Nederman Holding AB (publ) (NMAN) Earnings Call Transcript & Summary

Welcome to the Nederman Holding Q2 presentation for 2024. During the questions-and-answer session, [Operator Instructions]. Now I will hand the conference over to CFO, Matthew Cusick. Please go ahead.

Good morning, everybody, and welcome to Nederman's Interim Report for Quarter 2 of 2024. If I start by dispelling maybe any rumors, there may be Sven is not here today. Unfortunately, he had to attend a private event of funeral, but like I said, that will probably have been the first question where is Sven and I've put that one away. If we move on to the Quarter 2, fortunately, for me, this is a rather good report to presenting as we see it. This is the most -- the second most profitable quarter ever in the Nederman Group history. Unfortunately, for this presentation, the Quarter 2 last year was actually the most profitable quarter in the year, so some very tough comparative figures, but we will come back to that. Quarter 2 has good profitability development, higher margins overall and strengthened position for the Nederman Group. We -- in the quarter, we have continued to focus on the development of the range, we've made some new product releases, which I will come back to and we believe we are strengthening our leading position in what is an uncertain macro environment. Solid profitability in the second quarter, stable cash flow, advanced positions in some growing industries around the world, and that is something that we take out as a clear positive going forward. Growing service business with a continued positive development in all 3 of the divisions operate -- all 4 of the division's operations in that respect and that is reflected, not least in the margin improvement that we see this quarter. If I move on to the key financials, starting on Slide 4 with orders received. Orders received for the group as a whole were down. That's quite clearly in the Process Technology division, which we know is inherently volatile with the large project business making up the vast majority of the majority of the sales in that division. The other 3 divisions are improved -- are rather solid on the order intake. Nevertheless, that doesn't compensate for the downturn versus the extremely stronger Quarter 2 last year, it must be said. Currency-neutral order intake is 8.9% down in Quarter 2 this year quarter-on-quarter. Organic fee, that's 9.9%. Year-to-date, SEK 2.934 billion versus just over SEK 3.505 billion last year, currency-neutral, 4.1%, down and organically 5.5% for the year-to-date. Like I say, a very different picture between the divisions, which we will come back to later on. Moving on to Slide 5. Sales clearly decreased during the quarter versus, again, what I must point out was a record quarter for sales in Quarter 2 2023. SEK 1.67 billion is down from SEK 1.63 billion in Quarter 2 last year. This is Process Technology, again, accounting for the entire drop there. Currency-neutral, 10.6%, down organically 11.9% down. Year-to-date, we're at SEK 2.864 billion after half year now versus SEK 3.113 billion at this point last year. Currency neutral 8.3% down and organically 9.6%, down. What we can see on these charts as well on the bottom left and right of Slide #5 is that the currency impact has been negligible so far this year. We have seen at least over the first 6 months of the year in total, a relatively stable Swedish krone even if it has fluctuated somewhat during the first 6 months of the year. Profitability, like I already mentioned now on Slide 6, this is the second most profitable quarter ever, and that is by quite some way and we are rather pleased with this outcome. It is lower than Quarter 2 last year, like I mentioned, and it is down to the volume -- the lower volumes in Process Technology. For Quarter 2, adjusted EBITDA, SEK 188 million, just below the SEK195 million that we did in Quarter 2 last year. Adjusted EBITA margin now at 12.8% versus 12.0%. So going in the right direction, and I'll come into some explanations of that via the different divisions as we move on today. Profit after tax, SEK 97 million versus SEK 100 million in Quarter 2 last year, gives earnings per share of SEK 277 versus SEK 286 million last year. Year-to-date EBITDA almost exactly at the same level as last year, SEK 366 million versus SEK 368 million. The margin clearly improved 12.6% EBITDA margin for the first 6 months of this year versus 11.8% at the same point last year. Profit after tax, SEK 187 million versus SEK 178 million last year. Remember, last year, we had a restructuring that cost approximately SEK 20 million in China that did impact things. That is one of -- the outcome of that restructuring is one reason for the improving EBITDA margin we now see. Earnings per share, SEK 5.34 for the first 6 months is ahead of the SEK 5.08 for the first 6 months of 2023. When we look at the chart, like I say, it's quite clear that this is the second most profitable quarter we've ever seen in both in Swedish krona and the most profitable when it comes to net margin. Cash flow and net debt, stable cash flow position, a dividend paid out in the year of SEK 139 million that was SEK 7 million higher than last year. That was paid in May, which obviously impacts the net debt and as always, Quarter 2 has an increase in debt following the dividend payout. What we can say on the cash flow from operating activities is with lower order intake in Process Technology division we do also have fewer down payments received on large projects, and that impacts somewhat negatively on the cash flow from operations. Nevertheless, for the year-to-date, SEK 170 million is still rather strong and then if we look at the rolling 4 quarters, cash flow from operating activities for Nederman Group on the left side there, we are still over the SEK 500 million mark. Net debt, like I mentioned, is increased somewhat from the same point last