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

Ladies and gentlemen, welcome to the presentation of Indutrade AB for the Q2 report 2020. Today, I'm pleased to present Mr. Bo Annvik, CEO; and Patrik Johnson, CFO. [Operator Instructions] I'll now hand it over to Bo Annvik. Please begin.

Good afternoon, and welcome on my and Patrik's behalf as well. We will, as usual, start with some highlights of the quarter. And it's obviously been an extraordinary quarter due to the COVID-19 pandemic. Our primary focus has been the health of our employees, and at the same time, trying to manage a significantly weaker demand situation. For those of you who follow us more closely, you know that we are not very much using sort of group policies and guidelines, but this situation has, I would say, demanded clarity and decisiveness to do that. So we have launched, I would say, clear instructions applicable for all companies and not only because of that, but we can say that we don't have any employees who have been seriously ill or hospitalized due to the pandemic. So that's good news for us. Most companies have experienced a lower demand, but still significant variations between companies and segments and markets. And I would say, all companies with sales declines have worked to protect or defend margins in a very successful way. And some of our companies have had favorable market demand, especially in the MedTech pharma segments and delivered really great results. And this, together have led to an improved EBITA margin of 13%. We have also strengthened our financial position and improved our cash flow. Patrik will go through that in more detail. And in terms of acquisitions, I would say that the pipeline remains good and we have deliberately delayed projects due to the sort of unstable situation, but I will comment about this more in detail. And it's, in general, a quite positive situation anyway. If we then turn to the order intake slide. As I said, it's been a decline and large variations between companies and segments and also the business areas. We have also, as I said, seen a strong development in certain MedTech and pharma companies and also in the infrastructure segment, primarily in the Nordic countries. And by infrastructure, it's primarily water and wastewater related for Indutrade. And then we have a large company in the power generation market providing high-pressure valves and they are also experiencing a good market demand situation. In terms of MedTech and pharma, to elaborate a little bit more on that. We have a growing portfolio, growing cluster of companies, and it's different sort of types of companies, but just to give you a flavor of where we are involved. We have a number of flow companies and some have supported the Swiss pharma industry now with facility upgrades and new machinery equipment installations. Also, I would say, similarly flow related companies are having a good market situation in Ireland linked to the large biopharma investments in Ireland. So several flow related companies in different sort of segments have experienced good sales or order intake. We actually have some -- 1 specific company providing ventilators, but just in 1 particular geographic market, and then another company supporting with the components to ventilators. And that's, I would say, the customer they have is selling more broad-based internationally. And then we have a company providing medical gas equipment, predominantly in the U.K. And as you understand, there has been a lot of new installations, both in field type of hospitals being built during this time, but also upgrades and additional equipment in normal hospitals. We also have a cluster of companies in what we call single-use products. So quite a lot of pharma companies are switching from sort of stainless steel equipment to single-use equipment, which is recyclable in order to have more, I would say, efficiency and less manpower linked to cleaning and preparing and things like that. We are also in some markets providing products for diabetes. So as you hear, it's a large number of products. And I would say, a handful of our 200-plus companies have a positive COVID-19 effect in quarter 2, but not more than that. Most of our companies are exposed to general engineering and some are exposed indirectly to the automotive sector, providing, I would say, components to the production systems. And they have, obviously, experienced much lower demand. However, we see now that trend-wise, those segments are improving a little bit. And I would hope that in the second half of the year, we will continue to see improvement there. The order intake was basically in-line with the sales, so book-to-bill sort of equal there. In total, the growth was minus 1% in order intake and organically minus 5%, and the acquisition effect was plus 5% and currency was negative 1%. As I said, I think before, there was not perhaps a large difference sequentially in the quarter, but still a slight one with some further improvement towards the end of the quarter. For you who follow this more closely, you probably know that there are some invoicing days differences versus last year. So you have to take that into account, obviously, when you analyze that situation, but a slight improvement towards the end of the quarter. If we perhaps should also say something about potential stock buildups since there has been a lot of supply chain disruptions at the end of quarter 1, early quarter 2. I don't think we have a significant effect in quarter 2 of stock buildups from our quarter, so that shouldn't be a very sort of significant issue hitting us in quarter 3. If we then move to the sales slide, as I said, sales are basically in-line with order intake. Total growth was plus 1% here, but again organically minus 5% and acquisitions added another 6%. And if we talk about sales in a geographic perspective to start with, we basically have 1 market with a positive sales situation, and that's Switzerland. So as I said, quite a lot of investments in new facilities, upgraded facilities, new equipment, where we have been benefiting with flow components, I would say, in general also some other things as well, but that's been the driving part. Then we have a segment of Scandinavian markets, Norway, Finland, Denmark, fairly stable perhaps slightly, slightly negative, but good market development in this difficult situation in these 3 countries. And then I would say Holland, a little bit worse. And then Sweden, almost 10% decline, not quite. But by far, the worst sort of markets, countries for us has been Germany and the U.K. and the U.K. is, obviously, linked to more of a full shutdown, difficult for a lot of companies to conduct business. And in Germany, I would say, it's mostly driven by an automotive industry, which