Alimak Group AB (publ)

STO:ALIG

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Alimak Group Q1 Report 2019. [Operator Instructions] Today, I am pleased to present, CEO, Tormod Gunleiksrud; and CFO, Tobias Lindquist. Please begin your meeting.

[Tormod Gunleiksrud, President & CEO]

Thank you for that and welcome to Alimak Group's Q1 2019 Result Call. And as said, together with me here -- this is Tormod Gunleiksrud, CEO, and together with me here I have also the CFO, Tobias Lindquist. And I think we'll just dive straight into the presentation. Moving onto Page #2 takes us into the quarterly highlights. And it's, of course, nice to see that we had double-digit growth in the quarter. We had a reported growth on the revenue side of 22%. And on the organic side, we ended up with a growth of 17%. So even though we had some revenues that went over from what I considered should have been part of 2018, it is anyway a solid quarter when it comes to the sales side. On the order side, slightly lower year-on-year and that is really relating to -- or mostly relating to the Industrial Equipment side of it. I think we dive into that as we get to the different BAs, but key here -- or keyword here is Wind and BMU, and as I said, I will dive slightly deeper into that when we get to the different BAs.Results-wise, happy to see that good improvement from Q1 2018. We ended up with an EBITA adjusted of SEK 153 million versus last year, SEK 111 million. So 38% growth on the EBITA side is with a solid growth on the earnings side. So happy to see that the development that we kind of expected is taking place and all continues to deliver. Also happy to see that improvement contribution is coming from Industrial Equipment side and certainly also on the Construction side. So, of course, good to see that the positive development on the Industrial side is continuing.We'd also like to draw some attention to the acquisition that was made actually just on that first day of Q2 but still drawing some attention to that on the reporting of Q1. We acquired Dataline i Borås, it's actually the name of the company. They have been a supplier of control systems to Alimak Group for a couple of decades. They have also been -- or they are also a supplier to what was previously known as Hitec in Norway. So they are -- made up fairly significant portion of the digital side of what we are doing in Alimak. And given the fact that time is getting closer for developing a new platform when it comes to control and the need of being connected real-time with our equipment and then we decided to acquire the company to make sure that we can have a firm grip on both the intellectual property of it, but also the Big Data that is possible to collect with these systems being constantly online or on demand online. So strong enabler for what we want to do in the Internet of Things going forward.Moving then to the next page. Page #3, takes us into the BAs. Starting with Construction Equipment. Quick view on the demand side on the market side. U.S., I can just say it continues to go very strong. Also happy to see that Southeast Asia, Middle East is coming back with a stronger demand. While one could say that Europe is slightly weaker versus previous quarters, I think that it's fair also to say that this is mainly related to the Nordics and also partly U.K. U.K. has a very strong pipeline on projects. However, it -- I think it is tightly connected to what is going on in terms of Brexit and that process because there are fairly large portfolio of projects that I would expect to materialize and come online going forward.So order side increase reported by 7%, minus 1% organically, leaves us with an order intake of SEK 212 million versus last year, SEK 199 million. Revenue-wise, ended up on SEK 208 million versus last year, SEK 177 million, 18% growth, 8% organically. And EBITA continued good development, ended up at SEK 30 million on EBITA adjusted versus last year, SEK 17 million, leaves us with a margin of 14.5% versus last year, 9.5%. So I have to say, Construction continued to deliver. I'm very pleased to see what came through in quarter 1. And, of course, it's good to see that pipeline of projects out there are well existing which also indicates good development going forward. Moving then to the next page takes us into Industrial Equipment. Here, we are on order side that decreased with 11%, 17% organically, ended up at SEK 477 million versus last year, SEK 533 million. And, of course, you could say that it's bit of a disappointment. You