Alimak Group AB (publ)

STO:ALIG

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and welcome to the Alimak Group Third Quarter 2022 Results Conference. [Operator Instructions] And finally I would like to advise all participants that this call is being recorded.

I'd now like to welcome Chief Executive Officer, Ole Kristian Jodahl, to begin the conference. Ole, over to you.

[Ole Jodahl, executive]

Thank you, and welcome to this quarter 3 2022 call for Alimak Group then. And as always, with me today, I have our CFO, Thomas Hendel.

If you turn page, and we look into the highlights of the quarter. Quarter 3 has been a very busy and good quarter for the group where we have made significant steps forward on our profitable growth journey. During the quarter we continue to execute on our New Heights Programme delivering solid organic growth. We increased our margins. We also improved significantly our cash flow from the first 6 months and also as you know accelerated our M&A activity.

We have signed and closed Tall Crane out of Canada, Vancouver and we have also signed the acquisition of Tractel. Both have a long solid history and leading positions in their businesses with high margins, higher than ourselves. So it will be a nice add-on to the group. And we are, of course, very excited about the opportunities that this will bring forward for us.

If you turn page and look a little bit more closely into the details. We see order intake was up 25% in the quarter, 10% organically with solid contributions from Facade Access, Construction and Industrial. The Wind market is still challenging, but we see very good opportunities ahead.

Revenue was up 21%, 7% organically, with solid organic growth in Construction, Industrial and Facade Access. And also service revenues continue to be a strong growth driver for the group. EBITA adjusted increased to SEK 150 million up from SEK 119 million last year and delivered a margin of 13.7% versus 13.2% last year, driven and supported, of course, by higher volumes, but also that we are very active in price management to mitigate the cost increases that we are facing.

So if you turn page and start to look into the divisions Facade Access, order intake was up 57% and 36% organically. Another very strong quarter for Facade Access. A strong order or equipment order intake in all regions, especially in Asia. And we also see increased investment activity in the U.S. Revenues were up 28%, 11% organically, strong equipment revenue driven by Asia, but also improved service revenue in most regions and especially Europe delivered a strong quarter.

EBITA increased to SEK 12 million, another step up from last year of SEK 5 million and the margin was 3.7% versus the 1.8% last year. And of course, supported by higher revenues. But still we have, of course, the effect here that it's a project type of business with long lead times from we take the contract until we actually deliver. And most of the industry is also in fixed cost terms which means that we -- there is a challenge to manage when, of course, the -- you see these raw material price increases that we have had lately. But I'm happy to see that we are making still steps forward in the right direction.

So if you turn page and a little bit more details for Facade Access. We continue to work on standardizing and improving our aims. This is, of course, a very important piece going forward. I'm also very happy to see that the CoxGomyl 4000 Series that I mentioned in the last quarter we launched for the Asian market is gaining traction in the Hong Kong residential market. It has been a good quarter for this. We have sold quite a bit. We see the U.S. market continue to rebound with good order intake during the quarter. But also as I mentioned, there is a high pressure on gross margin, of course, from the increased raw material costs.

We continue to be very selective and do not take contracts below our thresholds. As this is a project basis also, it's important to remember that there will be volatility in order intake between months and quarters. However, we see, of course, that with our strong focus on the service business which is continuing to grow and develop very solidly for us, which brings much more resilience and stability to this business.

And here also, Tractel will add a lot of value as they have a stronger position within the lower and medium height buildings and solutions which is also more stable business and also the fact that they have a very, very solid profitability which they bring into the group in this area.

Turning page, moving into Construction. Order intake was up 20% in the quarter, 3% organically and mostly driven then by improved new equipment sales and also rental sales in Europe and increased parts and services in Asia-Pacific and America. Revenue was up to 27%, 12% organically with the strong rental activity and also increased deliveries to the emerging market. EBITA was up to SEK 65 million from SEK 49 million last year, delivering a margin of 18.6% versus 17.7% last year, supported by high volumes, but of course, also our pricing management and activities to mitigate cost increases.

