Earnings Call: Q4 2018

Feb 13, 2019

Ladies and gentlemen, welcome to the presentation of Indu Trade AB Q4 Report 2018. Today, I'm pleased to present 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. I will now hand you over to Bo Andbeck. Please begin. Good morning and welcome on my behalf as well here. It's a positive day for Indo Trade since we have good year end results and good quarter 4 results to present. And I'd like to start with an overall summary for 2018. As many of you already know, we have a strong year behind us with a focus on profitable growth, and we have continued to execute on our business model. And this business model is established since basically 40 years back. It's based on developing good companies with good leaders, good entrepreneurs in our companies and also being active acquirers. We have had a very strong financial performance with an all time high EBITA margin. I think it's a great job overall in our companies basically. And also many of our individual companies have all time high results. And also we have raised that 1st from a lot of peers in the group. We have initiated some strategic initiatives and we see that they are value creating basically already now and will be so even more going forward. We have a simple belief that if we can support our people in their growth, in their development, we also think our companies will grow. So one of our initiatives is very people oriented, where we will support our companies in terms of competence development and leadership development in an InduTrader way. And another way to be successful is to base your progress on knowledge. And Industry is very much a knowledge based company. We have, I would say, extensive customer knowledge, application knowledge, which we base our businesses on. And now we are, I would say, extending a facilitation where we promote learning from each other and sharing knowledge among companies and among people in a broader way than before. Based on good developments for several years where we have improved in terms of EBITDA margin And also based on the launch of these strategic initiatives, we felt that it was a good time to update our financial targets during the year. So we increased our EBITA margin target from being atorabove10% to atorabout12 percent over a business cycle. We also have a platform in place in terms of an experienced management team. We made an organizational change and promoted some people internally at the beginning of last year. And it was basically people who had been within the trade for quite some time. So the new team is in place and up and running and eager to make progress working towards further sustainable profitable growth. The Board proposes a dividend of SEK4.5. It's basically in line with last year. We have a policy, a dividend policy stating that we should have a dividend between 30% 60% of our net profit. Last year, we had 40% if you account for the restructuring cost we had. And this year, we also based the dividend on 40% on net profit. So similar in terms of that. We are a company who have ideas in terms of using our capital. So this is by no means stating that we don't have ideas. We have a strong healthy acquisition pipeline and I'll come back to that. So we will definitely continue to grow also 2019. Part of Indo Trade's success business cycle is based on stability where we have business engagement in plus 10, I would say, larger market segments or industries. On this slide, you see that we are quite heavily involved in engineering, in construction and infrastructure, in the energy segment and also in the healthcare segment. And now we have been fortunate that most segments are doing well in more difficult business climates. It's usually so that some segments are not declining as much as others. So we have basically, I would say, a natural hedge against more difficult times. And this is part of our success. And we will, I think, benefit from this also going forward. I've been asked several times if we see that the construction segment is becoming more difficult for us. I don't think so. We have very little exposure, I would say, to house buildings in larger cities in the Nordic area. We are more linked to infrastructure. And to give you an example, strong, I would base in the water and wastewater segment where basically all major cities have a lot of need for maintenance repairs and a great business opportunity for us, which is actually partly why one of our business areas had a good development in quarter 4, which I will come back to. If we leave the full year and focus a bit more on highlights from the Q4, it's a bit similar, I would say, success basis. High stable demand with improved organic growth rates. It's broad based. It's not across or it is across several of our business areas. Good EBITA margin improvement, both organically and through acquisitions. And it's really good to see the organic dimension here where we have a strong positive leverage. As I said, good performance in most areas, to mention some which really stand out from a great sales performance and also good profitability will be the U. K. And Fluids and Mechanical Solutions. We finalized 2 acquisitions in the quarter, a Dutch company by the name Thermo Electric, very good at temperature sensing and another U. K.