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2021-11-03

Concentric AB: CONCENTRIC INTERIM REPORT JANUARY - SEPTEMBER 2021

THIRD QUARTER

  • Net sales: MSEK 515 (324) - reported sales were up +59% year-on-year. After adjusting for the impact of currency (-4%) and Allied Enterprises (+6%), sales in constant currency year-on-year were up +57%.
  • Operating income: MSEK 114 (57), generating an operating margin of 22.2% (17.5).
  • Net income for the period: MSEK 91 (40); basic EPS of SEK 2.39 (1.06).
  • Cash flow from operating activities: MSEK 69 (51).
  • Acquisition: On 29 October 2021 the acquisition of Engineered Machine Products, Inc was completed for a purchase price of MSEK 1,260 on a cash free, debt free basis however, taking on equipment finance leases of MSEK 37. The deal was financed using MSEK 1,072 of debt.

FIRST NINE MONTHS

  • Net sales: MSEK 1,420 (1,122) - reported sales were up +27% year-on-year. After adjusting for the impact of currency (-9%) and Allied Enterprises (+6%), sales in constant currency were up +30%.
  • Operating income: Operating income was MSEK 316 (172), generating an operating margin of 22.3% (15.3), operating margin before items affecting comparability was 22.3% (17.1).
  • Net income for the period: MSEK 248 (117); basic EPS of SEK 6.54 (3.11).
  • Cash flow from operating activities: MSEK 217 (219).
  • Group's net debt: MSEK -136 (-69); gearing ratio of -10% (-6). A reduction in pension liabilities compared to December 2020 continues to drive the negative net debt.

President and CEO, David Woolley, comments on the Q3 2021 Interim Report.
Acquiring EMP is a landmark transaction and a step change in Concentric's electrification strategy as we dramatically increase our capacity, technological know-how and product portfolio to accelerate our growth in electrical products and systems.

Transformational acquisition to support the e-Pump electrification strategy

Concentric announced on October 26, 2021 the acquisition of Engineered Machined Products, Inc. ("EMP"), a leading US producer of electric and mechanical water and oil pumps, electric fans, thermal management systems and precision machined components for MSEK 1,260 (MUSD 147) on a cash and debt free basis, however, taking on MSEK 37 of equipment finance leases. The acquisition is a transformational event as it significantly strengthens Concentric's capabilities in electrical products including electrical fans, oil and water e-Pumps and will increase the Group's revenues by more than 50% on an annual basis.

The entire consideration was paid in cash and the transaction was completed on October 29, 2021. The deal was financed using MSEK 1,072 of debt, with the remainder being funded from existing cash reserves. The debt is made up of a new MSEK 858 term loan facility with the remaining MSEK 214 drawn down from an existing revolving credit facility.

EMP is predominantly active in North America enabling significant growth opportunities by expanding their geographical reach through our global presence and sales force. As EMP also has relationships with a number of key customers in Concentric's markets, the combination of the two companies increases the combined value proposition to these customers and provides Concentric with access to new customers

and platforms in our current markets.

Concentric's focus remains to develop world class technology with innovative solutions that meet the sustainability needs of our customers. As transport systems and support infrastructures move to a CO2 neutral future, there are several competing technologies with fuel cells, battery and hybrid solutions. With EMP's product portfolio Concentric can offer its customers products that are universally applicable regardless of the preferred technology. Concentric now have the capability not only to be a great e-Pump supplier, but also to supply the entire pumping and cooling modules for vehicles and machines, a full solution provider.

EMP has been family owned for 30 years, and it is with great mutual respect that we now embark on this exciting journey together. I'm impressed by the employees and leadership at EMP and I know we have a close cultural fit that will be critical to our future success.

Market and sales development

Group sales in constant currency and excluding Allied Enterprises were up +57% year-on-year for the third quarter and +30% for the first nine months of the year. Reported sales, for the third quarter and the first nine months of the year were up year-on-year +59% and +27% respectively. Published market indices blended to Concentric's mix of end-market applications and locations suggests the market remained flat year-on-year for the third quarter 2021. The same market indices suggest market growth for the first nine months of 2021 when compared to a year impacted by the global pandemic was +39%, with Europe and rest of world continuing to perform stronger than the Americas.

Our reported sales this quarter are MSEK 42 or +9% higher than the second quarter of 2021 and demand from our end market applications remained strong throughout the third quarter. The general industry supply chain has continued to struggle to meet this new level of demand, resulting in a further increase in our sales order backlog. We have continued to manage our customers near term product demands, however, we now expect the disruption in the supply chain to continue into the first half of 2022.

Concentric Business Excellence - managing operating margins and cash

The global market continues to recover from the pandemic quarter-on-quarter and the increase in demand from our end market applications continues to drive inflationary pressures within the industry supply chain. Our commercial teams, working through the Concentric Business Excellence program, ensured we were able to pass on these cost increases to our customers, albeit with a quarters delay. This has ensured the operating margin before items affecting comparability remained at strong levels for both the quarter, 22.2% (17.5) and the first nine months of the year, 22.3% (17.1%).

Cash flow from operating activities for the period was MSEK 69 (51) with an adjusted operating income to operating cash conversion ratio of 76%. As sales grow, so does our working capital investment and during this quarter there was a further quarter-on-quarter increase of MSEK 40, driven by an increase in inventory. With all of the uncertainty in the global supply chain Concentric increased the stock of critical components to ensure we continue to meet the needs of our customers.

Cash and cash equivalents increased to MSEK 608 (659) following a strong trading quarter and after receiving both a dividend payment and a loan repayment from Alfdex, our joint venture with Alfa Laval, which combined amounted to MSEK 59.

Outlook

Market indices suggest that production volumes blended to Concentric's end markets and regions will be up +18% year-on-year for 2021, up +2% on the previous forecast and demand from our customers for both our engine and hydraulic products continues to improve quarter-on-quarter.

The availability of critical raw materials will continue to influence our sales during the fourth quarter and into 2022 as our industry supply chain stabilises to meet the new market demand. The ongoing shortage of raw materials and components continues to have an inflationary effect, both from the metal indices and general supplier economic price increases. We have been successful passing these cost increases onto our customers, albeit with a quarters delay, and we will continue to pass on costs increases to our customers during the fourth quarter of 2021 to maintain our strong trading margins.

The orders received, and expected to be fulfilled during the fourth quarter of 2021, were broadly similar to the reported sales for the third quarter of 2021. We also expect the majority of the sales order backlog, predominantly relating to our North American businesses, will be supplied to our customers during the first half of 2022.

Concentric results for the fourth quarter will contain two trading months of the recent acquisition, EMP, who currently forecast full year revenues of about MSEK 1,095 and an adjusted EBITDA of about MSEK 147. There will of course be an element of seasonality to the final two months of EMP's trading due to the festive season.

Concentric remains well positioned both financially and operationally, to fully leverage our market opportunities.

For further information, please contact:
David Woolley (President and CEO) or Marcus Whitehouse (CFO) at

Tel: +44 121 445 6545 or E-mail: info@concentricab.com

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