Investment AB Latour

STO:LATO B

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to Investment AB Latour Q3 2022 Report. [Operator Instructions] Today, I'm pleased to present Johan Hjertonsson, President and CEO; and Anders Morck, CFO. Please begin.

[Johan Hjertonsson, executive]

Thank you, Ma'am. Hi. This is Johan Hjertonsson, and I'm here together with our CFO, Anders Morck, and very welcome to our Q3 report presentation. And if we go into the first slide here, I'd like to say that our group structure is unchanged from last quarter. We had a good quarter despite the declining economic climate and the global turbulence, I'm sure that you're all aware of. There is a high pressure on our organization to manage and deal with all the headwinds, but I have to say -- and I would like to say that we're handling that all very well and I'm very proud of our organization, taking us through this quite turbulent times.

So this is actually the best third quarter so far in absolute figures. As we've said before, we are very alert to continue changes in demand and are prepared to adjust quickly. And as I noted, I'd like to underline, that's also what we've done before in previous years and lower economic cycles. So we're all prepared for that. But the third quarter was very strong. We're proud of that.

So if we go into the next slide to comment on our listed portfolio. And there's no changes in the listed portfolios and we'd like to point out -- and as you all know, there is a broad decline in the stock market, which is affected by the overall instable economic climate. The investment portfolio is down 37.6%, whereas the SIXRX is down 30.5%. And until yesterday, the portfolio value increased somewhat from the low level at the end of September to SEK 62.7 billion and the total returns amount to 36.6%. So far, this year, minus 36.6% this year compared to the SIXRX of minus SEK 24.4 million.

In general, I would say there is a good development in the holdings with 1 or 2 exceptions, some of them with very good development, however, in some cases, also with a lower order intake. And there is pretty much the same situation here is in our wholly owned operations with supply chain disruptions, cost inflation and large exchange effects.

We've maintained a fairly high acquisition activity. We've done a number of acquisitions and add-on acquisitions to the portfolio. But a couple to mention, maybe specifically the security has entered into the acquisition of Stanley Security in July and thereafter conducted share emissions, where Latour participated with SEK 1 billion. Alimak also signed an agreement to acquire Tractel, which later on will result in a share emission where Latour will participate with close to SEK 0.75 billion.

And if we go to the next slide, please then, and to comment our wholly-owned industrial operations. As you can see, very strong, good third quarter. Demand remains at a high level on most markets with the exception of China, I would say. The growth in order intake is actually 1% up organic compared to a very strong growth level in Q3 last year, resulting in a very high order book, which is promising for the invoicing for the coming months, I would like to point out.

Good strong invoicing with a 30% organic -- 13% organic growth. However, supply issues remain. When it comes to logistics and components and semiconductors and so on. But it's good to note that the situation has improved slightly compared to earlier this year. We are battling the challenges with cost inflation and large currency effects and -- but nevertheless, this results in good volumes, but with slightly lower margins. And the reason for that is, as we pointed out before, that we do put a high priority on servicing our customers, and we think that's a very important competitive advantage going forward.

One way to do this is, of course, to keep a higher inventory and therefore, have a high service level when it comes to delivery to the customers. Hence, we have a slightly lower cash flow than normal at the third quarter. We believe this will start to normalize in the next couple of quarters.

And operating profit grew with 27% to SEK 784 million in the quarter, thus resulting in an EBIT margin of 13.9%. We continue to invest in our holdings with a forward-looking view, not only within sales, market and product development, but also with a clear sustainability focus going forward.

And then on the next slide, I'd like to comment on the acquisitions so far this year. And during the quarter, we have finalized 2 transactions and actually 4 more after the end of the quarter. In the quarter, we acquired ABC Ventilationsprodukter. ABC is a Swedish company that will complement Swegon's product range to include roof hoods, louvres and fire and safety products. Net sales of about SEK 140 million and 90 employees.

