Good day, and welcome to the Troax Group AB presentation Q2 report 2022 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Thomas Widstrand. Please go ahead, sir.
Thank you very much, and thank you for listening in. It's my pleasure to present the second quarter to you of Troax Group AB. As usual, we'll have a short Q&A session at the end. I'll start by introducing them if you want to follow my presentation. You have followed this before, so you know where to find it, but otherwise, you can find it on the Troax web page, our homepage on troax.com. You can find it under Investors. On there, you have the reports, and the reports obviously for the Q2. If you don't find it or if you don't want to do it, I'm sure you can follow in my file that's for the presentation. Nevertheless, I'll start directly going into the presentation.
We have a few introductory picture which you've seen before. We are safe and sound on solid ground. What is more important, I think, here is that we, as usual, are working with three main segments, and the biggest one is what we call machine guarding, which is 60% of our turnover. As a short introduction, you can see on this picture, and if you don't see the picture, there are a number of us working with automotive manufacturing, and that's typically what we do. We work a lot with different kind of industrial processes, but it's basically intended, I'm just saying, for people from working in close connection with hazardous processes or hazardous machines.
Next one we have is what we call warehouse partitioning, and it's safe handling warehouses, which is approximately 30% or something like this. It grew quite substantially last year, less this year, which I will come back to. As the picture implies, you can see that what we're doing there is we take all type of fences or safety solutions, and we bring them into either more static part of warehouse or more automated ones. I will talk about partitioning, and I will talk about safeguarding people who are one way or another working in this area. The third segment, which also the smallest one, which is approximately 10% of our turnover, and it's actually where it all started many years ago. For Troax, it's called property protection. It's mainly a North European solution.
What it does is it takes care of all our bicycles or skis or, you know, luggage, whatever we have that we want to take care of in some sort of storage solutions. People who are living in multi-story buildings normally have it in the cellars, but some have it in the attic as well. Also could be outside of the apartments one way or another. We call it property protection, 10% of our turnover. We have what we call automated warehouse, which is actually a hybrid between machine guarding and the warehouse part, where we then focus on the more automated warehouse part. We don't disclose how much we are in this, but what you see in this area, driven of course by the e-commerce solutions or the demand for e-commerce solutions.
Now for 2022, because of course I will say going down substantially, partly because people are not so keen, I guess, to order from e-commerce traders as they were during the pandemic. Also I think our conclusions are that some of these very big players in this field, they would, as I call it, have overinvested last year. Now with the reduction in demand for e-commerce, they are trying to grow into the capacity they would have built last year, which obviously was a bit too big. I firmly believe myself that we are going to see continued increase in demand in this important sector for Troax.
I think that for the rest of 2022 and also for some part of 2023, I think the demand will be at a lower level, simply because as I said before, I think these kind of integrators or end customers overinvested in 2021. Next page shows the summary of the overall development. It is split up into different segments. Geographical areas for us. You can see of course that 80% or something is still close to that for Europe. We have actually increased substantially in North America, driven last year by a lot in automated warehouse. Which obviously is not showing the same pattern in 2022. I come back to that.
You see also then the figures in the bottom left corner, and you see that we last year had a tremendous increase in our orders and sales and also of course our operating profit, which have to be in mind when, you know, comparing this quarter then of course with the strong quarter we had last year. Next one shows also the year in brief, but more long-term development. In this case, shows from 2012. We are a growth company, even if, as I said, last year was a bit of an extraordinary growth. We're talking only about that the market is growing with some 46% per year. On top of that, we should take market share. We've had historically an increase of some 8%-10% per year, depending on, of course, which time frame you're analyzing this.
We are approximately 2.5x or maybe even 3 x bigger than our closest competitor in this niche, and we obviously the leading company in this market of safety solutions. Coming to the next one, which is the financial targets. We're talking normally then about sales growth, which is not explicitly said that we have a specific target. As I said, historically, we've been able to grow 8%-10% per year, and that's probably not a bad indication of what could happen going forward, assuming of course that the market is continuing to grow, which I don't see any reason to doubt.
