Alimak Group AB (publ)

STO:ALIG

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the Alimak Group interim report for October to December 2018. [Operator Instructions] And today, I am pleased to present Tormod Gunleiksrud from -- CEO; and Tobias Lindquist, CFO. Speakers, please begin.

[Tormod Gunleiksrud, President & CEO]

Thank you for that, and welcome all of you for this Q4 and full year 2018 result call. We'll just dive into it and move into Page #2. And that is more for the sake of good order, and I think it should be the last time that we are actually showing this specific one at least. And again, just for the sake of good order, acquisitions still affecting the full year comparison. So with that in mind, Avanti Wind Systems was consolidated into the group as of 1st of February 2017. While Facade Access Group was consolidated into the group as of 1st of March 2017. So the report has comparisons to the businesses that we acquired back in late part of 2016 and that we closed in 2017. Good. Moving now to next page, Page #3. A few highlights on the quarter. And I'm happy to say that strong order intake continued in Q4. We had strong order intake growth in the quarter both on the Construction side as well as on the Industrial side, I should say. We know that Q4 in 2017 had the history's largest order from Sydney Harbour Bridge of SEK 170 million in it. So given that and ending up organically 5% up with SEK 1.2 billion versus SEK 1.096 billion from the previous year, I still think was a strong result on the order side for the quarter. Revenue-wise, we ended up with an organic growth of 4% quarter-over-quarter, leading up to SEK 1.15 billion in Q4 2018 versus SEK 1.050 billion in the previous year. So also on the revenue side I think it was a strong quarter in Q4. EBITDA adjusted, we ended up SEK 159 million versus previous year at SEK 145 million. And that translates into a margin of 13.8%, basically the same as we ended up on the year before. So we would, of course, liked to have seen a higher margin. But given what we have reported, what we've been through the year, I still think the quarter was a strong quarter. And of course, I'm very pleased to see that the good market conditions translated into orders, so providing a solid foundation also going forward into 2019.Moving then to next page, Page #4. I think look into the different business areas, starting with Construction Equipment. Very pleased to see such a strong quarter coming out of Construction in Q4, SEK 248 million orders received. It's very strong. Of course, that comparison to previous year is extremely favorable. But still I think it's a very strong quarter. And you probably see that from the curve as well. We had good order intake in quite a few regions. But I also -- I have to say that very much strong development in Q4 was driven out of the U.S. market, so very, very pleased with the top line that entered in Q4 on Construction. Revenue-wise, we ended up with a SEK 176 million versus previous year, SEK 228 million. And that leaves us with an organic decrease of 10% and mainly relates to fairly long order intake during previous quarters. Especially worth mentioning here is the Middle East. I should also mention that we had issues on the logistics side with shipments. We've been also a little bit of a victim for some disputes that plagued some of the harbors on the west coast of Sweden. And we saw some effect of that in Q4. So all in all, when this revenue of SEK 176 million translates into such a strong margin on the EBITA side of the 19.5%, I still think we can live with that revenue level. As I said, very strong margin for the quarter. I would say 19.5% is not what I would maybe call a normal level. It is very high level. And it is coming from a quarter where we had quite a few stars aligned when it comes to the mix of both markets and the product mix that are coming through. So all in all, I think Construction ended up on a very good note on the quarter.Moving then to next page. Page #5 takes us into the Industrial Equipment. Here, we actually see an organic decrease in order intake of 9%, takes us to SEK 600 million on the quarter versus last or previous year, SEK 627 million. I already touched upon the inclusion of the SEK 170 million order from Sydney Harbour Bridge in Q4 '17. So I think it's a tough comparison. Well, it's a comparison. But look a little bit away from that one, I still think we had a very strong quarter. Wind had a very good quarter on the order side, the same with oil and gas business and also on the general industry side. So all in all, I'm quite pleased with the development that we saw also on the Industrial side throughout the quarter.Revenue-wise, we saw a growth of 23%, meaning we ended up at SEK 580 million versus previous year of SEK 448 million, so good