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

Welcome to the Indutrade Q2 Presentation for 2024. [Operator Instructions] Now, I will hand conference over to CEO, Bo Annvik; and CFO, Patrik Johnson. Please go ahead.

Welcome, and good morning on our behalf as well. We are quite happy with this quarter. It's good to be back in terms of organic growth and having a strong EBITA margin. Let's start with some highlights. As I said, stable order intake. Growth of 6% in total. We're up 1% organically. Continued good demand in medical technology and pharmaceutical and also the process industry. Basically, the same segments and sectors as in quarter 1. Net sales increased 5%; organically, 1% despite strong references and supported by some more working days. EBITA margin of 14.8%, exactly the same as the underlying EBITA margin last year. Inventory, slightly down from quarter 1 2024. And also a good acquisition pace, six acquisitions completed in quarter 2 and 12 so far in 2024. And the inflow of interesting companies to acquire remains strong. If we then comment a bit more on the order intake and sales, is continued, aggregated, stable, high demand in terms of order intake and an increased invoicing pace versus the first quarter, resulting in record high SEK 8.5 billion. Both order intake and net sales increased plus 1% organically versus high levels last year, and as I said, somewhat helped by more working days. Total order intake and net sales increased with 6% and 5%, respectively, supported by good acquisition pace this year. On the organic side, we still see some variations between segments and companies, and I will elaborate a bit more on this later. In terms of segment, the MedTech and pharma sectors were good. And in particular, we can mention that the diabetes area was good, both in terms of insulin production in the Danish sort of market, but also device sales in the Scandinavian, Nordic markets. And we also saw a good demand in the process industry, more broadly there. As I've said before, we benefit -- or our company's benefit from the green transformation quite broadly in the Scandinavian area, particularly, but quite a lot of projects also outside in the Western European sector or geography. The demand from the customers in the engineering sector was stable, more sort of varied picture there. Also, I would say, geographically, it's stronger in the Nordic area; Scandinavian area, a little bit weaker further south in Europe. The business climate in the infrastructure and construction sector was continued dampened, but they see some lights, at least more discussions in terms of projects since the expectation of a better financial climate in the second half of the year is going to have a positive impact there, but probably a fairly slow comeback, more impact in 2025 and onwards, I would guess. If we then comment on sales in a geographical perspective. As you can see on the slide here, strong development in the Nordics with the higher sales growth in Denmark. Finland aggregated slightly lower growth, but underlying good, dampened by strong references last year from larger deliveries to pulp and paper customers. And as you also know, there is more of a base industry in Finland, having usually a situation with lower demand early in the cycle, and then they come back more quickly also when the cycle turns. The business climate is slightly weaker in general in central parts of Europe with a stronger sales development in Germany among the larger markets and weakest in the Benelux, Netherlands area. Sales for North America and Asia is slightly volatile for us and the development can fluctuate with single projects and companies. And this year, so far, more activities and projects noted primarily from the U.S. customers. If we then look at the EBITA margins, overall recovery, which was obviously very good to see. And we weren't really happy with the development in quarter 1, and now we bounced back to more the level where we should be, 14.8%, driven by sequentially improved sales. It's also, as I said, exactly the same level as last year, excluding the positive one-offs we had then. Compared to last year's, EBITA increased with, in total, 3%, where -- or minus 2% organically and plus 5% from acquisitions. Organically, the gross margin strengthened slightly also this quarter, but the sales growth did not fully compensate for the increase in expenses. The organic expense growth was, however, below 2%. So we see impact from better cost management in quarter 2 than in quarter 1. And I assume this will continue also in H2. If we look at the different business areas, we can say that half of the company showed a sales growth in the quarter and 3 out of 5 business areas. The strongest development was in Life Science and Technology & System Solutions. And the growth in Life Science was driven by sales of diabetes-related products in the Nordics and production equipment in lower Nordics in Denmark. And the positive sales development in Technology & Systems Solutions came from several customer segments, and the majority of the company showed growth. Broad and good sales development also in the business area Process, Energy & Water, partly offset by strong references in valves for power generation. And then lastly, slightly dampened market climate impacts business area, Industrial & Engineering and Infrastructure & Construction. So a little bit more dampened situation in the Industrial & Engineering area versus what we have seen before, nothing dramatic. And as we have also commented before, it's good to remember that most of our companies are small to medium-sized and can usually find business opportunities by being entrepreneurial and innovative. If we look at the EBITA margin by business area, I would say, it was solid margin performance with improvements in 3 out of 5. And the development and level in Industrial & Engineering and Infrastructure & Construction was held back by the dampened market and organic sales decline, but acquisitions and divestments supported a margin improvement in Infrastructure & Construction. The good margin levels and development in Life Science; Process, Energy & Water; and Technology & Systems Solutions was driven by a positive organic gross margin development and solid sales growth. In terms of acquisitions, we have a high pace so far in 2024. 12 well-managed companies acquired with combined annual sales of more than SEK 1.5 billion -- SEK 1.1 billion. All business areas have acquired one or more than one company. And we have a number of projects in different phases ongoing. So I would guess that we will have, all in all, a good acquisition year. We have, as we have said before, a capability to acquire around 20 companies per year. And the conditions are continued good, I would say, going forward here. And we don't sort of measure really acquisitions by quarter. It's better to see that over a longer time period. And when you compare 2023 to 2024, so far, it's good to remember that we prolonged deliberately some processes in 2023, but anyway, high pace so far this year. And towards the right there, you see the EBITA effect from acquisitions and in quarter 1, the effects were not that strong, around SEK 30 million. And now in quarter 2, we are coming up to more normal level, SEK 60 million. And the acquisitions we closed now in quarter 2, we had an EBITA margin of around 16%. And I think the effects will continue to be positive in the remainder of the year. And by that, I ask you, Patrik to go through the financials in some more details.

