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

Good morning. Welcome to the Indutrade Third Quarter 2022 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Bo Annvik, CEO. Please go ahead.

Good morning, and welcome on our behalf as well. We are obviously happy to present the new strong quarterly report from Indutrade. And as usually, let's start with some of the overall highlights. It's satisfying that we continue to grow in order intake, sales and profits with a new record high EBITA margin, and this thanks obviously to great performance from our companies and employees. We saw a continued solid demand situation during the third quarter in most business areas, similar to what we saw in Q2. There was, however, some variations between different customer segments, companies and geographical areas, which is partly due to the strong references from the same period last year. Order intake grew in total with 20%, of which 8% was organic growth. Net sales grow a total of 27%, which is very high and also one of the reasons for why the book-to-bill ratio is below 100%. Organic sales growth was also high at 14%. There are still some supply chain disturbances, which are challenging for many of our companies, but the situation has improved somewhat for some of our companies during the quarter, and I would say that, that's primarily linked now that delivery accuracy is becoming better and better. For the second quarter in a row, EBITA exceeded SEK 1 billion and up 28% from the same period last year. And the strong organic sales development and positive effects from acquisitions also had a positive effect on the EBITA margin, which was at 15.4%, a new record level for Indutrade. On the acquisition side, we had a good pace in quarter 3 with 5 completed acquisitions. And yesterday, we also signed a larger acquisition with a Danish company, Bramming Plast-Industri. In total, we have now completed 13 acquisitions so far this year, adding some SEK 1.4 billion in annual revenues to our group. If we turn to order intake, I would say that the demand was continued solid in the quarter. And orders grow, as I said, organically 8% versus strong references last year, and was slightly up also sequentially from quarter 2. There is, as you know, a seasonal downturn in the quarter due to summer holidays and it's therefore difficult to analyze underlying demand changes. But our daily order analysis show a stable demand development through the whole quarter. Majority of our companies continue to show organic order growth in the quarter. Actually a few more grow in quarter 3 than in quarter 2. All customer segments continue to grow on aggregated level, but there is a variation between companies as we have talked about earlier. The Process Industry continued to stand out positively with a good development for almost all companies and geographies. And for instance, Infrastructure and Construction and in parts of the MedTech and Pharma customer segments, we see bigger variation and slightly more companies declining somewhat. Partly this is due to very strong references last year, and one obvious explanation is less COVID-19 vaccine-related businesses. Orders grew organically in 7 out of 8 business areas during the quarter. The strongest developments were in business area DACH and Finland. The weakest development was in business area U.K., mostly connected to a few companies supplying to the Infrastructure and Construction and Marine customer segments. The total growth in the quarter was plus 20% order intake-wise, and as I said, 8% organically, acquisition effects was plus 8% and currencies plus 4%. If we then turn to our net sales situation, the sales growth rate increased significantly during the quarter. Total net sales development was plus 27% versus last year, and the organic development increased to plus 14%. Acquisitions contributed with 8% and currencies with 5%. And the increased sales growth contributed to a slightly -- slight order backlog reduction in 5 out of 8 business areas. And in 2 business area -- business areas, it was unchanged and the backlog continued to increase in 1 business area. Sales was on aggregate 3% higher than orders in the quarter. Again, the book-to-bill below 100% is more driven by very high sales rather than a weak order intake, which wasn't the case. The supply chain issues with long lead times from suppliers and component and product shortages continued during the quarter, but some companies experienced a slightly better situation. The worst impact is still within business area, Measurement & Sensor Technology connected to supply of electronics. Price is obviously a large component of the group -- of the growth. We see now with our diverse structure, it's extremely difficult to get a consolidated view of the balance between price and volume, but we have estimated pricing effects to be around 7% to 8% in the quarter versus last year, meaning that sales growth in volume was around 6% to 7%. We also have a slide of the sales growth in different geographical markets. And it's basically positive in all major countries and regions. Standing out most is Denmark with the MedTech and Pharma customer segments. In Germany, it is, for instance, the energy sector and the chemicals segment and in Asia, also the energy sector. A slightly weaker aggregated sales growth in the Netherlands, mainly connected to the Infrastructure and Construction segment. As I've talked about before, a high priority for us is to engage with our companies and support them to grow organically. It's, I