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

Hello, and welcome to the Indutrade audiocast with telecom phone conference Q4 2021. [Operator Instructions] Today, I'm pleased to present CEO, Bo Annvik; and CFO, Patrik Johnson. Please begin your meeting.

Good morning, and welcome on our behalf as well. We are happy to present a new strong quarterly and also full year report from Indutrade. And as usual, let's start with some overall highlights for 2021. As I said, another very strong year for us, and thanks to great performance of our companies and our people. We saw a positive and broad demand development in general through the year and for all business areas. Order intake grew in total with plus 20% and net sales with 13%. And in numbers, order intake was SEK 23.5 billion and net sales, SEK 21.7 billion. And it feels good to mentally to be above that SEK 20 billion mark for us. So now we set out for SEK 30 billion. EBITA improved to an all-time high level of 14.7%, was 13.6% a year ago. And the strong profitability in combination with improved capital efficiency created a very good cash flow of SEK 2.9 billion. The year was also great in terms of acquisitions, 17 good companies with strong offerings was added to our family and the annual turnover of around SEK 1.6 billion. Our financial position has continued strong, and the Board proposed a dividend of SEK 2.3 per share, which equals 40% of net profit. And this is in line with our financial targets to have a dividend in the range of 30% to 50% of net profit. If we then turn to highlights of the fourth quarter, I would say that the positive market situation continued sequentially. And in the last quarter, we saw also improvement versus last year in most segments and companies. Organic order intake grew with 15% and for net sales with plus 6%. So really good organic year performance. And the organic growth, and the continued organic improvement of the gross margin in combination with strong performance in newly acquired companies contributed to a record Q4 EBITA margin of 14.6%, was 14.2% a year ago. The improved profitability, combined with good control of the working capital, despite all the supply chain challenges we have had, gave us a record high cash flow also in the quarter of SEK 901 million. And we also ended the year with a strong acquisition pace. We acquired 7 high-quality companies in the quarter. If we then look at the order intake. As I said earlier, the demand was continued strong in the quarter and, organically, order intake increased with 15%. And this was versus Q4 2020 which was also good, where we organically grew 7%. So it was not based on a recovery situation, we grew from an already strong position in Q4 '20. And as I said, it's a broad-based growth. Most company segments and countries showed a positive development. And if we should mention some segments which have developed primarily good, I would say infrastructure, general engineering and different types of companies in the process industry. We have, since a couple of years now, also focused on the MedTech and pharmaceutical segments and they also performed well, but we had very strong references, I would say, from Q4 2020, so the growth was not as good there, but the overall level was very good. And obviously, the growth Q4 last year was COVID-19 related in some of those companies. Demand for valves for power generation in business area Benelux was also good in the quarter and basically in line with Q4 2020. All business areas grew their orders organically during the quarter and the strongest was in Measurement & Sensor Technology and also Flow Technology. Order intake was 10% higher than sales in the quarter and is 8% higher for the full year. And now our order backlog is very strong at an all-time high level, obviously. Total growth in the quarter, plus 23%, whereof organic, as I said, plus 15%; acquisition effects, plus 8%; and currencies and divestments had a very marginal impact this quarter. Net sales also very strong in the quarter, plus 14% overall and organically plus 6%. Acquisitions added 7% and currencies minus 1% and no impact from divestments there. And again, I'd like to underline that the plus 6% should be seen versus the sales growth organically of plus 3% in Q4 2020. So again, not from a weak position, rather a good ending also of 2020. If we analyze our sales in a geographic perspective, I would say that countries standing out positively would be Switzerland, Sweden and Finland. But also in Germany, the Netherlands, Denmark, Norway, saw good developments. And I would say that U.K., there was a small decline and a bit more volatility. The supply chain issues have continued. Many of our companies are experiencing long lead times from suppliers and some have component and product shortages. But I would say that in situations and times like this, Indutrade is at its best versus an integrated large industrial group. So the decentralized structure with the entrepreneurial spirit is really creating positive results in this way with flexibility and, also, I would say that quite a lot of personal relationships based on supplier relationships from long times and privately held companies. If we should estimate what this is causing in terms of held-back invoicing, it's around the same level as we were at the end of Q3, estimating this to be around SEK 100 million to SEK 200 million. Yes, I think that's enough in terms of that. We have also added a slide where we try to demonstrate our organic sales growth trend for the last 5 years. And 2021 stand out, as you see, very strongly with a full year organic growth of plus 8%. And as I said already, earlier, it was not from a recovery. We had 1 quarter with a decline in 2020, but the full year was on the same level organically as 2019 pre-pandemic. And again, the growth is also broad-based. All business areas and most companies show a positive development. And looking ahead, we have an all-time high backlog when we move into 2022. And order intake was 8% higher than invoicing during the full year. Then we turn to our results perspective and start with EBITA here, which increased with 17% versus last year. And the EBITA margin increased to an all-time high for quarter 4, 14.6% versus 14.2% last year. And organically, EBITA increased with plus 8%, which is a bit better than the organic increase of net sales, which was plus 6%. So we have a positive leverage, which we always aim for. And the organic margin improvement was driven predominantly by strong sales development but also an improved gross margin. The upward pressure on prices for raw material and components continued in the quarter but positive customer pricing effects together with some product mix changes and also improved production efficiency managed to more than offset these increases. So a great job from our companies in that perspective. And the newly acquired companies also developed very well and contributed to the improved margins. So we have bought and acquired quality companies, and they have had a really good start in their first year with Indutrade. In the result, there are some one-offs included with a total effect of minus SEK 22 million, and this is relating to some smaller restructuring measures we have made. And if we exclude that, the EBITA margin was 15% versus 14.2% last year. If we then turn to a business area perspective, it's positive to see that 7 out of 8 business areas grew sales organically in the quarter and most companies developed positively. So in our overall KPI chart show all the companies we own it is a lot of green. We saw the strongest growth in business area DACH and Fluids & Mechanical Solutions and also Finland. And it is, as I said already earlier, in the segments of engineering, infrastructure and process industry. Measurement & Sensor Technology also had a good development, but the overall sales level was held back slightly by the longer supply lead times and shortages. That's the business area with, I would say, most electronic components in their product range. And naturally so, they probably have the biggest issues regarding supply chain. The slightly lower growth in business area Benelux was related to our large valves company in the power-gen sector. They had good and stable sales but declined a bit versus a very strong Q4 2020. I would say that the majority of the companies in business area U.K. also developed positively. The U.K. market, however, still shows some variation and volatility which dampens the overall growth somewhat. And we see signs of improvements, but I think they will still be slightly sort of behind the average Central European rates shortly -- or in the short-term perspective here. Business Area Industrial Components and Flow Technology also showed good sales levels, but they had very tough references from Q4 2020 primarily related to MedTech, pharma and also some process industry customer segments. And to take Industrial Components more specifically, you might remember that they had a very large ventilator deliveries in Q4 2020. So that was more of a one-off impact which made the reference difficult. The EBITA margin overall, as I said, came in at 14.6%, a record for Q4. And the main reason is continued improved gross margin; continued sales development, which has been strong. And this is -- the gross margin is despite the price increases from many of our suppliers which we have tackled and handled in a very good way. And as I said, also good performance from our newly acquired companies. The margin improvement is, in general, broad-based, and most companies in the group improved their margins. And we saw the largest aggregated margin increases in business area DACH and Fluids & Mechanical Solutions, mainly driven by good organic growth and gross margin improvements. Industrial components show a continued high margin but slightly lower than last year due to the strong Q4 2020 with the ventilator deliveries there. If we adjust from some of these, call it, one-offs, they were at a similar level as last year in the EBITA margin. And business area U.K. is still affected by some of the weaker market or the variations or volatility in the market. And they also had some one-off impact in Q4 partly related to acquisitions. And if we exclude for that, they were also on par with the EBITA margin a year ago. If we then look at the acquisitions for 2021, as I said, it's been a very strong year. In total, we completed 17 acquisitions, and 7 of them were in Q4. And I would say that all companies have strong positions in their respective niches and good growth prospects for the future. All business areas have done acquisitions during the year, and we also have a good spread among the geographic markets. And total annual sales of the acquired companies is around SEK 1.6 billion. We have a good, continued pipeline for the coming quarters. And I think it's fair to say that despite certain COVID-19 restrictions and so on and so forth, we are keeping good speed in the different projects we are involved in. And this is thanks to, I would say, local resources which can drive these projects forward in their local markets. We are also adding acquisition resources in order to strengthen our capability going forward. So in some of our business areas and also centrally, we are adding capabilities. And our overall ambition is to make 2 to 3 acquisitions per business area per year which equals 16 to 24 on a group level. So by that first part of the presentation, I will leave over the word to Patrik to comment more on the financials.

