Momentum Group AB

STO:MMGR B

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to Momentum Group AB Q2 Report 2020. Today, I'm pleased to present Ulf Lilius, Niklas Enmark and Clein Ullenvik. [Operator Instructions] I'll now hand the call over to Ulf. Please begin.

[Ulf Lilius, President, CEO & Business Area Manager]

Thank you. We move to Slide 2. First, I would like to say welcome to our web meeting presenting our interim report with my colleagues: Niklas, Executive Vice President; and Clein, Business Area Manager for Alligo. Slide 3. Just a glance. Momentum Group is today operating with a decentralized business model, where our two business areas are operationally independent of each other and our total turnover is around SEK 9 billion to SEK 10 billion. If we turn to Slide 5, I will give you some highlights on the report. Sales and earnings for the majority of the group's operations developed positively during the second quarter after the slightly more tentative start of the financial year. And the EBITA for the entire group increased by 38% during the quarter. In the Alligo business area, the integration work between TOOLS and Swedol continues in order to achieve target synergies and economies of scale over time. They work with the joint product range with new purchasing agreements and the introduction of our own product brand. And the colocation of stores is progressing according to plan. In the Components & Services business area, our work continues with acquisition-driven growth. And the four businesses we acquired during the first quarter of the year are now integrated into the business area and contribute to both sales and earnings development. Many of the group's customers have also indicated that they view -- let's say, view the outlook for the rest of the year positively, which gives us hope for continued volume increase. Despite the positive signals we see from customers and suppliers, there is still uncertainty in the outside world and in the group market. There is currently a demand surplus for certain product areas, which in combination with material shortages and global logistics disruptions lead to key price increases in a number of areas as well as in raw materials and transportation. If we go to Slide 6, Clein will give you some highlights on the Alligo business area.

[Clein Johansson Ullenvik, Business Area Manager]

Very good. At Slide 6, you end up at Alligo, and we had a growth of some 4% in the quarter and first half year, 3% growth. We see positive sales trends in all markets. But we have to bear in mind that we compared with a period last year heavily affected by the COVID-19. EBITA increased from SEK 122 million to SEK 167 million, 37%. And the EBITA margin landed on 7.7%. The integration of TOOLS and Swedol continues according to plan, 15 stores colocated in Sweden and Norway, some 15 more to follow. We have now worked in setting together the product offering. And that is in place and that will be rolled out starting this autumn. It will take some time, but it will start the rollout. And we continue to look at the logistics operation. And in Norway, we come quite far, as we communicated before, closing down the regional warehouses. So Page 7 and back to you, Ulf.

[Ulf Lilius, President, CEO & Business Area Manager]

Thank you, Clein. If we look at the Components & Services, both sales and earnings development in the business area were positive during the second quarter of the financial year. Net sales for comparable units in the business area increased by 19% during the quarter. The businesses acquired during the first quarter contributed with SEK 70 million in sales. EBITA increased by 47% for the quarter, corresponding to an EBITA margin of 12.6%. For the full reporting period, EBITA increased by 18%. Increased sales measure for improved efficiency and higher margins and a good product mix contributed to the strong profit development. And also there, flexibility mitigate the price increases. We are already seeing interesting collaboration opportunities between our new companies and our existing operations. During the quarter, a new organizational structure was introduced to strengthen the focus on growth, both organically and through acquisitions. If we go to Slide 8, the group in summary. The revenue in total increased by 6% during the second quarter. And for the full reporting period, the increase was 3%. EBITA increased by 38%, corresponding to an EBITA margin of 8.4%. And for the reporting period, EBITA increased by 17%. The investigation of the prerequisites for splitting the group into two separate listed companies proceeds according to plan. And advisory costs affecting the results in the period was SEK 2 million. The measures that we have taken continued to make a positive contribution to our earnings development, and we continued to generate strong cash flow. This gives an increase in return on working capital from 29% to 33% for the rolling 12-month period and the equity/asset ratio was 39% at the end of the period. I now hand over to Niklas. On Slide 9, he will give you summary about the cash flow statement.

[Niklas Enmark, Executive VP & CFO]

