Earnings Call: Q4 2019

Feb 10, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Presentation Q4 Report 2019. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Also, I must advise that this call is being recorded today, Monday, February 10, 2020. And without any further delay, I would now like to hand over the call to your speaker today, Mr. Thomas Wittstrand. Thank you. Please go ahead. Thank you very much, and thank you for listening in. I would believe that most of you have been listening to me before. So I think then the context or the setup that we normally are doing is familiar to you. But nevertheless, if you want to follow the reports that we have made official today, you can find it on our troax dotcom webpage. And under the headline Investors, you will then find reports, if I'm not mistaken. And then you can find on the report of today, which is then the report from the Q4. We have, as you know, then the results given out today. And I will try to make a short introduction and to explain a little bit what happened during the Q4. As normal, we have a few pages here in the report that explains then what we are doing. So I'll just do a very brief introduction to anyone who has not been around before. So what Truax is doing is, of course, we try to make your world safe for people who are working in factories or in warehouses, and we also make safe installations for those who have cellar installations where they keep bicycles or skis or whatever luggage you might have there. If you then continue to the next page, you will then find what we tried really to have as our mission and that is safety in every aspect. And that's we try to do then something for the customers who then, as we normally call it, can sleep well in the nighttime. And we then have 3 segments, customer segments that we're working with. The first one is the machine guarding. You'll see that on the next page. And I think the page illustrates quite clearly what it's all about. It means then that you have normally then a production line one way or another, and you normally then need some hard fences around to create a proper safety cage then for the people who are working around it. This is approximately 60%, 65% of our turnover, which you will see laterals in the figures. Next one is the full warehouse partitioning, which is approximately 25%. And as the name implies, it's mainly then connected with doing warehouse installations, where you need some sort of safety fences to prevent goods from falling down or at least to making a mess out of what you have in the warehouse. The third part, which is the smallest one also, let's call it a little bit less than 15%, is property protection, which is mainly directed towards the Nordic area, but you also find it in Germany and a few other countries. And as you see from the page, and as I said before, it's more of a cage than where you keep your luggage and the things that you don't need in your flat on a day to day basis as some sort of storage. Then we have something which is a little bit a mixture of everything. And we normally show that because that's a segment within the segments, which is growing substantially. It used to be quite a small part of our turnover, but it has now grown substantially. So it's actually just as big as the automotive is for us, which otherwise is also for us a big important segment. And this Automated Warehouse, we from our point of view, we see it as some sort of positive trend, which will go on for a number of years due to the fact that a lot of these distribution companies or retail companies want them to have a better delivery performance? Or maybe they also want to reduce the picking and packing costs per parcel? Then I go to the next one, which is actually the first one where you see some figures. I've already touched upon a few ones of these. So if you go down to the right part of the page, you will see then the split up of the 2019 figures, figures, sales by business area, and this is what I tried to explain just a couple of minutes before. On the same right side, you have another circle, which shows then our geographical split between the markets. And nothing really big has happened during the years between 2018 2019. So we're still, let's call it, struggling to get the new markets to increase more. And this year or other 2019, we are, as I will explain later, a little bit disappointed over the development in especially in Mainland China. I think the other ones mainly are developing in the right way even if there are some few ones that I will also address a little bit later. So stable situation. To the left, you have a summary then of the complete year, but I think we take that as the presentation continues. So if you don't mind, I go to the next page, where we have the historical overview of the development. And in this niche market, which we think is maybe €1,000,000,000 worldwide. We have some we think we have some 14%, 15% market share. I can't do that also. We think we are 2.5x bigger than the number 2 player and there are actually 2 number 2 players come to that as well. We have local presence, 1, 1,000,000 in at least 42 countries. And we are, of course, a growth company, and we should continue to grow even if 2019 was, to put in mindly, a year of what I call mediocre growth. Historically, we've been growing with some organically with some maybe 8%, 10%, and during some years, maybe even better. And a lot of our people are working with sales, which obviously is important since we are selling solutions to customers, safety solutions. And this is really what I think makes Truax and the Truax organization worth a lot to many of our customers. We go to financial targets. This is summary, next page, where you see then that we have an organic growth of 2019 of 4%, which is clearly below then the long term average growth. So you probably will agree to what I say then that this is not a figure which we think is especially good. But of course, if you have an average of 8%, 9%, 10%, you have to have a few years of below just as you've had a few years of higher percentages. I would say that 2019 was a year where we saw some good development during some parts of the year, but actually the market was if best, it was more or less the same as the year before. And I think our estimate, very