Earnings Call: Q3 2020

Oct 23, 2020

Thank you very much. Good morning, everyone, and welcome to this call where we are going to devote about NERMAN Holding's Q3 2020 report. We start with 2 headlines, good margin development despite market challenges. We have, through the period here, been able to not only maintain, but actually slightly improve our margins, which we think is a good achievement considering the market challenges we have seen over that period. And this is a result of the early actions taken already in late Q1, Q2 and now resulting in that we have a good cost control And we see also that we've had a bounce back in September when it comes to sales and order intake after very slow July, August. We can also say the Digital Solution display strength. And we have since a couple of years, 2, 3 years focused a lot on the digitalization journey in Neriman as well as the cleaner journey where we now have solutions with the acquired companies as well as with our own developed equipment, where we continuously introduce these on the market. And we have seen that if you could say a positive effect of the corona pandemic and the close downs, the lockdown has been that people see that being able to have remote services, better understanding has value. And we've seen that in strong order intake in that part of our business. If I move on to Slide 3 now and go through some financials for quarter 3. Orders in the quarter amounted to €827,000,000 versus €965,000,000 last year. That's a decrease currency neutral of 5.6 percent versus the same quarter last year. We've got some comparisons with Q2 in our report this year. I think that's quite relevant in order to understand how the world is developing in these unstable times versus quarter 2, our order intake was up by almost 12%. Sales for quarter 3, dollars 826,000,000 versus 1.089 1,000,000,000 which is in Q3 last year, which is a decreased currency neutral of 16%. Adjusted operating profit for the quarter, DKK 63,500,000 versus DKK 77,900,000. As Svein has already mentioned, our operating margin has increased from 7.2% in quarter 3 last year to 7.7% in the quarter 3 2020. Net profit, SEK 31,500,000 versus SEK 52,800,000 last year, which gives us an earnings per share of SEK 90 versus DKK1.50 in 2019. If I move on to Slide 4 and take the financials for the year to date, we are on orders received of DKK2.562 billion which is versus DKK3.028 1,000,000,000 at this point last year. That's a currency neutral decrease of 12.5%. Sales have increased at the same time with 12.3%. Operating profit, including our restructuring cost of SEK75 1,000,000 was DKK125 1,000,000 for the year to date versus DKK235 1,000,000 at this point last year. Adjusted operating profit where we add back restructuring and acquisition costs comes to DKK202 1,000,000 versus DKK 236 1,000,000 for the 1st 9 months of last year. Adjusted operating margin is increasing for the year to date as well, 7.4% versus 7.3% at this point last year. Net profit, CHF 55,000,000 versus CHF 153,000,000 gives us an earnings per share of CHF 1.58 kroner versus 4.37 kroner at this point last year. If we then move on to Slide 5 and Sven will tell us a little bit about Extraction and Filtration Technology division. Yes. Extraction and Filtration Technology is the largest division and they mostly work on the brand Nederman. Their focus area are good industry, welding industry, metal fabrication, composite and other dust applications, just to refresh your memories here. The key activities for the division has been to continue launching what we call future proof smart IoT enabled filters, so they can optimize and control their air filtration. We have also slogans like taking control over your air filtration. This has been a plan. It's been slightly delayed because we not because of the R and D people, which is the normal case. In this case, it's been the lockdowns. And we have had a plan to early in Germany for the metal industry, have a big launch and in late August in Atlanta for the wood industry, the world's largest woodworking fair. Unfortunately, which 6 months ago I did not think would happen. They closed down both of them. So we have had to launch them in a different way, trying to use and develop online webinars. And we have some success, more than some, I would say, we have been able to get our message across. But it is, of course, a drawback and disappointing when we had 80% of all filters, advanced filters at the AWS show in Atlanta would have been with Neromel IoT enabled filters. But again, we have to adapt, improvise and overcome as one of our division managers takes from Clint Eastwood. So we have had to do it this way. We have also launched a dental market system for aerosols, which has been a topic now with people not wanting to go to the dentist and the dentist not wanting to take care of it. So we have launched that, especially for the American market. It's a known fact that aerosols could be a very significant problem in dental, and it's a 20 year old knowledge, but now it starts to move. Further measures relating to cost implementation have also made us reduce our expenses considerably. When it comes to the market, we can, of course, go through Walgreens, but you can see it has been like a roller coaster. They open, they close. They open, they close. And we see different effects in different markets. And it changes week by week. And it's also so that there's not