Earnings Call: Q2 2020

Aug 13, 2020

Ladies and gentlemen, thank you for standing by and welcome to presentation Q2 report 2020. I would now like to hand the conference over to your speaker today, Thomas Wissam. Please go ahead, sir. Thank you, and very happy to be with you again. Thanks for joining in. I will talk about, obviously, the SuezGroup's Q2. And as a basis for this, I have as usual for those who are following what we normally present. We have the sort of report that you can find in our web page. And if you find the script for aim for investors, we have the reports and then we have second quarter. You will be able to follow all what I say without exactly following this format. But for those who are who wants to follow, you can find them more or less what I say as a summary on the web page under Investors and then Reports Q2 presentation. If I then start by introducing Clorox, I do that very briefly because I think most of you have a certain understanding of what Truax is. But the first page shows, of course, then our mesh panel, our fantastic mesh panel that are aimed and created and a lot of safety for people who are working in this kind of environment. We continue to show you a little bit of public relationship and saying that we try to do a lot of safety in every aspect. And then I come to the first introduction picture on our 3 different segments that we are working with. The first one is machine guarding. And as the name implies, and as the picture shows, it is actually then parametric guarding around some of the loblates that need to be protected or rather the persons need to be protected from this. This is our biggest segment. We talk about 60%, 65% of our turnover based on 2019. The 2nd biggest is called warehouse positioning, 24%. And as you can see from the picture and also probably from the name, we're talking about also installing selling solutions for warehouses either to protect people from what is falling down from the pellet themselves or to protect people who are working with picking and from, of course, also from objects, loose objects, but also from the forklift trucks that could be manual or automatic and going around in different places on the field. The 3rd and the smallest one, but still very important for us is property protection. And as the name implies, it's not really protection that are used to protect people. It's more than for protecting property. So these are mainly for multi store houses where you and the seller typically have cases where you can store skis or bicycles or whatever you want to store, so to speak, with you, which you don't use at this very moment. And this is approximately 14% turnover. Part of what we sell in machine guarding and also part of what we sell in the warehouse part is a combination that we call internally for automated warehouse. It's quite interesting because this part is growing substantially. Obviously, then, and that the increase in e commerce, which are really more or less exploding in the last 2, 3 years. We don't take so many show any figures of this because it's part of those 2. But I can at least say then that it's a very interesting segment, which is growing at least with double digit figures in the last 2, 3 years. And we do expect that this trend will continue and if anything, probably accelerate further in the coming 5 years since this is a trend which is really, let's say, helped them by increased technology for improving efficiency in automated warehouses. Next page is a summary of the year of 2019. We've gone through this several times. So I don't indulge you too much in the figures. But if you look at the left high, which is there, I'm talking about the turnover for the different geographical regions. You can see then that still Europe is extremely important for us. If we put together the total of the European regions, we have approximately 80% of our turnover in Europe. We have 15% in North America. And this morning, the markets which are supposed and over time to increase substantially, it's been only on 4%, 5%. I go quickly and turn to in this case, for you will follow the forms, something about 2019. We are a growth company, but in the last year, the growth has been, I would say, a bit meager, partially because that we used to be quite dependent on the automotive sector. 5 years ago, we had a third of our turnover in automotive sector. And as you all very well are aware, the automotive sector has decreased substantially, which in a way is good for us from a dependence point of view, but of course, it's quite good for business if you get follows from the automotive part. So that's part of the reason why the growth in the last couple of years has not been really what we would like it to be. But over a longer period of time, we've had approximately then a growth of we normally talk about 8% to 10% of the business cycle. And I think the actual figures in the last year have actually been slightly higher on that. Moving on to financial targets before I jump into some comments about the Q2. We have put up 4 targets that we were normally then discussing or communicating about. And the sales growth is very important for us, obviously. And we are, unfortunately, after the 1st 6 months, 5% down in the organic growth in orders. And that's, of course, because of the rather negative development in orders in the Q2 due to corona