Ladies and gentlemen, welcome to the presentation of Indutrade's Q2 Report 2018. Today, I'm 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 Annvik. Please begin your meeting.
Thank you so much. Good afternoon. Welcome from my side as well. We start this presentation with some highlights on page 2 from quarter 2. We see that the business climate is positive, and the demand is stable on a high level. Those who follow us more closely know that we are primarily a European-scoped business. In quarter two, we had just below 90% of our invoicing relating to Europe. The business climate in Europe is predominantly important to us. Nordic still represents around 50% of our sales, so obviously the Scandinavian and Nordic market is very important. A business climate which is positive, as I said, despite quite a lot of disturbances of international trade barriers, discussions, and Brexit, and so on. I will comment on the outlook a bit later. We are also very happy with the improved profitability and the EPS development.
This was obviously driven by higher sales, but also a lot of good performance in our different companies. In that perspective, two business areas stands out this quarter, Industrial Components and the U.K., but six of eight business areas are improving their performance. I would say we are still in a good development mode. We have been active in terms of acquisitions, as usual, and we have finalized two acquisitions in the quarter, one U.K. company and one Swiss company. Just after the close of the quarter, we also acquired a Norwegian company, and I will comment a bit more on these later on. In the fall of last year, we implemented or started a quite extensive restructuring program at one of our companies called [Sandvik Sol]. I am happy to say that this work is developing in accordance with plan.
We can turn page and look at our financial summary for the quarter. Our order intake rose with 11%, so strong order intake increase, even stronger sales increase with 17%. This also had a result effect, meaning that our EBITA rose with 19% to SEK 543 million this quarter, and our margin came in at 12.4% versus 12.2% a year ago. This is a good level in a historic perspective, one of our better quarters as a company. We are obviously happy and positive about the development in the quarter here. Also worth to note is that our earnings per share rose with 19% to SEK 3.01 versus 2.52 a year ago. We had also a good return on operating capital.
We measure this on a 12-month rolling basis, we are including the effects of the restructuring in that 19% figure. If you exclude that, we came in at 21% above last year and above our target. All in all, a very good, I would say, financial performance from Indutrade in quarter two. If we turn page and look at our order intake, I said that the order intake rose with 11%, up to SEK 4,391 million. Of this was 2% organic growth. I still think that's a good development performance by us, since we had a very strong order intake number in Q2 2017. All in all, a good level, a positive level, book-to-bill came in at 1.0.
If we look at our business areas, the Flow Technology area stood out with the best organic growth, also good levels in Industrial Components and Fluids & Mechanical Solutions. All those three areas have a commonality in the sense that they have quite strong Scandinavian linkages. Scandinavia stood out from a market development perspective in a good way. We have a large company in power generation, they are performing well, I would say. However, in an order intake perspective, they came in slightly lower than previous year. Nothing alarming, I would say. Still at an expected level, more or less, outlook for order intake quarter three is still okay. We turn page towards the net sales, we had a fantastic level, +17%, out of that was +6% organic, a good level.
However, we should also note that we had somewhat more working days in quarter two this year than a year ago. I think on average, approximately this is around two days difference. The strongest development from a business area perspective is Industrial Components and the U.K. Again, six of eight had a good performance and a bit lower in the DACH region and measurement and sensor technology, I will come back to that a little bit. Again, commenting separately on the power generation side, invoicing was a bit better actually than last year. Order intake slightly lower, invoicing a bit better. We turn to the EBITA side. As I said earlier, rose with 19% to SEK 543 million, a very high level, an EBITA margin of 12.4% versus 12.2% last year, organically increasing with 5%. Very positive development.
Again, in a business area perspective, Industrial Components and U.K. stand out, good development in most of them. We could have seen an even stronger development, we choose to take some strategic investments in some defined companies for profitable growth reasons. A bit higher cost level in some companies, that's by design and by strategic plan, you can say. Good EBITA development as well. If we look at acquisitions for 2018, we made, as I said, two acquisitions in the quarter. We bought a smaller company as an add-on acquisition to one of our current Swiss companies. This new company is called Digitrade, they are making flow measurement equipment or gas measurement equipment and gas warning equipment. This company is being integrated by a current Indutrade company in Switzerland. Good profitability level and complementary to our existing company.
We bought a company called Precision Parts, a U.K.-based company with very strong export out of the U.K., a leading company in medical gas equipment and have a wide variety of offerings and a broad product range in this area. They came in in May and have had a good start with Indutrade, and will continue to internationalize with our support going forward. We also finished one acquisition right after the close of the quarter, a Norwegian company called Norsecraft Tec, and they are basically a technical trading company providing central lubrication systems for construction machinery, but also for industrial applications in the Norwegian market. They represent the market leader in this area. We at Indutrade are representing the same company also in Finland, so we have some knowledge in this, and we think we can grow this company successfully in the Norwegian market.
