Tomas Billing’s comments in Nordstjernan’s 2018 Annual Report
2018 – a mediocre year for Nordstjernan, but we outperformed the stock market
In 2018, revenue for the Nordstjernan group increased nearly 20 per cent, and profit more than doubled compared to the previous year. Are we kicking up our heels? Drinking champagne? No, unfortunately the profit and loss account does not reflect how things really went for Nordstjernan.
The more relevant metric total return on net asset value was +0.2 per cent in 2018. That is not much to boast about, but the Stockholm stock market fell nearly 5 per cent during the same period. And outperforming the stock market by 5 percentage points is really good. Over the past twenty years, net asset value has increased 14 per cent a year compared to 8 per cent for the stock market.
The main reason why total return in 2018 was not more than +0.2 per cent is that three of our construction-related listed holdings – NCC, Nobia and Ramirent – generated a negative total return of 15 per cent on average. Net asset value was nevertheless unchanged because other holdings posted very good performances, with rising market values as a result. For example, the profit from our largest holding in market value terms, Rosti, increased 20 per cent to SEK 415 million. The relatively new acquisition Dacke Industri also performed well – profit doubled to SEK 170 million. These two holdings together with Etac are now each valued at as much as or more than our holding in NCC. When I started at Nordstjernan in 1999, NCC accounted for a full 80 per cent of net asset value.
NCC – new CEO, revaluations and IFRS
As NCC’s chairman, I led the Board’s work of finding a new CEO. To provide some background, in 2017, the Board realised that NCC was not developing in the right direction and profitability was too low. In October 2017, the Board therefore dismissed the then CEO and launched a recruitment process to find a new one. In January 2018, Tomas Carlsson was appointed CEO of NCC, and he assumed his duties in May. Tomas was previously CEO of Sweco and prior to that worked for more than twenty years at NCC. In 2018, Tomas focused on building a good team that will take NCC to the next level. Among other things, this entails a sharper focus on profitability in its main operations, construction projects.
During the summer and autumn of 2018, NCC analysed all of its major construction projects and all of the big balance sheet items. The review resulted, unfortunately, in revaluations of nearly SEK 1.6 billion, an alarmingly large figure.
How could the figure be so large? Obviously, it is because NCC did not develop as planned, but this has had a larger impact on results than at many other companies since NCC’s profit and loss account and balance sheet are affected by judgements about the future. Anyone who has read my previous Messages from the CEO knows that I have criticised IFRS accounting standards, in part because these regulations force executive management to base profit recognition on judgements about the future. That is true of many aspects of accounting – for example, how disputes should be recognised in the books. But perhaps by far the most difficult matter of judgement is the percentage of completion method used to recognise revenue in construction projects.
Assume that NCC will build a tunnel and that it will take three years. Assume for simplicity’s sake that it will cost SEK 900 million and an equal portion will be built in all three years. In that case, NCC will recognise revenue of SEK 300 million each year and realise a third of the total profit on that revenue each year. After one year, management will assess whether the work is proceeding as planned – in other words, whether their project calculations hold. This judgement will then be examined by the Board of Directors and auditors.
In hindsight, it is easy to say that the judgements NCC made related to projects, disputes and other matters in a number of cases were overly optimistic, although at the time they were considered realistic and were made to the best of people’s ability. This shows the difficulty of IFRS, where judgements play a major role.
After a review of operations, NCC launched an extensive action programme to improve profitability in 2018. Among other measures, it includes the sale of operations, the closure of units that did not deliver results, and a programme to turn around units operating in the red. Leadership has been enhanced through changes in the executive management and at the level of head of business units. NCC has also improved processes involving tender offers and project follow-up and has launched a broad training programme for project managers.
Nordstjernan has great faith in NCC’s new team and believes these measures will bear fruit. Both Nordstjernan and I as a private investor increased our shareholdings in NCC during the autumn.
Dacke Industri – turnaround completed
The holding that has had perhaps the best performance in recent years is the hydraulics company Dacke Industri. In January 2016, we acquired the then PMC Group from a consortium of banks that had taken over ownership of PMC shortly before. The consortium wanted to find an active owner that could provide PMC a long-term home. Although PMC had had a negative profit trend for a number of years, we believed there was great potential. We had Börje Vernet, PMC’s former CEO, in our group, and he was willing to assume responsibility for trying to implement a turnaround.
PMC’s Board of Directors and executive management also saw an opportunity to use PMC as a platform for a group of companies that acquires and develops innovative technology firms using a decentralised model. We changed the name from PMC to Dacke Industri to signal this new direction. We also took Johnny Alvarsson, former CEO of Indutrade, on board as chairman.
The investment in PMC/Dacke Industri has been a success, and in three years operating profit has gone from virtually zero to SEK 170 million. In the last year alone, profit doubled. The ugly duckling has grown into a white swan. And CEO Börje Vernet should be given high praise for this work. On 1 January 2019, Börje Vernet (who retired) was succeeded by Lars Fredin (former CEO of Konecranes Lifttrucks). With this turnaround work behind us and a new management team in place, we hope that we will be able to develop Dacke Industri further, in part through new acquisitions.
