Investment AB Latour

STO:LATO B

Earnings Call Analysis

Strong performance amid challenging markets with growth and successful acquisitions

In the third quarter of 2024, Investment AB Latour demonstrated resilience, achieving a 2% increase in net sales driven by a mix of organic and acquisition-related growth across its subsidiaries. Despite a subdued business climate, order intake rose by 3%, underpinned by acquisitions reflecting their strategic focus on value and market share. The company maintained a healthy operating margin of 14.9%. Notably, they have executed six acquisitions year-to-date, projected to add SEK 2.4 billion in annual net sales. Looking ahead, growth forecasts remain cautious due to economic conditions but signal optimism for future profitability.

A Resilient Quarter Amid Economic Challenges

In the third quarter of 2024, Investment AB Latour reported a positive performance despite a subdued economic environment. The company’s order intake showed an organic growth of 2%, with net sales up by 2% as well. The CEO, Johan Hjertonsson, noted that while demand is generally weak, particularly in construction and real estate, some sectors continue to perform well. This indicates that Latour is adapting effectively to the prevailing market conditions.

Strong Financial Performance

The EBIT for the quarter reached SEK 927 million, despite minor mix effects across various business areas. Latour maintained a commendable operating margin of 14.9%. The strong gross margin further underlines the efficiency of their operations, showcasing solid cost control even in a sluggish market. The company aims for a long-term growth strategy, targeting an operating margin of over 15% while achieving a return on operating capital exceeding 15%.

Robust Portfolio Performance

Latour's total return from its listed portfolio was impressive, with an annual growth of 18.2%, surpassing the SIXRX index’s return of 11.4%. The total value of the portfolio stood at SEK 92.2 billion as of November 5. This performance reflects Latour's ability to effectively manage its investments and generate substantial returns, even amidst economic uncertainty.

Active M&A Strategy and New Investments

The company has been proactive in its mergers and acquisitions efforts, completing six acquisitions this year, which collectively contributed an annualized SEK 2.4 billion in net sales. Notable acquisitions include HC Groep in the Netherlands focused on indoor climate technology, and QEL in Canada, strengthening its North American operations. These acquisitions align with Latour’s strategy to diversify its portfolio and establish robust market positions in critical sectors.

Sector-Specific Insights and Future Outlook

Although the construction market is showing signs of weakness, Latour’s sectors, specifically Swegon, are benefiting from demand in cooling and heating. Swegon's order intake grew by 5% and net sales increased by 7%. Despite some fluctuations, all seven of Latour’s wholly-owned business areas reported positive organic growth in Q3. The company expects this positive trend to continue, with management indicating that they foresee a gradual recovery in the market as 2025 progresses.

Financial Metrics and Debt Management

As of the end of September, Latour's net asset value increased to SEK 216 per share, reflecting a significant 36% premium over their stock price. However, net debt rose from SEK 11.6 billion to SEK 13.4 billion, mainly due to acquisition activities. Nonetheless, net debt remains only about 9% of the market value of investments, providing headroom for further acquisitions, showcasing prudent financial management even amidst growing liabilities.

Earnings Call Transcript 2024-Q3

[Katarina Rautenberg, executive]

Good morning, and welcome to the presentation of Investment AB Latour interim report for the third quarter 2024. The first part of the presentation will be in listen-only mode and we will then open up for questions. [Operator Instructions] So with this, I hand over to our CEO, Johan Hjertonsson and CFO, Anders Morck.

[Johan Hjertonsson, executive]

Thank you very much, Katarina. And once again, very welcome to our Q3 report conference for this year 2024, very welcome. I'm here together with, as said, Anders Morck, our CFO. And if we go to the first slide, where we show our group structure. As you can see, the structure is completely unchanged compared to last time we talked.

We had a good third quarter despite the challenging business climate at the moment. Order intake and net sales are growing organically and profitability is at a healthy and strong level. The general demand is fairly subdued in many markets that we operate on, but it varies between the regions and industries. A weaker demand for businesses with exposure to the construction and real estate markets but the picture is mixed as we will come back to later.

And if we go into the -- yes, the total return for the listed portfolio, right, exactly. No change within the listed portfolio during the quarter. Earlier this year, we increased our holding in [ CTEK ] from 33.0% to 33.5% of the capital votes. We also participated in HMS Networks new share issue with our pro rata share which was part of the financing of the acquisition of Red Lion Control in the U.S.