don't really want to see the order side go down. Where does it come from? We have seen, on the Wind side, slightly more competitive market in China. I think it's fair to say that we have sort of 2 main offerings that goes into that market. It is service lifts and connected ladder systems. In addition to that, we also delivered what you could call power internals. Power internals consist of platforms, hatches, cable trays, very much, how should I predict, more commodity, less technology into power internals. And what we have seen is that -- we've seen some suppliers, some competitors going in there with products that we have hard to understand it's sustainable. We have decided not to participate in such a race, supplying for almost 0 margins. It's not really our ability. However, we, of course, have to oversee our cost position and take a stronger look at that and that is currently something that we are working on. So we are still fairly positive on our position and our strength in the market going forward. The other one that has contributed to slightly lower bookings on the order side is the BMU business. Given our experiences from 2018, we have been sort of enforcing process that is aligned with the rest of the groups when it comes to order bookings. That means that we don't really book orders on letter of intent. We think it is good for the customers and it is definitely good for Alimak Group that all both technical conditions as well as commercial conditions are sorted out and brought well into leasing contracts before we are actually booking. So we have aligned that and the inning result of that is that some SEK 45 million are sitting on the desk of the BMU side in terms of letter of intent. That are awaiting firm contract implementation and when that has taken place and the orders will also be starting. This is more delay of the orders, has less to say on the revenue side.Revenue-wise, on the Industrial side, very good, ended up at SEK 570 million versus last year at SEK 428 million, leaves us with a growth of 33% and organically, 24%. So strong growth on the revenue side. Also positive margin development is continuing. We ended up EBITA adjusted at SEK 34 million versus last year, SEK 11 million. And that takes the margin to 5.9% versus 2.5%. So I think, directionally, it's good. Directionally, it's what we expected. So it's good to see that it is also materializing. Moving then to the next page. Page #5 takes us into After Sales. Happy also here to see that good increase on order intake. Ended up on the order side at SEK 321 million versus last year, SEK 286 million. So it was a strong quarter on the order side also from After Sales. Revenue-wise, reported growth of 9%, 1% organically, okay? This took the revenue to SEK 297 million versus last year, SEK 274 million. So all in all, I think it's a good quarter. EBITA adjusted ended up at SEK 78 million versus last year at SEK 74 million, margin of 26.2%. It's somehow in the lower part of the window that I would like to see. I said earlier that I would expect to see margin in After Sales sitting at around 27%. So I also know that After Sales was a bit quiet in January, then it picked up in February and it had a very strong March. So I'm still quite optimistic on where we are heading with After Sales. Moving then to next page. Page #6 takes us into the Rental business. Here, we saw the order intake coming in with SEK 90 million versus last year, SEK 102 million, for the quarter and that leaves us with a decrease of 12%, organically 15%. It's actually again more driven by ourselves. We are, of course, in the short window. We are aiming for the longer project. We have a very strong order book. So we don't necessarily have to ruin our utilization and come into situations where we cannot deliver. So all in all, I think it is okay. We had a revenue of SEK 91 million versus last year, SEK 80 million, leaves us with a growth of 14%, 10% organically. So on the sales side, I'm quite happy. EBITA adjusted ended up at SEK 12 million versus last year, SEK 9 million, also with a margin of 13% versus last year, 11.6%. So again, I think Rental did a strong quarter. Very happy to see. If you combine the Rental and the Construction side of the business, I think that sector had a very strong Q1. So all in all, I'm quite pleased with what came through also on the Rental side on the quarter. Then I think we have embarked at Page #7, the earnings summary, and I would like to hand over to Tobias to take us through that one. So Tobias, please?

