Relais Group Oyj

OMXH:RELAIS

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Arni Ekholm, executive]

A very good morning everyone. Warm welcome to follow the webcast presentation of Relais Group quarter 2 results, and greetings from the sunny and very warm Helsinki this morning. My name is Arni Ekholm. I'm the CEO of the company. And I'm delighted to be able to present the results today with my wingman and CFO, Thomas Ekström, who will take a deep dive on the numbers after the business review.

[Thomas Ekstrom, executive]

Good morning.

[Arni Ekholm, executive]

The contents of the presentation in short, firstly, let's look at Relais as an investment. Then I will walk you through the events during the quarter 2 and part of the half -- first half year. Then we will touch upon the acquisitions and acquisition strategy. And then a short summary of the outlook for 2024. And then financial review, as I said, which Thomas will then be taking you through. [Operator Instructions]

There's also questions and answers part in the end. And for those of you following this live on webcast, you have the possibility to submit questions by pushing the button. I think it's called to Ask a Question. And then [ Jaki ] will, here, collect the questions, and we will then entertain them in the end of the presentation, roughly 20, 25 minutes from this.

Before looking at Relais as an investment, let me start by congratulating our over 1,000 professionals. Quarter 2, by any account, by any measure, was a fantastic performance. I'm really happy for the performance you, all the 1,000 people, have done and I'm really proud to be able to run this company. And together with you, take it to the next level.

Why is Relais such a good investment? Let's go through some of the main features of Relais Group as an investment. We are a sector specialist, we have decidedly focused on the aftermarket of vehicles because that's where we see is the biggest possibility to add value and to create shareholder value. We call ourselves a competent compounder. We are not agnostic compounders. We focus very targeted in the acquisitions we do and how we deploy capital to create value for the shareholders. We have already now -- and let's look at the numbers a bit later, the size of the company on a rolling 12-month basis is already over EUR 300 million turnover, with over 10% EBITA. So we are very profitable, a unique growth platform in this business in Northern Europe.

We have done roughly 20 -- or 19, 20 acquisitions during the last 5 years. Successfully being able to develop the companies we have acquired, which is very important from a value creation point of view. We have a strong profitability and cash flow, which, of course, gives us possibility to finance the acquisitions as well. The market -- the aftermarket of vehicles is steadily growing. It's not growing double digit, but it's growing every year. Every vehicle for us is a source for revenue. We can either repair the vehicle or equip it with equipment or lighting or spare parts. So for us, it's important that there are vehicles no matter what the drivetrain or the technology is the vehicle is.

We have also -- I sometimes call it a rough diamond or hidden gem, which is the vehicle lighting range, which -- that business has grown steadily during the last few years. We have owned strong brands focused on business-to-business customers mostly and showing already good export performance in North America and Central Europe, and even Australia. And then I always said, we hate overheads. We don't want to have a big administration to run these companies. We are very lean and effective as a company, not anorectic or anything from that perspective. So we have enough resources to run this business, but we do not accumulate overheads more than is needed absolutely to run the business.

Okay. Let's have a look at the structure of the company, there's no major change from the last time I presented this to you, but it's maybe good for everybody to just recap this. 2/3 of the business is coming from Technical Wholesale and Products, and 1/3 is coming from the repair and maintenance business, which is 100% focused on commercial vehicles and mostly heavy commercial vehicles.

Then if we take a closer look at the Technical Wholesale and Products, we can split that into 2, where 31% points of the [ 62% ] is coming from spare parts business. And also there, at least half of that business is directly related to commercial vehicles. And then lighting and equipment is the 36% points out of the 67%. And then we have various companies across the Nordic region focusing on electrical equipment and lighting. And the lighting brands I mentioned make a big part of Strands business and also Startax and Lumise business. And the latest newcomers are the commercial repair shop equipment businesses, AutoMateriell and Nordic Lift.

