Alimak Group AB (publ)

STO:ALIG

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Alimak Group Interim Report for Q2 2020. [Operator Instructions]Today, I'm pleased to present Ole Kristian Jodahl, CEO; and Tobias Lindquist, CFO. Speakers, please begin.

[Ole Kristian Jodahl, President, CEO & Director]

Thank you, and welcome to this Quarter 2 2020 call for Alimak Group. This is my first call with the group, and it's also the first time I do a call as a CEO for a listed company. New experience, so I find that appealing. I'm, of course, very excited to have joined this group, and I plan to make a lot of these calls with Alimak.I thought I should start by saying some few words about myself. I started, as you may know, 1st of June. And prior to that, I spent my last 3.5 years as the CEO for Hultafors Group, a group of leading brands in PPE, workwear and hand tools. And before that, I had 17 years in SKF, where the last 10 years were in different operational roles. And lastly, I was the Head of Sales and Marketing for the global industrial market of SKF.With me today, I have CFO, Tobias Lindquist. So with that, I think we turn to Page 2. We look at the agenda. We plan to talk then, of course, first about the quarter 2 results. Then we will move into some of my first priorities and some reflections and then a Q&A session.So if we then move to Page 3. We start with looking at the group results, where we see that COVID-19 continued to impact the group in the second quarter. We see an underlying uncertainty in end markets, leading to delayed investment decisions from customers. There has also been an impact from restrictions on travel and customer site access. We did also have some manufacturing closed down at the beginning of the quarter due to complete lockdown from the local authorities. All these effects more severely in the beginning of the quarter, but improving throughout the quarter as more markets were opening up. Order intake decreased by 16%, where rental was the only BA with an order increase. The other BAs decreased from the previous year and especially BMU had a weak quarter. Revenue decreased by 18%, and we estimate that a bit more than half of the revenue drop came from COVID-19 effect, while the rest came from a lower backlog from entering the quarter.I'm pleased to see that sequentially, we improved from quarter 1, driven by Industrial Equipment and Construction, even though all BAs reported lower revenues than last year. EBITA adjusted ended on SEK 87 million, representing a margin of 8.9%. This drop was mainly driven by lower volumes within Construction Equipment and After Sales. We had cost control and short-term savings in focus during the quarter. It's a focus we will continue forward to ensure that we are well prepared for all types of developments, including more permanent measures.With that, we turn to Page 4 and Construction Equipment. Looking at Construction Equipment, we see order intake decreased with 15%. Due to COVID-19, we see uncertainty in the market with delayed investment decisions. We also see rental companies being increasingly opportunistic, buying only when projects are confirmed. Geographically, we see that still Asia Pacific and Americas are the softest markets, while U.K. and the Nordics continue to improve. If looking at construction and rental combined, the order intake was flat year-over-year, indicating that there is an increased preference to renting over buying.Revenue decreased 49%, which was driven down by a backlog -- low backlog, COVID-19 effects and comparison with an all-time high quarter of last year. Sequentially, we see an improvement from quarter 1 this year. EBITA adjusted ended at SEK 14 million, a margin of 10.1%. The result being an effect of lower volumes and favorable mix and a low utilization of the factories.We then turn to Page 5 and Rental. We are pleased -- or very pleased with the order intake for Rental in the quarter which was up by 26%. As mentioned, we have seen a preference in renting over purchasing. Australia was especially strong, where several large projects shifted from buy to rent. Revenue was -- decreased 15%, and this was driven by COVID-19 effects or lockdowns, especially in France and Australia, where we had limited access to customer sites. Decreased service revenue from not having technicians on site, setting up and taking down hoists, is the element affecting this. We saw improvements towards the end of the quarter as countries were opening up. EBITA adjusted at SEK 12 million, a margin of 13.7%. And it's a result of the drop in revenue, but happy to see the relative good resilience.And then we turn to Page 6 and Industrial Equipment. Order intake decreased with 26% in the quarter. All BUs were impacted by COVID-19. And we see a market uncertainty with delayed award dates and especially in U.S., which is an important market for the group. Biggest impact came from BMU, where we see customers are hesitant of awarding projects. The projects are not canceled. Wind was the most positive business unit with limited impact from the pandemic. Revenues were down 3%. Wind again being a highlight, and general industry and oil and gas performed relatively well. BMU more challenging, given the scheduling of projects, which was already highlighted in Q4 of last year, that there will be less activity in the first half but more in the second half. BMU also impacted by the factory in Spain being closed in the beginning of April. But we see sequential improvement in revenue from quarter 1 and that's positive. EBITA adjusted of SEK 7 million, giving a margin of 1.5%, which is the result of lower revenue and lower utilization in factories. The results were also impacted by a conservative view of inventory and projects. Even though margin is low, we see an improvement from quarter 1. But here, we have a job to do to improve this going forward.Then we turn to Page 7 and After Sales. After Sales was the BA most affected by COVID-19 in the quarter, where lockdowns restricted access to customer sites. As a result of this, order intake was down 13% and revenue decreased 17%. As we know, markets started to open up during the quarter and conditions improved in May and June. Uncertainty, however, remains as the pandemic still affects many countries a lot. Some markets to mention that are now again implementing more restrictions and are important to the group are U.S., Spain and Australia. EBITA adjusted ended on SEK 54 million, a margin of 19.6%. Mostly affected by the lower volume but also, as in previous quarter, negatively impacted by the mix as a larger share of revenue than previous year came from Wind and BMU customers.And then we turn to Page 8, and I leave the word for Tobias.