[Tobias Lindquist, Chief Financial Officer]

Thank you, Tormod. So we are at Page #7, earnings summary. So the Q1 result was SEK 153 million, an improvement of SEK 42 million compared to Q1 last year. And as mentioned, a large portion of that was addition came from Industrial, which improved their result with SEK 23 million and Construction with another SEK 13 million. After Sales and Rental both increased their result with SEK 3 million compared to a year ago. Also, our margin -- EBITA margin -- EBITA adjusted margin improved from 11.6% last year to 13.2% this quarter. That is also driven by the underlying improvements within the business area, specifically Construction, which added 5 percentage points to the margin and Industrial who improved their margin with 3.4 percentage points. The increase in revenue for Industrial, leaving them having a larger share of the group revenues, had a negative impact on the group margin of 1.6 percentage points. With the implementation of IFRS 16, our EBITA adjusted was positively affected by SEK 2 million. In terms of items affecting comparability, we had SEK 2 million in Q1. That's mainly relating to the acquisitions of Dataline, as Tormod mentioned before. Last year's SEK 17 million was relating to the integration of Facade and Avanti Systems. Our amortizations were SEK 3 million lower than a year ago, due to that some intangibles were fully amortized in 2018. Our financial net of 9 -- SEK 9.5 million is slightly higher than last year. Here also, an effect of IFRS 16, which increased our financial net cost with SEK 2 million. Our taxes increased following the improved results and we ended up with the results for the period of SEK 98.5 million. So that's an improvement with 87% compared to last year and the EBITA adjusted improved with 38%. Next page, Page 8, tax expense. So with the earnings before taxes of SEK 130 million and tax expense of SEK 32 million, we had a tax rate of 24%, which could be compared with 26% in Q1 2018. Q4, we had positive tax income due to the legal restructuring where we had deferred tax assets of SEK 40 million. We had no material change in deferred taxes -- tax assets in this quarter and we don't expect any material changes here in 2019. So our tax rate will remain on similar levels for the year.With that, moving into Page #9., results for the period and earnings per share. So Q1 results was, as I said, SEK 98 million, meaning an earnings per share of SEK 1.82. That can be compared with SEK 53 million result last year and SEK 0.97 in earnings per share. So both improved by 87%. Q4 results and earnings per share was, as mentioned, affected by the deferred tax assets of SEK 40 million. So overall, we have a good development in earnings per share as well as the result.Moving to next page, Page 10, cash flow and net debt. We were cash flow positive from operations with SEK 36 million in Q1 comparing to negative SEK 7 million in last year. Also, this was driven by the improved result , while increase in working capital of SEK 112 million. SEK 66 million out of the SEK 112 million increase came from contract assets related to BMU projects and SEK 53 million was increase in receivables. We had, as Tormod mentioned, very high activity in the latter part of the quarter and that impacted our working capital. We still can make and focusing on making improvements in this regards. Our net debt by March was SEK 1.2 billion. And also, here, we had a big increase relating to the IFRS. Basically, the whole increase is related to that, whilst our net debt situation otherwise would be similar as year-end. In Q2, we will make the dividend and that will also affect our net debt situation.We ended up with a leverage on 1.94 compared to 1.55 in December. And that is, obviously, also affected by the change in net debt and IFRS 16. Excluding that factor, we would have ended up in -- at 1.37, so improvement from Q4. And that is mainly related to the EBITA result which we had what's SEK 191 million for Q1 compared to SEK 160 million in Q4. So overall, we generate -- we have a good financial situations with a nearly positive cash flow, strong balance sheet and improving leverage. Let's move to the Page #11, our mid-term financial targets. These were set in 2017 following the acquisitions of Avanti and Facade. In terms of revenue growth, our target is having an annual organic revenue growth of 6%. In 2017, we ended up on 9%. And in 2018, we were at 0% or flat for the year as a whole. However, we had a negative development during the first 6 months and then improving during the latter part of the year. Q1, we ended up on 13.5%, so leaving good improvement continuing. For EBITA margin target, it's 15%. We were at 12.8% in 2017 and also 12.8% for 2018 as a whole. We have -- could see in Q4 last year went up on 13.8% with improvements within all business areas. And Q1, we were at 13.2% also here with improvements for all business areas except for After Sales, which, however, improved their margin compared to Q4 2018. In terms of our leverage, our target is being below 2x. And we ended up on 1.94. That's, however, as mentioned, affected by the IFRS 16 changes. Excluding that, we would have been on 1.37x. So also, here, we have a good traction. So to summarize, our mid-term financial targets, we are moving in the right directions in terms of the revenue growth and also in terms of EBITA margin. Leverage, we're already at target level. We're still focusing on reaching these targets as on a run rate by end of this year, Q4 2019. With that, I hand over back to Tormod.

