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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 Q3 Report 2018. Today, I'm pleased to present CEO, Sven Kristensson; and CFO, Matthew Cusick. [Operator Instructions]I will now hand over the call to Sven Kristensson. Please begin your meeting, sir.
Thank you. Good morning, and thank you for listening in into this session where we are going to present the results of the third quarter for Nederman Holding. It's been a challenging and educational quarter, and we'll see what explanation and what the future will bring.We'll start with Matthew taking [ some of ] you through some of the figures.
If I start -- good morning, everybody. If I start on Slide 2, I'll provide a brief summary region-by-region before I go into the numbers for the group as a whole.In Americas, we have an organic decline of 15% in orders received. That must be put into perspective when we compare to a very strong quarter 3 last year, with several larger orders booked. And sales also decreased organically somewhat.In EMEA, we grew the strong organic growth of 3.5% on top of the clear acquisition growth from NEO Monitors. Remember everybody, NEO Monitors was acquired during Q4 of last year.Asia Pacific had a mixed development, weaker order intake, but good sales growth, and we have some bigger backlog going into the quarter. Orders declined organically by 5.7%. We'll talk a little bit more about that later. So I don't go -- I won't go into too many more details there for now.Summarizing the numbers on Slide 3 for the group as a whole. Incoming orders, SEK 817.9 million, which is an increase -- which currency adjusted is an increase of 1.2% compared with the same period last year. Sales for the quarter, SEK 835 million, SEK 769 million last year, currency adjusted. This is an increase of 2.5% compared with Q3 2017.Operating profit was just over SEK 50 million, SEK 50.6 million to be exact, versus SEK 69.3 million last year, a very strong quarter last year there, giving adjusted operating margin for the quarter 6.1% versus 9.0%.Net profit SEK 32.9 million, SEK 42.9 million last year. Earnings per share SEK 0.94. Just in case anyone has missed, we did do a share split during quarter 2. So these numbers have changed since previous presentations. We were on SEK 1.22 last year, so somewhat behind Q3 last year.January to September numbers now, the first 9 months of this year. Order intake SEK 2.512 billion versus SEK 2.341 billion last year. Currency adjusted, that's an increase of 5.4% compared with the first 9 months of last year. Sales, SEK 2.485 billion. That's an increase of 6.6% currency adjusted compared to the same period last year.Adjusted operating profit, just over where we were at this point last year, SEK 181.4 million versus SEK 179 million last year. That's a margin of 7.3% versus 7.8% last year.Operating profit, SEK 177.6 million. This includes the acquisition costs that were involved in the acquisition of Auburn FilterSense during the second quarter of the year. That was SEK 177.6 million versus SEK 179 million last year.Net profit year-to-date, SEK 113.5 million, slight -- very slightly ahead of the SEK 113.1 million that we were at after 9 months of last year. Earnings per share year-to-date, SEK 3.23 million, which is actually exactly in line with the Q3 last year.Okay. That's a brief summary of the numbers. If I move on to Slide 5, Sven can talk in a little bit more detail about the Americas region first of all.
Yes. Americas, as you see, we have had a fantastic order intake last year's third quarter. We unfortunately could not repeat that this year. There is continued uncertainty in the U.S. trade relation, not only with the China which we read a lot about but also about the neighbors. We believe that the new U.S.-Mexico-Canada Agreement will take away some of that uncertainty, and we believe that in the coming quarters this will have a slight positive effect on the decision makers to actually finally take the decision that's been due for quite some time.It's also been a lot of uncertainties about what is really the different trade tariffs if you import, and it's been sought of, if it's raw material or if it's how much and so on. So it's been a little bit of a mess in that. The positive side is that we've had very good aftermarket sales, but that is also an effect of the fact that there has been less investments in new equipment and more refurbishments to keep going waiting for the fog to lift. Brazil has been doing very well. They have come back after some periods of slower activity and seems to be more positive business-wise going forward.So if we look at the development per country, we have, as we said, U.S. in the context of the very strong Q3 last year and then again aftermarket very good. We had also encountered the same. The tropical storm Florence resulted in a major disruption. We have 3 factories in Americas, and they are all located in South and North Carolina, where traffic and distribution systems were down for couple of days, which hampered our sort of the last-minute distribution in the quarter. Canada has been the same. But when it comes to the NAFTA agreement and so on, we've had a declining orders, but the aftermarket has been growing. Brazil is strong. Mexico continues to do well.