Turning page, and of course, this is a -- as we have said in our strategy, these divisions are there to focus now much more on the customer perspective. And here you see a couple of examples where we actually not only provide products, but we are much more moving into this solving productivity and logistics issues for our customers.

And if you move to the right picture, you'll see a solution where we have a big mammoth hoist in the middle where they actually can load complete [indiscernible] here, they load a complete bathroom unit with a loader to take heavy loads and move huge pieces of material up high. And on the right side there is the [indiscernible] hoist where -- which is set up to transport people which moves them at a very high speed while the one on the left side, it's set up in this configuration to move both people and materials which moves at lower speed, but then it gives you a very solid and flexible logistics solution.

And it's more or less a similar type of setup you see on the left picture, but there instead of the mammoth in the middle, it's the transport platform in the middle and this is of the size where you actually can load a full container to this platform and move the container up and then you unload the container at the right floor of the building. And we see more and more of these type of developments around the world.

In August we also closed the acquisition of Tall Crane and established our own, then fully-owned footprint in Canada for the first time. And we see this, of course, as a very nice opportunity to grow both our construction business in Canada, but also our industrial business in Canada.

As to now we do not see any major effects from the turbulent market in our order intake. But we are, of course, preparing for tougher times, based on all you read in the newspaper. But I would also like to say that with our diversified portfolio and our global presence and also a very solid piece off the market business into this, we have a more resilient business than ever on the construction side.

If you turn page to Industrial, order intake was up 24% in the quarter, up 12% organically. We see strong order equipment intake in U.S. and in Europe. Continued strong development in the marine and power segments and also increased order intake in parts and services in all regions. Revenue was up 30%, up 15% organically and a strong growth driven by the strategic focus on service as well as the high order backlog for equipment.

EBITA increased to SEK 50 million up from SEK 47 million last year, a margin of 18.3% down from the 22.2% last year. But also happy to see that it's moving up from the previous quarter, quarter 2. And here also we have this effect that it's a delay from when we take orders lead time from when we take the orders until we actually deliver. So the pricing effects that we have done has not really come to effect yet. And also the fact that we have invested heavily into this division to make sure that we have a strong industrial division, which has also paid off in very strong order intake over almost 2 years now.

So if you turn page, we have increased our activities globally with this organization with a dedicated and customer-oriented organization and being much closer to our customers through this segment focus. And this has also allowed us to take the first and the biggest service contracts ever in North America within the power segments where we take the full responsibility for all lifting solutions at the customer side, which also means that we not only service our own equipment, but we also service competitive equipment on -- for this customer. So it's a nice step forward in taking more responsibility and being closer to our customers.

We also have taken some large orders in Asia as the ports because there we saw an example of one customer that have tried to service their own forklift -- or no, a crane lift for a long time and then they had an incident when we made an audit we see that basically all of them have serious issues which puts us in a position to either refurbish or replace a huge number of [indiscernible]. And it also again confirms the importance of our service business and the follow up of these machines from a safety perspective.

We still see solid demand globally in industrial markets. Some segments like energy are very strong. And also this is a place where we have traditionally as a group been very strong, so important to us, of course. The stronger regionalization that we also see as an effect from the more difficult and challenging geopolitical environment also supports further investments within industry globally. And then our service business and the significant installed base that we have around the world, with where we see increasing needs for refurbishment and service provides resilience in this business.

Turning page to Wind, order intake was down 16%, 24% organically. And still the Chinese market continue to be challenging, but positive, we had strong order intake for [indiscernible] in the U.S. in the quarter. Revenues was down 10%, 18% organically and driven by the lower volumes in China. However, equipment revenue in Spain and Denmark as well as services in Germany improved. EBITA increased to SEK 22 million, up from SEK 18 million and margin of 15.6% versus 11.3% last year, and it's driven by our continuous focus on profit improving matters, cost reductions and active price management.

So turning page, so short term the market challenges remain within Wind. China is still a difficult market from the political perspective and -- but it is also an important market because it's still the world's biggest Wind market. And we do have a good position there, but it is a challenging market condition. Then we also have, of course, the high cost inflation which is also affecting our western customers. We know investors have moved into losses due to this. [indiscernible] have also -- are in a loss situation which means that they are also focusing now strongly on coming back into profit and reduce the number of projects to make sure that they get back on the right side of the bottom line, which means that this market will remain challenging for some more quarters.