preliminary estimate right now is that the market was actually decreasing slightly during the year on a general basis. So we've continued to take market share, which is good, but we're not happy in itself with the 4% organic growth. If you come to the next one, the operating margin. We've been in excess of 20%, and it should be possible for us regarding our operating margin. And this year, we achieved 19.6%, a little bit negatively influenced by some currency in the last quarter and also by some moving costs in our entity in Italy. But nevertheless, we are close to the 20%. So I think that on an overall basis, this is perhaps not the best figure we have achieved, but it's an acceptable figure. Net debt is continuing to go in the right way. So even if we include now the IFRS 16 valuation, which a little bit increases than the debt, We are now at 1.3%, which we think is very good, and it gives us a healthy balance sheet when we are looking into possible acquisition possibilities. And regarding dividend, the board has just announced that the proposal is to have a dividend to be paid out later during the year of approximately 47% of our net result, which is done more or less as we said we have as a target. Next page is doing a summary of the Q4 2019. And I would say that we think there has been a, what we call, a reasonable development in the Q4. Again, the market was not very good, but we think the development for Truak was decent or reasonable. It was, however, a little bit lower EBIT result and margin in Q4, mainly due to this moving cost in Italy and also some negative currency development that actually positive last year and this year negative. These things happen, of course, depending on the currency. I think we have a sort of stable currency development as regards on the operating flow. But of course, if the currency changes, there will be certain currency fluctuations that we have to take over the result account. In Q4 further, there was stable development in most areas, with the exception of North America, and I'll come back to this in a moment. Earnings per share were slightly below what it was last year. Coming then into more the U. S. Operations. I would say that the improvement process in falling on is continuing also in Q4, and we think we're really stable last night, now the operative levels. So it means that the delivery performance is good, the productivity is decent, Could still be improved. Product quality is okay. The people in folding are returning quotes or possible quotes to customers quite quick in a normal way. So those are things where we say now the operating things are moving in the right direction and are actually quite stable. So even if the result development in the quarter was still not of where we should like it to be because of the sales is still not where we want it to be, we can see it was a, let's call it, a stable development. Working capital. Next item is on the expected level, even if we see then that there are slight tendencies that perhaps because of the financial development in the world, so to speak, customers are delaying a little bit on the payments. And we try to, of course, keep on top of that. Regarding the investments, they are proceeding according to plan. The investments in the factory in Sweden are more or less finalized with a few exceptions, which I will come back to. And the complete brand new factory in Italy has just been started up. We actually did it in such a way that part of the factory was already moved in December, hence that we took then the moving cost already in December, which maybe could have been taken also in January, February. So that's a good thing. And they are right now starting up to produce more volumes. And there are a few, of course, hiccups as always when you have this kind of big start ups. But it's going in the right way, and I have full faith that the factory in Italy will be up and running in a full fledged way during the Q1. Regarding the general market situation, I would say it's stable and clearly not growing. I would say that during Q3 and Q4, the market has actually been decreasing. Even if maybe if you see it on the whole year, maybe it's not a big difference compared with the year before. And the major impact, of course, on that continues to be the automotive sector, which is a weak segment. We do see maybe some signs that it should improve, but it has not happened during 2019. I think it will take some time before really the automotive sector will start to move in a more positive way. An interesting thing that we have done during the Q4, maybe it's not the biggest thing, but we have acquired another distributor in Japan. And from now on, we have our own TROEX company. We have, of course, the intention of invest further in the sales organization. Since we believe that Japan is an interesting market and it's partly, we think, opening up a little bit more to foreign producers because before we think Japan has been a little bit of a closed country, if you see what I mean. We go to next page, take the financial highlights. I don't have the intention of going through, of course, every figure. I'll first start with the 12 month figure, and we then got a turnover and actually orders of the same size, EUR 168,000,000. So some increase then, as we said, compared with last year of 4%. We have a gross margin, which is actually slightly better than the year before, which is a good sign. And we believe we have increased productivity, and we are a bit more effective, I think, in that process. On the other hand, the operating profit is on the same level as the year before, which means then that we have, to a certain extent, increased our cost level, not only because of currency or moving costs, but we also like we try to do in a structured way and try to increase our safety and marketing costs since basically we do believe that this is a growing market and we should invest more to fulfill under requirements of new customers coming along over time. So we are slightly lower than in operating margin, even if that's not maybe a big thing. So if you go around the profit of tax, it's more or less the same as the year before, so a very consistent and stable development. If we look at EBITDA, it's still a little bit higher, which means then that, of course, we now have