Addtech AB (publ.) (ADDTB) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Addtech AB Year-End Report April 2021 to March 2022 Conference Call. [Operator Instructions] I'd now like to hand the conference over to your speakers today, Niklas Stenberg, CEO; and Malin Enarson, CFO. Please go ahead.

Good morning, everyone, and welcome to this presentation of our year-end report. We will have a presentation and then, of course, open up for Q&A. I would like to shortly comment on the fourth quarter. To begin with, we ended the financial year in a very strong way. The positive development we have seen in earlier quarters with very strong underlying demand across the board really and high activity in all business areas continued. I must really stress out that I'm very impressed and proud in the way how our organization and entrepreneurs have handled the operational challenges. It's, of course, value chain disruptions and price inflation that I'm sure you hear about every day. Our companies have struggled a lot with this. But the outcome on sales and the record-high margins boils down to our company's very good customer-supplier relationships and active efforts to offset the oil price increase. In this picture, you see the net sales of the Q4. And this is -- as you can see in the top-right graph, we had a very strong growth, 32%, of which 24% was organic. And even considering that we had easy comps this quarter, it is a very high number, of course. All business areas outperformed, especially with a very strong March, where the level of customer deliveries and invoicing was better than expected, I must say. As I said, exceptional work has been done. Our companies have managed to find ways around the problems by redesigning products to get other components into the solutions, finding new suppliers and just making sure that their orders are on top of the pile, so to say. Despite the high level of invoicing in the quarter, we continue to build our order books, and high demand in most key segments remained throughout the quarter. Of course, I also have to mention Russia and Russia's aggression on Ukraine. Certainly, it's primarily a humanitarian tragedy, and our thoughts and sympathies go to the Ukrainian people. With regard to Addtech, our business relations with companies in Russia and Belarus have been halted, as we say in the report. Our exposure, however, is limited, and the total effect on the net sales from these measures we have taken is marginal. Just to move on to EBITA development, very strong, of course. The positive profit and margin trend continued this quarter. Active efforts to offset price increase in parallel with the firm grip on the cost base has given this 54% EBITA growth with record-high margins. I should also say that our acquisitions have contributed in a good way, but primarily very strong incremental margins. And the rolling 12-months EBITA margin of 12.8% is a number we are very satisfied with. If we then move over and talk a bit about the highlights of this full year, it's indeed been another successful year for us, solid deliveries across the board, primarily marked by a strong recovery in market activity. And we have experienced a sequential increase in demand throughout the year, resulting in high growth on all lines, basically, and solid positions in selected niches. I will come back to that a bit later. This picture is showing our customer segments in the pie chart on the top right and the geographies in the bottom. And if we start saying that the recovery in some segments and also the very strong growth in other segments that was strong also the year before, has really continued throughout the year. You know that we are providing a lot of OEM components that is relating to an investment willingness. And the main market for OEM for us is electronics, medical, special vehicles, mechanical industry. And the 2 latter, vehicle and mechanical industry, we have the strongest growth over the year, but also with easier comps. Other important areas, such as electricity-related products, has been favorable. Our companies active on the growing market for national and regional grids have strong positions, as we have been talking about for many years. And the project flow and demand increased during the year. And finally, on the segment side, I have to point out, as particularly strong in the sawmill industry with a very strong sentiment. From a geographical perspective, Nordic markets developed strongly. Norway is slightly weaker due to the lower will to invest in oil and gas. If we then look outside the Nordics, our main markets in terms of size, DACH and U.K., has also strengthened during the year. And it's very nice to see that our position outside Nordics continued to increase, both by acquisitions, but also by increased sales of our own products. So all in all, we continue to broaden our exposure in both segments and geographies according to plan. And now the sales outside of the Nordic region is more than 30%. Shortly on net sales and EBITA on the full year, as mentioned, strong growth all quarters, organic growth in total 15%. And I'm repeating myself, but most segments, geographies and also of our companies, many of them have experienced the best year they have ever had. And the supply chain challenges have been there and continues. We see no clear indications of an improvement. So we foresee that these challenges will remain throughout at least this year. But the situation has been managed, and I'm sure that our companies will be able to continue to manage this situation. We had a very pleasing 44% EBITA growth over the year. And I was actually looking back all the years in Addtech's history, and we have only had that profit increase level one time before in our history. And all in all, we managed to hold up our profit fairly