Ladies and gentlemen, welcome to the presentation of Indutrade's Q3 Report 2018. Today, I am pleased to present CEO Bo Annvik and CFO Patrik Johnson. 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. Good afternoon. Welcome from my side as well. Just for your information, we are about now to publish the presentation on our homepage, but it might take a minute or two here, so bear with us. Soon you will have that in front of you, so you can follow easier. I start anyway here now and switch then to the Let's see here if we can switch to. We have a bit of a glitch here. Now it works. Slide two, highlights quarter three, 2018. We are obviously very happy to be able to present the results for this quarter. It's overall a good quarter for Indutrade, 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. We also see improved organic order intake, which is positive.
Also, the EBITA margin improvement is good, both organically and via acquisitions. I will obviously elaborate more on that later on here. 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 seven out of eight, and particularly good in the U.K., in our Measurement & Sensor Technology area and also in Finland. We were able to close two acquisitions in the quarter, a Norwegian company called Norsecraft, which we have informed about, and then we made an add-on acquisition, a bit of a larger add-on in the U.S., linked to a Danish company we own called Combilent.
This U.S. company is called TXRX, very exciting and interesting. 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. We have also decided that it's a good time now to update our financial targets, and we are in particular changing our EBITA margin target. I will explain the reasons for that later on here. All in all, a very positive and good quarter. If we turn to Slide three with the headline order intake, you can see that overall in the quarter, we are + 16%, so a strong order intake growth. We are particularly happy with the organic improvement or growth of 6%. Strong organic growth for us, and the acquisitions are also adding another 6%.
As you who follow us closely know, we have a bit of an extraordinary phase now with some strategic divestments. There we sort of lost 2%. The currency has also helped us to gain 6%, adding up to the 16%. I would say that it's broadly positive overall. Most market segments and geographies are still good. 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 area perhaps to mention is that we have a larger business in the power generation segment, which is quite significant for us. 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 Q3, Q4 this year.
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. We are also actually experiencing a bit of lower order intake this quarter in the power generation segment. That is including in the 6%, so the 6% is obviously a net effect of that. All in all, good positive order intake. If we change slide again here and see the headline net sales, it's a quite similar situation overall. In total, plus 13%, good. 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 improved sales situations in Q3 last year, which is on a relative basis impacting here.
We are happy and positive about the 3% organic growth. Acquisitions is adding 6%, and the divestment is again taking out 2% here, and currency is also equal to the order intake, + 6%. 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 in some areas, we are keeping up 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 turn page again and look at our EBITA profitability, we see a very positive development, I must say, coming in at SEK 525 million and an overall quarterly growth of 17%. As you see in the chart there, organic improvement of 3%. We are taking some one-off costs this quarter, so if we exclude them, we have an organic improvement of more towards 7%. The underlying profitability shows a good leverage, which is obviously very positive. Acquisitions is adding 8%, the divestments - 1%, and currency + 7%. A good EBITA margin development and one of the higher quarters in this perspective in the company history. It's good to 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. We are also managing, I would say, expenses in a controlled way. 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, this is then, as I said, resulting in a good leverage and profitability improvement. 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 eight different business areas. U.K. really stands out in an extremely positive way. Organically, above 12% growth, obviously very strong, and we don't really see any negative Brexit-related effects up until now.
We have assessed this quite a lot in detail to understand the situation in the U.K., 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. Strong performance in the U.K., stable. 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. We have some automotive companies on the aftermarket, which are also progressing well. Good overall sales development in that business area. We have the Measurement & Sensor Technology also standing out a bit.
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. Very positive, gaining large order, being competitive in the marketplace. All companies or all business areas are actually improving a bit, but at slightly lower levels. It's good to see that it's an overall growth across the business areas. I would say it's also on the next page, EBITA margin development by business area, also a positive perspective. Seven out of eight business areas are improving this quarter. You can see there that the Measurement & Sensor Technology area is really improving and having a high margin in the quarter, and it's basically mostly driven by the higher and better sales in the quarter.