Latour Industries acquired MAX/AGV. And MAX/AGV is a leading mobile robotics and software company providing automation technology with good handling solutions with headquarters in Mölndal in Sweden and has 67 employees. Net sales amounts to about SEK 160 million, of which the vast majority is exported.

And after the end of the quarter, Hultafors Group acquired Martinez Tools Co, a manufacturer of premium tools, for example, customizable, high-quality titanium hammers. LSAB Group within Latour Industries, acquired Lahden Teräteos Oy, I hope I pronounced that correctly, a specialized Finnish manufacturer of customized and tailor-made tools for profiling and supplier of standard tools for the woodworking industry.

And then we made 2 acquisitions within the 2 future solutions: SenseNode and Anolytech. SenseNode has developed a complete IoT solution with associated SaaS platform for energy efficiency in all types of industries to save energy, to save electricity actually. And Anolytech has developed a circular system for producing effective disinfection completely free from the use of harmful chemicals. So very welcome to all of these mentioned companies.

And earlier this year, just to remind, we acquired Telesteps, Consens, Esse-Ti, PHS Logistiktechnik and Barcol-Air. So all in all, we have concluded 11 transactions so far this year up until today, which adds about another SEK 1 billion of sales -- of annual sales to the group. Just underlining including also the transactions after the third quarter. So having said that, as a long introduction, I hand over to Anders.

[Anders Mörck, executive]

Thank you so much, Johan. And we now are going to talk each and one of the business areas that we have. So we're starting with Bemsiq where we have seen a continued strong underlying demand in a growing market. The total growth for Bemsiq during the quarter was 48% to a large extent, then explained by acquisitions, but also to excellent organic growth.

The order intake grew organically by 17% and net sales by 13%. In this business area, as in all, we see lack of components being a big challenge, but it's been handled very well by the business area. As you can see, very strong profitability. The profit grew to SEK 82 million in the quarter from SEK 58 million last year with an operating margin of 25%. And so very well done, we can say.

We turn to the next page and go to Caljan. And as you have noted, Caljan had a very, very high order intake for a long period. But now this quarter, we see an expected lower order intake during the quarter. However, the order book is still very high, which will cover a good part of next quarter and also a good part of 2023 for Caljan. Net sales is developing very positively following the earlier higher order intake and is significantly above last year, growing organically by 60% in the quarter.

And exactly for -- as for all other business areas, Caljan has challenges within the supply chain. And I don't think we have to go through details there because all are aware of them. But we have managed them very well. And as you can see, the profitability in Caljan is excellent, EUR 14.8 million, not Swedish kronas, compared to EUR 7.6 million last year. So it's almost double the level and the operating margin is 23.3%. So very well done also by Caljan, and we go to the next page, Hultafors Group.

And as you can see, net sales grew by 19% in the quarter, and the organic growth for Hultafors was 4%. Hultafors has had a lot of supply chain challenges as well. But above all for Hultafors, the strong U.S. dollar is affecting very negatively, which also has had a quite large negative effect on the profit measures for this are in place, for example, price increases.

All in all, operating profit increased to SEK 176 million with a margin, of 11.2%, which then under normal circumstances could have been substantially better. But I think you should look on the picture to the left here, where you can see the long-term trend for Hultafors that has been growing and doubling rolling 12 profits in 2019 from SEK 400 million per year to now being a bit above SEK 800 million, almost SEK 900 million.

So having said that, for us, the long-term development is the important thing. And we know that our Hultafors are doing the right things to increase and strengthen the profitability again.

Yes, we turn to the next page and go to Latour Industries. We have seen a good underlying demand with an order intake growth organically by 10%. You can see strong net sales, total growth of 35% and of which 16% were organic. And as for all other business areas, we have increased costs for raw materials, transportation, energy and so on. And this affects profit in the short term negatively and the profitability in the business area is still low.

