Alimak Group AB (publ) (ALIG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Alimak Group CMU. [Operator Instructions] And now I'll hand the floor to Ole Kristian Jødahl. Please begin your meeting.

Thank you, and welcome. First of all, I'm sorry for the few minutes delay, but -- due to some technical problems here. As communicated earlier, we have had a strategy review in the group. And today, I'm presenting the outcome of this and our way forward. With me, I have Tobias, our CFO. The group has a strong foundation. The group has a leading market position with a unique know-how and expertise within vertical access solutions for professional use. A global footprint and the large installed base of around 70,000 units around the world and a leading position within the aftermarket. We are present in a vast number of segments. And with our strong aftermarket presence, we are in a unique position to help our customers from a full asset life cycle perspective, optimizing total cost of ownership. We have a portfolio of strong leading brands globally known for safety and reliability. We are supported by some megatrends like urbanization, more high rises, governmental regulations within safety, digitalization, high demand on sustainability and productivity, of which a group like ours, with our size, global reach and solidity are well positioned to capitalize on. We have a strong financial position with a solid balance sheet and cash conversion, which puts us in a position to invest significant. In sum, a great company with a lot of value creation and potential forward. Next page, yes. Our financial targets were set in February 2017. And as I said earlier, I note that some targets we have delivered upon and some not. And this has, of course, formed an important input into our strategy work. Next page, please. Another input into our strategy work was the 4 focus areas I brought with me. Customer focus, a truly customer-driven company, ensuring all decisions are being influenced by customer needs; technology leadership, setting the agenda in the industry from the perspectives of innovation, productivity, digitilization and sustainability, goes both in our offering to our customers, but also internally in our own development; delivering shareholder value, delivering on our commitments, focus on the figures, profit before growth, but also organic growth and continuous improvements; and last, people and culture. Attract, develop and retain the best people. Having a culture where we all live our core values and where people can blossom. And to have the best people blossom, I do believe a well-functioning organization is vital. An organization with clear responsibilities, accountability and a mandate to act. Digitalization and sustainability should be our fundamental enablers and cross through all strategic initiatives. Next page, please. So we are now introducing the New Heights program. A program in 3 steps to take us to new heights that will run through to 2025. We are currently in Step 1, reviewing and tuning to have the foundations right. Step 2 will be focusing on getting up to speed with implementation of our strategies and where profit before growth is vital. And step 3 will be to drive strong profitable growth where we deliver on our financial targets over the business cycle. So what are we doing now? We are updating the group vision and core values. We are setting a new customer-centric organization with full accountability and mandate to act. We are accelerating innovation, digitalization and setting a customer-centric value proposition. We are establishing a people and culture function to secure excellence in our -- developing our most important asset. And we are setting profit before growth, securing margin improvements. And we will be back to all of these during the presentation. Next page, please. When reviewing the strategy, the first thing you look at is the vision. And we noted that it was not used that much within the group. We also felt a little bit limited by having the word, vertical, in it. In addition, a lot of people still talk about us as the big [Foreign Language] or in English, the construction hoist company. So we decided to update the vision. And the new vision is then moving people, material and businesses safely to New Heights. We shift focus on vertical access to smart solutions for people and material access and flow. We also highlight our ambition to help our customers excel. New Heights is a clear signal of constant improvements, both for our customers and ourselves, but also our core knowledge of providing access and flow safely at Heights. And we open up for the possibility to review new verticals that would fit the group. Next page, please. With the reorganization that we are making, we also reviewed our core values to ensure they were supporting and strengthening our new structure. We will also now have a strong focus on people and culture and an excellent way to kick start that work is actually to update the core values. We want to have a culture where people take ownership, and we now also get an organizational structure that fully support that, that we constantly move forward, we challenge the limits as we want to go to New Heights, and we realize that the most efficient way is to do that in a well-diversified team. Next page, please. We have decided to reorganize to have 4 customer-centric divisions with full responsibility and accountability and a mandate to act for its own business. Adding up these 4 divisions will form the group result. It will be supported by some carefully selected corporate functions, and each division will be fully responsible for the full value proposition through the entire asset life cycle. The division we know the customer needs best. So they develop our products and solutions, our aftermarket offering and commercial models. They produce market and take to market. They are responsible for P&L, balance sheet and cash flow. Today, the organization has 4 business areas with 7 business units, all reporting into me. But also 13 country managers are reporting directly to me. I felt this was a too complex metrics and something I wanted to simplify. With this structure, it will be easier to implement and execute, both operationally and strategically. We will be organized around the customer, ensuring we drive our strategies and actions from the customer perspective. And we will make people blossom through giving individuals clear responsibilities and the mandate to act. Next page, please. And here, you see our 4 new divisions and figures you see here are pro forma of 2019 and not audited. Construction will be approximately 30% of the group, consisting of 26% coming from the original equipment sales and 4% from the group sales coming from the former After Sales, being then spare parts and services. Constructions consist of then the old construction business unit and the Rental business unit. They will own the rack-and-pinion technology and thereby, also the group's rack-and-pinion manufacturing, supporting and selling rack-and-pinion products to the other divisions. And it's a similar then setup for the other divisions. Industrial will account for approximately 25% of the group, where 11% is coming from original equipment sales and 13% coming from the former After Sales sales. Their core competence will be traction technology. Wind will be around 20% of the group, where 16% is coming from original equipment sales and 4% from the After Sales. And their core competence will be design to cost. While BMU will be around 25% of the group, 19% coming from original equipment and 6% from the After Sales. Core competence will be around project management and customer-specific projects. As for service delivery, that will not be split up. This consists today of teams in each market today, and they will remain like this. A local team per country managed by one division, supporting delivery of services to the other divisions. You also see the EBITA per division and I'm convinced that we can lift our profit in all of the divisions, even though it's obvious that in some areas, we have a too low EBITA and it will require more focus going forward. This level of detail will be available in future reporting. Next page, please. We will have these 5 support functions. And that means, first of all, that the COO or the operation in all in the former organization is taken out. We will have finance and technology as before. We have added one function around strategy and M&A. We will have a people and culture function to take care of our most important asset. And we will have a group support function to support and drive common processes and system support for our local service delivery teams to continue the very good work ongoing in that area. Next page, please. To be a leader, we must secure with develop and deliver the most value to our customers. We are low in R&D spending compared to industrial peers, even though it has been doubled over the last years. We report around 2%. But in this, it's also included engineering, so maybe it's more correct to say 1%. I would argue that some relevant comparable peers have around 3.5%. And you would find up to 10% for fully technology driven and leading industrial companies. The question is, of course, not only how much money you spend, but how you spend the money, but that we should do more is clear. Our investments will be increased. Continue to drive connectivity and digitalization, which is now ongoing through our IoT hub. That has grown out of the 2019 acquisition made of Dataline in Bors. I believe that all our products and solutions forward will be connected and digitalized. And having divisions responsible for both the original equipment sales and services will allow us to develop the full value proposition from a customer perspective. Next page, please. Our people are the most important assets and thereby must be a strategic focus. We have, therefore, created this function to secure excellence in this area. We want to attract, retain and develop exceptional people. We want a high-performing inspirational culture, and we want people to blossom. Next page, please. Creating 4 strong independent divisions, means they will take care of most themselves. But still, there are, of course, several areas where the group will play an important and vital role in value creation for our stakeholders. Within digitalization, sustainability and corporate culture and people, as already highlighted, that divisions can leverage our global footprint and utilize a common back-office setup. That together with all divisions, we have the widest technology base and portfolio in industry that will be leveraged across the divisions. We will benefit from having a common global service delivery organization and capability. And of course, the strong financial backing we can provide to all the divisions. Next page, please. And then I invite Tobias on stage, so he will take us through how we now will make the first solid step in improving our margins. Tobias?

