Indutrade AB

STO:INDT

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Indutrade Q1 presentation for 2023. [Operator Instructions]Now I will hand the conference over to CEO, Bo Annvik; and CFO, Patrik Johnson. Please go ahead.

[Bo Annvik, executive]

Thank you, and good morning on our behalf as well. We are of course glad to present another strong Q1 report from Indutrade, and let's start with some overall highlights.In general, I would say that the quarter was very good on basically all accounts. If we start with order intake and top line, we saw a stable and high demand level in terms of order intake. We were up in total 14% and we grew 3% organically.And we also had a sales level, actually also in order intake for the first time in a quarter at above SEK 8 billion. And sales growth 26% and 13% was organic growth. We also had a new all-time high level for a first quarter in terms of EBITA margin at 15.2%. And our EBITA increased with 28% to SEK 1.2 billion.And we also had a cash flow, which increased versus a year ago significantly. However, we had a slight continued inventory buildup, which we will comment a bit more on later on in the presentation.Also a good start in terms of acquisitions. We completed 3 acquisitions in the first quarter and we have finalized one project now in April. And if we add all this in terms of annual sales together, it equals SEK 655 million, so also a good start here.If we then start to look at order intake a bit more in detail, as I said, good order intake, high and stable and actually broad across basically all business areas. And we obviously measure order intake in all our companies and it was a bit more than 50% of the companies which had a positive organic order intake in the quarter. And the total level was above SEK 8 billion, so a respectful number for Indutrade. If we take the numbers as such, again 14% up in total, whereof 3% organic, 8% linked to acquisitions and 3% linked to currency.And we had a fairly strong organic order intake in Q1 a year ago. It was down 12%. So topping that now with 3% was good. I think it's also interesting to reflect a bit on how last year was in terms of organic order intake. So in quarter 2 and quarter 3, we were at 7%, 8%. And then as you probably remember, we went down to a flat organic order intake situation in Q4.And then we wandered a bit initially in the quarter where ordering take would take us, but really good now to see that that we were actually sequentially improving to 3% in quarter 1.And it was a number of segments, which was strong and good. I will say General Engineering stands out. You have seen a lot of strong quarterly report from a lot of large engineering related companies and they all have strong order books and now when the supply chains are improving, they start to deliver on these order books. And then they need obviously components and equipments to do that. So a lot of our companies have had strong demand linked to that.But we continue to see a good sort of demand level from the energy segment quite broadly. Basically, a lot of investments going into that, not least electrification, we also now see that there are more and more, for example, hydrogen related projects. We have some companies working with leak detection for tanks. They have in the past have big business linked to leak detecting tanks for petrol and diesel and now they're starting to be building production lines for hydrogen tanks instead, which needs these types of equipment. So that's been positive in the quarter.We see mining equipment being very strong globally and we deliver filter solutions to a lot of mining equipment. In terms of pharma and MedTech, I would say that, for example, the diabetes area stands out. We have some companies linked to production equipment to diabetes production, but we also have a company for example, delivering diabetes devices for patients or people and they have a very strong development.So that's just to mention a few segments fairly broad and it's basically only the infrastructure and particularly the construction segment which stands out to be a little bit weaker, I would say. It was also so that order intake was slightly higher than sales. So we actually had also a positive book-to-bill in the quarter.If we then turn to sales, continued strong developments, I would say. We have been fortunate to have double digit total sales growth now for all of 2022 and actually all quarters also in 2021 except for the first quarter in 2021. So it's been a strong sales situation for quite a long time now.And most companies and all business areas, they also grew organically. And as I said, we were at a level above SEK 8 billion for the first time in a single quarter. And if we take the particular numbers in total plus 26% whereof 