Earnings Call: Q4 2020

Feb 12, 2021

Good morning, everybody, and welcome to this session where we are going to present Nerman's Group Q4 2020 statement. Let's start with some statements. We have had a very healthy operating margin and a strong cash flow despite very challenging environment with renewed lockdowns around the world, political uncertainty in U. S. And protracted Brexit negotiations. On the positive side, the lockdowns had increased the interest for our digital solutions and our inside control, smart filters and so on. And we can happily now say that the fairly new MCT division is valuable part of the group exceeding SEK 500,000,000 in sales with good profitability. If If I move on to Slide 3 and talk through some of the financials before Sven gives some more details on what's happening in the 4 divisions. If we take the financials for Q4, first of all, orders for the quarter were €918,000,000 which is obviously higher than Q3 3 in 2020, but it's a currency neutral decrease of 17% versus the Q4 of 2019. Sales were €940,000,000 in the quarter and however, which is lower than last year, 10 0.4% currency neutral down. However, operating profit was at €94,000,000 which is 10% versus 10.4% last year, we see the effects of our cost control as it may meant that we've been able to keep the margins in percentage terms at least up. Net profit for the quarter, euros 55,100,000 which is earnings per share of DKK1.57 versus DKK2.06 for Q4 2019. If If we look at the full year financials on Slide 4, orders for the full year were SEK 3,480,000,000 Swedish krona, not million as the IOC that it said in this presentation versus EUR 4.16 €1,000,000,000 in 2019. That's a currency neutral decrease of almost 14%. Sales were approaching DKK 3 point DKK7 billion versus DKK4.3 billion last year sorry, in 2019, which is a decrease of almost 12%. Adjusted operating profit for 2020 was €296,000,000 versus €349,000,000 in the prior year. The margin for the operating margin for the full year was 8% versus 8.1% in 2019. Again, we see the impact of the cost control measures that we have taken throughout the year and our work on operational efficiency has helped with margins. Net profit for the full year was DKK 110,000,000, earnings per share, DKK 3.15 Regarding dividend, due to the continued high uncertainty, the Board is current proposal is that no dividend be paid right now. The intention with this is to maintain financial stability, also increasing flexibility for new opportunities that may arise. The Board will evaluate this situation continually and further statement regarding dividends will be made during this year and absolutely at the latest in the release of the Q3 report on the 22nd October. Moving on to Slide 5 now, this the Extraction and Filtration Technology division, Sven. Yes. Extraction Filtration Technology is the traditional Meermann branded product working with typically welding wood composite etcetera. The key activities has being to finalize the optimization of the operational logistics, especially in EMEA, but also some work has been done in the Chinese area. This means that we have a very good efficiency in our main plants in Poland and in Helsingborg. We have continued efforts to modernize and digitize the product range. This has very much been in cooperation with the Monoclon Control Technology Division. And we can now say that a large portion of the stationary filters are going out with Insight Ready modules, which we call the smart filters. And not later, but 2023, all filters sold, stationary filters sold will be in site ready. So they can be linked to IT Solutions with the proper control system. The division has been very early on handling the cost control issues with the lockdown starting already in the spring. And We have followed up that and have by that been able to protect our profitability. The main challenge for extraction and filtration division has been the lockdown, especially in Europe, partly in Americas and in Asia, we can come back to certain areas like India has been basically closed for 8 months where you were not allowed to have more than 10% people in at the same time etcetera, etcetera. But you all know about these things. During the quarter, Germany had order intake, which was positive. There was sort of a buildup of demand after of the lockdowns. Now they have new lockdowns. So let's see. Certain decline in Nordic countries, especially difficulties, Norway and so on. UK completely locked down and with the Brexit, but we have being able to maintain the delivery capacity because we have several years to plan for it because it was a long painful process before we finally got done. In France, we had a breakthrough order for the wind power industry in southern parts of France and we are glad for that. And we will handle that with technology support from our Nordic countries. In Spain came back and were in line with last year, whereas Belgium and the Netherlands has being very impacted by lockdown. Poland, however, has had good growth in many areas, both with both in food and in composite manufacturing as well as traditional wood, which is strong in Poland. The distributor markets grew compared to last year, which was positive. India had a very strong