Troax Group AB (publ)

STO:TROAX

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Presentation Q4 Report 2019. [Operator Instructions] Also must be advised that this call is being recorded today, Monday, the 10th of February 2020. And without any further delay, I would now like to hand over the call to your speaker today, Mr. Thomas Widstrand. Thank you. Please go ahead.

[Thomas Widstrand, CEO, President & Director]

Thank you very much, and thank you for listening in. I would believe that most of you have been listening to me before. So I think then the context or the setup that we normally are doing this is familiar to you. But nevertheless, if you want to follow the reports that we have made official today, you can find it on our troax.com web page. And under the headline Investors, you will then find report, if I'm not mistaken. And then you can find under report of today, which is then the report from the fourth quarter. We have, as you know, then the results given out today. And I will try to make a short introduction and to explain a little bit what happened during the fourth quarter. As normal, we have a few pages here and there in the report that explains what we are doing. So I'll just do a very brief introduction to anyone who has not been around before. So what Troax is doing is, of course, we try to make your world safe for people who are working in factories or in warehouses, and we also make safe installations for those who have cellar installations where they keep bicycles or skis or whatever luggage you might have there. If we then continue to the next page, you will then find what we tried really to have as our mission and that is safety in every aspect, and that we try to do something for the customers, who then, as we normally call it, can sleep well in the night time. And we then have 3 segments, customer segments that we're working with: The first one is the machine guarding. You'll see that on the next page. And I think the page illustrates quite clearly what it's all about. It means then that you have normally done a production line, one way or another. You've normally then need some hard fences around to create a proper safety cage channel for the people who are working around it. This is approximately 60%, 65% of our turnover, which you will see later also in the figures. Next one is the warehouse partitioning, which is approximately 25%. And as the name implies, it's mainly then connected with doing warehouse installations, where you need some sort of safe defenses to prevent goods from falling down or at least to making a mess out of what you have in the warehouse. The third part, which is the smallest one also, let's call it, a little bit less than 15% is property projection, which is mainly directed towards the Nordic area, but you also find it in Germany and a few other countries. And as you see from the page, and as I said before, is more of a cage then where you keep your luggage and the things that you don't need in your flat on a day-to-day basis as some sort of storage. Then we have something which is a little bit mixture of everything. We normally show that because that's a segment within the segment, which is growing substantially. It used to be quite a small part of our turnover, but it has now grown substantially. So it's actually just as big as the automotive is for us, which otherwise is also, for us, a big important segment. And this automated warehouse, we -- from our point of view, we see there's some sort of positive trend, which will go on for a number of years due to the fact that a lot of these distribution companies or retail companies want them to have a better delivery performance or maybe they also want to reduce the picking and packing costs per parcel. Then I go to the next one, which is actually the first one where you see some figures, I've already touched upon a few ones of these. So if you go down to the right part of the page, you will see then the split up of the 2019 figures, sales by business area, and this is what I tried to explain just a couple of minutes before. On the same right side, you have another circle, which shows then our geographical split between the markets, nothing really big has happened during the years between '18 and '19. And so we're still, let's call it, struggling to get the new markets to increase more and this year or 2019, we are, as I will explain later, a little bit disappointed over the development in -- especially in Mainland China. I think the other ones mainly are developing in the right way even if there are some few ones that I will also address a little bit later. So a stable situation. To the left, you have a summary then of the complete year, but I think we take that as the presentation continues. So if you don't mind, I go to the next page, where we have the historical overview of the development. And in this niche market, which we think is maybe EUR 1 billion, EUR 1.1 billion worldwide. We have some -- we think we have some 14%, 15% market share come to that of -- we think we are 2.5x bigger than the #2 player, and there are actually two #2 players come to that as well. We have local presence [indiscernible] at least 42 countries. And we are, of course, a growth company, and we should continue to grow even if 2019 was to put in model year, a year of what I call mediocre growth. Historically, we've been growing with some -- organically, with some maybe 8%, 9% or 10% and during some years, maybe even better. And a lot of our people are working with sales, which obviously is important since we are selling solutions to customers, safety solutions, and this is really what I think makes Troax and the Troax organization worth a lot to many of our customers. We go to financial targets. It's a summary, next page, where you see then that we have an organic growth of 2019 of 4%, which is clearly below then the long-term average growth. So you probably will agree to what I say then that this is not a figure which we think is especially good. But of course, if you have an average of 8%, 9%, 10%, you have to have a few years of below just as you've had a few years of higher percentages. I would say that 2019 was a year where we saw some good development during some parts of the year, but actually the market was -- if best, it was more or less the same as the year before. And I think our estimate -- very preliminary estimate right now is that the market was actually decreasing slightly during the year on a general basis. So we've continued to take market share, which is good, but we're not happy in itself with the 4% organic growth. If you come to the next one, the operating margin, we've been in excess of 20%, and it should be possible for us regarding our operating margin. And this year, we achieved 19.6%, a little bit negatively influenced then by some currency in the last quarter and also by some moving costs in our entity in Italy. But nevertheless, we are close to the 20%. So I think that on an overall basis, this is perhaps not the best figure we have achieved, but it's an acceptable figure. Net debt is continuing to go in the right way. So even if we include now the IFRS 16 valuation, which a little bit increases than the debt, we are now at 1.3x, which we think is very good, and it gives us a healthy balance sheet. When we are looking into possible -- acquisition possibilities. And regarding dividend, the Board has just announced then that the proposal is to have a dividend to be paid out later during the year of approximately 47% of our net result, which is then more or less, as we said, we have as a target. And next page is doing a summary of the Q4 2019. And I would say that we think there has been, what we call a reasonable development in the