Troax Group AB (publ)

STO:TROAX

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to presentation, Q3 Report 2021 Conference Call. [Operator Instructions]I would like to hand the conference over your speaker today, Thomas Widstrand. Please go ahead, sir.

[Thomas Widstrand, CEO, President & Director]

Thank you very much. Welcome, everyone. The theme for today are as usual, to stay safe, obviously, since we have had a lot of improvement with the pandemic. And, obviously, since Troax is a safety oriented company, we try to stay safe and sound on solid ground.But its normal. I'll do a small introduction to -- before we briefly go through the figures. And as normal, for those of you who've been around before, which I think most of you have been, you will find the documentation of what I'm presenting on our webpage under the headlines on Investor, you will see our presentations. And if everything has worked out all right, you will then find the presentation for the third quarter, which I briefly will follow. And then, of course, in the end, you can put the questions on this or anything else that you'd like to.First, a brief introduction. As you know, Troax is a growing company. We are working down with safety solutions. And the biggest segment for us is Machine Guarding, which we have on Page 3 on this presentation that we have prepared. This is approximately 65% of our turnover.Let's quickly go to the next one, which is what we call Warehouse Partitioning, which is some 20%, 22% of our turnover. And I'll come back later with a brief description of some customer or customer segments, which are a combination, both of Warehouse or Machine Guarding, which of course the warehouse automation.The third segment that we're working with is, what we call Property Protection, and mainly it's in the north -- for the northern part of Europe. It's approximately 14% of our turnover. And as you can see from the picture, those of you will put it up on the screen. You see that it's mostly done safety more from a static point of view, we protect the largest bicycles you have in these kind of cages.Whereas, the other 2 previous ones, where we -- the really the strategy is in the business IDs to prevent accidents, either with rolling of this like conveyors or robots or other moving objects. Or like we had in the warehouse, you could also say we try to protect them people from getting injured in an area where there could be fallouts from goods or trucks could lose something or whatever.Then next page, we show you then what we call Automated Warehouse. And it's a combination, and as I said, there are now products coming from different segments. And this is then a segment which then is growing substantially. It used to be only a couple of percentages of our turnover a number -- few years ago. But due to the ongoing demand of e-commerce this is, of course, growing substantially. I would say it's grown substantially for us now during 2 years, maybe 3 years.And this is a long term trend, which I expect then to be ongoing for a number of years. So for us, it's, of course, quite interesting that even this is today driven then by major international customers who are doing this kind of huge automation in warehouses. It will also spread to the medium-sized customer it's our firm belief, so it's a trend which will go on, obviously, not forever, but for another year is our conviction.Going to the next page. I think the figures that you have on left side are pertaining to 2020. They are bit old, so I'll skip them for the time being. But just to briefly talk about the sales per region, which we have on the mid part here of the paper. You see that the Mainland Europe is, of course, the big part of our turnover still, with a little bit more than 50% of our turnover. And then if you combine that with the Nordics and U.K., which are also then roughly 10%, 15% each, in addition. Then, of course, you quickly come to the conclusion and that still, we have some 80% of our turnover is related to European business.Even if we're growing very nicely, I would say in North America, within last, let's say, a year or so, I think we've had a quite good development there. And also new markets, which are mainly countries in the Far East like China, Japan and a few others, also growing, of course, nicely, but of course, from a low level.And then next page shows also related figures over a number of years. So it's a more of the long term trend. And I'm normally saying then that we are going into too much details. That we have had an organic sales growth of some 8%, 9%, 10% per year. And even if we don't have any official targets that we communicate over the future, I'm normally saying then that what we've done historically could possibly be some sort of indication what could be expected going forward. Because we should continue to take market share, and we are in a market that is growing regardless of what we are doing. So we get some help from the market, and that's, from our point of view, calculated to something around 4% to 6% per year over a business cycle of growth.We have some 2.5x bigger market share than our #2 player, and there are 2 #2 players, which are coming to little bit later. So with this done, I think you at least got some sort of indication of what we've been doing historically.On the next page, you have the financial targets, and I will comment on briefly what happened in the last quarter. And, obviously, when it comes to sales growth, just as I just said, we don't have communicated a specific target, but we should grow more than what the market is growing. And as I said historically, we've been growing with some 8% to 10% per year.And, of course, right now, we are growing substantially. And organically, we've been growing with, let's say, around 40% and with some additional of the acquisition within -- towards the end of the year -- last year in Poland, we've had quite a good growth this year. And I would say that these kind of figures is not really -- let's call it normal, and you have to see it as some sort of