Earnings Call: Q1 2019

Apr 25, 2019

Ladies and gentlemen, welcome to the presentation of Indu Trade AB Q1 Report 2019. Today, I'm pleased to present Mr. Bo Amvic, 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 afternoon on my behalf as well here and welcome to this webcast. We start with some highlights of the Q1. All in all, a very good quarter from Indo Trade. We continue to see stable demand on a high level, which we have basically seen for quite some quarters now and no change in terms of this, which is positive, both good order intake and sales. And it's also positive to see that we have good leverage from the top line to the bottom line with good organic growth in terms of our profit level. We also have a good cash flow in the quarter, quite a lot better than a year ago. However, we still have a high working capital and we are working actively. We're trying to reduce that and we will comment more on that later on. It's also positive in terms of acquisitions. We have had a good start of 2019. We bought 2 companies in the quarter and one company right after the close of the quarter And we would obviously elaborate a bit more on them later on here as well. And as one important strategic initiative, we are working more and more with sustainability and we see sustainability as a clear business opportunity. And as a company now we have signed the UN Global Compact and we'll talk a bit about that as well. So all in all a good quarter from industry. If we look more closely then on the order intake, it was, I would say, strong through the quarter. All the different months in the quarter were good. And sometime we have no we have effect from number of working days due to Easter and so on in quarter 1, but this year there were no effect regarding this. So the same number of working days basically. And overall in total order intake up 10%, which is a good and high level and corresponding to our financial objectives. And also good to see that growth rate continue to be on a high level of 5%. It's basically good in most business areas, a really strong increase in the DACH area where some of our companies are making good progress in terms of the pharmaceutical and chemical industries. We saw some decline in the Benelux area and also in the measurement and sensor technology area. I would say that mostly this is relating to difficult references from a year ago and shouldn't be seen as any big worrying signs. However, we have had a bit of an issue in terms of the larger company we have is making valves for the power generation sector and they came back in terms of order intake quite okay, but came into the year with lower order intake, which affected sales negatively and I will elaborate a little bit more on that as well. But overall, good order intake, plus 10% and organically, plus 5%. And this was also rather equal in terms of the sales situation. Seasonally, quarter 1 is usually a bit weaker for Indo Trade, but we ended the quarter with plus 12% and organically plus 6%. So overall a good positive situation and as we have expressed before, stable on a high level. Also here no effect from number of working days and basically all business areas improved except for the Benelux area where the power generation business linked to the valves we have there were low and that was linked to the order intake in quarter 3 last year which came in low and the lead time from order to delivery is about 6 months on average in that business. So that's why sales were very low in quarter 1 this year. I can comment on that now directly. They are the management of that company is transforming the business. We see a business shift from, I would say, North American and Western European customers to more Asian customers. And we are trying to adopt and align to that and we are setting up a new sales company and have been doing that for some time in China. So there is a market and we are active in the market and I think we step by step will be more successful here. So the year will hopefully be fairly okay. We are also trying to transform the company from being more or less 100% relying on power generation to also penetrate more of industrial segments. And we have close to cooperation with an external partner to help with that transformation, which we will talk more of in the coming quarters. So the company is working with their cost base, also reducing the cost in order to improve profitability. So all in all, I think the company is making progress both short term and long term and I think the year will end in a fairly okay perspective. We saw strong improvement in the U. K. And Industrial Components, good work in all companies, I would say, basically in those two business areas. And in the U. K, it's both linked to domestic business and business where you have an export dimension. We see some effects from Brexit, but not really material, both some positive dimensions linked to pre buy in the market, but also some issues where some customers has chosen other suppliers than some of our inter trade companies. So both dimensions, the net effect is probably slightly positive, but in the big picture, business area, U. I would say Industrial Components sales improvement came from a number of different segments, so rather broad based good progress in that business area. If we look at the EBITDA performance, as I said, a good leverage, 19% improvement versus a year ago. So we