Earnings Call: Q3 2018

Nov 8, 2018

Ladies and gentlemen, welcome to the presentation of IndiTrade's Q3 Report 2018. Today, I am pleased to present CEO, Bo Anmik and CFO, Patrick Gilsson. 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. Please begin your meeting. Thank you so much, and good afternoon. Welcome from my side as well. Yes, for your information, we are about now to publish the presentation on our homepage, but it might take a minute or 2 here. So bear with us, but soon you will have that in front of you so you can follow easier. But I start anyway here now and switch then to the let's see if we can switch to we have a glitch here. Now it works. So Slide 2 highlights quarter 3 2018. We are obviously very happy to be able to present the results for this quarter. It's overall a good quarter for Indo Trade. And if we start with the market situation, it's continued stable demand on a high level, which we have stated for some time now, and we also see improved organic order intake, which is positive. Also, the EBITDA margin improvement is good, both organically and via acquisitions, and I will obviously elaborate more on that later on here. And we have had a bit of weaker cash flow in the first half of the year. But now in the third quarter, we see an improved situation also on the cash flow situation, which is positive. It's basically good performance in all business areas, I would say. From a profitability point of view, it's improving in 7 out of 8 and particularly good in the UK, in our measurement and sensor technology area and also in Finland. We were able to close 2 acquisitions in the quarter, a Norwegian company called Nordcraft, which we have informed about, and then we made an add on acquisitions, a bit of a larger add on in the U. S. Linked to a Danish company we own called Convilent. So this U. S. Company is called TxRx, very exciting and interesting. And then after the close of the quarter, we have also acquired a Dutch company called Thermo Electric, which is also a larger add on to a very successful Swedish company called Pentronic. And we have also decided that it's a good time now to update our financial targets, and we are in particular changing our EBITDA margin target, and I will explain the reasons for that later on here. So all in all, a very positive and good quarter. Then if we turn to Slide 3 with the headline order intake, You can see that overall in the quarter, we are plus 16%, so a strong order intake growth. And we are particularly happy with the organic improvement or growth of 6%, So strong organic growth for us, and the acquisitions are also adding another 6%. And as you who follow us closely know, we have a bit of an extraordinary phase now with some strategic divestments, and there we sort of lost 2%. And then the currency have also helped us to gain 6% adding up the 16%. I would say that it's broadly positive in overall. Most market segments and geographies are still good. We if we look at the number of working days in this quarter, there is basically no effect. So no change in terms of that. One sort of area perhaps to mention is that we have a larger business in the power generation segment, which is quite significant for us. And there, we have said basically that sort of order intake has been sliding over some quarters downwards, and now we were supposed to find more of a stabilization basically from quarter 3, quarter 4 this year. But the segment is struggling a bit, and some of the larger customers, being companies like Siemens and General Electric, are struggling a bit in that segment with lower order intake on their side. So we are also actually experiencing a bit of lower order intake this quarter in the power generation segment. But that is including sort of in the 6%. So the 6% is obviously a net effect of that. But all in all, good positive order intake. Then if we change slide again here and see the headline, net sales, it's a quite similar situation. Overall, in total, plus 13%, good. And also here, we see a growth on the organic side of not up to the 6%, but at least 3%. So that's positive. We had some bigger sort of improved sales situations in quarter 3 last year, which is on a relative basis impact in here. So we are happy and positive about the 3% organic growth. Acquisitions is adding 6 percent and divestment is again taking out 2% here and currency is also equal to the order intake, plus 6%. And so again, good overall sales situation, some similar type of issues which we have discussed the recent quarters. The Swiss geography, for example, is similar to before. Less investment related activity in the process industry, which we suffer a bit from. We see perhaps that some in some areas, we are keeping up a good day to day sales activity. However, a little bit lower project activity among others in Finland, maybe slightly also lower on the Irish market, but nothing really significant and overall a steady and good situation. If we then turn page again and look at our EBITA profitability, We see very positive development, I must say, coming in at SEK 525 1,000,000 and an overall quarterly growth of 17%. And as you see in the chart there, organic improvement of 3%. But we are taking some one off costs this