Indutrade AB

STO:INDT

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the Indutrade's audiocast teleconference for Q1 2022. [Operator Instructions]

Today, I am pleased to present CEO, Bo Annvik; and CFO, Patrik Johnson. Please begin your meeting.

[Bo Annvik, executive]

Thank you. Good morning, everyone, and welcome on our behalf as well to this Q1 report presentation. We are very pleased to report another strong quarter for Indutrade. And let's start by moving to the highlights of the quarter. The demand continued to be broad and strong and orders and sales improved sequentially from Q4. I would say all major customer segments developed positively although the process industry and the infrastructure sector were particularly strong during the quarter. The business situation continues to be challenging with the war in Ukraine, continued supply chain disturbances and rising inflation all putting pressure on our companies. But it's, therefore, also satisfying to conclude that they continue to perform very well. The organic order intake and the organic net sales both grew 12%, a very high level, and driven by the positive development in basically most company segments and markets, countries.

The EBITA margin increased to 15% with an increase in all business areas and this is an all-time high for a first quarter for Indutrade. We also welcomed 2 new companies to the group during the quarter and we have also successfully acquired 2 more companies in April. And the activity level in our acquisition processes remains high and we have a very good pipeline going forward. Then it's of course impossible not to address Russia's invasion to Ukraine. It's a tremendous tragedy and our hearts go out to everyone which has been affected by this war. We have stopped all business activities with companies in Russia and Belarus since a while and Indutrade does not have any subsidiaries or employees in Russia, Ukraine or Belarus. And the direct as well as the indirect business exposure is limited and the total impact on net sales during the quarter is marginal. It's also relevant I think to say that our sourcing from these countries is very limited for Indutrade.

Many of our companies continue to be affected by supply chain disturbances with shortage of components, longer delivery times and also higher costs for raw materials, components, freight, et cetera. However, they continue to show strong flexibility and successfully manage the pricing issues while maintaining focus on continuing to make deliveries and provide service to the customers. The overall net impact for the group was limited during the quarter. Going forward the inflation is a rising challenge for our companies, but our entrepreneurs are I think skilled at navigating through these volatile market conditions and I feel confident in their ability to manage the situation also going forward with proactive purchasing efforts and continued successful pricing initiatives. If we turn our focus to order intake. As I said, demand was -- continued strong in the quarter and also improved sequentially meaning that the daily order intakes were higher in quarter 1 this year than in quarter 4 last year.

And as I said, organically order intake increased with 12% versus last year, I think a very high level and the growth was broad-based in a clear majority of our companies, basically all segments and countries showed a positive development. Standing out a bit extra was the process industry and if we talk about steel, metal, engineered plastics, different types of chemicals; all are producing at very high levels. And in the process industry, you need flow components, which is a big market segment for Indutrade, different types of instrumentations and other industrial products. So well fit with high capacity levels at those industries with a demand for Indutrade products I would say. Also, infrastructure investments are high in a number of areas and broadly in the markets where we are present. And again the same types of industrial components, which we saw, were sort of driven by that.

In the last couple of quarters we have spoken a lot about medtech and pharma as a growing segment and it did grow also quarter 1 here, but a little bit less growth rate levels than what we have seen before and that's for instance also driven by slightly lower COVID-19 related orders now. It was comforting to see that all business areas grow their orders organically so it was not a few of them. It was all of them. And the strongest one standing out was business area Finland and Flow Technology. And order intake was 11% higher than sales in the quarter and our order backlog is continuing to increase. The average lead time in the backlog is longer than normal, but it really continues to be sort of a solid order book. And the total growth in the quarter was plus 23% and, as I said, organically plus 12%. Acquisition supported by 7% and currencies 4%.

