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

Hello, and welcome to Indutrade Year-end Report for 2020. [Operator Instructions] Today, I am pleased to present CEO, Bo Annvik; and CFO, Patrik Johnson. Please go ahead with your meeting.

Good morning, and welcome on our behalf as well. If we start the presentation with a summary of the year 2020, we are obviously very happy and satisfied with the end result of the year. If we look back briefly, to start with, the year started out in a very strong way for us. We had a really good quarter 1 with a strong order intake, in total, 17% and organically, 7% and an EBITA margin of 12.4%. So we were happy. And obviously, we got worried as the pandemic spread and came into our markets in a more severe way. So we early on decided on 3 priorities. We have spoken on this before. Obviously, the health and safety of our people; and then to protect our profit margins, work with cost management; and thirdly, to try to capture business opportunities in a dynamic and difficult market situation. And I would say that we have delivered well on all 3 priorities. Even if the aggregated results are really good, it's been significant variations between companies, segments and countries. And we have had good benefit from the cluster of companies we have in the MedTech/pharma segments. We have had good cost management, and this is thanks to our, I would say, culture and entrepreneurial MDs, very agile. And all of these resulted in very strong financial performance with an all-time high EBITA margin of 13.6%. We have also improved our cash flow and strengthened our financial position. And I would say, despite the difficult pandemic, we managed to acquire 10 good companies, total sales of about SEK 800 million. So also pleased with that. Equally important, we have taken, I would say, big steps forward in our sustainability work, and we will elaborate a little bit more on that, but we have decided on some, I would say, inspiring long-term objectives towards 2030. And the Board proposes a dividend of SEK 1.8, and I will explain more about that later in the presentation. If we then turn page and focus a little bit more on the fourth quarter, I will basically repeat myself a bit because the development and message is basically the same. But again, a good improved demand situation supported by mostly the MedTech/pharma segments. This resulted in an organic order intake in plus 7%, very strong, and net sales organically plus 3%. And again, then continued variations between companies, segments and countries. We also had a record high EBITA margin for the fourth quarter at 14.2% and this was driven by good demand sales, but also good cost management, as basically in the earlier or previous quarters during the year, good strong cash flow and also improved working capital efficiency. And I would say that the acquisition pipeline is good. We managed to close 2 really good acquisitions in the fourth quarter and now the year has started in a really good way with 3 acquisitions, and I will explain more about these great companies. So they're down in the presentation. So really happy with the fourth quarter. It could have been, obviously, much more difficult in a macroeconomic perspective with the U.S. election, Brexit and so on, I'd be uncertain, but we are obviously very happy as it's turned out. If we try to explain a little bit more in terms of our order intake. As I've said, we have a growing cluster of MedTech/pharma companies, and they aggregated up to a very strong demand in Q4. The pandemic continued to negatively impact all our companies during the quarter, but the impact was slightly less than in quarter 3. So we have seen an improving trend, I would say, sequentially. The segments show a broad and strong growth for us in MedTech/pharma and in the quarter, we saw that some of these companies had a few large COVID-19-related orders. So I would say, broadly, strong development in all MedTech/pharma companies, but some had an extra COVID-19 push. And this, predominantly, I would say, linked to 2 things. We have invested both organically and structurally in what we call single-use systems. And here, we see good growth to both vaccine development but also other type of related treatment where these are needed. And then we have sold ventilators in a good way also in the quarter. We also see positive development in other segments. To mention a few, I would say, infrastructure stands out; water and wastewater, good segment for us. And many parts of the process industry and also the wind energy side. The demand for valves for power generation, we have a large company in that segment, continue to be relatively good, but declined versus a strong Q4 last year. Many of our companies exposed to the general engineering and automotive sectors still have a lower demand than last year, but it was slightly improved versus the situation sequentially in Q3. If we talk in a business area perspective, the strongest development was noted in Industrial Components and DACH and the weakest was in Measurement & Sensor Technology and U.K. All in all, the order intake was 2% higher than sales. And in terms of the numbers, then total growth plus 7% -- organic growth, plus 7%; acquisition effects, plus 5%; and divestments, minus 1%. And the currency now give us a headwind of minus 4% in the quarter. And if we talk about the total year, plus 5% in order intake, organic growth was plus 2%, acquisition was plus 6%. So both these together plus 8%, which is good, I think, during the circumstances; and currency minus 3%. If we turn page to sales. The net sales development in the quarter was plus 3% versus last year. And organic development was also plus 3%, acquisitions contributed with classified divestment minus 1% and currency, minus 4%. If we talk in a geographical perspective about sales, I would say that Scandinavia was our strongest region, primarily driven actually by Denmark and Norway. And where we had a bit more difficulty in this quarter was in the U.K., not surprisingly, and also a bit in the U.S. and the Netherlands and Switzerland. Net sales development for the full year was in total, plus 4%, organic development was in line with last year. Acquisitions contributed with plus 6% and divestments and currency, of course, minus 1% each. It's been a continued journey in terms of improving digitalization. So a lot of our companies