Troax Group AB (publ)

STO:TROAX

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the Troax Group AB Presentation Q2 Report 2022 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Thomas Widstrand. Please go ahead, sir.

[Thomas Widstrand, executive]

Thank you very much, and thank you for listening. It's my pleasure to present the second quarter term of Troax Group AB. And as usual, we have a short Q&A session at the end. I'll start by introducing them if you want to follow my presentation and also we have followed this before, so you know what to find it but otherwise, you can find it on the Troax website or on our page at Troax.com, and you can find it in our investors and the way you have the reports and reports obviously for the Q2, that is if you don't find it or if you don't want to do it, I'm sure you can follow with my priorities for the presentation.

Nevertheless, I'll start directly into the presentation and we have a few introductory picture, which we've seen before. We are safe and sound on solid ground but what is more important, I think that we are actually sure are working with 3 main segments and the biggest one is what we call machine guarding, which is 60% of our turnover and also short-term reduction, you can see on this picture. If you don't see the picture, there are a number of us working with automotive manufacturing, and that's typically what we do.

We work a lot with different kind of industrial processes, but it's basically intended on just for people from working in close connection with half of those processes or half of those solutions. Next one, we have this what we call warehouse partitioning and is stationed in new warehouses, which is approximately 30% or something like this. It grew quite substantial last year, last this year, if I will come back to you. And as the picture implies, you can see that reviewing the areas we take our type of fences for safety solutions, and we bring them into either more static part of warehouse or more alternative ones but we talk about partitioning and we talk about safe one for the people who are long away or other working in this area, and the third segment, which was the smallest one, which is percent 20% of our turnover and is actually where it all was started many years ago.

The Troax is [indiscernible] to protection. It's mainly our North European solution and what it does is it takes care of all our bicycles or ski storages, or luggage or whatever we have that we want to take care of in some storage solutions. So people are more living in multi to reach billions normally arising the sellers, but some have in Gaia well. So even though it could be outside of that important one way and other but we call it up to protection, 10% of us of our turnover. And then we have what we call automated warehouse with effect to the hybrid between machine or in the warehouse part where we don't focus on a more automated warehouse part.

We don't disclose how much [indiscernible] area driven, of course, then by the e-commerce solutions or the demand for commercial solutions. And for Q 2022. This is, of course, I will say, going down substantially, partly because people are not so keen, I guess, to order from e-commerce traders as they were during the pandemic and also I think a bit our conclusions are that some of the very big players in this field they would, as I call it, have already invested last year and now we deal with the reduction in demand for e-commerce, they are trying to go into the cost interest of last year, which obviously was a bit to me.

And I firmly believe myself that we are still continuing increase in demand in this important sector for Troax, but I think that for the rest of 2022 and also for some part of '23, I think the demand will be at a lower level simply because it a fact before. I think we turned out integrators or customers over invested in 2021. Next page shows the summary of the overall development, the speedup in the different segments, sorry, geographical areas for us. So you can see, of course, that 80% or something we still close to that is for Europe, but we have actually increased substantially in North America driven than last year by a lot in automotive warehouse, which obviously is not showing the same pattern in 2022.

I'll come back to that. And you see also then the figures down last quarter and you see that we last year had a terminal increase annual different phases and this of course, operating profit, which has to be in line now comparing this quarter. And of course, with a very strong quarter of last year.

Next one shows also the year in brief but more long-term development in this case shows in 2012 and we are a growth company, even if as I said, last year was a bit of a go slow. We're talking only about that the market is going with some 46% per year and on top of that, we should take market share. So we had historically an increase of some 8% to 10% per year, depending on, of course, which and from analyzing this. We are approximately 2.5 or maybe even 3x bigger than our closest competitor in this field, and we obviously the leading company in the solution of safety solutions.

Coming to the next one, which is the financial progress we're talking normal on that sales growth, which is not explicitly said that we have a specific target but as I said, historically, we've been able to grow 8% to 10% a year, and that's probably not a bad indication of what could happen going forward, assuming, of course, that the market is continuing to grow, which I don't see any reason to doubt. So for the first 2 quarters then or actually a good quarter, if you look at the year-to-date here, we've been growing organically and just 1% with a small figure with a small acquisition, which is in Spain. But however, I must say that most of this is coming down from the price increases that we have been achieving due to, as it was necessary so to raise prices due to the steel price increases.

