Troax Group AB (publ)

STO:TROAX

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and welcome to the Presentation Troax Group AB Q3 Report 2022 Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Thomas Widstrand. Please go ahead, sir.

[Thomas Widstrand, executive]

Thank you very much. Thank you, everyone, for listening in. And as usual, I'll do a bit of a presentation on the third quarter development for Troax Group. And eventually, then you will have the possibility to put questions, and I will do as usual, my best to answer them. As normal, for those who have listened in before, I will follow on a little bit the presentation structure that we have in what we call, the report, in which you can find at our web page under Investor Relations. And under that, you will have then reporting. And obviously, this is third quarter reporting. So you will find it under that. If you don't find it, you don't have access to webpage is not a big problem because I will still comment on the main issues.

So as usual, I'll start with a short interactions group. And we are, as you know, the safe and sound on solid ground. We are working mainly within 3 different segments within the safety business. And the first and the biggest one for us is called Machine Guarding, which is approximately 60% of our turnover. And for those of you who are looking into the web page, you will find out that the picture we have that with exemplifies the Machine Guarding shows a long production line, where a number of robots are doing different welling or different operations, which potentially can be passed for people working in the same area.

So obviously then, this is what we do. We help the customer with safety installation regardless if it is permitted order if it is coding then connected directly with the machine. The second segment that we are reporting are what we call Warehouse Partitioning, which is some 30% of our turnover. And as you see from the enclosed picture, it's a typical warehouse where people are not going so much around, but they are traveling with forklift trucks. And what we are doing then to help customers increase safety here is everything from preventing the things we saw on the shelves to fall down. We are also helping them to install the shelves itself. We do that through our company in Natom that we bought 2 years ago. And we're also putting up different perimeter solutions than dividing and possible dangerous areas towards people working in this area.

And the last one, which we call, Property Protection, approximately 10% of our turnover is then what we call storage solutions. It's perhaps not safety from a dangerous point of view or from a personnel dangerous point of view, it's more obviously for storage. So everything that you and I have gotten in luggage or bicycles. So whatever we want to store them we normally then put in some sort of case we saw them in the sellers it could also be in the uptick.

Then something which we call an Automated Warehouse, which actually is a higher book within Machine Guarding and Warehouse Partitioning where we have seen that in the last couple of years, we have had a substantial growth in demand for more Automated Warehouse. So we created a special product package for this kind of installation, which as the name implies, is much more automated than the normal warehouse. And as you can see from this picture to the right, you also see the typical guarding than to prevent things from falling down. But this is much more than developed in order to prevent the people from being hurt because a number of pallets regardless if they are filling up on the cabinets or if you take it up to be dispatched on to customers or distribution centers, we try then to help the customers to put up the safety solutions for this in order then to prevent that no one should be injury if something should fall or a machine will go broke and go a bit nonoperating mode, the super way, et cetera.

Now I think there is also one or two sentences regarding Automated Warehouse in general because we've had an extremely good organic growth in 2020 and 2021 with this, driven by the continued demand for e-commerce solutions, where a number of international either integrators or big international end customers are then investing in rather huge installations, I would say. Now, what we saw last year 2021, was that this kind of turnover had increased to approximately 20% of our turnover. But as we have explained before, a number of these big customers overinvested and during this pandemic period. And now during 2022, and it is expected to go into 2023 as well are diminishing the number of new orders rating and that the positive trend of Automated warehouse, we put them into a situation then where the over investments done couple of years ago, would we absorb them with the continuing demand from the market.

Now we are agreeing to this analysis. So we think also that there will be a good market coming in again to us with new orders, but probably not until earlier towards the end of 2023. So let's say, segment, which we are officially not reporting, but as a hybrid in between, as I said, Machine Guarding and warehouse. We'll probably go down from some 20% last year to a substantially lower level this year. And this is the major effect then or the reason why then I would say that the order intake is on a lower level than compared to last year when we compare the third quarter come to the figures in a second.

The brief is the next figure, I think with Janta because I think you are well aware of the substantial increase we had on sales and orders in 2021. This is our history. We're working with 2022. So, I jump to the next page which shows the historical development. And as you know, we are a growth company. We are the biggest one in our niche market of indoor perimeter protection. You could call it mesh panel solutions. We are 2.5 to maybe 3x bigger than the 2 players. We are in a number of countries, obviously, and we are with time growing with -- in this case, these examples as 12%. We are normally saying that we are growing over a business cycle with some 8% to 10% per year. Based on that, we have a market which is growing with perhaps half of that size. And then on top of that, we normally take market share over a business cycle regarding if it is tougher times or even at the more positive times.