Q4, but as we've said, it was lined up for that when they finally opened after many months complete lockdowns. Wind power has been and still is an important area for us there. Thailand, solid growth. Other or APAC country mixed picture. North America, we were slightly behind a very strong Q4, but we had some good orders. Brazil, where they have had less lockdowns compared to other place, we have a continuing strong trend. If I talk through the financials for Extraction and Filtration Technology, In quarter 4, order intake was DKK 450,000,000 versus DKK 5 12,000,000 in Q4 2019. That's a decrease of 8%. Sales was DKK437 1,000,000 in the quarter. So we see we actually built managed to build backlog in that division. Adjusted EBITDA, SEK 65,600,000 gives a margin of 15%, which is actually ahead of the Q4 of 2019 of 14.9%, and this is despite negative currency impacts that are particularly do have a bigger impact on this division than the others. For the full year, sales SEK 1,650,000,000 versus SEK 1,940,000,000 2019 is a decrease of almost 12% or currency neutral. It beat DKK222 1,000,000 versus 263 in 2019. There was a margin of 13.4%. So almost in line with the 13.6% that they had in a very good 2019 with obviously significantly currency market conditions are obviously significantly more favorable. Moving on to the Next division is Process Technology and back over to you Sven, Slide 6 now. Process Technology is here where we have mainly large installations including the processes. This is foundry, smelters, metal recovery and the fiber manufacturing textile side of it. The key activities is the ongoing digitalization of the product line, same as for the other division where together with MCT division, they gradually add more and more features and capabilities in these. 28 of the large installations made last year were completely fitted with what is called then MicroProAssist, which gives all data online in the cloud based services and we are continuing to build the capabilities giving more features to the customers, which mean that we can claim that we are future proof supplier in this field. Very important to continue with that. Focus on strengthening orders received, obviously. This is the divisions that has been hardest hit by the hesitancy, the lockdowns and the restrictions and thereby jumpy investors. We come to the Textile segment later. Securing profitability in the short and long term, we are very glad that due to the activities made, we've been able to be profitable, which is not all competitors that can say that in this very challenging market condition for this division. Some brightening if we say that for the quarter, brightening in the marketing can be seen. We see that project that was halted early in the spring and now sort of gradually coming in live. We have also with the cost control mentioned over cut the expenses were over 20% and that gives us the maneuverability. Taking 2 segments, textile, we have to realize that for a period of 7 to 8 months last year. 65% almost of all textile fiber based which were completely closed down, more or less completely closed down and that does not give a good incentive for further investment. We now see and we have this side of New Year. Lead landed some orders, so it starts to roll again. The Indian market, especially is important in this case and they have been as mentioned before with an enormous strong lockdown very affected. China remains a bit difficult. They have been reduced and that has also to do with the trade war between China and U. S. Where now a lot of that Industries moving to other countries like Vietnam, Cambodia, etcetera. The monitoring solutions are growing and it's part of the standard range. We will further link that to the Insight solutions and the measurement and monitoring systems that will further enhance and make it even more attractive with new features just as we continue to develop that capability. If we go to foundry smelters, the key market have some signs of recovery, metal recycling. Generally speaking, it's not a lot of new other trends, but one trend is recycling could be and should be an interesting area. Service operation continue only with the practicalities that you are not allowed to side and that has been a problem. We are seeing that as a continuous issue. And again, the only positive we can say about that is that there is a growing interest for the remote monitoring that we are supplying for DD7 with the text file with the microphone assist with the combination of sensors, IT solutions, sending to the cloud being able also to solve some of the issues over phone and over the web. Over to you. Financials for Process Technology Division. Orders received for the Q4 were €248,000,000 That's a significant drop from an extremely strong quarter 4 of 2019. It must be pointed out the drop is approximately 43% currency neutral. Sales for the quarter were DKK262,000,000 versus DKK360,000,000 in 2019. Adjusted EBITDA for Q4 2020 was SEK 9,100,000, which like Sven said is positive, which compared to some factors, we suspect having large issues there. But the €9,100,000 gives us an EBITDA margin of 38.5% versus 7% last year. If we take the full year order intake for Process Technology, €99 €3,000,000 versus €1,462,000,000 in 2019 is a drop of 30%. Sales, dollars 1,137,000,000 giving an EBITDA of SEK 58,100,000, is kroner, which is an EBITDA margin of 5.1% versus 6.2% in the prior year. If we move forward on to Slide 7, we talk a little about duct and filter technology. Yes. Duct and filter technology. We are supplying special duct for systems with high dust slopes and we also supply filter elements to the filters. The key activities has been the decision and ordering of a fully automated pipe welding system for the European market. It will be placed in our factory in essence, in Utepland, Denmark. And it's an important further step to increase our capabilities both when it comes to longer pipe and efficiency. So we are looking forward to continue to grow the European business the same way as we've been able to do in the Americas and partly in Asia. And we will also revise investments in the Asian business later during the year. We have launched WebShop again, digitalization, make it easy. They have the slogan in this division, fast, friendly and reliable and now launching the web shop starting with U. S. And will roll it out in other areas. We have launched new system product for the food industry as an important part of this. The development in the quarter was positive in most markets. But again, the renewed lockdowns in Europe had some negative impact there. NoFUB, under the brand name that we sell the pipe. We grew orders both versus last year's Q4 and also continue the good and we had a better order intake than Q3. And a growing number of digitally orders, the web shop and EDI and so on. So we continue the digitalization, not only with IoT solution, but also and the normal operations. In Europe, we had some negatives again. We blame it on the lockdowns and but we grew versus the Q3 2020. So that's still a positive trend. And again, the Thailand plant is working farewell. Yes, we have for the Menardi, we feel that we have increased opportunities and some of the earlier postponed orders are now materializing again. Again, it starts to move and starts to roll again. On to the financials reductive filter technology, Order intake for quarter 4 was SEK 101,000,000 versus SEK 89,000,000 last year, which is 15% currency neutral growth. Sales was slightly it was 100 slightly higher than order intake, €106,000,000 which is 8% down from last year. However, due to better efficiency mainly, we could say, in operations, but also good cost EBITDA was DKK20.8 million versus DKK8.3 million in Q4 last year and that's an EBITDA margin of 19.7 percent for the Q4. For the full year, order intake was €403,000,000 which is 12.8% behind the full year 2019. Sales was SEK 458 458,000,000. That's approximately 16% down versus last year. EBITDA, DKK 64,000,000 versus DKK 69.6 in 2019 is an EBITDA margin for the full year of 14% versus 12.5 sent last year. So we see that the operation the overall division is operating in a more efficient manner now. I think it's worth to mention that duct and filter technology is normally in the early warning. They are moving much faster than the other divisions when it comes to if you see a change. So it's little bit of positive sign that they had a good Q4. Absolutely. Moving on to Monitoring and Control Technology, Slide 8 now, Sven. Yes. Monitoring control is where we have our IoT solutions with the insight, NERMAN insight. We have our measurement control for gases, particles and we have that fairly new. As you know, it's been from our own development as well as the acquisition of specialist that are technology leaders in their field. Key activities has been to launch new functionality in the insight, improving flexibility and use of friendliness for the platform. And we have now a very strong platform that can continue to deliver new functionalities in an easier way and gives it more trade more attractiveness for the user. We have established business toward the process industry in the U. S. And that is progressing. U. S. Has been beside AFS, the Boston based company has been a weak spot for the other European based companies. We further focus on digitalization of all key processes. Development in the quarter, the trend for product sales and service mine divisions end customers was very positive for development in Asia. Though the development in Asia was affected to some extent by travel restrictions. Some of the activities and growth initiatives we had planned or had planned during the years has been hampered by the fact that we have not been able to send people. We have not the travel restrictions had slowed us down. The OMA orders declined somewhat compared to Q3 2020. Again, large variations, but remission related sales generally has negatively affect than process control, meaning and what we mean that that process control is ones that are in the process and more linked to new investment. APAC orders were also slightly behind the Q3 2020, but the mission related sales were relatively strong. Sales in Americas increased significantly compared to Q3 and also Q4 last year. We are now able to go to market directly with our process oriented product and services and that has been well received. We have also increased our capability with local or