year, given that we have made rather significant investments in product development and also in some investments in production efficiency in several of our plants around the world. If we then dive down a little deeper and go into the different divisions within the group, extraction and filtration technology. How is the development for them in the quarter has been one where we have seen a higher number of larger orders received. They count large orders as greater than SEK 5 million in individual side, record number of large orders received. But the activity has dampened on what they call midsized orders between SEK 1 million and SEK 5 million. There's been significantly fewer of those and there is some rising economic certainty in certain markets that we cannot get away from that. But increased R&D expenses with several product launches has meant that we've been able to perform rather well on the market here. We had some one-off costs as RoboVent moved their entire operations onto one new site. Good growth in service sales. This is a positive, and this is part of the strategy for the group as a whole, as we know, but good to see the results of that from [ EFT ]. Increased sales volumes on products is also a positive, but this improved sales mix with more service and all product sales didn't fully offset the increase in expenses and one-off costs, for example, from RoboVent that we saw. If we take it region by region. In EMEA, [ EFT ] saw growth in orders and sales. The growth was largely 4 major orders came in EMEA, and that's healthy and that impacts things positively. Well, there is still lower activity in some markets. It's dampened -- we can -- it's the usual companies and countries and it's Germany, U.K. and perhaps some other countries that work closely with Germany as well. Americas reduced order intake for Americas as a whole. However, USA saw strong growth with major orders and rather solid base business in the U.S. as well, so a slightly different picture versus Europe. APAC had a recovery versus recent quarters, and this is something that's positive. It was behind Q2 last year, we're more concerned about how they've been performing versus recent quarters. 2 major orders secured in the quarter, one in China, one in Australia and a little bit more activity and a little bit more traction, clearly in China now. Extraction and filtration technology, one of their key activities been a number of product launches, low-back plug and play, MCP-Go, Smart filter was launched, PAK-M, which is a hvac filter for the dust and fume extraction -- dust and fume extraction for extraction and filtration. This was -- this is important for the Nederman Group as a whole and this is where we feel we're getting some traction is the newer energy-efficient products and solutions and filters. They are attracting interest on the market, it's giving better -- we are able to -- how can I say, we are able to give our sales organization, very good material to sell to customers over total cost of ownership. We're never the cheapest. Our solutions are often the most expensive in the initial cost but when it comes to energy efficiency, we're clearly better than most -- almost all of the competition. And this development that we're doing in our size on a generally very fragmented market means we're able to invest more and more, and this is giving us some traction that others are not having. We've launched the future of welding concept, it's related to latest ISO standards and requirements. RoboVent, like we mentioned, they moved their entire production and offices and the distribution as well from the 2 sites into 1 during the quarter, that did come with some one-off costs and not least double rental costs, but it was a full operational move, and that impacted somewhat negatively in the quarter. And these digital solutions for fume extraction presented at 2 health and safety conferences in the year. Again, new products, new development and interesting for customers. When it comes to the financials, orders received, currency neutral were up 2% in Quarter 2, very slightly down organically 0.5%, sales 3.4% up in the quarter and flat organically. Adjusted EBITDA down from SEK 84.5 million to SEK 78.0, the one-off costs from the move of RoboVent and increased R&D expenses are the 2 biggest factors there on the profit reduction. When we look year-to-date, 2.3% growth in orders received, currency-neutral and 3.3% growth in sales and profit, 14.1% EBITDA margin versus 14% gives SEK 181 million in adjusted EBITDA versus SEK 173 million at the same point last year. So improvement for the division for the first 6 months of the year is clear. Process Technology, where I suspect the most questions might come this quarter from those listening, order growth clearly down, only 2 major orders were booked for the Process Technology division. Lower sales, yes, but the most important thing there for us perhaps is that's in line with our current expectations and the budget that they have. Remember, Process Technology went into 2024 with a significantly lower order backlog than 2020 -- they went into 2023 with. This is a cyclical business, particularly fiber and textile but other industries as well and significantly more volatile than the other 3 divisions. Stable development of a service continued service clearly improving its share of the division sales, and that's reflected in the EBITDA margin, which is in percentage terms, is a record for the quarter, even if in the Swedish krona, there's a clear reduction there. Improved sales mix, like I said, more profitable projects as well. The Process Technology have a very clear what they call -- refer to their playbook, where we are very careful to select projects with the right margins. If projects are going to drive aftermarket business in the future, which could be profitable for us, then maybe we're willing to take slightly lower margins. But