Earnings Call: Q1 2021

Apr 22, 2021

Good morning, and welcome to Nederman's First Quarter Presentation. We start to say that Neriman had a strong start to the year. There were with a lot of vacations, a lot of sort of uncertainty in market in the beginning, It started to gradually climb from mid January up to end of March, and we've seen a recovery. The positive outlook are also there if we can have a continued recovery with seeing distribution and so on. And we see a more positive way of thinking, especially in China and in not to forget U. S, where a large portion are already vaccinated. We have for the Q1 had organic growth in all division. Totally, We had close to 15% organic growth, though the Swedish strength strengthening of the Swedish krona has taken that down with 10% when we so in real money, a bit more than 4% coming back to that. We have had a safe growth versus Q4, and we have also had a positive mix and a good cost control. The cost control comes, of course, out of that program we started a year ago, and we continue to deliver on that. We also have had a positive sales mix where we are selling more of newly released products with slightly higher margins that also have an impact on our result. And we are pleased to say that for the 2nd consecutive quarter, we have achieved our target of 10% operating margin. And we've also managed to have a very good cash flow in the quarter. If I move on to Slide 3 in the presentation and The summary of the financials for Q1. Incoming orders for the Q1 were SEK 1,035,000,000 versus SEK 9.95 €5,000,000 last year. Currency neutral, like Sven mentioned, is 14.7% growth. We have had the strength in kroner working against So one example is the U. S. Dollar where the quarter on quarter versus last year, the U. S. Dollar is 13% weaker than it was in Q1 last year versus Q4 last year, orders also increased. That was by 12.7%. Sales, €868,000,000 versus €981,000,000 in Q1 last year, so down there. Currency neutral growth, we can debate with the definition, but it's negative growth 2.7%. On the charts at the bottom Of the Slide 3, you see the we see the trend on orders is an upwards one for the since the lows of Q2 last year where We were far from alone in having extremely low order intake. What you see is this the Q1 for some time that we've exceeded €1,000,000,000 In order intake, you also see comparing that chart the orders chart to the sales chart on the right hand side that there is A little bit of a delay in the sales growth in that certain divisions and certain parts of most of our divisions of the business, The order intake the time from order intake to delivery is not immediate. It can be up to several months in the case of process technology, for example. But we expect given the order intake in the quarter, one, we expect the sales in quarter 2 They'll obviously be higher than they are in Q1 of 2021. Moving down to the on to Slide 4, the financials in terms of operating profit, euros 87,000,000 SEK versus €65,000,000 last year, like Sven mentioned, that gives us an operating margin over 10% for the 2nd successive quarter. Net profit, DKK 57,000,000 versus DKK 34,000,000 in Q1 last year, giving earnings per share of DKK 1.6 DKK 3 versus DKK 0.98. As Sven also mentioned, the cash flow from operations was strong in Q1 with Cash flow from operations at SEK 74,000,000 versus SEK 13,000,000 in Q1 last year. The two charts on the bottom of Slide 4, perhaps the most pleasing one we see right now is that we've managed to get this cash flow from operations. Q1 traditionally is a bit of a slow quarter in terms of cash flow. A lot of that related to project business, but we have been much Stronger in Q1 this year than prior. Yes. If we then move on to the divisions and Sven, I'll hand over you for Slide 5, extraction and filtration technology. Yes. The extraction and filtration technology, just to recap, that's So mainly sold they are mainly selling under the brand, Nederman, and they are actively in all three regions. And key areas are welding, it's woodworking and its composites, etcetera. All three regions saw an increase in orders received, Though we have still seen lockdowns having an impact there, we've seen it in Central Europe, we've seen it in India, although the quarter, as we mentioned, was good. Germany, increased base business, Still hesitation to book the larger orders, but it's coming. Strong growth in Denmark. Poland, very strong coming back with service and product sales. Southern Europe Coming back with some midsized order. Czech Republic was completely as was Slovak Republic closed, so they had an impact there. Turkey come back. U. K. Was impacted by, again, The restrictions, we can see that Benelux countries closed more positive than last year. Orders received in India were in line with Q1 2020, and we had a major wind power order booked in Q4 last year. They are coming back. What is a bit disturbing is the new lockdowns that might have an impact going forward. Whereas The rest of Asia, China, Australia and Thailand all reported very solid growth in orders received and sales. As mentioned before, North America have a more positive outlook and optimism, and we saw healthy order growth compared Last quarter, more midsized projects were booked and released, and It's been primarily in the wood industry, and we've seen that they are coming back. It's just it's both construction industry, furniture consumption is coming back. Even though we had lower sales volume following the tough market conditions in late 2020, We have increased the profitability in North America. But still, we have a continuous good trend. And also in many of the distribution market, we had a strong quarter compared to Q1 2020, and we have had healthy growth. We've seen a good comeback in the wood industry. Key activities in the division has been to improve the performance of the digital Tools. Under the motto, Easy to do Business Week, we have