So the real growth for the first half year, extreme price increases are not that impressive, effectively and below, we have reached 8% to 10%, and it's probably done because as I said before, we've had this very, very strong development in the whole of last year. We did not come back growing profitability were a little bit behind. Our targets were up 17.8%. We thought it's still okay under the difficult situation and have been now especially on the pricing side, which I can comment a little bit later on. So I think this is a decent achievement even if it's a little bit below our target.

Regarding the capital structure, there is no, I would say, main problem. We have a quite good balance sheet, and we have a net debt to EBITDA, which is only 1.1%, which means that we have good resources to continue to now find existing investment of the [indiscernible] acquisition of it. So in that respect, there are no real [indiscernible] on our side.

Regarding dividend, we don't need to talk about that. We have just paid out the dividend a couple of months ago, so we can come out in 2022 resale. Coming then to the next to some more a little bit to Q2. I have a few conclusions later, so it's hopefully then will [indiscernible] it. But just to take a few examples here, I will say that Q2 continued equaled all the trend. We started already in 2021 and okay before with the exception of alternative rounds, which when we annualize the figures, the doesn't look that impressive, and this is what is my conclusion but if you can exclude the automated warehouse development, I will say that with a very strong development in all other segments, and we don't see any reason that customers are not being active or buying from us.

So I would say that on the contrary, it looks quite stable. I would say we got the number of [indiscernible] also sort of exciting .So in other words, Q2 were in line with last year if you exclude this, bear in mind that Q2 last year was a very strong quarter from order intake point of view. Now in fact, it still goes without saying that all in orders and sales is being inflated on the net price increase of some 15%.

We've increased more when we talk about growth, but this is somewhere in the line, which you can say that this is really interesting in the West African. So the fact is problem, then I think we achieved what I call a reasonable leverage result despite that the margin were on the low side, which we're connecting we've had a good utilization in our manufacturing units with the exception of our Chinese plant and the Chinese don't want us closed from also this period due to the Covid problem that China was experiencing. So we didn't have much storage and that to agree to regulations will come in.

Our Chinese units will open up then towards the end of the quarter but for most of the quarter, this was actually closed. Now coming to, I think, one thing with now many people are quite interested in some comments on the growth on here and we are very clear in saying that it was on the low side this quarter also just like it was in Q1. And it's mainly coming from the purchase of steel materials and unfortunately, we have this time line when we increase prices to customers.

It normally takes 2, 3 months before we see it in our own top line because we have an order book which has to go out and in some cases, we actually have plan to wait a little bit until you can get for this to be implemented even if I think we have much less a problem by the finality than any other companies. So we have a time level of 2 to 3 months and also this Q2 was very difficult for a number of our customers so I think that we've been a bit cautious than to just in a very harsh way to introduce increases month after month, after months what we think we've been trying to help and to an extent without working on more in 2 months just to make sure that they are surviving and that they are in good, let's say, help from [indiscernible] which hopefully will pay off in the long run by having our customers then, of course, be more positive to work with the suppliers.

So in other words, this growth margin is not what we call acceptable, but it's mathematically more or less than correct based on what I now expect. Now on top of this, with the pricing issue, which otherwise is going quite okay towards the customers. We are, of course, experiencing just like any other companies with cost increases or other types of process materials and components, freight, electricity, especially I will say and this is, of course, in support which, over time, we will -- is being passed over as we speak, to customers.

So I'm not too real about this new long-term not for the Q2 because this which was definitely negatively impact by the very steep increases in steel price towards the end of March 2022, we took cost of course some time to get our corresponding price increases implemented in our result. Stepping over to the regional development, which also we see some figures over later. We have, I think, good safe levels in most markets, especially in new markets. So good growth figures and I will say that's coming from most markets where we're expecting on of China, obviously. In North America, which is the main negative one, we have been actually quite heated by the lack of digital in automated warehouse, where we also have the main success there, I would say, last year within this kind of bigger projects.