[Tormod Gunleiksrud, President & CEO]

Thank you for that, Tobias, and I think if then move to the next page in the presentation. Page #12 takes us into the acquisition of Dataline that we announced on April 2, 2019. I think, as I already touched upon, Dataline has been an important key supplier to Alimak and Hitec for quite a few years and we have been using their control systems, both for construction wise as well as for our permanent lifts. That was both for the Alimak brand and the previous Hitec brand. So they have been sort of developing the brain of our systems for quite a few years. And I think as I also said that it is time for us to start to look into the next generation of -- next-generation platform for control systems. And it was also natural for us to rethink our strategy on make or buy on the intellectual properties that are linked to that and also the way that these systems are enabling what we want to do in terms of being real-time connected in order to enhance the offering both on the services that we are bringing into the market as well as product offerings around it. So we ended up concluding that this was an important enabler for where we would like to take the offering of both services and products from Alimak Group in terms of having the right offering when it comes to Internet of Things, or IoT. So Dataline will be central or act as a development hub for all the enhanced product and service offerings that we are plan to do -- are planning to do on the connected side of our product. It's not overly complicated what we are buying, so we expect the closing to take place end of this month, so that we can have a full focus on developing the functionality that we plan to do and plan to use Dataline and its related products for. Moving then to the next page, Page #13. And I think with that, we have also arrived at the summary of the quarter. And of course, having seen reported growth of 22% and 13% organic growth and having contribution from all the business areas, I think deserves to be the first bullet on that one. So all in all, we are happy to see what came through on the revenue side. Slightly lower order intake, mainly stemming from the Industrial Equipment side of the business. Having said that, it's also important to mention that looking at legacy part of the business, Alimak brand of the business had a solid quarter on the order side. Very happy to see that the pipeline on new projects continue to grow on the oil and gas side. So I'm, all in all, quite optimistic on the Industrial side and what's going on, also on the margin development on the business. And that, of course, takes us into the fact that we had a significant improvement of that earnings side for the quarter. And so that was, of course, good to see. I've already been touching on the fact that we are planning and also executing on what we want to do when it comes to digital future. And that our first step of that was acquisition of Dataline, which I expect us to be able to enable our products for much more seamless real-time information exchange with our customers' installed base. And I think to sum it all up, I think all this leaves Alimak Group well positioned to capture opportunities in delivering and servicing safe, innovative and vertical access solution as we are also continued to improve our own financial performance towards what we have defined as our mid-term targets.So all in all, I think it was a good quarter. But as we are saying we are proud, but we are, of course, never satisfied. So we want to do more. So by that, I think we conclude our presentation and we leave the line open for questions, I guess. So we hand it back to the moderator. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Mattias Holmberg from DNB Markets.

[Mattias Holmberg, Analyst]

So I have a first question relating to the order intake, in particular to the stricter internal conditions for booking orders that you mentioned. So just to sort of get the fundamentals right here to understand how the actual underlying business is going. Am I right to assume that if I look at what you reported, which is SEK 1.101 billion in order intake and then so add back sort of speak this SEK 45 million that you say have been postponed or delayed due to this change in when you recognized orders, we would actually have an order intake of SEK 1.146 billion if you would have reported or booked the orders at the same -- say, the same way as you did earlier and that would actually imply that you have orders are up year-on-year rather than down. So could you just help me to see if my reasoning here is correct?

[Tormod Gunleiksrud, President & CEO]

Your way of describing it is absolutely correct.

[Mattias Holmberg, Analyst]

Great. And then just to follow up on that, will there be any similar impact in the coming quarters or is the sort of a one-off and then we should start to see these delayed orders coming in, in Q2 again and then sort of a normalization?

[Tormod Gunleiksrud, President & CEO]

That is absolutely correct.

[Mattias Holmberg, Analyst]

Great. And then another thing. You mentioned in the report on Construction Equipment that you've had some negative impact on the earnings from the relocation of a production facility. Could you give us sort of a ballpark figure for how much this cost has been?

[Tobias Lindquist, Chief Financial Officer]

It's -- yes, we have new relocation of our -- one of our production facilities in China which had an impact of that to have to break on some fixed assets. So it had an impact in Q1. We will not go into amounts, but it is, yes, it is not a huge amount.

