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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen welcome to the Nederman Holding Q2 Report 2018. Today, I'm pleased to present CEO, Sven Kristensson; and CFO, Matthew Cusick. [Operator Instructions] I will now hand over to Sven Kristensson, please begin your meeting.
Yes, good morning. This is Matthew and Sven from Helsingborg. We are going to talk about the second quarter of 2018, and we'll then let you ask any questions as long it's not regarding football, because that will make Matthew even more depressed this morning, and I don't want to handle that. Looking at the second quarter, the incoming orders in the Americas grew organically with 11.5%. Still, we have some lagging behind on the sales due to the earlier slower order intake. We've seen in the U.S., we will come back to that, a certain growth in some segments. But as you say -- and you've seen earlier, it's been a bit volatile. We were a bit disappointed last quarter that we didn't get the orders. We've got a significantly better signing of orders in the Americas. When it comes to EMEA, we had a strong development, but that is basically that we had NEO Monitor. The organic growth was not great. It's been a weaker demand and it's been so that we haven't got any large orders on the second quarter. We've seen that there's a nervousness and hesitation to sign the orders, although there is a significant pipeline of needed investment. So we see that, hopefully, we can see a better situation going forward. Come back a little bit to that. APAC has been the same. We have good sales, the invoicing, but there has been a weaker order intake. Again, we have a very strong pipeline, especially in China. However, financing and also trade war issues and so on are making investors a little bit hesitant. We believe this is a thing that will change gradually here.
If we move on to Slide 3 and the numbers for the second quarter, orders totaled SEK 912.1 million, which is an organic decrease of 1.3% compared with Q2 last year. Sales reached SEK 863.9 million, which is an increase organically of 5.2% quarter-on-quarter. Adjusted operating profit was SEK 70.4 million, up from SEK 60.9 million, giving an adjusted operating margin of 8.1% versus 8% last year. Net profit, SEK 43.8 million versus SEK 38.3 million last year; and earnings per share, SEK 1.25 versus SEK 1.09. This is, of course, new money following the share split, so hopefully, no one's fallen off their seat when they've seen this lower figure here. Nederman Group from January to June in numbers on Slide 4, orders SEK 1.694 billion, which organically is an increase of 1.1% compared with January to June last year. Net sales, SEK 1.65 billion. That's an organic increase of 3.2% compared with the same period last year. Adjusted operating profit up by approximately SEK 20 million to SEK 130.8 million. That's an adjusted operating margin of 7.9% versus 7.2% last year. Net profit, SEK 80.6 million versus SEK 70.2 million in the first 6 months of 2017 and earnings per share year-to-date is SEK 2.3 versus SEK 2.00 in the first 6 months of 2017. I hand back over to Sven on to Slide 5 for Americas.
Yes. If we look at the general market situation, it's still so that the constant [ trickle ] flow creates uncertainty around trade, health, environmental and so on. But as I think I've said it before, if you disregard the [ trickle ] flow and look at the statistics, that real world, it's going great for America. And we can see that we see stabilization and we also see investments happening in the U.S. Brazilian economy continues to show some signs of recovery, some stabilization, and we see that as positive. The uncertainty around the NAFTA and the neighbors to the U.S., Canada, Mexico makes it a bit volatile. Mexico, we had some good order intake this quarter. But we also see that there are discussions: shall we, shall we not and so on. However, I'm fairly positive that in the mid -- long term in the [indiscernible].Yes, I don't think there's much more to say about that. We will be ready for any questions.
On the numbers for Americas for Q2 and also the first 6 months of the year: orders, SEK 359.3 million in Q2 and SEK 622.9 for January to June. This is an organic increase for the quarter of 11.5% and 8% year-to-date. Net sales, SEK 320 million during the second quarter, SEK 600.5 million for the period January to June. Organically, a decrease of 1.7% in the quarter and 2.7 -- 2.6% year to date. This is obviously largely coming -- this decrease in sales, obviously, largely coming from the lower level of order intake earlier in the year. Adjusted operating profit increased in the quarter to SEK 28 million from SEK 25.1 million, with a margin of 8.7% versus 8% last year. January to June operating profit is still a decrease of -- to SEK 55 million from SEK 60 million in 2017. Operating margin 9.1% year-to-date versus 9.5% last year. Moving on to Slide 7 and EMEA.