So on term, we see good development positive should come also in North America, but for 22, it will be well decreased and because of the lack of activity in recent market. Due to the earnings per share, slightly low with OFC, I would say, quite okay. Working capital is on an expected level. Then we still utilize security levels, I thought right here. We think there are possibilities now in to stabilize, we can somewhat reduce the event during the year.

We see only how that those and how the degrees we want to take I think the keys allow relative success is also we've enabled during the whole problematic period during the cold wave and also during this first half year, where actually deliveries of steel was an issue. We've always been able to deliver inventory through and partly because we then have taken a more safe approach to keeping a bit more in stock, obviously, to have a good service to some customers.

Report sites, I will touch upon rerouting the report by Q1 that we saw will continue to lengthen unfortunately, it happens so I will say, especially in the beginning of this quarter, a really big turbulence and it started to fade towards the end of the quarter. So we have seen a stabilization towards the end of it, of the term. So if you then want to compare something I will say that we are in a better situation from that in point of view now ending quarter 2 compared with quarter 1 with what we see behind. Otherwise, in general, price half then, as I said, this NDA have been adjusted to reflect higher steel prices.

So the higher [indiscernible] the lower orders with in the order book before the steel price were really being it is step-by-step going out to lower book and we think we'll, of course, improve during the period. We do see that we want to add a number of ore going out in Q3. So it will certainly be somewhat reflected, however, to a lesser extent, we think, than in Q2 but with some effect you will see also in Q3.

Few words about the acquisitions, let's say Poland. They will again show the development and nothing more to comment on that, I would say. We also made a small acquisition this quarter in Spain called Playtech. And we're not drawing any conclusion I would say it started very well and we have in a small way, started to introduce the interesting solutions, which one or more for now let's say, communication point of view, and solutions then that are interested to our customers. We're not [indiscernible] and communicating between a focus for in the machines and they could, of course, increase under the safe [indiscernible] differentials between personnel and forklift is going well.

We always think they are on automatic or the manual. Some between the next page, the financial highlights, which I think you've been going through yourself so we don't need to dwell a lot on that you see around that on the ordinate looks a bit good on paper for the quarter but if you exclude the price increases, it's not impressive. Now the sales is still quite to play, I would say, based on the that we're still enjoying them to invoice a number of the projects which we've come from in before.

Gross profit, as I said, on the low side, clearly on the low side, we are not entirely happy with that but as I said, we aren't too worried about this going forward because we see that we're still now stabilizing. We have very good opportunity to come back to old margins during the second half of the year. Operating profit, obviously, also then with on the lower side but I will still say that the 17.6% operating margin based on bad thing than the turbine in the market but we just blow our target, we are working to connect to the [indiscernible] we have before.

If you look at the 6 months, you have a similar picture, but it's been more expensive, I would say, during the last quarter. So you can do your own conclusions but of course, the first quarter was on par issuance by the steel price, It came on in March, whereas, of course, the second quarter of this year has been fully influenced by much higher on.

Coming to the next one, call regional development or intake sales and if you look at the columns in the middle here, which are shown under 3 months being in quarter 2, you will see that the picture is then that Continental Europe is more or less the same, but we will then take out on the price increases with the decrease, which also here is influenced by development in automated wares even if the big influence in that is coming from North America or Asia rather than it's correspondence to [indiscernible] and general liquidity in the U.K., we've actually been doing quite well.

So even if you exclude and the price increases here, I would say that in U.K., within some other point of view, at least having a stable development , which I think is very well done and in normal I think has been rose despite price increases. So I think this is quite a good achievement and also discuss new markets which still is a bit on the lower side if you talk about absolute figures but step by step, we're increasing by market share and turn over there. So this quarter was a good quarter, plus 50% I think you want to see you kind of figure every quarter but over time, we should certainly increase the sales at record new markets, which are very much, of course, connected with, I would say, a specific remain important in that one in the market, which still import.

