Momentum Group AB

STO:MMGR B

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Momentum Group AB Q3 Report 2018 to 2019 Call. Today, I'm pleased to present CEO, Ulf Lilius; and CFO, Niklas Enmark. [Operator Instructions] I'll now hand over to the speakers. Please begin.

[Ulf Lilius, President & CEO]

First, I would like to say welcome to our web meeting presenting our report for the first 9 months. If we look at the highlights. On the whole, the industrial markets in Sweden, Norway and Finland continued to display steady performance during the third quarter of the financial year, although the timing of the Christmas holidays resulted in fewer trading days and generally low rate of activity in late December than the preceding year. We had a favorable growth in Norway, enhanced by the upturn in the oil and gas sector and then Momentum Industrial. And as you can see, our actions taken in the Momentum Group have had a positive result on the result and the cash flow. In total, for the quarter, we did see a slow pace at sales in December, as I mentioned, compared to last year. But in the total, the sales volume rose by 4% and the adjusted profit by 12%. Please go to Slide 5. The earning growth and our improved operating margin are based in the efficiency work we have carried out in several of the group companies in conjunction with the increased sales foremost to the industrial sector. I'm pleased to see the positive trend in TOOLS Norway created by efficiency improvement due to the new ERP system as well as the increased demand in the oil and gas sector. The integration of Brammer's Swedish MRO business has helped Momentum Industrial to increase their sales as well as their earnings in the quarter. In addition, the acquisition we have carried out in the workwear have contributed as expected. The group's new e-commerce initiative, Brider, was also launched in December. Brider will sell tools and consumables to customer groups that the group does not cultivate through the existing market channels today. And after the end of the quarter, we also acquired TOOLS Løvold in Norway. The acquisition will strengthen TOOLS' position as a leading supplier to Norwegian industry further. In total, our adjusted operating margin increased to 5.5% and the adjusted profit increased by 12%. Please move to Slide 6. For the business area Tools & Consumables, their organic sales decreased by 1% during the quarter, mainly due to slow sales in December and due somewhat to the timing of the Christmas holidays that resulted in, as I said before, the few trading days. And we also saw a general lower rate of activity in late December than in the preceding year. The sales in TOOLS Sweden decreased due to the restructuring work we have carried out in the company, winding down of 15 unprofitable stores and also the takeaway of less-profitable assortment. In Finland, the sales were quite the same. And in TOOLS Norway, we increased our sales during the quarter with the favorable trends in the oil and gas sector.We will continue to focus on improved efficiency, and we have started to move a few of the 19 sales units, local warehouses, into the regional logistic hub in Oslo. The first aim is that the hub will serve 50% of our sales units in Norway in order to optimize logistic and assortment. The improvement activities initiated in the operations to increase profitability are continuing combined with sound cost control, and that resulted in a slight better earnings performance for the operations during the quarter compared to last year. Though, all in all, in the reporting period, we increased the operating profit by 19% and the turnover by 5% in these business segments.Please, Slide 7. Sales in the Components & Services business area increased by 14% during the third quarter of the financial year. The largest unit, Momentum Industrial, noted favorable revenue growth, with a high activity level among many existing customers, and that was, of course, then added by the acquisition of Brammer's sales unit. As I mentioned before, Gigant was the company of former B&B TOOLS which was most affected by the split of the company, and we have gradually changed its focus. And we are now changing the way of doing business internally with TOOLS chain. This in order to gain a high 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 internal cost to serve. The adjusted operating profit in the quarter increased by 25% and for the reporting period it rose by 16% for the business segment, Components & Services.If we go to Slide 8. So the aim for us within Momentum Group is to create increased shareholder value over time by giving each businesses better opportunities to develop based on its condition. And as before, the period has been eventful and our development has been positive. With the spinoff, we have continued to take important step in the improvement journey for long-term sustainable profitability, and the earnings performance has been positive every quarter.For Momentum Group as a whole, the adjusted operating profit has increased by 17% to date in the financial year and the operating margin was 5%. At the same time, we have improved our operating cash flow through the activities we have implemented to optimize the group's funds tied up in working capital. But of course, we have more to prove in the future, and that is what we will continue to work for. If we go to Slide 9, I will hand over to my Executive Vice President, Niklas.