extraordinary growth, and I think over a business cycle. We are almost talking about what we have historical done to be more realistic, excluding acquisitions, of course.Regarding profitability, our target is to be on top of 20%. And right now, I think year-to-date, we are close to 22%. And there has been a lot of turbulence, as you know. But, basically, we've had a good development from a volume point of view, and that, of course, helps to offset all these things we have been again, turbulent with substantial price increases both on steel, freight and lately on energy. And unfortunately, we believe that this will continue. But I'll come back to this a little bit later.But again, on the capital structure, our net debt in relation to EBITDA should not be more than 2.5x. And right now, we are at 0.9, so we have a very strong balance sheet, I would say. And we are quite prepared to go into serious discussion for any acquisition, which we deem to be interesting.And I think the last thing is probably the most difficult to find, interesting alternatives, because we have the financial means, but there are not so many out there in the markets, which are really of interest to us. And of course, they also have to be interested to talk to us. So I think that that's what limits us today, not so much the balance sheet or the financial structure.Dividend is not really relevant right now. But as you know, we should pay approximately 50% of our net profit, and that's the target that I think we are doing and paying.Going to the next page, I also address a little bit some sort of summary then of the quarter 3. And, in general, we continue then with good order trends, which already started, I would say, towards the end of quarter one, when actually the pandemic then started to go away, perhaps not entirely, but at least the business-wise, it started to improve then.And the main explanation for the good order intake in Q3 are again then the strong development from international customers, mainly within Automated Warehouse, but also in Machine Guarding, not so much in automotive, but in Machine Guarding in general, I would say, it has been quite positive during the quarter. But from a figure point of view, it's actually the Automated Warehouse, which is driving the most of the Europe.This, of course, gives us a good EBIT result and a margin also in quarter 3. And as I said before, the good utilization of our manufacturing units and of course, a key to this relative success.There are good sales levels in all markets. I would say that the market is very strong out there, and it reflects then good activity in Q3. We note, and I've said this also in previous times that, some sort of delay in orders coming down from 2020, we regard it as clearly diminishing. So we think that the market towards the end of Q3, and clearly, the market going forward in Q4 and probably into next year, will be what we call and an normal market, whatever that means, and will not be influential by old possible orders or old orders that should have come earlier from the COVID -- if we hadn't had a COVID in 2020.So obviously, then this means that the net result is increasing, because the earnings per share increased, I would say, in a nice way from EUR 0.12 last year to EUR 0.19, which I think, again, is -- as I said, is a good development.Working capital is on the expected level, even if the inventory is still high due to higher security levels, and that's something which I think we are going to continue to defend, because we the turbulence that there is still with deliveries of different source, we think we need to keep the high security levels in our inventory until things are starting to stabilize and that we don't see until probably the earlier second part of next year, not only earlier than that.Steel price has continued to increase also in the third quarter. We have expected this to start stabilize and we have seen some sign on that now going into the fourth quarter. Whatever would happen in the fourth quarter it's too early to say, but we've seen some signs of this. But, of course, with the turbulence in steel and in other things, there might be a continued need for increasing prices also going into next year, even if that's something, of course, that we try to avoid. And talking about the prices, they have then with some delay, been adjusted to reflect the higher steel price primarily.Talking briefly about automotive as a subsegment. It has not been as strong as expected during the third quarter. And this is probably, as we're right here, attributable to the delay in supply of these semiconductors to the industry in general, and we have noted, and of course, such a delay in production in the automotive industry have delayed also investments.We don't see, however, that the share size of investments will be diminished just because of this delay, but we think that the projects will be delayed. And that will, of course, also have a hampering effect of deliveries from Troax and our competitors to these segments until, of course, things are starting to stabilize for this important segment.On the other hand, then which I referred to before, the Automated Warehouse segment continue to give us substantial orders, and it's very encouraging to see that our solutions then seem to fall in very good grounds with these kind of customers. So we have very good development there.However, we would like you to understand then that, of course, our dependence of these international customers have increased in the last 2 years. Normally, we have a very broad customer base, and we still have. But, of course, especially in these Automated Warehouse field, the development is driven, as you know, by some very big international customers. And, of course, this change is a little bit structure than of the customer base of Troax. Nothing negative, we're very positive over there, but it changes nevertheless little bit of structure.Jumping a little bit to Poland with our acquisition of Natom, which we did on 1st of November last year. We've continued to have a very good