And as you know, we are building future business areas in Latour industries. So we have a lot of costs for extensions, which means that in the long run, we have a capability of doing much better profits here. The acquisition agenda for Latour Industries continues both with add-ons and also to try to find new platforms.

Okay. So we turn to the next page, which is Nord-Lock. And we can see continued positive development for Nord-Lock despite and also considering the downturn in China. So the development this year has been saved, you can say, by good development in Europe and Americas. Even if we now see some sign of declining market even there.

In total, relatively strong net sales, total growth, 19%, of which 7% is organic and the operating result increased to SEK 104 million with an operating margin of 24.6%, which is really strong, I must say, considering the China situation.

Let's go from the last business area, which is Swegon, and Swegon had a relatively strong quarter. Organic growth in order intake was 5% and the net sales organically grow by 11%. As you remember from second quarter, we are going to have quite severe challenges by disruptions in the supply chain. But from July and especially from August, the situation has been stabilized, considering that the rebounds in the third quarter results are really strong, we must say.

The operating result increased to SEK 184 million with a margin of 10.7%. So very well done Swegon. Then we don't go to the 7th business area, but we go to net asset value instead. And that is -- as you can see, it has decreased during the year with 30.5% to SEK 148 per share. And this can be compared with the share price at the end of September of SEK 186, which means that there were -- there was a premium to our net asset value of 26% at that time compared to our relatively prudent valuation of the net asset value.

And yesterday, the net asset value increased to SEK 151 per share and the share price was SEK 188, and the premium was 24%. And also commenting on our net debt is the increase due to acquisitions from SEK 9.8 billion to SEK 9.9 billion during the quarter. Not so much then.

The total net debt now corresponds to about 10% of the market value of our investments. Still on a fairly low level even though the market values of our listing portfolio was very low at the end of September. Yes, I think that was that, Johan. So I hand over back to you again. Johan, we can't hear you.

[Johan Hjertonsson, executive]

Sorry, I think I'm back there. So thank you, Anders, I should say, from your presentation, facts or not. I'd like to comment on the financial targets. And as you all know, the mature companies and where we invest, we would like to see a growth of over 10% annually, and an operating margin above 10% and a return on capital, 15% to 20%.

So during the last 12 months, we have had growth of 26.1% and rolling 12 months. The EBIT margin of 13.9%, rolling 12, and the return on operating capital was 15.4%. So we have achieved all the targets that we have -- that for our whole owned industrial operations. And let's remind ourselves operating margin of 10% is a minimum target for the 2 companies.

So all in all, a very strong performance in the industrial operation, and we're very proud as a team having done that. And then on the next slide, on the international growth. And as you know, Latour is a long-term sustainable investment company with a financial strength that enables us to continue investing in existing and new holdings despite short-term market slowdowns and disruptions where we're in right now.

And our long-term ambition to grow has not changed. We are delivering on the growth target, as I just pointed out. But there is a large potential that remains, as you can see from this slide. We continue with all the long-term initiatives in our companies and act with a long-term forward-looking view. And at the same time, we are monitoring the better economic development and the overall geopolitical situation closely and are always prepared to act and react to changes that affects us.

So having said that, on behalf of Anders and myself, I would like to thank you all for listening. And then the next slide is actually a little bit prompt for our Q&A session. So I hand over to the operator here to take this forward to the Q&A session.

[Operator]

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

[Joachim Gunell, analyst]

So starting off with any comments here from you with regards to the visibility you see today in comparison to, say, a quarter ago? And what gives you confidence here into early 2023 based on the order book?

[Johan Hjertonsson, executive]

Yes. I think I can start and maybe, Anders, you can add. I think as you can see, when you read this report, we're pretty confident on the Q4. Of course, we have a very high order stock so that we're quite sure that will be strong. And as naturally as long as you go into the future, more the harder is to predict, right? But I think I have to say I'm positively surprised that the demand is still so good given everything that's going on in the world right now with Russia's war in Ukraine, energy prices, high inflation and high interest rates. So I have to say, I think the overall industry is quite resilient.