-based company called NRG making, I would say, control systems for door automations. Interesting that both these companies are basically technology cluster acquisitions, meaning that we already have companies active in these areas, successful companies. And I think we can really add value to both these acquisitions and be good owners and try to develop these companies along with the great people in the companies, of course. It was also good to see in the quarter that we were able to improve our cash flow. The start of the year was a bit weaker in this regard and we'll come back to explain a bit more about that. But quarter 4 was a really positive development in terms of cash flow. If we take a more detailed look at our order intake, It's been strong demand throughout the quarter and broadly business wise, as I said before. Order intake, our order intake was up 13% for the quarter and equally so for the full year. So strong total order intake. And also good to see that our organic growth rate was 6% for the quarter, which is really strong for being in the trade. Area standing out was DACH where we actually have had some problems earlier to some extent linked to the process industry. Now I would say that our success in the quarter were mainly based on really good performance from individual companies rather than that perhaps the industry as such is improving or growing. So great work from individual companies in this area in the DACH region. A bit of organic decline in the Finland and in the Benelux. I would say in Finland, as you know, we have a lot of base industry, process industry and capital intense projects and a bit lower number of projects like that. So our day to day business in Finland is still strong and good, but we see a bit lower project level, I would say, in Finland and hence more flat organic growth development. In terms of the Benelux, our decline there was to a very large extent related to our business in the power gen sector. Those who follow us more closely know that we have a larger company in that sector making high pressure valves. And they had a very strong quarter for 2017, so the reference was quite difficult. When we discuss this company or talk about this company, I think it's fair to state also that the order intake in this company in quarter 3 2018 was rather weak. So we usually have about a 6 month lead time from order intake to delivery and invoicing. Hence, quarter 1 will be a bit weaker in terms of this company. But I would say the overall outlook for the company is still positive and good. We are strategically adding some dimensions to this company. We have mostly worked with traditional power generation projects, gas related power generation projects. Now we have started a cooperation with an external company focusing more on the industrial segment. So a lot of process industries are also using high pressure valves and we are step by step entering into this segment. And we are also establishing more of a formal foothold in China this year. So I think strategically, this company will benefit from this and step by step build a more broad based business. If we look at the net sales, also positive and good with an overall growth of 13% both in the quarter and for the full year. In terms of the quarter, no net effect changes in terms of working days. 7% organic growth rate, strong for Indo Trade, very positive and basically coming from all business areas. To highlight again some of them, U. K. Standing out and Fluids and Mechanical Solutions standing out positively. And U. K. Might be a bit surprising, not least linked to the ongoing Brexit discussions. But we see that our growth in the quarter was based on both, I would say, domestic and export oriented companies. We continuously ask ourselves if there is a Brexit pre buy effect in these numbers. And we don't think there is a major effect linked to this. There might be a minor effect. But going forward in quarter 1 and onwards, we might potentially see more and more of pre buy effects there. But fairly limited is our estimate for quarter 4 and actually for the full year 2018. In Fluids and Mechanical Solutions, 2 segments stood out. General Industry was really good. And as I said before, also the Infrastructure segment made good progress in the quarter. The good sales obviously had positive effect on our EBITDA development. And in the quarter, we were up 32% versus the adjusted EBITDA a year ago. Most of you know that we had a fairly large restructuring in quarter 4 a year ago. And so that part is now behind us, but really strong improvement and adjusted for that 32% growth. And as you can see on the slide there, a 14% organic improvement, which means that we had a really positive leverage from the stronger sales also making effect on the bottom line. We have also had some, I would say, companies with loss making companies, a few loss making companies, which we have dealt with actively during 2018. And this is also having an effect, which is good, both in terms of, I would say, money and also this will also take less, I would say, management time in 2019 and onwards. Looking at the whole year, EBITDA grew 20% to the adjusted EBITDA last year ago and we had a record EBITDA margin of 12.4%, which is very positive and appreciated of us obviously. If we then look at our business areas, you see on the graph here our organic sales growth for the quarter, where several of them were really high, up to the highest 11% in the U. K. And Fluid and Mechanical Solutions 10%, really strong numbers, but also several others around 7%, 8%, 9%. As we have said before or iCenti 4 in the UK, broad based positive development from really good performance in individual companies, both domestically and export oriented. In terms of Finland, you see more of a flat development and I explained that already, which is linked to a bit less project related sales to the process industry or base industry in Finland. And it will probably be so also in 2019. But one should remember that we are still at a high level in Finland, so good level anyway. If we look at the profitability for the business areas, really positive to see that basically all areas were improving in terms of EBITDA margin and really strong improvements in some areas. And it's both organic and