Momentum Group AB

STO:MMGR B

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, welcome to the Momentum Group AB Q2 Reports 2018. Today, I am pleased to present CEO, Ulf Lilius; and CFO, Niklas Enmark. [Operator Instructions] Speakers, please begin.

[Ulf Lilius, President & CEO]

Thank you. First, a warm welcome to the web meeting presenting our interim report for the first 6 months here with my colleague, Niklas Enmark, Executive Vice President and CFO. And I will give you some highlights if we move to Slide 4. Our main markets continue to display stable conditions during the second quarter with favorable growth in Norway, enhanced by the upturn in the oil and gas sector. Our actions taken in tools and other areas have had a positive impact on the result. In total for the quarter, we can see a slow pace of sales in the 2 summer months, primarily in Sweden, compared to last year. But in total, the sales volume rose by 6% and adjusted profit by 8%. We move to Slide 5. As I mentioned, the overall business situation has been stable, and we have strengthened our position on main markets in the Nordics during the quarter. The earnings growth and our improved operating margin are based on the efficiency work that we have carried out in several of the group companies in conjunction with increased sales, primarily in the industrial sector. I'm very pleased to see the positive earnings trend towards Norway, created by efficiency improvements due to the new ERP system as well as the increased demand in the oil and gas sector. In addition, the acquisitions we have carried out in workwear have contributed as expected. The integration of Brammer's Swedish MRO business was concluded during the quarter, comprising 8 local sales and service units across Sweden. Our general meeting was also held during the quarter and we have paid out a dividend of SEK 73 million. Our adjusted operating margin increased to 5% and the adjusted profit increased by 8%.If you could please go to Slide 6. If we look at the business area, Tools & Consumables, for the quarter, the sales decreased by 1%, mainly due to the slow start in Sweden in the summer month as well as the winding down of 15 unprofitable stores. In Finland, the sales were almost the same and they are now taking strong comparative months. Combined with sound cost control, a continued focus on customer cultivation resulted in a stable earnings performance for the operation during the quarter, and we had an operating margin that remained above 5%. Sales in TOOLS Sweden decreased due to the restructuring work carried out in the company. The improvement activities initiated in operations to increase profitably are continuing and includes -- and improved sales promotion, investments in e-commerce and digitalization and also changes in purchasing and logistic. TOOLS Norway increased their sales during the quarter with the favorable trend, as I mentioned, in the oil and gas sector and also with the stable demand in the other customer groups. Along with the actions taken to improve efficiency after the ERP implementation, the increase in sales had a positive impact on the earnings trend. We continue to focus on improved efficiency and reduction of costs in the TOOLS business and we have started to establish a regional logistics hub in the Oslo area, which would serve 50% of the sales in Norway.In addition, the group company specializing in workwear and profile materials noted continued positive sales and earnings trend during the quarter. All in all, this affected our operating profit in the quarter compared to last year, even though we had a positive earnings trend to some of our companies in the quarter. In the reporting period for the business area, we increased our operating profit by 30% and the turnover by 7% with an operating margin of 3.5%.We go to Slide 7, I'll give you some comments about the Components & Services. In this business area, the sales increased by 8% during the second quarter. The largest unit, Momentum Industrial, noted favorable revenue growth with a high level activity of many existing customers. Momentum Industrial consistent work by improving their business has contributed to good organic sales trend during the quarter and also aided by the acquisition of Brammer's sales units that is completed according to plan. Momentum net sales increased during the quarter and the business passed for the first time SEK 100 million in sales in a month in September.As I have mentioned before, Gigant was the company in the former B&B TOOLS, which was most affected by the split of the company and has gradually changed its focus. And we are now changing the way of doing business internally with the tools change in order to gain a higher profitability next fiscal year, both for TOOLS and Gigant. We will, by this action, get clearer sales channels to the market as well as decrease the income and cost to serve. For this business area, the adjusted operating profit in the quarter increased by 3%, and for the reporting period, it rose by 11%.We move to Slide 8. For the reporting period, when the Board of Directors of B&B TOOLS decided to propose a split of the group into 2 independent stock companies, Bergman & Beving and Momentum Group, the aim was to create increased shareholder value over time by giving each business better opportunities to develop based on its own conditions. For us, with being the Momentum Group, the period has been eventful and our development has been positive. Since the spin-off, we have continued to take important step in the improvement journey for long-term sustainable profitability, and earnings performance has been positive every quarter since then. The last quarter was also positive despite the impact of the slow summer months, especially in Sweden. But we summarize growth in adjusted operating profit to a total of 20% for the TOOLS reporting period and the operating margin to 4.7%. But of course, we have more to prove, as I have said before, and that is what we are working for in the coming months.So if we look to Slide 9, I will hand over to Niklas.

