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

Welcome to the Indutrade Q2 presentation for 2025. [Operator Instructions] Now I will hand the conference over to CEO, Bo Annvik; and CFO, Patrik Johnson. Please go ahead.

Welcome, and good morning on our behalf as well. As usual, let's begin with the overall highlights. Starting with the demand situation. The order intake was stable organically unchanged from last year despite fewer working days and the uncertain market situation. So underlying, it was stronger than last year. Around half of the companies had organic order intake growth with good demand from customers within the energy sector. Demand within medical technology and pharmaceuticals was aggregated on a high and stable level. Net sales decreased 4% in total, organically also minus 4%, and I will soon comment more on this. The EBITA margin came in at 13.7%. We continued to reduce inventory during the quarter. Four acquisitions completed so far in 2025. We have prolonged some of the acquisition processes due to the general market uncertainty, but the pipeline now is very strong. Looking more specifically at the order intake and sales trends, demand was underlying stronger than last year, considering the number of working days during the quarter. We had a positive book-to-bill also this quarter with orders being 2% higher than sales. It's the second quarter in a row with a positive book-to-bill. There were continued variation between companies, segments and countries with the strongest growth in the energy sector. The demand within medical and pharmaceuticals was high and stable. Demand within infrastructure and construction, general engineering and the process industry was weaker. In terms of sales, we declined 4% during the quarter as an effect of currency headwinds and a minus 4% organic decline, while acquisitions contributed positively. The organic sales development is primarily explained by the lower order backlog coming into the quarter as well as strong references, especially for business area, Life Science and fewer working days. I think visually, you can actually see at the net sales bar diagram that quarter 2 2024 stands out with an all-time high sales of SEK 8.5 billion. I think it's also good for you to understand that if we exclude the 2 companies with the highest sales to Novo Nordisk, that has a 2% impact on sales this quarter. So instead of minus 4%, it will be minus 2%. And if we exclude the working day effect, it's also around 2%. So with those 2 sort of adjustments, it's a flat sales situation, basically perhaps giving you a better understanding of the overall situation within the group. Moving into sales per geographical market. Sales to Sweden was overall flat with good demand within, for example, the energy sector and infrastructure-related business, while it was lower in medical technology and pharmaceuticals, mainly due to challenging references. Sales in Denmark was down due to strong sales to Novo Nordisk the same period last year. Also Finland and Norway was aggregated down year-over-year. For rest of Europe, sales development was stable in the Benelux, U.K., Ireland and Switzerland and Austria. Sales growth was strong for single-use products, but lower for infrastructure construction-related business and general engineering, especially in Germany. Sales to North America and Asia is slightly volatile and the development can fluctuate with single projects. In North America, we had a strong development within valves for power generation, while some of the companies in the business area, Technology & Systems Solutions had a weaker development on the back of hesitation from U.S. customers due to the tariff situation. All in all, it was flat from last year and down in Asia. EBITA decreased 11% in total to SEK 1.1 billion, corresponding to an EBITA margin of 13.7%, an improvement sequentially from 13.3% in Q1, but lower than 14.8% last year. The organic sales development of minus 4% is, of course, the main driver of the underlying EBITA margin decline versus last year. The gross margin was stable and high at 35.3%, basically in line with last year. We also start to see some effects from our company's efforts in terms of adapting costs to the situation prevailing in their markets with organic expenses being flat compared to the same period last year and also lower than the first quarter. This is a positive development effort and the work will obviously continue also into Q3 and Q4. If we then comment on the net sales per business area, as mentioned, some headwinds in terms of fewer working days, strong references and a lower order book coming into the quarter, resulting in a negative organic sales development for all business areas. The main explanation for the organic sales drop in business area Life Science is that they had very strong sales during the same period last year connected to diabetes-related products in the Nordics and production equipment to Novo Nordisk in Denmark. We saw continued good development within the single-use area during the quarter and over half of the companies in the business area had organic growth in both sales and orders. If we do the same exercise for business area Life Science and exclude the 2 companies with the highest sales to Novo Nordisk in the quarter, the organic sales would go from minus 4% to plus 4% for the business area. So big impact from very few companies, but also good to know that those companies are 2 very good companies, and you will see that they will have a positive impact also order intake-wise and sales-wise going forward. Process, Energy & Water was impacted negatively by weak development within the Finnish process industry and the weak general business climate continued to impact Infrastructure & Construction, Industrial & Engineering and Technology & Systems Solutions. As mentioned, for Technology & Systems Solutions, it was primarily sales to North America and Asia that was weak. I can also mention that we have appointed a new Head of Business Area Technology & Systems Solutions, Mr. Peter Laveson, an external recruit who will start towards the end of August with a very relevant background. If we then turn to EBITA margin by business area. As mentioned, we had stable high gross margin and positive expense development. However, all business areas had a declining EBITA margin in the quarter. In addition to the organic sales development, slightly higher expenses had a negative effect in Industrial & Engineering and Life Science. Infrastructure & Construction had a slightly lower gross margin, but was impacted positively by acquisitions, divestments and restructuring activities. Process, Energy & Water had the weakest margin development compared to the same period last year. However, they had the best improvement from quarter 1. Technology & Systems Solutions was impacted negatively by some one-offs connected to, for instance, layoffs in addition to the organic sales decline. Sequentially, the EBITA margin improved versus Q1 in all business areas, except for Technology & Systems Solutions. If we then turn to acquisitions. So far this year, the acquisition pace has been somewhat lower with 4 acquisitions completed adding approximately SEK 425 million in annual revenues to the group. Due to the general market uncertainty that also intensified in April with the tariff announcements from the U.S., we decided to prolong some of our acquisition processes. We do, however, remain very opportunity oriented and are looking for a wide range of companies in many different geographies and end segments. The pipeline is now very strong, and we are working on several projects in different stages. So we are confident that the second half of this year will be successful in terms of acquisitions. Looking at the longer trend, more importantly, we are step-wise increasing the number of acquisitions per year, as can be seen in the yellow line to the left, although number of acquisitions per year can be a bit volatile. Looking at the bridge effects from acquisitions over the last 12 months, we have added over SEK 100 million to the group's EBITA in 2025. Furthermore, we can also see that the acquisitions are margin accretive with an accumulated EBITA margin of 17.3% for the quarter and also over 17% on a rolling 12-month basis. Then I hand over the word to Patrik to comment more on the financials.

