Relais Group Oyj (RELAIS) Earnings Call Transcript & Summary

Very good morning, everyone. Warmly welcome to follow the presentation of the Relais Group financial results for 2020. My name is Arni Ekholm. I'm the CEO of the company. And together with me today, following a 4-meter safety procedure distance, is Mr. Pekka Raatikainen, who is our CFO. The presentation will take about 20 minutes to 30 minutes, after which you will have the chance to make questions. [Operator Instructions] The copy of this presentation will be available on our website, on our corporate website, the English version later today. And we'll try to get a Finnish version of it also on the website a little bit later. Before kicking off, I would, at this stage, like to thank very warmly our staff, very dedicated, committed, hard-working staff. It's been a very challenging year. I mean I was trying to find a proper adjective for last year, and I came up with exceptional, which I think is an understatement. Nobody knew 1 year ago, when we were presenting the results for 2019, how this year would turn up. And I think the COVID-19 has really made things, to put it mildly, exceptional. And even in those very hard times, you could perform very strongly, which I'm really, really grateful for. And also at this stage, I would like to thank our customers for the loyalty that you have shown and also our shareholders and owners. And we hope to -- of course, to earn that trust during the coming years. So the contents of the presentation today, I will give a short business review of the second half of the year 2020 and look at the full year results as well. Then Pekka will walk you through the financials. We will review the major events after the period, and then we will have a short look at our strategy and financial targets for the year. Who are we? Who is Relais Group? I think we are still fairly unknown to the large public. We are one of the leading players in the vehicle aftermarket in the Nordic and Baltic countries. We consider ourselves as an industrial operator having a sector focus on the vehicle life cycle enhancement and related services. And I will soon tell a little bit more how we look at the vehicle life cycle enhancement, what does it mean. We also serve as a growth platform for the companies that belong to our group. So it's kind of a positive cycle, if you will, where we can build on the strengths of each group company. Just very quick look on the top line of the company last year, roughly EUR 129 million, which is growth of 30%. And the EBITA grew from EUR 13 million to EUR 18.7 million, which was a very strong result. So let's go forward and look at the second half year 2020 results in a recap. When I was presenting the first half year results here in the very same spot last August, I think I used the word, "We are well prepared to the H2 and for the very important lighting season." We had been able to get enough supplies to cater for the needs of our customers. Also, we had a very strong pipeline of new products coming in. And the underlying markets had picked up at the latter part of quarter 2 in 2020. So there were a lot of positive signs, albeit that still the visibility to the business was fairly limited because of the COVID-19 pandemic. Overall, the sales performance was very strong, especially on the lighting season, but not only the lighting products. We had a very robust sales of spare parts and equipment also in most of our markets. And we were able to produce organic growth actually in all of the operating countries during the second half year. Very shortly about the markets on the second half of the year. It's fairly complicated to estimate the market development. There is not really a reliable statistic from each country. I think our best estimate, the management estimate, is that on a full year level, if we look at the markets in our main operating countries, they were at the best, maybe flat, if not even a slight minus. So with that as a perspective, the performance of the group is especially strong. The impacts of the pandemic were lower on the second half than in the first half. There were not really that big lockdown actions going on in our operating countries on the second half year. And generally, despite maybe some of the statistically lessened traffic on the roads, it didn't really affect our sales. I would even say that some parts of the goods transportation increased because of the e-commerce -- rise of the e-commerce, and a lot of commercial vehicles were moving on the roads. Our operating cash flow which is, let's say, inherent to our company is very strong. And then one of the major topics which I will touch a little bit deeper in a couple of slides was the acquisition of the Strands Group in Sweden in December 2020. One important milestone was also a renewed and expanded financing agreement that we managed to negotiate and achieve, which gives us a very good possibility to go on with our acquisition strategy. And also the financial terms of the agreement were more favorable to us. A few words about Strands. Such a great company. I mean we have talked with the founder of Strands, Jon Strand, already 2.5, 3 years ago and looking if there were possibilities to maybe join forces. At that stage, it was a little bit maybe early for that. And then we get the dialogue going inofficially every now and then, and let's say, roughly 1 year ago, we started to really seriously talk. And then the COVID-19 pandemic situation got much more serious, and I think we took a little break on the discussions, which we then reconvened in June. So we know each other. We know the company very well. And this was a perfect strategic fit, I would even maybe say a match made in heaven. It's one of the fastest-growing companies in the vehicle life cycle aftermarket area in Europe. The acquisition of Strands also increases the amount of own label products in our group. It's really a good addition to the range that we have on the lighting area. The rationale, a little bit further. Strands is a company operating, let's say, largely outside the borders of Sweden. So about 55% of the company's turnover comes from export to the other markets. And it's truly, I would even say, a global company, exporting the lighting products to Australia, States, Canada, New Zealand and so forth, which are big lighting markets for vehicles. So this clearly strengthens our position in the lighting market and opens up new