Alimak Group AB (publ)

STO:ALIG

Earnings Call Analysis

Revenue Growth Amid Challenges and Strategic Initiatives

In Q2 2024, the company reported a modest 1% revenue increase to SEK 1,806 million, with adjusted EBITA growing 4% to SEK 307 million. The EBITA margin achieved a record high of 17%. The Facade Access division's transformation program significantly improved its margin from 5.3% to 10%. Despite challenges in Construction, it rebounded, contributing to the solid order book. The Industrial division showed robust order intake and revenue growth. Additionally, the company secured a new EUR 50 million revolving credit facility, reinforcing its strong financial position. Management maintained a revenue growth target of 6-10% and an EBITA margin over 18% within the next 1-2 years.

Performance Overview

In the latest earnings call, the company reported a solid quarter despite facing challenging market conditions. Revenue grew by 1% to SEK 1,806 million compared to the previous quarter, with a significant 11% increase in net profit to SEK 143 million. Adjusted EPS increased from SEK 1.21 to SEK 1.35. These results reflect manageable cost inflation and improved operational efficiency, particularly within the Facade Access division.

Key Revenue Drivers

The increase in revenue was driven by strong performances in specific divisions, notably Industrial and Wind. The Industrial division saw a remarkable 19% increase in order intake, amounting to SEK 442 million, contributing to a 7% revenue uptick to SEK 362 million, largely thanks to aftermarket and refurbishment projects. Meanwhile, Wind division revenue rose 3%, spurred by new machinery sales, particularly in Asia.

Facade Access Challenges and Transformation

The Facade Access division experienced a decrease in order intake by 16% to SEK 364 million, attributed to high interest rates and market uncertainties in North America. Despite this, the division's EBITA margin notably improved from 5.3% to 10% due to the success of the ongoing transformation program and better project execution. The overall strategy appears to focus on enhancing service and infrastructure projects to capture future market potential.

Market Trends and Future Outlook

The company outlined its expectations for a rebound in market conditions, suggested to occur as inflationary pressures ease and interest rates potentially decline in 2025. Current conditions suggest a slow recovery in both the Facade Access and Construction markets, yet management is optimistic about strong long-term demand due to ongoing urbanization and sustainability trends.

Cost Management and Financial Targets

The company achieved a gross margin of 40.9%, which is nearly 200 basis points higher than Q2 2023, marking an all-time financial high. With a clear focus on operational efficiency, they aim for an EBITA margin exceeding 18% over the next couple of years, supported by significant cost synergies following recent integrations. The current leverage ratio stands stable at 2.29, consistent with their target of being below 2.5, allowing room for continued investment in growth.

Sustainability Goals and Dividend Policy

Sustainability is a priority for the company, with a target to reduce CO2 emissions by 30% by 2025. The dividend payout remains robust, projected between 40% to 60% of net profits, aligning financial performance with shareholder returns while underlining the commitment to sustainable practices.

Earnings Call Transcript 2024-Q2

[Operator]

This call is being recorded. Your line is muted. Welcome to the Alimak Group Q2 2024 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]

Thank you. And welcome to the quarter 2 call of '24. And with me, as always, I have Sylvain.

If we turn page, and we do a short recap of the group. So yes, a global industrial company, well diversified in our business, focusing on sustainable vertical access solutions and working at height. We have some fundamental drivers for our success that I would like to mention, and first of all, supported by some global trends like growing population, urbanization, more happening at height, the reshoring, moving back to localized production, good for our industrial business, the sustainability trend, focus on health and safety. These are all factors that are providing fundamental growth into our business.

We also have a leading market position in the niches that we operate in. We have a really global footprint and a large installed base around the world with machines that have a long life, which is then a great fundament for our aftermarket business, with spares and services. And all in all, we also have a strong balance sheet, good cash conversion, and a strong financial position. And we drive the business through 5 customer-centric decentralized divisions.

Turning page. I came to the group 2020, and then we kicked off a new strategy, what we call the New Heights program. And this is what you see here. We have talked about many times, and we have been focusing on executing and delivering on this. It's something that we have done and followed.