have found new ways to sell and market, which we will benefit from in a longer perspective. And we still see issues where some of our companies are, I would say, dependent on installation work or service repair work on site, that's still obviously problematic due to the pandemic but all in all, a good sales situation. If we then turn page towards the EBITA. I would say that thanks to the organic growth, for instance, in MedTech and pharma and good cost management, EBITA grew during the quarter with 13%, and the EBITA margin was record high for Q4, came in at 14.2% versus 13% a year ago. Organically, EBITA increased with 11%. Acquisitions added 6% and currency was minus 4%. We have had some governmental support for furloughs, and that's equal to about 0.3% of net sales during the quarter. And that means then that the EBITA margin, excluding governmental support, was still 13.9%, good improvement versus last year. EBITA for the full year 2020 grew 12% and the margin increased to an all-time high of 13.6%, and if we again exclude governmental support, the margin was 13.1% compared to 12.7% in 2019. So despite pandemic, again, good cost management and to some extent, also a good benefit from a positive mix in terms of companies and products led to record high EBITA margin. If we turn to the business areas and start to talk about the sales situation. As I've said a couple of times, large variations between companies, segments and countries. Valves for power generation had a relatively good quarter, but declined still versus the very strong year before. And this is the main reason for why business area Benelux declined in the slide here. In DACH, the German engineering customers are still at lower level than last year and also some of our companies with customers in the Swiss process industry had tough comparables in good 2019. The sales decline in Finland is mainly due to a lower activity level at industrial customers, obviously caused by the pandemic. I would also say that in the quarter, we saw some positive signs towards the end of the quarter in Finland. So still, a positive movement there. Business Area Flow Technology continued to develop very strong, biopharma and MedTech are strong drivers, but we also see a good development in many companies with customers in the process industry and also in the infrastructure segment. Fluids & Mechanical Solutions turned the organic decline the last quarters into growth now. And the strongest development was in the automotive aftermarket and also in water and wastewater treatment applications. The business area really standing out in an incredible way, I would say, is Industrial Components. So very strong growth here, and this was mainly driven by the MedTech segments. And in this business area, half of the growth in MedTech relates to COVID-19 and it's, I would say, primarily linked to ventilator sales. Business area Measurement & Sensor Technology in U.K. noted a lower activity level in many customer segments due to the pandemic and in the U.K. also because of Brexit uncertainties during the quarter. And the weaker segments there was automotive, marine, aerospace and general engineering. If we turn to EBITA then by business area, 6 out of 8 improved EBITA margin, obviously, very good. And the strongest was noted in Industrial Components, as I said, and this ended up in a record high margin of 17.1%, super strong. All segments in the business area actually improved margins but again, the strongest development was in MedTech. High increases also noted in business areas flow and DACH. And these areas saw improvements in all our companies. But again, MedTech/pharma, process industry and infrastructure stood out positively. In general, very good cost management and the short-term work is only a small part of the cost reductions. So that's not the main driver. The only business areas with lower EBITA margin than last year were Benelux and U.K. And in Benelux, this is mainly due to a large positive one-off effect last year related to pensions. And the decline in the U.K. is related to the sales decline, but also, to some extent, to unfavorable product mix versus a year ago. If we talk about acquisitions during 2020. We have now completed, as I said earlier, with 2 very good companies in the fourth quarter. First, Cheirón, a Company in the Czech Republic, and they are in the MedTech segment. They sell the equipment for surgery and in intensive care rooms, for example, ventilators and defibrillators and those types of equipment. It's a plus-EUR 10 million company and they have a really good start within Indutrade. And then we were able to acquire X-RAY WorX, very niche-oriented companies with a strong position in the global niche. They provide industrial x-ray inspection -- or they provide the tubes for these inspection systems and have a really strong market position and innovation, quality position in this segment. And they are also plus-EUR 10 million type of company. But totally, we made 10 acquisitions with a combined annual turnover of around SEK 800 million. So despite difficulties to travel and basically need, at least, beyond borders, we were able to manage this. So I would say that we have an organization, which is not really dependent on headquarters' resources. So they are quite self-sufficient and do this in a really good way. And if we look at the start this year, now acquisitions, 2021, started in a really good way. We've been able to buy or acquire 3 great companies. First, we acquired Pistesarjat in Finland, and they are -- they have a strong position with advanced cable systems in Finland, well known, strong brand, strong market position. And then we were also able to buy a German company called Tecno Plast, which fits right into the cluster of companies, we have now building this single-use system in the MedTech area, pharma area. So they have clean room establishments and we share some suppliers already with them and know them well since several years, so really strong add on to already the position we have in this segment. And then we acquired Fire Proof in the Netherlands, providing passive safety products, with also a very strong position in the Benelux area. We have a very similar company in the DACH region, and they know each other well from before. So a strong complement there. And by that, I leave the word over to Patrik to elaborate more on the financials.