fourth quarter. Again, the market was not very good, but we think the development for Troax was decent or reasonable. It was, however, a little bit lower EBIT result in margin in Q4, mainly due to then this moving costs in Italy and also some negative currency development actually was positive last year, and this year, negative. These things happen, of course, depending on the currency. I think we have a sort of stable currency development as regards on the operating flow. But of course, if the currency changes, there will be certain currency fluctuations that we have to take over the result account. In Q4 further, there were stable development in most areas with the exception of North America, and I'll come back to this in a moment. Earnings per share were then slightly below what it was last year. Coming then into more the U.S. operations, I would say that the improvement process in Folding Guard is continuing also in Q4. And we think we're really stabilized now at the operative levels. So it means that the delivery performance is good, the productivity is decent. Could still be improved. Product quality is okay. The people in Folding are returning quotes or possible quotes to customers quite quick in a normal way. So those are things where we say that now the operative things are moving in the right direction and are actually quite stable. So even if the result development in the quarter was still not of where we should like it to be because of the sales is still not where we want it to be. We can say, it was, let's call it, a stable development. Working capital, next item is on the expected level, even if we see then that Slide 10 insist that perhaps because of the financial development in the world, so to speak. Customers are delaying a little bit on the payments. And we try to, of course, keep on top of that. Regarding divestments, they are proceeding according to plan. The investments in the factory in Sweden are more or less finalized with a few exceptions, which I will come back to and the complete brand-new factory in Italy has just been started up. We actually did it in such a way that part of the factory was already moved in December; hence, that we took then the moving cost already in December, which maybe could have been taken also in January, February. So that's a good thing. And they are right now starting up to produce more volumes. And there are a few, of course, hiccups, as always, when you have this kind of big sort of, but it's going in the right way, and I have full faith that the factory in Italy will be up and running in a full-fledged way during the first quarter. Regarding the general market situation, I would say, it's stable and clearly not growing. I would say that during Q3 and Q4, the market has actually been decreasing even if maybe if you see it on the whole year, maybe it's not a big difference compared with the year before. And the major impact, of course, on that continues to be the automotive sector, which is a weak segment. We do see maybe some signs that it should improve, but it has not happened during 2019, and I think it will take some time before really the automotive sector will start to move in a more positive way. An interesting thing that we have done during the Q4, maybe it's not the biggest thing, but we have acquired another distributor in Japan. And from now, we have our own Troax company. We have, of course, the intention of investing further in the sales organization. Since we believe Japan is an interesting market, and it's partly, we think, opening up a little bit more to foreign producers because before we think Japan has been a little bit of a close country, if you see what I mean. We go to the next page, take the financial highlights. I don't have the intention of going through -- of course, have a figure. I'll first start with the 12-month figure, and we then go to turnover and actually orders of the same size, so EUR 168 million. So some increase then, as we said, compared with last year, 4%. We have a gross margin, which is actually slightly better than the year before, which is a good sign and we believe we have increased productivity, and we are a bit more effective, I think, in that process. On the other hand, the operating profit is on the same level as year before, which means then that we have, to a certain extent, increased our cost level, not only because of currency or moving costs, but we also, like we try to do, and structure way, try to increase our sales and marketing costs. Since basically, we do believe that this is a growing market, and we should invest more to fulfill the requirements of new customers coming along, over time. So we have -- we are slightly lower in operating margin, even if that's not maybe a big thing. So if you go down to profit after tax, it's more or less the same as the year before. So a very consistent and stable development. If we look at EBITDA, it's still a little bit higher, which means then that of course, we now have to compensate a little bit higher depreciation, which we have been able to do. But obviously, then it takes some time to grow into this new investment. So I'd like to phrase it that we now have an excellent pace for further growth since we've done a lot of the more heavy investments, which have now given us a substantially higher machine capacity, which is actually quite good and fully coming, we believe, 3, 4 years, so whatever will come in practice in reality. Earnings per share, same as the year before. So due to the fact that we think we have a real stable situation and that a lot of the investments already have been done. And the Board has proposed and that we should increase then the dividend compared with year before. A few comments then also on the fourth quarter and the 3 months, then October to December. And you see that we have on the order intake, actually, the same one as last year or I should see it as a strength. Since last year, fourth quarter orders was actually quite good. So -- and this is, from my point of view, at least, then something which I would like to point out being a rather strong development despite a rather weak market development in general. Gross margin is also quite okay, similar as last year. But as I said, the operating profit is a little bit lower, partly because of this valuation of the currencies and a little bit about the moving costs. But on top of that, we also have slightly higher cost because of the sales costs that we are trying to invest time after time. Otherwise, there's been no strengthening as far as we have seen or anything that is worth to speak or commenting in this kind of meetings. I go to the next page. You have the regional development order intake in sales. And you can see then on the order side, which is on the first column stand where we compare the fourth quarter, '19 with '18. You see that there's a stable development in Continental Europe. I would say it's actually positive. In this quarter, you can see a little bit negative in the Nordic region, and we have seen that the billing market for our type of products have been a little bit lower during the fourth quarter this year compared with same period last year. And that's something which you can no more or less follow from that the building permits went down 2 years ago and that obviously will have a certain impact on us. But it's still a good market situation. I wouldn't say that it's a dramatic decrease, but if there is something that's influencing what you see in the fourth quarter. U.K. was a little bit weak in orders compared with last year. On the other hand, we had some good, very good product orders last year in the U.K. If you see then down on the invoicing, you will see that they have done a very good job