© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Q1 2019 Interim Report for Concentric AB on this very beautiful spring day in Stockholm. Today's presentation will be delivered by myself, David Woolley, as the CEO; and I'll be joined with Marcus Whitehouse, the CFO.We'll be following our normal format. And so our agenda, which starts off with myself, talking about the highlights for quarter 1 2019. I will then pass over to Marcus to talk about the summary of the financial results. And then it will come back to myself to give a view of how Concentric sees quarter 2 2019. And of course, we'll finish with the Q&A session to allow you to ask us how the results went and the questions behind the detail.So let's start off with the sales. If we look at just the numbers, quarter 1 sales were down 6% year-on-year, coming in at SEK 566 million. And that after adjusting for the currency, which gathered positive 6%. So if we then look at sales in constant currency, they're actually down 12% year-on-year. And as we've been reporting over the last 3 and 6 months, most of this effect is due to the dual sourcing that we've reported on by one of our global OEMs. Q1 2019 is the first quarter that we get the full effect of that dual source. So we can see that very clearly in those numbers.If we look at the -- if we look at sales other than the dual source area, we're seeing that the group sales were constant year-on-year, first quarter compared to first quarter, after we allow for the dual sourcing. If we look at the graph, the sales and book-to-bill, the book-to-bill ratio is about 95%. The form of the graph is entirely consistent with the trends that we've seen over quarter 1 '18 and quarter 1 '17. And again, to be repetitive, you can see that small effect from the dual sourcing, of course. But there is an effect in there of a slightly more uncertain economic outlook, which we'll talk about later on in the presentation.And going to the next slide. The thing to say is that the demand in the markets we're seeing, although we'll talk about it, it seems to be a little bit more cautious. The level of demand is really strong. Whether we look at the U.S., whether we look at Europe, the level of demand is at a high level and a good level. Basically, the indices will be saying that the markets have grown 5% year-on-year. It's worthy of note that we're actually getting slightly more growth as well in the emerging markets. Our India and China markets are in pretty good shape. There are some turbulences there in terms of India and government elections, but the underlying markets are good.And the second point is that, although the indices that we think are correct, there is some good growth in the end markets, there is definitely more preparations going on. We see slightly more turbulence in terms of people managing inventory. And we're seeing much more inventory management going on. And so we see a bit more movement in the supplier or the schedules they're putting their sources as supplier.If we talk now about the sales to our customers, excluding the dual sourcing, what we will talk about is the largest year-on-year improvement we saw was actually in the sales of agricultural machines. This is a market which we think has been underperforming for a couple of years. There are still some challenges in the ag world. But overall, we've seen it's the largest growth of our 4 sectors.Moving on to the construction equipment sector. This has actually been quite challenging. We hear lots of reasons for it, like the slowdown in some of the infrastructure growth in China. We've seen some of our German construction machine equipment manufacturers slowing up a little bit. Still good demand, but we've seen slightly lower than it was in North America and Europe. India, of course, continues at the pace with these infrastructure investments, despite this turbulence we've seen out of the very, very big election program now going on right now.If we look at the truck sector, again, broadly flat year-on-year. There's lots of speculation in the truck market, there always is. Strong demand across the world, the Americas, again, still strong. There is -- we'll talk about the forecast a bit later, some questions going there. But the European has been very -- European market edging down very slightly but still in an extremely good shape.We -- In this quarter, we did make a press announcement. We've spoken a great deal now over the last 2 years about the electrification of -- whether it's trucks or construction equipment, buses, electrification continues on at a pace. It's making a -- really quite radical changes to the world and the market. The press release we put out said that we have actually won 5 new contracts, where we are supplying electrohydraulic steering systems predominantly to bus companies, of course, mostly to electric vehicles or hybrid vehicles but also some fuel cell vehicles. We see this as strategically important to our business. The numbers per se, at SEK 94 million over the period, is not dramatic. But I think this is a constant reminder to us all that electrification is going to be a very real thing going forward. And although [indiscernible] diesel engines aren't going to go away fast in the truck market, electrification of diesel engines or mild hybrids are a reality and for us, a very positive reality. The point of these -- winning these 5 contracts is we're building up our credibility and our confidence in our capability in a strategic future market.If I go now to the next slide and look at earnings, we can say that quarter 1 '19, actually, we got an operating income of SEK 126 million. This actually means comparing year-on-year, we increased our profit in the quarter from 19.9% up to 22.2%. And this figure of 22.2% is pretty consistent with where the whole year -- the full year of 2018 finished at 22.1%.We're maintaining a high quality of margins, of course, with the existing business. But as we all constantly talking about, the Concentric Business Excellence model is going at a pace. The -- if anything, the dual sourcing exercise encouraged us to accelerate this program even harder. So we're managing our capacity costs and output costs extremely well. The businesses, the teams are doing a fantastic job to support the customers in what is still a very busy time and at the same, turning out a high level of profitability.The cash flow was good for quarter 1. Again, we can feel that the effect of lower sales in terms of lower cash generation. But again, cash is strong, and it's one of the fingerprints as part of the DNA for the Concentric business. It will remain strong. Net debt reduced now from SEK 92 million down to SEK 27 million. And our gearing ratio comes down to 2%. And Marcus will talk a little bit more about this in a few minutes. The graph is showing that development where we've seen profitability steadily increasing over the period. We can see that slight step-down going into quarter 9 in terms of -- again, we can feel the effect of that dual sourcing just slightly.Now that's all I wanted to say for this point of the presentation. So now I'll hand over to Marcus to take us through the summary of the financial results.