[Niklas Enmark, Executive VP & CFO]

Okay. Thank you, Ulf. My name is Niklas Enmark, CFO at Momentum Group. And if you look at Slide 9, I would like to comment on some aspects of our cash flow that were strong for the period. As part of the continuous effort to work more efficiently with the processes around procurement and with the cash, we see that this has been an increasingly positive effect on the cash flow, where we see our cash conversion increase in this last 18 months. This was, in the last quarter, helped by the fact that it is normally a strong quarter in terms of cash flow due to the high sales levels activity during October-November time.The cash flow from operations increased to SEK 162 million for the reporting period compared to SEK 100 million for the corresponding period last year. For the last quarter, we reported cash flow from operations of SEK 154 million.Looking at the changes for the reporting period, some comments can be made. Inventory increased by some SEK 28 million in reporting period, but not -- but at a much slower pace in the last quarter on Q3. This has been in line with the comments that we made in conjunction with the last quarter, where we normally have a buildup of inventory before the October-November period.Operating receivables decreased for the reporting period by SEK 26 million despite the higher level of net sales, which is then in line with our efforts to reduce days of sales outstanding.Also in the quarter, we increased our operating liabilities after the relatively large decrease in the previous quarter that was related to customer changes in liabilities for holiday pay during the summer period. This is then in line with our efforts, also then, to increase the days payable outstanding. Taken together, the working capital changes contributed with some SEK 80 million to the cash flow in Q3.We also continued to invest in digitization, such as product information management systems, e-commerce, ERP, et cetera, which is then the major part of the investments in noncurrent assets, although we see that the level of investments have come down as we finished the implementation of the new ERP system in Norway last year. Rolling 12 months, our total level of investments, including immaterial and material investments then is at SEK 29 million.If we turn to Slide 10, you see some selected key ratios, we have to comment on a few of these. Our return on adjusted capital employed stood at 19% for the last 12 months. Return on equity increased to 18%, which can be then compared to our external financial objective of 20%. Our internal key ratio return on working capital was stable at 24%.We see that we had a strong financial position with an equity-to-assets ratio of 45% and an operational net loan liability that decreased during the quarter to SEK 297 million. We also see that we have ample room to make further acquisitions with available liquidity of more than SEK 500 million.If we turn to page -- Slide 11, we can look at the rolling 12-month numbers. We are glad to see a continued positive trend, both in terms of revenue, but foremost then, in our profit and profit margin levels. Rolling 12 months, the adjusted operating profit amounted to SEK 284 million, which was up from SEK 239 million in corresponding period of last year, and this represents then an increase of 19%. It's also up from the level that we have for the last financial year, which was then SEK 252 million. For business areas, we see that the rolling 12 months adjusted operating profit increased in both business areas, both thanks to organic growth as well as positive contributions from acquisitions made.In terms of revenue, we are now at the level of SEK 5.9 billion, which is an up from SEK 5.6 billion a year ago, and this is a result of both organic and acquisitive initiatives. Also here, we see an increase in both business areas.