Yes. Thank you, Bo. Total growth for orders and sales in the quarter was 6% and 5%, respectively. And if you look at the year-to-date orders, they have grown 3% and sales is in line with high levels of last year. Book-to-bill in the quarter is slightly below 1. But looking at the year-to-date accumulated number is still above 1. We continued with the good gross margin development in the quarter and good to see 35.4% versus 34.6% last year and almost the same in the year-to-date numbers. EBITA increased 3% in the quarter, and mainly thanks then to contribution from acquisitions. Year-to-date, we're still below last year. Margin. The EBITA margin for the quarter was 14.8% compared to 15%. But as mentioned, that we had some positive one-offs last year primarily related to earnouts. And if you exclude that, the margin was last year also 14.8%, so in line with each other. Finance net, up 15% in the quarter and 16% year-to-date, and entirely related to the interest rate -- the higher interest rates. The tax cost, up 1% in the quarter and down 11% year-to-date. And that's in line with the result, which means then that the underlying tax rate is the same as last year, around 23%. Earnings per share increased with 1% in the quarter, and we look at the graphical trend in the slides to come. Return on capital employed declined, but is still on a good level of 20%, in line with our financial target. And operational cash flow is good in the quarter, around SEK 1 billion, but slightly weaker than last year. Accumulated cash flow is SEK 1.5 billion versus SEK 1.7 billion last year. Net debt to EBITA, end of the quarter is at 1.7 versus 1.9 last year, and we'll come back to the net debt later on as well. So then cash flow. And as I said, slightly more than SEK 1 billion in the quarter, and that is slightly lower than last year, but I would say it's a good level. It's the second-highest quarter 2 ever, as you can see from the slide. The decrease versus last year is mainly driven by less favorable working capital movements. However, in inventories as we are focusing on declined organically slightly since last year. Then also good to highlight is that our companies are relatively capital-light. And continuously, we have a strong underlying operational cash flow coming from the companies. And that is reflected in good cash conversion, which we have added then to this slide. Right now, we are trending then on 140%, if you measure the cash conversion as net profit, or the operating cash flow compared to net profit less CapEx. That's how we defined it here in the slide, 140% on a rolling 4 quarter basis. And the working capital efficiency, which is a focus area for us. The level, however, is relatively unchanged at the end of this quarter compared to last year and also compared to year-end. The lower organic sales, of course, is creating some headwind in the work here, but we continue to push on this area. And if we continue with looking at earnings per share development. Earnings per share for the quarter was SEK 2, and that is an increase of 1% last year. The increase, of course, driven by the higher EBITA, but dampened slightly by the increase in interest cost and amortizations. And if you look at the longer perspective, the growth in 3- and 5-year rolling fourth quarter earnings per share were 12% and 14%, respectively. And then finally, coming back to the debt situation, then interest-bearing net debt increased sequentially, compared to quarter 1 and was then 9.5% at the end of quarter 2. And that increase is entirely driven then by the dividend payout. And because of this, quarter 2 is seasonally normally the quarter with the highest debt, might be good to remember. But when it comes down to the debt ratios, net debt to equity was 63% versus 74% last year, and the net debt to EBITA was 1.7 versus 1.9 last year. And if we exclude earnouts, which we always include in the net debt, it would have been slightly lower, 1.6 versus 1.7 last year. So to summarize, despite the high acquisition pace, our debt ratios are well balanced, and we have a strong financial position. By that, I think I end and leave back over to Bo.