would say, the prioritized strategic objective since some time back now. And organic sustainable profitable growth is a verification that you have a competitive offering appreciated by the customers, and it is a good value generator obviously. We have now had 8 consecutive quarters with organic sales growth despite challenging references and all the supply chain issues. Obviously, a good support from a global strong demand situation and high price effects, but the foundation, we believe, is our well-positioned and competitive companies. The growth rate increased during the quarter, both versus Q3 2021, but also sequentially. All business areas grew organically also in this quarter, and a clear majority of the companies develops positively. We have an uncertain market environment, but the high backlog, however, gives us a good base to deliver further organic growth also in the coming quarter. EBITA increased during the quarter with plus 28%. As I said, it exceeded SEK 1 billion and increased to an all-time high margin of 15.4% versus 15.3% last year. In the same way as last year, we had some one-offs during the quarter relating to smaller revaluations of earn-outs and goodwill write-downs. In total, this had a positive effect of SEK 16 million. Excluding these one-offs, the EBITA margin was 15.2%, and the comparable number last year was 15.0%. The organic EBITA margin was stable. The strong growth development was basically offset by slightly lower gross margins and higher activity and expense levels in many companies. The newly acquired companies continue to show good margin levels and contributed also this quarter to the improved group margin. All in all, EBITA increased organically with 14%. Acquisitions added 9% and currencies 4%. All business areas grew organically in the quarter and 7 out of 8 grew double digit. We saw the strongest growth in business areas Flow Technology, supported by a broad positive development, MedTech and Pharma and Process Industry customer segments stand out positively. The MedTech and Pharma customer segments was also one of the key drivers in the growth for business areas, Benelux, DACH, Fluid & Mechanical Solutions and also Industrial Components. The growth in business area Finland was broad-based with the Process Industry being a strong contributor. The most positive customer segments in the quarter for business area Measurement & Sensor Technology belong to energy, HVAC and also professional communication. The majority of our companies in business area U.K. grew organically in the quarter, but the aggregated growth was slightly lower than the other business areas. This was primarily because of a few companies in the Infrastructure and Construction segments. EBITA margin for the quarter, as I said, was all-time high, 15.4%. Record level margin was also reached by the business areas, DACH and Finland. Most companies improve their profitability and the key driver in both business areas was a positive gross margin development. The most positive EBITA margin improvement was achieved by business area Benelux. Also here, we saw margin improvements in most companies standing out in a positive way where companies in the medtech and pharma sector, along with valves for power generation. Business area Flow Technology, Industrial Components and Fluid & Mechanical Solutions maintain their margins on good levels, but declined slightly versus last year, mainly due to somewhat lower gross margins. In Fluid & Mechanical Solutions, the stopped business to Russia and Belarus also had a negative impact. Business area Measurement & Sensor Technology continued to deliver a high margin as the development was held back slightly by higher expenses connected to innovation and growth initiatives. The EBITA margin in business area U.K. continued to be a bit lower than the other business areas. The main reason is somewhat lower growth in combination with the higher expense and activity level. The weaker growth is, as I mentioned before, partly connected to a relatively large exposure to the Infrastructure and Construction segments, but also a challenging macro development in the U.K. Acquisitions. 2022 has been intense, I would say, when it comes to acquisitions, and we have welcomed 13 great companies to the group so far this year. Of the 5 acquisitions we made during Q3, 3 companies are based in the Netherlands, 1 in Sweden and 1 in Germany. This week, we also signed an agreement to acquire the leading Danish company Bramming Plast-Industri, or BPI, with an annual sales of about SEK 500 million. BPI develops and sells customer-specific engineered foam solutions, such as vibration and noise dampening materials and also isolation materials to different industrial players in, for example, the HVAC segment, wind power, but also infrastructure and construction companies. BPI has also come a long way in terms of sustainability, and they have an ambitious program in place, using sustainable material and circularity concepts as key parts of their customer solutions. We also continue to strengthen our acquisition capabilities, both in the business areas and at the central team in order to be able to manage more acquisitions in total. I would say that our pipeline remains strong, and we are working on several interesting projects in different stages. As I've said before, ambition-wise, we aim at 2 to 3 acquisitions per business area per year, which would then total up to 16 to 24 acquisitions on group level per year. Then I leave the word over to Patrik to comment on the financials.