launched new quotation tools, other things to make life easier for ourselves and our customers. And that has proven to be successful so far. We have also a continuation of the new, as we call it, smart filters that was launched last year. And we can see that there's a growing interest for the capabilities with the IoT and other features that comes with the Neriman Insight applications. If we talk about the financials for this division, incoming orders, €431,000,000 versus 426 in Q1 last year. That's actually currency neutral growth of 9.4%, currency neutral and organic being the same So all of our divisions are given that we haven't made any acquisitions in the last 12 months. But even there, you can see that the currency is not insignificant. On sales, €396,000,000 versus a very strong €462,000,000 last year. Q1 was very good for extraction and filtration technology last year. Despite the reduction in sales, you can see the adjusted EBITDA is still at DKK 65,000,000, so a very strong performance there. That gives an EBITDA margin of 16.3 percent. Moving on to Process Technology for Q1. Yes. Process Technology, larger Projects focusing on more heavy industries, foundries, smelters, very much recycling industry, recycling and also in the textile fiber manufacturing. The division has been approaching pre pandemic levels in terms of Q1 orders received, which is interesting and very good. They were strongly hit by the disturbances in the market, they are very often linked to large projects and investments. And of course, With close downs in our major industries in the textile side and in other areas, Of course, that has had last year a very negative impact, but we see now that it's coming back. Quotations for large projects that has been delayed are now sort of Moving again, some we have got the orders. Some, they are at least requoting. And so That's a more positive sentiment in the market. If we look at the Textile segment, they had a very From order received in most markets for this quarter. China had a strong start of the year. We have also seen that the Pakistani government has made a financing program available, And that has also sort of tipped the our customers over. So they are now booking the orders. Bangladesh, where we have a strong textile and fiber industry, We have had handshakes, but the final order has not been received. Now they are beginning to be realized, and we have been given down payments for some and there by book the project, and they will start again. Increased freight cost and fuel freight cost do make Project planning and execution more difficult. Worth mentioning, it's also The now and then returning lockdowns for shorter or longer period where you are affecting the ability to reach the site to do service or installation. But So far, they are managing at a reasonable way. There's also been some price pressure in market. We keep the balance between volume and margins and making the more proper aftermarket business even more key. There are some competitors that are under strong pressure, some actually 2 that went bankrupt late last year, and some are trying to fill the factories with orders and fighting for their life. We Say that we have the high technology, and we see here also the value of the new DG7, the insight where we give new value to the customers and thereby instead of lowering price, giving much more value. And that has so far proven successful. In the Foundry and Smelter segment, the sustainability trend is creating Tangible increased demand for recycled aluminum, and this has given us higher orders in Q1. In Europe, They are refurbishing and some of the existing and there are also some interest to increase capacity. We have also in Americas got 2 foundry Importance of globalization. We are here now after fighting for several years introducing the European way of the filtration. And now finally, we are getting the success with that. We have to realize that, that has been a very regional market in many, where you are a sort of trapped into habits, how you do it, even though you can find better solutions in other place. Now we have, after a few years of intense marketing and sharing, I'm starting to get the European way and the HE filters coming normally from our German factory. The key activities, of course, a number of connected system being installed. And This is again one of our competitive strength I mentioned in the textile segment, but it's also so in the smelters and foundry segment, where we are adding services that tip in our favor when it comes to who they choose. We are the future proof supplier. There were several major projects in new markets booked and that Work again across the regional boundaries are accelerating. We are combining expertise from LULVA, textile fiber with MicroPult, normally more heavy industry. And we have thereby launched new heat recovery solution for the foundry industry, where Luvak come with that capability and micro pool with the customers and the knowledge about the customers and the customer process. So it's been so far fruitful. It's also so that we have launched with the Inside, we have got orders. And actually, through this continuous monitoring of the activities of filters, one of our large customers We're very pleased because they managed to stop a big fire due to this continuous monitoring. And we hope that we can continue with this distribution of our IoT solutions, continuous Monitoring also being able to do calculation help them to be more efficient. When it comes to financials for Process Technology, we can see a large increase in incoming orders, €375,000,000 krona versus €335,000,000 So a strong increase despite Currency is working somewhat against us. That's growth of 25% currency neutral year on year. Sales for Q1 were rather low, as we would expect, following the weaker order intake during the latter half Last year, euros 242,000,000 versus €299,000,000 is a 10.5% drop in currency