otherwise, projects need to be absolutely on satisfactory levels and without any inherent risk, we have seen competitors to this division who have some rather major problems following significant growth. We are looking for profitable growth, not growth for the sake of it. Process Technology had a small warehouse, which they actually rented out to [ E&ST ] division in Germany. We have sold that during the quarter, and that boosted EBITDA by SEK 6 million. So the 13.3% is slightly artificial, but there's still around 12.5% to beat for the quarter even if you exclude this, so still a record quarter for this division in EBITDA margin. If we move between the business units for Process Technology, Textile of 5 were actually increased versus Quarter 2 of 2023, but that was from a very low level. There's a slight upturn now and perhaps China could be mentioned there that we've been booking slightly more orders. In India, we've been stronger but China has been rather weak. We've now seen some start of a return in activity in China. The capacity utilization at [ spinning ] mills is still rather low, which curbed demand for new equipment there. In foundry and smelters, metal recycling is clearly a driver, all sorts of metals for steel to aluminum lead -- including lead batteries as well. However, orders and sales did decline versus Quarter 2 of 2023. Customized Solutions also orders down and partly reduced because of the mining sector. Key activities, we have a plant in Germany where we've installed a new sand blasting system and the paint line as well. That's been completed during the second quarter. That increases production capacity and lowers costs and transport needs as well. And we have continued the rollout of this energy-efficient and for the fiber and textile market, which we launched late last year. I've actually included one more slide on this division -- one more slide on a slide here, if you see the top right there's chart there, which those of you that have excel sheets and follow Nederman orders and sales on a sustained period of time, we'll probably be -- or we'll be able to work this out for you themselves. But we -- we constantly monitor the backlog for Process Technology division, and this is going back to 2020 and looking at the backlog level and we can see even if backlog is lower than the peaks from the middle of 2022, it is still clearly higher than the troughs that we saw during the COVID time. We're talking double -- more than double the level of the backlog from the pits of the COVID time. So although there is a downturn in Process Technology is a downturn from very high levels, and they still have backlog to deliver out quite significant sales in the second half of this year as well. Moving on to duct and filter technology. Excuse me, I may be able to talk on numbers here for a moment, otherwise Tomas Hagstrom, the head of the division will never forgive me. Sales in the quarter, SEK 410 million versus SEK 644 million is a clear reduction as orders were as well. Adjusted EBITDA, however, SEK 54.4 million is 13.3%. It's a record for Process Technology division. 11.5% last year was very good, but 13.3% is beat and beating that. And for the year-to-date, they are now at 10.7% adjusted EBITDA versus 10.1% at this point last year. So despite a significant drop in sales, they have managed to increase the aftermarket business and increase the profitability on projects to come up with what is for them a rather good or very good EBITDA margin. Sticking with the theme of good EBITDA margins, we then move on to duct and filter technology. In the second quarter, they increased both orders and sales versus Quarter 2 of 2023. Nordfab the forefront with [ Montana ] as well. Several orders, what's perhaps the most pleasing thing, growth segments, battery manufacturing, food and green energy have all of the good order intake there. Profitability, extremely good, improved production efficiency, which is giving -- which is this payback from investments that we've been making in the facilities, improved inventory processes, which is also a payback from the investments we've made in expanding the warehouses and improving layouts and such, and that will continue for this division. And then, of course, increased sales volumes, I mean better absorption of fixed overheads as well. In Nordfab, orders received and sales grew versus both Q2 last year and Q1 of this year. Like I mentioned, major orders in battery manufacturing. This Nordfab Now concept with delivery within 24 hours, that's launched in early April, and this is connected to the inventory processes and ensuring that we have the correct articles in stock, high-volume, high movers in order that we are able to dispatch orders very quickly. This accounted for almost 1/5 of the orders in the quarter in Thomasville and, we expect that to increase further. In [ Minardi ], orders were down versus Q2 last year, but historically at high levels, and we saw a pickup in Quarter 2. Orders received in May, that was the second highest ever for a single month so definitely something positive there. Carbon -- steel producers, carbon black are examples of a couple of industries in which orders were received. Key activities. I've mentioned Nordfab the launch of that is absolutely a major thing for the Nordfab ducting organization. BIM Objects, we've now connected up to BIM Objects for Nordfab, and it's been launched for the U.S. and Europe, and it's resulted in a large number of product downloads and we would continue to work with that, and we anticipate that, that should be able to drive further sales volumes. In Australia, profitability is not at a satisfactory level right now, and we have initiated a cost saving program there. It's a rather small part of the business right now. We would like it to be a bigger part, but the first thing to do is ensure that we are making money before we grow the business. Coming on to the financials for Duct Filter Technology. 