Alimak Group AB (publ)

STO:ALIG

Earnings Call Transcript 2023-Q2

[Operator]

This call is being recorded. Welcome to the Alimak Group Q2 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Ole Kristian Jodahl; and CFO, Sylvain Grange. Please go ahead.

[Ole Jodahl, executive]

Yes. Thank you, and welcome, everyone, to this quarter 2 call of 2023. And as always, with me, I have Sylvain. If we turn page, we will first -- just to recap a little bit. We will start to bring some slides to put this a little bit in perspective also. So we are Alimak Group, a well-diversified global industrial company with presence all around the world, driven in the daily business by these 5 customer-centric and fully diversified divisions. We have leading market position in focused niches around the world. We have a solid global footprint, which also means that we have a huge installed base of our machines, which build a base then for our spare parts and service business, which is a very, very important part of the business model of the Group.

Turning page, I came to the Group, June 2020, and then we kicked off a strategic program or a road map, if you like, the New Heights Programme, which we then put in 3 phases and first was to establish the base, which we have done then during 2020. Then doing the securing margin improvements during 2021, which we also then delivered upon, and then the focus has been from 2022 and onwards to deliver profitable growth. And this overall thing was, of course, to ensure that we are delivering upon our financial targets. And we had the Capital Markets Day a little bit more than a month ago, where we then presented the fact that we have delivered upon the financial targets we set out to make 2.5 years ago. and that we are now raising the bar going forward to the next level.

So turning page, the new financial targets for the group is to have a revenue growth then of 6% to 10% annually going forward, where a major part should be organic growth, but also, of course, supported by M&A. Then the EBITA margin should be above 18% within 2 to 3 years range for now. And then also that we have a leverage ratio of below 2.5x but something we can overshoot for shorter term for the right type of investments and a dividend payout ratio of 40% to 60% that we should deliver upon every year.

So then turning page and coming into where do we stand then coming into quarter 2. So very happy to say that we are continuing on our profitable growth journey, delivering another strong quarter. We have an adjusted EBITA margin in the quarter of 16.5%, which is then up from the 13.1% last year. And aggregated, this is -- if you then take in Tractel full-year 2022. It's an operational improvement of 6% in the quarter. Revenues increased by 65% where we both delivered organic growth and also, of course, a solid piece of the acquired. And this means that we are both taking care of the integration of Tractel in a very solid way continuing and also that we are showing good operational improvements.

Order intake was equal to the revenue in absolute value, around the SEK 1.8 billion. So book-to-bill ratio was 1, which is also a good level for the quarter, of course, meaning that we maintain our order book going forward and into quarter 3. The -- especially we see strong performance in Wind, Industrial and the Height Safety and Productivity Solutions divisions, very positive, which has been for a long time.

And we also report a strong and good cash flow in the quarter. And this means that we have delivered a very solid first half of the year, aggregated looking if Tractel would have been part of the full year last year, we have an order intake increase of 4% in the first half. We have a revenue increase of 13%, and we have an increase in adjusted EBITA of 19%. So a very strong also operational improvement and an EBITA margin of 16.5% on a year-to-date basis.

So turning page and a little bit more details about the quarter. Order intake was SEK 1,782 million, up 43%, 53% coming from acquisitions and then a negative growth of 15% on an organic base. And the organic decrease is mainly coming from high comparables. And then we also have a very strong in the quarter, organic growth in Industrial and Wind.

But I want to highlight the fact that I've been talking about many times that we have high variations both in months and quarters. but also between geographies. So we are happy with this order intake and looking back, we see that it's a good level and also that it's a level of the revenue. Revenues was at SEK 1,784 million, up 65% where then 59% is coming from acquisitions and 1% organic. And again, strong organic growth in Industrial and Wind and year-to-date base, we report 6.5% organic growth in -- on the revenue side.