But we see attractive long-term opportunities and not at least driven by this increased demand for renewable energy that we all see coming. And also very, very positive for us, of course, is that still with all this around us we are having a strong position with our customers and with active costs and pricing management, they have been able to lift the result up to record high 15.6% in the quarter. And also to note that, as we announced earlier that the strategic review or the Wind division has been concluded and it will remain part of the group.

So the future looks bright for this business. And we -- but we do not see really any significant uptick starting until 2024. But we have a strong position in this market and adding also the capabilities, products and solutions from Tractel, we feel very well set for the future of this business.

Turning page. And then, in June 2000, I came to this group and we then looked into the strategy and we defined a new vision which was then what you see here, moving people, material and businesses safely to new heights. And we also defined a program which would make us able to take us there and that was called the New Heights Programme.

So if you turn page. This program consisted basically of 3 steps, establishing the base 2020, secure margin improvements during 2021, ensuring that we knew what we were supposed to drive forward and also then from 2022 and onwards, we should be in a situation where we have a solid base where we could drive profitable growth.

And since the launch of the New Heights Programme late 2020 then, we have established a customer-centric, decentralized, cost-efficient, people-focused organizational platform where we can serve our customers efficiently around the world. And it's also very pleasing to see now that this platform continue to deliver results. We have done step 2 -- 1 and step 2 in a solid way and we are also now establishing ourselves solidly in step 3 by delivering profitable growth. That also means, as I've talked about earlier to step up our M&A activities. And since we have now the base set, we feel well set then to take on these acquisitions.

Turning page. Tractel is the big acquisition that we have then signed up during quarter 3 and this will then significantly accelerate the group's profitable growth going forward. If we look at rounding 12 months from June 2022 annual revenues with Tractel onboard would be exceeding SEK 6 billion and also around an EBITA margin of 17%, Tractel is and have been a high performing organization with a very resilient business model and has actually delivered stable margins for the last 10 years or more than 10 years.

So we are, of course, very excited to get this 1,100 highly competent Tractel people onboard. And I'm convinced that we can create significant shareholder value over time. And this transaction is expected to close in during quarter 4 of this year.

Turning page. Tractel brings a lot of things to the group. And one of the things is a new vertical which is its height safety and productivity solutions. And you see some of the products in this picture. And this will, of course, create significant synergies for cross-selling of solutions both within divisions and across. And I'm coming little bit back to this in next page. Tractel also contributes with a global network of distributors, a lot of new customers and also new segments where we will see -- and we see, of course, synergies. And customers are found within the construction segments, so that's also a very important segment for Tractel. But also important to note also, all other or most other industrial segments out there like we see for Alimak.

So turning page. If you look a little bit more into the commercial opportunities. So here you see in orange the customer focus, let's say structure of all the market group just to visualize a little bit. So if you look into construction, this is not an organizational chart, but more to explain. So if you look into construction, we have our business there, but also Tractel brings in a strong leading brand and position in the climbing business, which is something where we are not very strong. So it will be a very, very nice complement, something we sell and take to the same customers globally.

If we look into Facade Access, we have our Facade Access business focusing mostly on the taller structures while Tractel, as I have also mentioned before, have focused more on the medium to lower structures. They also bring in very solid profits where we struggle on the profit. So they have a better structure on how to drive that business. So here it's a lot of good combinations and things to learn from each other. And we will create a very solid piece of this Facade Access business.

And then on the Wind side we have our wind business focusing on the lifting solutions inside the tower while Tractel have developed solutions to access and do things more outside to access blade for blade maintenance. They have also these emergency systems to actually -- to quickly get down from the nacelle outside if you have an emergency and also systems inside in the nacelle to lift and handle heavy pieces when you do maintenance or service inside in the nacelle. So combined also a much wider portfolio and then opportunities together.

And then you have the flight safety and productivity solutions piece, which is not something comparable in the Alimak Group today, where all these products, they go into all these type of segments. So it's synergies across the board here with, of course, these markets and customers. So something we look forward to be able to dive much more into.

