Addnode Group AB (publ) (ANODB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Addnode Q2 report for 2021. Today, I am pleased to present CEO, Johan Andersson; and CFO, Lotta Jarleryd. [Operator Instructions] I will now hand over to Johan Andersson. Please begin your meeting.

Thanks for that introduction, and welcome all to the presentation of the Addnode Group interim report for the second quarter. And previously stated, I have with me also the CFO for Addnode Group, Lotta Jarleryd. Could we please move to the slide with the agenda. For today, we'll give you an introduction of the interim report with the full group, Addnode Group, digging in a little bit more to the 3 divisions. Also talk about the cash flow and the financial position, a little bit about our acquisition strategy, sustainability, summarize our investment case and then open up for Q&A as well. Before we do that, I would like to give -- moving on to the next slide, Addnode Group, and give a short introduction to Addnode Group for those of you who are newcomer to Addnode Group. We are a group of companies creating sustainable growth in value by acquiring and developing cutting-edge enterprises that digitalized society. We are organized in 3 divisions, providing the digital solutions, Design Management, Product Lifecycle Management and Process Management. Our group net sales is almost SEK 4 billion. We have a business model with 67% recurring revenue from our software and services of a recurring nature, adding to that. We are predominantly doing business in Northern Europe, and we are located also in Asia, Australia and U.S. With that, I would like to move on to the next slide, Addnode Group. Signifying second quarter was growth, improved earnings and better market conditions. The group operations performed well during the second quarter of 2021 and noted higher demand in several areas. Customers in the manufacturing and automotive industries once again showed a greater willingness to invest. The British market is showing signs of recovery, which is favorable for the businesses in Design Management and Product Lifecycle Management. Demand for the Process Management division's solutions and service for the public sector remained good. Net sales increased by 18%, of which 14% was organic adjusted for currency movements. Our subsidiaries are continuing their successful work on generating new business. Organic growth in all the divisions shows that customers appreciate our digital solutions and that industrial customers have gained a willingness to invest. The EBITDA increased by 75% to SEK 98 million, and we strengthened the EBITDA margin to 9.8%. Recurring revenue is providing a stable foundation for earnings and accounted for 65% of net sales. The earnings improvement is mainly attributable to the Product Lifecycle Management divisions, but the Process Management and Design Management division also had good earnings improvement. So good contribution from all divisions. The cost-cutting program that was initiated in the division Product Lifecycle Management a year ago, has been carried out according to plan and adding to the results improvement. With that, I would like to move on to the next slide, growth in recurring revenue. Compared to second quarter 2017, looking to the left side of the slide, we have almost doubled net sales and the majority of that coming from growth in recurring revenue directly related to software. Many customers have been with us for a very long time, meaning that a lot of the services also are of a recurring nature, even though we don't recognize that as recurring revenue. Looking specifically at the second quarter, if we break down net sales. License revenue increased with 44% to SEK 62 million, adding to the margin improvement. Recurring revenue increased with 18% to SEK 653 million. Service revenue increased 14% to SEK 271 million. And the share of recurring revenue, as I stated earlier on, was 65% of the total net sales. And moving on to the next slide, 3 divisions. We are 3 divisions in Addnode Group contributing to the Addnode Group. And as you can see, and they are fairly similar in size, but we -- the biggest one is to Design Management in sales and the big one in EBITDA is Process Management, reflecting the different margin in the divisions. So if we move on to the next slide, Design Management. Organic growth and improved market conditions. Design had an organic growth of 16% in the quarter, and the EBITDA margin was stable during the second quarter. We have won new businesses for design and BIM systems in both the Nordic countries and the U.K. market and demand for digital facility management systems has improved. Net sales increased during the second quarter to SEK 493 million (sic) [ SEK 439 million ], representing growth of 16%. EBITDA increased to SEK 40 million, corresponding to an EBITDA margin of 9.1%. The acquisition of the Irish company Procad in June 2021 further expands the group's geographic presence. So a stable quarter for design with good organic growth. So moving on to next slide, Product Lifecycle Management. PLM had a significant improved EBITDA and better market conditions. Organic growth of 13% and strongly improved earnings. Net sales increased to SEK 299 million. The level of activity and customers' willingness to invest are even better. This is clear, especially in the manufacturing industry in Germany and the U.K. where companies are once again investing in new licenses. We can see continued favorable demand in the Nordic countries, Benelux and Germany. The restructuring program has yielded the intended cost savings and the EBITDA increased to SEK 27 million compared to minus SEK 9 million last year, and the EBITDA margin strengthened to 9% being negative last year for the comparable quarter. So moving on to next slide. Process Management had good organic growth compared to historical, and net sales increased with 31% to SEK 268 million, and the EBITDA increased also with 30% to SEK 48 million. Demand for the division's solution for documents and case management, citizen services and municipal technical systems and other systems services remained good during the quarter. The division is positioned for public sector tenders and have attractive digital solution, providing it for customers and -- a solid experience and good references. That's also one of the things that drives the organic growth for the business, a strong offering. One example is the order from company called Apoteket, you can translate it to the pharmacy. It's an offspring from the deregulation of the public pharmacies in Sweden that stretches over 5 years where we will deliver a support system for prescription, processing our drugs for retail pharmacies and dose dispensing, spanning a 5-year product. So that's just an example of what we can do for our customers and the time range and the long-term commitment from our customers. So a good solid quarter with the organic growth that sets out this quarter for Process Management. So with that as an introduction to the business, I would like to hand over to Lotta, our CFO, who will walk you through the cash flow and the balance sheet.

