Earnings Call: Q1 2018

May 16, 2018

Quarterly report

And gentlemen, welcome to the NIVE Q1 Results Presentation. Today, I'm pleased to present Jeterik Lindqvist, CEO and Hans Bachmann, CFO. Mr. Lindqvist and Mr. Bachmann, please begin. Thank you very much. Good morning, everyone out there. Good morning. And we're going to have the same procedure as before, where I start with some slides and then Hans continues. But prior to that, we'd just like to give you weather report from Markelhut. It's blue skies and like 21, 23 degrees already. And we're going to have our annual shareholders meeting later on today, as most of you know, like 5 o'clock. And then more than 1100 people signed up for that event. So we just had to acquire a building to be able to host all those. It's an old building that we are refurbishing to produce heat pumps eventually, but for this particular occasion, we'll host our initiatives. So the setting is just gorgeous. And also another thing, the previous meeting we had, some of you might recall that we had to have a very abrupt ending to that because we had other things to do. So to end in a more orderly fashion, we would suggest that we continue, let's say, 50, 55 minutes if there would be that many questions. And then we would have to end discussions and questions at that point. Not to be rude, so just to pre warn you about that. So with that said, thank you for calling in. And you've all read the report, hopefully. And as we the overall statement that you see is that it's been a decent demand in most of our regions. And of course, there are many hotspots or whatever you would call that in English all over the world, but it's promising to see that the demand seems to be decent despite that. And of course, in Europe, it's very obvious that we are having a greater interest for renewable energy that is very certain also that the overall economy is better. The construction industry is up. And in North America, despite everything that we hear, is also carrying on likewise in Asia. So we can't complain really about the setting around this. If we just talk about ourselves for a while, we can say that the growth that we've had is, of course, mainly acquisition driven, and we've had an underlying stable organic growth. There's been some hindrance currency wise and also slightly fewer days in the Q1. And when we talk about 60, 61, 62 versus 60, of course, it becomes fairly crucial to have the exact number of days when you talk about growth. The result has improved both in numbers and percentage, and that is, of course, due to the good growth itself, but also strict cost control, productivity and not to forget also the work that is carrying out carried out with all the acquired entities not being at the decided or targeted profit level gap. So far this year, we've been able to sign up 2 acquisitions. We've had 1 in America or in the U. S, brisket. It's a different kind of heating elements, more like jackets. It's serving primarily the semiconductor industry. And then, of course, we also acquired Alfa Laval's business when it comes to district heating and district cooling, and we're going to come back to that in the live. So those are the acquisitions, but it's a very steady flow of companies. And we just touched upon that because we also had an ongoing Board meeting in our company and we said that there are quite a number of companies up for sale and of course the economy is such and we are sure is a driver. The family transitions and then from the founder is a little bit older, he and his wife or she and her husband, they would decide to sell out rather than the kids being reluctant to take over. And I think we're going to benefit from that because we have a very, as you say, steady flow and also very interesting discussions regarding all three business areas. If we look at the climate solution, of course, last year, it was a little bit of a weaker trend performance wise when it comes to margin, and we feel now that we are picking up again. Of course, it's always difficult to transmit what's going on in the company to you sitting out there. The guidance we gave when we acquired the Enertec group and the CCG group was that eventually, we need like 18 to 24 months to bring it up at a level where we would like to have it. And I think that we are following that standard pretty much, and that's behind the performance. Certain term can be discussed a bit more in detail perhaps because district heating and district cooling has been something that we have not totally embraced in the past. I would see now that there is another way of heating in combination with heat pumps. Not necessarily do you have to ship out or send out very hot water from a central incineration plant where the losses in heat are phenomenal, but you could rather send out more moderately temperature or tempered water, and then you boost it up with a heat pump at the very end of the station. And of course, also when you have that distich cooling has also a more efficient way of cooling than perhaps just having a chilli by itself. And as already mentioned, the integration efforts are just phenomenal. We must say very devoted people out there in the businesses, respectively. We are very impressed here in Marche Rood with all the work that's going on, which again, I think embraces the model that we have, giving a lot of people the autonomy to do things or to improve things in the companies out there, respectively. So we're very pleased with that. Having a look at the Element Group, of course, we are steady above or steadily above the 10%. Here, we've had in the U. S, we had some object or particular project orders that kind of come to an end. So that's why the underlying growth is still good, but with that taken away, it shows like almost the growth has stopped, but that is not true. So that