markets for us. And on the other hand, also our existing companies are able to support Strands sales in our operating countries. Lighting, as such, I would like to state in this connection, is a global potential for the company. And already now, I would estimate roughly 1/4 of our sales comes from own label lighting products, and we really see a good potential with Strands and also with other products to reach this global audience in the future. The size of Strands turnover-wise, roughly EUR 15 million; and the EBITDA, approximately EUR 2.5 million last year. And employees, 30 people in Fritsla, near Gothenburg. Especially, I would like to lift up one point with Strands. I mean the heritage of the company is very much of design and marketing and branding, and Jon has really created a fantastic concept. Strands has 55,000 followers on Instagram, which has grown 40% during the last 8 months; almost 3 million viewers on the posts; 28,000 Facebook followers. And why I'm listing all this is that it's a good example of how in the product area of vehicle lighting, you can really create a kind of community of loyal customers that actually post pictures of their trucks with the fantastic lights and everything. So I really like this. And also, at this -- in this connection, I want to say that Jon has promised to stay with us during this journey. And he also made a sizable reinvestment into Relais. He is actually now heading a project regarding brand strategy and marketing for our company. So we reckon we will see good results on that area for the whole group in the months to come. Right. Your 2020 in brief. I use the word exceptional. In many ways, it was exceptional, both by the market conditions but both also by the performance of our teams. We kicked off the year by acquiring a small but [indiscernible] company in Denmark, SEC Scandinavia, which is our bridgehead, if you will, in the Danish market, focusing on vehicle lighting, especially commercial vehicle lighting. And we hope to leverage on that bridgehead later when we look at the Danish market. We bought a majority of TD Tunga Delar in February. Mikael and Håkan Öbrink, the owners, then also made an investment into Relais Group. So this kind of proves a point that we can use our share very successfully as means of payment, and people want to join our team. The increase in sales doesn't only come from acquisitions. There was also very, as I used the word, robust demand, especially in the Swedish market all through the year. The COVID-19 didn't really affect the demand that much. And also, there was very strong performance by the teams, doing cross-sales with the new group lighting products in Sweden. Also in Finland, there was really good performance, good growth on the -- especially on the second half year. I would say, in the first half year, the warm winter and some of the lockdowns in Finland affected the sales, as I commented in the first half year result publication. When the COVID-19 pandemic started to kick in, we did some very quick measures on the cost side in order to defend the cash position of the company. So we did some cost-saving measures, which then effectively where we have seen in the results already in the first half year. But let's say, in the second half year, there has not really been a need to do further layoffs or anything because of the situation. As a general note on COVID-19, I could say that luckily, there were no serious incidents in our company. I mean the safety and health of our employees was, of course, top priority. And we did measure how to keep everybody safe, and luckily, we have managed fairly well and very well in that. Right. What it points down to also is that because of this very strong financial performance and stable financial performance and also the high cash conversion ratio, which is inherent to the line of business that we do, the Board feels confident to propose to the Annual General Meeting to actually triple the dividend from the last year's EUR 0.10 per share to EUR 0.30 per share, which is a strong demonstration of our belief in the strength of our company. So quickly again, recapping. Roughly EUR 129 million, net sales; EBITDA, about EUR 19 million; EBITA, EUR 18.7 million; and a dividend of EUR 0.30 per share. How would I describe the year? How did we achieve all of this? I mean what is it based on? In the big picture, it all comes back to the execution of our strategy. I really feel we have a very clear strategy, and we have pursued the strategy to the point last year and succeeded with it. We had, as I commented a little bit earlier, favorable business development in all markets. In Finland, there were some major successes on the launch of the new products, the lighting product range. And we had good growth in Sweden all through the year. We have also managed to leverage on the synergies between the group companies. That has been one part, and it's one elementary part of our strategy. This is demonstrated by the fact that we have been able to expand the sales of the existing lighting products in Sweden and also partly vice versa to Finland when it comes to some spare parts and accessories. We made 3 highly targeted and successful acquisitions. We said basically in our strategy that we aim to do 1 to 2 every year. We made 3. And I will come back to the question of the commercial vehicles. But I would say already, before the Raskone acquisition, our position in the commercial vehicle segment increased significantly by acquisition of Tunga Delar in Sweden. We actually operate Tunga Delar and Huzells more or less like one company these days, and I will get back to that a little bit later. So we could really utilize the synergies between those 2 companies in the commercial vehicle segment. As I said before, the lighting -- the vehicle lighting solutions business represents a global potential for us, and we are very well positioned now with all the brands we have in the company. And now, together with Strands, we really feel that there's a chance to leverage on this one. And then the digital transformation. Of course, we could talk hours about that, but that's really one of the key points in our strategy, to offer really effective and good digital solutions to our customers in form of digital catalogs and other e-commerce-related solutions. Then I will hand over to Pekka to walk you through the financial numbers a little bit more precisely. So the stage is yours, Pekka.

