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

Welcome to the Addnode Group Q3 Presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Johan Andersson; and CFO, Lotta Jarleryd. Please go ahead.

Hello and welcome to Addnode's presentation of the Q3 report. I'm the CEO, Johan Andersson and with me, I have Lotta Jarleryd, CFO of Addnode Group as well.

Good morning.

And for you who have missed it, it's actually Lotta's last interim report for Addnode Group. So this will be the big finale. So with that, I would like to start with our agenda. We'll walk you through the Q3 2023, talk a little bit short about our sustainability agenda, and then we'll move over to Q&A. In the attached presentation that we'll walk through, you will find an appendix as well with our acquisitions, our shareholders, and our share performance for the last year. And of course, you will find more material on our website as well, addnodegroup.com. So Addnode Group, as you know, we provide digital solutions for a sustainable future. We generate sustainable value growth by acquiring new businesses and actively support our subsidiaries to drive organic growth. The companies in Addnode Group, we provide digital solutions for sustainable design and Product Lifecycle Management, management of real estate and facilities, and public administration. Looking at rolling 12-month, net sales [Technical Difficulty] over SEK 7 billion and 69% is what we address as recurring revenue. With that as a short introduction to Addnode Group, let's move on to Q3. The headline for Q3 is that weaker U.S.A. figures cloud outlook. Looking at net sales for the third quarter of 2023, it increased to SEK 1.8 billion, representing a growth of 11%. Acquired growth amounted to 16% and organic growth was negative in the quarter. The EBITA adjusted for the restructuring costs amounted to SEK 137 million. The negative growth in the quarter and lower earnings related to weaker demand from the construction industry and lower sales of Autodesk 3-year agreements in the Design Management division, this was most evident in the U.S.A. market. In addition, the comparative figures for the division were high following the record-breaking sales in the third quarter of 2022. The Product Lifecycle Management and Process Management division reported organic growth in the quarter. And both division also delivered improved EBITA adjusted for the restructuring costs. Cash flow from operating activities was negative in the quarter primarily due to lower revenues [Technical Difficulty] and a temporary increase in working capital tied up. With that as an introduction to the Q3, I would like to hand over to our CFO, Lotta Jarleryd.

Thank you, Johan. I would like to start by sharing a few more details on net sales. These graphs set up the breakdown of net sales from 3 different perspectives. In the first graph, we present net sales for the third quarter over the last 5 years. It is evident that we have experienced considerable growth in the last 2 years. The current quarter totaled SEK 1.8 billion, as Johan said, corresponding to a total growth of 11%. Recurring revenue demonstrated an increase of 8% compared to previous year. Organic growth of recurring revenue was negative following the lower sales of 3-year agreements. Recurring revenue continued, however, to constitute a stable foundation in our business model, representing a portion of 71% of net sales. The demand for our service offering grew by 14% total in this quarter. Our consulting revenue derives from both services related to our software offering and customer-specific solutions. 5% constituted organic growth. In the third graph to the right, we have set out a breakdown of net sales by geography. Please note that this quarter is a milestone in the Addnode Group internationalization journey. For the first quarter ever, Sweden is not our largest market. U.S.A. has passed Sweden after the acquisitions of Microdesk, Team D3, and a few small bolt-on acquisitions for PLM division. Back to you, Johan.