[Niklas Enmark, Executive VP & CFO]

Thank you. My name is Niklas Enmark. I'm the CFO with the Momentum Group. And on Slide 9, I would like to highlight some aspects of our cash flow for the period. The cash flow from operations increased to SEK 8 million for the period compared to minus SEK 29 million for the corresponding period of last year. This means that on a rolling 12-month basis, cash flow from operations amounted to SEK 129 million compared to SEK 92 million the last financial year.We have a firm focus on our working capital as we grow, and looking at the changes for the reporting period, some comments can be made. The inventory increased by some SEK 19 million in the reporting period and SEK 22 million during the second quarter. The buildup of inventory during the quarter is very much related to preparation for the active sales period of October and November as we also commented on the interim report today. Operating receivables increased for reporting period by 49 -- SEK 41 million. And this increase comes from the higher activity levels we see among customers, especially in Norway, but also for Momentum Industrial in Sweden. The largest change in working capital during the quarter was, however, operating liabilities, which decreased by some SEK 67 million during the quarter and for a total of minus SEK 32 million for the reporting period. And this is due predominantly related to customer changes in liabilities for holidays during the summer period.Looking at the investment side, as we have completed the ERP investments in Norway last year, we see that level of IT-related investments have decreased to SEK 7 million for reporting period for a total of SEK 13 million compared to SEK 10 million and SEK 17 million, respectively, for the previous year. Rolling 12 months, our total level of investments is at SEK 32 million. During the reporting period, we have made 2 acquisitions, Profilmakarna in Södertälje, adding to the group more profitable companies within workwear and product media and within business area Tools & Consumables; and also the Brammer MRO business in Sweden, which has now been integrated into Momentum Industrial.Turning to Slide 10, you see some selected key ratios. Our return on adjusted capital employed stood at 18% for the last 12 months. Return on equity increased to 18%, which then can be compared to our external financial objective of 20%. Our internal key ratio profit over working capital reached 24%, increasing from 21% a year ago. We see that we have a strong financial position with an equity-to-asset ratio of 42% and an operational net loan liability of SEK 419 million. The change during the quarter for the last year was mostly related to the paid out dividend of SEK 73 million as also we commented on. So in conclusion, we have ample room to make further acquisitions with available liquidity of around SEK 400 million.Turning to Page 11 and looking at the rolling 12-month numbers, we are glad to see a positive trend both in terms of revenue but almost in our profit level. The rolling 12-month adjusted operating profit amounted to SEK 275 million, up from SEK 207 million, a corresponding period of last year, and up from SEK 252 million for the financial year '17/'18. For business area, we see that the rolling 12-month adjusted operating profit increased in both business areas. In terms of revenue, we are now at the level of SEK 5.8 billion, up from SEK 5.5 billion rolling 12 months a year ago and SEK 5.6 billion at last financial year, and this is a result of both organic and acquisition initiatives. Also here, we see increases in both business areas.

[Ulf Lilius, President & CEO]

So if we go to Slide 13, I give you some comments about what we will continue to do. As you have heard before, our focus is still concentrated on 3 main areas: change and improvement initiatives in TOOLS; our second focus, continued development, establishment of niche offerings in current operations; and third, as Niklas mentioned, that we have ample room for niche acquisition growth-driven strategy with a focus on niche acquisitions.So if we go a little deeper in the first one, we turn to Slide 14. In TOOLS, we focus on changing, improving and streamlining the sales focus on occupational health and safety products and services. And of course, our updated e-commerce platform as well has increased the number of customer visits. In our offering, we're moving against the core assortment as well as purchase direct from producers. In logistics, we have established a central warehouse for TOOLS Sweden. We have one for Finland. And we are now in the preparation of making a regional hub in Oslo that will serve 50% of our sales units in Norway, which is 20 out of 38. The fourth initiative is to continue to adapt our local presence. We will continue to optimize or rightsize our local presence of TOOLS in the Nordic to change and streamline several local sales outlets focused on the industrial customer. However, we will continue to sell to industrial customers in these areas as we will continue to visit the customer with the thin sales. Our customer focus is primarily again industry, civil engineering and construction and the public sector. This means that these are what we are adapting for, both assortment and our logistics setup. This will enable us in the future to be -- have a clearer cost-effective logistic operating sales as well as purchasing.If we take a second one, we turn to Page 15. As I mentioned, our second focus is to continue development of these niche offerings that we have within occupational health and safety and the increased operational safety for industrial customer in Momentum as well as workwear and product media in Mercus, TriffiQ and Reklamproffsen. And we also continue to invest in digital solutions for target customers. Our web store into Sweden is today our largest sales unit with a turnover of SEK 80 million per year. And our total e-commerce in the group represents around 25% of the total transactions and 15% of the volume.So if you go to Slide 16, Niklas will give you some update on acquisitions.

