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

Hello, and welcome to the Indutrade audiocast with Telecom's Q2 2021. [Operator Instructions] Today, I'm pleased to present CEO, Bo Annvik; and CFO, Patrik Johnson. Bo, please begin your meeting.

Good morning, and welcome on our behalf as well. We are obviously in a good mood this morning. We have a very good quarter to report, to present. And our companies have done a fantastic job during the quarter. So it's really great performance. If we start to look at some overall highlights, we can briefly comment on them. And what really stands out, I would say, in the quarter is the strong demand, the strong order intake, the strong top line. We improved both sequentially versus Q1 and also versus Q2 in 2020 and really high numbers organically plus in 26% in order intake and plus 16% in sales. And all of this, we will comment on more in detail in a few slides. We obviously review our companies and business areas on a regular basis. And it's recently been extremely green, I would say, on the KPI charts. So basically all companies and segment countries are in a positive situation, very few red dots on the chart -- some of our companies, quite a few of them are obviously having a bit of a stressed supply chain situation. We see higher raw material prices, higher component costs, and we also have the issues with long lead times in terms of deliveries and also freight prices increasing and so on and so forth. You have heard about this from other companies already. I think our model with having entrepreneurial MDs and agile companies is managing this really in a good way. So the overall impact financially on a group level is still limited. We had a record high EBITA margin, 15.2%, super strong for us. We are also improving our working capital efficiency, which we think is good. Obviously, the top line is increasing and improving the ratios, but we are actually managing the inventories and also receivables in a good way, and we will comment more on that. And we have made 3 acquisitions in the quarter and one now in the beginning of Q3. So all in all, 9 acquisitions and plus SEK 700 million in top line on a yearly basis and perhaps even more importantly, a good pipeline to work with. So if we turn our eyes to the order intake slide, you see the bars on the slide and the blue bar is obviously quarter 2 and it's perhaps good to start reflecting on what happened in Quarter 2, 2020. And that's really when the pandemic hit more seriously in a enolase for a lot of businesses in a global perspective also for us. But the order intake impact was, I would say, only 5% down in Quarter 2 2020. So some hit, but not very, very significant. So that is an important reference to have when you look at the increase we have in this quarter, plus 26% organically and 30% in total. So in that perspective, I think, very, very strong numbers. And as I said before, it's really almost all companies and segments show a positive development. We have spoken a lot about the MedTech/Pharma segment in previous quarters. That remains strong, also infrastructure and process industries. But now we also see more of a recovering broader engineering sector, which is positive for a lot of our industrial component companies which we have in different countries. We have a large valve company in the Netherlands. They still have a good order intake situation, but they had a very strong in 2020. So reference wise, a little bit lower now, but still, I would say, a good situation. All business areas grow their orders organically during the quarter with double-digit growth numbers and the strongest development was in DACH, U.K. and in fluids and mechanical solutions. And order intake was a positive book-to-bill plus 8% higher than the sales. And as I said, in total, plus 30% order intake growth organically plus 26%, acquisitions added another 7% and the currency worked against us with minus 3%. In order to understand the order intake situation, we have looked at the average daily orders and compare that with the situation in Q1. And I would say, on average, we are 5% higher in Q2. So sequentially, we are growing and having a good order intake situation in Quarter 2. There is an obvious question linked to prebuy and order for inventory buildups and there is -- some of that, I'm sure, definitely in the MedTech and pharma segment, I think the big global international pharma companies are really trying to buy ahead. And there is also some prebuy in the Industrial segment. But still, on an overall level for Indutrade, not very significant, is our judgment. If we then turn our -- turn page and look at net sales, it's also a very good situation, strong in the quarter, and we have definitely increased our backlog. Total net sales development was plus 20% versus last year, and the organic development was plus 16%, acquisitions plus 7% and currency against last week, minus 4%. And again, in Q2 2020, organic sales was minus 5%, so not super dramatic. So plus 16% is, again, a very strong number, I will say. In a geographical perspective, when we look at our larger countries, what stands out is obviously, the U.K. and Germany, Finland and Switzerland have slightly lower growth rates, but they have really good references in 2020. So still, I would say, a good situation also in those countries. And as I said, the delivery issues, potential component shortages and things like that was not very significant. The rough estimate is that we had a negative effect of around 1% to 2% lower sales during the quarter linked to this on a group basis. And perhaps this will intensify a little bit in Quarter 3 versus Quarter 2. It's very difficult to judge. But a little bit even more issues in Quarter 3. I'm sure how this will develop. Then we turn to our profitability development, and, it was, as I said, super strong. And EBITA increased with 40%, which is very, very high numbers. And the EBITDA margin in itself was at an all-time high level at 15.2%; last year, 13%. And in addition to to the portfolio of companies we have held for some time, also the newly acquired companies