So if I summarize the figures for Americas region on Slide 6. Incoming orders, SEK 309.7 million in the quarter, SEK 932.6 million for the period for January to September. It is an organic decrease, a 15.3% in the quarter which we've mentioned already and very slightly below 0.3% for January to September.Sales, quarter 3, SEK 307 million and SEK 907.5 million for the year-to-date, organically 6% down in the quarter and 3.7% year-to-date.Adjusted operating profit in Q3, that went down somewhat to SEK 26.1 million from SEK 31.5 million last year. That was going for a margin of 8.5% versus 11% in Q3 2017. Adjusted operating profit January to September, that is now at SEK 81 million for 2018. That was SEK 91.5 million in the first 9 months of last year. Operating margin, therefore, down to 8.9% from exactly 10% in 2017 first 9 months.If I then move on to Slide 7, Sven will talk a little bit more detail about the EMEA region.
Yes, EMEA, it's been a region that seemed to be more stable, and it seems like for the first time in many, many years that the investments levels have been very low for a decade now in industrial investments, and it's also contributing to the very low the efficiency in -- efficiency decline in European industry. We can see some signs that there are movement to start also having an interest in the investment side of it. Still, we can say it's a more stable market than any of the other regions and with a sort of a positive sign.If we look at it, Germany in the quarter was slightly low, and Nordic was so-so. Denmark was doing excellently in this quarter. We have others. Even U.K. had a positive trend, how long that will pursue because of the discussions now of a hard Brexit or not. Poland, Czech Republic were a bit slower, lower sales of medium-sized systems, very dependent on wood and metal hardware.Turkey, which has very challenging macroeconomic conditions, were doing very well. And, also the distributor market, they're seeing other eastern European market as well as Middle East. So that was the sort of general more stable but difficult to sometimes to push on fast enough the changes in raw material prices and so on that are fluctuating up and down in a bit unforeseen manner depending on the speed of flow from U.S.
If I move on to Slide 8 and summarize the numbers for EMEA. Incoming orders in quarter 3 were SEK 412.9 million and for the year-to-date SEK 1.263 million (sic) [ SEK 1.263 billion]. Organically, this is an increase of 3.5% in the third quarter and a decrease of 1.6% compared with January to September 2017.Net sales, SEK 410.5 million in quarter 3 and SEK 1.244 billion for the period January to September. Organically, this is a decrease of 4.9% compared with Q3 2017 and an increase year-to-date of 0.7%.Adjusted operating profit in [ coming to ] the third quarter was SEK 47.7 million from SEK 51.4 million in Q3 2017. It's an operating margin of a 11.6% Q3 this year versus 13.7% last year. Adjusted operating profit for January to September, that increase is still on the increase to SEK 165.5 million from a SEK 138 million in 2017. And adjusted operating margin year-to-date is now at 13.3% versus 12.7% at this point last year.Now moving on to Slide 9 and Sven's comments on APAC.
Yes. As we said, APAC is a market that will eventually be a very strong and good opportunities. This fall both have been a bit challenging, both in India and in China. And in China particular, there is significant limitation when it comes to obtaining financing for investments.This Chinese government is pushing for a better, cleaner, better environmental thinking; however, a lot of that now is focused on closing down low-performing, polluting factories, but there will be also investments in the coming year when financing. We've also seen that the Chinese government and the central bank has sort of eased the -- now I've lost the English word, but they're -- at least, they are pouring down more money into the system to ease the situation, and that could probably will cause for some hope later.So we had some decline in order intake. And what is worse that we were negatively affected by the rapid steel price increases there. They normally do have a couple of months to make these changes. Here, we had a handful of projects that were procuring to some and then we could see that we would have difficulties to live up to that since the raw materials shifted very, very rapidly in this.The other thing was that we had some projects going into North America we -- from the Chinese customers, which is very encouraging that we could see that we could, from Chinese customers, sell projects in China for supply in U.S., which is very interesting future. The drawback was that in this turmoil, in the discussion between China and U.S., there were significant changes in the landing cost which hampered our profitability. Yes, that's about it.We see continued improvement in Australia and things like that. And Thailand is doing a slightly better. The situation is stabilizing, and we can see that business is coming back. Japanese customers, that has been a backbone of our high-quality supply -- system supply to these are now coming to a point where they are starting to invest again.