a long visibility on decisions in this case. But if we summarize it, APAC has come back, especially China. They are moving faster than the rest of the world, especially China. And they have took some large orders. And also you see a return in Southeast Asian market there. North America has had a a difficult time. Wood industry has been okay. Some of the engineering markets, car industry and so on has been significantly weaker. And in Europe, as you see here, Germany being weak. We have Belgium that has been less affected, Netherlands and so on. But I leave that for you to study. And it's very much the same pattern as you probably see with other people working with investments related and also the engineering sector as such. So should we If I take some financials on this division, Extraction and Filtration Technology, we see the incoming orders SEK360 1,000,000 versus SEK494 1,000,000 in the same quarter last year, an organic decrease of 20%. Sales down by 19% as well. As we said, we've managed to reduce expenses significantly and our adjusted EBITDA has decreased to 48.6%, but that gives us an EBITDA margin of 13.6% of sales versus 12.6 percent for the same quarter last year. And so a margin improvement in this division year to date, the margin is 12.9% of sales versus 13.1% for the year to date last year. So obviously, we've managed to compensate for some of the rather large drop in revenue that we've seen particularly in Europe and Americas. I'll move over to back to Sven again and we talk about process technology. Yes. Process technology, large system, very much integrated in the process of our customers. And it's large filters for foundries, smelters, textile or fiber and other significantly large investments. Our key activities in this segment has, of course, been to try to secure what business is there and what is planned and try to build a strong backlog. Here, we've seen a a return in the textile fiber segment, especially in September. But it will be so that we have a pipeline and we'll see when the decision makers are ready to sign. Of course, we are moving forward. We have seen an extra and with our digitalized filters with our ability for a remote control, remote service and so on has given us an advantage in this market. And we're also dealing with potential aftermarket revamp being for large, especially American groups at this time. We have had a continued focus on cost control, and we have managed to keep the expense under control in order to secure that we can deliver profitability even in this demanding time. Weak demand, although some brightening in the market situation can be seen. And it's been especially in September, where we've seen that the orders and product had booked earlier are now restarted and is moving on, although some are pushed in or very many are pushed into Q4. And there are some optimists in some areas of the market. And we can see increased activity meetings starting to be launched. Then, of course, it doesn't help that we are now seeing lockdowns in Europe again. Textile segment has been challenging for some time. Spin Mills has suspended production for long period. But we can see, as mentioned earlier, that we see some recovery and interest in improving their capabilities. We have had problems in the Indian market where we have not been allowed to have more than 10% of the workforce, including white colors and blue colors, which has slowed down work, which has led to that we had to change some destinations of where we could perform work. But that is, as of October, now open again. So it's now only trying to find the right orders. The orders received in the quarter were clearly better than 2019, and it was very much in September when we saw the customers coming back to us. As also expected, the farmer and Sverter had a very weak performance. There has been a low level demand from automotive industry and some have been postponed. Increased activity has been seen towards the end. Again, I'm talking about September where we've seen activities. We have been active on the aftermarket keeping the machinery rolling at our customer and that has been a successful so far. So now over to Matthew. Financials for the Process Technology division, if we take order intake again for quarter 3, SEK 233,000,000 versus SEK 291,000,000 in quarter 3 last year, that's organic decline of 7.4%. Sales were down significantly more from a very high CHF 4 19,000,000 last year to €266,000,000 in the quarter this year. Nevertheless, EBITDA dropped by approximately £7,000,000 from £21,500,000 in 2019 to £14,000,000 this year. £14,000,000 in EBITDA gives us a margin of 5.3%, which is an improvement of from 5.1% in quarter 3 last year. If we look at the year to date growth in order intake is down organically by 24%. So what we see is a slight improvement in this quarter given that we only decreased by 7.4%. Sven, I will move it back to you in duct and filter technology. Duct and Filter Technology is where we have our special ducting and filters that are replacement filters and filters that are in our equipment. Key activities has been to complete the restructuring program to protect profitability and that has been done in U. K. Work. We have started the preparation for what seems to be not unlikely at least a hard Brexit, and this is a very important market for us. If we look at the total Northrop under the brand where we sell our DUC, we have had an overall negative