Ratos AB (publ) (RATOB) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Ratos interim report January to June 2020. Today, I am pleased to present Jonas Wiström, CEO; Helene Gustafsson, Head of IR and Press; and CFO Jonas Ågrup. [Operator Instructions] I will now hand the call over to the speakers. Please begin.

Good morning, everyone. And welcome to today's telephone conference where Ratos' CEO, Jonas Wiström; and interim CFO, Jonas Ågrup, will present Ratos' report for the second quarter. After the presentation, a Q&A session will follow. The recorded version of the telephone conference will also be published on our website after the call. With that said, we will start the presentation, turning to Slide 2 and the agenda of today. The presentation will focus on the results development for the second quarter as well as important events in the quarter, the impacts of COVID-19, the performance in companies and finally a summary of the quarter. With that said, I leave the word over to you, Jonas, to present the results.

Thank you, Helene. And good morning, everyone. Let's turn over to Page 3 then. We are actually rather happy here today at Ratos not just because of the weather situation in Stockholm which is excellent, but we're happy of the fact that our positive earnings trend continues and that our company group actually are becoming quite stable. I remember joining my first quarter, 2018. We had 3 companies out of 13 making a better result. Corresponding Q2 of '18 was 5 of 13. And now we have 10 out of 12 doing better results for the quarter and 11 of 12 doing better for the half year, and that also in spite of corona. If we start with net sales. We saw that increase by 2%, ending up on SEK 7.2 billion. The organic growth, however, is 9%, adjusted for currency effects of 5%, 6%. And divestments and acquisitions are about 1%, 2%. Seven of our companies grow their revenue in the second quarter. EBITA. EBITA increased 49% or SEK 344 million. Again, 10 of 12 showed EBITA improvement. Plantasjen increased their EBITA with SEK 182 million during the quarter. So they are, of course, a big contributor but not the only one. I'm really happy to see that our focus on people and operational excellence in our companies continue to generate stronger and stronger results and better EBITA margins in spite of the pandemic. And if we look at the margin development in Q2 year-to-date, rolling last 12 months, it's increasing. If we look at the EBITA for the last 12 months, it's nearly SEK 1.6 billion. Also happy to see, especially in corona times, that the cash flow is improved further due to our earnings, of course, but also an increased focus on working capital. The profit before tax is up to SEK 953 million compared to SEK 514 million last year. And our earnings per share is SEK 2.18 versus SEK 1.28 the previous year. So with that, let's move to Slide 4. The activities had been quite high also in the second quarter. Of course, the transaction market is weaker during a corona quarter, but our strategy remains from what we told you at our Capital Markets Day in November. I'm very happy that we have announced the CEO change in both Plantasjen and HL Display not just because we have 2 strong CEOs recruited. They both comes from the Ratos family. And then Nina Jönsson came to Plantasjen from HL Display, where she's been very successful. And Björn Borgman took over the helm in HL Display; and he has a number of years of experience, [ help ] the position, leading all sales in all markets. We are building a talent pool in the Ratos Group through different processes, including our own academy for businessmanship and leadership belt. So I'm very happy to see these internal recruitments. Diab is a company that has developed very well. I come back to that later on. During the quarter, Diab continued to make investments. Worth to mention is that all are coupled to customer contracts. The China investment is the fifth in a series of investments for production of PET core and -- foam. And the total capacity of PET core will make Diab a global leader in that area. HENT, that disturbed the second quarter last year with down-writings, signed a contract quite some time ago for university hospital in Narvik, which is a big project, value NOK 1.2 billion. And it's a public project, and that is now starting up. And I think it's good that the public sector accounts now for 71% of the backlog of orders at the end of the second quarter. Aibel, again affected by the COVID-19 pandemic, has been awarded contract for Sleipner, Gina Krog fields in the North Sea. And the total value of that is NOK 600 million. After the end of the period, Aibel has been awarded a portfolio agreement with Equinor for modification tasks which will stabilize Aibel. And I will come back to Aibel later also when I go through the companies, but we have also received a large order for airteam, I think their largest ever, in connection with Ferring's new head office in Denmark. That was actually in July. If we now turn to Page 5. We try to give an overview here on how COVID-19 has affected us. Well, it's very different between the companies. The most severe impact has been in Aibel, TFS, LEDiL and HL Display. We have moderate negative impact in Diab, in Bisnode and in HENT; and minor effects in airteam, Speed Group, KVD and Oase Outdoors, although Oase Outdoors were very heavily impacted in the beginning of Q2. We are certain that we have had a positive impact in Plantasjen. I am impressed by the companies, how they have continued to implement actions to mitigate effects in the second quarter. We have had no real significant disruptions in supply chains or in-house production, but measures are implemented in all companies. The total amount of governance (sic) [ government ] support in Sweden and other countries around the world amounts to a small number. It's just SEK 30 million. I think that's some 0.4% of our revenue or something. Our priorities, of course, continues to be health and safety, liquidity and EBITA, in that order. It's clear that our governance model has helped us -- our new governance model, I should say, has helped us to act very fast in our companies with quick decisions around restructuring measures and other measures taken. Now the financial situation is very important in all times and especially in these times, so when I -- we now turn to Slide 6, I will leave over the word to Jonas Ågrup, who will go through our leverage and financial situation. Please, Jonas.