EBITA adjusted increased to SEK 295 million, up from SEK 148 million -- sorry, SEK 141 million last year and a margin of 16.5% versus the 13.1% last year. And then aggregated EBITA, as I pointed to, was -- or then is up 6%. We see high performance in Industrial, Wind and High Safety and Productivity Solutions. So turning page and going into more on the division side, Facade Access. And here, we continue to execute on our transformation plan. Order intake was in the quarter SEK 433 million, up 4%, 56% coming from acquisitions, and it's down 55% organically, service continues to contribute in a very positive way. And then the reason for the organic decrease is that we had a very strong quarter 2 last year. So it's a high comparable where we had then a big project in the Middle East, with a substantial contract value.

We also start to see or we have seen a little bit in the quarter that some projects have been put on hold or delayed, and this is driven by higher interest rates and costs, which means that it's an uncertainty for the contractors, and therefore, they are pushing it a little bit forward. But these are not projects that are disappearing. And then also the fact that we, of course, as I said, we are executing on our transformation plan, which means that we are not taking contracts, which are not meeting the standards or the profit levels that we are now saying it's a base for us, which also have led to that we have stepped away from a couple of tenders during the quarter. But still a good, decent level and we move into quarter 3 also with a high order book.

Revenue was SEK 495 million, up 58% or 57% coming from acquisitions, slightly down then 4% organically. And EBITA, we reported SEK 26 million, up from SEK 6 million last year and a margin of 5.3% versus 2% last year. And again, we continue to execute on this transformation program which has also led to that the new project management model that we're now applying have led to that we have taken some more costs earlier in the project phase for some legacy Alimak projects. So we are more conservative in this respect. So that we saw partly in quarter 1 and also now in quarter 2.

But the Tractel piece is continuing to develop exactly like it has done and very solid. And this is then this conservative approach is also something of a temporary base, as you understand. Moving page. So the management team is now fully in place. We are applying the new contracting policy. We are tendering according to also the new guidelines and the margin levels that we have set, and we also are running these strict project reviews. But overall, we see, of course, that we have a very strong and nice strength in position with the combined offering, Tractel and Alimak.

So we are in a good position going forward, and we feel very, very sure that we will continue to deliver on our plans here that we have set forward. Turning page, a couple of examples of what we are doing. We have a big stadium -- football stadium in Spain where we are doing a nice project where we combine the Tirak hoists, which is coming down from the HSPS division and also solutions within Facade Access, which is actually a system to lower and take up nets inside the stadium to separate spectators for security reasons. So a nice project. And then we also have another example from Austria, where we are providing shaft access down to a railway tunnel.

And here, we actually combined both Scanclimber platforms, 2 of them with the systems from Facade Access and also Faba ladders from the HSPS division. So again, showing the strength of our combined offerings. Turning page and looking into construction.

Order intake was at SEK 476 million in the quarter, up 34%, 33% are coming from acquisitions and slightly down 4% organically. We see strong, say, order intake in used, rental and service. And this is also, even though it's slightly down organically, much higher than invoice level, so it is a very good level of order intake in the quarter. Revenue was reported at SEK 402 million, up 19%, where then 28% comes from acquisitions and 14% down organically. We see high level on the rental side, but we had a little bit lower as we have also talked about before in the Nordic region, mostly driven by Scanclimber overall and also Australia had a softer quarter.

But here, it's also important to look at it more over a time period. If you recall, we had a 20% organic increase in quarter 1. So this means that we still have a solid order intake during the first half of the year. So this is the swings again between months and quarters that we typically see in this type of business. EBITA was SEK 71 million, up from SEK 64 million last year, a slight drop in margin then to 17.5% versus the 18.8% and here also, it's the legacy Alimak part is continuing to do very strong results.

But we are affected by the fact that we are selling less Scanclimber machines then, mostly then in the Nordic region where we also have a factory. So we have some fixed cost there in the factory that is affecting this. But this is also a temporary base and we are sure that this will come back. So it's not triggering per now fundamental cost activities other than managing, of course, day-to-day in a good way. So we see overall a strong performance in also a challenging market.

Turning page. Some developments here which we have had a significant order in the Middle East for construction hoists. And this is a little bit externalized because it's also machines then that we are developing in the China factory, so bringing up loads there. And we also see that we are now able to sell these machines out of China. We also received multiple rental orders in Germany, and this is an important market for us and also where we see our main competitors in this business. So of course, it's something that we appreciate.

