Earnings Call: Q1 2018

Apr 26, 2018

Ladies and gentlemen, welcome to the presentation of Indu Trade AB Q1 Report 2018. Today, I am pleased to present Mr. Bo Henvik, CEO Patrick Johnson, CFO. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Speakers, please begin. Good afternoon. This is Bo Henrik and welcome from my side as well. I will share the presentation today with Patrick Johnson, our new CFO, who started April 1, but is already into the financial situation and the company as well in a good way. So we start with the first slide with some highlights from the Q1. I would say that the demand situation overall is good and perhaps particularly in Sweden, in the U. K. And in the Benelux operations. We have, however, some Easter effects, which is quite relevant for a company or many of our companies, which are technical trading companies. We also have the cold winter impacting many of our Nordic companies and also some of our companies in the UK and Ireland. As many of you know who follow us or have followed us for a longer time, we have a large company in the power generation sector, and this company had a fairly low invoicing for the quarter impacting the overall situation a bit. We will come back to that. We took a rather extensive restructuring decision and program for a company called Sander Maison in the marine segment during the fall last year. And this restructuring plan is being implemented in accordance with plans. So that's going well. And we have formalized one acquisition in the Q1, a company in Holland, Seitwelt Grippers, And I will talk a bit more about that later on as well, a very successful start with Indo Trade. And then we also successfully launched a new bond issue during the Q1, and we will come back and share some further information on that later on as well. So, if we turn page 10 to the financial summary. In an overall perspective, I think the results are good. We had an order intake of +14%, and our net sales rose by 10%, so good situation above our sort of target level or at our target level. This resulted in an EBITDA, which rose by 11% to SEK 451,000,000 and that's corresponding to an EBITDA margin of 11.6% was 11.5% a year ago, so rather stable at the high level. I would say this year and last year's quarter 1 is on a margin level basis, one of the best in a historic perspective. So good start of the year in that sense. Our earnings per share rose 11% to SEK 2.42 and was previously SEK2.18. And our return on operating capital was 19% versus 20% a year ago. And I think Patrick will elaborate perhaps slightly on this, but I can already now say that the restructuring program we had or have ongoing is also look at the market conditions. And this is not more scientific than our perspective on how Indo trade is experiencing the different geographic markets right now basically. Sweden is a positive situation, still growth in the Swedish market for many of the Indo trade companies. In Finland, we experienced good growth during 2017 from earlier sluggish situations, as you know. It's still a good situation at the high level in Finland, but perhaps not the same growth as we saw during last year. But still, as I said, good activity level. I would say that the capacity situation in the machine building sector is perhaps hindering some further growth. So still a positive perspective on Finland in that sense. Norway is actually, I would say, a bit better and mostly for us driven by the activity level in the oil and gas sector. We see that some of the larger companies in that sector are benefiting from the higher oil price and are more profitable and hence invest more in new projects and maintenance projects and so on, also benefiting a bit from the fish farming side in Norway. Denmark is good, but moving more sideways for us. And in the UK, perhaps surprisingly, but going well for us and mostly driven by our export oriented companies who, I think, over some time have benefited a bit also from the currency in the UK. But overall, a good and increasing business for us in that market. Benelux equally to U. K, also very good activity level and growth in that market for a majority of our companies. Switzerland, again, a bit more sideways, I would say. There is a high cost level, strong currency, a bit lower investment activity. So, fairly good, but more a sideways move, I would say. Germany, also a good market, still growing for a majority of our companies. North America is, for us, a bit more sideways, could probably be stronger for many other companies, but this is more company specific for us. And we are benefiting from a good situation, but not dramatic growth at this time. And Asia to end with positive overall situation in Asia for us. So, that was a bit of an expo see over the different geographical markets. And as I said, more of a snapshot how we see the markets from an Indo trade perspective right now. If we then turn page and look at the order intake, at the beginning, I said that it was quite strong overall, plus 14%. And we came in at SEK 4.1 73,000,000 and 3% approximately organic growth in order intake. So not great, but not bad either. I will elaborate on this a bit more on the sales situation. Book to bill, 7% up, good situation demonstrating still that we are growing overall as a company. But as I have mentioned and you probably will hear a bit over and over again here, we have impact from the Easter, which was impacting a lot of our technical trading companies primarily and also the cold winter in the Nordic areas and in the U. K. Again, underlining that primarily strong, I would say, organic development from an order intake point of view in the Benelux area in the U. K. Area. Perhaps also worth to mention that there is high capacity utilization in many geographies, in many segments, and that's