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

Good morning, and welcome to the Addnode Group Q2 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Johan Andersson, CEO. Please go ahead.

Thank you, and thank you to all of you listening on this busy report today. With me is Lotta Jarleryd as well, our CFO, and we will give you a guidance to the Q2 report today. So I guess if we could please flip all the way to the slide with agenda Q2 2022. We will walk you through a little bit of Addnode Group, our Q2 report spend some minutes on sustainability and our investment case and with the Q&A. There are also some appendices for further reading with regards to acquisitions, sustainability cases and our shareholders. So I guess for the operator, we could flip to the slide saying Addnode Group Digital Solutions for a Sustainable Future. For you, our new channel group, we are providing digital solutions. We have a strategy growing by acquiring and developing cutting-edge enterprises that digitalize society. We are organized in 3 divisions: design management, product life cycle management and process management. And looking at the financial rolling 12 months and in Q2 in 2022, net sales are around SEK 4.8 million. We are delivering an EBITA of SEK 590 million, and we are 2,300 employees providing digital solutions. With the high growth, we have managed to keep the recurring revenue at 67% of net sales. Next slide, please. Addnode Group has presence in some countries in Europe, Asia, Australia and North America. On the slide to the right, you can see that net sale distribution for the rolling 12 months period ending in Q2. With the acquisition of Microdesk in USA., we have become an important -- USA has become an important geography for Addnode Group. As Microdesk has only been consolidated for 4 months, USA is expected to be a higher portion of Addnode Group's net sales going forward. Next slide, please. So looking at Q2, we can see strong progress in all divisions. And the second quarter was another record quarter for Addnode Group. We had good demand, high organic growth, and we improved EBITA and our margins. Net sales increased by 49%, of which 11% was currency adjusted organic and increased to SEK 1.5 billion almost. And we had a tailwind from the euro and the U.S. dollars. EBITA was up 57% to SEK 154 million. Earnings per share rose by 73% to SEK 0.52. All 3 divisions experienced good demand on new businesses and improved earnings. What particularly stood out this quarter was that the Design Management division achieved the biggest improvement, doubling EBITA from SEK 40 million to SEK 80 million, primarily the growth and earnings gain in the division were related to strong sales by Symetri and the newly acquired Microdesk, which was acquired in March 2022. We'll come back to that further when we go through the different divisions. Next slide, please. Looking at our net sales distribution. License revenue increased to SEK 67 million. Recurring revenue increased to SEK 1.5 billion. Service revenues increased to SEK 386 million, and we also saw some increase in other revenue. The recurring revenue that increased by 56% was 68% of net sales in the second quarter. We see that long-term customer relationships and our business model with a high share of recurring revenue aid stability over time. Because investing in a digital solution for a mission-critical process is an undertaking for our customers and also for ourselves as a provider. It's not unusual for us to have customer relationships extending over 20 years back in time. Next slide, please. As I said earlier on, we are organized in 3 divisions. We are a decentralized organization with 21 companies summing up to the 3 different divisions to make sure that synergies can be generated when possible. Next slide, please. So looking at design management and a continued strong market drive and a record quarter. Net sales increased by 84% to SEK 806 million. Organic growth was 19% and 15% currency adjusted. EBITA increased by 10% to SEK 80 million, and the EBITA margin increased as well to 9.9%. The demand for Symetri's digital solutions and services remain good as reflected in the division's growth and earnings. Demand in the Nordics remained positive from the AEC segment and from manufacturing as well. The demand increase was especially positive in the U.K. and our customers value an Autodesk partner with proprietary related products and services. Microdesk performed above our expectations, thanks to increased demand in the AEC segment on the American market. For both Microdesk and Symetri, new business sales and renewals of pre-year agreements performed above expectations. Tribia and Service Works Group providing collaborative portal construction, infrastructure and facility management also made good progress, especially in the Nordics. Next slide, please. So looking at product life cycle management, had a strong market position and continued to support growth. Net sales increased by 32% to [SEK 494 million]. Organic growth was 13% and currency adjusted 9%. The EBITA also increased to SEK 35 million, and the EBITA margin was stable compared to last year. Operations in the U.K. and U.S. made especially positive progress in the second quarter with good demand for PLM systems and related services. Demand also remained good and stable in the Nordics and Germany. Initiatives in simulation solutions and solutions for customers in Life Sciences progressed well and supported the growth in the quarter. Next slide, please. Process management. Once again, process management's high organic growth collaborated leadership status of the division's offering to Sweden's public sector. Net sales increased by 11% to SEK 297 million. Organic growth was 9%, in line with recent quarters. EBITA increased to SEK 56 million and the EBITA margin also increased to 18.9%. The division is outgrowing the market in those operations, providing solutions and services in document and case management, public services and municipal engineering information systems for public authorities and municipalities. The division executed its first acquisition outside Sweden in the quarter, Decisive Norway was consolidated effective from 1st of June 2022. Next slide, please. Looking a little bit closer at the acquisition that we did in the second quarter of Decisive. The company has net sales of SEK 57 million and 25 employees. It was founded in 2003 by the company's current CEO. The company is a leading provider rule-based decision support system for the Norwegian public sector. Examples of customers are the Norwegian Tax Administration, the Norwegian Labor and Welfare Administration and the Norwegian Directorate of Health. So it's something that support what we're doing in Sweden, and we are hoping to grow the market in Norway as well with this as a start. Next slide, please. And with that, I would like to hand over to our CFO, Lotta Jarleryd.

