Earnings Call: Q2 2020

Aug 20, 2020

Ladies and gentlemen, welcome to the Investment AB Lators Internal Report Q2. Today, I am pleased to present Johan Jertonsson, President and CEO and Anders Mork, 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. I will now hand you over to Johan Jastanson. Please begin. Thank you. Welcome to this conference call presenting the Q2 2020 for Investment Day VLATOUR. This quarter has been characterized by the ongoing pandemic and the turbulence it has caused in major parts of the world. Our holdings acted directly at the outbreak with the employees' safety as the first priority, but also to adapt our businesses to the new circumstances. We'll tell you more about this later on in the presentation. Our overall group structure is unchanged from last quarter. We have 2 major business lines, a wholly owned industrial operation consisting of 5 business areas and a long term investment portfolio consisting of 9 listed holdings, where we are the main shareholder or in some cases, the main shareholder together with a partner. Then we go to the next slide. We have made a few transactions in the listed portfolio during the quarter. In May, we divested 7,800,000 shares in Thomra, corresponding to 5.3% of the outstanding shares in Thomra. The divestment realized financial resources from new investments, but it's important to emphasize that we have continued full support of Tomra's long term strategy in the same way as before, and Latour remains as the main shareholder in the company. In addition to the Tonga transaction, we have continued to increase our investment in Fagirl and in Alimac. The value development of our investment portfolio reflects the overall stock market and decreased by 4.7% since the end of December compared to the 6 Rx, which decreased with 4.1%. We are very pleased with our holdings' underlying development during the quarter, not least given the circumstances with COVID-nineteen. All of the holdings have reported now for the Q2 and are more or less affected by the pandemic with a negative organic growth that has shown great resistance and have protected the profits very well. Until yesterday, the portfolio value has increased to almost ZAR 68,000,000,000, which means that the total return amounts to 7.7 percent so far this year compared to the 6 Rx development of 4%. And we go to the next slide. During this quarter, our wholly owned operations have primarily focused on keeping all employees safe and adapt the businesses to the fast changing environment. The management teams have also put a lot of energy on trying to understand where the impact on the pandemic would hit the most. All of our businesses have been affected by the pandemic, but it's a mixed picture depending on market exposure and type of business. Our portfolio is well diversified, both in terms of geography and in terms of product and customer, which has mitigated the negative effects. It has been a challenging quarter, but the profit development is proof that we own very well run companies with good management and dedicated employees. We had a 15% negative organic growth in orders in the quarter and an organic decline of net sales by 13%. The operating profit for the period decreased by 8% to SEK474,000,000 corresponding to an EBIT margin of 13.4%. Also keep in mind that the comparison year's quarter was a record quarter. So all in all, we are very proud of our development during Q2 with the full pandemic in play. The big question mark going forward is how the overall market will develop, both in the short and long term and how our businesses can make the most out of it. We continue to invest in our holdings with product development, sales and marketing in our business areas to drive sustainable growth and further strengthen the positions of our operations. And we turn the page again. At the end of the Q1, we temporarily shifted focus from acquisitions into handling the ongoing crisis. Hence, no acquisitions was made during the Q2. Our business development team has nevertheless continued its analytical work during this time, and the pipeline of potential acquisitions is strong. We are looking forward to hopefully be able to report about interest and transactions finalizing during the second half of this year. Having said that, I'll hand over to you, Anders, to take us through the business area. Yes. So we start with the first business area on the next picture, which would be Talian. And as you know, Kallian is, to some extent, a project oriented business. And for Kallian, the demand decreased somewhat during the quarter, but from a high level. And the order backlog is still very high. The E from our sector, which is an important customer sector, is in good momentum, and we see a positive trend going forward. Talion is mainly affected by the pandemic through postponed projects, which is the reason why net sales decreased by 23 percent in the quarter when a number of projects were postponed through the Q3. It's important to say that they were postponed, not canceled. The operating profit for Italian amounts to EUR 3,000,000 during the quarter with an operating margin of 12 0.5%. So we go to the next page, and there you see Ultrafoss Group that had a weak start of the quarter due to the pandemic, but recovered