Earnings Call: Q2 2017

Jul 25, 2017

And gentlemen, welcome to the presentation of IndiTrade AB Q2 Report 2017. Today, I am pleased to present Mr. Bojanvik, CEO and Mr. Jan Ullmann, 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. Speakers, please begin. Good afternoon. This is Bo Anwick. I'm happy to be on this call here now. I'm the new CEO of Indo Trade since mid of April, and we have a presentation to make. And I'll start with some highlights for the quarter. It's a good quarterly report in general, I would say. Strong underlying demand, helping our businesses as a good platform. We had, as all companies, basically an Easter effect here in quarter 2 with fewer invoicing days, and I'll come back to that a bit. But most of our companies have good growth in terms of order intake, sales and earnings, so a positive situation in general, I would say. 1 of our business areas stands out a bit, and that's engineering and equipment, which is basically equal to Finland in our case, with a good development there in a relative perspective and also starting to be very good in an absolute perspective. We have 2 areas which are more problematic. One is valves for power generation, which is a sizable business for us with continued low volumes. And then we also have some businesses in the Marine segment with a segment which is not really performing strongly and both having impact on our earnings and EBITDA margins. We've been very active, I would say, in terms of M and A and made 2 acquisitions in the quarter and finalized 4 in July. And I will come back and comment on those as well, of course. If we then turn to the next page, which is more the financial summary for the quarter, you can see that our order intake rose with 15% ending at SEK 3,952,000,000, and the organic growth was 4%. Our net sales rose 13% in the quarter, up to SEK 3,749,000,000,000 and our EBITDA rose 13 percent to SEK 458,000,000, resulting in an EBITDA margin of 12 point 2%, which is equal to a year ago. However, since we have this Easter effect, I think that still is good performance. Our profit after tax rose 17% to 303,000,000 corresponding to earnings per share of SEK2.52. And we had a return on operating capital of 20% and a good situation in terms of our balance sheet. Our net debt to equity ratio was 79% for the quarter. So I would say, all in all, a good development. If we then turn to our market conditions, I would say it's stable to good in all markets where we mostly operate. We have a good situation in Sweden and Finland, as I commented earlier. And in Sweden, I would say it's basically, in general, across most industries. In Finland, most of the machine builders and construction companies we work with have a good situation. And I would say, in general, the OEM companies have a good situation in Finland. Otherwise, also good in the Benelux countries across most segments, a bit weaker in oil and gas. Some of our companies also have fairly sizable businesses in North America and Asia, and there we also see a good demand situation. Otherwise, it's mostly stable in Europe. Norway, stable. Oil and gas is picking up a bit from where it has been before, and we see some new contracts and some new developments in our businesses there. In U. K. And Ireland, mostly, I would say, stable performances. Obviously, Brexit has some impact, however, mostly on large potential capital intense projects. But I would say day to day business is still operating well in the segments where we are present. Switzerland, stable, difficult cost position in some industries, but a rather stable position as we see it and also so for Germany. So good environment, I would say, business wise, to operate in and mostly will continue, I would say, also in the fall here as we see it now. Then if we turn to the order intake, I already commented on that briefly, plus 15% in the quarter, we're of 4% organic. But a better perspective, I would say, is the first half year where we have sort of less impact of the Easter effect. And there, you saw that our order intake rose 18% 6% organic. So I think that's a very good situation for us. Also a fortunate situation in terms of net sales. Again, as I said, plus 13%, whereof the organic was plus 3%. On year to date situation, we have plus 5% organic and plus 16% overall. So also here, I would say, a very good performance leading to a positive situation in terms of our EBIT A results. So 12.2% margin equal to a year ago. Again, that's, I would say, good remembering the Easter effect. And we also have had some businesses with fairly strong, I would say, sales situation a year ago. So also taking that into consideration, I would say this is a good performance and one of the better quarters since 2,008, 2009 period. If we look at our margins, we have a, I'll say, a stable gross profit situation at 33.8% this quarter and year to date, 33.9%. So we are quite stable over time at around 34%, and that seems to continue, which is, I would say, a good level. We continuously try to improve that in all our companies, but it's still a healthy and good situation where we are. You can