Thank you, Ulf. On Slide 9 then. My name is Niklas Enmark, I'm the CFO of Momentum Group. As I have mentioned these last quarters, we have taken a vigilant approach relating to our cash flow and liquidity situation during the pandemic, making sure that the decrease in revenues was met with the corresponding decrease in working capital and thus contributing to our cash flow. It is therefore very reassuring to see that we continue to show a strong cash flow also in the second quarter, when we meet the stronger demand and thus also an increase in our revenue level. This last quarter, our cash flow from operations before working capital changes increased to SEK 308 million. Adding to this, an effect from working capital buildup of SEK 37 million means we generated SEK 271 million in cash flow from operations this quarter and SEK 486 million for the first half of the year. Our cash for the rolling 12-month period amounted to approximately SEK 1.2 billion, corresponding to cash conversion, adjusted for effects from IFRS 16, of approximately 135%. Coming back to the working capital changes this last quarter. We see sequential development compared to the first quarter with the buildup of accounts payables as well as inventory. Adding to this for the second quarter was the increased level of accounts receivables attributed to the increased level of revenue. Effects from IFRS 16 contributing to depreciation impacted operating cash flow by SEK 92 million for the quarter and SEK 185 million for the 6-month period, which is then reduced by the same amount in the cash flow from financing activities. As I mentioned before, our level of CapEx, that is high today than before the Swedol acquisition of the CapEx during the period. The largest part has been attributed to the finalization of Örebro logistics facility as well as store adaptations and IT-related investments in the business area Alligo. If we turn to Page 10, you see some selected key ratios for the rolling 12-month period. Our top line revenue stood at approximately SEK 9.4 billion for the last 12 months. This means that compared to pre-pandemic level, basically then in March of last year, we have lost approximately SEK 300 million in turnover. Despite this, our EBITA level is close to pre-pandemic level and our EBITA margin is higher. This in turn is due to the hard work, increasing our gross margins and also good cost control during this period. Also, we have been able to generate good cash flow from operations, which here also can be seen in terms of the increased return on working capital, both through increased EBITA margins but also from the fact that our working capital turnover has increased close to 5x. And I'm especially pleased to see that we have increased our inventory turnover as well as our positive net between our days of payables and days of sales outstanding during this period. Our financial position continues to be strong. Operational net loan liabilities amounted to approximately SEK 1.3 billion at the end of the quarter. In relation to EBITA and adjusted for the effects from IFRS 16, our net debt-to-EBITDA stood at 1.7 by the end of the period. Cash and cash equivalents, including unutilized granted credit facilities, totaled SEK 1.4 billion end of the period. Related to our other external financial objective, our return on equity was 12%. This measure is, of course, affected by the restructuring reserve of SEK 97 million during last year, of which SEK 76 million is remaining at the end of the period. And as Ulf mentioned, the equity/assets ratio is strong with 39% at the end of the period. Coming back to you, Ulf.

[Ulf Lilius, President, CEO & Business Area Manager]

Thank you, Niklas. If we go to Slide 12, I'll give you some focus on the short to medium term, and then Clein will come in and give you some information about Alligo. So our three main focus areas in the short to medium term in order to take the next step in our development is, of course, the integration and merger of TOOLS and Swedol in the business area Alligo as well as always continued development and improved efficiency in all our units as well as to mitigate the demand surplus for certain product areas, which in combination with material shortages and global logistics disruptions lead to key price increases in a number of areas as well as in raw materials and transportation. And the third, important to Components & Services, is the acquisition-driven growth strategy. We have a strong financial position, and we are increasing and building a good pipeline in this business area, where we will focus on our M&A activities going forward. And I will get back to this later on. So if we go to Slide 13, Clein will give you some information about Alligo.

[Clein Johansson Ullenvik, Business Area Manager]

Thank you. And then we are back at Alligo. We have now carved out the core values, and they are being implemented throughout the business area. And it sounds perhaps fluffy, "Why do you talk about the core values?" But it's a very important cornerstone for us building this company that we have the core values in place. And everybody in each and every little entity is working with that, the management team as well. We have handbooks working with the core values, really defining who we are going forward. So now we have the most important cornerstones or pillars in place, mission, vision. We will detail the strategic objectives in the beginning of the autumn, but -- and core the values together gives us a good foundation to build on for the future. We are continuing to the preparations of a new ERP system for TOOLS in Sweden. And after that, Norway will follow. I don't think it's moving along nicely. And during the quarter, we had quite an extensive ISO certification process, some 160 entities were audited these 30 days. And it's ISO 9001, 14001 and 45001. So Sweden and Norway now in total are -- will be under the same ISO umbrella. Local integration of stores and sales forces continues as planned. Smart services are being rolled out. We see an increasing demand from our customers for these type of services. And as I mentioned before, consolidation of supplies and product ranges are ready for rollout. And the rollout of proprietary brands from the original Swedol is moving along nicely into the TOOLS system. So Slide 14, and back to you, Ulf.

