Earnings Call: Q2 2018

Jul 25, 2018

Ladies and gentlemen, welcome to the presentation of IndiTrade's Q2 Report 2018. Today, I'm pleased to present CEO, Bo Anrik and CFO, Patrick Jonsson. Session. I will now hand you over to Bo Anrik. 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. And 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 2, we had just below 90% of our invoicing relating to Europe. So the business climate in Europe is predominantly important to us. And Nordic still represents around 50% of our sales. So obviously, the Scandinavian and Nordic market is very important. But 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. So 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. And in that perspective, 2 business areas stands out this quarter, Industrial Components and the UK, but 6 of 8 business areas are improving their performance. So 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 2 acquisitions in the quarter, 1 UK company and 1 Swiss company. And just after the close of the quarter, we also acquired a Norwegian company. I will comment a bit more on these later on. And in the fall of last year, we implemented or started a quite extensive restructuring program at one of our companies called Sande Maison, and I'm happy to say that this work is developing in accordance with plan. But then we can turn page and look at our financial summary for the quarter. And our order intake rose with 11%, so strong order intake increase, even stronger sales increase with 17%. And this also had a result effect, meaning that our EBITA rose with 90 percent to SEK 543 1,000,000 this quarter, and our margin came in at 12 point 4% versus 12.2% a year ago. And this is a good level in a historic perspective, one of our better quarters as a company. So 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 90% to SEK3.01 versus SEK2.52 a year ago. And we had also a good return on operating capital. We measure this on a 12 month rolling basis, and hence, we are including the effects of the restructuring in that 19% figure. So if you exclude that, we came in at 21% above last year and above our target. So all in all, a very good, I would say, financial performance from Intertrade in quarter 2. If we then turn on Page and look at our order intake, I said that the order intake rose with 11%, up to SEK4 1,000,000,000, and 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 quarter 2, 2017. So all in all, a good level, a positive level and 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, but also good levels in Industrial Components and Fluid and Mechanical Solutions. All those three areas have a commonality in the sense that they have quite strong Scandinavian linkages. So Scandinavia stood out from a market development perspective in a good way. We have a large company in power generation, and they are performing well, I would say. However, in an order intake perspective, So, So still at an expected level more or less and outlook for order intake quarter 3 is still okay. Then we turn page towards the net sales and we had a fantastic level, plus 17%, and out of that was plus 6% organic, so a good level. However, we should also note that we had somewhat more working days in quarter 2 this year than a year ago. I think, on average, approximately, this is around 2 days difference. And the strongest development from a business area perspective is Industrial Components and the U. K. But again, 6 on 8 had a good performance and a bit lower in the DACH region and measurement and sensor technology, and I will come back to that a little bit. Again, separately on the Power Generation side, invoicing was a bit better actually than last year. So, all retail slightly lower, but invoicing a bit better. Then we turn to the EBITA side. And as I said earlier, rose with 19% to SEK 543 1,000,000, very high level and an EBITA margin of 12.4% versus 12.2% last year, organically increasing with 5%. So very positive development. Again, in a business area perspective, Industrial Components and UK stand out, but good development in most of them. We could have seen an even stronger development, but we choose to take some strategic investments in some defined companies for profitable growth reasons. So a bit higher cost level in some companies, but that's by design and by strategic plan, you can say. So good EBITDA development as well. If we look at acquisitions for 2018, we made, as I said, 2 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, and they are making flow measurement equipment and or gas measurement equipment and gas warning equipment. And this company is being integrated by a current industry company in Switzerland. Good profitability level and complementary to our existing company. And then 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 has a wide variety of offerings and a broad product range in this area. So they came in, in May and have had a good start with Intertrade, and we'll continue to internationalize with our support going forward. And then we also finished one acquisition right after the close of the quarter, a Norwegian company called Norskraft Tech, 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 Intertrade 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 a, I would say, a rigorous portfolio analysis we made when I came on board. And it's extraordinary sort of activities. We sold 1 company in January, and we now sold 1 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. Then if we comment a bit on the specific business areas and start with the Benelux area, Had a really strong sales growth, almost 30% plus and organically plus 6%, so good sales development. A bit weaker on the order intake side. So book to bill was at 0.9, but this was a bit driven by the larger power generation company having big impact. So not for the region in general. I would say it's a positive business climate in the region and Indo Trade is making good progress in this region. We have now good brand equity, I would say, in the market and strong interest from both, I would say, different types of brokers, but also