13% organic, 9% linked to acquisitions, and 4% currency.And I will say also for our companies, we see improvements in terms of the supply chains. However the lead times still remain fairly long in some cases, but it's becoming better and better step-by-step. It's difficult to estimate what is volume and what is price effects. We don't really have that level of detail. But I would say our guesstimate is as previous quarter that the price effect is somewhere around maybe 7% to 8%.We still have a good order book and it's basically at the same level as it was a year ago. And sequentially, from quarter 4, these numbers were exactly the same actually, 13% organic growth and 26% in total, so a stable and strong sales situation.If we look at sales in more of a geographic perspective and start -- we start with Scandinavia. It was basically a good level in Sweden and Norway and a bit of extra good in Denmark driven mostly by the pharma sector and not least the diabetes related business I spoke about earlier. Sweden is our biggest market and Denmark is continuously improving, I would say. It's on number 5, the fifth place in rank.Finland was actually quite okay. If we look at Finland as a market, Finland as a business area, was maybe slightly weaker, but that was more linked to that we have some export related businesses in Finland. And they had, I would say, really strong order intake and sales a year ago and was not equally strong this quarter.U.K. and Ireland was really good, mostly driven by the pharma sector on Ireland. But there were also some good General Engineering oriented business development in the U.K. Business area, U.K. doesn't and come across as doing fantastic this quarter, but we have quite a lot of U.K. oriented companies or U.K. based companies in, for example, business area Flow and also business area Measurement & Sensor Technology. So in some of those areas, the business in the U.K. was actually quite good.And also in the Netherlands, Benelux, really strong year sales. And there we have a cluster of pharma related companies, but also I would say the General Engineering was quite good in that market as well.Germany did well. Switzerland, Austria did quite okay, also North America. Asia stood out as a weak point this quarter and that's because we have lost some COVID-19 related business in China, where those customers have turned to buy locally rather than import from some of our companies.If we look at sales in a timeline perspective, you can now see that we have had quite a lot of quarters with very good organic sales levels at above the 10% level. And if we look at the quarter, the first quarter, I would say that in March, we actually had an all-time high daily sales level. So it's been strong in the quarter, and as I said before, it's really driven by a strong order backlog and now supply chains which are easing up and improving step-by-step.And it's a combination of both volume and some price increases. And its organic growth, as I said, in all business areas and in most of our companies. And again, the order backlog remains good and at the same level as a year ago.If we then look at the EBITA profitability, it was continued strong and a good improvement. We reached above SEK 1.2 billion, which is a very high level in absolute terms for Indutrade. The increase was in total 28% organically plus 14%, acquisition added 10%, and currency 4%.As I said before, we came in at 15.2% in terms of EBITA margin, which was a record for first quarter and sequentially also an improvement versus Q4 where we were at 15%. So I think it's a strong sign that we are remaining at the 15 percentage level now here. And with the order book we have, I'm quite confident that it will improve or it will continue to be good also in the coming quarters.And the improvement was driven by the strong organic growth in combination with stable, high gross margins. And we also had a positive contribution from our acquisitions. We see that our companies are managing costs in a good way. However, the activity level is high now, more travel, more fairs, exhibitions, more activity level in general, which are impacting cost levels a bit upwards, but even though we came in at a record high EBITA level.If we then turn to the business area perspective, as I said, all 8 business areas grew sales organically, but some variations between them. If we start from the left with Benelux, as I said before, the MedTech and pharma sector were strong contributors. We have a large company in the -- producing and developing valves for the power gen sector, which they are doing really great at this time.General Engineering did well and also actually some infrastructure construction-related companies did well in the Benelux area. So they were up 25%, which was really strong. DACH