actually hampering the growth to some extent for some of our businesses as well. Then we turn page and look at the sales situation, where we came in overall at plus 10%, SEK 3,897,000,000, where the organic growth was basically stable or 0%. And that is, in a sense, not great obviously. But again, I would say that the fewer working days is probably corresponding to approximately 2%. And then the cold winter, it's difficult to set a number on, but also obviously some effect could maybe be 1% or so or 0.5% to 1%. We don't have a definite number there. And then the lower sales for the large company in the power generation sector is also probably impacting around 1% or so. So, with that perspective, it's not that bad and quite acceptable, I would say. And we will benefit from this in the second quarter. So, we will probably see a good April and then overall a good quarter 2 based on this. The strongest organic development was in the measurement and sensor technology business area in the U. K. And also in Fluids and Mechanical Solutions. I think we move on from there into the EBITA development. And as I said initially, EBITA rose with 11% to SEK 451,000,000 corresponding to a margin of 11.6%. So, a good level, stable level versus a year ago. And in a historic perspective, I would say high level. Again, impacting on the Easter effect and the cold weather. Some business areas developed in a very good way. I would say, Finland had a good development and also the industrial components business area. So, good positive improvements there. But overall, I would say good levels in most business areas. If we look at the acquisition on the acquisition side, as I said, we acquired a company in Holland called Seitzel Grippers, a good size, around SEK 130,000,000 approximately with 40 employees, making hydraulically controlled gripper tools for construction equipment machines. They have a nice good facility in the outskirts of Amsterdam and a modular approach to their product range and very good order intake situation, high capacity utilization already now. And this will be a growth company, profitable growth company for Indo Trade in a good way. I would say that the M and A market in general is on a high activity level right now. A lot of private equity companies are trying to divest now. We are at the high level in terms of the business cycle here, so it's probably not so surprising. Our pipeline is strong, good. There is a lot of activity level. Maybe that price level has increased a little bit and that we turned down some proposal linked to price now a bit more now than in a relative perspective. But I would say that we are a very attractive potential buyer, and we get a lot of attention in all our markets where we are established right now. We are a cherry picker, so we only buy good companies. And eventually, I think later in the year, there will be further investments or acquisitions from our side. We've also made some what we call add on acquisitions, and they are basically managed from one of our portfolio companies, and they buy them based on synergies and growth potential. So, we've made one in the UK and one in Sweden. And there are several more lined up, I would say, to be completed later on here. We have also divested 1 company this time, not very common from Indo Trade. This should definitely not be seen as a new strategy. We basically still have a sort of a non exit strategy, and we don't profit from buying and selling companies. And when we buy a company, we have no intention whatsoever to divest it. But this was a company with some difficult financials and profitability situations for quite some time. And we approached one of the suppliers here, and they saw some synergies in investing forward in Finland. So they did so, and we agreed on a reasonable price level and so on and so forth. So we have sold the tekalimit companies with presence in Finland and some presence also in the Baltic countries. Again, there might be some further divestments going forward, but this is not I want to underline that a change of our business model or how we view our sort of cornerstones by buy and build for the long term. Okay. Then we can present a bit more details per business area. And for you who have maybe not followed Indo Trade over the years, we reorganized at the end of last year, and we went from 6 business areas to 8 business areas, and we basically split the larger business area called Special Products into mostly a geographical structure of U. K. Benelux and DACH. So, I start with the Benelux area where we also include this larger company in the power generation sector. So, overall, net sales increased with 5%. However, organically, it was -twelve percent. But if we exclude this larger company in the power generation sector, we had a positive growth organically also in the Benelux area. Book to bill, SEK 110,000,000, good situation. And the EBITA came in at SEK 77,000,000 and a margin at 16%, slightly lower than last year, but still on a level, I would say. There is a positive business climate, and our outlook for quarter 2 in the Benelux, I would say, is good and optimistic. The lower margin can basically be explained by some mix changes. So nothing dramatic. As I said, good level good high level and positive perspective on the coming quarters for from the Benelux area. If we then go to the DACH region, which is short for Germany, Austria, Switzerland, we had a positive order intake and net sales increased dramatically to plus 37%, but that's more linked to a new company, Innovative Tools, which is now included in that area. Organically, minus 5%, Book to bill, dollars 1.12 and EBITDA at SEK30 1,000,000 and that's also a good increase. EBITDA margin at 10.1% versus 9.3% a year ago. I would say from a market perspective, good demand