Rosti – record profit
The plastic injection moulding company Rosti also turned in a positive performance for 2018 (profit increased 20 per cent) and solidified its position as Nordstjernan’s largest holding in terms of net asset value by delivering record revenue and profit. The company has positioned itself as a partner for demanding global customers, and its success in 2018 is a result of projects launched several years ago.
But there are clouds on the horizon. Many of Rosti’s customers have large sales in the US, with deliveries from Rosti’s factory in China. If the trade war between the US and China escalates in 2019, it could hit Rosti hard. I believe trade is an important driver for prosperity – both for Rosti and for the world.
It has now been 14 years since Nordstjernan bought GP Plastindustri, the company that was the starting point for the Rosti we own today. We then appointed Mats Heiman as the company’s chairman. In his 14 years as chairman, Mats has taken Rosti from a small, local plastics manufacturer with SEK 300 million in revenue to a global production partner for the most demanding customers with revenue of SEK 3.9 billion – an incredible journey.
In 2018, Mats chose to hand over the baton for Rosti. The new chairman as of the summer of 2018 is Khashayar Nikavar, one of our talented colleagues, who today is also responsible for the Unlisted Holdings business unit. Mats and Khashayar have worked together with Rosti since 2014, and we are pleased to have found an internal successor, which ensures long-term continuity and stability at Rosti.
Net asset value is increased by profit
In the section above about Dacke Industri and Rosti, I described how the profit from these companies has increased. But my work at Nordstjernan has been focused on increasing net asset value. It is satisfying, though not particularly surprising, to see that increased profit leads to increased net asset value.
Sale of the year – Ekornes
But Nordstjernan is working not just to increase profit in our holdings. We also carry out business deals. In the autumn of 2007, Nordstjernan made its first investment in the Norwegian company Ekornes, the largest furniture manufacturer in the Nordic region. In the summer of 2018, eleven years later, we accepted the Chinese furniture company Qumei’s offer on the company. We received nearly SEK 1 billion through the sale. We realised that the price was attractive and that Qumei was a good industrial owner. A total of about 98 per cent of Ekornes’ shareholders were of the same view.
Nordstjernan has extensive and good experience working together with other families that control companies. The same is true of Ekornes; throughout our period of ownership, we had a close, constructive partnership with the Ekornes family.
As an owner of Ekornes, with our share of ownership amounting to 17 per cent, our focus was on long-term value growth. During the last two years of our ownership, Nordstjernan’s employee Nora F. Larssen played an active role as chairman to accelerate the pace of the change work. In our agenda as an owner, we focused on creating greater cost-consciousness in an environment with high profitability, establishing Ekornes in the rapidly growing mid-price segment through the acquisition of the Southeast Asia-based company IMG, putting a more effective capital structure in place and once again creating growth in the highly profitable Stressless product area.
With the benefit of hindsight, we had good success with the first three priorities but not quite as much with creating growth again. Our annual return on the investment in Ekornes was about 10 per cent. That is decent for an unleveraged company in a demanding environment for listed companies.
Investments in health
A growing health trend has long been discernible in large parts of the world. Many markets are affected, in the production of both goods and services. As a result of scientific advances and greater focus on health, people are increasingly healthy and living longer. But in some situations and phases of life, professional care is nonetheless needed and there are growing demands for accessible, high-quality, individually-oriented health care activities. Nordstjernan sees a great need in the future for expanding private-sector health care operations.
Since 2007, Nordstjernan has owned Etac, an unlisted global company that manufactures technical aids for people with reduced mobility. Etac has performed well and today is Nordstjernan’s second largest holding in value terms.
In 2015, Nordstjernan invested in the listed health care company Attendo, and today we are the company’s biggest shareholder. In its first few years as a listed company, Attendo performed better than we and the market expected. The share price more than doubled. However, recently, the share price has fallen sharply since Attendo faces considerable challenges.
In 2017, we acquired the majority of shares in the unlisted primary care company Lideta. In early 2018, Lideta in turn acquired the maternity and child health care services company Mama Mia, which today constitutes a separate business unit at Lideta.
As a result, Nordstjernan has three separate, important holdings in the Health sector – Etac, Attendo and Lideta. The two other sectors that we have numerous holdings in are Construction & Real Estate and Manufacturing.
Tomas Billing hands the job over…
In May, I will leave my position as CEO after twenty years in the same job. I will then take on the role of senior advisor at Nordstjernan.
A great deal has happened in these twenty years. In many of my Messages from the CEO over the past two decades, I have tried to spotlight a topic without a direct impact on business at Nordstjernan. These have been diverse topics such as IFRS, gender quotas and the lack of legal certainty.
…to Peter Hofvenstam
The person taking over as CEO is Peter Hofvenstam. Today he is Deputy CEO, and he has also worked for twenty years at the company, so to say that he knows the operations is an understatement. I wish Peter great success.
I would also like to take the opportunity to thank all our employees, both at Nordstjernan and at our holdings, for twenty fantastic years as CEO. I am proud of what we have achieved.
Stockholm, 11 April 2019
Chief executive officer