up 6%, I would say, in general, broadly continue to be on a good level. They had tough references in their MedTech pharma sector, which made it a bit difficult to be on higher levels, but a good situation in the DACH area.Finland, up 2%, good level, but they had very strong references also. I think they increased with 14% a year ago. And as I said, 2 companies, in particular, had very strong sales situations a year ago linked to some big export projects, which they didn't have this quarter.Flow is doing really, really well. They were up 23%, and they are also benefiting from a strong MedTech pharma situation. But also, I would say, the green transformation is benefiting Flow. A lot of investments in the energy sector, also company doing really well in the marine sector, but quite broad positive situation in terms of Flow Technology.FMS did well, plus 7%. They had a strong situation, plus 17% a year ago. But basically, growth in all segments, except construction within this business area. So a broad-based good organic sales situation.Industrial Components were up 9%, also a strong development in the MedTech area, also good in General Engineering and also a bit weaker in terms of the infrastructure area. MST were up 13% and strong development overall in engineering-related areas quite broadly, I would say.And U.K., up 1%. They had companies in the -- linked to the aerospace segment, energy, defense, but also a bit weaker in terms of infrastructure and construction. And some companies in the U.K. business area linked to Engineering were also a little bit weaker.If we then look at profitability in a business area perspective, I would say, we are, in general, at high levels in basically all business areas except maybe for the U.K. And the reasons I have particularly already elaborated on linked to the top line. So I think the explanations are similar also in terms of profitability.Three business areas really stood out; Flow Technology, 17.7%, strong increase there. And Benelux also had a really strong profit level at 16.3%. And also DACH had an all-time high for the first quarter in terms of profit margin, 14.5%. And they benefited also a bit from newly acquired companies in the DACH area. But otherwise, I would say that most of the comments are similar to what I already said in terms of the top line situations for the business areas.We had a good start in terms of acquisitions. We were able to acquire 3 great companies in quarter 1. Sax Lift making scissor lift tables in Denmark, but selling quite a lot internationally with a very, very strong, quite unique digital sales platform. We have Hobe developing, producing precision tools, micro tools for application areas in the dental segments, MedTech area, watches and other things.And a company in the Netherlands, SKS in the Flow Technology area, a bit larger company. They are, for example, the biggest partner agent to Alfa Laval in Europe. They are also experiencing a good business situation. So we are very happy with that start. And also now in April, we were able to add a company in Denmark, Safematic, working with filters. So all in all, now we have added about SEK 655 million of extra top line on an annualized basis.And I would say that we have a very good pipeline in terms of projects we are working with. And I think the multiples are basically on the same level as before, maybe have come down slightly, but not too much. As we are basically acquiring really good companies, stable companies with high profitability, the owners, they know what type of price they want for these businesses. And if they don't have to, they rather delay their decision to divest. But even though or even so, I would say that we have a strong and good pipeline. And I think 2023 can be basically an equally good acquisition year as 2022 and the previous years.And if we look at acquisitions in a timeline perspective, you see here that that we have had a really good situation in '21, '22, and we measure this on obviously annualized, but also in a longer perspective and the 3-year average right now is currently at 15 companies. So I think that's basically at the lower point of the scope where we want to be in, and we have a positive outlook in terms of staying at that level or slightly increasing that level going forward.And if we look at how much the acquisitions add in a quarterly perspective on the other slide there, you see that we have been adding around SEK 60 million, SEK 70 million per quarter for quite some quarters. And thanks to the good acquisition activity in quarter 4 last year and in quarter 1 now this year, we are adding a bit above SEK 90 million, so a strong contribution from the acquisition side.So by that, I give the word over to our CFO, Patrik, to elaborate more on the financials.