is why we mentioned that in the report. And also this acquisition of Brisk Heat in America, that is taking us into a segment of the market where we haven't really been before. Again, a very good indicator of our or the world economy, we can say, because here, we service machines that are used to produce semiconductors. So of course, when demand for this company goes up, we know that the electronic industry, if we may call it in simple terms, that's certainly going up. So it's a very interesting barometer, you can say, for business in the electronic industry. Quick look at the stove business. It's also very solid. And there, we have added now the pellet market, producing pellet stoves, stokes ourselves. I'm sure that's no secret that we would also look for further acquisitions here because we see that particularly in southern part of the Earth and Mediterranean regions, wood burning pellets are used as a hybrid, we can say, between a regular primary heating source and a more cozy atmosphere source like we have it up here. So we feel that's very necessary to have pellet stoves in the assortments. And the FBI in America or Canada has also developed satisfyingly so far. And those are the numbers that you've seen earlier on today with a growth of some 11%. And of course, when you take them all together, the acquisitions, it's like 9.1%. But again, the organic growth then illustrated here by just north of 2% in reality. It's a little higher due to the currency I said before and also due to the fewer working days. And then operating margin is back again above the double digits. Of course, the Q1 is not as strong as we all know, but that's an indication that we are on the right track. And that's also addressing the top line of our report saying that it's a promising start to the year, and that's pretty much what you see in ProMedigy. And this graph here, of course, is more illustrative saying that quarter by quarter, we continue to increase. Of course, the 4th quarter and the Q3, they are always the stronger ones. And we see now, of course, that the Q1 this year is substantially better revenue wise than the Q1 last year. Underlying is having a decent direction. Profit after financial items is also following the same pattern. Of course, volume during the second half of the year is really adding a lot of profitability to the group. And the seasonality seems to be there to stay. And even when we acquire companies elsewhere in the world, they seem to have the same seasonality, at least on this part of the globe, north of the equator. And just a few graphs and pie charts, pretty much following the same path as before. The Climate Solution is substantially the largest ones, of course. Element is picking up and Stolt is around 110%. And the next chart is, of course, an illustration of the size that Climate Solution is around 61% and Elemente around 30 and Stove is around 9. Stove seems to be very small here, but they also have their very peak during the second half of the year. And if we look at the group, we are quite pleased with this distribution where we have now like 38% in Europe, the whole market as we identify them, the Nordic countries, 27% and North America, 30% and the others, 5%. That gives robustness to our group that we haven't had in the past. And we don't like any sector really to outgrow the other, but we rather like to see the pie growing overall. So with that said, I think that I hand to Hans, and you can go more into details with the figures within business areas, respectively. Yes. Thank you, Eric. I will do so. But before we look into the Climate Solutions business area, I thought I'd just mention the financial net that you all have seen in the report as well, where there was a drop, so to speak, in those numbers. And that's a consequence of 2 things, and I think they're mentioned in the report as well. It's, one, that the interest rates have somewhat planned up. As you might know, the bonds that we have, for example, are at not fixed interest rates but variable and so are most of our loans in a way. So and we have currency then drawn in U. S. Dollars, euros to match the acquisitions that we've made. And that leads to the second reason that we have currency effects in there when we well, as a result of us reporting them in Swedish currency. So it's currency and interest rates that have had that effect. Then jumping into Climate Solutions. As Eric mentioned, it's a stable and strong performance in a way they have come back the business area. Sales were just below $3,000,000,000 for the Q1, a growth there of some 6%, including then a negative currency effect. So really, the underlying organic growth has been higher than that. And we've had a very good growth, I would say, in Europe and a quite decent one in North America as well. What still is affecting us in this area, to some extent, is the material price increase that has been an issue in a way in the industry for the most part of last year and also continued into this, whereas we're better this year at compensating ourselves with price increases, which started at the latter part of last year. So we came back there from 9.7% in operating margin to about 10%, 10.4%. And as Eric mentioned, it's really a seasonality in the business. So the performance will, of course, come then in Q3 and Q4 being the stronger ones. But it's a nice return given the integration that we had of CCG and Enetech last year and which is going on this year. In terms of distribution of sales, it's fairly similar picture to what you have seen before. Of course, following our acquisitions in the U. S. The last couple of years, that is now basically onethree of our business. But we're still very strong, of course, in the Nordic region being our whole market and Mainland Europe. Element has a very solid underlying performance. Seemingly, they