Ladies and gentlemen, welcome to the presentation of Indutrade AB Q2 report 2019. Today, I am 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 on my behalf as well. It's Bo Annvik here. We start by looking at some highlights on slide two from the quarter. 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. EBITDA margin is improving slightly, and it's actually the second-best quarter two since we became a public company in 2005. We are also improving cash flow. However, working capital is still on a high level.
If one should rate the quarter on a very overall basis, I would say that order intake and sales is okay-ish, profitability is good, and the acquisition development is very good. 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. We look at slide three here. As I said, I still think the market is good and we basically have a stable situation, but there is more and 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.
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 - 0.6%, which is the weaker point, I would say. Acquisitions is providing 7%. We have - 2% linked to divestments, which are obviously the right things we have done there, and then 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 - 1.5%. 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 half a percent there.
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 first quarter, 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% in quarter one. Going from +5% to -1 or -0.6 is obviously a big step. I will expand on this a little bit. 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. Indutrade 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, also a little bit in general, I would say less project, less expansion investments from certain customer segments. We look specifically at segments, I would say that the passenger car segment and also the building and construction segments are clearly weaker. 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. 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 buildings in metro areas in the Nordics is weakening an impact to some extent.
Geographically, it's primarily Finland, which is a weaker geography. There we link ourselves to three main segments. We have the machine builders in Sandvik, John Deere, Metso, Valmet, Wärtsilä,` 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. We have larger end users, usually process industries, you can say like Kemira, Stora Enso and so on, and there we see a decline in the larger projects as I spoke about earlier. The third dimension linked to Finland would be the construction area, where we see less activity, mainly linked to the Helsinki broader area. We then think going forward from an order intake perspective, we don't think the macro perspective will improve dramatically in the second half of the year.
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. 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 two with the 7% that you saw. We have made quite a lot of acquisitions during the quarter and late in the quarter, we will see a better impact from that going forward. Overall, we definitely work towards our broader financial objective of growing 10% per year. That's also obviously the ambition for 2019.
If we then look at our sales situation, we came in on an overall level at +4%, and organically it's similar to the order intake side, -0.7%, and acquisitions also fairly similar, +6%. Also here we have the same impact on the calendar effect and also the power generation related company. If we account for that, I would say the underlying organic sales would be around +3% for the quarter. 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 three and hopefully also quarter four. If we then turn page and look at our profitability, as I said, it was a 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. Acquisitions are accretive and contributing with +8%, That's a positive effect. The divestment part or effect is fairly significant, -3%. That's mainly due to a non-recurring 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 half a percent 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%, earlier 33.6. Good pricing activity from a majority of the companies. I think we would 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 one, primarily in a order intake perspective. It's on an overall basis in the U.K., still marginal, and hopefully it will stay that way. 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. Overall, business climate is okay, and the MDs in the companies are eager to improve and have agendas to improve organically, and are working hard on that. They still see a little bit lower project opportunities, but good development in organic growth for also Flow. Business area DACH was basically supported by mostly, I would say, 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 FMS, 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 link to the infrastructure segment, water and wastewater, which is stable and good. Overall, quite stable for them. Measurement & 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. We will see a lower effect also going forward to some extent there.
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. This is more a single effect rather than a broad business area issue. Benelux looks very, I would say, weak on the slide here, -14%, but that's basically all linked to this power generation situation. If we exclude for that, there was a positive organic development in Benelux. Finland, we have spoken about basically fewer investment-related projects. Actually, also, that's the situation for Industrial Components. Industrial Components had a very good quarter two last year, and that was based on some good order intake linked to larger projects, which didn't come through this quarter. That's basically the explanation, I would say, in that business area.
If we turn slide and look at the EBITDA margin perspective for the business areas, we can see that five out of eight are actually improving, and the strongest development we see in the U.K. and the Flow Technology area. That's linked to better sales, favorable mix, and also good cost control, I would say. They stand out very positively. It's actually also very positive to see that Finland, despite lower sales, is actually improving their margin. That's linked to some divestments we have done, but also that they are having very good cost control and actually decreasing expenses in certain companies, so very well managed in Finland. The Benelux decline is mainly, again, used to the power generation segment. Otherwise, most of the companies there are stable, good in terms of profitability.
Measurement & Sensor Technology maintained a good level, again decreased slightly linked to this situation primarily in North America, in one of the companies there. Fluids & Mechanical Solutions and DACH are both improving slightly, mainly related to acquisitions and divestments. Structural activities, the main drivers there. 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. Missing some of these larger projects which they benefited from a quarter ago. Again, overall, 12.5% good level and positive in terms of keeping a good level for the remainder of the year. If we turn slide to look at the acquisition situation, we are obviously very happy with that development.