development on the revenue side. And that translates into an EBITA of SEK 32 million versus previous year at SEK 21 million. Starting to see improvements on the margin side, ended up at 5.5% versus the previous year, 4.8%. And we certainly start to see some of the synergies being realized. And of course, the fading out -- the phasing of the backlog that we had on the BMU side is, of course, also taking a smaller toll on the margin side for the business that is coming through. So I have to say also here, I'm quite pleased with the development. And if I look at the full year and look at the business, I just have the say that wind has been having a very, very strong 2018. So I'm very pleased with the development on that side. Also very good to see that oil and gas side starts to come back. And all in all, I think we are headed for good development.Moving then to After Sales. This is probably the area where I would say that had some disappointments to it. We had an order intake of SEK 254 million versus last year, SEK 263 million. That leaves us with an organic decrease of 9%. Reason for that, I should say, lower level on refurbishments is something that we saw took place during the quarter. We were also down on parts. So that certainly had an effect. And if you look at the full year, we are still left with an organic growth of 3%.And looking into the revenue side of After Sales, we ended up at SEK 303 million versus previous year at SEK 297 million. And again, that leaves us with a decrease of 3%. And for the full year basically, organically, we were flat over the year. EBITA, we ended up at SEK 78 million versus previous year at SEK 74 million. Again, that takes the margin down to 25.7%. We had 25% in the previous year. But we also said that it's a sort of margin level that we maybe do not like to see. And more in the line of 27% is what we expect. So do these represent some kind of a trend? No, that is certainly not what we believe. But I do believe that we will have quarters where we are well above and we will also have quarters that we are slightly down. So all in all, I think it's fair to say that it was a little bit of a disappointment. But I'm also quite confident that we are coming back on After Sales.Moving then to next page, which takes us to Page 7. And that would be our Rental business. Again, a strong quarter on the Rental side. Order intake-wise, we ended up SEK 113 million versus previous year, SEK 93 million, leaves us with an organic increase for the quarter of 17%. Revenue-wise, very much along the same lines, organic revenue growth of 15%, taking the revenues from previous year of SEK 77 million to last quarter revenues of SEK 91 million. So strong top line both on the order side as well as on the revenue side. Result-wise, EBITA margin, 15.9% versus previous year, 11.3%. So the continuous improvement and work that is taking place on improving the utilization of the fleet is certainly carrying through.So again, also on the Rental side, I should say they delivered a very strong quarter. So when I said, I think that was after Q3, that we were nearly sold out, it means that orders here are both for the longer window but also shorter projects in the shorter window. So all in all, a good contribution to future utilization and thereby also here providing a solid foundation going forward. Moving then to next page, Page #8, the quick view on the full year 2018. Already touched upon the order intake growth that we have seen. Also very happy to see that nearly all areas saw a growth in orders received, except for Construction Equipment. We came strong in Q4. If we could have extended the year with 2 more weeks, we probably maybe could have worked there. But that is what it is. So we didn't fully reach up to our own ambition. But I should still say a strong finish. The year has been a year of consolidation. We have had our issues on the BMU side. We've been working on containing those issues. We've been certainly working flat out on integration. We have seen those effects starting to come through and materialize. So all in all, and also given a strong backlog and what it looks like going forward, the Board of Directors, as a result of the 2018 result, decided to pay out a dividend of SEK 2.75 versus 2017 dividend of SEK 2.3. So all in all, I think it was a quite strong finish of the year that led up to an overall good year, even strong year for Alimak Group, continued to build backlog. So I'm quite pleased with the year. Of course, we are never satisfied. We want to move further in our ambition. So that is for sure. But all in all, I think we had a good year behind us. And with that, I think we would like to look a little bit more into some balance sheet items and cash flow and some debt. And I will hand over to Tobias to take you through that one. Tobias?