If we then turn to sales, it was equally strong as the order intake and also improved sequentially versus last year. Total net sales up 24%, organically plus 12%. Acquisitions contributed with 8% and currencies again with 4%. And from a geographical perspective and looking at our larger countries, all showed solid growth. Strongest was Denmark and Switzerland and slightly lower growth rate in the U.K., but I think U.K. for us is step-by-step trending in the right way. The supply chain issues with long lead times from suppliers and component and product shortages continued during the quarter as I said and unfortunately, there is no clear indication of an improvement. The consequences are an increase of the order backlog and also slightly held back sales level and it's difficult to estimate how large that is, but maybe slightly sort of -- the held back invoicing is slightly higher than at the end of quarter 4.

In general, we still feel that the situation is manageable and our companies do a great job. They are flexible and they are creative. And as we operate with relatively sort of smaller volumes, medium volumes, we have a bit of a different supply base than larger, more integrated industrial companies. So we have a relative advantage and that also I think shows in the way this is managed by our companies. If we look at our organic sales growth trend. Organic growth as such is a strategic focus area for us and we are working with our capabilities broadly in the group to strengthen this and it's obviously fortunate to see that it's paying off even if the growth this quarter is also obviously driven by a generally sort of good market situation. A global strong demand situation combined with well-positioned companies have contributed to this. We have in fact now 6 consecutive quarters with organic sales growth.

In quarter 1, we also increased the growth rate sequentially and the organic sales level is higher than Q4. Encouraging is also to see that the organic growth is broad-based. All business areas grow organically and the majority of the companies developed positively. Business risks are increasing ahead and the strained supply chain gives us longer lead times than normal. But thanks to the continued high order intake, we have a very strong order book moving forward and this gives us good preconditions for organic sales growth also the coming quarter. If we then turn to EBITA. We had an extremely strong development with plus 35% versus last year and, as I said, the EBITA margin came in at 15%, which is an all-time high for Indutrade in a first quarter and this should be seen in relation to last year where we came in at 13.9%. Organically the EBITA increased with 19%, acquisitions added 11% and currencies 5%.

And the organic margin improvement was driven mainly by continued improved gross margins. There is still an upward price pressure from our suppliers, which is creating a tough headwind; but our companies, as I've said, are managing this in a great way. And I think this is one of the areas where Indutrade performs at its best now where we have entrepreneurial leaders who are proactive and creative and we also have quality products and confidence to take pricing sort of forward to our customers. The newly acquired companies also showed good margin levels and contributed to the improved group margins. There are always some nonrecurring items and one-offs in the closing. But all in all, I would say that they offset each other this quarter and the EBITA margin of 15% is a fair underlying operational results level.

If we then turn to our business areas. It was, as I said, very comforting to see that all 8 business areas grow sales organically in the quarter and really a clear majority of our companies developed positively. We saw the strongest growth in business area DACH, Finland, Flow Technology and Fluids & Mechanical Solutions and the growth was broad-based in these business areas. But again the process industry, the infrastructure sector and also the pharma medtech customer segments stood out particularly strong. The majority of the companies also grow in the business area: Benelux, Industrial Components, Measurement and Sensor Technology and the U.K. But the development was held back slightly in business area Benelux by the large company we have operating in the power generation sector. That company had a very good order intake, but lower sales. Due to that, some customers didn't take out the material, which was produced for them in this quarter, but that will happen in quarter 2 instead.

The medtech and pharma customer segment was strong last year in business area Industrial Components. And U.K. and MST, they were slightly held back relatively more, I would say, by supply chain issues versus the other business areas. If we then look at the EBITA margin for the business areas. Again all of the 8 business areas improved and increased and the main reason behind the broad and strong development is that we continue to improve gross margin organically despite the price increases from many suppliers. Also good performance from our newly acquired companies contribute and the margin improvements were in general broad-based and most companies in the group improved their margins. We saw the largest increase in business area Finland and in U.K. And Benelux was held back slightly by this larger power generation company I spoke about previously. But again they will trend back in quarter 2 in a good way.

