Alimak Group AB (publ)

STO:ALIG

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to the Alimak Group AB Interim Report for January to March 2021. [Operator Instructions] Today, I am pleased to present Ole Jodahl, CEO; and Bernt Ingman, CFO. Please begin your meeting.

[Ole Kristian Jodahl, President, CEO & Director]

Thank you, and welcome to this quarter 1, 2021 presentation. And as you heard, with me today, I have Bernt Ingman, our Interim CFO. Please turn to the next page and look at the agenda. Today's agenda is to go through the quarter 1 results of 2021. And now also where we then report for the first time our new division structure. We will also have a short update about the New Heights program and rounding off with a Q&A session. So then turning to next page, quarterly highlights. I'm pleased to see a solid step forward in improving profitability in the quarter with good effects from the cost-saving program that we implemented last year. We are on track to deliver on the SEK 60 million targeted annual savings and then with full effect as of the second half of 2021.We are still negatively impacted by currency translation effects, putting pressure on the reported order intake, revenue and earnings in the quarter. And we have now had these effects for 3 quarters, and then we expect also to see the same in quarter 2. The underlying development is more positive and adjusted for the currency translation effects, organic order intake was up 7% in the quarter, driven by increased customer investment activity in most of our businesses. January and February started a bit slow, but we saw a clear uptick in March. As expected, revenue was more or less flat organically due to the incoming order backlog and continued effects of the COVID-19 pandemic. EBITA increased 20%, and we report a strong cash flow, which has strengthened our financial position further.So then turning to the next page, group quarterly summary. So looking a little bit more in detail into the quarter, we see that the reported order intake increased by 1%, but then corrected for these currency translation effects, up 7% organically. Both BMU and Construction reported strong organic growth in the quarter. Industrial also delivered a solid order intake, whereas Wind reported a significant drop as an effect of our profit before growth focus, where we have then declined our internal orders, which do not meet our margin requirements. From a regional perspective, all regions were more or less in line with the same quarter last year, but good sequential improvements from the last quarters within APAC and Europe. Our aftermarket business is now part of each division, but as a group, reported order intake for the aftermarket grew 10% in the quarter and organically up 19%. Reported revenue decreased by 8% and were in line with last year organically, which we see as positive given the current circumstances. We saw slightly lower organic revenue in BMU, Construction and Wind as a result of the incoming backlog and effects of the pandemic. In Industrial, we saw a small organic increase. And as a group, again, our reported aftermarket business were down 4% in the quarter, but organically up 4%.Margins improved significantly in the quarter with an EBITA margin of 11.2%, up 2.5 percentage points and then mainly driven by our cost savings initiatives and a good and disciplined price management in the quarter.Turning to the next page. We then move into our new divisional structure. And first, we then go through BMU. Order intake in the quarter increased by 15% negatively affected by currency translation effects. And then organically, order intake was up 22%. The growth mainly came from increased service order intake in Europe and Asia and from increased equipment sales. However, we saw continued uncertainty in U.S. as well as intense price competition in Middle East and Asia, and this is stemming then from the COVID-19 and thereby a low level of contract awards in the industry. Revenues decreased by 9%, down 2% organically. The decrease was due to the incoming order backlog and continued impact from COVID-19. Earnings and margins in the quarter were negative, impacted by low volumes in January and February and a project mix. Reporting losses is, of course, the main concern. And we do have a plan to solve this, and this should be the last quarter where we report negative figures. We believe the EBITA margin in this business should be double digit, but it will, of course, take some time to get there and also considering the long lead times in this business. More details on our activities will come in the Capital Markets Day in June.We turn page and Construction. Reported order intake increased by 11%, up 17% organically, corrected for the negative currency translation effects. We saw an increase in capital investments in U.S. as well as improvements in the Nordics, Latin America, India and also Pacific, and especially Australia. Order intake was also solid for parts and service orders overall. Revenues decreased by 7%, but only down 2% organically. And again, the decrease was a consequence of the low backlog entering 2021. EBITA increased to SEK 35 million, down from SEK 33 million -- sorry, up from SEK 33 million. And the EBITA margin increased to 14.9% compared to 13% last year. The improvement was due to higher factory utilization, lower operating expenses, sales mix and also cost reduction measures that we have taken.We turn page and moving on to Industrial. Order intake decreased 3%, negatively affected by currency translation effects, and order intake organically was then up 4%. We saw increased CapEx investment, mainly in Americas but also solid order development in emerging markets and in spare parts as a result of increased activity in most industry segments. Interestingly, it was all driven by small and medium projects. No major projects won during the quarter, which continued to be pushed forward with delayed investment decisions, but we do not see any calculation.Reported revenue was down by 4%, but up 3% organically. Growth was impacted by a low backlog of refurbishment and upgrade projects due to the earlier limitation on travel. During the quarter, we saw some improvements, especially in America. Industrial delivered a solid margin improvement in the quarter. EBITA increased to SEK 50 million, up from SEK 38 million last year with a margin of 23.7%, up from 17.4%. The increase was driven by improved field service utilization and cost reduction measures. We turn page and finally, Wind. Wind reported a weak order intake in the quarter. Order intake decreased 27% and corrected then for the currency translation effects, down 20% organically. The decline was mainly driven down by our profit before growth focus, where we now only take orders for tower internals, which meet our margin requirement. The main impact was in China, but also in U.S. We will continue to see a drop in our order intake and revenues related to tower internals. Throughout the year, we believe order intake related to tower internals will be around SEK 60 million lower than last year, and revenues would be around SEK 100 million lower. We should then be at a sustainable level for 2022 and forward. This has, as you know, been an ongoing issue since 2019, where it was a big drop in the tower internal business, but we now believe that we should be at the end of this process by the end of this year.We saw delayed investment decisions in some European and Brazilian lift projects. Else, other parts of the Wind business showed good development with increased order intake in Northern Europe, particularly regarding equipment in Denmark and services in the U.K. Our core within Wind, the lift and other business is developing well according to plan. Revenue was 11% lower year-on-year, down 2% organically, impacted by the lower order backlog. EBITA came in at SEK 15 million, down from SEK 16 million last year with a margin of 9%, up from 8.4% last year. The margin was positively impacted by our cost reduction measures. And then we turn page to the earnings summary, and then I leave for Bernt.

