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

Ladies and gentlemen, welcome to Investment AB Latour's Q2 2022 report. [Operator Instructions] Today, I'm pleased to present Johan Hjertonsson President and CEO; and Anders Morck, CFO. Speakers, please begin.

Thank you, Johan Hjertonsson speaking. Welcome, everybody, to the presentation of the second quarter report for Investment AB Latour. I'm here today together with our CFO, Anders Morck. I will start and then later on, I will hand over to Anders. So if we could take the first slide, please. As you can see, the group structure is unchanged from last quarter. We believe we had a second -- good second quarter despite geopolitical turbulences and the lingering effects of COVID-19. We think demand remains at a high level and our invoicing is strong. So a strong top line. We had a record-high operating profit in absolute numbers -- in absolute figures. This said, we are alert to signs of change in demand and are prepared to adjust quickly, which we have done before with great success, I would like to underline. I would also like to point out that sustainability is still a key factor for us within Latour. And during the quarter, we established a framework for green financing during the quarter, as I said. And that's an exciting next step for us to bring our sustainability thinking into our financing. And we also, in the quarter, issued green bonds in the market with great success. So we're very happy for that. So next slide, please. And then I'd like to comment highlights on our investment portfolio. There's no change within the investment portfolio compared to previous quarters. As you all -- I'm sure you all know, there's been a broad decline in the stock market affected by the earlier mentioned geopolitical uncertainties. Our investment portfolio was down 1/3, actually, quite precisely, 33.3%. And the SIXRX was down the same period, 27.9%. Until yesterday, however, the portfolio value has increased somewhat from low level at the half year -- from the half year to SEK 70.9 billion and the total return amounts ended to minus 27.1% so far this year. And the SIXRX is down minus 22.4% during the same time until yesterday, that said. Our holdings development, I think overall gross -- cost increases and component efficiencies affect all holdings, all holdings gross margins on short term in various degrees, I should say, between the [ 10 ] companies. But you could also say that the demand remains strong all over the line and almost all companies report a positive development during the quarter. Almost all of our listed holding has reported at this time, not all of them, and almost all of them. Acquisition activities are high among the companies in the investment portfolio, I'd like to point out that Alimak acquired Tractel which is a large acquisition for Alimak and Latour has committed to its pro rata share of the subsequent new share issue in Alimak that will take place this fall. So Latour is very much behind this deal, and we think it makes a lot of great industrial logic for Alimak going forward. Next page, please. And then I'd like to comment on our wholly-owned operations. Satisfying second quarter, as I said at the start. Continued strong underlying demand. I would like to underline growth in order intake, 1% organic. That said, should be compared to a very strong organic growth in quarter 2 of last year and sales grew 6% organically. We have a very high order book, which is a good start for the top line or the invoicing in the coming months for the rest of the year. Good volumes, but with lower margins. And that is, I think you hear that in very many companies right now. So good volumes, but with lower margins. And that is due to supply chain disruptions, higher raw materials and transportation costs. We proud ourselves to keep a very high level of service to our customers, and that's very important for us, and we believe it's one of our key competitive advantages. So we'd rather take higher cost to serve in order to have very well-served customers. That's important for us. Therefore, the operating profit, the total growth was 8% to SEK 812 million in EBIT, which in absolute numbers is a record high quarter for Latour. And the EBIT margin, I would say, considering all of these headwinds I just mentioned, on 14.6% is a very nice and healthy EBIT margin. However, last year, the EBIT margin was 15.9%. As we usually say, but it's good to repeat, we continue to invest in our holdings with a forward-looking view. So that is in R&D and in marketing, in sales. Okay. Having said that, I'd like to comment on acquisitions in the wholly-owned operations. Wholly within brackets, 1 finalized transaction, during the quarter, but we have many ongoing discussions. However, we believe that the seller's expectations and the buyer's expectations are not on the same level at the moment. Since we are a buyer, we have a lower expectations on pricing than many sellers at the moment. So during the quarter, as we have already announced, Swegon acquired Barcol-Air. Barcol-air is a leading supplier of radiant ceiling systems, headquartered in Switzerland and production in Germany with a net sales of EUR 37 million and 90 employees. And yesterday, we communicated that we are going to sign an agreement to acquire Swedish ABC Ventilation; or in Swedish, ABC Ventilationsprodukter. That will complement Swegon's product range to include roof hoods, louvres, and fire and some other products. Excuse me. And earlier this year, in Q1, we acquired Telesteps, to Hultafors, Consens to Bemsiq and Esse-Ti to Latour Industries and PHS Logistiktechnik to Caljan. All in all, so far this year, we have concluded 6 transactions and that adds about SEK 700 million to our top line for the group. So having said that, and I can maybe go and get a glass of water. And during that time, I will hand over to Anders Morck, over to you, Anders.