is contributing in a strong and positive way. Organically, EBITDA increased with 32% and acquisitions added 12% and currency was minus 4%. So we obviously have a very strong leverage from our increased top line dropping down to the bottom line. There is still some utilization of programs for short-time work at a handful of companies, but on an aggregated level, it's very limited and the financial impact of governmental support in the result was therefore only 0.1% of sales. And in Q2 last year, it was 1.5%. The upward pressure on prices for raw materials and components continued in the quarter. I'd say our companies have successfully really worked with proactive pricing to offset these increases in an incredibly good way. So, so far, we don't really see a negative impact on our gross margin on an aggregated level. we actually improved our gross margins, which Patrick will elaborate on a little bit later on here. If we then turn to our business area situation and look at organic sales growth for Quarter 2. As I said, our KPI charts are very green. So almost all companies and segments developed positively -- You see on the bar diagrams here that the business areas, the 4 business areas to the right there are actually increasing more than the 4 towards the left. But they also all had a little bit different references from Q2 2020. So the ones towards the right, those 4 had more difficult situations in 2020 and the ones to the left had, Benelux, had plus 12%, Finland and Flow was fairly stable and DACH with minus 7%. So that needs to be sort of remember when you look at the growth numbers. But the strongest growth was in business area, U.K. Most companies in the business area grew, but the growth was partially fueled by lower levels last year, minus 26%. And the COVID-19 lockdown has probably been the hardest in that business area and country for us and really had severe impact on both infrastructure and the construction businesses in great. If you look at Fluids & Mechanical Solutions, they had a strong sales situation driven by, for example, the automotive aftermarket. And also some infrastructure-related companies. Industrial Components was driven by, again, good med tech sales but also more broadly in the engineering segment. And in what we call MST measurement and sensor technology standing out is their 4 sensor and instrument segments, but broadly good there as well. Flow Technology had also a good situation in MedTech and pharma. They had a very good situation last year in those segments. So not a super strong growth this year but a very difficult reference. And in Finland, I would say, good development in the infrastructure segment and Energy segments and in DACH, the Swiss pharma and process industries, were positive. In Benelux, most of our companies developed very well. Our larger company for high-performance valves did well but did extraordinarily well in Q2 last year. What other can we say -- I would say, some municipalities are actually delaying projects right now. They are hoping for lower project costs sometime in the future. So even if that is happening, we are still performing very well. I would say also some process industries refineries and similar are deferring their maintenance stops this summer to 2022 or even 2023. They are having so strong profitability right now, so they don't want to stop. And they prefer to run. And again, even if we don't benefit from that, we still see very good numbers. Then if we look at the EBITDA margin per business area, again, we came in on an overall all-time high level at 15.2%, and 7 out of 8 business areas increased their margins quite well, I would say. And it's obviously the strong sales, improved gross margins, which are driving the bottom line here with really good leverage. And as I said before, also supported by good development in the newly acquired companies. And it's broad-based, maybe what needs to be commented here is the U.K. situation where, as I said, a clear majority of the companies are growing, but we have a few companies with some segment issues, and they have high profitability usually, but not right now. So the company mix, product mix is hampering the U.K. profitability. And we also saw some one-off related costs in a few companies which added to the situation with a fairly strong stable profitability level at 12% there. I think U.K. will improve in H2 versus the level we see right now. Then Acquisitions. Really, I would say, a positive situation. We did 3 good acquisitions in the quarter. We acquired a Danish company called CKJ Steel, working with the MedTech segment in Denmark. And Denmark has a very much and growing MedTech market. So we're very happy to be able to acquire CKJ Steel. And then we bought a smaller company called Lamisa, sealing product company with -- Swedish company with very high service level and a good niche position. And then we bought another Danish company called Buhl & Bønsøe involved in measurement instruments and calibration in Denmark, high market share, strong market position. And then -- After the end of the quarter, we were able to acquire Atlas Industrial Print, working with industrial product marking solutions. A market we know well. We already own a company called Topflight in this segment. It's obviously a very good addition. So very happy with that. And -- As I said before, the annual turnover level of all the acquisitions so far is a bit more than SEK 700 million. We have a lot of projects in different stages and the pipeline has been good. It remains good. And we also see that the level of incoming projects is actually increasing a bit from Quarter 1 and earlier. We have, however, experienced a slight price increase that is good profitability in a lot of companies now, and it's not unfeasible that prices go up. And it's especially for what we call quality companies with good growth capabilities going forward. But it's still manageable, and I'm optimistic and positive in terms of acquisitions for the second half of the year as well. So by that, I leave the word over to Patrik to comment on the financials in more detail.

