Earnings Call: Q3 2020

Nov 5, 2020

Quarterly report

Ladies and gentlemen, welcome to the Investment A. B. Latour Interim Report Q3. 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. Today, I'm pleased to present Johan Geertonsson, President and CEO and Anders Merck, CFO. Speakers, please begin. Thank you. Welcome to this conference call presenting the Q3 2020 for investment AB L'Atul. The quarter was, of course, marked by the pandemic, but during the summer period markets started to open up and the demand increased again, which is reflected in our very strong Q3. Sitting here today, however, we can sadly state that we are now in the 2nd wave of the pandemic, which, of course, in some way, will affect us during the 4th quarter. We are closely monitoring the development, both here in Sweden and internationally, and we are prepared to once again take action when needed. Our overall group structure is unchanged from last quarter. We have 2 major business lines, a wholly owned industrial operations consisting of 5 business areas and a long term investment portfolio consisting of 9 listed holdings, we are where we are the main shareholder or in some cases, the main shareholder together with a partner. We're going to the next slide. No major changes were done in the listed portfolio during the quarter. We have, however, continued to increase our investment in Fagrut by acquiring another 1,000,000 shares. And at the end of the period, our shareholding in Falkholt was 47.8 percent. The value development of our investment portfolio reflects the overall stock market and increased by 9% since the end of December last year compared to the 6 Rx, which increased 8.2%. We're still very satisfied with the underlying development in our holdings, given the circumstances, and many of them are showing really strong results. Others have had significant negative organic growth in net sales that has shown a good resistance and protected their profits well. Yesterday, the portfolio value was SEK 66,000,000,000, which means that the total return amounts to 5.5 percent so far this year compared to SEK6 Rx development of 7.1%. Next slide, please. Coming into the summer period, markets started to open up and demand increased. But like I said in the beginning of this presentation, we are now in the 2nd wave with major risks for new close downs and limitations. No one can predict the effects that we're facing going forward. This is, of course, a risk, but also a possibility for us. We are prepared to readjust and adapt our businesses to the new conditions to make the most out of it. During the Q3, our businesses continued to focus on keeping all employees safe and also gradually began to return to somewhat normal activities. Our business areas have implemented significant measures to mitigate the effects of COVID-nineteen and just like after the second quarter just like after the Q2 this year. I can conclude that we've handled the challenges very well so far. Dedicated management teams and committed employees, combined with an overall cost awareness, have protected the net profit, and we report a very strong result for the period. Total organic growth in orders was 10%, and growth in net sales was 11%. We had a 2% negative organic growth in orders in the quarter and an organic decline of net sales by 1%. The operating profit for the period increased by 29% to SEK602,000,000, corresponding to a very strong EBIT margin of 16.6%. Needless to say, we are very happy and proud of these figures. 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 on our operations. We also currently maintain a high rate of investments in our factories. Sustainability and digitalization are also very important aspects to support further growth. We have launched several initiatives to support our holdings in these areas and also implemented additional sustainability KPIs that apply to all wholly owned operations. Next slide, please. We have increased our acquisition activities during the quarter, and the pipeline of potential acquisitions is strong. No transactions were finalized during the quarter, but on November 2, Svegon acquired the German SLT's Schanze Luft technique. SLT is a supplier of diffusions in Germany with the engineering capability to provide complex complex and customized solutions for its customers. The company had a total net sales of EUR 10,000,000 in 2019 with 70 employees. We are looking forward to hopefully be able to report about more interesting transactions finalizing during the Q4. And having said that, I hand over to our esteemed CFO, Anders Wirth. That's a good presentation, Johan. Thank you so much. And we go to the next picture. And we start with the 1st business area to be commented that is Kallian. And they had a record quarter during the Q3, and the backlog is still on a good level coming into the Q4. The e commerce sector is still in a very good momentum and the trend is still positive going forward long term. But as for all other businesses, the climate is more uncertain now when we are in the middle of the second wave of the COVID-nineteen. Net sales sorry, net sales for Kallian increased by 26%, and we are, of course, very pleased with the excellent profit development and the operating margin of 19.2%. We keep on investing in Kallian's expansion with a new factory in Latvia and the establishment of a factory in the U. S. Let's go for Hultafors. And Hultafors had a really excellent development since the weak start that