Troax Group AB (publ)

STO:TROAX

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Presentation Q2 Report 2020. I would now like to hand the conference over to your speaker today, Thomas Widstrand. Please go ahead, sir.

[Thomas Widstrand, CEO, President & Director]

Thank you, and very happy to be with you again. Thanks for joining in. I will talk about, obviously, the Troax Group second quarter. And as a basis, but if I have as usual, for those who are following what we normally present, we have the sort of report that you can find in our web page. And if you find the script for Investors, we have the reports and then we have second quarter. You will be able to follow-on what I say without exactly following this format. But for those who you are, who wants to follow, you can find them more or less what I say as a summary here on the web page under Investors and then Reports second quarter presentation. If I then start by introducing Troax, I do that very briefly because I think most of you have a certain understanding of what Troax is. But the first page shows, of course, then our mesh panel, our fantastic mesh panel that our team created and a lot of safety for people who are working in this kind of environment. We continue to show you a little bit of public relationship and saying that we try to do a lot of safety in our aspects. And then I come to the first introduction picture on our 3 different segments that we are working with. The first 1 is machine guarding. And as this name implies us and as the picture shows, it is actually the parameter guarding around some of the biopics that need to be protected or rather the process need to be protected from this. This is our biggest segment. We talk about 60%, 65% of our turnover based on 2019. The second biggest is called warehouse petitioning it's 24% and as you can see from the picture and also probably from the name, we're talking about also installing, selling solutions for warehouses, either to protect people from objects falling down from the pellets itself, or to protect people who are working with picking and packing from, of course, also from objects -- lose objects, but also from the forklift trucks that could be manual or automatic and going around in different places of -- around the floor. The third and the smallest one, but still very important for us is, property protection. And as the name implies, it's not really protection that are used to protect people. It's more than for protecting property. So these are mainly in for multi storehouses when you sell typically in cases where you can have stores or basics or whatever you want to store, so to speak, with you, which you don't use at this very moment. And you see it's approximately 14% turn around turnover. And part of what we sell in machine guarding and also part of what we sell in the warehouse part is a combination that we call internally for automated warehouse. It's quite interesting because this part is growing substantially. Obviously, in that the increase in e-commerce, which are really more or less exploding in the last 2, 3 years. We don't externally show any figures of this because it's part of those 2. But I can at least say then that it's a very interesting segment, which is growing at least with double-digit figures in the last 2, 3 years. And we do expect that this trend will continue. And if anything, probably accelerate further in the coming 5 years, this is a trend, which is really, let's say, help them by the increased technology for improving efficiency in automated warehouses. Next page is a summary of the year of 2019, we've gone through these several times. So I don't indulge too much in the figures. But if you look at the left pie, which is there. I'm talking then about the turnover per the different geographical regions. You can see then that still Europe is extremely important for us. If we put together the total of the European regions, we have approximately 80% of our turnover in Europe. We have 15% in North America and the small new markets which are supposed turn over time, to increase substantially, it's still only on 4%, 5%. I go quickly and turn to the -- with this case for you will follow the performs, something about 2019, we are a growth company. But in the last year, the growth has been, I would say, a bit meager, partly because that we used to be quite dependent on the automotive sector. 5 years ago, we had 1/3 of our turnover in automotive sector. And as you're all very well aware of the automotive sector has decreased substantially, which in a way is good for us from a dependence point of view. But of course, it's quite good for business if you get orders from the automotive part. So that's part of the reason why the growth in the loss at least has not been really that we would like it to be. But over a longer period of time, we've had approximately then a growth of -- we normally talk about 8% to 10% probably in this business cycle. And I think the actual figures in the last year have actually been slightly higher than that. Moving on to financial targets. Before I jump into some comments about the second quarter, we have put up 4 targets that we were -- are normally then discussing or communicating about. And the sales growth is very important for us, obviously, and we are unfortunately then after the first 6 months, 5% down in the organic growth in orders. And that's, of course, because of the rather negative