Relais Group Oyj

OMXH:RELAIS

Earnings Call Transcript 2024-Q1

[Arni Ekholm, executive]

Good morning, everyone. Warmly welcome to follow the webcast presentation of Relais-Group Quarter 1 2024 results. My name is Arni Ekholm, I'm the CEO of the company and together with me today, and always in the presentation is Thomas Ekstrom, our CFO. Good morning. The agenda for today's presentation is a few words about releasing brief for those of you who don't know Relais as a company. Then a short business review for the quarter 1, what's behind the really good result. And then Thomas will also go deeper into the financials -- in the financial review section of the presentation and at the end the summary of Relais as an investment. Before going into the Relais' in brief part, technical information I want to make, there is an 'Ask a question' button on your screen for those of you following this live and you can submit a question at any time. And then [Heiki] will here collate the questions in the end and we will then answer them at the end during the question-and-answer section of the presentation. Before going into the next slide, I want to warmly thank our team members. This was a fantastic quarter and your performance was outstanding, so I'm really proud to be working with all of you. And of course, I want to thank all the shareholders and customers and business partners for your support during the quarter. So very briefly, what is Relais about? We are aftermarket especially, specialized in the aftermarket of vehicles and we are competent compounders. So we compound and gather bigger entities and also compound capabilities in this sector. We are already one of the biggest and most profitable growth platforms in this sector in Northern Europe, a unique position from this perspective. Why are we focused on the vehicle aftermarket? Is because we see the best value creation potential in that market as opposed to selling new vehicles or used vehicles. That market -- the aftermarket is also less cyclical, so it's not so sensitive for the trends in the economy and it's more defensive than many other markets. And also have to bear in mind that the aftermarket is steadily growing, the number of vehicles is steadily growing. A large part of our business comes from commercial vehicles. I will explain that more in detail later, that is also very important to bear in mind. How do we create shareholder value? By delivering strong earnings growth with a strategy based on 3 reinforcing themes, acquisitions, organic growth and operational excellence. A quick glance at the aftermarket. From a value chain point of view, we call the aftermarket vehicle life cycle enhancement from the time when the vehicle is imported or sold in the market, it's equipped. it needs spare parts, it needs maintenance and other types of supporting services and then at the end of the life, the vehicle is demolished and recycled. We estimate the market size to be about EUR 20 billion in the Nordic and Baltic markets, consisting of about 19 million vehicles. So we and our, let's say, customers operate in this blue sector and that is also the scope of our acquisition targets moving forward. How does the Group look like after Quarter 1? It consists of 2 main business areas, technical wholesale and products, which is 2/3, and then 1/3 is the commercial vehicle repair and maintenance business. And if you look at the technical wholesale and Products division or business area, that can also be divided into 2 groups, spare parts and lighting and equipment, and you can see the names of the companies within this group. So that is split with the 67% split with 30% for spare parts and 37% for lighting and equipment. And also here, there's a very big weight of commercial vehicle targeted products and services and the commercial vehicle repair maintenance natural is all about commercial vehicles. And the latest acquisition increased the weight of the commercial vehicle repair and maintenance, that is not yet included in these 2 numbers. So that's the way it will go up somewhat during the Quarter 2. A short look at the history of the company Relais was founded in 2010, only having basically one asset, started in Finland. I started 2015 when the turnover was EUR 54 million, and the EBITDA -- local GAAP EBITDA was EUR 8 million. Now we are having a run rate the latest 12 months, about EUR 300 million turnover and over $30 million EBITDA. So it's been a very strong growth, not only acquisition-based growth but also