they had in the beginning of Q2. Both product areas and all main markets reported growth in the Q3. CLC in North America won a major contract with the important retailer loads that contributes to the strong sales in North America. In total, for Holtefos, net sales grew by 32% in the quarter, of which 14% is organic, very impressive. And good cost control combined with the high net sales development contributes to the strong operating results and the operating margin that was 17.1%. And as before, Grundfos continues to focus on the development of and investing in sales organization and marketing and also on product development and digitalization. Let's go for last Matur Industries on the next page. And as you might remember, Latour Industries was the business area that was most hit by the pandemic in the Q2. Given the circumstances, we are impressed by the quick recovery and the excellent third quarter that we now can show. Net sales, however, declined organically by 9% in the quarter, and the operating profit increased to SEK 87,000,000 with a strong operating margin of 12%. And that proves that the underlying profitability in Lattoir Industry is there. We go to Nord Lock. Nord Lock's overall business is decreasing as a result of the pandemic, but also due to currency effects. However, Asia Pacific is growing organically, which mitigates the negative effects somewhat. And a slight recovery in the business was also reported and seen at the end of the quarter. Net sales decreased by 12% during the quarter. The operating profit amounted to strong SEK 83,000,000 and that was also affected by SEK 5,000,000 extra costs from relocation of the production facilities in Italy, USA. The operating margin amounted to 26 sorry, 27.6 percent, very strong. And we are also glad to report that we have 1 or Nordhoff 1 important reference projects with a no concept load sensing tensioner with smart technology. Good to see that the development is going on though the situation is as it is, sorry. Let's go for the last business area, Svegon. And Svegon's growth is, of course, affected by the COVID-nineteen. But as for many other holding, it's a mixed picture between different markets. The Nordics and North America have developed well, but the picture is varies for other markets to a high degree. Net sales decreased organically by 8% in the quarter. A number of internal efficiency projects and low general spending contributes to a very strong operating profit for the period and the operating profit was SEK 217,000,000 with an operating profit margin of 15.8%, really strong. As Johan mentioned before us, we're going to acquire German SLP on earlier this week, and we are happy to welcome them both to Sweden and to the Latur Group. And all in all, we are very happy with the results achieved by Svegon and by all business areas during the Q3. Let's go to the next picture, which shows the net asset value. And the net asset value has increased by 9.8% during the year to SEK 148 per share at the end of September. And the 6 Rx, the comparable index had increased by 8.2% during the same period. The general stock market development was very strong during the second and the third quarter with high valuation that to some extent is reflected in our multiples that we use in our own valuation of the net asset value. But please bear in mind that our valuation of undistedd asset is just an indication of a prudent view of the value in a very difficult market where quality companies are rewarded with very high multiples, but not to the same extent are affected in our indicative valuation. Our share price at the end of September was SEK 2.11 per share, which corresponds to a premium to our net asset value of 43% at that time. And yesterday, the net asset value was SEK 143, the share price SEK 224 and the premium 57%. It's quite a figure. Latour's consolidated net debt decreased during the quarter from SEK 6,300,000,000 to SEK 6,000,000,000 because of the cash flow actually in the business and no acquisitions. And the net debt corresponds to about 6% of the total market value. Okay. Now Johan, I think it's back to the Thank you, Anders. Classic CFO sorry, CEO. Thank you, Anders. A great review of our business areas. Financial targets. This picture summarizes our financial targets. During the last 12 months, we have had growth rolling 12 months of 9.5 percent, EBIT margin rolling 12 months of 13.6% and return on operating capital of 13.8%. We have met all three criterias during our long string of consecutive quarters, but currently, growth just fell under the long term target of at least 10% and also the return on operating capital of at least 15% due to the high acquisition activities in 2019 and in the beginning of this year. Still a very good performance, I think, considering that we have 2 full quarters with the pandemic in those rolling twelve months numbers. And then we have the last slide. Latour is a sustainable Our financial strength enables us to continue investing in our existing holdings as well as carrying out acquisitions to support further growth. We will continue to do so even during a pandemic, which is affecting the world right now. We believe that we can come out of this crisis even stronger. And to do so, we continue with all long term initiatives in our companies as before. Having said that, I would like to thank you very much for listening in, and I think we open up for Q and A. Thank And our first question comes from the line of