growth compared to Q3 last year. Sales declined in U. S. But if we compare to Q2, we have seen a modest recovery. And again, the same pattern later in the quarter, it became better and better. In Europe, we have seen a decline and but we have seen that in our APAC small operation in Thailand, we have seen the profitability improvement continue. And we have seen that especially compared to last quarter, we have seen a significant upturn. Menardi filter, it has been affected by the fact that we have not been allowed nor any other service within 2 sites. And that's a situation where they have not been able to do the replacements as planned and thus postponed them. And Europe, we've been in line with last year, but the U. S. Market is significantly larger for us. Incoming orders in quarter 3 for Duct and Filter Technology were €92,100,000 versus €135,000,000 in the same quarter last year. So that's a negative organic less an organic decline, I should say, of 21%. Sales were down also by approximately 21%, it's very much in throughout business. So sales for the quarter, CHF106,000,000 versus CHF 154,000,000 euros excuse me, €155,000,000 last year. That includes sales to our other divisions. Adjusted EBITDA for the quarter, dollars 14,400,000 versus $21,000,000 last year is able to keep our costs in both in manufacturing and our general expenses under control. Year to date, the division has seen an organic decline in orders of 19.2%. If we move on to Monitoring and Control Technology now, Sven. Yes. If we haven't had happy messages, we can now take the best last in this presentation of the 4 division. Monotone Control is, as you know, the acquired companies, GASMET near Montes are measuring gases and particles and controlling also leakages, potential leakages in filters and predictive maintenance possibilities, etcetera. The key activities has been to launch, now delayed due to the fact we couldn't go to the exhibition we plan to, but we have launched them and we have had the largest inside sales and sort of a breakthrough here. It's one order for 120 filters at the customer for a one single plant in the U. S. I'm sorry, we are not allowed to tell you who it is. The In in site technology when monitoring and alarm factor will be used to EPA reporting. That is to meeting emissions reporting from the Environmental Protection Agency. So even if we have a negative Twittering when it comes to environmental things, there are still things happening also in the U. S. Market. We have continued to in cooperation with the other divisions launching the smart filters. And that has been the extraction and filtration for the wood, the latest launch. Highlights, highest ever quarterly order intake for the division. Asia remains the division's strongest region with significant growth both in orders and sales. And we continue the positive development. We had a slight order decline in EMEA. And it's been the lockdown, very hard lockdowns in UK and Germany, especially that has pushed orders forward and given us problem to access customers. In the U. S, we have grown compared to last year and also last in Q2. So that has continued. Financials for the quarter for Monitoring and Control Technology orders received £143,000,000 versus £54,000,000 in the same quarter last year. That's currency neutral growth of 175 percent organically. So there is underlying growth, it's not just purchase organically growth was 24%. In sales, we sold for SEK115 1,000,000 versus SEK56 1,000,000 in the same quarter last year, currency neutral growth of 115 percent there. That volume growth gives us an adjusted EBITDA of DKK22.4 million versus DKK1.5 million in Q3 2019. The EBITDA margin adjusted is therefore 19.4% versus 2.7% in the same quarter last year. If you see on the right hand side, the year to date currency neutral growth on orders is 119.5 percent despite the extremely low Q2 or tough Q2, we should say, organic growth is still positive as well in this division with 2%. EBITDA margin for the year to date now 60 point €5,000,000 versus €12,000,000 at the same point last year, 17.1% EBITDA margin for the year to date is clearly above the net demand the average for the rest of the net demand group as would be expected now. If I move on to Slide 9, there's some financials from the region. There's quite a lot of numbers on there, but the most telling thing here is that we see in the order intake in APAC has bounced back fast or faster than the other regions. Americas and EMEA still showing orders declining in the quarter, but obviously a clear upside in Asia versus Q3 2019. I think that's the most important numbers on this slide. If I move on to Slide 10, we see the cash flow from operations and we see the net demand typical trend continues with an improved cash flow throughout the year, a reasonably solid quarter of cash flow. We've made money, we've managed to collect it in. We've kept our working capital under control. And this is obviously extremely important in these times. Cash flow from operations, DKK 141,000,000 so far this year and this is despite having cash outflow from the restructuring programs. Approximately half of the spend has cash flow has hit as well. So reasonably good position there. And of course, if you move on to Slide 11, if you keep your cash flow coming in, your debt comes down as well and we see a slight reduction in net debt over the quarter. Turn back over to you, a summary of the