development in the third quarter. There, we have had a good development during the time in Troax, both in orders and in result. And they're, of course, mainly focused on the warehouse segments, driven at least to a major extent by the demand coming from the e-commerce and this Automated Warehouse trend, but also in other warehouse -- more traditional warehouse segment.We have continued in this quarter -- continue to invest in this new facility outside of Poznan in Poland, where we've bought -- we've bought this new facility beginning of the year. And by the end of this year, the first manufacturing machines will be the installed.The administration have actually just recently moved there, so we are now starting with the implementation there. Our intention is that the move of the 2 existing units will be done during -- the main part will be done in 2022. But part of it will be done probably also in 2023 because of some lead-time in acquiring and enough electrical power in the new facility.And as for just some information, we have also during the third quarter, started deliveries of the newly acquired Quick-Guard which was still ABB product range for aluminum product range. It doesn't change, as I call it, the top line of Troax, but it could be a good addition in markets then for customers who are used to work with aluminum, where we see that we can combine aluminum and our more traditional steel [ fans ] in a good way for the customer.Going to the next page, we saw the financial highlights for the group. I think we went through this briefly, at least today. But as just to summarize, we have a very good order intake. So as we shouldn't exaggerate any comparison with 2020, which, of course, was influenced negatively by the COVID, but nevertheless, it's quite a good figure.And also the same also the safety [ awareness ], which, of course, follows the order intake with some delay. And just to give you the information on that the order book that we have today is, of course, intended. The major part of that will be delivered in Q4 this year. Some part of it will deliver in Q1 in the next year that. But the main part is, of course, then connected with orders for delivery already this quarter.Gross profit is on a good level, albeit that I would say that the gross margin could have been even slightly higher than if we have been -- even quicker than with some of the price increases. So as I said, some delay in there. So we expect then the margin -- this good volume development increases to not to deteriorate further, but on the other hand, improve somewhat in the coming quarters. And regarding the result, it's, of course, quite encouraging to see that we are on this 22% margin. But due to the good volume level, this is something which is not really unexpected, but follows all of our plans.Net result, as I said, is following on the operating results. Obviously, it's a quite good improvement compared with last year. So after 9 months, we saw the middle section then of the columns, you see then that we are already now substantially above last year in turnover, both in orders and in sales, and also in the result. Of course, we are improving.So if you look to the right, you see then the 12 months rolling figures and you see that we have substantially improved them in orders and sales and also on the results. So so far this year, it looks very stable and a quite acceptable level.Going to the next page, which I think could be perhaps more interesting. If you look at the 3-quarter regions development on order intake and maybe on sales. So to the left -- on the left columns, you see then there is July to September development, and you see there is a continued strong development in all regions. This quarter was very, very strong in United Kingdom. And as I normally say, not all of this volume is going finally into U.K. But we have an organization that is handing also some sort of export activities.So some part of this is going to other parts of the world. But it's -- that's the way we report it. It's for us then how our U.K. organization is handling it. But generally speaking, it's been very strong mostly in North America, quite encouraging with good order trends, both in Troax part and also in the [ Poland ] part which was actually acquired number of years ago. So totally, we are then in the quarter of 47% up. And then we had, of course, the acquisitions, so we reached then quite good 80% increase in this quarter, even as I said, maybe the figures when we compare with last year, looks little bit too good.If we look at sales, it's a similar development. But there, of course, you don't see that North America, where we had very good order intake in the previous quarter, also has now good sales level, which means, of course, also that they have contributed well into the result development. And the same goes for principally all the other markets. So also the more mature region in the Nordic region and partly in Continental Europe have quite stable development, which is, I would say, quite encouraging when we see that our customers appreciate our solutions.So after 9 months, if you look at these same figures, the total excluding acquisition, we talked about around 40% in orders and a similar figure for sales, in organic growth. And then if you add then the acquisition, we talk about some 60% to 70% increase cumulative.Jumping to some sort of summary, which I briefly will touch upon what I said before. But you could also say in other words, that Q3 has been more or less expected. There has not been any tremendous deviation from expectations. So even if, of course, you've had this continued turbulence in pricing, which I think we've handled in an acceptable way.So the good orders coming, as I said, from Automated Warehouse and also Machine Guarding has, of course, been driving then the development and create then a good EBIT result and margin, mainly in all regions. The automotive, as I said, has not been as strong than as expected. So maybe that could be the negative deviation compared with our internal plans.But