We see that higher interest rates and material pricing affect development in certain geographies. We have talked about this in the Nordics for a while. And there are, of course, some uncertainties also going forward. But compensated very well by investments in infrastructure, energy and utility sectors, which also brings the resilience in this segment.

Turning page. We have launched a nice new product, First time we have done and this is a small hoist, which can then transport people based on transport platform. So it's a compact and cost-efficient solution, which then can be transported easily and put up and taken down easily. It can fit into lift shafts, which makes it also very flexible and have a quick and easy installation. And as I said, components are shared with the TPL. So you share the same mast and you share the same frame. So it's also something which is effective and nice solution for our rental customers. A nice example of how we drive product development today.

Turning page and moving into Height Safety and Productivity Solutions. First of all, I'm very happy to see that this acquired business continued to show great results. And I think it proves again that we are not stuck with the whole thing that the Group struggled with integrating acquisitions. This will show now that we are more than capable of doing and continuing a good trend. The order intake was SEK 350 million in the quarter, remaining at the high level. Revenues was SEK 373 million. We see strong sales in Americas and Germany and also strong sales to customers in the elevator segment, which is an important segment for this business. And EBITA was SEK 79 million, very solid margin of 21.2%.

Turning page. We are, of course, continuing here to work on the synergies, and this is where we see a lot of synergies with the other divisions and as you have seen in some examples, we already have them and working on them with -- towards the Facade Access, but also towards other divisions. We are continuing to work with our customers there, being close to our customers and develop products and solutions that really they need. And as you know, this is also a business where we mostly use distributors. So we work with our loyal partners in this respect to also come even closer to our customers and help them in the daily [ work ].

We have a fiberglass guardrail solution and this is something we see is coming back more now because of 5G [ mast ]. This is then a solution, which is not interfering with the signals. So it's actually something that is coming back very nicely for us now when we see growth. And then as an example, we also Tractel or Tractel, the HSPS division have these nice solutions like you see an example of here that also hangs in a bigger crane to be able to turn and place exactly heavy loads, just to give an example of other things that we are -- or some of the product range in this diversified business.

Turning page and moving in to industrial. And here, we just continue deliver another very strong quarter. Order intake was SEK 373 million in the quarter, up 12%, 8% organic. We -- after sales continue to be an important piece, but also, of course, several of the segments that we have seen for a long time, cement, marine, power, bridges, all delivered good growth for us.

Revenue was SEK 339 million, up 15% or 11% organic. And again, I would say this is driven by the fact that we have a dedicated focused organization, working close with our customers, and that provides business, and of course, also that the market in general, industrial markets are good. EBITA increased to SEK 81 million, up from SEK 52 million last quarter -- last year, a margin of than 23.9% versus 17.7%. So a very very solid margin and happy to see that this is continuing to deliver. We have good drop through, of course, and also our cost focus and active pricing management continue to help lift margins in this business.

Turning page. A couple of examples. We have received a large refurbishment order in Spain, and this is an iconic communication tower at 288 meters, where we have had 2 Alimak elevators operating for more than 30 years. One is for service of the tower and the other one is for more touristic and panoramic view, so people can go up and have a view. So these we will now refurbish, but it also says something about the durability and the long life of our machines and the good service business that comes with them, of course. We had a good quarter also in Asia Pacific in order intake. And also out of the China factory, we have these SL lifts, which we are then selling. And this is a very nice and big bridge project where we have done several of our machines in the construction phase of this bridge.

Turning page, moving to Wind. Another very strong quarter also here. Order intake was SEK 187 million, up 28% to last year and 21% organic. Continued strong order intake in U.S. We see and continue to see positive development in China and also now that the European markets are improving. Revenue was up or was SEK 188 million, up 41%, 32% organic growth. substantial increase in revenue in U.S. driven, of course, by the order intake there, but also Europe and China are contributing and the service is also here, an important contributor to the overall business.

The EBITA doubled to a record level SEK 38 million, up from SEK 19 million last year and a margin of 20.2%, up from 14.4%. And again, it's a good drop-through. It's good sales cost follow-up. We have done the right thing with product development and being close to our customers. And we also made a good and the right decision when we then took out the tower internals, which was also hurting this business.