So I think with that as a backdrop and inflation would not bite into their economy and stay for long. I'm quite positive going into 2023. Let's say it like that. So do you want to add, Anders, to that picture or?

[Anders Mörck, executive]

No, I think you summarized it pretty well. Maybe you can say that all of our business areas do not have order stocks in the same -- to the same extent. Of course, like Hultafors group is more day-to-day sales even we had good sales in the third quarter. So for some business area, of course, we feel the confidence to a larger extent.

[Joachim Gunell, analyst]

Understood. And is there -- to rephrase that question, is there any structural changes to the, say, composition of the industrial operations that you would like to call out to that really dampens the cyclical amplitude of your construction industry exposure and should basically quite raise the trough earnings level in the industry operations.

[Johan Hjertonsson, executive]

Yes. I think if we come to the industrial operations, you could say, for instance, you could say Swegon and Bemsiq are quite dependent on the construction industry. Both Swegon and Bemsiq are very related to energy efficiency and saving energy for heating and ventilating and cooling buildings. Bemsiq with all their monitors and control systems and Swegon with their units to ventilate the celling and heat the buildings.

So I think in a very efficient way. So I think I would say those 2 business areas are very well positioned in a climate with higher energy prices. And as you know, in Europe, there is a huge initiative from the European Union to invest into green buildings and I think that comes in play quite nicely for both Swegon and Nord-Lock. To mention a couple of examples in our industrial operations within Latour Industries, we have Aritco and Vimec for instance, which are doing platforms, elevators and other type of elevators for disabled and elderly people. I mean that's a strong macro trend that will be there also during a downturn.

So I think the resilience is quite strong. And I think it's a good question, Joachim, because you should not just lump sum everything together and say it's construction. You have to see a little bit underneath, which segments within constructions we are positioned. So having said that, I think we're quite nicely positioned in even a downturn in the construction market.

[Joachim Gunell, analyst]

That's great. And a final for me and I'll get back into the queue. So is there anything that you can say with regards to, say, overall inventory levels that you're seeing across your customers channels and perhaps if there's any particular business segment within the industrial operations where there is reason for concern or become incrementally positive.

[Johan Hjertonsson, executive]

Okay. Maybe you want to start on that, Anders. And then I add.

[Anders Mörck, executive]

Thank you, Johan. But we definitely have a stock level that today is higher than before. And that is, to a large extent, actually explained by inflation because the same thing on stock now constitutes a higher value. But I guess, you also asked about if we have seen stock adjustments with our customers, yes. And then I would say we don't see it yet, but we are prepared for that to have them. And when it happens, we consider it actually to be a one-off.

You can see that we have had higher order intake for a very long time the net sales, and that is also a sign of that our customers have been placing orders early to make sure that they have the right things on their shelves when they need to deliver to their customers. So of course, the whole system from raw material to end customer is somewhat a little bit so they're prepared for delivering and the system as a whole is not optimized at the moment. So at some point in time, we expect some adjustment to normal levels, and that will, of course, then effect also in the short term, the demand. But it's not that we have seen it yet. I don't know if that was the answer that you were looking for, Joachim.

[Joachim Gunell, analyst]

But I think it helps paint the picture more comprehensive with regards to what we have seen in terms of your net working capital buildup over the year. But I'll now get back to the queue and come back if there are any further questions.

[Operator]

[Operator Instructions] And our next question comes from the line of Rasmus Engberg from SHB.

[Rasmus Engberg, analyst]

I had a question with regards to your order intake, given the very ups and downs we've had in the last few years. Would you think, in your mind, we did grow 1% organically like-for-like in this quarter. Do you think we will recover from that or maybe pass through in the fourth quarter? What's your best guess on the situation in your industrial businesses for orders in the fourth quarter.

