Earnings Call: Q3 2022

Nov 8, 2022

Ladies and gentlemen, welcome to Investment A. B. La Tools Q3 2022 Report. 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 Hjertsson, President and CEO and Anders Nerg, CFO. Please begin. Thank you, man. Hi, this is Juayak van Son, And I'm here together with our CFO, Anders Smurk. And very welcome to our Q3 report presentation. And if we go into the first slide here, I'd like to say that our group structure is unchanged from last quarter. We had a good quarter despite the declining economic climate and the global turbulence, I'm sure, that you're All aware of. There is a high pressure on our organization to manage and deal with all the headwinds. But I have to say and I would like to say that we're handling that all very well, and I'm very proud of our organization Taking us through these quite turbulent times. So this is actually the best Q3 so far in absolute figures. As we've said before, we are very alert to continued changes in demand and are prepared to adjust quickly. And as I note, I'd like to underline that's also what we've done before in previous years and lower economic cycles. So we're all prepared for that. But the Q3 was very strong and we're proud of that. So if you go into the next slide to comment On our listed portfolio, there's no changes in the listed portfolios, I would like to point out. As you all know, there is a broad decline in the stock market, which is affected by the overall risk in stable economic climate. The investment portfolio is down 37.6%, whereas the 6 Rx is down 30 plus 0.5%. And until yesterday, the portfolio value increased somewhat from the low level at the end of September to SEK 62,700,000,000 And the total returns amount to 36.6 percent so far this year, minus 46.6% this year Compared to the 6 Rx of minus 24.4. In general, I would say there is a good development In the holdings, with 1 or a few exceptions, some of them with very good development. However, in some cases, Also with a lower order intake. And there is pretty much the same situation here is in our wholly owned operations With supply and chain disruptions, cost inflation and large exchange effects. We've maintained a fairly high acquisition activity. We've done a number of acquisitions And add on acquisitions to the portfolio, but a couple of dimension, maybe specifically, The security security has entered into the acquisition of Standard Security in July, and thereafter conducted a share emissions Where Latour participated with SEK1 1,000,000,000. Allermak also signed an agreement to acquire Traktell, which later on will result in a share emission where Natur will participate with Close to SEK0.75 billion. And if we go to the next slide, please, then, And to comment our wholly owned industrial operations, as you can see, a very strong good 3rd quarter. Demand remains at the high level on most markets, with the exception of China, I would say. The growth in order intake is actually 1% organic compared to a very strong growth level in Q3 last year, Resulting in a very high order book, which is promising for the invoicing for the coming months, I would like to point out. Good strong invoicing with a 30% organic 13% organic growth. However, supply issues remain when it comes to logistics and components And semiconductors and so on. But it's good to note that the Situation has improved slightly compared to earlier this year. We are battling the challenges with cost inflation and large currency effects. And but Nevertheless, this results in good volumes, but with slightly lower margins. And the reason for that is, as we pointed out before, that we do put a high priority servicing our customers, we think that's a very important competitive advantage going forward. One way to do this It's, of course, to keep a higher inventory and therefore have a high service level when it comes to delivery to the customers. Hence, we have a slightly lower cash flow than normal at the 3rd quarter. We believe this will start to normalize in the next couple of quarters. And operating profit grow with 27% to $784,000,000,000 in the quarter, thus resulting in an EBIT margin of 13.9%. We continue to invest in our holdings with a forward looking view, not only within sales, marketing and product development, but also with a clear sustainability focus going forward. And then on the next slide, I'd like to comment on the acquisitions. So far this year and during the quarter, we have finalized 2 transactions and actually 4 more after the end of the In the quarter, we acquired ABC's Landler Hunds Perdoktor to Swiggan. ABC is a Swedish company that will complement Sverigold's product range to include roof hoods, Louvers and Fire and Safety Products, net sales of about SEK140 1,000,000 and ninety employees. Natur Industries acquired MaxSorgewear. And MaxSorgewear is a leading mobile robotics and software company Providing automation technology for goods handling solutions with headquarters in Mandal in Sweden and has 67 employees. Net sales amounts to about SEK160 1,000,000 of which the vast majority is exported. And after the end of the quarter, Holterfors Group acquired Martinus Tools Company, a manufacturer of premium tools, For example, customizable high quality titanium hammers. And Lesabe within Latour Industries acquired Landa Hariters Oil, I hope I pronounced that correctly, a specialized finished manufacturer of customized and tailor made tools for Profiling and supplier standard tools for the woodworking industry. And then we made 2 acquisitions With the Intellateq Future Solutions, Sensnode and Analiteq. Sensnode has developed a complete IoT solution With associated SaaS platform for energy efficiency in all types of industries to save energy, to save electricity actually. And then Olitec has developed a circular system for producing effective disinfection completely free from the use of harmful chemicals. So very welcome to all of these mentioned companies. And earlier this year, just to remind, we acquired HillSteps, Constance, S and P, PHAs, Logistics Technique and Barcole Air. So all in all, we have