Investment AB Latour

STO:LATO B

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Investment AB Latour's interim report Q2. Today, I am pleased to present Johan Hjertonsson, President and CEO; and Anders Mörck, CFO. [Operator Instructions] I will now hand you over to Johan Hjertonsson. Please begin.

[Johan Hjertonsson, President, CEO & Director]

Thank you. Welcome to this conference call presenting the second quarter 2020 for Investment AB Latour. This quarter has been characterized by the ongoing pandemic and the turbulence it has caused in major parts of the world. Our holdings acted rapidly at outbreak with the employee safety as the first priority, but also to adapt our businesses to the new circumstances. We'll tell you more about this later on in the presentation.Our overall group structure is unchanged from last quarter. We have 2 major business lines, the wholly-owned industrial operations, consisting of 5 business areas and a long-term investment portfolio consisting of 9 listed holdings where we are the main shareholder or, in some cases, the main shareholders together with a partner. Then we go to the next slide. We have made a few transactions in the listed portfolio during the quarter. In May, we divested 7.8 million shares in Tomra, corresponding to 5.3% of the outstanding shares in Tomra. The divestment realized financial resources for new investments, but it's important to emphasize that we have continued full support of Tomra's long-term strategy in the same way as before, and Latour remains as the main shareholder in the company. In addition to the Tomra transaction, we have continued to increase our investment in Fagerhult and in Alimak. The value development of our investment portfolio reflects the overall stock market and decreased by 4.7% since the end of December compared to the SIXRX, which decreased with 4.1%. We are very pleased with our holdings' underlying development during the quarter, not least given the circumstances with COVID-19 all of the holdings have reported now for the second quarter and are all more or less affected by the pandemic with a negative organic growth, but has shown great resistance and have protected the profit very well. Until yesterday, the portfolio value has increased to almost SEK 68 billion, which means that the total return amounts to 7.7% so far this year compared to the SIXRX development of 4%. And we go to the next slide. During this quarter, our wholly-owned operations have primarily focused on keeping all employees safe and adapt the businesses to the fast-changing environment. The management teams have also put a lot of energy on trying to understand where the impact on the pandemic would hit the most. All of our businesses have been affected by the pandemic, but it's a mixed picture depending on market exposure and type of business. Our portfolio is well diversified, both in terms of geography and in terms of product and customers, which has mitigated the negative effects. It has been a challenging quarter, but the profit development is proof that we own very well-run companies with good management and dedicated employees. We had a 15% negative organic growth in orders in the quarter and an organic decline of net sales by 13%.The operating profit for the period decreased by 8% to SEK 474 million corresponding to an EBIT margin of 13.4%. Also keep in mind that the comparison year's quarter was a record quarter. So all in all, we are very proud of our development during quarter 2 with the full pandemic in play. The big question mark going forward is how the overall market will develop both in the short and long-term and how our businesses can make the most out of it. We continue to invest in our holdings, with product development, sales and marketing in our business areas to drive sustainable growth and further strengthen the positions of our operations. And we turn the page again. At the end of the first quarter, we temporarily shifted focus from acquisitions into handling the ongoing prices. Hence, no acquisitions was made during the second quarter. Our business development team has nevertheless continued its analytical work during this time and the pipeline of potential acquisitions is strong. We are looking forward to hopefully be able to report about interest in transactions finalizing during the second half of this year. Having said that, I hand over to you, Anders, to take us through the business area.

[Anders Mörck, CFO & Secretary]