regional, I would say, based service technicians, which is also giving us some good results. Moving on to the financials for Monitoring and Control Technology. What we must remember when looking at the financials for This division, particularly in Q4, is that we owned Gasmet in 2019 for only a short portion of the year. The acquisition was completed just after the turn of December. But if we take our incoming orders for the division, DKK 118,400,000 in the 4th quarter with currency neutral growth of 30%. Sales, €152,100,000 in the quarter was a good quarter for them there versus €14,600,000 last year. That's currency neutral growth of 37.6 percent. Adjusted EBITDA for the quarter, 34.1 percent versus what was a very strong Q4 last year as well as 32,600,000 EBITA margin now for that division in Q4 was 22.4%. And if we move on to the full year for this division, order intake just shy of DKK0.5 billion, 496,000,000. Sales just over DKK0.5 billion at DKK507 1,000,000. That's a growth of 87%, which we're obviously pleased with. Adjusted EBITDA, DKK 94.6 SEK 1,000,000 for the full year 2020 versus SEK 44,600,000 last in 2019, excuse me. The margin EBITDA margin for a full year now 18.7% versus 15.9% in 2019. If I move on to Slide 9 and look at the regional development, I will spare you the pain of reading out all of the numbers on this slide. But I think the most important takeaway we should have from this and it's true for both the quarter and for the full year is that you see the delta the drop versus 2019 is most significant in EMEA, where we have seen the heaviest lockdowns and the most prolonged lockdowns. Americas and APAC have seen a decline in both Q4 and in the full year, but not by as much as we have seen in Europe, like I say, where we have seen this lockdown restrictions, which impact both investment decision making in terms of particularly in terms of larger projects, but also hampered to some extent the service business in terms of accessibility and so on. If I move on to Slide 10 and look at the cash flow from operations, we see a somewhat more steady development throughout the whole of 2020 versus 2019. But we still see this very strong Q4 of the year, I mean, even in 2020 and cash flow for the full year from operations in 2020 actually exceeded that of 2019, which We are obviously very pleased with this is something we've worked extremely closely with in these tough financial times is to ensure that our operating working capital is utilized efficiently. I'll then move on to Slide 11. It means that you see a drop in net debt in the Q4 of the year. We've seen a steady reduction in debt from the Q1 onwards. The majority of that change is due to the good working capital development and cash flow performance. If we move on to the Slide 12, a little summary of Q4, I'll let you Sven take that. Yes. Let's have a very short summary of the last quarter of last year. X-ray and filtration technology. The lockdowns, especially in Europe, has had a major impact. We have seen growth in APAC. And despite all the difficulties, a healthy profitability, Process Technology have seen continued postponed investment decision. Though we can see now early in this year that there are some positive signs in some area more than others. The good cost control have given continued profitability. Dark and filter technology, growing order intake, increased production efficiency and thereby better profitability, monitoring control technology, strong sales and high profitability. A continuous improvement in NERMA's digital product range continue here. And we continue to spend time, money and efforts to stay ahead in this game. And we see more and more interest in these solutions. So for the group. Profit margins, good, strong cash flow. However, still mixed signals from the market with some positive signs, but the lockdown impact is still apparent and we are waiting to see what happens during the coming months. Finally, on to the outlook on Page 13. Yes. The outlook continued extreme uncertainty regarding development of the global economy. For the Q1 of the year, Nerman expects the effect of COVID-nineteen pandemic to remain significant in most of the group market. The vaccination programs that are now being initiated throughout the world had the expected effect on the global spread of infection, we anticipate a cautious recovery in the second half of twenty twenty one. Accordingly, it's currently not possible to provide detailed forecast of developments in coming quarters. However, during 2020, NERMAN conducted the series of measures to maintain healthy profitability and the effects of these measures should continue to be seen. We still see good opportunities to further advance our position, not least by launching new products and continuing the development of our digital offering. The problems with poor air quality in the world remains extensive leading to larger number of people buying prematurely every year and the underlying need for NERMANS products is significant. The final slide on financial calendar, we released the figures for our Q1 on the 22nd April, 21, the AGM is 4 days later on April 26. January to June, Q2 is released on July 15, and and the Q3 report is released on the 22nd October. With