So if you turn page, then we also have the financial targets and the dividend policy related. We updated this last year because at that stage, we already met the first targets we set out. So now we have a target of revenue growth of 6% to 10%. We have an EBITA margin where we should be north of 18% within 2 to 3 years, we said 1 year ago, so that means within 1 to 2 years now. We have a leverage ratio that should be below 2.5x, and we are well within that. And we also say that we should have a dividend payout ratio of 40% to 60% of net profits.

Turning page. Of course, we have sustainability targets, so a CO2 deduction within 2025 of 30%. But we have also applied, and we are in the formal stage of science-based targets, so that will come within a little bit more than a year. We have employee net promoter score of beyond 40. We have lost time injury frequency rate target of less than 2. And we should have an ESG assessment of our suppliers, more than 80% of our suppliers.

Turning page, and into the quarter. Yes, first of all, I was very happy to see that we continue to strengthen and develop the group in a continued challenging market for some of our divisions. We continue to invest in growth. We move forward in fixing Facade Access. And we also keep making our cost base more variable.

We reached, for the first time, an EBITA adjusted margin of 17%, which is a very nice step up. This means an all-time high, both in value and margin, and of course, en route to our target of 18%, that we have set out to reach. It's the transformation program in Facade Access that, of course, contributes, running according to plan, and they reached EBITA margin of 10% in the quarter. We have Construction profit rebounding, as we said last quarter, they will do. And also, overall order intake is in line with last year, and also revenue is actually slightly above, which we think is good, considering everything around us.

Turning page, and a little bit more detail. So the quarter order intake was SEK 1,789 million, flat organically. The Industrial and Wind divisions performed strongly. HSPS was stable and solid, I would say, in the quarter. Construction reports somewhat down order intake, but they are significantly up on revenue, which basically means that we are building a solid order book in the quarter, so in that sense also good order intake, while the Façade Access division reported a somewhat lower intake in line also with quarter 1.

Revenue was SEK 1,806 million, up 1%, also 1% organically, where we have positive contribution from Industrial Construction and Wind, while Facade Access was flat, and HSPS was slightly down, but basically driven by a high comparable.

EBITA adjusted at SEK 307 million, up from SEK 295 million, a margin of 17% versus the 16.5%, which is again an all-time high in both reported earnings and margin. And as I said, also, we are happy to see that we continue to improve the margin in Facade Access and the Construction, which was rebounding.

Turning page. Service aftermarket continues to be, of course, a very important part for the group. And we have a service, a global service structure in each of our divisions, driving their own aftermarket. And this creates resilience. And since we have machinery with long life, it also means that it is a significant business for us over time, which again also leads to refurbishment and also potential replacement. And I'm happy to see that we had positive order intake development in all divisions during the quarter. And we continue to drive this strategically, of course, and we see further nice potential in our aftermarket going forward.

Going into division, turning page, and Facade Access. Order intake was SEK 364 million in the quarter, down 16% or 17% organically. We continue to face headwinds in North America and this is market, so market for new equipment, especially the BMU, building maintenance units, the complex units, it's very slow due to high interest rates and also the upcoming U.S. election, which is pulling down investments.

We are retaining our market share in this business, so it's not that we lose out. Projects are on hold or not being pushed forward. So this is something that we feel will come when the market rebounds, absolutely. But it also means that we are focusing more on the infrastructure market, and I will come back to this.

We see increased -- or we saw increased order intake for new equipment in Asia Pacific and service is continuing to grow in all regions. Revenue was SEK 496 million, flat organically and supported by service revenue in all regions.

EBITA at SEK 50 million from SEK 26 million last year, margin of 10% versus the 5.3%. And this is supported by this program that we are running. So the new projects are signed at better margins, we have built in contingencies, and we are running projects the way they should be run with a solid project execution.

Turning page, and a little bit more of what we are doing here. So we are continuing to drive the footprint optimization and the closing of the assembly site in Germany, Mammendorf, is continuing and is according to plan. We are now moving the spare parts from the Manntech brand out of Madrid already.

We are, as I talked about, moving more into infrastructure projects. This Facade Access capability we have means that we can also do much more in infrastructure. We have a nice example from what we did in the FEMERN project, but it also means that we are driving this globally, and we see a nice potential and a place for us in taking Facade Access solutions and making that for infrastructure projects going forward.

