Investment AB Latour

STO:LATO B

Earnings Call Analysis

Mixed Q1 Performance with New Business Area

In Q1 2024, the company experienced a 4% decrease in net sales, impacted by lower volumes and fewer working days in March. Despite this, the operating margin remained strong at 14%. A notable development is the launch of Innovalift as a separate business area, reflecting long-term growth and innovation. The net asset value increased by 2.8%, although the share price showed a premium of 34%. Investments in R&D and sustainability continue, maintaining growth potential amid economic challenges. The company is optimistic about future M&A activities and market share gains, particularly in energy-efficient building solutions.

Introduction

In the recent earnings call, the company's leadership discussed the performance of various business areas, financial results for the first quarter of 2024, and strategic initiatives going forward. Despite a challenging market climate, the company's strategy of investing in product development and marketing seems to be paying off, creating a robust platform for future growth.

Market Conditions and Performance

The company reported a mixed demand environment, showing resilience despite market headwinds. Order intake decreased by 1% overall and 3% organically, primarily influenced by exposure to the construction and real estate markets. This segment is significantly impacted by economic cycles, with Northern Europe, particularly Sweden and Finland, experiencing more severe slowdowns. However, other regions like North America show relatively stronger demand.

Financial Highlights

For the first quarter of 2024, net sales decreased by 4% organically. The EBIT margin stood at 14%, compared to 15% last year, but this decline is mitigated by strong gross margins and effective cost control. The company's net asset value increased by 2.8% to SEK 204 per share, with a share price premium of 34%【4:0†source】【4:1†source】.

Strategic Projects and New Business Areas

One major development is the establishment of Innovalift as a standalone business area. Innovalift focuses on platform lifts and modernization of existing lifts, addressing key market drivers like accessibility and sustainability【4:2†source】. Over the years, Innovalift has grown significantly, with expectations for further growth driven by strong long-term macro trends.

Performance of Business Units

Different business units showed varied performance. For instance, Bemsiq experienced a volatile market with organic declines but maintained a strong operating margin of 22.8%. Caljan, affected by conservative customer capital expenditures, engaged in a cost-saving program to counter its challenges. Hultafors Group faced a 9% decline in net sales due to weaker demand but maintained a robust operating margin of 15.1%. Latour Industries saw positive developments in order intake and profitability【4:3†source】【4:4†source】【4:5†source】.

Future Outlook

Despite lower growth rates and the economic climate, the company remains optimistic due to its strategic investments and strong financial position. The leadership expects to ramp up M&A activities, leveraging a strong pipeline of potential targets and further enhancing its market position. Additionally, the focus on sustainability and better indoor climates positions the business units like Swegon well for future growth, even in a downturn【4:6†source】【4:7†source】.

Earnings Call Transcript 2024-Q1

[Katarina Rautenberg, executive]

Welcome to the presentation of Investment AB Latour's interim report for the first quarter 2024. [Operator Instructions]

I will now hand over to CEO, Johan Hjertonsson; and CFO, Anders Morck.

[Johan Hjertonsson, executive]

Thank you, Katarina, for that introduction. Johan Hjertonsson speaking. I'm here together with Anders Morck to present our Q1 report for 2024. .

If we start with the first slide, considering the business climate, a good start of the year for our businesses. The general demand is quite good in many markets that we operate in. But it varies, of course, by regions and industries. A weaker demand for businesses with exposure to construction and real estate markets, of course, but the picture is quite mixed.

We continue to invest in our companies and put a lot of efforts into our sustainability work. I'd like to highlight that in April, we arranged the fourth Latour Sustainability Day in Gothenburg, with more than 140 participants -- participating executives wholly owned and listed companies. Very inspiring and a true pleasure to see all, and this all great initiative and progress that's going on in all of our holdings.

Sustainability is a very important topic for Latour for 2 main reasons. One, because it's the right thing to do. Our moral and with our hearts, we really want to drive the sustainability agenda for future generations to come. Secondly, and that's from an investment company point of view, we do not want to offer businesses that do not long term take sustainability seriously.