organic growth in each of the markets. So very profitable and good growth, and that has created the platform that we now have in the Nordic and Baltic markets. Let's have a look at Quarter 1, business review, continued strong and profitable growth, which is very positive. There were a lot of factors affecting this: Firstly, I would say it was not only coming from the weather, of course, I've explained that before that the weather has an effect in this business. That is one factor, but there were also other factors, let's say, we are on a very stable level in all our businesses but yes, the cold weather contributed in this and also the effect of the acquisitions. So the net sales grew with 20%, which is really, really much and the organic growth was 12%, and the comparable EBITA grew with 27% compared with the Quarter 1 last year. And maybe a few words about the weather. It was really exceptional, and I will explain later what does that mean for certain product groups. So in a nutshell, the key numbers, EUR 82.8 million net sales, 20% growth, as I said, comparable EBITDA, almost EUR 10 million, which is 27% growth and return on capital employed, almost 17%, which is a big growth of 5.5 percentage points versus last year's Quarter 1. And then the rolling 12 months, we are approaching EUR 300 million turnover, almost EUR 31 million comparable EBITDA and ROCE was 11.3%, so a very strong start for the year. What's happened during the quarter 1 in the technical wholesale and product business? That business grew with 29%, out of which 16% points was the organic growth. and the rest came from the acquisitions we made last year, Adita, AutoMateriell and Nordic Lift. So it's a very, very strong performance and as I said, partly coming from the weather, but not only coming from the weather. So we were growing according to our estimates faster than the market in average in the Nordic markets. The growth very positively was strong in both the Finnish and the Scandinavian market. So there was not this kind of a difference that we have seen before in the Finnish and Scandinavian markets and the gross profit percentage remained on a stable level, which is, of course, very good. We didn't have to discount any products, there was a very good demand for the products during the first quarter. The cold weather, what does that really mean? I mean, it is if you have consecutive days and weeks of minus 15°C to minus 20°C, then it starts to affect the sales of electrical spare parts and equipment. I mean minus 5°C is not enough but if you have many, many days and weeks as we had in Finland and Sweden, it really kind of kills the starter batteries and then you have a need for other equipment for charging the batteries and such electrical equipment. Then the equipment product group also consists now the workshop equipment or contains the workshop equipment that we bought in Norway in last fall. So that is -- that growth is largely coming from the acquired businesses but also winter-related equipment that got a good boost in the start of the year. And the sales of the vehicle lighting products remained on last year's level, so that was very stable. The quarter 1 is not really a lighting season. So all in all, a fantastic performance by the teams in all our markets. Repair and maintenance, which is now, as I explained in the beginning, 1/3 of our business is very stable, developed positively, growth was 5%. Gross profit levels were stable compared to last year, and the demand for our services continue to grow as especially bigger fleet customers are looking for cost efficiency in their operations as opposed to -- to getting the services from vehicle manufacturers own repair shops. So that is the kind of trend that we are starting to see in the market and we have gained a good customer ships in both Finland and Sweden, and the teams are doing a very good job in both countries. The resource situation, some of you will remember that we had a lack of mechanics in '22, that situation has stabilized, and we are also getting back some people that either left the trade totally or went into another company. We have invested a lot to make the, let's say, personnel stay in the companies and we aim, of course, to take good care of our people. This is a hugely important area for us as a business and of course, it's very labor related. So we hope to succeed also in this, let's say, HR-related matter in the future. So all in all, a very stable performance from the repair and maintenance