Thank you, Johan. I would like to start with an overview of the consolidated cash flow for the second quarter. The operating cash flow in the second quarter amounted to SEK 51 million. The lower operating cash flow compared to previous year was attributable to lower contribution from working capital. Previous year, temporarily improved payment terms from certain suppliers and customers had a positive effect on cash flow. Also, the decline in business activity previous year due to the COVID pandemic temporarily created tied-up capital. The share of account receivables that was overdue by the end of June 2021 was, however, lower than before the COV19 pandemic, and we haven't suffered any significant credit losses. With regard to cash flow from investing activities of SEK 272 million, the amount primarily referred to the 3 acquisitions executed during the second quarter. S-GROUP Solutions, Elpool and Procad. The financing activities in the second quarter primarily related to 3 topics: repayment of previous credit facility and the corresponding rate of bank borrowing under the new agreement, leasing and dividend. With regard to the new credit facility, I will come back to that in more detail a little bit later. In the second quarter, the dividend of SEK 2.5 per share was distributed to the shareholders in line with the AGM's decision in May 2021. The total amount distributed was SEK 84 million. Previous year, no dividend was paid out as a consequence of the uncertainty regarding the COVID-19 dynamics progression. Next page, please. I would like to continue with a few comments on the balance sheet. And we continue to operate supported by a resilient balance sheet. We had a strong cash position as of June 30. Also we had financed the predominant part of the acquisitions this year by available cash funds. In June 2021, we entered into a new multicurrency credit facility agreement of SEK 1.6 billion with Nordea and SEB. The credit facility can be used for financing existing debt, acquisitions and general corporate purposes. It replaces the previous acquisition and credit overall facilities in Nordea of SEK 1.1 billion in total. The expansion of the credit facility of SEK 500 million strengthens our capacity to acquire and develop businesses even further. Out of the total credit facility, the SEK 761 million was utilized as per 30th of June. Please note that the utilized portion of the new credit facility has been classified under noncurrent liabilities. The previous credit facility was classified under current liabilities as its maturity date was 30th of June 2021. Net debt was at SEK 396 million, and the unutilized available credit facility was SEK 839 million. With regard to equity, I would like to mention a couple of things. Firstly, equity was increased by the SEK 54 million in connection with the issuance of the 204,802 new Class B shares as part of the total purchase price for S-GROUP Solutions. And secondly, following a resolution by Addnode Group's 2021 AGM, a long-term incentive plan for managers and senior executives has been launched. In June 2020, 195,800 call options for Class B shares were issued to some 60 participants. The market-valued call option premium of SEK 29.8 resulted in a total purchase price of approximately SEK 6 million, which has been applied to the group's shareholders' equity. There was no dilutive effect in earnings per share for the period since the call options exercise price was below the share price as at 30th of June. The equity ratio was 39% and return on shareholder equity was 12%. Other larger changes in the balance sheet items from December 31, 2020, mainly refer to recent acquisitions as well as the organic growth of operations. Over to you, again.

