strain in supply chain and need to keep inventories high. On the other hand, you have a weakening of demand in the project business. Is this something that you will sort of address more intensively to take down inventories? And will it impact profitability? It's a good question. And we have actually addressed it quite intensively internally, but we haven't seen the results fully of it yet. So we have had everything from a broad competence development sessions all over the group in terms of capital efficiency, capital management. And in conjunction to that, we have also defined formal targets for each business area in terms of what we want to see in terms of reductions. And they, in turn, have identified what companies in their business areas stand out the most and given them formal targets. So since sometime back, there is a process ongoing where we follow updates on a monthly basis and where the companies have a demand on them to improve. But it's you run a little bit uphill in some companies, in some of the larger companies where the sales situation is weakening a bit and still they should reduce inventories. So and the supply chains are perhaps involving Asia, long lead times and so on. So it's usually taking a while, but we have been on the ball for some time, and we hope to see progress during the year here, I would say. But do you see sort of a cost absorption issue in the second half? Not any significant, no. All right. Finally, just on HPW. So could you just sort of elaborate what's your outlook there for this sort of coming off year? Yes. They will have a fairly good or stable order intake, I should say, with what we have seen during the first half year. And invoicing will should be better than the first half year in the second half year. Then the mix is difficult to say. The market is for them moving from, I would say, larger customers like GE, Siemens to Chinese customers, some other Asian players and pushing gross margins down a little bit. At the same time, they are strategically working step by step on building an aftermarket business and also moving more and more into certain removable or renewable applications. But that's more of a medium, longer term impact, I would say, in a positive sense. So better invoicing, perhaps some strain on gross margin. But second half shouldn't be should be better, I would say, than first half. Okay. Thanks. The next question comes from the line of Robert Reddin from Carnegie. Could I just ask a detailed question on the acquisitions and divestments? So those 2 divestments, when were they made in the quarter? What profitability are you sort of losing there, if any? And you also said something about a cost or charge related to divestments in the quarter. How big was that? Yes. Let's see here. Yes, the one called Rostriere versus Tier was done fairly early in the quarter, and the other one was very late very recently. And I don't know if you have did you want to comment anything, Patrick, on I can elaborate a little bit then. Last year, basically no divestment impact. And the sales divestment of Esmond, we had We had a loss of around SEK 14,000,000, SEK 15,000,000, which we then took in the quarter. That's seen in the disclosed in the divestment component in the report. But perhaps, Robert, you meant also the margin impact going forward from those divestments. Exactly. Have they been profitable or not? I would say, in combination, not. All right. Perfect. Thanks. Those are my questions. The next question comes from the line of John Hiltner from Enter Funder. Please go ahead. Thank you. Can you hear me? Yes. Great. I just want to come back to the last question on the divestment. So 3% negative impact on EBITDA. And then you had a loss, you said SEK 14,000,000, SEK 15,000,000. Was that a transaction loss? So what was that? Yes. That was a transaction loss, yes. So fees for advisers or what? It's loss on the book value of the company basically. Okay, okay, okay. Got it. So that's more or less is all of the impact on EBITDA? Sorry? So that was more or less all the impact on EBITDA in the quarter from the investments then? Yes, yes. So great. And yes, that was it. Thank you. Thank you. The next question comes from the line of Johan Dahl from Danske Bank. Please go ahead. Yes. Just a follow-up on this divestment. Which business areas are they in? Or have I missed something here? No, I think there is actually a mistake here. So Ross Piavea system was in Flow Technology and ESMed in Industrial Components. Thanks. Then important to mention that the sort of transaction loss, the loss on book value on estimate we took on the group level is not seen in Industrial Components. But the underlying improvement will, in the end, come in Industrial Components. I guess that loss offsets the revaluation of earnouts that you did, right? Yes, exactly. Thanks. The next question comes from the line of Daniel Lindqvist from Handelsbanken. Please go ahead. Thank you. Just a quick question. If we look at the incremental margins in the business areas, would it be fair to say that the ones performing the weakest this quarter, when I'm thinking about Fluids and Mechanical Solutions, Industrial Components and Measurement and Sensing Technologies, are among those with the highest incremental margins on organic sales. Let's take that once more, Daniel. Yes. Just If you just look at the I mean, you have quite some incremental margins in many of your areas on organic sales growth. And then just looking at this quarter, you have weaker organic growth than it is I expected in some of the areas. I'm just trying to understand the deviations versus my expectations. If you look at, for example, Fluids and Mechanical Solutions, Industrial Components and Measurement and Sensing Technologies, Are these all areas with high incremental margins? I mean MST definitely has that FMS also on the perhaps higher side, industrial components, not one of the higher in a business perspective. Okay. So just for my own sake, trying to understand things. So thank you guys. There are currently no further questions registered. I'll hand the conference back to you. Okay. Then we say thank you for listening in and have a nice summer and we keep in touch. Bye bye.