was also more or less shutdown in April and opening up slightly in May onwards. If we look at what's sort of driving sales, it is clearly the MedTech and pharma segments. And when I looked together with Patrik and others at the 10 companies we have with most invoicing growth or sales growth, I think 7 of them are MedTech or pharma related. And then there is some infrastructure and some, obviously, the large company into energy and gas-related energy, but also actually a company benefiting a lot from the wind power market. Then we turn the page again. And talk a bit about our EBITA development. So despite the challenging demand situation, EBITA grew during the quarter, and we came in, as I said, at a high number in our terms, 13%. The total EBITA growth was 5%, organically, a reduction of 2%. But I think that's quite good considering the organic sales decline was 5%. We still came in at only minus 2%. Acquisitions have been accretive and added 8% and currency was negative with 1%. And now I'm basically repeating myself a bit, but the margin improvement came a lot from the MedTech and pharma segments. And also the power generation in the Benelux added. And then also infrastructure, as I said before. Many of our companies have used temporary layoffs. And in the beginning of May, we had around 1,500 employees furloughed. And towards the end of the quarter, we were down to around 1,000 employees, and we have approximately 7,400, and we have permanently laid off a bit more than 200 at this time period. Now several of our companies are basically assessing the situation for the fall. And those who think the order intake and sales development still will be very challenging are planning for more permanent layoffs. So that number will step-wise increase in quarter 3 here. I also think we have been very good, our companies have been very good in reducing their overhead expenses. And I would say, a clear majority of the expense reduction is not related to any government support, but rather other type of decisions, actions they have made in their individual companies. If we then look at the different business areas and their development in the quarter. As I said, large deviations, obviously all of them were having some effect of the pandemic, but some more than others. The strongest development in terms of sales was in the Benelux area. And again, that was driven by our valve company in power generation, but they also have MedTech or several MedTech companies who have supported the growth in that area. And the largest decline was in the U.K., as you see in the slide, minus 25%, 26%, and that's basically driven by the broad lockdown in the country, affecting basically all businesses and not least, infrastructure and construction was basically halted completely for large parts of the quarter. We also have some companies working in the aerospace segment in the U.K., and that's also been halted very significantly, unfortunately, because those companies are actually enjoying very good business in that segment. Also business area Measurement & Sensor Technology and Fluids & Mechanical Solutions noted large declines and particularly in companies exposed to general engineering and automotive. As I said, we don't supply any direct material to the automotive, but more components and equipment. In Measurement & Sensor Technology, we, for example, have a couple of companies providing leak detection equipment for heating and ventilation type of applications for passenger cars and construction vehicles and things like that. MST, which is short for that business area. They are also a bit more, I would say, dependent on CapEx related decisions at their customer base. And there's been quite a lot of delay in project starts to safeguard cash flow at the customers and so on. The pandemic impacted business area of flow, DACH and industrial components in Finland negatively as well, but a few segments compensated in flow. I would say, again, MedTech and pharma segment compensated also to some extent. The Marine segment, and again, the DACH segment was supported by the Swiss pharma industry. In Finland, it was more infrastructure and energy, which provided positive growth and industrial components, it's again mostly MedTech and infrastructure. If we look at the EBITA margin per business area, it's actually great to see that 5 out of 8 business areas increased the EBITA margin. And if we disregard any type of government support, it's 4 out of 8, which are still improving the margin and 1 being Benelux, where there is no government support at all are basically flat. So 5 plus 1, 6, only 2 having actual decline, and that's the U.K. and MST. And if you take away the government support, it's also the Fluids & Mechanical Solutions business area. And I think we have already elaborated on the reasons. It's very much driven through what type of segments you have in your portfolio mix. And then MST and U.K. are basically only -- more or less only company owned products and own manufacturing. And it's been difficult in these circumstances to offset the shortfall in sales with the equally large cost reductions in direct labor. And we have also wanted to safeguard competence in some areas and see if the market is bouncing back. And hence, we could then start ramping up quicker again. But as I said before, several of these companies are now assessing the situation for the second half of the year and will most likely lay off more employees, unfortunately, on a permanent basis after the summer here. We also had some unfortunate situations early on in the quarter, for example, in Asia, where some governments basically shut down our facilities and offered no financial support or anything. So that was some extraordinary costs we were having to take linked to those decisions. Then if we turn our focus to acquisitions, we haven't, as I said, made any acquisitions in quarter 2. We started out the year in a great way with 6 acquisitions, great companies, all developing well and being accretive and positive to the group. But we have a lot of projects ongoing, but we have deliberately decided to slow down the project and really make sure that when we make the acquisitions, they can be accretive, fairly early on and supportive to the group. So I don't feel that we have missed any opportunities. We have rather delayed the processes, as I said, deliberately. And hopefully, in a couple of months or so or quarters, we will see more of a catch-up effect where several acquisitions are finalized in a shorter time period. We have, however, divested a company in Russia, our only remaining company in that market, and that we have communicated before and also explained the reasons for it. So by that, I leave the word over to Patrik, and he can present the financials in more detail.