Thanks, Bo. And hello, everyone. So let's look at some detailed key data. And as Bo talked about earlier, total growth for orders and sales was plus 23% and plus 14%, respectively, in the quarter. And for the full year, we grew 20% and 13%, respectively. Order intake is higher than invoicing, 10% in the quarter and 8% year-to-date. And order backlog is continuing to increase and is now record strong. Gross margin continued to develop very positively despite the supply chain issues and increased supplier and freight prices. For the quarter, we are at 35.9% versus 34.7%. And for the full year, we increased 1% from 34% to 35%. The main driver, I would say, is the strong customer pricing activities from our companies. Then on top of that, we are -- we have also some positive product mix changes and also high volumes impact productivity also in a good way. EBITA grew 17% in the quarter, and margin improved to 14.6% versus 14.2% last year. Accumulated, it's an increase with 22%, up to 14.7% versus 13.6% last year. And as Bo mentioned, and we have some one-offs relating to restructuring, some smaller restructuring activities in one of our companies, totaling to SEK 21 million. And if you exclude those from the result, we are at 15%. Moving further down the P&L. Finance net, slightly lower than last year, mainly due to financial currency exchange differences. And tax costs are up in the quarter, relatively much to 37%, and this relates to revaluation of deferred tax liabilities in U.K. due to an announced coming change in corporate income tax rate. And if you exclude this one-off revaluation, the underlying tax rate is basically in line with last year. Earnings per share, up 16% in the quarter and 25% year-to-date. And return on capital employed improved to 22% versus 19% last year, driven by, of course, mainly the higher result, but also the improved working capital efficiency that we have. Cash flow continued on a strong level and reached an all-time high, above -- first time above SEK 900 million, up 14%. And full year cash flow was also increased on 3% versus last year. And all in all, this made our debt ratios at good levels. Net debt to EBITA, 1.4 versus 1.5 last year, on historically low level, I would say. Moving on and looking at the cash flow. As I said, a record high and amounted to SEK 901 million. Improvement was mainly related to the higher profitability. And if we look at the working capital changes, the organic working capital changes, we have a slight seasonal decline in the quarter versus quarter 3. But if you compare to last year, we have increased the working capital levels, and that's mainly due to the higher sales and volume levels we have in our companies. And in addition to that, some companies have also had to add some buffer stocks to manage the strained supply situation. But despite this, we continued to improve the working capital to sales ratio in the quarter, so that's really encouraging. Earnings per share grew in quarter 4 with 16% to 1.24 -- from SEK 1.24 to SEK 1.44. And also here, the main reason for the improvement is the higher EBITA development, but also the favorable finance net development I talked about. The higher tax cost, of course, holding back this increase slightly. And if you look at the longer-term development, 3- and 5-year averages, annual averages, we are at plus 15% and 17% then, respectively, as a growth rate. And lastly then, looking at the debt situation. Net debt, the interest-bearing net debt end of the year is close to SEK 5.5 billion, which is slightly higher than last year. And that I would say that, that's mainly connected to the higher acquisition pace. And the net debt-to-equity ratio decreased to 53% from 56% last year. And that's also a low level from a sort of a historical perspective. During the quarter, we issued a new long-term bond and we did that with proactively to secure liquidity for bonds then, that are falling due short term. To summarize, I would say that our financial position remains very strong, low debt ratios and also good headroom between our short-term debt and guaranteed long-term facilities. So by that, I leave back over to Bo.