structural activities driving this growth. If we take Benelux and DACH, as we state in the slide here, that's primarily driven by acquisitions. And in Finland, we had several cases of improvements of loss making companies, which they benefit of from now and going forward. In the flow area, we benefited from positive in principle finalized now. We divested a German business subsidiary to Maison earlier here this just a week ago basically. And with that, we see that most of the missile business is now sounder and we will see positive development from that going forward. Industrial components, I think underlying had also a good performance. Last year, they had a positive benefit from an earn out revaluation. So if you anyway saw good progress also within Industrial Components. If we look at what we accomplished in terms of acquisitions 2018, it was a bit, I would say, lower activity level versus the previous recent years. But anyway, we concluded 9 acquisitions and 6 of them, I will say, more normal size acquisitions and 3 of them more minor add on acquisitions, but still important and good. And that's an area we want to see more of also going forward. They are all interesting and good companies. The Dutch company Seitfeld is really interesting since it was founded by an entrepreneur who used grippers in line of work and felt that those in the market were not really up to the standards. He wanted to see in terms of quality, ease of use. So he started to design some grippers for his own use. He sold some to his friends. And some years later, he had a very successful company developing, designing and producing grippers. And that's part of Intertrade now and he is really motivated and happy to continue the development with us. Similar story with Precision UK, an entrepreneur who started to design an assortment of medical gas components, was successful in selling those and extended his product range to also include more sophisticated products and further on systems and now is a full scale producer on medical gas component systems and present in several markets internationally and we will help him grow further in a profitable way and again an engaged entrepreneur within the Intertrade family. We also divested some companies. They have been loss making unfortunately for quite some time and this should be seen as a really extraordinary activity, not something we will continue doing. We might do 1 or 2 more this year, but we are basically done with a major restructuring divestment phase and focus much more on building business and acquiring companies going forward. With that, I will leave the word to Patrick and he will comment a bit more on our financials. Thanks, Wouter, and good to be here. And I would like to go through then the financials a little bit more detail. And we start then with a key data summary. And as Bo talked about earlier, order intake and sales grew with totally 13% both for the quarter and the full year. And we actually surpassed on the SEK17 billion level in annual order intake. So that's an achievement, of course. Gross margin has had a good development through the year. And even though we have headwinds from raw material prices and also weak Swedish krona, that's tough for many of our trading companies, We have had a good development. And the major contributors, I would say, are good pricing work in many of the companies, but also, of course, then support from the divestments we've done. EBITA margin, 12.8% for the quarter and 12.4% for the full year, strong numbers. And last year's adjusted margin was 11.0% in quarter 4 and 11.8% for the full year. Finance net, slightly down in quarter 4, but up slightly for the year. Then increase is then lower than the average net debt increase for the year. So that shows that we have good terms in our loans. Tax, unfortunately, high in the quarter, but only due to some one off adjustments in connection with annual tax reconciliation. So to see the more correct or relevant underlying tax level or tax rate, I would look at the full year numbers. And here we are at around 22% in tax rate. Strong EPS development, up 32% for the full year, 20% excluding restructuring. Return up to 21% from the 19% last year. This is partly, of course, driven by the restructuring cost we took in 2017. Cash flow increased pace in the second half of the year and was up as much as 16% in quarter 4, mainly driven by the increased result. Working capital still remains on a slightly high level. And the main reason for that is and that's the main reason for why the full year cash flow was lower than 2017. Net debt EBITDA down to 1 point 7,000,000 thanks to good profit development and good cash flow then in later parts of the year. So diving in then to cash flow a little bit more and looking at it from a sort of a trend perspective. Quarter 4 is normally a strong quarter for Intertrade when it comes to cash flow, but this quarter was record strong, thanks to the good result. Looking at the full year again then, the weaker cash flow relates, as I said then, to the working capital level. And we have had done in the beginning of the year mainly a buildup. And it's partly volume related, I would say, but we also have had to build some extra inventory to safeguard delivery service to our customers. We have rather long lead times from our suppliers. And also then, we have an effect also from high workload in the factories that we have, creating some higher inventories as well. So and in addition, maybe important to note that in 2017 had a very strong cash flow and good capital efficiency. I think we grew organically sales with 7 sorry, 5% during 2017, but we did not increase working capital at all. So we came into 2018 with low working capital. That's also reason for a slight high increase than this year. So