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Edited Transcript of GUNN.ST earnings conference call or presentation 17-Jul-20 7:00am GMT

Q2 2020 Gunnebo AB Earnings Call

GÖTEBORG Aug 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Gunnebo AB earnings conference call or presentation Friday, July 17, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Åke Gunnar Bengtsson

Gunnebo AB (publ) - CFO

* Stefan Syren

Gunnebo AB (publ) - President, CEO, Senior VP of Business Unit Safe Storage & Business Unit Other Business

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Gunnebo AB Q2 Report 2020. (Operator Instructions) Today, I am pleased to present Stefan Syrén, President and CEO. Speaker, please begin.

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Stefan Syren, Gunnebo AB (publ) - President, CEO, Senior VP of Business Unit Safe Storage & Business Unit Other Business [2]

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Good morning, everybody. With me today is also Åke Bengtsson here, our CFO.

And I am now on Slide 2, the agenda slide here. So I'm going to cover first an overall development and give you a market update of what has happened in this very special quarter. Åke will come back and give a financial summary more in detail, and then I will go through the business units and the performance and the special, yes, features for each business unit. And then we will have a summary and as well a short outlook there. After that, we will have questions and answers as well.

Moving into Slide 3, the market update. And COVID is, of course, on many lips today. And this is, as I said, a very, very special year for, I think, everybody today. We have worked since quite early in the year with actions and measures to mitigate the impact of COVID-19. And as some of you are maybe aware, we have also a factory in China and quite a big presence in Asia. So when this started, we were quite early into the effects, and already during early Q1, we had to close our factory in China for, I think, 5, 6 weeks there. And this, of course, is something we have taken with us and that we could learn a lot from. And when this then continue to spread and moving into a pandemic, we have worked with 3 areas. It is -- the first focus have been people and well-being, making sure that we take care of our organization and also, of course, our customers and our stakeholders.

Secondly, we have worked a lot with the financial stability, making different scenarios and action plans. And thirdly, of course, to keep the supply chain up and running to support our customers. And we also have several, of course, critical customers or society critical customers, like pharmacy, like infrastructure and logistics, that we have supported also in very difficult times and in closed-down communities. To the right, you see a picture of one of the inventions that we have done, and that is the H-Sense product that I will come back and talk to a little bit later.

Moving in then to the overall development, now I am on Slide 4, so please turn slide. This is a summary of our quarter. And our order intake decreased roughly at the same level as our sales. So we had a sales decrease of 30% and a group order intake decrease of 31%. However, the order book year-on-year has increased with 2%. So we have, as you can see down below there, good order book. And we are basically pushing the order book a bit ahead of us due to a lot of delays in being able to deliver due to the closures. And we have seen, of course, major closures in several parts of the world: India, which is still, by the way, closed; south of Europe, which is starting up; and U.S., for example, now the 3 biggest states there, #1, 2 and 3 are under lockdowns. So you can say that the order and sales were purely impacted by COVID-19. And we actually had a quite good trend in Q1 in several of our business units, but COVID has taken a toll, of course.

The order book increase is mainly deriving from Entrance Control and Safe Storage. That's where we see order book growing, whilst in Other Business and Entrance Control, we see a decline. We have seen, of course, a significant slowdown in the marketplace, but this is purely directed towards COVID and the country or regional shutdowns that has taken place. And I would say that we have confirmed in a study as well quite recently that the underlying demand is continuing to be very strong in terms of safety and security, and we see the long-term demand growth of 4% to 6% here in our studies. And I think that's something which is positive and something we are also preparing for, which I will come back to.

We also see, when we plot now the development of the pandemic, that we believe we have passed the lowest point. Depending on the region and geography and business units, you can say that April, May was most likely the lowest point. We saw that the second half of June, for example, in Europe, orders came back, and we had quite good and interesting orders there. So we believe that we have passed the lowest point with a caveat, of course, of that there is no major new wave of the pandemic.

What have we done then to mitigate this? Of course, first of all, as I said, we have worked with a number of mitigating actions and plans. And we have taken, I would say, quite forceful actions to mitigate cost and also to do it faster than what you normally can anticipate. And of course, when you are in a situation like the pandemic, you can also take quite forceful actions.

If you look at our sales and admin costs, which is quite a big part of our cost structure, we have lowered them by 15% roughly in H1. And if you look at Q2, we are roughly on minus 25%. So you see that we have also increased the speed. Unfortunately, we have also needed to say goodbye to roughly 300 employees. We are below 4,000 now. So it's 7%, 8% here if you look at also that part of the cost side, so to say.

