Troax Group AB (publ)

STO:TROAX

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the presentation Quarter 1 Report 2022. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first -- or to your speaker today, Mr. Thomas Widstrand. Thank you. Please go ahead.

[Thomas Widstrand, executive]

Thank you very much, and thank you all for listening in. I will assume for those who have heard me before, I try to explain them a little bit what's happened here during the first quarter. So obviously, I will present the first quarter of 2022, so the Troax Group. And -- for those of you who are new, I can say that I will more or less follow the presentation scheme that we have put on our homepage, troax.com, and you will find it under Investors and on the investors, you will see presentations. And then obviously, presentation for the first quarter, you will find what I'm going to review. But you will be able to follow what I say regardless if you have this information or not. But is very interested to follow it, please feel free to do so.

First quarter, we sort of tried to say that we are celebrating cooperation because mainly going back to last year, there was a substantial increase of the volume for us. I think we grow with almost 40% of organic growth last year. And of course, that puts some stress to the organization. So I would like to start directly to -- will give some complements the organization. We did a very good job. And that's why, of course, we say that we support is cooperation, which is obviously quite important to handle this kind of quick increases or for that matter could be also decreases. You never know what's happened in the Q2.

We are safe and sound on solid ground. It's the next page. And thereafter, we show you a little bit about our product segments. I will go through that very, very briefly. The biggest one that we have, we call machine guarding, which [indiscernible] 60% of our turnover. And this picture, which we had now for a while, showing the production line for cars. And that's actually a good example of what could be used as our paramedical where we protect our people from a potential hazardous area. So that's 50% from the biggest turnover. Next one, we call warehouse petitioning. It's approximately 30%. And as you see from the picture, where it’s indicated that you're actually work in warehouses. This is more the traditional warehouses where you have a forklift [indiscernible], someone is picking up goods, and it's been delivered to some sort of dispatch area. And you have thousands of them, of course, around the world, and it's approximately 30% of our turnover.

Last not least, it's what we call property protection, which is personal safety from the same dynamic effect that we had in the 2 preceding segments. This is more, of course, to protect them, as you see from the picture here, skis, luggage, bicycles, or whenever you have that you [indiscernible] yours [sellers]. And in this case, it's normal in a multistory buildings where you have different inhabitants, of course, who are renting or as part of the [facts], and they have part of the stores in the [sellers] approximately 10% of our turnover.

Now as a hybrid between machine guarding and also the warehouse positioning. We have something that's called alternate warehouse storing primarily use the products from machine guarding, but it goes into the picture here implies to the more automated warehouses. And those have been increasing them for a substantial part during the last 3 years or something like that. And last year, we had a tremendous increase in this part. I think for the first quarter, -- it's been a little bit of a slower start because obviously, this is then coming mainly from the investments that companies are doing e-commerce or at least in the warehouse handling connected with e-commerce. And we can see then that probably some companies were investing a bit maybe 2 months last year. So it's a little bit lower this year. Probably also connected that after the pandemic. At least in most areas, people, I guess, are coming back a little bit to more physical shopping instead of just buying something on the Internet. But this is something which we think over a long-term trend is very positive and it will continue to grow substantially.

Next page is just a summary of 2021 sales per region, where obviously then still Europe is our home market and the biggest one. So we have 75% of our turnover in Europe, splitting different parts. We are growing then substantially in North America and also in what we call new markets, which is mainly the Asia Pacific area. And on the bottom left, you see on the figures for last year, which we don't need to go into. But then take the next page, we see that we have been having around 20% operating margin over a long period of time. We are a growth company, and we are the global market leader under a single parent’s protection. So we should be able to have a decent development within all the profitability. But as you see from the comments of the first quarter, we still have a little bit on the gross margin side by a certain delay then in transferring over price increases to customers because of the very turbulent steel price situation. I will come back to this in a few moments.

Coming to the next page, which is a summary of the financial targets before we go into the summary of the quarter 1. We should exceed the growth in the current markets. And normally, we are saying that we have market growth, which is some 4% to 6% per year. And then normally, we take some market share on top of that. So I think historically, we've been having 10% or something like that over business cycle. We have been increasing the first quarter of 27% in sales but approximately half of that or maybe slightly more than half of that is coming down from price increases to customers based on this increase coming on from steel price increases that we are suffering from.