Thank you, Jonas. So let's look at the leverage. And the leverage here is including the IFRS 16 leasing, which is important to note. So if we look at the leverage. We have seen a positive trend within the group since the end of 2018. And if we look at Q2 this year, we are at 2.6x, as you can see, which is down 28% if we compare to the fourth quarter 2019. And we see good development in basically all the companies. We have improved EBITDA in 11 out of 12 companies, and we see lower net debt in 10 out of 12 companies. For Aibel, the leverage, as you can see, went up a little bit. Aibel was impacted by lower EBITDA in the quarter. We ingested new capital into Plantasjen, NOK 300 million, in the quarter; and it -- and that was used for amortizing interest-bearing liabilities. And we improved cash position in Plantasjen. I would like to mention that Plantasjen has, as you know, 140 stores in the Norway, Sweden and Finland; and the leasing liability is quite high for Plantasjen. So the net debt is like NOK 4.3 billion, but the leasing liabilities are at NOK 3.6 billion. So that's a big part of the net debt, the leasing liabilities. Net cash position within Ratos AB is around SEK 1.2 billion. And that facility is, as of now, unutilized. Now we will continue to focus on the development of the business areas and our group companies, so we turn to Slide 7. And I leave the word back to you, Jonas.

Thank you, Jonas. It sounds like The Muppet Show, yes. Right, so let's start with Construction & Services. The business area had a decline in sales of 5% mainly due to Aibel. However, the EBITA increased by (sic) [ to ] SEK 79 million. So let me take you through my view of the companies here. Aibel had a net sales growth despite a decrease in activity from COVID-19, but EBITA was actually lower. And this is of 2 reasons -- or one reason, you should say, the COVID-19 uncertainty and Aibel's habit to never -- to be very well provisioned in their projects. And that is something, for you that have followed Aibel during the years, that they have never sort of came with negative surprises by the end of the projects, rather the opposite. All in all, the outlook for Aibel looks more positive than 3 months ago given the COVID-19 situation but also the orders taken in Q2 and July. There was also a crisis package from the Norwegian government which will have an indirect positive impact on Aibel. So we see a little bit better future for Aibel coming forward, but when comparing next half year with next half -- or the last 6 months of previous year, one should remember that in 2019 they were finalizing a lot of large projects. airteam is developing very well actually, grew by 19 -- 29% on a strong order book, which was actually further strengthened in July to a record order book after the Ferring order for the new headquarter. This makes airteam's Denmark's market position even stronger, but EBITA and the profitability has improved in both Danish and the Swedish operations. HENT's net sales were more or less maintained. Projects are affected with lower activity level and increased costs due to COVID-19. I think HENT has a more stable order book today, with again 71% of the backlog related to public sector. Comparing the results here with last year, we should remember that last year's EBITA was negatively impacted by write-downs of minus SEK 133 million. Speed Group is a company that has really developed well over the last 12 months. This is a result of the restructure measures we -- or they took in Q2 last year. We have today a new management team with a very experienced CEO from the sector, and further measures have been taken to increase the efficiency. And we also have a more healthy project portfolio. So stable and positive development for Speed, which I'm happy to see. So then let's move over to Consumer & Technology. We -- here we could see a net sales growth of 9%. The organic sales growth is 17%. The currency have been against us here. EBITA increased to SEK 827 million from SEK 607 million last year. The Q2 is a very strong quarter for Consumer & Technology, driven by all companies but, of course, Plantasjen as the largest contributor. Starting with Bisnode. Their sales decreased Bisnode by 3%, mainly due to their Marketing Solutions segment that is clearly negatively impacted by COVID-19. Also, smaller SME companies were buying less credit solutions. Despite this, EBITA improved, and of course their margin, due to the long-term transformation into a more efficient and scalable Bisnode. And Bisnode has also implemented a robust action program for COVID-19. KVD, dealing with cars, their sales increased 7%. Tough start of the Q2, but markets became better during the quarter, and they have a strong focus on private cars and gained market shares in this sector. So EBITA increased due to the high volumes but also to a more efficient processes, which I think, if some of you have been a client with KVD, you notice that as a customer. That's at least what I hear. Oase Outdoors. They had a very tough start, again, of the quarter with a majority of stores closed out in Europe and also the camping sites. As shops and the camping sites gradually opened in the quarter, sales came along and got very strong by the end of the quarter. So net sales increased over the quarter with 9%. The important U.K. market, which is very big for Oase, is -- was partially closed even in June and will open up gradually in July. So that has also affected the quarter. A cost savings program very well implemented also contributed to the improved EBITA, and the fact that last year we had a quality problem in our newly released series of inflatable tents. Last but not least, Plantasjen. Well, their organic sales increased by 25%, not due to the weather. We deal with weather statistics here at Ratos. And in Sweden it has been the coldest May for 5 years. In Norway, a little bit less sure on this number, but I read reports in 15 years this has not been as cold in May as this year. No, the reason for Plantasjen growing is that we have more customers coming to our stores and each customer buys more than before. We believe this is a result of the COVID-19 effect, of course, but also a focus on customer experience and product offering that will continue with Nina Jönsson having the helm in Plantasjen and will continue to strengthen the brand. Then I suggest that we move over to business area Industry on Page 9. So Industry had a net sales increase and an organic growth of just 1% in the quarter and the companies with quite some effects from COVID-19. EBITA, however, increased from SEK 104 million to SEK 141 million during the quarter. If we start with Diab again and which I've also been impressed on how well they've handled the corona pandemic given the fact that they have factories in China, Italy and U.S. China and Italy have stabilized. U.S. is still affected by the COVID-19 when it comes to production. They grow their organic net sales still by 21%. They have invested in new production, as I said earlier in this call, coupled to the long-term contracts. And they are mainly coupled to the wind sector. The aerospace and marine has a severe impact from COVID-19, but all in all, EBITA improved with impressive 53%. HL Display demand decreased quick and sharply from the COVID-19, most severe effects in the French market. This was partially offset by the quick development, the change of production in their factories and offerings to be able to offer protective equipment for shops. And that mitigates the sales decrease, which still is significant. I'm impressed that EBITA improved, despite the lower sales, as a result of very good cost control, increased production efficiencies and a favorable product mix. LEDiL, again hit by corona. Net sales decreased by 6%, order intake low. So COVID-19 impacted all markets negatively, especially the indoor lighting market. EBITA still increased even after we had a one-off last year of EUR 0.5 million, but even including that, EBITA increased, again thanks to good cost control. And last but not least, TFS, quite impacted by COVID-19, of course, because they want to perform clinical trials in hospitals. As everyone understands, it's been very difficult to do that during the quarter. The EBITA decreased, and the fact that they made black numbers in spite of this is very much due to the restructuring program performed in December. We have a new CEO. That significantly lowered the company's cost structure. And two, that we had special COVID-19 measures. So all in all, in summary, continued strong EBITA trend development in a seasonally strong quarter for Ratos. 10 out of 12 companies showed EBITA improvements, 11 of 12 in the first half [indiscernible], small costs -- small contributions from government grants and very good measures taken. And as Jonas Ågrup told us, our financial position is improved. So although it's too early to say COVID-19 is over, there are uncertainties for the future, but I feel that we're very well equipped financially. And in basically most things, we feel very well equipped to handle the challenges that will come also in the second half. Thank you very much.