Thank you, Lotta, for that. So moving on to the next slide. Acquisitions 2021 year-to-date. Addnode's strategy is to create sustained growth in value by acquiring and developing cutting-edge enterprises that digitalize society. To date in 2021, we have carried out 3 acquisitions: S-GROUP Solutions, Elpool and Procad. Together, these companies had annual sales of approximately SEK 200 million, most of which is recurring revenue. Our good cash flow and strong balance sheet, combined with the credit facility that was expanded, earlier explained by Lotta, by SEK 500 million, allows us to continue executing our acquisition strategy. Moving on to the next slide. Acquisition 2020, showing you the example of the 4 acquisitions we did in 2020, adding almost SEK 600 million net sales to the group and good business and expanding our operations. So with that, I would like to move on to the next slide, long-term sustainability. There is clearly a great need for digital solutions in a number of areas as sustainability demands are rising in businesses and society in general. We'd like to give you some examples of what we are doing in helping us making that happen. For example, our digital solutions make it possible for city planners, architects and product developers to design more sustainable products, properties and infrastructure. We also provide digital twins of machines or a vehicle, but also of a building, a tunnel, a bridge or an entire city that enables more structured life cycle planning simulations. Our case management system for public administration support the provision of services that meet citizens sustainability expectations while also complying with legal requirements. It is with pride and responsibility that Addnode Group is contributing to the creation and administration of a more sustainable society. For us, our 5 focus areas for our efforts in this area are what I explained earlier, our digital solutions that contribute to sustainable development, that's the foundation of what we actually do. But that we care for people and the plant in our own operations. How we work with our partners and suppliers. We must be long-term financially strong in order to make this happen, and we need to have a structure for sustainable management and governance. When adopting our work to the UN Global Goals, we have identified 6 goals with the closest connection to Addnode Group's focus areas. Good health and well-being, gender quality, decent work and economic growth, industry innovation and infrastructure, sustainable cities and communities and climate actions. The work is now being continued with in line with our decentralized management structure, where our companies are taking great personal responsibility with the support of Common Group guidelines, and we will report the progress on the goals that we are in the process of defining. So more to come in this area and something that is not separate what we are doing, but in very much a way things we are doing. So with that, I would like to move on to the next slide, Addnode Group as an investment. So in summary, I believe that our strategy and business model is valued for creating value for our shareholders. We see primarily 4 components that drive value growth in the annual Group. The first component is our acquisition-driven growth strategy where we create sustainable value by continuously acquiring new businesses, but also actively supporting our acquired companies to drive organic growth. So far, we have done 3 acquisitions in this year, and we have completed more than 60 acquisitions over the past 15 years, thereby both building extensive experience and refining our processes over time. We have grown with good profitability. The average growth in net sales over the last 10 years has been 14%. The second component is our focus on sustainable digital solutions. Our solutions for design, simulation, product data information and case management meet global trends and digitization, urbanization and sustainability. The regulatory development also takes even higher demands on transparency and traceability. We also see that the pace of the digitalization has increased further during the COV19 pandemic, both in the private and the public sectors. The product component in our strategy is our business model, which means that approximately a 65% of our net sales consists of recurring revenue from the software and SaaS solutions that we provide to our customers. But 1 could argue that our services are of a recurring nature as well as the customers often return for advice, further development or integration with other systems. We also have a strong cash flow generation, thanks to a large proportion of advanced payments at the beginning of the year and the low need for investment in addition to product development. The fourth and final component is the diversification across markets and customer categories, which provides a good spread of risk. We are active in several geographical markets. We have customers in both the private and the public sectors, and we have customers in many different industries. We are not dependent on individual customers, but we have built many long-term customer relationships. So with that, I would like to open up for Q&A. And thank you for listening.

[Operator Instructions] We have a question from the line of Daniel Thorsson from ABG.

First question, obviously, on Process Management, 13% organic growth in the quarter. What is really sustainable in that growth? And also given that margins remain stable versus previous quarters despite the high growth, would we have seen a slightly lower margin in the case organic growth would have been more in line with historical low single-digit growth?

Thanks for the question. Looking at organic growth, 13% for the quarter is something that stands out. And historically, it has been more close to probably 2%, 3%, 4%. And I think going forward, you shouldn't expect that we can deliver 13% every quarter. We are happy that we have done it and there are good reasons for that. So -- but we can't deliver that going forward. But I think -- but it's still a sign that we are doing better with regards to organic growth than we have done historically. And let's see where -- what we sort of -- what kind of pace we can set. But I can and will not promise that we will continue to deliver that high organic growth going forward. But we have done some good deals and some projects. And so that explains that. And going back to your second question around margins, sometimes when you drive growth, it also -- you have to make some investments. So we are happy that we can still continue that growth. It probably would have been the other way around if we hadn't been sort of -- hadn't a sort of a normal organic growth then we would have continued to work in on the margins.

