Beijer Alma AB (publ) (BEIAB) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our webcast where we present our second quarter 2021. So I am Henrik Perbeck. With me, I have Erika Stahl, our CFO. In addition to the overall performance of the Beijer Alma Group, we will also discuss our reporting segments, our 3 subsidiaries. These are: Lesjöfors, a full-range supplier of standard and customized industrial springs as well as wire and flat strip components, acting globally with majority of sales in Europe; Habia Cable, one of Europe's largest manufacturers of custom design cables for customers in telecom, nuclear power, defense, offshore and other industries; and Beijer Tech which specializes in industrial trading and manufacturing within Fluid Technology as well as consumables, components and machinery to Nordic industrial companies. Beijer Tech is also a platform for acquisitions into new industrial niches. So next page, please, straight to Page 4. So I'm happy to report another strong quarter with significant profitable growth. We saw continued strong demand in most customer segments and geographies. Order booking and sales increased both compared with previous quarter and last year. Operating results increased significantly versus last year albeit not quite on the first quarter's level mainly due to the impact of the data intrusion in Habia, still, the second highest result in the group's history. The high level of activity in the industry has put the strain on supply chains, both in terms of raw materials and components. But thanks to our efforts to adjust prices and actively manage inventory and procurement. The impact is limited, both financially and in our customer deliveries. Looking at our subsidiaries. For Lesjöfors, order bookings and sales remained at high levels, in particular, in the Chassis Springs business area, thanks to strong demand in the automotive aftermarkets. For Habia, demand was good with healthy order bookings. However, operations were affected by the data intrusion with impact on sales and operating profit. There, I would also like to take the opportunity to underline the extraordinary efforts from Habia's management and employees to promptly get the systems back online and always with a focus to minimize the impact for our customers. For Beijer Tech, noted strong demand with high organic growth, both in order bookings and sales in addition to profitable growth from acquisitions. Finally, on acquisitions. It continues to be a priority for the group. This resulted in 2 acquisitions in the quarter and 2 announced shortly after. In April, Beijer Tech acquired Noxon within Fluid Technology; and Novosystems within building automation. In July, an agreement was signed to acquire Källström Engineering Systems, a well-managed and profitable company in the field of filling solutions for the fast-growing battery industry. Later in the same month, we were happy to announce that Lesjöfors carried out its largest acquisition to date, the Alcomex Group, a leading and growing European manufacturer of door and industrial springs and an attractive platform for continued profitable growth. Next, Page 5, please. Now continuing with an overview of the group's financial performance. And as you are probably aware, significant COVID impact in the last year Q2 2020. So comparables are indeed weaker. However, on the graph on the right, you can also see the development versus the quarter in 2019 for a reference to more normal year. So looking at the performance, we can see that order bookings grew strongly by 60% organically and net sales by 37% organically. The operating result is up significantly to SEK 197 million with a margin of 14.7%. Moving on to the performance of the reporting segments. Our subsidiaries, Next, Page 6, please. Lesjöfors, our spring manufacturer, is organized into 2 business areas: industry, mainly a customized product to a very diversified customer base globally; Chassis Springs, standardized replacement springs sold to car part wholesalers, mainly in Europe. Order bookings for Lesjöfors as a group increased organically by 78%, which is a very strong development across the 2 business areas. Net revenues grew organically by 61%. For Industrial Springs, the largest business area, the growth was 38%, and it was broad, across geographies and customer segments. For Chassis Springs, demand in the aftermarket was strong. And I want to note that this is also the one business area within Lesjöfors and also Beijer Alma with a clear seasonality -- And the second quarter is typically the strongest. When you look into the dynamics in the lower middle graph, you will see that we had a very strong COVID effect second quarter last year due to that many workshops in Europe were closed. Instead last year, there was an unusual peak in the third quarter. You can also see a more normal seasonal pattern in the 2019 figures. The operating result for Lesjöfors increased SEK 179 million, with margin improvements broadly across business areas and geographies. thanks to high production utilization. Next, Page 7, please. Now to Habia, our specialty cable manufacturer. Habia is now organized in 2 business areas. However, sales to nuclear power, defense and offshore customers are usually strongly project related. And this can create volatility, and that's why we show the dynamics of these customer segments down on the left. As mentioned, demand was good in the quarter with order bookings amounting to SEK 242 million, up organically by 33%. Net revenues declined by 11% organically and the operating result reported was 0 in the quarter. Revenues and operating results were negatively affected by the data intrusion, which resulted in a loss of production and also a negative product mix since, in particular, the most sophisticated products need full system support during the whole manufacturing process. This event is covered through the group's cyber insurance. In the result, the extra direct costs have been offset by expected insurance compensation, less the deductible of SEK 1.5 million. Now once systems were back, production output has been fully ramped up to catch up and also meet demand. And this continues into the open after the quarter. Next, Page 8 please. Beijer Tech operates in 2 business areas: Fluid Technology and Industrial products mainly within trading but also manufacturing. Further, it is a platform for acquisitions into new product and business areas. Thanks to our continued strong demand, organic growth in order bookings amounted to 43% and net revenues grew by 52%, of which 28% was organic. Operating result increased to SEK 24 million. And in the quarter, 2 companies were acquired. Noxon within wastewater treatment is reported into Fluid Technology and has an annual turnover of approximately SEK 70 million. Novosystems within Building Automation is reported into industrial products and has an annual turnover of approximately SEK 50 million. The impact on operating results from these recent acquisitions is offset in this quarter by transaction costs. And regarding acquisitions, I will come back shortly with some positive events after the quarter. Next, Page 9, please. I will now hand over to Erika to further comment on the financials.