Going to the next one, showing the financial targets. So on the sales growth, we don't have a real KPI, which is we are externally saying we are going to have as a target. But we are, of course, saying them like I said just a second ago, that if the market is growing with some 6% to 7% over a business cycle, we should clearly be on top of this. And on paper, this quarter or year-to-date, it looks quite okay. We have been growing organically with 16%, but, there's a big but here. The main part of it is actually the price increases that we have implemented during last year and especially during this year. So if you just look at the volumes, it's not a big change compared with last year. Having said this, you have to remember that our huge increase of volumes last year, so we are comparing with the cumulative figures of 2021, which was a substantial increase compared with the year before.

M&A, just a small one we made, if you remember, a small acquisition this year in Spain, and it's not developing that at all. But of course, if you compare with the total figure of Troax, it has so far a rather small impact on the top line. Going to profitability, we are roughly on 18% of cumulative, and it was just slightly better in the third quarter. We have a target of 30%. The last year, we were actually above that, which some of you might remember, and getting actually a bit higher or explaining this because it's going on for a little bit longer time than what we perhaps anticipated from the beginning. But we have 2 more reasons for this. One is that when we implement price increases, which is based on the steel price, which is a primary raw material for us is increasing, especially after the Ukrainian war started.

It takes a number of 2-3 months until we see it's coming into our own results to count. And now during the third quarter, we actually see that coming in at least towards the end of the quarter. So that's starting to get rather positive, even if from an accounting point of view, you don't see it a lot for the whole of the third quarter. But the main part is actually still the delay in steel price reduction, which actually is going down since sometime this summer, assume you should maybe expect a little bit quicker implementation in the result of us since we obviously are using a lot of steel every month. But when you look at the conclusion, it is so that we -- during the period when there were rather tough times with steel and you didn't even know if you're going to get to steel and to what kind of price.

We bought a lot of steel to secure and deliveries to customers for a longer period of time, which means then that also during the third quarter, we've actually consumed a lot of the steel which was purchased earlier or a higher price than what you actually can buy for today. So in hindsight, you might say that, that was perhaps not the best solution. But I would say that if this situation would come up again, we will be exactly the same because we think it's quite important, obviously, to keep our customers happy and don't want, obviously, to let them suffer for not being to delivery because we have not ordered enough steel. That's the main reason.

Now having said this, this steel that we bought them for higher price is primarily now consumed. There are a number of these tons still there. But step-by-step during the fourth quarter, this will improve even if the full effect will only be visible, I will say, during next year. But it's going in the right way. We see that even if, of course, you cannot say that what we know today will be true tomorrow because we have seen that, especially during this year that there is a lot of turbulence both with steel prices and freight costs and other things as well. And right now, of course, energy is coming up as something which is increasing substantially. So it's yet to be seen that will have an influencing going forward.

Going to the next issue, capital structure. I would say that we are in a very good stable situation. We are far below than what is possible for us to have in relation if you compare the net debt to the result level of EBITDA. So in other words, we have quite good opportunities to continue to buy companies. The problem is only to find the right companies and not so many around that actually we are interested in. But if and when the opportunity comes up, then of course, we have the opportunity, as I said, now to continue to invest in acquisitions.

Dividend, we don't need to talk about right now. It's something for next year. So one sort of summary, which I already tossed upon, but I would say that the Q3 continued with good activity, except mainly in the Automated Warehouse field, excluding our new Automated Warehouse, we show a similar level as the strong third quarter 2021, which means then that I would say that the other customer segments or regions are actually developing quite well. We could see some improvement also in automotive, not in orders, but in activity level. And we reported last quarter that there was certainly increased nonproductively positive for quotes for new projects. And this is continuing in Q3, which is positive. But then as I already said, on the other hand, we expect a continued weak demand for Automated Warehouse, and this will continue into 2023 without giving an exact date when this will be changed.

So in orders and sales, these are positively influenced by a net effect or at least an indicative net effect on price increases that we have done to our customers based on the huge increase of steel. And we estimate that to be approximately 17%. So when you want to then analyze the volume effect. Obviously, you have to deduct the price effect in order to get a reasonable figure to compare that we lost your figure. I already said that the steel price continued or started to go down from the summer period. But as I said, we have now during the third quarter, consume most of what was still remaining from the higher price steel that we had in stock. So let's see then. Let's see how quick the improvements are going to quarter 4 and also in the beginning of next year. So we think it's a reasonable EBIT to in margin in Q3, especially seen in the light end of the turbulent situation in the quarter. But of course, as long as we are below the target, we are not really happy. But I still think that seeing the circumstances. It's at least what we call acceptable.