Thank you, Patrik. I'd like to take the opportunity to comment a bit on our business model. Broadly, that is about developing and acquiring small- and medium-sized entrepreneurial companies, as you know. And this has been our way of generating value in more than 40 years, and it still is. The model is, however, continuously refined. And as we become a larger and business environment changes, we learn more, we also need to adjust our way of working. . And on the development side of the slide here, we have done quite a lot in the last 5 years, and we've become more structured without being bureaucratic in any way. We have added activities and process to ensure that we have the right person in the right place and that we develop our people. I would say that, that's crucial in a decentralized organization in general and absolutely so for Indutrade. It's basically all about having the right people at the end of the day. So that's highly prioritized. Knowledge sharing has also been very important within Indutrade. But now we have more, I would say, a structured way and updated tools for this. And we arrange quite a lot of different conferences, seminars and also specific one-to-one meetings between companies we feel have learnings to gain from each other. And we have the Indutrade portal filled with the information and tools and best practices in different key topics needed for running a successful company, yes, in the size and type of business we have. We are obviously also trying to coach, challenge, support our companies to reach their full potential. And as a basis for that type of governance, we have developed a portfolio model. And by that, we can, I would say, ensure that the right focus and measures are taken and initiated for each company. Sustainability is also very important for us. Every company is obviously unique and has to define their own opportunities, risks, targets and activities. But we have a common sustainability framework. And all our companies have to do a materiality analysis. And based on that, define their specific objectives and targets. In addition, they also need to report on a few common group KPIs, which are important for everyone, which could or is, for instance, CO2 emissions or we have some people-related KPIs like safety and injuries and things like that. So I feel that the development side is highly focused. And above all right now, we spend time on organic growth and have quite a lot of focus and concepts, models way of working to step-by-step improve the organic growth capabilities in our companies. If we then move to the acquisition side of the model. I would say that gradually, our business areas have increased their capability to run acquisition processes since some years back already now. And we are continuing in that direction and, as I said earlier, adding resources and capability in the business areas which then is close to our companies and in the respective markets where we operate. We have also created more of a scalable organization and structure. So within the business areas, we now have business unit structures where senior and experienced MDs are taking up Chairman roles in sister companies. And one effect of this is that we have created career development opportunities. And also, we are freeing up time for business area management to work more with business development and acquisition activities. There are still many companies to acquire in our sort of historical core home markets, but we are also step-by-step adding new interesting geographies. And since some time now, we have had strategic focus on Germany. And even more sort of shortly, we have had or initiated focus on the northern part of Italy, where there are a lot of family-owned companies, high-quality companies in the size range we are looking for. So I think both these geographies will add value acquisition-wise going forward. A bit more specifically on sustainability. We have a -- I would say, an ambitious strategy, an ambitious targets, and we launched these almost 1.5 years ago now. And our targets are in line with the Paris Agreement and its -- the groups and also our companies share commitment to continuously improve in a sustainable and responsible way. We define the targets in 3 broad areas. One is more people-related. One is environmental-related. And one is what we call profitable growth. And that might sound a bit odd, but that's very much around coaching our companies, challenging our companies to really have and improve in terms of sustainable product offerings and long-term customer satisfaction and customer relationships. We will soon obviously publish our annual report and the sustainability section will be taking more important space there, and there you will be able to read more about our progress towards our targets in that report. So by that, we are basically through the presentation. A brief summary. 2021 was another successful year with great financial performance from our companies. We are basically having green lights in all financial KPIs and demand continued to be strong in Q4 with improvements in most companies, broad-based. The EBITA margin reached a record level for Q4. Also, cash flow was at an all-time high. And our financial position remains very strong. We completed 7 acquisitions in Q4 and 17 during the whole year, a high pace. And we also have a good pipeline adding resources and look positively on acquisitions going forward. Many companies continue to face supply challenges, but they do a really great job. And on an aggregated level, this had only a limited impact and we believe it also will be manageable going forward. Our order backlog is record high when we move into 2022 now. It will take some time before lead times have normalized, but this, of course, constitutes a good condition for a new successful year. And there is no indication that the business climate will change short term. So our estimate is that the demand in the coming quarter will remain on the same good level as the last quarters. So an optimistic and positive outlook. By that, we say thank you, and we open up for the Q&A session.