[Ulf Lilius, President, CEO & Business Area Manager]

Thank you. Yes, as mentioned, the main focus of the business area is to grow through acquisitions. With more than 100 years of continuous development as our corporate culture, we're looking for more businesses that possess a number of important characteristics and that can contribute to our future development. Acquisition targets should be able to achieve long-term sustainability, profitability and growth and have a committed and proven management with the willingness to improve in a decentralized environment based on simplicity. If we go to Slide 15, and what I told you, we have three -- we've gone from two to three main focus areas. We focus on Components and Services, Technical Services and Specialist companies. And based on this strategic focus, we have so far been able to add five interesting businesses with a total turnover of around SEK 300 million. After the last acquisition, the business area has now a substantial turnover in both our focus areas, Components & Services and then also the specialist business. The acquisition pipeline continues to look interesting for further development. And hopefully, we will be able to travel in the Nordics to meet companies after the summer months. So if we go to Slide 16, yes. And of course, in addition to the priorities of the operations of [indiscernible] we have the group management that previously announced to investigate the possibility for splitting the group into two separate listed companies. And of course, the purpose is to strengthen each business area and achieving its ambition in the best way and thereby creating increased shareholder value. And the Board intends to provide additional information on the results of the assignments during the financial year. So if we now turn to Slide 17, we go over to Q&A.

[Operator]

[Operator Instructions] We have a question from the line of Karl-Johan Bonnevier from DNB Markets.

[Karl-Johan Bonnevier]

Very encouraging development in Q2, congratulations. A couple of questions on your outlook statement, Ulf, where you obviously sounds very positive that clients are coming back asking for bigger volumes. And I know a kind of nice impact that normally have on your operation if you get volumes going. But you had two disclaimers there, one being the supply chain and the other being, say, the escalating inflation of your input of goods, so to say. And how do you see being able to cope with those and balance the challenge, so to say?

[Ulf Lilius, President, CEO & Business Area Manager]

I will answer for Components & Services and then Clein can take Alligo. Well, in Components & Services, we are -- continuously have an outlook of what kind of products do we have in stock, what kind of product is running. So what we did here -- or a couple of months ago, we purchased up our stock with SEK 30 million, SEK 35 million in order to be first in line with our suppliers. And then also, we continuously have a special task force that are sourcing products all over the world to meet the prerequisites of our customers. But also then of course, we're handling the price increases by increasing our prices ourselves. But we still see that it's a big tailwind on the demand even during the summer. So you can give us some notes about Alligo, Clein.

[Clein Johansson Ullenvik, Business Area Manager]

Yes. I mean, we have said even if it's frustrating if you have stock-outs in certain products, especially if they are private label ones, that's really, really annoying. But no customer, it's -- we can always provide the functions. So if one brand is out of stock and there's a sudden problem in the supply chain, we can always provide the same function, the same product with a different brand. So it shouldn't affect the customers. It's annoying especially if it's a high-margin product, but we will keep the customers safe. We can always provide the function they require. And as per the inflation question, we are big fans of inflation. And we have a good history taking advantage of that. So inflation is good as long as you manage to push prices further in the value chain. And we have a good history of doing that. So we see that as a positive thing actually. And I think [indiscernible] communicated something similar this morning. So we see that with -- we are a big fans of it.

[Karl-Johan Bonnevier]

Sounds promising. Yes, on that note, I'm not sure if that affects you, too, so to say. But obviously, all the clients, I guess, also see this supply chain challenge. And I've heard suggestion that there might be, say, now an over-inventory building up in the customer level and trying to take early deliveries and so on to be able to meet this potential challenge. Is that something you have seen as well that might, say, if things normalize, then that might suggest that we should also have a headwind from the normalization there?

[Ulf Lilius, President, CEO & Business Area Manager]

Yes, if we will -- yes, go ahead.

[Clein Johansson Ullenvik, Business Area Manager]

No, you start it.

[Ulf Lilius, President, CEO & Business Area Manager]

Okay. Yes. For the Components & Services, a lot of our product is stock-keep at our customers. And of course, during the 2008/2009 decline, they really lowered the stock and they have not increased it so much than it was that time. And then also during COVID-19, everybody was taking down the stock. So we see also a buildup of our customers. And we also see a demand from OEM customers, which we normally don't serve. They're also calling and trying to get the product from us.

[Clein Johansson Ullenvik, Business Area Manager]

I think the question is more related to your business, Ulf. We are in the things that needs to be consumed quickly, and I have not seen any new stock buildup. So I think that the question is more related to the Components business.

[Karl-Johan Bonnevier]

Sound logical. And Clein, coming back to the update you gave on the integration, it seems like you are back a little more on -- even more on track now than you might have been in Q1 and obviously seeing the benefits from volumes coming back, so having a very nice margin impact. But if you look at the integration project, I took your answer to the last question a little that you are still running slightly behind on own brands. And maybe also if you could give some sort of color on what kind of client feedback you have got on these kind of, say, integration work where you have been successful in joining the sales forces and the store structures in different cities, how you've seen volume develop there.