[Tobias Lindquist, Chief Financial Officer]

Thank you, Thomas. So let's move on to Slide 9, cash flow and net debt. So our operating cash flow in Q4 was SEK 148 million. That was derived from a profit of SEK 122 million and working capital reduction of SEK 26 million. During the quarter, we had the improvements in terms of inventories and payables supporting the working capital. But we also saw increases in working progress and receivables. The increases were partly related to the delivery issues that Tormod mentioned before but also affected on the market mix in terms of the receivables side. On the year as a whole, we had a cash flow of SEK 240 million versus SEK 335 million last year. And this is during the first 2 quarters, we had a negative cash flow where we build up working capital. And even though we had improvements in the latter part of the year, we were not able to recap the full part of that. Our investments for the year was SEK 68 million, so higher than SEK 37 million last year, but in line with depreciations and also representing 1% -- 1.5% of revenues, which is our average. The increases is mainly related to the Rental fleets, where we have made some additions following the increased amount and also for IS/IT systems.The net debt situation. We ended with a net debt of SEK 867 million, which was an improvement of SEK 113 million in the quarter 4. We repaid debts of SEK 75 million and we increased the cash flow to date. So that also resulted in lower interest costs. Our leverage of 1.55 also improved from Q3, 1.88. And that is an effect of mainly the net debt. We have had -- during the quarter, we had a low leverage every quarter except for Q2, where we made dividends. So to summarize, we had a strong financial position, where we have positive yearly cash flows, balanced investments, improved leverage. And also earlier in 2018, we found a new credit facility. So let's look to Slide 10, tax expense. We had a tax income in Q4 of SEK 22 million. That is relating to changes in deferred tax assets of SEK 47 million. SEK 40 million of those is relating to legal restructurings that took place during the quarter, where we were able to utilize existing tax loss carryforwards. Comparing to Q4 last year, it was also low at 8% tax ratio in Q4 2017. And that was due to the changed tax legislations in the U.S. For the year as a whole ending, we have tax loss carryforwards of SEK 517 million, of which we have deferred tax assets of SEK 68 million. Our taxes for full year was SEK 52 million, which represents 13% of profit before taxes, which is compared to 25% last year. If excluding the SEK 40 million relating to legal restructuring, we would have been at 23%. Looking ahead into 2019, we don't expect any similar one-off items as we had this year. However, we expect to be in the low -- continue being a low range of tax ratio of around roughly 23%. So if we move to Slide #11, net profit and earnings per share. So in Q4, we had a profit of SEK 144 million, which represents an EPS of SEK 2.65. That could be compared with SEK 90 million in profit last year and an EPS of SEK 1.67. For the year as a whole, our profit was SEK 344 million compared to SEK 292 million, an improvement of SEK 52 million out of which of SEK 44 million relates to EBITDA adjustment improvements. This translates then into an EPS of SEK 6.35. And last year, we had SEK 5.38. This year, we had a one-time positive effect of taxes of SEK 40 million affecting the EPS and the result. And last year, we also had a revaluation of loan facilities that improved financial net with SEK 43 million, so similar one-time adjustments.Given the earning per share development, as Tormod mentioned, the board has proposed an increased dividend to SEK 2.75 versus SEK 2.30 last year. So that is -- represents 43% of EPS, which is in line what the ratio that we had in 2017 and an increase of 20% year-over-year. Moving to the next slide, the integration update. So it has now been 2 years almost since the acquisitions of Avanti Wind Systems and Facade Access Group. Looking to our accomplishments during 2018, in the manufacturing area, we have centralized the global sourcing functions overseeing all areas within the group in relating to procurement, manufacturing and logistics. We also renegotiated prices and changed the suppliers in many areas. For After Sales, we merged the service functions in many of the countries. We have a few outstanding to be done in 2019. We launched Alimak Service brand, a common brand used for our After Sales activities. And we also trained staff in order to -- them to cover the larger part of our portfolio. In terms of organizational structure, we have now in many countries a common country and admin support functions. And we also have initiated and done legal restructuring in many countries where we're combining the entities and thereby improving efficiency.So looking ahead in 2019, we will continue to finalize the items that are left on the work stream, many of them are closed. We will finalize them when it comes to organizational and legal restructuring. Then we're more or less moving into a new phase, where there are continuous improvements in respective areas. One focus though will be when it comes to design, engineering and manufacturing, which will have -- we will look into more how to improve the processes there. But that will have more of a medium-term effect. We have over the past 2 years, we have had cost for the integration of approximately SEK 110 million, which is in line with our previous estimates. We don't expect any material costs coming forward in 2019. And the activities that remains to be done, we have provided for those in 2018. So don't expect any further cost for that.Looking into next slide, Slide 13, mid-term financial targets. So these targets were set in 2017 after the acquisitions with the ambitions to reach this at a run rate at the end of 2019. In terms of the revenue growth, our target is to have 6% average organic growth. And this year, we had an organic growth of 0%. That in mind, we had in 2017, an increase of 9%. We had positive development in Q3 and Q4, where our organic growth were 4.9% and 4.3%, respectively. In terms of EBITA margin our target is 15%. In 2018, we reached 12.8%. It was in the same level as last year. We had an improvement in all business areas, except for Industrial. Looking at Q4, we were there at 13.8%, also the same level as last year. However, all business areas improved their margins in Q4 compared to the year before. However, the revenue mix changed and thereby, they had no impact on the group margin as a whole. The leverage, touched upon earlier, we have had a positive development there and ended up on the 1.55, which is better than our target level of 2x. Now we have been lower than the target -- or reaching the target every quarter, except for Q2. So to summarize, we are not at target levels yet. However, we are moving in the right direction in many regards. With that, I hand over to Tormod again.