Thank you, Bo, and good morning, everyone. Let's dive into the financials a little more. And as Bo mentioned already then, total growth for orders was plus 7% and plus 3% for net sales in the quarter and the full year growth was plus 5% for orders and plus 4% for sales. Order intake was 2% above invoicing, both in the quarter and for the full year, mainly driven by the strong order development in the MedTech and pharma customer segment. Gross margin is slightly higher than last year in the quarter, and that's mainly driven by good cost management Bo talked about on the manufacturing side, that's improving the gross margins. And if you look at the full year, the gross margin is in line with last year. EBITA grew 13% in the quarter, and the margin improved to 14.2% versus 13.0% last year. And again, if you exclude the governmental support, the margin was 13.9% for the quarter. And looking at the full year numbers, we grew EBITA with 12% and the margin was 13.6%. And if you exclude the governmental support, it was then 13.1% versus the 12.7% last year, all-time high in all aspects. Finance net is lower than last year and that's driven mainly, I would say, by the lower debt level that we had through main part of the year. And relatively high tax cost during the quarter, but that's -- it is up 25%, while profit before tax was only up 16%, and this is connected into one-off items in the closing. And if you look at the full year, the underlying tax rate is basically in line with last year of around 22%. Earnings per share, up 13% in the quarter and 12% for the full year. Looking at return, return on capital employed, basically in line with last year, 19%. Cash flow was strong again in this quarter, improved 8%, up to SEK 792 million. And I'll elaborate a little bit more on the next slide. And if you look at cash flow, then in a trend perspective, you can see a really good development in the last 3 quarters, and this quarter, that grew 8% versus last year and as much as 45% for the full year. Working capital efficiency is increasing now. That's good. And the levels declined slightly, working capital levels declined slightly during the quarter despite that we have this aggregated volume increase. But if you look at the cash flow increase compared to last year, the main driver is actually the higher result. And even though we now are noting a decrease of the working capital and inventories, I think they are still on a slightly high level, it means many companies to safeguard customer service levels in these uncertain times. And when this uncertainty sort of is reduced, I think we are confident that we can reduce the inventories and working capital further during this year. Earnings per share for the quarter grew with 13% from SEK 1.10 to SEK 1.24. Full year earnings per share SEK 4.6 versus SEK 4.09 in the year before, an increase of 12%. And the improves mainly come from the strong EBITA, but also by the lower finance, as I talked about earlier. If you look at the EPS development in a more longer-term development, for instance, then at the average annual growth in the last 3 or 5 years, the increase is 14% and 13%, respectively. Debt, interest-bearing net debt continued to decline this quarter and was at the end of the year, around SEK 4.9 billion, and that's a decrease of 20% since last year. The quarterly decrease comes mostly from the strong cash flow, but the full year decrease of course, is also attributed to fewer completed acquisitions due to the pandemic and that we paid no dividend then for 2019. Net debt-to-equity ratio decreased to 56% from 85% last year. So that's a large reduction. And if you look at the historical perspective, it is at a low level and especially if you consider that implementation of IFRS 16, has actually increased the ratio with around 12 percentage points. The financial position is strong. Debt ratios, as I mentioned, are low. And if you look at the short-term funding at the end of the year, was around SEK 735 million and compare that with our long-term unutilized credit facilities, they were at a level of SEK 4.3 billion. So a large headroom. By that, I am ready to lead over back to Bo.