Thank you, Lotta. Addnode is, as you know, we have 3 divisions, and we will walk you through the 3 different divisions more in detail. So looking at Design Management, the headline is weaker U.S. market and high comps. So what do we mean by that? Net sales increased by 8% to SEK 1 billion roughly in the third quarter. Organic growth was, however, negative. Adjusted for currency effects, organic growth was minus 21%. EBITA decreased to SEK 57 million, and the EBITA margin declined to 5.4%. The division's operations in digital solutions for design, BIM, and product data, which are conducted under the company named Symetri, began to note weaker demand for Autodesk solutions during the second quarter of 2023, particularly for customers in the construction industry in the U.S. market. This trend continued in the third quarter and has resulted in longer sales cycles and significantly lower sales of 3-year agreements than in the same period last year, both in terms of new sales and with respect to renewed volumes. However, the comparative figures for the division are high following record-breaking sale of 3-year agreements in the third quarter of 2022, mainly driven by demand in the U.S.A. and the U.K. With these market conditions, competition in the U.S. market has increased, resulting in downward margin pressure. In order to adapt the cost structure, the employee headcount in the U.S. operation has been reduced. The operation on Team D3, which was acquired in July 2023, which mainly has manufacturing customers in the U.S.A., also noted certain market sluggishness and lower sales of 3-year agreements. But the Nordic operation of Symetri performed in line with last year, and U.K. had a solid performance. The number of customers and the annual value of the underlying contract base for Symetri, which is the basis for future contract renewals are continuing to increase. We still see great potential for selling Symetri's proprietary software to the growing customer base. The 2 other companies in the division, SWG and Tribia, which offer proprietary software for facility management and for construction and infrastructure projects displayed a stable performance. So with that, looking at Product Lifecycle Management, we had a strong business performance and acted out on the previously announced restructuring measures in the quarter. The division reported net sales of almost SEK 500 million represented a growth of 23%, a very strong growth. Organic growth was 20%. And if we adjust for currency, the organic growth was 10%. EBITA adjusted for restructuring costs of SEK 5 million was SEK 48 million, and that corresponded to an adjusted EBITA margin of 9.9%. Market conditions in Germany, the U.K., and the U.S.A. were stable in the quarter, while demand in Nordic was still weaker. Organic growth was partly attributable to a couple of large license deals for PLM systems in Germany and the U.K. The trend of customers increasingly demanding time-finite leasing licenses instead of the previous license purchases with perpetual right of use continued. This is a move to more recurring revenues. As previously reported, restructuring measures are ongoing in division to increase profitability by adapting the organization and cost structure. Estimated yearly cost saving is still around SEK 40 million and will have full effect from Q1 2024. As previously communicated, the cost for implementation will be SEK 20 million. Of those SEK 20 million, SEK 10 million was recognized in the second quarter of 2023, SEK 5 million has been recognized in the third quarter, and the remaining SEK 5 million will be recognized in the fourth quarter of 2023. So going to #3, Process Management, who continued to have a profitable organic growth in Q3. So the trend is going on. Process Management division increased net sales to SEK 280 million. It's a growth of 7%. EBITA increased to SEK 53 million, and the EBITA margin was 18.9%. Municipalities and public authorities continued to show some restraints in terms [Technical Difficulty]. Demand for the division's consulting offering was good, especially for services related to customer-specific solutions, where we do tailor-made solution and deliver systems for our customers. It's not a specific consulting offering [Technical Difficulty]. We invest in the product offering. We have good and well-established relationships with the large public sector customer base. This frequently present opportunities for recurring sales or the expansion of current assignments. The division's businesses are well-positioned in public sector tenders owing to their attractive digital solutions, in-depth experience, and very good references. So with that, on the divisions, I would like to hand over to Lotta Jarleryd.

