Technology + Innovation = Sustainability David Woolley (CEO) & David Bessant (CFO) Q3 2012 Interim Report 18 October 2012 1
Agenda • Q3-12 Highlights DW • Summary of financial results DB • Economic head wind and de-stocking DW • New business, new customers DW • FY-12 Outlook DW • Q&A DW & DB 2 18 October 2012
Q3-12 Highlights Global trading conditions in our end-markets became more • difficult through the quarter globally US end-market also started to slow down • • Economic ‘head wind’ reported in Q2-12 persisted and was compounded by de-stocking of product by the original equipment manufacturers The reduction in underlying demand, combined with the • de-stocking, has created a ‘bull whip effect similar, but not as severe, as that experienced in the 2008-09 recession Sales down -18% in constant currency (Q3-12 vs. Q3-11) • 3 18 October 2012
Q3-12 Highlights (continued) Concentric has responded rapidly and decisively, using the • flexibility retained from the last slowdown The Concentric Business Excellence programme has prepared the business well to respond effectively to the current lower activity levels See ‘Economic head wind and de- stocking’ for further details of the management actions taken Q3 results achieved from these management actions • (consistent with our targets over the business cycle):- EBIT margin of 13.4% maintained Cash inflow from operations of MSEK 61 Gearing reduced to 8% 4 18 October 2012
Q3-12 Highlights (continued) New Euro 6 contracts:- • In addition to the new orders announced for Alfdex and the Concentric variable flow oil pump in Q4-11 and Q1-12, respectively: New customer – Water pumps on 13-litre Euro 6 / US EPA 13 engine, worth MSEK 74 per annum on mature volumes New customer – Fuel transfer pump on 9-litre engine, worth MSEK 21 per annum on mature volumes 5 18 October 2012
Summary of financial results 6
Q3-12 & YTD-12 Results MSEK Jul-Sep Jan-Sep 2012 2011 Change 2012 2011 Change Net Sales 492 593 -101 1,698 1,706 -8 Change in constant currency -18% 20% -4% 30% Gross income 130 165 -35 461 463 -2 Operating income (1) 63 83 -20 236 225 12 Operating margin (1) 12.8% 14.1% 14.0% 13.2% Reported EBIT 66 83 227 201 Net financial expenses -5 -4 -22 -27 Net income 45 52 143 116 Adjusted EPS (1) (SEK) 0.95 1.19 3.36 3.02 Reported EPS (SEK) 1.01 1.19 3.24 2.63 Capital employed 1,234 1,224 ROCE (1) 25.7% 22.9% MSEK 2,241 ROE 21.7% 22.2% Enterprise Net debt 78 220 value based Gearing (Debt/Equity) 8% 25% on 30-Sep-12 share price (1) Earnings before items affecting comparability SEK 49.20 7 18 October 2012
Sales & Operating margin development Strong profitability as demand Sales & Operating income margins weakens: (rolling 12 months) 22.0% 2,600 Latest market indices are still • 20.0% 2,500 predicting growth in 2012, in 18.0% 2,400 stark contrast to Q3 sales 16.0% 2,300 14.0% 2,200 As noted last quarter, market • data tends to lag order intake 12.0% 2,100 experience by 3-6 months 10.0% 2,000 8.0% 1,900 • Difficult to separate de-stocking 6.0% 1,800 effect from the underlying build 4.0% 1,700 rates 2.0% 1,600 Benefits from Concentric • 0.0% 1,500 Business Excellence programme Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 and ongoing cost management Operating margin (Actual) Sales (Actual) have been vital to sustaining Market growth (Restated) Market growth (Reported) operating margins under Sales (Constant currency) pressure from lower sales volumes 8 18 October 2012
Overview of Market indices Key messages Market data for Q3-12 (+3%*), whilst in line with last quarter, does • not seem to align with current sales and order trends from our customers Published indices for North America, in particular, do not • represent recent customer sentiment (CAT and Cummins) Agricultural machinery is the only end-market holding up (in • relative terms) Europe continues to soften from weaker sales of Construction • equipment and Medium / Heavy Trucks It is evident that part of the sales decline in Q3-12 relates to • customer de-stocking but it is difficult to quantify this effect FY-12 forecast in Q3-12 (+3%*) looks unrealistic, re-enforcing our • assertion that indices lag order intake by 3-6 months * Blended growth rate using Concentric’s sales mix by end -market and customer location 9 18 October 2012
