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

Good morning, and welcome to the Indutrade Q2 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Mr. Bo Annvik, CEO and President. Please go ahead, sir.

Thank you, operator, and good morning on our behalf as well. Today, we are happy to present yet another strong quarter and first half year of 2022. And let's start by moving to the overall highlights. Q2 last year was a very strong quarter for us. It's, therefore, satisfying that we this year continue to grow in order intake, sales and profits with a record high EBITDA margin. This thanks to great performance from our companies and employees who continue to navigate the challenging market situation in a great way. We saw a positive demand situation during the second quarter in most business areas. There is, however, increased variations between companies and geographical areas, which is partly due to the strong references from the same period last year. Order intake grew in total with 17%, of which 7% organically. Net sales grew a total of 20% to SEK 6.7 billion. Despite continued supply chain disturbances, we also grow sequentially. This should not, however, be seen as the supply chain services are easing. It's more related to good performance from our companies, and we see no clear indication of an improvement when it comes to the supply chains in the short term. We also grew EBITDA up 21% from the same period last year. And for the first time ever, EBITDA exceeded SEK 1 billion, a new milestone achieved for us within Indutrade. EBITDA margin was slightly better than Q2 last year, record high 15.3%. And in terms of acquisitions, the activity level during the first quarter and the first half has been intense. We have completed 10 acquisitions so far this year, adding SEK 780 million in annual revenues to the group. In Q2, we closed 5 transactions and another 3 has been completed after the end of the quarter. If we look more specifically then on order intake, the demand was, as I said, continued strong in the quarter, and orders grew organically by 7% versus the high Q2 last year. And for those who follow us more regularly, you might remember then that the organic growth in Q2 last year was a record high, 26%. And obviously, it was a bit of a boost from the pandemic and COVID-19-related businesses. Daily orders were at a high and stable level during the whole quarter, in line with the levels of March. The growth continued to be broad-based with an aggregated positive order development versus last year in most segments. The process industry broadly, in general, continued to stand out positively with a good development for almost all companies and geographies. In most of the other segments, we see a bigger variation between companies and geographies partly, of course, also due to the strong references last year. Orders grew organically in 6 out of 8 business areas during the quarter. The strongest developments were in business area, Industrial Components and Flow Technology. The order backlog increased in all business areas and order intake was aggregated 5% higher than sales in the quarter. So a positive book-to-bill still. The average lead time in the backlog is now longer than normal, and that's mainly because of lead times from our suppliers. But the quality of the backlog still feels good and solid -- just some examples of orders starting maybe in Denmark. We have a large company, Novo Nordisk. They are leading in insulin production, and they have -- they are using [ great times ] and extending their production facilities and capacities. So we are having and -- gaining some orders from some of our flow companies linked to that. Our high-pressure valves company have now received a large order for components to a new solar power plant, a concentrated solar power plant in South Africa. We have flow equipment from one of our companies in Austria to the Brazilian pulp producer [ Talano ]. And we have several of our companies delivering both flow components like valves and gas detectors to the Northvolt group. So high activity level and not least linked to the sustainability transformation in the energy sector, I'd say. Total growth in the quarter was plus 17%, where organic was, as I said, plus 7%, acquisition plus 7%, also and currencies plus 3%. If we then turn to sales. The sales development was also strong during the quarter, improved both versus last year and sequentially despite tough comparables also here. Total net sales development in the quarter was plus 20%, and the organic development was plus 10%, acquisitions plus 7% and currencies plus 3%. And from a geographical perspective and looking at our larger markets, Denmark, Finland, and Switzerland stand all positively this quarter, while the U.K. and North America is a bit weaker. The supply chain issues with long lead times from suppliers and components and product shortages continue during the quarter. It's an issue for companies in all business areas, but the worst impact is within business area, measurement and sensor technology, which is a bit more electronics intense perhaps than the other business areas. A few companies report a slight improvement, but it is not a clear trend. The consequences of all these earnings the order backlog and also slightly lower sales and if things were normal. It's very hard to estimate, but the aggregate held back invoicing is probably still around the same level as it was in quarter one. In general, companies are doing a great job to manage the situation. They are flexible and creative. And as you know, most of them operate with low to medium volumes. So our situation is not as bad as high-volume producers within the fields like automotive, electronics, white goods and so on. We have, in general, I'd say, a different supplier base than those types of industries and companies. Organic sales growth trends. The highest priority for us really strategically is to engage with our companies and support them to grow organically. Organic sustainable profitable growth is key for generating sustainable value over time, and it's a verification that you have a competitive offering appreciated by the customers. We have now seen 7 consecutive quarters with organic sales growth despite challenging references. And this is, of course, benefited by a global strong demand situation and now also a high price effects. But the foundation, we believe, is well positioned and competitive companies. All business areas grew organically in the quarter, and the majority of the companies developed positively. Risks are increasing ahead because of the continued