entrepreneurs who are interested in divesting companies. So Benelux is performing well, good EBITDA margin increase up to 15.3%. If we then turn to Utag at the lower part of the page, also a good sales development, but organically more or less flat. Also good EBITA improvement in absolute numbers, plus 26%. A lot of that is driven by the acquisition of Innova Tools in Germany, larger acquisition we made last year performing well and had a good start with Intuitrade 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. And 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. And with that, also Finland. I think we have had a positive development also in the Finnish market. It continues, plus 7%, sales improvement and organically, plus 5% and slightly positive book to bill and EBITDA 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 full year. And the cost increase I spoke about earlier was actually from some of the Finnish companies and that's to some extent why the EBITA margin was not slightly better linked to the growth rate we had there. And if we go to Flow Technology, Flow Technology is actually one of 2 business areas where we have product and technology commonalities. We actually see some, I would say, competent 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 EBITDA margin improvement a bit driven by acquisitions. And the Sanderme Soren Group, which we are restructuring, is belonging to the Flow Technology business area. And 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's 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. And we have also kept the former Head of the Business Area as an adviser to myself and to many of the other business area heads. So it's working well from a management perspective. If we then turn page and discuss Fluids and Mechanical Solutions. This is a business area primarily established in Scandinavia with 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 Q3 and onwards. Then 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. It was really great, really strong growth, plus 27%, and of that 14% organic growth and a really strong EBITA improvement with 44%, having a margin of 12.7% versus 11.2 percent a year ago. And 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 work very close to their customers trying to add value in a positive way. So strong positive development and our outlook is that the market side will continue to be stable in a positive sense also for Q3. Then if we turn to measurement and sensor technology, this is our 2nd business area with product and technology commonality. So most of these companies have sort of use for each other in a competence perspective and we work with some synergies in a competence perspective. But the companies are managed autonomously in the trade way. MST, as we call them for short, had a great performance in Q2 2017. And that's why the organic growth was slightly negative in Q2 this year, but 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 the weaker growth, But there are also some issues in some specific companies. And also here, we have made some strategic growth investments. Many of the companies in this business area are, 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. But this is 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, UK. One could almost expect that UK would be slightly problematic due to the Brexit discussions and potential trade barrier discussions and so on. But in the trade, UK had a really good quarter too, strong performance, plus 13% organic growth and plus 37% growth in total. And this was also having good profitability impact. The EBITA rose with 47% up to SEK 44,000,000 now and the margin increase came strong here, so ended up at 14.6% for the quarter versus 13.6% a year ago. And 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. And maybe not strong increase in quarter 3, quarter 4, but I think still business on the higher level we are now. So good performance also in the UK. You can come back with questions on the business areas and business in general later on here, but now I leave the word to Patrick Johnson to comment on the financials. Thank you, Bo, and hello, everybody. So talking a little bit about cash flow then. And 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 a growth 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 EBITDA change we had last year, which was 2018. So that we really had good cash flow last year. I think that's important to understand when looking at 2018 numbers. But moving into 2018 then, I think what we see here is partly a backlash from the good development last year. So there is a volume related increase of working capital, which is hurting the cash flow a little bit. And Q2 operating cash flow, looking at the slide, you can see it's €290,000,000 and that's 13% lower than last year. And the full first half year is actually 45% lower than last year, but then again, there's very strong references last year. And besides the volume related increase of receivables inventories, there is also in a handful of companies an additional inventory buffer for increased lead times at suppliers and high capacity utilization. So we really want to safeguard the delivery service towards our customers. So those I mean volume related increase and this you can call it buffers and maybe also add then that last year's relatively high level of big orders project gave us a lot of customer advances. And those are at a more, would say, normal or lower level right now. So that also hurts us cash flow wise a little bit. So 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 think I would say that we have a really good development of the gross margin. As Bo mentioned, then we are working with we are working in an environment where we have some headwind with higher raw material prices and weak Swedish krona is actually hurting us since we are importing a lot of components and products into Sweden then. So that gives us a headwind on the gross margin. But I think all, Most companies are really good in price management, and they are managing in a good way to pass