We have relatively good utilization on manufacturing units, but they are lower than last year because last year, we had extremely high utilization because of this higher order intake from special team and automated way else, which obviously has the some sort of negative effect with recoveries of fixed cost, it's a bit lower. I've already commented on the gross margin. Regarding customers, we have in good cooperation, I would say, increased prices. And as we write here, we see some effect of that during this quarter. Good sales levels in the Nordic region and new markets, earnings per share seem slightly lower. Working capital is on an expected level. Inventories is high due to high secured levels but started to go down.

A few comments then on what I think some of you are interested in with our more recent acquisitions. So this time, actually Natom Logistics in Poland, this quarter been negatively influenced by the lower activity from the Automated Warehouse customers, up until the third quarter. I think that Natom has done a very good job, and we've been very happy with the development. We are still, so to speak, happy with development totally. But in the third quarter, we could see a negative trend then based on the lack of orders from these kind of customers.

The other one, we did a smaller one in Spain, and as I said, continued to develop well, some longer lead times on some components. But generally speaking, in well. After the closure of the quarter, we did another small acquisition called Suntec city, who had products or actually solutions than for bicycle stores mainly, I would say, for the Nordic area this short term. So that's something which will have, I think, a positive influence over the Nordic development in the coming years. It's a good complement to what we already are offering, especially then on the property protection side.

I think the finance shows - we have already gone through, so I don't need to go through that. It's rather clear and that the order intake is lower mainly because of the Automated Warehouse reduction already commented, sales is higher than last year, we are primarily then enjoying steel and the last projects that came in last year from the Automated Warehouse. So in the fourth quarter and first quarter next year, we don't have a big backlog or a big order book for this kind of customers. Gross margin, I already commented, they are too low, mainly because of what I already said with the steel price and the consumption of the higher inventory, which means that that's a good potential for us to come back to the previous level in the coming quarters.

Operating margin lower, partly because of then the little bit lower demand in automates and this kind of steel price development that I already explained. I think those are the biggest comments for this last 3 quarters -- sorry, 3 months. Going to the regional development, which is the next page. I just want to have a few comments then on -- especially on the order side. You can see here that in Continental Europe, we also have a number of important customers within Automated Warehouse I would say, has been a bit weak.

We don't see for the other type of customers that is weakening of the demand. But you and I will read the newspapers and you don't know what's going to happen in the coming quarters. But if you trust on the newspapers, you might see something negative in the coming quarters, but this is just speculation. Up until the third quarter this year, we've seen a lot of stable development in Europe as well as in the Nordic region, even if the Automated Warehouse has done a bit negative, both on Continental Europe and the U.K. In North America, it has had a more substantial impact. You can see it's a 23% decrease, which was substantial. So, in the U.S. I don't think there are many projects that all going through right now with new projects, at least with Automated Warehouse.

So totally, we are 9% down on last year. And on top of that, of course, you have the price effect. Sales is a bit better. You have 9% higher. So, as I said before, we have invoiced on a few of the remaining projects in Automated Warehouse which was taken during the end of last year. So going to some conclusion. I will repeat a few of the conclusions of the summaries I had before. So we continue to receive as we see it, some really important or in all segments. So mainly, this was pretty strong, I would say, within Machine Guarding. As I said now several times that the orders for Automated Warehouse were weak. We know that requests for also increasing from the automotive sector, not yet giving a lot of orders, but it's still a good sign for the quarters to come.

We think that the continued reasonable development in results. However, I've said now also several times, the model is or has been at least under pressure because of not now that's not the pricing effect to our customers have not gone through because we have seen that during third quarter, step by step, that that has been increased. But still, it's the effect on all these steel price, which were consumed which were bought for higher price. Investments are going on according to plan. So in an we are investing in the new plants that we have bought, and it's very good actually. I already mentioned the acquisition of [indiscernible] now in October. So in total, we think that we have an excellent pace for continued growth and continued development. Despite, of course, we have to still show you another that the margin needs to be improved compared to the third quarter.

Going to some factors, which has a positive effect on the growth. I would say that those are still remaining. I will just mention two of them, which are, according to my opinion, the most important. One is the continued increase in industrial atomization. We been ongoing for a number of years, and we think it will continue to grow. And especially now, I think the - probably, I think a lot of people have realized and that maybe you have to have manufacturing closer to home, which is not negative for us. And then you have the growth in e-commerce, which now has some sort of pause phase or a slow phase during 2022 and '23. But I'm convinced that this will continue to take off in a positive way from maybe end of '23 or beginning of '22 and going forward.