Thanks, Bo, and hello, everyone. Let's dive into the numbers of the quarter. And as Bo mentioned already, it was a fantastic demand level during the quarter, and we came in at plus 30% for orders and plus 20% for sales. That's really good. And year-to-date, we are now at plus 17% and plus 12% then, respectively. And order intake was higher than invoicing, plus 8% in the quarter and plus 10% year-to-date. Order backlog is now, of course, very, very strong when we move into the second half of the year. Despite headwinds from increased supplier prices, we managed to increase the gross margin during the quarter and it was 34.8% versus 33.7% last year. Year-to-date, it's also higher than last year, 34.6% versus 33.9%. And the increase comes mainly, I would say, from a more favorable better product mix and also higher volumes in our manufacturing companies giving us some good volume of sort or cost absorption. But all this was, of course, made possible through very good proactive pricing work where our company is offsetting the higher supplier prices. So the main driver is, I would say, the mix and good absorption, I would say. EBITA grew 40% in the quarter, improved to the all-time high, 15.2%, a very strong number then versus 13% last year. accumulated, we are now plus 28% and at a margin of 14.5% versus 12.7% last year. Finance net slightly lower than last year, and that's mainly driven by lower debt levels. Tax costs up, of course, 45% in the quarter and 34% year-to-date, basically in line with the profit increase. So underlying tax rate is basically the same as last year. Earnings per share, up 51% in the quarter and 34% year-to-date. Return on capital at 21% versus 18% last year. The increase is mainly driven by the higher results. But of course, also supported somewhat by the increased working capital efficiency that we have. Operational cash really strong, continues to be really strong, but actually decreased slightly versus last year, and I will elaborate a little bit on the next slide. And net debt-to-EBITDA continue on a low level, thanks to the favorable result and cash flow development, a 1.5% versus 1.8% last year. So let's move to look at the cash flow more in detail. As you can see then, cash flow was very strong and came in at almost SEK 800 million. And the slight decrease versus last year due to an increase in the working capital, and that's mainly receivables. Last year, working capital decreased and that's why we managed that high level last year. And as I said before, we continue to improve the working capital efficiency and inventories were actually organically lower than the same quarter last year, which is, of course, good. And moving to the next slide, looking at earnings per share. Q2 earnings per share grew with 51% from 1.02% to 1.54%, which is slightly higher increase than the EBITA increase. The main driver of the improvement is, of course, the EBITDA improvement, but also supported by stable or lower amortization of intangibles and also the finance net I mentioned before. Looking at the more longer-term perspective in 5-year increase in the annual earnings per share were plus 16% and 15%. And from that, moving on to the debt situation. The interest-bearing net debt end of the quarter, it increased slightly sequentially to SEK 5.389 billion. And due to the dividend payout, I would say, in the quarter. So it's quite natural increase. And on sort of a more longer-term perspective, I would say, the debt level is on a low level, and it's the main -- the main reason for that is the good cash flow during both the end of last year and the beginning of this. Net debt to equity ratio decreased to 59% from the 72% last year. A low level from a historical perspective, especially for the second quarter. And altogether, that makes -- I think our financial position remains very strong. And during the quarter, we actually issued a new 5.5-year bond to shift part of the borrowing from short to long term. And I think the interest from different debt investors were really good, and I think we'll end it in really competitive terms. So thanks, and I leave back to Bo.