Yes. EMEA, I would say that EMEA remains relatively stable. We still see that the industrial investment remains on a continuously relatively low level, but there are signs of recovery and there are evidence that people are starting to look to be upgrading, doing the necessary things. However, the latest turbulence around Brexit, around trade wars, et cetera, gives a perfect excuse for the boardroom members to postpone investor tightening, but it is what we see. But generally speaking, Europe is moving in the right direction. Germany had a positive quarter. Czech Republic, Turkey and others were doing very well. We've seen -- further south, we've seen a more weak development. And especially in the U.K., we see a hesitation in the U.K., what the effects of Brexit would be, should we invest in U.K. or other. Well, this is very difficult to assess what the long-term consequences would be. But these are some disturbances here. One thing that is very positive is that our digital sales channels continue to perform very well. The second quarter showed an all-time high for digital sales within EMEA.
Moving on to Slide 8 and some figures for the EMEA division. Incoming orders SEK 447.7 million in quarter 2 for 2018 and SEK 850 million for January to June. Organically, that's a 7.2% decrease in the quarter, as Sven already mentioned. Year-to-date, it's a decrease of 3.9% compared to the first 6 months of last year. Sales, SEK 427 million in the quarter versus -- and SEK 834 million year-to-date. Organically, it's an increase of 7.2% in the quarter and 3.7% sales increase organically January to June. Adjusted operating profit, that continues to rise, SEK 63.6 million from SEK 49 million in the quarter 2 of 2017. That's a margin of 14.9% versus 13.9% last year. January to June, operating profit significantly up to SEK 117.8 million from SEK 86.6 million in 2017. That's an adjusted operating margin year-to-date of 14.1% versus 12.2% last year. Moving back to Sven and APAC on Slide 9.
Yes. Generally, APAC long term, as we've said, is a market that really needs to take care of industrial air filtration system. There are good business opportunities in the APAC region. We have China that is with the later environmental legislation changes; and also, more activities to make people obey that legislation. We see long-term, midterm positive. However, in the short term, China has shown a weaker development. We've seen some hesitation due to -- well, if it's due to the trade wars and so on, but there's been some hesitation to sign the larger orders. However, there's a good pipeline. We have got a few, but we want more. And we believe that will happen going forward here. There are also still significant financing problems for the companies. They want to pay with bills of exchange and so on. Well, we are very, very reluctant to do that. We are a strong believer that cash is king and that is also sort of hampering some of the activities in the region. India was significantly weak. We had a fantastic first half of last year, we haven't been able to repeat this. However, the tax reforms and so on are now paving a way, and we see an increase in activity again in India. Thailand has been weak for a very long time. What we've seen now is some of the Japanese manufacturers, especially related to the automotive industry, the first TI Automotive suppliers and so on are coming back, because they need to start to evaluate, should they stay or should they go. That's an old rock song, but that's good for Japanese decision-makers anyway. And we believe with the latest stabilization here, they will stay and there could be an upturn within the coming 12 months. Malaysia, Indonesia are performing very positive; and Australia is also moving in the right direction.
Some figures for the APAC position on Slide 10. Incoming orders in the quarter were SEK 105.1 million and SEK 220.7 million year-to-date. Organically, a decrease in the quarter of 13% and exactly flat compared with the first 6 months of last year. Sales for the quarter, SEK 116.5 million and SEK 215.6 million the first 6 months of the year. Organically, that's an increase of 21.4% in the quarter and 22.3% sales increase year-to-date. Adjusted operating profit for the quarter, that increased to SEK 2 million from negative SEK 0.7 million in 2017, a margin of 1.7% for this second quarter 2018. Adjusted operating profit January to June, that increased to SEK 1.4 million from SEK 7.4 million negative in 2017, a clear improvement in profitability in APAC as well. If we move on to Slide 11, and Sven will talk a little more about Nederman Insight.
