U.S. Markets open in 7 hrs 58 mins

Edited Transcript of RATO B.ST earnings conference call or presentation 16-Aug-19 8:00am GMT

Q2 2019 Ratos AB Earnings Call

Stockholm Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Ratos AB earnings conference call or presentation Friday, August 16, 2019 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Helene Gustafsson

Ratos AB (publ) - Head of IR & Press

* Jonas Wiström

Ratos AB (publ) - CEO, President & Director

* Peter Wallin

Ratos AB (publ) - CFO

================================================================================

Conference Call Participants

================================================================================

* Mikael Löfdahl

Carnegie Investment Bank AB, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the Ratos Interim Report January to June 2019. Today, I'm pleased to present Jonas Wiström, CEO; Helene Gustafsson, Head of IR and Press; and Peter Wallin, CFO. (Operator Instructions)

Helene, please begin.

--------------------------------------------------------------------------------

Helene Gustafsson, Ratos AB (publ) - Head of IR & Press [2]

--------------------------------------------------------------------------------

Good morning, everyone, and welcome to today's telephone conference where Ratos CEO, Jonas Wiström; and Ratos CFO, Peter Wallin, will present Ratos' report for the second half of 2019. After the presentation, a Q&A session will follow. A recorded version of this telephone conference can be found on the Ratos website.

Now I leave the word over to Jonas to present the results.

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Helene, and very welcome, all of you, to this call that will focus on the second quarter 2019. We will talk about the performance in the portfolio, but also comment on our financial position and our key priorities.

And with that, we change slide to Slide #3. Well, the second quarter is not as bad as it might look. We have a continued good growth -- good organic growth in Ratos, and it's up to 9% now. Unfortunately, our EBITA goes down. And then as you all might remember from our previous call when we commented the Q1 report, we expressed some concerns over the performance in HENT and particularly in some projects. Those projects were worrying. We did some measures during the quarter. We changed the Chairman in HENT to Peter Wallin. As you all know, he have a long experience from construction business. And as a result, Oase performed more deep-looking review of all the projects in the portfolio. And the result from that was project write-downs of a total SEK 133 million. That is for our holding in the company and again Swedish crowns.

When we look at the results in HENT, we must also remember that last year in Q2, HENT divested their company or their business in Eiendomsinvest, which then gave us a one-off profit of SEK 65 million. So this explains in total the negative development in EBITA for the quarter. In general, we feel that we are continuing to stabilizing the results in the company portfolio even though, of course, challenges and potential improvements exist in all companies.

During the quarter, we have changed the CEO in Speed. In fact, that happen just between the Q1 and Q2 quarter. And we will comment on Speed further on in this report, but measures have been taken and will continue to be taken. We have also changed the CEO in LEDiL during the quarter, and we have also recruited a new permanent CEO for Plantasjen that will start October 1.

In our efforts to stabilizing our portfolio, we have also changed our Chairman in HENT, as I mentioned, but also in Speed Group where another Ratos Director, Christian Gebauer Johansson, is appointed Chairman. In LEDiL, we have appointed Karsten Slotte as Chairman. In -- And in Oase, we have appointed Anders Slettengren as the Chairman. So we are getting closer to our companies, especially those with challenges in the near term.

I'm also happy to see that our cash flow have improved during the quarter, not just because of IFRS 16, if we take it like-for-like, the cash flow is still improved. And our CFO, Peter Wallin, will comment on this and also other items that has strengthened -- further strengthened, I should say, our financial position in Ratos.

All in all, we are pleased to see that the efforts we are taking in the company portfolio, including the write-downs in HENT, is stabilizing the portfolio and generates positive results in many of our companies.

So with that, I'll ask you to turn to Page #4 where this is old news, I guess, for most of you, but just as an introduction for our coming slides. Ratos is, today, divided into 3 business areas, headed up by Peter Wallin in Construction & Services; by Anders Slettengren in Consumer & Technology; and by myself in Industry.

So now I ask you to move over to Slide #5, and I leave the word to our CFO, but also our business area President for Construction & Services, Peter Wallin.

--------------------------------------------------------------------------------

Peter Wallin, Ratos AB (publ) - CFO [4]

--------------------------------------------------------------------------------

Thank you so much, Jonas. So we have a business area, Construction & Services, where we reported a top line growth of 13% and in organic terms, 12% -- up to 12% to SEK 3 billion in top line. The results became in the red at SEK 10 million due to the swing impact in HENT, which Jonas has explained, and I will comment it a bit further.

And if you look into the report, you will actually see that the negative impact is something which appears because, unfortunately, we only own 32% effectively in Aibel, which is posting a very good profit level.

So let me take company by company. So I'll start with Aibel. And we can see a very strong growth in the earnings, and that is, of course, because of the many good projects that was secured in the order backlog the previous year and the periods before that. So we are harvesting, and we are also happy to see that there is a good growth in profitability in that portfolio.