Good, Patrik. We then take a look at our group management situation, which we have strengthened during the quarter. We work with an overall ambition labeled sustainable, profitable growth. And sort of below that, it's obviously both developing our portfolio of companies we already own and then being very active in terms of the acquirer. But if we stay at the portfolio, we already have. We have a segment of companies working with the MedTech/Pharma businesses and a cluster of those companies have together formed an independent brand called UltraPure International, where we are a producer, you can say, more of an assembler. We assemble things in clean room environments, usually, silicon tubing systems or sets and we now have a number of companies doing that. And they work during that brand UltraPure International and this is then sold via these companies and also by some additional trading companies we have. And -- Some of these companies sell to the same type of very large customers, global international big pharma customers. And these companies also buy from some of the same suppliers in terms of raw material. And in order to sort of develop and coordinate this business a bit -- We have asked Morgan O'Brien, who was previously head of our Flow Technology business area to enter into a role of broadly business development into this new segment for us. And he has a lot of knowledge, experience, capability contacts in this industry. So he fits in extremely well here. So he has entered into that role. And as I said, it's his role is more development oriented. The company is still belong to their respective business area. So this has no impact in terms of our reporting structure. And then Morgan left an open spot in the Flow Technology area which we filled internally with Per-Olow Jansson. And Per-Olow has been a very successful Managing Director for one of our Swedish flow companies called GPA Flowsystems, and he has also been a business unit leader chairing a handful of other companies. So he knows the Indutrade culture and business model extremely well. So it was a fairly seamless change from Morgan to Per-Olow. And we were also able to internally find a successor to Per-Olow in that specific Swedish company GPA Flowsystem. So good that we can handle these management sort of appointments all internally with the highly qualified persons -- But obviously, we have high hopes to continue to develop this MedTech/Pharma system business, and it's one of our stronger initiatives in terms of organic growth going forward. Then we've made 1 slide to try to simplify your work in terms of what are the effects of COVID-19 in Quarter 2 for Indutrade. And I think I have more or less commented on all of these already, but still doing. And we have some COVID-19-related orders, but they were substantially higher in quarter 2 2020. A -- We have some disturbances and disruptions, supply chain wise, but not very -- not very significant on a group level, as I said, perhaps impacting around 1% to 2% of sales. And yes, we have discussed the raw material and component and trade situations. Short-time work declined further during the quarter and the majority of the furloughs we have are in business area, U.K., and they have been previously impacted them on lockdowns. And our personnel-related government support was marginal during the quarter amounted to 0.1%, and it was 1.5% in Quarter 2 last year in relation to net sales then. Basically, it all works well now. We have a company in Malaysia which can only run at 60% speed linked to some 40 regulations there. We have some issues locally in South Africa, also a company which can't operate linked to local authorities. And we have had some smaller outbreaks in some European companies where it has some impact on operations for a week or so, but not more. But all in all, I would say, very manageable situation. So then we are at the key takeaways. Really strong and broader demand, maybe that's the important word -- green chart of KPI numbers very broadly in the group. And record high EBITDA margin and also improved capital efficiency to things which are obviously very important to us. 9 acquisitions so far, top line of plus SEK 700 million and a good strong pipeline for the second half of the year. We have a very high order backlog. We see a stable sort of demand situation into the fall here now. So book a positive outlook on the market, you can say. We definitely have some supply chain issues, but we think with the type of entrepreneurial and agile companies, we have -- it's still manageable. So very, very positive performance in quarter 2 and an optimistic outlook for the second half of the year as well. And by that, we say -- Thank you for listening in, and we are up for a Q&A session.

[Operator Instructions] Our first question comes from the line of Carl Ragnerstam from Nordea.

A couple of questions from my side. First of all, on the organic growth. You said that it's been fueled partly by pre-buying effects. And I wonder if it's possible to quantify the prebuying effects, I guess it might be a bit difficult, but if you could try and also if we should expect the sort of the prebuying effect to continue when entering Q3 as well?

Yes, we have a very difficult -- to set the number on the prebuy effect. But it's not very material for -- on a group level, I would say. I don't know, Patrik, if you want to elaborate on this number-wise?

And we have talked with our companies and business areas about it. And there are examples of it. But -- But it's not very broad, those comments, I would say. So -- but quantifying is difficult.

It's mostly MedTech and pharma related and to some extent in the more industrial-oriented companies but it's definitely not in the majority of our companies. We see it not so. I think it will probably continue a little bit in Quarter 3 as well. It's such strained supply chains now. So it's a clear business opportunity if you can deliver. So I think some of that will probably continue.

Okay. Perfect. And also it doesn't sound like it'd be probably during Q2, but on the raw material side, maybe you attached upon it, but you mentioned that some subsidiaries were impacted and -- but you implemented price increases. But should we assume a slightly bigger impact in the coming quarters as raw material prices usually comes with a bit of a lag?

