Alimak Group AB (publ)

STO:ALIG

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to the Alimak Group AB Interim Report for January to June 2021. Today, I am pleased to present Ole Jodahl, CEO; and Thomas Hendel, CFO. [operator Instructions] I will now hand over to Ole. Please begin your meeting.

[Ole Kristian Jodahl, President, CEO & Director]

Thank you, and welcome to this quarter 2, 2021 presentation for Alimak Group. With me today, I have Thomas Hendel, our new CFO, and very happy to have you with me here Thomas for the first time. Next please agenda. Today, we will go through the quarter 2 results and also some developments and rounding off in the end then with a Q&A session. The next page, please. Quarterly highlights. I'm pleased to see the continued margin improvements in the quarter with good effects from the cost saving program that we implemented last year. The efficiency measures are delivering well in line with the targeted savings and will from now on, have full effect as we announced also earlier. But we will, of course, continue to drive efficiencies and improving our results further going forward. We are still negatively impacted by currency translation effect, putting pressure on the reported order intake. Revenue and earnings in the quarter. We have had these negative effects now for 4 quarters, but we do expect to see some continued effect in quarter 3, but at a somewhat lower level due to the further weakening SEK. Excluding the effects from our exits from tower internals in Wind underlying organic order intake growth was 5% in the quarter. Organic order intake in services was 13% in the quarter, up 16% in the first half to last year. Very happy, of course, to see this development, driven by our strategic focus on strengthening our service business. Underlying organic revenue increased 8%, if we exclude then the effects of our internals exit. The growth was driven by the execution of the backlog and strong development in service. EBITDA increased by 45%, and we report a strong cash flow, which has further strengthened our financial position. Next page, please. Group quarterly summary. So looking at the quarter more in detail, we see that reported order intake decreased by 5%, but corrected for currency translation effects, up 1% organically. And then further excluding the effects of the decision to exit tower internals, the underlying organic growth was 5%. We saw strong order development in Industrial and with organic growth also in BMU. Reported revenue decreased by 2%, but up 4% organically, corrected then for currency translation effects. Excluding the effect of tower internals, organic growth was 8%. Construction showed strong growth, and BMU also had solid development. Revenue in Industrial decreased due to low backlogs coming into the quarter and also timing of deliveries in the U.S. And in Wind, the revenue declined due to exiting tower internals. Service revenue was strong in all divisions. I'm pleased to see the continued result improvements with a margin increase of 4.3 percentage points in the quarter, which now bring our -- or brought our EBITDA margin to 13.2% in the quarter. We saw improvements in all divisions, supported by our cost reduction measures launched in 2020, which then is improving the factory production results, giving a good leverage and also lowering our SG&A expenses. Next page, please, and moving into the divisions. We start with BMU. Order intake in the quarter decreased by 1%. Organically, order intake was up 5%, driven by a significant increase in service order intake in most regions, which is one of our most important strategic pillars also in this business. Equipment sales decreased quarter-over-quarter, particularly in the U.S. market, where we still face challenges due to delayed project awards. Our main focus is on taller buildings, and this is a segment which is showing a slower recovery. Our work to expand our offering will be important, of course, to secure a more stable growth and profitability going forward. Revenues increased by 6%, up 12% organically, with improved service revenues in Europe and Americas. And equipment project revenue was also up, driven by strong volume in Middle East as well as in Australia with revenue from the Sydney Harbor Bridge also coming in, in the quarter. EBITA increased to SEK 6 million corresponding to a margin of 2.5%. The improvements were driven by higher revenues, better utilization and reduced SG&A costs. I'm pleased to see, of course, that we have brought the division back into profit in the quarter, but we still have a long way to go and activities to improve profitability further is, of course, ongoing. Next page, please. Construction. Reported order intake decreased by 4%, but was on par with last year organically. New equipment sales in Europe and Australia, together with continuing parts demand was positively contributing. In rental, order intake was lower year-on-year in the quarter, but due to a strong order intake in quarter 1 this year. So year-to-date, rental has had a very solid growth. Revenues increased by 19%, 24% organically. And the increase primarily comes from new equipment and parts deliveries in Americas and Europe together with increased rental activity in both Europe and Australia. EBITA increased to SEK 61 million and the EBITDA margin increased to 20.2% and the increase was mainly due to the cost reduction measures launched in 2020, improving factory production results and the leverage and the lower SG&A expenses. Next page, please. Moving on to Industrial. Order intake increased by 18%, with an organic growth of 24% and the increase was mainly driven by solid equipment sales in Europe, but also in Americas and emerging markets as well as improvements in service and parts. The activity level in this business is high. and it's all driven by smaller and medium-sized orders. Reported revenue was down by 24% with an organic decrease of 18% and the decrease was mainly due to a low backlog and timing of some deliveries in U.S. However, Americas currently impacting the most, but shows positive signals with solid order intake. EBITA decreased to SEK 35 million due to lower revenue. However, the margin increased to 18.7% and driven by the previously implemented cost reduction measures. Next page, please. And finally, Wind. Reported order intake decreased 31%, down 25% organically. And the decline is an effect of our decision to exit from tower internals affecting then basically China and U.S. And in addition, the delay also government support programs have slowed down the market in China, also affecting the quarter, but something we expect to improve again in quarter 4 and onwards. Brazil and Northern Europe saw good order intake. Service order intake for the division was strong, up 26% organically. And the decrease in order intake from tower internals in the quarter was SEK 30 million and is now SEK 42 million year-to-date. Revenue was 12% lower year-on-year, down 5% organically. And the decrease in revenues from tower internals in the quarter was SEK 35 million and with now SEK 46 million year-to-date. U.K. showed solid development and with stable revenues also in the U.S. Service revenue growth was strong. I would like you to remind that -- and also confirm that the full year effects we announced last quarter from exiting the tower internal business is still estimated to be around SEK 60 million full year on order intake and SEK 100 million on revenues. So we expect further effects to come in Q3 and Q4. The EBITA was SEK 23 million with a margin of 11.1%. And the improvement was driven by the previously implemented cost reduction measures, but also we did some one-off costs in the quarter, which was taken to mitigate effects from the decreasing volumes in tower internals. Next page, please. And then I leave for Thomas.