Yes. Hello, everyone, and thanks, Bo. Looking at then the financials in more detail. Total growth for orders and sales in the quarter was plus/minus 0% and minus 4%, respectively. Year-to-date orders have grown 3% and sales is in line with last year. Book-to-bill above 1 in the quarter and also for the first half year. So that's encouraging and good. In quarter 2, we continue to have a stable high gross margin development, 35.3% versus 35.4% last year. And year-to-date, we are slightly ahead of last year. EBITA decreased with 11% in the quarter and is minus 3% year-to-date. Quarter 2 EBITA margin was 13.7% compared to 14.8% last year. And as Bo commented, a slight improvement versus Q1 when we had then 13.3%, excluding one-offs. Finance net decreased 17% in the quarter and 8% year-to-date, mainly because of the lower interest rates. Tax costs are down 10% in the quarter and down 4% year-to-date, basically in line with the result movement. So underlying tax rate is therefore in line with last year at around 23%. Earnings per share decreased with 12% in the quarter and 4% year-to-date, and I will show and talk around the graphical trend on the following slides. Return on capital employed is at 19%, which is slightly below last year and also slightly below our target. Operational cash flow was down in the quarter, and I will also elaborate a bit further on that on the coming slides. Net debt-to-EBITDA end of the quarter is at 1.5 versus 1.7 last year. So let's look at a few more details on starting then with cash flow. Cash flow, as I said, is down during the quarter. And the drivers here are the lower result, of course, but also less favorable working capital movements. We have had then 2 years of very strong cash flows, as you can see from the slide, supported by large working capital releases, mainly connected to inventory. We have, of course, an ambition to improve the capital efficiency further, but inventory levels are now more normalized, I would say, and further working capital releases will be sort of marginal. During the quarter, we also had less favorable cash flow movements in the more project-like businesses we have with less advances and more project buildups which also impacts the cash flow somewhat. However, if you look specifically at the inventories, they declined organically slightly since last quarter and the total organic working capital is also lower than last year. Cash conversion has continued on a good high level right now trending on a rolling 4-quarter basis at 131% compared to net profit less CapEx. As I said earlier, the working capital efficiency is a focus area for us going forward. And despite the lower organic sales, the working capital ratio in relation to sales has improved since last year. Moving on to looking at earnings per share. That amounted to SEK 1.71 (sic) [ SEK 1.75 ] in the quarter compared to SEK 2.00 last year. And decline is, of course, mainly an effect of the lower operational result. The lower interest cost, they compensate slightly. The interest net has otherwise been a headwind if you look at the more longer development the last 2 years, '23 and '24, but they have come down now somewhat to a more, call it, a normalized level. Looking at the longer perspective and the average growth in the 3- and 5-year rolling 4-quarter earnings per share, they are at 4% and 12%, respectively. And then ending with the financial position that is still very strong. The interest-bearing net debt decreased versus last year from SEK 9.5 billion to SEK 8.4 billion, mainly as a result of strong cash flows the last year, but also then a lower acquisition pace. Net debt, however, increased seasonally compared to the first quarter due to the dividend payout. And if you look at the net debt ratios, they are stable and low from a longer historical perspective. Net debt equity -- net debt-to-equity ratio was 52% compared to 63% last year. And the net debt-to-EBITDA ratio was 1.5, as I said earlier, then compared to 1.7 last year. And if you exclude earn-out liabilities, the net debt-to-EBITDA ratio is 1.4 compared to 1.6 last year. So to conclude, the financial position is strong and that, of course, creates good conditions for continued value-creative acquisitions and also organic growth investments. By that, I leave over back to Bo.