[Tormod Gunleiksrud, President & CEO]

Thank you, Tobias. And I think we have arrived at the point where we try to round it up. And if you move to the next page, Page #14, I will try to make a summary of the Q4 and maybe also touch a little on the full year the way I see it. I've said quite a few times here that I was very pleased with the strong order intake growth that we saw in the quarter still with -- having in mind that we were comparing with a very strong Q4 of '17 with the Sydney Harbour Bridge in there. Also looking at the group margin, really in line with last year, improved margins in all the business areas but with a changed business mix. So what I prefer, of course, to look at is the fact that every business here is managing to actually improve their margins. How much of the volume is within each one of them makes it a little harder to control. The main thing is that we are improving in all areas, so although that I'm pleased to see the development that has taken place. If then I look at, try to have a little bit of a view going forward. I mean, from our side, market sentiment still looks to us encouraging. Yes, we know there are uncertainties around. We have Brexit that is supposed to take place in roughly a month from now. There's geopolitical volatility in quite a few regions. But we would prefer to focus on those things that we can do something about. And markets and political situation is very little impact we have on those. And when I look at what we have at hand and what we can work at -- work with, then I think there's still a lot to do. We have a solid backlog. There is a strong pipeline of projects out there that is supposed to materialize, meaning there is a good market to go after. So all in all, from where we stand today, I'm still fairly optimistic looking forward.And if these all materialize, I would also expect that we should end up on a run rate that is pretty close on our financial targets run rate-wise by the end of 2019. So all in all, I would say that Q4 has also certainly contributed to having a positive view on the outlook moving forward.So I think by that, we are concluding our call. And I think it is time for us to open up for questions that might come from the audience. So I think I hand over to the facilitator. Thank you.

[Operator]

[Operator Instructions] And our first question comes from the line of Mattias Holmberg from DNB.

[Mattias Holmberg, Analyst]

I have a few thoughts on the After Sales division, which seems to have become considerably more lumpy, and particularly on the margins, since the acquisitions. So what I'm wondering is if this is a new type of normal for this division. Or should we expect this to, in any way, stabilize going forward? In particular, when we look at Q4 this year or Q4 2018 and Q4 the year before that, we've seen a quite weak margin. So is there any seasonal pattern that we should be expecting going forward with Q4 being sort of a weak quarter profitability-wise for the After Sales division? And then just finally on the After Sales as well, you say that you see good opportunities in these markets that have not yet materialized. Could you give us some examples of what it is that you see and what you're doing to go after it, please?