We focus on growing our design consultancy services. Instead of, you could say, just being a product supplier, we more look into the vertical. And we see that, with our knowledge, it's natural that we are also more into design consultancy. So it's also something we drive to increase our strength in this business.

And we leverage, of course, our customer relationships. We have some recent very nice projects, one in China. Thanks to our local presence there. But we are also actively managing our database within installed machines that we have out there to drive the aftermarket with refurbishment, retrofits, replacements, et cetera.

So overall, a challenging market, but we continue to invest, and we drive, like the infrastructure, new opportunities. We've continued to fix this business. And I feel very strongly that we are also ready for a potential rebound that we are sure will come.

Moving into Construction. Order intake was SEK 454 million in the quarter, down 5%, and also 5% down organically. Important to note is that this is still an order intake level, which is 7% up on revenue. So it means that we are building solidly on the order book in the quarter, and that this is a good order intake level.

Europe remained soft for new equipment, while we saw strong equipment orders in the rest of the world. We have nice contribution from our used equipment drive and also on both rental and the aftermarket in all regions.

Revenue was SEK 426 million, up 6%, 5% organically, where the growth is mainly driven by new equipment and rental in Asia Pacific.

EBITA at SEK 71 million, same level as last year, margin of 16.6% versus the 17.5%. And happy to see, first of all, that the margin was rebounding from last quarter, as we said it should do, but we still have an impact here from the lower load in the Polish production facility, the Scanclimber manufacturing.

Turning page. Mast climbing work platforms was something that was not really in the focus in the old days, and this has also been part of the New Height strategy to really revive mast climbing work platforms. We clearly believe that this is a fundamental driver and opportunity for the future, both to replace scaffoldings, but also because it's a safe and effective mean to work healthy and safe at work sites.

We have, from the old days, the Hek brand, which we are reviving, and we also have Scanclimber that we acquired, and these are areas that we strongly believe in going forward. And we have a couple of examples here where we see that we won a very nice rental project in Switzerland during the quarter, where we have 16 units of mast climbing work platforms being used for the refurbishment project, where we see that, from a sustainability perspective, the trend for taller buildings is not to demolish and build new, but it's to refurbish, and then you need to redo the Facade, and then these machines are a very natural and good choice to do that.

We also, as part of this strategy to revive it, we are actively using our used philosophy here. So in Australia, we repurchased, upgraded, and redistributed, sold again then, 19 units of mast climbing work platforms from Scanclimber with a lot of mast sections, and this is, as I said, the part of our strategy to revive and develop this market. So our diversified model, global strength that we have, we continue to develop, and it's working well for us. And we also feel that we are very well positioned for the improved market conditions that we are sure will come.

Moving on to Height Safety and Productivity Solutions. Order intake was SEK 352 million in the quarter, up 1% or flat organically. Our increased focus on lifting and handling distributors are paying off. And we saw stable development basically in all other segments.

Revenue was SEK 354 million, down 5%, 6% organically, but here basically meeting a high comparable in Q2 last year. EBITA was SEK 69 million, down from SEK 79 million, giving a margin of 19.5% versus the 21.2%. And first of all, this is, again, driven or affected by the cost allocation change that we did. So this would be the last quarter where we have this negative effect from that. And then somewhat also lower sales effect was mitigated by a favorable margin mix in the quarter.

Turning page, a little bit update also here. So what are we doing to drive growth? Yes, we are focusing on verticals to be more specific into different businesses and drive our offering more structurally. So verticals like underground networks, confined space, fire and rescue, load measurement industries, these are some of our key verticals, and that we are driving our focus towards. And also, of course, to be more customer-oriented, making more bespoke solutions, utilizing our product range, and thereby meeting and exceeding customer expectations.

So some examples here, we are making a black chain hoist for the entertainment industry in U.K. We are combining several projects to fit into chimney refurbishment solution in India, we have crane solution using both Tirak and Dynafor in Spain, and we are framing our Tiraks for a refurbishment project in the Canary Wharf, London, so altogether being more customer-oriented. So stable good quarter and continue to invest in the growth.