Then we conclude with key takeaways. We had a good underlying order intake and have had a positive book-to-bill 2 quarters in a row now, strengthening our order book. The sales and profit levels were down during the quarter, impacted by lower backlog, fewer working days and challenging references, but good to see that we are sequentially improving from quarter 1 to quarter 2. And also within quarter 2, we ended the quarter in terms of the month of June in a stronger way. Expenses down versus Q1. Many companies continue to work actively with adapting costs to their respective market situations. Market uncertainty remains for the upcoming quarters, and we still have a slightly lower order backlog. Very strong acquisition pipeline. We are working with several projects and look forward to welcome many more companies in the second half of the year and strong platform for long-term sustainable profitable growth going forward. By that, I say thank you for listening. And now we will open up for questions and answers.

[Operator Instructions] Next question comes from Carl Ragnerstam from Nordea.

It's Carl from Nordea. A couple of questions from my side. Firstly, starting off with M&A perhaps, as you mentioned, you're pausing the discussions due to a soft macro, as you said, of course, stands out a bit versus your sector colleague. Also remember when I listened to former CEOs of Indutrade Sectors, the best M&A was done in sort of a muted macro, which typically entails a healthy M&A, EBITA upside once macro turns. So could you help me a bit understand your thinking there when you decided to pause the discussions? Is it all discussions paused? Is it just certain exposures? And also, when do you plan to restart the dialogue? Because I guess the uncertainty is still here, right? So yes, your thinking there would be good.

Yes. I think pause is maybe the wrong terminology. We are more prolonging discussions in order for us to understand the pace and momentum in the companies. So when you finally take ownership, you don't really want to have 2 quarters in the beginning of the ownership to see declining performance. So it's more to build certainty around the customer situation, the order intake, the order book and yes, so more certainty around the broader situation leading to that the acquisition becomes accretive when we become owners. So it's more prolonging. Sometimes you need a couple of more months. And even if there is a general uncertainty continuing, you might have good enough sort of confidence to finalize the acquisitions based on knowledge you have gained in these discussions. So it's not pausing. It's more taking some more time to build confidence, I would say.

And when do you plan to restart the dialogue?

Again, we don't restart. They are ongoing. And from what we can see now, we have a lot of projects, which hopefully will be finalized in the second half of this year.

So then it suggests that you have better visibility of the macro from here on then?

I would say better micro project by project.

Okay. Perfect. Also looking into the cost side as we discussed this before, of course. But yes, if I remember correctly, you have low single-digit organic cost development in Q1. If I read it correctly, it is now flat in Q2. The ambition is, as I remember, to take it to negative territory. So could you help us a bit how the organic cost developed, for instance, in late Q2 or early Q3 to get more of a better picture into the organic development here from Q3 and onwards on the cost?

Do you want to take this, Patrik, or should...

Yes, I can comment. But you're right, we have worked a lot with the cost, and they are coming down. If you look sequentially, they are down versus Q1 and flat versus last year. And we expect sort of that trend to continue further down. And also maybe mention that we have some one-offs in the quarter connected to layoffs primarily. So if you exclude those, it would actually have been then slightly lower than last year. But that will continue and hopefully then end up being negative territory as you expressed it.

Is it low single-digit negative already in Q3 then? Or should we expect flat in Q3 as well? Or -- yes, could you help us a bit with the timing?

No, I don't have a specific number, but we will push on with this, and it will -- cost will come down in quarter 3 and quarter 4. I mean I think that's the only guiding we can give.

That is very clear. And I think it's, of course, positive to see the book-to-bill being positive second quarter in a row, but the backlog is, of course, not fully restored seemingly as you expressed it in the report. Could you give any insights into how the backlog looks at the end of Q2, especially in comparisons to Q2 last year?

Should you continue, Patrik or...

Yes. Let's see if we can help each other answer in a good way. I mean we have -- it's difficult having a sort of a super good transparency of the backlog. So we have so many companies, and it's spread over so long time. But it's almost restored to the levels we had last year. Then it's, of course, not only for invoicing in quarter 3 and quarter 4, it is then spread over, I would say, spread over, I don't know, 12 months or so. So it is quite long. But I mean, it indicates that sales level will pick up in quarter 3 and quarter 4. I don't know if you want to express it in another way, Bo.