well last year considering that we had quite a lot of drop in turnover, but we kept up the profit margins and profit. So 44% is really a strong number. We had an earnings per share of SEK 4 this year, an increase by 54% compared to last year. And the Board decided to propose a dividend of SEK 1.80 per share, which corresponds to a dividend share of 45%. Very shortly on the different business areas. As I said in the beginning, everyone has really performed well. Automation, strong quarter, high delivery capacity, especially towards the end. This is the business area where we have seen the clearest order buffering, I would say, during the year. So very satisfying that we were able to deliver out in a strong way from the order stock. Increased demand during the quarter. And also, defense sector, we have some companies delivering automation solution to defense, and that was increasing demand in the quarter. And in total, an EBITA growth of 35% with good margins. A very solid year, I would say, and the high recovery in mechanical industry was particularly strong. Also, Electrification ended in a good way. You can see in the pie chart to the left that Electrification has a very wide spread on segments. And basically, all segments have performed well here. High organic growth and positive trend in, for instance, our battery group. And despite high invoicing, the order book strengthened also during the quarter. Electrification, I would say, continues to be highly affected by component shortage. Well handled, again, but some of the companies have issues. So the sales could probably have been a bit even better due to that. Also a few important acquisitions. I will talk a little bit in a minute about Fey that we bought end of the year. We move on to Energy. Net sales increased 31%. And here, we actually had quite tough comps. If you remember last year, Energy was the business area that's kept up the best during the pandemic. So demand from construction sector, OEM and industry has remained strong. And maybe some concerns that the high interest rate, et cetera, might dampen the construction segment. This is quite obvious that, that might happen even if the majority, I would say, of our exposure here is relating more to infrastructure than house building. For the full year, a solid growth. We communicated last year that we thought '21/'22 would be a bit of a middle year for transmission, which is the biggest segment for Energy, and that was actually the case. So total net sales of 14% is not so much if you compare it to the other areas, but it's actually very, very strong considering that. But a very positive trend on the intake, especially on the transmission side at the moment. Industrial Solutions, a very strong quarter again. Investment in the sawmill industry continue to develop in a good way, but also strong development in companies offering ergonomic products and waste recycling. A very solid EBITA growth with record-high margins. And I mean an exceptional year, I mean, EBITA growth of 79% primarily organic. And it's basically from these 2 big segments that you also see in the pie chart, it's really these 2 segments that are important here. Important to bear in mind that, of course, it will be a tough comp for Industrial Solutions in the year we are stepping into now. Lastly, Process Technology, also delivers a very strong fourth quarter. Forest and process industry, key drivers here as well. But all business situation, here we have, for instance, aftermarket service components, and that has been very good. Increased service activities when the pandemic is losing up as well. We can also see a slightly positive trend from low levels in the marine segment. It's both on ship sense and also gas flue analyzer for LNG ships, for instance. So a slightly positive trend there. An impressive 78% with improved margins. And if you look at last year's margin, it was very, very low. And what -- the effect we see now on the EBITA growth is mainly driven by the structural efficiency measures that we've done in the units that were struggling after the scrubber market went down. Yes. If we move over to acquisitions, we had a high acquisition pace. During the year, we continued to deliver around 10% top line growth. That is the long-term goal. And we have also welcomed 4 more companies at the end of the period. And if you analyze this picture, you can see that we continue to increase acquisitions outside Nordics, which is in accordance with our ambitions, and we also have increased activities on selected markets. So it's very nice to see that it gives effect. And yes, the pipeline, as always, we have a strong pipeline. As you know, it's built up decentralized. We have a very strong organization working a lot with acquisitions. So we expect to be able to remain a strong pace also going forward. Before I let Malin in to talk a bit more on the figures, just a few words on this acquisition. It's the biggest acquisitions we made if you look on turnover, and this company and acquisition has been on our radar for many years. When I joined Addtech, it was as a business unit manager for the battery group. And the first time I met the owners of Fey was 10 years ago. So I would say this is a typical example of how we prefer to do acquisitions. No hurry, it's better to build trust and relations first. And then when it's a good time, we make the acquisition. And Fey has a very strong position on OEM markets in medical, for instance, on the German market. And this will strengthen our position as very much a leading player in Europe when you talk about industrial customized factories. And as you know, we see strong potential in electrification. And here, the battery group is one important brick stone on that. So we're very happy to welcome this company to the group. Over to you, Malin.