supply chain issues and geopolitical tensions also high inflation and increasing interest rates. The record high backlog, however, gives us a good base to deliver further organic growth in the coming quarter. And I'd say that uncertainty obviously can provide difficulty, about Indutrade. It is basically at its best and will operate and manage better than the integrated industrial group on average. And this is, of course, based on the entrepreneurial and decentralized model we have. EBITDA increased during the quarter with 21%. It exceeded SEK 1 billion, as I said, for the first time, and the EBITDA margin increased to a record high, 15.3% versus 15.2% last year. And organically, EBITDA increased with 9%, acquisitions added 8% and currencies 4%. We still see supplier price increases, which is creating a tough headwind, but our companies continue to manage this in a great way. The organic gross margin continued on a high level and was in line with Q1 and slightly higher than last year. The organic EBITDA margin development was, however, slightly subdued driven mainly by the increased activity and expense level in many companies. Since we have been basically having a quarter free from travel restrictions, there has been quite a lot of exhibitions and physical customer meetings and yes, basically invested time resource in business development in a good way. Our newly acquired companies continue to show good margin levels and contributed well to improved group margins. If we then turn to the business areas and start with the sales situation, 6 of our 8 business areas showed strong organic growth in the quarter. We saw the strongest growth in Business Area Flow Technology, Industrial Components, and Fluids & Mechanical Solutions with most companies developing positively. The process industry and medtech and pharma sectors stand out positively in these business areas. In Fluid & Mechanical Solutions, the sales development was held back somewhat by the automotive aftermarket group that has had business in Russia and Belarus, which has been stopped since basically the start of the war in Ukraine. In [ Benelux ], sales also developed positively in a majority of the companies and segments, for instance, in valves for power generation and in the Infrastructure and Construction segment. The growth in the med tech and pharma sector was slightly lower because of the higher references last year. Obviously, partly linked to strong new sales in the COVID-19-related segments. In DACH, the Swiss process industry, including chemical industry was the clear driver of the sales development, while the development in Business Area Finland was more broad-based. Growth was a bit weaker in business areas, measurement and sensor technology and U.K. with variations between segments and companies. Supply chain issues and component shortages had an adverse effect on the development and particularly in the business area MST. And if we continue with business areas and discuss the margins, profitability we had, as I said, a record high level EBITDA-wise at 15.3%. And the main drivers for the [indiscernible] development is the continued strong gross margin development along with good performance from our newly acquired companies. The organic development was dampened somewhat but by an increased activity and expense level, as I said, in many companies this quarter. But great to see 7 out of 8 business areas with margins at or above 15%. This is a clear improvement just versus a couple of years ago. Benelux noted the strongest improvement with valves for power generation as an important driver. In DACH, we saw good development in companies exposed to the process industry, including chemicals, along with contribution from newly acquired companies. Business area [indiscernible] Flow Technology margins were very strong, both were supported somewhat by positive one-offs from facility divestments. Flow Technology was still better than last year, excluding this one-off, but [indiscernible] slightly lower than last year, mainly because of a strong Q2 last year and also increases in activity and expense levels. Profitability development in Business Area Fluids & Mechanical Solutions was good, both organically and for newly acquired companies. But the automotive aftermarket segment which stopped sales to Russia and Belarus impacted negatively. Without that, they would have held stable margins, I would say. The margin in business area, Industrial Components was continued good but declined somewhat compared to last year, very high level, which was supported by a couple of medtech companies benefiting from the pandemic, as I said before. Business Area Measurement & Sensor Technology defended their high margin from last year despite the lower organic growth and supply chain challenges. We did unfortunately not see the margin increase in business U.K. as we hoped for. U.K. were perhaps worse hit by COVID-19 among all our largest countries. And in addition to this, Brexit have also impacted business. All in all, we have not recovered volumes and sales in U.K. since before the pandemic as we have in the other business areas. And the product and company mix in the U.K. is somewhat less favorable. We are, however, driving improvement activities and seeing progress, and we are confident that we will stepwise improve also in the U.K. If we then turn to acquisitions. As stated before, the first half of 2022 has been strong for us in terms of acquisitions. The challenging external factors have not had any impact on our acquisition activity, I would say, and it's continued really on a high level. So far this year, we have acquired 10 great companies with strong competitive and sustainable business models and good growth potential. There is one more acquisition this year compared to the same period last year, adding SEK 780 million in annual turnover compared to last year's SEK 730 million. 6 out of 8 business areas have completed at least one acquisition so far this year, and our pipeline remains good, and the flow of incoming leads are also good. We are thus confident that we can continue to acquire good companies at attractive prices during the rest of 2022. And as we have stated before, the ambition we have is that each business area should make 2 to 3 acquisitions per year. And adding that on group level means 16 to 24 acquisitions on group level per year. And we are also adding a few extra acquisition specialists in the group, both on group level, but even more on business area [ that ] I would say. And by that, I hand over the word to you, Patrik, to comment more on the financials.