What I also want to mention on the cost side is that we are actually increasing our product development costs for a number of reasons. First of all, we have driven a number of innovations that we have launched, the H-Sense, as I mentioned before, but also something we call OccuLinq. And we have launched a number of innovations also in Safe Storage, smaller ones but still very important, for example, in the U.S., to protect cashier personnel from being contaminated; and also, of course, the online sector, where we have in many markets established an online route to market in a much quicker pace than what we had planned before. So those are the 2 major reasons. And then, of course, we are continuing to develop also the next-generation products as that is the future of Gunnebo. I did not want to stop that.

The strategic review of the business continues. Of course, we have had some issues due to the pandemic to act as quick and forceful as we had hoped. So we are a bit delayed there, I would say a quarter roughly versus our original plan, but that is continuing, and we have focus on finding solutions there. The result, Åke will talk a bit more about that, but the EBITA came out on a 0 level. And what was positive as well, of course, was the cash flow that was positive with SEK 92 million. And we have worked a lot, of course, with inventory and payables. Of course, we had a little bit help of the sales decrease, but at the same time, we have also prepared our products and, i.e., inventory for the deliveries that we are going to do here going forward.

So I think that we have been managing this extremely tight here. And I would say that this has also been, for the whole organization, a positive journey in this aspect because everybody now has cash flow on the forehead, and that is good.

Moving into the R&D cost, moving to Slide 5, and the innovation. We are working a lot with innovation, and you have seen also innovation we mentioned in our 3 main business units here as an important part of doing business. And I think what we have shown now with both H-Sense and OccuLinq that we can get products to market in a quick way.

H-Sense then is the body temperature detection as well as mask detection. And also you can add gel dispensing. And this product, of course, is being sold now, and we have had an enormous interest for this.

A couple of weeks ago, we also launched the OccuSense, which is Slide 6. And this is, you can say, a social distancing manager for the retail sector. And what is interesting here is, of course, that we combine our gates with an app solution for the store where we have also what we call stereo cameras that can count people without storing personal data. And we have a display and design structure where the people going in or queuing can see the occupancy, which is an important part for shoppers both from a taking-it-serious perspective but also how long is my wait time. You are not normally used to wait going into a store.

And the speed gates, of course, the gates that we are selling, is regulating the flow then. And we also have exit control for these products, protecting them from shoplifting, which is another potential retail issue.

What is interesting as well with this solution is that we are moving now into SaaS as taking the charging for a solution by click, so to say, here. So we can have a subscription service for this solution as well, which many customers have said is very interesting.

So what I want to have with you here from the first section is that we have been affected due to the COVID, due to closedowns. We have worked very hard on the cost side to mitigate that. We have a good cash flow. We have done a lot of things during this quarter to prepare for the future, including innovation and R&D here. And we have also seen, we believe, the bottom of this pandemic from an influence perspective for Gunnebo.

So with that, I hand over to Åke here.

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Åke Gunnar Bengtsson, Gunnebo AB (publ) - CFO [3]

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Thank you, Stefan.

And let me then move to Page 7, the financial summary. Stefan had already comment about order intake and sales. I would just like to add that, as you see, the orders and sales are coming in, in parallel, the same decline number, which means we are able to keep order book solid for the coming quarter. On the decline, sales down reported minus 30%. We have also included a currency effect of minus 2. And then we have a structural effect of plus 3, coming out with an organic decline of 31.

Then I would like to spend some time on EBITA, where we come out at breakeven. But in that number, we need to come in and understand that the sales drop caused us a lost contribution on something plus SEK 150 million. And to cover a loss of contribution of SEK 150 million in a quarter, you need to take forceful actions. And one of the part is, obviously, that the saving program initiated last year have now come in and fully contribute in this quarter. We have a SEK 27 million in the quarter from the saving program launched last year.

We have then, obviously also, as Stefan mentioned, launched new cost saving activities. And in the quarter, we have, as many have also, utilized the governmental support in different countries, mainly in Europe, where we have gained or have achieved a support of SEK 32 million. Additional, there is a currency effect negative in the quarter on top of this. But a hard work to address the cost mitigations.