Turning page, and into Industrial. And again, I would say another great quarter by our Industrial division. Order intake was SEK 442 million, up 19% or 18% organically. And this is also actually 22% up on revenues in the quarter, which means that we are building another significant order book level here, record high level, strong equipment, and refurbishment order intake across most regions and segments. And parts and service, the aftermarket continue also to perform well in all regions.

Revenue was SEK 362 million, up 7% or 6% organically, where refurbishment and the aftermarket business were particularly strong in the quarter due to a lot of projects.

EBITA at SEK 82 million, up from SEK 81 million, a margin of 22.7% versus 23.9%, somewhat lower margin diluted by negative product mix effect, but nothing here that alludes to that we should run with lower margins going forward. We have high margin in our industrial business. It will be some natural swings over the months and quarters, but this will continue to develop in the way we have seen over time.

Turning page. So what are we doing here? Yes, we are continuing our geographical expansion. We continue also here to invest in growth. So we invest in sales resources in markets where we have been weaker or not really present from the old days, and we do that slowly and steadily. We focus on key account approach, of course, starting to build this more up also, and that's paying off in our ship-to-shore business. We continue to drive our aftermarket presence build on that organization to really ensure that we service our customers in the right way. And that's, of course, driving our growth here. And we also continue to focus on operational efficiency. And here, we have, in the quarter, moving away from air freights and moving over to other transport means, sea freights, et cetera, rail, lowering CO2 emissions, saving cost, and also improving customer satisfaction. So continue our profitable growth journey, investing, and we see great potential long term.

Turning over to Wind. Also here, another strong quarter. Order intake was SEK 202 million, a very nice level in the quarter, up 8%, 8% organically, increased orders in new equipment, but also, of course, then building a nice order book in Asia-Pacific and Americas.

Revenue was SEK 194 million, up 3%, 3% organically, and we had particularly strong sales of new equipment in China. It's personal protective equipment also that continues to perform well for us.

EBITA SEK 39 million, up from SEK 38 million, giving a margin of 19.8% versus 20.2%. So stable, solid, good margin level, supported by good factory utilization and good favorable product mix.

Turning page. So also here, it's -- remember that this is a very, very competitive market, few customers and very automotive like. So we are winning because we are close to our customers and meeting customer needs, exceeding customer expectations. So that proves effective for us.

We see the market is overall stable, some growth in Asia-Pacific, whilst we also see some decline in Europe and Americas. But combining our strength with our customer approach, product development, operational efficiency, we also see that we are taking market shares with these customers. And that's also, of course, then driving our growth. So good performance in service lift, good performance in personal protective equipment, and also the aftermarket with e-learning spare parts, it's all working well for us here at the time being. So strong development, although this is a very competitive and challenging market, as you can understand.

So that takes us to profit and loss, and I leave for Sylvain.

[Sylvain Grange, executive]

Thank you, Ole. And good morning, everybody. On this slide, indeed, we now present a summary profit and loss statement. I will not come back to order intake and revenue developments, which have already been commented. But I would like to highlight the EBITA.

We are glad to see an adjusted EBITA growing more than revenue in the quarter. It's a 4% growth for EBITA versus 1% growth for revenue. And this indicates that we have overcompensated some cost inflation by an improved operational efficiency. Items affecting comparability relate to the closure of the Mammendorf assembly facility.

Below EBITA, quarterly amortization is at its normal level, around SEK 50 million. Finance net is slightly down, mostly due to the reduced debt. Taxation rate in the quarter is down to 23.1%, thanks to a favorable country mix. Our typical tax rate is closer to 25%. And overall, that means we grow the bottom line, i.e. the net result by 11%.

So turning page, let's now look at the two main EBITA drivers; gross margin and operating expenses. Gross margin has been steadily increasing to 40.9% in the quarter. It's almost 200 basis points above Q2 2023 and 80 basis points above Q1 2024. The biggest contributor to the improvement is the Facade Access division. As already mentioned by Ole, the transformation program is bearing fruit in that division.

In the quarter, Construction and Industrial divisions performed below their usual standard due to a negative product mix for Industrial and an insufficient utilization of the Polish factory for construction.