Thank you, Jonas. And operator, I think we can open up for the Q&A session.

[Operator Instructions] So the first question is from the line of Derek Laliberte from ABG.

I was wondering if you could share some color on the capital injection in Plantasjen, why this came at this particular point in time and also if we expect this to be sufficient in the long term, et cetera.

Well, we -- and I think I've said during all these calls that we want to have our leverage down in our portfolio companies. We have a lot of money from EBITA disappearing in our financial net, making our EPS lower. So this is a step in line to lower the leverage in Plantasjen, and our ambition is to continue to lower the leverage in Plantasjen. I don't know if you have any further comments to that -- you asked if this is sufficient? Yes, we believe it's sufficient, but again we will follow up the development. And you shouldn't be surprised if we lower the leverage even further in the future.

Great. And also it was quite small, but regarding the government aid, just to be clear, which companies does this refer to?

Well, I actually have a list in front of me. I think all companies has -- we have a reduced labor taxes...

Payroll tax.

Sorry, payroll tax. We have this sick leave thing. So I think more or less all companies, but it's a very, very small amount. So I think, these furloughs, there we have had in -- most of it in Speed and Diab, some also in HL Display, but it's just 4 companies who have used that.

Got you. And finally is I know you've talked about this before, but if you could elaborate a bit on what Nina Jönsson brings to the table in Plantasjen. What do you expect from her to do differently in the company going forward? And sort of the whole situation with the CEO changes that -- at the moment.

Yes. I think you should give Nina a call actually. She's on holiday now, I think, but I got to learn Nina quite well since I'm the Chairman of HL Display. And so she's a natural strong leader with a great experience from both sides of the retail market. As you know, she spent a -- many years in senior positions in Procter & Gamble, including country manager positions in Sweden and over Europe, in Switzerland, in -- she's been in Moscow. So -- and then she had very senior positions in ICA, so I think she's very, very well suited for this mission. And I know that she's had a good start. She has a new management team in place. She has a new recruit actually from HL Display, Peder Clason, with long experience from Procter & Gamble and Absolut. I -- but again I don't want -- I mean take a call to Nina and hear from her, but I think it will mean a lot for Plantasjen.