As you can see on this slide, the overall group structure is unchanged. We still have 2 major business lines with our investment portfolio and our wholly owned operations. And -- but I would like to highlight that we have a new business area in our wholly owned operations, Innovalift, which is reported separately as of the second quarter this year. And I will talk more about Innovalift with -- in brief.

If we go to the next slide, it's our listed holdings. Our portfolio is 10 listed companies, as you know. The development of our listed companies that has reported for Q1 also about the same trend, i.e. somewhat lower order intake and net sales with lower results as a consequence, but from high levels.

Clearly, very positive underlying growth and profit development over the last year. I think it's important, especially when we are in a downturn in the economy, to look at the long-term trends in our listed companies. We own quality companies who have the ability to grow and win market shares in both boost and recessions.

Acquisition-wise, HMS finalized their acquisition of Red Lion Control in the U.S. in April. With full support from Latour, we participated in the new share issues with our pro rata share, which was part of the acquisition financing for Red Lion.

If we go to the next slide, we have the total return of the listed portfolio. And as I've said, there's no changes in the portfolio during the quarter. At the end of the quarter, development was 5.4% and the SIXRX had 7.9%. And until yesterday, April 25, the portfolio value was SEK 78.2 billion with a total return, which is about flat compared to the start of the year, whereas SIXRX as of yesterday evening was [indiscernible] .

And we go and then have some comments. I have some comments on our wholly owned operations. Order intake has decreased by 1% during the quarter. Organically, it's minus 3%. I'd like to highlight that the overall demand is quite -- still quite good in many markets. It's mainly the operations with exposure to the construction and real estate market that is most affected by a slowdown.

But the picture is mixed. So we have had a quite good order intake, Bemsiq a bit lower than before, Hultafors Group is organically lower than last year's high volumes. And Caljan is starting to see more activities in the pipeline, and the order intake is growing again. Latour Industries and Nord-Lock Group are developing positively.

Net sales has decreased by 4% organically, minus 6%. We are comparing, I think it's very important to highlight, against a record quarter last year with a somewhat boosted and duped net sales, where we delivered out on a very, very high order backlog after the supply chain disruptions that we had during 2022, which when we came out of the pandemic.

Also this year, Easter came, as you know, fully in Q1, which was not the case last year and actually means [ free ] working days less in March, and March is a very important month normally. So that affects us well.

So the quarterly EBIT amounted to SEK 856 million against SEK 989 million last year, and it's affected mainly by the lower volumes. I'm very happy to report that we have a very good cost control, and that especially the gross margin is still strong despite the lower volumes. And therefore, we can show an operating margin of strong 14% in the quarter.

So considering all the dimension aspects of last year's record levels and calendar effects, we are quite pleased with the Q1 results of 2024. And as you all know, those of you that follow Latour and has followed Latour for a long time, also in a downturning market, we do invest heavily into product development, marketing and sales going forward. So when the market turns, which it will, we will have a very strong platform to continue our growth journey.

And if we go to the next slide, you will see that it's a new slide here. We have the Innovalift business area, and here to present Innovalift to you. And Latour Industries business concept is to long-term develop independent entities to eventually become separate business areas within Latour. And now once again, Latour Industries is delivering a new business area to Latour. Before, last time it was Bemsiq. Before that, it was Nord-Lock, that you know are now 2 new businesses areas in Latour. And now for the first time, we have now Innovalift.

And Innovalift is now ready to operate as a separate business starting from the second quarter as of now. And Innovalift is a new division within -- it was formed within Latour Industries as a new division as late as in Q4 last year. But the comp in the group has been added continuously since 2016 when the Aritco Group was acquired.

Turnover in 2016 was SEK 372 million with less than 160 employees. Now it has grown to consist of 8 companies with an annual turnover pro forma of SEK 2.6 billion and with about 850 employees. So a fantastic development during these years, and it's time to stand on your own feet now and further develop this fantastic area going forward.

And Innovalift has platform lifts as its main business and a lift modernization business, their 2 main business areas, with key market drivers as accessibility requirements, cost and sustainability benefits of modernization of lifts, instead of [ whole ] replacements.

So I'm very much looking forward to see Innovalift's journey going forward with Andrea Veggian as the CEO and Niclas Nylund as the CFO. The best of luck to both of you and all team members in Innovalift for a fantastic uplifting journey into the future.