Also, if you think about the, what Startax call, the ICE part of the business, the internal combustion engine technology related business, we consider that only relevant from a passenger car point of view, because the powertrain development on the commercial vehicle side goes on another much slower path than on the passenger cars. And anyhow, how we look at electrification of the car parc in the Nordic region is a potential for us, a huge potential. The price of the components is going up.

Even if there's less repairs maybe, but there's a lot of spare parts still going to the e-vehicles. So we consider it as a possibility, a huge business opportunity. And having said that, maybe half of the half of the spare parts business is directly related to internal combustion engine. So it's a very big part of our business anyhow, whatever happens in the technology development.

Then I mentioned the strong track record on acquisitions. It's been -- it's a fantastic journey to be able to participate and to run the company. I joined 2015. And after that, we have made, let's say, during the last 5 years, we have made almost 20 acquisitions, and the company has grown in 10 years, almost tenfold in size. So that's the kind of platform that we are, and we are nowhere near the full potential of the company and the market. So this is just the beginning of the journey.

Then let me look closer and explain what has happened during quarter 2 on a business review point of view. This also marks the sixth consecutive quarter with a double-digit EBITA growth. So there's been a huge momentum in the company. I think we have managed to develop the companies we own to a much higher level, the organization is on a good level. We have the resources we need and, let's say, the market demand has been on a good level, and we have been able to meet the demands of the market in basically all the geographies we operate in within the Nordic region.

Thomas will then, of course, focus more on the numbers, so just pick some of the highlights here. The quarter 2 sales growth was 16%, versus last year's quarter 2. And on the first half year, we have grown with 18%. So all in all, the first half has been really strong. And the 12 months rolling net sales is EUR 308 million. Now we have passed the EUR 300 million mark. And then very strong development on the comparable EBITA as well versus the last year, and we look closer to the factors behind this, plus 52% is outstanding. And then also on the H1 levels, plus 37%. The rolling 12 months is plus 16% growth on the EBITA.

One thing that is also really, really positive is the earnings per share. I think from an investor point of view, a very important KPI growing from EUR 0.18 during the quarter. And then on the first half year at EUR 0.39 versus EUR 0.17. And also one very important KPI is the return on capital employed, which has grown with 2.4 percent points. So that's a very, let's say, a good number. And we, of course, aim to keep it high and even improve it as a compounder. It's an important KPI to show how we employ capital.

Right, then, let's say overall picture on the quarter 2, as I said, strong performance on all fronts, a 16% growth. And I think it's very important to note this as well, it's not coming from -- purely from acquisitions, it's -- half of the growth is coming from organic growth. And I will explain slightly more in detail later how it's divided between the business groups and the geographies.

What is also very positive is the growth of the gross profit percentage, which has gone up with 2% points. It's a result of many, many positive things. I mean we have been managing to push the price increases of our suppliers further on the sales prices, and partly also have been more effective in purchasing. So that's giving effect. That's one of the, let's say, thesis we have as a compounder or a consolidator, that the bigger we get, the more volumes we can purchase from certain suppliers, and our purchase power is following higher. And then, of course, our pricing power has proven to be good.

We have done a lot of activities and measures on the operational efficiency, especially on the workshop side, which is paying off as well in the gross profit. And as I said, the comparable EBITA grew with 52% versus last year, which is a huge, huge improvement.

Okay. Then look at the business areas. Technical Wholesale and Products, the growth was 18% as well and the organic growth was 9%. It's coming predominantly from the Scandinavian markets for us. Scandinavia is mostly the Swedish business. We have business in Denmark and Norway as well, but it's the Swedish market. And our performance in the Swedish market, that's been really, really positive. Other things that play into the net sales growth are the acquisitions we made in Norway after summer last year. This is the equipment business for the workshops. And then, let's say, from Finland and Baltics point of view, the development was positive. Not as strong as in Sweden, but let's say, even after the strong quarter 1, the Finnish companies managed to perform very well.