effect. Even if I want to stress then that it's probably better than what was expected at certain stage. There has been no acquisitions at this very moment. We are still very interested in doing acquisitions, but it's, of course, very difficult to pursue that in a practical way right now since there are limitations on traveling in certain. On profitability, we have the target of reaching 20 or above that EBITDA margin, and we are close to 17 after the first half year. We are normally a little bit lower on the 1st 1 and 2 quarters. We are improving in Q3 and Q4, But without giving a forecast, I can say due to the probably maintaining effects of corona. However, that will be small or bigger. We don't renew at this very moment. I think it will be actually quite difficult to reach to 20% for 2020. On the capital structure, we have the net debt in relation to EBITDA, and it should clearly be below 2.5 and we are at 1.1 at the moment. So it's a very good stable financial situation. Even if this time, due to that, we postponed the Annual General Meeting, we are paying or have actually paid the dividend in July compared with previously when we paid it in Q2. So this EUR1.1 billion that I just described, it will probably be a little bit worse than after the payout of the division of obvious reasons. And again, on the targets to pay dividend, we're normally saying 50%. We have originally proposed to pay approximately 50% or slightly below that, but due to the corona effects and the possible discrepancies, which could come up due to that, we decided or already and you're trying to meet and decided to take the Safeway and reduce the dividend to 50% of the region's proposal, meaning in practice, we are off to paying out 25% of net profit this year. Obviously, we aim to come back to the 50% for next year. Coming in then to some comments on the Q2. We can, of course, all agree that Q2 was a quite turbulent quarter, and I will give you a few examples of that. But nevertheless, I think that Trucks as a group still generated a stable development, seeing this in the light and of the what happened in the Q2. We had a lower EBIT result in the morning in Q2, and it was clearly then, I would say, due to the effect of the coronavirus. We have not had any other really negative effects that have had any significant effect. I would say, on the contrary, I think a number of things have been going actually better than before during Q2, and I will comment a little bit on that later. There were, of course, lower sales recorded in most areas, and obviously, we are very dependent on the sales. So if this top line is getting lower, then of course, it has a certain effect on the results. And the sales were obviously then reduced because we noted a substantial decrease in market activity. And especially then in the beginning of the quarter, it was very weak. We saw in the end of March, of course, a drastic reduction of activity. And that continued especially in April, started to improve a bit in May and we're actually then once that is better again in June. So if anything, the trend was positive then during the quarter. Obviously, the earnings per share was lower than last year, unfortunately, because of this effect. And there's nothing more to comment on this simply followed with the sales and lower result. Now one positive thing is that the improvement process in Falling Oil was continuing in Q2. Still, the order situation is or was on the weaker side due to the fact that the whole organization was more or less closed in April May due to requirements then from the government, the local government in Illinois where we are situated. As you probably know, we are mainly situated in Chicago. And in this period, of course, it's difficult time to get a lot of orders since both the factory was closed and a lot of customers then, at least in the states where the same situation were prevailing, could not, of course, come in with orders. On the other hand, we could keep our customers happy by sending out goods from the warehouse and also helping from other units. So I think from a dealer point of view, it was acceptable despite there were, of course, a lot of problem. But this point is really aiming to say that the improvement process in Poland is continuing even if, as I said, as I've rightly heard, the oil situation was still on the weak side, probably at least the major part is based on this requirement to keep the organization closed during April May. On the working capital, it's more or less an expected level. We have increased inventory partly, I would say, to handle the negative effects of the corona virus. So we are quite happy actually to do that because there has been certain problems in the supply chain, which I think we have overcome and due to the fact that we on an earlier stage started to build some sort of increase in inventory. The investments then that we have been doing now for a couple of years, they are according to plan and we are actually now in the final phase in phase. And I will give you a few comments on that a little bit later. The first comment related to that is that the new factory in Italy, which was a real new operation started in January, has been running quite a good way in Q2 despite some lack of volumes. But the productivity has been increased. The processes are improved. We can see that also the cost level