Thank you, Ole. As Ole mentioned, a key priority for us is to improve the profitability in the existing business. And with the measures that we now are putting in place, we have a targeted annual savings of SEK 60 million, full effect from end of first half 2021. These measures that we're now putting in place are affecting production, selling and administration functions with a net reduction of 120 employees, 5% of the workforce. Out of that, around 80 people are within production, mainly within the construction and BMU businesses. For construction, the reductions are mainly made in the [indiscernible] plant. Whilst for BMU, we will, amongst others, transfer the assembly facility in Netherlands to Spain. The annual run rate of these cost reductions is about SEK 33 million. The new organizations with the 4 divisions supported by the lean corporate functions will allow us to have less overlapping roles within selling and administration. The effect of this is a planned decrease of around 40 people throughout organizations globally. The annual savings of this is around SEK 27 million. We also strive to further improve the working capital management, one area specifically is to improve the inventory turnover rate. As a step in this direction, we will take one-off provision of SEK 12 million, a majority within the After Sales business relating to spare parts with a low turnover. R&D functions, as Ole mentioned, is a key priority for us and will not be directly impacted by the program. Instead, our focus here is to making sure the investments are correctly allocated, developing new functions and some product. All these measures combined with its nonrecurring cost of SEK 60 million, of which SEK 35 will be taken in Q3 and the remaining SEK 25 million in Q4. We targeted annual savings of SEK 60 million, we will improve our profitability significantly and move in the directions towards our financial targets.

