Indutrade AB (publ) (INDT) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the presentation of Indutrade AB for the Q4 report 2019. Today, I'm pleased to present Mr. Bo Annvik, CEO; and Patrik Johnson, CFO. [Operator Instructions] I will now hand you over to Bo Annvik. Please begin.

Thank you. And good morning, and welcome to this webcast. We start by elaborating a bit on 2019. We are happy to summarize the year with success, I would say. We have had really strong, sustainable, profitable growth, and we can also verify that our business model is still very, very relevant, and that our strategy is value creating. Demand on a yearly level has been, I would say, good. It's been fluctuating between the quarters. We started out well in quarter 1 with good organic growth. And then in quarter 2, we had a bit weaker situation, just basically flat, and then some improvement in quarter 3, again, and more of a flattish ending now in quarter 4. But I will elaborate more on quarter 4, obviously, as we go further into the presentation here. But on a yearly level, we had a 2% organic growth, which is okayish, I would say. Even better was the EBITA margin for the year, record high for Indutrade at 12.7% versus 12.4% the year before. And also very positive has been the acquisition pace during the year. We were able to attract 15 companies to the Indutrade family and good companies. We are basically paid at the same multiples as before, and we can also talk more about that later on here. We take sustainability seriously, and we feel that sustainability is part of our DNA at Indutrade. We are very long-term oriented. And among other things, in this area, we have become signatories of the UN's Global Compact. So we have continued to execute on our strategic initiatives. And in terms of the dividend, the Board proposes SEK 4.75 or krona. So a good year overall. If we then turn focus to the fourth quarter. As I said previously, we see a demand situation, which is still, I would say, on a high and a good level, but there is no real organic growth in the market. It obviously fluctuates a lot between our business areas and market segments and product areas. But overall, more of a flattish situation. To give you some numbers, we came in order intake wise minus 1% organically, and the sales was flat, plus/minus 0 basically. However, in total, order intake was plus 8%, and sales, plus 9%, so very close to our group targets in terms of growth. We had a very good EBITA margin, as I said, we came in at 13% for the quarter, last year, we were at 12.8%. We had some extraordinary or one-off effects helping us out here, so if we take those away, we can say that we were basically flat with last year's 12.8% underlying, which is a very good level for the quarter 4 and a short December month, I would say. We have also improved our cash flow, so comforting to see that, slightly helped by IFRS 16, but also organically, good improvement, I would say. However, our working capital is still on a slightly high level, and we are working with that, and hope to see clear improvements in this regard during 2020. We have also continued with high acquisition activity in the beginning of the year here, and have now acquired several companies, and I will elaborate on those later on in the presentation here. So overall, a good start of the year and a good finish of last year. We then turn page to the order intake on a group level. So as I said, aggregated, it was good, plus 8%, and I would say, relatively stable, but with variations and a more dynamic sort of situation below the surface. We have a slightly negative book-to-bill at 0.98. And it's also important to compare with last year, we had a very strong quarter 4. So the benchmark is a bit difficult. If we summarize on a total 2019 level, we were up 9% and 2% organic, as I said before. If we look at the net sales, we are fairly, I'll say, happy with the overall situation, plus 9% and organically flat versus last year. And I would say our comment is a little bit similar as on the order intake side. So prominently, the growth is structural. It's always a little bit difficult to elaborate on the sales in an Indutrade perspective since we have a portfolio of a lot of different companies aggregating up the total here. But if we talk about markets in a geographic perspective, I would say that Norway in the Nordic arena standout in a positive sense. I would say, Denmark is a little bit flattish. And Finland is down and has been down for a while here, a bit more of, I would say, base industry and less investments for expansion since some time there. Sweden also somewhat down. In the U.K., I would say, we see a mixed picture, I would say, Brexit uncertainty, the elections also caused some uncertainty. And now when Brexit is more sort of finalized, there might have been also some reduction of inventories at some companies making sales a bit or having some impact on the sales situation and order situation in the U.K. I would say, lowest is Germany as a market, obviously, impacting the automotive industry. And since the Netherlands is a neighboring country there, I think they also have some impact on that indirectly. And the Netherlands has also been a little bit weaker, I would say, geographically. Again, full year was plus 9% and in total and organically plus 2%. EBITA, strong development, as I said, we improved by 11% up to an EBITA margin of 13%, which was or which is the best level we have in at Indutrade since the IPO in 2005. As I said briefly before, we had some support of one-offs here, primarily related to a new pension agreement in Holland. So if we exclude that, we basically were even at 12.8%-ish with last year. Organically, the EBITA decreased slightly in the quarter and was basically caused by slightly weaker organic sales. Actually, sales contributed with plus 9% in the quarter and this is margin accretive. And as we have said, the 2019 EBITA margin reached 12.7%, which, again, is all-time high for Indutrade. If we then turn to the sales situation for the business areas, you see that the graph for the diagram has bars a bit up and down, and a few more down than up, so it's a bit of a mixed situation here. Perhaps good to mention that Q4 2018 was strong, so