as I said before, this will come back, but it probably will be some delay in the timing then from the automotive companies when they start to invest in a way, which also gives some volumes to Troax.In the acquisition we did in Natom is continuing in a very good way, and we're quite happy then to see them integrate in a good way into Troax group. That's a good addition to our portfolio. And the same goes, hopefully, for the new Quick-Guard aluminum. It's still a bit early days to say that they have done something in a good way. But I think that this will be created in a way that makes it positive.So our North American operation, as a conclusion then has continued to develop well and show continued improved results. All factories are continuing to develop well, have good utilization. We have still over capacity in the normal Troax factories. So we can say cope with good high demand, which is according to plan. The exception for this is basically the Natom factory then, which is moving to this new factory. And until we got that in operation, they are working more or less at full capacity.So in total, a good development in the quarter with a substantial better result in the corresponding quarter 2020, even if, as I said before, this was and, of course, negatively influenced by COVID.So to end up, and you can start with your questions very soon. Just would like to end and for the sake of clarity that the growth factors for us and probably for our competitors are very similar to before. So it's a lot about the industrial automation and the growth in e-commerce. And I do think the figures presented now for the third quarter exactly shows this.To a certain extent, we also believe the onshoring of manufacturing will help this. We will probably not change the total picture. But on the top, it will have a certain positive impact. And then, of course, as usual, safety awareness and stricter regulation will, of course, also over time improve the market. But real influence from the market development is coming from this general trend of industrial automatization and the growth in e-commerce.In this market, and as I said before, we are the market leader. We are approximately 2.5x bigger than the closest competitor. We still are in a good position, because a number of our very small local competitors -- we call them blacksmiths -- they don't have the same possibility as the professional suppliers to compete with good prices, good technical knowledge, safety knowledge, lead-times and what have you. So far, I think we have still a good advantage in competing with this, more or less in all places in the world, maybe with the exception of the Nordic countries in Europe, where this kind of blacksmiths has disappeared since quite a long time I would say.Obviously, we need to do some new estimate now after COVID over the global market. But on these old figures coming from '18 and '19, we think that the global market was some EUR 1.1 billion. And then, of course, the European market was approximately half and the American market or North American market little bit less than half. And the rest is basically the APAC region, which is growing substantially as we speak, but of course, coming from a lower level.Next page, you have the -- our assessment of the competitive situation and turnover based on 2019, 2020, I won't go into this.In our production units then, which is the next page, you see where we are producing, which I think is right now actually then benefiting us in a good way because we are from an environmental point of view then not having to ship everything from one place. We have a different regional manufacturing, which, of course, is good, both from an environmental point of view and now also good from a lead-time point of view, because the freights right now with containers over the world is, of course, not the easiest thing to organize and plan. And of course, the costs are also increasing.So the addition to the right we have in Poland, the capacity there will be increased and by the end of the year, and when we meet again in February, talking about the full year, I will then inform it then about the what's new capacity will be.In our growth, we're working with actually different brands. They are very important, even if Troax as a brand is, of course, the biggest one, but the others are good complementary brands. And we're working down with safer tomorrow, as you know, since 1955. We're working with a lot of things, obviously, like any companies today for safer tomorrow. And we try to, especially to decrease the energy consumption. We try where we do investments to have then, of course, an environmental angle to it, which, in some cases, could even then do that we accept longer private back times just because we see that as a healthy influence on the environment.We worked on with compensating programs for the transportation, et cetera, et cetera. But I think that as a conclusion, our main advantage from environmental point of view is that our products are more or less 100% recyclable. And that means, of course, that we help our customers with environment, because the products they buy from us, they don't really hamper so much, I would say, than what they are doing from an environment point of view, because can be reutilized time after time, assuming, of course, that we see steel and to the recyclable product or recyclable source, which we think [indiscernible].Okay. Going into then the questions, just briefly touching upon that. We, of course, test our products. We have our R&D centers. We're getting certified by external parties so that the customers know that we are not only writing something or saying something by ourselves, but someone is testing us. And by the end, of course, our aim is to protect people, property and processes. And with it then we aim to continue to work and grow and continue to be the original what -- since we have been since 1955.So dear operator, I think I end my presentation there, and you could ask the participants then to come with the questions pertaining to this.