Yes, as we've been highlighting before, Nederman Insight was established to exploit and develop digital opportunities, IoT solutions and so on. We have, in early April, acquired our second company into that group, Auburn FilterSense, a Boston-based -- Boston, Massachusetts U.S. based company, and it's now under integration with the Nederman. We are building up a quite powerful customer offering. We have been a hand -- and now are gradually incorporating our IoT solutions into the Auburn FilterSense systems, where they do particulate monitoring. NEO Monitor is more related to gas. They also do particles. Auburn FilterSense is a particle measurement. And we also have in Auburn FilterSense intelligent controls and diagnostic software for filter leakage. And with our IoT solutions that we have developed in-house, we can have online maintenance, planning and supervision. So we are continuing to broaden our offering to our customers, and we think that this could have a positive effect going forward, especially when it comes to help in building the aftermarket. Also, NEO Monitor launched an actually world-leading hydrogen measurement technology. This is something that -- it's like the -- with the bumblebee and flying. It's been said for a decade that it can't be done with laser, but our technicians at NEO have shown that it can. And it was very well-received at the exhibition last month.
If we move on to some further key figures on Slide 13, we see the cash flow from operations, SEK 19 million positive year-to-date. This is behind where we were at the same point last year. Lower operating cash flow compared to last year, the biggest single factor there is the temporarily unfavorable cash positions on a number of the larger projects that we do have ongoing. That is, like we say, a temporary position and the balance sheet and therefore, the cash flow position being a -- rather a photograph at the end of the quarter rather than a picture of the ongoing business. If we move onto net debt on Slide 14, we see that has increased somewhat. We have, obviously, acquired a new company in Auburn FilterSense during the second quarter of this year. And that, combined with a somewhat weaker operating cash flow, has made an increase in net debt during the quarter. Of course, we also paid out a dividend of approximately SEK 70 million at the same time. We have a slide on the acquisition of Auburn FilterSense on Slide 15. I'm not sure that we need to go through that again, and we've announced it twice now.
Yes, I think we can leave that. If there are any questions, we can come back to that.
Exactly. So if we move onto Slide 16 and the summary of the quarter and year-to-date.
Yes, if we summarize, we continue to strengthen our profitability. Americas, we had very good order growth and a good sales of a large project in Mexico, and continuously improved profitability. EMEA, we continue to have a strong and strengthened profitability. And in Central Europe, with the space with Germany, had a very strong development in the quarter. APAC, we've seen that we have some delays in orders, especially in China, where we have still a very good order pipeline and hope that that will materialize in the second half of the year. We have had very good product sales in Indonesia, where the industrialization of Indonesia is taking place right now. They are moving from just selling basic metals or even iron ore to have some more industrial activities, and we hope to be part of that. In the end, we continue to improve the profitability in APAC. It's still not at the level it should be, but we are moving in the right direction and we are focusing very much on taking the right profitable orders. Moving to the outlook, the situation in Europe continues to improve, with positive growth for both incoming orders and sales. In the U.S., we also see continued stability in sales in the core business, while there's still some uncertainty surrounding major projects and that remains for some time, although we have seen some improvement. In Asia, several markets are growing positively. In China, we have seen increased environmental activity, and we believe that will have a positive effect going forward.
Final Slide, 18, you see the financial calendar for the remainder of 2018. Interim report January to September will be released on October 18; and the financial statements for 2018, they will be released on February 19, 2019. Okay. I think we can open up now for any questions that you may have.
[Operator Instructions] And our first question comes from the line of Daniel Lindkvist from Handelsbanken.
So I'd say a strong report, but the market seems to focus singly on the order intake. So -- and when looking at the order intake and the conversion on all order intake, how much can we read out from this order intake for the short-term numbers going forward? Is there a lag in all the orders as well that could help the situation?
I think you can look at it a little bit market by market. Sven's comments around APAC and I think we even hinted in our comments earlier. But in APAC, we see that some of these orders will be -- it was more of a timing issue around the quarter end than a significant drop in APAC. In Europe, there is more hesitancy on the larger order side. However, the smaller orders we are still seeing coming in, some hesitancy on major investments. Americas, yes, we have a good quarter, the pipeline is definitely more positive over there. We are being rather noncommittal here with the last few weeks of trade. More talks, obviously, being something of concern for major -- anyone planning major investments. I don't know if you have more to add.