No, I think that's generally a good explanation on a group perspective, then it differs business area to business area, obviously. I would say that Life Science has broadly a good situation. Process, Energy & Water is also a good situation. For several quarters, we have hoped that Infrastructure & Construction would have bottomed and see stronger order intake buildup, but that seems to be a more pragmatic situation. So probably Q3, Q4 will be a bit challenging for them also going forward here. And then Industrial & Engineering and Technology & Systems Solutions have similar order intake patterns, I think, mostly industrial customers broadly being their customer base. And yes, there, it is a little bit more hesitant. There is order intake growth on consumables, if it's more CapEx-related projects, more hesitations in the market. So -- but all in all, the sentiment is a little bit more positive in towards -- sequentially, you can say, Q2 to Q3 and H2. So you also saw that within quarter 2, a sequential improvement. So yes, hopefully, that will continue and be realized as we think and see right now.

That's very clear. And the final one, if I may, is on Infra & Construction, quite hefty leverage on the 2% negative organic growth. So could you just explain a bit what happened there? You touched upon the gross margin in the report. But of course, you've also done divestitures that should have helped the margin or underlying it's maybe even worse. So what happened in the quarter in Infra & Construction would be super helpful to get more flavor on that.

Yes. They have -- like in all business areas, it's a mixed situation with companies in different positions and with different performance. But they had a cluster for some time now of companies which have had super weak performance, unfortunately. And we have seen it beneficial to divest a part of them, and we are divesting another one basically as we speak here, which also will be an accretive sort of decision going forward here. But after that now is done, I think there is no obvious perhaps more divestment case there, more continued organic growth and improvement work. And we have -- and they have worked quite a lot with their expense levels. So as soon as we see some light there, I think we will see a lot of good profitability improvements and return improvements. But we need a slightly better top line in order for that to come still.

And Patrik, the quite big leverage there on the -- because the organic growth was just negative 2%, right? So it's a big deviation versus what we saw in Q1.

They have some one-offs. I think we wrote that in the report as well. So we have some one-offs and the divestiture case Bo is speaking about also had some problems in the quarter. If you take away that, it would have not been as dramatic, I would say. So...

How big are they?

Sorry?

How big are the one-offs?

No. I mean, it's in total, it's around SEK 10 million, I would say, in total, if you put all of these things sort of together.

For the segment or group, sorry?

In the business area.

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

A follow-up on the -- just a clarification here because my line was a bit bad. But the one-off cost items here that you talked about, was this for like the entire Indutrade Group in this quarter, a negative SEK 10 million figure?

No. I talked about Infra, then it's maybe double that amount for the group in total.

Understood. Then going to the divisions. If we go back just one quarter, for example, TSS was one division where you saw a bit slower order development and also some declining margins. But now in this quarter, it was a very strong plus 10% organic order increase and another quarter of positive book-to-bill. So would you say that this division was perhaps only affected by the kind of early April uncertainty and then activity has resumed again. I'm just thinking a little bit about the type of businesses in this division and perhaps also that similar comments could be said about PEW?

I think those 2 business areas are actually quite different. If you take Technology & Systems Solutions, it's our most international business area with around 20% of sales to North America and a fair extent also to Asia, China. So they have -- the tariff uncertainty has impacted their business area more, I would say. And part of that business area also have companies with fairly large CapEx orientation with also more hesitations lately. But it was good to see that they had order intake growth. So we will see going forward here. But most of the customer base in -- towards that business area is larger engineering, industrial companies globally, I would say. So they are not that different from industrial and engineering, but they are more European in their scope geographically, I would say. Process, Energy & Water is also much more Northern Europe, Western Europe oriented and have a completely different customer base, which is much more process industry and obviously, water, wastewater, both in industrial companies, but also municipalities and those types of customers with, I would say, a good underlying situation now. So they should have a stronger Q3, Q4, hopefully, going forward here.

Understood. And then when it comes to the tough references for these 2 particular businesses in Life Science, how many more quarters should we consider that when we look into the second half?

Yes. It's very difficult to say and be very clear about that. It's a bit volatile when their orders are entered into the system. So but there will, for sure, be some fairly large orders into those companies during the second half. So yes, I cannot be more specific than that right now.

If I comment -- history, they had also good deliveries during quarter 3 and quarter 4. So sort of from historical references, those will be a bit challenging also quarter 3 and quarter 4. But we hope to fill up with new orders as Bo says.

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

Then we thank you all for good participations, good questions and wish you all a nice summer.