Earnings Call: Q1 2020

Apr 28, 2020

Thank you. This is Johan speaking. Welcome to this conference call presenting the Q1 2020 for our investment in AB Latour. The business climate has changed rapidly due to the COVID-nineteen pandemic, which, of course, has affected Latour as well as for all other companies around the world today. Our group structure, however, is unchanged from last quarter. We still have 2 major business lines, a wholly owned industrial operations consisting of 5 business areas and a long term portfolio consisting of 9 listed holdings, where we are the main shareholder or in some cases, the main shareholder together with a partner. In the listed investment portfolio, we have continued to increase our investment in FagerUtd with another 590,000 shares, raising our share capital to 46.7%. We have also made a small increase in Alimak with 65,000 shares, increasing our share capital to 29.3%. Now we turn the page. As you know, the stock market has been very volatile during the quarter due to the ongoing pandemic. This is very much reflected in the value development of our investment portfolio, which decreased by 19% since the end of December compared to the 6 Rx, which decreased with 18.2%. Some of the companies in our investment portfolio have reported for the Q1, and we have decided not to comment on forward looking perspective for the holdings. Instead, we refer to each group's own reporting. But we can conclude that the effects of COVID-nineteen has hit some companies more than others looking at the 1st 3 months, And most likely, everyone will be affected in the coming months ahead. Several companies have canceled or postponed their proposed dividends. And we continuously evaluate Kratou's proposed dividend of SEK2.75 per share. Should there be any change to the proposal, we will inform the market before the AGM, which is due May 11. Until yesterday, the portfolio value had increased to almost SEK 57.8 billion, which means that the total return amounts to minus 11.9% so far this year compared to the fixed RX development of minus 13.4%. And we turn the page again. The wholly owned operation started off the year very strongly but has gradually been more and more affected by COVID-nineteen during the quarter, and this is accelerated in the second quarter. It's a mixed picture depending on market exposure and type of business, although. We had a 20% growth in orders in the quarter, of which 3% was organic. Net sales grew by 16% in total, but slightly negative comparable units. The operating profit for the period increased by 8% to SEK449,000,000, corresponding to an EBIT margin of 12.4%, 13.2% last year. There will be a major impact due to the pandemic on all our businesses moving forward. But how big and for how long it will last at this stage, it's actually impossible to predict. As we have said before, our businesses have been preparing for some time now for a possible downturn, and now they have put a lot of the preparations in actions. No one could predict the rapid change in the market that we have seen now, but the management in our operations have truly proved themselves and handled the issues and challenges coming from the ongoing world crisis on a daily basis in an excellent way. I really would like to underline the sale. Our message going forward is unchanged. We will invest with undeminished strength in product development, sales and marketing in our business areas to drive sustainable growth and future strength in the position of our operations. Sartorius' ambition is to come out even stronger after the COVID-nineteen pandemic has finished. And then we go to the next stage, acquisitions during the quarter. Due to the current situation, we have shifted focus from acquisitions into handling the ongoing crisis. Nevertheless, we managed to complete 4 acquisitions in the Q1 before the pandemic hit the world. Both Rultaboz Group acquired 80 percent of the shares in EMA Safety Footwear in the Netherlands. EMA is an industry leading European safety footwear company with a strong presence in Central Europe and in the Benelux area in particular. Net sales amounted to EUR 23,000,000 in 2019, and the company employs around 140 employees. MS Group, formerly Rea, with Ildatura Industries, acquired the Spanish company, Battec Mobility, a leading manufacturer of power assisted devices for manual wheelchairs. Battec Mobility has an annual turnover of €4,800,000 and has 41 MPs. Stjergon acquired Waterloo Air Products, a leading manufacturer of grills and diffusers in the U. K. The company has 140 employees with the head office and the manufacturing located in Elesford. Net sales in 2019 amounted to GBP 12,000,000. We have also completed the acquisition of SPSS to BEMSIQ with the Intra II indices that was announced already during last year. And having Sevett, I hand over to our CFO, Andersburg. Okay. Thank you very much, Johan. Now we want to talk about our 5 business areas. So we start with Kallian. Kallian had a very positive development during the Q1. The e