to increasing the invoicing. So you would then see, obviously, then that the orders that we got during the end of last year and, of course, during this year, has now been transferred into invoicing, which is very good. I've said before, and I continue to say that even if now things are starting to clear up with U.K., there will be quarters which will be positive and there will be clearly big quarters, which are negative because there is not really a stable situation at the moment as far as we can judge. I continue to North America, where we have a little bit mixed picture. We continue to have a very good development of the Troax brand. I'm quite happy with that. It is obviously then not at all that good for the Folding Guard. And that's this space is not at all connected with factory or anything like this. But it's connected with -- of course, with that, it takes a certain time to get the customers to understand that we really have changed and the operational efficiency in following in a way that they feel secure and to buy from them. And secondly, then, which is a little bit of the SKUs, but nevertheless, it's a fact following on is, to a certain extent. And depending on the automotive industry. And we have not been successful in North America, compensate the decrease of the automotive industry for following on that we have been in the European Troax operations. So those are, I would say, the 2 main reasons why you see then rather negative development in this specific quarter. New markets, nothing really to say about, forget about the -- the percentage is still too low figures. And as I said before, if you look at the whole year, we are quite disappointed over the development in China, where we are putting now a complete new management, and we do expect a positive thing to happen over some time, even, of course, with this situation right now with the virus and the uncertainty connected with that. We don't think that start of the year will be very brilliant in China, but we think we're doing now the right things for a good long-term development. So totally, more or less same orders in the last 3 months of the year, where invoicing was slightly higher. If you look at the cumulative figures, it's a similar picture. Go to the conclusion. Next page. We think there has been somewhat weaker market activity, nothing dramatic, but a little bit weaker. And as I said before, there's been a continued low demand from the automotive industry. Regarding the U.S., we do see a good development in the Troax Inc., just as we've done now for 1 or 2 years, we are doing quite well. Whereas volume is still struggling. Now mainly on the -- still on the orders and sales side, and we think we have it under control now on the operative side. In our European operations, otherwise, it's a stable development. The capacity increase in Sweden is finished and working quite well. And the investment in Satech, where we've done, as I said before, a billing and also then right now starting up a complete new manufacturing unit, complete new factory. It's going according to plan. And the expansion of the storage space also in the Swedish unit is proceeding according to plan. And as a small thing, the acquisition in Japan gives us the opportunity to further strengthen our position in the region. That was actually then the comments on the fourth quarter, on the year. Then there comes then a few comments on the next page on our growth sector, and nothing has really changed. So we do still see that we are in a positive, so to speak, general trend over a business cycle because then we are helped by the fact that customers are increasing their automization level. And when they do that, they need some sort of protection. And I would say the other really main thing is, of course, the growth in e-commerce, which is helping then investment on the warehouse side, especially what we call the automated warehouse. Next page, we've done some assessment of how the market has been developing, and we don't think it's been really developing, as I said, during 2019. We do think that the small competitors have probably gained a little bit. Blacksmiths continued to lose. And so maybe both us and 1 or 2 of our competitors have continued to take market share, but we have to calculate this more thoroughly before we release anything. So this is a -- mainly, I would say, same picture as you saw last year. Nothing really dramatic has happened or reinfluenced the comparison between competitors, as far as we know right now. Regarding the competitive situation next page, we've done some assessment and other developments of different companies, as you see, run over huge differences, very similar to a year before. When we come to the manufacturing, we would like to address then 2 things. We call it best-in-class manufacturing, and we are quite proud of this. You see that in the line in Hillerstorp, Sweden, which is still our main manufacturing unit. We have done during the year, increased machine capacity. So we do have now some more quite good overcapacity on the machine side, which is good and helpful for coming years. The other big thing is you'll notice then a new photo for the Italian one. And we have more or less doubled the machine capacity there. So with these 2 investments, and as I said, we will have a substantial overcapacity for a few years to come. And sooner we will not have this full capacity that we have here or will be, but we do think in reality, we now have good capacity for the coming 3, 4 years. So the investment level will clearly be a little bit lower now in the coming years. Also in the U.S., we have increased a little bit the machine capacity, but not to the same extent as in Italy and in Sweden. So as a conclusion, for safer tomorrow, we continue to work with different things connected with the environmental issues. What we focus on today, you can read for yourself. I would say that the real interesting thing short term is that on the new factory in Italy, you will find that on the bottom of this page, which has done -- what we focus on today. We are now invested or are investing in solar panels on the roof. We cover approximately 50% of energy consumption in the new factory, which is a good thing. It's actually demanded from the government. So it's not entirely our own requirement, but it's actually in line with what we would like to do. So we think this is a good thing generally for the businesses. We continue with our innovation center. We have in the next page, just one example, one new product that we bring forward, which is our Uni-bracket. It's a very innovative solution, which you can use then for the pallet racking installations, to secure that the pallets won't fall out. And we think it's a good thing, maybe not the biggest thing ever, but it's a clever thing, which shows on that Troax is leading the development in this niche market. And finally, last, just as you know before, we continue to be certified by an external party, in this case TÜV Rheinland. So the test that we're doing, where we then promise our customers that our products should be on a certain safety level is then externally tested. It means that they can rely on that our process is safe and it will give the same result time after time. We all continue to be the original since 1955 and even if we now are 65 years young, we still have a lot of ideas how to further improve both our business and our products. So we will continue to work a lot for the customers with improved safety. And this, of course, goes down to making our world safe and also you all safe. So thank you for listening. Now we can move on to the questions. So if you take over in the control room, you can ask them if they have any questions. Thank you.