Joakim Ginnel from DNB Markets. Please go ahead. Your line is now open. Thank you for that operator. Good morning, Johan and Annes. So I was wondering perhaps if you could provide a bit more color on your thinking here. I mean, you've been very swift to take out costs in the industrial operations in your business areas. But how should we think about how these costs will come back as you aim to, say, accelerate growth into 2021? And I mean, now with the 2nd wave of the pandemic as well, So how are you preparing your subsidiaries for that based on the learnings from, say, Q1 this year? Maybe I can start and you can fit in and understand this. Yes, it's true. We've adjusted the cost level quite swiftly, and we're actually quite proud that we've managed to do that. However, having said that, the strong result is not only because of lower cost. I mean, in Budapest Group, for instance, it's also because of very high top line. In Fyhrgo, for instance, it's also because of a very nice gross margin development. So I would say the result in the quarter is a mix of lower costs that we've done to prepare and adjust for the pandemic, but it's also long term operational things that play out in a quite good way. And we're protected and continue to have cost and investments in long term areas that we have said, product development and marketing and so on. And that's important to not forget. And having said that going into the next year and hopefully, this pandemic will vanish sometime during next year, Some levels will come up, of course, to a more normalized level where we think the business starts to normalize in that sense. But that goes hand in hand. That's how we look at that. You know something to add there, Anders? I think that's a good summary. Always not. I always forget that comment from the sales force. No, that's clear. Makes sense. And yes, I mean, it's impressive underlying operational performance, obviously, despite the challenging end markets here. But perhaps on the business momentum in Kallian, very strong organic growth, 29%. Can you elaborate a bit on how you think about that going into Q4? Have I mean, have the trends we saw in Q3 continued here into the Q1 month of Q4? Italian is soon approaching 1 year with us in the group. I think we started to consolidate Calion for 1st December last year. So it's actually pretty close to 1 year that Calion has been with us. And I would like to underline that I'm very happy and understand I are very happy about Calyen's performance and how they have come into the group. And of course, I think you touched upon that in the Q2 conference call that Calyen is very nicely positioned in a very strong macro sector, which is e commerce, and that has, of course, accelerated during the pandemic. So we're quite confident about that and very happy with that. So long term, we are very positive with towards Kallian's development. All right. But say, I know Kallian has only been consolidated into your numbers for just a few quarters here. But if I look on their historical numbers, I mean, if we take an average growth rate in Talian, it has been, I think, 20% almost or even beyond that. So are we seeing here, I mean, Talion accelerating organic growth towards, say, those levels on an annual basis? Is that fair to assume? Or is this more, say, of a onetime effect accelerated by, say, more e commerce during the pandemic? It's a long term quite strong effect, but it's very hard to answer exactly that question you're working because it depends on how the pandemic plays out and everything. I mean, you can actually say that demand for Kallian products has increased and increased quickly due to the pandemic, But you need to also manufacture all these products and ship them all of that. And that has not been easier. On the contrary, that has been more difficult during the pandemic. Pandemic. Roger that. And for Anders, just to make sure here with the SEK 6,000,000,000 net debt position, Where are we here in terms of financial muscle within your MTN program? Is it still somewhere in the range of SEK 3,000,000,000? Yes. The MTN program is SEK 3,000,000,000, and we of course, we have facilities on the side of MTN program as well. So I would not say that financing is an issue if we should come with investment opportunities. And we also always have worked so that we have the muscle that we need. But we also have, to some extent, a limitation. And I would say somewhere between €5,000,000,000 or €6,000,000,000 would be the investment well, not opportunity, but how much we can take on short term if we follow the limitations that we have from the board about our limitations for the net debt. All right. And then I mean it's glad to see that you've resumed your M and A agenda here with the recently announced acquisition. Would you say that this is a common thread for all of your subsidiaries or business areas that, okay, visibility is returning somewhat? Will this is this a signal that your systematic M and A activity should resume in other business areas as well? Short answer is yes. Very clear. I think that's all for me. Thank you. Thank you, Joakim. Thank you. And as there are no more questions registered, I now hand back to our speakers for any closing comments. I think that's fine. And thanks again, everybody, for listening in. And really looking forward to speak to you again in about 3 months' time. Thank you. This now concludes our conference. Thank you all for attending, and you may now disconnect.