Thank you, Arni. Thank you, and good morning. Let's go to the financials then. Let's start with net sales. We can clearly see the impact of the recent 2 years' acquisitions on this comparison. But -- and in addition to those, we have a lot of positive things behind that happened last year: spare parts -- strong demand for spare parts in Sweden, excellent lighting product season in all countries, the recovery of sales in second half, to summarize some of those. And then the profitability. This is also heavily impacted and contributed by the acquisitions. But perhaps it's worth mentioning here that for the companies being acquired and going through the acquisition process and post-acquisition activities, it's not an easy task to remain or maintain the profitability or even improve it. And in this respect, our acquired companies performed very well. Balance sheet. The changes in balance sheet are mainly due to the acquisitions, the assets and debts acquired. Group equity developed positively due to the profitability. Net debt especially is worth mentioning. The cash flow that I will get back later was a very positive characteristic for the recent financial year and is contributing positively to the net debt. The cash flow. In circumstances we were facing during March, April, it is often typical that the net working capital gets affected. But we succeeded to avoid any major delays or extended payment terms related to accounts receivable, which resulted in a very steady and stable cash flow. And it also demonstrates that our customers were doing well in these hard circumstances. Cash flow from investments. Here, we can see the impact of acquisition of Tunga Delar and SEC, the cash contribution -- consideration related to them. And in financing, there was a lot of activities that the net of them is only presented in this cash flow from financing. But as mentioned by Arni, we negotiated a new senior facility agreement and including an extended term loan facility for further acquisition and refinanced the existing debt at the same time. Key figures. This chart demonstrate positive development in all of these KPIs, and it's, of course, reflected by the business performance mainly. And this is the chart of EPS. The dividend proposal, the Board is proposing EUR 0.30, represents around the 4% of the EPS, excluding the amortization of goodwill. And it's well in line with the dividend policy. Largest shareholders. On balance sheet day, we had 2,462 shareholders enabling all this by their investment, and the other changes on the list remained moderate, I say. Thank you, and I hand it over to Arni who is presenting the events after the review period.

Thank you, Pekka. So let's move forward to look at the major events after the review period. This is map showing the locations we have in the company. And we have, at the moment -- well, we had in January 2021, 7 different concepts, if you will: ABR, AB Reservdelar, Awimex, Huzells, SEC Scandinavia, Startax, Strands and TD Tunga Delar. And then I will touch on the subject of the latest acquisition, Raskone, a bit later. Our operating -- say, modus operandi or how we run the company is that the companies retain a fair amount of independence and local entrepreneurship. Having said that, if we look at the Swedish market, we do a lot of coordination, and we run actually the country as one organization by Juan Garcia, who is the Managing Director of Scandinavia. So there's a very good amount of coordination and co-working cooperation between the units so as not to get the wrong picture that this is purely a group of companies doing their own race. Most or even all the companies have their own specific target group of customers, and we harvest the synergies between the companies on the procurement side and the product development. Some of the administrative processes and everything, we harmonize. But then the face against the customer is the brand of the company. So there's a -- just wanted to make a point of that, that there's a lot of cooperation between the companies and also a joint management on top of the company. So we really follow the synergies and lay out the strategies, which then our very, let's say, dedicated teams then execute in the countries. So our latest family member that we announced on the 29th of January, Raskone, a Finnish company specialized in the commercial vehicle maintenance repair business. It's actually, I dare to say, the biggest operator in the Nordic markets for the independent repair business for the commercial vehicles. The Managing Director, Jan Popov, and his team have really made an outstanding turnaround in the company during the last 2 years. And we have had a dialogue with the owners of the company, let's say, started before summer. And then we had a little bit of a break during the summer in the talks, and then we reconvened the talks again after the summer, after we got a little bit more visibility on the business. So we very clearly came to the conclusion that if and when we want to grow on the commercial vehicle business, this was the solution for us. I mean it's fairly limited amount of pure wholesalers in this business. So we took the kind of bold step to go to the maintenance and repair business as well. There are good synergy benefits already now happening as we speak. The teams are looking at the spare part procurement and synergies on that one. And we see a lot of potential with Raskone also, I mean, as a part of the family on the lighting business and equipment business. So there's a clear thinking behind this, how this fits into our company. And as I said earlier, the commercial vehicle business is one of the existing