Alimak Group AB (publ)

STO:ALIG

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the Alimak Group interim report for January through to September of 2020. [Operator Instructions]Today, I am pleased to present Ole Kristian Jodahl, CEO; and Tobias Lindquist, CFO. Speakers, please begin your meeting.

[Ole Kristian Jodahl, President, CEO & Director]

Thank you, and welcome to the quarter 3 presentation of Alimak Group. And as you said, with me today, I have our CFO, Tobias Lindquist.Next page. We will cover, of course, our quarter 3 results, and then we will do a short recap of the New Heights program before we briefly sum up the quarter and move to Q&A.Next page, please. We saw continued significant impact from COVID-19 on our performance in the quarter, and customers are still delaying investments, and we are still facing restrictions and limitations to access customer sites. We have a high exposure to U.S., which accounted for 26% of our revenues in 2019 and where we saw now a very weak market in quarter 3. The summer months were very quiet, and we saw higher activity levels in September. Positive is also that we do not see any trend of project cancellations remain. The strengthening SEK is also now starting to affect our translated sales and order intake. Effect on revenue was negative of SEK 58 million for the quarter or 6% points of our revenue.However, since we are hedging our sales at the time where we sign a contract, we can control the results effect, and thereby, we see limited effect in our results. However, since we do have quite a bit of our production in Sweden, this is something that we will see coming forward. And we will be forced to increase prices in the coming months to cover for this. But it's something that is in our control.I'm pleased to see that despite being conservative in our provisions, we managed to improve our operational results and margin compared to the 2 previous quarters as well as reporting a strong cash flow from operations. And 2 weeks ago, we launched the New Heights program, 3 steps to take us to delivering on our financial targets over the business cycle. And one part of this was the cost-saving program of SEK 60 million, where then SEK 35 million was extraordinary costs that we have taken now in quarter 3. And the savings from this program are all expected to have full effect in our operational results from mid-2021.We continue to invest in R&D and digitalization, something that is vital to our organic growth going forward. And one example is that all BMUs now being sold from early next year and onwards will have a built-in capability of remote monitoring. I'm also very pleased with the acquisition we closed end of September, the Verta Corporation, an American service provider focusing on BMUs and then mostly our own Manntech machines. And this is, of course, an important step in further increasing our reach into the After Sales and also especially targeting the BMU customers.Next page, please. So looking into our group results for the quarter. Order intake decreased 9% organic and 6% due to currency translation effect. The total reduction is 15%. The drop is -- the organic drop is all driven by the challenging business climate and the biggest decline we faced in U.S. and Asia Pacific with -- then the exception of China, where we see a much more stable business lineup. Order intake in Europe increased compared to last year.The revenues decreased 9% organic and 6% due to currency, total reduction of 16%, where, again, the main drop came from Americas and now Europe, while Asia Pacific had a slight increase. The organic decrease comes as a natural consequence of the lower order intake over the last quarters.EBITA adjusted ended at SEK 103 million, down from the SEK 152 million last year. And that gave us a margin of 11.2% versus 14%. Positive, though, is that we managed to improve our margins from quarter 2, and this is coming through our efforts, so both on the short term measures but also our long-term measures. And we will continue to lift this going forward.I see that we are a bit too much in the hand of the market developments, and an important part of the New Heights program is to get more control over our own destiny and become less cyclical and areas that are[Audio Gap]to drive and strengthen the After Sales.We also see definitely that we can have a much better geographical spread within each of the divisions increasing our portfolio there. It's a nice potential. We also have the digitalization. We do believe all our products and solutions moving forward will be digitalized and connected to more integrated with customers. And also to become a more active part in the bigger ecosystem around our products, for example, at the Construction side.Next page, please. Moving into Construction Equipment. We've seen an organic decrease of 9% and a total decrease then of 15%, where the difference is driven by currency. In general, a weak quarter across the board, and the main disappointment is coming from U.S. and Australia. Positive was China and Sweden, where we see that the market has more stabilized.Customers' investment decisions are being still pushed forward, and we see rental customers are still being short term-focused. Investing when projects are confirmed, and the current fleet cannot really cope with the demand.The revenues decreased 10% organically and 16% in total, including currency effects. The main negative variance is from U.S., while we saw a slight improvement in Asia and a flat development in Europe.EBITA adjusted ended at SEK 8 million, a disappointing margin of 7.1%, driven down by the low volume, of course, but also negative mix effect from the low U.S. sales. And both our temporary and permanent measures taken will, of course, help the profit situation moving forward. And we neither do expect to have this negative mix effect from the U.S. hitting like it did now in the quarter forward.On the positive side, we have several activities going that will be important for the future. A couple of examples. We have released Alimak BIM Gallery, which will allow our product to be digitally modeled into the project in the planning phase for our customers. And we have also taken the first steps in remote monitoring where we are now monitoring our construction machines within our rental -- our own rental fleet, and we will also start to invite customers into this journey beginning next year.Next page, please, and Rentals. In business area Rentals, the order intake, we see an organic decrease of 10% and a total decrease of 14%, again, driven by currency, a somewhat lower order intake after 2 very strong quarters. Europe improved, and Australia was then lower after a very strong first half. But also in Rental, we see that timing of large orders also makes the Rental order intake lumpy, and that we can see here. So year-to-date, this business has reported an organic order intake increase of 14%.Reported revenue was flat but organically, up 2%. Europe that was previously hard hit by the pandemic, we saw improvements in quarter 3, while Australia had a weak quarter due to renewed lockdowns. Still somewhat benefiting from the increased preference for renting over buying, most prominent in Australia, and we do not really see any project cancellations but delays.EBITA adjusted ended at SEK 18.7 million, a strong margin of 18.8%.Next page, please. Industrial Equipment. We saw organic order intake decreased 10% and a total decrease of 16%, also driven by currency. Decline is largely related to business unit, BMU, but though the business unit had a pickup in September and especially in U.K. Again, we do not see cancellations, so the pipe remains strong. Also to note is that last year, the BMU business had some bigger orders, which were not seen so far this year. General industry also had a good pipe and prospects but many delayed decisions. But despite this, order intake slightly better than last year. And the highlight was also a nice order in the marine segment related to servicing of offshore wind turbines.The revenues decreased 13% organically and 20% in total, including currency. Again, BMU is significantly lower than last year. General industry faced high comparables from last year, but Wind had a solid quarter and especially in China.EBITA adjusted ended at SEK 0.4 million, a very disappointing margin of 0.1%, a result of low volumes as well as cost of approximately SEK 10 million that we took in the month, not as one-offs, but relating to inventories and risk provisions.Next [ page, please ]. After Sales. And here, we have the biggest impact of currency in the quarter. Organically, we had an order intake decrease of 5%, and including currency, a reduction of 12%. After Sales continue to be on the receiving end of this market uncertainty. And this is then, again, due to travel restrictions and difficulties to access the sites as well as also customers -- some refurbishment projects.The revenue decreased 6% organically, 13% in total, and we see the biggest impact coming from U.S., which is a significant market for our After Sales.EBITA adjusted ended at SEK 76 million, a margin of 27.3% and the strongest margin in more than a year, supported, of course, by our actions but also a favorable mix in the quarter.Yes. And I also would like to mention the Verta acquisition that we closed in September, again, fully in line with our ambition to grow our After Sales and expand our coverage and then, of course, also especially towards the BMU customers.Next page, please. And then I leave for Tobias.