So we're quite positive over that more long term. For those who are interested, I can just a little bit round off before we come into questions. But on the production units, which is the next page, we have not done any major things right now, except that if you go to the right side of it, we show there the Poland, which is the Natom acquisition. We have substantially increased the sales capacity during this year, and we have much better possibilities right now for continued growth, especially on the shelf side. we saw an important product segment, especially when selling into these international customers within Automated Warehouse. On the Troax Group, we are working, as you know, with different plans, and we have added now Platek which perhaps will from a brand point of view, not have a major impact. But nevertheless, it has had a good development so far, and we look forward to continuing to develop solutions based on the technology that we have acquired on Platek.

Say for somewhere since 1955, as you know, we are the original. And for the safe of tomorrow we continue to work on environmental issues. So the main issue price is still to increase on the recycled steel and what we purchased from the steel means. All other things that we can do are only that they have a minor impact compared to the increased possibility with recycled steel. We're also starting now to show the CO2 consumption for many articles for customers. So if they are interested, they can see them if they buy a certain type of work or the CO2 consumption here. It doesn't change our own consumption perhaps of CO2. But nevertheless, it gives the customer then a better decision model for [indiscernible].

On the safety center, we continue to do this and to develop our R&D. And as I think I've said before, we have now opened a bit new doors. And actually, you can see here we have Troax Power door. So we are trying also to knock down the sliding doors that the customers are using in production and warehouses, and it's been very well received. So we think that, that opens even further possibilities, of course, going forward. We are certified by two [indiscernible] of the customers. Of course, we know that we're not the only one who was saying that we are doing checks coming up with the policy level which is according to specification. We also have done someone external to prove that, which is, I think, okay. So with this, I'd like to round off saying we still continue to protect people, property and processes. And with this, I'd like to hand over then to the operator to invite them for some questions.

[Operator]

That concludes today's event. Thank you for your participation. You may now disconnect.

[Operator]

[Operator Instructions]. We will take the first question from Peter Testa from One Investment.

[Peter Testa, analyst]

Firstly, just to understand your comments around price and how we should think about it going forward in the context of steel prices, which are, as you point below the end of 2021? If you could give some sort of sense, please, as to how you think you consider price going forward in new orders and new opportunities?

[Thomas Widstrand, executive]

It's a very good question. I have to be a bit careful. However, our comment is because people listening into this call with my team influenced based on what I say. But I can just say then that we have, as I tried to say before in good cooperation with our customers, increased already pricing to compensate for the steel price increase, and we have seen that at least starting in a good way to come through in our result account. So to answer your question, how does it look going forward? It is obviously then so that some customers will require a lower price. We think tenant there are so many things which have increased in costing. So we will be rather cautious going forward by further reducing the price. But of course, in some cases, we are doing is because otherwise, we would be out of the price tunnel, which we and the competitors are setting in practice.

So in other words, you can translate in to say that there will be some reduction in pricing going forward based on that the steel price is going down or has been going down. But we have no intention, so to speak, of letting all of disappear because there are a number of other things which are increasing among this energy, which we also need to one or other to control and to compensate as for.

[Peter Testa, analyst]

And then the second question was just on costs. Yourselves, you've been thinking about your own inflation, what sort of inflation you think you're facing going forward? And maybe also when thinking about the units, I think, U.S. and Poland, in particular, more focused on Automated Warehouse, whether you have flexibility within that to manage utilization the way you have on that slide that you showed in the presentation.

[Thomas Widstrand, executive]

Good question. We will obviously try as much as possible to reduce at least the variable cost going forward in order to follow and the possible order trend until the Automated Warehouse will get started again. So we will have them we regarded if it is one year or whenever it is, we will try to, as good as possible, compensate development costs. Talking about the fixed cost like depreciation, the sales cost, we will not do any major changes there because it is so that we put in a lot of effort into hiring good salespeople and also to educate them in what we're doing. And we have no impact of taking them out because when we then start again, it will cause us a lot of work to get new good people and to train them.

So, I try to answer your question on the variable cost side, I think we can rather compensate for this, especially on the manufacturing side. But the fixed costs, apart from depreciation, if I call on the sales, especially the sales cost, we don't have the intention of doing any dramatic decreases shorter. So there will be, in that case, if we cannot compensate this on other projects, which there are clear possibilities that we can do. And we will have a reduction of the operating margin.

[Peter Testa, analyst]

And then on the automotive opportunity that's building up, I was wondering if you could give some sort of sense as to kind of the breadth and character of those orders. What you think it will take to convert them from the customer side, what sort of decision to happen?