Thank you, Johan. I would like to start with an overview of the consolidated cash flow. The operating cash flow for the second quarter amounted to SEK 122 million, an increase of SEK 71 million quarter-over-quarter. Since we had a very strong cash flow also in the first quarter this year, the first half of the year has generated a total operating cash flow of SEK 364 million that corresponds to cash conversion well over 100%, and that is operating cash flow to EBITA adjusted for property sales in the first quarter. The improved operating cash flow compared to the same quarter previous year was primarily attributable to increased operating profit. Investing activities in the second quarter amounting to SEK 93 million, primarily related to 3 topics: acquisition of Decisive deferred payment for acquisitions made in previous periods and investments in development of proprietary software. These investments were financed through available cash funds. Previous year, we did 3 acquisitions in the second quarter, which explains the rather large comparative amount. Financing activities predominantly related to the dividend of SEK 3 per share that was distributed to the shareholders in line with the AGM's decision in May 2022. Total dividend of SEK 100 million was paid out on May 11. Next page, please. I would like to continue with a few comments on the consolidated balance sheet. We continue to operate supported by a resilient balance sheet, which give us a favorable position to continue to grow organically and through acquisitions. Changes in the balance sheet from December 31, 2021 until the end of June 2022, predominantly derived from the 4 acquisitions we have executed during the period. Following the customary purchase price allocation exercises, goodwill and other intangible assets have increased by about SEK 800 million in total. Due to strong cash flow during the first 6 months of the year, the cash position has increased by SEK 191 million to SEK 597 million as per June 30. Together with unutilized portion of the revolver credit facility, we had about SEK 1.2 billion in available funds by the end of June. Addnode Group's current revolving credit facility totaling SEK 1.6 billion was arranged in June last year and has a 3-year term with option for extension 1 plus 1 year. In June 2022, we exercised the first option to extend the credit facility by 1 year to June 2025 with other terms and conditions unchanged. By the end of June 2022, the credit facility was utilized by SEK 1 billion, and the amount was reported under noncurrent liabilities. Net debt has increased to SEK 601 million following the 4 acquisitions made in 2022. Finally, I would like to mention a couple of things related to equity and the Addnode Group share. Following a resolution of Addnode Group's AGM in May 2022, a second long-term incentive plan for managers and senior executives were launched. In June 2022, 56,950 call options for Class B shares were issued to some 40 participants. The market value call option premium of SEK 49.7 per call option resulted in a total purchase price of approximately SEK 3 million, which has been applied to the group's shareholders' equity. Each call option carries entitlement for purchase of 4 shares. In June, the Board of Directors support the authorization from the AGM 2022, decided to repurchase 230,000 class B shares. The main purpose was to enable delivery of shares associated with the new incentive plan just mentioned. The repurchase has not yet been executed. Finally, I would like to mention that the AGM 2022 also approved the Board's proposal for a 4:1 share split. The purpose was to increase the liquidity of the Addnode Group share, the first day of trading in the company's share after the share with was May 17. Back to you, Johan.