that, I think we can open up first questions. Thank Nirmal. We have a question from the line of Marcela Klein from Handelsbanken. Please go ahead. Good morning, Sven and Matthew, and thank you for the good presentation. Obviously, the pandemic is affecting many companies. And you also gave a very good overview of the outlook, what you can see right now. Do you have any feeling how your Competitors are managing or how your customers are managing, are there any potential structural opportunities For you appearing for future M and A or something like that. Yes, difficult to answer in a politically correct way, but We have never had so many requests and inflow of You can say like Exactly. My inbox is receiving more teasers from companies than for a very long probably ever. So they are coming in quick and fast at the moment and they are being evaluated. Some maybe a cash flow issues and others see the opportunity maybe to divest certain parts of their business. And what's going on with you, one please? It's always we are always Lutin, you know that we are evaluating all the time. Let's see what comes out of this. We are obviously also focusing our interest in what will give synergies with the investments made and have a special interest in continue to grow the new technologies we have in the MCT C. D. Rachel. Thank you. You mentioned a lot of modernization and digitalization activities for 2021. What else are you focusing on in this year on maybe on a group level in terms of further cost actions adjusting capacity or what they are focusing on near term? Well, I can make an attempt at answering that. In terms of the cost cutting that we did in 2020, we don't see Right now as long as there is not a significant change or significant further drop in the market, we don't see that those activities will need to be repeated. We will need further to do more there. Obviously, we are working on a sort of 1 foot on the gas, 1 foot on the brake here and Things are as we see the market opening up again and this investment decisions coming in and such that we will look to obviously to take those opportunities and that if that requires more investment in personnel or whatever in in terms of operations, we will make those changes. But we don't see that there's a need for further costs now. We see on the level of revenue that we had in the Q4, we still managed to achieve a 10% EBIT. Okay. The absolute numbers in Swedish krona are not as high as we would like to see, but we're quite happy with the margins that we have right now at least. Of course. And then obviously follow-up question, is this cost level sustainable once we start opening up and traveling more and spending more? What I can say to that is we don't see in the short term that we should need to accelerate costs at the same speed as sales would increase. So the cost level is to some extent sustainable. Of course, you can't growth forever without increasing your expenditure. But the growth we would expect the growth in sales to out run the growth in expenses at least in the short term. We are in some way But what we are doing is that there are significant layers and since some companies are barely up at the moment. We have taken the opportunity to add on and exchange some senior persons, especially in sales and market development around the world, where we felt that that is an opportunity. So that we add and all we added, we continue to develop our product. We are launching new product continuously now and we will during later in the quarter as well new features also including maybe in April including gas masks for the inside control so they can start doing remote services on their equipment, etcetera. So that's a continuing efforts. So we have not halted our development when it comes to these. Then we when you talk about digitalization. It's not only the IoT solution that is digitalization. We are trying to be as modern as possible with new quotation tools modernizing. We will have a completely new quotation tool web based for the ducting systems here late March, early April, which enables the installer to basically do the drawing from a drawing just make a billion material coming out with us and that's instead of a 3, 4, 5 hour exercise maybe an hour's Society. These type of efficiencies again fast, friendly, reliable that is investment when we talked about digitalization, not only IT, not only remote control, but we try to be, as we say, future proof for our customers going forward. Understood. In terms of capacity Utilization, what level are you at right now? Low. Less than 40%, 50%. It depends on how you are calculating. If you extend to shifts, then of course, you but when it comes to the manufacturing side, we can increase, I would say, easily 20%. Absolutely. Yes. And that also basically helps with keeping the costs down in the first phase of the opening up and recovery. Which segments do you expect to be the first ones for you to open up given the latest signals you are receiving? Where the need is the underlying need is the strongest and the investors already. That's not the same thing because the need is very strong when it comes to recycling material, but it's longer process and it's bigger investments. I think that there