Value development, 17% during the year, whereas SIXRX increased 15.2%. And until yesterday, November 5, portfolio value was SEK 92.2 billion, total returns -- return amounts, thus, to 18.2% so far this year, compared to SIXRX so far this year of 11.4%.

And if we continue then into next slide, the wholly-owned industrial operations, if I comment on that. And as I said, the order intake increased by 3% during the quarter. The organic increase was actually 2%. The overall demand is fairly subdued on the markets that we operate on due to the weak business climate. I don't think it's going to be that much weaker than where we are, but let's see, the future will tell, but it will be a fairly prolonged slower cycle is, I think, the best guess. In general, the construction and real estate markets are so far most affected by the slowdown.

However, our 3 largest business areas with exposure to these markets still show a relatively positive development. We are most likely gaining market shares in these areas. And net sales has increased by 2% and organic is plus 1% in the third quarter. And the quarterly EBIT amounts to SEK 975 -- SEK 927 million, which is somewhat affected by slightly negative mix effects in between the business areas.

We have good cost control, and the gross margin is strong, thus relating in an operating margin of 14.9% in the quarter. So overall, we're satisfied with the outcome of the third quarter, given that we are in a slow economic cycle at the moment, as I said.

And then we go into the next slide, and we have the acquisitions during 2024. And we have a high pace within the M&A area right now. We made 3 acquisitions during the quarter. This has been announced also separately. Swegon, we acquired the Dutch company, HC Groep, a market leader in the area of indoor climate technology with a strong position on the Dutch market, with high-end products offering -- with higher product offerings to 10 different -- with 10 different business labels, covering the entire buildings indoor climate systems, including building automation.

The company have 386 employees and a net sales in 2023 amounted to north of EUR 100 million. Bemsiq acquired a Canadian company, QEL that will strengthen Bemsiq's footprint even more in North America. QEL has a full suite of indoor air quality and refrigerant gas detection products. The company has 15 employees and the net sales in 2023 amounted to CAD 8 million.

And then Innovalift signed an agreement to acquire the Turkish company, Arkel and closing is expected later this year. And the acquisition of Arkel will give Innovalift a leading position expanding its geographic reach and complement it's product portfolio components for elevators. Arkel is a leading Turkish manufacturing of components for elevators for both new installations and the growing modernization segment. The company has 410 employees and net sales in 2023 amounted to EUR 62 million.

And earlier this year, we finalized 3 transactions; BS Tableau, the Innovalift; Eelectron and [indiscernible] Bemsiq; PBL and Condor, Nord-Lock Group. It all sums up to 6 acquisitions so far this year, all with the profit level, well in line with Latour's wholly-owned operations and in total, adding about SEK 2.4 billion in net sales on an annual basis, and we're very happy with that, that we found the 6 fantastic companies that are now part of our family. And as I said, with very good profitability as well.

Last but not the least, Latour Future Solutions have made 2 investments this year and now the whole -- now -- now holding a portfolio of 9 sustainability-focused Swedish companies, very exciting.

And having said that, I should hand over to Anders. But I think, the slide on the listed holdings, right? We should go back to that, No. Okay. We skipped that then for this time. Okay. And then I hand over to Anders.

[Anders Mörck, executive]

Thank you so much. And now we're going to talk about our different business areas, and we start with Bemsiq growth. The order intake for Bemsiq grew organically by 5% in the third quarter. Building Automation continues to show a stable development, while the metering business is a bit more volatile when it comes to the order intake. The total growth in net sales was 29%, explained by acquisition, but 10% were organic growth. This is a very strong performance then considering this challenging market that we have within real estate and construction industries. .

The operating profit amounted to SEK 121 million with a strong margin of 24.7%. And this is despite several ongoing initiatives within product developments and completed recruitments during the year so far. So far, we see that Bemsiq have finalized 2 acquisitions, both of them performing according to plan and adds 21% acquired growth during the quarter. So very well done, Mikael and his team.

We turn the page and talk a little bit about Caljan and as you know, Caljan's customers have been and still are much more conservative when it comes to capital expenditures. The pipeline is slowly increasing, and the order intake is now exceeding last year by 25%, which, of course, is very positive, but this is still on very low levels.

And as an effect of the lower order intake, the net sales is below the corresponding period last year. Despite the lower volume, Caljan really shows a good gross margin and good cost control, leading to actually an increased operating profit with an operating margin of 15.7%. Very well done, Henrik and your team, this quarter as well. We go to Hultafors Group. And Hultafors is of course also in this market with a challenging market condition. The top line reduced by 4%, half of it, however, was explained by currency.