[Bernt Ingman, Interim Chief Financial Officer]

Thank you, Ole. Let's run through the main impacts on the profit and loss from EBITA and down in the profit and loss for the quarter compared to the same quarter last year. EBITA was up SEK 16 million in spite of the fact that SEK 13 million lower gross profit. And primarily due to cost savings and -- as well as good and disciplined price management, the EBITA was up SEK 16 million. Currency adjusted, EBITA increased SEK 19 million. The financial net had a positive impact of SEK 10 million compared to quarter 1 the year before. And that was a result of lower external funding of SEK 450 million with both lower interest rates on our senior credit facilities and lower margins due to lower leverage as well as a positive currency conversion effect compared to last year's negative effect. Tax expenses for the quarter was SEK 20 million compared to SEK 12 million, corresponding to a tax rate of 25% compared to 23% the year before.Next slide, please. Results for the period and earnings per share. The higher net profit was the result of higher operating profit and improved financial net. This led to an increased earnings per share to SEK 1.15 compared to SEK 0.76 in the quarter last year. The numbers of shares are the same as the quarter a year ago.Next slide, please. Cash flow. We maintained a strong cash flow of SEK 112 million in the quarter, following a strong focus on receivables, payment terms and working capital, which was reduced by SEK 16 million in quarter 1.Next slide, please. Net debt. Our strong operating cash flow, together with limited investments helped to take our net debt down to SEK 603 million by the end of the quarter from SEK 680 million in the beginning of the year. The lower net debt made our leverage end up at 1.29x by March 31, below our target of 2x. And we maintained our strong financial position. In addition to this, the group has SEK 1.8 billion in unutilized credit facilities, which gives us financial flexibility in the future. Thank you. And now I return the word to Ole for a final summary.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. So we turn into the next page. Product development, technology and sustainability. From our operations in China, we have launched 2 new products during the quarter -- yes, one of them actually between quarter 4 and quarter 1. And these are then products adopted specific to the Asian market, new industrial elevator specialized on the requirements for the growing industrial sector in Asia. And then also construction machine to be used in 5 lift shafts during the construction phase of tall residential buildings.During the quarter, we were also piloting various digital services with selected customers with very good feedback. And as part of our increased focus on sustainability, we have signed up as a partner to REES, a strategic R&D in circular economy, led by Linköping University. And also more details about our sustainability strategy will come in the Capital Markets Day in June.We turn page to the summary. I'm pleased to see organic order intake growth in the quarter, and a solid step forward in improving profitability with a margin increase of 2.5 percentage points. We have a strong financial position and cash flow, which enable us to continue invest in growth-enhancing activities. We have now entered Phase 2 of the New Heights program. We have a new organization and diverse leadership team in place. The team is committed to deliver on our profit commitments, while also preparing for sustainable profitable growth going forward. The core in this is our strategic wheel, which I have been presenting several times with the customer obsession in the center, technology leadership, operational efficiency, people development, digitalization and sustainability being the vital elements. And we are now in the final stages of completing our divisional strategies and look forward to presenting this at the upcoming Capital Markets Day on June 17.Looking at the current market development, we expect to see continued COVID-19 impact in quarter 2, but a gradually improved business climate in the second half of this year, as we also announced last quarter. I want to take this opportunity to sincerely thank all our committed and engaged employees that have embraced our new strategy and organizational setup in an excellent way. Thank you. And then we move to the Q&A.