[Operator Instructions] We have a first question, it's from Carl Ragnerstam, Nordea.

It's Carl here from Nordea. A couple of questions. First, you mentioned that supply chain issues will remain entering 2022. Would you say that it's same sequentially, i.e., the SEK 100 million to SEK 200 million on a quarterly basis so far in Q1 or -- yes, how should we see it entering H1 or Q1?

I think that's a reasonable perspective and best judgment right now.

Perfect. And also, you mentioned that you did some restructuring measures, which was the SEK 21 million in nonrecurring items. Could you give us some flavor on what you've done?

Yes. We -- it's a specific company which hasn't developed in line with expectations. And we have divested a part of that and then transformed it to integrate other parts with other companies in the group.

Perfect. And what division is it within?

It was within Measurement & Sensor Technology.

But if I add there, Carl, we -- the cost for this, we took centrally, so it didn't impact the [indiscernible]

Perfect. And on the 6% organic growth, is it possible to split out how much is related to pricing and how much is underlying volumes?

That's a great question, and we would have liked to do that. But with the structure we have, we can't really do that, unfortunately. So I can't give you a specific answer on that.

Okay. So it's not 50-50? Or is it -- on a high level, is it possible to give any indications at least?

I refrain from guiding regarding...

No problem. Also on -- you said that you're aiming for the -- or you have -- you've set the target to reach SEK 30 billion in sales. What time frame do you have for that?

Now we would like to double the size of the group in a 5- to 8-year perspective. And that depends obviously what type of business cycle we operate in and so on. But that's the type of time frame we work towards.

So the SEK 30 billion you mentioned will be reached then by 2025, according to your financial targets. That's a fair assumption then?

Absolutely.

Perfect. And the final one from my side is a bit on the gross margin. You mentioned a couple of things behind the quite big uplift year-over-year. But could you help us sort of give more specifics on what was the mix effect, M&A pricing, et cetera to sort of quantify it?