[Ulf Lilius, President & CEO]

Thank you, Niklas. If we turn to Slide 13, our focus. Well, as market conditions vary, we have to adapt and adjust our operations accordingly, which is facilitated by close cooperation with our customers. The digitalization of all parts of the group's daily operations continue, of which our new e-commerce initiative, Brider.se, is a good example. With Brider, we're aiming to reach the customer groups that we do not cultivate through our existing market channels. These customers do not require the values we trade through local presence and competent, for example, smaller businesses and do-it-yourself, and we try to do service them as cost efficiently as possible. But our overriding focus is still concentrated on 3 main areas. The first one is change and improvement initiatives in TOOLS business. The second is focused -- continued development and establishment of niche offerings in current operations. And as the third, acquisition-driven growth strategy with focus on niche acquisitions.So we turn to Slide 14. In TOOLS, we're focusing on changing, but primarily in the sales by a focus on occupational health and safety products and services as well as increase the number of customers it serves.In offering, we're moving against the core assortment as well as purchase direct from producers. And internally, again, we're not changing the way of doing business with the TOOLS chain. We will by these actions get clearer sales channels to the market as well as decrease internal cost to serve. In logistic, we have established a central warehouse in TOOLS Sweden. We have one in Finland. And we are now in the start of a project like implementing the regional hub in Oslo, that place to serve 50% of those sales units.The fourth initiative is continuously adapt a local presence, and we will continue to optimize our local presence of TOOLS in the Nordic to change and streamline several local sales outlets focused on the industrial customers. So our customer focus is primarily, again, industry, civil engineering and construction and the public sector. This means that we adapt assortment for these customer segments and our logistics set up. This will enable us to get a clearer, cost-effective logistic offering and purchasing as well as sales effectiveness.If we turn to Slide 15. Our second focus is continued development and establishment of niche offerings in current operations regarding our concept within occupational health and safety in TOOLS and increased operational safety for industrial customers in Momentum Industrial as well as workwear and product media in Mercus, TriffiQ and Reklamproffsen.As I said, we also continued to invest in digital solution for target customers. And our web store into Sweden is, today, our larger sales unit with over -- with a turnover above SEK 80 million per year. And our total e-commerce in the group represent around 25% of the total transactions. So if we turn to Slide 16, Niklas will run through the acquisition.

[Niklas Enmark, Executive VP & CFO]

Right. And the third focus then is to continue with our activities within M&A. And as we have mentioned before, we look for possible companies with a strong local market position that can be further developed. We target companies that have a clear end customer focus. This last 12-month period, we have acquired 5 businesses with some SEK 300 million in annual turnover at the time of acquisition. And as Ulf mentioned, the latest acquisition that we made was that of TOOLS Løvold in Norway, with earnings sales of approximately SEK 100 million and with 28 employees. That will be consolidated as from January 2019. TOOLS Løvold was the previous partners of TOOLS in Norway. And through the acquisition, that business will now further benefit from the investments that we made in logistics, systems and assortment. In addition, TOOLS are now represented with 4 more owned branches in the Norwegian market.

[Ulf Lilius, President & CEO]

Thank you, Niklas. I'll give you some final words maybe before we open up to questions. So finally, Momentum Group's operating margin has improved significantly in recent years and the group's cash flow and financial position are stronger than have been for a long time. We also have a solid foundation to carry out further corporate acquisition, as Niklas talked about, and boost the profitability of both the operating segments through the improvement efforts we're implementing within the Momentum Group. Therefore, we will continue to take actions in each company based on their unique situation and opportunities. And our aim for the end of the financial year is for all operations to continue improving the profitability. And therefore, decentralize responsibility and cost proximity, and remain a high priority in our daily work.So if we please move to Slide 17 and open up for question.

[Operator]

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

[Karl-Johan Bonnevier]

A couple of them from me, please. Just looking at now standing here at the start of 2019, obviously, we're -- I understand we're hearing a lot from different sources about, say, maybe that demand side -- the demand in the general market is slowing down slightly or at least leveling off. What have you seen yourselves in this respect? Because I understand you are talking more of a stable kind of environment, looking at your perception of what's going on.

[Ulf Lilius, President & CEO]

We follow closely -- we do a rolling 12 charts and a 2-year back, and we can say -- see the same as you're saying. It's not dropping, but it's leveling off from a high level in Finland and Sweden. But in Norway, we see still a stable upturn. But as I have mentioned before, our market share is around 10%, 15% in total, so we have to take market shares as well in a slight sideway business trend.