Thanks, Bo. Yes, let's look at the key [ data ] summary then. Total growth for orders and sales was plus 17% and plus 20%, respectively, in the quarter. And year-to-date, we are up 20% on orders and 22% in sales. Encouraging to see that book-to-bill continued positively in all business areas in the quarter, 105% in total and accumulated, we are at 108%. The gross margin continued to develop positively despite the supply chain issues and increased supplier and freight prices. 34.9% in the quarter versus 34.8% last year, accumulated SEK 34.7 million compared to SEK 34.6 million last year. And organically, excluding acquisitions and currency, we actually have improved slightly more than this. EBITDA grew 21% in the quarter and 27% year-to-date. And the EBITDA margin improved to 15.3% record level versus 15.2% last year. Year-to-date, 15.2% compared to 14.5% million last year. And there are always a few one-offs, of course, in the quarterly closing, but I would say that the net effect of these -- this quarter is around zero in the quarter. So the margin of SEK 15.3 million is a fair underlying result, I would say. The positive facility-related one-offs Bo talked about in flow and business area, Finland. They were offset by -- we had some provisions, write-downs of receivables in Russia relating to Russia. And we didn't do any revaluations of earnouts either. So it [ 15.3% ] fair and underlying result. Finance net increased with 28% in the quarter and 24% year-to-date. The increase is driven by higher borrowing and increased interest rates. Tax costs increased in the quarter with 23% and 27% accumulated, and that's basically in line with profit, profit increases, which means that the underlying tax rate is stable at 22%. Earnings per share up 20% in quarter 2 and 28% year-to-date. And return on capital employed improved to 23% versus 21% last year and improvement is mainly driven by the higher results, I would say. [ Major ] cash flow declined versus last year, and I will come back to that and elaborate a little bit more on the next slide. Net debt EBITDA is maintained on a low level at 1.6% versus 1.5% last year. Maybe note on this KPI is that we include earn-out liabilities, of course, in the net debt calculation. But as you well know, the earn-outs, they will not be paid out if profits are not increased. So it distorts a little bit the outcome of the KPI. So if you exclude the earn-out liabilities in the calculation, the net debt-to-EBITDA would be 1.3. It's important to note. Okay, so if we move to cash flow then. Second quarter cash flow -- operational cash flow was SEK 622 million, so that's a 21% decline versus last year. And it's related to stock buildups in many companies because of the supply chain disturbances that we have and the longer lead times from suppliers and also supplier price increases are impacting the stock levels also, that's also a major driver. If you look at the 12 months rolling working capital efficiency, by that, I mean the working capital in relation to sales, that's in line with last year and quarter 4 last year, and it still improved versus quarter 2 last year. If you look at the 3 months rolling trend, that's also in line with year-end, but it declined, however, that versus the same period last year. Earnings per share grew with 20% from SEK 1.54 to SEK 1.85, which is an increase very much in line with the improvement in EBITDA. And if you look at the more long-term trend in EPS, the 3 and 5-year increase in the annual EPS -- it was up 90% on the 3-year rolling and 18% per year then on the 5-year old. Finally, the net debt. The interest-bearing net debt end of the quarter was almost SEK 7 billion, and that's an increase with SEK 1.6 billion approximately since quarter 2 last year. The increase is mainly connected to the high acquisition pace that we've had the last year and also then the slightly lower operational cash I talked about. The net debt ratios, however, they are still -- they increased somewhat, but they are still at low levels from a historical perspective, I would say. The net debt to equity ratio was 64% and the net debt-to-EBITDA, 1.6, as I said earlier. And excluding earnout liabilities, it was 1.3 million. In June, we issued a new long-term bond. And main purpose was to replace some short-term debt we had, but also to proactively secure long-term funds for this autumn acquisition activities. And in addition to that bond, we also have ample amount of long-term unused credit facilities. And to summarize, I would say then our financial position remains solid and strong, increased but still low debt ratios and also a good headroom between short-term debt and guarantees long-term facilities. Yes. And by that, I leave over back to you, Bo.