[Thomas Hendel, Chief Financial Officer]

Thank you, Ole. You have a financial summary for the group during 2021. You have seen the Q2 result. And so I will comment on the financial performance year-to-date, meaning the first half of 2021. And as you have heard, we have organic growth of both orders and revenues for the half year. Important that we have built backlog with around SEK 200 million during the first 6 months, supporting our future growth ambition. We have a strong EBITA margin in the quarter, 13.2% and year-to-date, 12.3%. So to summarize, we are recovering, and we are on track. Next page, please. The earnings summary. I will go through the main impacts on the P&L in the quarter compared to Q2 2020. EBITA was up SEK 39 million, primarily due to the cost savings that we initiated 2020 and the currency adjusted EBITA improvement is 52% quarter-on-quarter. We have so far managed the effects of raw material price increases as well as freight costs and semiconductor shortage issues. We continue to closely monitor and work on mitigating actions in these areas. The financial net was stable quarter-on-quarter. And then the tax rate -- tax expense for the quarter was SEK 27 million, corresponding to a tax rate of 25.5% versus a 21.9% in Q2 2020. The current tax rate of 25.5% is close to where we should be, reflecting the country profit mix that we have. The low rate in Q2 2020 included the tax adjustment in the U.S., which is not sustainable. Next page, please, results for the period. The higher net profit was the result of the higher operating profit and also this led to an increase in earnings per share for the quarter to SEK 1.45 compared to SEK 0.94 in the second quarter 2020. The number of shares are as before, 54.2 million. Next page, please. Cash flow. We maintained a strong cash flow in the quarter of SEK 151 million driven by -- mainly by an improved EBITA, but also some contribution from further reduction of working capital. We continue to have focus on receivables, payment terms and project execution. Next page, please, net debt. Our strong operating cash flow, together with limited investments took our net debt down to SEK 670 million by the end of the quarter from SEK 680 million in the beginning of the year. The low net debt and higher EBITDA made our leverage end up at [ 1.23x ] by June 30, below our target of 2x, and we maintain our strong financial position. And in May, we paid out dividend by SEK 162 million following the Board decision to pay an extra SEK 1 per share. The group has SEK 1.9 billion in unutilized credit facilities, which gives us financial flexibility in the future. Next page, please. And then taking back to Ole.

