Investment AB Latour

STO:LATO B

Earnings Call Analysis

Latour Surpasses Economic Hurdles with Strategic Acquisitions

Investment AB Latour had a steady second quarter despite a challenging business climate. The company saw organic order intake grow by 5%, while net sales decreased slightly by 1%. The operating margin held strong at 14.4%. Latour made significant strides in M&A, acquiring companies like HC Groep, Arkel, and QEL, adding SEK 2.4 billion in acquired growth. The company remains focused on long-term growth, balancing both organic growth and strategic acquisitions. Financial targets include over 10% growth with an EBIT margin above 15%, and a return on operating capital of 15%, reflecting a stable outlook amidst economic volatility.

Strong Organic Growth Amid Weak Business Climate

Investment AB Latour reported a resilient second quarter with a 5% organic growth in order intake despite a challenging economic environment. CEO Johan Hjertonsson highlighted that while net sales were slightly lower year-over-year, reflecting reduced volumes, the overall demand remained strong across various markets. Regions and industries displayed mixed results, with notable weaknesses in construction and real estate sectors .

Wholly-Owned Industrial Operations

Latour's wholly-owned industrial operations showed solid performance with a 5% increase in order intake in organic terms and 7% in absolute terms for the quarter. However, net sales saw a slight decline of 1% compared to the previous year's record quarter. The operating EBIT reached SEK 939 million, down from slightly over SEK 1 billion last year. Despite lower volumes, strong cost control and gross margins maintained a robust operating margin of 14.4% .

High Pace in Mergers and Acquisitions

Latour has ramped up its M&A activities following a deliberate slowdown last year aimed at consolidating previous acquisitions. The company completed several transactions including BS Tableau to Innovalift and acquisitions by Bemsiq and Nord-Lock Group. Post-reporting period, Latour announced further acquisitions, such as Swegon’s acquisition of the Dutch company HC Groep and Innovalift’s acquisition of Turkish Arkel. These acquisitions are expected to augment Latour's portfolio, adding SEK 2.4 billion to acquired growth, almost 10% of net sales run rate .

Financial Highlights and Targets

Latour’s financial targets include growth above 10%, an operating margin above 15%, and a return on operating capital above 15%. Over the past 12 months, the company achieved a growth rate of 1%, an EBIT margin of 14.3%, and a return on operating capital of 15.3%. Despite a lower growth rate, largely attributable to the weak economic climate and reduced M&A activity in 2023, the company’s EBIT margin and return on capital remain strong, presenting a positive outlook for future acquisitions and growth .

Performance by Business Area

Business areas like Bemsiq exhibited a 10% organic growth in order intake in Q2 after a weaker first quarter. Caljan faced lower order intake and sales due to conservative capital expenditures among its customers, but proactive cost-saving measures mitigated the financial impact. Hultafors Group managed effective cost control and margin maintenance despite a slight decline in net sales. The newly formed Innovalift division, despite challenges in China, anticipates strong long-term growth driven by aging populations and environmental concerns surrounding elevator modernization .

Acquisitions and Strategic Investments

Latour continued its strategic investments by acquiring companies aligned with its growth areas. Significant acquisitions included HC Groep by Swegon, Arkel by Innovalift, and QEL by Bemsiq. These acquisitions are expected to enhance Latour’s market position and operational capabilities across various geographies and sectors. The company maintains a strong balance sheet, with a consolidated net debt of SEK 11.6 billion which supports future acquisitions .

Future Outlook

Latour remains committed to long-term investment strategies, with a focus on both organic growth and acquisitions. The company highlights substantial international growth potential, particularly outside Europe. Despite short-term economic uncertainties, Latour posted a total return of 11.3% year-to-date, slightly outperforming the SIXRX benchmark of 11.1%. The management is optimistic about sustaining strong margins and growth through strategic acquisitions and cost management .

Earnings Call Transcript 2024-Q2

[Katarina Rautenberg, executive]

Good morning, and welcome to the presentation of Investment AB Latour's Interim Report for the Second Quarter 2024. [Operator Instructions] And I will now hand over to our CEO, Johan Hjertonsson; and CFO, Anders Morck.

[Johan Hjertonsson, executive]

Thank you, Katarina. I'm here together with Anders Morck, as said, our CFO, and welcome to the Q2 quarterly presentation.