We have made some divestments this year. This should not be seen as a change of strategy. It's more a result of, I would say, a rigorous portfolio analysis we made when I came on board, and it's extraordinary sort of activities. We sold one company in January, and we now sold one company in June, a German company making insulation material for the construction market. These companies have been unprofitable or have had profitability issues for quite some time. We are not the right owners for different reasons, and hence we have decided to divest this. But again, this is not a change of strategy. It's extraordinary activities. We will divest some more companies, but it's very few, I would say, that we will divest going forward.
If we comment a bit on the specific business areas and start with the Benelux area, had a really strong sales growth, almost 30%+, and organically +6%, good sales development. A bit weaker on the order intake side. book-to-bill was at 0.9, but this was a bit driven by the larger power generation company having big impact. Not for the region in general, I would say it's a positive business climate in the region and Indutrade is making good progress in this region. We have now good brand equity, I would say, in the market and strong interest from both different types of brokers, but also entrepreneurs who are interested in divesting companies. Benelux is performing well. Good EBITDA margin increase up to 15.3%.
If we then turn to DACH at the lower part of the page, also a good safe development, but organically more or less flat. Also good EBITDA improvement in absolute numbers, +26%. A lot of that is driven by the acquisition of Inovatools in Germany. Larger acquisition we made last year, performing well and have had a good start with Indutrade, and is providing good profitable growth. We have had some issues in Switzerland, primarily linked to, I would say, Flow Technology companies who are active with process industries in Switzerland. When these customer companies are redesigning their facilities or building new facilities, it's usually a lot of flow-related components needed. There has been a bit lower activity level in Switzerland from this, which some of our companies have suffered from. But other than that, I would say most of the operations also in Switzerland are developing well.
Now since we divested this company with lower performance in Germany, we will step by step, I think, see better performance in the DACH region also. We then go to Finland, I think we have had a positive development also in the Finnish market. It continues, +7% base improvement and organically +5%, and a slightly positive book-to-bill, and EBITA increasing and margin rather flat on 11%. Many customers here have very high capacity utilization, but I think it will continue to be a good market also in the fall here. The cost increase I spoke about earlier was actually from some of the Finnish companies, and that is to some extent why the EBITA margin was not slightly better linked to the growth rate we had there. We then go to Flow Technology.
Flow Technology is actually one of two business areas where we have product and technology commonalities. We actually see some, I would say, competence synergy in that area. They had a good order intake development and also safe development and a positive book-to-bill. So I would say Flow Technology is having a good development, and also an EBITA margin improvement, a bit driven by acquisitions. The Sandrew Mason group, which we are restructuring, is belonging to the Flow Technology business area. As I said before, most of those initiatives we identified in the restructuring program have been implemented now. We have some activities left to do in Germany, but it is starting to be minor in the big picture. So I would say Flow Technology is performing well.
We have a fairly new head of the business area who is now, I would say, more familiar with a broad number of companies. He has traveled around extensively and will step by step have good impact. We have also kept the former head of the business area as an advisor to myself and to many of the other business area heads. So it is working well from a management perspective. We turn page and discuss Fluids and Mechanical Solutions. This is a business area primarily established in Scandinavia, with a profile in terms of industrial companies and also some technology trading companies or technical trading companies. I think very good solid performance from this business area, growth with +7%, and out of that +6% organic positive book-to-bill, and they see a positive and stable business climate. Some of the improvement came from the automotive aftermarket companies.
We also have some hydraulic companies and filter companies, so they took a step up. In one of the automotive-related companies, we have had a problematic e-commerce business. That business is dealt with now, you can say, and will have less negative impact in quarter 3 and onwards. We turn to Industrial Components. This is also mostly Scandinavia and technical trading companies in Scandinavia. I have to take my hat off for the performance in the business area, was really great. Really strong growth, +27%, and of that, 14% organic growth, and a really strong EBITA improvement with 44%, having a margin of 12.7% versus 11.2% a year ago.
This is despite that most of the Scandinavian companies have had currency issues, raw material increases, late deliveries from suppliers, and they have dealt with this in a fantastic way, increased prices, and worked very close to their customers trying to add value in a positive way. Strong positive development, and our outlook is that the market side will continue to be stable in a positive sense also for quarter three. If we turn to measurement and sensor technology, this is our second business area with product and technology commonality. Most of these companies have use for each other in a competence perspective, and here we work with some synergies in a competence perspective. The companies are managed autonomously in an Indutrade way.