Looking at some of the product group comments, the spare parts grew with 13%. The ones who followed the quarter 1 presentation, you will remember that the first quarter was very hard from a weather condition point of view, which is always good for us. And the hard winter conditions actually carried over to the quarter 2, because some of the damages in the vehicles are only detected, let's say, after the summer tires have been put in and some of the damages need to be then repaired after the quarter 1. And that is visible on brake parts and suspension and steering components. And then -- well, partly in Finland as well, May was very warm and that affects some of the air conditioning components. So all in all, positive momentum on spare parts.

Equipment product group, which is then excluding the lighting products, grew with 33%. And this is largely coming from the acquired workshop equipment businesses in Norway. An important, let's say, point here is the growth of the vehicle lighting products. I mean quarter 2 is traditionally not a very strong season for lighting, but we have been managed to, let's say, restructure the business of lighting together with our distributors and customers in that way, that a bigger part -- a bigger and bigger part goes to lighting products that are not seasonally driven. It's not like the -- when it gets dark, you need auxiliary lighting. This is more work lights, warning lights and that type of stuff that goes for equipping of the professional vehicles all year round. And this is also coming very largely from the export markets in Central Europe and Northern America.

Then Repair and Maintenance was a very steady business. We have -- that business has developed very positively during the last quarters. And sales was growing with 12%, organic was 6%. I mean there was some acquired growth as well, as I will explain later. And our takeoff from this is that we are growing mostly on the big customer side, and the key customers and fleet customers who are looking at more cost-efficient alternatives to their repair operations than maybe the, let's say, the vehicle manufacturer-related repair shops. So this is clearly one source for the growth.

And then from an EBITA point of view, also the -- it's on a very good level. Let's say, since we have bought the companies, we have almost doubled the profitability of this business. The resource situation, those of you who have followed realize for a longer time will remember that a couple of years ago, there was a big demand or big deficit of workforce in the in the workshops, but now we have -- the current has turned. I'm not saying it's -- we can still hire more mechanics in Finland and Sweden. But the tide has turned and people are actually coming back after the COVID times when many people left actually the whole business, and now they are coming back to our workshops.

Some very short comments on the segments. For us, segments are geographies. Sweden and the other Scandinavian countries and Finland and Baltics. No major change, I would say, either on the quarter or on the half year level. At least in the quarter, yes, the 3% points more from Scandinavia. As I say, Scandinavia was growing faster than the Finnish and Baltic markets, but both markets were growing, Scandinavia with 23% and Finland, Baltics with 8%. So my takeoff is Finland grew slightly more than the market. And Sweden, clearly, more than the market average growth during the quarter 2.

Then the business areas, the share of the business areas. Again, no major change as I showed on the slide. In the beginning, Repair and Maintenance stands for 1/3 and the Technical Wholesale and Products for 2/3, so no major change. Also growth in both areas is double digit.

And then finally, on the pie chart, looking at the product groups. And here, we also report Repair and Maintenance of commercial vehicles as a product group. So you will see it's the same 33% there on the first half year. What has grown on a first half year level is the equipment business, which is quite natural since we have bought the Norwegian workshop equipment business. So that explains the relative growth and absolute growth of that. What I'm really happy to see is that all business -- all the product groups have grown, and also lighting, which is traditionally not a strong product group during the first half year.

A few words about sustainability. CSRD is, of course, something that we are focusing a lot, not only just because it's directed but it's important. And we do -- we have done a lot of work in many teams to ramp up to meet the demands of the directive. And we have finalized our materiality assessment naturally based on the principle of double materiality from financial risks and opportunities perspective, and we started this evaluation already back in 2023. And then following in April, our Board approved the topics that we have presented and suggested in accordance with double materiality assessment. And we will then report on these topics in connection with the financial statements for 2024. So more of this to come when we present our '24 full year.