Thank you, Johan. I would like to continue with an overview of the consolidated cash flow. The operating cash flow in the third quarter was negative SEK 139 million. Previous year, the operating cash flow was positive and very strong, SEK 89 million. The comparative figures were high following record-breaking sales of 3-year agreements in the third quarter of 2022. Before that, the third quarter has historically been a weak quarter in terms of operating cash flow. The operating cash flow has been negative several times, for example, in 2021, 2020, and 2018. The lower cash flow was mainly attributable to lower operating profit and temporary increase in working capital tied up. Please note, however, that the net working capital is still negative SEK 495 million. The changes in invoicing and payment procedures for the 3-year agreements introduced by Symetri's partner Autodesk at the end of March 2023, had a limited effect on the operating cash flow. The reason for this was that the volume of 3-year agreements was low in the quarter, but also that a number of customers decided to pay for the full 3-year agreement on a one-off basis despite having the option to spread payments over 3 years under the new model. Investing activities in the third quarter amounted to SEK 373 million. As Johan mentioned, we closed the acquisition of Team D3 at the beginning of the third quarter. The net outbound cash flow from that acquisition was SEK 254 million. The remaining portion of the investing activities comprises earn-out payments to sellers for acquisitions made previous years, and development of proprietary software. Financing activities included SEK 14 million relating to repurchase of 180,000 owned B shares on fx.com in accordance with the mandate from the 2023 AGM. The purpose of the repurchase was to enable delivery of shares related to completion of Addnode Group's long-term share-based incentive plans. The remaining portion is mainly related to leasing. The acquisition of Team D3 was financed through our revolving credit facility. To be able to pay the initial purchase price consideration on time on July 3, the loan was withdrawn from the credit facility already on June 30, which is why the drawdown of the credit facility is not reflected in this quarter, but rather than the 9-month period ending next September 30. Back to you, Johan. It's me again. So I would like to proceed with a few comments on the consolidated balance sheet. So we continue to operate, supported by a resilient balance sheet, which is an important foundation for our continued growth organically and through acquisitions. Changes in the balance sheet from December 31, 2022, until the end of September 2023, predominantly derived from the 3 acquisitions we have executed during the period. Following the customary price -- purchase price allocation exercises, goodwill and other intangible assets have increased by over SEK 500 million in total. Our business model enables us to operate with a negative net working capital, and we continue to do so at SEK 495 million. Provisions, taxes, and other debt included future earn-out payments depending on the financial performance of the acquired companies, amounting to about SEK 480 million as well as other liabilities to sellers of SEK 53 million. Net debt increased by SEK 0.6 billion to SEK 1.1 billion during 2023 as we continue to execute acquisitions. Net debt through rolling 12 months EBITA was 1.41. Lastly, I would also like to mention that Addnode Group now holds 1,210,000 owned B shares. As already mentioned, we repurchased 180,000 class B shares this summer, following the Board of Directors decision in June. Now, it's back to you, Johan.

Yes. Thank you, Lotta. As we started out the new presentation, we provide technology for a sustainable future. This is supported, of course, by our sustainability agenda. Our biggest contribution to a more sustainable society is the digital solutions we provide to our customers, so they can help their customers to make more sustainable buildings, infrastructure, products, and services for creating a more sustainable society. So what do we actually do for our customers? We have 3 examples here in the report that you can read more about on our website as well. I would like to introduce these 3 case studies that shows how our digital solutions supports our sustainability development goals. Looking to the left, example one is from Tribia in the Design Management division. It's a project management tool for documentation and coordination. Tribia has supported Peab, the construction company with the project management tool Interaxo to ensure quality and documentation in the development of the tools in Tasenhjemmet nursing home in Norway which is built in solid wood. One benefit of using Interaxo is that Peab may reduce the risk of mistakes and misunderstandings that can lead to design problems and waste during the construction process. Looking at -- in the middle, you'll find a strong example from TECHNIA in the Product Lifecycle Management division about optimizing energy use in electric vehicles. TECHNIA has delivered a modeling and simulation solution to McMurtry, one of motorsport's leading electric car manufacturers. These advanced solutions will allow McMurtry to better optimize the efficiency and energy use of its cars. And TECHNIA's experience and solutions for more commercial vehicle applications are also transferred. Example 3 is from Stamford in the Process Management division. It's about more efficient port logistics that helps to reduce idling on the quayside. Stamford has implemented a notification system for the harbor of Halmstad's container operations. This has resulted in a significant increase in resource efficiency, both for the port and for the freight companies. It also helps with planning and prediction of workloads and transportation, shortening the idle time of trucks and thereby, reducing the amount of CO2 emissions from the port operations. And like I mentioned, you will find a full version of these cases at the Addnode Group website. Let's see. So before we go to question-and-answer, I should remind you about Addnode Group, what we believe ourselves as an investment. The structural underlying demand for the digital solutions that's offered by our companies extends beyond and across economic cycles. It's driven by customers' needs for digitalization, automation, urbanization, and sustainability. However, the current economic situation is dominated by uncertainty and restraint among more several of our customers. Addnode Group's strategy is to, with a sound risk-taking, capitalize on these trends by continuously acquiring new businesses and actively supporting our subsidiaries to generate sustainable value growth and drive organic earnings. During 2023, we have carried out acquisitions and cost reductions that have provided Addnode Group with an even better position for achieving profitable growth when the economic climate stabilizes and recovers. Addnode Group's good financial position that Lotta mentioned means that we can continue to invest and execute on our acquisition strategy. And with that, I would like to hand over to Q&A, and we are open for questions.