[Operator]

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

[Mattias Holmberg, Analyst]

I'm a bit curious on the comments you made on the BMU division, where you mentioned that Q1 now will be the last quarter with negative EBITA. So I'm, first of all, wondering what measures have you taken to lift the profitability short term, as you mentioned, sort of the double-digit margin further down the horizon with long lead times, et cetera. And also, if you can provide any clarity on sort of what the level or sort of what region of margin we should be able to expect for the rest of this year? Sort of should the overall year for BMU be at least breakeven? Or will it be better than that? Or any color would be very helpful.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. Yes. Thank you for the question. It's -- we have had, as you know, and seen in the figures also this situation within BMU throughout last year. So this is something that we have been working on for quite some time. So there is a lot of activities now in place to ensure that this would be the last quarter. And it's, of course, related to many things. We are working hard on the cost. We are working hard on quality. We are working hard on our processes. And we have clear activities in all these areas to make sure now that we can put this behind us. So we feel very confident that this would be the last quarter where we report negative figures. And we also feel very, very confident that the full year definitely will be with a positive outcome for this business. It should be clearly better than breakeven.

[Mattias Holmberg, Analyst]

And one more question from my side. When I look at some leading indicators for construction markets, it seems like there's been a pretty clear pickup here in the latter part of Q1 and you also mentioned that you've seen a similar trend. What's your view generally on the construction industry at this point? And sort of do you think that we will get out of this whole COVID situation with some pent-up demand? Or what do you see here?

[Ole Kristian Jodahl, President, CEO & Director]

Well, I think it's -- yes, definitely, it was some positive signs during the quarter, especially towards the last part of it. But I think it's too early to really say that this is stabilized and we are really out of the pandemic. And you know also construction had a tougher situation also pre-pandemic. So I think it's a little bit too early to really say that now it's full speed, but we see positive signs, definitely. And it was positive for us in the first quarter. So we expect a slow and steady improvement. But I think also with the pandemic very much around us, it's still, of course, a lot of uncertainty in quarter 2 because we know the pandemic is so much present. But we expect them, as we have said before, also for construction that the second half would be showing more signs of further improvements.

[Operator]

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

[Johan Dahl, Analyst]

Just on the numbers that you announced on orders for the aftersales operation, I think you said that it was up some 19%. How much of that would you say is sort of recurring revenue in the terms that it's long-term commitment to serve? And what is sort of pent-up demand for spares, et cetera? I'm just trying to understand the sort of long-term effect of that strong order intake.

[Ole Kristian Jodahl, President, CEO & Director]

I think you could say that I don't have exact split on that. But I think a solid portion of this was what you would refer to as pent-up, an effect of less activity over the last quarters. So that we will see -- continue to see exactly this time forward. It's still too early to say, but we saw that this is -- part of this were definitely related to more pent-up demand.

[Johan Dahl, Analyst]

It doesn't sound as if you address the success -- the changes that you've done recently in the organization? Or am I wrong there? Do you see that sort of new incentive for your sales personnel, et cetera, it's really having an effect? Or is it still too early to say?

[Ole Kristian Jodahl, President, CEO & Director]

No, I think it's a good question. We have reorganized to the entire group. We are building up new strategies. We have overall new group strategy. We are working on the final stages with the division strategies. So clearly, I would say that the real effects of what the strategy will bring, they are not here. That's for the future to bring. But what we have proven, I think, is that we have been able to carry through this organizational change in a good way, stabilizing the business and started our journey on having control over the cost and yes, starting to be more customer and market-driven. But you don't make these changes or build Rome in a day. So things like this will take time, and it's a journey that we are on.

