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

Thank you, and good morning, everybody. And we welcome to our webcast where we present our third quarter 2022. So I am Henrik Perbeck, and with me, I have our CFO, Johan Dufvenmark.

Good morning.

So in addition to the overall performance and developments of the Alma Group, we will also present our reporting segments, our three main 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. It is Beijer Tech specializes in industrial trading and manufacturing within Fluid Technology as well as components, consumables and machinery to Nordic industrial companies and also building automation. And they take results on platforms for acquisitions into new industrial niches. And Habia Cable, which was divested in October, but it's reported as discontinued operations in this report. So we can go to straight to Page 4, please. So the third quarter, the group's growth was mainly acquisition-driven. Demand was vary in fairly uncertain economic climate. The general demand was fairly good, but varied really between regions and segments. The continued high inflation has led to increased costs, which have been compensated through price increases. And on a relatively more positive note, we can see that the trend that the supply chains are stabilizing. In Lesjöfors, the chassis spring showed significantly lower volumes versus last year. Partly, this is due to the suspended sales to Russia, but also in other parts of Europe. For industrial springs, we see the Nordic region remain the strongest together with the U.S., whereas Asia and Central Europe has showed weaker demand. Beijer Tech had a stable demand in the Nordic markets in both business areas, especially the Norwegian market. And we're also very happy to see a good contribution from our recent acquisitions. The important and strategic acquisition of John Evans' Sons into Lesjöfors was completed early in this quarter. This doubles our presence in the U.S. and also increases our sales to interesting medical device market. And in addition, the Turkish spring manufactured, Telform was acquired in early October. And as mentioned, finally, Habia Cable was divested according to plan in early October as well. The next Page 5, please. Now continuing with an overview of the group's financial performance, since Habia Cable has been divested in this report according to the IFRS accounting rules, Habia is reported as discontinued operations and not part of these consolidated accounts and comparables in the report nor in this presentation. And below left on this slide, you can see how the split of revenues has changed with and without Habia Cable. And generally, we are still facing tough comparables due to the strong performance in 2021. So in this quarter, we can see that order bookings grew by 22%, and which was a decrease by 3% organically. Net revenues grew by 30%, of which 3% was organic, which, of course, also includes price increases implying that overall volumes are somewhat down versus from Q3 last year. Operating results before items affecting comparability increased slightly to SEK 200 million, with a margin of 13.5%. There are no items -- this quarter reported as affecting comparability only in the comparables and the historical numbers on the group. So moving on to the performance of our reporting segments, our subsidiaries. We go to next Page 6, please. Lesjöfors, our spring manufacturer is organized into two business areas. These are industry with mainly customized products to a very diversified customer base globally. And the other is chassis springs, which are standardized replacement springs sold to car parts wholesalers mainly in Europe. For Lesjöfors, order bookings increased by 27%, supported by the acquisitions and some currency effects. Organically, order bookings decreased by 4%. Net revenue grew by 30%, also with a decline of 4% organically. For industrial springs, the largest business area, growth was 51% and where, as mentioned, the Nordic region was the strongest together with the U.S. In Central Europe, volumes have been lower and more volatile. And also in China, the economic uncertainty affected demand. The recent acquisitions with some contribution from Alcomex, Plymouth, and also John Evans contributed strong performance, and they are reported into this business area, industrial springs. For chassis springs, the demand was significantly lower in Europe in addition to this effect from the suspended operations in Russia. And this had an impact on net sales and order intake. There was a lower end customer demand, and this was amplified by destocking at the wholesalers, which is not uncommon in this market when the demand changes. This led to a decline in net revenue of 24% compared to last year in the quarter, which is quite significant. The operating result of Lesjöfors declined to SEK 154 million, which corresponds to an operating margin of 14.8%. And there are some onetime effects related to the acquisition of John Evans of SEK 17 million and adjusting for this, the margin would have been 16.4%. But to summarize, in addition to this, the key drivers of reduced profitability in the quarter when comparing to last year. Firstly, the direct effect from the safety Russia and lower volumes in Russia in the contribution the chassis spring business area is lower than previous periods. As you can see on the graph -- on the slide on the right lower, the share of revenues in the quarter from chassis springs was 70% and which is lower than usual. Further, as mentioned within industrial springs volumes and profitability in Central Europe and Asia had an impact also on profitability. And finally, as we have made price increases to offset cost increases, there is still a margin effect that is not fully compensated. Next, Page 7, please. Beijer Tech operates in two business areas: Fluid Technology and industrial products both acting within industrial trading and manufacturing and further, it's a platform for acquisitions into new attractive industrial niches, such as building automation, which is reported into industrial products. Growth in order bookings amounted to 9% with a decrease organically by 2%. Net revenues grew broadly by 32%, of which 19% was organic. Within both business areas, industrial products and Fluid Technology, growth was broad over the Nordics and revenue grew organically with support from price increases. In addition, the recent acquisitions of Swedish Microwave and Mountpac contributes to profitable growth in the industrial products business area. The challenges in the supply chain are stabilizing, although some lead times continue to be long. Beijer delivered a strong operating result, which increased to SEK 52 million, with an operating margin of almost 12%. Next page please. Now also briefly some comments on Habia Cable, which is mentioned -- is reported as discontinued operation, but we're still a part of the group in the third quarter. Demand continued to be good in the quarter and order bookings amounted to SEK 261 million, up organically by 7%. Total net revenues grew organically by 17%. Profitability improved and margin was 11.8%. And operating result improved to SEK 29 million in the quarter. So this will be the last time we discussed Habia Cable in our reports and webcast. With the divestment of Habia, our leverage has decreased. And with a strong balance sheet, we can continue to both invest in our current companies as well as add new companies when interesting opportunities arise. And finally, I would also like to thank the management, employees of Habia for excellent work in cooperation in the last five years in my role as CEO, and also, of course, for the 30 years ahead of that. Thank you. Next, Page 9, please. I will now hand over to our CFO, Johan Dufvenmark, for some more comments on the financials.