Thank you, Bo, and hello, everybody. So let's dig into the financials slightly more then. And as noted earlier, the total growth for orders and sales was minus 1% and plus 1%, respectively, in the quarter. Year-to-date, we are at plus 8% and plus 7%, thanks to a very strong Q1, which you remember, I guess. Order intake was in-line with invoicing in the quarter, so a book-to-bill of 100. Looking at the gross margin, it continues on a relatively good level, I would say, from a historical perspective, but slightly lower than last year, both in the quarter and year-to-date. And the change is primarily mix driven relates to a slightly less favorable mix of the companies and products compared to what we had last year. EBITA grew 5% in the quarter, and the margin improved to 13% versus the 12.5% last year, accumulated. EBITA has grown 10%, and the margin to 12.7% versus 12.4% last year. Further down in the P&L, finance net, a relatively large increase. And there is a slight increase in the borrowing rates following changes on the market and also financing fees for our -- we have now slightly larger facilities that impact somewhat. But the main increase this quarter is, however, more onetime related currency differences relating to our internal funding transactions, basically half of the increase relates to that and it's nonrecurring really. Tax costs, up 6% in the quarter and 11% year-to-date. There's a slight increase, and it's mainly caused by more nondeductible items. EPS up 1% in the quarter, 6% year-to-date. On the return side, return on capital employed at 18% versus 20% last year. And 0.5 percentage point of that decrease versus last year, actually relates to IFRS 16 and as you know, then, the measurement is always calculated on a 12-month rolling basis, which means that at Q2 last year, we only had sort of a half a year's impact in the measurement. The other main reason behind the decline is the increased acquisition pace in the last year. And even though we didn't acquire anything in Q2, we are -- we have done in last 12, 18 months, acquired more and that initially lowers return as intangibles in the balance sheet increases. Cash flow was really strong in the quarter and increased with 65% to SEK 806 million. And I will elaborate on that a little bit more on the next slide. And following that, net debt/EBITDA also improved, and that came in at 1.8 versus 2.5 last year. So let's shift to the next slide and look at the cash flow development. And it was, as I said, very strong and grew with 65%, and the increase is mainly driven then by a better working capital development. And also, of course, a slightly higher result. And if I elaborate on the working capital development, last year, we had a slight increase in the working capital and this year, we have a slight decrease. That gives you a relatively big delta. And the decrease this year is mainly related to receivable -- to the receivables reduction following the slightly lower sales. Inventories, they are still on a high level and intentionally, I would say then, to ensure good delivery service and availability for our customers. And so we've chosen not to push that hard in this quarter. And I think -- I believe that this has actually supported some market share growth for many of our companies. So we move to the next slide and look at earnings per share. It grew 1% to SEK 3.02 -- from SEK 3.02 to SEK 3.05. And -- but that increase then is lower than the improvement in EBITA, as you recognize. And the EBITA improvement was partly offset by finance net and the tax that I talked about earlier, but also increased amortizations of intangibles. And that relates also then to the higher acquisition pace that we've had done for the last 12, 18 months. And if you zoom out and look at the more longer-term perspective, the 3- and 5-year increase in our 4-quarter rolling earnings per share is 13% and 14%, respectively. And last but not least, looking at the debt situation. The net debt declined during the quarter to SEK 5.7 billion versus SEK 6.4 billion last year. And the decrease comes from, of course, the strong cash flow I talked about. But also in combination then with the delayed acquisitions and that no dividend was paid out for this year. The net debt-to-equity ratio decreased to 72% from the 99% last year, and that -- the 72% is a low level for a quarter 2. And lastly, then the financing more in general, I think when we moved into this year, we had already done a strong financing situation. But given the uncertain situation, we put some effort in strengthening it further. And in the quarter, we actually renewed SEK 800 million of short-term loans. We prolonged the long-term credit facilities we have even longer. And we increased them with also -- we increased the facilities further also, SEK 750 million. And after that, if you summarize sort of the position at the end of the quarter, the short-term funding was only around SEK 359 million, and our long-term unused guaranteed credit facilities were SEK 3 billion. So quite a big gap and flexibility for us to act. And so by that, I'd say thank you and over back to you, Bo.