[Mattias Holmberg, Analyst]

Okay. And then finally before I step back in line. I was wondering a bit about this weather condition that you mentioned in -- which in particular impacted the After Sales division where January and February seems to have been quite tough and then momentum picking up again in March. So should we expect any type of catch-up effect from the muted activity in January and February in the coming quarters? And also have you seen what was this increased activity in March related to? Is this fundamentally-driven or rather sort of a recovery or a pickup from the low activity in January and February?

[Tormod Gunleiksrud, President & CEO]

No. I think it is fair to say that some of the activities that were sort of delayed because of bad weather conditions. You should know that strong wind is always an issue if you want to travel with equipment in the heights. So that will -- that would always have some impact on the business. And of course, when it comes -- and also with -- that also stops people from using the equipment under certain weather conditions. So what they have been doing, cannot be tested, cannot -- we cannot do test runs -- that part of the principle. So I think some of this very, very strong, I would say very strong March was a little bit of a pickup from that. So obviously, I expect After Sales going forward to deliver on what would be my expectations. And then, of course, your next question will be, okay, so what are your expectations? My expectations have been open on those earlier. I would expect to see After Sales develop in a good positive direction. I should also say that I've been a little bit may-be disappointed to see that we have not been able to capture more of the BMU market on the After Sales side earlier and in a more speedy way. And I hope this will pick up. I think I was also touching upon that in my CEO letter in the report where I'm describing court cases that have taken place and verdict has also taken place leaving real estate or property owners with a responsibility for not maintaining the equipment according to what the OEM prescribes. So all in all, I see a good development on After Sales. And I think we should leave it by that. And I hope that they can continue what we started on in March to put this upward.

[Operator]

Our next question comes from the line of Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

I was just wondering if you could give some sort of indication of sort of the rolling 12 months order intake on the BMU business? I think it was SEK 1 billion business when you acquired it. Just curious to know where that sits in the last 12 months? Secondly, I was just -- I was under an impression that you changed this sort of order booking procedures last year, but I may be wrong there, but is it -- yes, just clarify that, please.

[Tormod Gunleiksrud, President & CEO]

First of all, when we acquired the business, then I think it's fair to say that it was roughly a SEK 1 billion business where a significant portion of that or I think we, at the time, said that our estimate for what actually went into After Sales was sitting at around 25%. So if you deduct that, it was like SEK 750 million. I think -- moving forward, I think the BMU side is delivering and growing according to our expectations. We -- as management, we are actually putting stricter rules for what we are actually quoting for what margins they are accepting. We did absolutely put measures in place last year to secure that we were not taking on orders but contains certain elements that we think that was not compatible to how we are conducting our business in Alimak. And that goes both on the commercial side as well as on the technical side. So that we did. However, we -- when we felt that most or the most important elements when it comes to both the technical side as well as the commercial side, we are sort of fulfilled. We also booked new orders. And I think we were open also on that. And we have not seen that -- we haven't had any cancellations or stuff like that. But we have seen that some elements that were not taken into contracts were sort of left open to be dealt with. We believe that it's not good for the end customer. We do not believe it is good for Alimak. So we have tightened up even further. And I think the effect of that is to make sure that all paperwork is actually done and dusted before we are booking and before also the salespeople are getting recognition for the sales actually being done. So I think that portion is a good thing to put in place. And it also aligns the booking procedure for all the businesses with what there have been placed in Alimak for quite a few years. So all in all, I think that is the way it should be.

[Johan Dahl, Analyst]

Not, I'm not questioning the logic of tightening routine. So I'm just curious to know, out of that SEK 750 million, which were new installations on BMUs, what is rolling sort of 12-month business? Is it possible to give any sort of view there? And also I wanted to -- what's your perception of the underlying market growth in this business at the moment?

[Tormod Gunleiksrud, President & CEO]

I -- we have never disclosed a breakdown of the Industrial business area. Anything else but what we disclosed when we made the acquisition, Johan, I think, that is a principle that we stated and I think I've mentioned a reason for that quite a few times. We are the only one in this business that are basically listed and it's quite some intelligence that are behind those numbers that we don't necessarily want to disclose in the public.

