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

Good morning, everybody, and welcome to our webcast where we today will present our third quarter 2023. My name is Henrik Perbeck; and with me, I have our CFO, Johan Dufvenmark.

Good morning.

Today, we will present the performance of the group and the recent development. In addition, we will also present our reporting segments, our 2 main subsidiaries. These are Lesjöfors, a full-range supplier of standard and customized industrial springs as well as wire and flat strip components. Lesjöfors is acting globally with majority of sales in Europe. And it is Beijer Tech, acting mainly in the Nordics within specialized manufacturing, value-adding industrial trading and automation in profitable niches. And Beijer Tech is also a platform for acquisitions into new industrial niches. So today, I will present to you what I believe is a decent report in the uncertain operating environment we are in today. It was a third quarter with good cash flow growth, thanks to the acquisitions, but with lower volumes in the broader industrial segments. So the group noted a very varied demand situation within our diversified customer base. Volumes in the industrial segments are somewhat lower year-on-year, but other segments such as automotive aftermarket, medical technology and other niches posted good growth. Overall, the margins were stable, although in certain operations, lower volumes resulted in margin pressure. Cash flow remains strong, partly thanks to reduced inventory levels and other measures to improve working capital, which has been supported by more stable supply chains. Looking at Lesjöfors. Here, we saw a mixed demand between the customer segments, the Chassis Springs business area posted strong growth. Volume remained high in the beginning of the autumn driven by stable demand from end customers and normalized inventory levels among our wholesale customers. Within Industrial Springs, volumes decreased somewhat in the Nordics, U.S. and Asia. In Europe, U.K. posted growth while several operations in Central Europe faced greater margin pressure. A number of measures have been taken, such as savings and local restructuring to ensure profitability and growth over the long term. Beijer Tech in the Nordics had a more stable demand situation. Order bookings increased organically, partly thanks to new projects, but volumes in industrial trading also remained at decent levels. Several of our niche companies noted good demand driven by trends outside of general industry demand. And this year's acquisitions of Botek and Finn Lamex are examples of this, and they both have had a very good start in our group. So the operating environment remains uncertain related to demand, but also inflation and higher interest rates. This means that, overall, we are continuously balancing between growth initiatives and savings. And no new acquisitions were made in this quarter, but our acquisition strategy is long term, and we're continuing to build relationships with attractive companies that could strengthen the group with future profitable growth. Now continuing with an overview of the group's financial performance. And for the last time since Habia was divested in Q4 last year, Habia Cable is reported as discontinued operations and not part of the consolidated accounts in the Q3 comparables in this report. Looking at the performance, we can see that order bookings grew by 21%, but decreased by 1% organically. Net revenues grew by 13% and was decreasing by 5% organically. And compared to earlier recent reports, the price component is less significant. But nevertheless, of course, volumes were overall lower versus Q3 last year. And to give you some flavor of the developments during the quarter, we saw a fairly weak start to the quarter in the summer month of July, whereas order intake and revenues improved significantly in August and were more stable in the end of the quarter in September. The adjusted operating profit increased to SEK 225 million with a margin of 13.4%, and there were adjustments made with a net positive effect of SEK 9 million on EBIT. And Johan will go through this in more detail with you in a while. So moving on to the performance of the reporting segments, our subsidiaries. Starting with Lesjöfors, our spring manufacturer, which is organized into 2 business areas, and these are industry with mainly customized products to a very diversified customer base globally. And the other is Chassis Springs, and these are standardized replacement springs sold to car part wholesalers, mainly in Europe. The order bookings for Lesjöfors increased by 18%, but decreased 4% organically and revenue grew by 15% with a decline of 6% organically. For Industrial Springs, the largest business area, the growth was 13%, thanks to acquisition and currency effects. As mentioned, volumes decreased in the Nordics, the U.S. and Asia. In Europe, the U.K. posted growth, while several our companies in Central Europe faced greater margin pressure. And actions have been taken to improve profitability. Some end markets posted growth such as medical technology, whereas building sector and the automotive manufacturing were somewhat weaker. The recent acquisitions, Telform, Amatec and Tollman Spring contributed growth. For Chassis Springs, we saw a good demand during third quarter, prolonging the spring high season before we now start coming to the lower -- low season, which is normally in Q4. Inventory levels at wholesalers are estimated to be normalized, and it was the end customer demand that drove the increase in the volumes. Adjusted operating profit for Lesjöfors improved to SEK 175 million. And as mentioned, there are adjustments made by a net positive SEK 9 million. And as you can see top right, operating margin was similar to preceding quarters at 14.6% on adjusted EBIT terms this quarter. In the report, you can also see the EBITDA margin being 1.3% higher than EBIT margins, meaning 15.9% in this quarter. Moving on to our other subsidiary, Beijer Tech. Beijer Tech operates in 2 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, and these are reported into Industrial Products. Order bookings continued to increase in the quarter by 30%, of which 9% organically. The organic growth was partly thanks to new projects, but also a stable demand situation. Net revenue grew by 10%, of which 4% was organic. Within both business areas, Industrial Products and Fluid Technology, demand was overall stable within most industrial trading segments. This picture was similar across the Nordic countries. In several of our new niches, demand was good. And here, demand is typically not driven by other trends than industrial cycle. And I think the latest acquisitions, Botek and Finn Lamex are really good examples and contribute to growth in the industrial product business area. Beijer Tech's operating result increased to SEK 56 million, with a good operating margin of 11.7%, and there are no adjustments in the Beijer Tech results. I will now hand over to our CFO, Johan Dufvenmark, for some more comments on the financials.