commerce sector is strong, and we a continuous high demand moving forward. The organic growth in sales was 11%. Tallien is the business area that has the least impact of the COVID-nineteen situation. There are some issues with supply of materials and also difficulties of traveling that makes it hard to visit customers and do installations or service work. But all production units are fully booked and the water stock is on a record level. The factories are not at full productivity level. The operating profit for Kallian amounts to EUR 3,000,000 with an operating margin of 13.3%. And we turn page to Multafoss Group. And Multafoss continued the growth with another 30% during the quarter, and this was driven by acquisitions. All products areas are developing well, but at the end of the quarter, net sales was clearly affected by the COVID-nineteen effects and even more so coming into the Q2. To secure its competitiveness, Ultrafos Group has implemented a cost reduction program as well as keeping its focus on development of the sales organization and marketing on product development and digitization. A lot of focus is also put on further integrate the new companies into the group, following the relatively large number of acquisitions that we have made during the last years. The operating result increased to SEK 108,000,000 an increase with 23% with an operating margin of 12.8%. We'll move to Latour Industries that also continues to develop well during the Q1 with improved profitability in line with our expectations. Net sales increased to SEK 812,000,000 mainly driven by acquisitions. COVID-nineteen have had major negative impact on Ariccus. Ariccus is a part of Latour Industries. Ariccus sales in China in the quarter and then even bigger impact on DMEK in Italy, the Italian factory that closed down its production unit during the second half of March. The factory has now opened again, but with limited capacity. A broader downturn in demand in the second quarter has led to impacts for most of Lattour Industries business units. The operating profit amounted to €71,000,000, 60,000 last year with an operating margin of 8.3%, a slight increase. Now we turn to the next page, which would be Nord Lock. Nord Lock's order intake growth is flat compared to last year, while sales were down somewhat compared to a very strong last year and amounted to SEK 3 57,000,000. The figures for last year included major project deliveries, which is the explanation for the downturn in sales. The operating profit was affected by the lower volumes and amounted to SEK 97,000,000 with an operating margin of 27%, still acquired good profit. COVID-nineteen had major impact on Nord Lock sales in Asia Pacific when China was closed in the beginning or in the middle of the quarter. However, the order intake made a solid recovery in March. But in the beginning of the Q2, Europe and Americas has been more and more affected by the pandemic in the negative direction of course. It's also worth to mention that the Nord Lock have received 2 great awards during the quarter. The suitable Toll was appointed a Red Dot Award for Best Product Design in the Tool category. And in Sweden, Nordlok was appointed Swedish Sweden's 5th most attractive employer by Brilliant, which has measured which was measured in employer commitment. Congratulations to that. We are very glad about that. And we turn the page to Svegon that continues after a very positive 2019 continues with a stable development considering the tough market. Especially on the Swedish market, the year has started off very well. The quarter's total growth in order intake amounted to 6%, of which organic growth was 3%. Net sales grew by 2% to SEK1.4 billion, I should say, or SEK 1,394,000,000. However, the organic growth in net sales was slightly negative. COVID-nineteen affected the growth, especially in the South of Europe, in U. K. And partly in North America. Coming into the Q2, this impact is and will be even greater and Svegon has closed down factories now or have decreased the capacity in Italy, in India, in Belgium and the U. K. In some regions, delays in deliveries is also causing problems. The operating results during the circumstance these circumstances is amount to SEK 140 3,000,000 almost the same as last year, which is very good and with an operating margin of 10.3%. And with the page coming into the net asset value of Latour. Well, the weak stock market was also reflected in Latour's net asset value, which decreased by 16.2% to SEK114 per share, which can be compared then to Seaxarex that decreased by 18.2%. The stock market situation also led to a downward adjustment for the multiples in our wholly owned operations Kultavos and for VEgon. Our share price at the end of March was SEK 142 per share, which then corresponds to a premium of 25%. Yesterday, on April 27, the net asset value had increased to SEK 122 per share, and the share price at the same time closed at SEK 151 giving a premium of 24%, a rather big premium, we must say. And finally, about plateau's