very strongly from the end of April when net sales gradually increased again. Both product areas report good sales, thanks to the strong finish of the period, which was then in an organic decline with only, we can say, 3%, which is very impressive. Cost control combined with relatively strong net sales developments contributed to an increased operating result of SEK 114,000,000 and that's an increase with 27% and then operating margin of 13.6%. Very good. And as before, Holtefos Group is still keeping high focus on the development of sales organization and marketing, on product development and on digitization. And we shall also mention that Ole Christian Jordahl, the former business area management of Ultra Holterfoss Group has been appointed as CEO for our listed holding Alimax Group. Ola has been with Rotakos in 2017, and we are very happy to see him grow within the group, so we can keep him and wish him, of course, the best of luck. And our new CEO has been recruited to Hirtgen Fost, but the name has not been announced yet. We turn to the next picture, which is Latour Industries. And the Latour Industries is maybe the business area that is most affected by the pandemic with a large presence in Southern Europe. So some parts of the Lakhpur Industries businesses have been severely affected, but anyway in total the business area is very resilient. Negative effects are also mitigated by the business areas that are diversified business units. And for example, building automation is the least affected and shows a very positive development during the quarter. And also all business units finished the period in a strong way. Net sales anyway declined organically by 70%, which is quite much, but the operating profit anyway amounted to SEK 48,000,000, which is strong for our core industries, the operating margin being 7.9%, a little bit lower than before. And we still expect and we still believe that this business area will continue to improve its operational performance as we have communicated now for several quarters. And this trend was, however, grew in this quarter because of the pandemic and fully understand that, but we'll come back. We're on Page 2, the next picture. We go to Nordlak. And for Nordlak, the overall business is decreasing, but the negative effects on it, once again then mitigated through the business areas as well as exposure on different markets. While demand was decreasing during the quarter in Europe and Americas, it was balanced by recovered market in Asia Pacific. Net sales decreased by 18%, and the operating profit amounted to €84,000,000 dollars with an operating margin of 25.8%, which is very strong under these circumstances. Let's go to the next picture where we find Sverigand. And also Sverigand's growth is clearly affected by COVID-nineteen like the other program, we have a mixed picture. In the Nordics, we have had a very strong development, though the pandemic, while Southern Europe and U. K. Were hit very hard by closed construction sites. And also good to say that North America developed very positively during the period. Net sales decreased organically by 12% in the quarter. Good cost control supported the result, which gave an operating result then of SEK 201,000,000 with a strong operating margin at the same level as last year, 13.7% compared to 13.8%. And here, we have a message then that the Business Area Manager, Hannes Sastamonen, has decided to step aside after 8 successful years. He is replaced on September 1 by Andreas Varyavelson, who has been within Vla Tur and Sverdorn since 2010. And of course, we want to thank Andy for all his efforts and great success during these years and wish Andreas also welcome in new role which we think is very good. And it's also great to have been able to give an internal candidate the opportunity to pursue a career within Latour in competition which will participate with external candidates. Okay, we go to the next picture, and that is about the net asset value. And compared to the beginning of the year, our net asset value has decreased by 5.5% to NOK 107.27 per share at the end of June. At the same time, 6 Rx decreased by 4.1%. Maybe we should say that please bear in mind our valuation of unlisted assets are just an indication of a prudent view of the value. In a very difficult market climate where quality companies actually now on the stock markets are rewarded with very high mercurables, And these very high mercurables are not reflected in our indicative valuation. But as Johan mentioned before, we like to think at least that our companies are quality companies. Yes, hope that comment is taken well. Our share price at the end of June was SEK169 per share, which corresponds to a premium to our net asset value of 33%. And then compared to our indicated net asset value. Yesterday, on 2019 August, the net asset value had increased to DKK 140 per share, and the share price on the same day closed at DKK 193 $3,900,000 which gives a premium in the same way to value the assets then of 38%. Latour's consolidated net debt decreased during the quarter from SEK 8,600,000,000 to SEK 6,300,000,000 percent due to the sale of Tom Rath, the biggest and most important explanation. And the net debt corresponds to 7% now of the total market value of our