is a growing interest in if you look at recycling, whether that is recycling of waste into LNG or recycling of metals or other recycling. That's a long term trend which we believe will be very strong. But again, this is long cycles and we've seen with the heavy investments needed there, this is also depending on the regulations and so on. So that I think that in short term you will see in the engineering sector, the fastest bounce back in EFT when it comes to when they start producing again. We will probably see service after and so on in a number of areas in especially textile that has been so pushed back there that will be a need to start the weekend. When it comes to the where I believe that will be a continuous demand is the measurements control because the way we have team working over the last year. There is a growing interest in understanding that things can be solved over the web even if they're not used to do it that way. So I think that that will come back. And it's also so if you really want to control your emissions, unique to understand and measure it. So I think that could be bounced back fairly quickly. If we open up for it and it happens. And you can see the regulators in China especially are now pushing for measurement and we are in the front line of capabilities when it comes to mercury, diet science, Zepro and we've seen that the drawback is that we haven't been able to travel. We haven't been able to visit and show and set up the structures and limitation also with installations. So It was a long answer, but it's very difficult to say because it's going to be depending also on what the industries get back to business first. But as you see here, NOLFAD will deduct that installation. Into number of installations that's been held back because they haven't been able to assess sites. There's been slow down, slow down. There they have seen a recovery last quarter. Next division probably to follow is EFT and MCT. And then the one that will take some time probably is process technology. But you don't know if someone decides then of course we take, but the process of getting it through takes several months. And maybe a final question for me. Do you also see any of these subsidies, The green deal programs affecting you directly or indirectly and supporting demand for your products. Not in the short term, potentially long term. The green subsidies is very much being focused also on green gas emissions in the sense for some reason whereas we have which is a bit dubious when you see that the jargon last week publicized new. We have said and never heard before, a new report that €8,700,000 minimum €8,700,000 annual deaths in 2018 could be attributed to bad air quality. And China themselves said that at least 20% of all deaths in China or related to that. So again What you can say on this is that not directly in the short term is because of what Sven says, a lot of this actions engines are focused on CO2 emissions. However, they should drive new investments regardless of what they are, which are beneficial for NERMUN. And we see and we have a feeling that there's a lot of discussions on what is green and what is not at the moment. If you take the Swedish forestry industry and things like that, Those are lobbying very hard. So we suspect that there will be changes to the system and what investments come in and that will further benefit Nerman going forward. So in the mid long term, definitely it will have an impact. And the awareness we try is growing. Yes, true, true. So a lot of opportunities and Hopefully, the vaccination programs throughout the world don't get hit by further delays. And we all can start returning back to normal towards middle of this year. Thank you so much. That was my questions. Thank you. We have a question from the line of Herman Eriksson from Handelsbanken. Please go ahead. Hi, guys. Thank you for the presentation. So my colleague, Marcella, covered most of our questions. So I just have one more question here. So Looking at the orders and looking back at 2020, to what degree should we just see the lost business during the year as simply postponed and to what degree as lost business? How to answer that? What we have this discussion a lot. The One thing that we should point out is that we don't feel that we have lost market share. Probably on the contrary, but it's a very difficult science to get there, then to break down what is lost and what is delayed, that's quite a difficult one. On Process Technology, the majority, I would say, is delayed. We still see that we don't see projects canceled, but the willingness to make the final decisions or even the practical ability to finalize projects is severely hampered and that's not a good thing. Sven, I don't know, maybe you want to say. No, I think you covered. It's not that projects are closed, but it can take some time before they have financials or willingness to do it. We have to realize in the number of cases we are just a small portion of the investments. Great. Thank you very much. There are no further questions at this time. Please go ahead speakers. So if there are no further questions, we thank you for taking the time listening to us and will meet again we hope in April. Thank you very much.