development in orders in the second quarter due to corona effect. Even if I want to stress standard, it's probably better than what was expected at a certain stage. There has been no acquisitions at this very moment. We are still very interested in doing acquisitions. But which, of course, are difficult to pursue that in a practical way, right now, since there are limitations on traveling et cetera. On profitability, we have the target of reaching 20% or above that EBITDA and organic margin. And we are, let's say, close to 17% after the first half year. We are on a little bit lower on the first one and two quarters and we will improve in Q3 and Q4. But without giving any forecast, I can say due to the probably maintaining effects of corona, however, that will be smaller or bigger. We don't really at this very moment. I think we'll be actually quite difficult to reach 20% for 2020. On the capital structure, we have the net debt in relation to EBITDA, it should clearly be below 2.5x and we are at 1.1 at the moment. So it's a very good stable financial situation. Even if this time due to that we postponed the Annual General Meeting, we are -- paying or have actually paid the dividend in July compared with previous year when we paid it in Q2. So this 1.1 that I just described, it will probably be a little bit worse and also the payout of the dividend of obvious reasons. And again, on the targets to pay a dividend, we're normally saying 50%. We have original proposed to pay approximately 50% or slightly below that, but due to the corona effect and the possible discrepancies, which could come up due to that.We decided or rather the Annual General Meeting decided to take the safe way and reduce the dividend to 50% of the regional proposal, meaning in practices and we are obviously paying now 25% of the net profit this year. Obviously, we aim to come back to the 50% for next year.Coming in then to some comments on the second quarter. We can, of course, all agree that Q2 was a quite turbulent quarter, and I will give you a few examples of that. But nevertheless, I think that Troax as a Group still generated a stable development, seeing this in the light and of the -- what happened in the Q2. We had a lower EBIT results and margin in Q2, and it was clearly then, I would say, due to the effect of the coronavirus. We have not had any other really negative effects that have had any significant effect, I would say, on the contrary, I think a number of things have been growing actually better than before during second quarter, and I will comment a little bit on that later.There were, of course, lower sales recorded in most areas. And obviously, we are very dependent on the sales. So if this top line is getting lower, then, of course, it has a certain effect of the results. And the sales were obviously then reduced because we noted a substantial decrease in market activity, and especially then in the beginning of the quarter, it was very weak. We saw in the end of March, of course, a drastic reduction of activity. And that continues, especially in April, started to improve a bit in May, and we actually then once that better again in June. So if anything, the trend was positive then during the quarter. Obviously, the earnings per share was lower than last year, unfortunately, because of this effect.And there's nothing more to comment on this. So simply follows with the sales and low results. Now one positive thing is that the improvement process in Folding Guard was continuing in Q2. Still the order situation is -- was on the weaker side due to the fact that the whole organization was more or less closed in April and May due to requirements then from the government, the local government in Illinois, where we are situated, as you probably know, we are mainly situated in Chicago. And in this period, of course, it's difficult then to get a lot of orders since both the factory was closed and a lot of customers then at least in the states where the same situation where prevailing could not, of course, come in with orders. On the other hand, we could keep our customers happy by sending out goods from the warehouse and also helping from other units. So I think from delivery point of view, it was acceptable despite there were, of course, a lot of problem. But this point is really aiming to say that the improvement process in problem that is continuing even if, as I said, the old situation was still on the weak side, probably at least the major part is based on this requirement to keep the organization closed during April and May. On the working capital is more or less an expected level. We have increased inventory partly, I would say, to handle really negative effects of the corona virus. And we are quite happy actually to do that because there has been certain problems in the supply chain, which I think we have overcome and due to the fact that we, on an early stage, we started to build some sort of increase in inventory. The investments then that we are doing now for a couple of years. They are according to plan, and we are actually now in the finalization phase. And I will give you a few comments on that a little bit later.The first comment related to at least that the new factory in Italy, which was a real new operation started in January, has been running quite a good way in Q2 despite some lack of volumes. But the productivity has been increased. The processes are improved. And we can see