Small part, which is the acquisition of totally 5%. If you go to the safe port border below, it shows the same development, slightly better than because, as I say, it has been a bit strong compared with the development and then you see them, especially on the Europe, that's what the differences we've been enduring the today with the invoice employees who've have been taken over than the second quarter.

If you look at the first half year, you see a similar development but steel sales are a bit stronger, which means then that you can understand it the big orders we had last year from England are being enhanced now by the US to Los Angeles in June 2022 but they are short term, at least not coming back into the orders as [indiscernible].So you must then understand that from order point of view, I think that the ordinary ways it will continue to be a little bit on the lower side for the second half year but the worst thing that we saw continued good improvements during the second half year sorry, in the second quarter.

So next one, some conclusion and I think I will start around of a little bit for some Q&A. So as we see it, we continue to receive very good overall rating in both segments and I would say it's especially strong in machine volume and we have this time not seeing more orders, but we have seen an increase in activity level and request for quotes in the automotive sector, which is a good sign. It's the right that you probably know that has been more required for some time. So unlike the development in orders side and the different segments is quite stable with the exceptions I've now said several times in those notes.

Result is reflected based on the reasonable good sales, but a little bit less good margin somewhat compensated by good rural facing and manufacturing as we expecting China as, as I've said now several times also not relocate reception on the steel price and the communication on to tourist or customers. Integration of [indiscernible] in our right way excess is not part and the time. So in total, we think it's a reasonable development despite the turbulence created by the new price development. Jumping forward to the growth factors, which have not changed from before.

So I'm still saying that the increased industrial automization is the main driver for us, It's been so for some years and will continue to be so. Right now, we also e-commerce is not there we have a significant increase in 2021 and as a, think we will come back at much short term and those are the 2 main days, I would think, I would say, for increasing tenure for the market, not on [indiscernible].

Jumping quick production, which you've seen before Sweden, U.K., China, Italy, United States, 4 and take the next one, which shows then the different banks that we're operating under, and we now added this small Unity graphics which come in prospects on top of the other one and jumping quickly, I would say, than a few pages to what is called for the operator solution and just to thank you, let's say, recap we're we have introduced now what we call product Paolo, and it actually opens maybe it's a bit big work, but it actually has a new door to industry 4.7, where I think that we ask the first one out of different shield that we can integrate different doors, which made some production to communicate with folks trucks other types of moving equipment in an automatic way and that will, of course, enhance the solution provider thinking on that product has given now the customers for the number of years. So it's a good sign that we have introduced it.

It won't change in the top line picture for the work short term, but it's a good step in reaction and we think that the customers will appreciate this as we go forward. By this, I will say that we jump over the last sheet. You've seen this before. I'd just like to end by saying safety equals still works, and we are the origin of course, we're spanning 55. And by this by introducing the Q&A session. So I'd like to end my presentation here.

Thank you so far for your listening in and waiting for your questions . So please operator, could you help them to sort the Q&A session?

[Operator]

[Operator Instructions] We have one question now, sir.

[Unknown Analyst]

This is [ Gustavo ] from Carnegie. A couple of questions from my side. The first one is on demand trends. There's a mix of things going on there but I just wanted to start with the you mentioned a substantial drop in automated warehouses. What kind of year-on-year declines are we talking about here?

[Thomas Widstrand, executive]

I would say that we compare with sort if extreme high intake in 2021 we're talking about our cation of the order intake to some sort of indication so far.

[Unknown Analyst]

That's very helpful. And just on the sort of the sequential development in the quarter and compared to Q1, are you seeing a stable new level where you expect demand to find for the coming periods? Or are we seeing a decline within the quarter as well.

[Thomas Widstrand, executive]

Good question, Gustav. I think what we see so far at least up until the end of quarter 2 was at most of the demand in the ordinary warehouse port coming January to a substantial level, but it was not continuing to drop fine. So we think it's better to a level a bit more sustainable for the short-term foreseeable future release, and we don't expect it to deteriorate further.