[Tobias Lindquist, Chief Financial Officer]

Thank you, Ole. We are at Page 8 or earnings summary. Our EBITA adjusted result of SEK 87 million in Q2 was SEK 85 million lower than last year. The decrease was revenue-related, especially affecting After Sales and Construction Equipment, both recording SEK 36 million lower result than compared to Q2 last year.For After Sales, the lower revenue was a direct impact of COVID-19 whilst Construction Equipment was facing tough comparable figures from Q2 as well as entering the quarter with low backlog. Amortizations were minus SEK 13 million, where the increase mainly related to the ERP system launched in Q1.We had an improvement in financial net. Minus SEK 10 million this quarter versus minus SEK 17 million last year. Lower loans, combined with a reduction in interest rates, both had a positive impact on the interest net. Given the lower result, our tax expense was SEK 22 million lower compared to 2019. And with earnings before taxes of SEK 64 million and taxes of SEK 14 million, the tax rate was 21% compared to 25% last year. We expect to be at the lower range of 23% to 25% for the year as a whole. So the result for the period ended at SEK 51 million, where deviation compared to last year comes from lower operating results, partly offset with lower taxes.We turn to next page, Page 9, result for the period and earnings per share. So with a result of SEK 51 million, the earnings per share was SEK 0.94, up from the first quarter but lower than Q2 last year, which were at SEK 2.Turn to next page, Page 10, cash flow. Balance sheet and cash management have been an even more focus lately, and we have maintained a positive operating cash flow in the quarter, even higher than last year, even though we had lower revenue and lower earnings before tax. In regards to working capital, we continuously review all positions and having a conservative approach in terms of risk. So far, we haven't had any material write-offs of receivables and our overdues are also decreasing.We had revenues heavily weighted to the latter part of the quarter, and this had an impact on both receivables and inventory levels. We also managed our payables side and had also some improvements in these regards in the quarter. We ended up the quarter overall with a decrease in working capital of SEK 23 million compared to an increase last year of SEK 59 million. Also in terms of investments, we have reduced those. Main investments in the quarter relates to rent -- increasing the rental fleet, which accounts for SEK 12 million of the total investment in the quarter of SEK 20 million. So our attention and focus on balance sheet and cash flow will continue to remain.We turn to next page, Page 11, net debt. Net debt decreased slightly in the quarter but basically on the same level, as in the same -- or just about SEK 1 billion. Our net additions to loans was SEK 9 million, significantly lower than last year as an effect of positive operating cash flow as well as lower dividend payments. The leverage of 1.71 by end of June can be compared to 1.52 in Q1 and 1.33 by the end of December last year. And the increase is fully related to lower EBITA results.So to summarize, our financial positions remain strong with a solid balance sheet and positive cash flow. With that, I hand back over to Ole.

[Ole Kristian Jodahl, President, CEO & Director]