Okay. Moving on to Slide 10 and the financials for the Asia Pacific region. Incoming orders amounted to SEK 95.3 million quarter 3 and SEK 316 million for January to September 2018. This is an organic decrease of 5.7% in the quarter and 1.7% for the first 9 months of the year.Net sales in quarter 3, a SEK 117.7 million and year-to-date SEK 333.3 million. Organically, this is a decrease -- this is an increase -- excuse me, of 8.2% compared with quarter 3 of last year and an increase of 17% compared with January to September 2017.The adjusted operating profit in the quarter was minus SEK 1.5 million versus positive SEK 5.2 million in Q3 2017. That's a margin of minus 1.3% versus 5.2% positive in Q3 2017. Adjusted operating profit for January to September, the first 9 months of the year is basically 0, SEK 0.2 million negative from a position of negative SEK 2.2 million after the first 9 months of 2017. This is an adjusted operating margin of 0.0%, if we round it up and which -- and it was slightly below that minus 0.8% for the first 9 months of the last year.Moving now on to Slide 11, Sven will talk some more about Nederman Insight developments.
Yes. We got some questions of what we are doing. As we've said, sometimes we have had focused on digitalization infiltration all seeing now. Most say it’s process with the quoting tools, et cetera. Nederman Insight, it's however working without digitalization of the processes in this filtration side of it. We have, over the last few years, built a competitive digitalized offering in short period of time. And we are quite pleased to say that we are now pacing roughly SEK 250 million in annual -- annually for SEK 250 million which makes at least a significant part of it.We see that -- we, during this quarter, also launched some, I call it, application, new solutions. We have the backbone. We have it like a tone. We are now developing the solutions to make it sort of more popular in calling the apps. And we have introduced in woodworking fair in Atlanta this summer, they put inside where we can monitor filter system's performance in real-time, obtain valuable data, implement planned service measures. We can also take out report basically for compliance discussion.We have also introduced SAVE, Smart Air Ventilation Economics monitors. Since we do have this system -- IoT system measuring and also all the sensors linked up, we can monitor the workstation and automatically adjust fans, moisture configurations and create optimal conditions. Thereby by doing that, we have better quality but also save energy.And of course, it's the 2 acquisitions of Auburn FilterSense this spring and NEO Monitors last autumn had significantly contributed to this development. We have added competencies in the group. And with the group, we have added for them sales channels. So we have so far been a slightly ahead of our original plan.
Okay. Moving on to Slide 12. Today's press release for the quarter 3 results was our second press release in 2 days. Sven will talk a little bit about the acquisition of Luwa Air Engineering, yes, simply to do...
Yesterday, we finalized a long journey to acquire Luwa Air Engineering in Switzerland. It's the #1 brand in manufacturing when it comes to fiber and handling dust removal, air conditioning, et cetera, for fiber manufacturing. They have the headquarter in Switzerland, and then they have manufacturing in China, India and have also significant sales offices in Singapore, small one in U.S. and Turkey.Luwa was founded in 1935 and has since then developed on a global basis. With the -- thing that they were working together with another subsidiary of -- now subsidiary of Nederman Pneumafil in U.S. So the interesting thing is Nederman has the #1 position under the brand name Pneumafil in U.S. and also in North America, but it's mainly U.S., whereas for the rest of the world, Luwa is the #1 brand. So fortunate for Luwa, the other world has developed better when it comes to volume in the sense that a lot of the fiber production is now in India, China and other areas.What we do here is working with fiber and nonwoven. So it's typically for textile industry, high-tech industry with special fibers to -- yes, fibers are used in a number of different applications. It's also nonwoven, which is typically for diapers and different types of applications around the [ tending ] care. It's also with wound care and things like that.So the acquisition price was CHF 28.5 million under a locked box mechanism, so -- and we also took over some cash positions in various -- included in the price. They have approximately 350 employees and had a turnover of CHF 66 million for the group in 2017. That's equivalent to EUR 56 million, EUR 57 million, I think, roughly. And it will be a part of the Nederman Mikropul organization, where we will merge Pneumafil, Luwa, and they will be back to where they were in working together some 30 years ago. So it's a very strategic and important, and we have for the large filtration business and why we called Nederman Mikropul, we have had fibers as one of the core areas that we want to be #1, and we have, with this acquisition, met that target.