[Johan Hjertonsson, executive]

It's a good question. It's hard to say there also a little bit related to commenting on the overall demand going forward. I can't confidently say that we're not losing market shares in any of the 6 business areas that I would like to point out. On the contrary, we are taking market shares. And I think also here, I think you should look at each business area separately, as Anders pointed out earlier on, you could see in Caljan, we have seen extreme high order intake growth over the years related quite a lot to the very strong logistics demand during the pandemic. And there, you can see that, that order intake is normalizing, I would like to say. So it's -- we have to see what we compare with. And so -- but otherwise I am quite -- and as I said before, I'm quite positively surprised that there is a good demand there going forward.

[Rasmus Engberg, analyst]

The second question, just generally speaking, with these very large currency moves that we have, which at the moment, at least it looks like they will be even bigger in the fourth quarter. Net-net, does that impact your margin positively or negatively on the group level for your industrial holdings? Is it a positive or a negative, you think, overall?

[Johan Hjertonsson, executive]

That's question for the CFO. So over to Anders.

[Anders Mörck, executive]

Thank you for that Johan and Rasmus. Yes, I would say we are quite near 12, but it's spread over the business areas with the different exposures, where I could say that Hultafors, the dollar will continue to be a negative exposure and it's always difficult to make the right price adjustment if the currencies are very, very volatile. It can go back as well. When it comes to Nord-Lock, maybe that is the extreme that is supported by the dollars positively. And all in all, those together may be takes each of them out. And the exposure is not so big in our other business areas to be honest. So we have a good spread or diversity in our assets from that point of view.

[Operator]

Our next question is a follow-up question from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

So yes, just a final one for me. So we've seen how listed valuation has correct but more than private ones. So can you say anything with regards to issue at this stage are incrementally and we're open to add a new listed portfolio holding? Or will the focus continue to be on basically industrial operations we've seen what is 9 acquisitions already this year?

[Johan Hjertonsson, executive]

Yes. Thank you, Joachim. Good question. I'd like to comment like this that I think when valuations come down, they come down first in the listed market. And my experience is it takes about a year or so or more before that spills over to the sellers in the private market. But I think we can see now that also pricing is getting more normalized so to speak on the private market. And I think also there is less competition also in the private market because the credit market is quite restrained, as you know, right now. And that should further drive down prices on potential acquisition targets. So -- but having said that, we look at the complete market on both the listed and the private market when we invest and pursue our investment strategies to see where it makes more sense and where we find great ideas and great companies irrespectively if it's listed or private in that sense.

[Joachim Gunell, analyst]

Great. And given that we've seen you support your listed holdings in both Securitas and Alimak, can you just help us with what you were, call it, financial flexibility is to basically continue to pursue a systematic M&A?

[Anders Mörck, executive]

We have -- we still have a good portion of space for new investment, even we just put in SEK 1 billion in Securitas, and we will soon when the competition authorities will allow Alimak to acquire Tractel which will give that is SEK 740 million on Latour's account when that share issue will be dealt with. But after that, we still have a level of, say, SEK 2 billion to SEK 3 billion in considering our internal limit that is official and that is 2.5x our EBITDA plus 10% of the value of our listed portfolio. And as you all know, the listed portfolio has been reduced during the year. So if it should be valued as it was in the beginning of the year, the acquisition strength on muscle. However, you would put it would be even higher. And from that point of view. So we feel confident that we can continue in the same pace as before.

[Operator]

[Operator Instructions] And as there are no more questions registered. I hand back to our speakers.

[Johan Hjertonsson, executive]

Okay. Thank you. And on behalf of Anders and myself, that concludes the presentation of the Q3 results. Thank you all for dialing in and listening. And we'll speak to you again on the Q4 results in next year. So thank you all for your time, and that concludes the call then. Thank you.

[Operator]

This now concludes our presentation. Thank you all for attending. You may now disconnect.