[Johan Dahl, Analyst]

Okay. Also on the order intake on Construction, I mean, we haven't seen those levels for a couple of years' time. What do you make of that? Is that -- yes, just to -- it would be interesting to hear your read on the market, why that is occurring right now? Is it pandemic related or is it...

[Ole Kristian Jodahl, President, CEO & Director]

No. But I think what we hear and also see a lot of companies are reporting. There is a more positive sentiment in the Industrial. And that's also what we have seen. We have taken a lot of smaller and medium-sized projects. It's none of the big ones, which normally, pre-pandemic, you always have some of these ones, but we don't have any of those now. They are still being pushed forward. So there is a positive underlying sentiment in the industry that these small and medium-sized orders are coming, and we see it quite broad in the different industries. So there is an underlying positive trend here.

[Johan Dahl, Analyst]

Okay. Finally, before getting back in line, can you just talk about components shortage as what sort of risk...

[Ole Kristian Jodahl, President, CEO & Director]

Components, yes? Cost, you mean or -- yes?

[Unknown Executive]

Component shortage?

[Ole Kristian Jodahl, President, CEO & Director]

Yes. Component shortage, yes? We have not really been affected heavily by this, and the cost increases that has occurred in transport and raw material, we have been able to pass on. We, of course, monitor also some shortages, but it has not really had an effect on us for now. And we think that we have it under control as it looks now, at least.

[Operator]

[Operator Instructions] The next question comes from the line of Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

So on the Wind side, you're giving some guidance on how much...

[Ole Kristian Jodahl, President, CEO & Director]

Hello? We lost him.

[Kenneth Toll Johansson, Financial Analyst]

The rest of the business, what -- yes, how do you think that market shares for the hoist business on the Wind side is moving? And are you competitive there from a cost and price point of view? And what about the service business on the Wind side, please?

[Ole Kristian Jodahl, President, CEO & Director]

We lost you a little bit. So I think it would be good if you could repeat the whole question.

[Kenneth Toll Johansson, Financial Analyst]

Sorry. Yes. So the -- on the Wind side, I mean, you gave good guidance there for how much revenues and orders are going to be affected by you exiting this tower internals, but can you talk a little bit about the hoist side for the Wind business? Are you sort of keeping your market shares there? And how is your cost competitiveness there? And what about the service business to the Wind side?

[Ole Kristian Jodahl, President, CEO & Director]

Yes, yes, absolutely. I think we do well on, yes, what we call the lift and ladder business within Wind. And we keep our market shares and rather have, I think, a strong position, which we are leveraging on and think that we can take more market shares moving forward. As it is now, we are cost competitive, definitely. And we have our plans to be even more so moving forward. So that business, I see as a stable and a relatively solid business for us going forward. But also what I've pointed towards is that -- a couple of times is that we don't -- or it's important that we understand the difference about the energy output expected from the wind production in the years to come versus actually our market potential in this business because our market potential is driven by the number of erected towers and the penetration of lift and other systems inside these towers. And the number of towers is now forecasted to actually go down in the next 10 years because they are becoming bigger and thereby still produce much more energy than they used to do before. But at the same time, as the number of towers go down, there's also an increased penetration because they are growing bigger and therefore, the need for these solutions -- lift and other solutions are higher, and they're also going offshore, where it's basically 100% penetration. So for us, we see it as a stable, solid market, not enormous growth and not growth related to the energy outlets.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And on the service side, do you think there are opportunities to grow that side of the Wind business?

[Ole Kristian Jodahl, President, CEO & Director]

Absolutely. Now with the strategy, we really aim within each of these divisions to understand the customer ecosystem better, working even closer with our customers, becoming stronger partners and being able to provide more value to our customers. And one natural element for us, of course, is to have a stronger stance within the service business than what we are currently having. So that's clearly an important part of our strategy within Wind.

[Operator]

The next question comes from the line of Douglas Lindahl from Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

Just following up on that wind theme. The wind industry has been impacted by quite a lot of pricing pressure since 2017. I guess that's something you would have experienced as well to some degree. Can you give a bit of -- some sort of indication of what margin levels do you see as attainable maybe in the longer term now that you've been vocal about lifting profitability, while we see pricing pressure? Obviously, you have service that can lift your overall profitability for this business, but structurally, you should see price pressure on the equipment side at least. Any sort of comments on that?