Q3-12 Regional Results Americas Q3-12 Q3-11 Change Amounts in MSEK Net sales - total (including inter-regional sales) 289 331 -13% Operating income 33 36 -9% % Operating margin 11.6 11.1 0.5 Return on capital employed (1) 40.6 28.2 12.4 (1) The quarterly ROCE has been calculated on a rolling 12 month basis. Sharp decline in sales from last quarter and year on year • Sales in constant currency were down -16% in Q3-12 vs. Q2-12 and Q3-11, driven by a combination of a reduction in underlying demand and de-stocking experienced across all end-sectors • Average sales on a working day basis were down to MSEK 4.7 (5.3) Operating margins continue to improve • Operating margins for the quarter were up despite the decrease in sales volumes due to the benefits of the Concentric Business Excellence program and effective cost management 10 18 October 2012
Q3-12 Regional Results Europe & RoW Q3-12 Q3-11 Change Amounts in MSEK Net sales - total (including inter-regional sales) 228 298 -24% Operating income 33 47 -31% % Operating margin 14.3 15.7 -1.4 Return on capital employed (1) 21.8 20.0 1.8 (1) The quarterly ROCE has been calculated on a rolling 12 month basis. Demand continues to soften • In constant currency, sales were down -21% in Q3-12 vs. Q3-11, driven by the continued market decline and de-stocking experienced across all end sectors • Average sales on a working day basis were down to MSEK 3.7 (4.7) Operating margins under pressure • Adjusting for one-off pension items, underlying operating income and margins were 31 and 13.6%. • Under severe market pressure, the region continued to work hard to flex its cost base and maintain margins 11 18 October2012
Robust Financial Position Amounts in MSEK Q3-12 Q3-11 Comments Balance Sheet Strong working capital disciplines Working Capital 72 61 maintained As % of annualised sales 3.1% 2.9% Capital Employed 1,234 1,223 Available facilities of c. MSEK 360 Net Debt 78 220 Equity 944 876 Gearing (Debt/Equity) ratio 8% 25% Very low gearing Cash Flow EBITDA 296 263 Net CAPEX -31 -35 Cash in flow before financing 159 87 Continued strong cash conversion Dividends paid -88 - Buy-back own shares -12 - 12 18 October 2012
Pensions update As noted in previous interim reports, under the ‘corridor • method’, the Group had unrecognised defined pension liabilities of MSEK 419 (79), as at 31 December, 2011 As a result, the Group has booked pension amortisation charges of • MSEK -18 for the first nine months of 2012 Under the amended standard applicable for 2013 reporting, • 2012 ’s results will be restated to reflect the full liability (and associated deferred tax asset) in the opening balance sheet as at 1 January 2012, and reverse these amortisation charges In an effort to reduce the deficit on the Group’s UK pension • schemes, management have initiated an ongoing programme to selectively buy-out certain defined pension obligations from members using existing scheme assets, which generated curtailment gains of MSEK 8 (nil) recognised in Q3-12 13 18 October 2012
Economic Head Wind and De-stocking 14
Economic Head Wind and De-stocking Global economic slowdown worsened in Europe and Asia; the US market • moved into negative growth more recently • Engine product (early cycle) was first affected, followed by vehicle / end application of the hydraulic product • End-sectors:- Construction reduced slightly (but already at a low base) Truck markets have been impacted between 15-20% Industrial applications have reduced but are later cycle Agriculture is seasonal but has held up best in year-on-year comparisons De-stocking by our customers has magnified the impact on the demand • seen by Concentric - the ‘bull whip’ effect 15 18 October 2012
Flexible business model excels Each of our businesses has built in a range of plans and measures to • reduce minimise the effects of downturn:- Shift patterns reduced, overtime work excluded (All plants). Release of temporary contract workers (US, UK and Germany) Redundancies of permanent contract workers (UK) Short-time working / short-term lay-offs (US and India) Combined effect of these (Q3-12 vs. Q3-11) :- • Direct labour headcount reduced by 13% Maintained ratio of direct labour cost to sales Total personnel cost reduced by 12% 16 18 October 2012
Flexible business model excels (continued) Concentric Business Excellence programme – ongoing improvements have • continued to streamline processes and reduce costs without compromising customer support and quality • Importance of strong working capital disciplines continues to increase - gearing has been reduced to 8% Ongoing strategic review of manufacturing footprint – consideration of • expansion into South America, but also looking at how to maximise output and performance of our existing business 17 18 October 2012
New Customers, New Business 18
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