[Tobias Lindquist;Chief Financial Officer]

Thank you, Ole. I'm on Page 9, earnings summary. So our EBITA adjusted result of SEK 103 million was SEK 49 million lower than Q3 2019. Of the drop, Industrial Equipment accounted for SEK 32 million and Construction Equipment of SEK 11 million. And as we mentioned, the drop in the results for these business areas was largely volume-driven but also impacted by risk provisions of SEK 10 million within Industrial Equipment.Both Rental and After Sales improved in margins compared to last year and also recorded higher results from prior quarters this year. Favorable product mix and already some effect of cost reduction measures supported the improvement for these business areas.As we announced a few weeks ago, the reorganization and restructuring, focusing on securing our margin going forward led to a tie-in cost of SEK 35 million in the quarter, and we expect another SEK 25 million in Q4.Amortizations of SEK 9 million is SEK 2 million lower than last year, largely an effect of intangibles now are fully amortized.Our financial net was SEK 6 million, which is SEK 6 million better last year where deviation is currency-related. The interest net and leasing costs were on par with 2019.With earnings before tax of EUR 52 million and tax cost of SEK 11 million, we had a tax rate of 22% compared to 23% last year. And we expect to remain on this level last -- also for the remainder of the year.So the result for the period thereby amounted to SEK 41 million, where the impact is -- or the reduction is impacted by lower EBITA result and then, of course, the nonrecurring expenses, partly offset by lower taxes.Then we move to Page 10, results for the period and earnings per share. So with a result of SEK 41 million, this translated to an EPS, earnings per share, of SEK 0.75. This then impacted by the nonrecurring expenses of SEK 35 million.Then we move to next page, Page 11, cash flow. So we had a very strong operating cash flow in the quarter of SEK 206 million, which can be compared with SEK 134 million last year and significant improvement in cash conversions. The main driver of this was a reduction in working capital, largely driven by our high attention of cash collections and continuously reducing the days of outstanding of receivables. The improvement was noticed across all countries and business [ areas, with ] sales having the largest impact in the quarter.We also reduced the inventory levels in Q3, but here, there are room for further reductions and improvements in this area. And we -- with the increased attention and [ vision ], we also included then, as mentioned before, SEK 12 million of the nonrecurring expenses relating to inventories.Our investments in fixed assets was SEK 23 million in the quarter, which the majority relates to replacement equipment and additions to the rentals.Our focus on cash flow remains, and we don't see or plan for any major investment, in fact, in fixed assets for the remainder of the year.If we move to the next page, Page 12, net debt. So our net debt continued to decrease from SEK 1 billion by end of last year to SEK 854 million now end of Q3. The reduction is driven by the improvement under good operating cash flow. We have SEK 341 million operating cash flow for the year-to-date basis, which is SEK 65 million better than last [ year ].We have made investments of SEK 85 million during the year, which is basically on par with 2019. We had lower dividends, SEK 94 million, compared to SEK 149 million last year. Our leverage is 1.68 by end of September. So that is higher than the 1.33 that we had in December last year. So the positive effect of the lower net debt is offset by the lower EBITA result.So to summarize, we have been able to strengthen our balance [ sheet ]. We remain having a solid and stable financial position.With that, I hand over back to Ole, again.