We have now made 10 acquisitions up until now this year, and adding around SEK 1.2 billion in yearly sales effect and having around a 7% impact on overall net sales. We are positioned very favorably. Our reputation in the market is very good, very positive. When we reach a situation and meet potential sellers, we have a very high closing rate based on what Indutrade has done over the past many years. 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. Very favorable and good outlook in terms of the 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. I would say important to mention that if anyone had worry about that. I leave the word over to you, Patrik, 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 +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, an important KPI measurement for us, and it improved from 33.6% last year to 34.4% for the quarter. The main improvement is organic. 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 the price management in a good way. EBITDA margin improved slightly then to 12.5%. Year to date, we are at 12.4%.
There's 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%. 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. 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. Those are impacting the tax breach then versus last year. Earnings per share, basically flat versus last year in the quarter, but up +9% year to date.
Return on capital employed, 20% compared to the 19% last year, the improvement mainly comes from the fact that last year's calculation included the restructuring of the Sander Meson group, as the return on capital employed measurement is always on a rolling 12-month basis. Cash flow improved really good in the quarter, partly it's due to a relatively low level last year. I would say that the level this quarter is actually good also. It's not only the reference that makes the improvement. This is a good level this year, I'll come back to that as well. Looking at the debt situation, a net debt EBITDA is at 2.5, which is increased versus last year's 2.2. Here, as you know, IFRS 16 plays impact.
If you exclude that, it would be at 2.1, which is lower than last year. When you look at the debt situation and the debt KPIs, you need to remember that quarter two is a seasonally high quarter with the dividend. All in all, it's a normal level that we see on these KPIs. We move to the next slide, here you have some details about the IFRS 16 effects, the numbers are year-to-date numbers or the first one is the opening balance, the net debt impact of the IFRS 16 opening balance. Closing balance is actually around SEK 880 million, that's higher.
Impact on the P&L, finance net minus SEK 10 million year to date, depreciation increased with SEK 140 million, which means that you get an EBIT impact of plus SEK 10 and an EBITDA impact of plus SEK 150. You calculate some KPIs and look at the net debt equity, the IFRS 16 has an impact, of course, it actually increases that measurement with 14 percentage points end of quarter two. When you calculate the impact on other measurements, you need to remember, 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, the full impact will not be seen until year-end. It's important to remember.
Leaving IFRS 16, looking at cash flow, as I said, cash flow increased, I think also, you can see that clearly from the chart, it's also strong level for the quarter. The main driver is, of course, the underlying good high operational result, we only had small working capital increases during the quarter. That gives the good level we have. The low level last year, it was mainly quarter one, but also quarter two was slightly low last year. It was explained by the increases of working capital that we had to do last year to safeguard delivery service and manage the high capacity utilization that we still have. Working capital is still on a slightly high level due to these circumstances. 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. Shifting slide again and looking at the earnings per share, that is basically flat in the quarter, but for year to date, it's up 9%. The quarterly development then, 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. 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. Zooming out and looking at the long-term trend, we still have a really strong development, three and five-year EPS development. They are 12% and 16% up per year.
That is, of course, a strong development that we are proud of. Moving on to the debt side, that has increased then from very low levels end of last year and also in the beginning of this. The increase has three components. The first one we talked about, IFRS 16, adds close then to SEK 900 million to the debt level. It's a rather significant impact. The increased acquisition pace is the second driver and also logical, of course. The high acquisition pace we have increased the level. The dividend, which is seasonal in quarter two. Zooming out then, 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 two numbers we've seen earlier in this time chart.
I would say then all in all, debt levels and ratios are normal for a quarter two, 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 five-year rolling credit facility that we managed to put in place together with the banks. We also issued a new 5.25-year bond. All that together makes our long-term financing secured, I would say, in a very good way. I think I end there and I leave the word over to Bo again. Thank you.
Thank you, Patrik. We can take a look at our business in a 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 four larger segments, general engineering, 19% of sales, construction infrastructure, 17%, and we are heavier on the infrastructure side. Energy segment, 12%, healthcare, 11%. We have a number of other segments. This is to some extent, a bit of a business cycle hedging. When one segment goes down, maybe there is more stability or even growth in another one. We've seen that in the past related to Indutrade, 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. Indutrade is 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. That area is a good development for the group as such. As an owner, we are increasing our activity in terms of sustainability. In quarter one now, we have had a very elaborate training program for all our MDs of our subsidiaries, a mandatory program. Now they have been obliged to start to work on their materiality analysis for their specific companies. As that is done, they will define KPIs and start to measure progress in this area.
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. We see more and more dialogue between MDs, between companies where they benchmark and learn from each other, discussing markets, technologies, products, and things like that. We recently had a large MD conference. We have that once per year, and it was a super atmosphere and a lot of inspiration, I think, for all the attendees there. Also, the toolbox is making more and more progress, and here we basically have general 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.
Good progress in terms of this and appreciated by the MDs and a little top-down push rather pull from below. On sustainability, we have a clear ownership, I would say demand. That concludes 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 and remain 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 already have a diversified group. Our companies are agile, flexible, and they can take their own business decisions.
