Earnings Call: Q3 2017

Oct 25, 2017

Ladies and gentlemen, welcome to the presentation of IndiTrade AB Q3 Report for 2017. Today, I am pleased to present Mr. Bo Anh Witt, CEO and Mr. Jan Jermall, CFO. 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 be handing over to Paul Amrit. Please begin your meeting. Thank you, and good afternoon to all you who are participating. Overall, I think quarter 3 was a good quarter for Indo Trade and a step in the right direction. And if we start with some highlights of the quarter, it's a stable market conditions basically all over, and I will elaborate a bit more on that. And we also have positive momentum in most operations with growth in order intake, sales and earnings. Perhaps the Nordic countries stands out a bit extra. But again, I would say overall in a geographical perspective, it's a good and stable development. We have issues. And for you who follow us more closely, you recognize this. Valves for power generation is still at a low volume level. And we also have issues in some marine related companies, which impacts our earnings and the EBITDA margin. And also, I'm glad to sort of announce then that we were able to sign an LOI with a company called Innovators in Germany, our 2nd larger direct investment in Germany, and I will come back to that also a bit later in the report here. So if we turn to some of the financials, you have obviously seen this. But anyway, good order intake at 15% and equally good sales increase of 14%. So we are growing as a company at a high rate and also correspondingly a good profitability impact leading to an EBITA improvement of 19 percent up to SEK 450,000,000, and that is resulting then in an EBITDA margin of 12.4%, up from 11.9% a year ago. Our profit after tax rose 22 percent to SEK 293,000,000 and earnings per share increased to SEK 2.43. Our return on operating capital was 21% at a stable level with a year ago, and we have improved our balance sheet. So our net debt to equity ratio was at 77%. If we look at If we look at the market conditions from a broader macro perspective, as I said, I still think it's good in general overall. I think we are aware of, as many of you, that we are at basically a broad top of a business cycle. And I think it will continue still for 2018. But after that, there might be some signs of a slowdown perhaps started in the U. S, but that we don't know now. Short term, things are positive. I would say Sweden is working well for us, and we still see good momentum in the market. There is still a robust situation in Finland, and our order intake is still improving and at a good and higher level now. Also Norway is good, I would say, in general. And oil and gas in the oil and gas segment, they start to see some improvements, and there is a second phase of this launch, Johan Sverdrup field coming about. So some light at the end of the tunnel there. Denmark is also good. I think they have had 6 quarters now of GDP improvements. So I'll say stable and good. U. K, also good for us at a stable level. There is obviously a risk link to Brexit. We don't see too much of impact from that in our businesses right now, but we are obviously following that closely and also considering that in terms of future M and A activity. Benelux and especially Holland, I think, is really strong. I think the GDP growth in Holland was best in the all of the Eurozone in quarter 2. And we also see that in our business in the Benelux. Basically, all companies are improving and doing well. Switzerland, perhaps a bit stable, lower project activity, I would say, in Switzerland for us. So maybe that market is perhaps the market with a bit lower activity in the industry portfolio of geographies. Germany is still strong. North America, for us, robust growth and also doing well. And Asia, for us, it's primarily China, I would say, is also doing good. So overall, short term, a good situation, which we benefit from. And as we basically are in business plan mode for 2018 now, we still expect the market to be positive and stable in 'eighteen. When we summarize the quarter, we saw that July was quite weak. August came in strong, perhaps even stronger than we anticipated. And then the quarter ended with September, which was slightly below our expectations. So it's a bit difficult to read something stringent from that. But as I said, we still see optimistically on the remainder of the year and also into 20 18. Then we turn Page 2, our order intake. And as I said, we improved with 15% in the quarter, and year to date, we are up 17%. We tend to watch our organic growth prominently, and here, we see that we are up 7% both in the quarter and year to date. So I think a good positive order intake growth. And basically, the same for our sales situation, invoicing situation, also up 14% in the quarter, 15% year to date and similar numbers in terms of organic growth, plus 7% in the quarter and 6% percent for the year to date number there. So positive sales development overall, and I will comment a bit more linked to the different business areas in a few slides here. But good order intake and good net sales improvement. And with that as a base, I would say that our results are improving well. We had good operational leverage and see clear benefits from the sales increase, and it's really coming down to the bottom line in a good way. So organically improving 12% in the quarter and 8% over the year so far. And when we are increasing sales, we see that we can keep a stable gross margin level, which is also comforting. So we don't sort of take large order and reduce our gross margins. We keep that on a good and stable level. Then if we look at our M and A activity, we have been fairly active, I would say, during the year. We have completed now 10 acquisitions year to date, different markets, different industries and a positive portfolio. And now we were able to sign the company Innova Tools, and we plan to close that project towards the end of November. There is no problem whatsoever. It's just that the competition authorities need some time in, I would say, Germany and Austria. So that was basically part of the plan. Innovatools is really a quality company, and they are providing high quality metal cutting and drilling tools, sales of plus €30,000,000 Main establishment in Germany, in the southern part of