on these increases to the customers as you can see them from the gross margin. And 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 then, 12.4% versus last year 12.2. And as also, those have been that this is from a historical perspective, a good level. And it's actually the best quarter 2 then since the financial crisis. So I think it's a good level for sure. Looking at a few important financial KPIs then on a 12 month rolling basis. And here, I think, as you understand, then when you take 12 months rolling, you also include then quarter 4 events and the restructuring charges we took then in quarter 4. So that affects then the result based KPIs you can see in the slide. So that's why we also added a condom where we calculated the KPI excluding restructuring than 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%. So that's 1 step ahead of last year. And return on operating capital is also 1 step ahead of last year, if you exclude restructuring charges. So 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 with the backlash on the working capital. So slight increase in debt and that also then, of course, translates into a slightly higher than net debt ratio as well then. Also then, important to note that quarter 2 is normally seasonally high when you look at the debt and the debt ratios because of the dividend we pay out in Q2. But in general, I would say that we are pretty much in line with last year's performance on these capital ratios. And earnings per share, an important measurement and 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. And I think here, we have a really proud development, if you look at the longer perspective. And also this specific quarter, then with plus 19, which is a good and strong number. If you look at it on a 12 month rolling basis, it's 6% up. But then again, of course, this here, we have an impact of the restructuring charges. So if you exclude those, it's as high as 16%. And as an average over the last 5 years, it's 16%. So it's not just this year, we've actually managed this kind of level for quite some years. Okay. Moving to the financial targets. And as you know, then we have 4 financial targets that we have communicated. And the zoomed out view is, I would say, that we are actually in line or above all the targets. Growth, 17% versus the 10% EBITDA margin, 12.4% versus the 10%. Return on operating capital, of course, in the official number, it's slightly lower. So but if we exclude restructuring charges, underlying, slightly above and also below the 100% for the net debt. So I think we are also good in So that's maybe next to you then, Blud. Thank you so much, Patrick. We then are through the formal presentation, and then we open up for questions. Thank you. And 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 as 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. It's 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. So we are sort of a bit below or behind the last couple of years recent levels. But the activity level is the same and the interest to turn to industry is, I would say, even higher. So 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. But the result is not linked to any deliberate change, I would say. Then some of us have put some emphasis into the divestments obviously, but I shouldn't say that that has taken focus from acquisitions. But anyway, we have finalized some divestments and as I said, some to come, I think, during the fall as well. But you're unable to find any sort of relevant cause. It's just the off chance or Yes. It's just that some of the discussions or negotiations might take longer time. Some cases, we might have declined later on or so there are various reasons, but as I said, no deliberate change in strategy or direction. Okay. Just a 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 2 where we assess and discuss all the strategic plans for the companies and then we 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. So we have taken some deliberate investments in the quarter in some companies where we see growth potential and so on. But we have not started a new initiative that is aimed at all companies at the same time, if I say so. Okay, thanks. Thank And our next question comes from the line of Jan Wachlekski from Handelsbanken. 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 some. We have one group wide initiative, which maybe I should have spoken about when you post this question. We are building what you can call a modern, easy to use type knowledge transfer instrument, you can call it perhaps an industry 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. So we are investing a bit in a new tool like that or not very significant. Thank you. Our next question comes from the line of Amy Osklein from ABG. Please go ahead. Your line is open. Okay. Hi. So I'm sorry if you already answered this, but I lost you a little bit when you were talking about the divestment. So 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. And it was it will have an effect on sales, but not on EBITDA. Was that also correctly understood? No, it will we will lose sales, but improve margin because it's a loss making unit. Yes. And 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. So they basically netted out or was slightly on the negative side. Okay. Okay. So 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 sort of net financials, whatever you call it. What is this due to something particular or? You talk about financial items then, I guess, or? Yes, yes, in the cash flow statement. Well, I can't recall we have any I mean, we are in general, we have a very low level of interest on the funds on the the forwardings we have, then so we don't we should not have an increased level of interest. Okay. Yes, because it's normally very stable. So I was just wondering if there was anything there. Okay. Well, thank you very much. I will get back in line. Line. Thank you. Thank you. And as we have no further questions, I'll return the conference to our speakers. Then we say thank you for today and speak to you soon again. Bye bye.