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Ladies and gentlemen, welcome to the Momentum Group AB Q3 report for 2019. Today, I'm pleased to present the CEO, Ulf Lilius; and the CFO, Niklas Enmark. [Operator Instructions] I'll now hand over to the speakers. Please begin.
Thank you. Maybe you could put on Slide #2. And first, I would like to say welcome to our web meeting, presenting our interim report for first 9 months, together with my colleague, Niklas Enmark, Executive Vice President and CFO.If we go to Slide 4, we will look at the highlights for the quarter. The industrial markets in Norway continue to display a stable performance during the third quarter. In Sweden and Finland, we could sense a little bit weaker sentiment in some customer segments. We continue to improve our efficiency and profit, which resulted in an increase in EBITA of 3% to SEK 92 million compared to SEK 89 million previous year as well as improving our cash flow. Decentralized responsibility. We increased coordination within TOOLS in 3 countries, and acquisition has been in focus for the financial year in order to improve EBITA compared to last year. The merger of Swedol and TOOLS will create favorable opportunities for the next fiscal year. At the same time, we're continuing to evaluate attractive acquisition opportunities in the business area, Components & Services, in order to strengthen our position.Slide 5. As you all know probably, in mid-November, we took a strategic important step through the offer for Swedol. Together with TOOLS, we are creating a stronger partner in the market. We are confident that the combination of TOOLS and Swedol's complementary customer focus and sales channels will help our 2 companies to become an even stronger and more attractive business partner for our customers, suppliers and employees. Together, we will be able to strengthen our product ranges, procurement channels and logistics solutions. We will be able to increase the proportion of own brands and develop an even better service offering and new digital solutions. I've been following Swedol for quite some time, and I'm impressed by their development since the acquisition of Grolls. And the merger is very logical from an industrial perspective and will create favorable opportunities to continue to generate value for our owners. The ambition is to improve the EBITA margin of the new business area to 10% over time from today's 6.5%. We are now awaiting approval of the merger from the national competition authorities in Sweden and Finland and hope to, thereafter, be able to complete the offer during March 2020.Slide 6. As I mentioned, the overall business situation has been quite stable, and we have increased operating profit, excluding costs from the acquisition of Swedol, in the quarter even though the revenue decreased slightly for the comparable units in local currency. The end of the third quarter was characterized by somewhat lower activity among customers, but trends varied significantly between different customer segment and product areas with negative effect on sales of winter workwear due to the relatively mild weather. It is encouraging to see healthy revenue growth in Norway, where demand in the oil and gas sector remain favorable. It is also positive that our acquired businesses have contributed to revenue growth so far this year. The logistics product in Norway was expanding during the late autumn to encompass more local units, and additional extra cost of SEK 4 million was taken in the third quarter due to the expansion of the logistics function, and this had a negative impact on earnings as well. In total, for the quarter, we continued to improve our EBITA margin as well as in percentage and numbers compared to last year due to increased gross margins and efficiency actions taken.If we turn to Slide 6. For the business area Tools & Consumables, the sales decreased by 2% organically during the quarter. As I mentioned, we had stable demand in Norway but weaker than normal in Sweden and Finland. In some operations, the relatively mild winter had a negative effect on sales of winter workwear. The revenue for TOOLS Norway increased by 8% in comparable units with the continued good trend in oil and gas sector. Revenue for TOOLS Sweden decreased by 7% during the quarter partly due to lower activity among industrial customers and less sales, of course, of winter workwear. The revenue in TOOLS Finland declined by 4% during the quarter due to lower activity among industrial customer. The business continues to focus on customer cultivation in order to capture market shares in combination with measures to streamline operations and increase earnings.The personal protective equipment business acquired from Lindström Group contributed to revenue and earnings during the quarter. If you look at the Gigant, it's proceeding according to plan and gradually contributes to a reduction in cost and improved operating margin and profit in the unit. The group's niche companies contributed positively to group earnings performance during the quarter, although sales in these companies were negatively impacted by weaker demand for winter workwear due to the mild winter. In total, the operating profit decreased during the quarter, and we are taking action in Nordic levels in TOOLS in order to improve gross margins and to be more efficient. So therefore, in the quarter, we enhanced increased coordination in TOOLS Nordic by starting to build the Nordic organization to share resources within areas such as logistics, IT, offering and purchasing.We go to Slide 7. If we look at sales in the Components & Services business, it decreased by 3% during the third quarter financial year. Momentum Industrial noted favorable revenue growth in the steel and automotive segments, while demand in pulp and paper was somewhat more