Then acquisitions, I think we have had a good start. We have now acquired 4 great companies so far this year and the total turnover is SEK 340 million, which is added. We acquired a company called NTi Audio in Liechtenstein and a company in the U.K. called Autoroll in the first quarter. NTi is a leading provider of test and measurement equipment for acoustics and vibration applications. They operate in a well-defined niche here and I think it fits perfectly well into the Indutrade portfolio. Autoroll is more of an add-on acquisition to a company we already own called the Ellard Group in the U.K. and they are broadly into supply of different types of doors and applications to door technologies. Then we also bought a company in Germany by the name Stabalux. They provide profile systems for subs for buildings and we already have a presence in this segment by a Swedish company called Starke Arvid. So a good sort of addition to that cluster.

And then we also acquired a company in the southern part of Sweden called PMH International and they are involved in material handling and lifting equipment as one area and also industrial and storage halls as another area. Also a well-known segment to us from previous sort of -- from companies we already own. And I would say that the project level intensity we have in acquisitions is very good right now so I'm confident that we would have a very good acquisition year in 2022. As I've said before in other calls, we are also continuously strengthen our capabilities and resources in this area and that has sort of been done step-wise in a few quarters now and it also happened in quarter 1. And we have an ambition to make 2 to 3 acquisitions per business area, which adds up to about 16 to 24 acquisitions on group level per year.

By that, I leave the word over to Patrik to elaborate a little bit more on the financials.

[Patrik Johnson, executive]

Thanks, Bo, and good morning, everyone. Looking at the numbers more in detail. Total growth for orders and sales was plus 23% and plus 24%, respectively, in the quarter, really strong. Book-to-bill, as Bo said, continued to be good plus 11% in the quarter and the back backlog continued to increase. And if we give that some more color. If you go back 1 year, 1.5 years, it was around 20% of annual net sales and it has increased and is slightly more than 30% of annual net sales. And what has caused it this time? Well, it's of course driven by the general good demand situation, but also the longer lead times. And we also have, I would say, slight mix component here where we've seen a strong development in customer segment with in general relatively longer lead times. Medtech pharma for instance and the process industry and also infrastructure, that explains also. That's also one piece in the puzzle.

Gross margin continued to develop very positively despite the supply chain issues and increased to 34.6%. Organically, excluding acquisitions and currency, it actually improved even more. So it is a good development. It's difficult to calculate exactly the drivers of this increase, but I would say the main contributor is good customer pricing from our companies. But there is also effects from positive product mix changes and production efficiency is also improving. So that also contributes. EBITA grew 35% in the quarter and the margin improved to an all-time high for Q1 of 15%. EBITA includes, as you might have noted, a positive one-off from release of earnout liabilities of around SEK 22 million, but there are also some negative one-offs in the closing with around the same amount for instance relating to some receivable write-downs in Russia. So I would say the net impact of those one-offs is basically 0. So the underlying result is around 15%.

Finance net increased with SEK 6 million driven by slightly higher borrowing and also slightly higher increased interest rates. Tax cost increased in the quarter 32%, basically in line with profit. Underlying tax rate is therefore in line with last year at 22%. EPS up 38%. Return we are now at 23% versus 20% last year. Good development driven both by -- mainly by the higher result of course, but working capital efficiency also contributes. Cash flow declined versus last year and I will dig into that on the next slide. But finally then on this slide, net debt to EBITDA is maintained on a historically low level, 1.4x versus 1.5x last year. So then cash flow then. First I think important to state that cash flow is seasonally low in Q1 because of the shorter months and lower invoicing in December, January and February. But on top of this, Q1 declined versus last year due to an increase in working capital.

There's a natural increase of course in receivables because of higher invoicing compared to last year and some companies have also then had to add inventory to manage the strained supply chain and they need to maintain of course customer delivery service. So that has caused also then inventory increases. But important to note is that the working capital efficiency, working capital in relation to sales is continuing to improve. So that is really good. Okay. And then moving to earnings per share. It grew, as I said, then with 38% in Q1 to SEK 1.75 versus SEK 1.27 last year and the main driver of course is the strong operational result in EBITA development. And if you look at EPS development in a more longer-term perspective, 3- and 5-year annual average, it has been 17% per year for both 3 and 5 years.