Thank you, Henrik. Let's look into some of the financials. As mentioned, net revenue is up SEK 193 million compared to last year. The largest part of the growth is due to the acquisitions, which contributed with SEK 154 million, which was equal to an increase of 10%, while the organic growth was negative 5%. Both Lesjöfors and Beijer Tech showed a negative organic growth, minus 6% and minus 3%, respectively. Both Lesjöfors and Beijer Tech was affected by a slow start in the quarter and lower demand in the industry-related segments. The effect from stronger foreign currencies compared to Swedish krona was large plus SEK 119 million. Also, order bookings increased, and this was with SEK 289 million to SEK 1,666 million. The acquisitions and currency effects were both positive, while the organic growth was slightly negative, minus SEK 14 million. Beijer Tech had an organic increase in the order bookings of 9% and Lesjöfors, 4%. The change in Lesjöfors was related to the industry business area. In order bookings, as in revenue, effect from FX was large, plus SEK 121 million. Let's continue with a short look on the sentiments and how they contribute to the revenue and operating results. As we saw in the previous slide, we had a strong increase in net revenue and the main effect was within Lesjöfors and was related to the acquisitions and currency effects. The increase in Beijer Tech was mainly related to acquisitions. Adjusted operating profit was SEK 225 million in Q3, the increase compared to last year was mainly related to Chassis Springs and acquisitions. Beijer Tech had a higher EBIT compared to last year despite meeting some tough comparables. We have some items affecting the comparability in the period, and these are comprised of 3 items. One is the earn-out, which we have reversed for both Tollman and Telform, since the agreed and ambitious thresholds will not be met due to lower demand than anticipated. The effect from this was SEK 46 million. And also, we have SEK 40 million related to a restructuring project in Lesjöfors, in European operations, which was treated as an item affecting comparability, where SEK 7 million is related to cost in Q3 and SEK 33 million is related to future costs. The restructuring project is related to parts of Lesjöfors Europe and Slovakian operations. And some of these costs are related to employees that have left the company. The goals of the restructuring are to lower the cost and to achieve a more efficient production setup. And we did as well reverse an additional SEK 2 million from the Russian close down provision from 2022. And as Henrik mentioned, the total items affecting compared to it was a positive SEK 9 million. Now to some of the key financial ratios. Adjusted EBITDA is up SEK 31 million compared to last year, the difference to adjusted EBIT being higher depreciation following a number of acquisitions. Cash flow after capital expenditure was positive SEK 293 million, a large change compared to last year related to both more efficient user working capital and as well as some tailwind from lower raw material prices. Net debt is lower compared to last year related to both to a more efficient use of working capital as well as the operating cash flow. The financial net was affected with accounting-related positive effects from high inflation accounting, which is called IAS 29. This effect was related to the Turkish company. The effect was launched in Q3, a positive SEK 40 million, and this is since the local CPI has increased significantly compared to previous periods. I tried to explain this effect shortly where the value in the balance sheet is revalued according to IAS 29, the change will be booked as a positive in the finance net. The underlying financial net increase some compared to previous periods and last year. Thank you. And back to Henrik for some concluding remarks.

Thank you, Johan. Yes, to summarize the quarter, the growth came mainly from the 5 acquisitions made in the last 12 months. And overall, we saw a very demand situation across our customer segments in the Nordics, U.S. and Asia, lower volumes in industrial segments. In Europe, we saw U.K. growing, whereas Central Europe saw lower demand and actions to improve profitability have been taken. Examples such as medical technology in Chassis Springs were areas with good demand and growth. And we saw a continued strong order intake in Beijer Tech, especially in niches with nonindustrial trends. We generated a good cash flow, partly thanks to the inventory reductions. And finally, as mentioned upfront, our acquisition strategy is long term, and we're continuing to build our pipeline of good companies that could join our group in the future. So with that, we will open up for questions. Operator?

[Operator Instructions] The next question comes from Aline Ghatan from Carnegie Investment Bank.

Henrik and Johan, I have a couple of questions. First of all, I wonder if you could just discuss the outlook a little bit. What trends you've seen here in October, and you had negative organic growth in the Q3. So just wondering what we should think going forward?

So as you know, we don't provide a full outlook. I gave some indications in the dynamics during this quarter that we saw strong weaker start during the summer, then it came back well in August and the more sort of stable level in September. So I think that is -- and of course, you have the order bookings as some kind of indication. But I guess also coming back to the general statement earlier, it is a bit of an uncertain demand situation around in the broad industrial segment. So I think we saw a stable development towards the end of the quarter.

Okay. Also a question regarding the strong year-on-year growth in Chassis Springs, what was the main driver there?

Well, as I mentioned, the main driver is what we sometimes call the end consumer demand, meaning the number of cars that are repair out in Europe. And this on what we believe are fairly normalized levels of inventory with our customers, the wholesalers. As you might recall, early in the year, we were still getting signals that wholesale customers were reducing their demand. Having had safety stock because of the supply chains. They went into more normal demand -- sorry, normal stock situation, and we had some impact of that in Q1. Whereas since actually both Q2 and Q3, I think we see more the actual end consumer demand flowing through to our sales as well.

Okay. And then Lesjöfors, the margin at 14.6 percentage points is this margin. Is this normal levels? Do you -- should we expect that we should land here?

So I think we have had these levels in the last couple of quarters. And as we have mentioned, there are -- we are taking some actions in certain areas, which obviously has the goal of improvement in profitability. Having said that, the volumes are, of course, an important factor in any manufacturing business where you always have a certain amount of fixed cost. So I would say it depends very much on the demand going forward, but we are focusing on setting up on having an efficient production platform to get leverage from increased volumes as well in the future.

And when is the restructuring costs expected to assume that the full restructuring cost?