As we start with the first slide, Katarina, and the overall group structure is unchanged compared to last time we spoke. We had a good second quarter despite the weak business climate. Order intake is growing again organically. We actually had plus 5% organic growth in the quarter, which I think is quite strong given the economic business climate we're in.

Whilst net sales were slightly below last year's high volumes with a slightly lower result as a consequence. The general demand is still quite good in many markets that we operate on, but it varies between regions and industries. A weaker demand for businesses with exposure to construction and real estate is especially to be underlined, but it's a mix picture.

If we go to the next page, which is about our listed portfolio. Also here, there's no major change within the listed portfolio. We have done some minor changes with increasing our holdings in CTEK from 33% to 33.5% of the capital votes. We also participated in HMS Network's new chair issue with our pro rata share, which was part of the financing of the acquisition of the Red Lion Controls in the U.S.

All of our companies have now reported for the Q2 and the picture of a weaker business climate is consistent. But despite this, a number of the companies are actually increasing the results. So really good.

Value development, plus 5.7% during the year at the end of the reporting period where SIXRX was 10.6%. And until yesterday, August 19, the portfolio value was SEK 87 billion and the total return amounts to 11.3% so far this year, where SIXRX comparably is at 11.1%.

And then if we go to the next slide to cover the wholly-owned industrial operations. As I said, order increase was -- the order intake increased by 5% organically and in absolute with all included, it was 7% in the quarter. The overall demand is still good on markets we operate on despite the weak business climate and as I underlined.

Order intake is a bit volatile in between the months. So development on the short term is a bit hard to estimate in general. But you can say in general that operations with exposure to the construction and real estate markets are so far mostly affected by the slowdown. However, our three largest business areas with exposure show a relatively positive development. Swegon and Bemsiq is growing and Hultafors Group on the same level as last year. And all of these business areas have a high exposure to the construction and real estate market. So that's really strong.

And as said, the net sales has decreased by 1% or organic minus 4%. But once again, which is the most important forward-looking is that order intake has increased by 5%. And we are comparing against a record quarter last year where net sales was boosted due to the recovery from previous supply chain disruptions important to keep in mind.

So the quarterly EBIT that was affected by lower volumes amounted to SEK 939 million compared to a little bit more than SEK 1 billion a year ago. We have good cost control, and the gross margin is strong, and this results at a strong operating margin of 14.4%. So overall, we're satisfied with the outcome in the second quarter.

And if I comment a bit on acquisitions. We have a high pace within the M&A area. And those of you that follow us closely, you know that we deliberately last year had a lower pace in M&A, because we wanted to consolidate and integrate all of the acquisitions we did in the year before in 2022, I think we did more than 20 acquisitions. So, and now we feel that's fully in pace, and we are geared up for a higher tempo in the M&A area.

And we started 2024 this year with 3 transactions, BS Tableau to Innovalift, Eelectron and IPAS to Bemsiq, and PBL and Condor to Nord-Lock Group.

And during the quarter, Latour Future Solutions have entered into minority owner decision through new share reaches in two Swedish companies, Plant and Econans. Both companies offer different tools and software for pilot calculations and impacts of properties, quite interesting.

And after the reporting period, we have announced during the summer, three more acquisitions within the wholly owned operations. Swegon has signed an agreement to acquire the Dutch company, HC Groep, with expected closing as of this month. HC Groep is a market leader in the area of indoor climate technology with a strong position on the Dutch market with high-end product offering of 10 business labels targeting the entire buildings' indoor climate systems, including building automation. The company has 386 employees -- 86 employees and net sales last year amounted to EUR 106 million.

Innovalift, this summer, has signed an agreement to acquire the Turkish company, Arkel. The acquisition will give Innovalift a leading position and expanding geographic reach and complement its product portfolio of components for elevators. Arkel is a leading Turkish manufacturer of components for elevators for both new installations and the growing modernization segment. The company has about 410 employees and net sales last year amounted to EUR 62 million.

And then finally, Bemsiq have acquired the Canadian company, QEL, and they strengthen its footprint even more in North America. QEL has a full suit of indoor air quality and refrigerant gas detection products and the company has 15 employees and net sales last year amounted to CAD 8 million.

