Investment AB Latour
STO:LATO B
Earnings Call Analysis
Q3-2023 Analysis
Investment AB Latour
Nord-Lock, one of the company's business units, has demonstrated remarkable performance with one of its 'best quarters ever.' The business unit achieved a strong operating profit of SEK 127 million complemented by an impressive operating margin of 27.8%, illuminating its efficiency and potential for yield.
Swegon faces a mixed performance with slower order intake due to market normalization post-COVID-19 and quicker delivery times. The residential segment experienced a dip in demand, particularly in the Nordic countries, while other European regions and North America showed positive growth. Despite this, Swegon still reported a robust operating profit of SEK 290 million, boasting a healthy margin of 13.5%.
Despite a reduced organic order intake, the quality, equated to profitability, has not diminished. This signifies a consistency in the company's ability to maintain profitable orders and indicates a close correlation between order intake and net sales.
The management acknowledges the current economic downturn yet provides a nuanced picture. Residential and private consumption segments are more affected, unlike business-to-business segments where the company primarily operates. Geographically, North America exhibits strength, whereas Northern Europe, including Sweden, witnesses weaker markets. The comparison to high order intake in previous years is also a factor in the perceived reduction, suggesting a need to consider normalized order books for proper analysis. Early into Q4, there are no significant demand changes, sustaining the status quo.
There's hope that the end of increasing interest rates is near and that inflation will reduce rapidly, leading to what might be considered a 'soft landing' for the economy. However, the situation remains fluid and uncertain due to geopolitical issues like the conflict in Ukraine and developments in the Middle East.
The company witnessed strong cash flows in the quarter with a continued 'unwind' of working capital from the pandemic high. Efforts are still being made to normalize cash flow and inventories that were increased deliberately during the pandemic for customer satisfaction. This trend is expected to persist for some time, and despite inventory value inflation, a positive cash flow trend is anticipated.
The company remains dedicated to making decisions for the long run, focusing on competitiveness and growth over the next 10 to 20 years. This strategy includes supporting transformative acquisitions and investments to strengthen the company's positioning in its markets.
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Welcome to the presentation of Investment AB Latour's Interim Report for the Third quarter 2023. [Operator Instructions]
I will now hand over to CEO, Johan Hjertonsson; and CFO, Anders Morck.
Thank you. Johan Hjertonsson speaking. I'm here together with Anders Morck. And once again, very welcome to our Q3 interim report for Investment AB Latour.
If we start with the first slide here, I'd like to point out that our overall group structure is unchanged compared to the last quarters. Our industrial operations report a positive development during the quarter and a very strong result. Already here, I would like to comment on the order intake that is slightly weakening. But it's important to understand that this is not fully reflecting the actual underlying demand on the market. It is partly explained by the weaker demand, but also by a continued normalization of how customers plan and place their orders.
However, the major effects of this normalization have now passed, and the order intake as we move forward should better reflect the underlying demand in our markets. Saying that, we acknowledge, of course, that we are in a downturn. If we go to the next slide, I'd like to make a statement or a comment on the development in our listed portfolio. As you know, we have 10 listed companies, and I'd like to comment a little bit more on the underlying profit development. This picture illustrates all of these 10 holdings development going 10 years back, which clearly has been positive with 1 or 2 exceptions. Majority of our holdings has grown with double digits and maintained profitability during these years. We do own quality companies. We have the ability to grow and win market shares in both strong and weak markets.
All of our listed holding has now reported the quarter and several with good profit development. The order intake has weakened for most of the companies, but the picture is mixed. The positive profit development is not reflected in the share price development of these companies. Hence, I think it's valuable to comment and highlight the actual very strong positive journeys that these companies have made over the last years.
And also to emphasize and point out that we, as active owners, put our focus on the long term underlying demand, not the short-term ups and downs in the share price development. And I think it's important to point out what's very obvious that the underlying development of the company is actually the most important.
And if we go to the next slide, that is then the total return for the listed portfolio. And as you point out also that there's no change within the listed portfolio. The stock market has been very weak during the third quarter. Even though after the quarter closed last -- end of last week, we had a rebound, and the weakness in the quarter is affected by the very stable economic climate and unsecured future outlook, especially with the ongoing war in Europe and Ukraine and a very unsettling situation in Middle East.
During the 9 months period, the investment portfolio's value has increased to SEK 64.8 billion, which is an increase of 1.3%. The SIXRX during the same year has increased 4.6%. Until yesterday, November 6, the portfolio value was SEK 65.3 billion, which returns a total return of 2.1% so far this year and the SIXRX orders of 3.8%.