So we say that the real organic in volume is only half of that or maybe even maybe even slightly less than all. Due to the fact that we are [indiscernible] not late transferring over price increases to customers, but there is a certain time difference between we get is from our suppliers until we get it, so to speak, to form a basis for our results again as we have an outstanding order book, which, of course, is taken to the oil pricing. And then, of course, you have to -- we have to let those orders be honored with the oil price. So it takes normally - I’m only saying it takes a quarter to get this compensative. And by the end of last year, we saw the steel price starting to stabilize. So we had good hopes that we could, so to speak, during the first quarter now come back to what we think are reasonable levels.

But you turn to the war in Ukraine with a substantial lack of steel in the market. There has been a lot of turbulence on the pricing side. So obviously, there’s a [indiscernible] on the purchasing side. And we take a number of, I think, months or probably also quarters until we stabilize again. So we are back into this situation. I would say we were end of December, we still need a couple of months everything equal to compensate for the price increases that we started on the processing side.

Otherwise, on the capital structure, there is no really change. We have increased our finished goods stock and also the raw material stock [indiscernible] we don't want to have any delivery problems. So we have increased stocking on to cope with long lead times and some problems while buying and steel or other things in the market. Otherwise, there's nothing, I would say, in particular, that have problem.

Now coming to the next page, which I think is the most interesting, some sort of summary for the first quarter when we try to explain what's happened. And go the points briefly. But in the first quarter then of 2022, we continued good order plan we started in 2021, and there should continue strong development from customers within automated warehouse and machine guarding. However, that in this quarter, the order level on the automated warehouse side was slightly lower than it was last year. So it's mainly a machine guarding, I will say that improved compared with last year. And again, as I've been saying now, at least once before, this figure is, of course, substantially in place by the price increases implemented both during '21 after the first -- we had the first increase towards the end of Q1 last year and then, of course, now already in 2022.

We have what we call a reasonable EBIT result. We have a better result when compared with last year, but the EBIT margin is slightly lower than last year. And I will say that we've been able to hand this situation in a quite a take way because we've had as many companies right now, severe cost increases of raw materials, not only steel, but also in other types of components. And then obviously, like all of us now, we've had substantial increases of energy of freight cost and what have you. On the other hand, we've had very good utilization of our manufacturing, which, of course, gives a good coverage of fixed costs. So that somehow compensates this, albeit not to the same extent. So we're still, as I said, a few months behind in transferring the price increases to customers.

The price increases to customers is growing then more or less as planned. I mean it's not so, of course, that the customers are very pleased to have this discussion and some of them are, of course, trying to refrain from this discussion. But in general, there's a big understanding in the market that we think rates are coming all over the place and why should products not suffer from the same thing. So I don't think we have a major problem in coping with this. But there are, of course, [indiscernible].

Good sales levels in all markets, except actually new markets. We had in China, Japan, especially, I would say, a slow start of the year where we last year had 1 or 2 bigger projects. But I would say that the biggest part of the explanation for the difference compared with last year is to some polemic effect because, for instance, in Japan, the country was more or less closed during January and February. And as you know, from also China, not all of China, obviously, but Shanghai where we are was more or less closed, for instance, our own manufacturing units in China has been closed now for more than 1 month. And the port activity in China is, of course, seeing enhanced if not [strong]. So that's obviously we can't bring the activity even in the market. Going to the earnings per share, it was higher than last year. And as I said, working capital is higher, but still on the expected level. So we're not worried about the content, other working capital is just to be timed because we have higher safety stocks, both in raw materials and then on the finished goods side.

On the manufacturing side, as I already mentioned, I had a good development, good volumes. Steel price continued to increase substantially towards the end of the first quarter due to the effects of the Ukrainian war, and we seem like is that we don't see really a major risk for not having supply of steel to our company. But we are not quite sure where the price will end. There are still an upgoing trend in the market, but the expectations from many people is that people start to stabilize and then up to while go down. Let's see what is we are, of course, following it closely, and we take the necessary action regarding pricing and our actions to compensate. The automotive a segment, as I said, give us -- coming give us very important orders, but there were, as I said, a little bit lower activity during the first quarter compared to maybe part of '21.

And our company in Poland, [indiscernible] that we have now for 1.5 year continued to show good development both in orders, sales and results. And one of the factors that we bought in Poznan outside of Poznan in Poland has now been closed, and it's been -- the entire activity in that factory has been moved to the new factory outside of Poznan. And the other one we can step-by-step during either end of this year or more probably during next year as we are still waiting for some electricity improvement in the facility. With this, I go to the next page, which is a little bit on the financial highlights.