and future pillars of the company, even on the Nordic scale. The estimated net sales of Raskone on the calculated financial period of January to December was EUR 63 million; and the EBITDA, approximately EUR 4.7 million. So it's a very healthy company. And still, we see a lot of potential to get further synergies. And 460 people, hard-working, dedicated people, 19 workshops across Finland, multi-branch, and also some brand representations in different locations. So it's really an important part of our strategy, and we really warmly welcome the whole Raskone team to join and have already joined the team as of 1st of February. So I have very positive and high expectations on this acquisition. Then looking at the strategy and financial targets. There's no drama here. I mean there are no big changes, of course, into our strategy. I think we have proved it works, and we intend to pursue that strategy also in the coming years. There are, however, some slight definitions and comments I want to make on this one. I have showed this before, it's slightly different than before, mainly because we now are operating in the service and repair business, which we were not before. We consider -- as we have all time, considered our -- as our focus area the vehicle life cycle enhancement part, which is then if you look at the life cycle, from manufacturing to demolition and recycling of the vehicles, we focus on where we see there is the best value creation possibility for the group. The underlying market is, of course, the 19 million, give or take, vehicles on the roads, everything from 2-wheelers to forest machines and light and heavy commercial vehicles, buses, trucks, passenger cars. So it's a big and stable and steadily growing market that is supporting the growth and also has, as we have said before, some defensive characteristics that, I guess, have been demonstrated during this last year. What is our strategy? It deserves to be repeated every time. We base our growth in a combination of our organic growth, growth from acquisitions and then creating added value to our customers. And how do we intend to grow organically? And we intend to grow with a faster pace than the average growth of the general market. We aim to reach that accelerated growth by utilizing the synergies between existing and acquired companies. And this is really something that we have been able to demonstrate. It really works. And there's still a lot to do, of course, and the world is never ready, but it's already a good indication of how this kind of self-fulfilling prophesy works. We are and we want to be an active consolidator in the Nordic market, and we have also proven that with quickly counting 5 acquisitions during the last 13 months or so. And this is really something that we intend to pursue also in the future. Added value to the customers, how do we do that? I mean a good demonstration again is that we have, I think, already now closer to 10,000 different customers in the Nordic area. And we have very committed customers, and also want to again thank our customers for sticking together with us and making -- going through this hard time in 2020. We have a comprehensive product range, which is, of course, very important in this type of business. We have to be close to our customers and to be able to help them. I mean if a truck is there to be repaired and is waiting for a spare part, I mean, the owner of the truck can't really do his business unless we help him with the right part at the right time. So that's the purpose. Digital platform. We have very refined, I would even call them, search engines, which help the customers to find the right product. And then also that makes the whole value chain more effective. And superior customer service. We have a very dedicated, good and large teams, helping our customers also personally in all the Nordic markets. I mentioned a little bit about the market, the market trends, the 19 million vehicles. There are some drivers that also have been demonstrated during 2020. Despite the lockdowns in different societies, there is a need to get from A to B. There is a need to transport people and goods. And probably also, there has been some kind of a shift from public transport to passenger cars. That is at least one theory. This need will not go away. People will always need to move. Goods will always need to move. And the emerging and growing e-commerce will keep the wheels rolling in our large Nordic countries with big distances. The vehicle stock is fairly stable and even growing. Vehicle age goes together a little bit with the need of spare parts and repair. The vehicle utilization, i.e., how many kilometers are driven by the cars is also one basic factor in the market. And the amount of sold new vehicles then feeds business to the equipment and lighting business. What other trends are there supporting the business of the company? We see that the consolidation will go on. It's a little bit go big or go home type of situation in many businesses. And we foresee this development to continue, and we aim to be an active player in this field also in the future. The evolution of the vehicle powertrain. There will be new innovative technologies coming. The electrification is a trend that is happening already now, from hybrid to full electric vehicles. This will create new business. Electricity is in the DNA of the company. And of course, we will be able to harvest also on the ecosystem around the e-vehicles. The complexity of the vehicle components. We are specialized in very complex components, electrical components. That is going to be increasing as a part of the vehicles. And also, the digitalization