Thanks. We thought we could elaborate a little bit on our sustainability situation and we have worked diligently and focused on that for some years now. And last year, we introduced something we call the Indutrade Sustainability Awards. Many know that we successfully have used financial benchmarking awards since a very long time in the group. And based on that, we have copied this into the sustainability area. And obviously, we want to acknowledge great work, share knowledge and inspire each other to improve. And the companies can nominate themselves or nominate other companies and we have three categories. It's within people, the environment and products and customers. And the winners this time was in the people category, a Finnish trading company called YTM, a fairly large company, providing, you can say, critical components to the Finnish process industry. They have done a fantastic job to basically improve culture or diversity, inclusiveness and also improved KPIs business-wise. And in terms of the environmental area, we have a Swedish company called ETP. They manufacture hydraulic hub shaft connections and tool holders and components like that. And they have done a fantastic job, I would say, on the environmental side to really decarbonize large parts of their value chain, really impressive. And then we have a Danish company called PPI, which we acquired fairly recently. And they provide customer-specific and engineered foam solutions, and they are extremely structured in terms of how they go about the whole sustainability area and work towards becoming fossil-free and offer more and more circular solutions, and that is also having good business impact. So good for you to understand a little bit about this. And at the end of this quarter, we have also applied to have our updated climate targets validated by science-based targets initiative. And as soon as we have more to update in terms of this, we will obviously communicate that as well. But all in all, a lot happens, I would say, sort of sustainability, and we see that as a clear business opportunity within Indutrade. Then time to summarize the key takeaways. So stable demand and increasing net sales despite challenging references and a solid EBITA margin and cash flow. And I think maybe the highest gross margin, at least since I joined Indutrade. Record high acquisition pace, 12 acquisitions so far in 2024, and with a combined annual sales of SEK 1.1 billion. And the uncertainty around the general business climate remains for the second half of the year. But with a strong acquisition pace and the solid backlog we have and somewhat easier references, we are quite optimistic about H2, and all in all, well positioned for further growth with a strong portfolio of entrepreneurial companies in a new group structure, which we think will have positive impact in the medium and long term, not least linked to organic sales growth. By that, we end the formal presentations and leave the word over to the facilitator.

[Operator Instructions] The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

I would like to start in Life Science and talk a bit about the sequential margin development. You mentioned that you had some deliveries now. Can you talk about how they have impacted the margins?

Yes, I would say it's a broad-based good situation, and we highlighted the companies related to production increases and build-outs at Novo Nordisk and also device sales in the Nordic markets of diabetes equipment, but there are a lot of other companies also having a good market situation. And still, I would say, more potential to come in terms of the single-use area. Their customers have still had quite high inventories of products, and we haven't seen real order intake taking off again there. And hopefully, that happens towards later this year, early next year. A bit difficult to say exactly when, but there is potential to come in that area. And the Novo Nordisk's situation will continue to be strong for several years. They have different phases of their different types of extensions. So it's not something we only live with very short term now, and then this will disappear, but it's more several year types of engagement, I would say. Was that answering your question or?

Yes. And then moving on to Process, Energy & Water. You also had a good margin development and you mentioned that it's a good -- relatively good environment there. Can you also talk a bit about the drivers there in the margin? And also if it's -- you think that those drivers are more sustainable or if there should be a degree of reversal there?

No, I think that's quite sustainable as well. It's quite broad-based. As I said, it's not just a few companies doing extraordinary well. It's more a broader good situation. And to some extent, project-based, but there are always new projects. And as I said, not least linked to the green transformation, which is ongoing, continuing. There are also some projects linked to the defense area, which will also be interesting for several years going forward. Maybe a little bit lower market for pulp and paper, for example, which is a big flow technology area and usually, at least in the Nordics now, but that will eventually come back, I think. So, no, fairly broad-based, good situation and no -- it will be hopefully continued at the level where we are.

Okay. And just lastly from me, you talked last quarter a bit about some of the companies not being on their toes as much with costs when they face headwinds and it looks better now. Do you think that there's anything there worth mentioning regarding the work that has been done in the quarter with your company's managing costs?

I would say it's -- in general, Indutrade companies and Indutrade team members are good in terms of cost consciousness. And maybe part of this has been linked to organic growth investments, and now when the market in some sectors and segments have been a bit subdued, there hasn't been pay off from those initiatives. And then in general, maybe that could have been a little bit more quick to response to manage costs, when they have seen that order intake has stabilized or perhaps even been weaker in some specific companies and so on and so forth. And yes. Yes, clear dialogue between business area management and companies and Boards and companies to manage this well. We have seen some effects from this later in quarter 2, and I assume this will continue to be sort of well managed in Q3 and Q4. But I don't know, Patrik, if you want to elaborate anything on this.