are improved. We also, to certain extent, I would say, is reflected in a better gross margin in the period. And the factor has been producing in the whole period, despite the problems that Italo has been having and the same as Italy for the main production plant we have in Sweden. I can say also there has been a really layoff or so in Sweden for those who are interested, but we have, of course, reduced number of people who are employed on a short term basis. Going back then to what I said before that talking a little bit about the marketing situation, we said that it was considered very weak in April and at least part of May, but it was improving during the latter part of the quarter. And I think as some sort of estimate from our side. We can see then that most probably so that the bigger customers continue to pursue and the installations of already ordered projects and they're putting orders to us for installment during this period or later, whereas we saw clearly around that smaller and medium sized customers were reducing, especially during the difficult period of it. And I come back a little bit later during the quarter. So it was very clear that the customer mix changed during the quarter where the bigger customers were those who were continuing to put in orders on at least on a reasonable level. So the weak part was really the smaller and medium sized customers in the quarter 2. Jumping a little bit to more comments about the segments. Automotive is still continuing to be weak segment. There have been some orders during these months, so it's not completely black. We have before said that we expect the automotive to come back and at least improve the investment program during this year. And I think based on the development now with the corona and some comments we've had, we are absolutely sure that unfortunately, the improvement in the investment programs for a lot of these big companies with the further delays. So we are not expecting really improvement from the automotive sector until earliest during next year. On the other hand, we have had very positive positive development in the quarter again from the Automated Warehouse business, and we can clearly see that and this was, of course, long before the corona effect, but the trend of investing in automated warehouses continues. And now also we can see that not small companies can do it because there are a lot of money along these CapExes. But it's not only the big companies who are doing it, mainly retail companies. It only goes down a bit to that in at least we can call it medium sized companies are starting to look into these, which are positive for the future. So we don't give any focus, as you know, but we do expect then compared with last year, a decrease in our models in Q3 due to diminishing activities created by the coronavirus. Then of course, we don't know how bad it will be of obvious reasons because if there will be a second phase, of course, it could be quite negative. But with what we know today, we are expecting a clearly decreased demand. But I'm sure we're going to show some positive things at least during the Q3 even based on this. We now come to more to the figures. I don't have the intention of going through this in a lot of detail, but you can see then that as some sort of summary that, of course, orders are substantially lower than same quarter last year, which in itself, that was a very strong quarter, but regardless of the efficiencies have decreased by 19%. And the sales force decreased by 15%, partly then helped by that we had a good order intake in the group in the Q1. And still part of that good order intake will de lever only in Q3 and maybe perhaps something also will remain until the Q4. So obviously, based on the lowering of the sales, the operating profit decreased. So we had an operating margin then of close to 18%, which is a little bit more than 2% lower than last year. Still, without saying that this is, of course, not very good. That will be decreasing the result. But based on the situation and what's been happening in the market, I would say that it is quite an acceptable development. And it gives further basis for more investments in the future for us. We can see that we continue to take market shares and we have a good base for further development. We have also, which everyone should understand, due to the corona, we have received government subsidies in the USA and the UK during the quarter, total amounting to SEK 1,300,000 and this has been recorded separately under the line of their operating income and expenses. On the other hand, of course, everyone should understand if we haven't got these subsidies, we would have, of course, been forced to make rather substantial redundancies. So it's difficult to say what the effect would have been. If not, we had to receive it. But clearly, it's, of course, that in the USA and the UK, we have received substantial subsidies. This, of course, has helped to offset some of the negative development otherwise we would have seen during the quarter. So conclusion for the first half year then is that we are 5% behind last year in orders and 6% in sales, We are €1,500,000 after in operating profit and we are approximately 1% below the operating margin. On the order intake per region. A few comments I think are valid that you can see that in Continental Europe, it is, of