Turning page. In Europe, EU signed off this Renewable Energy Directive, which means that we believe and hope that this 80 gigawatt projects that is in the pipeline will be speeding up and coming to reality which then, of course, would be good for us. Wind division, we continue to work closely with our customers and develop products, both for on and offshore which is, of course, key. And then a nice example, we have also been working with a big wind farm in China where we have successfully delivered Phase 1 and 2, and now we also got the orders for Phase 3 and also connected with this a 5-year service contract for all our lifts here. important part of the business also service. So that takes us to the next page, financial summary and Sylvain.

[Sylvain Grange, executive]

Thank you very much, Ole. Good morning to all of you. And we are now coming to an overview of our key financial indicators for the quarter and the semester. Many of those indicators have already been mentioned by Ole. And we are pleased to present an overall good performance despite the macroeconomic challenges. Regarding revenue, we posted some small organic growth in the quarter, resulting from significant growth for the Industrial and Wind divisions and some organic decrease for Facade Access and construction. The quarterly order intake is down organically, but equal to revenue in absolute value, that means the backlog was unaffected in quarter 2 and remains on the same high level.

If -- now we look at the semester, the backdrop grew as in Q1, order intake was bigger than Q1 revenue. So that obviously gives some comfort for the revenue in the coming months and quarters. Quarterly adjusted EBITA is moving up to SEK 295 million, and this is 16.5% of revenue in Q2 2023, Assuming Tractel had been acquired on first of Jan 2022, the aggregated EBITA performance would have been SEK 279 million in Q2 2022. So we are growing adjusted EBITA -- aggregated adjusted EBITA by 6%, which we find is a good performance, and that is mostly due to higher aggregated revenue and operational improvements. Operating cash flow has grown to SEK 206 million in the quarter from a low base of SEK 37 million in Q2 2022. And I will come back later to cash flows.

Let's now focus on the bottom part of the profit and loss statement as just mentioned the growing adjusted EBITA. And to be more specific, we are -- we have maintained our total overall gross margin on a stable high level on an aggregated basis, notably reflecting our active price management policies and our continuous efforts to optimize the cost of our products and solutions. The gross margin was close to 40% in Q2 2023. That was the level we were at in Q1 2023. And to give a base of comparison, gross margin was reported at roughly 35% in Q1 2022 to a solid gross margin.

At the same time, we pay continuous attention to controlling the cost below the gross margin. At constant ForEx, SG&A have increased organically by less than inflation in the quarter. So the higher revenue has mechanic led to higher adjusted EBITA. Below EBITA, we do see the impact of the recent acquisitions that applies obviously to amortization. We had to make minor adjustments in the quarter, and the normative quarterly charge is expected to be around SEK 45 million in the future. The increase in financial nets mostly comes from the interest related to the debt we raised for the Tractel acquisition and the increase in the average tax rate is due to the evolution in country [ mix ]. Legacy Tractel operations are overall located in countries with higher tax rates and that explains the increase.

Turn page, please. We now come to the results for the period, which was SEK 130 million versus SEK 98 million in Q2 2022. Adjusted for items affecting comparability, that was SEK 136 million, and this represents an increase of 38% versus Q2 2022. EPS was SEK 1.21 versus SEK 1.38 in Q2 2022, and the decrease is basically due to the increased number of shares. Adjusted for IAC, the EPS was SEK 1.26 in the quarter versus SEK 1.38 in Q2 2022.

Let's turn page, please. And now coming back to the cash flows in the quarter, we paid more cash interest, we paid more taxes, SEK 86 million in Q2 2023 versus SEK 13 million only in Q2 2022. And this has been overcompensated by much stronger earnings and as well a much lower working capital increase. We grew very slightly the working capital in the quarter but much less than in Q2 2022. The outcome is cash flow from operations at SEK 206 million in the quarter versus SEK 37 million in Q2 '22 and that is definitely a very positive development.

And we now come to the net debt, which has increased slightly in the quarter, and that's mostly due to dividend payment we made in the quarter of close to SEK 200 million and to a lesser extent, the revaluation of the euro term loan. The weakening SEK has led to approximately SEK 150 million of additional SEK debt on our balance sheet.