Thank you, Patrik. We have tried to summarize all aspects of the COVID-19 situation on this slide early on in March, basically, when this started more sort of seriously significantly for us. We basically had to change the way we work in everything from us as a group management team. We started to meet with a much higher frequency. Our reporting demands to our companies changed from monthly to weekly, not involving everything, obviously, but primarily order intake and sales to be on top of situations and being able to at least assess where we are heading in a quicker way. And this has worked in a great way, I would say. Then we have already discussed the demand situation. So you know what segments we saw more challenges in and where we have seen improvements. We've had some disturbances in terms of supply chains in the sort of April, early May time frames, but then things have improved. And towards the end of the quarter now, it's, I would say, very limited product shortages from manufacturing situations at suppliers. There are still some logistic issues and freight related issues. And not least high prices for airfreight. And then we have implemented -- or our companies have implemented a lot of cost measures. And as I said, a clear majority of the overhead expense reductions are from own initiatives and not from the support. We have used the tool of temporary layoffs or furloughs, actually a great tool because you can keep competence and then ramp up when the market is rebounding. And as I said, initially, 1,500 are now down to around 1,000 of our 7,400 employees. And about plus 200 have been permanently laid off during this quarter. And the support we have received equals to 1.5% of sales, approximately SEK 70 million. Again, most importantly, none of our employees have been seriously ill or hospitalized. Okay. Then if we turn slide and look at our, I would say, collection of companies. You know that we have 2 basic characters of companies. We have our technical trading companies, and we have companies with their own brands and proprietary products and manufacturing. And even more importantly, I think in a situation like this, our values-driven culture and our model, which is really based on entrepreneurship and decentralization really shows the benefit. Our MDs and company managements are very agile, quick to decisions, working very closely with our customers and trying to, basically, defend margins or even improve margins, if possible. What stands out, I would say, is that we are learning how to use digital tools in a very fast time. So there's been quite a lot of investment both in competence development, training, but also basically practically changing everything from home pages to other digital tools to hold efficient webinars and be close to customers even if our sort of physical sales force cannot visit customers. And this will have a material effect even after the pandemic is over. So I think we will see some efficiency effects based on this in a good beneficial way. So thanks to all great employees in the group. We have a number of strategic initiatives we've been working with for some time. Nothing new. We invest a lot in people and talent management. We also invest a lot in knowledge sharing between companies and in what we call an Indutrade toolbox and this has been ongoing during the quarter and investment have been quite high, actually, not in monetary terms, but in added content and also usage between companies here. So a great benefit to have that. And we have continued to basically work with sustainability in a lot of different ways during the quarter as well. And we see that the combination of digitalization and sustainability is really strong in building both customer value and shareholder value going forward. Then if we then summarize the presentation and the quarter, we see lower demand due to the COVID-19, but with large variations between company segments and markets. Where are we heading in the second half of the year, obviously, very difficult to say. But slightly more positive outlook for the second half of the year than what we had in quarter 2. Hopefully, the general engineering and the automotive sectors are step-wise improving at least. And also that countries are opening up in terms of travel restrictions will open up for service and installation type of visits and work in the different process industries we are involved in. So I think some of our companies have actually been held back due to that. I think the building and construction sort of industries -- infrastructure industries will continue, hopefully, to improve. We will most likely, I think, see supported programs in infrastructure and health care from governments in different countries in Europe. Not sure how quickly this will start, but definitely, I think we will see that. And then hopefully, machine builders, OEM type of product builders for forest machines and other type of similar machines will also slightly improve. What might impact a little bit more negatively is that extra COVID-19 effect we had for a handful of companies in the quarter. That's basically a onetime effect we had in this quarter. The large company we have in terms of high-pressure valves for the energy market. I think they sequentially will continue as they have been doing in quarter 2 also for the second half. But they will have more demanding numbers to compete with versus -- or for -- they -- 2019 in the fall was a bit better than in the springtime. So the comparison will be more difficult. Short term, there will probably be a little bit weaker July, early August for some customers, longer holiday type of shutdowns perhaps if they have less of order books and so on. But I think the positive potential effects are larger than the negative ones. And that's why we are slightly more optimistic for quarter 3, at least from September and October onwards. So we said that the EBITDA margin improved. The cost management was to defend loss of sales and invoicing and the real margin increase came from health care and infrastructure-related companies improving their margins by higher revenues. We have as I said, seen gradual improvement as countries are opening up. And we are really benefiting from being the type of group we are with really driven entrepreneurs being agile and working very close with the customers. We feel no worry whatsoever in terms of our financial position, and I would be extremely surprised if we don't see some acquisitions in the second half of the year here. So by that, I say thank you, and we can potentially open up for any questions.