Then I would like to move down to net profit. Net profit in the period is minus SEK 71 million. And that also include a number of one-offs sitting both in financial cost, where we have made structural releases and obligations; and on taxes, where we have made a transfer of dividend from subsidiaries abroad to bring cash back home into the tax pools for us to optimize financial tax. But the dividend tax we then will report as a one-off in the tax line for this quarter.

Stefan also addressed the focus on cash flow, which will end up in the last line here where you see the free cash flow per share, which is a healthy number for a quarter reported on the cash flow. But I will come back to that and move to the next slide, where we address working capital.

And as you see, we have been able to reduce working capital in the quarter. And partially, yes, when sales drop, you have an automatic effect on your receivables, but it's more important to work with your supply chain to reduce and focus on collection to bring the cash in from customers, which we have been quite successful. There are a lot of things to do. It had been difficult, it is difficult with countries in lockdown to have dialogue with customers, but we have made it very well during the quarter.

And that ends up then in a positive free cash flow for the quarter. The operating cash flow, as you see, SEK 128 million generated in the quarter and ending up as a free cash flow positive of SEK 92 million in the quarter. Substantial numbers and result of hard work in the organization.

Then I move to Page 9 and the net debt to clarify the net debt situation in the company. Total net debt, SEK 1.7 billion, including the post beneficial pension commitments and excluding SEK 1.3 billion. And then if we include -- exclude as well the IFRS leasing -- long-term leasing contracts, I would argue that we have SEK 1.1 billion addressed as an interest-bearing net debt which could be allocated to the bank. So that is what our profit should be shown as repayable. And with the leverage, which we report here of 3.9x, which then include the IFRS 16 number, it is an increase due to the weakening performance, obviously, even though we are able to keep and even reduce the net debt situation. But if I calculate the performance -- underlying performance on a rolling 12 basis and measure it against the interest-bearing debt allocated to banks, I will come out with a 2.6x leverage, which is a more healthy number to report back. So the underlying performance is running on a 2.6x leverage, which I think is a good number also to share with you.

We have also in the quarter secured funding to ensure that the management manage the temporary decline in performance due to the pandemic, COVID-19 crisis we face right now.

By that, Stefan, I will hand back to you for the performance in business units.

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Stefan Syren, Gunnebo AB (publ) - President, CEO, Senior VP of Business Unit Safe Storage & Business Unit Other Business [4]

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Thank you very much, Åke.

I'm now on Slide 10, business unit performance, Q2, Entrance Control. Some highlights here. This is now 30% of group sales. We saw a growth despite the tough situation here. Even though we had a bit of a windfall in the order intake, strong EBITA result, and the order book grow almost SEK 100 million. So the order book we are sitting on right now is SEK 100 million bigger versus previous year.

So we launched the H-Sense and OccuLinq. We have, of course, seen business impacted but more resilience towards the pandemic. We have, of course, also a little bit longer order cycle here than what we had in the other business units.

We have had a number of strategic wins. We continue in APAC and Middle East to take very, very interesting orders. And we also believe, of course, that the infrastructure will be one area which the government will push in money going forward here to help with investments in that sector.

We have seen that the business activity in Entrance Control has recovered to a fairly high degree after the COVID-19. And as you know, I mentioned that in Q1, we had a closure in China. And in Q2, we have had a closure in Lavis in Italy, which is our second big factory, but they have been open since mid-April. We are not running full there yet, but of course, we are working with all the precautions that is needed there. So I would say that a strong performance in very difficult times from Entrance Control and a lot of exciting stuff going on there.

Moving to Safe Storage. This business unit had been heavily impacted by COVID-19 as, for example, India, which is an important market both from a production perspective and sales perspective; and Indonesia, where we have another major factory, has been heavily impacted. We have also seen U.S. now in the latter part of the quarter being affected of the situation here. We have opened up our factory in India gradually, but we are still running on a fairly low level there. And we are having a number of business activities. I mentioned, for example, the online launches, and we are having a lot of customer meetings, project meetings online. But of course, this is not the pace we want to have.

We have a strong order book development during the quarter. It's plus SEK 66 million if you look year-on-year even though the order intake growth was negative. But you can see there, of course, the number, minus 43%, is a tough blow. And that also, of course, relates then to a negative EBITA. We have not been able to offset that margin loss here. But the good thing here is that the order book is intact, we are pushing it forward, and we hope now that we can open up more of the delivery activities here during Q3.

We have also a new partnership in China for moving into the home sector in China, which is quite interesting, where we have launched now in 20 retail stores a new concept, which we are also following closely. China is and will be, also for Safe Storage, an important market, where we are a premium brand in that sector.