All these pre-acquisitions that is done after the reporting period, have a profit level well in line or above Latour's wholly-owned operations. So all in all, the transactions so far this year will add about SEK 2.4 billion in acquired growth, which amounts to a little bit less than 10% of our net sales run rate, you could say. So that's -- we are very happy with that and very happy with these acquisitions that we have in place.

So having said that, as an introduction, I hand over with a warm hand to Anders to comment on our business areas and other fields as well. So over to you, Anders.

[Anders Mörck, executive]

Thank you so much, Johan. And we start with the first business area, which is Bemsiq. And after a somewhat weaker first quarter order intake grew organically by 10% in the second quarter. And this was, of course, a very positive signal, even though it's too early to draw any long-term conclusions yet, but very positive in the second quarter. The total growth in net sales was 17%, but when it comes to sales, then that means it translated to organic growth, it was a decline of 2% compared to the strong corresponding quarter last year.

The operating profit increased to SEK 108 million with a strong operating margin of 21.8%. And as Johan said before, the acquisition, Johan, it continues for Bemsiq when Canadian company QEL was acquired by Bemsiq now in August. So very well done and your team.

And we go to the next business area, which is Caljan. And for a while now, you all know that customers to Caljan have been and still are more conservative when it comes to capital expenditures. And therefore, the order intake continues on a lower level for Caljan. Pipeline is slowly increasing, but this has not yet materialized in order intake.

Both order intake and net sales is therefore, on lower levels than we wish well below corresponding period last year and the lower volumes resulted in an operating profit lower than last year with an operating margin of 12.8%, which is considering the very tough situation very well handled in this steep downturn. Caljan has conducted cost-saving program to decrease fixed costs, resulting in a 12% lower cost space and last year. So many thanks to Henrik and your team for taking care of this very special situation.

We go to the next business area, Hultafors Group. And in a tough market, net sales continues to be slightly low, below last year, which is not a surprise considering the situation. The weakening demand affects the European market somewhat more than the North American market. The hardware divisions, however, are recovering just a little bit then from lower levels during the quarter.

Organic growth was negative with 1%. And thanks to strong gross margin and also to effective cost management. This resulted in a good, very good operating profit of SEK 267 million with a good operating margin of 15.8%. So Martin, all your team very well managed to you.

And then we go to the new business area, Innovalift. This is the first quarter that we make a separate statement of this newly established business area. So we say very much welcome to Andrea Veggian and your team. Order intake was hampered by an overall weak constructions market, especially lower demand than for new installations in China, which has been low for a while now as well.

The modernization division is, however, growing. And net sales grew by 1% in total, but organically, it was 2% behind last year. Gross profit is still improving, but not enough to compensate for the lower volumes. So we see looking forward to even better gross profit going forward. The quarterly result amounts to SEK 62 million with a margin of 9.6%.

And then as Johan said before, we have signed an agreement now to acquire Arkel in Turkey. The important thing is that -- and you know that we like companies in leading position that it will move the position that Innovalift have in the lift modernization market to a leading position. And it will also double the size of the components and modernization business within the business area. So we're really looking forward to that is really exciting. So once again, welcome and very well done then Andrea and your team.

So we go to the next business area, which is Latour Industries. And Latour Industries had an overall positive development of order intake with an organic growth of 12% during the quarter and net sales grew 6% in total and 4% organically, very much driven by REAC, that has a very positive development in the U.S. market at the moment. EBIT is in line with last year, but with somewhat lower margin after a successful launch, then on, Innovalift, that's a new business area. Focus is now to continue to build and develop the remaining holdings within Latour Industries, and also to find new platform investments for Latour Industries going forward.

And here, we shall also make a very big thank you to Björn Lenander, that will leave after 10 years and step down as in the role as CSO -- sorry, CEO, try to find a new position for him then. And Tina Hultkvist, that was CEO before since the beginning of this year, and also part of today's executive management team will take on the role as the new CEO from the 1st of September. So many thanks, Björn, for all your valuable contributions over a very long time and also thank you to your team for your achievements and also then Tina, good luck to you.

We go to the next business area, which is Nord-Lock. When it comes to order intake, it was very positive and a record high actually, it grew by 14%, of which 12% were organic growth. Also quite strong net sales, considering the business climate with an organic growth of 2%, and we saw especially good growth in Asia Pacific. EBIT was slightly below last year, but still on a high level with an operating margin of 24%. And then, as we announced last quarter, Daniel Westberg has now been recruited as the new CEO of Nord-Lock Group, and we now started his position in the beginning of August. So good luck to you, Daniel, going forward.