[Patrik Johnson, executive]

Thank you, Bo. So let's go a bit deeper into the financials. Total growth for orders and sales was high and good for the first quarter, 14% and 26%, respectively. And as Bo talked about, good to see that book-to-bill, again, slightly above 1 and both of them above SEK 8 billion.Gross margin, 34.6%, stable, same level as last year. And I would say our companies continue with price increases to mitigate supplier price increases that we still see and also inflation and also that we see that impacts a lot of our Swedish trading companies.EBITA grew 28%, and the margin was an all-time high for Q1, 15.2%. Further down in the P&L, of course, the finance net is now increasing as an effect of both higher interest rates and also that we increased our borrowing in the last year. Tax costs increased with 30% in the quarter, and that implies a tax rate of 23% versus 22% last year.And earnings per share, up 18% and looking at the return, it's still a step above our target. So it's at 22%, but slightly lower than last year. And the main reason for that is the high acquisition pace adding capital to the balance sheet and also, of course, higher working capital the last year.Cash flow, substantially higher than last year. So that's good. And net debt to EBITDA at same level as year-end, but higher than last year. But if you look at a more longer-term perspective, I think the level we see now is basically in line with the history.Then moving on and looking a little bit more on the cash flow side. And as you can see here, we came in at a good level of SEK 632 million. Quarter 1 is normally a seasonally low quarter for us in cash flow, so SEK 632 million is good. And the improvement comes from, of course, the high result and also a lower working capital buildup this year. We normally have built up our working capital during the first half of the year, particularly Q1. So, and that's not strange.And because of them, the maintained good order situation and that there are still a lot of long lead times from suppliers and also the seasonal effect, inventory continue to increase slightly in the quarter. But as we continue, hopefully, to see gradual improvements in the supply chain, more and more of our companies will manage to reduce their inventory levels going forward in both quarter 2 and quarter 3, we think.Earnings per share grew in the quarter with 18%. So it's now up to SEK 2.06. And the increase is driven, of course, mainly by the operational results, the EBITA, and dampened somewhat by the increased finance net. And if you look at the development in a more longer-term perspective, the 3-year average is at 22% increase per year and the 5-year average is 21% increase per year.And finally, the debt situation. And the interest-bearing net debt increased to SEK 9.4 million, and the increase is mainly connected to the high acquisition pace, especially in quarter 4 and also now in quarter 1 when we acquired a few larger companies. Then, yes, the slightly dampened operational cash flow, of course, impacts also a little bit, I would say.But I think if you look at the net debt ratios, they are still stable, as you can see from the graph and not high from a longer-term perspective. And the net debt-to-equity ratio, 69%, and as I said then before, the net debt/EBITDA 1.8x. And if you exclude the earn-out liabilities, they were slightly lower than 1.6x at the end of the quarter.Good to mention as well is that we, during the quarter, renewed and also increased our unused revolving credit facilities to better align them with the size of company we now have become. So the total size of the unused guaranteed backup facilities are now SEK 5.5 billion.So if you summarize, I would say that the financial position is still strong, stable, relatively low debt ratios, and the maturity curve is balanced and also the guaranteed long-term facilities well balanced and aligned with the size of company we now are.So thanks. And then I turn back to you, Bo.

[Bo Annvik, executive]

Thank you. Some brief comments on strategic priorities. Maybe starting with the short term, I would say that all our companies are basically working with pricing power and protecting the gross margin, fundamentally important. We see that there are still price increases. There's still inflation and their job is to protect the gross margin and obviously, the bottom line. And I think they have a proven track record to do that in a good way, but that's obviously still high on the agenda.And the other area, I would say, is working capital efficiency and working with step-by-step bringing down inventory. We see that we are making progress in this area. And there are some dimensions, which makes this taking more time, obviously, inflation, but also, to some extent, currency translation effects. So step-by-step, we are improving capabilities and will drive down the inventory level. So I'm quite confident that we will see good results in this area in the coming quarters.In terms of more fundamental strategic priority, it's still on organic growth and improving our capabilities in terms of organic growth, also impacting our acquisition strategy, I would say, and then increasing our acquisition ambition. But still being very selective and making sure that we buy strong good companies, which will be value accretive going forward.We also have strategic priorities on a group level. This is not on a per company basis, but more on how we operate as a group with different types of priorities. And people development is very central. We are very active in terms of improving, I would say, our platform for knowledge sharing in a lot of different areas.We work in terms of sustainability broadly, but more particularly with decarbonization. I view that as a business opportunity. We are trying to step-by-step become more and more professional owners and be obviously both active, but still balancing the decentralization and keeping that true. And we are also working with the scalability dimension when we grow as much as we do, we need to be half a step ahead in terms of recruiting leaders, board members and facilitating this growth in a broad sense in a good way.And if we look more particularly in terms of our sustainability work, you have hopefully seen now that our sustainability report was published now for 2022, and we see positive trends in most of our KPIs. We have also, last year, added Scope 3 and started to work with that step-by-step in our companies. And this will obviously give us a better understanding of those emissions and how we should include that in our objectives and strategies going forward.Most of you know that we have joined the science-based target initiative. And also here, we are step-by-step understanding more about this and how that will be integrated into our objectives and ambition levels.We have singled out the environment, the climate as being the most prioritized area. And right now, we have actually launched a new quite broad and comprehensive climate training for all our companies.That basically concludes the presentations, and it's time to basically summarize what we have said and what we want you to take with you from this presentation.So it's a new record quarter with continued high profitable growth. The demand remained high and stable and improved a bit sequentially organically, but there is still some variations between our companies, obviously. We had a really strong sales situation and profit growth with a record EBITDA margin level for the first quarter.We have a large, high-quality order backlog, and this gives confidence for sales and earnings in the near term, although we obviously understand that we have challenging references. We have made 4 acquisitions so far in 2023. We have added SEK 655 million of top line and on an annualized basis. And we are still working with a good pipeline with a lot of interesting projects.And we are also, as a management team and also broader than that, working with our strategic platform to step-by-step strengthening that, and this will add to our long-term sustainable profitable growth.And by that, I say thank you for listening, and I think we open up for Q&A.