have dropped some in growth there, but that's also a combination then of this project business that Erik mentioned and the negative currency effect. So adjusted for that, we've seen a quite decent growth in Europe and rather flat, you can say, in North America. And we've been able to deliver their profit of $154,000,000 up more than $10,000,000 from last year, giving us this operating margin of $10,400,000 being above $10,000,000 which we've strived for so long during the past years. So a solid performance from the Element business area. And this is also a matter of the business area being so well distributed geographically seen, where we have a nice spread between the Nordic countries, mainland Europe, North America and also a fairly large portion of what we call others here, which basically is Asia and Australia. In terms of stoves, it is continuously a stable performance. The business is, in a way, moving sideways in terms of sales. There is not a huge pickup. We came in roughly at the same level of last year. But also here, there is a slight negative currency effect cooling us down somewhat. But the North American business, headed by FPI, so to speak, has shown a nice growth, whereas Europe has been rather stable. So here, we've landed at an operating margin of 8.6%, basically the same as last year. And it's not so long ago actually that Q1 and Q2 were more or less breakeven. So this is a decent performance for sure, and this is really the business area where everything happens in the latter part of the year. In terms of the distribution of sales, it is the FBI acquisition in Canada that has given us the chunk there in North America and reduced the dependency on the Nordics and Europe, although those together, of course, are the main part of our business. The balance sheet is not so much to mention about that. We're past the $30,000,000,000 mark. You can mark on total assets and total liabilities and equity. It's partly a consequence of currency, but I mean a function of us growing. The movements that have been there on intangible assets and so forth is really a consequence of the acquisitions that were maybe risky than some smaller add ons. So it's a very stable balance sheet, and we can actually jump to the cash flow statement. And here, we've generated some $60,000,000 more than the comparable period of last year. We do, however, have a larger negative change in working capital, which, of course, disturbs me as a CFO, but it's also a function of the market, you can say. We have deliberately been building more inventory here. Then you can, of course, always question how much should you build. But there was, in the latter part of last year, a lack of material, and we couldn't, in all cases, meet the demand that was out there due to missing parts. So we have deliberately been building inventories in selected units to meet the demand out there. But of course, that costs on the operating cash, you can say, which then basically came out at a 0 there or minus 40. And the rest is, I mean, a function of the acquisitions we've made, some financing activities that we've had. And also here, we have some exchange rate differences. And to just take a look at some key financial numbers. We have continuously and we are continuously investing in our operations and have been increasing that to some extent. Last year, we were at SEK 103,000,000 level. It's now at 152,000,000. 1,000,000. It's a consequence of us investing in new machines. We are investing in some factory buildings and so forth. Overall, we've been able to bring down the interest bearing liabilities continuously now over a period. The net debt is basically at the same level as at the beginning of the year despite the acquisitions. So really, the reason for the slight increase there is, of course, the acquisition. But that is far below the 2.5% that the bonds people like, so to speak. And the equity assets ratio is very stable at around 45%, 46%, and it came up after the rights submission we made in the latter part of 2016. Working capital has improved slightly despite the buildup in inventory. I mean, there is a difference there compared to last year from 20% to 19%, but of course, it's up since the beginning of the year due to the buildup in inventory. But as a matter of fact, we have been addressing both DSO and DPO and been able to improve both of those. So the DSOs have been brought down and the DPOs up, which has given us this slight improvement, you can say. And then overall, on the last key financial numbers, they're very stable in a way. The return on capital employed is up slightly from last year, return on equity as well. Of course, that has come down following the rights submission that we made, and we're in a good position to make an acquisition there. Net profit per share has increased and as has equity per share. And then the last one, I don't think we typically comment upon the closing date. Share price that is always moving, and we're focusing on the business. So of course, try to have a good share price. Yes. That's great. That was a quick walk through, maybe room for questions or if you would like to add something, Eric. No, I think that we open up for the Q and A since we have abbreviated everything here now. So it's up to you out there to put your questions, please. Thank you. The first question comes from the line of Olof Lars Hammer from DNB Markets. Please go ahead. Hi, Hans and Erik. Thank you for taking my questions. Firstly, if we could start off with the impact of higher oil price. You're mentioning increased focus on environmental friendly heating solutions, etcetera. But what's your thought about the oil price has accelerated quite fast in the last quarters? Do you think that, that could have a positive impact on demand for NUDA in 2018 2019? Okay. If I should take that