Acquisitions. Again, we continue all the time. I say this every time, this is part of our -- the way we operate, our modus operandi. We actively scan and engage different entrepreneurs and owners -- business owners in the market for good acquisition opportunities. Yes, we are picky. We do not want to buy companies that are in trouble. We want to find the good companies and then pay the market price for them, and then develop them. And buy companies where there's a good potential for further growth and a good strategic fit. So at any given time, we have a number of discussions and dialogues ongoing with different parties.

When do they mature to actual deals is then, of course, another question. And some discussions can take and contracts can take years before they mature, so you need to have enough in the funnel and engaged enough of business owners and companies. We also do get inbound contacts all the time where companies are offered to us. So let's say, watch that space and more to come than when we will close some deals. And there are enough interesting targets in the Nordic marketplace, let alone then if we lift the big -- above the Nordic and look at regions outside the Nordic, which can be relevant also for, let's say, lighting business.

So this year, 2 acquisitions we have announced, which have been focusing on the heavy commercial vehicle and Repair and Maintenance business, which is, of course, a strategic growth area where we want to grow in the future as well. Just very briefly recapping the Ahlqvist purchase or acquisition we did 30 years history of vehicle and trailer repair in Southwestern Finland, 3 workshops, 68 employees. And I want to welcome all of you to join Relais Group, you have joined already in the summer. A very good add-on to Raskone, giving us a very critical and good expertise on the trailer repairs, and that is strategically important where we also want to grow with Raskone in the future and keeping the Ahlqvist, strong Ahlqvist brand.

And then in July, we announced the signing of the deal to buy Team Verkstad Sverige AB from Vy Buss, a Norwegian company. That is a kind of add-on for the STS company we have in Sweden. So this completes the say was a white space in Gothenburg that we can now fill with, with these 2 workshops, which have , let's say, a focus on the bus business, but also we have a potential to then grow the truck repair business and trailer repair business on those 2 workshops. So it's a very nice, good fit, strategic fit for STS. And this is the way we operate. We try to find good add-on acquisitions as well, and then also some bigger platforms for the future.

Okay. Let me then explain how we look at the rest of the year, what is the outlook for '24. I consider it or we consider it as a stable outlook. Then, of course, provided that the current market conditions prevail and no asymmetric shocks or anything happens on the macro side. So it looks stable. There are some uncertainties as I have explained before. Some part of our business in the lighting business is coming from consumer-related products. There is a seasonality when I said before, when it gets dark, people are looking at, okay, I maybe need a new set of auxiliary lights. How the Finnish consumers purchase power is going to be -- remains to be seen. But again, luckily, we have grown the business-to-business part of the lighting, so much that is not a huge question mark, but still.

The second half year, as you know, is traditionally very important for the total profit of the group. So it's very important that we then also have success in our commercial activities. And then we have loads of new product launches coming for the lighting business. Very interesting and good new products and commercial activities during the peak season. So that is crucial for the success of the rest of the year.

Having said all that, we consider that we are well positioned. I mean we have all hands on deck. No critical resource questions at the moment and good momentum in the market. So we see that we have a good possibility to carry out our -- carry on to implement our strategy also successfully and sustainably for the rest of the year. So this is basically our outlook for the '24.

And then just to remind you of our long-term financial targets, which is then by the end of '25, so it's not that long term anymore. That is the target we have is to reach a comparable EBITA of EUR 50 million on a pro forma basis, i.e., including a run rate EBITA of acquired businesses as well during '25. So that is the performance bar that we have set for ourselves.

And then now, Thomas, the stage is yours.

[Thomas Ekstrom, executive]

All right. The financial review is actually really kind of -- to summarize, it's a really good performance across the board for the second quarter. And also when you look at all the kind of other metrics or the balance sheet, it's really pretty much as expected. That's the way, I guess, you can summarize the financials.