[Ole Kristian Jodahl, President, CEO & Director]

Thank you, Thomas. So then we are at enhancing the customer value through digitalization slide. We, as a group, continue on our digital journey. We have now an installed base of more than 5,000 machines connected, and this is, of course, a great opportunity for increased service revenue. Technology leadership and digitalization is key for us to deliver more value to our customers. As also previously mentioned, we are developing building information models, BIM for all our products and also work hard to make all our products connected. And when they are connected, daily use and maintenance, of course, can be improved and done more efficient. We can prolong life. We can monitor and troubleshoot remotely, and we also facilitate planning and control of the flow of people and materials through our lifts and hoists to ensure an optimized flow in our customers' ecosystem. And making the machines connected and integrated into our customers' ecosystem also contributes to sustainability. We are resource efficiency and also making workplaces even more safe or safer. Our focus on the service business is also a vital part in creating a more sustainable society as the offering of upgrades and refurbishment extends the solutions lifetime. Next page, please. I'm also very pleased to welcome Cento Engineering Group into Alimak Group. We made this acquisition just at the end of the quarter. So from 1st of July, it will be part -- or it became part of the group. Cento is a U.K. BMU engineering and service provider that has been our Manntech distributor and service partner in U.K. for more than 20 years and of course, have a very solid experience within their team. The acquisition further strengthened our standing as a market-leading BMU service provider in the U.K. and will, of course, help grow our service business. The revenue of Cento was approximately SEK 60 million last year, and the company will become part of the BMU division. Next page, please. In June, the group had its first ever Capital Markets Day. And there, we gave an update of the New Heights program and also more details of the division strategies. Connected to this, we also updated our financial targets and the dividend policy. And just to remind the updated midterm financial targets are now as for revenue then, a growth target of being in the range of 5% to 7%. As for EBITA, we have a target to be in the range of 14% to 16%. We have -- and remained with a leverage target of 2x, but this is also flexible in the sense that certain investments could -- or give us the room to overshoot, but we should then, as a group, do what we can to be back into the framework of the 2x as soon as possible. And then we also updated the dividend policy from being approximately 50% to now be in the range between 40% to 60% of net profits. And of course, as a management team, we are highly committed to deliver on these targets and get into this as soon as possible. Next page, please. As part of the Capital Market Day, we also announced for the first time a CO2 target for the group. And our aim is then to reduce our CO2 footprint with 30% by the end of 2025 and 2019 is the comparison base. And this also then includes Scope 3. Next page, please. And then to sum up the quarter. I'm pleased to see recovering underlying organic growth on order intake in the quarter and also the solid margin increase of 4 percentage points, bringing it up to 13.2% in the quarter. We have a strong financial position and cash flow, which enables us to continue to invest in growth forward, also including acquisitions. Our divisions are now implementing the strategies for profitable growth. The core elements of these divisional growth strategies are expanding, the range of our products and solutions or working with the value proposition as we like to call it. Further geographical expansion, also further service penetration, digitalization and, of course, also pursuing further M&A opportunities. I also want to note it takes time to get the effects from all of these activities. And as announced in our New Heights program, we should start to see effects of this in Phase III, which is from 2022 and onwards. This year, focus is on securing our margin and preparing the group for growth, which I'm glad to see we are well on track doing. We expect markets to continue to improve going forward, supported by trends like urbanization, digitalization, sustainability and increased focus on safety. And I would say we are well on track to set the foundation for sustainable profitable growth and are highly committed to deliver on our targets. However, there are current insecurities around us and regarding raw material costs also regarding supply issues on some products like semiconductors and of course, also the further development of the pandemic. But so far, we have managed to manage it well. And I would say we are also well prepared to continue to do so. I want to take this opportunity to thank all employees for their commitment and the embracement of the New Heights program and delivering a solid quarter. I hope you all have a great summer break. So with that, I say thank you. Next page, please, and we move to the Q&A.

[Operator]

[Operator Instructions] We have a question from the line of Douglas Lindahl from Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

Yes. Starting on the wind business area where you comment that you've taken a one-off? Is it possible to be more specific on how much that has been in the quarter?