[Operator Instructions] The next question comes from Daniel Thorsson from ABG Sundal Collier.

I will start off with a question in Design Management here. And I'm a bit curious where you are in the process of addressing costs. I guess that it is difficult to even see close to a full quarter effect here given that you entered Team D3 at 1st of July, for example. So I guess the EBITA margin has maybe kind of bottomed out here in Q3, even though sales may be negative for another quarter or so. Is that the right way to think about it?

I think with the cost, what we have done in the Q3 is that it is roughly 30% in the U.S. operations who have left. So all costs really, in the U.S., as you know, has a different type -- it's a different thing of doing cost reduction in Sweden than in the U.S. So that's already addressed, and that's part of the Q3 results. So you will see nothing in a cost way with regards to that going forward. And that means that we will have a lower cost base when entering Q4 related to that. We are very hesitant to bring on new people and actually more of a hiring freeze in the organization, totally. But we don't see that we will do more of a big restructuring cost program right now because there is business ahead of us. And -- so no more is planned according to that. So if the business is as we believe it will be, it will be a little bit tougher in the coming period and then hopefully moving forward, you will see no more big cost restructuring. But of course, we will work with costs. That's the answer I can give on that, if that addresses your question.

Absolutely. That's very clear. And then how many people are in total in the U.S. today after Team D3? Just to get the feeling of how large shared the 30% are.

Roughly 500.

And then on D3 as well here, in Q3, did Team D3 perform relatively as you expected or weaker than expected when you announced and closed the deal in the early summer?

In this specific quarter, it was weaker than we expected. We had more of a linear approach over the year, and that was affected part of the market, but also about becoming part of Addnode Group, and we probably -- we're the entrepreneur-led company even though it's bigger, it becomes part of a listed company. And there are some adoptions that need to be made and those -- and then the management probably spends too much. They need to do it, but they spend more time on the integration rather than sales. So that probably has an effect as well. So long term, our view on Team D3 hasn't changed. In the specific quarter, we were hoping that they would have done better.

On PLM here, the strong organic growth of 10% despite that you actually addressed cost base is pretty much in line with what Dassault Systèmes said in their Q3 just a few days ago that we see some return on large orders, et cetera, which you mentioned here in Germany and U.K. as well. But looking at their guidance, they're guiding for relatively flat growth in Q4, so down to 0%. Again, is that how we should view that market, or do you see anything else out there?

We still see there are -- the thing is that there is deals to be made, but we will not guide for a 10% organic growth going forward. If we are able to have an organic growth, then we're okay with that. So we're probably -- we don't do any guidance, but we don't see that it's still -- we have the German market and there are some things to discuss. And then we'll see what happens. But this, -- like we showed in Q3, it's still possible to do deals, but don't expect that we will do 10% organic growth going forward. If we do that, I'm happy but we are not planning for it.

The next question comes from Daniel Djurberg from Handelsbanken.