the benchmark is difficult in that sense. I would say, several of the business areas decline linked to the general weaker demand situation in industrial, automotive companies in Europe. Lowest sales or weakest sales was in Fluids & Mechanical Solutions and they have a cluster of companies in the general industry, and I would say, they have the more difficult situation organically sales-wise in Q4. Benelux, you see, is up 9% and that's mostly driven by, I would say, our large company in the valves segment for power generation. If you exclude that, it's more a similar situation with the rest of, I would say, the business area with slightly weaker organic growth. DACH was also positive, surprisingly I would say, because in the DACH region, obviously Germany is negative, but some of our companies had a positive support from the process industry in Switzerland and altogether were able to show positive numbers in terms of sales here. The business area, I would say, which stands out in a very positive way here is Flow Technology and they are organically up 5%, very strong, and I would say that they're supported by good development in the MedTech segment and also in the Marine segment, but a lot of companies in the Flow Technology area had actually very good quarter 4. If we then look at the EBITA margin development for business area, it's also little bit of a mixed situation, 4 of the areas are improving their EBITA margin, and 4 of them were -- having declining margins or weaker margins. And you can see improvements in Finland in Flow, Industrial Components. And in Finland, I would say they have been cost conscious and they are also supported to some extent by some of the extraordinary divestments we have done there. In Flow, it's mostly, I would say, organic development and improvements, as I said, supported by the MedTech and Marine segments, and that's the same with Industrial Components basically, also quite a lot of companies in the MedTech area supporting their improvement. Declining margins in business area DACH. Perhaps not very surprising, mostly linked to weaker sales situation in Germany, and indirectly into Germany. And in terms of Fluids & Mechanical Solutions, as I said before, they have a cluster of companies linked to the general industry in Sweden, the Nordics and those companies had lower sales and that had an impact on their EBITA development as well. Measurement & Sensor Technology, similar there. Again, quite a few companies who had weaker sales and weren't able fully to offset that and then had a negative EBITA development due to that. Perhaps the surprising development or the most surprising development was in the U.K. with quite a significant margin drop. And this is also reflecting that quite a lot of the companies had lower sales in the quarter. And then one company really having more sort of severe, I would say, order intake and sales issues and are close to -- yes, they are basically in a loss situation, so that's impacting more in relative terms then. We will see how U.K. will develop here. I think this is hopefully not something which will continue going forward in 2020 in that strong way, but I can come back to that. If we then turn page and look at our list of acquisitions in the year. You see, it's been a very active year. And I would say that we have a good situation, Indutrade is very attractive. I think the entrepreneurs really appreciate the culture, the values and also appreciate they can work in a decentralized situation, which something they obviously enjoy, and we can support them in different ways where they want and have the support. We basically pay at the same levels, at the same multiples as before. And we have definitely not reduced our demand in terms of buying good companies, high-quality companies. So that's exactly the same as before. So in quarter 4, we bought, as most of you know, 3 companies, a Swiss company called Uniska, making high-quality glass partitions, and then a smaller company in the Netherlands, basically working with geotechnical measurement solutions, that's -- both of those are add-ons to companies we already have in those regions. And then we also bought a very interesting company working with security solutions in Sweden, growing interesting area. We have also had some extraordinary divestments during the year, and you see those listed there as well. Some of you who follow us more closely, also perhaps know that yesterday, we had an extraordinary general assembly meeting and got the agreement to divest a company we own in Russia, so that project is ongoing and will most likely be finalized in the next months or so. Otherwise, we have -- as I said before, we are basically through the divestment, the extraordinary divestment phase and don't see any sort of a number of projects during this year. If we look at how we have started this year already, it's, again, been strong in terms of acquisitions. So we have finalized 4 acquisitions already, happy to be able to acquire STEIN Automation in Germany. Many of you know that we are a bit focused on Germany, we want to grow that and see good opportunities to do that. High-quality company and providing customized pallet transfer systems for assembly lines, and that's trending well, I would say, with ensuring to more assembly work in Europe and automation. And then we bought VarioDrive in the Amsterdam area, a motion control systems company with, I would say, great ability to customize solutions for customers. We also have acquired AVA Monitoring in the Goteborg area in Sweden, linked to, I would say, infrastructure investments, they provide solutions for vibration measurements and are able actually to go beyond the Scandinavian market and work more internationally with, I would say, very modern, innovative technology. And then we also acquired a company in Norway called Sverre Hellum, and they work with diamond tools and related equipment for that, and that's also linked a lot to, I would say, infrastructure investments to some extent, on and offshore construction and mining and so on. So great companies, great additions. We were very happy to see them becoming part of Indutrade. By that, I leave the word over to Patrik to go over the financials in more detail.