[Ole Kristian Jodahl, President, CEO & Director]

Yes. Wind business, I think it's the most competitive and difficult business that we are having in the group because it's driven by some very -- few very large customers. And that's also maybe one of the main reasons behind these issues of the tower internal business because these products doesn't really add any value. So that the big customers, end customers here, they can easily understand what these products are, and they are competitive. And there, they are driving pricing heavily. And this is also, of course, one of the main reasons that we are stepping out. It's -- the price pressure is enormous. It's very, very competitive. We can't make the margins that we would like to do, and we cannot really add any value to those products, unless there is a value to connect it with our core products, the lift and the ladder systems. And there, we see that in some cases risk. So therefore, we also forecast that some part of it will remain in the group. But a big chunk, several hundred millions have then disappeared since the acquisition was made of Avanti because this business is not really providing us anything -- any margin, and we can't add value as I'm saying. But other type -- the other remaining business, where we have our core, there, of course, as I just said, we see a good, stable, sound business for us moving forward that this will be a business where we can lift margins heavily going forward, I don't expect, but that they can, but that we can maintain and that we can work on improving definitely.

[Douglas Lindahl, Analyst]

Okay. So no big margin delta maybe on the upside more maintaining these levels [indiscernible]?

[Ole Kristian Jodahl, President, CEO & Director]

Yes. I don't expect a big margin uptick on the Wind business. It is already at relatively okay levels, and we will work hard to improve and -- yes.

[Douglas Lindahl, Analyst]

No it looks solid in the Wind context on the margin side. And finally, just a question on your balance sheet. This is really strengthening. What -- can you give us an update on your sort of M&A view? Which business areas would you be interested in doing acquisitions, which geographies? I mean, any sort of comment on M&A would be interesting.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. M&A is important to us, and it will remain to be important. It's been important to the group historically, but they also have a lot of issues now. And you see the issue is mainly in the group sitting related to the 2 main acquisitions that was done. So that's an important work that we're now undertaking to make sure that we control this. But we still drive and we work on the fumble and opportunities every day. And when we are able to do something there, we will do. So that's an ongoing work. And basically, I think, as I mentioned it before, interesting areas, definitely within service to expand our service offer and aftermarket offer. It's technology because we need to be more connected. We will make our products connected, and therefore, we will also be more connected into our customers' ecosystems. And therefore, it's also natural to look at the different technologies. And then, of course, also -- we also have a geographical perspective. We sell to more than 100 countries, but we are operational ourselves in a little bit more than 20. So there is an opportunity to also establish ourselves more in some countries, and it could be acquisitions related to that. And of course, something on the product range. We have a very, very strong product base if you look at the Alimak range, at least for bigger, heavier applications, but we are not so strong on the smaller, medium-sized and also on the platform side. So definitely, it's interesting areas also from a product perspective.

[Operator]

We now have a further question from Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

Yes. Just a few more questions. Can you say anything regarding the SEK 60 million savings that you are aiming to realize? How -- where was the run rate in Q1? Secondly, can you say anything -- obviously, substantial headwind in terms of raw material cost inflation and currency. The way prices and currencies are right now, when will that headwind sort of peak for you guys? Was it -- has it already been in the numbers? Or do you see sort of the main challenge going forward?

[Ole Kristian Jodahl, President, CEO & Director]

I maybe leave this for Bernt to comment.

[Bernt Ingman, Interim Chief Financial Officer]

The SEK 60 million, you mean the restructuring program. We are following that. And as said from the beginning, it will be in full swing at the half year. And we are sure that we will reach the levels we have indicated before. Regarding the currency, I think it will be leveling out at the end of the year, but we will have against us currencies during the next 2 quarters, I would say.

[Johan Dahl, Analyst]

And on raw materials, I guess, we're not fully aware of the sort of arrangements, the contracts you buy and not how fixed that is. So I'm just trying to understand when you feel inside the group that you really passed the peak in terms of this challenge both on currency and raw material.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. But I think the -- the currency, I think we have had the currency impact now for 3 quarters, and we expect one more quarter where we will really have the major effects and then it should be stabilized. As for the cost increases, we are able to -- we follow what's happening in the market, and we are able to take this out in most of our businesses when we sign up new deals now. So we have, let's say, control over that. So I don't foresee that we will have a worsening situation from that moving forward, with maybe a little bit exception in -- with transportation, yes, maybe. But also BMU, we have some long contracts, but we feel that we have good control over it. And I don't see that this should be a main impact for us going forward from where we are today. Yes.

[Operator]

As we have no further questions, I will pass back for any closing comments.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. Thank you. And again, I want to thank all the employees of the group for delivering what I think is a solid quarter after all. Happy with the order intake that are increasing nicely. And thank you to all for following us today. So thank you.