And then if we go to the next slide, I'd like to comment on our wholly owned operations. And our wholly owned operations report a strong, good third quarter with strong results. And as I said in the beginning of this presentation, the order intake has slowed down, but it's difficult to assess how much is explained by customers' normalized purchase behavior and how much is an action downturn. What we can say that it's both.
So far, it's our operations that are targeting the residential segments at, i.e., private consumption that has noticed a decline in demand. Also, Caljan's order intake has been on a lower level since the third quarter last year as a normalization effect after a very, very strong order intake from '21 and '22, but also since customers are very slow when it comes to capital investments at the moment.
Referring to the chart, it's easy to see that the order intake was boosted during '21 and '22 when lead times were very long during the pandemic and customers wanted to secure their deliveries. What we have seen in the last quarter is that we have delivered on the high order book that was built during those years, with higher invoicing than order intake as a result and that's pure mathematic. It has to be like that when you deliver on a very high order book.
Looking at the industrial operations as a whole, order intake increased by 5% and net sales increased by 9%. Our businesses has good cost control and protects the profit in an effective manner. The quarter result is growing by 20% to SEK 942 million with a margin of 15.4%. And lastly, I would like to mention our very strong cash flow which amounts to more than SEK 1 billion during the quarter and more than SEK 3 billion since the start of the year, which is a really strong development. So very strong top line, strong EBIT and strong cash flow in our wholly owned operations, which we're very happy and proud about.
And if we take the next slide and comment on the acquisitions in 2023. After a very intensive acquisition pace in '22 and '21, we have temporarily lowered the tempo; however, activities are still ongoing with a good pace as usual. We have a lot of ongoing dialogues in contracts out there and lots of prospects and potential deals that we are looking into. We did acquire Dalair through Swegon that we announced in the end of last year, but it was finalized to close in January of this year. In July, Latour Future Solutions invested in Quandify and entered as minority shareholders.
Quandify is a Swedish company that offers intelligent water measurement systems for commercial and private buildings, enabling cost-efficient, analyzes water consumption, leakage detection and remote shutoff capability.
Very good. Having started with those comments on an overall level, I'd like to hand over to Anders to some other things to comment each of our wholly owned holdings. Over to you, Anders.
Thank you so much, Johan. Very good. And do we start with the first business area, which would be Bemsiq. And this was another strong quarter for Bemsiq. Order intake came in almost on the same level as net sales this quarter. The total growth in net sales was 22%, of which 3% were organic. The delivery capacity in Bemsiq has been good and the profit development is impressive. All companies within Bemsiq contributing positively. So very well done, Michael and the team, so the trend continues.
We go to the next business area, which is Caljan, and we want you to put your eyes on the 5-year chart. And as you can see in the 5-year chart, the business is now double the size than 2020 and this is more an organic growth. But now, as you know, we have concluded for a time that order intake has been on a lower level. The development in the long term should be in hindsight.
We know that customers have been more conservative when it comes to capital expenditures and that is affecting Caljan very much. Market activities are gradually starting to increase, but it has not yet turned into orders. The lower volumes resulted in an operating result that is lower than last year, with an operating margin of 13.1%. Caljan has reduced the fixed costs accordingly. And thanks to Henrik and his team for handling this situation in a very professional manner.
Let's go for Hultafors Group. Hultafors Group continued to develop positively, mainly driven by the business area, personal protection equipment in Europe. The European market is still stable. And I would say in that market, Hultafors is doing very well under the tough market climate that we now are in. The Nordic countries are in a tougher market at the moment.
The gross margin development is very positive and contributes to a very good profitability together with also a very effective cost management. All in all, the profit increased by 51% to SEK 266 million and a strong margin of 16.3%. Very well, Martin and team.
We go to Latour Industries. And here, we can see a mixed picture with regard to the order intake, but overall, on a very good level. Net sales grew by 12%, of which 1% was organic. Earnings and profitability as a whole is developed well in the right direction. And operating profit grew by 28% to SEK 105 million with an operating margin of 10%, very good. And as you can read in the heading of this picture, we are investing and building the basis for future business areas within Latour Industries. This means that the profitability has good prospects to grow even stronger going forward.
The acquisition agenda continues, both with add-ons and finding new platforms. So very well done, John and your team.