No. No. I think you expressed it well. I think we have slightly lower cost level in this quarter compared to the first, and it's the right trend. So I think -- and I also think, as you say, that we'll continue improvements during the second half of the year.

The next question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. Just a follow-up on the cost side here, as you mentioned. Just -- I mean, if I understood it correctly, you had 2 percentage points lower increase in SG&A sequentially. Is it fair to assume a similar sort of deceleration of the acceleration of the costs or sequentially and to Q3 as well?

Patrik, do you want to...

Well, I think what you will see is it's not sort of a dramatic decrease in cost. It's more of a -- if we have the -- partly because of inflation and partly because of growth investment in selected companies, we've seen an increase during last year. And step one is to stabilize that. I think we managed to do that. And I don't think it will go down dramatically. I think it will be stabilized, maybe slightly down here and there in certain companies that see a more softer climate. But I think you will see sort of a sideways going cost level. If not, demand will turn into a worse situation then, of course, companies need to act, but that is not sort of our pre-action.

And then when you see here and there, I guess you're building costs a little bit then, I guess, Life Science, parts of the science and lower in construction? Or...

And in general, we -- and I think you heard that, Carl, we work with a structured portfolio model. Where we define the companies where they are in terms of strategy and business climate, et cetera, and the companies that are clearly categorized as growth companies. Here, we allow or even push for investments and doing more. So that is -- we will continue to do. But then companies that are -- that are not ready to grow, they, of course, need to be much more cautious, especially in -- when you have soft business climate. And so you need to push and work with this very selectively and adopted to the companies.

That's good. And on Life Science, you touched upon the Novo volumes a bit here, but you said that it's a long-term trend, obviously. Should we expect the continued volatility between the quarters? Or should we expect sort of a more stable development in the deliveries over the coming few quarters here, I guess? And the second part, are you taking new orders from the same customer? Or is it that you're actually totally draining the backlog with every delivery?

We are definitely taking new orders and we'll do so for quite some time. And there could be volatility between quarters, I would say, but maybe not over 4 quarters or so, more of a stable trend. And the volatility is probably higher, order intake-wise than on sales-wise.

Okay. Very clear. And also looked a bit on sort of central costs in the quarter, up to SEK 100 million. Is it a revaluation acquisition cost we should consider there?

What we define as group items is much more than...

Yes, for sure.

What we have there. Of course, sort of the central cost, but then you have also then, as you referred to, earnout releases, potential write-downs and other things, IS adjustments. So it is a bit up and down, I would say. And last Q2, we had some earnout releases. So that I think that's the major thing pulling down the levels last year, and we did not have that basically this year. So that's the big deviation, I would say.

Okay. That's also very clear. And now you had the new group structure for half year. So could you update us a bit on what you've seen so far in terms of collaboration between the companies, deal flow, which we're supposed to, I guess, be better when the same type of company perhaps talk to each other in an easier way. And also on perhaps cost efficiency, the latter is perhaps a bit far-fetched, but anyway.

Yes. We are in early days, I would say. It's extremely important that the individual company is still the core of Indutrade or the collection of 200-plus individual companies, and that we are not pushing for too much coordination or cooperation in some sort of awkward way, if you understand what I mean. So now we have this 30-plus segment and 30-plus segment leaders, and they usually have from 3, 4 companies to 10 companies, maybe in their segments. Some of them are maybe still MDs in a specific company in addition to this role, and some of these people have this as a full-time job, you can say. And they have started now to visit companies, engage in the Boards and have some initial segment meetings. But this is like a slower raise if you use that word. And I think, and we think the benefits are more medium term than short term. So now we are assessing potential areas of sharing and soft synergies sort of. And they're also building on this white spot acquisition agenda, but it's going to take probably a year or two before we really see any material effect from it, I would think.

That's very clear. And the final one from me is a bit on the Infrastructure & Construction. You said demand is still muted, but we still saw positive organic quarter growth in the quarter. Is it that you had any big projects in, I guess, even -- that of the organic growth? Or how should we look at it?

Yes, there were some specific companies who had quite good order intake. So I would still say that it's a bit muted as you said yourself, as an area. And so no quick bounce back in Q3, Q4, more a slow potential progress and more impact in 2025 would be my guess.