The gross margin is just below the corresponding period last year and the operating profit decreased to SEK 227 million, with a margin of 14.5% which is still very good during the -- under the circumstances. We are continuously investing in product development, sustainability and digitalization to strengthen the company going forward for the long term. So very well managed by Martin and your team.

We go for the next business area, which is Innovalift and the order intake is still hampered by the weaker construction market, especially when it comes to the installations of platform lifts in China and Europe. Consequently the divisions for lift manufacturing and installation and services are developing a bit slower H.owever, the components and modernization division is reporting a good growth in this market.

In total, the net sales is 4% behind last year and the gross margin is improving step by step. And so are the operating results, which increased to SEK 72 million with a margin of 12.1%, and this is a nice improvement, but we can see that there is a room for further improvement going forward. So the only way is up, if you know what I mean.

Innovalift has, as I said before, signed an agreement to acquire Arkel in Turkey. The transaction has not yet been finalized. It's slow, handled by the authorities in Turkey, but we expect it to take place during the fourth quarter. When completed, this will be a major addition to Innovalift so all in all, it looks very good for Innovalift and very well done, Andrea and team.

And we go to Latour industries where the picture is a bit mixed for the remaining businesses after we separated Innovalift from this business area. The underlying demand is good for [indiscernible], and it's also good for MAXAGV. Other businesses like LSAB is depending on the wood and mining industry and is quite weak right now. In total, the net sales grew 4% and 5% organically. But the operating profit is suppressed by the business units with lower net sales during the quarter. So it reduced to SEK 20 million.

Latour Industries is now focusing on continuing finding newer platforms to make new business areas for Latour in the future? Tina Hultkvist was appointed a new CFO from 1st of September. Many thanks to our former CEO, Björn Lenander, and well done so far, Tina and your team for taking on this job to build new platforms going forward?

We go to Nord-Lock. The business climate is gradually becoming more tough for Nord-Lock but even though Nord-Lock is in line with last year, both in terms of order intake and net sales, which is quite strong, I would say, currency effects has, however, had a negative impact on both net sales and profit. So the EBIT comes in a bit lower than last year with an operating margin of 24.1%.

Here, we have Daniel Westberg as the new CEO from 1st of August when he took over after Marcus Lundevall that held the position as acting CEO for a number of months. And Marcus is now being back in the CFO position. So very well done, both Daniel and Marcus and your team. And we go to the last but not the least business area, Swegon.

And considering the business climate with its exposure to real estate and construction industries, Swegon is overall performing very well. Order intake grew by 5% in total, very much driven by demand in cooling and heating and within services. The net sales grew 7% in total and 4% organically. There is still a mixed picture between segments and geographies, of course. And thanks to a strong gross margin and good cost management, EBIT came in strongly at 13.7% with an increased EBIT also in absolute terms.

And as Johan said before, Swegon acquired HC Groep in Netherlands, and this company is included in the figures from 1st of September. Very well done, Andreas Örje Wellstam and your team, and we leave the business areas and continue with the net asset value, that increased from the beginning of the year to SEK 216 at the end of September.

And if we look at yesterday, it was SEK 218 per share. And this constitutes a premium if we compare it to our share price yesterday of 36%. The consolidated net debt increased during the quarter from SEK 11.6 billion to SEK 13.4 billion. And this is, of course, explained by acquisitions in the period. The cash flow during the prior year was strong.

And this gives us a net debt that corresponds to about 9% of the market value of our investments, leaving a nice headroom for further acquisitions. Thank you so much. And I would like to leave back to Johan.

[Johan Hjertonsson, executive]

Thank you, Anders. We will soon comment the financial targets, but I would also like to comment a little bit on our listed holdings. And a majority of our companies that are listed are now reported in Q3, and the picture of a weaker business climate is consistent also there.

Despite this, several of our listed companies are maintaining or actually increasing its profitability with margins on good levels overall, a really good job in the listed holdings. Also this morning, actually, at the same time, as we released our report, also Securitas released its support and Securitas is making good progress in obtaining its 2025 margin target of 8%. So a fantastic report from Securitas also this morning.

So great to see. And the acquisition activities are very high in the listed holdings. I'd like to point out. One example is Tomra, who after the reporting period, acquired c-trace, a German leader with digital waste management solutions. With this acquisition, Tomra can broaden its offering in the waste management and recycling area, a very exciting acquisition there.