Thank you, Patrik. I thought I'll elaborate slightly on the character of the Indutrade Group. Over the years, the Indutrade model has demonstrated its strength and resilience. I think we agree on that, started in 1978, and then we have been profitable ever since. And our diversified structure with more than 200 companies in many sectors and geographic markets provides us with good risk diversification, which creates the prerequisite for stability. And by constantly adding new well-managed and successful companies, our portfolio is further diversified and the aggregated economic risk is reduced, but the opportunity for organic growth improves. And through our proven decentralized business model driven entrepreneurs are given the opportunity to maintain independence with full operational responsibility and mandate. We are confident that the best decisions are made locally, close to the customers and the market. And you can see on the slide that we, as a group, have very little dependency on any single market segment and a single product area, any company, customer, supplier or whatever dimension you choose to analyze. So I think we are well-positioned to manage different economic cycles with strong stability and professionalism. Also talking a bit about a leadership conference we recently had, we really have a long-term commitment to ensuring that both our people and companies can grow. And we contribute to our own development and that of society at large, I would say, by giving more people and companies the chance to become part of a business world, driven by 2 entrepreneurial spirit. Our employees are, of course, the key to our future success. We strive to drive the greatest value and benefits from our employees by sharing and spreading best practice throughout the group. And one key activity for this is knowledge sharing and to facilitate networking between our companies. So during quarter 2, we had the Indutrade leadership conference in Stockholm, where we were plus 200 managing directors and other key people from the group. We gather to exchange ideas workshop and to learn from each other and obviously also celebrate successes. And we have, during the last year, increased focus, as I've said several times on organic growth, but also on sustainability in all aspects of the business, and it's really inspiring to see the engagement from our companies on these topics. Together, we are working actively on innovation and product development, finding new partners, finding add-on products and other opportunities to strengthen the competitive edge even further. In addition, we see sustainability as a business opportunity. It will be key that we reduce our own CO2 footprint as well as ensure that we offer solutions that help reduce customers' CO2 footprint. And during the conference, we also gave out awards to the best performing companies. We've done that since many years back. And the first award is what we call the benchmarking winners. We look at a number of financial KPIs to award the companies who have the greatest performance. But new for this year, we also had a sustainability award where we recognize the companies who stands out in 3 different categories. It's the people dimension, climate environment and last but not least, what we call profitable growth/innovation. And not only is it important to celebrate victories. But I would also say that the awards are also a great opportunity to further ignite the winner mentality of our MDs if now that's possible. They are quite driven already in terms of this, I would say. And it's clear that we have exciting times ahead of us and good prerequisites in place for continued value creation. And by that, it's time to summarize and focus on the key takeaways from this presentation. So despite the very tough comparisons from Q2 last year, as I said, when the organic growth was plus 26%. And in a general challenging market situation, Indutrade had a very strong performance in the first half of 2022. Our companies are doing a fantastic job, showing good flexibility and working closely with our customers and suppliers. The business risk for the second half have, however, increased and supply chain disturbances continues to be a challenge. It's therefore satisfying that our order backlog is record high, which provides confidence in our ability to provide good invoicing and profit development also in the short term. And I'm also very happy that the Indutrade family has been strengthened by 10 new quality companies so far this year. And as I said before, the pipeline is strong, and we have good acquisition activity in all business areas. I'm convinced that our robust business model, which is based on decentralization and diversification with decision power close to the customer is able to cope with any changed conditions in a very good way. We are continuously developing our ability to generate sustainable profitable growth, and we have a stable platform as a starting point for continued value creation. Lastly, I'd also like to highlight that we will host a Capital Markets Day on November 8 in Central Stockholm. Obviously, we will give some more flavor on our strategy and priorities for the years to come. So please mark this in your calendars, and we will send an invitation with registration details soon to you. By that, I say thank you for participating, listening and I leave the word over to the operator.