We go to Nord-Lock. And for Nord-Lock, we are very happy to conclude that order intake increased by 16% and organically by 11%. And order levels are on very high levels, which builds a good basis for future growth in net sales. Net sales grew by 8%, of which 3% was organic, with the best growth in this case, in Americas and in Asia Pacific. These volumes contributed to a strong operating profit of SEK 127 million with an operating margin of a strong 27.8%, and this is one of Nord-Lock's best quarters ever. So very well done Fredrik and team and I hope that message is clear.
Now Fredrik when you're -- have decided to leave us. So we want to send our thanks to you for these years that we have had you with us. We still have a few months to go together. And now it feels like a separation with a family member. But anyway, we have very much appreciated working together with you.
Let's turn the page to Swegon. Order intake for Swegon continued in a somewhat weaker pace in the quarter, explained by this discussion by a normalization of how customers plan and place their orders. And also maybe internally on our side that we are now quicker on deliveries when things are normal. All business units are reporting good organic net sales growth apart from residential who is much more affected by the declining demand.
Also the Nordic countries are negatively affected by this, while the rest of Europe and North America are developing quite positively. Even though we have seen a bit lower order intake, the quarter ended up with high net sales and a good gross margin development that together we -- altogether contributed to a very good operating profit of SEK 290 million with a margin of 13.5%. So very, very well done, Andreas and your team.
And we go to the next page, which [ is not a ] business area, but it's the net asset value for Latour, and it ended up at SEK 172 per share at the end of September. The share price at the same time was SEK 193, and that constitutes a premium of 12%. Yesterday, the net asset value was SEK 173 per share when we have calculated the changed value in the investment portfolio and the share price yesterday was SEK 206. That means we now have a premium of about 19%.
The net debt decreased during the quarter to SEK 11.7 billion. It was SEK 12.7 billion last quarter. And as Johan said before, we had a very, very good cash flow, explaining all of the difference. This amount corresponds to about 10% of the market value of our investments, still on a reasonably low level, and we have a good headroom for investments going forward.
So Johan, now it's you again.
Okay. Thank you very much, Anders. I'd like to comment on our performance compared to our financial targets and just as a reminder, our financial targets is an annual growth of more than 10%, operating margin more than 15%, return on operating capital more than 15%. For those of you recall at the beginning of the year, we changed operating margin from more than 10% to more than 50%. So that was fairly recently we did that.
And during the last 12 months, if we take rolling 12 months, that growth has been 18.8%, EBIT margin 15.2%, and return on operating capital [ 16.7% ]. So we think it's a very strong performance, and we are delivering on all of the 3 financial targets. On behalf of all the team members within Latour, we're very proud of that result, and that gives us strength going forward.
And going into the next slide, as you can see here, Latour is a long-term sustainable investment company, as you know, and a responsible owner. We have possible and strong companies in our group and a strong financial position, which enabled us to continue investing in our factories, product development, sustainability and digitalization. And this applies even if there is a downturn in the economy, important to point out.
We have an ambition to grow, as you know, and we are truly delivering on the growth target, but the large portion of the potential remains, as you can see on this map. So there is immense growth opportunities going forward, I would like to say. So having said that, that's all from Anders and me, and we open up for the Q&A session.
[Operator Instructions] The next question comes from Zino Engdalen Ricciuti from Handelsbanken.
A couple from my side. So on the order intake, which has reduced organically, you comment that it's a part of a normalization. But have you seen that the quality of the order intake has changed during the quarter?
Yes, I can start to comment and then you can add also, Anders. No, I would say the quality of the order intake is the same. And if you -- I guess you refer to quality as the profitability in the orders taken, I would say it's very much in line with the profitability that we also show in our results.
So, no -- the straight answer to the question, no, the quality hasn't changed. It's still good quality in the order intake, and we have a correlation of more or less one when it comes to order intake and then net sales later. We have very, very few lost orders once we have them recorded as order intake, I would say and that remains. Anything to add, Anders?
No, I think you answered very straight and correctly.
And a question on the M&A side. Last quarter, you commented that you expected the autumn to be more active. Have your M&A discussions progressed as you expected 1 quarter ago?
Yes, I would say. We have -- even though we have done fewer deals, the intensity and the number of conversations and potential discussions going on has always been high at the same time. So there's nothing changed in that agenda, and we are leaning forward in the M&A activities again going forward.
Okay. And just very quickly. You made a SEK 115 million write-down of goodwill in the group in the 2 industries. Could you just share what happened there?
Anders, would you like to comment on that?