are satisfied with that and we came sort of out with an EBITA margin in total of 12.3%, which is significantly higher than a year ago, which was at 11.6%. And since our since Intertek became public in 2,005, this is the best quarter 1 EBITA margin we have had, so very positive. I would say most business areas improved their EBITA margin, strongest performance improvement in the flow area and that was mainly driven by the organic sales increase. The decline in the Benelux area and in the UK, I already sort of elaborate a little bit about Benelux. I can say this that if the bigger company in the power generation sector had been on equal level with a year ago, there had been organic growth in Benelux and there has also been a EBITA margin improvement in Benelux. So the underlying business from the many companies in the Benelux area is developing well, I would say. In the U. K, the headwind came more from, I would say, mix issues, products and customer mix issues and some one off cost issues in a few companies. If we then look at the organic sales growth by business area, It's been, as I said, very good in the U. K. And industrial components. And in most areas, you see improvements between 7% 11% organically, slightly lower in DACH and that's linked to some specific situation in certain companies there, no sort of trend or any bigger worry. I think we will step by step improve that situation. And then I have already discussed the situation in the Benelux business area, mostly then linked to the power generation business. EBITA margin in the different business areas in absolute terms improving in 6 out of 8 areas. So really good situation and where we had some decline in EBITDA margin in the UK, I already touched upon that. We saw some mix changes and some one off cost issues in a couple of the companies. And in DACH, we have seen also some companies having some sort of issues versus a year ago. But all in all, a positive situation. Finland improving even if the market is rather flat in Finland, so benefiting a bit from the restructurings and divestments we did last year in that business area. If we then look at the acquisitions we have made, we bought a very interesting company in the UK in the beginning of the year called Veltability Sift. They are developing, making welding equipment and have a very interesting and unique concept where they educate welders in the UK and have done that in large amounts. So there is an installed base of certified and educated welders in the UK, which are closely linked to the weldability products and equipments. So good development potential, growth potential. It's a generation shift where the parents are leaving the business to their children and the children have been involved in the business for many years and know the business extremely well and the company is in good hands, I would say, in the 2nd generation here, supported by Indo Trade going forward. We bought another very interesting company in Sweden called Strel. They are in the market for external light equipment and have a strong, I would say, market position and have an extremely good business model and modular concept. And it's a company really geared for growth going forward. So great experienced management team, engaged owner and positive outlook for that company going forward. We know that market a bit from before. We already have companies in that market and I think from a capability and competence perspective, they can support each other. And right after the close of the quarter, we also bought a company called Acumu. They are working in the area of automation solutions, primarily in the Swedish market and have a strong knowledge base, strong customer relationships and a bit of a unique edge. Also here, we have other similar type of companies and I would say good knowledge base in order to help and support them in their growth path going forward. We also divested one company in Germany. It's linked to the Maison Group where we have had a a with this being closed now, we see Emerson, which is now making profit and step by step will achieve profitable growth going forward. We have an extremely strong pipeline in the acquisition area of projects in different stages. So I'm very optimistic in terms of us making several more acquisitions going forward in the year here. So with that introduction, I leave the word over to Patrick. Thank you, Bo. Going through the financial key data a little bit more in-depth. First, I note and sorry for that, that the headings in the table are wrong. It's of course the Q1 2019 we're looking at. Order intake came in, as Bo already said, then plus 10%, double digit growth and also sales, plus 12%. So still very good demand situation. Gross margin, 34.1%. And I think that is still a good level, but it's slightly lower than last year. And last year you have to remember last year is a tough reference. Q1 last year was actually the best quarter last year. So I think even though slightly lower, it's a good level on gross margin. EBITA up 19% to a margin of 12.3%. Again, as Bo said, a record for Q1. Finance net is up 35%. So that's a relatively big increase, but that's mainly due to the implementation of these IFRS 16 leasing rules then. So if you exclude that, the increase is relatively small. Tax up 18%, which means that the tax the underlying tax rate is basically the same as last year, 21%. Return on capital employed, up 