level in Germany, a bit weaker in Switzerland, and this is linked to one extent that we have some project related businesses, which fluctuate over quarters. And there are some of our businesses linked to, I would say, facility investments and maintenance investments linked to the pharmaceutical and chemical segments in Switzerland, and there's been a bit lower activity level now in quarter 1 there. But equal to the Benelux area, I think the coming quarters will be improving and have a good development for us. Then we turn page and start to look at Finland. Here we saw a net sales just below SEK 400,000,000 and a decrease of 1%, but organically plus 1%, book to bill at 1, EBITDA level at SEK38 1,000,000 and a good margin improvement from 8% to 9.6%. As I said, we see more of a sideways movement regarding the market here, but it's a good market at a high activity level now. Quite a lot of impact here from the cold winter. We have some companies in the construction area and also perhaps more specifically in the water and wastewater area where it's been very difficult to basically perform projects during the Q1. And again, some positive impact from the divestment of the tekalimit companies impacting the margin to some extent in Finland. Then one of our larger business areas, flow technology, which is very much about, different types of valves and pipe components, pipe cladding and so on. This is also one of the business areas where we see product commonality and technology commonality. So, Flow basically covers several geographies different from some of the other market more related business areas. Overall, plus 5%, net sales increase organically, plus 1% and book to bill, 1.13%. And they came in at a fairly stable EBITA margin at 9.6%. And I will say that the outlook is also quite stable here. They also have quite a lot of sales technical sales company in their portfolio impacted by the quarter. And in this business area, the Sander Maison Group is belonging here. And as I said, that restructuring is going according to plan. It's quite extensive. We are shutting down some subsidiaries and reorganizing and downsizing. And the plan is that most of these activities will be finalized by the end of Q2. So from the Q3 and onwards, there will be a different structure in that group. Then we turn page again and look at what we call Fluids and Mechanical Solutions, which is mostly companies in Scandinavia, a bit more with an industrial profile, but there are also some sales companies in that portfolio. Net sales increased with 4%, and this was organic growth. They haven't had any structure recently there. Book to bill was 5% plus and the EBITDA margin increased with 0.5%. I think this is great performance because also here they have some Easter effect and definitely like in Finland some impact of the cold weather and also products linked to water and wastewater and so on, underground type of segments. So, very good profitability improvement despite difficult circumstances. We have discussed earlier that they have had an unprofitable e commerce business, which is a subsidiary we have to one of the companies. This one, we are trying to divest and hopefully this will be finalized during the Q2 and history sort of from the Q1 and onwards or Q3 and onwards. That's also dragged down, I would say, profitability a bit during the Q2. Then industrial components, this is a business area with quite a lot of companies, primarily technical trading companies in Scandinavia. Good growth, plus 18%, four percent organic, and they definitely have impact of Easter and cold weather. So good, I would say, momentum in the industrial components business area in general. And we can also see a good EBITA margin development from 10.2% to 10.8%. They are usually lower in terms of profitability in quarter 1. They have a segment of medtech companies in the portfolio. And when you sell to the basically state owned hospital segments in the areas, there is usually quite a lot of invoicing in the Q4. So that's a seasonal effect within the business area. But I'm very positive towards what's happening in industrial components, and I also think we will see a good quarter too there. Then we turn page and then discuss what we call measurement and sensors technology, a very interesting business area. And this is the 2nd business area we have with quite a lot of product and technology commonality and the portfolio of companies in diverse market geographies. Here we work with basically measuring different things, could be weight or temperature or noise levels or humidity, but also leakage from thematic systems or hydraulic systems and things like that. This sort of business overall is having a very high capacity utilization hampering, I would say, growth. But they came in at +6 percent and organically, +5 percent, book to bill 105% and slightly lower EBITDA margin 15.6% versus 16.7% a year ago. This should be seen mostly that we have a bit of a problem in 1 or 2 companies rather than a problem for the whole business area as such. And we are obviously dealing with those situations with high engagement. But back to the high capacity utilization, we see that at our supply structures, we buy a lot of electronic components from Asia. So, some price increases, but also very long delivery lead times. And in this business area, but also in some other business areas, due to this, we have built some safety stocks, which have driven up our working capital a bit. Then last but not least, business area, U. K, very positive situation. Overall growth, 28%, organically, plus 5%, book to bill, 1.11% percent and a margins at sort of a stable high level at 15%, slightly below last year. As I said initially, good growth from the different export oriented businesses we have in the U. K. And they