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

Good morning, and welcome to the Beijer Alma Q2 2022 Earnings Call [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to the CEO, Mr. Henrik Perbeck. Please go ahead, sir.

Good morning, everybody, and welcome to our webcast where we present our second quarter 2022. So I am Henrik Perbeck. And with me, I have our new CFO since June 1, Johan Dufvenmark. So a special welcome to you, Johan.

Thank you, Henrik.

In addition to the overall performance and the recent developments in the Beijer Alma Group, we will also present our reporting segments. These are our 3 subsidiaries. These are Lesjöfors, 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. It is Habia Cable, a leading manufacturer of custom design cables for customers in telecom, nuclear power, defense, offshore and other industries. And Beijer Tech, specializes in industrial trading and manufacturing within fluid technology as well as consumables, components and machinery to Nordic industrial companies and also building automation. And Beijer Tech is also a platform for acquisitions into new industrial niches. So let's go to next page, straight to Page 4, please. In the second quarter, the group's growth was acquisition-driven, demand was stable and we increased our strategic focus through some important events we'll discuss today. In general, demand was stable and good, but more varied across regions. The Nordics remained the strongest region with organic growth, whereas Central Europe and Asia were more impacted by external factors, such as still the COVID and also the war in Ukraine and supply chains. Continued high inflation has led to increased costs, which, to a large extent, have been compensated through price increases. In this report, Chassis Springs showed growth in most of Europe, but the suspended sales to Russia and decrease in Ukraine had a negative impact on revenues and earnings. For Lesjöfors Industrial Springs in the Nordic region, as mentioned, has remained the strongest, whereas Asia and Central Europe was more impacted by customer and supply disruptions, especially in markets such as automotive. Habia Cable had another strong quarter, with favorable order bookings, revenues and profitability. Demand was strong in the industry and telecom customer segments as well as the defense market. Beijer Tech had favorable demand in the Nordic markets in both of its business areas, despite a continued challenging environment in terms of supply. We're also happy to see the positive contribution from recent acquisitions. At the very end of the quarter, we signed the acquisition of John Evans' Sons, important and strategic acquisition of Lesjöfors which doubles our presence in the U.S. and also increases our sales to the interesting medical device market. And finally and importantly, in July, we announced the divestment of Habia Cable following our strategic review during the spring. This strengthens the strategic focus of our group. Next, Page 5, please. Now continuing with an overview of the group's financial performance. Firstly, since Habia Cable will be divested in our Q2 report according to IFRS accounting rules, Habia Cable is reported as discontinued operations and not part of the consolidated accounts and comparables in the report and not in this presentation. Below left, you can see a split of the revenues and how it changes with and without Habia Cable included. In general, based on a very strong recovery in performance last year, we are facing tough comparables this quarter. Despite of this, looking at the performance, we can see that order bookings grew by 22%, but decreased 1% organically. Net revenues grew by 29%, of which 3% was organic, which, of course, includes price increases implying that volumes are somewhat down versus a strong Q2 last year. The operating result decreased slightly to SEK 190 million with a margin of 13%. There are no items this quarter affecting comparability, only in historical numbers, where, for example, the impairment of assets in Russia of SEK 25 million in Q1 are. Moving on to the performance of the reporting segments, our subsidiaries. Next, Page 6, please. So Lesjöfors, our spring manufacturer, is organized into 2 business areas. These are Industry, with mainly customized products through a very diversified customer base globally. The other business area in Chassis Springs, these are standardized replacement springs sold to car part wholesalers, mainly in Europe. Order bookings for Lesjöfors increased by 20%, and the net revenues grew by 28%, but declined 1% organically. For Industrial Springs industry, the largest business area, the growth was 39% -- sorry, 44%, where, as mentioned, the Nordic region was the strongest. In Central Europe, the volumes were impacted by indirect effects from customers lacking other components, supply chain issues. In Asia and China, we had disruptions due to COVID lockdowns, which affected operations during the quarter. The recent acquisitions, Alcomex and Plymouth contributed with strong performance, and they are reported into this business area. For Chassis Springs, demand in the aftermarket in Europe was relatively good, but the effect of the suspended operations in Russia and also lower sales to Ukraine impacted sales and order intake. This contributed to a decline in net revenue by 7% compared to last strong year. The operating result declined to SEK 156 million, which corresponds to an operating margin of 15.4%. The key drivers of reduced profitability in the quarter when comparing to the strong Q2 '21 were: Firstly, of course, the direct effect from suspended sales to Russian and short term also lower volumes to Ukraine. In addition, the sudden drop in volumes for Chassis Springs due to rushing late Q1. It happened at the time where was, as usual, having built up inventory for the full season. This had an impact not only on the sales, but also temporary effects of less efficient operations. Several actions have been taken to adapt to the new situation and already towards the end of the quarter, we could see positive effects. Well, further, thirdly, within Industrial Springs, as described, volumes and profitability were impacted in Central Europe and Asia. And finally, as a remark, price increases that have been made to offset cost increase affects the margin in percent. But to summarize, apart from the sales to Russia, we do consider these effects to be mostly temporary. Next, Page 7, please. Beijer Tech. Beijer Tech operates in 2 business areas: Fluid Technology and Industrial Products, both acting within industrial trading and manufacturing. Further, it's a platform for acquisitions into new attractive niches, such as building automation, which is reported into industrial products. Thanks to a continued stable demand, growth in order bookings amounted to 28%. Net revenues grew broadly by 28%, of which 14% was organic. Within both business areas, Industrial Products and Fluid Technology, growth was broad over the Nordics and the revenues grew organically with, of course, support from price increases. In addition, the recent acquisitions this year of Swedish Microwave and Mountpac contributes to the profitable growth in the Industrial Products business area. Challenges in the form of longer lead times and price increases are handled proactively in the companies, but continued to be challenging during the quarter. Operating result increased to SEK 42 million with an operating margin just under 10%. Next, Page 8, please. Now briefly also some comments on Habia Cable, which is, as mentioned, reported as discontinued operations, but still a part of our group. I also want to comment that the comparables for Habia in Q2 last year were impacted by the data inclusion events in that quarter last year. Demand continued to be good in the quarter with order bookings amounting to SEK 260 million. Net revenues grew by 45% organically. This was driven by the telecom industrial customer segments but also good activity in defense projects. Thanks to good capacity utilization and an increased share of defense, nuclear and offshore versus previous quarters, the profitability improved. And operating results improved to SEK 44 million in the quarter. Next, Page 9, please. I will now hand over to our CFO, Johan Dufvenmark, for some more comments on the financials. So next, Page 10, please.