And then I would also like to highlight the Service business, of course, it's extremely important to Alimak, and it's the same thing for Tractel. They also have a significant service business and lots of their equipment needs also -- even though it's smaller equipment, not this big installations that we typically have a lot of it, these products also require service and recertification being brought into a workshop to be dismantled and refurbished and then put back into business with the customer. So also repetitive and revenue-generating business over time.

Turning page. We also -- or not in quarter 3, but just after quarter 3, but I mentioned this also slightly in quarter 2. Now we have signed a strategic partnership with OO Software, but also based a small company which are developing a web-based tool for field service management. And we have acquired 45% of this company. It's so small, so it's nothing material to us, but it's strategically very, very important because service, as I mentioned, is a key for the group, and having a tool which makes our people effective and that we can reduce downtime that we can manage our time of our engineers in the best possible way and have full control over all information and what we are doing with the customers is, of course, vital. And here, we are then getting access to a tool that we will develop together to help us get to that point.

Turning page, and that takes us to the financial summary and I'll leave the floor for Thomas.

[Thomas Hendel, executive]

Thank you, Ole. Financial summary and as usual, the financial overview then both the quarter and year-to-date. I'm very happy to report back a very strong quarter and year-to-date values in terms of volumes and earnings and also an important recovery on cash flow in the third quarter versus the first 2 quarters this year. We have now increased our backlog during the year by almost SEK 300 million, ending up with a SEK 3 billion backlog, which is a record high level. And that supports, of course, our further growth in revenues.

Next page, please, earnings summary. EBITA adjusted, the margin improved versus last year, mainly due to the increased revenues, but also that we have kept gross margin on a high level through active price management, offsetting a challenging market with high cost inflation. I would also add the items affecting comparability, the SEK 32 million that we now moved into third quarter, that is around SEK 25 million in transaction and advisory costs and SEK 7 million is our exit from Russia. And this further, the items affecting comparability will impact 2022 and 2023 as previously communicated.

The financial net year-over-year is actually the same and -- but to break it down, the interest net is minus SEK 4 million year-over-year, and the currency effect is plus SEK 4 million year-over-year. Tax rate for the quarter is 20.9% versus the 26.2%, reflecting the country profit distribution, but also a prior year adjustment impacting around 3% on the Q3 tax rate.

Next page, please. Result for the period on EPS. Yes, the result for the period reported SEK 77 million versus the SEK 74 million. But if you adjust for the items affecting comparability to find a more of an operational level of the net profit, then it would be SEK 103 million versus SEK 74 million. Earnings per share, the same story, if the reported is 4% up, but adjusted for our items affecting comparability that would have been an EPS growth of 39% quarter-over-quarter, which more reflects the operational improvement.

Next page, please. Cash flow. Cash flow from operations is SEK 134 million versus the SEK 244 million in the third quarter last year. But as I said, it's an improvement of the cash reversals Q1 and Q2. We are already in a growth mode, as you know. And we are now focusing very much on the working capital. But to explain the deviation between the years is the timing of project payment milestones, which means that we have increased our contract assets at the moment. We have a selective inventory buildup to secure deliveries and critical components and we have also a high level of trade receivables in spite of the improved cash collection trends end of Q3.

Next page, please. Net debt. We have an increased debt in the quarter, but mainly due to -- we made the acquisition of Tall Crane Equipment approximately cash out SEK 200 million, and the lower cash conversion year-to-date is also, of course, impacting the current debt level. But we continue to have a very strong financial position. And when we ended September, we had an unutilized credit facility of around SEK 1.7 billion.

And just to recap again, our capital allocation priorities remains profitable growth, investing in sales and development, M&A, very clear this quarter and also that we expect to deliver according to our dividend policy, which is 40% to 60% of net income. So by that, thank you, and back to Ole.