[Niklas Enmark, Executive VP & CFO]

Right. On Slide 16 then, highlighting the metrics of the M&A activities that we pursue. As we have mentioned before, we look for profitable companies with a strong local market position that can be further developed with target companies that have a clear end customer focus in the Nordics. Within the existing businesses, we see opportunities to acquire both for geographical expansion and to know then the existing product offer. In terms of market segments, we think that workwear, personal protection and the industrial components and services are especially interesting. And these last 12 months, we have acquired 5 businesses with some SEK 240 million in annual turnover at the time of acquisition. And we also see that we have ample room for continuing our acquisitions with a good cash flow and available liquidity.

[Ulf Lilius, President & CEO]

Yes. And I can give you some, of course, final words before we open for questions. Finally, after summarizing this past year, we have made many good efforts to improve our business and we will continue to improve workwear and as well these most critical and existing units. Coupled with reduced working capital, it's on top of the agenda, of course, to increase profitability. Therefore, we will continue to take actions in each company based on their unique situations and opportunities and customer closeness and customization of our offering and safe channels, both local and digital. It's very important so we can be better than yesterday. So let's open for questions now.

[Operator]

[Operator Instructions] Our first question comes from the line of Karl-Johan Bonnevier of DNB Markets.

[Karl-Johan Bonnevier]

Just to kick off a couple of things. Looking first at the tools operation in Sweden, how long do you still see the impact of these 15 closures that you have done impacting? Is that coming into the year-on-year comparison now?

[Ulf Lilius, President & CEO]

Yes, it is.

[Karl-Johan Bonnevier]

So basically, as of your Q3, that impact is out of it.

[Ulf Lilius, President & CEO]

Yes.

[Karl-Johan Bonnevier]

Excellent. And now you describe that you have had a couple of 2 slow summer months and I can say I understand considering the heatwave we have had and all these kind of things. And I understand from your comments that you saw the expected pickup, so to say, heading into the, say, your high sales season.

[Ulf Lilius, President & CEO]

That's correct, that's correct. We saw a pickup in September and we also have seen a better trend in the first weeks of October.

[Karl-Johan Bonnevier]

Excellent. And now when -- I think you described your opportunity in a good way, looking at the 3, say, target areas as you describe them. If you look at the first one, say the initiatives within the TOOLS change, what kind of, say, time lag do you see for also seeing this impact coming through in the profitability and improvement in R/RK.

[Ulf Lilius, President & CEO]

I will see -- if you take TOOLS together, we will see a little bit better impact now in Sweden because now we have around the central warehouse for a while and we know what to have there and not to have there. And then in Finland, we have invested. But in Norway now, we are making the third regional hub. We made one many years ago up in Tromsø, north of Norway. We have one in Stavanger for the oil and gas. And now we have this in Oslo that will help us with the RK.

[Karl-Johan Bonnevier]

So basically, this is something that should come through over the next, say, 12, 18 months or something like that?

[Ulf Lilius, President & CEO]

I would say so, yes.

[Karl-Johan Bonnevier]

Excellent. What's your first impression of the Brammer acquisition? Has it come into your numbers as expected? Have you managed to keep, say, client volumes in the way you expected to?

[Ulf Lilius, President & CEO]

Yes, we have. If you look at the Brammer acquisition, we decided to do the asset deal first in order to put the people with our people. So we didn't get the cultural change and have its branches at 2 places at the same geographical location and that we managed very well and that has been good. If we look at the volume, we had 140 million. We took over 40 million with more tools and supplies and that we are trying to move to TOOLS in Sweden or maybe not to do that because that is not profitable for Momentum Industrial to do. So if we look at the volume and we look at the risk, it has gone, so far, according to plan.

[Karl-Johan Bonnevier]

Excellent. And just one final thing. Looking at now heading into this high sales season and you described you're looking at, say, establishing new niches and then focusing on your niches. Are there any particular niches that you have added during this sales season compared to what you have had before?

[Ulf Lilius, President & CEO]

No, it's more the niche that we add now is to get more in service in Momentum Industrial and pick that up. That is the niche that we are more focusing on. And of course, also the occupational health and safety more and more in Norway now when we have the ERP system and we have a common platform.

[Operator]

[Operator Instructions] As there are no further questions coming through at this time, I'll hand back to our speakers.

[Ulf Lilius, President & CEO]

Okay. Thank you very much for taking your time and don't hesitate to call us if you have any more questions. We are more than welcome to answer them. So thank you very much from me, Niklas and Mats Karlqvist is also a representative. Thank you. Bye-bye.