Okay. If I move away from the acquisition and on to Slide 14, I will show -- can discuss a couple of key figures on here. Cash flow from operations has resulted a bit positive in the quarter. We see that we are not year-to-date at the same position as we were last year. We have commented on that in the press release. We have somewhat different mix of sales this year -- to last year with a larger portion of large solutions in there which is impacting cash flow from operations. This is expected to improve in quarter 4. We had lastly with almost an untypically steady development throughout the year for the Nederman group, I would say.I will move -- moving on to the Slide #15. This is the net debt position as at 30th of September 2018. We see -- we reduced our net debt during the quarter. This, of course, is impacted to some extent by the acquisition of Luwa in the first -- in October. Luwa likely say it's going to have cash position themselves, so the full CHF 28.5 million does not hit our net debt.If I move on to Slide 16, Sven can briefly summarize the quarter and then the outlook for the rest of the year and going forward, and then we will soon open up the questions. Sven, summary.
Yes, I think we have gone through this. It's been the uncertainties in North America, whereas Mexico and Brazil has been doing very well, and the aftermarket has been growing in -- also in U.S. and Canada. EMEA, much more stable, a positive development in organic growth and also the Nederman Insight contributing. APAC in the end, the turmoil, especially in China, has been disappointing. Positive developments especially in Thailand and in Australia. But as we've seen, we have not been on our toes fast enough and fast enough been reactive and handling the very rapid changes in raw materials and import duties and transportation to use and so on, which is -- has had a significant negative effect in the quarter.
On to the outlook.
Yes, the situation in Europe continues to be stable for both order intake and sales. The U.S. will also see continued stabilization and the sales of core business while uncertainty surrounding major projects is expected to continue for some time although we have seen some improvement there. The USMCA, I have problems too. It's only Trump that thinks that's better than NAFTA. But the agreement should have a positive effect. We believe that some of uncertainties have been taken away. In Asia, several markets are seeing positive developments. In China, increased environmental activity can be noted, but development is subdued by lack of funding.
I think on Slide 18, the financial calendar. Financial statements for 2018 are released on February 19, 2019. I will not read out the rest of the dates for you. They are available on our website as well as in the quarterly report.So now we hand over to our host who can set up the question-and-answer session for us.
[Operator Instructions] First question comes from Daniel Lindkvist from Handelsbanken.
So just a few questions. If we look at the Americas, I know you've talked about price hikes in the region. And we're seeing them kick in yet or what are the lengths of the orders that you're delivering on because the order intake conversion is a bit longer than in Europe as the way I see it? And this second question on Americas is, can you quantify the effect from the hurricane in some more detail?
Okay. I think Sven will hand these over to me, so I will take them up. Price hikes in the U.S., we have not -- we think the full -- the effect -- the negative effect of these I would say -- I would like to say that this ought to be a somewhat of an improvement moving forwards in the margin purely, if we're looking purely based on raw materials. I think that is fair to say. Sven is nodding his head for everybody there. In terms of quantifying the impact of the hurricane, it was the tropical storm by the time it finally hit, but it's still caused rather widespread devastation, particularly on the roads, as Sven said. So there was more of a distribution problem than production, although 4 days of distribution lost there. It was a heavy -- it was a tough part of the month there. We are looking at several million SEK in EBIT impact for us towards the end of the quarter there that isn't negative.
Okay, great. And then if we look at the EMEA, you're saying that it started to show more interest on the investment side. So just a question as to what's the normal catalyst for such investments?
Sorry, I didn't hear your question.
So when discussing EMEA, Sven said that it -- they are starting to show more interest on the investment side. So the question is what's the normal catalyst, what are we going to look for such investments to start out? What's going to make CapEx slightly pick up?
I think it is when you look at -- if you look at the more larger part, the mid-sized part of it, it's when you need to renew your capacity or renew and rebuild your factories, you will have an interest in also because then you normally have an increase in your output and so on. So it is more of the fact that -- this is my personal opinion. We have seen the 2004 to '07, there was heavy investments in manufacturing. When you then look at the situation for a period between '08 and '09 and so on, it was extremely low '10, so we have in European investments, if you look at statistics been around 2010 levels since -- yes, all the time here, '11 was slightly better, but it's been like that. And talking to some macroeconomists, they are quite worried about the fact that Western Europe's productivity is declining fairly rapidly, and one of the reason is that the manufacturing equipment is starting to get more older. The other thing is that to say that very productive group of workers that are going into retirement, that also hampered our development. And there's also been a survey from one of the big 4--big 4, what we call, the audit firms that say for the first time in several years -- on top 3 list on the question, if you have surplus cash, what would you use it for? And for the first time, R&D and investments in efficiency and manufacturing came up on the top 3 list. So I think that we can see the sign that we -- there is a need and hopefully that also will materialize in the near future, maybe next year and so on. That's a very long answer.