Thank you so much, Johan, and we turn to the first business area, turn page, which then is Bemsiq. And as you can see, Bemsiq has increased turnover a lot. There has been a continued very strong underlying demand in this growing market. The total growth is actually 61%. This is, however, to a large extent, explained by acquisitions, but it's also an excellent organic growth. In orders, organic growth was 23%, and net sales grew by 18%, which, of course, is a very satisfying and very strong figures. Lack of components is a challenge also here, but it handled very well and so are also the pricing issues. So you can see the profitability increased with a very good operating margin of 22.8%, which is even higher than last year, 21.4%. So very well done, and we go to the next page and come to Caljan. And Caljan also continued its very strong underlying demand. So the order book is now on a new record level again. It has been on a record level for a long time. So it continued to increase. And the order book is now EUR 193 million, which you can see is even more than 1 year's turnover in this company. So the net sales is also developing positive, and it's significantly above last year. And as you can see, net sales grew by 48% to EUR 53 million. The main challenge surprised them, also here, supply chain disruptions. We still can keep a very high service level to the customers. even though these problems and some of the delays are actually explained by that the customer cannot take the goods that is supposed to be delivered. Despite all challenges, operating profit more than doubled to EUR 13.6 million with a margin of 25.7%, also very, very good. And we have said it before, we continue to invest in Caljan. We have the latest investment now is an establishment of the new factory in Germany. And of course, growing this much also means many, many recruitments, which, of course, is heavy work for the management in Caljan. Well done also here. So we go to the next page, which will be Hultafors Group. And as you can see, total net sales for Hultafors grew by 10% in the quarter. This is actually mainly due to acquisition. And compared to a very, very strong last year's quarter for Q2, actually resulting in a slightly negative organic growth of minus 2%. Hultafors has also supply chain challenges in many dimension. Transportation challenges, for example, and the currency development with a weak krona and a very, very strong U.S. dollar. And together with that, also increased prices on raw material. This, of course, has a negative effect on profit. Price increases are made to meet this. They have come into force and will do even more in the coming quarters. But all in all, the operating profit decreased for Hultafors to SEK 236 million with a margin of 14.6%, and this is then compared to a very, very strong quarter last year where the operating margin was 18%. So considering that, I think this year's result is also quite strong. But you tend to forget that the previous success is taken for given and you expect the companies always to improve. So we think it's a very good result this year as well for us. Yes. And we go to Latour Industries. And Latour Industries have had a strong underlying demand. The organic growth in orders was 17%. The total growth in net sales was 28% including 1 acquisition and the net sales growth organically by 10%. Well, attempt to repeat myself. So we have here increased cost for raw material. We have a problem with transportation, increased energy costs. And of course, these have short-term effects on profit. But even though you can see that the profit level actually increased for Latour Industries. I think EBIT increased to SEK 90 million compared to SEK 57 million last year, which we think is very good, but we can also repeat, which we have said many times before, this business area build for growth and future profitability. So normally, it is a little bit lower here before the company has become mature, so to say. And the acquisition, again, that continues both with add-ons and to find new platforms. Very well done. So we turn page once again, and we come to Nord-Lock. You can see Nord-Lock has continued strong growth despite the lockdown in China, the Shanghai region during the -- almost the entire quarter, which affected the Chinese market very negatively. So consider during that, the net sales growth of 10% organically must be considered very, very strong. So the negative development in China is well compensated by growth in Europe and Americas. And the operating result increased to SEK 112 million corresponding to an operating margin of almost 27%. Well done in Nord-Lock. So -- and then we turn page again and look at the final business areas, Swegon. You can see the order intake here grew by 9% organically, and the order backlog here is once again on a record level. The net sales grew in total by 6% but organically more or less on the same level as last year. And net sales and margins are negatively affected by quite severe disruptions, we must say, in the supply chain especially in the production of air handling units and cooling and heating. The situation is somewhat more stable now during the end of the quarter, but the issue still remains to some extent. And all in all, this leads to quite severe effect on the operating result, which decreased to SEK 154 million with a relatively low margin of 9.3%, but then depending on all these severe challenges. Well, Johan said it before, we are going to acquire Barcol-Air. So I don't have to measure that once again. And I think we leave it there and we go to the net asset value on the next page. And the net asset value decreased by 25% during the half year to SEK 158 per share. This can be compared with the share price of SEK 202, which means that there was a premium to our net asset value of 28% at that time. And we tend to repeat that our way of calculating the net asset value is only an indication of a prudent view of the value of our companies. Yesterday, the net asset value had increased to SEK 169, and the share price was SEK 227 so that gives a premium of 34%. Our total net debt increased during the quarter from SEK 8.6 billion to SEK 9.9 billion and this corresponds to about 9% of the market value of our investments. So it's still on a fairly low level. And you can also see that at the end of the quarter, the market value of our investment was at a very low level. So this is a sign of our resilience against weak market conditions as well. So thank you so much. And now I hope you found the water, Johan, so I can give the word back to you.