Germany, very nice updated facilities there. And then they have subsidiaries in Italy, Spain, Portugal, Turkey and the U. S. And they also have some local manufacturing in those subsidiaries. And these tools, they are of high quality. So there is also a refurbishment business where the customers basically send the tools back InovaTools, and they refurbish them then and basically get them into new condition and send them back to the customers. And some of that activity is happening out in those subsidiaries as well. This company has a good prospect for international growth. They are already selling to a broad number of countries. They have some direct sales but also are selling via distributor. So very, very positive addition to the Indo Trade portfolio. And this is also building a better base for us in Germany as we have a high ambition to for further growth in Germany. So now we have a handful of good companies in Germany. We bought MaxVision earlier this year. We have a Walsz company called Giff from earlier, and we have some other companies as well. So we start to get the portfolio now and getting some brand recognition in Germany. So I would say brokers and potential owners of businesses understand that Indo Trade can be an alternative to divest or sell to. I would say also that the pipeline of companies is still good. We have continuously interesting companies to assess, and we are obviously, on a continuous basis, having a dialogue with different companies. So I would say in overall, the pipeline is interesting and good. We are also working a bit with our M and A team centrally. We have had and we still have Head of M and A by the name Klas Jallmarsond. Klas has been involved in the plus 100 acquisitions for Indo Trade. He has made a tremendously good job for the company. And Klas is turning 64 next year, and we have had a planned succession discussion with Klas. And based on that, we have been able to attract a person by the name Jonas Hallbord, who is currently the Head of M and A within the SKF Group. Jonas have had that role for quite some years, so he's very experienced both in terms I would say, industrial companies, but also distribution businesses. So Jonas will join in the trade starting January 8 and work together with Klaus with a long overlap, and Klaus will remain working within Indo trade for the foreseeable future. We have also been able to attract a new Head of Communication. Her name is Frida Adrian, and she will work both with internal and external communication but also the IR side. And she will start November 20 and help us be more efficient and more even more professional in the area of communication, a good addition. Frieda has experience from public companies before like investor and other type of companies. We are also working on a recruitment in terms of a new CFO. I would say that, that process is working well. It seems like we have attractiveness, and I hope that we will be able to finalize that recruitment within fairly short. Then if we look at the different business areas, the first one being Engineering and Equipment, which is fairly similar to Finland for us. This business area is doing well. We all know that Finland has had tougher times and now is improving quarter after quarter and so are we. They came in at with an EBITDA margin this quarter at 12 point 8 percent. So they are above the average of the group, strong performance, good improvement in terms of net sales. And we still see a positive business climate and stable demand in most customer segments. Working a lot with OEM machine vendors, we work a bit with premium shipbuilding and, I would say, industry in general in Finland. Then if we look at flow technology, which is a lot in terms of piping, pipe components, valves, actuators, products like that. Flow comes from a more, I would say, demanding profitability situation from 2016 and made an improvement step in quarter 2 this year, and that continues also this quarter, coming in with an EBITDA margin of 9.8%. So that is driven, I would say, largely by some underlying market improvements, but definitely company performance improvements, which is positive to see. Within the Flow Technology business area, we have some problem companies, I would say, relating to the Marine segment. And yes, for you to understand that flow in itself is definitely not a problem area. It's actually very interesting, I think, as a technology area. And if we exclude these problem companies, I would say that, that flow technology is close to the average level of the group as a whole. So we very much, I would say, believe in the flow technology area, and we are willing to invest more in the flow technology area. And this is actually an area where we have commonalities. And if we aggregate our business here versus suppliers and versus customers, we have a fairly strong position in the European perspective and a strong voice, I would say, in a business discussion perspective. Then if we look at Fluids and Mechanical Solutions, This is, I would say, primarily a conglomerate of Nordic companies, a mixture of both Mechanical Solutions has been have been very stable in terms of performance, good performance at the high level, I would say, and that continues also this quarter. And they are above the average of the group. And I would say business area is performing absolutely well. Industrial Components is also, I would say, a bit of a conglomerate primarily linked to also the Scandinavian geography and a bit more technical trading companies focused in that business area. They slipped a bit in terms of profitability towards the end of last year and early this year and are now improving again. And they are working, I would say, very well with performance improvements, price increase improvements where we can create value together with the customers, and that's turning out in a good way now. So good improvements, a bit below the average of the group. But these companies, they look at past performances and try to continuously improve from where they were before, so step by step in the right direction. Then we have a very interesting business area called measurement and sensor technology. I would say, extremely well positioned in general in terms of digitalization and where a lot of the customer base wants to make less intelligent, I would say, products more