[Thomas Widstrand, executive]

We've been waiting long term for the automotive segment to increase because with all what's going on here with the transfer of platforms to electrical platforms, et cetera. We thought that this would have started actually earlier this year or maybe even to last year. So we have seen a positive development already last year in United States. And this year, we might see at least on the request for quotes now coming in Europe, not so much the far east yet. So we have good, let's say, good hopes at least that this might take off in a little bit in 2023. And I think Thomas tried to answer your question. It is on that we are quite strong with automotive, even obviously, there are other competitors.

So when they do projects, which they now finally seem to get starting. I think we have a fair chance of taking our part of what we think we should get from these kind of projects. I think maybe we have underestimated and also the lead time between they start to think about them to invest until they get the manufacturing line order because it's only then when they start normally to look into the kind of solutions that we are providing. So, it looks this time that the lead times reality is longer than what it's been historically. Maybe this is something to try to answer your question also to give you a full flavor. Otherwise, we're quite positive over so later, this will take off at than what it has been doing in the last couple of years.

[Operator]

We will take the next one from Gustav Österberg, Carnegie Investment Bank.

[Gustav Österberg, analyst]

I guess a follow-up for me. I know you talked about sort of the performance of the order intake of the Automated Warehouses. And I mean, you seem to be quite comfortable still with the order levels that you see outside of that segment. Can you -- you talked a little bit about automotive, but can you provide some flavor of how you think about the cyclicality of those orders with regard to sort of a general business outlook.

[Thomas Widstrand, executive]

Yes. If there will be now with a lot of newspapers or expert or saying there will be some reduction in general loan. Obviously, we are going to get hit by that also. But otherwise, up until the end of September, we didn't see any lowering of activity except on this Automated Warehouse. So we've seen from small companies to big customers, they still have a lot of projects which are ongoing and probably ongoing into the first part of next year to say something about the summer of next year or so is pretty difficult right now, we can't really comment. But I would say that for the coming 3 to 6 months, we see a market which is pretty stable, if nothing new is coming up, again, with the exception Automated Warehouse, which you can more or less forget them for the coming 6 months.

So whether or not there will be a further reduction of activity in quarter 4, it's difficult to say. But based on the information we have until the end of September, it was quite stable, not going, I must be stressed -- I must stress this. But on the other hand, the third quarter loss year, which we will compare was very strong. So you have to remember, when you compare with this quarter and that when I say that it looks stable. It's rather a positive comment so far.

[Gustav Österberg, analyst]

Well understood. And I have a follow-up on that question. I mean you're seeing some companies talking about nearshoring trends where you move production back to Europe and the U.S. with more -- are there factories being built or remanufacturing of existing supply lines to allow for more automation. Is that something that you're seeing currently or having discussions with clients about at least?

[Thomas Widstrand, executive]

Yes. We hear a lot of customers talking about it, and we might have seen one or 2 examples of it being not pricing executed but at least being decided. But these are things would normally take a little bit longer time. So I wouldn't say that you have seen a lot of it in third quarter, and I'm pretty certain you're not going to see a lot of it in the coming quarters. I think if you look at it more in the years to come, this is clearly a positive trend, which we will enjoy. I would say, well, especially in Europe and in North America.

[Operator]

The next one from Johan Skoglund, DNB Markets.

[Johan Skoglund, analyst]

So concerning inventory since your security stock going down, would you please be able to provide some more color on how this could look going forward? For example, if you are posting orders from supply separately to bring inventories down quickly? Or would you say that this is more of a gradual decrease going out?

[Thomas Widstrand, executive]

You want to talk about the inventory, right?

[Johan Skoglund, analyst]

Yes.

[Thomas Widstrand, executive]

Yes. I lost you a little bit. And yes, we talk about a gradual decrease because we won't come back to the previous level of inventory because I think those days are over when you could use just in time and have this security still things we're working. But we were and we are still at the end of September on a too high level on inventory level. And step-by-step, this will go down, not as I said, to what it was before. The Ukrainian problem started, but maybe somewhere in between. Let's see. But it will certainly go down from today's level.

[Operator]

We have no more participants queuing for questions, sir. You can take the floor.

[Thomas Widstrand, executive]

Okay. Thank you very much. Appreciate your questions. Some are very new and some are, let's say, more common. So let's just say that I'm very grateful for your interest in us, and we are seriously, of course, looking forward to meet you again, I think, mid of February when we're going to report in the fourth quarter. And I guess that one of the key issues then will, of course, be the gross margin again. So let's see how we can handle it until then. Thank you very much and take care, talk to you in February. Bye-bye.