As a percentage of revenue, operating expenses are slightly up versus Q2 2023, and this result from various factors. We have taken on some specific additional expenses such as sale expenses for the Industrial division or product development in Construction and HSPS divisions, but we see those expenses as an investment for the future. We have had some cost inflation, typically labor. And on the other hand, we have made some savings further to the Tractel integration. As already mentioned, we are delivering the SEK 40 million cost synergies, which we announced for 2024.

Beyond that, we have taken some other cost initiatives, which have not had any effect yet, and I'm referring in particular to the closure of the Facade Access assembly facility in Germany.

Turning to result for the period. This was SEK 143 million in the quarter versus SEK 130 million in Q2 2023, so that's an 11% growth. Excluding items affecting comparability, result for the period was SEK 154 million, against SEK 136 million in Q2 2023, that's a 13% growth. EPS was SEK 1.35 versus SEK 1.21. And adjusted for IAC and acquisition-related amortization, EPS was SEK 1.78 versus SEK 1.61 in Q2 2023.

Let's move now to the operating cash flows, which were soft in the quarter due to some temporary working capital increase in the Construction and Facade Access divisions. This is in particular related to the phasing of the invoicing, and we expect most of it to be reversed by year-end.

In Construction, the repurchase of the used mast climbers in Sydney contributed as well to the temporary increase as the cash inflows resulting from the resale will mostly come in the third quarter.

In the first semester, cash flows are still growing by 20% despite the soft Q2, and the cash focus will definitely continue in the future.

Let's move now to debt and ROCE. Net debt is stable in the quarter. It is mostly a factor of the operating cash flows on the one hand and the dividend payment on the other hand. It's important to note that we secured an additional revolving credit facility in the quarter for an amount of EUR 50 million and a tenure of 3-plus-1-plus-1 years. This comes on top of the SEK 2 billion RCF, which we executed in December last year. So in total, we have a bit more than SEK 2.5 billion of available RCF.

Leverage at the end of the quarter is 2.29%, in line with our target of being below 2.5%. And as I already said, we will continue to focus on operating cash flows, which will contribute to future deleveraging.

Our priorities for capital allocation remain unchanged. We will invest in organic growth, and I mentioned some examples earlier. We continue to actively work on acquisition opportunities followed by the decreasing leverage, and we will apply as a dividend policy, although ultimately, this is a board proposal and an AGM decision.

And I will finish with one word on ROCE, which is an important metric for us. It's slightly growing in the quarter, thanks to an increased EBIT, and we will continue our work to uplift ROCE in the future.

And on this, I'm handing over to Ole.

[Ole Jodahl, executive]

Thank you, Sylvain. And we turn page into the summary. So yes, good quarter, and we are on track to deliver on our financial and sustainability targets. We have reached a new margin level in the quarter despite that we still face a challenging market condition for several of our divisions.

And the New Heights strategy continues to serve us well, and these are having these three key elements. So first of all, these strategic drivers, customer obsession, technology leadership, operational efficiency, and people, this is the drivers that we all focus on every day.

But then I would also like to highlight the importance of the effective and decentralized organizational structure that we are having. Combined with the right strong culture, this is giving an effective and well-performing machine that continue to take the group to new heights.

And we also have a solid financial position that allows us to continue to invest both in organic growth, M&A, and et cetera, like Sylvain was mentioning. And we also feel very ready now that we are in a strong position to capitalize on improved market conditions when they start to emerge.

So with that, I would like to thank all employees and customers and partners for this first-half year, and we move to Q&A and turn page.

[Operator]

[Operator Instructions] The next question comes from Jenna Xu from Berenberg.

[Jenna Xu, analyst]

Just a couple of questions for me, maybe on the margin. So from HSPS, how should we think about that margin going forward following the end of the central cost allocation? Because I understand that Q3 is historically a weaker quarter in terms of revenues. But does that also impact the margins for Q3? Or was last year's margins just an effect from that cost allocation?

[Ole Jodahl, executive]

I think you should look a little bit upon where we are now year-to-date over the last 4 quarters. I think that would be more the signal of -- if you look at the last 4 quarters and take the average, I think that would be the most or best indicator for what to expect going forward.