Yes. It's one investment made -- many investments that we have made that has not so good prospectus for the coming years. So we decided to make a write-off of that. So we don't see it's remarkable. It has partly to do, of course, with increased interest rates because we have a slightly higher average -- yes, I don't find the word -- interest in the return. So the VAC is higher for that specific company. But in this case, we see that we won't reach the levels that we thought when we made the acquisition. And it's for one smaller company in this case.
The next question comes from David Johansson from Nordea Markets.
3 real questions from me. First, kind of breaking down your comments here on the order intake, which was obviously, a bit on the weaker side. You said in your initial statement that the order intake going forward will be better aligned with the underlying demand. So could you comment a bit on what you're seeing here in terms of underlying demand across your business areas? And also a bit into Q4 here. Do you note any changes from Q3? That would be the first one.
Overall, I mean, to comment on the economic activity overall. I mean we are in a downturn, as we all know. But I think it's a pretty mixed picture. One is to look from a kind of product segment dimension, which we mentioned. And those areas that are -- that has -- that is targeting residential segments or private consumption is more affected. Fortunately, that's a very small part of our businesses. As you know, we're mainly into business to business. And if you look at it from a kind of geographic point of view, you could say that I would say North America, U.S. is stronger. Europe is slightly weaker and North Europe even in -- Northern Europe and weaker and actually Sweden, probably right now, one of the weaker markets in that sense, but a very large part of our sales is outside of Sweden, as you know.
I think it is reported once again to remember that a large part of this order intake is that we're normalizing our order book and delivering on a very, very high order intake that we had in '21 and '22. So the comparisons in order intake is very high. But I think to complete that analysis, I think you should look at the order book as well at the start of the year and what's a normalized kind of order book.
And then if I comment a little bit on the start of the fourth quarter, we see no special change in demand. And obviously, you could see at the end of last year that the financial markets and many people, obviously, maybe think we're reaching the top of the interest rate hike curve. I support that view, and I think inflation is coming down fairly quickly. So my hope -- but that's a hope, is that we will have a fairly soft landing going forward. But it's a quite fluid situation also with the macro economic and geopolitical situation, I would say, with Ukraine and now also the Middle East.
I appreciate the clarity there. Then moving on to Swegon. Obviously, also a bit of a mixed picture here with a weak residential segment, while other areas seem to be holding up. Trying to understand the margin situation here. Is this 13%, 14% kind of a new normal for Swegon? Or is this more an effect of higher utilization from the order backlog? And also, if you could give us any indication of what the backlog situation currently looks like and kind of what you expect in terms of growth here for the rest of the year?
Yes. I think -- I'd like to add on the order intake situation. I think on your previous question, just to add one more thought around that. I think it's important -- even though we are very exposed to the building segment, I think it's important also to look a little bit closer. And then you see we are we are exposed to very interesting segments within the building construction industry, i.e., segments, which is about saving energy, indoor climate and so on. And those are quite growing and nice subsegments within the building industry. That's very true.
[indiscernible] we're going to have for Bemsiq, our 2 wholly owned business areas and also for some of the listed companies in the sales. When it comes to Swegon, when it comes to the margin, I'd like to comment. I think Swegon over the last year or 2 done a very good job on working on their price management and the product mix and the gross margin. So I would say you have -- you are seeing a more normal, slightly higher EBIT margin in Swegon, kind of a new platform that they're establishing. And commenting on the development forward, that's very difficult. So I'd like to maybe pass on that unless, Anders -- to do that, but I think we should maybe pass on that, right?
Yes. But it's, of course, quite fair should the volumes go down of course, as any company, the profitability will also go down. So that's simple mathematics, nothing specific for Swegon.
Then lastly, on Caljan comment. A bit on activity being somewhat better here in Q3 while investments from customers remain maybe more subdued. When do you see these activities potentially translating to orders? And also trying to understand the pipeline for Caljan. Is this mainly service driven or more of investments coming back from customers?
It's about 25% to 30% of Caljan's net sales is service. We have a very large installed base of telescopic conveyors that need service. So that's a very good downside protection, so to speak, within the Caljan business. And otherwise, I would say almost all of the sales in Caljan and the order intake in Caljan is exposed to capital goods budget in very, very large corporations. I mean it is the big freight and logistic companies of the world that are the clients of Caljan. And of course, they overinvested and invested a lot during pandemic because of the exceptionally high growth.
And when you prepare for a downturn, you usually start by cutting capital investments. So, therefore, the shifts are quite strong in Caljan, but we expect next year that those investments will come back and they will absolutely come back. And you see early signs of that in the Caljan order intake now. So hopefully, touch wood, I think we've bottomed out there in the Caljan order intake.
