Bergman & Beving - All time high margin

Hi and welcome to Carnegar with Bugman

and Beving. My name is Mark Salmer. I'm

an analyst here at the bank. I got with

me Manga Sutherland who is CEO at Bugman

and Beving. Nice to be here.

>> Thank you.

>> You released Q2 earnings this morning.

>> Yes.

>> Um a good report. Market still

difficult. Negative 4% organic growth.

uh if we start there and just maybe

looking a little bit about the market

and what you're seeing in demand both on

the industrial side and on the

construction side.

>> Uh firstly 70% of our revenue is in the

Nordic roughly. So that's really our our

main market and the 50/50 in the Nordic

region is construction industrial

roughly and uh the construction sector

on a Nordic level is still struggling.

>> Uh you don't see any clear pickups.

There are small signs there and there

but but on the overall picture it's it's

still I would say flat.

>> Mhm.

>> Uh the industrial sector uh is quite a

broad segment. they have many different

sub sectors in in industrial and and

some are still struggling and and some

see some small pickup as well but on an

aggregated group level I would say it's

uh quite flat

>> okay okay both on construction side and

on on industrial side

>> uh and part of this 4% organic growth uh

was this phase out of profitable

products which we've been talking about

before and now you mention it again uh

is this a renewed effort and is it

significant or is it spill over from

from before? It's correct that we have

been working with phasing out low margin

businesses uh that typically is more

high volume as you can see on our our

top line over time has been quite flat.

Um and and previously we have been

working you know with the companies in

our portfolio for them to do selective

phase out. Uh this quarter is more

structural.

>> Uh as communicated earlier we sold off

the shouldanordic business uh last

quarter and this quarter we sold off the

luna baltic business. So the the margin

effect you see this quarter is more

related to structural changes we made

>> in this quarter. Okay. And we'll come

back to that uh especially on on the we

had the hood side but then also the Luna

side is is more new how much that

actually means for the margin uh but but

okay so it's not it's that what you're

talking about is is and and other other

than that then the minus 4% organic

growth is is that's market purely market

>> more or less

>> uh and on the construction side um SV is

seeing some marginal pick up from this

root business but that's also quite

small right I get the right

uh and then if we move on to the

acquisition side you had five percentage

points increase from net from from from

M&A

uh but you keep a fairly high pace in

making acquisitions I I think you said

on the call you mentioned that you have

made as many acquisitions in two

quarters that you usually do in in a

full year.

>> Yes. Um do you think that you will be

able to keep this pace or is it

temporary? Uh to answer that questions,

you need to realize that you can't

always decide exactly when you want to

make the acquisitions.

>> Uh it's really you should find the right

company. You should ensure it it's kind

of have the right quality and and you

should be able to buy it at the kind of

a reasonable level. So with that said,

you can't plan, you know, we want to

acquire three companies this quarter.

It's really a lot of things that need to

be in place for this to be an

acquisition in the end. So so yes, we've

had a a good pace so far this year. Uh

but there is no guarantee that we will

keep up this pace in the next coming

quarters. What what I'm confident is

that we will you know we have

communicated we should acquire 50 to 80

million profit per year and we will be

able to achieve that this year and I

can't see any reason why we shouldn't be

able to achieve that in the coming years

as well.

>> Mhm. But if if if I put it this way

instead that you you take the pace that

you're having is it is it just that what

you were referring to that the pieces

have fallen together. It's not an is not

an effort from your side to actually

increase. It's just happened that way. I

mean we we have done some investments in

in in people during the the last

quarters to to enhance our M&A capacity.

So uh I'm not sure if that is the result

you see now but overall we are you know

facing up to be able over time to

increase the acquisition pace. Um if we

didn't haven't been done in that before

I'm not sure maybe we have made the same

number acquisitions anyway but but the

general kind of ambition is over time to

increase uh the the acquisitions

uh amount we are doing. So, so the way

we should look at it is the 50 to 80

million in addition from M&A per year.

Uh once you get to the 500

EBIT target, I mean the larger you

become the the more acquisitions you

have to make and this is what you are

investing in right now.

>> Yeah. The general notion over a business

cycle is that we should grow profit with

15% per year.

>> Mhm.

>> And and then 5% organic profit growth

and 10% acquisition driven growth. So

with that said, uh over time as we grow

the EBTA and EBIT, we need to improve

increase the the EBTA level that we

acquire. Mhm. And looking at the

pipeline and the prices, nothing has

changed in terms of neither the price

environment or or the the amount of

target. I I I have said it before in in

in worse time as we are currently there

are fewer highquality company for sale

but much fewer buyer

in the in in a kind of a good business

climate. There are more companies out

for sale but also more buyer. So in the

end we see the kind of same

uh possibilities in bad times as good

times to to acquire the lead that we

would like to acquire

>> at the prices you would like at

>> the prices we like to price.

>> Yeah.

>> H and and looking at the balance sheet I

mean net is now two and a half times

um but this is not restricting factor in

any way as you see it. No, not in terms

of uh any any kind of balance sheet or

financial uh limitations.

>> Mhm. So I mean we have set that two and

a half time is kind of a level we are

comfortable with and we're also

comfortable to kind of exceed that for a

for a shorter period of time

because I assume that as the the margin

comes up and we'll come back to the

margin in a second but as it comes up

then the cash flows will also improve

even more so the cash generation from

the companies you're buying and also you

have the the the um u profitability

target which is also So increasing also

driving

>> cash flow.