[Ole Jodahl, executive]

Thank you. And if you turn Page 10 to the summary. So yes, as you understand, we are in this third phase of the New Heights Programme, executing on this now, which means accelerated profitable growth and that we have done in the quarter. We have solid organic growth. We have a solid step-up in operational profit. We have also made then and closed the Tall Crane acquisition as of August 24. We have signed up the acquisition of Tractel. And as I mentioned, important to this, they both have a long, solid resilient business model, where they have also delivered very solid profits over a long time. And especially Tractel with more than 10 years of more or less the same profit level.

The rights issue we aim to do as soon as practically possible after the closing of Tractel. There is still a turbulent and uncertain macro environment around us. And this is, of course, also expected then to continue during the remainder of the year, which means that in addition to drive the New Heights Programme, we also have a very tight focus on cash, cost and pricing, of course, as we have had throughout the year. So we will continue also then to execute on the New Heights Programme as a team.

And I would like to end up saying a big thank you to all the committed and dedicated employees, helping lifting Alimak Group to new heights. So with that, I say thank you. We turn page and move into the Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Johan Dahl from Alimak (sic) [ Danske ].

[Johan Dahl, analyst]

That's Johan Dahl at Danske possibly. Anyway, can you hear me?

[Ole Jodahl, executive]

Yes. It's weak, Johan, but I think try to be loud, yes.

[Johan Dahl, analyst]

Okay, I'll try to be loud. Firstly, just asking on the sort of visibility in the Tractel operations. You talked about an order backlog of SEK 3 billion in the legacy Alimak business. How does that look in Tractel in terms of visibility in '23? Can you say anything there?

[Ole Jodahl, executive]

Oh, unfortunately, I can't disclose anything more about the Tractel figures and what we have already done. But we -- of course, as soon as we are able to close the deal, you will get that full setup. But what I'm saying is that they have shown a very resilient business model over many, many years. I think that's important to understand.

[Johan Dahl, analyst]

From a financial perspective, I think you talked about the net debt EBITA to [ spot 9 ], I think, when you talked about this transaction. Arguably things look slightly worse at the moment, but with what sort of leeway do you have in terms -- in your debt covenants, et cetera, to finance this?

[Ole Jodahl, executive]

Yes. We have a solid leeway that we took into account, of course, when we signed this up. So we feel it's no risk at all for us going forward with this. We have what we need in the initial agreements that we made. So that I feel very confident about.

[Johan Dahl, analyst]

All right. Also finally, just on foreign exchange. I think you're right in your annual report that you have some just short of SEK 400 million net flows in dollars to the company. Can you just try to explain to us where we are at the moment in realizing those effects in terms of flows in dollars? Is that being competed away on pricing in the markets where you sell in dollars? So just to understand where we stand. Or is it hedged? Or -- we would very much appreciate some clarity there.

[Ole Jodahl, executive]

Yes, I'll leave that for Thomas.

[Thomas Hendel, executive]

Yes. No. But it's -- we haven't left that to the market, so to speak. But we have, of course, hedged -- we hedged all our firm orders, which takes part of that, of course, in the hedging situation. But then we also realized, of course, the current -- the FX actual rate as well. So I would say that you see that in the tailwind on our -- obviously, on our top line. But then we have -- when it comes to the profit on the EBITDA currency impact, then we have, of course, in both income and cost in different currencies. So you see that very clearly in our report how -- what the impact is.

[Johan Dahl, analyst]

But I mean, is it possible to say what sort of dollar rates you have in the P&L, what you're actually reporting profits on in the third quarter here, what you realized in terms of dollar rates?

[Thomas Hendel, executive]

I will come back to you separately on that, Johan.

[Operator]

[Operator Instructions] And your next question comes from the line of Gustav Osterberg from Carnegie Investment Bank.

[Gustav Österberg, analyst]

I just wanted to follow up with a question on the demand environment on the equipment side. I mean, we see it come from, obviously, a weaker growth in 2020 and then some recovery in BMU or Facade Access and then in Construction. But overall, the recovery hasn't been that high. So I was wondering where do you see sort of the current equipment demand relative to trend. I appreciate that sort of there's a lot of news and comments about a much weaker macro environment, but just trying to understand where we are today.

[Ole Jodahl, executive]

It's a complicated question also because this varies from division to division, I would say. But if you look into Construction, that has been relatively resilient and solid. And I don't see that there have been -- but these are also natural swings. So it's difficult to say that this is really driven by the pandemic. But some of these bigger deals was not coming through during the pandemic.