[Operator Instructions] The first question is from Carl Ragnerstam with Nordea.

It's Carl from Nordea. A few questions. Firstly, I wonder if you have seen any changes in the demand situation throughout the quarter or entering July. And also you talked a bit about the uncertainty. Of course, we have the inflation, et cetera. But is it something you have seen in any of it in any of your end markets? Or is it more something we all read in the newspapers, et cetera?

No, as we said during the presentation, we basically saw a stable order intake in line with the March level in all the individual months of quarter 2. So it's been stable and good. So we don't really see experience. We haven't really seen or experienced anything yet. So we are more on the newspaper headline stage, as you said yourselves.

And also in your construction infrastructure, it is your largest end market? You haven't even seen any changes there or postponed or canceled projects, et cetera, or -- no changes there either?

No cancelled projects. We -- one area where we are experiencing a bit of a dynamic situation is maybe more the pharmaceutical area where we have some companies who have supplied to vaccine producers and they have overbought to some extent and build safety stocks. So -- they are not canceling orders, but the order growth will probably be a bit hampered in the fall and maybe the beginning of next year. But I would say in the construction sector, the infrastructure sector, it's a little bit too early to be anything visible for our companies yet.

Okay, super. And also, Patrick, a question on the cash flow. As you also mentioned, a fairly significant -- I mean change in inventory at least -- could you help us understand your thinking regarding sort of inventory management, the risk of sitting with too much inventory in potentially at least weakening market? And also if it's possible to quantify the pricing and then maybe FX effect on inventory in the quarter.

Yes. If you take the sort of the composition of the increase first, it's really difficult, but I would -- my high-level assessment would be that it's a 50-50 split between price and volume, not -- and not a significant current impact, I would say. Then yes, we have, in many companies and increased buffer stocks, of course. And the sort of the more volatile purchase path then lead times to suppliers have made it forced us to do that. And I think in many cases, has been good. I think we feel that many companies have also been able actually to gain market share as they have been able to deliver. But it's, of course, a difficult balance. And -- we now see the increased lock down and I don't see big risk for solid sense. I think what we have focused on our companies are focused on is, of course, the high runners and making sure that they are on the shelf. So I don't really see a big risk for obsolescence, no. But it is hampering a little bit of the cash flow. That's true.

Very good. And the final one from my side. As I think Bo mentioned, you've strengthened the [ MAA ] team or at least you plan to do so centrally as well as locally. Could you perhaps update us where you are on that journey currently? Yes. We think we have made 1 to 3 or maybe 4 appointments -- and I think most of them will start basically right after the holidays in August, September.

And on the remaining, I guess, 4 positions or did you plan to fill them in the second half or...

Yes. Basically, all business areas work on their staffing situation and are solving this in different ways. But all of them will strengthen their acquisition capability during this year, and most of them will have it in place in the beginning of the full year.

The next question is from Johan Dahl with Danske Bank.

Just a question on your acquisition pipeline here. I mean it's a totally new world out there for that funded acquisitions in your space, I guess. How do you see that impacting your dialogues? What sort of threat does that constitute the -- or on the other hand, can you capitalize in any way on that possibly reduced competition, et cetera, would be interesting to hear.