>> Yes. So we see improvement in the cash

generation over the over time.

>> Mhm. Mhm. And and part of this is is the

margin because it's it's I think it it

surprised me the kind of level that you

now came in at which was which was a new

high. So first of all, you you grew EBA

um for I think the 23rd consecutive

quarter, but the betaar margin was was

very high uh historically high. What

drove this?

>> Yeah. And and we're quite happy with

that level. Um and despite the tough

underlying market, we're able to uh

deliver all-time high EB margin. And the

reason for that is is um one is all the

acquisition high margin acquisition we

made contribute to increasing this

margin. It's the the divestment of Hua

Nordic for example that is quite a big

chunk there. So that uh kind of have an

positive margin effect on the group as

well. And the continuous work we do in

all our platforms you know to over time

improve the margin. Mhm.

>> So it's an it's a result of of multiple

efforts uh across the group that you see

>> and looking at the divestments of the

Baltics which is which is kind of new

now is that what was the profitability

like in in Luna Baltics

>> limited

>> limited okay so that was also

>> yes

>> the contributing factor here

>> no not yet because we had that

>> oh okay

>> last of September so you will see that

effect in this quarter

>> okay okay

uh so more to come. Um,

and stopping maybe a little bit on these

on these divestments because you are I

mean you're an acquisition driven

company and the kind of underlying

thought is to be

eternal owner and and now you have made

two divestments.

Should we expect more of this? Because

you also have both CO and Luna are

wholesalers

uh and you have your targets on the

profitability level. Should we expect

more and how do you think in balancing

these?

>> Uh I mean we have communicated

internally as well externally to be a

long-term part of the Bman and Beaven

group you need to achieve our

profitability target of 45%. Mhm.

>> And we have set a time limit for that.

And if if the company don't kind of

improve

in a way that we feel it's is likely

that way they will achieve it, we need

to think other structural measurements

and and divestment is one of those.

>> Okay. Okay. So there might there might

be more because I assume that if you if

you look at your toolbox and you kind of

try to put the companies in in these

boxes, you still have boxes which are

done. Yes,

>> that

>> and and part of that is of course the

tougher underlying market

>> and when that will pick up uh they will

improve the profitability

uh but if that doesn't improve enough

then then we need to take other

measurements

>> and in terms of timing I assume that

because also different companies in your

portfolio have are different so they

they have different drivers so the time

>> the time that they have to fix this is

also different for the different units.

>> Yes. Yeah. Uh and then finally

maybe or not not finally but your

financial targets you have 500 million

EBIT and more than 10% margin and I

think you flagged you had those for this

fiscal year originally but you have

flagged that this this will be delayed

because of the divestment. Uh what are

your thoughts here? Yeah, the shoulda uh

deliver roughly 45 million in eBay

peranom.

So uh uh in our kind of target we

expected to acquire on the level we have

acquired so far and and not divest any

>> any businesses. So we need to compensate

for those 45 million in profit uh in a

way and that will delay uh our our our

target achievement of the 500 and I said

there will be a couple of quarters delay

in that.

>> Mhm.

>> So not more than that.

>> Yeah that's my expectation.

And then finally maybe coming back to

the margin uh because I think this

interesting it was an alltime high

margin. uh I think it surprised me at

least that you were able to keep that to

kind of get to that level and we also

said that you have kept increasing EB

day despite organic growth actually

being negative. Yes, you mean topline

has grown because you've made

acquisitions.

Uh but you've also worked on the cost

base and now maybe a leading question

but talking about volume leverage once

volumes comes back because now the

market is difficult but but it is

cyclical markets and they will turn.

I would assume that you expect quite

good operational leverage once volumes

comes back.

>> Yeah. I mean our business model the

compounder business model is is is kind

of two engine driven

>> so one engine is the acquisition engine

and that has been going on uh and that

you can see on the level as expected uh

but the organic engine hasn't been

delivered on on the level it has

actually been below the expected level

of those 5% I said so of course when the

when the market pickups and that engine

starts to move uh then we have a very

positive positive effect on the profit

uh especially since we have uh now a

much higher gross margin in those

businesses due to the kind of phase out

activities have been doing in

combination that we're taking down cost

in in many of our companies uh that we

don't need to rebuild when the market

picks up. So, so we will then have a

higher gross margin, lower cost base and

and and stronger topline and that will

of course have a positive effect on the

group as such and and it's it's easy to

say or or I mean the the the cost

there's always more to do but but would

you say that the biggest I mean now the

change in in the phase out was

structural rather than that you took out

are the main measures taken so what the

missing piece here is really the volume.

>> Yeah. Um I mean we have when we have

reduced cost in in our companies we have

done that uh with the purpose that they

should you know be benefit when the

market picks up again.

>> So we haven't deterated the business

just to reduce costs and with that said

you can always do a little bit more but

the big chunk is is done already

organically. So you shouldn't expect any

big organic cost reductions uh in in the

coming quarters.

>> Okay. So so it's just we're waiting for

for well as it stands right now

beginning of next year beginning of 26

we should see some pickup and let's hope

we see that and it'll be very exciting

to to follow.

>> Yeah.

>> Mus thank you very much for coming here

to talk to us.

>> Thank you

>> and thank you for watching.