debt situation, it increased during the quarter from SEK 7,500,000,000 to SEK 8,600,000,000 mainly due to the acquisitions that Johan informed about earlier. And the net debt now corresponds to about 10% of the market value of our investment, which is 2 percentage points higher than in the end of December. And now, Johan? Thank you, Anders. We'll go to the next page, financial targets. This picture summarizes our financial targets. We are still above all targets. During the last 12 months, we have had growth of 14.9%, EBIT margin of 13.3% and return on operating capital of 15.9%. We have met all three criteria during a long string of consecutive quarters now. But needless to say, this will be a great challenge to maintain going forward for the next couple of quarters. And then we turn the page again, and we are now changing the long term ambition. We are not changing the long term ambition for Latour, which is to grow our operations by both organic and acquired growth. The uncertainties around COVID-nineteen right now means that we now choose to put 100% focus on the business set that we already have in the portfolio today. No one can tell what the new normal will be once we are out of this situation. Acquisitions are investigated, but all negotiations are temporarily put on hold. But besides that, all strategic initiatives within our companies continues as usual. It's important that we continue to invest in our companies so that we continue to be in the forefront in a sustainable way and that we come out even greater on the other side. Thank you. And there, we open up for Q and A. Thank you. The first question comes from the line of Joakim Gunnell from DNB Markets. Please go ahead. Good day, Johan and Andes. So let's kick it off with if we look at the chart you provided, providing the long term trends in terms of trailing sales order intake and operating results. In terms of the cyclicality we saw in 2,009 and 2012, I mean, as you also mentioned, operational metrics have only been improving upwards in the past years. But as you have prepared for a downturn now, what sort of, say, are the operating margins you think the industrial operations as a group can maintain? And what are the actual, let's say, levers to achieve that? I mean, long term through the crisis, we, of course, maintain all our financial targets, So we want to continue to increase and improve our operating margins. I think that's important to underline maybe the obvious, but in this situation, I think we should underline that. I mean, what operating margins we will operate with during the next couple of quarters due to the COVID-nineteen pandemic, it's really hard to say actually. We have obviously a very strong focus on cash flow at the moment, extreme focus on cost, but also a very strong focus on not hurting the businesses long term. That's why we say we're really investing in long term important issues like product development, market development sales. I think that's what you can comment right now. And Sander can add some more flavor to that. Yes. The long term answer is actually more easier than the short term because once you, for example, close a factory, that factory goes from profit to loss from one day to another. So no one can actually tell the short term profitability effect. We know it's going to be negative I mean, severely or very much lower than last year, but you cannot say which level it will be. And I'd like to also underline which we said in the presentation that we have prepared for a kind of more normal economic type downturn. Earlier on. So we had a lot of good plans and actions prepared. And of course, we could have foreseen that it will come so quickly and so choppy, but all of those but we were at least prepared. And all of those plants are now fully in action plus additional plants, of course. And I really like the underlying that we operate from a really strong position, a position of strength. And we are and I think it really shows the quality in our operations in these difficult times going forward. And once again, I'd like to underline the very strong team members we have and the very strong and efficient management teams that we operate. But sorry, Joakim, I can't give you operating margin for Q2 and Q3. No, no. Of course not. But yes, that's an extensive answer. And coming back to, I mean, operating out of a position of strength. I mean for basically all of your business areas, investments came up a bit here in Q1. I guess that's in order to as you alluded to, really drive sustainable growth in the future. So the investment rates we saw now in Q1, should we basically extrapolate that throughout 2020? Or how should we think there? Acquisitions, you mean, right? No, no, no. I mean investments in sales, marketing, etcetera. No. You should assume more or less the same type of investment levels going forward. That's a fundamental strength of La Tur that we should be able to maintain those type of investments for the future. We don't want to eat the seed today that we plant for