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. 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. 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. I was just wondering, this shift you're seeing in your project business, how would you expect that to impact Indutrade looking forward? Alternatively, 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. What you have seen in this quarter, I think if I generalize, likely to be fairly similar for the next couple of quarters. Not a dramatic decline from this level. In terms of profitability, I would say the project business is usually a little bit lower profitability because it's perhaps some sort of competitive tendering, if I say so. Again, generalizing, slightly lower profitability on the project business than the normal business.
How much do you estimate that is of the total Indutrade portfolio?
It would be wrong of me. We haven't calculated that you want. It's absolutely definitely less than 50%.
Less than what?
Less than half. Absolutely.
Yeah.
Yeah.
All right. Just a second question. If you look on inventories and just look on how that has progressed, looking just Q2 in the last couple of years, it seems very elevated. How are you actually addressing this? We heard, Patrik, that you see a continued strain supply chain and a 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 address more intensively to take down inventories, and will it impact profitability?
That's a good question. We have actually addressed it quite intensively internally, but we haven't seen the results fully of it yet. We have had everything from a broad competence development sessions all over the group in terms of capital efficiency, capital management. 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. Since some time back, there is a process ongoing where we follow up this on a monthly basis and where the companies have a demand on them to improve.
You run a little bit uphill in some companies, some of the larger companies, where the sales situation is weakening a bit and still they should reduce inventories. The supply chains are perhaps involving Asia, long lead times, and so on. 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.
Do you see a cost absorption issue in the second half?
Not any significant, no.
All right. Finally, just on HP Valves, could you just elaborate on what your outlook there for this coming half year?
They will have a fairly good or stable ordering take, I should say, with what we have seen during the first half year, and invoicing should be better than the first half year in the second half year. 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 renewable applications. That's more of a medium, longer-term impact, I would say, in a positive sense. Better invoicing, perhaps some strain on gross margin. Second half should be better, I would say, than first half.
Okay. Thanks.
The next question comes from the line of Robert Redin from Carnegie. Please go ahead.
Yeah. Hi. Could I just ask a detailed question on the acquisitions and divestments? Those two divestments, when were they made in the quarter? What profitability are you losing there, if any? You also said something about a cost or charge related to the investments in the quarter. How big was that?
Let's see here. The one called Rostfria VA-system was done fairly early in the quarter, the other one was very late, very recently. I don't know. Did you want to comment anything, Patrik, on?
Well, I can elaborate a little bit then. Rostfria, basically no divestment impact, the sale divestment of EssMed, we had a loss of around SEK 14, 15 million, which we then took in the quarter. That's seen in the disclosed divestment component in the report.
Right.
Perhaps, Robert, you meant also the margin impact going forward from those divestments, or?
Exactly. Have they been profitable or not?
I would say in combination, not.
All right, perfect. Thanks. That was my questions. Thanks.
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 Jon Hyltner from Enter Fonder. Please go ahead.
Thank you. Can you hear me?
Yes.
Hey, great. I just want to come back to the last question on the divestment. 3% negative impact on the EBITDA, you had a loss, you said SEK 14 million, SEK 15 million. Was that a transaction loss? What was that?
Yes. That was a transaction loss, yes.
Fees for advisors or what?
It's loss on the book value of the company, basically.
Okay. Got it. That's more or less, is it all of the impact on EBITDA?
Sorry?
That was more or less all the impact on EBITDA in the quarter from the divestment then?
Yes.
Great. Yeah, that was it. Thank you.
Thank you.
The next question comes from the line of Johan Dahl from Danske Bank. Please go ahead.
Just to follow up on this divestment. Which business areas are they in or have I missed something here too?
I think there is actually a mistake here. Rostfria VA-system was in the Flow Technology and EssMed in Industrial Components.
Thanks.
Important to mention that the sort of transaction loss, the loss on book value on EssMed we took on the group level. It's not seen in Industrial Components, but the underlying improvement will, in the end, come in Industrial Components.
I get that loss offsets the revaluation of earn-outs that you did, right?
Yeah. Exactly it is.
Thanks.
The next question comes from the line of Daniel Lindkvist 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, then I'm thinking about Fluids & Mechanical Solutions, Industrial Components, and Measurement & Sensor Technology are among those with the highest incremental margins on organic sales?
Let's take that once more, Daniel.
Yeah, if you just look at. You have quite some incremental margins in many areas on organic sales growth. Then just looking at this quarter, you have weaker organic growth than at least I expected in some of the areas, and just trying to understand the deviations versus my expectations. If you look at, for example, Fluids & Mechanical Solutions, Industrial Components, and Measurement & Sensor Technology, are these all areas with high incremental margins?
MST definitely has that. FMS also on the perhaps higher side. Industrial Components, not one of the higher in a business area perspective.
Okay. Just from my own side, trying to understand things. Thank you, guys.
Yep.
Once again, ladies and gentlemen, if you do have a question for the speakers, please press zero one on your telephone keypad. There are currently no further questions registered. I'll hand the conference back to you.
Okay. We say thank you for listening in, and have a nice summer, and we keep in touch. Bye-bye.