Super. Thanks, David. Good morning, everybody. As David said, this is the first quarter where we are feeling the effects of that dual sourcing decision. And as such, the net sales have been reported at SEK 566 million, down 6% as reported but with a favorable FX gain within there of 6%. And as David said earlier, underlying sales were down 12% but broadly in line with what we guided during the latter half of last year.Operating income was reported at SEK 126 million, up from SEK 120 million, 5% year-on-year increase. But it should be noted that in 2018 quarter 1, we did make some inventory provisions that will have affected the overall margin in 2018. But again, it's pleasing to see that the margin that we talked about last year and the guidance that we gave of 22% for the full year in '18 has continued on into the first quarter of 2019.Cash has been good, impacted by lower sales, of course and some accounting changes that we will come on to a little later but also by a little bit of inefficiency within our working capital, predominantly around stock and some late payments from customers. But still a pleasing strong performance overall. And that's seen our net debt fall from this year -- this period last year of SEK 92 million down to SEK 27 million. But you'll note that it's a year, an increase in the first quarter from where we closed of SEK 12 million. And the same with our gearing ratio. At the end of the first quarter, we finished at 2%, down from 9% on that first quarter last year but a slight increase on where we closed last year.Now with the cash flow, the net debt and the gearing percentage are all affected by an accounting change that came into effect on the 1st of January. And that's IFRS 16 accounting for leases. This means that we've got to put onto our balance sheets the assets and liabilities associated with those leases. And we've calculated that to be around about SEK 100 million. Now that increase of SEK 102 million on our liabilities is included within our net debt and therefore has increased in that quarter, our gearing ratio, by 8%. It should be noted this would have been the first quarter where we would have gone into a negative net debt position had it not been for this accounting change.But it also affects our operating cash flow. Why? Quite simply, those lease payments that would typically sit within the operating cash flow under the new regulations of IFRS 16 now fit outside. They're classed as financing activities. And thereby, the SEK 102 million that we've reported has got a SEK 6 million benefit from this accounting change. But under the old principles, we will still have generated cash of SEK 96 million and a pleasing performance.Moving on to our end markets. As David touched on at the start, our end markets are at this sustained high. We have seen some growth around our markets, regions and in sectors. But I think we also see some customer reactions to weakening order intakes during that first quarter. But overall, we have seen growth, albeit slightly lower than what we enjoyed during the 2018.So taking each of these markets. North America, yes, the medium- and heavy-duty truck markets, a key market for us, has slowed from what we saw in the fourth quarter. But we're still seeing pleasing growth in the off-highway sectors of construction and agriculture. Europe remains as it did for 2018, with good, consistent growth across all of our end applications. And our emerging markets of South America and India, again, are posting good growth numbers across all end applications. China continues without that mixed bag. The trend carries on in medium- and heavy-duty of negative growth. But this first quarter, we've also seen the off-highway sectors turn negative for agriculture and certainly a lower figure than what we were seeing through 2018 on the construction market. Outlook for the full year is perhaps a slowing within the market. But this is early indications. And we'll see as this market evolves over the year.Looking at our segmental analysis now. Clear to see the impact of our dual sourcing decision that has had on our North American business. And we'll see there, sales are down 22% year-on-year. Book-to-bill ratio was weaker than this period last year. It's pretty much constant to what we saw at the end of quarter 4 at 92%. And you'll see that the operating margin on our Americas business has dipped again as we've seen fewer sales. And we've worked to correct the cost base within our North American operations, but we have seen a little erosion in that margin.Europe, on the other hand -- or Europe and rest of world, on the other hand, have seen flat sales year-on-year. Book-to-bill still reasonably healthy at 97%. But we have seen some mixes within the various markets that we have. And David touched on it