investments. Now Johan, Back to you. Thank you, Anders. Next page then on our financial targets. This picture summarizes our financial targets. During the last 12 months, we have had growth of 10.3%, EBIT margin of 13% and return on operating capital of 14.1%. We have met all three criteria during a long string of consecutive quarters now, But this quarter, we fell just below on the return on operating capital target due to the decreased results in combination with high acquisition activity last year. And then we turn to the last page. We are not changing the long term ambition for Latour, which is to grow our operations both organically and through acquisitions. Latour's financial strength enabled us to continue doing this even during a pandemic, which is affecting the world right now. We believe that we can come out of this crisis even stronger. To do so, we continue with all strategic initiatives in our company's asset portfolio. That concludes the presentation from Anders and my side. Thank you all, then we open up for Q and A. Thank you. And our first question comes from the line of Joakim Gunnell from DNB Markets. Please go ahead. Your line is now open. Thank you and good day, Johan and Anders. So on the business momentum for each of your business areas, can you talk a bit more of what you're seeing going into Q3? I mean, we're almost halfway through the quarter. No, it's obviously, in general, and then please add Anders, start with 42. Obviously, in the beginning of the quarter, it was a very negative and dark development, and that eased up at end of 42,000,000 with actually pretty good momentum in June, and that has also continued into Q3. Having said that, it is unclear, as we write in the report, it is unclear on how the pandemic will play out in the autumn. And so we I think the classic saying, hope for the best and plan for the worst, is really how we operate right now. It's impossible to say how this would pay out. But so far, the positive trend at the end of Q2 has continued into the early part of Q3. Having said that, it's not an indication of how this will stay out in the second half because we don't we are some thoughts around it. So it's very difficult and a big question mark for 2021. We hope for the best there as well. That's clear. And a question then for perhaps Anders more particularly. Can you quantify the effect from utilizing government schemes and what effect that has had on the industrial operations EBIT? And perhaps what holdings have utilized such aid? Yes. If you want the exact amount. In total, Q2 was affected by SEK 50,000,000 and whereof SEK 10,000,000 was in Sweden. So it's actually in the report, but it's on the back side. So you haven't read the last pages yet you were in, but that's for the Anders Turnbull. I'll make sure to delve into those pieces later then. But coming back to what you said you want also, I assume there's still some SEK 3,000,000,000 left within your MTN program, right? And you talked about this during the first half of the year, but have sellers and the buyers' expectations started to come back, say converging a bit more as visibility returns? Yes. To some extent, but I wouldn't say the M and A market, so to speak, has fully normalized. It's quite turbulent out there, and it's not always that sellers and buyers' expectations are on the same level right now. I would say the discrepancy is slightly longer than normal, But it's much better today than it was 2 months ago. Rob, just a final question I mean, being on the board for your holdings in the investment portfolio and the opportunity for a second dividend installment from June later this year. Can you talk a bit about what are the moving parts here and what different kinds of scenarios do you see? I mean, it's each company each district company was more the decision to do that. And we haven't communicated that we plan to come back this fall. We will come back with an ordinary dividend next spring, and we will wait and see how this plays out during the fall. I think that's what I can comment at the moment, right, Thanos? Yes. It's up to each fall. Okay, then. That's all for me. Thank you very much. Thank you, Joakim. Great questions. Thank you. And we have a follow-up from Joakim Gunnell from DNB Markets. Please go ahead. Thank you. You're stuck with me guys. So since there are no other questions, outside. I'd like to take the opportunity to ask. So on the Tonra investment, I mean, like most of yours, it's been very value accretive. But the divestment in May, I mean, it could signal to some extent that you're a bit concerned about valuations in the market. And with that in mind, what is your take on using your own valuation to potentially raise equity? So we have no such plan. Thank you. And as there are no further questions registered at the moment, I will hand the word back to our speakers for the final comments. Please go ahead. I think that's fine. Good questions from Joakim. I think we've presented well in a condensed format, the report. There's more to read on details, of course, in the published report. And having said that, I think we finish, Anders, and hope to see you, so to speak, again on the quarterly report. This now concludes today's webcast. Thank you for attending. You may now disconnect your lines.