[Unknown Analyst]

Okay. Perfect. And then moving over to the one small but positive comments on the Automotive segment. I mean, you have some customer activity and interest, and I appreciate you mentioned it briefly on the call as well but could you elaborate on what you're seeing here? Is it remanufacturing of production lines for EV that is starting to make more sense what factors are driving that development? Because you did talk about it a few quarters back, and then it went a little bit weaker for a while, but now you're in positive again.

[Thomas Widstrand, executive]

Yes I try to say very calm we break up on those, but we have seen it yet in the order at the request for cones are being increased, and we see it in Europe, and we see it in some other places as well. We saw a tool, which also have communicated in North America. So we think North America is a bit only, let's say, is of getting more investments in this level but as you know, also on top of this, we are late in the process.

And I think maybe we underestimated and the time lag between the automotive companies are to talk about they need to invest. So we see that the recently generally just talking about where they start to do request the [indiscernible] of the companies because, obviously, the safety solutions are extremely important for them.

Of course, they need to have everything in order with the machine introduction and the lines before we can look into this, but I think that's maybe one part which take us longer than what we at least expected and we think they're all a bit on right now. So we would expect the investment and also the orders would slightly start to increase because they are now coming towards the end of the planning phase and then the planning on coming to reality, which means they have to start also other things like production other or [indiscernible].

On top of this, I would say also under there's an expectation and that, of course, this with the battery plants, which is, in some cases, an integrated part of the automotive manufacturing is obviously on is starting to become more suite much ore or more in or day-to-day coming into operation and I think that also makes it easy for these kind of automatic investment as a normal investment and it comes also to hopefully or just any comfort for the total company.

[Unknown Analyst]

Okay. Perfect, that makes sense. Just a quick follow-up on a contract for the automated warehouse segment. It's both orders and RFQ activity that has come down, right? And you're seeing more of that in the U.S. compared to Europe.

[Thomas Widstrand, executive]

That's absolutely the right conclusion.

[Unknown Analyst]

Is it also fair to say that the base level and the comparison period they are much, much tougher in the U.S. compared to Europe or I mean higher today... Yes. Okay. And then moving on to the margin. I mean it feels like the steel price development is the main driving factor here and I mean, are you seeing any uncertainty in terms of pass-through or anything that has been different to what we've experienced historically? Or can we expect a similar development with regards to the margin impact from both higher and lower steel prices.

[Thomas Widstrand, executive]

Thank you. You can expect now that assuming that the [indiscernible] are not the steel price or stabilizing, then the price increases that we have made on during Q2, especially we, of course, come into force in our result account and our top line and that will, of course, one other on the gross margin and also on general profitability, question is only how fast is we will go and we have to see about this because right now, at the end of quarter 2, we retested that it was stabilizing but if you need steel, you can go all the way , I think, in Europe nor in the [indiscernible]. So I think we are prepared for both case but on the normal circumstances, we are, as I said before, expecting a step-by-step conduct to what we call our normal margins in the end of the year.

[Unknown Analyst]

Okay. Perfect. And then just a final question on M&A, We're seeing pretty steep valuation reset in both public and private markets during H1 in 2022. Are we seeing a similar development of multiples in your target markets? Or how are discussions going in general as well?

[Thomas Widstrand, executive]

We don't have any fixed months case in our market, so to speak, that we can just follow we'll see how it's developing because there are not so many activity as maybe you would like but we do see that there are more interested parties that we can talk about all it today than it was half a year ago. So from that sense or that conclusion, I think that what you're saying is right. If it's coming down and I think it's easier to keep this kind of discussions going. What will come out is, of course, one storage, but we've discussed this on the issue 6 months ago.

[Operator]

[Operator Instructions]

[Thomas Widstrand, executive]

Hello?

[Operator]

Do you have any questions?

[Thomas Widstrand, executive]

I'm fine. We'll open, of course, to that. So with this, I'd like to thank you very much both for your questions and your interest to listen and I look forward to meet you again in a couple of months where we're going to communicate, of course, the third quarter development thank you very much. Take care and see you next time over to you, operator.

[Operator]

You're very welcome. This concludes today's call. Thank you for your participation. You may now disconnect.