For the first two quarters then, or actually this quarter, if you look at the year to date here, we've been growing organically and just 1% with a small figure, with a small acquisition we did in Spain. But however, I must say that most of this is coming then from the price increases that we have then been achieving due to, as it was mentioned here, so it's raised prices due to the steel price increases. The real growth for the first half year, ex term price increases are not that impressive, effectively around below the average 8%-10%. It's probably then because, as I said before, we had this very, very strong development in the automated warehouse last year, which has not come back this year. Regarding profitability, we are a little bit behind.
Our target, we are at 17.8%, which I think is still okay under the pretty difficult situation, there has been now, especially on the pricing side, which I can comment a little bit later on. I think or we think this is a decent achievement, even if it's a little bit below our target. Regarding the capital structure, there is no, I would say, any problem. We have a quite good balance sheet, and we have a net debt to EBITDA, which is only 1.1, which means that we have good resources to continue to now find interesting investments objects or even acquisition objects. From that perspective, there are no real hesitation from our side. Regarding dividend, we don't need to talk about that.
We've just paid out the dividend a couple of months ago, so we can come back to that when 2022 is over. Coming to the next page, which is perhaps somewhat a little bit Q2. I have a few conclusions later also, which hopefully then will accentuate this. Just to take a few examples here, I would say that Q2 continued with good order trend. We started already in 2021 and some cases before. With the exception of automated warehouse, which means when you analyze the figures, the total doesn't look that impressive. This is at least my conclusion.
If you exclude the automated warehouse development, I would say that it's a very strong development in all other segments, and we don't see any reason that customers are not being active or buying from us. I would say that on the contrary, it looks quite stable. I would say we've got a number of big orders, also to sort of pique excitement. In other words, Q2 were in line with last year if you exclude this. Bear in mind that Q2 last year was a very strong quarter from ordering standpoint of view. I think that it still goes without saying that orders and sales is being inflated.
Our net price increase of some 15%, we've increased more, when we talk about growth, but this is somewhere in the line, which you can say that, this is really influencing end user's account. Despite these problems, then I think we achieve a what I call a reasonable leverage result, despite that the margin were on the low side, which I will come back to. We had a good utilization in our manufacturing units, with the exception of our Chinese plant, and the Chinese plant was closed for most of this period due to the COVID problem that China was experiencing. We didn't have much choice but to adhere to the regulations that were coming. Our Chinese unit in Shanghai was opened up then towards the end of the quarter.
For most of the quarter, this was actually closed. Now, coming to, I think, one thing which I know many people are quite interested in, some comment on the gross margin. We are very clear in saying that it was on the lower side this quarter also, just like it was in Q1. It's mainly coming from the purchase of steel materials. Unfortunately, we have this timeline when we increase prices to customers.
It normally takes 2-3 months before you see it in our own top line because you have then an order book which has to go out, and in some cases you have to have time to wait a little bit until you can get this to be implemented, even if I think we have much less of a problem in this normality than any other companies. We have a time delay of 2-3 months. Also this Q2 was very difficult for a number of our customers.
I think that we've been a bit cautious rather than just in a very harsh way to introduce increases month after month, but I think we've been trying to help them to a certain extent without passing on more than two months, just to make sure then that they are surviving and that they are having good, let's say, help from us, which hopefully then will pay off in the long run by having our customers then, of course, being even more positive to work with the suppliers. In other words, this gross margin is not what we call acceptable, but it's mathematically more or less correct based on what I now expect.
Now on top of this, with the pricing issue, which otherwise is going quite okay towards the customers, we are of course experiencing just like many other companies with cost increases on other types of process, material and components, freights, electricity especially, I would say, and this is, of course, only part of it. Which over time we will and is being passed on as we speak to customers. I'm not too worried about this in the long term. For the Q2, it was 50%, and it was definitely negatively impacted by the very steep increases in steel price towards the end of March 2022, where it took us, of course, some time to get our corresponding price increases implemented in our own result account. Stepping over to the regional development, which also we'll see some figures there later.
We have, I think, a good sales level in most markets, especially in new markets. Show good growth figures, and I would say that's coming from most markets there, with the exception then of China, obviously. In North America, which is the main negative one, we have been actually quite hit by the lack of bigger projects in automated warehouse, where we also had the main success there, I would say, last year with this kind of bigger projects. Long term, we see good development, positive, should come also in North America, but for 2022, there will be a decrease then because of the lack of activity within the automation market. Earnings per share, slightly lower than our CIB, I would say quite okay. Working capital is on an expected level.