I just wanted to address the cash flow initially on the change in working capital, minus SEK 258 million. And we obviously had expected to see a negative working capital on the changes seen in the payments in the Design Management side. Can you just comment, though, how much, if it's possible, to give a ballpark, how much is also from the underlying squeeze in the DSO to the DPO in these types of markets where people tend to be focusing very much on cash flow? And also, if there are parts of this that will be one-time adjustments from these changes, or if it will continue to hamper the working capital here for a couple of quarters more?

The first question was about the DSO. And we don't see big changes in that compared to last year. We know, however, that the payment pattern in U.S. is a little bit slower than in Europe. But we haven't seen any big changes yet. And the other question was about the 3-year deals?

Yes.

Yes. And what has happened is that on the U.S. market, there you can see the new patterns, so to say that the payments are divided over 3 years. On the other hand, we had very low sales of 3-year deals in this quarter. But in Europe, we see another pattern, and that is that the customers continue to pay upfront, even though we don't have to pay the suppliers over 3 years. So these patterns sort of evens out the effect.

May I also ask a little bit? You mentioned the U.S. market on Design Management that I think you had talked about a little bit tougher competition, if I heard you correctly. If you can comment a little bit on if it's in a specific segment or if -- and also if it impacts your pricing strategy for 2024, that you need to be cautious on pricing in this inflationary environment?

No. I think this is what's related to Q3 and what we've seen and that affected the margins there. And the we're -- what happened is that you have one competitor who goes just for price. We don't -- we tend to think that we sell value to our customers. We provide our own technology. We provide our services and also the Autodesk platform. And then we had one customer who were pushing quite heavily on the price in the U.S. market, on the construction side, and that is something that we have seen that we are able to meet better here in Q4. So I would say that, no, it will not affect sort of the long-term business and the total business. It was something that was related to the U.K. -- the U.S. market construction here in Q2 and Q3. It's not something that we see will have that sort of effect on the total business in that respect with something that will sort of disturb the pattern here.

And finally, if I may, a little bit on -- you mentioned that the number of customers and the annual value of the underlying contract base in Design Management was increasing. But how much of that comes from acquisition? Is it, if you would, compare apples with apples here?

Yes, it also comes from acquisition, but it's also organic. So it's both organic and acquisition. So the sort of the existing customer base that you had, and if you'd put the D3 acquisition aside, you still have the same pattern.

Yes. Actually, you're right. Underlying contracts as you said. And I think that's good…

And that will be important with regards to our -- with the revenue recognition principle. So that's…

Yes, of course. Yes, that's good. Is it possible to give any ballpark percentage or number there, low single-digit percentage or number of these number of customers and value?

And with that, you think about new customers or…

No, no. The -- yes, on the change, year-over-year change quarter-over-quarter or something.

No, we have -- we are in a -- the reason why we don't want to give you any actual number is that, as you mentioned, we have recently acquired the U.K. -- U.S. operations. And we feel certain that we can give a statement on this. But before we give any data, we would like to see a couple of quarters with the U.S. operations as well. So we'll feel comfortable about that. So we feel comfortable about stating it. But to be honest, we need to sort of drive it a couple of quarters, so we can see that it actually is on the exact numbers.

I fully understand. And good luck in Q4.

The next question comes from Erik Larsson from SEB.

I have 2 questions, follow-ups on this last topic here. I didn't fully understand the comments you made regarding the underlying contract base in Design. So just to clarify, do you mean that the number of licenses are growing, but the mix of 3-year deals makes the recognized sales volume lower? Is that what you mean basically or…

Yes and no. What we mean is that, yes, the number of customers are growing, and the value of the annualized contract base is growing. So that means that, yes, we have a renewal of 3-year deals coming up, we're looking for, yes. So it's a mix. And it also -- then you have the mix over the year as well. So that means that depending on where the 1-year deals are being renewed as well, you have that composite -- that part of the composition as well. So what we're saying is that if you annualize the value of all the Autodesk contracts, we can see that the value of that is growing and there's a number of customers.