also see on this slide the EBITA margin development over time. And I would say the last quarters have been a slightly different pattern than what we have had the last several years where quarter 1 usually drops and then quarter 2 improves, and that holds fairly steady until quarter 1 next year again. The last quarters now, we had somewhat weaker quarter 3 and 4 if we compare to the pattern more historically. But we had a good quarter 1 and again, a stable and good quarter 2 here. So our performance is, in that perspective, good. And I will come back to how we see the development going forward a bit later here. Then we have a growth bridge where we can see our development in order intake, net sales and EBITDA, both for the quarter year to date or for the first half year. And perhaps worth to note here again then that organically, we grow 4% 3%, respectively, in order intake and net sales in the quarter, and EBITDA was stable. However, on a full first half year, EBITDA organically grows 6%, which is, I would say, a very good performance. We had impact of around 10% from acquisitions in most of the categories, and the currency was around 2%, so not very significant impact. And then as I said, Indo Trade has been very active in terms of M and A for the quarter here and also at the start of quarter 3. So in quarter 2, we bought a company called ProFlex in Norway, and that will be based in our Flow Technology business area. Proflex is a technical trading company and specializes in, I would say, high complex demand of hoses and comp couplings to the Norwegian industry broadly, but perhaps more specifically for fish farming, food, agriculture and also, to some extent, shipbuilding and offshore. So a broad customer base and very good technical skills in the company. We also made our 1st direct investment in Germany, a company called Max Division, again, a technical trading company, specializes in cameras for industrial processes, and they can be used in different applications like quality control, robotic controls, product identifications and things like this. Very strong management in the company, and we hope that this is obviously not our last direct investment in Germany. We have quite good focus on this as a market, and we'll try to do more impact in Germany as we see new quarters coming by here. Then we also acquired a company called Vennstrom Duse Control in Sweden. That's also a technical trading company managing light control and light components. Again, a very broad customer base and high skill set in the company and growth oriented, so a welcome addition into the Indo Trade family. We also acquired a company called Elma Instruments in Denmark, a larger technical trading company with a very good market position in test and management or test and measurement equipments. That's for electricity applications, ventilation, thermography, and they also have a service business and some owned brands and so on. So very good addition, I think, to our portfolio. Then we made an acquisition in the U. K, a company called Young Black, and they have a fairly broad portfolio of products: fasteners, pneumatic tools, compressors, holes, couplings and things like this. And again, a very broad customer base in the British Industry and Construction area. And they are a bit of a one stop shop for a large part of their customers with a good customer relationship over time. And last but not sort of least in importance, a company in Holland called Tubeworks. It's a company with their own production, and they are in the field of, I would say, complex and demanding pipes. So they do welding and cold forming and other types of machining for pipes for demanding applications for industrial purposes and also transportation companies and so on and so forth. So now this adds up to SEK 870,000,000 year to date. And as I stated in the quarterly report, we still have a strong pipeline, a good balance sheet. So it looks positive for additional acquisitions going forward. Then if we turn to our different business areas, some brief comments on them, starting with Engineering and Equipment, which is, as I said, fairly equal to Finland in our case. You see there in the slide that ending quarter 4 with 7% EBITDA and moving up to 8% in quarter 1 and now at 11.3% in quarter 2 this year. So a positive development with continued growth organic growth of 9% in the quarter. And actually, some of our companies had all time high levels this quarter now. So good platform, and I would say, a positive outlook for the fall here as well for Engineering and Equipment. Flow Technology has had 3 quarters of more difficult EBITA levels and made a good improvement now in quarter 2, ending at 9.2%. And we have commented before on that they have some companies in the Marine segment with, I would say, segment in general with no growth and some particular issues in some of these companies having effect on the business area overall here. So if one were to exclude that, I would say that the Flow Technology area were fairly much in line with the rest of the Intuitrade EBITDA level. So we are working actively with