Next, Page 10, please. Thank you, Henrik. As mentioned in the report, Habia Cable is regarded as discontinued operations and is not a part of the consolidated group in most cases. Looking at the numbers for the remaining group. Net revenue is up SEK 350 million compared to last year. Acquisitions contributed with SEK 230 million, which was an increase of 20%, while organic growth was SEK 35 million. Organic growth in Lesjöfors is negative, while Beijer Tech showed a strong development. The low organic growth in the quarter was mainly related to lower volumes within Lesjöfors, as Henrik mentioned, while price increases have had a positive effect. Compared to last year, the currency effect on revenue was up SEK 85 million. Order bookings increased to SEK 1,377 million compared to last year, where acquisitions contributed with SEK 204 million, an increase of 18%, whereas the organic growth was negative. Next, Page 11, please. So 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. And with Habia Cable included, it was SEK 1,724 million in the quarter and SEK 1,483 million, excluding Habia. The increase is mainly related to acquisitions in both Lesjöfors and Beijer Tech. The total increase in Lesjöfors was SEK 240 million, and Beijer Tech contributed with an increase of SEK 105 million compared to last year. As you remember from the last slide, the increase in the remaining operations was 65% related to the acquisitions, but there was some contribution from organic growth and currency. In the operating result for last year's third quarter, we had an items affecting -- an items comparability of SEK 45 million related to the divestment of the company in Germany. Operating profit before this item was SEK 220 million last year. Beijer Tech had a strong development, both related to acquisitions and organically and had an increase of SEK 18 million. Development operating profit in Lesjöfors was minus SEK 13 million comparing the quarters, the main reason being lower sales in Russia, U.K. and Germany. Next Page 12, please. Now let's take a look on some of the key financial ratios. We've already taken a look at the revenue, up 31% compared to last year, mainly driven by acquisition and price increases, but also good development in Beijer Tech. As mentioned by Henrik, operating margin before items affecting comparability was lower than last year, down 3.9 percentage points. Cash flow before acquisitions was SEK 93 million, affected mainly by higher inventory and lower accounts payable while accounts receivable have improved. Net debt increased compared to last year, which was an effect of the John Evans acquisitions, but some of the increases related to currency effects as well. Please note that since the close of the quarter, we have received the proceeds from divestment of Habia Cable. So net debts have decreased substantially in them. Thank you. And back to Henrik for a look at events after quarter and some final remarks.

Page 13, please. Now I would finally like to mention two positive events after the quarter. On 6 of October, we completed the acquisition of Telform. Telform is a successful manufacturer of Industrial Springs in Turkey and fits very well into Lesjöfors Group. This expands opportunities for cross sales and also gives Lesjöfors to a further footprint for low-cost production. And finally, as mentioned, on October 14, the divestment of Habia Cable was completed according to the agreed terms and conditions. Next, Page 14, please. So just a brief recap of today's messages. Still demand in general favorable but varied across geographies and segments. Growth this quarter, mainly from acquisitions. Price increases have offset cost increases. Acquisition of John Evans early in the quarter, strengthened Lesjöfors position and build further scale, at least on the U.S. markets. And the new acquisition in Turkey to expand sales and production footprint for Lesjöfors. And finally, the divestment of Habia Cable gives strength for further acquisitions. And in these uncertain times, we need to be agile to capture opportunities and react to changes. So next, Page 19 and open for Q&A.

[Operator Instructions] Your first question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. Firstly, looking at Lesjöfors EBIT margins fell a bit year-over-year here. I mean is it possible for any chance to quantify what is actually the impact from the sort of exit from Russia. I guess also you have sort of -- if you were to exclude Russia at all in this quarter and the comparison quarter as well. I guess you still have sort of a negative sales mix from lower chassis share of total sales, right? So I mean what impact did you have from that? And also you mentioned that you're not still on par with raw materials. Did it have any substantial impact? Or is it primarily Russia and maybe an underlying negative margin mix impacting?

Carl. So in terms of quantifying Russia, we don't do that quite on the bottom line level. As we have discussed before, it's around 16% of the sales within the chassis spring business area. In our previous quarter, we mentioned this as one of the key drivers, as you recall, of the reduced profitability. It continues to have an impact. I want -- but in this quarter, the overall lower demand in the chassis business area also in key European markets drives the volume down. As you can see, it's 24% down, and that's also including price increases, right? So volume-wise, it's a little bit more. So that is a combination of those both Russia and European markets. In terms of -- yes, what was the other part of your question?

Raw materials, you mentioned that raw material.

Yes. In terms of raw material, we have -- as I stated, we have compensated, but there still just a margin impact. So not compensated fully for the margin, but compensated for the cost increases. So, yes.

Do you still get price increases from your suppliers? Or are they -- is it more stable situation? And also with your, I guess, announced price increases, should we see sort of a more neutral situation when we are entering Q4 here from a raw material point of view?

It's a good question. In terms of raw material, we have seen stabilizing environment. And we can also see on the metal market that it should start going down, now during the autumn. Of course, there are some other components in more in general inflation that we -- as everyone expects to continue for now in the quarter and also going forward. But the peak of metal pricing we have passed. Having said that, as Johan mentioned, we did increase our working capital and the inventory, and that is mainly steel, driven by its more expensive materials having sort of come in during the last periods. So -- but that should also, from that perspective, level out from the raw material part of it.

So a more neutral situation in Q4 then or going forward at least?