Investment AB Latour (publ) (LATOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Investment AB Latour's Q2 report for 2021. [Operator Instructions] Today, I'm pleased to present Johan Hjertonsson, President and CEO; and Anders Mörck, CFO. Speakers, please begin.

Thank you, Madam. This is Johan Hjertonsson, and I'm here together with our Chief Financial Officer, Anders Mörck. And welcome, everybody. Our intention is to present the half year report and answer eventually some questions at the end. I think we can go to the next slide. We're very happy. It's a very strong development from all aspects. It's a record quarter with very strong growth. And we're continuing the excellent performance in all of our operations. And I'm very happy on behalf of all employees, what we've done. It's a strong order intake, strong sales growth and that coupled with very strong EBIT margins. Overall, I'd like to say the pandemic, of course, still lingers around. But I would also like to point out that we see less effects of the pandemic, but there are still effects. Main focus right now overall in our operations is really the supply of goods. We have component shortages, disruptions in the supply chain and a heavily increased raw material prices. So it's been quite a lot of work to compensate for this and to work with this and make this still happen from an operational point of view. We have implemented pricing increases to compensate, especially for the raw material prices. Overall, our group structure is unchanged. We have 2 major business lines. We have the wholly-owned operations with our 5 business areas, Caljan, Hultafors Group, Nord-Lock, Leijona, Latour Industries. We also have, since a year back, our newly founded Latour Future Solutions. And we have some smaller part on holdings. And then we have the investment portfolio, which is unchanged with 9 listed holdings. Then I think we can say that it's a good lead into the next slide, where we talk about the portfolio, the listed holdings. And there's no changes in the portfolio during the quarter. The value of development of the holdings was 22.2% during the year compared to the SIXRX of 22.4%. Overall, I would say the underlying development is satisfying. Most of them have reported good orders on sales and profits during the quarter. Quite high activity when it comes to acquisitions in many of our holdings during the first half or in quarter 2. Until Friday of last week, the portfolio value had increased to SEK 88.3 billion. Therefore, a total return of 41.3% so far this year compared to the SIXRX of 32%. That's accounting for the listed portfolio only. And then we go to the next slide, and we should comment the wholly-owned operations. Very high activity on many markets with excellent growth for several of our operations, actually for all of our operations, especially order intake, I would say. So we have a very, very high order stock at the end of the quarter. As I said, less direct effects from the pandemic. And big focus in our wholly-owned operations on the disruptions in supply chain, price inflation and raw material and components, as I said. We're very happy with the positions our operations have in growing market segments and, therefore, that gives a very positive development all over the line, I would like to point out. That makes me especially happy that it's a strong result in all of the 5 wholly owned business area. Organic growth in order intake is a staggering 51% and net sales growth of 26%. Of course, this is compared to last year, which was heavily hampered by the pandemic. But even if you go back to another year to 2019, I would like to say that this is strong growth if we compare to a more normal quarter in Q2 of '19. And the operating profit had a total growth of close to 60% and amounted to SEK 753 million with a very strong EBIT margin of almost 16%, 15.9%. And this is primarily driven by good cost control and high volumes in quarter 2. So a very good drop-through effect on that increased sales in the quarter. We're continuing with high investment pace to meet the growing demand as well as driving the sustainable growth, to have a sustainable growth and strengthening our position further. As we usually say, we are investing heavily in product development, hence the marketing. But now I would also like to point out that we invest a lot in logistics and manufacturing in order to cater for the strong growth. Sustainability and digitalization is 2 strong focus areas. We would like to push the development even further going forward. We are now implementing the TCFD. For those who don't know, it stands for Task Force on Climate-related Financial Disclosures. And this is very important to analyze the risks and opportunities connected to the climate change. Not the least after this summer's extreme weather, which makes this question even more important to work with and talk about, I think. And the TCFD work is quite important work, and that will be presented in the sustainability report for 2021. And then we change slide again. We go into acquisitions. So far, during the year, this year, 2021. We have a continued high acquisition activity also going forward. And at this point, I would also like to point out that we have announced earlier that now Johan Menckel has joined Latour and the Latour Group and is a member of the group management team, together with Anders Mörck and myself as Chief Investment Officer. Very welcome Johan. I think this is the second week starting to date on a new job. And we have also, in Q2, hired Fredrik Lycke and Niclas Nylund as new investment directors to the team. Very welcome, both Fredrik and Niclas as well. We have made an acquisition of HK Instruments, a Finnish company, which was acquired by Produal, which is a company within Bemsiq, Latour Industries with net sales of EUR 8 million. They offer advanced measuring devices for building automation. Latour Future Solution investing in Aqua Robur Technologies in June, which is a Swedish company that offers solutions to water companies in order to digitize the water networks; for example, detecting water leaks in the water network. And after the reporting period, Swegon signed an agreement to acquire the majority of 720°, a Finnish digital software company that will [indiscernible] Swegon's offering and digital services. And Aritco, within Latour Industries, signed an agreement to acquire the Swedish Motala Hissar with an annual net sales of about SEK 200 million. So in total, so far this year, we are adding -- through M&A, we're adding about SEK 1.6 billion on our top line in acquisitions. So having said that, and commented all of that, we are now super eager to listen to Anders Mörck that will present a little bit more in detail the different business areas and so on. So over to you, Anders.