Thank you, Bo. And then diving a little bit more in detail into the numbers. As Bo had mentioned earlier, the total growth for orders and sales was plus 8% and plus 9% respectively, in the quarter, and for the full year, the growth was plus 9% for both orders and sales. Book-to-bill for the quarter was slightly negative, minus 2%, but for the full year, plus 1. And all in all, I would say no dramatic change over the year, relatively stable. Gross margins very stable versus last year for both the quarter and year-to-date. And remember here, the headwind that many of our Swedish trading companies have from the weak Swedish krona, basically all through the year. And they really do a good pricing job versus their customers to manage this problem. EBITA margin improved from last year, both in the quarter and for the full year to 13% and 12.7% for the full year. Further down in the P&L, large increase also this quarter then in the finance net. And roughly half of this increase relates to IFRS 16, as you remember, surely, and half of this is due to increased debt level and slightly higher interest rates. Tax costs. They are actually down versus last year in the quarter, but that is because we had high costs last year with some closing adjustments. So the tax rate this quarter is 22%, which is in line with what we have had earlier this year. So no change sequentially. Earnings per share up 8% for the quarter and actually, the same also year-to-date. Return on capital employed at 19% and compared to 21% last year. And here also, we have an effect from IFRS 16, and if you exclude that, we are on the 20% level. Operational cash came in at SEK 732 million for the quarter, and that's a very high level. The improvement versus last year is partly also driven then by IFRS 16. I will elaborate a little bit more on that in a few slides. Net debt-to-EBITDA at 2.1, and that's a slight increase versus last year when we had 1.7. But if you exclude IFRS 16, it would be at 2.0, and I will elaborate also on those ratios a little bit further in the coming slides. So next slide, we have an overview of the main IFRS 16 effects. And maybe the main change is the increased debt, the leasing debt coming into the balance sheet at the beginning of the year. The opening balance now changed to SEK 842 million, it's -- in the end of the year, it's higher, it's around SEK 900 million. And then finance net, basically, you have an increased cost then of SEK 24 million for the full year, basically, SEK 5 million, SEK 6 million each quarter. Depreciation, SEK 290 million for the full year, an increase. And that means that you have not a big change, relatively small change than on the EBITA, only SEK 24 million, corresponding to the finance net then, of course. But EBITDA, a bigger change SEK 290 million. And that impacts on a couple of ratios, and you can do that math yourself quite simply. I assume then net debt/equity as one example and plus 12%, if you compare to situation without IFRS 16. So -- and moving on to the next slide and looking at the cash flow which was then at a really high level in the quarter, as you can see, it grew then 23% up to a level of SEK 732 million. For the full year, it's also -- we also had a high growth, 41%. And approximately half of this improvement, both for the quarter and full year came from a higher result and a slightly better working capital development on the other half, from IFRS 16. Working capital, the levels they are, even though, we saw a slightly better sort of development or impact in the cash flow, they are still on a slightly high level, and we are working with this, and we hope to see a change in the coming year in the levels, having a positive impact on the cash flow. And you remember this probably then, but the higher level is mainly due to higher inventory. We had an inventory buildup during 2018, mainly, where our companies had to increase inventories to ensure the delivery service and stock availability for their customers. So moving on to elaborating a little bit on earnings per share. Quarter 4, earnings per share grew 8% to SEK 3.29. Full year earnings per share increased also to 8% and to SEK 12.26, and the improvement comes from mainly the higher EBITA, but it's partly offset by increased amortizations of intangibles and higher financing costs. And this is, of course, mainly connected to the higher acquisition pace. If we look at earnings per share on a more sort of long-term perspective, 3- and 5-year average have been plus 17% and 12%, respectively, so very high annual growth rates. Debt situation, the interest-bearing debt, net debt end of the year increased quite much to SEK 6.1 billion versus the SEK 3.9 million end of 2018. But the main driver is, as you well know, IFRS 16, and approximately half of the increase relates to this and the other half is mostly related to the increased borrowing to finance the higher acquisition pace. Net debt-to-equity ratio increased to 85% versus 63% last year. This ratio would have been approximately 73% if we exclude IFRS 16. And this level is slightly higher than last year. But look -- if you look, again, then at the longer time period, it is not a high level. The balance sheet and our financial strength, I would say, are still strong, solid. And by that, I say thank you. I'll leave it back to Bo.