[Johan Dahl, Analyst]

That's cool. And your perception on market growth, I'm sure you have something to put there.

[Tormod Gunleiksrud, President & CEO]

Yes, I mean, the market growth on the BMU side, we expect that to be sitting around the global GDP, I guess.

[Johan Dahl, Analyst]

Okay, okay. Just a final question before getting back in line. On the wind power side, can you just indicate your percent market share in China on these types of vertical access products for wind power? And secondly, also sort of from a strategic point of view looking at 2019, what sort of -- how do you prioritize your price versus profitability? What impact do you expect this renewed competition to have on your Wind business in China for the current year looking at the full year?

[Tormod Gunleiksrud, President & CEO]

No. I think, as I said in the presentation, I think before we make any -- we make judgments all the time, of course, but if we should make any judgment that we believe will have a material impact on where we believe that the Industrial side will end up this year, I will at least see another quarter before we make any sort of new view on how we would see the full year and also going forward. So we're used to new players popping up all the time in all different sectors. This time, it was on the Wind side, it came from China. We know that new entrants in China, they can also be aggressive. And we also see that sometimes we lose and then new entrants are not being able to deliver. And despite that, we may be lost initially. Customers are coming back and ordering despite that they have actually awarded to others. That is happening. So I wouldn't change on a general view on the year from what I have seen in Q1. When it comes to market share in China, we have never really disclosed that. What we have said is that we are having -- we do have a strong position in China, in particular on the service lift and ladder system side of it. So all in all, we continue to work on the Chinese warrant market as well as the other markets. And working on our own cost position is something that you always have to work on, no matter what product line you're talking about. So all in all, it does not make any material changes, to my view, on the year. It just confirms what my strong belief is that you always have to work on your own cost position. And if some new entrants are coming in, let's not do any stupid things. I think that is my take on the current situation. We're still in a good position

[Operator]

[Operator Instructions] And we do have a follow-up question from Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

Yes, on the Construction, would you say that the sort of performance in Q1 sort of fully reflects the order book. I mean, what's in more high-value orders mature markets increasing more positive than sort of emerging markets or is this mix sort of progressing further in 2019 in your expectation?

[Tormod Gunleiksrud, President & CEO]

No, I think overall, in the order book or in the backlog, I think we have a very healthy mix. So I think on the -- I can only repeat what I said, Johan, I think, I used some words on that when I also was diving into the Construction side of the business. Healthy order book. Solid pipeline in the market. I'm quite positive on what I see on the Construction side. So adding to that, that I was also believing in our financial targets and where we should be run rate-wise at the end of the year. I think I should leave it with that.

[Johan Dahl, Analyst]

Okay. Also on the foreign exchange, can you provide any guidance sort of what do you expect on the full year impact on results, delta '19 versus '18 at current exchange rates?

[Tobias Lindquist, Chief Financial Officer]

Well, in terms of Q1 result of the result improvement of 38%, 6 percentage point was relating to currency or translation effect of the currency, and then, of course, we have the underlying transaction effect as well. So when it comes to the Swedish krona and the development, it is moving, fluctuating quite heavily over the last few months. So, of course, as we said before, we continue our hedging policies where we are having sort of 6 months hedges on average. So yes, depending on how it develops, we're hedged 6 months from now.

[Johan Dahl, Analyst]

Yes, but the 6% you mentioned in the written report and the foreign exchange effect on adjusted EBITA, is that all the translation, i.e., excluding transaction?

[Tobias Lindquist, Chief Financial Officer]

Yes.

[Johan Dahl, Analyst]

Okay. Can you say in Q1, what the total amount was, translation and transaction?

[Tobias Lindquist, Chief Financial Officer]

No. We don't discuss that. But of course, it has an impact on -- the weakening Swedish krona has positive impact on both translation and transaction, specifically for Construction side.

[Operator]

Thank you very much. As there are no further telephone questions, I will return the conference to our speakers.

[Tormod Gunleiksrud, President & CEO]

Thank you for that. And I think it remained for us only to say thank you for all those who dialed in to listen to the conference. And yes, we say good day, and again, thanks for dialing in. Thank you.