[Operator Instructions] And our first question comes from Johan Dahl from Danske Bank.

I was just wondering, can you talk a little bit more about these group-wide initiatives that you referred to, Bo. I guess it was regarding cost levels in your subsidiaries. So what are you actually targeting with these initiatives? And where -- what will they eventually result in, do you expect?

Well, it's -- the whole setup we have, as you know, is that all our companies are different, and they work in different segments, industries and so on and so forth. So they are basically challenged by us to defend their margins to start with. And how to do that can be quite different for different companies. Some are working with pricing or some see maybe some niche opportunities to grow volume. Some are perhaps experiencing difficulties in terms of gross margin mix wise and then they need to work with their overhead expenses. So it's not really a group wide program with a lot of similar type of activities, but rather more tailored to their specific companies but there is a very clear demand to defend margin, I would say. And then we have a toolbox of things. How to sort of deal with different situations and we have webinars internally and things like that. So that's perhaps explaining the situation a little bit better.

All right. Also, just on the 1.5% of sales you received in sort of government support. To what extent did you have restructuring costs, et cetera, that offset that benefit to Indutrade.

I don't know, Patrik, is that something you want to...

No. Yes, we did not have any sort of material one-offs really in the quarter. And we -- as Bo talked about, we had some permanent layoffs, but those have not led to any material one-offs. But as we've also said, there are companies then evaluating if they need to go further with the permanent layoffs and so there -- that means that it could come something then later on in quarter 3.

[Operator Instructions] And our next question comes from Oskar Vikström from ABG.