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

Ladies and gentlemen, welcome to the Addnode Audiocast for Teleconference Q4 2021. [Operator Instructions] Today, I'm pleased to present Johan Andersson, CEO; and Lotta Jarleryd, CFO. Please begin your meeting.

Great. Thank you for this introduction. I'm Johan Andersson, the CEO of Addnode Group. And like you said, with me I have Lotta as well. And we'd like to present the Q4 report today. And so in the presentation, so probably we'll just move to the agenda slide. And today, we would like to walk you through a short introduction to Addnode Group. I think most of you are familiar with us. But -- and then we'll spend most of the time on Q4 2021 and a little bit of -- about acquisitions, sustainability and our focus area and investment case and then open up for Q&A. So let's move to the slide with -- 4, Addnode Group. For you who are new to us, with Addnode Group, we provide digital solutions for a sustainable future, and we do that in 3 -- and organized in 3 divisions, Design, Product Lifecycle Management and Process Management. And in Design, we do software for design, construction and facility management, and we provide services as well. in the Product Lifecycle Management, it's software for simulation, design and taking care of all the product data that is being created during the design phase and maintain that over the product life cycle phase. And in Process Management, we are targeting customers in the private sector -- sorry, public sector, both on the local municipalities and state agencies, and supporting them with case management systems and with regard to communication with the people living in the local municipalities and both in the countries and also making sure that they can archive every decision that has been made by the people in the organization. And in 2021, we ended up with net sales of SEK 4 billion, and we had an EBITA of SEK 461 million. And we are 1,900 people, and we are predominantly located in Northern Europe, in Sweden, Norway, Finland, Denmark and in Germany and in U.K. and France. And then we are also having businesses in Australia and in Japan and in Canada and the U.S., totally adding up to 19 countries. And we also have 200 people in India as well. So with that as an introduction, I would like to move on to Q4. Next slide, please. In Q4, we could see that all the hard work and investments that we made paid off. We had a net sales increase of 21% to SEK 140 million -- billion, SEK 1 billion, 12% currency adjusted organic growth. EBITA was up 37% to SEK 148 million, and our EBITA margin expanded to 13.3%, up from 11.7%. All three divisions achieved good growth and improved earnings, but Design Management and Process Management were special contributors to the strong earnings growth this year. Even though PLM did a good quarter, we can see that the biggest increase was in Design Management and Process Management. And all these fantastic result was, of course, due to the fact of all the good people in the organization making fantastic efforts. Looking at the demand side, we could see that the demand for Design Management and Product Lifecycle Management digital solution and services was positive on all the main Nordic markets, the U.K. and Germany. The positive progress of Process Management's market position and offering to Sweden's public sector made a -- drove the organic growth in this quarter as well, and we can see some good margins there. And looking at the acquisitions that we did in 2021, they supported the good growth in the quarter as well and contributed to the earnings. And we did one acquisition that we'll come back to later in -- after we closed the quarter. And the Board has also decided to propose at the AGM that we will give a dividend of SEK 3 per share and also to split the share to 4:1. And that will be a decision for the AGM later this spring. So please, moving on to next slide, looking at our net sales and the breakdown of that. We can see that license revenue increased to SEK 92 million and the biggest increase in recurring revenues who increased to SEK 702 million from SEK 571 million. Service revenue increased as well as we continued to do good business with our customers. And we can also see that the share of recurring revenue increased a little bit from 62% to 63% but are stable above 60% as we grow as well. So I think that's an important message. And looking at the 5-year trend, we could see in the diagram to the left that we are back on the growth path that we have been on for. So yes, all in all, good net sales. So please, moving on to next slide. As I mentioned before, we did one acquisition in the beginning of the year. This year is an acquisition of a company called Claytex. It's a specialist in advanced simulation and testing focused on automotive systems and autonomous vehicles. This acquisition bolsters and expands TECHNIA's offering on the PLM company, in the PLM division, as a global provider of premium simulation software, services, training and support through the TECHNIA Simulation Centre of excellence. Additionally, it strengthens TECHNIA's ability to perform simulation of autonomous vehicles based on Claytex's own software products together with the 3DEXPERIENCE, SIMULIA and RFP platforms. Claytex and TECHNIA have been partners of Dassault Systèmes for over a decade, offering the full suite of the developed product alongside expert training and support. Claytex are highly successful in generating own IP on the foundation of their world-leading skills. This industry and domain-specific simulation libraries are marketed and sold both by Claytex and also Dassault Systèmes as well. So this is a good add-on to the -- acquisitions to what we are doing in TECHNIA. We have been investing and expanding our simulation capacity with several acquisitions both with Scanscot. And then we also did the acquisition of Budsoft, and this is another acquisition down the line of building an even greater strength within the simulation area. So a great add-on and great teams that are more than happy to welcome to Addnode Group. So moving on to the next slide, looking at the full year 2021 that is also another record year. We achieved our best-ever earnings. Net sales increased to SEK 4 billion. We had a growth of 7%, of which 2% was organic. We had a tougher start in the first quarter, and then we can clearly see that we were back on the growth path for second and third and fourth quarter. So -- but the lower organic growth is a result of that we had a tougher first quarter. But we can see that we have a greater demand now from industrial customers in Design Management and Product Lifecycle Management. EBITA For the full year increased to SEK 461 million, and the EBITA margin increased to 11.3%. Addnode Group, we are getting stronger in all our focus segments: digital solutions for design and engineering, construction and facility management as well as public administration. The important enablers this year, and that is part of our strategy as well, are the expansion of our products and service offerings, complementary acquisitions and expansion into new geographical markets. So all in all, a strong year for Addnode Group as a result of all the hard work that our people in the organization has been able to put forward to make our customers happy. So with that, I would like to move on to next slide, please. So Addnode's ambition is to create sustainable shareholder value. In 2021, earnings per share increased by 36%. And looking back for the last 5 years, our average yearly EPS growth was 20%. The value creation we are currently generating is a result of hard work, investments in expertise and products, acquisitions and well-founded strategic decisions. We intend to keep generating sustainable earnings growth by executing our strategy of acquiring and developing cutting-edge companies that deliver digital solutions for a sustainable society. So with that as a background for the full 2020, I would like to move to the next slide and walk you through the result of the 3 divisions in -- for Q4. As we mentioned, we are 3 divisions in Addnode Group in the centralized organizations: Design Management, Process Management and Product Lifecycle Management. And moving on to the next slide and starting off with Design Management. Just to sum up, Design Management had a very good quarter. Net sales increased to SEK 471 million. It's a growth of 23%. Organic growth was 19%. And adjusting for currency, the growth was 15%. Symetri achieved especially positive growth and earnings performance. Demand was favorable in the Nordics and U.K. Customers appreciate the value of an Autodesk partner with proprietary related own products as well as a broad-based, in-depth design and being in scale, supporting the deliverance of the software. Demand in U.K. and especially the Nordic market for digital solution for facility management remained positive in the quarter. EBITA increased to SEK 59 million, and the EBITA margin widened to 12.5% from 9.4%. All in all, a very good quarter for Design. Next slide, please. Product Lifecycle Management continued the improvement in Q4. Net sales increased to SEK 352 million. It's a growth of 13%. Organic growth was 11%. And adjusting for currency, the growth was 11%. In the Nordics and Benelux, the demand for the division's PLM systems and related services remained favorable. The fourth quarter brought greater willingness to invest from industrial customers in the German market and also the U.K. market, which is important for this division. The division's initiative in advanced simulation solutions is continuing and is being well received in the market. EBITA increased to SEK 44 million, and EBITA margin of 12.5%. The restructuring program that we executed in 2020 yielded the intended cost savings. As previously presented, the acquisition of Claytex further strengthens the division's simulation capacity, adds interesting IP and a strong position within autonomous vehicles. So a good quarter for PLM as well. Next slide, please, Process Management. Process Management showed in Q4 that they have a leading position as a provider of software and digital solutions for the public sector in Sweden. Net sales increased to SEK 297 million. It's a growth of 29%. Organic growth was 8%. The division finished the year strongly, and operations acquired in the year performed well. Demand for the division's solutions for document and case management, public services and municipal engineering information systems and other services remain healthy. The division's business are well positioned for public sector tendering owing to their attractive digital solutions, in-depth experience and good references. EBITA increased to SEK 59 million, and the EBITA margin widened to 19.9%. So a good quarter with organic growth, acquisitions performing according to plan and above and some great efforts on the market, building the order book for next year. So a good year for the quarter -- and a quarter for process. So with that, I would like to hand over to our CFO, Lotta Jarleryd, who will talk about the cash flow and the balance sheet.