Inventory still high, utilize service levels as we are right here. We think there are possibilities now because things are starting to stabilize. We can in some way reduce the inventory during the year. We see how we have that close and how the risk we want to take. I think the key for our relative success is also we have enabled during the whole problematic period during COVID and also during this first half year where actually deliveries of steel was an issue. We have always been able to deliver, and partly because we then have taken a more safer approach to keeping a bit more in stock, obviously, to have a good service to our customers. The price will have already touched upon.
We were all set to report by Q1 that we saw risk for continued turbulence and unfortunately this happened. I will say especially in the beginning of this quarter, there were really big turbulence. It started to fade towards the end of the quarter. We have seen stabilization towards the end of quarter. If you then want to compare something, I would say that we are in a better situation from pricing point of view now ending quarter two compared with quarter one, with what we see in our side. Otherwise, in general, prices have done, as I said with M&A, they've been adjusted to reflect the higher steel prices.
The higher than the lower orders that were in the order book before the steel prices were really being hit are step by step going out of the order book, and we think it will of course then improve during the period. We do see that we won't have number of orders going out in 2023, so it will certainly be somewhat reflected. However, to a lesser extent, we think, than planned in Q2. But with some effect, we will see also in Q3. This is about the acquisitions, Natom in Poland. There again show the good development and nothing more to comment on that I would say. We also made a small acquisition, Claitec, in Spain.
Without drawing any conclusion, I would say it started very well, and we have in a small way started to introduce very interesting solutions which were more from a let's say communication point of view solutions that are interesting to our customers. When I say communication, I mean communication between AGVs and the machines, and they could of course increase the safety distances in warehouses between personnel and forklift trucks going along. There's always SLR1 automatic or SLR1 in a manual way. Coming to the next page, the financial highlights, which I think you've been going through yourself, so we don't need to dwell a lot on that.
You see then that on the order intake, it looks a bit good on paper for the quarter, but if you exclude then the price increases, it's not that impressive. Whereas the sales is still hard to say, I would say, based on that we're still continuing to invoice a number of the projects which came in before. Gross profit, as I said, on the low side. Clearly on the low side. We're not entirely happy with that. As I said, we are not too worried about this going forward because we see that we're still stabilizing now. We have very good opportunity to come back to our old margins during the second half year.
Operating profit obviously also been a bit on the lower side, but I would still say that the 17.6% operating margin is not bad, seeing then the turbulence that has been in the market. It is below our target, and we are working to come back to this level that we had before. Look at the six months, you have a similar picture, but it being more accentuated, I would say, during the last quarter. You can draw your own conclusions. Of course, first quarter was only partially influenced by the steel price. It came then in March. Whereas of course, the second quarter of this year has been fully influenced then by much higher steel price. Coming to the next one, called regional development, order intake and sales.
If you look at the columns in the middle here, which are showing under three months, meaning quarter two, you will see here then that the picture is then that Continental Europe is more or less the same, but if you then take out then the price increases, clearly then a decrease is also here, is influenced then by development in automated warehouse, even if the big influence in that is coming from North America, where you see the figures are not critical. In Germanic region and U.K., which actually have been doing quite well. Even if you exclude then the price increases here, I would say that in U.K., within from our point of view at least, having a stable development, which I think is very well done.
In the Nordic, I think it has been a growth despite price increases. I think this is quite a good achievement. Also discuss new markets, which still is a bit on the lower side if you talk about absolute figures. Step by step, we're increasing our market share and the turnover there. This quarter was a good quarter, plus 50%. I don't think you want to see this kind of figure every quarter, but over time we should certainly increase the sales to what we call new markets, which are very much and of course connected with other Asia Pacific, it's main part in that one, even as other markets which still are important. Small part, which is the acquisitions are totally 5%.
If you go to the sales part, as we said below, it shows the same development, slightly better than because as I said, sales have been a bit stronger compared with the orders. Then you see especially on the Continental Europe, that's where the difference is, and we've been enjoying them to be able to invoice them for this, which have been taken earlier than the second quarter. If you look at the first half year, you see similar development, but still sales are a bit stronger, which means then that you can understand that the big orders we have last year from England and automated warehouse are being invoiced now to a large extent during 2022. Our short-term, at least not coming back into the orders as in relatively way.