I think that's a good assumption. I -- Cautiously, a little bit more difficult in Q3 than Q2 will be my assumption.

Okay. Perfect. And on the cost side, you talked for a while about ramping up costs. Could you give us some flavor on it? I mean what magnitude and where do you see that you need to ramp up costs? And also if we should see or expect to see cost ramp up already in Q3 related to selling marketing expenses?

It's for the most part, top line related cost increases then. So you need a little bit more headcount to deliver or operational handle a higher top line. And then we try to have a portfolio perspective in each of our business areas and those companies with clear organic growth opportunities, we really want to support and they should go for growth. And if they need headcount increases, they should appoint those persons. And some of the companies have a little bit less organic growth opportunity short term. And there, we should be more sort of -- yes, manage cost a bit more closely. But I think we, as a group, and definitely, the individual companies are handling this in a strong way. I'm not really worried about the cost in a ratio versus sales perspective. I think this will be managed well. And anything more, Patrik, on your side?

No, maybe that market sales activities have, during Quarter 2, we increased slightly. But I would say they are still on a relatively low levels, and we've had restrictions for most part of the quarter. So if -- when societies open more -- open up even more, I would say, that these type of activities even in the new normal will increase in many companies. But is not a major increase, but it will impact the cost level, of course.

You will probably see a bit of a travel bump. So as Patrik say, we discussed the new normal with our companies, and they all should have a plan for that. But they all will obviously try to actually physically visit customers whenever they can. If you haven't done that for a year or 1.5 years, it's obviously important to do that. So I think quite a lot of companies, when they can, they will travel more to visit customers. But then they will not continue to visit customers physically in the same way as they did before the pandemic. So it's going to be much more of a mixture between digital and fiscal meetings. But in -- I don't know if it's going to be in Quarter 3 or Quarter 4, but in any of those quarters, there will be a little bit of a travel bump that I expect.

Okay. Perfect. And the final one from my side. In terms of M&A, maybe also a difficult question. But we have seen quite nice M&A pace, both for you as well as the sector year-to-date. I mean would you say that is that you're working through a catch-up effect given the restrictions during the pandemic? Or would you see that more and more companie's want to sell their business or -- yes, and also if you want to comment on the increasing multiples, if you could quantify or give you an example?

It's not a very significant sort of catch-up effect. It's -- we still did what -- the 10 acquisitions last year. So it was fairly good level even if we had a pandemic. But it's a positive market. It's definitely more incoming projects than 2, 3 quarters ago. And as I said, the pipeline is good and all business areas are engaged in different projects. So it's a quite broad sort of positive situation, and it's going to be simpler and easier now when it's less restrictions in terms of meetings and travel to visit the companies. So it's I think, a positive situation. Prices are going up a bit, mostly, I would say, in Scandinavia, Nordics, perhaps predominantly Sweden, but it's still manageable. We have said no in some projects, quite few though, but we have done that. We know what levels we want to buy yet, and we know exactly what we are looking for and so on. And we are fortunate enough to have been doing this for 41 years. So we are fairly established, I would say, and the incoming sort of project is, I would say, at a higher rate for us than in many less -- lesser established companies in this field. Do you want to add anything, Patrik?

No, not really.

And the next question comes from the line of Robert Redin from Carnegie.

Yes. I just wanted to ask on that very, very strong order intake in the quarter, if the lead time or delivery time on those orders is sort of longer than normal, if you expect to see less of that in Q3 than a normal pattern?

In our MedTech and pharma business, we are reaching some capacity issues in these clean room assembly units we spoke about. So there, we have had a little bit longer delivery lead times out from us. But if we expect or if we sort of take out that part, I think it's fairly normal. You can add here, Patrik, also, if you want.

No, I think, it's -- I think there is a slight increase, but I don't think it's not material if you sort of exclude -- if you exclude the MedTech/Pharma sector, which you mentioned but a slight increase, I guess, but that's more of a gut feeling rather than something I can quantify.

All right. That sounds great. And yes, you mentioned also costs in the U.K. are sort of nonrecurring nature, but how small were they? Can you say something about magnitude?

You need to take that.

Yes. In total, they were, say, around SEK 5 million in a handful of companies.

And as there are no further audio questions, I'll hand it back to the speakers.

Then we say thank you for listening in, participating and wish you all a good summer, and we keep in touch. Bye-bye from us.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.