Okay. Okay. I see. So then margins could have been around 17%, 18% anyway, it sounds like.

Yes. So we didn't need sort of -- how should I say, we didn't need a organic growth in order to keep the margins at the same level.

I see. And what specifically was actually driving the 13% growth in the quarter?

Both that we can see that we are doing good in the projects that we are, and then there are some specific deals make in -- some of the companies make that sort of landed in this quarter.

Okay. I see. So some timing effect. How about the market? Has that accelerated at least a few percentage points?

We can say, yes, the -- if any -- it's not getting sort of work. We had a quite a good market during the whole year, the whole pandemic, so to speak, with the offering that we are having for the public sector being technical infrastructure to municipalities and case management system to still afford this. That market is still good.

Okay. Okay, I see. And then my second question on central costs in Q2, they were SEK 17 million. That was some SEK 5 million higher than normally. Any reason for that or any nonrecurring items in that figure?

Yes and no. What I mean by that is that you will find that we have costs for acquisitions in the second quarter related to that we have been -- really done pre acquisition, and then I include the one that we did for S-GROUP as well that sort of landed in between the first and second quarter. And then we have also made some investments in group policies regarding different things that sort of needed to be done. So some of them are not of recurring nature but -- of recurring nature because we will continue to do acquisitions, but that's mainly consultancy cost for externals. And some costs will, of course, have to increase as we are growing bigger and bigger. So...

Okay. So around the SEK 10 million or slightly above going forward, excluding an acquisition-related cost sounds reasonable, still.

Yes, it needs to -- we need to grow. We can't continue to be -- we will continue to be sort of a slim organization, but we need to add as we grow.

Okay. Fair enough. And then on PLM, the cost-cutting activity you made in 2020, they were to slim the organization post a couple of good years that grew the business significantly versus 5 years back. Do you feel comfortable that PLM will come out post the pandemic with potentially higher margins than we saw before of around 8%, 9%?

Let's see that happening. So I thought we need -- I think we should be happy what they have performed and what they are doing. And there are potentials to do more than 8%, 9%, but there's also a timing effect, how long it will take. Because normally, when you do this, you need to land the organization here, and so to speak, and then start working again. So I think in the near time -- so long term, yes. Short term, I think we need some time to make that happen.

Okay. Okay. I see. The final question to Lotta, I guess, touching on cash flow. We see a changed pattern here versus previous year. So with strong cash flow in Q1 and first half of the year. Can you again just touch upon the relatively weaker cash flow this year and the working capital pattern?

Yes. I mean, firstly, the cash flow is more or less the same as in 2019 for the first 2 quarters. So I think that 2020 was exceptional year driven by the pandemic and all the measures we took in connection with that. And as we also have mentioned before, I mean, we got some improved payment terms for some of our suppliers and also some of the customers, they gave us some more time to -- dated earlier than they had to. Also, I mean, last year, the business was -- it was -- I mean, there was less activity during a certain period, and then the tied up capital, obviously, also became lower. So now when we are growing again, of course, we are binding a little bit more capital. But I wouldn't say it's a big change from the year before the pandemic year.

Okay. So it's more the comparable year in 2020, that is abnormal?

Yes, I would say that.

Our next question comes from the line of Daniel Djurberg from Handelsbanken.

My first question would be on M&A. You have your gun well loaded for bolt-on acquisitions or larger ones. And my question is, would you prefer doing a larger acquisition compared to a number of smaller ones? And also if you can touch upon geographies for preferred public or for private end markets and so on. And I think we continue to favor Process Management, we will so, of course, the S-GROUP and Elpool recently. And also the pricing environment that you see if it's very hard to get a deal done given quite high valuations.