Now we have seen some more of them. But I can't really say that we have had some sort of pent-up demand really from the pandemic. It is -- but it is a better market in general and that we remain to see. We have not really seen any effects of what you read so much about. But then also you maybe read more about it and hear more about it here in the Nordics. It's important to remember that we have a global footprint for our Construction business.

If you come to Industrial, it's -- the investment level has been high, and we have had a very strong order intake now over 2 years and that remains. We still see it. It is some swings a little bit between some segments. Overall, the development is solid and remains to be solid. And as for Facade Access there, it's a little bit more, you could say, coming back from the pandemic because it was very little happening during the pandemic on new equipment. And there we have seen now higher levels over the last quarters or this year. And that I do believe has -- is something coming back from the pandemic or that we see.

So there is higher activity level there. How that will be impacted then by when, it's difficult to say. But for now we don't really see any demand changes on that side neither for new equipment. That's high, but it is a very, very tough price pressure and because the expectancy and prices is more like it used to be, while the cost has gone up heavily. So -- and that's why we also choose to opt out on a lot of these contracts because we don't compromise on our thresholds there.

[Gustav Österberg, analyst]

I appreciate the color. And then I just wondered if you could give some more color on Tractel. I appreciate you cannot share any numbers, but has there been any sort of larger changes to Tractel over the past 10, 15 years in terms of acquisitions, divestments or big changes to the product portfolio? Or has it been a very stable business over time from an organizational point of view?

[Ole Jodahl, executive]

Yes, that's been relatively stable. They have made a couple of acquisitions of some significance and that was Scanclimber back in 2019, the Finnish, the mast-climbing business, which is fitting well with our Construction business. And then they also made another one in U.S. a year or 2 before, which was related to high safety products on construction site and also on top of buildings, et cetera. But that [indiscernible] has been this high safety productivity, [indiscernible] that's been the core and the company is from '48.

So it's more or less same as us and long type of legacy high-quality safety products where customers opt, when they become happy with this, they don't change it for safety reasons because they are happy with it. It always performs. And it's something which is also a repetitive business because these products, a lot of them go back into a service workshop for servicing and recertification and then back to the customer. So it is a very resilient and actually going back more than 10 years, as I said, the margin has been very, very stable.

So -- but that is also, I think, been a very clear target of that group. And the business is that, first and foremost, is to make sure that we keep our margins. And that they have done. And so -- and that means also that they not been -- they have not had enormous growth, but they have been growing all the way, that they have done, but not enormous growth, but very solid, resilient business.

[Operator]

Your next question comes from the line of Hanna Lindbo from DNB.

[Hanna Lindbo, analyst]

I just have one question. I'm kind of impressed by the margins within Wind. And I'm wondering if this is sort of a new level we can expect? And also if you could say something about like the operational leverage within Wind?

[Ole Jodahl, executive]

We are also very happy with these margins, of course. And if you look back into our previous quarters, we have had some stable steady improvements here. So this is not something that just comes by accident. It's very solid hard work over time. But it's also always some mix and so forth. So I can't say and promise now that it will -- but it's a level that for the time being is happy with, to put it this way. And now I'm more often to really get back into the growth mode. But for that to happen, then we need to start more to see 2024, where the real investments are really coming back into the wind market.

But also, I think that when we now get Tractel onboard, and we have their expanded portfolio into this, we will become a more important player and that will feed opportunities for us to develop even more and better solutions. But remember that we have a very, very solid position. It's basically just these 4 Western customers that are our key customers there, and we have a very solid position with them. They don't make money as we do in a solid way. And this also sets something about the resilience in the business that when we have reliable suppliers, taking care of their safety needs, bringing people safely up and down, that's something to stick to.

[Operator]

There are no further questions at this time. I would like to turn the call back over to Ole for closing statements.

[Ole Jodahl, executive]

Yes. Thank you, and thank you, everyone, for listening in. And yes, we're looking forward to next time. So thank you.

[Operator]

This concludes today's conference call. You may now disconnect.