And finally, the debt situation. The interest-bearing net debt end of Q1 increased slightly versus year-end and is now SEK 5.8 billion and mainly connected, I would say, to the slightly lower -- or the lower cash flow. And the ratios, however, are historically -- are at a historically low level. The net debt to equity ratio is at 52% versus 56% last year. And despite some turbulences on the credit market in March on the back of the war, we managed to issue a new long-term bond with really competitive terms so that's good. Main purpose is to proactively secure long-term financing for the dividend in April and also our continued ambitions on acquisitions. But to summarize, I would say our financial position remains strong. Low debt ratios and also good headroom between short-term debt and the guaranteed long-term facilities that we have.

So thanks and I turn over to Bo again.

[Bo Annvik, executive]

Thank you, Patrik. I'd like to take a moment and talk about our business model. We have been in operation since 1978 so quite some time now and we basically have the same business model based on developing and acquiring successful small and medium-sized companies driven by passionate entrepreneurs. Our decentralized structure with over 200 well-managed and profitable companies in a large number of different segments provides a natural hedge against weaker business cycles. Sometimes we are I think compared with more cyclical companies, but I definitely stand behind that that we are good in also weaker business cycles and can defend our profitability levels in a relatively very strong way. We also see the strength in smaller companies maintaining their flexibility, commitment and social responsibility and at the same time as we contribute with the stability of a larger company and financial support.

And this establishes the right level of commitment and customer suppliers and company employees appreciate local decision-making. Many challenges and solutions are also relevant to most companies. And by being part of Indutrade, entrepreneurs can gain access to a unique network of colleagues and they can also exchange ideas and experiences and learn from each other, which drives both development and growth. We also balance our business risk by acquiring successful companies in different niches with stable customer and supplier relationships and good profitability. Our acquisition strategy has developed a bit over time, but I would say it's solid and historically very successful. And there are many different types of companies these days working with acquisitions, but we don't really consider ourselves being one in the crowd.

But what really sets us apart from any of the other is I would say the people and value-based approach to acquisitions we have. And we never make an acquisition where we don't see full alignment in terms of values and business principles and that is one of the things, which I think has led to the success we have had over the years. If we then turn to sustainability. Since the last report presentation, we have now published our Sustainability Report for 2021 and that can obviously be found on our website. And this is also the first time we can measure the progress of our common long-term goals and KPIs within the 3 focus areas we have: people, environment and profitable growth, which is a bit equal to innovation. And it's really satisfying to see then that nearly all of the KPIs are developing in a positive direction.

Going forward, the environment and climate are high on the agenda for us. And therefore, in 2022 we are now planning to include Scope 3 in the data collection from our companies and this will obviously give us better understanding of all sort of other indirect emissions that occur in our company's value chain and we will include them in a better way in our goals and strategies going forward. We are also considering to join the science-based targets initiative. So time to summarize the key takeaways. Despite challenging market conditions, we had a very solid Q1 with really strong growth and record high profitability. The war in Ukraine, rising inflation, along with continued supply chain disturbances have increased the business risks for our companies, but we still expect this to have a marginal impact. And I would say that our companies are in a relatively better position than any large integrated industrial company and we are fortunate to have this structure and we will also reap the benefits of this going forward.

In the short term, we expect the demand to remain at a high level and our order backlog is once again record high and that's obviously a great foundation regarding sales and earnings growth in the short term going forward. We see very good acquisition activity in all business areas. We have now acquired 4 companies so far this year and, as I said, the pipeline is really strong in terms of acquisitions going forward. Sustainability is prioritized. We take steps forward all the time, I would say, and we really view sustainability as a business opportunity for our companies going forward. The platform is solid and we continuously refine our strategic cornerstones and this together provide a long-term sustainable and profitable growth opportunity for us.

By that, we say thank you for listening and participating. And we leave the word over to the operator.

[Operator]

[Operator Instructions] Our first question is from Max Bacco, ABG Sundal Collier.