Thank you so much, Johan. So we start with the Caljan, our Danish business area, and it has been a very strong momentum for Caljan also this quarter. Increased demand contributes to excellent growth. The order intake grew by 218%, which is more or less unbelievable during the quarter. And you might remember that also the first quarter was very, very strong on order intake. So the order book now is on a record level. Sales has taken off from Q1 organic growth by 75% and is expected to increase even more than the coming quarters due to the higher order intake. The operating profit was EUR 6.1 million with a margin of 17%, despite, you can say, adding a lot of staff and also doing other investments to support the growth. For example, we have established a factory in the U.S., which is now completed to meet the demand from U.S. customers. And as all other, you will hear me say that often now, there is a lot of work done now on sourcing due to the shortage of, for example, electrical components. Okay. We go to the next business area, which is Hultafors Group. And we can see a continued excellent development for Hultafors Group also this quarter. But also Hultafors has strong supply chain challenges and price increases and delivery disruptions, mainly then from Asia. In total, the net sales grew by 76% in the quarter, of which 37% was organic, and that is also very impressive. And the good cost control combined with the high volumes contributed to a strong result of SEK 266 million with a margin of 18.1%. The integration of the newly acquired Fristads, Kansas and Leijona is developing very well, and we also can say that we have a new distribution center in Poland established and has been taken into use during the second quarter. We go to the next business area, which is Latour Industries. And also here, we see a very, very good order intake and growth in sales, well above last year for all units, which is important. The organic growth was 41% during the quarter. And then also here, we see and have concerns regarding price increases and lack of raw material and other components in the production. So in the short term, this will affect the margins. But overall, good cost control in combination with lot of good volumes leads to a very good operating results with an operating margin of 10.4%. And this should also be said that this quarter was hit by a one-off cost of SEK 20 million. So without that, it would have been even higher. We have said it before, Latour Industries is the business area where we build and invest a lot in the future for smaller units to become future business areas. And the company within the business area have the capacity for even higher profitability. We turn to the next page, where we find Nord-Lock. And we can conclude that the market recovery continues for Nord-Lock. It was strong growth during the quarter, 24% and even higher growth on order intake. And now I feel like parrot repeating myself, but you wouldn't be surprised that the increased raw material prices and supply chain challenges also for Nord-Lock. So it's a lot of hard work being done to be able to fulfill all the orders coming in. But the operating profit anyway was increasing and amounts to SEK 98 million with a margin of 26%. Of course, to meet these incoming increases in raw materials, we have made price increases that will be implemented quarter-by-quarter going forward. A lot of strategic initiatives that support further growth and profitability continues as always before. And finally, on Nord-Lock, we should say that they won the Silver in the Swedish Content Awards in the category business to business with their fantastic video When Safety Really Matters. So congratulations. So that's very well done. We go to the next page, where we find Swegon. And again, a quarter with a good development. Many markets now shows recovery where it has been weak before, and order intake has been very strong, especially in Sweden and in the U.K. The order intake grew by 28%, which is a very good figure and net sales by 8%. We also see improved productivity that resulted in a strong operating profit with a margin of 14.5% in this business area, which is the biggest when it comes to net sales. And now we repeat our sales plans again. We have issues with raw material prices, and we try to do price adjustments to cover for that. And also, we have disruptions in supply chains, which is the challenging production in many units. So we turn page once again, and there we find the net asset value for Latour. It has increased by 25.4% so far this year to SEK 188 per share. Our share price at the end of June was SEK 281, and that corresponds to a premium to a net value of 49%. And as you remember, our valuation of unlisted assets is just an indication of a prudent view of the net asset value. So if we instead would compare our wholly-owned operations with other well-known listed companies with mixed industrial holdings and similar acquisition agenda, the EBIT multiple could be 29 instead of 17, that is our figure. And we shall also say that this Friday, the 20th of August, the net value increased to SEK 197 per share, and the share price at that time was SEK 306. And then that gives the premium to the way we describe the net debt value of 55%. And finally, Latour's consolidated net debt increased during the quarter due to acquisitions from SEK 5.9 billion to SEK 6.7 billion. This corresponds to about 5% of the market value of our investment, which is more or less the same level at the end of March. Thank you very much. And I leave back to Johan to conclude.