Yes, absolutely, absolutely. So -- and then another question for -- I mean relating to this. The automation of production that we see constantly from companies. And to what sense does that affect you? And what's happening with the -- what's the need for clean environments and so on? And can they use the old equipment still by automating the production line or they normal exchange in that...
Yes, it depends. You can -- you probably use a filtration unit. But then it's a capturing device that says that you have an [ instant that’s ] for changes. But it's also so that machines, I used to say that machines are sometimes more sensitive to dust and have other problems heat and so on than human beings because we are very adaptable. It takes 2 decades when we are really harmed by this. So I don't think it will have a significant sort of downturn because of automization. It's rather so that it would be slightly different investments. But they still need the same filtration, they need it. And as you say, we introduced this what we call SAVE, Smart Air Ventilation Economics, monitoring. It's regards whether it's people or machines in that. It's a quality issue as well. You need to have the more advanced materials you're using, the more advanced. We come back to -- let's come back to the fiber manufacturing. If we go back to Luwa, it's a high-tech. It's not what you have in your school books some so-called poor people sitting and sewing, this is fiber manufacturing. You have a cotton fiber, for instance. You have cotton bales going in at one place, out comes big rows of cotton fiber, and in between there are very few people working, but it's extremely sensitive to dust, differences in humidity and so on. And if it goes down, it's a significant cost. That's why they have already started to ask, for instance, inbound remote sort of support on more high-tech and some of the more high-tech application. And that's why what we expect to be able to use our Nederman Insight competence to amalgamate this into and do that part of it. So again, a long talk, did I answer your question in a...
Yes, absolutely, absolutely. So -- and then just a final question from my side then if we look at the acquisition. Just a few questions on that one. How long have the adjustments been? If I'm assessing that this is roughly half your profitability or somewhere in the near, then this seems to be at a very favorable price. And even so if they got some cash with it as well. So could you just elaborate on the profitability in rough sense? And then just with acquisitions, is the Nederman Insight an add on that you can sell to these customers normally in each vicinity as well?
There's no easy synergy. There's no easy synergies anywhere. That's not a quick lunch but -- we -- since this is another high-tech industry as I tried to explain here, yes, we believe that in the quarter or maybe a little bit more, we will have the full adaptation to this. And here, we see an interest for remote monitoring, remote services and so on, and that is very well. The discussion has been gotten up, ongoing for quite some time. If you are in a hurry, you will most likely do worse than if you are patient and make sure that you take portfolio that deepens it. We are very pleased. We believe this is another cornerstone in the Nederman Mikropul addition that will be talked here and that we will have starting from the New Year. The -- one of the 4 core areas we definitely have now a leading #1 position, not only in U.S. Remember, we were #1 with Pneumafil brand in U.S. and our discussions strategically has been, can we find the opportunities to have a global #1 position or we have to focus on the sort of Americas #1 position and even sort of make this stronghold even stronger. Were there any more question around...
Yes, so just for the rough profitability, just so I can calculate on the -- on what you've paid for because it seems like the multiples are very favorable?
About 5%.
Okay, so that's just make this somewhere around...
Roughly, roughly. 4% to 5% normal, yes.
Okay. So that should give us an EV/EBIT of around 8 and an EV/EBITDA of significantly lower than that?
It's a rather -- we see it as a rather good multiple that we have said, if we were are going to measure it that way.
Yes, great. And just a last question. The seller for this operation, was it sold as a private company? Or was it in some larger...
It was -- I could say private equity, but it was the private investors going together, doing some investments as joint -- I think it was 17 or 20 shareholders.
[Operator Instructions] There appear to be no further questions. I'll return the conference back to you, speakers.
Okay. Then, we -- if there's no other questions, we thank you for taking the time. And wish you all a good day.
Thank you, ladies and gentlemen. This does conclude today's conference call. Thank you very much for attending. You may now disconnect your line.