Then if I add also, I think the comment on the segment is sort of more sort of an overall assessment. And if you look at our business area structure, the companies -- many of the companies are selling to different types or more than one customer segment. And we also have then Technology & Systems Solutions. That is more of a technology and a product-oriented business area. They sell also broadly to all the customer segments. So -- and for instance, in that segment, there is more dampened development towards the Infrastructure & Construction segment. So it is more of an overall assessment rather than the business area development.

The next question comes from Johan Skoglund from DNB Markets.

Johan from DNB here. Congratulations on the Q2 report. Just a couple of short questions building on the many good ones that were already asked. So continuing on Infrastructure & Construction, the margins there are progressing well. Do you see that segment performing in line with the group once demand situation normalizes? Or do you see any higher or lower potential there going forward?

No, I would. I expect them to be at 14% in a normal business climate and maybe also going beyond that. So it's not a collection of weaker companies, less quality companies. It's also really good companies in that business area. So no, they should come back to a more Indutrade standard level.

Okay. That's very good to hear. And the final question is on the gross margins, which were strong in Q2. You mentioned that they're mainly driven by price hikes. But have you also seen purchasing gains from lower input prices or more efficient purchasing here?

I wish I could have said that we have been -- that we have become much more professional in the purchasing area. I think that's a slow process. So maybe more raw material market swings, maybe like steel prices going down and things like that. But more -- it's more on the price side than effective purchasing reductions, I would say.

Okay. Are you able to quantify how much of growth was price and how much was volume?

No. We have very -- it's a very difficult analysis for us with this type of -- we have, so we can't do that.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Well, then, we say...

The next question comes from Karl Bokvist from ABG Sundal Collier.

My first question is on just if we take Q1 and Q2 together now, as you said, Q1, perhaps a bit below what you had hoped. Q2 seems to be back on track. But are you fully back on track now compared to what we might say, normal levels and the headwinds you described in Q1 and what you've done to -- what the units have done to recover that in Q2?

Yes. I don't know how we could interpret the word fully, but I would say, we might even have a slightly better cost situation in Q3 -- expense situation in Q3, Q4 or H2 versus H1, definitely. And we strive -- or our company strives to continue to manage gross margins in a good way. And I think the demand situation will be quite okay in H2. So yes, quite attractive.

Okay. Understood. And you already discussed it a bit now during the call here, but the -- for lack of better words, the special deliveries you mentioned in Q1 that were I believe you said they were partly like delayed. Are they kind of back to normal now in Q2?

Special deliveries in...

Yes, I might have misinterpret it, but I think you partly said like single-use and stuff year-over-year was a bit challenging, but also I think it was some project deliveries that might have not been delivered at a full extent that you had hoped for in Q1.

Single use is still weak in -- rather weak in Q2 and so hopefully, better in Q4, but maybe even Q1 next year. So that area will be a little bit subdued, muted still for some time, I think. But the inventory situations at those customers are -- it's definitely much better and at some point now they definitely need to place new orders to a higher extent.

I can comment, I think the delays we talked about in Q1 was related to and overdo this. We have a good backlog. And we did not deliver that much in Q1 because yes, there was delays from the customer side, basically. That has been much better in quarter 2, and we expect the levels from quarter 2 to be -- to see -- we see those also in the second half of the year. It is slightly volatile between quarters. It's not sort of the same amount every month. But the reaction is that we will see basically what we saw in Q2 also in the second half of the year.

Understood. And now when there's been a bit more time with the new divisions here, can -- I understand or I heard a comment you said about construction in the normal business climate to be at 14% or so. But when you look at the other divisions, is there anything worth pointing out for these divisions going forward compared to the 2 years that you have disclosed for us to consider?

Basically, all of them have growth potential and obviously, construction and infrastructure since they are at that low EBITA level right now, they have -- the expectation level is much higher that they should perform better, quicker when the market is bouncing back. Life Science is at 18% or even above. It's a good level and obviously, a little bit more demanding for them to go from 18% to 20%, 22%. But I would say all areas have potential to increase and improve. And if we then talk about growth and EBITA margin improvement, we are extremely set on trying to deliver on our target of 10% growth per year. And we -- if we can do that at stable margins where we are now, I think that's quite good. But over time, we have ambitions to also improve the EBITA margin, but it's -- as we have said before, it's a bit of a slower rate and in a fairly normal market situation, maybe half EBITA percent over 2 years or something like that organically, which can be expected. And then it can go quicker if we are successful in terms of acquisition projects, so yes.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Then again, we say thanks for listening in and being engaged at the call here, and we wish you a great summer. Thanks so much.