[Max Bacco, analyst]

So let's see. Can you hear me?

[Bo Annvik, executive]

Yes.

[Max Bacco, analyst]

And as always, congratulations on another strong report. So a few questions from me. First on the strong organic growth of 12%. Can you say anything about the split between price increases and volume?

[Bo Annvik, executive]

It's obviously a great question and it's a little bit difficult for us to have a clear sort of detailed answer on that with our decentralized and fragmented structure. But I would say directionally that it's a bit more volume than pricing. But I don't know, Patrik, do you want to elaborate more on that that?

[Patrik Johnson, executive]

I don't have a number either, but I would say that I agree with you. It's probably slightly more volume, but the pricing part is of course relatively substantial. So I don't know, 64 or something like that.

[Max Bacco, analyst]

Sounds fair enough. And have you continued to increase prices here during Q1 and Q2?

[Bo Annvik, executive]

I would say it's an ongoing effort and since we have quite a lot of companies, it happens with different frequency in different companies, but it's definitely ongoing I would say.

[Max Bacco, analyst]

Okay. And you mentioned this during the presentation that component shortage and longer delivery times affected net sales and perhaps slightly more than in Q4. Can you just remind us how much was it in Q4? Was it SEK 200 million or something like that?

[Patrik Johnson, executive]

Yes, that is what we said. We said at the end of Q4, we had an aggregated held back invoicing of SEK 100 million to SEK 200 million and we estimate that has increased slightly during Q1. So the additional held back invoicing, I don't know how much, but slightly more than SEK 200 million I would say right now.

[Max Bacco, analyst]

Yes. And now on a rolling 12-month basis, your adjusted EBITA margin is at 15% as it was in the quarter here. Do you see this as a sustainable level for full year 2022 or do you expect a slight decline?

[Bo Annvik, executive]

We will fight for defending the level we have now. So that's clearly the ambition.

[Max Bacco, analyst]

Okay. And 2 more short questions. As you said, the cash flow was a bit soft for quite natural reasons. But do you expect cash flows to remain a bit soft here during 2022 and then a release in '23 or could we see a boost from net working capital in 2022 already?

[Patrik Johnson, executive]

I would say in general, we have good operational cash flow -- underlying operational cash flow. But when you have this type of growth, we consume of course for working capital. So I think if you calculate that we will grow further, you would also need to add more receivables. I think most of the inventory increase we have done during the last 3 to 6 months I would say so I don't expect inventories to increase to the extent that it has done in Q4 or Q1. Slightly lower inventory increase, but receivables will continue to develop according to invoice. So to summarize, cash flow will probably be slightly lower than last year because last year was fantastically good. But from an historical perspective, still be good.

[Max Bacco, analyst]

And last one, you mentioned this also somewhat. But in April Q2, have you seen that the demand have continued on par with Q1? If you could give some more color on that.

[Bo Annvik, executive]

I would say that demand was strong all the way up until the last day in March and we expect a similar business climate in Q2 as in Q1.

[Operator]

Our next question is from Carl Ragnerstam, Nordea.

[Carl Ragnerstam, analyst]

It's Carl from Nordea. Firstly, you said that price increases was offset by -- or really the raw material prices was offset by price increases. But I mean looking into Q2, we can see that obviously a lot of raw materials started to accelerate or rally up in April. Did you feel that you are on par with the recent raw mats looking in more specifically in April?

[Bo Annvik, executive]

I'm not sure if we can be that specific. But in general, we are monitoring or our companies are working with this on a daily basis and they are definitely acting to not sit sort of with lower margins themselves, but transferring cost to the customers. So it's not anything negatively has happened during the last couple of weeks here. We continue to work with this as before.

[Carl Ragnerstam, analyst]

And also as you said, you have a substantial backlog currently. I mean, are you able to raise prices on your already taken orders or how do you handle that in the backlog?