[Clein Johansson Ullenvik, Business Area Manager]

Yes. No, in general, all integration activities are going just according to plan. As per the private labels, yes, there, we had an effect, as we communicated earlier. There was the Suez Canal and there was so many other -- lack of containers, I think, that had us to move a May launch of some private labels into the TOOLS system being delayed until August, September. So there, we have a little delay. When it comes to store locations, we are even a little bit ahead of plan and negotiation with suppliers and so forth. So everything is going just according to plan and with a little -- a few months' delay in the private label rollout. And so far, it has the same pattern. If you move together two shops, initially you have a slight drop in sales and then it picks up again. Just as when you start a new shop, it starts slower, then it picks up. And we see the same pattern, which gives us high hopes for the future that the remaining 15 shops will develop nicely as well.

[Karl-Johan Bonnevier]

And any early feedback on -- to customers' acceptance of the Swedol brand names?

[Clein Johansson Ullenvik, Business Area Manager]

Yes, we started with the Gesto shoes. And we were -- we were anxiously looking at the development from different perspectives. Because suddenly, you are giving even the sales force, as we said, a loaded gun because the products with higher margins and can we as a sales force to keep that margin? And it has been rolled out nicely, a well-controlled process that has been well received by the customers and have had a nice sales development. So the first product range we rolled out had a good start, which is also important, of course, going forward. So it doesn't start with failure, then it will be difficult to come back with other brands, but it had a good start.

[Karl-Johan Bonnevier]

Excellent. And Niklas, just to come back to your reasoning around the working capital, looking at, say, organic growth coming back now and volumes going up, the supply chain challenges, should we expect, say, a headwind here really coming over the next, say, maybe 2, 3 quarters to then normalize at the new level after that? Or how should we see it?

[Niklas Enmark, Executive VP & CFO]

Well, I think you are on the point there. I mean, looking at historical levels, of course, when we have this shift in revenue from some of the decrease that we have had during the last year, last quarter, we had a slight positive growth. And then this quarter, we had even more growth. Of course, that over time means that we build up working capital. So what we have seen is this sort of traditional pattern that we increase our accounts payables and also the inventory and then we grow our accounts receivables. But I think that from our point of view, we are really sort of working with these questions and trying to manage the working capital. But of course, over time, it's very difficult to grow in terms of revenue with a decreasing working capital situation. So I think that we are going to see a buildup of working capital. But in terms of sort of working capital in relation to sales, that's predominantly what we measure, I think, that we can, over time, continue to decrease that level as we go forward as well. We have seen a decrease over these last years. So I think that we are now below 20%, which I think is sort of a very good level.

[Karl-Johan Bonnevier]

Perfect. Had, had a very good move in the R to RK here of late. And I guess, that should continue. And how does it look when you break it down on the 2 units? I couldn't find that in the -- at least in my early look in the reports.

[Niklas Enmark, Executive VP & CFO]

It should be in the report. Yes, you should have it in the report there.

[Ulf Lilius, President, CEO & Business Area Manager]

Rolling 12 months.

[Niklas Enmark, Executive VP & CFO]

Rolling 12 months. Should be on -- let's just look.

[Karl-Johan Bonnevier]

Yes, if you have the numbers on top of your head, I'll take them instead. That's perfect.

[Niklas Enmark, Executive VP & CFO]

Yes. If you look at Page 5, we have it for Alligo. It's 29% return on working capital compared to 26% for the corresponding period 12 months then last year. And on Page 6, you have this for Components & Services, which is then 67%, an increase from 60% the corresponding period 1 year ago. So we see an increase in working capital return on both business areas, which is extremely good.

[Ulf Lilius, President, CEO & Business Area Manager]

There is a list.

[Karl-Johan Bonnevier]

And in the quarter, Niklas, was there a big release of restructuring reserves?

[Niklas Enmark, Executive VP & CFO]

No, we didn't think. But we have a remaining reserve of SEK 76 million as I mentioned. That means that we released SEK 11 million during this last quarter.

[Karl-Johan Bonnevier]

Excellent. And when you now look at the -- and dug into this split that has been proposed, have you come across anything that might be a deal breaker, so to say, in the process out to date?

[Ulf Lilius, President, CEO & Business Area Manager]

No, we have not. And as I mentioned also before, when we splitted the company to Bergman & Beving and Momentum Group, we made a setup that we were not so combined together so that we can eventually make another split in the future. So we took this lesson from the last time.

[Karl-Johan Bonnevier]

Sounds promising. And the idea is still to be back in the second half of this year with more firm details. So how it can happen and when it can happen?

[Ulf Lilius, President, CEO & Business Area Manager]

Yes. The last time we will continue to work during the summer to try to tie up the loose ends that we have. And then hopefully, in the autumn, September, October, maybe we can make some new information about it.

[Operator]

And as there are no further questions, I'll hand it back for any closing remarks.

[Ulf Lilius, President, CEO & Business Area Manager]

Okay, then thank you very much for listening, and do not hesitate to contact us if you have any more questions. Thank you, and have a good summer.

[Operator]

This concludes the conference call. Thank you all for attending. You may now disconnect your lines.