I can iterate a little bit, I'm not sure if it's more specific. But I think the main improvement that you see is organic. I think that's important to state initially. Mainly, it's organic. And I would say -- but that's more of a sort of a subjective judgment, listening and looking at our companies, that the main portion is from pricing, the pricing dimension, I would say. And then there are, say, that half of it, if I'm judging or estimating, half of the increase is pricing, and then you have productivity and mix as the rest.

And the M&A, is that an important factor? Because it looks like at least on an EBITA level you've done quite margin in housing acquisitions?

Yes. It is, of course, supporting the margin, I would say. It's not the main driver of the gross margin increase. And I mean if you look at the EBITA margin, it is supporting. Overall, it's margin-accretive. But I would say that we are also margin-accretive in -- with good leverage on the organic side. So it's not either or it's both.

Next question is by Johan Dahl, Danske Bank.

Just on your -- I presume you're in sort of a process where you may update financial targets as we go through 2022. But I'm just struggling a bit to understand your relatively sort of cautious view on the long-term margin potential in this business listening to you guys how you're describing the business today and also considering the margin in the companies that you have acquired last year. I'm just trying to understand what is it exactly you think will happen as we go forward? Do you think these price hikes to roll back going forward? Or what are you actually seeing out there? Is it a reduction of this productivity improvements that you've done in the last 2 years, et cetera?

Well, good question. To put this in some sort of perspective, short term in terms of margin, EBITA margin, we are perhaps a little bit defensive in the sense that we have basically taken the company from a 12% level to now 13%, 14%, 15% in certain quarters. And I think we might need some time to consolidate now on this level to try to defend these levels but at the same time continue to grow with the minimum 10%. What the dynamics behind this and what will happen now post pandemic is quite complex, I think, to forecast. There are certain materials predominantly, I would say, which have had extreme price increases during the pandemic. And I think they will go down. But maybe more material price reductions than component and product price reductions. And we will probably step by step see our costs increase if -- in a more normalized world, where we will see more physical activity again, even if we will try to reap continued benefits of digitalization, obviously. But we are taking good steps also in digitalization, but we are not fully where we want to be or -- so we won't sort of stop to invest in digitalization either. So that will also be a bit of a cost for that going forward. So I'm not sure if I answer your question, Johan. But short term, we want to defend the margin levels we have but still continue to grow aggressively, both organically and acquisition-wise. And then in a perhaps more of a 5-year perspective, we want to come back to this situation where we try to improve margin with small steps again.

All right. On the order book, I think last time we talk, you described the order book is in good quality. How would you say the order book is today?

Yes. I -- we review that very frequently, and I would say it still remains in good quality.

And is that with regards to profitability or just -- is that with regards to...

I was more potential cancellations or -- that all of a sudden the order book will disappear, if I say so, which happens in certain industries.

Finally, on the efforts to accelerate organic growth. Would you argue that the outcome in orders here in 2021 is that we're basically already seeing the main results of those initiatives? Or is this something that you started quite recently and you're sort of anticipating more results [indiscernible]

More the latter. We have started this and we will hopefully see more benefit from this going forward. What we have seen now is more based on old capabilities, qualities, mindsets and perhaps not fully linked to what we started a year ago or so.

The next question is by Robert Redin, Carnegie.

Two questions, please. So on the strong order intake, 50% organic growth in order intake in Q4, is there still sort of longer lead time orders? I mean orders were especially strong now in Q4, but they've been above sales all year. So yes, you mentioned that your order book is strong, but is it just a longer order book? Or could we see organic sales growth accelerating now into Q1, Q2 on that strong order intake that you have?

Also a good relevant question. I think Q1 will not be a catch-up effect, I don't think. But maybe the later part of Q2 and onwards, hopefully, will be better effects from the order book, I think.

Okay. Right. So you have visibility then for part of this well into 2022.

Yes. Obviously, some visibility and some estimation assumption.

All right. Cool. And then the other question I had was on acquisitions. So if you look at the table you have showing the effects of acquisitions during [indiscernible] for sales and EBITA, those acquisitions have had margins of about 20%. So that's a bit above group margins. Is this a sort of a temporary thing? Or would you expect acquisitions to be more [indiscernible] going forward?

Yes, we -- when we acquire a company, we are predominantly looking for companies which are minimum at the levels where we are on average as a group. And now we have been successful for some time to find companies which are a step above that. What will happen in the next year, 2 years, hopefully somewhat above the average level. But since we have increased our level also now, it maybe not delta-wise the same step as we have seen this year.

[Operator Instructions] There are no further questions, and so I'll hand back to you.

Thank you. Then we say thank you for today, and we keep in touch going forward. Bye-bye.