Earnings Call: Q4 2018

Feb 6, 2019

Ladies and gentlemen, welcome to the Vistgold Q4 Report 2018 Call. Today, I'm pleased to present CEO and President, Frederic Karlsson. 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. Holic, please begin. Thank you very much. Well, I will go through the quarterly numbers. If everyone turns to Page 2, you can have a look. We are basically happy with most of the numbers apart from the cash flow. So the cash flow has been we'll be building too much stocks and too much receivables, especially at the end of the year. We had a very good sales month in December compared to last year, so of course, that builds receivables. On the stock level is that they've had delivery problems, they have some delivery problems. What happens is that we have a lot of sales subsidiaries, and managing director of the sales subsidiary responsible for its own balance sheet and P and L. And when he loses the confidence in that the factory can deliver, he is overstocking or she is overstocking. So that's an explanation on the cash flow, and we hope that we will get this under control next year. Then if we turn to Page 3, I think we can comment on yes, not much to say, stable development. Demolition tools, the margin is a little bit weaker than last year. When we have delivery problems, sometimes we have to we are forced to source a little bit more expensively. And when you are at this level, this 25 percent profit margin, you also sometimes go down a little bit in price to take an order. Yes, so that's the reason why it fluctuates a little bit. Now we're a little bit down in the evolution of those. Systems Solutions, we have a good improvement. Last quarter was especially good, and half of the profit increase comes from project sales. We have 3 companies, pure project sales companies, that's 2 in for the forest. In the forest division, that's Hyrkatek and Heinla and then Eldan in environmental. Forest can go up and down a little bit from year to year. In the environmental, there's also structural change in the market. So what's happened is that a lot of scrap and Elan is producing equipment to take care of scrap, copper, tires and things like that. A lot of this scrap was during the last 10 years, shipped to China and China took care of it. But now China has blocked the import of scrap because of environmental reasons. So there is a structural change. And basically, the scrap yards in Western Europe and in the States, they have to take care of the scraps now locally. So they have to build to purchase equipment for taking care of the scrap. On a yearly basis, these three businesses, they account for 25% of the profit increase approximately. And then if we turn to Page number 4, there you can see how big part of the profit increase comes from acquisitions and how big part is from organic growth. So this year, even though we haven't acquired so much, the last row is SEK 110,000,000, we had a contribution from acquisitions for SEK 197,000,000 and more than half has come from last year's acquisitions, the acquisitions we made second half year last year. So we needed to fill up for 2019. And luckily enough, we made 2 acquisitions here in beginning of January. So now it looks pretty good for 2019 as well on the acquisition part. And 2018 was from organic growth, a very good year. Of course, the tank the cycle is very good, and we had some good profit improvements in the number of companies. So there's the explanation there. And then we go to Page 5. And there you can see that the net debt to EBITA level has dropped because we basically made 2 fewer positions in 2018. So there is AMP, there is a lot of space to do more acquisitions in 2019. We have the financial power to do that. We can turn to Page 6. You see the graph. We were listed on a stock exchange 2014. You see that the graph looks nicer after 2014. 2 reasons. First of all, the cycle has been good. And secondly, as we are public, we pay more attention, and we want to grow our profits. We turn to Page 7. If you look at the capital employed levels, they're very good. And then I would actually go back to look at the acquisitions. And I will comment on the acquisitions being made 20 19, the 2 acquisitions made. First of all, the company called Hammer. That's an Italian company. They are a challenger in the business of hydraulic hammers. They export about 85% of the production, and they are growing very rapidly. It's a good complement to Kine Sofit's range of products. So we are very happy to acquire that. The second acquisition is the Indexator, and they are making rotators primarily for forest machinery, it's about 85%. And they have a high very high market share there for rotators, it's about 90%. And the uniqueness with their product is that the lifetime of their rotators is much longer than the rotators of their competitors. That's why they're having such a high market. And we're very happy with that acquisition as well. You can say it's a complement to our the company required a couple of years ago, Corte Haltines. So between the forest machine and the equipment of Voltiens, you have this rotator. That was everything I had to say. So I will leave you to answer some questions. Thank you. Thank you. And the first question comes from the line of Johan Nilsson from Nordea. Please go ahead. Yes. Hello. I can start to congratulate on a strong report indeed. I have some questions on the margins in System Solutions. Can if you can help me out there a bit to split it out in terms of leverage on volumes, price increase and cost control. That's very difficult because there are so many businesses and the managers are doing that individually. But we don't have any targets or margins, but everyone who is not achieving our average margin, 80% is under a lot of pressure to increase his or her margins. So they have to take actions to improve the margin. And when we acquire a company, of course, we don't want to lower our average margin. So we prefer to acquire companies with higher margins. It's not always possible, but on average, we always try to be at least our average margin in acquisitions. Okay. I see. But could you yes, I understand it's hard to say. But is it largely related to price increase? Could it if you on an aggregate level, could you No, you know, on the price, we can't say that because these managers, they are working with price all the time. And finally, it can be small things and big things, sometimes they're even lower prices. But of course, their