neutral. We see how much the backlog has obviously increased during the quarter. We're approximately €130,000,000 higher in backlog now within this division than we were at the start of the year, which is very positive moving forward. Despite the sales drop, we've managed To maintain profitability in this division, which is we are quite happy with actually, euros 6 €800,000 versus €9,300,000 on an EBITDA level. Moving on to monitoring and control technology for quarter 1. Yes, in monitor and control, here we have the brand name GasMed, Neo Monitor, NERMINE Insight and AFS. And we had an organic ore intake growth of 11 In the quarter, and it was a Specialty Gatsby and NeoMontez that were developing well. And as you see here, It was mainly Asia that gave this. EMEA was slow. The lockdowns have dampened activities in this process control operations. And we have though So we've got into and got orders in the sales and orders received increased for emission related businesses. But EMEA, a bit slow. APAC, on the other hand, were doing well. We clearly increased versus last year, and it's been Faster recover in that region, especially with China. And also with the Chinese legislation, Chinese wish to be able to monitor in a more precise way. And here, it comes in handy to have the 3 leading brands. We are technology leaders in FTIR. We are technology leaders in with Neo Monitor, in laser emission control and also with AFS in particle. So it's been a good quarter for Asia. Americas, we had higher order intake than last quarter and in line with Q1 2020. If the gas oil and gas is coming back, we will see a continuous growth in the Americas. We have also seen a growing increase because the recovery appears to be significantly faster in Americas compared to Europe. So we have a positive trend for process oriented products and services, and that really continues. Key activities is, of course, one is to continue to launch new product, going into new market. And also, as mentioned on Process Technology, being more globalizing where we see we have Areas where we are not as strong sales wise as we are in some areas, we are continuing that work. We got NeoMonte's laser gas free gas achieved its Seal II certification. And why do we bring this up? Yes, these high end products need certification to be classified, And it opens definitely new possibilities in the international market for process instrumentation. So we are very happy passing that, and that's very good. We also continue to deliver 42 advanced particle measurement instrument to one of the largest partners in the U. S. They are getting operational improvement and system building, cost reduction value of the system rather than regulatory compliance was the key driver behind this sales. They are saving money on energy, etcetera. We have had a number of other installations where it's been the regulation that has been the major driving force. The financials for Monitoring and Control Technology, incoming orders for Q1 twenty €21,000,000 were €119,000,000 versus €117,000,000 last year. That's currency neutral growth of 10.8%. Sales, €122,000,000 versus €108,000,000 last year is currency neutral growth of 22%, obviously, Significantly less at prevailing rates, but still SEK 14,000,000 higher than the Q1 last year. And we have an adjusted EBITDA The EBITDA that is has basically doubled to DKK 21,400,000 from DKK 10,600,000 Last year, that's an EBITDA margin of 17.5 percent for Q1 2021. If we move now straight on to Duct and Filter Technology, Slide 8. Yes. Duct and filter is where we produce the ducting systems And the filter bag filters for internal use as well as for external where we externally used the brand Norfa from Menardi. The development in the quarter, we've had a positive trend in most markets, and we've seen distinctly covering orders and sales. And since U. S. Is the largest market by far, we have benefited from the bounce back there. We have had strong profitability, and that is mostly on the enhancement in operational performance. Of course, we have continued the good cost control starting, giving also result. But We see the investments in new equipment and new procedures are giving result. And we will also here later in the year install a completely new set up in Denmark, and we hope that then we can boost the European sales there. For NORFA Deducting part, we saw a positive order growth. In U. S, the orders received significantly higher compared to both last quarter and the same quarter last year. We also had Higher sales, and we also can say that digital orders continue to grow, and medium sized installation displayed a strong recovery. Europe, we also had a growth compared to last year and the Same in the smaller factory in Thailand. And they continue to through operational improvements to be more and more profitable. Minerva, which sells the division's filter solutions, saw strong sales growth during the quarter. Better post filter fiscal customer visit and an acute need for maintenance Following delays in the customers replacing filter bags are driving growth. And we're coming back To what I mentioned in the previous division in Process Technology, that there has been some issues for customers allowing service technician on-site. And now they are needing to do that. Sales in U. S. Were particularly positive following good order intake last quarter And in Europe, it was in line with the last quarter. The key activities is an updated version of our customer portal, where we make it again. They have the slogan fast, friendly and reliable in the duct and in North fab. And in order to be we have a lot of distributors, smaller distributors and installers who buy from us. And here, The customer portal, the digitalization makes it simpler for them and more efficient for us to handle the orders. We had a quick tool in QTO. The Inter Auto Maintain tool was launched, productive in Europe. It is and has before only being used in