Investment AB Latour

STO:LATO B

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the Investment AB Latour Interim Report Q3. [Operator Instructions]Today, I'm pleased to present Johan Hjertonsson, President and CEO; and Anders Mörck, CFO. Speakers, please begin.

[Johan Hjertonsson, President, CEO & Director]

Thank you. Welcome to this conference call presenting the third quarter 2020 for Investment AB Latour. The quarter was, of course, marked by the pandemic, but during the summer period, markets started to open up and the demand increased, again, which is reflected in our very strong third quarter.Sitting here today, however, we can sadly say that we are now in the second wave of the pandemic, which, of course, in some way, will affect us during the fourth quarter. We're closely monitoring the development, both here in Sweden and internationally, and we are prepared to once again take action when needed.Our overall group structure is unchanged from last quarter. We have 2 major business lines, a wholly owned industrial operations, consisting of 5 business areas; and our long-term investment portfolio consisting of 9 listed holdings, we are -- where we are the main shareholder or, in some cases, the main shareholders together with a partner.Going to the next slide. No major changes was done in the listed portfolio during the quarter. We have, however, continued to increase our investment in Fagerhult by acquiring another 1 million shares. And at the end of the period, our shareholding in Fagerhult was 47.8%.The value development of our investment portfolio reflects the overall stock market and increased by 9% since the end of December last year and compared to the SIXRX, which increased 8.2%. We're still very satisfied with the underlying development in our holdings, given the circumstances. And many of them are showing really strong results. Others have had significant negative organic growth in net sales, but has shown a good resistance and protected their profits well.Yesterday, the portfolio value was SEK 66 billion, which means that the total return amounts to 5.5% so far this year compared to SIXRX development of 7.1%. Next slide, please. Coming into the summer period, markets started to open up and demand increased. But like I said in the beginning of this presentation, we are now in the second wave with major risks for new closedowns and limitations. No one can predict the effects that we're facing going forward.This is, of course, a risk, but also a possibility for us. We are prepared to readjust and adapt our businesses to the new conditions to make the most out of it.During the third quarter, our businesses continued to focus on keeping all employees safe, and also gradually began to return to somewhat normal activities. Our business areas have implemented significant measures to mitigate the effects of COVID-19 just like after the second quarter this year.I can conclude that we've handed the challenges very well so far. Dedicated management teams and committed employees, combined with an overall cost awareness, have protected the net profit, and we report a very strong result for the period.Total organic growth in orders was 10% and growth in net sales was 11%. We had a 2% negative organic growth in orders in the quarter and an organic decline of net sales by 1%.The operating profit for the period increased by 29% to SEK 602 million, corresponding to a very strong EBIT margin of 16.6%. Needless to say, we are very happy and proud of these figures. We continue 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. We also currently maintain a high rate of investments in our factories.Sustainability and digitalization are also very important aspects to support further growth. We have, though, several initiatives to support our holdings in these areas and also implemented additional sustainability KPIs that apply to all wholly owned operations.Next slide, please. We have increased our acquisition activities during the quarter, and the pipeline of potential acquisitions is strong. No transactions were finalized during the quarter. As on November 2 Swegon acquired the German SLT Schanze Lufttechnik. SLT is a supplier of the fuses in Germany with the engineering capability to provide compact and customized solutions for its customers.The company had a total net sales of EUR 10 million in 2019 with 70 employees. We are looking forward to hopefully be able to report about more interesting transactions finalizing during the fourth quarter.And having said that, I hand over to our esteemed CFO, Anders Mörck.

[Anders Mörck, CFO & Secretary]