2 percentage points. And that's actually mainly due to that last year included 2017 restructuring cost for the Sanderme Soren Group. As you know, then we calculate these measurements on always on a 12 months rolling basis. Cash flow, up to SEK 168,000,000 from the low levels of SEK 4,000,000 last year. So a big increase, but it's still impacted then by increased working capital. And I'll elaborate in a few slides on that a little bit more. Net debt EBITA, it's lower than last year, even though it's actually impacted negatively by this IFRS 16 rules again, should have been around 1.8 if you exclude an IFRS 16 effect. So and talking about IFRS 16 then and supporting you with a sort of an overview on the numbers that are in the report and impact our numbers. And net debt increases with SEK 842,000,000 in the opening balance of the year and around SEK 8.20 dollars Q1 balance sheet. Finance net, it increases the cost, the finance cost with around minus €5,000,000 Depreciation levels increased €67,000,000 So all in all, that means that EBITDA increases or improves with €5,000,000 and EBITDA increases with $72,000,000 in the quarter compared to 1 last year. Net equity impact plus 12 percentage points versus last year. Then just a reminder that when you calculate the impact on other measurements like return on capital employed, for instance, you need to consider that we normally calculate with 12 months rolling data for income statement items then. So then cash flow. And looking at the trend development, and here you see the increase then up to SEK 168,000,000 versus last year's SEK 4,000,000. That's mainly driven by the increased profit level. It is still negatively impacted by working capital increases since year end. And this increase then it's partly seasonal, and I think you can see that from the previous years that we normally have a relatively weak Q1 then when it's mainly then receivables increase when you have a strong invoicing month in March. So it's partly seasonal and it's also, of course, volume related. We are increasing volumes, which is good then, but that impacts working capital slightly negative. And then we still have the fact that there is a high capacity utilization in the whole supply chain at our companies, but also even also at suppliers and customers, which impact lead times. And all that translates into need for higher buffer stocks, etcetera. And we have not come out of that situation yet that it impacts also the numbers this quarter then. But all in all, it is an improvement up to a level of SEK168 at least for this quarter. Earnings per share, and the trend of that curve, of course, is very similar to the one that Bo showed for EBITA. This one is actually slightly better. The Q1 earnings per share increases with 20% to SEK2.9. And if you look at the more longer term trend that we have and also the 5 year average quarterly earnings per share growth is actually 23% and per year, which is, of course, a strong number and slightly stronger than the operational earnings increase. Net debt takes a jump in Q1 to almost SEK 9,100,000,000 versus the SEK 4,100,000,000 last year. But then the major part of that is relating to the IFRS 16 again, which we talked about. So if you deduct that or look at the graph excluding IFRS, it would be have been a smaller increase. Net debt to equity ratio, as I mentioned earlier, 76% versus the 72% last year. The ratio would have been around 64% then excluding IFRS. I think I end there and then I leave over to you again, Bo. Thank you, Patrick. Just to more broadly and generally talk a bit about Indo trade. We are now on our first 41st year of successful profitable growth and it's important to underline and sort of describe that this is very much linked to that we have had a very clear business model from the start based on simply acquiring good companies and keep developing those companies we own. As we are now becoming a bigger and bigger group, we are step by step perhaps changing a little bit the order of those 2. So instead of acquiring being perhaps the most important growth parameter, we are working more and more with development and growth initiatives for the companies we already own. So going forward, it will perhaps stepwise be a change from acquiring develop to develop acquire, but both parameters are very central and important and we will be engaged in both dimensions going forward. In combination to the clear and simple business model, we have already from the start been very values driven and people oriented and that differentiates and sets us apart a bit from other similar companies in different parts of the world. So we are a bit sort of oriented to slower acquisition processes where we really put a lot of emphasis in terms of the company we buy from a leadership perspective, values perspective and really make sure that there is a strong correspondence to what we believe in a company value perspective. So we are on an evolutionary development, building on the past and trying to, however, work with continuous improvement and step by step, year over year trying to do things a little bit better than last year. We have launched some new strategic initiatives. We have spoken about these in different forums already some time. One initiative is linked more to leadership and competence development and another one is more linked to, I would say, active knowledge sharing where the companies