[Tormod Gunleiksrud, President & CEO]

Yes, that was quite a few questions at the same time, Mattias. But we will, of course, try to deal with them. First of all, starting with the first part of it, whether there are some seasonalities to the business. Yes, there are some seasonalities to the business. And most probably, a little bit more that has come with the acquisitions. Because in earlier years, Q4 used to be quite strong, I think I remember. Because if you look at the old rack and pinion business, a lot of the After Sales business went into the Industrial side. And Christmas and leading up to Christmas, i.e., Q4, end of Q4, would normally be a -- Christmas would be a time of the year when industries were shutting down for maintenance needs. So you would normally have the summer shutdown and you would have a winter shutdown. And that's that normally took place during Christmas. And you would normally, at that time, have a higher activity on the rack and pinion side. With more different business coming in, you probably see less of those effects. So there might be some seasonalities to it. I think it is still a little bit early to say that after 2 Q4s with the business in. But lumpiness there, I think, of course, growing the business going forward, I still believe that in -- it should not be too volatile that business, when we start to get some real momentum to it.But as I said, there will certainly be quarters also in the future, where parts that are carrying a high margin. And of course, if that -- it will-- it's coming down volume-wise, it will have an impact. So the balance between parts and, let's say, service work, where you are charging or [ innovative type ] of hours, if that balance is very skewed between quarters, it will have an impact. That is for sure. But I do not expect a dramatic effect. But I can only agree with you. I mean, we saw 25% again in this Q4, same as last Q4. I have said that I would not expect to be below 27% on a year at least. So that is what we are working with. And then we have to find out how we may we do this better, what can be done on our side. And a lot of this is, of course, driven from direct needs on our customers' side.

[Mattias Holmberg, Analyst]

Maybe I can also ask a bit, you mentioned that you expect to reach the run rate of your targets by the end of 2019. If you could just specify a little bit what you mean by that. Is that -- so should we assume? Or are you having in mind reaching the EBITA margin of 15% in the fourth quarter of 2019? And is it just the margin you're talking about or also the growth figure?

[Tormod Gunleiksrud, President & CEO]

No. I mean, I think Tobias was touching on it, mentioning the last quarters of 2018 with I think it was 4.3% and 4.8% or 4.9% growth. So it is, of course, something that we definitely are aiming for. And certainly on the margin side. So I'm not just talking about one of the targets, I'm talking about a set of targets.

[Operator]

Our next question comes from the line of Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

So I have a question on the aftermarket again. Could you say something how the aftermarket business of the 2 acquired units have developed for the wind system and for the BMUs, please? I mean, have you been able to expand that? And have you been able to service more of those? And yes, could you please elaborate, please?

[Tormod Gunleiksrud, President & CEO]

Yes. We are certainly moving into those businesses. So we are definitely taking on more portfolio that we are servicing. I think revenue-wise, we are probably picking up more from the wind side compared to what we are picking up from the BMU side. So I think what we really started on the wind side, we are doing a lot of inspections because there's a lot of -- we have a lot of safety equipment that is attached to our either ladders systems or the lift systems that we are supplying to these towers. So we are definitely picking up business on that side. It is also easier, I should say, on the wind side because there is a legal framework who are actually allowed to work on the equipment. That is not exactly so on the BMU side. It's amazing that piece of equipment of 200 tons sitting on my rooftop. And it is actually quite random if you could theoretically work on it. So I think we have to educate the market a little bit on the owner of real estate, if they really know what responsibility they have related to the equipment that sits on the rooftop. So that is definitely something that we are working on. So I should say that we have a -- I think we have a good approach towards the market. But what we probably also could see is that these bulk markets are also carrying lower margins than what we probably were used to in Alimak. I think that is basically something that we have sort of communicated all the time, first of all, that there were less business at least developed by the company that we acquired. And in general, it's a slightly different market from the maybe the mainstream industrial after sales that we came from with old Alimak. But I think there are very strong opportunities out there.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And then talking about acquisitions, I mean, your balance sheet is healthy and you communicate that you are -- have now integrated those 2 acquisitions in a good way. So would you, from a sort of management and perspective, be able to do more acquisitions in 2019 already?