Thank you, Henrik. As mentioned in the report, Habia Cable is regarded as a discontinued operations and is not part of the consolidated group in most cases. Looking at the numbers for the remaining group, net revenue is up SEK 317 million compared to last year. The acquisitions contributed to -- with almost SEK 222 million, which made up 19% of the increase, while organic growth was SEK 39 million. The low organic growth in the quarter was mainly related to the discontinued sales to Russia, which affected negatively, while price increases have had a positive effect. Compared to last year, the currency effect on revenue was SEK 56 million. Order bookings increased to SEK 1,437 million this year compared to last year, where acquisitions contributed with SEK 217 million, 18% of the increase, whereas the organic growth was slightly negative. Next, Page 11, please. Now a short look on the segments and how they contribute to revenue and operating results. As you saw on the previous slide, net revenue increased to SEK 1,461 million in the quarter, driven mainly by acquisitions in both Lesjöfors and Beijer Tech. The total increase in Lesjöfors was SEK 218 million and Beijer Tech contributed with an increase of SEK 99 million compared to last year. The development of the operating result paints a little different picture as there was a strong development in Beijer Tech, which Henrik told you about earlier, but the decrease in operating profit in Lesjöfors. As previously mentioned, this was due to decreased sales to the Russian and Ukraine market, challenges related to COVID lockdowns in China as well as strains on the supply chain for some customers in Europe. Next, Page 12, please. Now let's take a look on some of the financial KPIs. For quite some time, we have seen an outflow of cash related to inventory and more precisely due to increased raw material prices. We expect now this effect to have leveled out since raw material prices have come down some in the commodity market. Net debt has increased to almost SEK 1 billion since last year and was almost SEK 1.7 billion. The increase is mainly related to acquisitions and higher working capital, more specifically, higher raw material prices. In regards to available liquidity, which is cash and undrawn credit facilities, the [indiscernible] in credit facilities [ in held ] acquisition for John Evans' Sons and the total is now back on a more normal and lower level. Thank you. And now back to Henrik for look at the events after the quarter and some final remarks.