Thank you, Lotta. And looking at our sustainability agenda. If you could flip a slide to sustainability, agenda, please. We work according to with 5 focus areas, and we believe that our biggest contribution to a more sustainable society is actually the digital solution we offer to our customers that can use the solutions, among other things, to perform digital simulation for the benefit of environmental health, make more sustainable design choices, product life cycle management, and the property management and improved participation and dialogue with the citizen in the community where we are active. Of course, we care about the people and the environment in our businesses, trying to ensure that our partners and suppliers support our sustainability agenda. It's also important to make money so that we can finance our business and make investments to support the sustainability agenda and to make all these things happen, we need the control and management of all the sustainability work. By identifying 5-year and global targets that we support, it's good health and well-being, gender equality, decent work conditions and economic growth, sustainable industry innovation and infrastructure and also climate action. So it's a part of our business DNA and we try to live by it. Next slide, please. So Addnode Group as an investment. Addnode Group is continuously creating value by acquiring enterprises that complement its current businesses. We bring industry expertise and structural capital to accelerate sales, product development and support of all the people in the organization. Together, we try to create synergies and even more value for our customers. Like I discussed previously, we provide digital solutions to our customers, and we are positioned to benefit from continued digitalization. Demand from both private and public sector customers is driven by urbanization, more senior and sustainability standards, change in working methods and the need for efficiency. 2/3 of our net sales is from recurring revenue, meaning that the customers pay upfront yearly, quarterly and also 3 years ahead for the right to use of software, software as a software solution or a digital solution that we provide. For the customer to get the full benefit of their investment, it needs to be implemented and adopted those consulting services tend to also to be of a recurring nature, even though we don't disclose them as such. While I'm proud of Addnode Group's positive progress in the second quarter and the first half of the year, we are [indiscernible] to have an uncertain business environment with the conflict in Ukraine, supply chain disruptions, rising interest rates and inflation may impact demand. But on the other hand, we have a strong financial position with a low debt equity ratio. We have extended our credit facility, and we have a business model with a high share of recurring revenue, which offer us the freedom to keep executing on our strategy for profitable and sustainable growth. So with that as an introduction to our second quarter. Next slide, please, and we would like to open up for Q&A.

[Operator Instructions] The first question is from Daniel Thorsson with ABG.

Yes. And very solid report indeed. You mentioned in the end, Johan, that inflation may cause lower demand in your market. Can you explain in what way that could happen? And have you seen any early signs of that in any market so far?

No, we haven't seen any effect of that in our business. We're just saying that we are part of a bigger economy. And if something changes in the bigger economy, that will probably have some effect on us down the road as well. But we haven't seen that in the demand from our services. And looking at in Q2, in all the divisions, there were no division that -- I think the lowest currency adjusted organic growth was 9% in a division. So we still have a good demand, and I can't see a change from that yet. But of course, we are part of the greater economy. So I'm just opening up for that. I think you should view it from that point.

Yes. That makes sense, that makes sense. And then a follow-up on that, I guess, regionally, you commented a little bit soft comments here or verbal comments in the different business units. What is standing out here? I guess U.K., U.S. is kind of my takeaway performing better than Germany and the Nordics. Is that a good conclusion?