restrained. Measures to improve cost efficiency and customer cultivation had a positive effect on the contribution ratios and operating profit during the quarter. The operating profit rose by 18% in the quarter, and the margin was 12.5%. Focus on the business area Components & Services during this year will be continued focus on profitable growth, both organic and acquired.We turn to Slide 8, the reporting period. The revenue for the group remained stable during the first 9 months of the financial year compared to the preceding year. The end of the third quarter was characterized by somewhat lower activity among customers, but trends varied significantly between segments and product areas as well as countries. It is, nevertheless, encouraging to see the healthy revenue growth in Norway. As I mentioned, the demand in oil and gas sector is particularly good. It is also positive that our acquired businesses have contributed approximately 4% of revenue growth so far this year.Operating profit for the reporting period includes items affecting comparability of SEK 9 million of cost arising from the ongoing acquisition of Swedol. Adjusted for these items, EBITA rose by 5% for the period. Additionally, extra cost of approximately SEK 12 million pertaining to the expansion on the logistics function in TOOLS Norway had also a negative impact on the earnings. As I mentioned, the logistics products was expanding during the late autumn to encompass more local units. But thanks to our focused initiatives, our cash flow from operating activities strengthened during the reporting period even when adjusted for IFRS 16 effects. Increased coordination and shared resources within areas such as logistics, IT, offering and purchasing are key factors, which we've now strengthened through the acquisition of Swedol in the business area Tools & Consumables. At the time -- same time, we continue to evaluate attractive acquisition opportunities in the business area Components & Services so that we further strengthen our position.If we turn to Slide 10, I will hand over to Niklas.
Thank you, Ulf. As Ulf mentioned before, we have a continued strong focus on cash flow within the group. First thing to note is that over the last 4 quarters, we have had a positive cash flow from operations of more than SEK 300 million, adjusted for change in accounting principles. The last quarter, which is normally a strong cash flow quarter for us, we generated SEK 163 million, also adjusted for a change in accounting principles. We do this via our decentralized mobile operations, where we have set targets and activities per subsidiary, focusing on this, for example, through renegotiation and payment terms through optimization of systems and processes. We have been able to compensate our decreased payables through a strong development in accounts receivables from our customers. I'm pleased to see also that we have been able to keep our inventory levels relatively stable during the last quarter despite the added effect of lack of winter weather causing a difficult season to predict for some of our assortment.If you turn to Page 11, you see some performance measures. As Ulf mentioned also, our profit expansion measured on EBITA level was 3% for the third quarter. For the reporting period, EBITA increased by 5%. Our EBITA margin is gradually increasing and stood at 5.8% in the last quarter. Our internal profitability ratio, profit over working capital, was 27% for the last 12 months, measured based on EBITA. Related to our other external financial objective, our return on equity was 17%, measured on rolling 12-month basis. Our financial position is strong with operational net loan liabilities of SEK 198 million, down from SEK 349 million the preceding quarter, thanks to the strong cash flow. I hand back to you, Ulf.
Thank you. We go to Slide 13. As you know, market conditions vary, both up and down, but we also must adapt our operations accordingly, which is facilitated by close cooperation with our customers. But overriding focus is still concentrated on 3 main areas: change and improvement initiatives in TOOLS; continued development of niche offerings in current operations; and then also acquisition-driven growth strategy with focus on niche acquisitions.If we look at the first one in TOOLS, we are now focused on change and improving TOOLS by streamlining the organization in Nordic as well as increase the number of customers. With the Nordic organization, we will coordinate and improve our operating, purchasing and logistics capabilities. And the second focus is continued development of niche offerings in current operations by improved and developed concepts to meet the demand from the primarily industrial customer. As the third cornerstone of our strategic focus is the ambition to grow the group through acquisitions, from the start, as a separate company, our efforts have been dedicated towards a selective M&A strategy with the purpose to support transition of TOOLS, broadening of our offering with existing businesses and to add new, interesting and profitable components to the group.If we go to Slide 14, Niklas will go through some of our acquisitions.
Exactly. On Page 14, you see the acquisitions we made in last 3 years after the spin-off from B&B TOOLS. So we have concluded 11 acquisitions with some SEK 650 million in annualized revenue. In line with our strategic focus areas, we are happy to see that the acquired units add a lot of energy to the group and also business acumen and new opportunities. We will continue with our initiatives in M&A also after the Swedol acquisition. We have a very strong financial position enabling this. In addition, we are devoting more resources now, building a good pipeline mostly in the business area, Components & Services, where we think we will focus more on our M&A activities going forward.