Thank you, Johan. Next slide, please. I would like to start with an overview of the consolidated operating cash flow for the fourth quarter 2021. We ended the year with a strong operating cash flow, SEK 257 million. This represents a cash conversion rate at 1.7x, and that is operating cash flow-to-EBITA. The improved operating cash flow compared to the same quarter previous year was attributable to improved earnings as well as a higher contribution from the change in working capital. We haven't made any acquisitions in the fourth quarter. The investing activities mainly related to development costs for proprietary software. With regard to cash flow from financing activities of SEK 100 million, the amount includes the purchase of Addnode Group B shares amounting to about SEK 70 million. In September 2021, the Board of Directors of Addnode Group, through support of an authorization by the 2021 AGM, decided to repurchase Class B shares in Addnode Group. The aim of exercising this mandate was mainly to enable delivery of shares related to Addnode Group's long-term incentive program. In October, 200,000 Class B shares were acquired on Nasdaq Stockholm, and the shares remain in treasury as of today. Next page, please. I would like to carry on with a few comments on the consolidated balance sheet. We continue to operate supported by a resilient balance sheet. Even though we have financed a major part of the 4 acquisitions this year by available cash funds, our cash position remained strong at SEK 406 million by the year-end 2021. As we communicated earlier this year, we have expanded our multicurrency credit facility to SEK 1.6 billion. The expansion of the credit facility of SEK 500 million strengthen our capacity to acquire and develop businesses even further. By the end of 2021, SEK 931 million remain in credit scope, which can be used for acquisitions and general corporate purposes. 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 the maturity date was June 30, 2021. Following the acquisitions made in 2021, net debt increased to SEK 368 million as per December 31. The equity ratio was 39%, and return on shareholders' equity was 14%. Other larger changes in the balance sheet items from December 31, 2020, mainly referred to the acquisitions made during the second and third quarters this year. Back to you, Johan.