So if we go into the next slide, we have our acquisitions during 2024. We started this year with 3 finalized transactions quite early in the year. We have the BS Tableau; two, Innovalift, the aforementioned Innovalift. And BS Tableau is a German leading manufacturer components for elevators, manufactures and sells bespoke fixtures for elevated cabins and a broad range of electronic components to lift operators and OEMs, mostly targeting modernization projects, net sales about SEK 6 million.

We also acquired Eelectron and IPAS to Bemsiq. Eelectron is an Italian provider of the KNX technology and has over 25 years of experience in development of hardware, software devices for smart buildings, energy efficiency and hospitality applications.

IPAS is a German developer and manufacturer of KNX and DALI building automation devices, and DALI stands for digital addressable lighting interface, for those of you that did not know that. Together, Eelectron and IPAS has an estimated net sales of EUR 26 million.

And finally, we acquired PBL and Condor for the Nord-Lock Group. PBL is a Nord-Lock Group distributor in Western Canada, and Condor is a niche manufacturer of specialized metal components. Together, PBL and Condor has estimated net sales of CAD 7 million.

And lastly, also after the reporting period, Latour Future Solutions and the rest of minority owner drew a new share issue in the Swedish company Plant. Plant offers climate calculations in property projects and climate declarations for environmental certification of properties. When used, industry stakeholders together can work towards reducing the climate impact of a property. That's a very interesting business to follow going forward.

So having said that and done this overall conference and this leading and presented Innovalift, I, with big pleasure, hands over to our CFO, Anders Morck. Over to you, Anders.

[Anders Mörck, executive]

Thank you so much, Johan. Thank you for that. And we will start going through the business areas separately then. And we start with Bemsiq as the first business area. We have had a volatile market climate for Basic. The order intake grew by 12%, but this was explained by the acquisition of Eelectron. So if we only look on the organical growth, it was minus 5% decrease. So -- and as I said, the demand has been somewhat volatile, especially within the metering business.

And we think that in the short term, the market climate will be a little bit uncertain. But long term, we know that Bemsiq's market position, and they are -- is very good, and we are in a very positive environment.

The total growth in net sales was 15%, but this counted down to an organic decline of 2%. But it should also be said that this is compared to our first quarter last year that was very, very strong for Bemsiq.

So the operating profit came in at SEK 14 million with an operating margin of 22.8%. And even though this is lower than last year, we need to point out that the start of 2023 was extremely strong with a margin of 26.9%.

We have several ongoing investments in R&D that will lead to a number of product launches during 2024, and all these investments are taken through the profit and loss. And as said before by Johan, there was an acquisition of Eelectron and IPAS during January this year. So all in all, very well done, Mikael and your team.

And we go to the next business area, which then is Caljan. And we now have seen for a very, very long time that the market condition has been tough, where the customers -- the big customers are -- have been very conservative when it comes to capital expenditures. And therefore, the order intake has been and still are on a very low level, and on a lower level than we, of course, would like it to be in the long term.

The pipeline is increasing, and the market activities are gradually starting to increase. But as we noted before, the assessment in the short term is that the net sales will continue to be at lower levels in the short term. And as a consequence, net sales then also this quarter was well below corresponding period last year. And this resulted in an operating profit considerably lower than last year, with an operating margin of 9.3%.

So we think that this can actually not be a surprise to anyone. Caljan has contracted a cost-saving program -- or rather several cost-saving programs. So it has been a very, very good job carried out by Henrik Olesen and his team for -- thank you very much for that in this, yes, demanding market climate.

I think we go to the next business area, which should be Hultafors Group. And also for Hultafors Group, that has a strong presence in Northern Europe, it has been challenging market condition. So they were hit by a weakening demand, and meaning that the net sales for Hultafors decreased by 9% organically.

The weakening demand affects the 2 hardware divisions tougher than the PPE segment within the group, but in total, 9% down. And despite that, the gross margin is strong and contributes to a good profitability, together with the effective cost control. And all in all, this resulted in an operating level slightly lower than last year, but with a very good margin of 15.1%.