are very diverse in different types of segments, but all basically have a good niche position they are benefiting from in both profitability and growth perspective. They also have some Easter effect and there are also some cold winter effect in the U. K. But overall, I would say a good situation in the U. K. And a good portfolio of companies. With that sort of business overview, I turn over to Patrick to present the financials. Thank you, Bo. It's very nice to be here and to present for Indo Trade the first time. Exciting to go directly into the quarterly report and when you start. So that's good. So earnings per share recovered stronger than from the quarter 4 levels when we took the restructuring charges. So it rose an 11% year over year if you compare to last year to a level of SEK2.42 compared to SEK2.18 last year. If you look at the earnings per share on a 12 month rolling basis, it rose with 5% to 8.79%. And the lesser increase here is, of course, due to the restructuring charges we took in quarter 4 mainly. Looking a little bit into the margins. And here, I think it's really encouraging to see that the gross margin is increasing to 34.6% versus the 33 0.9% last year. I think there are, of course, several factors driving this, but I think it's worth mentioning that I see and feel that there is a good price management in many of our companies. And then we've also seen then a favorable mix then during the Q1. I think those are 2 main components driving the gross margin, which is encouraging then. EBITDA margin, we talked about that, but 11.6% for the quarter, which is a step up from the quarter 4 again and also a slight step up from last year's 11.5%. Percent. Rolling 12 months basis, it is we are on a slightly lower basis now than compared to a few quarters back because of the restructuring charges. If you exclude those, we are trending on a level of 11.8. So that's a slightly better than what we saw than quarter 1 last year. Key data summary, all KPIs here on the rolling 12 months calculation. EBITDA margin on 10.9 percent, 11.8 percent excluding EBITDA excluding restructuring charges. Return on operating capital, 90% versus 20% last year. And the main reason for this one decreasing slightly is, of course, the restructuring charges mentioned earlier by Boo. But we see also here then a slight operating capital buildup in many of our companies, mainly on the inventory side. Few explanations behind this. We are in our production units, production companies. We have a high capacity utilization and also we see that in among our suppliers. So, we have higher work in progress. We have also the need to put more things on the shelf to secure customer delivery service. So those things in combination then is pushing up inventory slightly. So, that's also making the return slightly lower currently. Debt situation and also the capital situation is, of course, also impacting the debt situation slightly. So, we are at slightly more than SEK 4,000,000,000 in net debt currently, slightly more than at year end. And maybe here, when we talk about the net debt, mention the bond issue we had done earlier this quarter. I think this is the 1st historical bond issue for Indo Trade, and we felt it was a really, really successful process, totaling on 5 year bonds and SEK 750,000,000 for variable interest rate and SEK 250,000,000 for fixed at really competitive interest rates. Yes, we can move to the next one. Summarizing then the most important KPIs, we are basically in line with the communicated financial targets, Growth 10% versus the communicated target of 10% EBITA margin 11.6% versus the 10%. Return on operating capital, of course, here it's a slight miss. But then remember the restructuring charges and excluding that one, we are basically in line. And net debt equity ratio well in line. So, by that, I leave over to Bo for some concluding remarks. Thank you, Patrick. Yes, we think quarter 1 was a good quarter. And when we look ahead now for quarter 2 and the rest of the year, I think we have a positive situation. We have a reorganization behind us now, and we have an engaged management team with mostly people who have been with Indo Trade for a longer time, but also some new injections like Patrick on the CFO side. So we are in full swing focusing on developing our portfolio companies and engaging and trying to find additional acquisition targets. And we also have, I think, a good market situation. And hence, we are optimistic for the remainder of the year here. By that, we say thank you from our side and open up for potential questions. Thank you so much. We have a question from Johan Dahl from SEB. Sir, please go ahead. Yes. Johan here at SEBIC. Could you just I didn't see the profit made on the divestment there in Finland. How much was that in the quarter? We haven't disclosed that. So, it's not surprising that you haven't seen that. But it's like this. When we divest sort of unprofitable companies, it's usually not that we are seeing a profit. It's more that we usually unhappy with a minor sort of book loss. But as I said, we don't disclose that information, Johan. I appreciate that. It's just that you mentioned it when talking regarding margins in Finland. So I thought if you say perhaps you say a bit on that issue, but Okay. Never mind. Can you talk about the capacity constraints in the group, how you sort of interpret that? I mean, it's fairly flat in terms of sales in the Q1. Still, you're sort of stretched here in terms of capacity, it seems. How do you see that impacting cash flow in the long term, mainly sort of CapEx in your group? So, we have our portfolio is, as you know, it's diverse, but you can basically structure it in some different buckets. And we have one bucket with good technical sales companies, which was acquired by