future harvest. Very clear. And regarding business momentum, say, mean, for future year business areas, we didn't talk that much about what you have seen now in April and say, what you think about that going into Q2. Is there anything you want to add in terms of business momentum for the 1st week of Q2? I think we can stay in Q2, and Anders may please add, it's we saw in the end of Q1 and second half of March, we saw a downturn in order income. And I think as we said in the presentation, it accelerated in the beginning of April or in April. So it's top line wise, April is a fairly tough start. Okay. So are we thinking like, say, 20% down? Or is it more like in the 10% area? I don't think we should comment too precisely, but it's definitely down. I mean, it's no surprise given what's going on now. Okay. All right. No, I think that's all for me. Thank you. Thank you, Jorgen. We have a question from the line of Frederik Olsen from Handelsbanken. Please go ahead. Hello, Frederic, your line is open. Frederic, is there anyone Can you hear me now? Yes, we can hear you. Thank you. Sorry. Thank you. Sorry about that. I just wanted to talk a little bit about the unlisted portfolio and you spoke a little bit about the measures you're taking given the circumstances today. Could you give some examples of the cost cutting measures in the unlisted portfolio? That's my first question. No, of course, we are a large part of the workforce. I would say it's not doing it's not done across the line. It's doing business unit by business unit, but put quite a lot of our team members are on furlough and that's one large part. We are also overseeing the effectiveness of the organization. We had earlier plans that we are now putting forward and implementing much quicker. General overhead is, of course, down quite a lot in the quarter. I think those are the main actions. So anything to add there, Anders? No. No unnecessary questions. Okay. That's clear. And regarding the sort of general price tag out there, you said you're putting 100% focus on the current portfolio. But I mean, the general price that should be down now, in my view at least. Would it be possible for an add on acquisition to sort of support the momentum through this crisis, so to speak? Is that out of the question completely or As I said, we temporarily put it on hold and maybe not only or not for reasons or financial strength, but merely to your point, Fredrik, it's a very good question. It's more that what is the value today out there? What is the price tag out there? That's quite unclear actually. And that's why we put negotiations temporarily on hold and underlying the word temporarily. Our ambition, of course, is to be active on the acquisition side as well during these crises. But number 1 is to a little bit stop everything and assess damage and get control of the situation. And I think we are in a good situation. We have good overview, and we have a good grip of our fully owned operations. And I think but in fairly short, we can be more active also on the acquisition side as well. But it, of course, also depends on sellers' expectations going forward. Absolutely. Thank you. Thank you, Felix. We have a follow-up question from the line of Joakim Gunnels from DNB Markets. Please go ahead. Thank you. So just one final question. I mean, you base your investment strategy analysis on this large megatrends, you tend to come back to what shifts are you seeing in this trend? Sustainability has obviously been one that you've highlighted in recent years. But can you elaborate a bit? Do you see any, so to say, COVID-nineteen related impacts to the trends you base your analysis on? Yes. I can start and maybe Anders had it. I think sustainability, we have really and stressed, and I think that's actually accelerating probably during the COVID-nineteen. Digitalization is a trend that we talked a lot about before. I think that's really accelerating during the COVID-nineteen. And you can see a sub trend to digitalization in the e commerce, and everybody is quarantined and sitting at home and doing e commerce. And I think lots of people are getting into new habits that will not go away after the COVID-nineteen pandemic. So that actually underlines the strength of e commerce growth going forward. And obviously, with CALIA, a nice position in that situation. And then we've had the trend, a big trend, a general trend of globalization that's been very strong throughout the last 10 to 15 years. And I would say probably after the COVID-nineteen pandemic, slowing trend in the globalization. We probably see a little bit more regional type focus going forward and probably an increased polarization of renewables are my estimations on that. That's really interesting. Thank you. Thanks, There are currently no further questions registered. I'll hand the conference back to you, speakers. Okay. That concludes the presentation of quarter 1 before the minimum investment of revenues from Anders and myself. Thank you all for listening, and thanks for the good questions.