The next question comes from Joachim Gunell from DNB Markets.
Two questions from my side, starting with just brief one with regards to cash flows, which was obviously strong here in the quarter. We continue to see this working capital unwind. Would it be fair to assume that, that is a trend we can expect to continue given the fact that you're tied so much in 2022 over the coming quarters?
Yes, I would say that this trend will continue. We're still in the race of normalizing the cash flow after the pandemic. We have put a lot of efforts into that. As you may recall, we deliberately during the pandemic increased our inventories and so on to best serve and to have excellent customer focus during the pandemic. And it's, of course, tough to normalize that and to come back, but we are doing that, and we're progressing very well. And we still -- there is still more potential until we are fully normalized. When it comes to the kind of operating cash flow side, I think that will continue for a while. Hope, Anders agrees as well, but let's see. Do you have any followup?
Well, it's perfectly true. But it's also a fact that there has been inflation, so stocks value should be a bit higher even if the normalizing has happened, so to say. So the total increase in stock value will not be cash flow, but there is still a positive trend to expect.
Very clear. And final one from me. If we take a quite a broader perspective, you're obviously -- for the long run, as you highlighted in the opening remarks, Johan, you want to build businesses that are competitive also 10, 20 years from now. So there's been a lot of [indiscernible] like transformative or at least sizable acquisitions where you've led the rights issues here despite signs of weakening economy, if we take your listed holdings of Alimak, Securitas, et cetera.
So can you just talk a bit about your reasoning here to -- that you choose to do these types of transactions and drive them or lead them at least despite one could argue that it's not that much in favor to do transformative M&A in this environment? To what extent do you think that, that really defines the active owner model you highlighted? And do you think that you, as an owner, have both the financial muscle to support similar transactions across the listed portfolio at this pace or -- and also perhaps just finally, if you have a preference with regards to preferred versus direct rights issues?
Okay. The last question, I will let Anders to think about while I answered your -- the first to you Joachim. And I think, to your point, we looked very, very long term. We kind of have an outlook that is forever infinite. And we just want to do what's right for the company and what is right for them to grow, for them to be even more competitive, for them to service their customers. So therefore, those potential transactions or those transactions, they have been kind of when they happened. And of course, they are more available when the market is on a high level.
And then, of course, you could say, you paid a fairly sensible amount for it and so on, but that was also the reason why they were available in that type of macro environment there was at that time. But having said that, long term, we know these are very, very important and strategic and to your point, transformative acquisitions. That will be very, very beneficial for the companies and then, of course, also for the shareholders in these companies.
And yes, in Securitas, they did transformation acquisition with STANLEY Security. There was the rights issue behind that. For us, it was 100%, obviously clear that we wanted to support that acquisition, which is very important for Securitas positioning going forward.
In Alimak, we did also transformative acquisition with Tractel which long term is very important for Alimak. And you can already see strong signs of that in the Alimak numbers that this is integrating very well in ASSA ABLOY, of course, of hardware and home improvement, HHI, which was a very important acquisition for ASSA to either strengthen its position on the consumer market in North America, was very strong there. That has, of course, did it on its own balance sheet without any rights issue in that sense a long term, that's absolutely the right acquisition for us and will be very beneficial for the shareholders. long term.
So it's really working that, if you have a 1- to 2-year perspective, of course, you can put questions around all acquisitions in that sense. But we have a very long-term and kind of industrial perspective and what's important to grow and take a very nice and strong position in those respective industries to mention some examples. And then your third question on direct rights issues, so Anders, let's hear your view on that.
Joachim, can you repeat the question? Because I was putting notes down on your first question, so actually to fully get it?
Yes. Sorry about that. No, but just overall comments here. So in both Alimak Securitas, CTEK as well, actually, there had been a preferred rights issue as opposed to direct ones. So what's your overall view with them or what's your preferences here, basically?
I think you cannot say that there are any preferences. You have to judge by the situation and the picture in the respective company. So I think we could be flexible for both solutions. And you have to judge by the need for the company and the situation -- that every situation brings with it. So there is nothing that says that the one way than the other will be best in all cases.
Good. Is there any more questions, Anders?
I don't see anything on the chart.
No written questions. Okay. Thank you, everybody, for listening in, and I hope to talk to you again on the full year report in next year. And thank you so much for listening, and thanks for great questions as well. So having said that, from Anders and myself, over and out. Thank you.
Thank you.