Thank you, Niklas. If you take Slide 15, some final words here before we open up for questions. The merger of TOOLS and Swedol. Well, together, we are creating a strong part in the market, and we're confident that this combination with complementary focus -- customer focus and sales channels will help these 2 companies to become an even stronger and more attractive business partner for our customers, suppliers as well as for employees in area of tools, workwear, personal protective equipment and consumables. Together, we will be able to strengthen our product ranges, procurement channels and logistics solutions, and we will increase the proportion of own brands and develop an even better service offering and new digital solutions.I've been following Swedol for quite some time since the Grolls acquisition, and I'm impressed by their development over the past few years. The merger is logical from an industrial perspective, and it will create stable opportunities for us to generate value for our owners. We're now awaiting approval from the merger -- from the national competition authorities in Sweden and Finland, and we hope to conclude the acquisition in March.In conclusion, Momentum Group's operating margin has improved since the spin-off, and the group's cash flow and financial position are stronger than they have been for a long time. We have a solid foundation to carry out even further corporate acquisition after Swedol is completed.So let's open up for Q&A.
[Operator Instructions] And we have a question from the line of Karl-Johan Bonnevier of DNB Markets.
First of all, on Components & Services area, very strong margins, obviously, in the quarter, getting up to new high levels, kind of, at least when I compare historically. With the kind of outlook you now see for the operation with maybe a little slower development in the industrial segment, do you see those kind of margins being defendable?
Yes, I do actually because in Components & Services, almost 100% of our business is off the market. So as long as the machines are running, they need spare parts. So we could also see, if we look back to the down -- decline in 2008 or '09, we lost around 9% in revenue at that time. So it's quite stable as long as the production is running.
Excellent. And I take it as a very encouraging sign too even though having, say, the Swedol transaction on the table are talking about doing add-on acquisitions also in the consumable and service side. I guess normally a huge acquisition like Swedol would probably take all your resources for coordination and central. But you'll still see the opportunity to graft your acquisitions in consumables and services.
Yes. We see somewhat -- of course, it strengthened our presence in Finland as well as in Norway. And so yes, we do.
And do you have a, say, pipeline in all the countries for realizing that?
Karl, as I mentioned, we are building a pipeline. I think I mentioned this before as well. And of course, we have previously a lot of candidates basically involving or coupled with Momentum Industrial, basically bolt-on to Momentum Industrial. What we are now doing is that we are sort of more broadening the pipe, also looking for sort of adjacent product areas within this larger field of industrial performance, so to speak. So yes, we are broadening the scope also to include other countries than sort of our core market for Momentum Industrial, which is then Sweden basically. So that's just...
Excellent. And you see that those segments in Norway and Finland are as profitable or have the same kind of opportunity as you have in Sweden?
Yes, we do. It's -- in both, we look at the MRO of the market business, but we also look into the OEM business. And looking into broadening like ETAB, we did the acquisition in Sweden in hydraulic schematics, which is a specialist. So there's still a lot of niche players out there that are a good technical competence and can result in high margins.
Splendid. Looking at the TOOLS, say, when -- obviously you enlarged the warehouse project in Oslo. So I guess you probably realized, say, early gains from the early parts of the project have encouraged you to take the next step in that one. But if you look at, say, the strong volumes that you are now also seeing underlying in the Norwegian operation, are you seeing the earnings leverage that you would expect in Norway is coming out of that?
Somewhat. We have invested -- due to the Albert E. Olsen went bankrupt, we hired a couple of salesmen and women from Albert E. Olsen. So we have invested also in resources to gain market shares, and we will see now it will level out and we will go breakeven with the new volume we have generated on that. But then, of course, we also have a high strong demand in oil and gas, which is the west side. And now we also look at expand the logistics solutions to be able to serve almost whole Norway actually.
Excellent. And when you look at the cost for doing that, is it similar cost in the next couple of quarters to finalize the warehouse projects in Norway and then maybe the gain is coming through in the next fiscal year? Or how should we see it?