[Operator]

[Operator Instructions] The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A couple of questions. Firstly, on orders, is it possible to give any flavor on how the order intake progressed during the quarter and whether you have seen any changes whatsoever month by month or especially when entering Q2 here?

[Bo Annvik, executive]

I would say it was stable through the quarter, strong start in January and then it held up at a good level through the quarter. And what we have seen so far in April doesn't sort of differ from this year.

[Carl Ragnerstam, analyst]

And also, if you could give any flavor on the organic development, if you try to look at the solely at infra and the construction companies, both from a perhaps a sales point of view, but also orders during the quarter. I mean is it that demand is still holding up quite well from the fact that you might have long lead times in some projects, while you see that orders start to contract a bit? Or how should we look at that division or that -- and the market, I'd say?

[Patrik Johnson, executive]

Well, it's always a good one. It's always a little bit difficult when it comes to Indutrade to give a very clear answer since it's a collection of individual companies. But if you -- if we start with infrastructure and construction, then for us as a group, construction is lower than the broader infrastructure part in terms of sales. And there are clear sort of upside, I would say, right now in infrastructure in some companies and a bit weaker in some companies. So it's a little bit mixed situation, but it's definitely not all negative.And the construction side is a little bit more generically negative. There can be some positive sort of single points here and there. But more generically, I think it's a decline in construction. But it's not a complete standstill in those companies either. I think it's probably good to remember that our companies -- the average size of an Indutrade company is around SEK 120 million, SEK 125 million. And for that size of company, there are still projects going on. There is day-to-day business. So there is never sort of a standstill completely but a bit weaker order book, I would say.

[Carl Ragnerstam, analyst]

And also, when you say that EBITA will continue to be good and grow over the coming few quarters, given your backlog, I mean, and orders, of course, what visibility do you actually have? And I guess when you say plural, is it Q2 and Q3, you referred to? Or do you also have decent conviction on full year 2023 as well?

[Bo Annvik, executive]

We have really good perspectives. Our order book is 3 months approximately, right?

[Patrik Johnson, executive]

Yes.

[Bo Annvik, executive]

So in that perspective, we have good grip on Q2. And some of these orders are not always delivered in a single next coming quarter. It could be a little bit longer lead time sometimes. So I think fairly confident for also Q3. Beyond that, obviously, a bit more difficult to assess the situation. So I don't know, Patrik, if you want to add anything.

[Patrik Johnson, executive]

If you look at the aggregated backlog, it's, as Bo said, been around 3, 4 months. So that's correct. But also in this case, it varies very much from company to company, where some companies basically have no backlog, but other companies have maybe a year backlog. And those companies with this slightly longer, they have, of course, confidence for their development more than 1 quarter, so.But aggregately, it's, of course, more difficult -- if you go 1 quarter, yes, it's a good visibility, 2 quarters it's okay, but then it's say, not super clear visibility.

[Bo Annvik, executive]

I think we are experiencing a situation now where a lot of General Engineering related companies are delivering strongly on their order books, as you've seen in the quarterly reports. And so that will, I think, continue for some time. And when their order books are normalized, we obviously come to a bit of a new situation where the economy is then and what the demand situation would be then and what is underlying demand and so on and so forth. So a little bit, I think tricky to say something beyond quarter 3 right now.