In the semester, you can see that the net debt is down, and that is mostly due to the successful SEK 2.5 billion rights issue in the first quarter. Leverage. Leverage ratio has decreased to 3.36. And factoring rolling 12 months of Tractel EBITDA, the leverage was 2.97 at the end of Q2. And you surely remember that we have announced a leverage ratio of 2.5 as a financial target of below 2.5. So we are not there yet. But we believe we are on track and deleveraging will continue to be a top priority in the coming months and quarters.

The other capital allocation priorities are unchanged. We will continue to apply the dividend policy which we confirm last month at the CMD. Although practically, it's no more a matter for next year when we expect to make the next dividend payment. At some stage, as we said as well, we'll come back to the M&A trail as it is a very important part of our strategy. And definitely, we believe this can be value creative.

And finally, we are making the necessary investments to support our organic profitable growth journey. And if we can now come to the balance sheet. And as you all know, the most significant changes in the balance sheet relate to the acquisitions we made in the second semester last year, and in particular, the Tractel acquisition and its financing. This definitely applies to goodwill and other intangible assets, which have grown significantly versus Q2 2022. Equity was impacted by the SEK 2.5 billion rights issue, which I mentioned earlier, and which we concluded in Q1 2023. And maybe one additional comment regarding the debt,I referred earlier to the EUR 300 million term loan, which is making the biggest component of our debt at the end of the quarter. This loan matures in 2025, and we have 2 1-year extension options, so that may take us to November 2027. And that's it for the key financial information.

And I will now hand over to Ole again.

[Ole Jodahl, executive]

Thank you, Sylvain. So then if we flip page into the summary. We see that we are continuing very solidly on our profitable growth journey. And this means that we are both managing continuously, the integration of Tractel in a very solid way but also that we are continuing to deliver operational improvements on a day-to-day basis. We have specifically strong performance in Industrial, Wind and the Height Safety and Productivity Solutions. We start to see, as I have said also that the higher interest rates have impacted or started to impact a little bit our business, but also our well-diversified business model, our good cost control, active pricing management brings us resilience, which I -- which you can clearly also see now in the first half of this year. And we will continue to execute on the New Heights program. That's our -- continuing to be our route forward. And this is, of course, to ensure that we are now also then delivering on our financial and sustainability targets that we have set out for the coming years. So that will be with us, and we feel very comfortable around this.

So with that, I would like to say thank you to all employees for another good quarter and a great first half of the year. So with that, we turn page, and we move to Q&A.

[Operator]

[Operator Instructions] The next question comes from Hanna Lindbo from DNB Markets.

[Hanna Lindbo, analyst]

And my first question is on the higher interest rate. If you can give some more color on how you expect it to impact you in the near term?

[Ole Jodahl, executive]

Yes. Hanna, That's a very, very difficult question how that will impact the business overall. You see that -- and that's what I'm referring to. We have had some effect in the Nordic region for some time and that we know that the residential piece of that business is down, and this is basically what is surfing also residential globally. And we also have seen some effects on some projects on Facade Access that are being pushed forward in the decision process.

So I think that we will see much more effects than what we are seeing now? No. But again, it's -- we don't know where the interest rate and this is ending. But if we start to see the end of maybe the interest rate hikes, then most likely also we will not see, let's say, stronger effects in the market about these things. So it's yes, we feel confident about the business momentum and that we will continue to manage this in a good way also going forward.

[Hanna Lindbo, analyst]

Great. And on the legacy Facade Access margin, it looks like it declined again. And I know that you're doing a lot of stuff here. But could you give us a bit more of an update of how it's going? And when do you expect to see a turnaround here?

[Ole Jodahl, executive]

Yes. I think first of all, as we have said, this -- and as we all know, this needs a turnaround. And we know we have a very solid lead in the Tractel business there, we know how to do it, and this is the logic and the way of working that we're now applying. And this is moving forward according to plan. And it's stepwise. First, it was to get the organization in place, so to get the base structure there. And then it's, of course, about commercial terms and how we act in the market with -- from contract and pricing. And then it's our internal perspective on how we manage our own operations, project management, et cetera. So in all these areas, we work and a lot of it is implemented. But the element that will take time is, of course, the most time, it's the project management and how we are fully, let's say, organized and managing that internally.