quarter. So if we exclude them, we have an organic improvement of more towards 7%. So the underlying profitability shows a good leverage, which is obviously very positive. Acquisitions is adding 8%. The divestments minus 1% and currency plus 7%. So a good EBITA margin development and one of the higher quarters in this perspective in the company history. It's good see that our gross margins are holding up well. I think good price management in many business areas, in many companies because we are experiencing some higher costs on raw materials and components, but we are actively trying to transfer that to the customers. And we are also managing, I would say, expenses in a controlled way. And it's absolutely not so that we are refraining from investing in positive business cases. We are absolutely doing that but still managing costs well. And this is then, as I said, resulting in a good leverage and profitability improvement. If we then go to the business area perspective on the next slide, we start with organic sales growth by business area. You see the blue bars, the 8 different business areas. And U. K. Really stands out in an extremely positive way. So organically, above 12% growth, obviously very strong, and we don't really see any negative Brexit related effects up until now. And we have assessed this quite a lot in detail to understand the situation in the U. K. And it's not only so that it's only the export oriented companies who are improving and developing well. It's actually also the domestically related companies. So strong performance in the U. K, stable. Then Fluids and Mechanical Solutions is also doing a very good job, I must say. We have some industrial companies in that business area which are performing well, very much based on, I would say, innovation, good product development and business development. And we have some automotive companies on the aftermarket, which are also progressing well. So good overall sales development in that business area. And then we have the measurement and sensor technology also standing out a bit. And here, we actually see several companies in that business area with basically all time high situations from a sales perspective, also from a profit perspective, so very positive, gaining large order, being competitive in the marketplace. And then all companies or all business areas are actually improving a bit, but at slightly lower levels. But it's good to see that it's an overall growth across the business areas. And I would say it's also on the next page, EBITA margin development by business area, also a positive perspective. It's 7 out of 8 business areas are improving this quarter. And you can see there that the measurement and sensor technology area is really improving and having a high margin in the quarter, and it's basically driven mostly driven by the higher and better sales in the quarter. But otherwise, if we turn from the left and towards the right, Benelux improving and also the DACH area is improving, and that's basically mostly driven by accretive and good acquisitions recently. Also good to see that Finland is improving. And here, we have had more, I would say, divestment activity, and that's also paying off in a profitability perspective, which we have been expecting. So that's a good receipt on those activities. Flow technology also improving. And again, similar to Finland, the efforts we are doing in the Sandermeissen Group where we restructure quite heavily or in a restructuring phase is still a bit that's also paying off and improving their profitability. Then we have the Fluid and Mechanical Solutions. That's basically Scandinavia and mostly industrial companies. There you see actually a slightly lower EBITDA margin. A lot of good work is done in that business area, But unfortunately, they are experiencing higher raw material costs and component costs and suffering a bit from that. They are also transferring trying to transfer that cost towards the customers, but sometimes, we have situations where we cannot we have yearly negotiations, and we have to wait until the beginning of next year to increase prices and so on and so forth. So I think the situation will improve, but it's still managed in a good way. Industrial components, mostly Scandinavian technical trading companies, improving, very good to see, good management in terms of both, I would say, cost control price initiatives. So they are stepwise improving here and have been doing that for several quarters, so positive situation. I already elaborated a bit on measurement and sensor technology. Many companies doing very well there. And then last but not least, U. K. Is improving positively based on the higher revenue mostly. So good companies in the U. K. Business area overall, I would say. Then if we turn to the acquisitions divestments slide, I already said that we added 2 companies in the quarter, Northcroft. They are basically a technical trading company adding some value add in their operations geared towards automatic lubrication systems for the construction machinery market but also working with those applications in industrial companies. And they are based in Norway, as you know or have seen, and the Norwegian government has, since some