And this actually shows, with the tough climate, that Hultafors result is very resilient to a tougher business climate, very well handled, I must say. And we don't think we are losing market shares. And we think we are in a challenging market climate in the Northern Europe, as all know, with the construction markets quite negative at the moment. So all in all, I must say very well done also to Martin and your team.

We go to the next business area, which should be Latour Industries. And this quarter then, Innovalift is still a part of Latour Industries. And overall, a very positive development of order intake and an organic growth on -- by 2%. Most units are doing well.

Net sales grew by 7% in total, which, when we look on organic growth, it corresponds to 4% growth. Profitability is increasing and the quarter result is outperforming last year with 29%, reaching SEK 94 million with an operating margin of 8.7%.

And we have said it before, this business area is building new business areas, and that means they are taking costs for the future and having the potential for higher profitability going forward. So -- and now mission accomplished when it comes to Innovalift. Congratulations now to Bjorn and your team for doing that. Very good.

Okay. Let's go to Nord-Lock. Also for Nord-Lock, the order intake came in relatively strong considering the market condition, just below the strong corresponding quarter of last year. Also strong net sales with an organic growth of 1%. EBIT was slightly below last year, but this was due to the product mix, and the operating margin came in at 24.8%. And as Johan said before, Nord-Lock make the acquisition of both PBL and Condor in Canada during the quarter.

We should also note that Daniel Westberg has been appointed the new CEO of Nord-Lock from first of August this year, and that Marcus Lundevall, the CFO, is acting as the CEO until then. So very well done, Marcus and your team, and also very much welcome to Daniel from first of August. So we're looking forward to that.

Let's go to Swegon on the last business area. The majority of the business units within Swegon are actually performing quite well on order intake. But compared to a very strong last year, the order intake decreased by 3% organically. There is still, of course, a lower demand in the residential business. However, that was quite expected.

Net sales shows an organic decrease of 5%. And thanks to a strong gross margin and good cost control, EBIT margin came in strongly at 12%. And as a reminder, 2023 was extremely strong in the beginning of the year. So very well done, Andreas and team.

And we go to the net asset value. The net asset value increased by 2.8% during the quarter to SEK 204 per share. And the share price at the end of March was SEK 282, which means there was a premium to our net asset value of 38%. Yesterday, the net asset value was SEK 198, which gave a premium of 34% since the share price then was SEK 265.

Our consolidated net debt increased during the quarter from SEK 10 billion to SEK 10.3 billion. Of course, this was explained by the acquisitions that we have made, combined with a relatively stable cash flow for the first 3 months. And the net debt now corresponds to about 8% of the market value of our investments, leaving a very good headroom for investments going further in the business.

So Johan, I leave it back to you.

[Johan Hjertonsson, executive]

Thank you, Anders. Excellent presentation of our business areas and net asset value development.

We'll go to the next slide, and we have the financial targets. As you know, we changed those last year, and our financial target is now to grow over a cycle of more than 10%, to have an operating margin of above 15% and a return on operating capital of above 15%.

So during the last 12 months, we had growth of 5.6%, we had an EBIT margin of 14.5% and a return on operating capital of 15.7%. This is an outcome that we're very pleased with. Growth is lower than before, but considering the economic climate that we've just talked about. And also since we have had lower M&A activity during '24, we haven't added as much acquired growth as we usually do.

And this has been a conscious decisions from our part to slow down because the year before, we had a very high pace in terms of M&A. And now we have integrated that, and I'm pleased to inform that we have a very strong pipeline of potential M&A targets going forward. So we expect to pick up M&A activities during this year. And the EBIT margin is strong, and the return on operating capital is more than satisfying.

So once again, I think given the climate, actually slightly negative growth in total, still doing 40% in EBIT margin in Q1 in our industrial operations. That shows our resilience. And also to Anders' point that we continue with heavy investments in R&D and marketing and sales during this time. That means we have a very, very strong platform when the economy will start to tick up. So we are quite confident going forward.

And if we go to next slide, we have the international growth potential, and that's kind of the next statement. We are a long-term sustainable investment company and a responsible owner, creating value long term for our shareholders. In all of our holdings, we have a strong corporate culture that we cherish and nurture and further develop, which is of great value when we move forward in a quite turbulent global world. We own profitable and stable companies, both in the fully owned and listed side of our business. And we have a strong financial position, which enable us to continue investing in both existing and new holdings to enable further growth.