That's a good presentation, Johan. Thank you so much. And we go to the next picture. And we start with the first business area to be commenting that is Caljan. And they had a record quarter during the third quarter and backlog is still on a good level coming into the fourth quarter.The e-commerce sector is still in a very good momentum, and the trend is still positive going forward long term. But as for all other businesses, the climate is more uncertain now, and we are in the middle of the second wave of the COVID-19.Net sales for Caljan increased by 26%, and we are, of course, very pleased with the excellent profit development and the operating margin of 19.2%. We keep on investing in Caljan's expansion with a new factory in Latvia and the establishment of a factory in the U.S.Let's go for Hultafors. And Hultafors had a really excellent development since the weak start that they had in the beginning of the second quarter. Both product areas and all main markets recorded growth in the third quarter. CLC in North America won a major contract with important retailer loads that contributes strong -- to the strong sales in North America. In total for Hultafors net sales grew by 32% in the quarter, of which 14% is organic, very impressive. And good cost control, combined with a high net sales development, contributes to the strong operating results and the operating margin net of 17.1%.And as before, Hultafors continues to focus on the development and investing in sales organization and marketing and also on product development and digitalization.Let's go for Latour Industries on the next page. And as you might remember, Latour Industries was the business area that was most hit by the pandemic in the second quarter. Given the circumstances, we are impressed by the quick recovery and the excellent third quarter that we now can show.Net sales, however, declined organically by 9% in the quarter, and the operating profit increased to SEK 87 million with a strong operating margin of 12%. And that proves that the underlying profitability in Latour Industries is there.We go to Nord-Lock. Nord-Lock's overall business is decreasing as a result of the pandemic, but also due to currency effects. However, Asia Pacific is growing organically, which mitigates the negative effects somewhat and a slight recovery in the business was also reported and seen at the end of the quarter.Net sales decreased by 12% during the quarter. The operating profit amounted to a strong SEK 83 million and that was also affected by SEK 5 million extra costs from relocation of the production facilities in the Pittsburgh, U.S.A.The operating margin amounted to 26 -- sorry, 27.6%, very strong. And we are also glad to report that we have won or -- more likely won important reference projects with the known concept of load sensing with SMART technology. Good to see that the development is going on though the situation is as it is, sorry.Let's go for the last business area, Swegon. And Swegon's growth is, of course, affected by COVID-19. But as for many other holding, it's a mixed picture between different markets.The Nordics and North America have developed well, but the picture varies for other markets to a high degree. Net sales decreased organically by 8% in the quarter. A number of internal efficiency projects and low general spending contributed to a very strong operating profit for the period and the operating profit was SEK 217 million, with an operating profit margin of 15.8%, really strong.As Johan mentioned before, Swegon acquired a German SLT this week, and we are happy to welcome them, both to Swegon and to the Latour Group. And all in all, we are very happy with the results achieved by Swegon and by all business areas during the third quarter.Let's go to the next picture, which shows the net asset value. And the net asset value has increased by 9.8% during the year to SEK 128 per share at the end of September. And SIXRX, the comparable index, has increased by 8.2% during the same period. The general stock market development was very strong during the both second and the third quarter with high valuation that, to some extent, is reflected in our multiples that we use in our own valuation of the net asset value.But please bear in mind that our valuation of unlisted assets is just an indication of a prudent view of the value in a very difficult market where quality companies are rewarded with very high multiples that's not to the same extent reflected in our indicative valuation.Our share price at the end of September was SEK 211 per share, which corresponds to the premium of our net asset value of 43% at that time. And yesterday, the net asset value was SEK 143, the share price SEK 224 and the premium 57%. It's quite a figure.Latour's consolidated net debt decreased during the quarter from SEK 6.3 billion to SEK 6 billion because of the cash flow actually in the business and no acquisitions. And the net debt corresponds to about 6% of the total market value.Okay. Now, Johan, I think it's back to you, fantastic CFO -- so sorry, CEO.

[Johan Hjertonsson, President, CEO & Director]

Thank you, Anders. Great review of our business areas. Financial targets. This picture summarizes our financial targets. During the last 12 months, we have had growth rolling 12 months of 95%, EBIT margin rolling 12 months of 13.6% and return on operating capital of 13.8%.We have met all 3 criteria during a long string of consecutive quarters. But currently, growth just fell under the long-term target of at least 10%. And also the return on operating capital where it's 15% due to the higher acquisition activities in 2019 and in the beginning of this year. Still a very good performance, I think, considering that we have 2 full quarters with the pandemic in those rolling time -- long summers.And then we have the last slide. Latour is a sustainable investment company and our long-term ambition, which is to grow our operations, both organic and through acquisitions, is not changing. Our financial strength enables us to continue investing in our existing holdings as well as carrying out acquisitions to support further growth.We will continue to do so even during the 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 long-term initiatives in our companies as before.Having said that, I would like to thank you very much for listening in, and I think 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 I was wondering perhaps if you could provide a bit more color of your thinking here. I mean you've been very swift to take out costs in the industrial operations and your business areas, but how should we think about how these costs will come back as you're going to, say, accelerated growth into 2021, and I mean, now with the second wave of the pandemic as well? So how are you preparing your subsidiaries for that based on the learnings from, let's say, Q1 this year?