business. Looking at both businesses together, I think what I've explained before about the defensiveness of the aftermarket seems to show that this is corroborated by the results already after last year's results and also the Quarter 1. Sales by segment very shortly, not a dramatic change versus last year. Finland and Baltics, 46% as opposed to 45% last year and Scandinavia, 54% as opposed to 55% last year. Scandinavia also includes in this reporting some export from [strands] to other European or American countries. Looking at the sales by business area, already, I showed this before, so it's 2/3 coming from technical wholesale products and then 1/3 from a repair and maintenance business. Then looking at the sales by product group, the equipment part has increased from 14% to 21%. This is mostly coming from the acquired businesses, as I explained from Norway, which I classified here as equipment businesses, but also organic growth from the winter-related sales of electrical equipment. So not a huge change but the weight of equipment has increased. Other than that, it's fairly stable. Acquisitions. That is, of course, a very important part of our strategy and we continued also during Quarter 1 to scan the market. They are at any given point of time, I have said that before, discussions going on with several entrepreneurs and business owners. There are several interesting targets that have a good strategic fit with us in the Nordic marketplace. This is a numbers game, the more companies who contact the more probabilities that you end up actually then agreeing on a transaction between the owners and us. We aim to have a healthy large M&A pipeline which is relevant for us but also, we have to bear in mind that even if we have in the long list hundreds of companies, together, the long list in the aftermarket consists of, let's say, billions of euros in turnover and hundreds of millions euro EBITDA. But the funnel, it gets more narrow and narrow from that perspective that what are the discussions they materialize into deals. So I would say, I would be happy if we could make at least one acquisition per quarter, which is then realistic to be able to grasp from the market, different sizes, of course. And we are very disciplined in the way we manage the processes and of course, aim at not paying an overprice but paying a market price and find companies that are in good shape and have a good strategic fit with our company and our culture, and that is the strategy. Just very shortly about the latest acquisition, I want to welcome [Aquist] family to our family, and it is a 30-year history behind this company in Southwestern Finland, focused on heavy commercial vehicles and trailers, a very well-kept and developed company, and we are happy that the son of the previous owner, Tony [Alquist] is continuing as a Managing Director and also becomes a member of [Ruscone's] management team focusing on the trailer business development. So this is yet another add-on that we have in Rascone, which is the concept that -- how we aim to grow also in the future. And this is strategically important for us, going to expand in the trailer business, which is not yet really big part of Rascone's business. So welcome our [Alquist] team to our family. Then outlook 24 kind of a dualistic picture because the clouds -- the gray or dark clouds that I see are more coming from the environment or the surrounding world, the macroeconomic factors, which may potentially affect the markets negatively during the coming quarters. So especially the development in Finland, as we all know, who follow the media is quite poor. The forecast for the economic growth are very, very close to 0, if at all positive, unemployment seems to be increasing and then the interest rate levels do not seem to go down as quickly as was projected. I mean, I don't want to sound like a kind of very negative prophet here but there's not a lot of light in the Finnish economy from the macroeconomic point of view. But then, of course, looking at us internally and how we are positioned and resourced, we feel that we are well positioned also in Finland to serve our customers. And then if we look at the Scandinavian markets, they seem to be less vulnerable or not have actually the same type of challenges in the macroeconomic side as Finland seems to have. So all in all, on balance, we feel that we have a good possibility to continue implementing our strategy during 204 despite these macroeconomic factors. Then over to you, Thomas.