I think -- yes, we still have a sort of stable good demand in the Nordics and in Germany. What stands out is that we had a lower demand in the U.K. going back a year ago because I think there were more sort of effects from the COVID situation. And now it's back to a good stable demand, and we can also see we are quite new to the U.S. market, even though we have some operations in the PLM division, but it's a different scale now with the acquisition of Microdesk. And we could see that we have a positive -- Microdesk is performing better than we expected. And I think that is generated -- that is sort of is reflected in our comments with the different regions.

Yes. Okay. That makes sense. And then a question on Microdesk, please. I guess that they diluted the margins quite significantly in design management with full effect in this quarter, meaning that the underlying margin in design management must be very strong. Can you walk through the drivers a bit please on that for the strong underlying margins?

Yes, we have a good margin in the underlying business. And we can see that both in the sort of the Symetri business, it has a similar business as Microdesk. We can also see that we have a very good performance in the other parts of the division within Tribia and Service Works group who are our own software, providing support for the construction of the facility market. But we also have a better-than-expected situation in Microdesk for the first 4 months. I think we talked about that they have a lower margin coming into Addnode Group, but they have also contributed on a higher level this quarter than we expected. They are still not up to the levels where we would like them to be going forward, but they have done a very good four first months.

Is there any...

Good underlying margin. And I think if I look into our CFO, she would probably guide me to say please look at the end of the report where we have stated how much the effect is from the acquisitions that we have to do in the report. And if you look at that, you could probably see that Microdesk is probably trailing around 5% margin, 5%, 6% in the first 6 months, so.

Okay. That's very helpful. Is there any risk for a backlash in Microdesk that they have like tried to perform as good as possible here initially for you, and that there may be some costs coming up that they reduced around the M&A process?

Nothing with relation to the M&A process. I think we are [indiscernible] . But of course, we have to be open that Microdesk has been part of the group for 4 months, and it's still fresh and is still new. We are very happy that they are performing well and that they are, by well I mean by our expectations for the first 4 months. But let's evaluate them, let's have a year before we evaluate it, so.

Yes, that makes sense. Makes sense. Okay. That's good. And then the second on process management. I mean the organic growth was very strong there. I guess price was one component of the growth. Can you quantify that a bit? I guess it was KPI-linked partly?

We can't quantify it. We don't disclose those figures. But you're correct that there are sort of indices adjustment in the contracts in the public sector. Those are, of course, reflected in the inorganic growth. And there also volumes as well. So they are both components. But, so you have both price increases and volume in that.

Can you say if price or volume is the largest driver. I guess, volume is slightly larger than prices this quarter. Is that fair to assume?

We don't disclose any figures around that, but you have both components.

Yes. Okay. Fair enough. And then my last question is on employee turnover and salary inflation. We see many other IT companies reporting for Q2 here this morning, for example, reporting declining margins due to increased costs here. How do you see that playing out? You are reporting that way around there?

We can see that what's happening is that there are more sort of interaction with customers and internally with regards to different conferences, et cetera. Of course, we have that as well. But we haven't seen that those things has sort of affected the margins as we are right now. Then we have the question about wage inflation. Yes, we had a round of -- there will be salary increases this year as well. But it's not yet that drastic, as we can see, does it mean that we are sort of, that there will be any changes in the autumn. I don't know yet. But so far, we haven't seen those dramatic effects. But of course, costs are increasing, meaning that if you look at margin, we had a history in the last few years of increasing margins sort of every quarter by quarter, by division for the entire group. It will be tough to continue that sort of progress. We can grow on top line and probably if we can maintain the margins over time. That's probably more to be expected rather than seeing this sequential growth in margins that we had over the last 2 years.

Yes. I see. Okay. That's a good comment. Yes, that was it for me.

The next question is from Fredrik Nilsson with Redeye.

Fredrik Nilsson from Redeye here. I want to ask a question about the organic growth on the group level. I mean, you typically say that if you can manage 3% to 5% over time, you're quite happy. However, the recent 1.5 year almost, the numbers have been much stronger basically in every division. I suppose there's a rebound effect from COVID and possibly some inflation effect currently, but still, it seems like you're doing quite good there. Could you explain a bit what's happening behind the numbers and what you think are the reasons?