But however, for the past quarter, we think it's very much worth highlighting that Marcus Lundevall, CFO and also acting CEO until recently, handle the group for a while now and also the transition period in an extremely professional manner. So many thanks to you, Marcus and also to the whole Nord-Lock team.

And then we come to the last but not the least business areas, Swegon, where we can see that the majority of the business units are performing very well, especially when we consider how the overall business climate looks like right now. Order intake grew by 12%, of which 11% was organic growth, very much driven by cooling and heating. And this is, of course, explained by the very positive exposure to the commercial heat pumps market, but it was also very good in the North American market.

In total, net sales is in line with the corresponding quarter last year, but there is a mixed picture between the segments and geographies. Thanks to a strong gross margin and effective cost management. EBIT margin comes in strongly at 12.8%. And as a reminder, once again then last, the second cost last year was boosted by the chain -- supply chain recovery situation that we had at that point.

And as Johan said before, Swegon signed the agreement to acquire HC Groep in the Netherlands and the transaction has been finalized in August. It also brings Swegon to a leading position in the Netherlands. And to remind everyone, that's what we're looking for in all our niches leading position. Very much well done, Andreas and your team.

And we have one picture left for me before I leave back to Johan. And it's about the net asset value, and our conservative way of valuation -- doing the valuation of our wholly owned operation leads to a net asset value of SEK 198 per share at the end of June, which was an increase of 1.8% from the beginning of the year. The share price was SEK 286 million at that moment, which means it was a premium to the net asset value of 44%. And yesterday, the net asset value was SEK 204 million, so increased by SEK 6 and the share price at the same day closed at SEK 300, which then gives a premium valuation of 47% when we look at the share price.

Our consolidated net debt increased during the quarter from SEK 10.3 billion to SEK 11.6 billion. This is explained by the paid dividend in the period. And the net debt corresponds to about 8% of the market value of our investments, leaving a nice headroom for further acquisitions. Even after then, we have completed two of the three acquisitions, but we will, of course, also complete the third one later on this autumn. So we see a good headroom for further acquisitions.

Thank you very much. And back to you, Johan.

[Johan Hjertonsson, executive]

Thank you very much, Anders. Great presentation. Let's comment the financial targets. As you know, our financial target is to grow above 10%, operating margin above 15%, and return on operating capital about 15%. As you know, who follows us closely that we -- beginning of last year, we put higher targets on operating margin from 10% to 15%. So they're relatively new, these numbers.

So during the last 12 months, we had a growth rate of about 1%, EBIT margin of 14.3% and return on operating capital of 15.3%. And this is actually an outcome that we're pleased with. Growth is lower than before. As I said -- but considering the economic climate, it is expected. And also since we have a low M&A activity during 2023, we haven't added as much acquired growth as before. But as I said earlier and as Anders also pointed out earlier in this presentation, this will obviously increase quite a lot going forward. Since we have almost 10% acquired growth already, so to speak side, so that will come through the numbers going forward. And EBIT margin is still strong and return on operating capital is satisfying.

And if we look at our next page, the international growth potential. Latour is a long-term sustainable investment company and a responsible owner creating value for our shareholders. We continue to invest forward looking in both existing and new holdings regardless of the economic climate to enable future growth, were very long term, as you all know. And this is core of our long-term perspective and the gain of being financially strong. We have an ambition to grow both organically and through acquisitions but the large part of potential remains.

If you look at the map, we have 81% overseas in Europe, 14% in Americas and 5% in Asia and Rest of the World. So there is a lot of potential to grow also outside Europe, I think, is the main message of this picture.

So thank you. And there, we open up for questions with hopefully, some answers to follow as well. Q&A.

[Operator]

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

[David Johansson, analyst]

I wanted to start off with a question on Swegon, which to me looks to be very strong here. I think you mentioned the Cooling & Heating business performing exceptionally well in North America, sort of the main driver. And perhaps if you could expand on the demand and also the margin development in the quarter and sort of, I think, your expectations now as we look towards H2?

[Johan Hjertonsson, executive]

Thank you, David, I hand over to Anders.