Otherwise, if we turn from the left and towards the right, Benelux improving, the DACH area is improving, that's basically mostly driven by creative and good acquisitions recently. Good to see that Finland is improving, here we have had more, I would say, restructuring divestment activity, that's also paying off in a profitability perspective, which we have been expecting. That's a good receipt on those activities. Flow Technology also improving, again, similar to Finland, the efforts we are doing in the Sandem & Sønn group where we restructured quite heavily or are in a restructuring phase still a bit, that's also paying off and improving their profitability. We have the Fluids 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. Unfortunately, they are experiencing higher raw material costs and component costs and suffering a bit from that. They are also trying to transfer that cost towards the customers, but sometimes we have situations where we have yearly negotiations, and we have to wait until the beginning of next year to increase prices and so on and so forth. 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 and price initiatives. They are stepwise improving here and have been doing that for several quarters, so positive situation. I already elaborated a bit on Measurement & Sensor Technology. Many companies doing very well there.
Last but not least, U.K. is improving positively based on the higher revenue, mostly. Good companies in the U.K. business area overall, I would say. If we turn to the acquisitions, divestments slide, I already said that then we added two companies in the quarter, Norsecraft. 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. They are based in Norway as you know or have seen, the Norwegian government have since some time initiated quite a lot on substantial infrastructure investments, which are driving construction machinery usage in a positive way. We believe strategically that they will have a positive situation going forward here.
Also on the add-on situation, we have a successful company in Denmark working with what is called mission-critical communication. Basically communication components, product systems to organizations like police forces or fire brigades where you need to communicate securely, quickly. 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. Now they were able to acquire, you can say, a competitor, we see very positive strategic synergies, I would say, between Combilent and TXRX. They have started out well in the trade ownership perspective. 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.
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, 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, I would be surprised if we don't close further acquisitions before the year-end also. We have also been active on the divestment side, I want to reinforce, underline that this is a strategic, extraordinary type of activity linked to the strategic review we have done earlier. Now we are seeing the end of these activities, I would say.
We sold a Finnish company now and also one company in Lithuania, and these have both been loss-making, and it's going to be positive for the Finnish business area and Fluids and Mechanical Solutions going forward without this company now. We'll probably divest something more. Now, as I said, we are really towards the end of this divestment phase in an extraordinary perspective then. By that, I leave the word over to our CFO, Patrik Johnson. Please, Patrik.
Thank you, Bo. Moving into the next slide, which is a key data summary. I will run through that very quickly with you, repeating a little bit what Bo said. On the top line, order intake and net sales, I think it's encouraging to see still delivering high growth numbers, 16% for orders and 13% for sales. Order intake then, 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 three, 34.1% versus 33.1%. This is then despite headwind from raw material and component prices and also the weak Swedish krona hitting several of our companies then. It's well done, really, from the companies. EBITA margin moving up to 12.8% against the 12.4% last year.
In this then, we have embedded a few non-recurring costs now related to improvement projects we have in a couple of the companies and business areas, also then some loss on the divestment Bo talked about. If you take away all these costs, then we are actually about 13% in EBITA margin. 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 increase 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 and cash flow side, 19% on return on operating capital, that then reminding you that includes the non-recurring restructuring cost we took in quarter four, since we're looking at 12 months rolling when we calculate return. If you take away those non-recurring 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. 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. 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. We are still a little bit high on the working capital, and that comes mainly from high volumes, of course, but also we have a 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. Let's continue to the next slide. Earnings per share. Here we have an increase in the quarter of the 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 then from quarter four included.
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. On a five-year rolling basis then, it's actually 16%. 16% per year in five years then. Strong numbers. Last but not least, looking at the debt situation. Debt situation has increased since last year. We're at roughly SEK 4.3 billion in total net debt versus SEK 3.8 billion last year, up 15%. 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. All in all, relatively stable development, I would say.
Maybe an additional note, on top of this, we have also the unutilized credit facilities of roughly SEK 2.7 billion. Yes, I think thank you. Then I turn back to Bo.
Thank you, Patrik. As we said initially in the beginning, we have decided to update our financial targets. 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. 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 the ambition to improve. 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. A third area is more linked to, how to say, governance and business improvement.
We as a management team, we strongly believe in these initiatives, they are not nice to have. It's a resource investment from our side, and that should pay off. We obviously believe it will pay off and pay back in a good way. Based on this, we feel that it's time to improve, increase our EBITA margin target. It has previously been at equal to or better than 10%, and now we increase it 2% to 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. We know that we are at the business cycles where there is a risk for some recession going forward.
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. That one 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 a business cycle is very ambitious, I think. 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 all manufacturing and actually tying up a bit more capital in that perspective. We have neither changed the more risk-related target of net debt to equity. The gearing should still be below or equal to 100%.