And in general, when we talk about our listed companies, we think that the Board remuneration has to increase, and I will come back to that in a second. So having said that, our financial targets, as you know, is to grow more than 10%, to have an operating margin of more than 15% and return on operating capital of more than 15%. So during the last 12 months, we had a growth, slightly negative growth on the last 12 months of minus 0.6%.

EBIT margin of 14.1% and return on operating capital of 15.1%, This is an outcome we're actually pleased with. The targets are to be seen over a business cycle and are long term, and we are right now in an economic downturn.

Growth is lower than before, but considering the slowdown in the economy and also that our M&A activities during 2023 were purposely on a low level, we haven't added that much acquired growth. But as I just explained here earlier, obviously, going forward, this will increase quite significantly in terms of growth from M&A. And the EBIT margin is strong and the return on operating capital is satisfying.

Great. So if we move on then to the next slide. Latour is a long-term sustainable investment company and a responsible only creating long-term value for our shareholders. In our wholly-owned operations, we continue to invest with a forward-looking mindset, regardless of economic climate to enable future growth and profitability. And at the end of -- and at the end creates value for our shareholders going forward.

To create value on our listed holdings, Latour plays an important role in the nomination committees. It is truly in, both, ours and all shareholders' interest that the companies have the best possible boards, which we, as active principal shareholders can help ensure in the nomination committee work.

In order to attract the best possible board candidates, both domestically but also internationally, we want to significantly increase the Board remuneration to levels that are competitive on an international arena. We believe that this is crucial to reach a broader circle of candidates and in the end, ensure a high quality of competence in our boards. And that's important for our quite large international Swedish-based companies.

So having said that, we thank you very much for listening in, and we now open up also for questions, Q&A.

[Katarina Rautenberg, executive]

[Operator Instructions] The next question comes from Linus Sigurdson from DNB Markets.

[Linus Sigurdson, analyst]

Now starting up, you alluded to this earlier in your presentation, but would you say that you've pushed your expectations of markets improving further into 2025? Or how should we think about this?

[Johan Hjertonsson, executive]

I'm not a macro economist and there are many of those out there, and it's extremely hard to predict the future, Linus. My best guess is -- it won't be a very deep recession, but it will be fairly prolonged. So I think sometime next year, it should come back. But it's very hard to say exactly when and so on. And lots of things happen as we speak.

And as you know, we have the outcome from the U.S. elections just a couple of hours ago here and obviously, that has an impact as well and so on. So it's quite hard to answer that question, Linus. With the best available data right now, you could say like this, if this is the low point in the low economic cycle for Latour, I think we've done quite well in that sense. That's another way of looking at it.

[Linus Sigurdson, analyst]

No, that's a fair response. And if I could ask on acquisitions. As you said, you made a lot of them during the year. And I'm thinking primarily here about the industrial operations, how would you characterize the current pipeline for M&A in the industrial operations?

[Johan Hjertonsson, executive]

I would say it's a good pipeline. We see a healthy number of opportunities out there to continue to add on good acquisitions through all of our 7 industrial holdings -- wholly-owned holdings. So it's a good pipeline out there. With touch on wood and let's see, and lots of things are in negotiations and so on. But hopefully, we will see more acquisitions that will materialize going forward, yes. .

[Linus Sigurdson, analyst]

And then a final question, if I may, on Swegon. You talked about a slightly weaker order intake in Q3 versus the first half, if I understand you correctly. Could you give some color on what's driving that in Q3 specifically? And then should we sort of expect that weakness to continue into Q4?

[Johan Hjertonsson, executive]

No, I would say and I'll ask Anders to chip in here as well. But overall, on all the 7 wholly-owned business areas, we actually saw organically positive order intake growth in Q3. And I hope that will continue also going forward. And then Anders, if you want to comment more .

[Anders Mörck, executive]

Yes. I think you -- the question actually is that you see that it's seasonally lowered during the autumn than the seasonally normally higher spring. So for us, we look at quarter-to-quarter basis, we have organic growth. And that is a good sign for a company like Swegon when we do have this exposure to the construction and real estate markets, which we know that the market itself is not very good. .

[Johan Hjertonsson, executive]

But Linus, to sum up, rolling 12 for underlying growth is there. But if you look at it seasonally, it can vary, if you compare it to the same period, it's still growing, which is quite strong. And that's the point we're doing in a fairly weak construction market to grow quite good. .

Then as I can see, I get [indiscernible], there's no more questions lined up. And there's no written questions either. So from myself and Anders, thank you very much for listening in and hope to speak to you again when we release the full year report, in the beginning of next year. So thank you very much, and goodbye. .

[Anders Mörck, executive]

Thank you.