of the customer interaction opens interesting possibilities. I mean the vehicle is actually a computer on 4 wheels nowadays, if you will. And the data generated by vehicle is an important question, how to be able to utilize it also on the -- let's say, in the independent aftermarket. Then looking at our defined financial targets and dividend policy. As I stated before, the strategy is based on the organic growth, combined with the synergies. Our view has been that the market -- or our view is that the markets tend to develop with roughly 1% to 3% annually. I mean, of course, last year is a special year also in that perspective, which has been hard to estimate. But we consider the markets as fairly stable. And then we leverage on the M&A-based growth. And then we set as a target in 2019 to double the sales in 5 years, and I'll come back to that one after a little bit. And that's -- the doubling is planned to happen with -- as a combination of acquisitions and organic growth. As Pekka stated, the company's dividend policy is to be able to pay an amount exceeding 30% of the average comparable profit of the group. Here, of course, we need to take into consideration the situation from year-to-year over business cycles and look at our possibilities to also pursue the strategy of acquisitions. And so last year, we are very happy to be able to then increase the amount of the dividend. When it comes to the long-term financial targets, it is very probable that the strategy or the strategic target that I mentioned of doubling the turnover in 5 years, it will happen much earlier. I mean if we look at the turnover last year, which we just presented, EUR 129 million, and if you take into consideration the new acquisitions we made with Strands Group and Raskone, it is imminent that we will reach this target that we set in 2019 earlier. So we aim to redefine that target later this year once we have more visibility on the future and let's say, see if there's a need to redefine anything on the strategy. But this is a statement I want to make, that we will revisit this strategy later this year. The outlook for 2021. Having said everything I have now said of 2020, we have been able to demonstrate the effectivity and resilience of our business model under these challenging circumstances. So we feel that we are strongly positioned to meet the challenges of '21. I mean we have a very strong financial position. This gives us a good possibility to continue to implement our strategy also for '21. Having said that, we still feel that even if the market situation, at the moment, when we have made this financial bullet, is stable, there are still -- as we can read from the media, the situation is changing. And we feel that there's still uncertainty in the market. So therefore, we do not give a numeric guidance for the financial year 2021. But then I want to reinstate that we are very strongly positioned to meet the challenges for the year '21. So I'm almost there. I'm over my time already. I promised 20 to 30 minutes. But I hope I haven't bored you. So this is basically the last slide before the questions. Summarizing last year. Record-breaking growth in an exceptional year. It boils down to the strong strategy that we have, a clear strategy. So it's really strong growth driven by our strategy. We made highly targeted and successful acquisitions, as we promised we would do. We have now 2 very strong future growth pillars, lighting and commercial vehicles, on top of what we already have. The digital transformation and the things it brings together with it are key drivers for our growth in the future. We have a very strong development of profitability and cash flow, which helps us to continue implementing our strategy. And then summarizing that based on the strong and stable financial performance and the high cash conversion that is inherent for our business, the Board feels confident to then suggest an increased -- substantially increased dividend of EUR 0.30 to the Annual General Meeting. Thank you. And now a question for the moderator. Do we have questions?

Yes, we have a few questions. Let's start with Joni Sandvall. Regarding Raskone, could you give some indication about both top line and cost synergies?

Yes. Thanks, Joni, for the good question. We do not, let's say, forecast top line, and we don't give a guidance for 2021, as I just said. I mean on the general, of course, we see potential to increase the top line of Raskone, but it's way too early to give any specific number on that. I do see synergy potential on the top line also when it comes to equipment and lighting. But I'm not ready to give any specific number on that one. Cost side, I think, there are some low-hanging fruits, but this is not so much of a cost exercise to us. I mean during the previous ownership, there has been already executed a lot of activities to improve the profitability of the company. So we feel that the company is in good shape.

And more from Joni. Regarding turnover target. In your report, you note that you will reach target substantially earlier than anticipated. Should we read this as you have a good M&A pipeline and more acquisitions in 2021?

Well, you can read it in a way that we have written it. So we intend to come back to the target. But of course, seriously speaking, we have a good pipeline of acquisition candidates all the time. I have said it all the time. And we do have a very good and solid network in the Nordic countries. We know a lot of people, people know us and we get a lot of contacts from different companies. So the pipeline is very good, but of course, it's a combination of acquisitions and organic growth.