to compensate a little bit higher depreciation, which we have been able to do. But obviously, then it takes some time to grow into these new investments. So I'd like to phrase it that we now have an excellent base for further growth since we've done a lot of the more heavy investments, which have now given us substantially higher machine capacity, which is actually quite good and for the coming, we believe, 3, 4 years or whatever will come in practice in reality. Earnings per share, same as the year before. So due to the fact that we think we have a rather stable situation and that a lot of the investments already have been done. And the Board has proposed that we should increase the dividend compared with the year before. A few comments then also on the Q4 and the 3 months then October to December. And you see that we have on the order intake actually the same one as last year, and I see that as a strength. Since last year, Q4 orders was actually quite good. So this is, from my point of view, at least then something which I would like to point out of being a rather strong development despite a rather weak market development in general. Gross margin is also quite okay, similar as last year. But as I said, operating profit is a little bit lower, partially because of this valuation of the currencies and a little bit about the moving costs. But on top of that, we also have slightly higher costs because of the sales costs that we are trying to invest time after time. Otherwise, there's been no strange thing as far as we have seen or anything that is worth, so to speak, commenting in this kind of our meetings. I go to the next page. You have there the regional development order intake and sales. And you can see then on the order side, which is on the 1st columns then, where we compare them. The Q4 2019 with 2018, you see that in. There's a stable development in Continental Europe. I would say it's actually positive. In this quarter, you can see a little bit negative in the Nordic region, and we have seen that the billing market for our type of products have been a little bit lower during the Q4 this year compared with same period last year. And that's something which you can now more or less follow from that the billing permits went down 2 years ago, and that obviously will have a certain impact on us. But it's still a good market situation. I wouldn't say that it's a dramatic decrease. But if there is something that's influencing than what you see in the Q4. U. K. Was a little bit weak in orders compared with last year. On the other hand, we had some very good product orders last year in the U. K. If you see them down on the invoicing, you will see that they've done a very good job in to increasing invoicing. So you would then see obviously then that the orders that we got during the end of last year and of course during this year has now been transferred into invoicing, which is very good. I've said before and I continue to say that even if now things are starting to clear up with UK, there will be quarters which will be positive, and there will be clearly big quarters which are negative because there is not really a stable situation at the moment as far as we can judge. I continue to North America, where we have a little bit mixed picture. We continue to have a very good development of the Truax brand. I'm quite happy with that. It is obviously then not at all that good for the falling guard. And that's these days, it's not at all connected with the factory or anything like this. But it's connected, of course, with that. It takes a certain time to get the customers to understand that we really have changed the operational efficiency in falling arms in a way that they feel secure and to buy from them. And secondly then, which is a little bit of a skews, but nevertheless, it's a fact. Following on is to a certain extent and depending on the automotive industry. And we have not been as successful in North America to compensate the decrease of the automotive industry for falling on that we have been in the European trucks operation. So those are, I would say, the 2 main reasons why we see them are rather negative development in this specific quarter. New markets, nothing really to say about. Forget about the percentages. It's still too low figures. And as I said before, if you look at the whole year, we are quite disappointed over the development in China, where we are putting now a complete new management. And we do expect positive things to happen over some time. Even, of course, with the situation right now with the virus and the uncertainty connected with that, we don't think that the start of the year will be very brilliant in China, but we think we're doing now the right things for a good long term development. So totally, more or less same orders in the last 3 months of the year, where the invoicing was slightly higher. If you look at the cumulative figures, it's a similar picture. Go to the conclusion, next page. We think that has been a somewhat weaker market activity, nothing dramatic, but a little bit weaker. And as I said before, there's been a continued low demand from the automotive industry. Regarding the U. S, we do see a good development in the Truax Inc, just as we've done now for 1 or 2 years. We're doing quite well there, whereas Volumont is still struggling now mainly on the still on the orders and sales side, and we think we have it under control now on the operative side. In our European operations, otherwise, it's a stable development. The capacity increase in Sweden is finished and working quite well. And the investment in Sartek, where we then, as I said before, are building and also then right now starting up a complete new manufacturing unit, complete new factory, is going according to plan. And the expansion of the storage space also in the Swedish units is proceeding according to plan. And as a small thing, the acquisition in Japan gives us the opportunity to further strengthen our position in the region. That was actually then the comments on the Q4 on the year. Then there comes then a few comments on the next page on our growth sector, and nothing has really changed there. So we do still see that we are in a positive, so to speak, general trend over a business cycle because then we are helped by the fact that