earlier with construction equipment. It has been challenging in Europe, whilst the truck sector in India in that first quarter has been challenging but was offset by growth in the other off-highway sectors of ag and construction. But we've got good, strong margins continuing with Europe and rest of world.Looking at our cash flow and working capital, wherefore we've touched upon this. It's a good performance overall for the first quarter. But you'll see with that graph, 2 steps up from what we saw at the end of quarter 3. Quarter 4, we touched on and was affected by the release of some provisions associated with that decision by the global OEM. Quarter 1 is more operational issues that we've had around a little bit of higher stock and a few late payments coming in from key customers at the end of that first quarter. But overall, a pleasing position.Net debt and gearing. Important to say there were no adjustments on the pension liabilities in this quarter. And we've already touched upon the net debt position and the changes within the overall accounting. But gearing still remains at a very, very healthy position. And of course, excluding our pension liabilities, we continue to have surplus funds with a negative gearing position.I'll hand you back now to David to look at the outlook
It was great. Thanks, Marcus. So how does Concentric see quarter 2 2019? First thing to say is that the market really does continue to run at good levels. In absolute terms, the indices has shown a growth of 5% this quarter versus the same period last year of 7%. So the rate of growth is lower, but if it remained here, I think we'd all be very, very happy.Again, second point is the number of global customers. Again, we are absolutely seeing handling and harder handling of inventory in most all of our customers. As Marcus alluded to, we saw cash receipts coming in under some challenge in quarter 1, too. Customers that would normally pay on time are starting to hold back a little bit. So I think we see the evidence of overmanaging or greater management on schedules and cash and orders very, very real. Again, stories in the U.S. truck market, the truck market in terms of manufacturing and selling trucks runs at a fantastic high, but the order intakes are actually substantially lower. So again, there's a lot of management activity.Key point for us is -- though, is point 3. The orders that we actually received in quarter 1 for '19 indicate that our sales in quarter 2 are going to be at a similar numerical level, which with lower working days in Q2, actually represent a slight increase over quarter 1.Looking at the 4 sectors. Again, for us to say we know all 4 sectors are cyclical. Basically, the geographic regions are in good shape. We have got most attention looking at the truck market. But again, there's nothing absolutely to say there. Maybe we see a softening at the end of 2019. Other pundits, other experts are saying that the strength could last into 2020. Regardless, in terms of our business model, whatever the market throws towards us, what we've demonstrated over some years now is our model has the absolute flexibility to cope with whether the market does up or down. And that isn't going to change anytime soon. Financially strong, operationally strong, we look forward to what 2019 has got to bring us.And that's all we wanted to say in terms of the slides. And now of course, we'd like to open the floor for any questions.
Okay. Thank you. So let's start with questions from the room.
Mats Liss, Kepler Cheuvreux. Just a question here, first, regarding while you mentioned the inventory correction in the value chain, could you just sort of indicate the amount, well, give some more flavor of that?
Okay. Thanks for the question. How would we try to make it a numerical figure? I think what we can see is if the market is up 5%, I think we see a difference of minus 5% on actual orders. So to put a number on that, I would be struggling. But the quantum is plus 5% in the market, minus 5% in the orders to the first tier suppliers.
Yes. I think we've seen overall market, our sales flat year-on-year with a market that's grown. So we would have expected to see some growth with our overall sales. And that growth that hasn't come through, we pretty much labeling it, is going to be down to that inventory correction.
Yes. And I think because the different sectors have different effects, again, as we were talking in the presentation, construction has been quite volatile. And we've had quite a bit of feedback saying whatever is going on in China has meant that demand has pulled back quite quickly. So whether it's the U.S. suppliers or whether it's German, European suppliers, they are reacting and maybe slightly overreacting so construction more than truck in this particular case.