5% organic currency neutral and organic, it's the same thing in this division, no acquisitions made in the last 12 months. So 5% order intake growth, 8% in sales growth to SEK 236 million in sales in Quarter 2, which gave an EBITDA of SEK 49.4 million, which is a margin of 20.9%. Year-to-date, there -- the order intake slightly, very slightly positive. Sales 3.1% now gives SEK 443 million in sales for the first half of the year, SEK 92 million in adjusted EBITDA versus SEK 83 million last year. So tough comparative figures, which they have managed to beat, and that means 20.8% EBITDA margin for the division for the year to date. Moving on to Slide 11, Monitoring & Control Technology. In the quarter, orders received declined very slightly versus Quarter 2 last year. Hopefully, you remember how extremely good Quarter 1 of this year was the year-to-date growth in orders received for the division is 11.1%, which is in line with where we want to be for this highly profitable division. The substantial order backlog helped with a new quarterly sales record. The backlog is still at a high level, and we can expect rather strong -- we should expect rather strong sales going forward from here. One of the -- the key activities in relation to that is increasing production capacity for NEO Monitors in Norway, for example if we will continue working with that and there will be some layout changes and expansion there. Profitability improved compared with 2024 Quarter 1 and in absolute numbers versus Quarter 2 of last year as well. Higher sales volumes, larger share of portable products, that contributes to the higher margins versus Quarter 1. If we take it region by region for monitoring and control technology, EMEA performed well. Gasmet and NEO Monitors both performed strongly and achieved several major orders in France, U.K. and Switzerland, among other [ laces ]. Sales increased even more Gasmet were very strong in Europe in Quarter 2. We also -- there's not something that's not insignificant here, it's a 5-year service contract was secured for the lowest action chamber of agriculture and service business is important to monitoring and control technology as well. These measurement instruments have an aftermarket, they would require a recalibration, they will require servicing and for example, connecting our Gasmet instruments to our Insight app is enabling us to do some of this service work remotely now, which ought to increase margins further for this division as well. In Asia, sales increased versus Q1 and -- Q1 last year and Q2 of this year -- sorry, the other way around Q1 of this year and Q2 of last year, mainly driven by NEO Monitors, performing very strongly in the region, particularly in China. In Americas, we had somewhat of a decrease overall in the quarter, but that was fewer major project deliveries for NEO Monitors, while Gasmet and [Indiscernible] filter sets were in line with the second quarter of last year. Key activities I mentioned already, the continued investments in NEO Monitors production capacity, those will continue. And we are preparing for the launch of the next generation of insight products in the framework of and under the management of our OTC, our operational technology center. This is important, this is where monitoring and control technologies capabilities on digitalization are combined with the filtration knowledge that process technology division and Extraction & Filtration Technology division have. This is how we are able to launch these digital filter -- these more energy-efficient filters that are giving us a strong position in what is a tough market right now. Briefly on the financials then for Monitoring & Control Technology. Orders received very slightly down in the quarter, 1.6%, down 11.1% year-to-date in currency neutral and organic growth gives SEK 418 million in order intake for the first half of the year. Sales in Quarter 2, SEK 206 million, clearly up 14.9% up versus Quarter 2 of last year. EBITA, SEK 39 million is 18.9% for Quarter 2, an improvement over Quarter 1, as I mentioned. So far this year, then after 6 months, SEK 393 million in sales has led to SEK 67 million in EBITDA, which is on par with where we were at this point last year, 17% EBITDA margin, like I said, we've improved strongly in the second quarter on the margin. We talk about outlook, demand is slightly slower. We cannot get away from that, but we have a good base business and a strong digital range, which we feel an leads to us doing rather well on this current market. Having said that, even if the division -- divisional performance is largely positive there is a risk with interest rates, economic activity, generally -- the general economic environment and the investment appetite, it can impact on the investment decisions and geopolitical uncertainty is never usually a good thing for business and for investments. If we look a little more short term, with our large backlog that we have, we still have a good strong backlog, our ability to increase share of sales in industries also with good structural growth. These recycling industries are one example where battery plants and other -- we take a cautiously positive view on the opportunities for the second half of this year, still. And as we've said for some time, even if the outlook in industry can be dampened by external factors, the long term potentially is clear. In a world where there's growing insight into the damage that poor [Indiscernible] does to people and their demand with leading industrial air filtration range has a key role to play and is -- and we clearly have good possibilities for continued growth. The financial calendar interim report for Quarter 3 is released on the 22nd of October of this year, and the year-end report for 2024 is on the 13th of February 2025, as you know. And with that, I think I can open up for any questions that listeners may have.