Yes, it's a great question. And before I joined the trade, I've been here now as some of you know, a bit more than 5 years. I think the learning was it was a little bit weaker acquisition activity in a weak business climate and sellers of profitable, successful companies, they don't really want to reduce their price level. So then they rather hesitate to sell at that time and waited until there was an agreement between seller buyer on the price level they wanted. And I assume that has probably not changed too much. But we have also grown as a group, and we are even more established, well-known and have also more own resources. So I think our capability to be pipeline by having 200 companies and employees in these companies, keeping their eyes open for potential acquisition targets, plus being recognized as a good, I would say, acquirer from brokers also in quite a lot of new countries and so on. I'm making -- I'm quite confident that we will be able to keep this 16 to 24 type of level in the next couple of years, even if the economic cycle is weakening potentially a bit -- so yes, I'm really optimistic about the second half of this year and also rather confident for 2023 and onwards, that we will continue to manage in a good way. If we benefit from this versus competitors, other acquirers, yes, potentially some of these very opportunistic high leveraged buyers with less equity sort of by themselves, go away a bit. But I'm not sure that they have been too much of a problem for us either in the past. The companies we are geared at buying or probably not too interested in them anyway.

All right. On OpEx, you talked about increased OpEx year-over-year. How much was that approximately in your view for sort of traveling exhibitions, et cetera? And if you were to sort of take the full year view, given that that activity remains, how much sort of a headwind is that for '22 versus last year? And also, if you could follow up on the U.K., you talked about disappointing revenues and margins. What's your action plan there? I mean you talked about working close to your companies, absolutely. But is there anything else sort of you can spread that up possibly?

Yes. If I start, Patrick, and I can hear the word over to you soon. But my take on the expense and activity level is that it was at a certain level in Q1, and then it increased quite a lot. There are usually quite a lot of exhibitions in the springtime. And a lot of our companies engaged in that. And as I said, also travel physically to customers and so on. Depending on how Covid develops in Q3 here, it might also be -- if there are sort of few travel restrictions, it might be a fairly high activity level also in Q3, but then I think they have reinvested in their relationships and so on, and we will benefit again from digital solutions and digital means of talking to customers and so on in Q4 and onwards so those were slightly higher in Q2 and potentially in Q3 also, but going back to a lower level, normal level -- so new -- yes, we have a new normal. I think, I don't think we will go back to the expense level from an activity point of view, which we had pre-Covid. But lower in Q1 and Q4, a little bit higher in Q2, potentially also in Q3. I don't know, Patrick, if you want to comment on any numbers before I take the U.K. question.

Yes. I mean, the expense increase made the sort of the organic leverage done not [indiscernible] as good as it has been before. So I mean, we increased sales with organically with 10%, and the expense levels actually increased slightly more than 10%. Then of course, you have to remember that last year was still -- we still had Covid -- so activity levels were pushed down. So they are back now and you have a slight inflation also impacting. So it's all of that generated increase, which was slightly higher than 10%.

U.K. has been bit of a special case, maybe a very sort of broad perspective, if we look at the types of companies we own in different business areas and sort of large markets -- we have slightly, I would say, lower gross margin levels on an aggregated level of the companies in the U.K. And if they experience volume drops, there is a profitability impact. I would say also a little bit quicker in U.K. versus in most of the other business areas. And we have had, in the U.K. portfolio, there is also segments which are a little bit unusual. Maybe we have one very successful company linked to the aerospace industry. So when COVID hit, no planes were built, no components needed. So they went drastically down. And we have a few other cases like that where industries were impacted by COVID a little bit. What we didn't maybe see in other business areas because we didn't have that type of business in other business areas. So they were more specifically hit by certain COVID particularly. And step by step, they will improve now, I think, -- and then we have had some as normal in a portfolio, some issues here and there in the U.K., which the management there are working on and improving. So I'm confident that -- I mean, they were basically at a 15% EBITDA level pre-COVID. And step by step, they will work their way back. But there is no general medicine, if I say so. It's more a surgical company by company to solve certain situations and also then hope for a fairly okay economic sort of activity level in the U.K. I guess, it doesn't help maybe short term that there is politically a bit on stability that maybe doesn't impact too much either. But I think the fall might be slightly better for the U.K. than the first half.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Annvik for any closing remarks.

Let we say thank you again for participating, listening engaging in our quarterly report, and we wish you all a great summer and hope to see you at our Capital Markets Day later in the fall and sooner, hopefully, to speak to you. All the best. Bye-bye from us.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.