And then I think the key takeaway of this slide is that you see we have 81% of our sales in Europe, 14% in the U.S. and 5% in Asia. What we want to say with this slide is that the future is bright. The sky is the limit. There's a lot of potential to further grow with our -- within our different areas going forward.

We close the presentation part of the Q1 report from myself and Anders, and then we open up the Q&A session.

[Operator]

[Operator Instructions] The next question comes from David Johansson from Nordea Markets.

[David Johansson, analyst]

I have a couple of questions here. So first, if you could comment on the order book for the industrial operations. Was it up or down from Q4?

[Johan Hjertonsson, executive]

Anders, I hand that to you.

[Anders Mörck, executive]

Yes. Can you give me a minute? I will comment on that. So you can take the second question first because I don't have it in the back of my head.

[David Johansson, analyst]

Okay. Then I'll follow up with a question on Hultafors. You highlighted somewhat weaker conditions for hardware. And especially, North America looks to be down in the high teens here. So if you could elaborate perhaps a bit more on the result here and what visibility you have for the coming quarters.

If I remember correctly, the order book is a lot shorter for Hultafors, so it would be interesting to hear how you think about this development going forward.

[Johan Hjertonsson, executive]

Yes, I can comment on that. The order intake and the net sales of Hultafors is almost the same number because orders placed are delivered kind of the day after. So you can see a perfect correlation between order intake and net sales. There's no delay in the Hultafors case.

And it's true, in Hultafors, we still see very good strong demand in the PPE segment and the -- and then the hardware segment somewhat weaker and also a bit more in North America. I think it's quite natural. And to the background that we just talked about, a lot of the -- especially the hardware products are sold into the construction part of the industry, which is both professional constructions, carpenters and so on, but also for the homebuilder that has slowed down.

So that we are not losing market shares. It's just a weaker market in that sense. And hopefully, interest rates will come down. And the consumer and construction spending and investments will come back. And then we will turn back, especially in the hardware division in that sense. I hope that gives some light to your question, David.

[David Johansson, analyst]

Yes. And lastly, on your new business area, Innovalift, it's good to see another business forming out of Latour Industries. But perhaps, a question on the margin here. Obviously, good development over the past several years, but it's well below your operating target of 15% and maybe also in relation to your other business areas. So first, if you could comment a bit on the margin development in Innovalift and how you think about this progression maybe longer term.

And then my second question would be looking at maybe comparable valuation multiples for this business, how do you think about Innovalift maybe in comparison to your other business areas? I believe the average now is 15.5x and lower for Latour Industries. Is this also reflective how you -- how we should view this business?

[Johan Hjertonsson, executive]

If I comment the margin question, and maybe, Anders, you can take the valuation question. First of all, yes, they have somewhat lower margin than the average in -- for the wholly owned business. Our target is to have an EBIT margin of well above 15%. And rest assured, the management team and the team members in the business are very well aware.

And I'd also like to say we would not have formed a new business areas if we didn't think it would be possible to lift the margins to our -- well above our target levels. If this happens in the next quarters or slightly more into the future, I can't say at this point. But we're very confident that we will obtain and reach very good margins in Innovalift.

And then Anders, I think it's the order book question left and then some comments around the valuation of Innovalift, right?

[Anders Mörck, executive]

Yes. As you know, David, we haven't disclosed the order book in the report, so maybe we shouldn't comment about the level, but it's more or less unchanged. And it's a slight increase, but it also should be an increase in the order book in the beginning of the year. So -- but it's nothing dramatic. The big dramatic thing about the order book is that it's now normal. And if you compare 1 year back, that wasn't normal as it looked at that time. And as you know, for the longer lead times that all companies in the industry had last year and also the year before.

And when it comes to valuation, of course, we cannot say now how we will valuate Innovalift going forward. But we have tried, of course, before to look into which kind of peers we will use. And the problem not only with the Innovalift, but also for many of the existing business areas, is that the peer groups are not extremely perfect, so to say. So it's difficult to find a good and fitting peer group.

But I don't think that you should expect that there should be a big difference in the total of separating between Innovalift and the rest of Latour Industries.