course, a substantial decrease. And especially, I would say that the South Europe has been hit rather substantially during this period. Nordic region, very stable, has been hit less by the corona. And I think also the fact that we have more long term projects there related to the billing industry is, of course, positive short term. UK this quarter was clear rather negative. And if you remember, I've said before that UK is also includes some export orders to other regions. And in this case, we didn't get so much orders as last year. So obviously, it would be negative effect. And in North America, it's reflected on that we had to close down the actually most following order in the TRUVOC operations then for almost 2 months. So obviously, that had a negative impact. But the paradox is still that we're showing not too bad development and result wise, especially for full compared with 4 before. And I must say also that the TROEX, Inc, we saw a good development in the last 2 years or 2.5 years. Is continuing behind these figures to show, I would say, a rather good development. Positive in new markets is that we are growing, but you see also that the figures are low so that you shouldn't be too positively surprised over the high figure in growth. But we are, of course, glad that we're increasing. New markets mainly consist of the APAC region, so China, Japan and Korea, whereas if you remember, we also now include TRUVAC sales unit in Japan, which was previously not against. Sales has more or less a similar pattern, even if the Nordic region shows a low development on the quarterly comparing with the order side. Right. I think I'll continue with my further comments, as I call the conclusion. And that's been obviously then substantially weaker market activity, especially during the 1st part of the quarter. And as I said, we noted on that, especially a small range size customer that were hesitant to commit to new orders. And unfortunately, we still expect a weak market activity. Let's see how it will be, but we expect a weak market activity also during the Q3. Regarding the customer segments, as I said, there was a continued low demand from the automotive industry, but quite positive in the Automated Warehouse business, and we do expect that to continue. Regarding North America, Clarks Inc. Is continuing to help well, even if, of course, the order situation could have been even better, for Clarkson and Follinger was hit during the quarter by the compulsory shutdown. In the European operations, I think one could say, at least my judgment is that we have had stable, but of course, lower activity, in some cases, substantially lower activity in European operations. But nothing has happened, which has really turned anything really negative. We see it so far as a temporary drop and probably there will be some sort of drop in Q3 and then we hope to see how it's been developing. But it has not changed anything negatively for Kurz Group for the future. So we continue to do in a cautious way, obviously, our market investments, not perhaps just like before, but we try to do it in a constructive way. New factory in Italy was continuing to develop well despite some lack of volume. And the factories are selling UK and USA was in principle closed from end of March to end of May, whereas the Italian and Swedish were running during the whole period even if the lower production volumes. And also the Chinese, the small Chinese factory was running during the whole period. And we can see, of course, that China is running ahead of Europe and North America in regaining or coming back to where it was before. That's at least what we saw during the Q2. And the dividend was paid in July. So I think then that we have done what we committed to do. Trying to run off then my little presentation, I can say then that the growth factors, which comes physically on the next page still remains. There will still be increased to industrial automation. Of course, there could be little bit lapse in the curve because of the corona, but long term, this is still valid. There are still, especially in the United States, the trend of onshore in our manufacturing, maybe that will come a little bit in Europe as well. There continue to be growth in e commerce, which of course is positive. And the understanding of safety is continuing then to, let's say, increase. We are still a market leader. I don't think the we come back we will come back with more figures towards the end of the year because right now it's a bit chaotic situation to assess the market. So I'll try to round off there and just say that we're safer tomorrow. We are also, of course, then focusing on more climate compensating program, reducing energy consumption. And as I said before, in the investment we have in Italy, we have made sure then that approximately 50% of the energy consumption will be covered then by solar panels, which, of course, is good for the consumption for the environment and also, of course, for our cost. So with this, I think I stopped there with the presentation at us and I wait with some eagerness of your question regarding Q2 because despite the fact that we are hit them by rather lower demand, I think that the result is, I would say, acceptable. But let's see what you've got to say. So Mr. Operator, if you would like to start the Q and A session, I would be happy. We have one