Thank you, Lotta. So next slide, please, acquisitions. Acquisitions are an important part of our growth strategy. Since our formation in 2003, Addnode Group has executed nearly 70 acquisitions. On this journey, we have accumulated experience and structural capital. We acquired 4 companies in 2021 with a total year net sales of some SEK 220 million. So far, we have done one acquisition this year, so it's just one blip on this slide but hopefully will be more going forward. We still see great potential for value-creating acquisitions in 2022. So next slide, please. I will not walk you through this slide, but it's a representation of the acquisitions that we did in 2021, just to give you a flavor of the add-on acquisitions that we are looking for that are complementing the business that we are operating today. So next slide, please. Long-term sustainability focus areas. Addnode Group's mission is to provide technology for a sustainable future. The need for digitalization and automation of processes is a growth driver for all Addnode Group companies. Our biggest positive contribution to a more sustainable society are the digital solutions we deliver for customers, which, in turn, can make positive contributions through, for example, digital simulations benefiting the environment and health, design choices for sustainable development, product life cycle management, facility management and improved interaction and dialogue with citizens. In 2021, we enhanced our corporate value and sustainability work with a group-wide Code of Conduct and Sustainability Policy. Next slide, please. Addnode Group as an investment. So what can you expect when investing in Addnode Group? We have a strategy of acquisition-driven growth. Looking at the last 5-year period, our compounded annual growth for net sales has been 13% and 22% for EBITA, and we are expecting to continue on that journey. We deliver digital solutions for our customers that help them with design, simulation, product data information and case management. You will find that we have our customers in construction and real estate sectors, in manufacturing, automotive industry, life sciences and the public sector. And what are in common is that our businesses are supported by global trends for digitalization, urbanization and sustainability that is driving the demand for those digital solutions that we provide to our customers. We believe that we have an attractive business model with a high share of recurring revenue. We have a long-term customer relationship. Some customers have been with us for almost 30 years. We have a strong cash flow generation. Like Lotta mentioned before and discussed, you can see that -- the operating result that we generate and surplus cash flow as well. We have a low CapEx need other than product development and, of course, the investment in our people. But that's not CapEx, that's operating cost. But that's our biggest investment, I would argue. We have indeed a diversification that spreads risk. We are active in several geographies, a track -- going for several markets. And we also have several offerings to different customers. That means that we are not dependent on individual customers. And so that's diversification. So that's what you can expect from Addnode Group and what we are continuing to do. We have had basically the same strategy since 2007. So with that as an ending, I would like to open up for Q&A, and both Lotta and I are here to answer your questions.

[Operator Instructions] Our first question comes from the line of Daniel Thorsson from ABG.

Yes. So first, a question on the regional development here. You're right in the report that demand is strong in both in the U.K. and Germany, where we have seen a more lumpy development, especially in Germany over the last two years. Is this a trend shift, entering a more stable demand, you think? Or do you foresee anything else going into 2022?

So in Germany, we can see that demand has increased in the second half of 2021, so it's definitely an improvement. If it is a stable improvement, I think we'll have to come back to that, but definitely an improvement in the demand, meaning that customers are ordering and we are also selling them the licenses that we didn't do a year ago.

Okay. So you would like to see another 1 or 2 quarters with the same level to feel confident on the strong rebound?

Yes. Yes. I always would like to see that. So -- but it's definitely an improvement.

Okay. Excellent. And secondly, on M&A opportunities, at least in my book, it looks like you are more positive on M&A opportunities versus the previous quarters. Is that true? And what is the reason for that? Is it because you see more reasonable prices or better targets out there?