moving forward, looking at the EPS earnings per share grew 150%, very high increase, but if we exclude the restructuring, it was up SEK 34,000,000 in the quarter. Full year earnings per share, ex U. S. Restructuring most relevant comparison up 20%. And if you look at the more long term trend, the 5 year annual growth has been 18%, strong development. Lastly, looking at the balance sheet and the net debt. Was at the end of the year SEK 3,900,000,000 versus that's down 1 step down versus last quarter, thanks to the strong cash flow, but it's slightly up versus end of 2017. And then the ratio net debt equity ratio took a step down to 63%. And also, of course, then due to or thanks to the strong operational cash in cash flow in the last quarter. But also of course due to slightly fewer acquisition during last year. Altogether, I think this makes our position very strong going into 2019, strong balance sheet and which will make us flexible, of course, when opportunities emerge. I guess, Bo, will come back to it. We have a good pipeline then for further growth. Thanks for that. And leaving over to Bo again. Thank you, Patrick. I'd like to underline that Intuitrade is a bit of a different company than a normal sort of operational industrial company. But where we perhaps stand out most is in terms of our culture and our core values. We, as I said earlier, really believe in people and we think people can make a difference. And we have during the year now really worked with our core values as a group. All our individual companies have their culture, have their core values and have their visions, which they should have. But in the Intertrade umbrella, we also have some core values, which obviously correspond very well with the individual companies. We believe strongly in entrepreneurship. And if you meet a stereotypical MD from Indu Trade, you are quickly struck by the passion this person shows for his business, his people, his customers and the knowledge he has or she has about applications and products and technology. So fantastic entrepreneurship, fantastic passion for the business. And we are truly decentralized. Many talk about decentralization. I think we really are decentralized. And in order to be that, there has to be a large level of trust in the people, which also means that there is a little bit less reporting and bureaucracy. We believe in people. We give people freedom to act, and they have full business responsibility, full P and L responsibility and they use that responsibility in a great way. We are also very long term oriented and we have, you can say, the luxury to be that since we are profitable and profitability gives autonomy. But it's truly so that I would say our board and our main owner is also giving us this long term perspective. So we never optimize on quarters or years. We think long term and take long term oriented business decisions, which are good for us. If we look at our financial targets and the outcome for 2018, it's good performance. Intertrain is a growth company and we will continue to be a growth company. So the first target of growing at least 10% a year is really important to us. And it's great to see that we were able to grow 13% last year. We are really striving towards that also this year obviously. We came in above our new target of atorabout12%. This target should be seen over a business cycle and we should manage also in more difficult times. I think we are geared and set towards optimizing performance also in more difficult times. Our simple business philosophy is really that the current year should be better than last year. And that's true for the group and that's true also for the individual companies. And all our variable compensation is also based on that this year should be a bit better than last year. So it's a philosophy which has been there for basically 40 years, and we strongly believe in continuous improvement. We had a good return on operating capital above 20%, and we have a strong balance sheet. We have freedom to make acquisitions in and I've already discussed our proposed dividend of 40% of our net profit. So in terms of key takeaways and a bit of an outlook, again, I reiterate great execution of our many companies and we continue to build on an established business model and strategy. All time high EBITDA margin, fantastic. We are a diversified group. We are, I would say, agile and flexible in terms of our individual companies and they work very closely with their customers. So if there is a potential business decline, I think our companies are really geared towards handling and managing this in best way possible. We now have a very scalable structure. We have business areas, 8 business areas, people running these business areas who are true Indo Trade people and with a proven track record. And we can easily, I would say, add 100 companies to the structure without any reorganizations or anything like that. So we have a scalable platform good to go. In terms of the business climate, I think it's still good and stable. Perhaps only Finland, which stands out a little bit in terms of less project activity. We see a little bit of hesitation regarding large capital investments in Ireland, in the U. K, I would say linked to Brexit, but with limited effect on our businesses overall. So still good stable business climate, Might be some seasonality in terms of Q1. So not perhaps sequentially as strong as we have been in quarter 4 and quarter 1, but still optimistic about quarter 1 in 2019 and eager to move on. So with that, we are done with our presentation. And thank you for listening. And I And our first question comes from the line of Johan Dahl from SEB. Please go ahead. Your line is now open. Yes, hi. Thanks for taking my question. I was wondering regarding the