quarter 3. Yes. Let's do a quick summary of the different divisions and for the group. Extraction and Filtration Technology, the shutdowns the lockdowns have had a major impact in Europe and America. However, it seems like Asia is opening up and we've seen positive trend there. Process Technology is under a lot of pressure when it comes to getting orders done. But we've seen in the quarter a growth in Fiber and Textile and especially APAC again coming back. Duct and Filter Technology, a negative growth, but a slow pickup has been seen, especially later in the quarter. Monitoring Control, very strong order intake and began Asia driving very strong for this division as well. So if you look overall for the NERMA Group, we have despite the situation had a good margin development, the Digital Solution displaying strength. We have seen growth in Asia, but Europe and America is very slow in the recovering. We have a solid cash flow. If we then take the very long outlook this time, I believe is saying that there is currently extreme uncertainty regarding development of the global economy. During Q4 2020, NERMAN expects the effects of COVID-nineteen pandemic to remain considerable in most of the Group's markets. We're doing our utmost to navigate successfully in a highly unpredictable time and have a high level of readiness to adapt our operations. A contributing factor to these difficulties is the major differences in COVID-nineteen between different countries. Prevailing regulations are often changed in one direction or another. And the signs from authorities all over the world often difficult to interpret from a long term perspective. Accordingly, it's currently not possible to provide a detailed forecast for developments in the coming quarters. A positive effect of the lockdowns is that they have shown what the world looks like when the air is not polluted by industrial emissions. This is the world that Nerman is working to create by offering the effective industrial air filtration instead of paralyzing pandemic. We demonstrate every day that this can be achieved as every installation that we implement. On Slide 14, we see the financial calendar. I believe the only date that we have not previously released is the interim report for January to September next year. That will be released on October 22, 2021. And with that, I think we can open up for any questions that our listeners have. Thank We have a question from Daniel Lindqvist from Handelsbanken. Please go ahead. Hi, guys. Can you hear me? Yes. Yes. So I mean, just looking at the quarter, there were some dramatic numbers as expected, but now you see signs of activity picking up. So my question is simply how much is postponed volumes and not lost business? Are we talking 75% or something? Or can you give us some flavor on how you view things? Process technology. Yes. It's very difficult to give you a great answer. But very, very few of the orders will be canceled as long as our customers are alive and kicking, they want to do these changes. And there's also a push for the environment. So yes, I would say that could very well be. Then how drawn this recover will be, that's something else. And that's very much depending on the general, how should I say, what's going to happen there? Are we seeing significant close downs again and so on? Then they could postpone even further. If it's we have some they have been postponing it from April. Now it seems that they are restarting it now in October, the project, because they have to if they are going to continue doing business and so on. So you are not completely wrong because and I can't say exactly, but it is very much about the gut to sign that paper, do the investment and it's very much related to how their own business is performing. Okay. But simply at some point you need to do the investment to stay in business? Yes. Absolutely. If you take Process Technology division, we hear nothing that any project and they're the ones that these longer term projects, they're the ones that we're not hearing that projects are canceled. It is delays. I mean that's the division just It's delays and it's also delays in the decision process. But it's not only the decision processing within the companies. The decision processing governmental bodies are also slowing down when it comes to new legislation and things like that. We see a lot of that happening right now. They cannot take simply they are so preoccupied with what they are going to do with lockdowns, etcetera and so on. So it seems like they are paralyzed to take any other decisions at the moment. So and then just moving on to the Monitoring and Control Systems, it really sticks out. So now it seems you have a big order supporting you. But even so, we've seen a strong development. So my question is simply, should we is this due to legislation, efutivization, demand for the customers, previous sales initiatives or simply current customers expanding their business with you? What's the explanation? All of it. Because what we have there are let me one thing is that we, of course, have developed our own product and have been launching them. Now it may be a little bit delayed because of we were planning to have it in conjunction with the large shows and so on. We have our own development. We have also we should have launched new product from near monitors at one time and so on. What we are seeing is that we are launching new products. We have