[Bo Annvik, executive]

I would say that most companies when they accept an order, they are somehow confident that they will have a good gross margin on that order at delivery. So either they have already purchased the material or they have secured pricing of the material somehow and so on. So I don't expect that there is a big margin issue linked to the order backlog.

[Carl Ragnerstam, analyst]

Okay, perfect. Also when looking at contingent considerations as a percentage of purchase prices gone up lately, is it an effect of you being more cautious in your assessment of the underlying earnings quality of the companies you acquire or is it just a coincidence, I mean that the salaries appreciated, that model?

[Patrik Johnson, executive]

I wouldn't say that there is any overtime. In the last couple of years, we've increased the earn-out portion in our acquisition contract so that's sort of the right reflection. And we have been looking for companies more and more with organic profitable growth potential. So I guess that's a reflection of that I would say. But there is no sort of change recently in our way of working. That's more a coincidence I would say.

[Carl Ragnerstam, analyst]

Okay, brilliant. And also looking at your acquired margin on a run rate basis, it's close to 20% or just below. I mean would you say that you have a similar margin profile in your M&A pipeline as well?

[Bo Annvik, executive]

I think it's been very successful and quite high now. So maybe the average margin level is slightly lower in the pipeline than the 20% level.

[Carl Ragnerstam, analyst]

Okay, perfect. And the final one from my side is on the M&A piece. I mean we have a challenging environment. I guess in historical context, we have seen a lower M&A pace when it's macroeconomic uncertainties. You had a very good year last year in terms of the M&A piece. Do you expect to keep the M&A piece in 2022 or even accelerate it or what's the ambition given the circumstances?

[Bo Annvik, executive]

The ambition is to make 2 to 3 acquisitions per business area per year equaling 16 to 24 on group level per year. And I'm quite confident that we will reach that target also 2022. So it's -- we are in a fortunate situation in terms of acquisitions right now.

[Carl Ragnerstam, analyst]

Okay, perfect. So the inflation is not impacting sort of the closing rates or...?

[Bo Annvik, executive]

No, no.

[Operator]

We've got a question from Johan, Danske Bank.

[Johan Dahl, analyst]

Most of my questions are answered. But on the -- I just wanted to hear you how you look on the risk of your or Indutrade's customers building inventory just like you are doing yourselves sort of to safeguard their ability to supply and how you foresee the risk that this will sort of be a headwind as your customers not offering them inventories going forward on your order intake? Is there a discussion in the group in that area?

[Bo Annvik, executive]

It's a great question and something we continuously discuss with our companies and business areas to try to penetrate and understand. And there is an element of building inventory I think in certain segments. In the pharmaceutical segment it has definitely been so linked to COVID-19, but also in some other sort of pharmaceutical areas. But we usually have both relationships and contracts, which prevent us from a sharp decline somehow in the order book. So we don't judge the risk to be very significant in any way in terms of this. We think the order book is strong and the relationships with those customers good and we will step-by-step deliver on that order book now.

[Johan Dahl, analyst]

Okay. Final question just on the gross margin, it declined 130 bps compared to Q4. Can you help us bridge that change sequentially given acquisitions, et cetera, which is useful to understand?

[Patrik Johnson, executive]

It's right. As you say that we -- the gross margin is slightly weaker than quarter 4. Quarter 4 was extremely strong and there were a couple of one-offs making that extra high I would say as one comment to that. And another comment is that we organically actually increase. If you compare the gross margin this year compared to last year, it's actually organically slightly higher than the 0.3% increase you see in the total gross margin. So organically, we are performing slightly better. And if you zoom out and look at the overall trend, I would say that we sequentially are on a flat pace when it comes to -- on a high flat pace when it comes to gross margin.

[Johan Dahl, analyst]

Okay. So organically flat pretty much sequentially in your [indiscernible].

[Patrik Johnson, executive]

Yes.

[Operator]

There are no further questions. I leave the word back to the speakers for any concluding remarks. Please go ahead.

[Bo Annvik, executive]

Thank you for participating and listening in. And we end the presentation here and wish you all a good day. Bye from us.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.