There are several things. I think to start with, we have to believe that we have a good offering to the customers that makes us more. And I think we have become probably a little bit more focused over the years, meaning that we are more focused in our offering. That tends to make us more interesting for the customers. And then like you said in the beginning, we probably had some rebound effects from the COVID and then there are possibility to increase prices. I think it's a little bit of both here. And we are very happy that we are able to generate organic growth and like the above. But then on the other hand, like you said, it's a little bit of a new situation for us as well being able to do 10% organic growth every quarter and go with it. So we don't want to make any promises with regards to that. So we're happy that we're doing it. I would like to continue that, but I can't make any promises on that side. So I think -- but why are we able to generate organic growth? Yes. We have a good offering to our customers in areas where there are good demand, meaning that customers who would like to work [indiscernible] to become more efficient and automate different things. And that are things within design and engineering, it's in construction and facility management and in public sector. And I truly believe that, that underlying demand will be there going forward as well, also driven by urbanization, also driven by sustainability. There are demands on making sure that you follow different things. So we have that. And we need to keep up doing the good work where the people in the organization are doing that. But we'll see, we will do anything we can.

The next question is from Erik Larsson with SEB.

Yes. So I have a question on Microdesk, which you said was outperforming. If they have expanded their margins, it feels like it's too early to say it's because of something you have implemented these 4 months. Would you say that's fair? Like have they sort of improved their margins stand-alone?

No. No. Of course, we have only been there for 4 months. And we are sort of in discussion all day. But of course, it's up to the management team and the people in it [indiscernible] Microdesk doing a really good job these 4 months. It wouldn't be fair of us saying that it's been sort of on our side. It's the team in Microdesk that has performed that.

Okay. And in terms of their growth rate, would you say -- I mean, is it fair to assume they're keeping the level that you mentioned during the acquisition, they doubled over the last 5 years, is that the same pace sort of the first 6 months?

Yes, they have a growth. And to be honest, it's tough to measure different types of exactment right now with regards to different, sort of IFRS, [indiscernible] , but they have a growth in the market. And looking at the U.S. market, I think that you have a rebound there with the COVID situation because the COVID situation was much tougher in the U.S. than it was here in Europe I truly believe. So you have probably a little bit of a rebound effect as well.

And then a final question on Tribia and Service Works Global. I assume they have better margins, but if we're talking about the underlying business and design management, excluding Micro desk, my take is that they have taken a higher share of the revenues there? Is it sort of like mix effects behind parts of the margin expansion there?

Yes, they are -- we have a growth in that business. And with the higher margin, it has a positive effect as well, yes. But we also see that we are. The Symetri business is also performing well. So it's actually both.

Okay. Great. That's all for me.

[Operator Instructions] There is a follow-up question from Daniel Thorsson with ABG.

Yes. Okay. I missed some of the latest questions, but I have one on the current M&A activity in the market here. I mean, given how the markets are developing, the IPO window is pretty much closed. Do you see more, not forced sellers, but more willing sellers to look in the private market here, which could gain you in the M&A activity? Or what you see playing out there?

I think to start with most of the sort of what we are interested is entrepreneur-led companies within the areas where we are, that means that we are very seldom involved in auction process and different things like that. So in the short run, no, I don't think there will be forced processes with regards to the companies that we are interested in. But in the overall M&A market, yes, true what you're saying that. There are the valuation sort of is going down in overall level. There will be companies who have to sell because they can't generate capital to support further growth. And that will have sort of a -- from my perspective, have a positive effect, meaning that valuation probably will go down. But that's sort of more on the overall M&A picture and expectations. But I don't think that we will see for sales that we will sort of be interested because that's not generally our target.

Yes, that makes sense.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Andersson for any closing remarks.

I just want to say thank you for listening in and all the good questions. And with that, I will hopefully will wish you a good summer period. So thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.