No, what I would say is I think it's fair to say that this turbulence sort of delays decisions. Because as I think -- so it gives a perfect excuse for any boardroom directors to say, well, maybe we wait and see. However, what we've said for a long time in the U.S., they can't wait and see too long. And what we've seen now is that some of the orders have materialized and then we signed up this quarter has been discussed and expected maybe 6 months earlier. And now, they have taken the decision. We can see the same pattern here in a number of markets. What you can say is, of course, large decisions in China and so on has also been hampered, the decision-makers, by the fact that there are uncertainties with this trade war discussions and so on. But we have already seen that some of the orders we expected to come in May-June have come in July, and we see that it's a pipeline that is very solid. Then, of course, you never know what decisions will be taken. We have a good order book for delivery on the third quarter here.
And then looking at your -- the orders, it's within foundry and smelters that we see the first pickup of the CapEx, in general, all over the markets or...
No, you can't say that. Because it's -- if you look at it, in Asia, we have a -- first of all, global, we have a very strong position in smelters and foundries and so on. And in China, it's been mainly, mainly because that's where we have the absolute leading position and it's the outstanding #1, call it, of the high-end suppliers in that market. That's one of the reasons we've got that. If you look at a lot of the discussions in Europe, it's very much about recycling. Recycling is an issue here, whether it's recycling of steel, recycling of aluminum, recycling of the electronic scraps and so on, or lead batteries and so that is a bigger issue. And the same goes with, to a certain extent, in the U.S. We believe that you can see that we will have, despite what Mr. Trump might think and so on, that you will have to have much more recycling in these areas. And if you compare how much we recycle of scrap metals in Europe, it's more than twice the number of new wares, and I think that long-term you cannot have the landfills. So that will happen going forward. But that's -- so -- and then again, we continue to focus on growing our profitability. We are very, very reluctant to take projects with bad payment terms. We do not enter into agreements that do not include cash but bills of exchange in China or things like that, which some of the locals might accept and have a higher risk level. So we continue to focus, grow the profitable business, and we are fairly positive for the second half of the year.
So just a follow-up on that, with focus on profitability. Just looking at the APAC region, the incremental margins on the new sales is significantly weaker than we've gotten used to, and I guess that's what's hitting the gross margins as well overall in -- from Q1 to Q2, where we've been -- we were expecting maybe flat gross margins from historical numbers. So could you just elaborate on what's happened after bidding that project orders with lower profitability or something in the APAC region this quarter?
What you could say, Daniel, on that one is I don't think we're taking -- or we are not taking projects at lower profit margins, but you see we have taken more -- including our sales, we are the higher percentage of large project business, which does have margins below the average for the whole of the Nederman group. So that is what you see. We scale up on sales, but it's not given the same percentage margins in APAC right now.
Okay. And then just for the U.S., talking about Trump in the U.S. market with the tariffs or the duties in the market. Will that force local companies to invest more to cope with future demand? Or what are the implications from your side, what are you expecting?
That's the million-dollar questions, but I think it might be. The questions, of course, what you see and what you need and what level they will have to invest. I'm not sure yet. We'll see what happens here. We are evaluating the situation. But there are a number of positive things happening in the U.S. besides the fact that it's very turbulent. You have the tax reform that gives a better profitability for the local companies. However, the discussion and some of the surveys indicated that they shouldn't use -- or they were not planning to use as much as probably the legislator expected to invest, more to take out and do other things or whatever. They -- I think there was a hope that they should invest even more. But again, there is a platform with increased profitability, there are possibilities. Then adding on that the tariffs might increase the level of local manufacturing in the U.S. but it's too early to really say that this is what it's going to be. But I think -- or I don't think, it's the obvious thing that they want that to happen. Because that is what Trump's administration is trying to do, is to get more local manufacturing. And what we've seen is the weak Canada is very much linked to the fact that there are uncertainties around the NAFTA. You have to realize that on -- all of Southern Ontario is filled with Tier 1 suppliers to the Detroit auto industry. And they are right now not investing in new capacity or build-outs and so on, all trying to evaluate the situation, what to do, where to do it and what will happen there. You have -- and so it is a bit of uncertainty that pushes decisions forward. But on the other hand, long-term, midterm, I think it's quite positive. If you sort of disregard some of the [ trickle ] flow and look at the statistics, it goes quite well for the U.S. economy at the moment.