No. I think it's more of a -- of two -- we took it a little bit -- during the pandemic, in the start of that, we decided to slow down a little bit of the M&A activities. And then you start building the pipe again, and you start becoming sort of being more active in the dialogues. And then they -- so we have definitely a better pipe right now, and that has to do with the way we do acquisitions. We like to do bilateral discussions with entrepreneurs that are ready to sell their businesses. We are rarely involved in competitive auction processes. So that means that it's more of a building up a pipe, and we have been doing that for almost -- so yes, I'm more positive with regards to that. We can do more acquisitions. But -- then timing, who knows? Because, like I mentioned, we are more into bilateral processes. That means that one quarter, we can do several, and then it could take some time and as a -- but more positive, yes..

Excellent. And then a question on Process Management. I mean that division did an extremely well development in 2021. So that's going to face tough comps in 2022. Should we still expect a small, single-digit organic growth for the business area from what you see today at least? Or are there any risks of backdrops?

No, I think we should expect organic growth because there are no sort of singular events that -- or projects or anything that has been -- driven the organic growth in the division. It's more of that we have been working hard over the years to make sure that we have a good offering to the market. And then on top of that, there is a demand for digital solutions to work more automated and with the resources that are available for the public sector. So there's a demand to digitalize where they are. So I think we should expect organic growth. And then it's more of a question of how much. As you mentioned, we are getting used to have an organic growth in this division, and it was very good in 2021. 2020, I think we had some. But if you go back 2019, we were less focused on that. So -- but long answer to your question, and yes, you should expect organic growth for next year.

Okay. That's clear. And my final question for Lotta, I guess. On cash flow with the acquisitions made, should we expect a normal seasonal pattern in cash flow in 2022, i.e., strong in Q1 this year ending with a strong Q4 in terms of operating cash flow?

I think the invoicing pattern is the same from operations. I mean we do a lot of invoicing at the later part of the year and also in the beginning of the new year. So we don't see any change in that sense. And the acquisitions we made, they have more or less the same pattern as well..

Okay. That's clear. That was everything from me.

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

I want to start with Design Management. I mean the margin was quite high, although you had a strong demand for your Autodesk-related offerings. Could you elaborate a bit on that? .

I think basically, what you're saying is that when we are -- the sales for Autodesk then is, to one extent, so third-party business, meaning that we have to share part of what we are selling to Autodesk. That implies a lower gross profit over the time. But at the same time, we have a very good organization that are able to do more, meaning that we have an operational leverage in the organization, meaning that we don't have to add 1 more people to do 1 more sales. So that means that -- and we also have our own software as well that complements it. So -- and that is, by design, 100% gross profit. So I think it's a matter of two things. We have a good operational leverage, meaning that people are good at what they are doing, and also that we do own services as well and also own software that complements it. So I think that's the factor that makes sure that we have a good profit of what we are doing by the end of the day.

Okay. We have seen a sharp decline in multiples, especially for software companies on the stock market at least. Have you seen anything similar in your M&A discussions?

Yes and no. What do I mean by that? Because Addnode Group, we are not going for those high-value multiple companies. We normally tend to back out of those discussions. So we have never been part of that acquisition frenzy because we look at complementary acquisitions with what we are doing, and we are normally buying from entrepreneurs. And so we are not in a hurry to do the acquisition, no, no, no, in auction processes. So it means that, that is the no, meaning we have never been part of that. And the yes is that I think that over time, the multiples will go down because -- but it takes time. It's nothing that has -- happens over a day because people need to get used to it. So -- but we are still doing acquisitions at what we believe are sensible valuation multiples. That means that sometimes we start at 5x operating profit, and sometimes, if it's a fast-growing business with high margins, then we can look at a multiple of 10x operating profit. And then we are moving in that area.

Okay. So one follow-up question on that. So we should not expect the multiples you pay to decline. However, there might be more companies that are up for sale in multiples that you can accept. Is that the right interpretation?

Yes, I believe so. But it's a -- like you said, it's a matter of time. I think that is what will happen if we look forward. It has not happened yet, but I think it's -- that is what will happen.

Okay. I see. One last question from me. You mentioned that you have strengthened your position in your core segments. Should we interpret that as you believe you have increased your market share?

Yes, I believe that, that we have -- looking at Sweden and public sector, our offering for the local municipalities, technical infrastructure, case management system for state agencies, we are growing. And then if you're looking at Design and PLM, we can see that we are -- I think we're the third largest Autodesk partner in the world, and we are definitely increasing that position. We have a strong service offering there. We can also see for TECHNIA growing their businesses. In PLM, we have an organic growth right now, and we are not losing market shares. If any, we are gaining market shares there. So it's a positive trend, but it's not a massive trend. .

And now there are no further questions. I will hand it back to the speakers.

Okay. Thank you for taking the time to listen in and those who asked questions as well. So with that, I would like to thank you all.

Thank you.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.