And then the first quarter is, of course, everything from order to gross result and operating margin, compared quarter-by-quarter. So as you see, we have an operating profit of EUR 2.5 million compared with EUR 1 million last year. So we are higher result compared with last year. But the margin, as I said, has been dropping a little bit due to -- that we are a little bit behind with the price increases. On the other hand, we have a very strong order intake, even if we exclude and the price increases, the activity level has been rather [indiscernible]. But the first increase, if you exclude enterprise increases has not been on the same level as has the high that we had during last year, but still very good activity.

Safety was very good. Earnings per share increased as I said. So we understand that the running 12 months a year is now further improved, and we are now up to a figure of close to EUR 270 million internal [indiscernible]. Going to the next one, which I think maybe is more interesting. You can see a little bit about the regional development in order intake and sales. And we're concentrated, obviously, on the 3 months’ comparison. And you see that on the left here the different regions. So we've had from a [indiscernible] point of view and also from sales point of view, a quite strong development in Continental Europe, even if you exclude price increases has been a real organic growth increase in volume. And the same was for the [indiscernible], which has had a very good volume development and done a really good job. Whereas U.K., then it's a little bit lower actually going down if you’re excluding price increases. And it's because, as I said several times before, it's difficult to access clear conclusion for U.K., since we are running a number of big international projects through that organization.

So in some cases, we get very high figures and then of course, it looks very good, but in some cases, we haven't got those type of big orders that quarter. And then of course, if you see this like this, that's an average quarter or whatever you want to call it. So we're not happy with the development in U.K. So there we will come in to do good. North America is still lower, and that is that last year, we had a number of very big orders for the automated warehouse, which has not come during this year. And we know, especially then in North America, that some of our big international customers are postponing a delivery of some projects because they are late of different sorts as we are waiting for some other components or some products, which means that they cannot finalize the project or they see them the demand from their type of customers are [indiscernible]. So they are postponing just by that and a little bit the investments. But it's not so that many orders have disappeared. So it's just that they have been a little bit [impossible]. So it will come with [indiscernible]

And the same was here before. I already explained new markets, where we had 2 projects over last year. And then on top of this, we have this anemic effect. So you can't rely on the major conclusions out of this. But of course, a minus is minus and it's not really good and we don't like that, obviously. But totally, we are up 16% or something like on the order side, which means a small volume increase then for the first quarter, excluding price increases. On the sales, it looks a little bit better because it's plus 27%. And if you exclude the price increases you're talking still about a real organic growth of some, I would say, close to 50% or something similar.

Going on to some conclusion of the quarter, and as we said several plans before, we've continued to receive several important orders in all segments. We think we'll continue to take market share in many markets. And these [board] orders comes mainly with an automated warehouse and machine guarding, but also project protection has actually been doing quite good. Result is what we call reasonable, I mean, seeing from the turbulence in the market and the work we have to do by transferring price increases to customers. I would say it's practically well, of course, we are not satisfied that it's a low margin in percentages compared with last year. So obviously, the work is continuing to catch up with this effect in [indiscernible] risks.

Good activity level in the market. At least for now China is more or less closed. I'm sure that we'll soon see a comeback. And for the sake of clarity, I want to stress that we have very marginal sales in Russia and U.K., and before. So we have not been hit at all from a sales point of view. However, some of the steel that we were buying more indirectly accounting will from Ukraine. So we had to change, of course, the purchase impacting somewhat. And as you know, not for us specifically, but in general, of course, the lack of steel coming from [indiscernible] it's, of course, putting a lot of tons in the steel market and in Europe, it will [indiscernible] stock settle down again.

The integration of rate is going in a positive way. We started the most of the new facility. So you can say it's even if there are some problems correctly, we still see it as a good first quarter to continue to work into the coming quarters. I don't want to get some questions also specifically over the automotive situation, and it continues to be, I would say, a little bit weak. We had just like we had in 2021, a reasonable development of automotive demand in North America. But for Europe, it's still a bit on the weak side, and especially because of the pandemic in -- from Asia Pacific, it's been very low, I would say that specifically. So, so far, it's not yet any sense that it's really breaking through and certainly, it's not booming for us.