[Tormod Gunleiksrud, President & CEO]

Yes. First of all, we have a strong financial position. We have extremely supportive owners. And I think the experiences that we have had with the issues on the integration that we've been working on the last couple of years has been sort of contained. I think we have managed to control that in a fairly good way. And of course, that leaves room for start to do more on other potential and also on M&A agenda for sure.

[Operator]

Our next question comes from the line of Carlos Val-Carreres from Augustus Capital.

[Carlos Val-Carreres]

You almost answered our 2 questions. So I will try to be a little bit more specific. At the end of your presentation, you mentioned run rate on financial targets by the end of 2019. So we would like to -- if you could clarify if that means that at the EBITA margin, you could be at a 15% margin by 2020, at the beginning of that year because we understand that when you say that run rate of financial targets. And the second question is related to the leverage and the M&A. If you are at the run rate of your financial targets, if 2x EBITDA, so that means that in our figures, you could be with a net debt by the year-end around 1x. So you could have close to SEK 1 billion of potential for M&A. So we would like to understand if that is an amount that you could spend in acquisitions for next year.

[Tormod Gunleiksrud, President & CEO]

Yes, I will start with your first question related to the run rate. When we say run rate, since we are only reporting 4 times per year, and when I say run rate, I would expect at the latest by Q4 to see a 15% when I look at the EBITA margin. That is what I'm saying. And so that should be the basis then for '20. I think that is how we have communicated. That is how we have tried to communicate it earlier. So that is really what I would expect to see. And when you talk about leverage, then you are, of course, absolutely correct. But I think I've already said that we have a strong financial position. We have good support from banks. We have very supportive owners. So I think when it comes to dry gunpowder, I think that is not the problem. So it is for us to make sure that we have an M&A agenda that are singling out the right strategic targets that would strategically fit with the group going forward. I think from a financial perspective, we have all the opportunities.

[Operator]

[Operator Instructions] And our next question comes from the line of Mattias Holmberg from DNB.

[Mattias Holmberg, Analyst]

I would just like to clarify, you mentioned the tax rate here, what you're expecting in 2019. So just making sure that I got that right. So could you please repeat that?

[Tobias Lindquist, Chief Financial Officer]

Yes. Well, as I said, we were at a tax rate of 23% in 2018, excluding the one-time effect of the deferred tax assets. And we expect to be around the same levels in 2019.

[Mattias Holmberg, Analyst]

Perfect. And then maybe if you have time, could you please elaborate a little bit on how much of the target, the 2 percentage points, in terms of synergies on the EBITA margin from the acquisitions that you've been able to realize so far and how much that you're expecting to come through in 2019? Just to understand a bit where we are in that journey.

[Tobias Lindquist, Chief Financial Officer]

The effects in -- or impacts in 2018 is not very material. So we have to take a lot of actions, as mentioned. However, those -- the run rate effect of that will be seen for 2019 and onwards. So except for the tax, that is the one that has the single most impact on 2018. The other one has some effect but will have more effect during 2019 and onwards.

[Operator]

Thank you. And there are no more questions registered at this time, so I'll hand the call back to you, speakers, for your closing comments.

[Tormod Gunleiksrud, President & CEO]

Thank you very much, and thank you for the questions that came. I'm sure they were helpful to the audience. And by that, I think it's for us to conclude this Q4 and full year 2018 results call. And it just remains to say thank you all for dialing in and listening to the presentation. And I'm sure I will see you all in short. Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.