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

Welcome to Latour Year-End Report 2022 presentation. [Operator Instructions] Now I will hand the conference over to the speakers. CEO, Johan Hjertonsson; and CFO, Anders Morck. Please go ahead.

Hi. Welcome to our conference for the full year and the Q4 report for Investment AB Latour. At my side here, I also have Anders Morck. So welcome, as I said, everybody. If we start with the first slide here. Our overall group structure is unchanged from the last quarter. So no changes there. It was a good end to the year despite the declining economic climate and the global turbulence. We'll come back to that more later. There's been a high pressure on our organizations that handle a variety of challenges, cost inflation, disturbances in supply chain, war in Europe, et cetera, et cetera. All levels in the organizations are working hard, and we're handling the challenges very well, I would like to say. And this is resulting in, for our wholly owned business, in the best quarter so far in the absolute figures. Earlier this week, we revised our financial targets. That's been communicated earlier this week. Our 10% EBIT target has played out its role and we have raised that to a minimum of 15%, measured as an average target for the whole group, which caters for a diverse portfolio of companies that we have. And many of our businesses performed well above that target. But we'll come back to that little bit more later in the conference. So if we go into the next slide. This is a new slide for those of you that have followed these earnings reports earlier. And here, I would like to comment our 10 listed companies and focus a little bit more on the underlying profit development. The picture illustrates the holdings profit development 10 years back, which clearly has been quite positive, as you can see. A majority of our holding has grown with double digits and maintain the profitability during these years. We do own quality companies who have the ability to grow and win market shares in both booms and recessions. Our holdings development in 2022 has in general been good. Some of them are very good, I'd like to highlight. However, the profit development during 2022 has also been reflected in the share price development, which you see on the next slide -- has not been reflected, as you will see on the next slide. Hence, I think it's valuable to comment and highlight the actual very positive journey that this company has made over the last year. And share prices, they vary a lot over time and not -- or there's not always fully correlated line to profit development and the share price development. And acquisition-wise, the activities has been high in the listed portfolio. During 2022, a number of acquisitions was included. One -- large one to mention is Securitas entered into the acquisition of Stanley Security in July and thereafter did a rights issue to finance that acquisition. And Latour participated with SEK 1 billion. And Alimak entered into the acquisition of Tractel in November, and we are going to participate in the following rights issue during Q1, which was part of the financing for that acquisition. And also, this Wednesday, CTEK announced its need for a rights issue of SEK 350 million. We are, as a responsible long-term owner committed -- committing our part in the right issue, which corresponds to SEK 108 million. And we have also -- we're also guaranteeing the remainder of that rights issue should the rights issue not be fully subscribed. And then we can go into the next slide and with just -- with what I just commented one should look at this slide. There's no change within the listed portfolio, other than we participated in the Securitas rights issue, as I just said. This was a broad decline in the stock market during the year, affected by the instable economic climate and unsecured future outlooks that we had last year. And the investment portfolio was down almost 35% and the SIXRX was down almost 22% during that time period. Until yesterday, the portfolio value increased somewhat, and at the end of December, the value was SEK 74.9 billion, but the total return so far this year is 16.7% whereas the SIXRX benchmark index is 10.3%. And that's -- those numbers is as of yesterday. And then we can go to the next slide, please. And now, I'd like to comment on our wholly-owned business. We had a very strong end of the year, actually the best quarter result ever in absolute figures so far. Continued underlying demand in most markets, I would like to point out. Supply chain issues remain, but there's a slightly better situation than earlier in the year. And our top line, the invoicing, increased 22% in the quarter. The general cost inflation and increasing energy prices put short-term pressure on our margins. Several price increases have been made. And combined with high volumes with good cost control, the quarter result is growing by 29% quarter-over-quarter, Q4 to Q4 to SEK 329 million (sic) SEK 929 million with a margin of 14.5% in the quarter compared to 13.8% in the quarter 4 last year. And if I comment a little bit on the full year, of course, it's very much marked by the war in Ukraine, here in Europe, and the overall geopolitical turbulence. And however, with these headwinds, I'm very proud to say that our operations have developed very positively. Total growth of order intake of 15% and net sales of 24%. And our operating profit total grow 20% to SEK 3,194 million with an EBIT margin of 14.2% compared to 14.6% the year before. We continue to invest in our holdings with a forward-looking view to continue to drive future growth and we are investing heavily in product development and marketing and sales activities. We also continue to drive and invest, increase -- increasing the networking between our wholly owned companies and also our listed companies. We are very well positioned with high-quality earnings and engaged employees. We're proud of the result, and we're very happy and looking forward going forward. And then I'd like to comment on the acquisitions for 2022. Actually, this time, there's been so many acquisitions. I won't read out a full description of every acquisitions we've done. However, I have a couple of comments. The total annualized top line contribution is SEK 1.4 billion from these acquisitions. And also in the beginning of January, we closed -- which is after the reporting period, we closed another acquisition for Swegon with Dalair in the U.K. Two of these acquisitions last year are in North America. So I would say both organically and through M&A, we are increasing and strengthening our foothold in the North American market. And I think -- so overall, we have finalized 11 transactions during the year. And that's, as I said, added almost close to SEK 1.5 billion in net sales. And I think with that, I will hand over to Mr. Anders Morck. So over to you.