Thanks, Bo, and hello, everyone. Total growth for orders and sales was plus 20% and plus 27%, respectively, in the quarter. Accumulated new orders is 20% and sales 24%. Orders are slightly lower than sales in the quarter, as Bo commented on already. And to repeat that, this is mainly driven by the increased sales level in the quarter. Gross margin for the quarter is 34.2%, which is a good level, but slightly lower than last year. The decline primarily comes from more expensive components bought earlier that is filtering through the inventory, I would say, into the results. Our pricing power is still good, I think. Our companies continue to forward cost increases in a good way to customers. So pricing power still maintained good. Gross margin year-to-date is 34.6% compared to 34.7% last year. EBITA grew 28%, both in the quarter and accumulated second quarter in a row above SEK 1 billion. And EBITA margin, 15.4% versus 15.3% last year, an all-time high for the group. And year-to-date, we are at 15.2% compared to 14.8% last year. As Bo also mentioned, we had a few one-offs relating to earn-outs and goodwill. And if you exclude those, the quarterly EBITA margin was 15.2% compared to 15.0% last year. Moving down further into the P&L, finance net increase in the quarterly substantially, but from a very low level. The increase was driven by increased interest rates and higher borrowings. Tax costs increased in the quarter with 23% and 26% accumulated, and this is basically in line with profit increase, which means a stable tax rate. The tax rate then accumulated is around 22%, in line with last year. Earnings per share, up 26% in the quarter and 27% year-to-date. Return on capital employed improved to 23% versus 22% last year, driven mainly by the higher operational result. Operational cash flow improved versus the first and second quarter, but declined somewhat versus last year, and I will elaborate a little bit more on the next slide around that. And finally then, net debt to EBITDA is maintained on a historically relatively low level of 1.6 versus 1.3 last year. And important to note that if you exclude earn-out liabilities, it would be lower around 1.4. So moving on to slide on cash flow then. Operational cash flow was SEK 624 million in the quarter, a decline of 7% versus last year. And the decline is related to inventory increases in many companies due to the continued constraints in the supply chains, long lead times and other disturbances. And of course, as you know, supply, price increases is also, of course, a big part of the equation. Working capital efficiency, if you measure working capital in relation to sales, it's still better than the levels we had a few years back, but has declined somewhat since last year. Also this is connected to the inventory increases. Earnings per share grew in quarter 3 with 26% from SEK 1.51 to SEK 1.9, which is an increase almost in line with the improvement in EBITA and dampening a little bit is the increased finance net I talked about. If you look at the more longer term, the 3 and 5 year increase in the fourth quarter rolling EPS, it is then plus 20% per year and plus 18% per year, respectively. And lastly, then looking at the debt situation. The interest-bearing debt -- net debt end of the quarter amounted to around SEK 7.3 billion, which is a slight increase versus quarter 2. And the increase is mainly connected to continued high acquisition pace with the -- in combination with a slightly lower or damp on the cash flow I talked about. But the net debt ratios are relatively stable since last quarter. And in a historical perspective, I would say, low. And net debt to equity was 61%, net debt EBITDA 1.6. And if you exclude the earn-out liability is 1.4, as I mentioned earlier. But to conclude, our financial position remains stable and strong, stable low debt ratios and also good headroom between the short-term debt we have and the guaranteed long-term facilities we have. So by that, I end and then back to you, Bo.