[Karl-Johan Bonnevier]

And looking at the Brammer acquisition, it seems to be -- have gone very well and the integration seems to have been worked very well, looking at the margin progression you already see in that unit.

[Ulf Lilius, President & CEO]

Yes. Momentum Industrial had done a great job implementing it and taking care of the business and also scaling off the products and assortments that we didn't want to sell. So they have done a good job. And of course, we also added some competence of good new employees, in specific, very good competence in power transmission. And I can see in the figures that Gävle, which was -- had a good Brammer unit, there we are boosting sales and profitability in that local sales unit. So it has been good and vital for Momentum Industrial.

[Karl-Johan Bonnevier]

And I remember you mentioned at the start of that acquisition that you saw a slight risk maybe that the clients that had used both of you might have concerns over putting all the volumes into one source, so to say. Have you worked through that in a good way?

[Ulf Lilius, President & CEO]

Yes, we have. We have. And we had good conversations with customers. But some customers like to have 2 suppliers, and we respect that and that's nothing that is unusual. But we haven't lost any major vital business within the integration.

[Karl-Johan Bonnevier]

Excellent. And looking at the volume that you didn't want to take away, I remember you mentioned that you had some traded goods in it. So how much of the SEK 140 million operation that you, say, on paper acquired, have you really, say, integrated?

[Ulf Lilius, President & CEO]

I would say around SEK 100 million plus/minus something.

[Karl-Johan Bonnevier]

Excellent. Then looking at the acquisition you now did up in Norway, the TOOLS operation, what kind of things, synergies, can you get out of those kind of, say, in-sourcing of already, to some extent, I guess, existing volumes within your franchise?

[Ulf Lilius, President & CEO]

Of course, now when we have a common ERP system and we're fixing the logistic, in the short term, we can get some margin improvement in purchasing. And in the midterm, we will, of course, integrate them into our ERP system and then we can get some other effectiveness of logistic and, of course, employees.

[Karl-Johan Bonnevier]

So when you look at it, can you take out, say, 4%, 5% of costs in those kind of situations? Or what should -- what are you aiming for?

[Ulf Lilius, President & CEO]

We haven't really put that down. We tried to do every acquisition on what this looks. And of course, then we're looking in to get -- we don't need to have, of course, economy to -- we can move that. So a couple of percentage in costs, definitely.

[Karl-Johan Bonnevier]

Excellent. And then, yes, the small -- some small numbers there. What was the restructuring reserve at the end of the quarter, and did you utilize anything of it during Q3?

[Niklas Enmark, Executive VP & CFO]

Within kind of -- Niklas, here. During the quarter, we used SEK 3 million of the restructuring reserve. Accumulated during the year was SEK 10 million, so the remainder at the end of the period is SEK 28 million.

[Karl-Johan Bonnevier]

Excellent. And just to continue on those kind of accounting things. Have you done any preliminary calculation how you were going to implement IFRS 16?

[Niklas Enmark, Executive VP & CFO]

Yes, we have. We are conducting that right now. So we have actually a few -- probably, I guess, we had a number of contracts especially around the course and also our premises, so we're doing that right now [ to bring up those. ] But we will have some kind of clarification in our Q4 work about the financial effects. And then we'll [indiscernible] with sort of the exact effects as from 1st of April of our next accounting year. But we'll have some additional information in this Q4 report.

[Karl-Johan Bonnevier]

And your best guess at this stage, is it about SEK 1 billion that's supposed to end up on the balance sheet or...

[Niklas Enmark, Executive VP & CFO]

We're not making a guess. And I would like to refer you to the next report in order to give you a more detailed answer.

[Operator]

[Operator Instructions] As there are no further questions, I'll hand back to the speakers.

[Ulf Lilius, President & CEO]

Okay. Thank you very much for taking time to listen to us, and please do not hesitate to call if you need some more information. Thank you, and have a nice weekend to all of you.

[Operator]

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