Thank you, Patrik. Then we have a slide with our financial targets and the outcome of 2020. And I would say that overall, we are quite happy with this outcome. We are not really reaching the growth target of minimum 10%, and that's a target we are quite determined to reach year-by-year, obviously. If we add in the organic growth and the acquisition-related growth, we came in at plus 6% for sales and plus 8% for orders. But then we have some headwinds from currency and divestments taking it down to 4%. So that's a bit annoying, but we are still focused in a great way to reach that going forward. However, on -- in terms of the EBITA margin, we have an all-time high, 13.6%, so well above our target there. In terms of return on capital employed, slightly below our target. We came in at 19%, target of 20%. I can't refrain from saying that if we exclude IFRS 16, we would have been at 20%. When it comes to net debt to equity, we are well below 100%. And in terms of our dividend, as I said, the Board is proposing a dividend of SEK 1.8 per share, which is equal to 39% of net profit. We didn't have a dividend for 2019 for well-known reasons. But for 2018, we had SEK 1.5. So in comparison to that, it's an increase with 20%. So all in all, a good year. We know we missed a bit in terms of growth, and we are working hard to come back to plus 10% going forward. If we then turn slide, we have some comments in terms of the effects from COVID-19. And it's basically the same messages as we have had in the previous quarters. As you have heard, some segments are still lagging in terms of demand. We have had some positive orders from the COVID-19 in the MedTech and pharma segments. The cost measures continue in all companies with decreasing volumes. Short-term work declined for the majority of the programs terminated by year-end and definitely so in Sweden. And the governmental support corresponded to approximately 0.3% of net sales and permanent headcount reductions, 320 FTEs, approximately 4% of the workforce since the end of Q1. And I think we were at 260 at the end of quarter 3, another 60 persons. And now we will see dramatically less on that from quarter 1 and onwards. So the positive thing, if any, sort of, from COVID-19 is that we have pushed ourselves in terms of digitalization. And I would say we will benefit from that in sales efficiency and cost efficiency going forward. And we will not go back to the old normal, rather find a new normal, and that's going to be a benefit. And as I segue into the next slide, I would say, we have also pushed ourselves in terms of sustainability. And we launched our new sustainability ambition and long-term objectives for 2030 in November. And this is defining our joint ambitions in a more, I would say, explicit way than before. It represents our shared commitment to continuously develop and improve the businesses within our group in a way, which is economically, environmentally and socially responsible. And our strategy focuses on driving sustainable profitable growth while supporting also the UN Sustainable Development Goals. We are making good progress with our current sustainability efforts where all companies are defining individual KPIs. And we have also introduced 5 common KPIs on a group-wide basis. And our group's sustainability strategy and objectives are focused on 3 main areas. It's people, which is extremely central to Indutrade, environment and also profitable growth. And in the people area, we have set the goal to have 100% engaged people. In the environmental area, we have said that we want to become the CO2-neutral by 2030. And in terms of profitable growth, we say that 100% of the Indutrade companies will contribute to a sustainable development. So as a business group, we are known for our long-term commitment to making both our people and our companies grow. And this commitment, combined with our strong entrepreneurial culture give us the best possible platform to continue to create sustainable path for growth together. So by that, we have reached this summary of the quarter and the full year reporting here. Strong 2020 with record-high profitability, improved demand situation, primarily related to customers within MedTech and pharma, but also some other strong segments, continued large variations between companies, segments and countries. Record high earnings, positively affected by strong segments and good cost management, gradual demand improvement expected, still some uncertainty due to the pandemic, obviously. We have a very good acquisition pipeline and a good start here in quarter 1. And I would say that our diversified business group with agile and flexible companies working closely with our customers is a good foundation also for going forward. And by this, we say thank you for sort of the formal presentation part and open up for any potential questions.

[Operator Instructions] We have a question from the line of Johan Dahl from Danske Bank.

Just a couple of questions. Just on -- as we look into 2021 here, I'm just curious to see, in your view, when you look at the efficiency measures on staffing pretty much and you net that against probably some sort of normalization on OpEx, less government support or no government support, what do you presume the net effect of that will be in the current year on a sort of apples-to-apples basis for getting volumes?

It's obviously a very relevant and good question, Johan. I can't really give you a quantitative answer on that. It's -- as I said, we will definitely benefit from the efficiency measures and also from the competence and experience gain in digitalization and things like that. But I don't know, Patrik, do you want to try to answer it.

What I can say is that as we move into 2021 further, and we see a normalization in demand, cost will gradually increase in our companies as they want to increase activities and -- so that will happen. And we are now leaving most of our sort of furlough schemes. And -- but instead, we have the structural savings you talked about, Johan. And what's the net effect of this? Well, it's a difficult equation and it's difficult to guide. But of course, increasing margin substantially is tough for us at the levels we are now since cost levels are pushed down. That's potentially the only guiding, and I can do. I don't know if you want to complement, Bo.

No. But we can't give you any numbers, Johan. It's -- we are so so many companies, so many different situations. So that's...

Yes. I guess, we have a figure about that. But if you look at gross margins, a lot has happened also on the product mix. Can you say anything there when you look into sort of the normalization of the business post-COVID, any conclusions there?

Yes. We normally -- we have a very stable gross margin over years. Now in quarter 4, we benefited a bit from maybe weaker sales. For example, in the U.K., we have some mix which affected negatively in some other companies. In MedTech segment, for example, we gained mix from that. So I -- I think, if anything, the mix will be slightly sustainable rather than negative going forward.