Thank you. Those who have followed us in some time knows how much we value decentralization as we firmly believe the best decisions are made by those closest to the customers. During the years, we have seen the strength of our model reflected in how our company successfully manages business cycles changes as well as challenges like, for example, the supply chain disruptions or rising inflation, et cetera. Another strength of our group is the characteristics of the companies we own. Our portfolio consists partly of technical trading companies with no own production facilities. And the manufacturing companies we own are, in general, more assembly-oriented. All in all, this leads up to a fairly capital-light business group. We also appreciate companies with products that have a recurring sales pattern products that our customers need, both in good times and in weaker cycles, and they are often linked to maintenance and repairs rather than CapEx. Although some of the products often can be seen as not too complex at a first glance, they all have high technical content and play an important role in a larger production system. Our customers tend to rely on our technical advice in terms of what model to use in a specific application and situation, which is also why we have a good pricing power for our products. We have around 200 companies targeting over 14 broader customer segments and also have a strong exposure to growth segments such as medtech and pharma, energy and water and wastewater, to mention a few. And they have strong underlying market drivers. With our strong business model based on decentralization and balanced diversification, together with our driven entrepreneurs and dedicated employees, we are well-positioned for continued value creation independently of where we are in the cycle. We also want to talk a bit about our sustainability agenda, and in particular, decarbonization, which is a key priority for us. We have an ambitious strategy and ambitious targets, and it is the groups' and our companies' shared commitment to continuously improve ourselves in a sustainable and responsible way. Through a combination of group initiatives and company-specific activities, we work intensively to accelerate our efforts to lower our own and our customers' carbon footprint. During the quarter, we, for example, launched a new climate guide with a purpose to give our companies concrete guidance on how they can address their most important greenhouse gas emission sources throughout the value chain and how to create their own climate road map to reduce them. We are convinced that the strength in climate action with proven progress toward climate goals will lead to significant positive advantages for us as a group and business opportunities for our companies. If we then summarize, our companies are continuing to do a fantastic job, showing good flexibility and working closely with our customers and suppliers, which is also reflected in the numbers for the third quarter. The demand situation is still on a solid level, although we see some indications of lower activity in a few segments as well as increased business risks going forward. We do, however, have a strong order backlog that is still at record high levels, which provides confidence in our ability to provide good invoicing and profit development in the short-term. We are strengthening our acquisition capabilities, and I'm almost happy -- I am also happy that we have welcomed 13 great new companies to the group so far this year. It is also satisfying that we have completed our first Q4 acquisition with a larger company, BPI. All in all, Indutrade continues to demonstrate its strength through both balanced diversification and diversified decision-making, which offers our companies flexibility and the ability to effectively handle changed circumstances. We thus have a stable platform with good prerequisites for continued long-term sustainable and profitable growth. At last, our Capital Markets Day is approaching November 8. So if you are in Stockholm and want to participate, you are obviously more than welcome. For those of you who cannot attend the physical event, you can always join the live webcast. By that, we say thank you for listening and the formal presentation.

Sir, should we start the floor for Q&A? Sir, should we start the floor for questions and answer?

Yes, please. Yes.

We will now begin the Question-and-Answer Session. [Operator Instructions] The first question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. So firstly, you mentioned that you saw lower activity in some segments or end markets. Could you yet again elaborate a bit on what proportion of group sales it -- they represent, and also to what extent that you see lower activity? Have you seen an acceleration of sort of softness in those segments during the quarter? Are we talking about sort of low single-digit volume drops? Or is it flattish or yes, if we start there?

It's a quite sort of broad question in a sense. If we try to give some light on this then. One area which is clearly down, significantly down, is COVID-related vaccine sort of related businesses for a handful of our companies. But anyway, large volumes for them. And in other segments with more clear downturn in several geographical areas is the construction-related segment. Perhaps more home improvement up until now, but I assume also step by step, it's going to be new build sort of in terms of houses and so on. Other than that, there are no clear sort of negative declines, I would say. It's rather stable and still strong growth in several areas, not least driven by the sustainability transformation in society at large. On the energy side, we still see a lot of investments in renewable energies. There are projects starting up now in terms of nuclear energy. We want to get rid of the dependency on Russian gas. So a lot of LNG terminals and other types of investments related to that. Electrification is driving a lot of investments in battery production facilities but also at all kinds of vehicle manufacturers who transform their facilities from combustion engine assemblies to handle electric drivetrains. So you see from off-shoring to on-shoring, so the automation trend is strong and increasing, I would say. And then you have segments like pharmaceutical manufacturing, food-related manufacturing, which are less sort of cyclical. So a lot of still positive areas to work with for a broad number of our companies. And as I said before, most of our businesses are traditionally oriented to maintaining technical components in a large production system. So if you take a Process Industry, which are running fairly in harsh environment, usually, there you need to change flow technology components like pumps and the valves frequently, you need to change filters and seals and so on and so forth. And that's the bread and butter business for most Indutrade companies. And then it obviously helps with the investment and CapEx-related projects. And there, we can refer to the sustainability-oriented transformational areas, which are a strong base. So I think it's still -- I'm still quite optimistic that there are business opportunities. And one last -- this is a long answer now, but one last comment would be that we have small to midsized companies. And if you are a company with EUR 10 million in sales, you can always find business opportunities versus a company which are EUR 500 or EUR 500 million in sales and 5,000 employees much more difficult. So being small and being business-oriented entrepreneurial, there is always room to either grow in the market or gain market share if you are entrepreneurial.