[Anders Mörck, executive]

Thank you, Johan, and I gladly take the question. First of all, then it was misunderstanding then that the heat pumps are not growing in the North American market. That's the ventilation business that we have there, which is seeing a positive development from rather low level, but it's a market with great potential. But when it comes to heat pumps and commercial heat pumps, then that's, as you know, that we have in our portfolio that is growing very much in Europe, in the European market, which is very positive. And well, we don't make any forecast, but we think we have a very good position going forward in this market doing great business. So -- and we have had confidence about that for a long time now. And it's good to see that there has been some really great orders coming in.

[David Johansson, analyst]

And then, if I could perhaps follow-up with a question on Caljan. Obviously, you're not happy with this performance. But you mentioned now that you think the order intake is starting to bottom out, at least. Is this mainly sort of looking at easy comparables for Q3? Or are there some underlying developments in terms of changing demand as we look towards the second half of the year. I think you also mentioned some light at the end of the tunnel. So perhaps if you could expand on that one?

[Johan Hjertonsson, executive]

Yes. Just to backtrack a little bit, David, thanks for asking a good question. And I think, it's important to point out that we -- it's not that we're unhappy with Caljan. We think, Caljan is doing a great job in the present market, macro environment that they operate in. And if you backtrack a couple of years, during the pandemic, many logistic companies over invested heavily when e-commerce exploded. So I would say at that time, the market was up almost 100%.

It also did Caljan sales increase with over 100% during those pandemic years. And then, the pandemic was over. And I think reality caught many large logistic companies and the volumes came down quite a lot in e-commerce and therefore, they have been overinvested for a while. So this is kind of a big backlog that needs to be worked out of the system. And to your point, David, I think we are starting to see signs. Of course, the long-term trend is there that e-commerce and logistics will continue to grow. It was just an unnormal exceptionally high growth rate during the pandemic and then unnormal, exceptionally low growth rate, the years directly after to pandemic, but we're seeing times that this will now start to normalize, back to kind of normal growth rates for the industry in that sense. So I hope that, I had shed some light on your question, David.

[David Johansson, analyst]

Yes. It did. And then, if I could end with a question on Innovalift, a bit better margin than expected for me, actually. So and I think you highlight a bit on the construction exposure and also China as sort of the main drivers for the decline in the quarter. And I think since this is a new company for you, I think if you could talk a little bit more about the end market exposure here and sort of the main trends to look out for and perhaps also what you expect in terms of growth as we look forward here?

[Johan Hjertonsson, executive]

Yes. I can start, and Anders, you can fill in, I think. It's not a new company for us. We've had Innovalift for a long time, but it's the first time we expose it publicly, so to speak, and we have it as a business area. So we're very pleased with the first kind of quarter of Innovalift. And I think Innovalift is mainly two divisions, one is elevators and so for more for an elderly population, so to speak, elevators that you can install at home and so on.

And that market we see is down a little bit and especially the Chinese part of that market. But the long-term growth trend, it's very strong. We have an aging population globally. They want to invest to be able to stay at home in a long period of time. So there's a very strong long-term growth story in that part of the Innovalift's division.

And the other division, and that's also really where we did this large acquisition that I just mentioned in Arkel in Turkey, is the whole modernization business of modernizing present elevators, normal elevators that you see everywhere. And there we see very, very high growth going forward. And among other things, this is driven a lot about the environmental consort, not clean out a complete elevator shaft with new elevators and everything, but rather modernize elevators that you have with new control systems and components. And therefore, save on material, for instance.

So -- and when it comes to the margins, so we expect very high growth rates going forward, Innovalift, it will be because of the acquisition now, it's a big growth as you could say, supplying start, this new business area. I agree with you, the margins, the EBIT margins are developing in a nice way. But remember, our EBIT target is 15%. And we think over time, Innovalift will also make 15% as an EBIT target going forward. So with a rather long answer, I don't know if you want to add Anders to that.

[Anders Mörck, executive]

No, I think you made it very good, Johan.

[David Johansson, analyst]

Okay. Thank you. Thank you very much. Those are my questions.

[Anders Mörck, executive]

I don't see any more questions on the chat.

[Johan Hjertonsson, executive]

No. We're done then. There's no more questions being ask, basically. Okay. We know there's a lot of people calling in, listening in to this. We highly appreciate that. So thank you very much listening to the Q2 report, and I hope to, within brackets, see you all in the Q3 report later this year. So thanks from Anders and myself, and have a great day, everybody out there. Thanks.