You must then understand that, from order point of view, I think that the automated warehouse part will continue to be a bit on the lower side for the second half year. The rest then okay. We saw continued good improvements during the second quarter. Next one, some conclusion. I think I will start to round off a little bit for some Q&A. As we see it, we continue to receive very good orders in all segments. I would say especially strong in machine guarding. We have this time not seen more orders, but we have seen an increase in activity level and request for quotes in the automotive sector, which is a good sign. It's otherwise, as you probably know, has been rather quiet for some time.
Otherwise, the development in order side and in different segments is quite favorable with the exception that I now have said several times in the automatic warehouse part. Results reflected based on the reasonably good sales, but with a little bit less good margin, somewhat compensated by good utilization in the manufacturing units with the exception of China and machine, as I've said now several times also. Now we're okay with the exception of the steel price and the passing on to our customers. Integration of Natom is going in the right way as is not high tech this time. In total, we think it's a reasonable development despite the turbulence created by the price development. Jumping forward to the growth factors, which have not changed from before.
I'm still saying one of the increases in industrial automation is the main driver for us. It's been so for some years and will continue to be so. Right now, the growth of e-commerce is not there. We had a significant increase in 2021 and as I said, I think it will come back, but not short term. Those are the two main drivers I would think, I would say for the increasing in terms of for the market, not only for us. Jumping quick, our production units, which you've seen before, Sweden, U.K., China, Italy, United States, four. Take the next one, which shows then the different brands that we're operating under. We now added this small unit in Claitec, which come in first day on top of the other one.
Jumping quickly, I would say down a few pages to what is called fully automated solution. Just as a little, sort of recap of what we're doing. We have introduced now what we call Troax Power Door, and it actually opens maybe it's a bit big word, but it actually opens a new door to Industry 4.0, where I think that we as the first one outside of different silos that we can integrate different doors, which enables production to communicate with forklift trucks or other types of, you know, moving equipment in an automated way. That will of course enhance the solution provider thinking that Troax has given now the customers for a number of years. It's a good sign now that we have introduced this.
It won't change, you know, the top line picture for Troax short term, but it's a good step in the right direction. We think that the customers will appreciate this as we go forward. By this I would say that we jump over the last sheets. You've seen this before. Just like to end then by saying safety equals Troax. We are the original, of course, since 1955. By this, by introducing the Q&A session. I'd like to end my presentation here. Thank you so far for your listening in and I'm waiting for your questions. Please, operator, could you help them to start the Q&A session?
Yes. Thank you, Mr. Widstrand. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name and company before posing your question. Again, press star one to ask a question. We'll pause now for just a moment to allow everyone the opportunity to signal a question.
All right.
Okay, we have one question now, sir.
Mm-hmm.
Hello, this is Gustav Österberg from Carnegie. Hi, Thomas, and thank you, operator, for letting me through. A couple of questions from my side. The first one is on demand trends, and there's a mix of things going on there, but I just want to start with sort of the immense and a substantial drop in automated warehouses. What kind of year-over-year declines are we talking about here?
I would say that if you compare with I would say a very extreme high order intake in 2021, you're talking about a halving of the order intake, you know, as some sort of indication, at least so far.
Okay. Thank you. That's very helpful. Just on the sort of the sequential development in the quarter and compared to Q1, are you seeing?
Mm-hmm.
Sort of a stable new level where you expect demand sort of to find a you know for the coming periods, or are we seeing sort of a decline within the quarter as well?
Yeah. Good question, Gustav. I think what we see so far, at least up until the end of quarter two, was what most of the demand in the automated warehouse part came in January to a, as I said, substantial level, but it was not continuing to drop if you see my point. We think it's flat down to a level which is more sustainable for the short term foreseeable future at least, and we don't expect it to deteriorate further.
Okay. Perfect. Thank you. Then moving over to there's some small but positive comments on the automotive segment. I mean-
Mm-hmm.