So yes, I don't know if that's the answer you're looking for, David. But I think in this context, it's also wise to comment about the valuation method that we have. We do not consider that we actually give the right or the correct value for our net asset value. It's only a guiding, and it's up to everyone to think about is this average 15.5%, as you say, relevant or not relevant for businesses that we have in our industrial operations.

And that it's a possibility for anyone to say that it should be 15 or 10 or 20 or 25 or whatever. So we only use this to guide for the net asset value in the future, but we do not really think it is the correct valuation, so to say. And I hope that has been clear over the years.

[Operator]

The next question comes from Linus Sigurdson from DNB Markets.

[Linus Sigurdson, analyst]

I wanted to start off with sort of a high-level question on construction demand. Is there anything you can say about what you see in terms of regional differences, say, perhaps between Sweden and the rest of Europe or Northern Europe?

[Johan Hjertonsson, executive]

You have a very good question. You could summarize it like this. I would say North America, still quite good demand. Europe, weaker. Northern Europe, slightly weaker than that. And actually within Europe, I would say, Sweden and Finland are the most depressed in that sense from the -- on the construction market as a very general note.

Having said that, I think we are at the bottom. Right now, we see the declines in the Nordic markets as such. But if you take the whole world market together, it's fairly okay. But I would divide it, more or less, the way I said in that sense in terms of demand on the construction market.

[Linus Sigurdson, analyst]

And then I'd like to follow up on Innovalift. Obviously, it's going to be very exciting to follow a new business area here, and you talk about the prospects of increasing profitability. And I wanted to ask if you could elaborate on the drivers there.

I mean, are we talking about sort of stripping out growth investments? Or is it more about operating leverage coming through? Any color there would be appreciated.

[Johan Hjertonsson, executive]

It's mainly finding more synergies, of course, within this group and these companies. It's because of a much higher focus than we will have now with the new -- a more focused and dedicated management team. Thirdly, we think there are very nice M&A opportunities to consolidate this market to do with nice margins going forward. So I would -- and then most importantly, as maybe the fourth point, is we see very strong long-term macro trends.

One is accessibility, we're becoming older, so to speak. And therefore, this platform lift operation business with Innovalift has a very good macro demand long term. And the other part is the modernization part of lifts, and that's not only platform lifts. That's any lift, right? And they will see also big potential going forward, rather than modernize a lift in a building instead of replacing it.

So those I would say are the main driver. So it's the market and it's the demand that should drive these volumes that helps with profitability, more synergies within the companies and very nice M&A opportunities for profitable nice niche companies that we can potentially acquire going forward.

[Linus Sigurdson, analyst]

And then one final question on my end. If you could talk a bit more about what's driving the -- you've called relatively strong order intake in Swegon, it would be interesting to hear.

[Johan Hjertonsson, executive]

Yes. Let's elaborate on that. I think, yes, you could say on one hand, Swegon is quite exposed to the construction market that we just discussed. On the other hand, Swegon's products really drive good energy efficiency in buildings. And it also promotes a very strong indoor climate.

And we also see that there is a higher demand and a higher focus on a better indoor climate in buildings, especially after the pandemic. And there is a big focus on energy-efficient buildings going forward.

So there are -- even though Swegon is exposed to the construction industry, there are very good and strong growth in the subsegments within the construction industry.

[Linus Sigurdson, analyst]

And just a follow-up, if I may. I mean, do you sort of see Swegon taking market share in those sort of subsegments that you're referring to?

[Johan Hjertonsson, executive]

Yes. I would definitely say that Swegon takes market share in those segments by very long-term commitment, strategic priorities in these areas. We identified this a long time ago in the core of the Swegon brand positioning and all of its business. So we are really looking forward to reap the benefits of that in the future. So yes.

Okay. There are no further questions aligned here. And are there no other written questions?

[Anders Mörck, executive]

No written questions in the -- on the web.

[Johan Hjertonsson, executive]

Okay. Fantastic. Then Anders and I, on behalf of myself and Anders, we'd like to thank you all for listening in, and thank you for the questions, and looking forward to speak with you again on the Q2 results later on. So thank you all. And when we come there, I wish you all a fantastic weekend. Thanks.