intelligent, and they use our different types of sensors, integrating them into their products in a value creating way. Here, we have a high margin level and a high growth area, basically a stable development in terms our margin, and all companies basically in this business area are doing very well. And here, we see that we have very high capacity utilization within our businesses, and we also see that in terms of our customers and our suppliers. So this, I think, will impact growth a bit going forward, but it shouldn't impact the margin levels. Then at the bottom of the page, we have special products, which I manage myself. But I think it's also interesting for you to understand that it's quite a large business area, and it's basically built on a number of large market clusters heading up being heading it up of very capable persons. So we have a cluster in the U. K, in the Benelux in Switzerland, Austria and so on and starting to build a cluster in Germany slowly. So these clusters in themselves are basically managed similarly to the other business areas. And good performance, stable performance. 1 of the bigger companies in the group is within this business area in the power generation sector, basically developing, selling valves in this sector. And here, we have had some problems versus high good historic performance. And the market is now shifting a bit since some time here. We have, for several years, benefited from some very large projects in this business, 1 or 2 really large projects per year, providing good base load in our operations. And since some time now, we don't see those very large projects, and we don't really have those large projects in our order books. But there is still a healthy, I would say, demand in terms of more normal projects and replacement products and projects. So we are now working with dimensioning, I would say, our operations and business towards that market demand. And step by step, we will don't we won't sort of suffer in a relative perspective from the earlier high numbers here. So the company is now doing well. It's not a problem company, but they were really benefiting from large projects earlier, and that is not part of the situation right now. If we look at our earnings per share development, it's been good, plus 22% in the quarter to SEK 2.43 and year to date, plus 24%. And now we are at SEK 7 point 12. So step by step improving in the right direction. And if we compare our performance with our financial targets, it's also a positive picture. As we have already said, we came in, in terms of growth, at 15%, and the target is about 10%. Our EBITDA margin is now at 12% year to date, and the target is above 10% there as well. And our return on operating capital of 21%, target 20% plus. And our net debt to equity, we came in at 77%, and we should below be below 1% or 100%. So doing well in that perspective as well. As still being fairly new as a CEO, as I've said to you before, we are working with strategic review, and that will be ongoing until the end of the year. And Indu Trade is a good company, so we are basically having a good very good starting point. So what you can expect is absolutely more evolution than any type of revolution. We are building on a good base. And for sure, we have the ambition to improve that further. The business model remains firm. We very much believe in the decentralized entrepreneurial driven business model. So that is not a question in this analysis or review. I've also said that we have a low number of companies with profitability issues. I think we have a very good track record of buying good businesses, But we have a few with problems, and there we are very active right now trying to either turn them around or potentially see if there might be other owners who have more synergies and can be a better home for of these businesses. And if and when we have something to inform, we will obviously do that to the market at the appropriate time. Then we have, obviously, an income statement. We have the balance sheet and some KPIs. And so but I think you are quite up to date in terms of all of that. So I think we actually stop here in terms of the presentation and go to the question and answering session. Thank Our first question comes from the line of Johan Dahl from SEB Equities. Please go ahead. Your line is open. Just on the topic of operating leverage, Bo, you mentioned you seem to be fairly happy with it. I just done the calculation, it seemed to be around 20% for the quarter. Is that where it should be? Are you seeing any sort of cost creeps in the business? No. I think we are managing cost in a very good way. The whole culture in Indo trade is very cost conscious, and we balance cost when we grow the companies, if I say so. So I think it is basically where we should expect it to be. Right. In terms of valuations, what are you seeing out there, valuations of companies that you acquire? You seem to be doing a lot more outside Nordics at the moment. Just your view on that. Yes. We as we have said, outside Sweden, we still think the multiples are stable at around where we have been 5, 6, 7. So we still see a pipeline of businesses to be acquired around that level. There are also companies in Sweden at that level, but there is, in general, a bit more competition in Sweden. But I would my perspective right now is that are perhaps creeping up a little bit, but not symptomatic. All right. Just on the topic of capacity constraints, is that very much a BA specific issue? Or do you see sort of group wide need to jack up investments? It's primarily, I would say, in the measurement and sensor technology area, not equally much of an issue in the other business areas. And we will obviously take positive growth in investment expansions if we feel that they based on a solid business plan and we understand that there is a real sort of customer need and that they can hold in a potential recession and so on. So we, I think, manage that in a responsible way. All right. Just finally, on the matter of strategic review, I appreciate you're not done with that yet, but could you just elaborate a bit on what areas you're exploring there? I mean, as you say, it's a well functioning system. Still, you're working on this for half a year, just to enlighten us on that point. And how many or how much turnover do you