we own share more knowledge between each other and learn from each other, benchmark and try to sort of achieve new best practices. We are building a general toolbox step by step for relevant, I would say, segment perspective, functional areas and so on. And the 4th area, which we have worked on more actively the last year is sustainability and where we see sustainability more as a clear business opportunity. So if we focus a little bit more on that, we as I said earlier, we have now signed the UN Global Compact Principles. It's basically built on 10 principles in 4 different areas: human rights, employment conditions, the environment and anti corruption. So I think it's a good structure system for us to work with. And now we are on a sort of development path to implement this in our way in our different companies. So it sort of fits our decentralized business model in a good way. But most of our companies have worked with sustainability for quite some time and are quite successful, I would say. They understand that by being good at this, you can impact your revenues, you can definitely impact your costs. It's positive in terms of talent management and a lot of different other dimensions. And we have for a quite long time had a clear code of conduct and that's very much, I would say, implemented and used in our companies already since sometime. When they meet demanding customers or suppliers, they can rely on this and use this on a daily basis, I would say. We have on a group level updated our materiality analysis. And during the last couple of months, there has been active workshops and training modules for all our companies, MDs linked to this. And the way we will actively sort of work with this is more linked to our board work going forward. So there's going to be a mandatory part in a board meeting once a year where we discuss sustainability in all our companies. And we have developed a toolkit which is relevant for our companies in order to sort of use and support this in their different developments going forward. So this is not administration, this is not cost, this is a clear business opportunity and it's welcomed and we have already made quite a lot of progress in this in individual companies. So if we try to summarize this webcast and the message from us, we have a positive business climate still. We don't see a trend change. And as I just said, our values, our business model and our strategy is on an evolutionary development and a step by step improvement. We came out sort of good in terms of organic growth and total growth, both in order intake and sales. And we saw good operational leverage, which resulted in a high EBITDA margin in quarter 1 of 12.3%. If we potentially were to enter into a weaker business climate, I would still underline that with the diversified group we are very agile and flexible versus a large, more single oriented product line type of industrial company. So I would say that we are well positioned to tackle a weaker business climate. However, underlining that we don't see that right now at all. We have a very favorable acquisition situation with a strong pipeline and I'll say great credibility in the market. And as previously elaborated on, we see favorably on us making progress in terms of sustainability. So by that, we end the more formal presentation and say thank you for listening and we open up for a Q and We have our first question from Elena Elsner from Danske Bank. Please go ahead. Your line is now open. Hi. Just one question on the dock area. So organic EBITDA continues to decline despite having good organic growth on sales. Could you elaborate a bit on that? It's not a sort of a broad based situation for the geographic area as such. It's more situation linked to a couple of companies we have there where they have had some challenges in the quarter linked to increase in raw material costs and some higher production costs. Particular company in mind has a good market situation, good demand situation, but fairly higher costs, which I think will improve, maybe not completely in quarter 2, but I think we will see in terms of gross margin there. Okay. Thank you. We have our next question from Oscar Bickstrom from ABG. Please go ahead. Your line is now open. Hello. I just have one quick question regarding Benelux. So you mentioned that order volumes are recovering in the Q1, but then you also mentioned this lead time of about 6 months. So I'm just thinking in terms of when we can start to see the company capitalizing on these orders, would that be more towards like H2 2019 rather than in Q2? Yes, that's a correct assumption. So quarter 2 will still suffer a bit, I think, say, profitability wise. And then quarter 3 and quarter 4 will hopefully be a better situation. Understood. Just to follow-up on that, so when you're saying that you think the year will be okay, could you please help me define okay? I mean, does that mean that you won't see a loss over the year? Or does that imply growth? It's definitely not going to be a loss situation. It's hopefully going to end in close to an in the trade average profitability. All right. Understood. All right. Thank you very much. There are no further questions at this time. Okay. We take that as a sign of clarity in terms of presentation and say thank you for today. Thank you for listening. And please follow-up with Kohl's if you want afterwards. Thank you and bye bye.