Thank you, Anders. Had a glass of water. So that's my voice is stronger this time. Financial targets. I'd like to comment on those. As you all know, our financial target is to grow more than 10% per year with an operating margin of about 10% and the return on operating capital in between 15% to 20%. So during -- so how have we done so during the last 12 months? We have grown by 24%. Our EBIT margin has been 14% in the last 4 quarters and the return on operating capital has been 15.4%. So we are on target, on all the free targets. So we're very proud of that. And let's remind ourselves, the operating margin of 10% is a minimum target for Latour companies, both wholly-owned and listed. So it's a strong performance, and we're very proud of that as such in these difficult times. Next slide, please. And as we usually do, we comment on our net sales outside the Nordic area. Latour is a long-term sustainable investment company with financial strengths that enable us to continue investing in existing and new holding despite the short-term market slowdowns or disruptions. Our long-term ambition is to grow and that is not changing. We are delivering on the growth targets, but a large portion of potential remains. If you can see, 79% of our sales today is in Europe, 15% in Americas and 6% in Asia. And as you can also see on the slide, in 2015, we had about half of our sales in the Nordic countries. And 2022, we had 67% of our sales outside the Nordic countries. So we are growing quite heavily on the international arena, but there's a huge potential left. We continue with all long-term initiatives in our companies and we act with a forward-looking view, as I've said, and also, just to repeat, we are monitoring the macroeconomic development closely and are well prepared to act and react to changes that will affect us going forward. Having said that, Anders and myself would like to thank you for listening on the presentation part, and then we open up for Q&A.

[Operator Instructions] The first question comes from the line of Aurore Tigerschiöld from DNB Markets.

Thank you, operator. And hello, Johan and Anders. Thank you for the presentation and taking my questions. I have 2. So my first question with regards to that we have been seeing across most industries, that is an inventory buildup that boost orders booked in 2021 and 2022 across several steps across value chain to secure delivery capabilities. On a broader level, and we can stick to industrial operations, if you want to, what's your view on the risks that this can pose to order books for H2 2022 and 2023?

Okay. Should we answer that and then you take your second question, Aurore?

Yes.

Okay. Let's do it that way. Anders, do you want to like to start to comment on Aurore's inventory question?