I won't go into details that Arni already told you, but here, just the kind of long-term quarterly time series on sales and EBITA and it's -- you can see, it's really good to follow online. Perhaps just to reiterate that it was both businesses that performed well, both sales-wise and profitability-wise. And also geographically, both Scandinavia and Finland and Baltics both performed well and improved both net sales and EBITA.

And then to go into the kind of components of the profitability. First, the gross profit and gross margin, Arni just commented on the good improvement on the second quarter. Also, first half was a really good development. And there's a lot of drivers behind it, of course, strong organic growth driven by kind of good sales development, price increases. That's more on the wholesale side. Operational efficiency has more on the workshop side, and also effective purchasing in both businesses. So all these kind of add up and support this good development in gross profit and gross margin.

Then going down the P&L, operating expenses, of course, they have increased in euro value because of most of the acquisitions and inflation. But the key metric here is that the OpEx percent is stable, which then kind of allows for the improved gross margin to come through. So this is really key issue also.

Then if you look at one key component of the cash flow in addition to profitability, net working capital has really kind of been -- it has increased but in a good level. And we have the inventory turnover and net working capital turnover has been stable, which is the key metric here as we have in a growth environment. Of course, when we grow, we increase prices, sourcing costs increase. Of course, the euro values of net working capital increase. But turnover-wise, we kind of have really a good and stable performance.

Cash flow, of course, when you have good profitability improvement, that also spills over to cash flow. But also in the second quarter, especially, we had really a good development in net working capital change. That brought EUR 3 million additional kind of improvement on top of the good profitability. Then again, net financial items in cash flow, of course, when we have increasing interest rates. Of course, they will pay out more interest, and we also had kind of biannual payment of interest now in the second quarter. And we have paid more taxes also due to improved profitability. So here, also a really good development.

And just I won't go through these, perhaps just kind of reiterating also that the cash flow from investing activities, we bought the Ahlqvist business, Raskone bought that one, and then we have made normal investments in tangible and intangible. So nothing special there. And then the cash flow from financing activities, we have repaid lease liabilities. We have paid dividends this quarter. And we have also then raised EUR 3 million from our uncommitted facility to partly finance the acquisitions that we made during the quarter. So no surprises as expected here.

Also on the net debt development side, I would like to kind of raise here that the net debt to EBITDA measure or leverage has really kind of developed positively. It's now down to 3 multiple. It was, last year, 3.6 at this time of the year. And that's, of course, has to do with the improved EBITDA as the net debt level is quite stable. So cash-wise, we have good cash reserves. The cash level also stable, a bit below last year, but nothing kind of abnormal.

So all in all, when you perhaps then look still deeply at the net financial items, it's good to kind of notice that last year, in almost in all quarters, we took a negative impact in net financial items from the weakening krona. And now you can see here that this quarter, we had -- first time in a long time, we had a small positive impact on the net financial -- on kind of when we translate the loans and loan receivables, we had a positive impact here. So this time, it has not impacted the EPS number negatively as it did before. So that's good to note. Otherwise expected interest expense costs due to the increased interest rates.

So that's, in a nutshell, the key metrics and the key financials. So these are again here the summary of the other ones. So I won't go through this, you can read them in the material.

[Arni Ekholm, executive]

Yes, thank you. Thank you so much. Yes, a very concise performance and presentation. Thank you very much. And then we are ready to answer some questions. I hope you have been active in that front. So [ Jaki ], please.

[Unknown Executive]

Yes. Joni Sandvall from Nordea says, first, congrats for the strong Q2. Your organic growth was a strong 8% in Q2, how much price increases supported growth? And how much new customers you have gained in Repair and Maintenance during H1?

[Arni Ekholm, executive]

Thank you, Joni, for the good question. It's virtually impossible to be very precise on what part is the price increase part of the 8%. But let's say, my assumption would be roughly half. How much new -- how many new customers, it's not so many. Let's say, it's not so much a question of gaining a lot of new customers, we have had many of these fleet customers before. Let's say, our share of their purchases has grown. There are a few new ones, but mostly established already big customers have grown.