U. S, and that will also have a positive impact. We will also have And launch of we have the prelaunch and it has been prelaunch in due design for quotation tool. And it will go live fully during Q2 in U. S. And during Q3 in EMEA and APAC. Here, we will give how customers access to simple tools over the web, where they can do a design that normally takes a couple of hours to do in less than half an hour. And I think that will also drive sales for us. So again, for us, digitalization is not a matter only of the IoT, only of the measurement control So it's also trying to make use of more efficient tools internally. The financials with Delta Field to Technology incoming orders 7.4% up currency neutral versus last year despite the with providing rates being a decrease to SEK 111,000,000 from SEK 117,000,000. Sales, SEK 128,000,000 versus SEK 132,000,000 in Q1 last That's actually currency neutral growth of 10.3%. And despite the slight drop In revenue, we see a significant increase in adjusted EBITDA. They're now over 20% or were over 20% in Q1, DKK 25,900,000 EBITDA is very positive development. DKK 15,700,000 was the comparative figure in Q1 last year. If I move on to Slide 9, a short summary of the quarter, Sven. Yes, if we summarize, we think we have had a strong start, especially on cash flow and profitability. We had organic growth in all division, which is also positive, even though we Hope for even more sales and order intake. We are not where we expect and want to be long term. The sales growth versus last quarter and also with the positive sales mix, Combined, as mentioned before, continued good cost control. We did an operating profit of over 10%, which is Very good in Q1, which is normally one of the weaker ones. Good operating cash flow, as mentioned before. So All in all, we are quite pleased with the Q1, and we hope to continue the growth and bounce back from the last year. A little bit on the outlook spend maybe. Yes. The outlook is positive for continued recovery, though market uncertainty remains as does the potential for further lockdowns. For the Q2, NERMAN expects the effects of COVID-nineteen pandemic to have a continued dampening effect on the group's market, particularly in Europe. If the vaccination programs That are now underway throughout the world are rolled out according to current plans. We can look forward to a stronger second half of the year from Erman. The COVID-nineteen pandemic has put the focus on clean air, and lockdowns have shown that the world can look like What the world can look like when the air is not polluted by industrial emissions? This can be achieved without the paralyzing pandemic by effective which Neromain demonstrates for each installation. Finally, before we open up the question, the financial calendar for the remainder of 2021, we have the AGM on 26 April, a very intimate affair. It's been it's postal voting only. There's no interactive meeting or anything such that Final day for both for postal voting is tomorrow. We're following the recommendations of Swedish authorities and the temporary Swedish laws for Annual General Meetings in that respect. The interim report for Q2 will be released on the 15th July and for Q3 on 22nd October of this year. That is the presentation for now. So we could Open up for questions. Thank Our first question comes from the line of Hermann Eriksson from Handelsbanken. Please go ahead. Sven and Matthew. First of all, congratulations on the strong reports. So I just have some few questions here. So we saw impressive order intake in all of your divisions. And just looking at the Process Technology, this has historically been A low margin business area. Can you say anything about on the margins on the orders received in Q1? Should we expect higher And this going forward or who should look at it? What you can say there is, obviously, there is some price Pressure on the market, but we are like Sven mentioned, we try to keep a balance between margin and volume. And We have relatively compared to some of our competition, we have relatively low fixed costs. We don't have they're not Completely nonexistent, but we have relatively low fixed costs. So we try not to get dragged into these pricing gains to a large extent. However, There is some margin erosion at the moment. What you can say if you look down to the bottom line or to at least to a beat in the Process Technology division, of course, some better volumes sales volumes ought to mean a higher EBITDA margin, but That division is potentially what it does have always is a much stronger division in terms of capital employed. The cash position on projects is usually, particularly in the textile industry, is usually positive throughout The project, so they contribute in that factor. They're never going to be at 20% EBITDA like the filter technology can fee. But the margins on the projects that we're taking right now, they're not there is some pressure, but not on all of them. And What we do try and do is grow the aftermarket business where there is a significantly higher gross profit margins. And I can say that I have to remind the we have seen that we are You're getting paid for, if you say that the extra efforts with the MicroProAssist, the Digi7, there are a bit different names in the different divisions, but where we attract the interest from the head office, how they can actually Control the business significantly better and get better efficiency. Here, when we say we are The future proof solution, we get significantly better paid than some others. And that is working for us. And then the market pressure from some more desperate areas is working again. So I think we have a fairly balanced approach. And it's also so that as mentioned by Matthew, Volume is important even though we do not have so many huge factories. We have some we have a lot of engineers. If they are meeting idle, of course, it costs money. So I think that's a good balance