time initiated quite a lot of substantial infrastructure investments, which are driving construction machinery usage in a positive way. So we believe strategically that they will have a positive situation going forward here. And also on the add on situation then. We have a successful company in Denmark working with what is called mission critical communication. Basically communication components, products, systems to organizations like police forces or fire brigades where you need to communicate securely, quickly. And they have been very successful in Europe and, to some extent, also in Asia but had a difficult time to enter into the North American market. And now they were able to acquire a, you can say, a competitor, and we see very positive strategic synergies, I would say, between Convylent and TxRx, and they have started out well in the trade ownership perspective. Then towards the end of October, we were able to buy a Dutch company. It's one of our more successful Swedish companies called Pentronic. They are in the temperature sensor business, very specialized, I would say, low volume, medium volume type of operations. So they saw a similar company in the Benelux area and have had contact with that company for several years. Now we were able to acquire that company, and we see a lot of positive synergies also here going forward. Otherwise, I would say that we still have a healthy pipeline of potential acquisition targets, and we have dialogues in different stages. And I wouldn't be surprised if we don't close further acquisitions before the year end also. We have also been active on the divestment side, and I want to reinforce underlying that this is a strategic extraordinary type of activity linked to the strategic review we have done earlier. And now we are seeing the end of these activities, I would say. But we sold a Finnish company now and also one company in Lithuania. And these have both been in loss making, and it's going to be positive for the Finnish business area and Fluids and Mechanical Solutions going forward without this company. But we will probably divest some something more. But now, as I said, we are really towards the end of this divestment phase in an extraordinary perspective. By that, I leave the word over to our CFO, Patrick Johnson. Please, Patrick? Thank you, Bo. Then moving into the next slide, which is a key data summary. I will go run through that very quickly with you and repeating what Bruce said then. On the top line then order intake in net sales, I think it's encouraging to see still delivering high growth numbers, 16 order for orders and 13 for sales. And order intake and particularly encouraging to see that we are increasing the growth rate versus what we had earlier this year. Gross margin, a full percentage point and better than last year's quarter 3, 34.1% versus 33.1%. And this is then despite headwind from raw material and component prices and also the weak Swedish krona hitting several of our companies. And so it's well done really from the companies. EBITA margin moving up to 12.8% then against the 12.4 last year. And in this, we have embedded a few nonrecurring costs related to improvement projects we have in a couple of the companies and business areas and also then some loss on the divestments we talked about then. So if you take away all these costs that we are actually about 13 percent in EBITA margin, then so underlying margin is strong, I must say. Looking at financial items and tax, I think we are basically pacing on the levels we had earlier this year. Tax, slightly volatile between quarters, but basically the same increase as we have in the result. Financial items increased slightly lower than the debt, indicating the good terms we have in our financing agreement. EPS, up 16%, in line with profits. Moving to the return on cash flow side, 19% return on operating capital, but that then I'm reminding you that, that includes then the nonrecurring restructuring cost we took then in quarter 4 since we're looking at 12 months rolling when we calculate return. So if you take away those nonrecurring costs, we're actually at 21%, which is at the same level as last year. Cash flow up 23%. That's a good rebound from the not so good Q1 and Q2. And net debt EBITDA, basically in line with last year, 0.1% higher, and that comes from the slightly higher working capital we are carrying still. So if we move to the next slide, looking at cash flow a little bit more in detail. As I said earlier, 23% up. That's a good development. That improvement versus last year is mainly driven by the increased profits. Working capital is actually relatively flat during the quarter. So we still we are still a little bit high on the working capital. And that comes mainly from high volumes, of course, but also we have put we have higher safety stocks in many of the companies then due to longer lead times from suppliers and also high capacity utilizations that we are still suffering from but continue to work on. So let's continue to the next slide. Earnings per share. Here, we have an increase in the quarter of 16%, a good increase in line with the profit increase then, of course. At the 12 months rolling basis, we are only up 5% then, but that's the