Thank you, Henrik. Please go to Page 10, which is a very busy page but it includes a summary of the quarter and the year-to-date first half of 2021. And I would like to highlight a few things that I have not -- in addition to what Henrik has already mentioned, we had an operating margin of 14.7% in the second quarter and 15.7% in the first half. This is a very strong start for the year 2021. Cash flow in the quarter was good, but of course, we had an impact from the higher operating capital as we have higher accounts receivable due to the higher sales. And as you can see from the key ratios, we have a strong balance sheet. And also, if I would like to add, after the recent acquisitions that we have made and announced, this impact is not visible in the numbers, but our balance sheet remains stable. So we continue to have room for acquisitions. And additional information is also then that we have increased our revolving credit facility from SEK 300 million to SEK 800 million. Please move to Page 11. And here, we have the bridges that show the development of order bookings and net revenues in the quarter. And both items then have a headwind of 4% and the acquisition impact is from the Beijer Tech acquisitions. And as you can see, the level of organic growth is high. And of course, we have, as Henrik has already mentioned, the comparables from last year has been heavily affected by the COVID-19 pandemic. And order bookings were strong in all of our companies. whilst then the net revenues for Habia was lower than last year. But then Lesjöfors and Beijer Tech had a strong net revenue development. Please move to Page 12. Looking at 2 bridges showing the contribution from the different segments on net revenue and operating results. And as mentioned, and as you can see on the chart as well, Lesjöfors and Beijer Tech had a very strong net revenue development, which then also resulted in good operating result development for the quarter. And as we talked about before, we then have a 0 result in Habia, which then resulted in SEK 13 million lower than last year. And all of these things then led up to the SEK 197 million operating profit for the second quarter 2021. Please move to Page 13, which then are same bridges -- similar bridges, as the one we looked at on the previous page. But these ones depict the development in the first half 2021 compared to 2020 first half. And here, we see also then a strong contribution from Lesjöfors and Beijer Tech and both in terms of net revenues and operating results, whilst then Habia is lower than last year. And even though we did have a 0 result for the second quarter. And for the first half, it's only SEK 3 million, but Habia is behind in the first half year perspective. So I think that is a good thing to keep in mind when talking about the performance of the different segments. And now with that, I hand over back to you, Henrik.

Thank you, Erika. So we are now going to have Page 15. So after the quarter closed, we have several events and on -- that are interesting to highlight for you. On July 9th, Beijer Tech signed an agreement to acquire Källström Engineering Systems. Källström designs and produces equipment for filling, mixing and handling of corrosive liquids and primarily for the growing international battery industry. Källström sales amounts approximately SEK 35 million with good profitability. The transaction is expected to close during the third quarter. Later in July on 28th, Lesjöfors acquired Alcomex, which I will come back to in more detail shortly. Moving on. On the 29th of July, we signed an agreement to divest S&P Federnwerk in Germany, and the transaction has been closed since. S&P was a part of Lesjöfors since 2013 and had a turnover of approximately SEK 110 million mainly to automotive OEM customers and agricultural vehicles. The decision followed an evaluation of strategic alternatives and unsatisfactory profitability. Now for Beijer Alma and Lesjöfors, this will incur a negative result effect of approximately SEK 60 million not affecting cash flow, and this will be seen in the third quarter. And as Erika mentioned, during the quarter, we increased our credit facilities from SEK 300 million to SEK 800 million to cater for the above-mentioned transactions. Now coming back to the main event. Next, Page 16, please. The acquisition of Alcomex. So we are proud to disclose this acquisition by Lesjöfors in the end of July. And I would like to take this opportunity to present Alcomex Group. Alcomex is a leading and growing door and industrial springs manufacturer that is based in the Netherlands. Like Lesjöfors, the focus is on smaller batches and customized products with value creation through technical expertise. It has a diversified customer base and becomes the new platform for continued profitable growth for Lesjöfors. Alcomex has a complementary geographical footprint for us, both in its sales but also through production footprint in countries like India, Poland and Czech Republic. So in a snapshot, a revenue of approximately EUR 45 million with good profitability, approximately 350 employees and serving 2 main product segments, door springs and industrial springs. We're also positive to continue to develop Alcomex together with our strong management, who remains as minority owners. So we see a clear industrial logic in this acquisition and many opportunities for collaboration and synergies going forward. It is a large acquisition to date by Lesjöfors and will bring significant impact to the profitable growth for Beijer Alma as a group. So next, Page 17, please. Finally, in the last webcast, I presented our strategic focus. I would like to reconnect to this in the light of what we have discussed today. In the quarter, we see -- we report significant profitable growth, both organic and through acquisitions. Our diversified customer base is a strength as demand has increased, both during the pandemic and recent challenges in the supply chain we have showed on resilience and managed our customer deliveries. Our increased acquisition focus continues. The consolidation of the industrial springs market for Lesjöfors continues with the acquisition of Alcomex. Three acquisitions by Beijer Tech discussed today establishes further its role of a compounder within industrial niches. And as Erika mentioned, our financial position remains strong to support acquisitions also beyond these recent events. We are a long-term owner but with the divestment of S&P also shows that if we cannot achieve profitable growth long term, we will take action and also adjust our portfolio of companies accordingly. Finally, our decentralized governance is key to us to empower local management and encourage entrepreneurship both for our existing and recently acquired companies. So with that, we'll move on to Page 18, please, and open up for questions. So operator, please.