Thank you, Anders. Great presentation. And we have the slide with our financial targets. And as you probably all know by this time now, our financial target is to have an annual growth of about 10%, operating margin above 10% and a return on operating capital in the -- or in between 15% to 20%. And then if we look at these 3 targets with a rolling 12 months mindset, growth the last 12 months was 16%; EBIT margin rolling 12 months that was 15.5%; and the return on operating capital, I'm happy to report was 15.5% for the rolling 12 months. So we're very happy with that performance, and I would like to thank all colleagues within Latour for this really, really great performance. And I think that we are fulfilling all of our 3 financial targets during a period rolling 12 months, then looking back with full pandemic during that time. I think that merits a comment of strong performance. So thanks, everybody, for contributing. And then we have the last slide here. International growth with great potential. As co-founders and I have said now, all in all, a very strong first half year for Latour. Latour is a long-term sustainable investment company. Our long-term ambition is not changing, is to continue to grow and to become more and more international, even though the pandemic has been very tough and there are some short-term disruptions. We are still investing in the long-term growth ambitions for the group, and that's very important. And as you can see on the map here, 80% is in Europe, 7% in Asia and 13% in North America. So there is a lot of room for growth, I would say, everywhere, both in Asia and in the Americas but also in Europe going forward. And our financial strength enables us to continue investing in our existing holdings, add-on acquisitions and new holdings. And we continue with all long-term initiatives in our companies as before, and we act with a long-term forward-looking view going forward. So thank you so much. That's the presentation from Anders and myself. And I think if we go to the next slide, it's the Q&A slide. And there, we open up for questions.

[Operator Instructions] Our first question is from Joachim Gunell of DNB Markets.

So a couple of questions from me. We can perhaps start off with the financial targets that you alluded to, Johan, that you have clearly outperformed as recently. I know these are over a cycle. But still, I mean, given that these were communicated already prior to, I mean, Caljan being a part of the industrial operations and with that, call it in growth outlook and from a profitability side, would it be fair to perhaps at least update the profitability target for the industrial operations going forward? Any comments on that?

Thanks, Joachim, for your question. And let's see if Anders wants to add to this, but we have no plans to update our financial targets at this time. And we're very happy, as I said, that we have overshot them during this period, but we have no such intention to change the financial targets at this time. You want to add, Anders, to that?

Yes. And I think we have communicated many times before that this is more or less qualification targets, as minimum targets. It's not the target that we should deal with our EBIT. So we have so many different companies. And of course, we have a much higher targets for those companies that have the ability to be much above, but some have the ability to do 25 to 30 and some 15 to 20 and some 20 to 25. So it's not so easy. It's more -- this is actually more important for us when we do acquisitions. We shouldn't acquire companies that cannot do more than 10.