We haven't either changed the dividend of 30%- 60% of net profit. I think, again, ambitious set of targets. It's the right time to improve the margin target. We believe in this, and we have the initiatives and activities to generate this over time and hopefully even above this. These are now valid as basically from today or tomorrow. That's a good lead in, I would 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 one now. A lot have happened lately at Indutrade.
A lot of new faces in the management team, a lot of new strategic initiatives, 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 two board bus out to Kista and join us at December 4th. We will elaborate a lot on where we are heading and why we believe we will continue the successful, sustainable, profitable growth journey of Indutrade. Please join us for that. We summarize the presentation. We are very happy with the quarter. I think it's a solid quarter, we reiterate basically the same outlook with stable demand situation on a high level, 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 macro ahead, not least 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. Potentially if we were to experience a more difficult market situation, I think it's good to underline that with the diversified structure Indutrade 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. That's why we have increased the EBITA target and have now, I would say, ambitious overall financial targets for the group going forward. With that, we say thank you for listening and open up for any potential questions.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad now. There will now be a brief pause while questions are being registered. Ladies and gentlemen, once again, if you do wish to ask a question, please press zero one your telephone keypad now. Our first question comes from the line of Robert Redin from Carnegie. Please go ahead, your line is open.
Yeah. Hi, just a detail question on this divestments to the Lithuanian company that was in this quarter now, right, in Q3?
It was.
Yeah. The capital loss there of SEK 8 million is something that impacted this result. The other divestments that you write about in the report were earlier this year, right? This one was this quarter impacting the result.
Yes.
Yes.
Yes. Correct.
That was in addition to the comment that you said that your sort of extraordinary costs improving some of the businesses, they counted for 4% of EBIT last year. 7% versus 3% comment on EBIT growth or EBITDA growth, excluding or like for like EBIT growth.
That particular loss of SEK 8 million is not in our organic. That we treated as cost in the divestment category. Of course, when we in general talk about non-recurring costs, that is part of it. That is the reason for us saying that underlying, we are really at about 13%. That is not included when Bo said that we are underlying increasing organic EBITDA with 7%. That is not part of that. That is actually a few other projects that we have.
Right. Perfect. On working capital, you are not super happy. Do you feel that if the market situation remains the same, these longer lead times or the good times we have, if that continues, can you still work down working capital to sales, or will you still have this elevated level?
I think we will short-term have a bit of a problem to take it down significantly. You should not count on any dramatic reductions in the next quarter or so if the market holds up.
In many cases, it is linked to supplier lead times. We have to buffer up to be able to manage the customer delivery service we have. As Bo said, the short-term is difficult.
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. We are struggling to sort of deliver, and that's a bad link to, at the same time, work with those more strategic perspectives on capital reduction projects. Not too much improvement, unfortunately, on that situation short-term.
All right. Good. Looking into Q4, should we read something positive into this organic order intake growth of 6%? Should we not look too much at order intake? Maybe it's not too much of a leading factor.
Robert, no, as I reiterate basically what I say, we see a continued stable market situation at a high level. We don't feel necessarily nervous about quarter four in that perspective.
Okay, perfect. Those are my questions. Thanks.
Thank you. Ladies and gentlemen, once again, if you do have any further questions, please press zero one on your telephone keypad now. As there are currently no further telephone questions. Bear with us. We do have a question just registered now from Jan Wokalewski from Handelsbanken. Please go ahead. Your line is open.
Hi. Just a quick question regarding the divestment of the companies. What was the timing of those? Was it at the beginning, mid, or late Q3? Thanks.
Well, the timing-
Towards the end of the quarter.
towards the end. At the very end.
Yeah.
Even. Did you hear that, Jan, or?
I'm here. Sorry.
It was at the end of the quarter. At the very end.
Okay. For the both of the companies?
Yeah.
Okay, thanks. That was all my questions. Thanks.
Thank you. Our next question comes from the line of Emmi Östlund from ABG. Please go ahead, your line is open.
Hi there. I have two questions. First, on the eliminations, they were quite high this quarter. Are 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. Underlying, we are still at basically the same cost level for sort of central functions.
Okay. Got you. Second, we have seen some deals in Measurement & Sensor Technology. 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 in the trade average level. Not significantly higher than the average, what we have seen or experiencing.
Okay. Thank you. That's all for me.
Thank you. Ladies and gentlemen, once again, if you do have any questions, please press zero one on your telephone keypad. As there are no further questions, I'll return the conference to our speakers.
We appreciate that you took time and listened, and say thank you very much, and we keep in touch. Bye-bye.