[Operator Instructions] And we have 2 questions in the queue so far. The first is from the line of Carl Ragnerstam of Nordea.

It's Carl from Nordea. A couple of questions from my side. Just, first, a clarification on Habia cable. Could you just, once again, please explain how the insurance policy is working. And just one more time, also explain the impact on the Habia's results in the quarter. Yes, let's start there.

Hello, Carl. Okay. To clarify how the cyber insurance work, it has the component of covering direct costs associated with coming back up online with the systems. It also has a component on the business interruption covering sort of loss of business during the period. So during the quarter, as I explained, we have taken significant extra costs to manage the situation. We have less the deductible, added back this as our expected insurance compensation. Referring to the business impact, as I mentioned, we are -- in the quarter already ramped up our production to catch up with customers that did not receive their deliveries during that time, and we are continuing to work on that into the open.

Okay. Perfect. And the sales loss in the quarter, as you reported, negative 11%, I think, negative organic growth. What was the sales loss during the quarter owing to the IT attack? I guess, you managed to, yes, offset it fully, at least.

So If you talk about the sales loss in the numbers related to last year, I just want to iterate on that -- Habia actually were not that heavily impacted by COVID in Q2 last year. So we're comparing to fairly normal numbers there. We have not quantified specifically the sales impact, but there are -- the sales impact comes from loss of production, as I mentioned, during a couple of weeks. It is not -- it's different for the different factories. Some factories managed to run quite high utilization on -- through manual processes, whereas, as I mentioned, the most sophisticated production, which require full system support throughout the manufacturing, had a larger impact.

Okay. And then on that note, then I guess it's fair to assume a more positive margin mix going forward. I guess that -- it implies that.

So once again, the mix effect in the quarter -- as I mentioned, there is a mix effect due to what I just explained on the more advanced products and also, of course, a top line effect in general.

Okay. Perfect. And on the Chassis Springs, of course, strong growth, but you had favorable comparisons as well. But I'm a bit curious to know what sort of the growth looks like at the end of the quarter when you don't have a favorable COVID comparisons, for instance, when looking at LKQ's European division, they reported close to 10% growth in June, for instance. Is that a fair proxy for you as well in at the end of the quarter?

The demand was very strong throughout the quarter and as actually I mentioned also in my CEO comment in the report through the summer. And so of course, when you have -- you'll remember or you remember that in April last year, it was more or less shut down. So the growth continues to be strong throughout the quarter.

Okay. Perfect. And also, a bit on Beijer Tech. I mean strong growth there as well, but margin looked a bit muted at least in the quarter. And especially when considered the strong organic recovery, which seemingly gave a little drop-through. What is behind that?

We have -- I think the margins are on a similar level. We had some impact from, as we mentioned, from acquisition transaction costs. And it is a portfolio of companies. And so the development is fairly similar to the previous quarter.

Okay. Perfect. And the final one from my side is related to M&A, and you have obviously closed quite a solid amounts of M&A year-to-date to say the least. And would you say that it is an effect -- a catch-up effect from the pandemic, if you will? Or would we say that it's partly due to the strength in M&A team and that you're able to follow up on leads more effectively and maybe even more -- be more proactive in your M&A approach?

I think it's a combination of both. Of course, the M&A market has been quite strong. We have been working proactively throughout also the pandemic, by the way. And a project like Alcomex, is of course, a lot of work during longer time. So it's a combination, a strong market, but also definitely a proactive work with the team that we have both in our subsidiaries and supported by us, Beijer Alma centrally.

And we have 1 further question that's from the line of Hjalmar Jernström of Erik Penser Bank.

The first question is relating to Lesjöfors. You have an improved operating margin here, both compared to 2020 and 2019. Could you elaborate a bit on the facts here, and whether this mainly stands from input gross margin? Or is it the management of capital operating expenditures?