also added safe resources and we could have done even more if we only had been allowed to travel to Hong Kong and to U. S. Where we should sign some papers and do to open new sales channels. But even so, we are now using the sites and body that we have created in this division, whereas before the individual companies were very regional, if I say so, because they didn't have the global reach as we have and that we are adding. We see even more possibilities to do that, to do exactly the same as we do in few markets we can do in all markets, oversimplifying it a little bit. It's also so that legislation is driven very much of the fact what can be measured. And we have, especially in certain areas, been able to show you can measure on a significantly more distinct and accurate level. And again, that drives legislation. However, some of that legislation has now been postponed due not due to anything else that it seems like the notifying bodies and the governments are unable to get the act together and sign the papers and focus also on these things. But if you look a year or 2 or 3 ahead, I think that this will be continued. Of course, anything can happen in these tiles, but it will be a continued demand for being able to prove and measure. That is the basis. As we say, you have to measure and control and then you filter. And we can do all. And we can make sure that this is that the industry is not contributing to the air pollution. And that's giving us a better world. Now I'm sort of almost preaching, but that's what so yes, I think that there is definitely demand. And we have been working very hard for a couple of years to get into it. Remember how much money we have spent on acquisition and especially on our own product development. So that's a result of that. If we look at the big order you received in this quarter, is that from a customer that's simply expanding their business that tried you out and now they're expanding? Or is it a new customer altogether? It's a new customer. They didn't know. This system didn't exist. It's something that we have developed it. We were the only one that in this case for with the knowledge and it's not more unique that I'm sure that Siemens, anyone, if they wanted to develop it, they could probably in there. But this in our niche, we know what it takes to measure and control these types of emissions. Very few others do. We have since 3 years developed this reporting and system. And now we are and we've had many hours in test installation for a long period, a year and so on. And now we got this breakthrough and we have many other discussions. What happens due to the COVID-nineteen if there is delays and so on, I don't know. But there are probably some delays. But we look very positive to the ability and we also look positive to the thing that we are the cleaner company. We can, as I mentioned before, we can both measure, we can control the process and we can clean the air. So this monitoring control system, it could even be a breach for you selling the rest of your offering to these customers? I think that it already been to a certain extent. We made a very big secondary aluminum, so it's recycling of aluminum. And one of the determining factors and that we got the order on a higher technical level on, if you say, in it wasn't in Cronos, but in higher price was that we could prove that we were future proof. We could give them today a solution that works with also extra all including knowledge and follow-up, etcetera. But we could also say, if you want to continue develop, we will continue to develop the programs and the capabilities with this. That has been a determining fact in a couple of cases during this year, although there have been too few large orders unfortunately due to the situation we are in. But that's the same for everyone. Yes. Yes. So and then just my last question. I mean, now you have your savings program. It seems to already kick in this quarter. So to what degree should we expect this to stick if we have a fully normalized situation again with demand? So what I'm asking is simply, is there an outlook for you to leave this difficult period being an even more effective company? Answer to that, if you want the short answer, yes. And what's the long answer, Jan? The long answer is what is the new normal that would be the We won't get into that next call because we usually try and keep it to around an hour or so. But we see in the short term that this is sustainable. It's not that we will at the level we are, this is sustainable. When it comes back, we will need to look at where potentially you expand and obviously monitoring and control technology is going well and the digital solutions that are solved by process technology and extraction filtration technology are also very important. So it might need some different competencies. But we in the short term, the profitability is protected by what we have done here. But we will not slow down on our R and D We will continue to launch new products here. We will continue to spend to keep ahead to stay ahead of competition in these deals. Yes. So cool. So I'll just fall back in line then. Thank you, guys. Thank There are no further questions registered. So I hand back to the speakers for any closing remarks. Thank you very much for taking the time listening to us, and we hope you all have a good continuation of the day. So thank you from Helsingborg and Matthew and Sven. Thank you.