Thank you, Tobias. Then we turn to Page 12, and we try to sum up quarter 2. Quarter 2 was a very challenging quarter with the continued effect from the global pandemic. We were impacted on all KPIs. We saw restrictions on travel and customer site access and a continued uncertainty on end markets, severely in the beginning of the quarter but somewhat recovering in the latter part as more and more markets opened up. We see the world's economic development still being uncertain, so we will ensure to be ready to act on all types of development, including more permanent measures. We will also ensure we continue to invest into our future development. The group has a continued strong financial position that we will continue to build on.Then we turn to Page 13, and we move into some of my first impressions and priorities. So if we continue on to Page 14, I've been here now for 7 weeks. And my main focus has been, of course, to get to know the group, understand how it operates, and to meet and talk to as many people as possible. It's, of course, a bit extra challenging in these current times with the pandemic and especially the travel that normally I would like to do to be around as much as possible, to see and meet as much as possible our people and the organization.But I've managed to at least travel to 4 locations so far. The first one was Skellefteå. I would say the Alimak home base, where we find the core products and technology of the group, the rack and pinion, with full production testing, et cetera. And here, I also got a chance to, of course, do the first ride in Alimak hoist, which was very nice. So a nice day out there. Then I've also been to Bergen in Norway, where Alimak Group acquired a company called Hitec in 2014 and it's now base for oil, gas and marine and the traction technology. And here, I also see definitely a lot of potential in the different industrial segments moving forward and a lot of competence in this site. Then I also have been to Borås, which hosts our last acquisition of last year, Dataline. And this was the company that developed the control systems for the group. And I think it's especially important and I'm very, very happy to see that this is now a part of the group. It's an in-house piece now. And this, I see also definitely will be our digitalization hub moving forward. And the company was 2 employees when acquired a year ago. And today, it's 8, which is something that, of course, is, I think, both very, very important and something I'm very happy to see and something we will continue to invest in. Then lastly, I visited Denmark, Silkeborg, which is a base for the Wind business, something that came in with the Avanti acquisition in 2017. So I got a much more view into the Wind segment business, of course, and also to see our ladder production that is there in Denmark. All very interesting visits where I've learned a lot. And it's very clear to me that the group has a strong foundation for future growth.And then we turn to Page 15. The group has a leading market position with what I understand to be a unique know-how and expertise within vertical access solutions for professional use. The group also has a global footprint and a large installed base of around 70,000 units around the world and also a leading position within the aftermarket servicing these. We are present in a vast number of segments. And with our strong aftermarket presence, I think we are in a unique position to help our customers from a full asset life cycle perspective to optimize total cost of ownership.We have a portfolio of strong leading brands globally known for safety and reliability. We are supported by mega trends such as urbanization, more higher rises, governmental regulations within safety, digitalization, high demands on sustainability and productivity, all of which a group like Alimak, with its size, global presence and solidity are very well positioned to capitalize on. We have a strong financial position with a solid balance sheet and cash conversion, which puts us in a position to invest strategically. So I would say, a great company with a lot of value creation and potential. But I've also noted that we deliver on some financial targets and some not. And therefore, kicked off a business strategy review to see what more we can do to make sure we deliver on all our financial targets over time.We then turn to Page 16. And in this business and strategy review, we will look at the group strategy and how we should act to become the best version of ourselves. What you see here in this slide will be my guiding principle in this work and what I strongly believe are crucial for a company like Alimak Group to thrive.Customer focus. Being a truly customer-driven company. Customers do pay for everything we do. So doing something the customers are not ready to pay for, we should not do. And I think this is an important question that we should all ask ourselves every day. Are we now doing something that the customer is ready to pay for?Technology leadership. Really setting the agenda in the industry. And these are all from the perspectives of innovation, productivity, digitalization and sustainability. And it both goes for our offering to our customers but also in our own processes and manufacturing.Delivering shareholder value. Really delivering on our commitments, focus on the figures, profit before growth, organic profitable growth and driving continuous improvements.People and culture. Really attract, develop and retain the best people. This is where all value is developed. Having a culture where we all live our core values and where people can blossom. And to have the best people blossom, I do believe a well-functioning organization is very vital, an organization with clear responsibilities, accountability and a mandate to act.Digitalization and sustainability will be our fundamental enablers in all this. And then my ambition is to present the findings within a couple of months.With that, I say thank you for this. And we move to Page 18 and the Q&A.

[Operator]

[Operator Instructions] It does not seem like we have any questions for the speakers. So I will hand it back to you for any closing remarks.

[Ole Kristian Jodahl, President, CEO & Director]

Okay. If there's no questions -- we are sure there are no questions, no? Then we will conclude, yes? Or...

[Operator]

It does not seem like there are any questions at this moment. [Operator Instructions]

[Mathilda Eriksson]

Would it be possible to unmute the people who have dialed in just in case there's a technology issue...

[Johan Dahl, Analyst]

Johan at Danske. Can you hear me, Mathilda?

[Mathilda Eriksson]

Yes, I can.

[Johan Dahl, Analyst]

Johan Dahl at Danske. The polling didn't work obviously, but, yes, in any case, just a few questions from my side. I was just wondering, Ole Kristian, as you -- I appreciate you're fairly new at the office. But what would you argue are sort of -- in terms of sense of urgency, where would you put the sort of activities from your point of view? I appreciate you're in a sort of research phase, but what is the most sort of critical things to address in the short term, next sort of 6 months, would you argue?

[Ole Kristian Jodahl, President, CEO & Director]

The focus now is, of course, to manage short-term overall situation with COVID-19 and, yes, the general market situation that we have around us. Else, I would say the focus for me now is continuing to learn the company and to work and drive this business strategy review. And then I will come back to the findings there in a couple of months' time. But short time, it's basically to manage the day-to-day, like we are and have been focusing a lot on during the quarter 2.

[Johan Dahl, Analyst]

Okay. You talked a bit in your priorities about technological leadership. Can you say anything how well invested you argue this company is in terms of achieving that position?