MST, as we call them for short, had a great performance in Q2 2017, that's why the organic growth was slightly negative in Q2 this year, it's still on a high and good level. Margin-wise, they came in at 16.8% versus 18.4% a year ago. Some of this is impacted by a weaker growth, there are also some issues in some specific companies, also here we have made some strategic growth investments. Many of the companies in this business area are, I would say, competing on a global market and need to establish either product development initiatives or sales companies abroad and things like that. We took some deliberate cost increases in a strategic perspective in this business area. These are good businesses, and I think we will see positive performance from this business area in the longer term, absolutely.
Last but not least, U.K. One could almost expect that U.K. would be slightly problematic due to the Brexit discussions and potential trade barrier discussions and so on. Indutrade U.K. had a really good quarter two, strong performance, plus 13% organic growth and plus 37% growth in total. This was also having good profitability impact. The EBITA rose with 47% up to SEK 44 million now, the margin increase came strongly here, ended up at 14.6% for the quarter versus 13.6% a year ago. This is basically driven by many companies in the business area, both with domestic businesses and export businesses. Book-to-bill came in at 1.01, as you see there. Maybe not strong increase in quarter three, quarter four, but I think still business on the higher level we are now. Good performance also in the U.K.
You can come back with questions on the business areas and business in general later on here, now I leave the word to Patrik Johnson to comment on the financials.
Thank you, Bo, and hello, everybody. Talking a little bit about cash flow. Before we talk about 2018 numbers, I think it's important to reflect a little bit on the development last year, actually. Cash flow was very strong last year. We had organic growth of 5%, and despite that, we actually managed to increase cash flow last year with 29%, and you can compare that with the EBITA change we had last year, which was 18%. We really had good cash flow last year, and I think that's important to understand when looking at the 2018 numbers. Moving into 2018, I think what we see here is partly a backlash from the good development last year. There is a volume-related increase of working capital, which is hurting the cash flow a little bit.
Q2 operating cash flow, looking at the slide, you can see it's SEK 290 million, and that's 13% lower than last year. The full first half year is actually 45% lower last year, again, it's very strong references last year. Besides the volume-related increase of receivables and inventories, there is also, in a handful of companies, an additional inventory buffer for increased lead times at suppliers and high capacity utilization. We really want to safeguard the delivery service towards our customers. Those volume-related increase and these, you can call it buffers, and maybe also add that last year's relatively high level of big orders projects gave us a lot of customer advances. Those are at a more, I would say, normal or lower level right now, that also hurts us cash flow-wise a little bit. That's cash flow.
Moving on to the next slide, looking a little bit at the margin development and starting with the gross margin. I think in general, I would say that we have a really good development of the gross margin. As Bo mentioned, we are working in an environment where we have some headwind with higher raw material prices, and a weak Swedish krona is actually hurting us since we are importing a lot of components and products into Sweden. That gives us a headwind on the gross margin. I think all, most companies are really good in price management. They are managing in a good way to pass on these increases to the customers, as you can see from the gross margin. The quarter was 33.6%. That's slightly below last year, but if you look at the year-to-date numbers, we're actually slightly above last year.
EBITDA margin, 12.4% versus last year, 12.2%, and as also Bo said, that this is, from an historical perspective, a good level, and it's actually the best Q2 since the financial crisis. I think it's a good level for sure. Looking at a few important financial KPIs on a 12-month rolling basis. Here, I think, as you understand, when you take 12 months rolling, you also include Q4 events and the restructuring charges we took in Q4. That affects the result-based KPIs you can see in the slide. That's why we also added a column where we calculated the KPI excluding restructuring, a few of the KPIs. The EBITDA margin on a 12-month rolling basis is 11%, but if you exclude the restructuring charges, it's 11.8%, that's one step ahead of last year.
Return on operating capital is also one step ahead of last year if you exclude restructuring charges. Underlying, I would argue that we are improving slightly. Return on equity is pretty much on par with last year. On the debt side, here, of course, you see a negative impact on the cash flow issue, you could say, that we have right now then with the backlash on the working capital. Slight increase in debt, that also then, of course, is translating to a slightly higher than net debt ratio as well then. Important to note that quarter two is normally seasonally high when you look at the debt ratios because of the dividends we pay out in quarter two. In general, I would say that we are pretty much in line with last year's performance on these capital ratios.
Earnings per share, an important measurement then, of course, and I think we can move to the next slide where we have a trend chart of the development of the earnings per share. I think here we have a really proud development if you look at the longer perspective. Also this specific quarter then with +19, which is a good and strong number. If you look at it on a 12-month rolling basis, it's 6% up. Again, of course, here we have an impact of the restructuring charges. If you exclude those, it's as high as 16% then. As an average over the last five years, it's 16%. It's not just this year. We've actually managed this kind of level then for quite some years.
Moving to the financial targets, as you know then, we have four financial targets that we have communicated. The zoomed-out view is, I would say that we are actually in line or above all the targets Growth 17% versus the 10%. EBITA margin 12.4% versus the 10%. Return on operating capital, of course, in official numbers, slightly lower. If you exclude restructuring charges, underlying, slightly above. Also below the 100% for the net debt. I think we are also good in. That's it. Back to you, Bo.