here. Great. And then just looking at your cost, you continue to have low admin costs compared to historical numbers. How much of this would you say is sustainable going forward? It's generally sustainable to a large We don't see a need right now that we need to accelerate on the anything on the administration costs front. What we are doing is selectively Ramping things up on the sales and distribution side, of course, where we see opportunities in Process Technology, for example, this Internet this globalization is important that we do that. And then we see certain niches within monitoring and control technology where we will add costs selectively. But There it's not we don't see a need with the sales volume or with the order intake volumes that we have right now. But This profit protection plan that we carried out last year ought to we ought to be able to maintain a large chunk of the cost reductions that we made there, at least for the foreseeable future. I would say that close to keeping that, there will be some lifting travel rates and there are some need for traveling. But the behavior has changed, and I don't think it will come back to This is a bit more of the new normal. And of course, we will see and we can also see that some Lack of the fiscal meeting has hampered some new introduction to new customers, but It won't be a big issue. Where we invest is in R and D. We are focusing and getting more engineers in to deliver the next generation because we see that we get a payoff. We are, as Matthew mentioned here, investing now in areas, in territories where we see that we can grow our sales and where we have strengthen our position. And we want to if there is an opportunity, we will do that. So we are adding sales resources, especially in some areas. But that means that We ought to be able to, within a few months, get the payback that they also start to deliver new orders to us. Perfect. And then looking at Duction Filter Technology, you had a strong converting on your orders 3 quarters in a row. Should we interpret it as you have received orders during the quarters? And if so, is this something we should expect for Q2 as well? It's going rather well in ducting fields. The duct particularly the ducting So it is an early indicator. They're very early cyclically. You see we see that already in the last couple of weeks of Q1 last year, they started to go down Rather quickly as lockdown started, they are cautious We're optimistic what we've been able to do so far is to ride out or pass on steel price increases to our customers Whether we can hold the margins that we had in Q1 on a gross profit level, that remains to be seen, but Generally, a positive outlook for that division. And if they continue to grow sales volumes, then the margin is It should not it should be 15% to 20% in that division on a reasonably regular basis. I don't know what you say there, Sven. Yes. I agree. And they are focusing on efficiency in the major plants and That has had a good impact. And then, of course, they are volume sensitive in the sense that Growing volumes will generate higher profit and higher margins. So they should be in this exceeding 15% going forward. Perfect. And then the last question for me. Looking at the Monitoring and Control System division, The incremental margins are nothing that is short of impressive. So should we expect these kind of margins on the order intake we've seen in this quarter as well? Or how should we look at it? Yes. Perfect. Thank you. That's all for me. And once again, congratulations on the report. Thank you, Hermann. And we have another question from the line of Gustaf von Sydas from Cowgus. Please go ahead. Yes. Good morning, gentlemen. Good morning, Gustav. I hope you have a better weather than here in Stockholm because here it's snowing at the moment. So you reported as a night In this setback of spring movement, okay. I have a question regarding the process Technology, when you bought Luva a couple of years ago, was it 2018, Has the market changed competitive wise? The price pressure you're seeing now, is that temporary? Or is it structural? I would say what you have seen is that the price pressure is now I think it's temporary because what you've seen is a number of competitors, smaller competitors That has gone belly up here. We've seen that and some others are needing to, How should I say, fill the factories and try to fight because they do not have new product. We are launching new products, new ways of doing this. So I think that this is not a I would rather say that coming out of this structurally, it would be better because we will see that some of the low cost of the one fighting only with price, so getting out of business. And It will be for in the midterm a better situation. Okay. Thanks. And question number 2, the last one. The tax rate around 26%, is that what we're continuing to look at? Ask by them. What we could say on 26% is it probably you might sense it feels a little high. It depends very much where in which countries we're making the profit. We've I don't want to say unfortunately, we've made quite good money in Germany in Q1, for example, And that doesn't help. But it's very dependent it will be very dependent on the U. S. Rates going forward, whether 26% is Going to remain. If the U. S. Rates remained unchanged from where they are now and Biden completely back down, then I think you could expect Somewhat of a decrease from 26%. But on the other hand, the indications are that Probably going it is something is going to happen on that front. Okay. Thank you. Thank you, Gustaf. And as there are no further questions, I'll hand it back for any closing remarks. Okay. We thank you for taking the time. And we have Gustaf, sun is shining, although it's very windy here. So You have to fight the winter, and I hope that this report, as you said, give some light to you and waiting for the spring. So thank you for taking your time listening to us.