divestments in the group. Could you just clarify what impact that is expected to have looking on 9% versus 18%? It appears as if there are some quite significant losses in those units that you've divested. We have a new divestment here quite recently and you're talking about maybe 1 or 2 more. But just to get the sense of how that may impact 2019 in terms of EBIT A? Yes. We haven't really given the exact guidance regarding this. I don't know, Patrik, if you have any broader No. And if you I mean, we had a big rather big impact in quarter 4 to start there. And but quarter 4 2017 was some one off negative items in the sold entity. So that's you should not sort of extrapolate the quarter 4 levels into 2019. So altogether, I it's not a dramatic positive impact in the 2019, if you look at the bridge, so to say. It's I would say a slight positive impact altogether would be my sort of overall summary, slight positive impact, absolute positive impact. Okay. So that's what you're saying basically, it's a much less impact in the sort of in 'nineteen compared to what we saw in Q4, is that? Well, at least you can extrapolate the quarter four numbers into take it times 4 and you have the full year level for 2019. That you can't do. I think it will be a slight given the companies that we divested, it will be a slight positive impact for the full year 2019 versus 2018. Okay. Got you. Just a follow-up on the price mix to which you talked about driving sort of operating leverage in the quarter. Was that a surprise to you guys? Is it a result of some sort of group initiative that you've been driving in the Q4? And I'm also curious to hear sort of the sustainability in that leverage and those price mix improvements. It was definitely not a group initiative. We talk about pricing and value on the bottom line of pricing initiatives in our different conferences and so on and so forth. But this is obviously managed locally and individually. But I would say at large, our companies and our management teams in the companies are really good at transferring potential cost increases to the customers fairly quickly. So I think this will continue and I'm optimistic optimistic about that also for 2019. All right. Just finally on the so one locks because I think you've been very transparent on the sort of the impact of divestments on your earnings also saw reversals of earnouts. But is there anything else that we should consider in the Q4? If you could just bridge the in the legal T and L, there was a positive impact, SEK 23,000,000 other revenues and costs last year was minus SEK 56,000,000. Was that just restructuring or are there any sort of reversals that we should know about? If you look at the total impact, I would say it's not big at all then for the quarter. If you look at the business areas, we had a slight positive impact in Benelux, I think, which we write about. It's a few million SEK related to stock taking differences. But otherwise from that, you have no really big positive impact at all in this quarter result. So no. Thanks. Thank you. And the next question comes from the line of Carolina Elvin from Danske Bank. Please go ahead. Your line is now open. Hi, and congratulations on a very good report. So my first question is about the DACH area. And you talk about that there was a broad good development in that division. But organic development on EBITDA is still quite poor. Is that related to a specific company? Or do we potentially see a few divestments there going forward? No divestments planned in the Dutch region going forward, but some companies few number of companies with improvement programs, you can say. So hopefully, that will take step by step positive sort of effect during 2019. Yes. The comment from my side, if you look at the organic development, organic EBITDA development and in DACH, last year, they had the support from an earn out revaluation. So if you look at the bridge on only the organic, they look more negative than they are. If you take away that sort of earn out of valuation in 2017, they are more flattish, I would say though. Organic. Okay. And then one question on your M and A pipeline. So among the potential acquisition targets, do you notice anything about them being more worried about the economy and so they would be more interested in selling fast? Yes. I think if you want to sell a company, you usually tend to do that when the price levels are fairly good. So I think the number of companies for sale will decrease in a negative business climate if you don't have to sell for any type of reason. But if I generalize, there might be a little bit less companies for sale. And usually, they the sellers don't are not so open to reduce their price levels. So there is a bit of a lag usually from a business climate decline to when the price levels really decrease, you can say. But we have I'm extremely happy with the pipeline we have right now and it's broadly in several of our business areas, sectors, geographies. So we right now, our outlook in terms of acquisitions is very positive for 2019. Good. I meant that if they were very worried about the economy going forward, they would have to sell right now, right, to get to that price they want. So my question is, do you notice sellers being more on right now? I don't think it's so business climate driven actually. There might be so, but the pipeline we have is mostly not driven because of that reason. Okay. Well, that was all from it. Thank you. Thank you. Thank you. And as there are no more questions answered, I'll now hand back to our speakers for any closing comments. Okay. Thank you very much for participating and listening, and we'll keep in touch going forward. Thank you, and bye bye. This now concludes our conference. Thank you all for attending. You may now disconnect.