-in terms of customer activity and interest, and I appreciate you mentioning it briefly on the call as well, but could you elaborate sort of on what you're seeing here? Is it remanufacturing of production lines for EVs that is starting to make more sense? or what factors are driving that development? Because you-
Mm-hmm.
Did talk about it a few quarters back, and then it went.
Mm-hmm.
A little bit weaker for a while, but now you're seeing positive again.
As I tried to say very clearly, maybe it will break open doors, but we haven't seen it yet in the ordering date. The request for quotes are being increased, and we see it in Europe, and we see it in some other places as well. We saw it earlier, which I've also have communicated in North America. We think North America is a bit earlier in the phases of getting more investments in this level. As you know also on top of this, we are late in the process. I think maybe we are underestimated on the timeline between what the automotive companies start to talk about they need to invest.
You know, we see that recently generally just talking about where they start to do requests for quotes to production of the companies, because obviously you need the safety solutions are extremely important for them. Of course, they need to have everything in order with the machine production and the lines before they can look into this. I think that's maybe one part which is taking us longer than what we at least expected. We think they are a bit over right now, so we would expect then that the investment and also the orders will slightly start to increase because they are now coming towards the end of the planning phase and then the planning coming to reality, which means they have to start also all the things like production.
On top of this, I would say also then that there's an expectation and that, of course this with the battery plants, which is in some cases an integrated part of the automotive manufacturing today for obvious reasons, it's starting to become more, let's call it much more in operative or day-to-day coming into operation. I think that also makes it easy for this channel, the automotive companies and to first see it as a normal investment. It comes also into, hopefully orders then in the coming quarters for production and other types of companies.
Okay, perfect. That makes sense. Just a quick follow-up on sort of the, a contrast to the automated warehouses segment. It's both, you know, orders and RFQ activity that has gone down, right? You're seeing more-
Yes.
of that in the U.S. compared to Europe.
That's actually the right conclusion.
Is it also fair to say that sort of the base level and the comparison period are much, much tougher in the U.S. compared to Europe? Or, I mean.
Sorry.
Did you see much higher activity there? Yeah. Okay.
Sure.
Moving on to the margin. I mean, it seems like the steel price development is the main driving factor here. I mean, are you seeing sort of any uncertainty in terms of pass through or anything, that has been different to what we've experienced historically? Or can we expect sort of a similar development, with regards to sort of the margin impact from both higher and lower steel prices?
I think you can expect now that assuming then that the steel prices are at least stabilizing, then the price increases that we have made now during Q2 essentially will of course come into force in our results account and our top line. That will of course one way or another enhance the gross margin and also our general profitability. Question is only how fast this will go, and we have to see about this because right now at the end of quarter three, we of course can see that it was stabilizing. If there is a new cycle in steel, it can go either way, I think in Europe more in the winter. I think we are prepared for both cases.
On the normal circumstances, we are, as I said before, expecting then a step-by-step to come back to what we call our normal margins in the group.
Okay, perfect. Just a final question on M&A. I mean, we're seeing pretty steep valuation resets in both public and private markets during H1 in 2022.
Mm-hmm.
Are you seeing a similar development of multiples in your target markets? Or how are discussions going in general as well?
We don't have any fixed multiples in our market, so to speak, that we can just follow or see how it's developing because there are not so many activities as maybe you would like. We do see that there are more interested parties that we can talk about or with today than it was half a year ago. From that sense or that conclusion, I think that what you're saying, Gustav Österberg, is right. It's calming down, and I think it's easier to keep these kind of discussions going. What will come out is of course another story, but discussions are easier today than six months ago.
Perfect. Thank you very much, Thomas. That was all questions from my side.
Mm-hmm. Thank you, Gustav Östberg.
Once again, if you'd like to ask a question, please press star one. Final reminder, please press star one for any questions.
All right.
It appears there are no further questions.
That's fine. It means that I think the communication has been working. You know where to find us if there should be any questions. We're open, of course, to that. With this, I'd like to thank you very much for your both for your questions and your interest to listen. I look forward then to meet you again then in a couple of months where we'll going to communicate of course the third quarter development. Thank you very much. Take care. See you next time. Over to you, operator.
You're very welcome. This concludes today's call. Thank you for your participation. You may now disconnect.