[Ole Kristian Jodahl, President, CEO & Director]

Thank you. Then we are at Page 13, the New Heights program. So yes, 2 weeks after I started here, I kicked off business strategy, strategy review. This was then driven by some first impressions but also input from the Board and the fact that the group not delivered all the financial targets over time. And my aim was to create the plan where we will deliver on our financial targets over the business cycle.Two weeks ago, we introduced the New Heights program, a program [ done in 3 steps ] that will take us then to new heights and will run towards 2025. Currently, we are in Step 1, reviewing and tuning to have the foundation set right. And Step 2 will be the where we set profit before growth and focus on lifting the group to the right profit level, while we also finalize and start implementing the division strategies that will secure that we can deliver on our targets moving forward. And then Step 3 will be to drive the strong profitable growth where we deliver on our financial targets over the business cycle.Next page. So what are we doing or have been doing now? We have updated, as we presented 2 weeks ago, our new group vision and core values. And to say 2 words about the vision. We felt that it was limiting us a little bit that it had the word vertical in it. So that was taken off [ as stated ]. So now we have a little bit of a wider group vision. We structured [ an ] organizational structure, where we have then 4 customer-centric divisions, which do have the full accountability and the mandate to act. They are also responsible both for the OE and their own aftermarket because from the customer perspective, they should be the one best to know how we should develop our value proposition towards that segment and how we should go to market with our complete offer to provide most value to our customers and also to the group.And yes -- and we were coming from more of a metric [ customer-centric ] structure where it was both countries and business units reporting to me. So I felt also it was a need to clarify and make a more lean and agile structure.We are also accelerating and putting more focus into innovation and our technology leadership with also digitalization and this customer-centric value proposition, as I talked about, by having the division focusing on this and owning these questions. But I also note that we are low in R&D spending. So that's something that definitely we will have to increase moving forward. But again, we need to make sure we do the right things, and these are things that will be owned and should help us remain the leader and accelerate growth going forward.We are establishing people and culture function at group level in the leadership team. People, it's our most important asset. And really, we need to drive that strategically from a group perspective.And then we are setting profit before growth, securing margin improvements and trying to move then the group into the right profit area.So next page, please. And this is also what we presented 2 weeks ago about our restructuring program, where we are taking out 120 employees, around 5% of the workforce, 80 from manufacturing and 40 from SG&A. And we're also doing efficiencies and improvements on the capital management side. So in total, saving of SEK 60 million and the one-off costs of SEK 60 million, where now -- then we took SEK 35 million in quarter 3, and the remaining part is planned to be taken in quarter 4.And then next page, please. And then also for the future value creation for the group and also as a guiding principle for the divisions, when they now start their work on their strategies, we will have this steering wheel or in this -- or in Alimak terms, maybe a pinion wheel, where we then have the customer at the center of everything we do, should be considered in all decisions we make. We will ensure, as I've been talking about, our technology leadership, helping provide the customer with the most possible value. We are putting attention to our most important assets, our people. And we will drive, of course, operational excellence in our own operations. All in the world where digitalization and sustainability will influence everything we do. And as I said, I strongly believe that all our products and solutions going forward will be intelligent. They will be connected. They will be remotely managed, and they will be part of the ecosystem where they operate and not stand-alone products.Creating these 4 strong independent divisions means that they will take care of most themselves. But still, of course, there are areas that -- where the group will play a vital role in the value creation for our stakeholders. And I mentioned then digitalization, sustainability, the corporate culture, people development, these are areas where the group can support, and we can work together across the divisions where we then leverage and secure speed and quality in these areas.The divisions can also leverage our global footprint and utilize a common back office setup. Together within the divisions, we also have the widest technology base in the industry and the product portfolio, which also is something that we can leverage across divisions and then towards different customer segments. We do have this common global service delivery capability, which will -- a common group function, the delivery capability, something that we will continue to strengthen, and we see as very, very important for our future developments. And of course, the strong financial banking that we can provide to all divisions.Next page, please. Then we come to the summary of the quarter. And of course, we are not happy with the quarter, and especially, U.S.A. as a market was very weak. And that we also do see is a consequence of the current political situation, something we hope should ease somewhat after the election because the corona crisis is also used in a political manner. And this had a significant impact on Construction.BMU continued to face a difficult market situation. So -- but considering that the summer months was very soft, we saw much better market conditions in September.We are not losing market share. So we feel that we are well positioned to capitalize on improved market conditions. We are also taking, as you have seen, and we will continue to take, active measures to safeguard our profit margins. So we will continue to see them improve going forward.We have launched the New Heights program, which will take us to deliver on our financial targets going forward.And with that, we are at the last page and the Q&A. Thank you.