that also the cost levels are improved. We will also, to a certain extent, I would say, is reflected in a better gross margin in the period. And the factor has been producing in the whole period, despite the problems that Italy has been having. And the same as is early for the main production plant we have in Sweden. I can say also, there has been really layoffs so in Sweden. For those who are interested, but we have, of course, reduced number of people, who were employed on a short-term basis.Going back then to what I said before, that talking a little bit about the marketing situation. We said that it was considered very weak in April and at least part of May, but it was improving during the latter part of the quarter. And I think as some sort of guesstimate from us, we can see then that most probably so that the bigger customers continue to pursue then the installations of value-added projects and they're putting orders to us for installment during this period or later, whereas we saw clearly and that smaller and medium-sized customers were reducing, especially during the difficult period of April and May come -- and that come back a little bit late during the quarter. So it was very clear that the customer mix changed during the quarter where the bigger customers were those who are continuing to put in orders on at least on a reasonable level. So the weak part was really the smaller and medium sized customers in the quarter 2. Jumping a little bit to more comments about the segments. Automotive is still continuing to be weak segment. There have been some orders during these months. So it's not completely black as we have before, so that we expect the automotive to come back and at least improve the investment program during this year. And I think based on the development now with corona and some comments, we've had -- we're absolutely sure that, unfortunately the improvement in the investment programs for a lot of these big companies with the further delay. So we are not expecting really improvement from the automotive sector until the earliest during next year. On the other hand, we have had a very positive development in the quarter, again from the automated warehouse business. And we can clearly see that -- and this was, of course, long before the corona effect, but the trend of reinvesting in automated warehouses continues. And now also, we can see that not small companies can do it because there are a lot of money involved in these CapExes.But it's not only the big companies, who are doing it mainly retail companies, only goes down a bit, but at least we can call it medium-sized companies are starting to look into this, which are positive for the future.So we don't give any focus. As you know, but we do expect turnaround compared with last year, a decreased demand also in Q3 due to diminishing activities created by the coronavirus. Then of course, we don't know how bad it will be of obvious reasons because if there will be the second phase, of course, it could be quite negative. But with what we know today, we are expecting a clearly decreased demand. But I'm sure we're going to show some positive things, at least during the third quarter, even based on this. We now come to more to the figures, and I don't have the intention of going through this in a lot of detail, but you can see and that there's some sort of summary that, of course, orders are substantially lower than same quarter last year, which in itself and was a very strong quarter, but regardless of that is to decrease somewhat 19%. And the sales force decreased then by 15%, partly then helped by that we had a good order intake in the group in the first quarter.And still part of that good order intake will be delivered only in third quarter. And I perhaps something also will remain until the fourth quarter. So obviously, based on the lowering of the sales, the operating profit decreased.So we had an operating margin then of close to 18%, which is a little bit more than 2% lower than last year. Still without saying that this is, of course, not very good that we were decreasing the result. But based on the situation on what's been happening in the market, I would say that it is quite an acceptable development. And it gives further basis for more investments in the future for us. We can see that we continue to take market shares, and we have a good base for further development.We have also, which everyone should understand, due to the corona, we have received a government subsidies in the U.S.A. and the U.K. during the quarter, total amounting to EUR 1.3 million, and this has been recorded and separately under the line other operating income and expenses.On the other hand, of course, everyone should understand if we haven't got these subsidies, we would have, of course, been forced to make here rather substantial redundancies.So it's difficult to say what the effect would have been, if not we had received it, but clearly is, of course, that in the U.S.A. and the U.K., we have received substantial subsidies, which, of course, has helped to offset some of the negative development, otherwise, we would have seen during the quarter. So conclusion for the first half year, then is that we are up 5% behind last year in orders and 6% in sales. We are EUR 1.5 million after in operating profit, and we are approximately 1% below the operating margin.On the order intake per region. A few comments, I think are valid