In addition and from a very important strategic point of view, Aibel is also securing a major contract within the offshore wind segment, a segment which offers a lot of opportunities also in the pipeline. So the profitability in Aibel is increasing in line with the -- almost in line with the increase in top line.

airteam. airteam is unchanged from a profitability point of view but is slumping in growth terms compared to last year. And in airteam, we have acquired a company based in the Stockholm Uppsala area in the beginning of the year. That is what sort of boosts the top line over and above the previous year. If we're talking about the market here, we can actually see a bit softer Swedish market in some pockets compared to what we saw last year whereas the Danish market is tracking a good performance and the backlog, as you can see, its also record high in the Danish business.

The Danish business is also reporting a good profitability, but the Danish business is also having a bit of large project, which has shifted into later periods. So that impacts the business to some extent.

The Swedish business is softer from an earnings perspective, and the market and the softness of the market is 1 explanation. But then, of course, we have also had some headwind from operations, and that is impacting performance. But all in all, we are at the same level as last year from an earnings perspective.

HENT, not least at all. We have a very good growth organically, 9%. And the earnings is then negative, and that is, of course, due to the project write-downs. As Jonas alluded to and as we spoke about in the Q1 earnings call, we could see that we had risks in some few projects in the backlog. And since I have assumed the full responsibility as the Chairman in this Group, we have undertaken a serious review of the backlog and specifically the projects that we have seen challenges within. And management and I have sort of found at the end of the day that in order for us to safeguard the risks of increased costs and the actual increased cost, we have made a write-down then, which impacts this year's result by SEK 133 million. Not all is bad. Actually, the major part of the backlog is performing quite okay. And also I'm very pleased to see a very robust backlog in the HENT business and a very innovative and great organization.

So let me go over to Speed Group where we are reducing top line. Some of that reduction is completely on purpose in order to consolidate the business. Earnings is negative. And earnings is negative, which we already was informing you about because we had identified a restructuring need already in tune with the Q1, and we have now taken that restructuring charge of around SEK 15 million in the second quarter. For the rest of the year, we expect the savings of this restructuring to amount to close to SEK 10 million in the second half, and the full year impact from this restructuring is in the tune of SEK 30 million on a full year basis. The full year savings will be achieved from January 1.

So Speed is -- adjusted for this restructuring charge, the Speed operations is doing okay, and we can see that this restructuring will benefit and feed into an improved earnings development going forward.

So with that, I conclude this business area and turn over to you, Jonas.

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [5]

--------------------------------------------------------------------------------

Thank you, Peter. And we're not only turning over to me, we're turning slide as well to #6, which brings us into Consumer & Technology. We had a growth of 4%, mainly due to a good sales development in Plantasjen, but also Kvdbil was growing. EBITA decreased some, primarily due to the quality problems in new generation of products in Oase Outdoors.

Starting with Bisnode, again, referring to our previous call and our Q1 report, we had a plan and have a plan in Bisnode to increase the pace in streamlining the product portfolio in the quarter. We did so in Q1 as well and took costs for that, and these efforts impacted EBITA negatively by SEK 8 million in the second quarter. This is exactly in line with the plan. And over the time, this migration will lead to enhanced efficiency through a lower cost base, but also increase sales. And we actually expect to see the results of this already in the second half of the year, which we are in right now. So Bisnode is going according to plan, although the EBITA is down a little bit compared to last year.

Kvdbil reported a growth of 11%, which I think is actually quite good, taking consideration the fact that as, at least you Swedes know, the government had an initiative last year, Bonus Malus, that really got the private car sales up in the second quarter. With this in mind, I think the sales numbers are great. EBITA was affected by a nonrecurring costs in a reorganization in Kvdbil of SEK 1 million. And again, last Q2 was very strong for Kvdbil. So we're quite happy with the development in the company.

Now Oase Outdoors is another story. Unfortunately, they reported quality problems in a new generation of products. This affected EBITA with DKK 12 million in the quarter. And over the year, I think they're up to DKK 18 million or will come up to DKK 18 million, DKK 19 million. This is to fix the problems. The problems are fixed, but costs are also taken to ensure that customer satisfaction and trust in the brand and the company remain on the high levels they've had.

Now most important for this business area, and very important also for Ratos, is the development in Plantasjen. Plantasjen actually had the highest sales number since we acquired the company in the end of 2016. So we're quite happy with the sales development. We're also actually quite confident in the market as such as a growing market for young and middle-aged and old people in Scandinavia.

What is not good is that the gross margins went down in the quarter and the OpEx also came up in the transformation especially of the IT part where we're introducing a complete new ERP system in the end of 2019.

The gross margins were down to FX effects that was not compensated for in the prices. Again, the ERP systems come in here to a certain extent. So the result for the quarter was a little bit lower than last year. But for the half year, it was actually a bit better in Plantasjen.