[Thomas Ekstrom, executive]

Thank you, Arni. I continue from where Arni ended and a bit here, focused on the kind of key income statement, balance sheet, financial position numbers. And as usual, first, we see here the -- a bit longer perspective on net sales and EBITDA, and here we can really see the strong performance in the long term both on net sales terms and EBITDA terms. And perhaps as an additional comment to Arni is that still we have a slight impact of the Swedish Kroner exchange rate to these numbers, but much more limited now in Q1 this year than last year. So it is a bit of a better position here than last year. When we then look at the other components of the income statement, gross profit continued to grow in euro terms quite strongly and the current gross margin then was quite stable compared to last year. And this was all coming from the fact that it was a technical wholesale and products business that grew in Q1 the most and the sales mix was from a kind of gross margin perspective, a bit different, causing this flat development in gross margin, but otherwise, really good development here also. And then you look at expenses, the operating expenses were gradually a bit increasing but still the kind of cost percentage came down against sale for the second consecutive year. So really kind of good cost control also on group level here in this sense. When looking at net working capital and capital tied into operations, we see that the net working capital turnover was flat and then continue to be on a stable level in Q1 against last Q1 in '23 and also against full year '23. So the key metric is stable here, but then there are 3 factors increasing the net working capital and that is mostly the acquired inventories, and that's also the acquisition-related buildup of receivables, especially in Norway after the acquisition there in August '23. And then as we all know, there's been kind of strong inflation, cost inflation on -- on sourcing prices, and that's cause the sales prices to increase, and this has an impact on the inventory and the whole net working capital value pushing that up. But the key metric here is that the net working capital turnover is flat, so that's under control also for last group. Cash flow due to the net working capital issues I just mentioned, the cash flow of the operations was clearly lower than the same quarter last year. But then again, the kind of profitability improved. So this is kind of an acquisition-driven fact mostly that the cash of operations is down. Other cash flow summary. No big changes in investing cash flow or in cash flow from financing activity is really basic normal running operations cash flows. So nothing to mention here. And then when you look at the financial position and the interest-bearing net debt, here also no special changes, only normal amortizations on the loans when you compare to the last -- to the same quarter last year and then also normal amortization on lease liabilities. Cash was lower than the same period last year but all in all, we had a good liquidity position and the kind of cash and unused facilities were above EUR 30 million at the end of the period and kind of dry powder for future acquisitions. We had also undrawn uncommitted facilities of a bit less than EUR 16 million. So here also really stable and predictable development. Then when we look at the net financial items in the income statement. As all know, the interest rates have continued to increase still and they still impact the kind of net interest expenses in our P&L. And also as previous quarters, we are still subject here to the fluctuations of especially Swedish Kroner exchange rate, where here in these net financial items in [Vecana], when we take in the FX change from external loans and also internal loan receivables for the parent company, from subsidiaries, we take in here a kind of bookkeeping FX impact, but that's mostly unrealized. But this, of course, impacts the net financial items you see in the P&L. Balance sheet summary, financial position. There is no special items. I just mentioned these, the total assets are quite flat and also total equities is increasing, so stable development here also. Events after review period, we had, of course, the AGM on the 10th of April and then we extended the senior term and multicurrency revolving financing agreement at the end of April. And as Arni mentioned, on second way, we announced the acquisition of [Aquist] and also we appointed a new director for compliance, legal and HR also on the 2nd of May.

[Arni Ekholm, executive]

So summarizing Relais as an investment, as I explained in the beginning, we are a sector specialist, which gives us a unique competitive advantage. We know this market very well, we have also a good track record of combining the companies into bigger entities and having the local autonomy driving the customer interface locally. We are a profitable and unique growth platform in Northern Europe. There are not many like us, if any. We have a successful acquisition track record, which is also very unique strong profitability and cash flow, growing defensive underlying market, which is, of course, positive during this type of times. We have owned brands with growth potential, especially in the lighting business and also in the equipment business. And we, as Thomas also showed, we have a very lean and effective operating model, which gives us a competitive advantage from that perspective. Shareholder value I mentioned in the beginning and just a quick recap of what has happened after the IPO we did in 2019. So if you look at the dividends paid between '20 and '24 and also then this upcoming part of the dividend, then the total yield of the value creation of the share has been 83.1% with yesterday's stock rating or price. Then a few releases we also published today. Just a few words about them before going to the questions and answers. We announced a share buyback program to enhance the capital structure, the equity structure of the company. You can all see the announcement, but it was based on basically acquiring a maximum of 85,000 shares or EUR 1 million. Then we also have a liquidity providing agreement with [Lao] Capital to enhance the liquidity of the share and then we announced a new stock option plans for the retainment and motivation of management and key employees in the company and also a slight technical change in terms of the '21 long-term incentive plan. So quite a lot of things happening on this front as well. Then over to questions and answers, and I hope you have been very active, and then [Heike] will read aloud the questions and then we will answer.

[Unknown Executive]

Yes. So there is quite a few questions, and we start from the fellow [Indiscernible] here. You mentioned in the previous quarterly report that the QA had started off well, are you on the same page regarding Q2?

[Arni Ekholm, executive]

Well, the market data is still very fresh. We don't actually have -- we cannot comment, of course, our own performance but I would say that looking at the market April, now the Easter is on the April side, which was last year in March. So in April, there are more sales days than last year but it's early days to comment about the market. I mean, no dramatic changes on the market as far as we have seen.