Thank you so much, Johan. And I hope you don't mind me making a short correction because you actually said that our profit grew to SEK 329 million during the quarter, but it's actually SEK 600 million more. So it grew by 29% to SEK 929 million. Sorry for that, Johan. But I thought it was a good thing to correct.

Very nice. Thank you...

Yes, sorry. And now we start talking about Bemsiq, the first business area. And you can see on the picture. On the right side of this picture, you have the last quarter, but I think it's important to see the long-term development. And then you look on the left part of the picture instead. And as you can see, it has been quite impressive during a few years for Bemsiq. The quarter had a strong underlying demand again in a growing market. The total growth was 20%, where 10% were organic. The lack of components in the business is still an issue, but it's still handled very well. And so, it's also the price management done by the management and in the companies within Bemsiq. The strong growth also means that the company, Bemsiq, and their subsidiaries have to employ a lot of new people, and so they do. We put a lot of efforts into product development and also in sales, which will build a good basis for future growth, but it will also increase the cost base going forward, of course. All in all, a fantastic year for Bemsiq. And as you see on the picture then, as I mentioned, a strong development now for several years. And finally, as a remark, Johan mentioned an acquisition of Dent before. It was a lot of work done by the team within Bemsiq at that time, and I know it was finalized more or less during Christmas. A lot of blood, sweat and tears by the people doing this job. So thank you very much. All in all, very well done. We go to the next business area, which is Caljan. And also, here, you can see a fantastic long-term development for several years now. But after a long period of very high order intake, we now see lower order intake. And this is very much due to that customers within e-commerce, make fewer investments than they did during the COVID period, which at that time meant extremely high growth. However, the order book is still very high, which cover this year, 2023, for a good part. So it looks good. The net sales, as you can see, has developed very much in the positive direction during the year and grew by 34%, sorry. And also during 2021, the growth was very high. So the result for Caljan is very, very good as a consequence of that. So very well done, all people working in and for Caljan. Let's go for Hultafors Group. The net sales for Hultafors Group grew by 14% in the quarter. But also, on this picture, I think you should look on the long-term development, which is really impressing, I must say. Currency fluctuation has been a challenge for Hultafors. It both affects net sales positively, but a large base of the cost base is dominated in the U.S. dollar, which has been very strong during 2022. But all in all, price management has been handled very well and so, also the cost control within the group. All in all, the profit for the quarter increased to SEK 316 million, corresponding to a margin of 16.8%. And for those of you that already have read the full report on Page 9, you now can note that Hultafors pro forma-wise actually reached SEK 1 billion in EBIT exactly. So that's a fantastic achievement if we look back a few years. Johan mentioned before that we made an acquisition in U.S. of Martinez Tool company. Welcome to our group. And all in all, Martin and team, very well done during 2022. Let's go to Latour Industries. You can see here, good underlying demand. Their order intake grew by 7% during the quarter. Also strong net sales, total growth of 23%, including acquisitions, 9% organically growth during the quarter. So quite a positive development on top line. However, for small companies, increased cost for raw material, transportation and energy, and also these problems within the supply chain makes a tougher environments for the companies within Latour industries. But here, as we have said many times before, the profitability can be much higher, and we still believe it will be going forward in the future. We build for future profitability and growth. So that's what we had to say about Latour Industries and let's go for the next business area, which is Nord-Lock. The underlying demand increased actually during the quarter, totaling a growth in order intake of 21% and 9% organic growth in sales. As you know, this -- the situation for Nord-Lock is that they have had a relatively large exposure to China, and the Chinese market has been a problem during both 2021 and 2022. But we saw a slight recovery coming back during the end of the fourth quarter this year. In total, relatively strong net sales, total growth of 17% and organically by 6%. Operating results, however, negatively affected by the slow Chinese market, and it amounted to SEK 74 million, the same level as last year with a margin of 17.9%. Considering the slowdown in the Chinese market, we think it was overall a very good year for Nord-Lock. Well done, Fredrik and team. And let's go to the last business area then, which is Swegon. And here, you can see that Swegon had a very, very strong quarter with 5% organic growth in order intake and 20% organic growth in net sales. For those of you that have followed these results before, you know that Swegon had major problems in the second -- end of the second quarter due to the supply chain issues. Now we can see that it has been a remarkable recovery made by Swegon. So the achievements we now see is truly remarkable. The operating result for the quarter increased to SEK 299 million, which is a record level with a margin of 14.1%. So very, very well done under the circumstances. And let's go for the net asset value. We leave the business areas. And as you can see, the net asset value amounted to SEK 159 at the end of the year. So it decreased from -- by 25% during 2022. And this is very much a consequence of the share price development of the listed portfolio, of course, that we talked about before. The share price for Latour at the end of December was SEK 197 and that would mean a premium to our net asset value of 24%. Yesterday, the net asset value had increased to SEK 176 per share. And the share price closed at SEK 226, giving a premium to about -- of about 28%. Our net debt situation increased during the quarter to SEK 11.1 billion. And this was, of course, due to the acquisitions we made, high acquisition activity in the wholly owned operations and also the Securitas rights issue. And now the net debt corresponds to about 10% of the market value of our investments, which still is on a reasonable level. Okay. That's what I had to say, Johan. So back to you.