Thank you, Tobias. Next page, please. We have now presented how we will establish the base, and which then will be implemented during Q4. We will also kick off the strategy development for the divisions and corporate functions now in the beginning of Q4. Beginning next year, we will finalize the strategies and present them in a Capital Market Day during the first half of 2021. We will start implementing our strategies where we keep our financial targets. But we set profit before growth and make the group ready for future profitable growth. The margin improvements will be initiated now with full targeted effect from second half of 2021. Next page, please. As a base for the future value creation for the group and the divisions, when they now start their work developing their strategies. This will be our steering wheel or pinion wheel if you like. Customer obsession is the core of everything we do. Technology leadership, operational excellence and people development, all in a world where digitalization and sustainability influence all we do. And finally, next page. Yes, I'm very happy to present the new group leadership team with some changes. Tobias will continue as the CFO and also Charlotte will continue as the CTO. We have a new face in the team with Matilda Wernhoff. She will be Head of the Strategy and M&A. She has been in the group for the last 4 years, working mostly with M&A. Then we are in recruitment process for Head of People and Culture, and we have hired Cecilia Westerholm Beer as an interim support. Patrick Sundqvist, who has been interim Head of Group After Sales will be Head of Service Delivery. José Maria and Mark will continue to manage Wind and BMU, respectively, as before. And as for Construction, Henrik Teiwik will leave the group and David Batson will resume the role as Head of Construction Division. He has been the Managing Director of our operations in Australia for the last 4 years and has a deep knowledge of Construction and Rental. And finally, Fredrik Betts, currently Head of General Industry and Oil & Gas will go out of the leadership team and take on the role as Global Head of Sales within Industrial Division. We have started the recruitment process for a new Head of Industrial Division. Patrick Sundqvist will in addition to his role, as Chief Service Delivery Officer, act as interim. And with that, I say thank you, and we move to the Q&A session. So then maybe Tobias, you will join me up here again.

Yes.

[Operator Instructions] And just as a reminder, this question-and-answer session is for analysts, journalists and institutional investors. Our first question comes from the line of Johan Dahl, Danske Bank.

Can you just -- since this reorganization, one of the main sort of changes that you're making is integrating the services operations into the industrial sort of verticals. Can you just talk about the purpose of having this global organization, I guess, was to get that global reach and coordination advantages? Could you just talk about what may sort of advantages you see with this new setup that you're proposing and what you aim to achieve through that and what the main challenges will be in doing that?

Yes. I think, first of all, we had relatively the way I saw it complex metrics with both the countries reporting into me and also division. And therefore, I wanted to simplify the sector, so you get a more clear line throughout the organization with, as I said several times, the responsibility and accountability and the mandate to act. So that you have a clear line through the organization with it. So that was the main purpose. Then I hope to have a customer-driven organization. And that -- so that leads us to the way we do it that it will be these 4 divisions. And then I also strongly believe that those that knows the customer segment direct, those that worked with the construction segment, they are also the ones that will know the best, what type of solutions and products that we should develop for that segment. And therefore, I believe that they all should own the full value proposition and thereby also the aftermarket offering and take that to market. We will, from a group perspective, follow and separate very clearly what is OE sales and what is aftermarket sales. So we have full control over that and that we know that we are developing both parts like we should. But yes, I think these were the 3 main areas that we were behind this new structure.

But what sort of challenge do you see that a unit that generates half of group earnings is not having its own sort of P&L in that sense, but rather included in the verticals. Is that something that you sort of create concern on your behalf?

I will not say concern, but it's something that I've been very mindful about. Of course, it's a very, very important part for the group. But also, I know that you don't have the service business if you don't also have the OEM business that we service our OEM products. So it's important that we see this together, they are actually feeding each other, both ways. So that's why I think still that actually getting this -- with the people that know that markets best is the right decision. But it will be kept, as I said, a separate focus and in most cases a separate team, but this also varies a little bit from segment to segment because it depends on the take to market. In some segments, OE and aftermarket sales are more deconnected. It's different customers and it's different sales. While in other segments, it's the same thing. You take the whole package to the customer in one go, it's the same customer that buys it. So this is also an important part that we understand this and really can leverage on this. So I'm convinced that this will allow us to gain even more speed, else I wouldn't have done it.

Okay. Just before I get back in line, can you just confirm that you're reiterating group financial targets? Secondly, these cost-out actions that you announced yesterday, in your view, is that sort of -- is that what's needed to take you to that group margin target in a couple of years' time? And also, have you looked at potential write-downs? And is it sort of fair to assume that given that you're not announcing anything now, that's where we will be. And finally, what's happening to Rental?