Okay. Great. Then well, secondly, you also mentioned the dual sourcing contract, of course. But I guess you also have been talking about opportunities in that area. And well, should we expect to see some opportunities to be won here during the year? Or is it more longer-term situation?
No, no, it's very good question. We did see 3 or 4 gains through 2018 of dual sourcing across that market, giving us some improvement. If we were to win 1 or 2 pieces of extra business this year out of dual sourcing strategy, then I wouldn't be surprised. In the time I'm taking to talk to the seniors within our customers, the feedback I'm receiving is the gaps in the supply chain that were extremely evident at the back of '17 and all the way through '18, those gaps are closing up now. So it seems that the supply base has pretty much caught up with the demand. So the panic need to dual source, I think we've gone to the next phase of stability and seeing how that lies still. So I don't expect to see it make a major effect. But I wouldn't be surprised to see some small positives yet.
Yes. Great. Then just about, I guess, Alfdex has won this Chinese contract, and you're about to ramp up production there. Could you say something about that situation?
Yes, absolutely. Predominantly, that's the Weichai contract, which is the largest truck manufacturer in China. They are the highest tech manufacturer in China. They have ambitions to export the Weichai product out of China in a much bigger way than anyone else before in China. We are looking to go from 1 production line up to 5 production lines. We're already now up to 4 production lines. So the team have done a great job. We are very neatly in position that by the middle of 2019, we'll have all lines up working, material provisioned, suppliers getting material and ahead of demand. So yes, we're waiting to see where that market takes. The blue sky initiative really starts 1st of July '19, so we're on the pre-ramp-up. And it's looking okay. And so we're quietly excited. And we're hopefully in a position maybe to talk about maybe some other contacts coming up.
And just finally about -- I looked at P&L there, and the selling expenses year -- well, quarter-over-quarter there was down. Could you say...
Yes, it's where we classify with the warranty provisions. So the difference between those 2 years is wholly associated with warranty provisions.
And we have one question from the telephone conference.
We're over to the line of Klara Jonsson of SEB.
This is Klara. So I have 3 questions. The first one is about, I think, the build-out of the volume from the OEM introducing dual sourcing. So as I understand it, with a 12% negative organic growth in Q1, but the decline is basically fully explained by this volume loss. But you also mentioned that you managed to gain some 3 or 4 smaller orders that potentially could offset some of this loss. So are we seeing the smaller orders offsetting the loss now in Q1 already? Or will they come later this year and maybe in 2020?
If I can attempt to answer that question, I think we are seeing the orders coming through in terms of the new orders from other customers across -- ramping up through quarter 4. There's a little bit more happened in quarter 1. And there might be a little bit more, I think, in quarter 2. So it's coming up to where it needs to be. The 12% is predominantly the dual sourcing effect from the OEM that we're talking about. But there are, again, something within there in terms of inventory correction. It's not just -- it's just predominantly a [ dual ] sourcing effect. But there is some noise in there about basically inventory reductions pushing it down, pushing down demand.
There's also one of the phasing effect that you need to consider. Whilst the guidance overall was 10% down going into '19, you need to think about the phasing-out. And we saw that phasing-out start during quarter 3 going into quarter 4. So whilst it's 10% over the year, we would expect to be a little higher in quarters 1 and 2 as we move forward. So again, it's broadly in line with where we expected it to be.
The next question is about the margin expansion we saw in the quarter, which was great. This was basically [indiscernible] some 260 basis points year-on-year expansion. Could you provide some background to the strong development? Did mix help anything?
No. We -- Again, we guided that we expected overall for '18 to be around about the 22% and again, guided for that first quarter to pretty much hold, so -- and it's done as we expected. There is no broad mix change that we have within the business. We have taken some corrective action on cost in that first quarter. But overall, it's in line with expectation.
I think the thing to add is because there was a protracted negotiation with the OEM over probably a 9-month period, we -- what's the expression, we hoped for the best, but we planned for the worst. So we were very diligently controlling costs through quarter 4 of last year, taking out cost that we didn't need and controlling that cost through quarter 1. So we were ready for the full impact. And of course, we were pleased to show that, overall, we had a slight margin improvement.
Yes. Okay. Well, that sounds promising for Q2 and Q3 then as well. My last question is about the 5 orders that you recently announced for your electrohydraulic steering system, which is great. These orders were for around, I think, some SEK 94 million over 5 years so maybe not impacting revenue growth too much right now but great potential. But could you provide some information on what margin you could expect to have on those products when you start to deliver on these orders and the potential margin if volumes for these types of products increase over time?