Intertek a longer time ago, high market shares in the local markets, but not perhaps geared towards dramatically high organic growth. But they are really good profitable companies with good customer relations. So that's sort of segment of companies, they are not growing organically very much because they have a very high market share and it's sort of they have a niche where they are strong and they don't want to dilute the niche by spreading too broadly into other areas. And then we have some products or companies with own products and own manufacturing, And here, we try on a case by case basis strategically assess if it makes sense to take a different a new sort of capacity investment step in a new factory or a new machinery or whatever it might be. So, we it's difficult to generalize there. But if we see that it's strategically sound, we obviously do it. If we feel that it's probably going to go down in the next couple of years, then we are more hesitant and work much more with productivity improvements and efficiency gains and so on. But yes, so we take it on a case by case basis. But there are absolutely businesses which are on a growth path for us, but there is also a chunk which is sort of not geared towards strong organic growth. I'm not sure if I answered your question, Julien. [SPEAKER CHRISTOPHER CHRISTENSEN:] Well, basically, looking at the whole system of companies, whether this is a big issue on the sort of stake agenda that you need to sort of ramp up capacity in the group, but I appreciate this from a case by case basis. Yes. No, we run our companies with a bit yes, with boards. And now we have a board meeting in the springtime, which is oriented towards the strategic perspective. And there are definitely meetings where we take decisions on increasing capacity. And when our management teams propose that, that's usually well grounded and we usually sort of support them on their proposals, I would say. Okay. Just a final question for me. I was just wondering the elevated cost levels which you saw in Q4, how much of that is remaining in Q1? Or is it all gone? Secondly, on group common cost, the €25,000,000 I think it was in the quarter. Is that where it is currently? Or was that also is that higher? Yes. I don't know. I don't have exact details linked to the question on Q4, but I would say a fair share of the Q4 additional cost was sort of more one time cost, which we don't see in quarter 1. So, I don't know, maybe half of that, if I have a view. And on your second question, I would think that we are on that level. We I don't know. We have had quite high, it may be, recruitment costs and some other costs, building the new management team and so on and so forth. But yes, fairly similar, I think. All right. Thanks. The next question comes from Albert Redding from Carnegie. Sir, please go ahead. Yes. Hi. So a question on the valves business, the power generation valves. So your comment now has been for 2 quarters. I think that the order intake has been good. And I think we also discussed that those really long projects, they're not so much available in the market anymore, but still sort of organic sales growth was very negative in Q1 in the business. So how do you see that look going forward? How long are these sort of order intake cycles? My first question. Yes. Usually, if I generalize, a common project from them have basically a 6 month lead time from order intake to delivery, 6, 7, 8 months maybe, somewhere around there or 5 to 8 months maybe. And now in quarter 2, I think we will hopefully be on par with a year ago in terms of invoicing, and we should sort of have most of that relative negative development behind us. Quarter 4 order intake was very strong, I would say. The order intake this quarter was perhaps more normal versus the market situation we see right now and more imperative with the sales situation. But it fluctuates a little bit of between the quarters of core. But I would say that the company as such have had their downturn and are now where we were a year or 2 ago. So, it is at a different level, a lower level. But financially or in a profitability perspective, they are still at a good level, accretive level absolutely. Okay. Thanks. And on this Easter theme, I guess, should we sort of assume that on the sales loss related to Easter or fewer working days that the gross margin would have group average gross margin on that? I'm asking because also your gross margins in the quarter were quite good. So Yes, I would think that's a good assumption. All right. Yes. And a final question from me, just to detail on the divestment. When was that in the quarter? It was quite early in January. All right. So it was consolidated very early in the quarter. Just most of that is done in the quarter. Okay. Thanks. Those are my questions. Thanks. Thank you so much. We have no other questions for the moment. We have a question from Daniel Liquist from Handelsbanken. Sir, please go ahead. Yes. Hi. Daniel from Handelsbanken. So just a short question. We are in a time of bottlenecks with suppliers. Your supply chain, how does it look? Do you have any large suppliers? And what's the part of the largest supplier? How much do they make up for? No. We have a very diverse portfolio of companies and a very diverse portfolio of suppliers. So no strategic threat or very difficult impacts from that point of view. Okay. Well, that's perfect. It's an issue for many of our customers. So just want to get it out of the way. Perfect. Yes. Thanks. We have no other questions for the moment. We have no other question. Okay. Then we say thank you for your engagement and your questions. And we finish for today, and we will go and have our AGM now. Thank you so much. Bye bye. Thank you. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.