[Ole Kristian Jodahl, President, CEO & Director]

Yes. Thomas, maybe you want to...

[Thomas Hendel, Chief Financial Officer]

Yes, it's some million, but not double digit, if I do it that way.

[Douglas Lindahl, Analyst]

Okay. And on the Industrials business, which saw pretty weak organic revenue growth, but obviously, a very strong order intake. When would you expect this strong order intake trend to be sort of visible in the revenues for the industrials business?

[Ole Kristian Jodahl, President, CEO & Director]

It's the normal, I would say, it's that we have a very wide span on the timing from order to revenue. But that can vary from 3 months to several quarters. So -- But I think this -- we had a low order intake quarter 3 last year, which also is part of what we saw some effects from now. So -- But quarter 4, at least and onwards, I would say, we should expect to see more of the effects from the strong order intake that we're having.

[Douglas Lindahl, Analyst]

Okay. So no sort of no change in the backlog duration compared to historic levels?

[Ole Kristian Jodahl, President, CEO & Director]

No.

[Douglas Lindahl, Analyst]

And on raw materials, you touched upon it now in your sort of summary here -- Can you talk a little bit about that, how you managed to offset that? And what you expect in terms of potential margin impact as we move towards H2? Any comment on that would be helpful.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. Of course, we see these raw material cost increases also everywhere. We started off early doing what we could on the pricing side, where we have implemented pricing increases wherever -- in all divisions. We have also, of course, been working with our suppliers to mitigate the effects as much as possible. I think we also have a benefit from the effect that we implemented last year, a cost reduction program. So the organization has been in that mode to take down costs and do whatever possible on the savings side. So we have been able to mitigate. Of course, we are affected by these raw material cost increases also, but we have been able to mitigate it to a great extent. How they -- that will develop further is always difficult to say, but we think that we will be able to also further manage this without -- unless it's some much stronger effect coming. But there is also -- I would say, the effects that we have seen is mostly, of course, where we have long order cycles, like in BMU and also in Wind. It's been easier to pass this on and to manage it on before the other two divisions.

[Douglas Lindahl, Analyst]

Yes. So more of the project business, I guess. Okay. Yes. That's -- well, just one final, if I may, on the Cento Engineering. Is it possible to give some sort of indication on the profitability levels? I would assume that given its high degree of service, it's double digit, at least or can you give some sense?

[Ole Kristian Jodahl, President, CEO & Director]

Absolutely good profit levels. This is a good add-on to the group, which will help support the development of further improving the group profitability.

[Operator]

[Operator Instructions]We have a question from the line of Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

Yes. So I'm wondering a little bit about COVID-19 effects. Did you feel in the second quarter that the service personnel and your sales force, were able to visit the plants, they wanted to visit and visit the customers that they wanted to visit? Or do you feel -- still feel restrictions there?

[Ole Kristian Jodahl, President, CEO & Director]

Yes, it's -- we clearly see that markets are slowly and steadily opening up. So that makes life easier, of course, for our service business and service personnel. But still, we do have restrictions also in many places. So this is not -- this -- it's still there also. But we have also had, I would say, it's difficult to quantify during the first half, but we also, for sure, have had some that you could call pent-up or some effects that all that we are now more speed into the business again. But mostly, it's driven by the fact that it is a strong focus in the group and one of our most strategic important pillars. So I'm very happy with that focus on how this is driven in the group for the time being.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And then when we talk about cost savings and you say that you will deliver on the plans you have and so on. But do you also have, I mean, lower costs that are caused by less traveling and so on due to the coronavirus that might come back, so to say. Do you know the split between those sort of the -- more sort of structural cost savings and savings where cost might come back?

[Ole Kristian Jodahl, President, CEO & Director]

Yes, I can -- Thomas, maybe I want to comment a little bit more in detail.

[Thomas Hendel, Chief Financial Officer]

I mean you're, of course, right. We, as everyone else has both temporary and sustainable cost savings, to be honest. And but we don't explicitly say when what is temporary and what's not. Of course, it's obvious that we travel less, we don't join events and that kind of activity. So -- but I would say most of these cost savings that we say that we now have landed, and we are on track is sustainable, actually. And then if we go for increased cost in marketing sales and R&D is, of course, exclusive decision as we go.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. And I also might add that that we will never go back to the pre-pandemic levels, of course. We have learned new ways. We have seen that it's possible to conduct the business in a completely different manner and be more effective without that substantial travel as an example. But of course, some effect, it will be.