I think overall, we'll see a mix change because in terms of we are buying in more equipment in terms of the electric motors. However, I think that the margin overall will not be dissimilar to the sort of margins percentage terms that you see and we enjoy today. So I don't think it will be particularly negative mix or overly positive mix either. I think our materials to sales will feel it. I think the most important thing for us is, again, we would like the numbers to be bigger. We're making actual sales now. And we have 1, 2, 3, 4 programs ramping up. But the numbers are still small. I think it's that strategic value, which is absolutely crucial to us. As we've won business, as we've developed this reputation, if I give an expression, plug and play because it's a new market, I think a lot of people are trying to do what we're doing. And there quite a few difficulties being apparent. But the Concentric product is plug and play. We're demonstrating the products can last for 40,000 hours, which in our terms is the equivalent of 2 million kilometers on a truck anyhow. We're developing that repetition. And although we're selling -- of course, we're actively selling, the market is becoming much more aware, and the market is chasing us down. And so we're getting quite a lot of inquiries purely by word-of-mouth and reputation in the market. So it looks positive but again, truly strategic in terms of where it will take us to. The follow-on question would be reasonable to ask. And that is we're buying a lot of electric motors. Would it make sense for us to make electric motors? And that would be a very good question, too. And that's clearly, strategically, one of the things we are thinking about, would we want to vertically integrate into the supply chain?
Then I guess the next thing to look for would be for some more orders for this type of product.
Absolutely.
There are currently no other questions on the phones. Can I pass it back to you?
Okay. Thank you. We have one more in the room. Please go ahead.
Just -- well, maybe a question about potential M&A opportunities. I guess you have a very strong and solid balance sheet there. And previously, you have indicated that there are opportunities out there and if you could say something about those opportunity. You mentioned the electric motors and potentially, well, that's more like a vertical integration and maybe you build that capacity on your own. But are there opportunities in that area as well?
No, absolutely. Again, if I start the answer with the end of the answer and say there's nothing to announce at this point. What we've done is we've increased our capacity to look at targets. We have engaged separate consultants where we've given them a brief. These are the technology companies we're looking at, these are the similar product companies we're looking at, and these are the geographic regions we're looking at. We're processing a greater and greater amount. And so our chances of success therefore increases. Not that it was ever really a consideration for us. I think when we were looking at the multiples the companies were paying to acquire businesses, that hit a peak in quarter 3 and quarter 4 of '18. We've seen the selling prices and multiples actually coming down slightly. Again, that's not part of our makeup. That's not what we are truly looking at. But certainly, we're processing a much greater number. And there are several things that looking interesting but nothing to say at this moment. And as you rightly say, our balance sheet is strong enough to take quite a good investment.
Yes, I guess that we will see more share buybacks -- I mean, or do you plan to make any change in the strategy regarding share buybacks? Or is it...
No, our ambition is we'll continue over the balance of the year to buy back around about SEK 150 million, which is what we've done over the previous years.
Okay. Great. And just one final there, I guess Mr. Trump made us aware there are negotiations between China and the U.S. going on. Could you say something about the potential impact for you if the tariffs are raised?
Okay. I can speculate. A lot of my time talking with customers will revolve around the Section 301 action of the U.S. on China. The belief -- again, people's opinion, so you can't take it to the bank necessarily. But the belief is that the tariffs between China and U.S. are not going to go away. They may come back a little bit as they get to a more amicable settlement. So the expectation that tariffs will go down from where they are, but they won't go away because there's underlying issues of IP theft going on. So there may be a slight cessation, but they won't go away. The other speculation as well is whether the U.S. will be looking on any other territories. Obviously, they have approached Europe over time. They are looking at India right now. So I think the -- quite the nationalistic tendency between how U.S. is behaving is not going to go away. We are pleased that we have within America a plant making engine products. We have a plant in America making hydraulic products. So we are truly national there. And if we look at -- we export quite a lot of material from India into the U.S. And even whatever tariffs might appear, our competitive cost base in India says we can live with a level of tariff as well.
Okay. Thank you. There are no further questions. So David, any closing comments?
Okay. Again, I would like to thank people for following us, for the questions. Really enjoyed the quarter 1 presentation and look forward to seeing you again on quarter 2. Thanks very much. Have a good day and good week. Thank you.
Thank you.