[Ole Kristian Jodahl, President, CEO & Director]

It's difficult for me to say anything in relative terms how well invested we are. I'm very, very happy to see that this Dataline is part of the group and the investments that have been done there from -- an increase from 2 to 8 people. We are a leader in our industry. So I think, overall, we must be pretty well invested. But definitely, there must be always also room to do more. And it will be a high priority for me to make sure that we do what we can in that area.

[Johan Dahl, Analyst]

All right. Just a final question. Can you just address briefly how much sort of extra cost you took in the quarter? You talked about some write-downs on projects and inventories, et cetera. And secondly, also, could you just address what sort of long-term measures on cost you are considering and how much you've done in that respect already?

[Tobias Lindquist, Chief Financial Officer]

First, in terms of costs taken in Q2, as there has been -- we have been focusing on our balance sheet, making sure that we have a solid balance sheet and not sitting on any risk. And in that sense, we have taken some provisions for inventories and so forth. But it's part of regular review, slightly maybe higher than before, but it's not materially impacting.In terms of overall cost reviews, as we mentioned, we have been -- we have done some reductions in costs on parts of the group, pending how the business situation is locally. We have also used -- or taking -- utilized governmental support where applicable in both -- in various forms during the quarter. But these programs are -- will be ending and the market situation will -- yes, we will take the necessary actions to respond to how the market develops.

[Mattias Holmberg, Analyst]

Mattias Holmberg, DNB markets here. Can you hear me?

[Ole Kristian Jodahl, President, CEO & Director]

Yes. We hear you.

[Mattias Holmberg, Analyst]

Great. Good to have you on board, Ole. I noticed when you talked about shareholder value that you mentioned profit before growth and in particular, organic profit. This comment seems to be a little bit less, say, M&A friendly compared to what your predecessor has been communicating. Am I interpreting this correctly?

[Ole Kristian Jodahl, President, CEO & Director]

First of all, I don't know what my predecessor have said, but for me, acquisitions will continue to be an important part of the group. So I don't believe it will be any change in that respect. I think, first of all, we as a group, we need to make sure we have the right profit level in the business that we are operating. Then it's important to have growth -- organic growth. I think that's the proof of success of our existing business, but then also, of course, to drive acquisitions to further strengthen the group. I think it's also a very clear objective moving forward. So no, I don't see any major change in that respect that will come.

[Mattias Holmberg, Analyst]

Great. You also -- when you mentioned the mix in the After Sales business as part of the explanation for the lower margin year-over-year, coupled with some other things, and considering that -- I mean I understand that it is a clear ambition to increase the After Sales activity in the 2 businesses, in particular, BMU and Wind, which contributed to this negative mix. Would you say that it's possible to reestablish margins at historical levels even with the share of these 2 lower margin end market increasing as part of After Sales?

[Ole Kristian Jodahl, President, CEO & Director]

Yes. I noted that the margin has been going down for some time due to this mix. And of course, in principle, you don't want to see margins go down. It's too early for me to say what is the right level for these different businesses. But in general, we will have a strong focus on growing margins and making sure that we have the right margins for each of the businesses. And too early to be more specific than this, but it's something we will come back to moving forward.

[Tobias Lindquist, Chief Financial Officer]

One additional comment was there -- just one of the reasons for there being different margins between -- from Alimak -- old Alimak product versus the acquired business is less parts. So the mix within the After Sales is also different. We are working on standardizing and focusing also on increasing the parts for the Wind and BMU business going forward.

[Mattias Holmberg, Analyst]

I have 2 final ones, if I may. You mentioned that the lower order book partly explained the lower sales. Is there any comment you can make in terms of the state of the order book at this point compared to what it's been over the past couple of quarters?

[Tobias Lindquist, Chief Financial Officer]

Well, we don't generally comment on the backlog. But you can see that over the past quarters, we have had a relatively -- our order intake has been, on a group level, fairly in line with revenue. So it has not been any dramatic improvement in the order backlog.

[Mattias Holmberg, Analyst]

And finally, could you at all quantify any government support you received during the quarter?

[Tobias Lindquist, Chief Financial Officer]

The government support comes in various forms from country to country. So in some cases, it is more cash-related. In some cases, it is postponing or flexibility in work hours. And in certain countries, there are more government support in terms of covering temporary layoffs and furloughs. So it varies. We keep track on this on all aspects of these ones, but where we have had most impact in terms of the cost savings has been in countries such as Australia, U.K. and Sweden.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. It's an open line then. So I guess it's free to -- if it's more questions?

[Mathilda Eriksson]

[Foreign Language]

[Ole Kristian Jodahl, President, CEO & Director]

Okay. So with that, I thank you all for listening in and for giving us some nice good questions. And thank you, Tobias and Mathilda. And yes, till next time. Thank you. Have a good summer. Bye-bye.

[Tobias Lindquist, Chief Financial Officer]

Bye-bye.