[Operator]

[Operator Instructions] And sir, your first question comes from the line of Herman Eriksson from Danske Bank.

[Herman Eriksson, Analyst]

So 2 questions from me. First of all, just regarding the order intake in the Automated Warehouse segment, are you receiving orders from new customers? Or is it mainly from already existing customers that you are ramping up on?

[Thomas Widstrand, CEO, President & Director]

I think if you just look at the order value, the main part is coming from existing customers who are ramping up the volumes and are increasing the demand. But we are expanding also the customer base quarter-by-quarter or month-by-month. So it's still important for us to continue to do that. But, again, from the size of the orders, the majority is coming from the existing customers.

[Herman Eriksson, Analyst]

And then secondly, just the CEO letter was a bit less forward-looking than usual. So should this be interpreted as business as usual or how should we view this?

[Thomas Widstrand, CEO, President & Director]

Yes. That's right, Thomas. I think you should read it, and that's our intention and to give you a conclusion that's -- we think then that it's very much business as usual. Of course, we cannot foresee everything with steel pricing or freight prices or energy. But, I think, since everything is moving, perhaps not in the right direction. But in the direction that we think we can, if not controlled, we can at least adopt to, then we think then that it's very much right now business as usual.

[Operator]

[Operator Instructions] And your next question comes from the line of Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

So I was a little bit curious, you're right in the report that this Automated Warehouses is now quite a large part of your order intake. I know, historically, several quarters back, you said that it was the same size as the automotive part used to be at around 20%. And now it has grown a lot since then. So is it now up to 30%-40% of orders incoming?

[Thomas Widstrand, CEO, President & Director]

It's a good question, Kenneth. I think we can talk better about this when we analyze the whole year. But if I just isolate the third quarter, it's definitely on top of 20%, and it's approaching 30%. So you are not too far out. But what I said before was probably that it was the same as at of automotive, and that was more in the 10%-15% range of the turnover. But, clearly, the Automated Warehouse is our biggest, let's call it, segment today. You can -- we are not reporting this directly as the segment. And it's certainly on the substantially higher than 20%.

[Kenneth Toll Johansson, Financial Analyst]

Also, you talk about high capacity utilization and that you had to bring in some temporary employees in some plants in order to cope with the high demand. But at the same time, on the chart, you show capacity utilization by plant. There it looks like you have more spare capacity.

[Thomas Widstrand, CEO, President & Director]

Yes.

[Kenneth Toll Johansson, Financial Analyst]

So do you have -- is it the spare capacity is more compared to the technical maximum capacity or how -- yes.