that you can see that in Continental Europe, this is, of course, a substantial decrease. And especially, I would say that the South Europe has been hit rather substantially during this period. Nordic region, very stable, has been hit less by the corona. And I think also the fact that we have more long-term projects there related to the building industry, is, of course, positive short term. U.K. this quarter was clear rather negative. And if you remember, I've said before that U.K. also includes some export orders to other regions. And in this case, we didn't get so much orders as last year. So obviously, would be a negative effect. And in North America is reflected and that we had to close then the -- actually both following order and the Troax operations then for almost 2 months. So obviously, that had a negative impact. But the proxies stand still that we're showing not too bad development and the result wise, especially for full compared with before. And I must say also that Troax team has had shown good development in the last 2 years or 2.5 years. It's continuing behind these figures to show, I would say, rather good development. Positive in new markets is that we are growing, but you see also that the figures are low, so that you shouldn't be too positively surprised over the high figure in growth. But we are, of course, glad that, we are increasing. New market mainly consists of the APAC region. So China, Japan and Korea, whereas if you remember, we also now include Troax safety unit in Japan, which was previously not against. Basis has more or less similar pattern even if the Nordic region that shows a lower development on the quarterly compared with the other site. Right. I think I'll continue with no further comments, as I call the conclusion. And that's been obviously then a substantially weaker market activity, especially during the first part of the quarter. And as I said, we noted in that especially a smaller and midsized customer that has potential commit to new orders. And unfortunately, we still expect a weak market activity, let's see how it will be. But we expect a weaker market particularly also during the third quarter.Regarding the customer segments. As I said, there was a continued low demand from the automotive industry, but quite positive in the automated warehouse business. And we do expect that to continue. Regarding North America, Troax team is continuing to develop well, even if, of course, the order situation could have been even better but Troax team can follow that was hit during the quarter by the compulsive short term. In the European operations, I think I wanted to say, at least my judgment is that we have had stable, but of course lower activity, in some cases, substantially lower activity in European operations, but nothing has happened, which has really shown anything really negative. We see it so far as a temporary drop and then probably there will be some sort of drop in Q3, and then we have to see how it's been developing. But it has not changed anything negatively to exclude for the future. So we continue to do in a cautious way, obviously, our marketing investment, not perhaps just like before, but we try to do it in a constructive way.New factory in Italy was continuing to develop well despite some lack of volume. And the factories as I said in U.K. and U.S.A. was in principle closed from end of March to end of May, whereas the Italian and Swedish were running during whole period even if the low broken volumes. And also the Chinese -- the small Chinese factory was running during the whole period. And we can see, of course, that China is running ahead of Europe and North America in regaining or coming back to where it was before. That's at least what we saw here in the second quarter.And the dividend was paid in July. So I think then that we've done what we committed to do. Trying to round off to my little presentation. I can say then that the growth factors, which comes physically on the next page, still remains. There will still be increased industrial automation. Of course, that could be a good lapse in the curve because of the corona, but long term, this is still valid. There are still, especially in the United States, a trend of onshoring of manufacturing, maybe that would come a little bit in Europe as well.There continue to be growth in e-commerce, which, of course, is positive. And the understanding of safety is continuing then to the same increase. We are still a market leader. I don't think the -- we come back -- we will come back with more figures towards the end of the year because right now, it's a bit healthy situation to assess the market.So I'll try to round off there and just say that for the safety of tomorrow, we are also, of course, then focusing on more climate compensating program, reducing new consumption.And as I said before, in a new investment we have in Italy, we have made sure then that approximately 25% of the energy consumption will be covered in by solar panels, which of course, is good for the environment and also, of course, for our costs. So with this I think I stop there with the presentation at last and I wait with some eagerness of your question regarding Q2 because despite the fact that we are hit then by rather lower demand. I think that the result is, I would say, acceptable. But let's see what you've got to say. So Mr. Operator, if you would like to start the Q&A session, I would be happy.