same reason as the lower return for the quarter. We have the restructuring cost from quarter 4 included. So if you take away those costs, then we are actually at 14% on a rolling 12 month basis, which is, of course, a strong level. And on a 5 year rolling basis then, it's actually 16%. So 16% per year on in 5 years then, strong numbers. And last but not least, looking at the debt situation. Debt situation has increased since last year at $4,300,000,000 roughly, dollars 4,300,000,000 in total net debt versus $3,800,000,000 last year, up 15%. And this is also, of course, then impacted slightly by the higher working capital situation we have, so slightly higher than we ideally should have had. Looking at the net debt equity ratio, it's 73%. It's slightly down versus both last quarter, which is mainly seasonal downturn, of course. The dividend paid out last quarter and also slightly down from last year. But all in all, relatively stable development, I would say. And maybe an additional note, top of this, we have also done unutilized credit facilities of roughly $2,700,000,000 Yes, I think. Thank you. And then I turn back to Bo. Update our financial targets. And to give you a bit of a background to that, many of you know that we carried out a quite extensive strategic assessment early on when I came on board as new CEO together with the management team. And based on that assessment, we basically reconfirmed the business model, and we have also stated that the strategic direction going forward is evolutionary but still with ambition to improve. And we have defined and initiated some new strategic activities broadly in the group. One is what we call the active knowledge sharing area where we are making progress. Another area is more linked to leadership and competence development. And the third area is more linked to, I would say, governance and business improvement. And we as a management team, we strongly believe in these initiatives, and they shouldn't be and they are not nice to have. They sort of it's a resource investment from our side, and that should pay off. And we obviously believe it will pay off and pay back in a good way. So based on this, we feel that it's time to improve, increase our EBITDA margin target. It has previously been at equal to or better than 10%, and now we increased it 2% or equal to or better than 12%. One can discuss the timing of this. For us, as a team again, we believe it's linked very much to what we want and expect in terms of internal improvement. Then we know that we are at the business cycles where there is a risk for some recession going forward. But we believe strongly in this and that we can have positive impact on the business and still think it's the appropriate time to demonstrate for ourselves and all our companies that now we take this decision. And that one is it was the obvious one, I think, to change. Otherwise, I think we actually have ambitious and challenging targets, Growth of equal or better than 10% per year over business cycle is very ambitious, I think, And our return on operating capital above or equal to 20% is also still relevant, not least linked to the fact that acquisition wise, we are tending to buy more and more companies with proprietary technology and old manufacturing and actually tying up a bit more capital in that perspective. We have neither changed the sort of more and more risk related target on net debt to equity, the gearing should still be below or equal to 100%. And we haven't either changed the dividend of 30% to 60% of net profit. So I think, again, ambitious set of targets. It's the right time to improve the margin target. We believe in this. We have the initiatives and activities to generate this over time and hopefully even above this. So these are now valid as basically from today or tomorrow. So that's a good lead in, I will say, to the next slide, which is stating welcome to our Capital Markets Day. We don't have those very often, but we feel it's time for 1 now. A lot have happened lately at Indo Trade, a lot of new faces in the management team, a lot of new strategic initiatives. And I think it's going to be worthwhile for many of you listening and your colleagues in the financial community to take the taxi or to Burbus out to Chista and join us at December 4 because we will elaborate a lot on where we are heading and why we believe we will continue the successful, sustainable, profitable growth journey of IndiTrade. So please join us for that. Now we summarize the presentation. We are very happy with the quarter. We think it's a solid quarter, and we reiterate basically the same outlook with stable demand situation on a high level, and we are happy with the improvement in terms of profitability and the leverage we saw in the quarter. There are some uncertainty in terms of the geopolitically, but we don't see any really clear signs of a change demand situation. It's stable, and we reiterate exactly the same message as we have had before, no change in terms of that. And potentially, if we were to experience a more difficult market situation, I think it's good to underline that with the diversified structure, Indu Trade has. And if you look at our 40 year history, we have been coping with