Yes. So we start with the first business area on the next picture, which would be Caljan and as you know, Caljan is, to some extent, a project-oriented business. And for Caljan, the demand decreased somewhat during the quarter, but from a high level, and the order backlog is still very high. The e-commerce sector, which is an important customer sector is in good momentum, and we see a positive trend going forward. Caljan is mainly affected by the pandemic through postpone projects, which is the reason why net sales decreased by 23% in the quarter when a number of projects were postponed to the third quarter it's important to say that they were postponed, not canceled. The operating profit for Caljan amounts to EUR 3 million during the quarter with an operating margin of 12.5%. So we go to the next page, and there we see Hultafors Group had a weak start of the quarter due to the pandemic, but recovered very strongly from the end of April when net sales gradually increased again. Both product areas report good sales, thanks to the strong finish of the period, which were sales then in an organic decline with only, we can say, 3%, which is very interesting. Cost control combined with relatively strong net sales development contributes to an increased operating result of SEK 114 million. And that's an increase with 27% and then operating margin of 13.6%. Very good. And as before Hultafors Group, is still keeping high focus on the development of the sales organization and marketing, on product development and on digitization. And we shall also mention that Ole Kristian Jødahl, the former business area management of Hultafors Group has been appointed as CEO for our listed holding Alimak Group. Ole has been with Hultafors since 2017, and we are very happy to see him grow within the group, so we can keep him and wishing, of course, the best of luck. And a new CEO has been recruited to Hultafors, but the name has not been announced yet. We turn to the next picture, which is Latour Industries. And the Latour Industries is maybe the business area that is most affected by the pandemic with a large presence in Southern Europe. So some part of the Latour Industries' businesses have been severely affected. But anyway, in total, the business area is very resilient. Negative effects are also mitigated by the business areas or to say business unit. And for example, building automation is the least affected and shows a very positive development during the quarter. And also all business units finished the period in a strong way. Net sales, anyway, declined then organically by [ 13% ], which is quite much. But the operating profit anyway, amounted to SEK 48 million, which is strong for Latour Industries, the operating margin being 7.9%, a little bit lower than before. And we still expect, and we still believe that this business area will continue to improve its operational performance as we have communicated now for several quarters. And this trend was, however, grew in this quarter because of the pandemic, and fully understandable. But we'll come back. We turn page to the next picture, we go to Nord-Lock. And to Nord-Lock, the overall business is decreasing, but the negative effects, once again, then mitigated through the business areas as well as their disclosure on different markets. While demand was decreasing during the quarter in Europe and Americas, it was balanced by a recovered market. In Asia Pacific, net sales decreased by 18%, and the operating profit amounted to SEK 84 million, with an operating margin of 25.8%, which is very strong under these circumstances.Let's go to the next picture, where I'm -- Swegon. And also Swegon's growth is clearly affected by COVID-19, like the other program, we have a mixed picture. In the Nordics, we have had a very strong development, though the pandemic. While Southern Europe and U.K. were hit very hard by closed construction sites. And also good to say that North America developed very positively during the period. Net sales decreased organically by 12% in the quarter. Good cost control supported the result, which gave an operating result of SEK 201 million, with a strong operating margin at the same level as last year, 13.7% compared to 13.8%. And here, we have a message from the Business Area Manager, Hannu Saastamoinen has decided to step aside after 8 successful years. He is replaced on September 1 by Andreas Örje Wellstam, based in here in Latour and Swegon in 2010. And of course, we want to thank Hannu for all his efforts and great success during these years and wish Andreas also welcome in new role, which we think is very good. And it's also great to have been able to give an internal candidate the opportunity to pursue a career within Latour in competition with external candidates. Okay. We go to the next picture, and that is about the net asset value. And compared to the beginning of the year, our net asset value has decreased by 5.5% to SEK 127 per share at the end of June. At the same time, SIXRX decreased by 4.1%. Maybe we should say that, please bear in mind that our valuation of unlisted assets are just an indication of a prudent view of the value in a very difficult market climate, where quality companies actually now on the stock markets are rewarded with very high multiples. And these very high multiples are not reflected in our indicative valuation. But as Johan mentioned before, we like to think at least that our companies are quality companies. Yes. So that comment is taken well. Our share price at the end of June was SEK 169 per share, which corresponds to a premium to our net asset value of 33%, and then compared to our indicating net asset value. Yesterday on 19th of August, the net asset value had increased to SEK 140 per share. And the share price on the same-day closed at SEK 193.90, which gives a premium in the same way to value of assets then of 38%. Latour's consolidated net debt decreased during the quarter from SEK 8.6 billion to SEK 6.3 billion due to the sale of Tomra, the biggest, most important explanation. And the net debt corresponds to 7% now of the total market value of our investments. Now Johan, back to you.

[Johan Hjertonsson, President, CEO & Director]

Thank you, Anders. Next page then on our financial targets. This picture summarizes our financial targets. During the last 12 months, we have had a growth of 10.3%, EBIT margin of 13% and return on operating capital of 14.1%. We have met all 3 criterias during a long string of consecutive quarters now. But this quarter, we fell just below on the return on operating capital target due to the decreased results in combination with high acquisition activity last year. And then we turn to the last page. We are not changing the long-term ambition for Latour, which is to grow our operations, both organically and through acquisitions. Latour's financial strength enabled us to continue doing this even during a pandemic which is affecting the world right now. We believe that we can come out of this crisis even stronger and to do so we continue with all strategic initiatives in our companies as we grow. That concludes the presentation from Anders and my side. Thank you all. Then we open up for Q&A.