[Carl Ragnerstam, analyst]

And the final one from my side is perhaps on pricing. You mentioned that you continue to increase prices in many of your companies during the quarter. What magnitude are we talking about on aggregate level? And also if they were implemented during the latter part of the quarter, meaning that they had maybe a marginal impact on Q1, maybe more entering Q2 then? Or how should we look at pricing here?

[Bo Annvik, executive]

Yes, I wish I could be more clear on that, Carl, but it's extremely difficult to give you any numbers which are verified by really effects since you have 200 companies to work with, and they all have quite unique situations. So I can't give you any more guidance than that. They are, in general, good at protecting their gross margins, and they sell on knowledge, competence, quality products. So they have confidence. They don't sell on price, if I say so.But it's also, in general becoming more and more demanding to increase price than it was like a year ago when everybody has screened for products. So you need to argue, you need to motivate. You have situations where maybe some customers are becoming a little bit more frustrated with price increases and so on. So you need to balance being a partner and so on and so forth. So I think we will be able to protect gross margins, but not strongly increase gross margins.

[Operator]

The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

My first one is just on a comment, I believe you made in the report and also now during the presentation on the strong demand from energy-related customers. And in at least one segment, you also mentioned that this had a positive effect on profitability. So just kind of if we look at the remainder of the year and you see strength in certain segments and a bit weaker in others, could this on aggregate have a positive effect on mix for you in terms of profitability?

[Bo Annvik, executive]

Good question. Of course, we have a different profitability in different companies, but I don't think we have a -- if you look at the segments aggregately, I don't think we have a super big difference in the profitability in general. I think MedTech pharma might be slightly above the average. But I think the difference are not that big…

[Karl Bokvist, analyst]

Sorry, go ahead.

[Bo Annvik, executive]

No, it's probably difficult to give you any better guidance than Patrik did, so.

[Karl Bokvist, analyst]

And then you -- I appreciate your comments on your view on the coming quarters in terms of deliveries from the backlog. Do you think -- and also the comment on tougher comparables, do you think that if we continue to have a very good output on sales, it would still be tougher to get the similar organic throughput on earnings due to the various different factors affecting profitability now going forward? You mentioned the stable gross margins, but if there's anything else to add?

[Bo Annvik, executive]

No. But we are absolutely having the ambition to protect the bottom line and the profit margin we are at right now. And there is inflation, and our companies are obviously also experiencing inflation and it's becoming step-by-step broader and has become broader since some months now, I guess, from starting maybe out on the energy side to becoming more broad-based now to everything from salaries to rents and so on and so forth.And as I said, there is also a high activity level in terms of business development. So our companies obviously need to manage the cost base not only for sort of purchased goods, but also more of a general inflation. And I feel fairly confident that they have the ability and capability to do that.

[Karl Bokvist, analyst]

My final one is just on a comment in the report. I believe it was mainly related to U.K. where you said certain nonrecurring items. Would it be possible for you to clarify the magnitude of those numbers, if they are meaningful?

[Bo Annvik, executive]

Do you want to take that, Patrik?

[Patrik Johnson, executive]

If you take away those one-timers, I think that U.K. would have been on par with the margin, you can say.

[Bo Annvik, executive]

Last year's margin.

[Patrik Johnson, executive]

On par with last year's margin. So it explains sort of the decline.

[Karl Bokvist, analyst]

And are they related to profit improvement initiatives or an impairment or just to understand what's happening?

[Patrik Johnson, executive]

It's not impairment. So it's more related to operational where a couple of companies have made, call it, smaller restructuring, changing people.

[Operator]

The next question comes from Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Just very briefly, you talked about, Bo, high activity in all your companies, a lot of fares and selling activities, et cetera. How will you look at this? How is this visible in the sort of when you look at the companies? I think it's tricky to see from the group accounts that you see any sort of inflation on that particular item. Just interested to hear your view there?

[Bo Annvik, executive]

Yes, I'm not -- maybe Patrik answers that question better than I. But yes, I'm…

[Patrik Johnson, executive]

No, but what we see is when you look at the organic increase of sales and marketing costs, of course, we see those increase. And then in a discussion with the companies, we understand that it's mostly activity related rather than inflation at this point.