Concluded 11 transactions so far this year up until today, which adds about another 1,000,000,000 Of sales, of annual sales to the group. Yes, underlinings, Including also the transactions after the Q3. So having said that, as an long introduction, I hand over to Anders. Thank you so much, Johan. And we now are going to talk Each and one of the business areas that we have. So we're starting with Bemfiq, where we have seen a continued strong underlying demand In a growing market, the total growth for Bemcic during the quarter was 48%, to a large Extent and explained by acquisitions, but also to excellent organic growth. The order intake grew organically by 17% And net sales by 13%. In this business area, as in all, We see lack of components being a big challenge, but it's been handled very well by the business area. As you can see, very strong profitability. The profit grew to SEK 82,000,000 in the quarter From 58% last year with an operating margin of 25%. So very well done, we can say. We turn to the next page and go to Kalyan. And as you have noted, Kallian had a very, very high order intake for a long period. But now this quarter, we see an expected We've lowered our order intake during the quarter. However, the order book is still very high, which will cover a good Part of next quarter and also a good part of 2023 for Kallian. Net sales is developing very positively following the earlier higher order intake and is Significantly above last year, growing organically by 60% in the quarter. And Exactly for as for all other business areas, Calyen has challenges within the supply chain, And I don't think we have to go through details there because all of us are aware of them. But we have managed them very well. And as you See the profitability in Italian is excellent, EUR 14,800,000 not Swedish kronas, but EUR 1,000,000 Compared to 7.6% last year, so it's almost double the level. And the operating margin is 23.3%. So very well done also by Kalyan. And we go to the next page, Ultafrost Growth. And as you can see, net sales grew by 19% in the Quarter and the organic growth for Holtefors was 4%. Holtefors has had a lot of supply Change selling, yes, as well. But above all, for Holteplos, the strong U. S. Dollar is affecting very negatively, which also has had a Quite large negative effects on the profit. Measures for this are in place, for example, price increases. All in all, operating profit increased to SEK176,000,000 With a margin of 11.2%, which then under normal circumstances could have been substantially better. But I think you should look on the picture to the left here, where you can see the long term trend for Multafoss That has been growing and doubling Rolling 12 profits in 2019 from SEK 400,000,000 per year to now being a bit above SEK 800,000,000, almost SEK 900,000,000 So having said that, For us, the long term development is the important thing, and we know that our Holtefors are doing the right things to Increase and strengthen the profitability again. Yes, we turn to the next Page and go to Latour Industries. We have seen a good underlying demand With an order intake growth organically by 10%. You can see strong net sales, Total growth of 35%, of which 16% were organic. And as for all other business areas, We have increased costs for raw material, transportation, energy and so on. And this affects profits In the short term, negatively. And the profitability in the business area is still low. And as you know, we are Building future business areas in Latour Industries. So we have a lot of costs for extensions, which means that in the long run, we have a capability of doing much better profits here. The acquisition agenda for Latour Industries continues both with add ons and also to try to find new platforms. Okay. So we turn to the next page, which is Nordlak. And we can see continued positive development for Nordlot despite and also considering the downturn In China. So the development this year has been saved, you can say, by good development in Europe and Americas, even if we now see some sign of declining markets even there. In total, relatively strong net sales. Total growth, 19%, of which 7% is organic, and the operating result increased to DKK 104,000,000 With an operating margin of 24.6%, which is really strong, I must say, considering the China situation. Let's go for the last business area, which is Swigand. And We are going to have a relatively strong quarter. Organic growth in order intake was 5% And net sales organically growth by 11%. As you remember From Q2, we are going to have quite severe challenges by disruptions in the supply chain. But from July and especially from August, the situation has been stabilized. Considering that the rebalancing the 3rd quarter results are really strong, We must say the operating result increased to €184,000,000 with a margin of 10.7 Percent. So very well done, Svein. Then we don't go to the sales business area, but we go to the Net asset value instead. And that is, as you can see, it has decreased during the year with 30.5 percent to DKK148 per share. And this can be compared with the share price at the end of September of $186,000,000 which means that there were was a premium To our net asset value of 26% at that time compared to our relatively prudent valuation of the net asset value. And yesterday, the net asset value increased to DKK 151 per share, And the share price was $188 and the premium was 24%. And also commenting on our net debt, it increased due to acquisitions From SEK9.8 billion to SEK9.9 billion during the quarter, Not so much then. The total net debt now corresponds to about 10% of the market value of our investments, Still on a fairly low level, even though the market values of our listed portfolio was very low at the end of September. Yes. I think that was that, Johan. So I hand over back to you again. Johan, we can't hear you. Sorry, I think I'm back there. So thank you, Anders, I should say, From your presentation, thanks a lot. So I'd like to comment then on the financial targets. And as you all know, There are 2 companies and where we invest, we