these companies trying to improve them, and we hope to see significant improvements at the end of the year and in the beginning of next year. And as I said before, one acquisition added into this business area of the Norwegian company, ProFlex. If we then turn to Fluids and Mechanical Solutions. In the chart here, you see a very stable, strong performance at around 12%, 13% EBITDA margin also sold for this quarter, and it's a positive and good, I would say, demand situation in most segments for this business area and a good level, good performance, no surprises. Industrial Components had a lower quarter 1 this year at 10.2 percent but now came back to the level where they have been and should be at 11.2 percent in quarter 2 here. So it's a welcome improvement, of course. And overall, we see most businesses in this area doing well, and they have been very active in terms of the acquisitions and added 3 companies to the area in MaxVision, Brennstrom and Elma Instruments. Then we turn to measurement and sensor technology. And here, we see a fantastic development, ending the quarter here now at 19.2 percent EBITDA margin, and I would say strong momentum in most regions. And I would say their product offering is very much linked to the demand in several segments and companies nowadays making their products more intelligent, adding sensors and technologies like that from Indo Trade. So really strong and good performance here. And I would say that, that seems to continue also going forward. In terms of Special Products, EBITDA margin went down a bit quarter 2 versus the beginning of the year here. And in general, I would say there is a stable demand and good performance in most companies. And we have a large company in the power generation sector, which have, I would say, not as good of a market situation as they've been used to, and that is impacting the relative EBITDA margin for the business area and that company in specific despite that, I would say, a fairly good 13.7% level. Also in this business area, we have added 2 companies, as I said before. If we look at the overall income statement, we have already been through the numbers a bit. Perhaps worth to comment the moving 12 months number on net sales, close to SEK 14,000,000,000, so a positive growth story here. And lower at this in this table here, you see the EBITDA margin also on the moving 12 months average at 11.7%. So good overall, I would say, development for the company in terms of this. Also a very healthy situation in terms of the balance sheet and perhaps noteworthy here. You can see that our intangible fixed assets are very much in line with the equity at around €4,500,000,000 in both categories, and that's a stable and healthy situation for us going forward. And then we have our financial key data here. Not commenting on everything on this slide here, but perhaps choosing to say something about net debt to equity ratio, again, on a moving 12 month basis at 79%, good stable situation. And our net debt to EBITDA is at 2% and also that good situation. And at the bottom of the page here, you see that our earnings per share at 8.76% on the moving 12 months, which is obviously a positive development. And on the next slide, you still you see our earnings per share development over time. Quarter 2, an improvement of 70% at SEK2.52 and year to date, 26 percent at SEK4.69. So also here, a very positive and nice growth, I would say. And last slide of the presentation, we have our financial targets versus the outcome year to date, And we are basically above or at our target, the growth at 16%, as we have said EBITDA margin at 11.9 percent return on operating capital 20% and again, the net debt to equity ratio at 79%. So I would say very good performance versus targets we have currently. Some brief comments in terms of an outlook. We stated in the quarterly report that our balance sheet is strong, and we also have a strong pipeline of potentially interesting companies to acquire. So it's a fortunate situation in terms of M and A. And we have a good start now in terms of the first half year, and we are positively in terms of the quarter 3 quarter 4 of 2017 here. Since I'm new as the CEO of the company, I'd also like to state that I'm very impressed of Indo Trade as a company and what I've seen so far here. I've traveled quite extensively during the 1st months here to visit companies and leadership teams of these companies and very impressive impressions, I would say, from those trips. We've also had a Managing Director Conference with a lot of the MDs in the group, and that also was a very good meeting, and I'm very optimistic about the capabilities we have as a group. But we are not planning any revolutionary new strategies here. We have a successful business model since long, and we will build on that going forward and try to improve continuously step by step, steady and steady. So by that, I end my presentation here and open up for any potential questions. Thank And And our first question comes from the line of Johan Dao from SEB. I was wondering on Flotek. You talked about the weak Marine