[Unknown Executive]

Good. Then we move on to Joni Sandvall, quite a few questions. Following strong January, February, has growth normalized when taking into account timing of the Easter?

[Arni Ekholm, executive]

I'm not quite sure I followed the question, but the -- I think the March -- yes, if I understand the question correctly, the March was more normalized, yes. The cold weather did not affect the March, it was more our own performance was really strong in March month, even taking into consideration that there were 3 less sales days. So the weather-related boost was in January, February. March was then from a market perspective, normalized, but we outperformed the market. I hope I answered you on your question.

[Unknown Executive]

And the next one from Joni on equipment sales were at the record level. How do you expect this to continue given somewhat soft outlook if listening for OEMs outlook?

[Arni Ekholm, executive]

I think the team in Norway because a big part of now in the way we report equipment comes from the Norwegian workshop equipment businesses and they have very long-standing customer relations and it's to a quite large extent, project business, and we have a good vision on the pipeline business. So it's -- we do not have any reason to be negative on that front.

[Unknown Executive]

Super. And then Joni continues on commercial vehicle repair and maintenance, you know increased demand for bigger fleet operators. Have you continued to gain market shares?

[Arni Ekholm, executive]

Yes, that is our understanding.

[Unknown Executive]

And then how you expect procurement and sourcing costs to develop ahead of high season given the Red Sea situation?

[Arni Ekholm, executive]

Not really at all negatively. The situation is China for the Chinese companies is very challenging because the volumes have gone down on a global basis. So I think it's more the freight cost, yes, that's probably another topic, but the weight of the freight cost is not too big in the type of products that we import. But I would say that we have a good negotiation negotiating position versus the manufacturers in China.

[Unknown Executive]

Then a couple of more questions from Joni, M&A pipeline is healthy. Is there some particular segment you are looking for?

[Arni Ekholm, executive]

We are looking at the whole scope that I showed in the beginning of my presentation, so with equal weight. I mean, of course, there are some the areas where we operate at the moment, it's more probable that we find suitable targets in those 3 areas that we operate in, but we are also looking at other targets in the universe of the vehicle aftermarket. Good.

[Unknown Executive]

And the last one from Joni. Following extension in financial agreement, what is the average interest rate of your loans? And are these in floating rates?

[Thomas Ekstrom, executive]

Yes, they are in floating rates and the average rate at the moment is a bit above 5%.

[Unknown Executive]

Good. Then next couple of ones from Petri Gostowski, what do you see as the reason for your outperformance compared to the market?

[Arni Ekholm, executive]

It's an extremely good question, Petri. I think there is not one single explanation, I mean, we have worked a lot on operational excellence, we have very high activity with the customers. I mean there were successes in all fronts. I would say if we take the repair and maintenance sector, small things that have accumulated during the last years on the operational side, on the utility or the utilization ratio and the customer work we do there and getting market shares and then on the wholesale business, I think the general trend is the kind of what I've been talking about the defensive nature of the business is supporting us at the moment and we have taken market shares. Also, it's not only the weather, it's a lot of good things that have happened at the same time, but not one single thing that I can lift as a reason. So it's a lot of good performance in all the teams.

[Unknown Executive]

And then the last question comes from Petri. Can you quantify the impact of price increases in the vehicle repair and maintenance business?

[Arni Ekholm, executive]

Not directly because it's -- the profitability of the repair business is not only pricing, it's also the way you operate, how you utilize the capacity that you have, the kind of would you call it, the ratio and how effective the machine works. It's really hard to say, it's a single-digit percentage relatively. So it's not a huge effect but I would say -- I don't know, Thomas, if you have a better analysis than myself. But the effect on the gross profit percentage on repair maintenance on the price increases, I mean, it's not really huge but it is there, maybe 1% to 2% points or something like that.

[Unknown Executive]

Good. No more questions.

[Arni Ekholm, executive]

Okay. Thank you very much, and thanks, everybody for following this and also, again, a warm thanks for all our teams for the fantastic performance during quarter one. Thank you.