Yes. The first question -- or the last question first. So of course, I cannot comment upon anything related to the current base business environment. But we are not changing any financial targets as it is now. The financial measures that we are now taking it is to help us lift profit for the group, definitely, yes. And I don't recall if you had even one more question.

Rental division or business area with part of the construction division going forward?

Yes. If that was your question regarding Rental, then definitely so Rental will be part of the construction division because in principle that's the same market. Okay?

Our next question comes from the line of Kenneth Johansson of Carnegie.

Yes. So maybe I'll ask the same question in a slightly different way. But if you work as a service technician at Alimak, I got the impression that before you were trained to service equipment coming from the Alimak brand, but maybe also from the -- well, the new brands or the wind brands so that you could sort of service many different equipments. So how will the daily work or what changes will the service technician working for Alimak experience in this new organization, please?

Well, it's a very good question. I don't think it's important rather than that's actually not changing at all. What we are changing with the service side is that each of these divisions will be responsible for developing and taking forward the value proposition and product take to market, but the service delivery. So for the service technician, they will still be part of the same long team in each market, where it will be scheduled and managed in the same way as before and support all divisions in that global market. So no change for the service delivery organization investment.

Okay. So it's more sales of services rather than performing the services that will change going forward. Okay. Excellent. Then also on the manufacturing slides, I mean -- sorry, side, you have a number of plants over the world. Those plants, they will belong to the divisions as well. Is that correct?

Yes.

Yes. Great. And then if you -- you don't see any synergies to produce maybe products or one brand in the plant for another brand or something like that, that you sort of miss with this organization? Or how is your thinking there?

Yes. Of course, it might be areas that you could maybe take out some more costs. But again, I do not long term believe in that the last synergy or cost element is what will take us forward. I more believe in that we should have an organizational set up for value creation and growth. And then -- and not be controlled and created by growth synergies. We've got before drive whatever we can on cost development and potential, but this will also be between divisions. They will also need to find their way that they own their results, so they will own also these decisions, not something that I'm enforcing across the board as we do. And remember, today, the factories are reporting to me in principle, all of them, and then they are not owned by the business, which I think is not the right way. I think they should be owned now. Construction will own the rack-and-pinion factories around the world and be responsible for make or buy footprint and how we develop that. The industrial will be for retraction part, et cetera.

Okay. And then finally, the margins on the BMU side are fairly low. Do you believe those are the EBIT margins there are in line with other industrial peers? Or do you see an opportunity to rapidly sort of increase margins on the BMU side?

I think the margin on the BMU side is way too low. That will, of course, now this is highlighted as we see the whole thing. And as we will work dedicated and hard together with the European [indiscernible]. And as I said, profit before growth. So that's something not only the value for the group, but also for each division.

We have a question from Johan Dahl of Danske Bank.

I read your commentary on innovation. And I read it as a need to increase sort of investment. Can you try to just quantify that? Will the cost savings that you're announcing the sort of enough to offset that increase in R&D spend if you could elaborate on that?

I'm not ready to give any figures on this for now. We will now move into a phase where we will develop the detailed strategy for each of the divisions and also these corporate functions, including people and culture, innovation, digitalization, et cetera. So that's something we will come back to in more detail in the Capital Market Day. Other than what I said that I think we are too low. And that I think in the future, all our products and solutions will be digitalized and connected in some way. So we have a way to go. We are, I think, it has started, and a lot of very, very good work is ongoing in that area, and that we need to continue to fuel and invest it.

To ask, can you possibly reiterate those tangible actions to realize the cost savings? It was a really bad line, but you talked about some measures that would lead to this cost savings?

Okay. Yes. So as I mentioned, so we're doing mainly there within production and selling and administration in terms of production, it is that we're reducing the workforce with about 80 people, mainly within construction and BMU businesses. For construction, it's reduction in [indiscernible] for BMU, amongst others, we will transfer the assembly facility for Netherlands to Spain, but also other actions. For selling and admin, it is making sure that we don't have overlapping roles and responsibilities. We are setting this new organization in sales, that is around 40 people with an estimated savings of SEK 27 million. For production, we estimate the annual savings is SEK 33 million. We will have the full effect by the end of first half 2021, so -- and onward.

[Operator Instructions] There seems to be no further questions from the phones at this time.

Okay. We give a few more seconds or nothing more? No? Okay. But then I would like to thank you for participating and for the interest. And also thank you, Tobias, for joining me here. And have a nice day. Thank you. Bye-bye.