question very quickly. I think that we have demonstrated the last few years that we can have a decent margin relatively low oil prices. That has always been a debate. When I say always, always since we got listed. If the oil prices come down, will you then be able to make or remain profitable? And I think that we have demonstrated that we can remain on a decent level even when the oil prices are low. And it came down to an extreme level, say, like 18 months ago, where it touched like 40, even below 40 U. S. Now it's up touching the 80 again. So that in combination with an increasing awareness of climate change without being fundamentalist in any way. I think that we all recognize the change in weather. And particularly here in Sweden now, on the 16th May, we had a weather that we typically had when I was young, which is many, many, many years ago, when we went to school around the 6th or 10th June, we had Lily or the Valley and the lilacs were out. Now they're already out and the old saying that you should have everything closed between chokecherries and nyloc. They're both out now. So I think that the awareness in general is there. And of course, now when the oil prices are increasing, that is further enhancing that that's not the way to go. There's a long answer to your question. We believe that, that will have a some positive effect to that. To measure that is very difficult, but it certainly enhances the road map towards renewable. Yes. My second question is more regarding to pricing. You mentioned that you have compensated more from higher input cost by price hikes. And would you say that when was your last price hikes? And are you fully compensating now? Or is it more to come in the coming quarters in terms of pricing? That's a very political answer, and I'm sure you know that. But you've been following our company for a long time. And I think you also remember that we always said that we are not really trying to achieve higher margins by increasing prices in a ridiculous way. So it might sound a little strange, but we are really trying to hold back. We are trying to increase efficiencies internally before we take that, if I may call it, weapon. So that's why we are perhaps a little bit slow when it comes to price increases. And they the magnitude they have sort of, yes, surprised, as you can say. So we've been if you put it one way, we've been slow. We've been following our tradition, perhaps believing in some instances where it's just a quarter and then you're going to fall back again. We've been wrong there. So I don't think that we have fully compensated ourselves for the price increases. But that, of course, is a very delicate balance. But I think in that answer, I think you've heard where we are expecting. Yes, yes. And last question from my side. You mentioned that the North American and the U. S. Market has come back a bit, but could you please elaborate a little bit more what is happening in especially U. S. Following the newly launched tax incentives? Well, I think that the market was surprised with the U. S. Withdrawing from the Paris Treaty or treaty, the agreement. And I think that the market was really surprised that the subsidies for tax advantages were reintroduced. And I think the reason why they were reintroduced was, of course, that now we are in parallel with the PV cells or PV panels and also wind turbines. And I think that was really that comparison that made the Congress change their mind. And I think that the market itself was certainly surprised that it was taken out end of 'sixteen and reinstalled beginning of 'seventeen by, if I may call it, a Republican government. So it's taken some time really to convince everyone, okay, it's back again. It was good in a way to experience, okay, that's the real market. But it was unfair that certain renewable items out there were not taken away from the subsidy list. And I think that the politicians realize that. To the private consumer, I think it came as a surprise, and I don't think or we don't think that the full effect has been seen yet. Yes. It will be interesting to see what happens during this year. And good luck with the annual shareholder meeting. Thank you. The next question comes from the line of Max Frieden from Danske Bank. Please go ahead. Yes, hi, good day. I just have a question on the Element project orders. If you could quantify how large a negative impact had? And also remind us when did you start to deliver on these projects? Well, I think that you can we can address the change to that altogether like the old point 6 or whatever it is. Sorry, could you repeat that last one? The change to maybe the entire change was related to the project orders. Yes. And the business came on board when we acquired Heatron in the U. S. Okay. That's very clear. And then just one more structural question on the gas regulation and the impact, where you say you're going to convert the majority of your products to natural refrigerants. And if I'm not mistaken, I believe that some 80 or so percent of your products are not on natural refrigerants. Now of course, there's a long time lag here until 2,030 before this is fully implemented. But could you just maybe talk a little bit around if this requires any larger investments from your side in terms of production equipment or change in the manufacturing process that we should be aware of? Well, I think that we are sort of dependent on the component manufacturers here. The natural refrigerants, I'm sure you're aware of, the desire or the aim by the politicians in Europe, of course, quite 2,030, they would like to be totally down to 1 or like the index of 1. Like the global warming index would be preferably down to 1. And now we read 2018, and there are 2 routes that we could choose. I mean, there are some intermediate refrigerants, and that would qualify