[Kenneth Toll Johansson, Financial Analyst]

And also when economies open up and you start travel a bit more, maybe you also get some more business on the service side that compensates some of those increased costs.

[Ole Kristian Jodahl, President, CEO & Director]

Yes. But of course, if we travel, if we spend money, we should get something back from it. So clearly, my expectation is that if we spend more money than we currently do, we should also generate more business than what we currently do. So clearly, we expect to get more out of it.

[Thomas Hendel, Chief Financial Officer]

Yes. I think you should look at it from the service business point of view, it's exactly what Ole said. But I believe that we should have increased customer interaction when it opens up even more, of course, to try to close deals, et cetera. So that's where we also have seen some effects.

[Kenneth Toll Johansson, Financial Analyst]

And then the acquisition you made of Cento Engineering Group is very interesting. Do you have a pipeline and plans to do several of those, more of those acquisitions?

[Ole Kristian Jodahl, President, CEO & Director]

Acquisitions is an important part of the group strategy. So definitely, we work on on our pipe. We do have a pipe, and we expect to do more acquisitions going forward. That's important to the group, absolutely.

[Kenneth Toll Johansson, Financial Analyst]

And could we also see it as a sign that the new organization that you put in place that it's -- have landed well now, and it is working well. If I was a CEO, I wouldn't be comfortable doing acquisitions unless the -- yes, the organization I have already is working well.

[Ole Kristian Jodahl, President, CEO & Director]

No, but I think you're absolutely right. And that's why it's also -- we select with care also, of course, where we can make acquisitions in the group because it's not perfect in all corners of course. So we need to be selective in that respect and be sure that we actually manage what we bring in. So that's a vital part absolutely.

[Kenneth Toll Johansson, Financial Analyst]

Yes. And when you bring in such an acquisition now, this company was very focused on the BMU side and servicing that and so on. But -- Do you think that you will use the service technicians also for servicing the Alimak construction hoist and other equipment, for example, in the group.

[Ole Kristian Jodahl, President, CEO & Director]

I don't exclude it, but there is actually -- typically, we see in our service organization that there are some benefits here, but mostly, they are focused on their own products, not brand, but I would say, products. So it's not that high degree of transition between the different product categories in that sense, but more of course, some there is, so there might be, but that's not the main thing. -- behind it. The main thing is that we get an even stronger base and continue to build on our BMU service, which we do think is very, very critical for that business to -- It's a lot of products out there that need refurbishment that need replacement, et cetera, and they need the regular service. So that's important for us to be part of it.

[Operator]

We have a question from the line of Mattias Holmberg from DNB.

[Mattias Holmberg, Analyst]

Apologies in advance, if you already discussed this as I was a little bit late into the call. But I noticed very strong margin that you have in the construction business in the second quarter. So I'm curious if there's anything beyond these restructuring measures that you mentioned that has resulted in this very strong profitability? Or there is anything of, say, one-off character in this? And also what is reasonable to expect from this division in terms of the margin level going forward?

[Ole Kristian Jodahl, President, CEO & Director]

Yes. No worries. That was a new question. So it's a good question. The margin was high, yes, but it's driven by the fact of -- it's nothing really one-off in this, but it's a good revenue. And we see here the leverage that we get now from our cost improvement program that when we get increased revenue, a big share falls through and down to the bottom line. So that's the main thing. So -- and that we saw also effects of -- within industry, first quarter. You had a similar type of effect. So actually, this old Alimak business, which is basically the industrial and the construction business. We do have a very good leverage effect there now from our cost programs, having been managed very well by that part of the group. And then, of course, also, we had a strong service business. So that also helps, of course, in the quarter.

[Operator]

There are no further questions at this time. I'd like to hand back to speaker for any closing remarks.

[Ole Kristian Jodahl, President, CEO & Director]

Okay. So thank you. Thank you for the interest and for listening in today. And again, thank you to all the employees of Alimak Group for delivering this quarter, and I wish you all a nice summer until next time. So see you. Bye-bye.