segment. However, margins appear to be improving sequentially in the unit. Could you just talk about what actually helped margins in the Q2? What's the outlook for that margin improvement for the second half? Yes. I think it's fortunately a broad number of companies with smaller improvements helping out the overall situation. So it's not based on a few companies making extraordinary results. It's more a broader movement in the business area, I would say. Is your expectation that those improvements will be able to offset them or continue to weaken in the segment? Yes. I don't see any reasons why that shouldn't continue to be a fairly positive situation going forward. All right. So exactly on Special Products, you talked about this unit being a 15% margin operations. And given the outlook for the Energy Valves operations, if they continue to be weak, do you expect to return to 15%? Or is this the margin leverage we're seeing in the first half? Is that where we're going to be at, do you think? Well, I think there is room for improvement, and we have a good underlying situation, as I discussed. And in some companies in that business area, we didn't really get invoicing down to the bottom line towards what would be doable, I would say. So I'm optimistic for some improvements in this area going forward. Okay. Can you talk anything about the strategic initiatives now that you're launching with your end taking leadership for this group? Or is it too early? It's a bit early. It's more that we have a bit of an analytical exercise right now, I would say, where we try really to learn from the portfolio we have and understand the portfolio we have or at least I need to understand it better than the rest of the team, obviously, understand this fairly well. And this will continue for a couple of months, and we will draw some conclusions from this. And when we have something to sort of present, we will do that. But that's going to be later towards the end of the year, I would think. Okay. Final follow-up just on acquisition multiples. They seem to be very stable at around 6, what you reported in the past. Is that your view as well? Or are multiples going up or down? I think they are going up slightly in Sweden. But in a more European perspective, we have sort of more stable multiples. And I would say that our M and A activity will probably proportionally be a bit more outside Sweden than in Sweden going forward. So I'm optimistic that we can keep fairly stable multiples going forward. We have a question from the line of Daniel Lindqvist from ABG. So just starting with the positive surprise in the measurement and sensor technology, could you please elaborate on the Q2 performance? And for example, to what extent it was project related of some temporary character because of very strong numbers? Yes. It's not really object related in single terms, if I say. So it's a number of companies having a really good performance. As I said, in general, that whole business area is well in line with the demand of industry at large right now with making products more intelligent using different types of sensors and sensor technologies. So it's a fairly broad based improvement there. Okay. So they're being helped by the demand for other companies to be more efficient? Yes. Okay. And then if we look at Special Products, can we hope for any new larger projects to enter the market? I believe you said at the presentation that you weren't expecting any new larger projects such as the LNG projects until maybe at the end of this year. There was no one no out in the market. Do you have any new information on that area? In terms of power generation, I would say that whole sector is more it's there are projects in the market, but in general, the projects are smaller than what they have been in the last couple of years. So there are projects to fight for and compete for. But in general, they are slightly, on average, smaller projects. The competition is a bit higher also now. So there is some price pressure in the segment also. So it's a bit of a demanding situation to tackle, but we have a very capable company and a very capable team in that company. So we are working actively with our product offering, both from an innovation point of view and a cost point of view. So I would think that the relative situation will improve slightly over time versus where we are right now. Okay. And you think that situation will be sustainable? So we're not going we're not sitting just waiting for a 9 month project to enter in half a year or something, more of the situation you're describing? Yes. No, it's more of the situation I described as in our outlook now for that segment. Okay, perfect. So congratulations on the strong report and thanks from my side. Thank you so much. Thank you. Okay. There appear to be no further questions. I'll return the conference to you. Okay. Then we say thank you from our side. As summary, we think we had a stable and good report here, and we wish you a nice summer break here also. Goodbye. Thank you. This now concludes our presentation. Thank you all for attending. You may now