customers are increasing their automation level. And when they do that, they need some sort of protection. And I would say the other really main thing is, of course, the growth in e commerce, which is helping an investment on the warehouse side, especially what we call the automated warehouse. Next page, we've done some assessment and of how the market has been developing, and we don't think it's been really developing. As I said, during 2019, we do think that the small competitors have probably gained a little bit. The blacksmiths have continued to lose. So maybe both us and 1 or 2 of our competitors have continued to take market share, but we have to calculate this more thoroughly before we release anything. So this is mainly, I would say, same picture as you saw last year. Nothing really dramatic has happened or influenced the comparison between competitors as far as we know right now. Regarding the competitive situation next page, we've done some assessment and other developments of different companies. As you see, there are no huge differences, very similar to a year before. When we come to manufacturing, we would like to address then 2 things. We call it best in class manufacturing, and we're quite proud of this. You see then in the line in Hill Thorpe, Sweden, which is still our main manufacturing unit. We have then, during the year, increased the machine capacity. So we do have now some more quite good overcapacity on the machine side, which is good and as for the coming years. The other big thing is you will notice then a new photo for the Italian one, and we have more or less doubled the machine capacity there. So with these two investments and SSN, we will have a substantial then overcapacity for a few years to come. And the sooner we will not have the short capacity, the happier we will be. But we do think in reality, we now have good capacity for the coming 3, 4 years. So the investment level will clearly be a little bit lower now in the coming years. Also in the U. S, we have increased a little bit the machine capacity, but not to the same extent as in Italy and in Sweden. So as a conclusion for a safer tomorrow, we continue to work with different things connected with the environmental issues. What we'll focus on today, you can read for yourself. I will say that the real interesting thing short term is that on the new factory in Italy, you will find that on the bottom of this page where it's just what we focus on today. We are now invested or are investing in solar panels on the roof. We cover approximately 50% of the unit consumption in the new factory, which is a good thing. It's actually demanded from the government. So it's not entirely our own requirement, but it's actually in line with what we would like to do. So we think this is a good thing generally for the businesses. We continue with our innovation center. We have in the next page just one example of one new product that we bring forward, which is our unit brackets. It's a very innovative solution, which you can use them for the pallet rack installations to secure them that the pallets won't fall down. And we think it's very good thing, maybe not the biggest thing ever, but it's a clever thing, which shows on the PROX is leading the development in this niche market. And finally, last, just as you know before, we continue to be certified by an external party, in this case, to Freineland. So the test that we're doing, where we then promise our customers that our products should be on a certain safety level is then externally tested, which means that they can rely on that our process is safe, and it will give the same result time after time. We are continued to be the original since 1955. And even if we now are 65 years young, we still have a lot of ideas how to further improve and both our business and our products. So we will continue to work a lot for the customers with improved safety. And this, of course, goes down to making our world safe and also your world safe. So thank you for listening. Now we can move on to the questions. So if you take over in the control room, you can ask them if they have any questions. Thank you. Thank you. Ladies and gentlemen, we will now begin the question and answer So our first question is from the line of Kenneth So first, in the quarter, you talked about some negative currency effect on the results. What currency pairs was it that had the major impact Was it the euro versus the British pound or Yes, certain. But I would say if you really pick out this one currency, it is the U. S. Dollar because we have a lot of Exports there, yes. Okay. Then also, you talked a lot about the CapEx plans now. How much spending is it left in Italy and in Hillestorpe of the projects? Okay. From a cash point of view, we've taken in Hillestorpe, we've taken the absolute majority. So there should be as if I take it from the top of my head, we'll talk about maybe EUR 1,000,000 EUR 1,000,000 to EUR 1,500,000 still to spend in HillisEurope. In Italy, there are more. I would say that maybe we talk about spending cash out, maybe EUR 2,000,000 or something like that. Okay. Great. And then also, I'm curious, now you've invested a lot during 2 years and that is coming to an end And the balance sheet is pretty strong. So are you ready for acquisitions, both, I mean, from a financial or from a management point of view? Absolutely. The very simple question is, Kenneth, yes, absolutely, we are. And we do believe that since now the market is maybe a little bit more gloomy, hopefully, there will be a few more opportunities coming up because there has been a little bit of scarcity of possible acquisition targets in the last couple of years. But to answer your question, yes, definitely, we're ready for that now. Perfect. Okay. That's all for me. Thanks, Kennen. Thanks. No further questions, sir. Please continue. Okay. Appreciate your interest, and we will be back, for those of you who are interested, on I think 23rd April, if I remember correctly. And then the idea is then to share with you our Q1 development. So in the meantime, I wish you some good business during this month. Thank you for listening in, and I appreciate your interest. Thank you. Bye bye. So that does conclude our conference for today. Thank you all for participating. You may all disconnect.