Thank you so much, Patrik. We then are through the formal presentation. Then we open up for questions.
Thank you. Ladies and gentlemen, if you do have an audio question for the speakers, please press 01 on your telephone keypad and you will enter the queue. Our first question comes from the line of Johan Dahl from SEB. Please go ahead, your line is open.
Yes, hi. Thank you for taking my question. I was just wondering on acquisitions. It appears that if, I mean, what you've announced so far this year in terms of acquisitions, the contribution going forward will be significantly lower. Could you just explain a little bit the activity in terms of acquisitions this year? What are the reasons for slightly lower activity? Does that have any connection to the portfolio work that you're doing, or any further focus on organic earnings improvement?
Good question. I would say it's not linked to any deliberate change. It's more that we work with a rather large number of projects simultaneously, and hopefully and mostly they turn out fairly evenly by quarter as formalized acquisitions. That hasn't been the case in the first half here now. We are sort of a bit below or behind the last couple of years' recent levels. The activity level is the same, and the interest to turn to Indutrade is, I would say, even higher. Sometimes, I guess there will be a bit of a catch-up effect and several acquisitions come at the same time, and sometimes they are more evenly spread out. The result is not linked to any deliberate change, I would say.
Some of us have put some emphasis into the divestments, obviously, but I shouldn't say that that has taken focus from acquisitions. Anyway, we have finalized some divestments and, as I said, some to come, I think, during the fall as well.
You were unable to find any sort of relevant cause. It's just the off chance, or?
Yeah. It's just that some of the discussions or negotiations might take longer time. Some cases we might have declined later on, or there are various reasons. As I said, no deliberate change in strategy or direction.
Okay. Just to follow up, on the sort of drop through in the quarter, you grew 6%, I think organic earnings was up 5%. Are you currently driving any sort of group-wide initiatives to improve operating leverage in the group?
Not one recipe for all, if I say so, but we have been through a phase now in quarter two where we assess and discuss all the strategic plans for the companies, and then there are obviously decisions taken to make strategic investments in some of them, and some of them are more use what you have and the companies are doing well from a, I would say, capital point of view or people point of view and so on. We have taken some deliberate investments in the quarter in some companies where we see growth potential and so on. We have not started a new initiative that is aimed at all companies at the same time, if I say so.
Okay, thanks.
Thank you. Ladies and gentlemen, once again, if you do wish to ask a question, please press 01 on your telephone keypad now. There will be a further pause whilst questions are being registered. Our next question comes from the line of Jan Wolkleski from Handelsbanken. Please go ahead, your line is open.
Hi, guys. One question regarding the strategic initiatives that you just talked about. Is this expected to continue also for the next quarters ahead, or is it just one-off this quarter?
I think there can be some investments also during the fall. Probably not very significant though, as I see it, but there can be. We have one group-wide initiative which maybe I should have spoken about when you posed this question. We are building what you can call a modern, easy-to-use type knowledge transfer instrument. You can call it perhaps an Indutrade portal where all our companies can go in and find relevant information linked to market segments or linked to functional strategies. It can also be about topics like digitalization or how to build a production unit in China and so on and so forth. We are investing a bit in a new tool like that. Not very significant. Hello? There we go.
Thank you. Our next question comes from the line of Emmy Östlund from ABG. Please go ahead. Your line is open.
Oh, okay. Hi. I'm sorry if you already answered this, but I lost you a little bit when you were talking about the divestment. The timing, was that in the end of the quarter?
Yes. It was basically the last days of the quarter, the German divestment was formalized.
Okay. It will have an effect on sales, but not on EBITDA. Was that also correctly understood?
We will lose sales but improve margin.
Yeah
because it's a loss-making unit.
Yeah. Did you record a loss in the quarter due to the sale or how does that?
Yes. We took some smaller extraordinary loss. We had also some smaller extraordinary gains. They basically netted out or was slightly on the negative side.
Okay. You don't specify them. Okay. Well, got you. Thank you very much. I just have another question on the cash flow statement. You had slightly higher net financials, whatever you call it. Is this due to something particular or?
You talk about financial items then, I guess, or?
Yeah. In the cash flow statement.
Well, I can't recall we have. In general, we have a very low level of interest on the borrowings we have. We should not have an increased level of interest.
Okay. Yeah, because it's normally very stable. I was just wondering if there was anything there. Okay. Thank you very much. I will get back in line.
Thank you.
Thank you. Ladies and gentlemen, once again, if you do have any final questions, please press 01 on your telephone keypad now. As we have no further questions, I'll return the conference to our speakers.
We say thank you for today and speak to you soon again. Bye-bye.