Thank you, Anders. And we could go into the next slide. I'd like to comment on the financial targets for 2022, which is an annual growth of more than 10%, operating margin of more than 10% and a return on operating capital, 15% to 20%. And if we kind of lay out our results according to those targets during the last 12 months, which is last year, we had a growth of 23.7%, we had an EBIT margin of 14.1% and a return on operating capital of 15.5%. So we have delivered on all of these three targets. Great performance, and we're very proud as a team. Thank you all team members for this great achievement. We have had a very nice trajectory over the last 10 years and -- moving from around 10% to closer to 15%. And in 2022, we ended up at 14.1%, as we said earlier. And therefore, it was time to revise the financial targets, as I said in the beginning of this call. So if we go to the next slide, you see the new revised financial targets, and we have revised the operating margin target from 10% to more than 15%, and we have clarified the return on operating capital to be more than 15%. And hence, it's no problem if you're a 25% or higher. So just more than 15%. When it comes to the growth target that remains 10% and of course, it's a combination of acquisition and organic growth. But we would like to point out that the organic growth shall be prioritized going forward. As of today, the new financial targets also apply over a business cycle. I'd like to emphasize that we fully support all of our existing holdings. And going forward, we will keep and we will make assessments based all the 3 financial targets combined going forward. So the next slide then, please. And there, you can see on the dividend, good development and a strong financial position gives us the possibility to increase the dividend, and the Board of Directors of Latour proposes an increased dividend to SEK 3.7 per share, which corresponds to an increase of 12% compared to last year. The proposal is in line with our dividend policy. And I think now we can show a strong historic trend of increased dividends. And one should also read the increased dividend as a sign of confidence for the future going forward for us in Investment AB Latour. And then we go into the last slide. As you can see, we are delivering on our growth target, both organically and acquired growth. And I would like to sum up. We had a great financial -- we have a great financial strength, and we'll continue to invest in new holdings to enable future growth also going forward. As you can see on this slide, it's a big world and the potential is large. And lastly, I'd like to say we are closely monitoring the macroeconomic development and are always prepared to act and react to changes that affects us. And lastly -- really lastly, I'd like to say, do not forget, we have been living in kind of a crisis mode since 2020, we could say first 2 years of pandemic and now the war in Ukraine, I think it's important to really put our employees first. Many of us -- many of our employees have worked under a high stress level during quite a long time. So it's important we take care of each other and think closely about each other. And that's actually #1. And let's -- I ask you all to really do that when we move forward. So thank you very much for listening in, and that opens up for the Q&A session. And Anders and I are ready to take your comments and questions. Thank you.

[Operator Instructions] The next question comes from Joachim Gunell from DNB Markets.

So I have 3 questions for you. Starting off here where you and Johan, with regards to how a more, call it, positive outlook is reflected in backward raised DPS here. Can you just say anything about -- to what extent you believe that the visibility here is better into, call it, the early parts of 2023 than you would have, say, 2, 3 quarters ago? And also we saw a slight decline organically in the order momentum. What, in particular, that pertains to, if there are any particular business area or in addition to Caljan that you would like to highlight or any geographical regions?

Thank you very much, Joachim. I'll take on the dividend and how we see kind of forward-looking. And then maybe, Anders, you can pick up. No, I think it's important to remind our -- I think I'm more saying, we stand strong. We have very good businesses. We have good teams in place in our businesses. And -- but to judge the future going forward, it's very difficult at this time. So it's more a reflection that we feel we have the house in order, and we are ready to react and move forward. Having said that, I'm positively surprised that the market demand is holding up as well as it is doing. I think I end there. Anders, you can add to that also going to Joachim's other question.

No. But I totally agree to you. But of course, it's -- the macroeconomic climate is not us, so to say. We will be affected if it will get worse and -- but, so far, last year was very good, and we didn't see too many problems.

Understood. And can you say anything just about the organic, call it, momentum? Obviously, you're facing quite high comparables as well. But is there in the order intake, anything besides Caljan that showed negative year-over-year development?

Anders, would you like to start?

We have so many business areas. And of course, the picture looks different for different companies. But Bemsiq, I would say, had the best development when it comes to order intake. But also it looks quite good for most of the companies. But it's a little bit difficult to interpret order intake since it's for a long time, starting already in '21 where we had high order intake. And as you have seen, there has been a spread between order intake and net sales. So to some extent, in the long run, this spread will have to normalize and the order intake will have to come out in net sales. So -- and it could be when this thing normalizes, so to say that order intake will temporarily become lower because of that. But then we have the order backlog to deliver still.