Going in then to Cash Management and Other Business, where we had a bit of a tougher ride. We were, of course, heavily impacted also in Cash Management by COVID as this is related to retail sector. We just got the report from what is called RBR, which is a survey institute doing these type of reports. And that confirms that we are market leading in the EMEA region, which is something we should build on. We have launched now during the quarter and are piloting now a customized deposit system for the U.S. market. And also our latest SafeDeposit unit D6, we are testing now live in customer sites.

But I think despite this, we had a negative 25% sales growth and also a negative order growth. Here, we have also not been able to sustain the year-on-year order growth, so we have a minus SEK 36 million loss there on the order book and a slight positive EBITA operating result.

What is positive, though, is that we have product for social distancing, for example, drive-up systems for banks or retail. And that has now taken off a lot in the U.S. market, where you also have, of course, a -- you have a -- you are used to a drive-up model, which is not maybe the case that much in Europe and Asia. But this has really taken off, and we have had really good sales development there with also fairly good margins.

Other Business, which is, as you know, 3 areas: it's electronic security mainly in Europe and Mexico; it's the fire system business in Indonesia and the fire safety in India; and then we have retail solutions, which is basically electronic article surveillance, and that is mainly Europe and Brazil where we have that business. This business is under review, and we have a lot of work going on there. As I mentioned, we are a bit time-wise set back. Otherwise, this is moving forward. Fire systems, of course, a lot of the projects in Indonesia and India have been on hold, even projects that we are in the middle of.

And that, of course, has also put a toll a bit on the cash flow, as Åke said there. Retail solutions, a lot of retail in south of Europe, at least, and Germany and the U.K. have been closed. So of course, we have not had a lot of new projects here during the period. And electronic security, we see now starting to move again mainly -- I mean, we are big in Spain, Portugal, Italy here and Mexico. And here, you can see that these countries, with the exception of Mexico, are starting to move again here. This is now around 10% of sales and continue a negative EBITA of around 8% here.

Summary. I'm moving now to Slide 14 just to give you a key takeaway. I mean we have taken measures in all parts of our business, both business unit-wise and regional-wise, to mitigate as much as possible of the impact. And we have, of course, also taken the opportunity to do a lot of changes that we had planned beforehand much quicker than what we had anticipated. We have focused a lot on our people, and I think we have done a very good job there. We have trained them. We have a lot of training hours logged, so preparing for the future. We have taken care of, in a safe way, to run our factories and our customer interactions. And I think we have had, as Åke mentioned, now a good dialogue with our financiers. And we are running constantly these scenarios and action plans around the financial stability, good cash flow coming in.

Of course, we have a lot of focus on continuing to deliver where we can to minimize any consequence for our customers, holding then the supply chain open. And we believe that we have passed the lowest point here, April, May, depending on a little bit where we talk about here.

Cost savings we have done and specific cost efficiency programs, both in Safe Storage and Cash Management, which we have put forward and we'll do a lot more this year. And we have also done it in Q2 here.

We will continue with the review of Other Business. And I hope I can come back to you with more news there in short.

And we have done a number of product launches and, I would say, a more innovative mindset, where we, in very few weeks, took the customer demand and converted that into products. And I think that is, of course, a cornerstone for developing Gunnebo in a better way, in a more agile way.

I always -- or very often get the question around, I mean, how can we better prepare now for the new normal. And I basically say, because this is also a bit of an outlook, of course, for me, we don't know what the new normal is. I think that you can, of course, build scenarios and work towards those. But one thing we have learned now is that you need to have an extremely high level of agility in an organization, which means that you need to delegate and have a delegated structure in the organization, so people locally take action quick. You cannot sit and [steer] that from customer. And I think we have shown that. Our people have taken a big step forward. They have taken and shown leadership, and they have pushed the necessary actions here in cooperation with us here in Gothenburg here, which -- and that is something which we are extremely proud of and I think also something we will build on for the future now. That was Slide 14.

And Slide 15 says to me Q&A. So with that, I would like to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) For the moment, we have no question by phone. (Operator Instructions) Mr. Syrén, we have no question by phone.

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Stefan Syren, Gunnebo AB (publ) - President, CEO, Senior VP of Business Unit Safe Storage & Business Unit Other Business [2]

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Okay. Good. If there are no questions, then I would like to thank you for calling in. And yes, thank you very much, and goodbye.

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Operator [3]

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Thank you. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.