Going to the next page, you see the growth factors. And I'm normally saying that the 2 factors of increased industrial automation and also in e-commerce, but important thing, coupled, of course, by a general understanding that safety is important. But due to these problems we have now with the pandemic, we see perhaps not so much yet on the top line, but we see that a number of companies are talking about doing more onshoring in transferring manufacturing to their home base. So we're seeing more discussion around that even if we have not seen it so much, as I said, on the top line.

The next one is a short summary of our production units and nothing else has changed except the last one is Poland, where we introduced a new shelf production line. So we are substantially increasing the capacity for that product in Poland, which is good because we've had production, I wouldn't say delays because we have taken those orders that we could deliver that have been in demand, which exceeded and the production capacity for last year. So now I think we have a better possibility to serve our customers with these new comments.

[Indiscernible] the Troax Group next slide it consists of several brands. And obviously, we work together for safety tomorrow, which is the next phase. So we'll be working with this since 1955, and we will continue to do that. And talking about [ Anesesa ] tomorrow, which is a headline for the next page. We continue to work time with the climate compensating program. We try to increase on the recycled steel, which is the one most record, one most important effect where we could reduce our CO2 content. So that's obviously quite important.

And as you see from the last part of this smaller presentation, the last side, you see that we're right here at the CO2 consumption for minority is now available on our web page, we intend that we try to indicate for our customers that if they are -- it has to depend what to buy, there at least get some indication over then the CO2 content of different projects, which might help them to form a decision what to buy. But having said this, it's not so always that the low CO2 product is the right one to buy because, obviously, it's the sales aspect, which is, I would say, is the most important.

And if you require stronger and more [steady] product, it probably needs more steel in it. An in that case, it has most probably got more CO2 content inversely and that means then from CO2, it's slightly higher. But nevertheless, it could be from a safety point of view and for the personnel that we're working with, that could still be the generalized solution if you take everything in the count. I would try then with this to run off. We have the safety center to read about. We are certified by Finland, as you know. And finally, we are protecting people, property and possibly that's really what we are doing. We have been on these markets since 1955. And we see that safety equals strong work in many aspects.

And with this, I'd like to have as a [fun] round off and the for some questions, which I think you've got. So please, operator, if you could invite the listeners to put some questions, and I'll try to do my best to answer them. Please, go ahead.

[Operator]

[Operator Instructions]

And our first question comes from the line of Herman Eriksson from Danske Bank.

[Herman Eriksson, analyst]

I was wondering -- I was just wondering on the orders you're seeing in e-commerce. Is it primarily large orders from larger e-commerce players? Or are you starting to see a better inflow for more small and medium-sized orders as well?

[Thomas Widstrand, executive]

Yes. This actually a little bit of [indiscernible] because for the first quarter, if you just look at that [ visolator ], we've seen then that when you compare with last year, there are a few less bigger orders coming in from the big international companies. On the other hand, we've seen an increase in the last quarter’s small-and medium-sized companies who took in orders in the same segment, but of course, because of the projects are smaller, the figures are lower for. So it's a little bit of a [indiscernible] how this is working, but it is correct, like you explained it.

[Herman Eriksson, analyst]

Okay. Perfect. And then just looking at the order intake in the Nordics, there’s like very strong growth. Like what customer segment is primarily a growth driver behind this or what is driving the growth?

[Thomas Widstrand, executive]

It's a growth sourcing in property protection, but also in the machine guarding. We did not [indiscernible] have very strong open machine guarding in the first quarter.

[Herman Eriksson, analyst]

Okay. Perfect. And then I was just wondering if you can -- you started the project with LTAB in the mining industry. I think it was last year. I was just wondering if you can say anything on how that project is proceeding and what will be the next step after that is completed?

[Thomas Widstrand, executive]

Yes. No, it's proceeding. So that's obviously part of the order is coming from this type of company. And -- we are still in some sort of evaluation phase before we want to release it to other markets. But obviously, the plan is to release these kind of solutions to the markets where we have big certified now that the whole development process of stickier, and we have certified that the quality is right, et cetera, et cetera.

[Operator]

[Operator Instructions]

And our next question comes from the line of [ Gustav Stenberg from Tuks ].

[Unknown Analyst]

A couple of questions to follow up the report from my side. Starting with the price increases, I think it's really encouraging to see them coming through probably. I just have a sort of a clarification here. Are we seeing a similar price effect year-on-year on orders and sales? So when you say real organic growth of 15% of sales, does that imply a pricing effect on 12%. Is that the same that we're seeing the order intake so that you have sort of a couple of few percentage points’ volume increase? Or how should we -- how can we think about that more in more detail?