[Jenna Xu, analyst]

And on sort of Facade Access and Construction, I know, by now, kind of the big question is the timing, but personally, when do you see sort of this market for Facade Access coming back, especially in the U.S.?

[Ole Jodahl, executive]

Yes, it's a good question, Jenna. And I don't really have -- it's just speculation, of course, but we all start to see now that the inflationary pressure is starting to come down. Interest rates have not really started to come down yet. So then it's also this question, what will start to drive the increased investment? Is it just now that everyone realizes that it most likely is to come down, or is it that we need to see it's coming down first? And if it is to see it's coming down, then most likely, globally, it's more closer to year-end or beginning next year that we can start to see some fundamentals there.

And then considering that also our products, our investment products, most likely, they will not be first out. Most likely, I would think that you need to start to see projects coming -- being put back on the table. So short term, I don't think you will have effects in the next 1 to 2 quarters if -- of any magnitude. But '25, hopefully, we need to start to see effect from this, I would believe.

[Jenna Xu, analyst]

And just a quick clarification. Is this for both Facade Access and Construction?

[Ole Jodahl, executive]

Yes.

[Jenna Xu, analyst]

Or just more on Facade Access? Okay.

[Ole Jodahl, executive]

No, this is both. Both are affected by this high inflationary pressure. U.S. also, as I mentioned, are influenced by the U.S. election. And also still in U.S., which you see a little bit more than, I think, in Europe, you are also having a little bit effect in some cities that people have not come back to office to the same degree as pre-pandemic. So there is also some effect there in some of the cities in U.S. But that we also believe will change going forward. But -- yes.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Ole Jodahl, executive]

Yes. Thank you. We have a question online here, so I will do that first then. So it is a question.

Can you speak some more about Alimak's digitalization and smart solutions? And how rolled out is it through the current unit base?

Yes. We have -- since I came to the group, we have been investing quite heavily into making our machines connected. And we have a team out of Boras, which is led by Charlotte, our CTO, driving this development. And this is a center, which are working for all our divisions, supporting all of them with this type of knowledge. And we leverage, in that sense, the knowledge and can also help every division moving fast on this.

Basically, what we have done is to put this type of control systems in our machines and sensors, et cetera. So today, most of our machines have this ability that we can see load, we can see run data. So you get the usage of the machines that we can see and also customers can see. So that's available today.

And then there is a question, of course, going forward, how much will it be adopted and so forth, and this will vary a little bit from industry to industry and segment-segment, division-division. But we are providing these things, and we start to see more and more interest from our customers in this respect.

Maybe one area to highlight is on the construction side. You have both the element of productivity because at the construction site, the question is, of course, to move effectively people and material at the construction site. And to be -- and most of -- if you build something in height, most of -- most material and people are moving through our machines.

So to be able to work on the productivity, to make sure that people and material should move more effective, you need to have data around it. And the only way to have data is to have run data from our machines. So then you can see where they are starting and stopping, where they are moving, what type of load they carry, and all these things. And from there, you can start to work on taking out the data and working on productivity and plan better the logistics at construction sites. So that's one element of -- on the productivity side.

Then you also have the safety side, of course, which is basically the same thing. You need to have digital machines. You need to have machines that are controllable. And that's also what we are having today. So that -- since you have a smart panel in the machine, we can build in, and we have this type of features available if customers want to use them, that the machines cannot be operated by anyone besides those that have a certified training and a certificate and a tag from us. So that's the only way to run the machine, that you can use these type of things during the installation of a machine to ensure that it's digitally approved by people that are certified to install, maybe two installers, so to ensure that it's all done correctly, et cetera, et cetera. So these are many ways that we can utilize and where we see strong trends. And we are sure that we will benefit strongly from our digital initiatives going forward. So yes, trying to be a little bit short, but giving a couple of examples.

That was the only question I had on the written side. So I don't know if there are any more on the phone side.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Ole Jodahl, executive]

Okay. So with that, again, thank you to all. Thank you to all our employees driving the company forward, partners, customers, and I wish you all a great summer. So until next time, thank you.