Thank you, Johan. I would now like to turn our focus to 2 exciting and significant events after the quarter. On July 5, we announced that we had entered into an agreement to divest Habia Cable. And on July 8, we completed the acquisition of John Evans' Sons into Lesjöfors. So next, Page 14, please. First, let's go to the announced divestment of Habia Cable, which followed a strategic review during the spring. Beijer Alma has owned the Habia Cable since 1985, and is now handing over to the German cable company, HEW-KABEL which, in turn, will create a European group specializing in custom designed tables. This, we believe, is a good home for Habia to flourish in the future. At the same time, the divestment will strengthen our financial profile to allow us to continue creating value through investments and acquisitions in Lesjöfors and Beijer Tech and thereby strengthening our strategic focus. In Lesjöfors, we focus on add-on acquisitions. And a great example is, of course, most recently with John Evans' Son. In Beijer Tech, we see ample opportunities, both with add-on acquisitions and also new attractive niches, such as shown with Swedish Microwave and Mountpac in the first quarter this year. So I'm confident when it comes to our prospects for continuing to generate profitable growth. Next, Page 15, please. So in late June, we were proud to disclose the strategic acquisition of John Evans' Son by Lesjöfors. I would like to take this opportunity in the call to present the company to you. John Evans' is actually the oldest spring maker in America, starting in 1850 and still a leader in its fields. And as a fun fact, Lesjöfors actually produced its first springs in 1852. Located in Pennsylvania, John Evans' focuses, similar to Lesjöfors, on customer-centric product development and has long-standing customer relationships. It takes pride in its skilled workforce. In a snapshot, they bring some USD 37 million with high profitability to our group. With strong focus on spiral torsion and constant force springs, we gain a leading market position also in these product areas. Further, the consistent focus to develop medical device market is impressing and gives an attractive end market split. The transaction also enables other opportunities for profitable growth, such as purchasing coordination, cross-selling, co-development projects as well as resource and knowledge sharing with Lesjöfors and other companies. And not the least, it doubles our presence on the North American market. By value, it is the largest acquisition to date by Lesjöfors and actually Beijer Alma and will bring significant impact to the profitable growth for Beijer Alma as a group. The next Page 16, please. We can now see that our strategy to further grow the acquisitions is having an increasing impact. We continue to look for good companies, which fits into our group and can deliver long-term growth. This year, the acquired companies bring some SEK 500 million in net revenues with good profitability. Next, Page 17, please -- or actually straight to Page 18, please. So a brief recap of today's main messages. Demand, stable and favorable, but varied across geographies. Growth came from acquisitions. The price increases have, to a large extent, offset the cost increases. And the discontinued business to Russia impacted growth in earnings. The divestment of Habia Cable gives strength for future acquisitions. And of course, as an example of such, the acquisition of John Evans' in the U.S. strengthens Lesjöfors' position and builds further scale. Next, Page 19, please. And now we open up for questions. So operator, please?

[Operator Instructions] Our first question is from Carl Ragnerstam of Nordea.

It's Carl here from Nordea. A few questions. Firstly, on Lesjöfors. Obviously, on a year-over-year basis, quite soft margin or, of course, tough comparisons as you said. But is it possible for you to sort of give any quantity or to quantify the Russian discontinuation impact on the margins, China lockdowns, maybe some raw material headwind, if I understood you correctly? Yes, we'll start there.