would like to see a growth over 10% annually and an operating margin above 10% And the return on capital, 15% to 20%. So during the last 12 months, we have had growth of 26 0.1%, rolling 12 months. The EBIT margin of 13.9%, rolling 12% And the return on operating capital was 15.4%. So we have achieved all the targets that we have That's for our wholly owned industrial operations. And let's remind ourselves, our operating margin of 10% is a minimum target for the 2 companies. So all in all, a very strong performance in the industrial operation, and we're very proud as a team Having done that. And then on the next slide, on the international growth. And as you know, Latour is a long term sustainable investment company with a financial strength that enable us to continue investing In existing and new holdings despite short term market slowdowns and disruptions where we're in right now. And our long term ambition to grow has not changed. We are delivering on the growth target, as I just pointed out. But there is a large potential that remains, as you can see from this slide. We continue with all the long Term initiatives in our companies enact with a long term forward looking view. And at the same time, we are monitoring the macroeconomic developments And the overall geopolitical situation closely and are as always prepared to act and react to changes that affect us. So having said that, on behalf of Anders and myself, I would like to thank you all for listening. And then the next slide is once again that is 01.1 your telephone keypad to register for a question. And our first question comes from the line of Joakim Kinnehl From DNB Markets, please go ahead. Your line is open. Thank you and good morning, Johan and Anders. So Starting off with any comments here from you with regards to the visibility you see today in Harrison to say a quarter ago and what gives you confidence here into early 2023 based on the order book? Yes. I think I can start and maybe Anders you can add. I think as you can see when you read this report, we're pretty confident on the Q4. Of course, we have a very high order stock, so that we are quite sure that will be strong. And actually, as long as you go into the future, you're more Harder is to predict, right? But I think I have to say I'm positively surprised That the demand is still so good given everything that's going on in the world right now With Russia's war in Ukraine, energy prices, high inflation and high interest rates. So I have to say, I think the overall industry is quite resilient. So I think with that as a backdrop, I mean, the inflation would not bite into the economy and stay for long. I'm quite positive Going into 2023. Let's say it like that. So do you want to add Anders So that picture of it. No. I think you summarized it pretty well. Maybe you can say that all of our Business areas do not have order stocks in the same to the same extent. Of course, like Ultrasbos Group is more day to day sales, Steven, we had good sales in the Q3. So for some business area, of course, we Feel the confidence to a larger extent. Understood. And is there to rephrase that question, is there any structural changes to the, The composition of the industrial operations that you would like to call out to that really, say, dampens the cyclical amplitude Of your construction industry exposure and should basically quite raise the trough earnings level in the Industrial Operations? Yes. I think if we come to the industrial operations, you could say, for instance, you could say, Svegon and Bemstik are quite dependent on the construction industry. Both Swiregion and Bemssik are very related to Energy's efficiency and saving energy for heating and ventilating and cooling Buildings, Bemcic with all their monitors and control systems and Sviagon with their units to develop the data shield and heat The building. So I think in a very efficient way, South Africa would say those two business areas are very well positioned In a climate with higher energy prices. And as you know, in Europe, there is a huge initiative from the European Union to invest into green buildings. I think that comes in play quite nicely for both Svegen and Novak, to mention a couple of examples in our industrial operations. Within Latour Industries, we have Go and Villek, for instance, which are doing platforms, elevators and other type of elevators For disabled and elderly people, I mean, that's a strong macro trend that will be there also during a Downturns. I think the resilience is quite strong and I think it's a good question, You're working because you should not just lump sum everything together and say it's construction. You have to see a little bit underneath Which segments within constructions we are positioned. So having said that, I think we're quite nicely positioned In even a downturn in the construction market. That's great. And a final for me and I'll get back into the queue. So is there anything that you can say with Regards to, say, overall inventory levels that you're seeing across your customers' channels and perhaps if there's any particular Business segment within the industrial operations where there is reason for, say, a concern or become incrementally positive? Okay. Maybe you want to start on that Anders and then I'll add. Thank you, Johan. No, but we definitely have a stock level that today is higher than before. And that is, to a large extent, actually explained by inflation because the same things on stocks now constitutes Higher value. But I guess you also asked about if we have Seeing stock adjustment with our customers, yes. And then I would say we don't see it yet, but we are prepared for that To happen. And when it happens, we consider it actually to be a one off. You can see that we have had higher order intake for a very long time than the net sales, And that is also a sign of that our customers have been placing orders early To make sure that they have the right things on their shelf when they need to deliver to their customers. So, of course, the whole system from raw material to end customer is Somewhat a little bit over