Yes. We will have more costs because we're looking into widening. We're looking into expand the hub we have in Stavanger and also automate that. As well as we're looking into if we should serve the whole Norway from Oslo, we also need to have maybe 2 shifts to workplace. So as we build that up, of course, we will level down out in the local logistics functions. But of course, in the beginning, we will have an extra cost of building it up, and then it takes some time to ramp down the cost locally.
So you would say -- maybe I was a little too optimistic in my time view on that, that this is really a project for the later part of 2020, so when you see the gains coming through for it? Or how should we see it?
Yes, that's absolutely correct.
Right. And when you look at TOOLS Sweden, it seems to be struggling a little bit when I look at the quarter. Is there anything particularly going on there that we should be aware of? And obviously, you have the big Swedol transaction that is probably going to be impacted most on that side, I guess?
Yes, it is. Of course, Swedol is very -- has -- very much of their revenue is generated in Sweden and very much of that is also generated through shop sales. So we will have some good combination of shop sales and the contract customers that -- to assess. But if we look at the revenue decline, of course, it's been very characterized by the mild winter. So clothing and winter jackets and boots is not sold at all. But also it varies from different customer segments that -- both in Momentum Industrial and into Sweden, we had some struggle with the pulp and paper, which has declined in the quarter. So it's in both plus and minuses.
And when I look at the Swedol transaction, obviously, it's still pending. And good to see that at least the Norwegian authorities were quick with their clearance of it. Have you got any discussions ongoing with the Swedish and Finnish authorities where you get indication or maybe concessions needed or it's still, say, sailing through as you hoped for?
No, we -- no discussion, but we, of course, have made a lot of work to present the numbers, figures and so on. So they have gotten all the material they need to make the decision. And I'm glad that the package seem to be very well performed due to the fact that the Norwegians that we normally thought were going to be last in saying yes said yes very quickly. So I'm very confident that the material we have delivered is -- will make no hesitation of saying yes.
Excellent. And I understand if you can't comment on this as the transaction is still pending. But obviously, you have put this margin ambition target now to get the new business up to 10% over time from, I guess, a pro forma basis of 6.5%.
Yes.
What parts of it do you see being, say, quicker to close that gap? And what part of it would be -- say, do you expect to be later to be able to close that gap?
Yes. The -- I can say that the figures we have based off is rolling 12 September 2019. So that's the base from the 6.5%. Of course, the first we will look into is purchasing prices, supplier coordination, own brands. And that could be more quicker to implement. But then, of course, depending on what we choose to use in our assortment standardization, we also have some in our warehouse we have to take care of. So pricing and assortment is the first and that goes quickest to do, but of course, then it's also time to move it in. And then of course, we're looking into where we have our local site today and that is, of course, if we should do something there, it's depending on the contract length of the rental agreements. And then the third, we have a logistics setup, which we can optimize. That also, of course, takes some time. And then at the end, of course, we will have doubled the stock in some areas where we will look into how we can do some more efficiency.
And when you look at optimizing the logistics setup, obviously, Swedol has more of a, say, shop-selling kind of logistics structure and you have more direct delivery structure. Is it possible to blend those together in a good way in one unit or you're still seeing this being kept separately?
Of course, it is possible to mold it together in one but not at the time due to the fact that -- as you say, that 100% of what we deliver is the orders come in the same day, but Swedol has shop fulfillment, which is more planned. So we have to do some analysis. But in the present structure, it's not possible to go to one setup in Sweden. But then, of course, we will look into the setup in Norway, where -- they have one in Skedsmokorset and we're building in Oslo. And then in Finland, we have in Kotka and they don't really have one. So of course, we will look at the logistics setup at Nordic level as well. And you can also do the -- you also have to do the calculation of the flow of different demands, as you say. Shop fulfillment is one. Direct deliveries is one. Taking home own brands from Asia is one. So we will look into the dimensions that is possible. And we can also optimize the flows, not just one side.
But when you look at this practically, if you get the clearance, as you hoped for in March, and can conclude the transaction, most of the things that will get the journey going towards 10% should be in place during 2020 basically?
I mean the plans will be done and then it will be implemented in -- sequently, of course. But we have identified in which area, and we have started to do some evaluation that we can share, and it's things that we are not allowed to share. So in the -- we have -- in the different work streams, we have come in a different place.
Excellent. Sounds like a good hunting ground for earnings opportunities going into 2021 then.
Yes. Yes, definitely.
[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.
Okay. Thank you very much for your time. Don't hesitate to call if you have any further questions or interest of knowing more about us. So thank you very much, and have a good day.