[Operator]

[Operator Instructions] And our first question comes from the line of Joachim Gunell from DNB Markets.

[Joachim Gunell, Junior Analyst]

So on the business momentum for each of your business areas, can you talk a bit more of what you're seeing going into Q3? I mean we're almost halfway through the quarter.

[Johan Hjertonsson, President, CEO & Director]

Obviously, in general, and then Anders should start with quarter 2. Obviously, in the beginning of the quarter, it was a very negative dark development and that eased up at the end of quarter 2 with actually pretty good momentum in June, and that has also continued into Q3. Having said that, it is unclear, as we write in the report, it is unclear how the pandemic will play out in the autumn. And so we -- I think the classic saying, hope for the best and plan for the worst, is really how we operate right now. It's impossible to say how this will play out. But so far, positive trend at the end of Q2 has continued into the early part of Q3. Having said that, it's not an indication of how this will play out in the second half. Because we don't -- we just don't know. Anders?

[Anders Mörck, CFO & Secretary]

So it's very difficult, and a big question mark for 2021. We hope for the best there as well.

[Joachim Gunell, Junior Analyst]

That's clear. And a question then for, perhaps, Anders, more particularly. Can you quantify the effect from utilizing government schemes and what impact that has had on the industrial operations EBIT and perhaps what holdings have utilized such aid?

[Anders Mörck, CFO & Secretary]

Yes. If you want the exact amount, in total, Q2 was affected by SEK 50 million, and whereof SEK 10 million was in Sweden. So it's actually in the report, but it's on the back side. So you haven't read the last pages yet, Joachim, but that's fully understandable.

[Joachim Gunell, Junior Analyst]

I'll make sure to delve into those details later on. But coming back to what you said, Johan, also, I assume there's still some SEK 3 billion left within your MTN program, right? And you talked about this during the first half of the year, but have sellers and buyers' expectations started to come back to converging a bit more as visibility returns?

[Johan Hjertonsson, President, CEO & Director]

Yes, to some extent, but I wouldn't say the M&A market, so to speak, has fully normalized. It's quite turbulent out there, and it's not always that sellers and buyers expectations are on the same level right now. I would say, discrepancy is slightly longer than normal. But it's much better today than it was 2 months ago.

[Joachim Gunell, Junior Analyst]

Roger that. And just a final question for me then. I mean, being on the Board for your holdings in the investment portfolio and the opportunity for a second dividend installment from you later this year. Can you talk a bit about what are the moving parts here? And what different kinds of scenarios do you see?

[Johan Hjertonsson, President, CEO & Director]

I mean, it's -- in each company, in each different company, it's the Board's decision to do that. And we haven't communicated that we plan to come back this fall. We will come back with an ordinary dividend next spring, and we will wait and see how this plays out during the fall. I think that's what I can comment on at the moment. Right, Anders?

[Anders Mörck, CFO & Secretary]

Yes. It's up to each quarter.

[Johan Hjertonsson, President, CEO & Director]

Yes.

[Operator]

[Operator Instructions] And we have a follow-up from Joachim Gunell from DNB Markets.

[Joachim Gunell, Junior Analyst]

You're stuck with me, guys. So it seems there are no other question outside. I'd like to take the opportunity to ask. So on the Tomra investment, I mean, like most of yours, it's been very value accretive. But the divestment in May, I mean it could signal to some extent that you're a bit concerned about valuations in the market. And with that in mind, what is your take on using your own valuation to potentially raise equity?

[Johan Hjertonsson, President, CEO & Director]

So we have no such plans.

[Operator]

And as there are no further questions registered at the moment, I will hand over back to our speakers for the final comments. Please go ahead.

[Johan Hjertonsson, President, CEO & Director]

I think that's fine. Good questions from Joachim. I think we've presented well in a condensed format, the report. There's more to read on details, of course, in the published report. And having said that, I think we're finished, Anders, and hope to see you, so to speak, again in the quarter 3 report.

[Operator]

This now concludes today's webcast. Thank you all for attending. You may now disconnect your lines.