prepared For delivering and the system in its as a whole is not optimized at the moment. So at some point in time, we We expect some adjustments to normal levels and that will, of course, Effect also the in the short term, the demand, But it's not that we have seen it yet. I don't know if that was the answer that you were looking for your investments. No, but I think it helps paint the picture more comprehensive with regards What we have seen in terms of your net working capital buildup over the year. But I'll get back to the queue and come back if there are any further questions. Thank you. There will be a brief pause whilst any further questions are being registered. And our next question comes from the line of Rasmus Enberg from SHB. Please go ahead. Your line is now open. Yes, hi. Good morning. I had a question with regards to the order intake. Given The very ups and downs we've had in the last few years. Would you think in your mind, we did grow 1% organically like for like in this quarter. Do you think we will recover from that or maybe pass through In the Q4, what's your best guess on the situation in your industrial businesses for orders in the Q4? It's a good question. It's hard to say because it's also a little bit related to commenting on the overall demand going forward. I can't with confidence say that we're not losing market shares in any of these 6 business areas. That I would like Point out, on the contrary, we're taking market shares. And I think also here, I think you should look at each business area separately. As Anders pointed out earlier on, you could see in Kallian, we have seen extreme high order intake growth Over the years related quite a lot to the very strong logistics demand during the pandemic. And there you can see that, that order intake is normalized I would like to say. So it's we have to see what we compare with. So but otherwise, I'm quite and as I said before, I'm quite Positively surprised that there is a good demand there out there still going forward. And thank you. The second question, Generally speaking, with these very large currency moves that we have, which at the moment, it looks like they will be even bigger in the Q4, Net net, does that impact your margin positively or negatively on the group level for your industrial holdings? Is it a positive or a negative, you think, overall? Okay. That's a good question for the CFO. So over time, Mitch. Thank you for that, Johan and Rasmus. Hi. Yes, I would say we're quite neutral, but it's Spread over the business areas with the different exposures where I Could say that, Holcazors, the dollar will continue to be a negative Exposure. And it's always difficult to make the right price Adjustment if the currencies are very, very volatile. It can go back as well. When it comes to Nordblot, Maybe that is the extreme that is supported by the dollar positively. And all in all, Those together maybe take each of them out. Okay. And the exposure is not so big in our other business areas, to be honest. So we have a good spread or diversity in our assets from that point of view. Very good. Thank you. I'll get back in line. Thank you, Rasmus. Thank you. Our next question is a follow-up question from Joakim Ganahl from DNB Markets. Please go ahead. Your line is open. Thank you. Hello again. So yes, just a final one for me. So we've seen how listed valuation has Correct. But more than private ones. So can you say anything with regards to which you at this stage are incrementally more open to add? So have you listed portfolio holding? Or will the focus continue to be on basically industrial operations? We've seen, what is it, 9 acquisitions already this year? Yes. Thank you, Joakim. Good question. I'd like to comment like this that I think when valuations come down, they come down first in the listed market. And my experience is it takes about a year or so or more before that spills over to the sellers In the private market. But I think we can see now that also pricing is getting more normalized, so to speak, On the private market. And I think also there is less competition also in the private market Because the credit market is quite restrained, as you know, right now. And that should further down drive down prices on potential acquisition targets. So have but having said that, We look at the complete market, both the listed and the private market when we invest and pursue our investment strategies This year to see where it makes more sense and where we find great ideas and great companies, irrespectively, If it's listed or private in that sense. Great. And given that we assume you Your listed holdings in both the Securities and Allimache. Can you Anders just help us with what your, Financial flexibility is to basically continue to pursue systematic M and A? We have we still have a good portion of Space for new investments, even we just put in SEK1 1,000,000,000 in securities. And we will Soon when the competition authorities will allow Alemak to acquire Kraktell, Which will give that is €740,000,000 on Latour's account when that Share issue will be dealt with. But after that, we still have a level of, say, SEK 2,000,000,000 to SEK 3,000,000,000 Considering our internal limit that is official, and that is 2.5 Times our EBITDA plus 10% of the value of our listed portfolio. And as you all know, the listed portfolio has been reduced during the year. So if it should have been valued as it was in the beginning of the year, the acquisition Strength or muscle, however you would put it, would be even higher From that point of view. So we feel confident that we can continue in the same pace as before. Understood. That's all for me. Thank you. Thank you, Joakim. Thank you. And as there are no more questions registered, I hand back to our speakers. Okay. Thank you. And on behalf Anders and myself, that concludes the presentation of the Q3 results. Thank you all for dialing in And listening. And we'll speak to you again on the Q4 results In next year. So thank you all for your time, and that concludes the call then. Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.