And then we have a pipe of projects that will take time to clean out, as we have said. So this is not a quick fix. And -- but we have done now a strict review, which means that we have been through quite a lot during quarter 1 and quarter 2. And as we also said at the CMD, we should start to see improvements already in '23. And then it's a gradual improvement going forward. So this is the expectancy that we are having today about this.

[Hanna Lindbo, analyst]

And all these measures that you are taking and like going away from certain contracts. Can you comment on like how much of the top line in Facade Access and this new strategy will impact?

[Ole Jodahl, executive]

You mean how much the impact from that we are turning. [indiscernible] Yes, away from some tenders.

[Hanna Lindbo, analyst]

Yes, exactly.

[Ole Jodahl, executive]

We -- honestly, I don't think that will impact us a lot. And at the same time, if it impacts the turnover slightly, then it's good for the results. So it will be good for the business that we are doing it that way. And we are also the leader in this business. So it's also good that we are leading the way in the market actually with being firm on what we are doing. So it's the only right way that will -- it will have a heavy impact on our top line. No, it will not. But that will you can see some impact in some contracts from time to time. Absolutely, yes. But then we are also stronger and better. So we also win new stuff based on the new group or the new division we are here. So I don't think that this will be an important piece, but it is a piece of the puzzle.

[Hanna Lindbo, analyst]

All right. Great. My last question is on Wind, which was very impressive in the quarter. So my question is, do you expect demand to continue to accelerate? And how should I view the margins going forward?

[Ole Jodahl, executive]

Yes. We have a huge step-up in order intake in quarter 1 and quarter 2. Quarter 2 was slightly -- a little bit less than on a level. And then you see that on the revenue side, it's -- as we have talked about, the lead time from order to revenue is normally within 2 to 4 or 6 months. So you see the order intake quarter 1 is coming down to revenue in quarter 2. So -- but this market will continue to grow 30% or that is, again, impossible for me to predict. What we do see is that this market is much better. It's a completely different market than before, and we are, of course, expecting to be continuing to grow this business. But it will be on the same growth levels that's too optimistic to say today that we will grow 30%, 40%, 50% every month.

[Sylvain Grange, executive]

Hanna, just one little additional piece of information regarding Wind. As we said, we have benefited from a favorable product mix in the quarter and the semester and this may vary from one quarter to the other. So we had positive effects in the quarter, definitely.

[Operator]

[Operator Instructions]

[Ole Jodahl, executive]

Yes. Does it mean we don't have more questions online. We have something on the net here that I can see a written question. So I think I will move and take these 2. The first question I have here, can you give us an idea what the volume growth is coming from cross-selling after the Tractel acquisition compared to what's coming from growth of the market size?

I would say that the volume growth today coming from cross-selling is neglectable. This is the work we are starting and -- but it's not really affecting the figures today. So the growth that you see is from, let's say, the regular business performed both from Tractel and from legacy Alimak. But as we do expect cross-selling, as you know, that we have synergies planned here and that we start to see that this will come, absolutely. And I had some examples in the presentation.

Then we had another question here. How much of organic order decline in Facade Access is driven by weaker market demand versus stricter margin requirements?

I think this was basically a little bit what I already said, it's difficult to give some sort of exact split on this. But we had 3 effects in the quarter. The major effects -- the big effect was high comparables, this big project that we had last year. So correcting for that, it's nothing really strange with our order intake in the quarter. And then we also had some effects, as I said, that we see some delays and some effects that we have turned back to a couple of projects. which could have maybe lifted again. So -- but again, these are -- it's the right decision for us to turn it back to those projects. And it's also not disappearing. These projects that are put on hold or delayed. They are in the pipe. They are just most likely then coming at a later stage.

So that was the 2 questions I have here on the net. So I don't know if there is nothing more. No? So then I would like to take this opportunity to thank you all for listening in. And again, thank you to all employees and partners for a good quarter and a very, very solid first half of this year. So with that, I wish everyone a great summer and looking forward to speak again after quarter 3. Thank you.