[Johan Dahl, analyst]

And is that -- should we read into it sort of that you're in your plans for this year, you're seeing this being sort of ramped up, I guess, in the remainder of the year as well as these activities normalize or?

[Bo Annvik, executive]

Yes, I think they have been step-by-step at higher levels. They didn't particularly increase dramatically in quarter 1. Now it has been a gradual increase since COVID and travel restrictions. So it's step-by-step increasing also. And then unfortunately, I think travel has been -- has become a bit more expensive than it were -- was pre-COVID. So that's also something to tackle.But at the same time, I think they are a bit smarter now. So there are less perhaps external traditional sales representatives traveling. There are more digital meetings and so on. So maybe all in all, it evens out in a fairly okay way.

[Patrik Johnson, executive]

I think if you look at the Q1 expense level, it's higher than last year. I think also during the first part of last year, we still had an increase of activity levels. So, the level we see now is higher than beginning of last year. And I don't think that, that level will not maybe increase dramatically, but it will not go down either. So it will be continued on a high level. But then you have, as Bo said, you have -- on top of that, you have also then inflationary effects. Things are getting more expensive; travel, exhibitions and also salaries. So maybe going forward, that will be the main sort of driver of a potential increase rather than even more activities.

[Johan Dahl, analyst]

Okay. Just a final question on order intake. With this normalizing supply chain, I guess your clients had fairly strong incentives last year sort of to place more long-term orders to safeguard deliveries, and that incentive is not with us today to the same extent. That would sort of imply that underlying activity, looking at the order intake, which increased 3%, that underlying activity is really stronger than the sort of 3% increase. Do you make any such conclusion looking at the order intake? Or is that sort of overanalyzing things?

[Bo Annvik, executive]

It's probably an interesting reflection to account for. But I'm not sure if that has any significant…

[Patrik Johnson, executive]

We know of a few companies, maybe 1 or 2 smaller clusters of companies where we have seen this sort of stock reduction in the supply chain, which have impacted the order intake. But to extrapolate that and say it's a big thing for us, I don't think we have that data, and we don't believe it really -- so it is there, but I don't think it's significant.

[Bo Annvik, executive]

I will say it's also so that a large part of our companies, they are, as you know, trading companies, and they deliver from their stock. So perhaps we keep a little bit more stock than that our customers keep the stock in terms of the components they buy from us, if I say so. So I don't think too many have a big stock of our types of components. They probably have a good partnership with our companies and depend on our service levels to a large extent.

[Operator]

The next question comes from Anna Widstrom from Handelsbanken.

[Anna Lindholm-Widström, analyst]

I just have one quick question, basically. Regarding the comments on continued increase in inventory levels, it's not really clear to me how the 3% organic growth in orders requires higher inventory levels from already high levels. Could you maybe give some additional comments on this?

[Bo Annvik, executive]

It could be, as you know, the supply chains have had and still have quite long lead times. So quite a lot of our companies might have order goods quite a long time ago and all of -- or finally, they are arriving to their warehouses. So it's a bit difficult to manage. And on top of that, as we said, there is an inflationary effect in the inventory, there is a currency effect in the inventory. So yes, I think those dimensions play in there.

[Patrik Johnson, executive]

Yes. And I think the aggregated level, it's a bit trickier to look at that because if you look at single companies, you have a lot of companies growing with -- still with double digit on orders. And they, of course, in their world, it's important to safeguard delivery service. So the average level is maybe difficult and not right to look at.

[Anna Lindholm-Widström, analyst]

If you have any comments on sort of your expectations going forward regarding the inventory levels? Do you feel confident that this is sort of stable and shouldn't be an issue? Or are you trying to get some companies to really look into this in a more intense way?

[Bo Annvik, executive]

No, I'm not at all satisfied with our capital efficiency and inventory situation. So as I said earlier, it's really a [audio gap] us as group management and also all the individual companies to step-by-step bring inventory levels down and has been so for a while. And we see signs of good progress now, and I am confident that the inventory levels will go down in the coming quarters.

[Operator]

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

[Bo Annvik, executive]

Yes. Then we thank you for your interest, your engagement, good questions. And hereby we end the call for today. Have a nice day going forward.