[Unknown Executive]

Good. Joni continues, considering important lighting season, does your customers have inventories left from last season?

[Arni Ekholm, executive]

Again, impossible to say very precisely, we have, of course, feedback from the beginning of the year. And our assumption is that there is not a problem on that front. Of course, there's always something left, but not to the level that we would be worried about it.

[Unknown Executive]

Good. And Joni continues, has there been any material changes in competitive environment?

[Arni Ekholm, executive]

Not really.

[Unknown Executive]

And one more. Tax rate remained relatively high during Q2. Is there some reason for this? And what should we expect for full year tax rate?

[Arni Ekholm, executive]

Over to you, Thomas.

[Thomas Ekstrom, executive]

Yes. I don't think there's going to be a big change on the full year tax rate. It has to do with which of the companies kind of have -- show their profit before taxes. So it's kind of a mix between the companies and countries. So all in all, I would not see a kind of a big change on that one. But of course, as Sweden grows -- as for Sweden has improved more, then there might be a slight impact on that way from the Swedish tax percentage, but no big change expected.

[Unknown Executive]

Good. Then a couple of questions from Petri Gostowski, Inderes. Can you describe the organic growth drivers of the Repair and Maintenance business on Q2 in more detail?

[Arni Ekholm, executive]

Yes. Thank you, Petri. It's also a combination of price increases and probably also, to a certain level, the mix between trailer and truck repairs. So the truck repair usually has a higher hourly rate than the trailer repair. That would be, let's say, the short and the long explanation of it.

[Unknown Executive]

Another one from Petri. Can you give some rough estimate of the share of consumer-driven business versus B2B in the lighting business?

[Arni Ekholm, executive]

Yes. I would start from, let's say, looking at the auxiliary lights, are about 20% to 25% of the total lighting business. And maybe roughly -- in the season, maybe half of the auxiliary lights is coming from the consumer business. So it's a very rough generalization. So let's say, 10% of the lighting sales probably is in the season related to the consumers. It can vary on a specific month, of course. But on a full year level, this is what I'm talking about. So the months of September, October, November, there we see a bigger part of the consumer-driven discretionary sales. But in a big picture, maybe 10%.

[Unknown Executive]

A couple of more questions, one from Joni. On M&A, how valuation levels have developed? And are you preferring bolt-on acquisitions or larger platform expansion possibilities?

[Arni Ekholm, executive]

I will answer the second question first or the second part of the question first to Joni that we are looking at both. We -- at any given time, we are looking at both. So we do also the bolt-on or add-on acquisitions, but we also look for platforms, even game changers. I mean, in different type of baskets. The multiples, I would say, a good company, there's always a certain level of multiples. For us, it's more like, I think, there are more discussions going on at the moment.

So maybe the over, let's say, exaggerated multiple expectations from a couple of years back have normalized, but there is no discount from that perspective going on. I mean a good company is always worth the market price. So no dramatic change, but still lower than they used to be a couple of years ago. But it's not like dirt cheap or anything. We are talking about maybe 6% to 7% EBITA multiples roughly.

[Unknown Executive]

Good. And then the last one from Petri. On the effective purchasing as a profitability driver, have you renegotiated terms with some big supplier? Or is this more about development across the board?

[Arni Ekholm, executive]

Yes, we have naturally negotiated with the big suppliers, absolutely. Putting together the volumes and, let's say, having a good dialogue with the suppliers of what kind of platform we are and what can we offer to them, and that has usually led to good results. It's an ongoing process. So it's a mixture of both. But yes, absolutely, we utilize the power that we have.

[Unknown Executive]

Good. That was all the questions from the chat. Thank you.

[Arni Ekholm, executive]

Thank you very much, [ Jaki ], and thanks, all of you for following us. And good luck and have a nice rest of August, everybody. Thank you very much.

[Thomas Ekstrom, executive]

Thank you.