And then just on the -- moving on to the working capital, since you've taken on some working capital. Is that due to you being more optimistic than what turned out? Or how should we interpret it?
The increase in working capital you're referring to there?
Yes.
Yes, what we -- I maybe get accused of not highlighting this at the time, but both of the last 2 year-ends, we've been in an extremely favorable working capital beyond '16 and '17. We have increased working capital during this year so far. Some of that is -- or the vast majority of that is due to project-related business. We're -- we've got a -- like we've said in Asia and elsewhere, we've got a higher percentage or a higher mix of what we call our engineered solutions business, large projects. And those are subject to stage payments. And your -- you have invoicing triggers there, and we've had a -- we were in a rather unfortunate position, you could say, at the end of June, in relation to a number of those projects. We see it more of a temporary increase than a permanent one. And you should not expect us to remain on the level of working capital that we were at '17 12.
No, no. Okay, so it's more of a normalization but still a bit high given that you should have -- you have some things that could have left you before the end of Q2 and went in Q3 instead?
I think that's a fair way of putting it. There's always some volatility, but I think that's a fair way of putting it, Dan.
Yes. But then just my final question, on the R&D, are we at sustainable levels with the levels we've seen in Q1, Q2 this year?
Yes, I think so. Sven is nodding his head opposite me as well. I think so. I think that is where you can probably expect us to be in the short-term foreseeable future.
We have spent and continued to spend on our IoT development. Obviously, that will peak during Q3, I would say. And then -- but then on the other hand, we're also starting some major overhaul that could be even more pressure to our other smaller local customers when it comes to more traditional Nederman business, to upgrade and come up with new generations early next year. But I would say that, give or take, it's about that.
[Operator Instructions] And the next question comes from the line of [ Bjorn Kaletsky ] from Handelsbanken.
The hesitation in EMEA, is it more like in the U.K.? Or is it a thing overall? Because Germany, for example, seems quite fine.
I think you can say it does. U.K. was definitely significant in this quarter. We have seen that there are no large investment taken in this quarter or decisions taken in the U.K. However, if you look at Germany, if you look at some of the former eastern countries, Czech Republic and some others is doing fabulously well. You can see even at total in something like Turkey is coming back in business. So I would say, yes, it's very much U.K. Then of course, there's a general uncertainty in the market. But we have underlying positive feeling that people are more confident. And let's see what happens here after -- when Trump has come back again. Sorry for referring to him, but it seems like people are getting nervous about these sales. And of course, steel industry is cautious at the moment. But again, what we've seen in the U.S., we've said for a long time, there has been nervousness. We have seen a growing pipeline with no orders, and then suddenly it starts to happen. So again, it's very difficult to predict, but the underlying positive times are there. This is not a big, sort of enormous trade. But we see that business is good, things are moving in the right direction for many people.
Okay. So for example, Canada was just hampered by tough comps rather than a bad momentum, correct?
Yes. [indiscernible], yes.
Yes, that's cool. You also have some comments on -- regarding the profitability that was unsatisfactory in Americas. Is that regarding Brazil or is it regarding the whole Americas?
It's still not satisfactory because as you see, where -- it should be where EMEA is at the moment. That is what we're aiming for. And with growing order intake and sales, we will be back there. If you remember, the decline we've had in '15, '16 in sales, we've seen the drop in profitability. The profitability will come back when the order backlog and the sales are increasing here.
And also, a last question from me. Is this financing problems in APAC, and especially in China, is that something new for you? Or is this something that has been in numbers in the last quarters?
We've seen quite some time that there are financing issues in the -- you can also see what happened. It was it in April, they released more money. They allowed these, what you call it in English, asked the banking system to push out more money. And that is because there is a lack of capital and free capital for investments in China, in many areas, especially the [indiscernible]. And this is the situation that has been there for quite some time. And you have this shadow bank system and you this [indiscernible] change, and they've been around for quite some time. But it's not been better. And it's not the only assets report that -- as you probably have seen since you read more report than I do. The thing is that there is a liquidity problem in the Chinese economy.
As there are no further questions, I will hand back to the speakers.
If there's no other questions, we thank you for taking the time listening to us. And hopefully, we'll have a good continuation of the summer, me longing for rain, lots of rain for my farmland. Thank you very much.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.