[Operator]

[Operator Instructions] And our first question comes from Johan Dahl of Danske Bank.

[Johan Dahl, Analyst]

Just a couple of questions on your order intake. I mean can you explain, Ole, your conviction that you're not losing market share? Just looking at Construction, for example, that was a business that had orders of 800 per year if we look 2 years back, and you're now logging about 100. I mean it just seems a bit weird that the average age of the fleet among your rental companies should age to that extent. And also, on the BMU side, is it -- should we sort of interpret here that projects are basically just at a standstill for more than 0.5 year on the BMU side as you're not getting awards on BMUs at the moment?

[Ole Kristian Jodahl, President, CEO & Director]

Yes. Thank you, Johan. On the Construction -- yes, or let me take the BMU side first then. We are still taking orders. So that's -- so it's not at standstill. But what we see is that there is a delay. It is some hesitation to make the final call. So that's basically what we are seeing. And then also last year, we had some bigger projects, and some of these are more than put on hold or delayed because there is an uncertainty in the market. So that's basically the main reason for BMU. We are close to these projects. We see that they are not lost or stopped. We see that they are still there, so we see the pipe that remains.As for the Construction and the market share, yes, we are not giving out any market share data. But as far as we know and we see, we are in a downward cycle. We do not feel either the same thing here. We are close to our markets that we are losing out. And it's also what we are having here. It's investment products, so that customers are not investing in new hoists or elevator doesn't mean that the Construction side is standing still. They are running their existing construction site, but they are not investing in new capital equipment unless they really need it. And that means opening more sites than they have equipment -- new sites than they have equipment for.And then, of course, they are trying to prolong, I guess. So yes, they are not renewing either in these times because cash is king, and it's the main uncertainty, and then you don't do then absolutely more than needed. And then -- but I think also, we have a small weakness in our offer in the sense that we are not really strong on the smaller side, where we talk about the hoists of -- with less capacity. There, we have competitors that are stronger than us, the way I understand it. And I think that's an area that we need to address, and we are addressing it now. And that might also be a consequence because we are definitely the best for the bigger and the heavier hoists. But it could also maybe that the smaller are doing better where we are not so strong.

[Johan Dahl, Analyst]

Could you just help us possibly quantify a little bit what's the need to raise prices here to remedy sort of the currency situation? What sort of magnitude are we talking about there?

[Ole Kristian Jodahl, President, CEO & Director]

We have not qualified that yet, but we are basically working on pricing every single project. So that's a constant thing. That's a way of working that we have in the group here. So -- but you see the currency effects that we're having now. So -- but as to be us or that we have said, we hedge when we make the contract. And -- but of course, if this continues going forward, then we will be forced also to increase prices. But remember that a huge part of our product cost is steel, which is priced in dollar. So therefore, we also have an offset there for part of it.

[Operator]

[Operator Instructions] And there are currently no further questions from the teleconference. I will hand back to the speakers for any further remarks.

[Ole Kristian Jodahl, President, CEO & Director]

We shouldn't wait another minute or 2? Yes. No. Then, yes, thank you, everyone, for listening in, and thank you, Tobias. And yes, hope to talk to you again soon. Thank you. Bye-bye.