question from the line of Daniel Limpuez from SHB. Please go ahead, sir. Your line is open. Perfect. Thank you. So hi, Thomas. Just a few quick questions. Then on the you talked about the gross margin. Could you just elaborate, I mean, comparing to Q1 where you only had minor effects from COVID-nineteen and now you have more effects with shutdowns and lower capacity utilization, Still, you have an impressive gross margin. Could you just elaborate on what's behind the gross margin this time around? Yes. I think that's a very good question. I think that's what really is clearly identifiable. I would say it's a combination of different things. Firstly, is this sort of even if it's full, of course, it's closed. We were doing relatively well during the part of the quarter. We had some good projects with very good margins. So in the sense that we were able to compensate part of this with everything from purchasing prices to better productivity. So it has didn't have this big effect as you might expect, and we also expected when we saw this growth effect of the corona. Secondly, I would say that Italy, our factory was started in January, have improved very much during the second quarter and increased the margin, which is good also because we have a new machine and better processes, etcetera, etcetera. So it should continue like that. Generally speaking, also on the sales side, we have had no really negative impact on a lot of reduced prices. On the contrary, I would say that the projects we have installed and sold during the Q2 were probably on the more positive side. So we had a good both product mix and a good rather good customer mix. And on top of that, there's some sort of general comment also the Swedish manufacturing. Even if cost volume were not same as last year, costs have been reduced. So we have quite a decent development cost wise also in that factory, which, of course, has usually impacted such as the biggest one in the region. So it's a combination of all those things, which then makes slightly surprising. I can understand that margin for the quarter was quite reasonable. Yes. Absolutely so. And then just on you touched upon the order intake. I mean, the conversion from the order intake in Q1 in the U. K. And U. S. Was low for natural reasons, and you're expecting that to come back some in Q3. But then my question is just from the Q2 situation, how much of a pent up demand or pent up orders should we expect in Q3? I think as a sense of basis for what we're expecting is that the market activity will clearly be lower in Q3 also. On the other hand, I think that is quite right in saying that there probably will be some demand, which should normally have been recorded in Q2, which will come in Q3. And that might, of course, a certain effect offset than the negative general trend, which we are expecting in Q3. How this relation, of course, will come into is just we have to come back to that when we deliver our result for the Q3. But the logic is right and the thinking is right, but the assumption that we are working with, and I think that's still valid, is that there will be a reduced amount during the Q3 as a net effect. Great. Then Jan, my last is more of a comment. I think normally, you have to read your CEO statement time after time to see what you really want to say in the report. But this time around, it seems very straightforward. Should we interpret that as that this has been a more normal quarter than we've seen lately, even though it was normally in many other ways? You're absolutely right, Don. The priority is actually, as you say, but besides this being a little bit of, I call it, a chaotic quarter with lots of problems created by corona and you have to handle that. But I would say that despite this, the business itself has been running in a rather good way. So now actually besides the corona, very few effects to comment upon. And those have occurred have been slightly on the positive side, not an 81, but slightly on the positive side. It's been a good quarter, you can say, from this point of view. And yes, I think you should interpret my sort of comment this time that we are, of course, rather humble about the situation and we don't think we can forecast that this is going to happen now because of the corona in Q3 or Q4. So I think we are leaving it a little bit like it is, saying then that this is what it was during Q2, no major surprises, I would say. Let's see now what happens in Q3 and Q4. So many things that happened, but it's better to have any real opinion on that. Yes, sounds fair. And then just my last question then on state support. So we should expect clearly less state support in Q3 than we saw in Q2. As far as we can judge today, there will be no state support at all in Q3 or Q4. No. That sounds fair. So great. That's all from me. Thank you, Thomas. Thank you, Daniel. Thank you. Any more? Thank you for your question. No, sir. We don't have any other question. Okay. Then I appreciate very much you're listening in. And it was a bit of a chaotic quarter. You can remain assured and that we try to continue to develop the company long term the way it should be developed. And I hope to be able to show something of that when we talk again in I don't remember the day, but this is in October when we have we are delivering down the Q3. So thanks for listening and talk to you next time.