Sounds definitely promising. Coming back a bit to sort of construction again and infra and construction is your biggest end market, 20% of group sales. What portion of construction and infra is where you actually see sort of a sluggish market currently? Is it a big part? Or is it a smaller part of it or?

More a smaller part. If we relate to Q3, it's a smaller part and it's more home improvement related up until now. So obviously, the construction companies haven't really stopped projects, but there will be potentially fewer starts of new projects in Q1, Q2 2023 versus Q1 and Q2 2022. So up until now, not too much yet.

And also maybe a question for Patrik here. I mean you reported SEK 27 million in revaluation of earn-outs positive. Is it any specific company that sort of performed worse than you probably expected in your earn-out structure? Or is it maybe a function of change in discount rates? I'm not sure how you value these companies or -- yes?

No, it's not -- it's a handful of companies, but given that we have around SEK 1 billion in earn-outs liabilities in total is a very small amount. I think most of our companies reach their earn-outs, which is good, of course, because then they reach their sales targets. But some companies have really ambitious sales and EBITA targets and then they missed them slightly. But -- so I think it's a few, and it's a relatively low amount, I would say.

And also, you announced your sort of largest acquisition in a while yesterday, Bramming there. But what would you say that the margin level is? We're trying to look at it, I mean, Danish companies is quite tough to find good financials, but it looks quite margin dilutive? Is it correct or?

It's incorrect. It's, I would say, on a stable to a higher level than we are on average EBITA-wise now, so...

The next question comes from Karl Bokvist from ABG.

Just a first more technical one to get that out of the way. The earn-out adjustment, is that booked in the kind of corporate line or central line? Because it seems like the corporate cost is a bit lower than what it has been in the past quarters?

Yes, that is correct. And we take all the earn-out adjustments and also potential goodwill write-downs on central level and to keep the business areas clean.

And then if possible, you did shed some light on it here during the presentation. But is there any chance you could talk a bit about how you view demand here in early October and how we should think about Q4 given what you say about the backlog?

Yes. Sales-wise, we are quite confident that Q4 will be good, a bit more -- I'm sure exactly how order intake will develop. But as I said, there are quite a lot of positive areas to work with for a majority of our companies. So it's not super negative in any way. Q4 has started, I think, fairly well in many companies. So I don't want to give you sort of a number. It would be premature to do that, but not very pessimistic, more positive.

And then just on profitability here, we see that gross margins are down and you attribute some parts on -- within OpEx to higher activity levels and so on. But do you feel there's been any changes in your subsidiaries' ability to offset cost inflation with price or some unforeseen cost spikes in certain companies here?

They have been extremely good at early -- they've been early out to increase price for raw material and components and freight and things like that. And they could obviously argue for those price increases early on. Now when some raw material prices are being reduced, and we don't see the same sort of increase there, they need to relate to, as you say, energy costs or other type of inflationary cost increases. And it becomes a little bit more and more difficult. But in general, our companies are extremely good at this, and they are always trying to be protecting or working with the gross margins in a positive way. So I am still confident that we will continue to be good at managing this. But compared to a year ago, it's slightly more difficult to argue for price increases, yes.

Just a final one, if I may here. Very strong growth in Flow Technology and not all of these trickles through to earnings due to some of the factors that you mentioned. But this relationship here should -- do you think this will continue for the coming quarters where you might still see good demand and good deliveries, but maybe a bit of subdued drop through to earnings?

Yes, probably a bit subdued due to these inflationary increases. But hopefully not worse than the ratio we have seen in Q3, rather the opposite.

The next question comes from Robert Redin from Carnegie.