If you wish to ask a question, [Operator Instructions]. The next question comes from Lina Blume from Handelsbanken.

Hello, Matthew, and thank you for the presentation and for taking my questions. So my first question is related to orders received and your current order backlog. What is your view of the orders received in the quarter? Are there currently sufficient order backlog to support good growth in the coming quarters or how should we interpret this?

What we can say, the backlog overall, if you -- again, if you've done your math on orders and sales, you probably have done this. The backlog is largely the same level as it was at this point last year. So we're still in a rather strong position. There's a difference in the dynamics between the divisions in that we have a higher portion of the backlog in Extraction & Filtration Technology and Monitoring and Control technology and a lower portion in Process Technology. That bodes well for profitability as the 2 divisions with the higher backlog are typically slightly more profitable than the Process Technology division. When it comes to -- if we're talking growth, I'm not sure that you will see huge growth figures in the coming quarters, but we have got a very strong position still -- or we're in exactly the same position almost as where we were 12 months ago. So you can make what you will of that given what you know about the profitability of the divisions. Process Technology, I was very clear to point out that in this presentation. They have got a lower backlog than they had some time ago, but it is still at rather high levels and we're not at any point near any sort of panicking or any concerns there. This is a cyclical business, and we expect to be able to take market share. And when this comes -- when the investments come back we will be there to take them.

And then it's good to see that you were able to keep stability at a higher level during the quarter. Could you give some color on what is the main contributor to this development? Is it mainly that you were able to maintain a higher share of sales that is on service and aftermarket or is it more to it?

There's a few reasons. The service business growth is perhaps the single -- the single largest one. We've managed to grow the portion of service -- or we've grown service sales in total and that means that the portion of it has grown even more as the solution sales in Process Technology have declined somewhat. Then you can -- if I take it division by division where there are significant changes, Process Technology, clearly more service business. Also the projects that we have, we've had fewer projects in the fiber and textile industry, which typically does have lower margins. So that has helped in that respect from a mix within the division. Then we have a higher portion of Monitoring and Control Technology for the group as a whole, which is clearly strong. And then the final one, and this isn't insignificant is in Duct and Filter Technology largely, but also other divisions. We are investing in our own premises and machine park, and we've looked at the production process in Thomasville, for example, on the ducting in quite a lot of detail, made big investments, and those are paying off now. So a very nice one to be able to say is that in the Thomasville plant, where we produced something 50% of the electricity that we have used in the first 6 months of the year has come from our own solar panels. And that's just -- that's one small example. But there's a lot of factors, but I think I've covered most of them in my answer there.

Super. And regarding the Process Technology division and the profitability reported there, I mean, it's higher compared to last year despite lower sales volumes. Would you say that it would be able to maintain a higher margin also when volumes come back or get an increase of larger orders and increased activity for fiber and textiles lead to lower EBITDA margin going forward?

What can I say there? The division is a significantly division -- different division to what it was some -- a few years ago now. There is this profitability is extremely good on this low margin. We would perhaps like more volume -- I mean shareholders dividends are paid in Swedish krona, not in percentages. But nevertheless, the process technology are generating more cash, they've got a very good return on capital employed still. If they get more project business in, they -- you will likely see some slide in the EBITDA margin from the 12 percentage. They aim -- we have a little line to be 8% to 10% in that division even in periods where there's a heavy load of solution sales. And the solutions as we can say, the margins aren't good why don't we just go for the aftermarket, but U.K. is a chicken and egg so we want to -- the most profitable business we have is the aftermarket, you cannot have that without the Solutions business and the initial sales, of course. They could drop from where they are, but they should know -- not be back down at the sort of 5% mark where they were some years ago. They're clearly somewhere else today.

Super. And then staying on the Process Technology division. You reported higher order received from textile and fiber industries, although from low levels, are you expecting this positive trend to continue going forward in these more traditional industries?