Thank you, Daniel. Starting with large and small. I think we will continue to do what some people consider small acquisitions because that is something that it could still be very value creating and adding to our businesses. So -- but at the same time, we are also looking at, for us, bigger acquisition. For us, bigger acquisition is the one, for example, we -- when we acquired Excitech, SEK 600 million in net sales. S-GROUP Solutions was a good add-on margin-wise. So we are always looking at that. But at the same time, we have found a way of continuing to adding what some people would consider small. So we're doing both, and we're looking actively at both. The smaller ones is easier to sort of to do because it's not as strategic. The smaller -- the bigger one is probably longer decision processes. So we'll -- in short, we'll do both. Looking at geographies, we are actively now in Northern Europe. So we are constantly looking in all the geographies we are there today. And that means that we have the Nordic countries, Benelux U.K., Germany and the neighboring countries. And it could be also with some of the business that we have today we could go outside of that. But then it needs to be something that we are doing today because we have sort of a strategy where we say we don't do 2 new things at the same time. We don't go into a new geography with the new offering. We go to a new geography, it's with something that we know of. But you should expect us doing acquisition in Northern Europe. And if we go outside of that, it needs to be with something that we sort of know of already, business. And then the pricing. Pricing has definitely gone up to last year for well-run software companies having high RRR going forward, the pricing is definitely up. Looking at the more partnership-based businesses that the pricing is still okay. For us, it means that if we historically have been paying around 5, 6x operating profit for pure software companies, we need to expect starting to paying around 9x operating profit. And you know the pricing for some of them are even higher, and then we say no, thank you. So the pricing has gone up, but it's -- compared to our own valuation, it's still possible to do fair acquisitions.

That's great. And if I may, question on -- perhaps for Lotta, a little bit what you see and expect from salary increases and possible employee turnover. I guess you're a bit more shelter than pure IT consultancy companies, but I mean what should we expect to see here in perhaps hopefully post-COVID environment?

What we can say right now is that the competition increases again. I mean it's been a period here where we have had easy to find people, but now the competition is tougher again. And of course, we are competing about the same resources in many of our operations. So that is what a lot of IT companies needs today. In terms of salaries, I mean I think we can -- we hope that we can stay on more or less the same level with the annual increases that we have had seen before. But of course, for very sort of high-end competencies, we probably need to pay more. And we have done in the past.

So -- and just adding to it. I think compared to -- as we are having a lot of companies that are not sort of located in the central parts of the different countries that we operate means that the competition is probably a little bit lower compared to foreign companies here in Sweden. If you are located outside of Stockholm or in Stockholm, of course, it has an effect. But we -- as Lotta said, we are fighting about the same competition. And what we can see is, like you said -- Lotta said, coming this -- after the summer, we expect, as the economies open up, people will start to move in.

Would you see it as hurdle that might impact your growth ambitions? Or is it more harder work to recruit and it might hit the margins instead worse case a bit?

As of now in the second, it's something that we need to handle. It's not something that will stop us what we normally would have to handle in our line of business.

Yes. And my last question would be a little bit if you see any changes in the scope from -- yes, to Autodesk in terms of what have they defined and target direct sales versus indirect sales and if the balance is well kept, so to say, in your view?

Short answer, no. We're still having good relationship with them. And I think the best way of making us relevant is continue to show the growth that we are.

[Operator Instructions] We have a question from the line of Fredrik Nilsson from Redeye.

One question on the demand in Design and the PLM. Is it largely back to pre-COVID levels? And is it -- are there any areas lagging behind?

Thank you for that question. I think if you looking at -- you have to separate it a little bit. If you're looking at the Nordics is sort of, I don't know, we will say it's better, but it's been a stable situation for the last year, for us, meaning that the demand is there. Looking at the U.K. market, it's opening up. People are coming back to offices have been good. So I wouldn't say that it's back to COVID -- pre-COVID the U.K.'s depth, but still good. Looking at the German market, it's better, but it's still not sort of back to where it was before the curve was broken by COVID. So they're better markets, but still not back to where it was in 2019.

Okay. And one follow-up there. Do you think that the difference between the countries is mainly related to the general market rather than your performance?

General market, I would say, where -- because with general market, the difference -- I'm sorry, to sort of split that in two the general market are different conditions. But we are -- having said that, I believe that we have performed better than the competition in the German and the U.K. markets.

There are no further questions registered, so I hand back for any closing remarks.

Okay. So -- sorry, I was waiting for another question. Then I realize it was up to me. So thank you for all the questions and the interest in Addnode Group. And with that, we would like to wish you a good summer wherever you choose to spend it. So thank you, and talk to you later.

Goodbye. Thank you.