objective is always to increase the total margin. So that you can't say that. It's a lot of volume increase. I think if we also have a volume increase and if you have a volume increase with the fixed and you have fixed costs, of course, it's good to have a volume increase also for the margins. Yes, sure. Yes, because it's a bit tricky to when looking on the quarterly basis, it's hard to see the leverage from volumes because sometimes even when the organic growth in Q2 is very high, it doesn't translate into EBIT increase. Yes. Yes. It depends basically if you have a lot of if you have a lot of fixed costs, it translates into EBIT immediately. If you have more variable costs, it doesn't translate into EBIT. So and all different businesses are a little bit different. So we basically can't we don't do this analysis ourselves. We run each individual business on its own. And I think it's we even we ourselves can't. And we ourselves, we even don't try to analyze it. Okay. But if yes, we can let it go. But just finish up with if, let's say, if we see organic growth of about 2%, 3% going forward, Is it reasonable to think there is more to get on the margins? Because it's on really high margins now historically. Yes. We try our best, but we don't know where the limit is. Yes. Okay. Yes. Okay. I see. Great. And just some if you could mention, is there some major project orders, something that impacted in an export in a way or something that one should be aware of in the quarter? Yes. It's of course, this product business, we had a very good quarter in the product business, and that can fluctuate from quarter to quarter. Half of the profit increase was on project business. Yes. So that can fluctuate. Yes. Okay. And looking at the cash flow, the inventory increase, it's also related stronger sales in the end of the period in December, right? Yes. But also that people are overstocking too much in the sales companies because they so this is something we have to work with to improve. Okay. I see. But if looking at December, if you could put it in perspective compared to December last year and also November? How is the activity? The activity is very good. So we the world hasn't fallen apart yet. No. No. Great. Yes, I agree. And could you you don't mention anything about book to bill and so on, but could you No. Because we can't we've been thinking about measuring it, but all different companies do it differently. For example, if you look at the forest machinery, if you would give the forest machinery suppliers a call now and you want a quote for a new forest machinery, you will get a delivery time of 14 months. But if we have a 2,009 scenario, these the 1st machinery suppliers would have negative order intake. Do you understand? Because you can't trust the order book. You can't trust the 14 months order book because if something happens, it is the order book disappears. Do you understand? I think that happened a while ago last time. So in general, in many of the industries, we have extremely long lead times. And many companies are running at full capacity. I'm speaking about customers and suppliers as well, not only us. Okay. Thank you. Okay. Well, that was all from me. Yes, thank you very much, and congratulations again for your support. Thank you. And the next question comes from the line of Daniel Lindqvist from Hennessbanken. Please go ahead. Hi, guys. So just two quick questions. In the improvement in System Solutions, should we interpret it that the environmental part is more sustainable than the forest part that are more fluctuating back and forth? Yes. There was one company environmental called Eldon, and they are producing this equipment for scrap yards. Yes. But that seems to be something that will be in demand more than before. Yes. That's some of that is actually due to that China stopped importing scraps. So in the civilized or the Western world, we have to build more scrap capacities to take care of the scrap, yes. Yes. And then just a very quick question. On the demolition tools, after your Q3 report, you discussed possible reversion of the credit losses from Q1 coming in the Q4 report. Was that the case? Yes. I don't remember if it was in Q3 or in Q4. It was in Q4 or Q3. Q3. Q3. Was it in Q3 or Q4? We reversed it in Q4. Q4 is what we're reversing. It's reversed in Q4, okay, by the same amount approximately as I think Q1 then? Yes. Yes. Okay. So great. Then no further questions from my part. And the next question comes from the line of Per Janssen from I and T Management. Please go ahead. Peer Janssen, your line is open. I don't think there's any response. There is no further question. Yes. Sorry. No, I'm here now. Sorry about that. Frederic, congratulations with the results. Again, very strong, impressive. About the cash flow you mentioned, do you see any, let's say, any signs that it will actually do with the raw materials and spare parts and so on, it will be a bit slowing down. So it will be easier for the companies to get hold of the all the things that they need? That's my first question. My second question is actually on this project business where you have been a bit reluctant before. Have you decided to put more capital to work in the project businesses? Or are you still trying to run them for cash and use the money elsewhere? Yes. On the product business is that you don't need any capital for the product business, especially if they grow. They basically produce cash for you because the prepayments, they get negative working because of due to prepayments. So since they are very the beauty of them is that you get a lot of cash, of course, from them. And if the product is the cash flow without the product business, twenty nineteen would have been even worse because they helped the cash flow, not in Q4 but in the 1st 3 quarters. Yes. So Jodo, we don't have we just we have these 3 companies, and we have yes, we are keeping them. And this year is a good year, so this is fair. And for the stock levels, I think now we are sorting out the supply problems, but there is a lag. As I explained to you, you still have high stock levels in the sales companies. So that's Yes. So it will be settled during the year, not in the 1st 2 quarters. Yes, during the year. But we don't know if there's another 30 percent, 10% organic growth, we will have problems. It depends. Yes. Okay. Great. Okay. Thank you. As there are no further questions, I'll hand back to the speakers. Okay. Thank you very much for listening to us. Thank you.