And then on D3, I tried to calculate backwards here and it seems like they did like around 0% margin for Q3, and you commented on the performance in general. But would you say that this weaker-than-expected performance, is it normal or is it more specific factors like the 3-year deals? And you mentioned integration. Is that sort of the bulk of the reason you think for the performance?

It's a mix, like I said. There are some seasonality over the year to be -- that's part of it. It's obvious. So -- and then also, there are some 3-year deals. They also are sold at -- volume of 3-year deals were higher for them last year. So that's also part of the mix. And the third part of the mix is that related to integration, meaning that the owners and the sellers have been heavily involved as part of making the transaction happen and then they need to spend some time on integration. And if they haven't spent that time, they would actually be now promoting and doing the sales. So it's a mix. Should we put one question aside that we have from the mail, Lotta?

Yes. [indiscernible] with Handelsbanken. You were beating expectations in the PLM division quite good on sales. Could you give some more color related to the larger license deals in Germany and the U.K.?

It's like we described, there has been -- we've done some bigger license deals in the U.K. and German market, and they are also related to both life science and also to EV companies. And there are all classical licenses when they are buying numerous licenses because they are expanding their businesses. These are customers that we've been working for quite some time, so that we are expanding the sort of the engagement with them.

Next question, could you perhaps give some more color on the EBITA margin in the Design division? The drop we saw, how much of this is related to a weaker market and how much from a dilution effect from AEC, Team D3, and Microdesk?

I think they are both connected because the market being slower, that's affecting both Team D3 -- predominantly, Microdesk and Team D3 in the U.S., and that leads to lower markets because if we are selling less, that sort of drop through the P&L. So I think they are both related in that sense.

And a follow-up question there. Considering Team D3's exposure more towards manufacturing and processing industry customers, how is the demand holding up there?

It's better compared to Microdesk. As you said, it's their end customer group are manufacturing companies of a diverse nature in the U.S. market. So this seems to be a better demand picture there for Team D3.

And the last question, the 3-year contracts are obviously down year-on-year from a tough comparable last year. I guess we should expect more 1-year contracts rather than 3 due to the macro. But could this boost your revenue going forward from 1-year contracts being more expensive, et cetera?

The -- what will happen is that -- I think there's 2 ways of addressing that. There are no sort of -- previously, if you go back a year ago, there were some discounts on the 3-year deals. And those discounts on the sales price is not there anymore. So it's sort of the same for 1-year or 3-years deals compared to that. But what will happen if we lower the volume of 3-year deals right now, that means a year from now, we will have a higher portion of renewals because the 1-year deals will then be renewed. If we have sold a 1-year deal now, it will take 3 years from now to renew that, that goes back to our revenue recognition principle. So based on that, the sort of the flip side of selling less 3-year deals right now is that a year from now, we will sell more compared to having sold 3-year deals. So you will have like a build-up of a SaaS model similar type.

And that was the last question from [indiscernible].

Any more questions from the audience?

The next question comes from Fredrik Nilsson from Redeye.

One question that you haven't touched upon already, and it's about Process Management. In the last quarter, you mentioned a lower level of procurement. And now you mentioned some restraints. And I mean, you have had quite strong growth and margin in that division for quite a long time. Should we expect a slower growth rate going forward, given what you say about the market?

I think what we are saying is that the overall market will probably have some effect on budget restraints that's coming out there. It's always there. Looking at ourselves, we still believe that we can have a growth in that business, but it's probably tougher to generate that growth because we probably need to alter it a little bit, more of a bit, but there is a market that's very low. We are coming from a -- what we are commenting is that we are coming from a backdrop last year when we are able to generate 10% organic growth in this division. I don't think that is feasible in the coming year. But we will still be able to have organic growth, but it will not be 10%.

There are no further phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Thank you. As I started out, you will hear me next time. You will unfortunately not hear Lotta because this was the final one. So I would like to end up with thanking Lotta for all the efforts during these years.

Thank you, Johan.

Thank you.