Thank you, Patrik. Then we will spend some time on sustainability. We think sustainability is very important. And we also feel that sustainability is a clear business opportunity for our companies. And we have been quite active, I would say, in this area, the last year. But I think it's also important to underline that sustainability is part of our DNA or culture and something our companies have worked with for a long time even if they perhaps not -- don't call it sustainability in the form we are right now. We have become signatories of the UN Global Compact, and we have worked on group level with our materiality analysis. So we have a clear view on that. But perhaps more importantly, we have had workshops with all our MDs in terms of sustainability during last year. And our approach has been that we should optimize each company's sustainability agenda. And they have also had their materiality analysis done. And based on that, they have set KPIs in their companies and start to measure progress. And there is also quite a lot of support and different types of toolkits and so on, they can use in this area. So based on this and based on our history, we subjectively would feel that we would come out fairly well in different sustainability assessments. However, we haven't really been that well positioned in some of those assessments, which is a bit frustrating. So if we turn page, now we have instead of only sort of working with optimizing each individual company, we have also now agreed on some group, I would say, KPIs that every company needs to measure and report from this year and onwards. And you can see those KPIs on the slide. 3 of them are more, I would say, social people-related, and 2 of them are more environmental. They are relevant. They are interesting. But apart from this, there are individual KPIs for every individual companies, I would say, as well. So we are making progress. We are taking this very seriously. And we hope to be able to perhaps communicate and come across in a better way in different types of studies regarding sustainability going forward. In a market situation with fluctuations, it's important to try to provide stability. And here, I think Indutrade is outstanding. So with our diversified structure, with our decentralized business model, we have agile companies. They are very flexible, and it's really part of our culture that the MDs and the management teams take action, take responsibility. And if they are behind plan -- behind last year, we don't really have to ask for any mitigation. It's natural for them to work with that by themselves. So that works very well. And we also have interest in a lot of different market segments, a lot of different product areas and geographies, and the geographical scope have, in recent years, been broader as well as the segment spread. So even if general industry is a bit down, even if automotive is a bit down, there are other segments which are improving, increasing, and summing all of it up, it usually provides more of a stable situation than a, I would say, an ordinary industrial company. If we look at our financial targets and the outcome for 2019, I would say that we can be proud and satisfied. We have basically reached our target in all aspects. Growth is important. We have a target to grow at least 10% per year. We have reported a 9% growth. But if we exclude the extraordinary divestments we made during the year, we are actually underlying at 10%, which is comforting and good. We are a bit above in terms of EBITA margin, which we have already spoken about. And in terms of return on capital employed, we report 19%. But if we exclude the effects of IFRS 16, we are basically at 20%. So again, in line with target. And as Patrik elaborated on before here, our financial position is solid and strong. Last on this page here, you see that there is a proposed dividend payout ratio at 39% of net profit. So the dividend is proposed to be SEK 4.75, last year was SEK 4.5, an increase with 5.5%. The Board has also taken a decision to change the dividend target, we have had 30% to 60% for some years since 2014, and now we are changing towards 30% to 50%. This is not dramatic. Since the Indutrade IPO in 2005, Indutrade has never had a dividend above 50%. And now we -- or now we have always and will continue to have, I would say, very active agenda in terms of acquisition growth. And now we just want to have a more of a stringent scope between 30% and 50%. So it's perhaps simpler, easier to judge the Indutrade dividend going forward, but again, it's not changing dramatically in any way from before. If we then look at the key takeaways from the presentation here, good year 2019 with record high profitability. We are satisfied and proud about that. There's been a fairly good demand level, but it has flattened out towards, I would say, mostly towards the end of the year. If we should give some sort of guidance going forward, I would say it's a little bit difficult to guide in January or early February. There is a lot of customers usually trying to shut down in terms of accepting deliveries in December, they want to take their inventories down. And then in January, there is always some level of inventory buildup again. So right now, it's a little bit difficult to judge what is underlying demand and what is perhaps inventory buildup. But I would say, the general industry, the automotive industry, there is a weaker demand, but we also see segments with improving demand and increasing demand. So I would say, we are fairly optimistic about Q1 organically. But it's difficult to judge, I would say. Continuing to talk about the takeaways, we are, I would say, stable in terms of earnings quarter by quarter by quarter. I actually think quarter 4 is a little bit demanding based on when December is short, and we came in a great way, very happy about that. We have continued with the high pace of acquisitions, and you see signs of a strong start also in 2020 here. We are diversified, which we have underlined. And I think we have a natural hedge in more difficult business situations by this diversified portfolio, and the culture, and the values, and the agility and flexibility we have is obviously very strong as well. All in all, a good, stable platform for continued sustainable profitable growth going forward. So by that, I open up for a Q&A here.

[Operator Instructions] And our first question comes from the line of Oskar Vikstrom from ABG.

I just -- I have a question regarding the organic EBITA. So you say that is down 1% year-over-year. Does this include this positive around SEK 10 million impact from the pensions?

Yes, it does, short answer.

So ex this pension situation, it would be around 2.5%, 3% negative?

Yes, roughly.