think is available potentially for sale in the group as you see as underperformers? It's basically to understand our portfolio in a very good way for myself. And obviously, the management team is to a large extent. But we place the businesses in different buckets, you can say, and we do that in a lot of different dimensions right now. So we can learn from the past and use that learning into the future in a value creating way. We'll definitely not divest any large number of companies or large values. It's going to be rather minor and linked to extraordinary situations, I would say. All right. Thanks. Our next question comes from the line of Johan Hiltner from Handelsbanken. Please go ahead. Your line is open. Thank you. My first question is on your valves business. I sensed a bit of a concern. Maybe I heard this wrong, but some concern about the exposure to power in this segment. And maybe this is related to the HP valves capacity expansion where you had some good projects before that might not come in. Is this correct? Or is are you referring to something else? I would say it's correct. It's to the power generation sector. And that sector is has been changing now with lower oil prices to a large extent. There is consolidation on our customer bonds. So you have GE Alstom, you have Mitsubishi, Hitachi, have Siemens buying NEM in Holland. So there is some consolidation ongoing there. And there are also some, I would say, Chinese or Asian challenging some of these 3 established houses, if I say so. So there is a bit of new dynamics linked to the lower oil prices, less investments. So that has led to, I think, right now that those very large projects are not in the order book. But there is still a sound business, and there is a sort of a healthy order book in terms of day to day and replacement business. So this is not a profitability issue in terms of any loss situation or anything like that. It's more that we come from a very healthy situation and are now in a more normal situation perhaps. Are you experiencing overcapacity since you expanded in HP Valves? And you maybe are still working off some bigger orders that are not about to be renewed? We have some overcapacity since when you build a new factory, you take some height for capacity expansion, of course. But I don't think that's not a big cost issue for us. Okay. Because if you just look at margins, it doesn't really seem like there is a problem because they are still at a fairly good level, I must say. Exactly, exactly. Another question. You mentioned that you're reviewing your portfolio. I'm just curious on some part of the business collaborating more within the portfolio companies, maybe merge some and get some scale benefits on perhaps sourcing sales, etcetera. How do you view those potentials? I think I can already now say that large synergy projects, more top down, will still not happen. It has never happened at Hindustrader, and I don't foresee that being implemented by myself either, where we say that you need to buy steel from supplier ABC or we should join the sales forces here and sell a number of products from that sales force. It's more, I would say, potential in terms of knowledge sharing horizontally in the group, which is where we might provide a more efficient platform from the group, but it's more driven from the companies in a market segment perspective or technology perspective, things like that. Okay. That's very clear. And then on the low performers, my sense is that previously, industry hasn't really been overly tough on the low performers and they haven't really had a big problem either because overall, the group has been developing pretty well. But do you see yourself being more active and really trying to get the low performance to improve profitability and growth? Yes. I don't want to see that in a relative perspective versus before, but I can say that we are very active now, absolutely. And I don't think you need to manage those situations and time cannot just pass, if I say so and so. Great. That's very clear. Thank you. That's all for me. We do have a follow-up question from Johan Hiltme from Handelsbanken. Your line is open. Thank you. There's another thing. On the recent acquisition in Germany, pretty interesting, I think, it's a bit bigger than the normal IndoChain acquisition even if IndoChain made bigger ones before. But is this more or less exactly the type of acquisitions you are looking for where you get a bit of a bigger size, hopefully, not really overpaying because maybe these German customers companies might be willing to sell to long term buyer as industry without really going for the maximum multiple? This is pretty much bull's eye, I would say. Yes, absolutely. And is there just a ton of these companies out there in Germany? You just need to build a reputation and present yourself to these companies to be able to execute those acquisitions? I think there's a fair number of those companies in Germany and in Europe. Then it's not just to introduce. I mean, it's going to be, don't think, a very easy journey to attract a large number of them initially now. But step by step by step, we will build this absolutely. Taking the question from a bit of a different angle, but just look at what happened in the UK when you once started acquiring, it felt like you had a bit of a catch up effect where all of a sudden you've made a lot of acquisitions in the UK, which seem to be related to you just being more known in the market. Isn't that possible for the German market as well? Yes. It's I think Germany is more difficult than the U. K. I think they are more geared towards doing business with Germans than if I generalize extremely much now than UK owners divesting to an outside sort of company like Intuitrade. But again, we have priority, focus ambition in Germany. But I also want to guide you in it's not going to be easy to find 10 of these companies quickly, if I say so. Okay. Fair enough. Thank you. There are no further audio questions registered. So I will return the conference back to the speakers. Okay. Then we say thank you for today, and please feel free to contact us later on here as well so we can answer any potential questions. Thank you for today, and bye bye. This now concludes today's webcast. Thank you all very much for attending. You may now disconnect your line.