So with that, I'll move over to Slide 7 and to business area industry. Business area industry had a good organic growth of 12% in the quarter driven by Diab, although TFS also had a growth. When it come to the EBITA who increased from SEK 29 million to SEK 102 million in the quarter, that was also primarily driven by Diab.

So let's take a few words about Diab. As you might remember, we started a restructuring program last summer. We had our new CEO on place, Tobias Hahn, from Atlas Copco. He came in, in September. The restructuring programs has really taken off well, but also we have had a very good market development in the wind area but also, in fact, in the marine and aerospace area. And all these things together creates a really improvement in our results and EBITA for the quarter.

Diab, still challenged some problems in the production also during this quarter, and the company is working heavily to make sure that these problems comes more and more seldom. We do also believe that this wind market will remain strong as the outlook we have right now. EBITA is also driven by a product mix change and the customer mix change.

Another good story is HL Display. HL Display is -- sales numbers dropped a little bit in June affecting the quarter, but the EBITA and EBITA margin continues to develop well. I think HL Display quite soon is ready for the next step of growth. Of course, we will work with the organic growth, but we will also look into acquisitional growth for this company who has a market-leading -- undisputable market-leading position in the European market where we still have some wide spots.

LEDiL, a very profitable company with high profit margins. They actually had a lower EBITA this quarter, and also sales were dropping. The gross margins are still on the same good level as it has been, but we took measures in the quarter to reduce OpEx, to change CEO and to drive sales. And driving sales is the main priority going on the rest of the year for LEDiL.

TFS finally acting in a very interesting market, clinical development services or clinical trials in general. We have 2 business areas here. One is the project part, the clinical development services; and one is the time and material business, professional services business, SRS. We've had a good development from -- in sales in the CRS area. The EBITA is still on a very low level, and the reason for the improved EBITA is increased sales, but also that we have taken out some SEK 10 million in OpEx. So all in all, a fairly good quarter for the business area industry.

As I mentioned, Peter will comment further on our financial position that has been further strengthened during the quarter. So let's move over to Peter and to Slide #8.

--------------------------------------------------------------------------------

Peter Wallin, Ratos AB (publ) - CFO [6]

--------------------------------------------------------------------------------

Thank you, Jonas. So in the -- taking a look into our companies and taking a look into Ratos situation, the balance sheet is strengthening in the second quarter and I should say continuing to be strengthened over the year. And in this number, we have not captured the - either the sale of the Ratos property nor the vendor note. So in total, SEK 600 million will come in the cash flow and has come into cash flow in July, i.e., the third quarter.

If you look on the Ratos, the parent company situation, you can see that the net cash situation has dropped compared to the year-end. And close to SEK 500 million of that difference is due to the fact that we have injected cash in Diab and in Plantasjen, respectively.

A good operating cash flow in the second quarter. The IFRS 16 is creating a bit of difficulty to compare. But if you adjust for the fact that some of the improvement is due to the fact that rent is not reported in operating cash flow as of 2019, the like-for-like comparison is an improvement in the second quarter of SEK 147 million.

If you look into the bottom line of the cash flow where the IFRS 16, of course, is neutral, you have a SEK 200 million difference. And in that difference also, you should account for the fact that HENT sold its property, the residential development unit, Eiendomsinvest, which Jonas has alluded to, and that was SEK 100 million alone. So if you really take underlying, it's a SEK 300 million improvement compared to last year.

Going into the companies. We are lowering gearing in 6 of the companies. And with gearing, I mean net debt to EBITDA.

Now Diab and Speed has been impacted by items affecting comparability over the last 12 months making that comparison. So over the next coming quarters, this company will continue to show a lower indebtedness compared to profitability. And then, of course, airteam is impacted when you compare the numbers to year-end than last year with the acquisition that we have already talked about. And I have already explained Plantasjen, Diab in order to be transparent. But all in all, we are continuing to review the company to be lower in terms of gearing if gearing is over the normal standard in the sector and in the market given the situation the company is in. All in all, we are seeing a lower gearing in our companies.

So with that, I turn over to you to recap, Jonas.

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [7]

--------------------------------------------------------------------------------

Thank you, Peter, and the recap is on Page 9. I'll try to summarize this quarter. Again, the company portfolio gradually stabilizes and the EBITA negatively affected by the project write-downs in HENT.

We do have an improved -- further improved financial position, and our current key priorities for the year stated in the beginning of the year is to continue our efforts to create a positive profitability return, which now was hurt by HENT. This is still our ambition, and we will continue to strengthen the financial position of subsidiaries, which Peter has talked about. And we will try to maintain our favorable growth in a market that, of course, gradually becomes more uncertain.

So with that, I want to thank you, and maybe we have some Q&A, Helene.