[Thomas Widstrand, CEO, President & Director]

Yes, that's correct. Maybe we should do it in a little bit other way to give better communications to you following us. But the figures relating that are of the technical capacity. So we right that we increased the number of people working with the machine. It's more short term than to increase than the working hours to increase the output, but the technical ability or technical volume is still the same as it was before.

[Kenneth Toll Johansson, Financial Analyst]

So we are not -- we do not need to see a massive CapEx program going forward since you did that a couple of years ago?

[Thomas Widstrand, CEO, President & Director]

No, not a massive. But, of course -- and this is for the clarity. If we have not communicated, if I think that you are quite good in analyzing us and others realized and that this is good development continues. Of course, then the overcapacity we have in machines will more quickly go in and we have to start the next investment program earlier than what was original planned. But short term, we are not starting a lot. We have still lower capacity. So with exceptional nature, and we're not doing any, let's say, dramatic increases in CapEx.

[Kenneth Toll Johansson, Financial Analyst]

And also, you've had Natom now assumed for year.

[Thomas Widstrand, CEO, President & Director]

Yes.

[Kenneth Toll Johansson, Financial Analyst]

And you are writing the report in very positive terms. So I guess you haven't found any, how do you say, any negative surprises lying around here or there in the company?

[Thomas Widstrand, CEO, President & Director]

Now, we haven't seen that. Especially also on financial point of view it's quite stable and quite, let's call it, well seen through. What we do see that we need to do, and that this is something which we see in all acquisitions that we do, we need to strengthen the management over time, and that's something we need to do that over here.

[Kenneth Toll Johansson, Financial Analyst]

Of course, when you grow a lot, everyone gets more to do, I guess. Yes. So finally, also, the balance sheet is very, very strong. And you talked about keeping the dividend policy intact and so on. But if you don't do an acquisition soon, I mean, you will almost be debt-free sometimes into next year. So how do you think around that? Would you consider to do an extraordinary dividend or buy back shares? Or are you trying even harder to look for acquisition targets?

[Thomas Widstrand, CEO, President & Director]

We'll probably do all of that, Kenneth. I mean if -- I don't want to joke about serious things. But, of course, we have a healthy balance sheet is very good. So I'm not at all negative on this. And we don't feel pressed to do acquisitions, which we don't see fit it. So if we don't see that we will find new interesting investments, which will benefit our shareholders, obviously, we will evaluate other ways of giving back some money to the shareholders.But I think with this dual markers, there will still be opportunities coming in. So I don't think we should be too closely focused on the short term issues of this -- with the dividend, et cetera. But, again, we'll see how it develops. And in the end, of course, it's not my opinion that matter, its, of course, the shareholders'. So we have to see this. But you have a point, sooner or later if we don't find alternative interesting investments, then we have to look at ways, of course, of perhaps increasing the dividend.

[Operator]

[Operator Instructions] Sorry no more question at this moment. Please continue.

[Thomas Widstrand, CEO, President & Director]

Okay. Thank you very much for your time and for your attention to…

[Operator]

Sir, sorry for the interruption. I think Kenneth have a follow-up question. Is that okay to hop in the line? Okay. Go ahead Kenneth Toll.

[Kenneth Toll Johansson, Financial Analyst]

Yes. Sorry for coming in late again. But I was just curious about this ABB aluminum products that you took over now and starting to produce. Do you think that there is a business case of expanding that business globally to maybe start production of such products in the U.S. or Asia or something to grow the business?

[Thomas Widstrand, CEO, President & Director]

Yes, absolutely. Well, we're talking a bit longer term, Kenneth. But the simple answer is, yes, absolutely. All right. If I understand correctly, there are no further questions. Otherwise, you have to interrupt me. But I would like to thank you, then for your interest and your time. And I look forward to talk to you again or together with you and try to answer questions in February of 2022, when we deliver the whole year result of 2021.So as I said, when I started -- stay safe, take care. I'm looking forward to see you next time. Thank you for your attention. Bye-bye.

[Operator]

This concludes your conference for today. Thank you for participating. You may now all disconnect.