[Johan Hjertonsson, President, CEO & Director]

Yes. Let me actually start and you can fill in and add, Anders. Yes, it's true, we've adjusted the cost level quite swiftly, and we're actually quite proud that we've managed to do that. However, having said that, the strong result is not only because cost control at the group, for instance, it's also because of very high lead time third quarter, for instance, it's also a very nice gross margin development.I would say the result in the quarter is a mix of lower cost than we do prepare and adjust for the pandemic, but it's also long-term operational things that pay out in a quite good way. And we protected and continue to have cost and investment in long-term areas that we have said toward development and marketing and so on. And that's important to not forget.And having said that then, I think going into the next year and hopefully, this pandemic will vanish sometime during next year, some costs will come up, of course, to a more normalized level, but we think the business starts to normalize on that sense, but that goes hand in hand. That's how we look at that. Anders, if you can add on that?

[Anders Mörck, CFO & Secretary]

No, no. I think that's a good summary.

[Johan Hjertonsson, President, CEO & Director]

Thank you, Anders, for being safe.

[Joachim Gunell, Junior Analyst]

No, that's clear. Makes sense. Yes, I mean it's impressive underlying operational performance, obviously, despite the challenging end market here. But perhaps onto business momentum in Caljan, very strong organic growth, 29%. Can you elaborate a bit on how you think about that going into Q4? I mean, have the trends we saw in Q3 continued here into the first month of Q4?

[Johan Hjertonsson, President, CEO & Director]

I can't tell you and it's soon approaching 1 year with us in the group. I think we started the integration of Caljan for 1st of December last year, in fact pretty close to 1 year that Caljan has been with us. And I would like to underline that I am very happy at this time and I am very happy about Caljan's performance and how they have come into the group. And of course, I think we touched upon that in the Q2 conference call that Caljan is very nicely positioned in a very strong market sector, which is the e-commerce, and that has, of course, accelerated during the pandemic.So we're quite confident about that, and I'm very happy with that. So long term, we are very positive with -- towards Caljan development.

[Joachim Gunell, Junior Analyst]

All right. But I know Caljan has only been consolidated into your numbers for just a few quarters. But if I look on their historical numbers, I mean, if we take an average growth rate in Caljan, it has been, I think, 20% or less or even beyond that? So are we seeing here, I mean, Caljan accelerating organic growth towards those, say, levels on an annual basis, is that fair to assume? Or is this more, say, one-time effect accelerated by, say, more e-commerce during the pandemic?

[Johan Hjertonsson, President, CEO & Director]

I think it's a long-term quite strong effect, but it's very hard to answer exactly that question, Joachim, because it depends on how the pandemic plays out and everything. I mean you can actually say that demand for Caljan products has increased and increased frequently due to the pandemic, but it also manufactures all these products we ship them. And that has not been this year. On the contrary, that has been more difficult during the pandemic.

[Joachim Gunell, Junior Analyst]

And for Anders, just to make sure here with SEK 6 billion net position, where are we here in terms of financial muscle within your MTM program? Is it still somewhere in the range of SEK 3 billion?

[Anders Mörck, CFO & Secretary]

Yes, the MTM program is SEK 3 billion. And we -- of course, we have facilities on the side of MTM program as well. So I would not say that financing is an issue if we should come across any investment opportunities. And we also always have worked so that we have the muscle that we need. But we also have, to some extent, a limitation. And I would say somewhere between SEK 5 billion or SEK 6 billion would be the investment, well, not opportunities, but how much we can take on customer to customer with all of the limitations that we have from the Board limitations with the net position.

[Joachim Gunell, Junior Analyst]

All right. No, I mean glad to see that you've resumed your M&A agenda here with recently announced acquisition. Would you say that this is a common trend for all of your subsidiaries or business areas that, okay, visibility is returning somewhat, will this -- it is a signal that your systematic M&A activity should resume in other business areas as well?

[Johan Hjertonsson, President, CEO & Director]

Short answer is yes.

[Operator]

[Operator Instructions] And as there are no more questions registered, I now hand back to our speakers for any closing comments.

[Johan Hjertonsson, President, CEO & Director]

Okay, that's fine. And thanks again, everybody, for listening in, and we will be looking forward to speak to you again in about 3 months' time. Thank you.

[Operator]

This now concludes our conference.