[Operator]

[Operator Instructions] So our first question is from the line of Kenneth Toll.

[Kenneth Toll Johansson, Financial Analyst]

Yes. So first, in the quarter, you talked about some negative currency effects on the results. What currency Paris -- what's it that had the major impact? Versus the British pound or...?

[Thomas Widstrand, CEO, President & Director]

Has certain, but I would say if you really pick out just one currency, it is the U.S. dollar because we have a lot of...

[Kenneth Toll Johansson, Financial Analyst]

Yes. Okay. Then also, you talked a lot about the CapEx plans now. How much spending is it left in Italy and in Hillerstorp of the projects?

[Thomas Widstrand, CEO, President & Director]

Okay. From a cash point of view, we've taken -- in Hillerstorp, we've taken the absolute majority. So there should be, as -- if I take it from the top of my head, we'll talk about maybe EUR 1 million -- EUR 1 million to EUR 1.5 million still to spend in Hillerstorp. In Italy there or more. I would say that maybe we talk about spending cash out, maybe EUR 2 million or something like that.

[Kenneth Toll Johansson, Financial Analyst]

Okay. Great. And then also, I'm curious, now you've invested a lot during 2 years, and that is coming to an end and the balance sheet is pretty strong. So are you ready for acquisitions, both, I mean, from a financial or from a management point of view?

[Thomas Widstrand, CEO, President & Director]

Absolutely. The very simple question is Kenneth, yes, absolutely, we are. We do believe that since now the market is maybe a little bit more gloomy; hopefully, there will be a few more opportunities coming up because there has been a little bit scarcity of possible acquisition targets in the last couple of years. But to answer your question, yes, definitely, we're ready for that.

[Operator]

No further questions, sir. Please continue.

[Thomas Widstrand, CEO, President & Director]

Okay. I appreciate your interest. And we will be back, for those of you who are interested, on I think 23rd of April, if I remember correctly. And then the idea is then to share with you our first quarter development. So in the meantime, I wish you some good business during this month. Thank you for listening in, and I appreciate your interest. Thank you. Bye-bye.

[Operator]

So that does conclude our conference for today. Thank you all for participating. You may all disconnect. Speakers, please stand by.