for another 5 or 8 years. But at the very end, 2030, there are very few refrigerants today available other than the propane that would sustain the requirements for the politicians. So whereas we have started with propane many, many years ago and we still have 2 families of propane on the source there inside. And we have very good experiences. But it's not so easy as a producer of the compressor because you have to use a totally different setup of the chemicals inside to allow the ball bearings to be lubricated. And you also have to have a certain electrical wiring not to jeopardize a sudden leakage to make a FI or anything like that. So we, of course, without going too much into details, we are actually having working on 2 parallel avenues, 1, of course, with natural refrigerants but also with some intermediate solutions. And when we come to the market, we which we hope will be within the coming year, year and a half or so. Then we, of course, will explain why we have chosen one path or the other. So we are fairly certain that we're going to solve this situation. And in reality, we have no reason to argue that we should come down, just like we came down on the R22 and R11 years ago, that was supposed to hurt the ozone layer. Those refrigerants are gone. And I think if I'm correctly informed, we talked about the ocean hole around the Arctic. I mean, that is healing again. So that was a very wise decision. Why this decision is a little bit strange, it's only hitting Europe, whereas there was an agreement on the Freon refrigerants years ago. There was more of an agreement all over the world, and that put more of an allure to the compression manufacturers that we have to solve this. So they have to be they have to be able to use other refrigerants. Here is Europe, where we have no compressor manufacturers. I'm not saying that we are blaming them, but we can also understand that since America, South America, Asia does not or they do not participate here, it's a limited market for them, and they have put priorities on the cooling industry rather than the heat pump industry. But we are very confident that we're going to solve this situation. And the constraints now on the supply on the refrigerants, I think that is more a reflection of they're going to be reflected in higher prices, but to our judgment, not necessarily shortage. Okay. That's good clarification. Thank you, Adi. The next question comes from the line of Amy Aslund from ABG Sundal Collier. Please go ahead. Hi, it's Erik and Hans. I just have a few questions on sort of your margins. So first of all, your gross margin was a little bit lower. And you touched upon that, that this was mainly due to raw material prices. But is there anything else affecting this? Or basically, can you just argue that this is sort of a just because of that? Well, I think that in general, there are different structure than when you sell the residential. So but also then you talk about larger volumes. So there you also have a larger a lower overhead situation rather than selling 1 heat pump at a time, you sell perhaps 150 at a time. So the prices are coming down, but of course, the efforts for selling there would be lower. The same thing on the element side. They, of course, when you sell a component to a subsupplier or as a subsupplier, then the prior year always lack of competition. So there you also have a lower margin, but you also have a lower overhead. So I think there are natural explanations to this. The only segment you can say where we do not have that, if I may call it segregation, it's within stalls because there we always sell to the trade to the consumer business directly. There, we have no project orders. There, we always walk into a store and you buy a stove one at a time. That's why they had a decent gross margin, if that's an answer to your question. So did I understand correctly that there were more sort of larger project orders during the quarter and that sort of could take in a few basis points. No, I think that the companies have come on board, I would say. Okay. Now I understand. Okay. But I was just thinking, okay, yes, okay. I think you understand. And then I think you then touched upon my sort of second question, which was basically that your SG and A costs have gone down. So this would then be sort of the effect of sort of these acquisitions, and you think that this will be sort of sustainable going forward? Well, I think they follow each other. When we grow on project orders, the SG and A would come down and the reverse. So they are shadowing each other. Okay. Great. Well, then that's the one And then there's also one effect there in the SG and A, which is a one off. And last year, we participated in the ISH fair, which always is a costly thing in a way. And this year, we only had well, only and only, but we had the Nordberg Fair in Sweden, which is very important but less costly. Okay. Okay. Well, thank you very much for clarifying. I will get back in queue. All right. It seems like either you are tired of us or we have exhausted all the subjects. So once again, we appreciate all of you calling in. And then we're going to return to our Board meeting. The rest of the members are sitting there anxiously waiting for us. They wanted to have, I'm sure, a description of your questions and the atmosphere. And 5 if you haven't bought your tickets down to Markel, if you have still a chance to take the crystal is shaking her head here because we're already $11.20. We're sold out. We are sold out. All right. So with that said, thank you very much for calling in, and you have a nice day, a nice spring or fall summer and a nice full summer eventually. Thank you very much. Thank you. Bye bye. Thank you. Ladies and gentlemen, this now concludes our conference call. Thank you all for attending. You may now disconnect.