[Operator]

[Operator Instructions] We have 1 question from the line of Daniel Lindquist from SHB.

[Unknown Analyst]

Thomas, just a few quick questions. Then on the -- you talked about the gross margin. Could you just elaborate, I mean, comparing to Q1 where you only had minor effects from COVID-19. And now you have more effects with shutdowns and lower capacity utilization. Still, you have an impressive gross margin. Could you just elaborate on what's behind the gross margin this time around?

[Thomas Widstrand, CEO, President & Director]

Yes. I think that's a very good question. I think that what we -- is clearly identifiable. And I would say the combination of these things. Firstly, so that even for, of course, was closed. We would do relatively well during the part of the quarter. We had some good projects with very good margins. So such that we were able to compensate part of this with everything from that to purchasing prices to better productivity. So it has -- didn't have these big effects, which you might expect. And we also expected this when we saw this first effect of the corona. Secondly, I would say that Italian factory will start in January that have improved very much during the second quarter and increased the margin, which is also because we have a new machine, better processes, et cetera, et cetera. So it should continue like that. Generally speaking, also on the sales side, we have had no really negative impact on a lot of reduced prices on the contrary. I would say that the projects we have installed. And so during the second quarter, we're probably on the more positive side. So we had a good both product mix and a good -- rather good customer mix.And on top of that some sort of general comments also the Swedish manufacturing, even, of course, volume were not same at last year. Costs have been reduced. So we have quite a decent development cost-wise also in that factory, which, of course, has a huge impact in such as the biggest 1 in the quarter. It's a combination of all those things, which then makes slightly surprising. I can understand then that margin for the quarter was quite reasonable.

[Unknown Analyst]

Yes. Absolutely. So and then just on -- you touched upon the order intake. I mean the conversion from the order intake in Q1 in the U.K. and U.S. was low for natural reasons, and you're expecting that to come back some in Q3. But then my question is just from the Q2 situation, how much of a pent-up demand or pent-up orders should we expect in Q3?

[Thomas Widstrand, CEO, President & Director]

I think as some sort of a basis for what we are expecting is that the market activity will clearly be lower in Q3 also. On the other hand, I think that is quite right in saying then that probably will be some demand, which should normally have been recorded in Q2, which will come in Q3. And that might, of course, a certain effect offset and the negative general trend, which we are expecting in Q3. How this relation, of course, will come into is just we have to come back to us when we deliver our results then for the third quarter.But the logic is right and the thinking is right but the assumption that we are working with and I think that's still there is that there will be a reduced demand during the third quarter as a net effect.

[Unknown Analyst]

Great. Then my last is more of a comment. I think normally, you have to read your CEO statement time after time to see what you really want to say in the report. But this time around, it seems very straightforward. Should we interpret that as that this has been a more normal quarter than we've seen lately, even though it was unnormally many other -- in many other ways?

[Thomas Widstrand, CEO, President & Director]

You're absolutely right on that. There are proxies actually, as you say, that besides this being a little bit of my clarification in the quarter with lots of problems created by corona, and you have to handle that. But I would say that despite the business themselves that's been running in a rather good way. So that will actually, besides the corona, very few effects to comment upon. And also those have occurred -- have been slightly on the positive side, not then maybe, but likely on the positive side, so we've seen a good quarter, you can say from this point of view. And yes, I think you should interpret my sort of comments we've pan that we are, of course, really humble about the situation, and we don't think we can forecast that this is going to happen now because of the corona in Q3 or Q4. So I think we are leaving it a little bit like it is and saying then that this is what it was during Q2. No major surprises, I would say. Let's see now what happens in Q3 and Q4. So many things can happen, but it's better to have any real opinion or not.

[Unknown Analyst]

Sounds fair. And then just my last question then on state support. So we should expect a less state support in Q3 than we saw in Q2?

[Thomas Widstrand, CEO, President & Director]

As far as we can judge today, there will be no state support at all in Q3 or Q4.

[Unknown Analyst]

No. That sounds fair. So great. That's all for me. Thank you, Thomas.

[Thomas Widstrand, CEO, President & Director]

Thank you, Dan. Thank you. Anymore?

[Operator]

No, sir, we don't have any other question?

[Thomas Widstrand, CEO, President & Director]

Okay. Then I appreciate very much you're listening in. And it was a bit of a chaotic quarter. You can remain assured and that we try to continue to develop the company long term, the way it should be developed.And I hope to be able to show something of that when we talk again then in, I don't remember the day, but it's in October when we are delivering again in the third quarter. So thanks for listening and talk to you next time. Good bye.

[Operator]

That does concludes the conference for today. Thank you for participating. You may all disconnect.