recessions in a great way. Our companies are very agile and working closely with customers, not tying up too much capital and can easily or maybe not easily, but anyway, in a relative perspective, adjust to a more difficult marketplace. We believe strongly that we will continue to execute our successful business model. And as I said, we believe strongly in the strategic initiatives we have launched, and that's why we have increased the EBITA target and have now, I would say, ambitious overall financial targets for the group going forward. So with that, we say thank you for listening and open up for any potential questions. Thank you. And our first question comes from the line of Robert Reddin from Carnegie. Please go ahead. Your line is open. Yes. Hi. Just a detailed question on this divestments, the Lithuanian company. That was in this quarter now, right, in Q3? It was. Yes, yes. And so the capital loss there of €8,000,000 is something that impacted this result. We had the other divestments that you write about in the report were earlier this year, right? But this one was this quarter impacting the result. Yes. Yes. Correct. And that was in addition to the comment that you said that your sort of extraordinary costs improving some of the businesses, they accounted for 4% of EBIT last year. 7% versus 3% comment on EBIT growth or EBITA growth excluding like for like EBIT growth? Well, that particular loss then of SEK 8,000,000 is not in our organic then. That's in the that we treated as cost in the divestment category then. But of course, it's when you talk about when we, in general, talk about nonrecurring costs, that's part of it then. So that's the reason for, I'd say, that underlying, we are really at about 13%. So but that's not included when Du said that we are underlying increasing organic EBITDA with 7%. That's not part of that. That's actually a few other projects that we have. Right, right. Perfect. On working capital, I mean, you're not super happy, but do you feel that if the market situation remains the same, these longer lead times, so the good times we have, if that continues, can you still work down working capital to sales? Or will you then still have this elevated level? I think we have we'll short term have a bit of a problem to take it down significantly. So you shouldn't count on any dramatic reductions in like the next quarter or so if the market holds up. In many cases, it's linked to supplier lead times then. We have to buffer up to be able to manage the customer delivery service we have done. So as Bruce said, short term, difficult. And it's difficult to when you have a situation like that and at the same time work strategically with capital efficiency projects and things like that. Now we are struggling to sort of deliver, and that's a bad link to the sector work with those more strategic perspectives on capital reduction projects. So not too much improvement unfortunately on that situation short term. All right. Good. Looking into sort of Q4, I mean, should we read something positive into this organic order intake growth of 6%? Or should we not look too much at order intake? Maybe it's not too much of a leading factor. But as I reiterate basically what I say, it's we see a continued stable market situation at the high level. So we don't feel necessarily nervous about quarter 4 in that perspective. Okay, perfect. Those were my questions. Thanks. Thank you. And as there are currently no further telephone questions, I'll return the call bear with us. We do have a question just registered now from Jan Wukulevskiy from Handelsbanken. Please go ahead. Your line is open. Hi. Just a quick question regarding the divestment of the What was the timing of those? Was it the beginning, mid or late Q3? Well, the timing Towards the end of the quarter. Towards the end, at the very end, even. Did you hear that, Johan? The mirror, sorry. It was at the end of the quarter, that is at the very end. For the both of the companies? Yes. Okay. That was all my questions. Thanks. Thank you. Our next question comes from the line of Amy Ovstrand from ABG. Please go ahead. Your line is open. Hi there. So I have two questions. First, on the eliminations, they were quite high this quarter. Are all of these everything due to these one off costs? Or did you actually have higher should we count on higher eliminations going forward? No, they are entirely due to these let me bring up the details here. They were entirely due to these one offs. And so underlying, we're still at basically the same cost level for sort of sensor functions. Okay. Okay. Got you. And then second, we have seen some deals in measurement and sensor technologies. I think I was just wondering about deal multiples here. Are they significantly higher than in other segments? Or should we just see it as a normal acquisition? Up until now, they are basically at the in the trade average level. And yes, so not significantly higher than the average what we have seen or experienced. Okay. Thank you. That's all for me. Thank you. And as there are no further questions, I'll return the conference to our speakers. Then we appreciate that you took time and listened and say thank you very much, and we keep in touch. Bye bye.