--------------------------------------------------------------------------------

Helene Gustafsson, Ratos AB (publ) - Head of IR & Press [8]

--------------------------------------------------------------------------------

Yes. Let us see. Operator, please?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Our first question comes from the line of Mikael Löfdahl from Carnegie.

--------------------------------------------------------------------------------

Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

A question on Plantasjen and the debt situation or your funding, rather. Is there -- I noticed that you write.

(technical difficulty)

in communication, but the...

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [3]

--------------------------------------------------------------------------------

Sorry, we lost you for a second, Mikael.

--------------------------------------------------------------------------------

Peter Wallin, Ratos AB (publ) - CFO [4]

--------------------------------------------------------------------------------

You're breaking up.

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [5]

--------------------------------------------------------------------------------

Can you repeat the question?

--------------------------------------------------------------------------------

Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Yes. Okay. It's regarding Plantasjen and the discussions that you're having with the banks regarding the financing of the Plantasjen. You mentioned it in the notes, in the report that you are -- that, that debt is reported as short term. How -- could you say something about this? Do you think you need to inject more capital than the roughly SEK 200 million that you injected earlier this year to find a sort of reasonable financing terms for Plantasjen?

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [7]

--------------------------------------------------------------------------------

I think I'll leave that question over to Peter.

--------------------------------------------------------------------------------

Peter Wallin, Ratos AB (publ) - CFO [8]

--------------------------------------------------------------------------------

Thank you, Jonas. Of course, we have -- you can say that we have reported this on a conservative and prudent basis as short term at the end of June, and that you can say it's a yellow card and not a red card in a way. So we are discussing with the banks, but I wouldn't preempt any decision we are taking here open on the line before we have concluded with the banks. So we are in close discussions with the banks, and we are on top of the situation. That is what I can comment.

--------------------------------------------------------------------------------

Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

Okay. And more broadly then on the indebtedness and debt ratios for the companies. Are you satisfied with the -- as it looks in the portfolio companies right now? Or do you see additional need for capital injections anywhere, any soon?

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [10]

--------------------------------------------------------------------------------

If we go back to the situation at year-end and we are also going back to Q1 when we decided to scrap this overall Ratos gearing target because we have so many types of businesses, it doesn't make sense. So -- but -- so to comment your -- and going back then to year-end, the 2 companies that were really standing out in terms of indebtedness measured as EBITDA -- net debt to EBITDA, that was 2 companies, mainly Diab and Plantasjen. And in the comments we have given in this earnings call, we are seeing a positive trend in Diab plus that we've made an injection of capital there since we see a very good return on investment from further investments in CapEx in Diab supporting the turnaround and restructuring of this company. So if you turn it around, Plantasjen has too high gearing for sure. So we need to reduce the gearing over time in Plantasjen. But other than that, we think we are on a pretty good level in the rest of the companies.

--------------------------------------------------------------------------------

Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

Okay. Just so I know also, on the -- on Page 13 in the report, just so I don't mix up including and excluding the IFRS 16 impact. So the net debt that you're showing on Page 13 for the respective companies, those are -- first of all, it's -- they are adjusted for the holdings, obviously. But then also they are -- those numbers are with the old accounting methods. So those do not include the IFRS 16?

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [12]

--------------------------------------------------------------------------------

That's completed. The only number that includes IFRS 16, on Page 13, is the cash flow, hence, the comment on cash flow previously. And then, of course, the net debt -- the interest-bearing net debt then is before the net cash position in -- at the Ratos level. And then, of course, you have also to adjust for the fact that Aibel is not owned as a subsidiary, but as a associated company. So you can find that all those numbers and all those adjustments on Page 24 there on the Note 3.

--------------------------------------------------------------------------------

Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

Yes. Okay. But it is fair to use those 4.9, 5.1 as a combined net debt for the companies and compared -- and obviously deduct your net cash position of 1.1 or 1 it is for the parent company as a sort of an ownership adjusted net debt? And if I want, I can compare that with the EBITDA, the summary of the EBITDA of SEK 771 million on Page 13, if I want to look at the HL Display's EBITDA?

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [14]

--------------------------------------------------------------------------------

That's correct. That's correct, yes.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

(Operator Instructions) And as there are no further questions, I'll hand it back to the speakers.

--------------------------------------------------------------------------------

Jonas Wiström, Ratos AB (publ) - CEO, President & Director [16]

--------------------------------------------------------------------------------

Okay, then. I want to -- or we want to thank you all for participating in this call and showing your interest in Ratos. And also wishing you a great weekend (inaudible) here later during the day.

--------------------------------------------------------------------------------

Helene Gustafsson, Ratos AB (publ) - Head of IR & Press [17]

--------------------------------------------------------------------------------

Thank you very much.

--------------------------------------------------------------------------------

Peter Wallin, Ratos AB (publ) - CFO [18]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.