[Thomas Widstrand, executive]

Yes. You're right. There is a slight decrease, of course, in between orders and say it's just because of the timing effect. But I think for the sake of simplicity, you can forget it. So you're absolutely right. We're talking about a price increase of somewhere between 12% and 15% due to compare quarter-to-quarter.

[Unknown Analyst]

And sort of if we look year-on-year on 2021, was there a big step-up in prices during 2021 any time, just trying to figure out sort of what the year-on-year impact will see the base effects sort of for 2022 coming up there. Yes.

[Thomas Widstrand, executive]

Yes. The effects for 2021 was up to 7%. The whole year effect on price.

[Unknown Analyst]

Okay. And then sort of -- are you seeing -- I know you have a very strong market position here, but what are you seeing sort of in terms of this environment where it's more difficult to delivering, you have high price increases? Are you taking share in this environment? Or what is your current read?

[Thomas Widstrand, executive]

I think the current read is there's a lot of demand in the market generally because of people are continuing to invest, and they try to increase the capacity in different ways, just simply because capacity is not there. And we are, obviously, a small part of this process. I personally think we shouldn't write 2 negative things on the wall. But obviously, it is already this continues. I think a number of our customers and other customers in all types of businesses, we probably postpone some projects, so there will be a little bit less of activity in the market level. But when that comes and how much it will influence, I don't know, but I'm sure we get some sort of reaction. But as we said here, we are in the market right now or end of first quarter, which is quite good [sometime over point.]

[Unknown Analyst]

And of course, a little of the thigh and solid level. And just a follow-up on the price increases? It's most of the pricing increase driven by the steel price? Or are there any other factors that sort of play into that price component as well?

[Thomas Widstrand, executive]

In the -- actually we have freight, of course, which plays an important role and of course, also energy, both electricity and gas, both play certain part. But if you really single out the most important one is still steel, which for us is the biggest influence if you talk about that. But of course, when we talk about the total meaningful increases will, of course, also include the other things [indiscernible].

[Unknown Analyst]

Lumber.

[Thomas Widstrand, executive]

Lumber also has gone up substantially, for instance, timber, lumber.

[Unknown Analyst]

And moving on to a question on M&A as well. I mean, how also you are you seeing -- are you seeing in this more sort of volatile but still strong market development? Are you seeing any changes to sort of how you'd like to conduct M&A? Are there more opportunities helping up or you see longer lead times on closing potential sort of targets? Or has there been any impact there?

[Thomas Widstrand, executive]

There's not been any real impact in quarter 1. I think there's too many other things happening in the world that a small lease market like [sweet] permitting would be influenced perhaps based on what you're saying. But my gut feeling is that this will create opportunities for us in the M&A market. And as I've said several times before, we are quite very interested to pursue activities in that as long as we can defend it from both economical point of view and from a strategical point of view. But to answer your question, nothing really has happened, I would say, in quarter 1. But you might expect hypothetical is that some things will open up a little later during the -- if this turbulence continues.

[Operator]

[Operator Instructions]

And your next question comes from the line of [ Chan ] from [ Enter ].

[Unknown Analyst]

Just one question. When the time lag between price increases and your cost increase is closed and you're in balance, with the increases you have put into place now on price be enough to keep your gross margin unaffected in percentage terms?

[Thomas Widstrand, executive]

Yes. With everything equal, so to speak, yes, we will come back to the old type of margins. So we don't see any structural changes basically. So we're just waiting, if you see my point that the good market will stabilize and then I think we will catch up with the delay of a few months.

[Operator]

[Operator Instructions]

[Thomas Widstrand, executive]

All right. Thank you very much for all good questions and for listening, or has anyone got something more?

[Operator]

There are no further questions at this time. You may continue.

[Thomas Widstrand, executive]

Okay. Yes. I'd just like to thank you very much for listening and taking your time and for your interest in Troax. We hope to be able then to talk to you again when we report the second quarter results and activities. And then I think a lot of things hopefully will be more clear as regards to both pricing and market development. That will be in [always]. So look forward to talking to you again, and thank you very much for listening in, and take care. Bye-bye.

[Operator]

Thank you so much. And that does conclude our conference for today. Thank you for participating. You may all now disconnect.