Carl, so referring to what I commented on speaking about Lesjöfors. We saw, as I said, 4 drivers, as I mentioned. We have the direct effect in Russia. We also had the operations effect of a fast reduction in volumes. And as mentioned, also in Industrial Springs, the Central Europe, and finally, also the price versus cost offset the impact on the margins. So once, as you said, we are comparing to a very strong quarter last year. But I would say this is also the priority -- without giving the specific numbers, these are the main drivers and also in that priority. So together, the 2 parts that are related to the war and the situation in Russia, of course, has an impact for us. So I would say that's the priority of the impact.

Okay. That's very good. But -- okay, if we look into the second half, what portions or what part of these drivers is the sort of weaker margin, please? Do you expect to sort of ease out in the second half?

Yes, so as I said, some of the drivers at the long -- the sales -- continued sales to Russia, that is, of course, as we see the situation of permanent nature. However, the more short-term would be the -- of course, the sales going into Ukraine. That is already -- actually towards the end of the quarter, we could see improvements versus, of course, April. Then, of course -- then, as once again, the effect on operations going from maximum production capacity to basically overnight, being overstocked. So we needed to reset and we planned. And that is certainly could be seen as temporary. And I mentioned also that we could see good effects from this also towards the end of the quarter. COVID in China, well, we saw the impact mainly in April-May, where we had lockdowns, which disturbed the deliveries. It disturbed -- we managed to produce quite well, but it was operationally very tricky. So whether that is a completely temporary thing, I would say right now, I guess it looks better, but not for -- that remains to be same. But I will still right now classify that as a more especially early Q2 effect. When it comes to European business, the -- of course, the supply chains in many markets are, I guess, expected to get more organized as we hear from many of the large industrial players. So in a way that will also hopefully ride out. But of course, once again, it comes to, of course, jointly with the development of the demand situation. Yes, so those -- that's how I would classify in terms of what is temporary in nature and...

And the lost sales in Russia, as you mentioned, is it the biggest impact or where would you rank it? Is it the one which is then sort of easing in second half?

[indiscernible] we -- last year, we sold SEK 150 million in Russia, which we disclosed in our annual report. We also saw a very strong start of the year up until late February. So of course, that has an impact, absolutely.

Okay. And is it possible to quantify it versus the other effect? Is it sort of the bigger effect of those?

I would say out of what I mentioned, it is the #1, but altogether, they play a part, of course.

Okay. Perfect. And also in Lesjöfors, have you seen any changes in the underlying market demand throughout the quarter, which is worth mentioning also? I mean, of course, your chassis sales is, to some extent, towards consumers it's nondiscretionary, however, have you seen any impacts from it or weakening consumer? Is it not impact your business at all or...?

Well, I wouldn't specifically tie it maybe to the weaker consumer demand. But of course, there could be such aspects, but that's not we -- more what we see, I think I discussed in the last call was also a fairly normal winter climate, not the very harsh winter, which always has some impact for us. So once again, comparing to last year, it is a tough comparison. But overall, as I commented, the demand is good in Europe. There are no big shifts on the chassis side. And once again, on the industrial side, we are, of course, our customers are all the leading industrial manufacturers in the Nordics and Europe. So of course, we -- the demand follows to a large extent back, but also fairly stable, and there are no big shifts as we see, especially quarter-from-quarter.

Very good. And also with the raw materials starting to come down to pre-pandemic levels, do you think that you'll be able to maintain your prices and maybe -- in that case, I guess, realize the margin tailwind at some point? Or do you think that your customer they have a pretty good visibility and by that, you need to sort of lower your prices?

[indiscernible] the question, Carl, Johan here. So of course, we will try to defend the prices that we have, but I think it's also important to remember that we are kind of -- when it comes to raw material, we don't buy the material we buy steel for our springs. So there will be kind of a lag when the prices go down. But of course, we will try to defend our prices. There are, of course, some places where if this will be a very big shift that the prices will come down, of course. But still, there could be a positive effect from this.

Okay. [indiscernible] yes, sorry, sorry, continue, continue.

Yes. So when looking at John Evans', obviously, quite a bit of medical sales, have you looked into whether they are -- were boosted by sort of COVID or had COVID volumes and by that, you're sort of facing tougher comparables in the short term or were they unaffected during the COVID period?