Thank you, Niklas. Yes, as you've heard Niklas talk about, we have had very good and satisfying development overall. Strong growth in sales as well as in profits both in the quarter and for the full year. The development in sales has come from a very good demand situation in mainly all of our important market segments, as you've heard. And in combination with well-protected margins, we have seen a very strong increase of profit. Our net profit has increased more than operating profit, especially during the quarter, mainly due to relatively better currency effects. With our company's active efforts to offset price increases and ability to deliver on the good demand situation, combined with continued good cost control, we delivered a record high operating margin for the year of 10.7%. In the quarter, the strong growth in sales gave the EBITA margin a good push upwards to 13.2%. As I mentioned, our companies have been amazingly good in finding their way through restrained supply chains and increased prices on components. Our overhead costs have slowly been increasing over the year, mainly due to acquisitions and sales and marketing costs coming back from historic low levels during the pandemic. Our efficiency measures taken during last fiscal year has given us an overall lower level of organic personnel costs. And even though now we see an organic growth of employees again, the increase has been less than 1% during the year. With this said, we must, of course, be humble looking forward. The restrained supply chains remain due to both the pandemic and the conflict in Ukraine. This, in combination with the uncertainties regarding inflation and overhead cost development, will give us challenges when it comes to keeping these rolling-12 margin levels, even though we expect to do so for the coming year as a whole. When it comes to cash flow, the relative increase of working capital, unfortunately, offset the very good increase from higher profits. Our working capital is bound to raise for the moment, both due to increased volumes, that means more capital is tied up in accounts receivables, but also due to the fact that we need to allow inventory levels to rise due to component shortages and long lead times. We are glad, though, to see that our profitable working capital keeps climbing to new record levels, 69% rolling 12. This is mainly due to high profits and margins and the fact that we, despite the increase in absolute numbers, have an improved working capital efficiency as working capital over sales. Our financial position remains very strong. Our net debt has increased mainly due to high acquisition pace, but our key KPIs are still at satisfactory levels. Our credit facilities have comforting headroom and are sufficient for our ambitions going forward. And we believe that the balance sheet could also stand for more with the remaining good key rates. Thank you. Back to you.

Thank you, Malin. So if we look ahead, on this picture, you see the organization as from 1st of October. And the recent years' increased focus on sustainable, technical solutions and with a high acquisition rate has offered us a strong position in selected niches. And even if these organizational changes were undramatic, they have -- for us, it has really vitalized the organization in a good way. So I'm very pleased and proud in the way how these new groups have come together and performed and delivered. And I'm truly confident that our position in the areas we chose to focus on, as you look on this picture, and the growth drivers will continue to create long-term profitable growth and shareholder value, which is, of course, our -- the end game. So focus on organic growth and continue to acquire, that's what we are doing. So in my mind, the strategic direction is very clear. And with the teams in place, we are well prepared to continue the journey. So yes, just as a summary, strong development, strong underlying demand throughout the year and increased during the quarter, and very good efforts to offset the price increase. If you look on the outlook, strong order books, and we still see high customer activity and expect continued stable demand going forward. But of course, we are humble of the market situation and, as Malin mentioned, the inflation, further lockdowns in China and the aggression on Ukraine. But as always, we keep our feet on the ground and adapt accordingly. That's what we are good at and will continue to do. Thank you. Over to Q&A.

[Operator Instructions] And your first question comes from the line of Max Bacco from ABG.

And once again, congratulations on a very strong report.

Thank you.

So I will begin with my usual question. If you could say anything about the split between price and volume in the organic growth in the quarter.

Yes. Okay. This is, as I've said last quarter as well, this is, as you all understand, very difficult to, in an organization that we have, to give a very clear answer to. But our estimations indicate, and I'm quite sure I've said the same last time as well, our indications show that the absolute majority is volume-driven. Maybe the price part of it is some 20%. So that's what our estimations are showing.

Yes. And in last quarter, you talked a bit about project completions boosting the sales level. Have you seen a similar effect here in Q4?

I would more put it like this, we have this, as you said, like a little boost effect in Q3. This -- and therefore, we said that we thought it will be a bit lower projects in Q4. But with the good -- we received a lot of goods that made us possible to also finalize projects this quarter. So I would say Q4 is more of a normal year from a project-based perspective. So better than we thought in Q3, but more in the normal level.

Okay. Understood. And you said during the conf call and mentioned in the report that the order book is strong. Could you say anything about organic growth in the order book or order intake? And also a comment on the split in the order book, is it similar to the sales split? Or is it a difference there?

So when you say the split in order book, you mean linked to the different business areas? Or...

Yes. Yes, different business areas, I guess that's more perhaps easy to answer on.

Okay. Yes. I would say on the last question, I would say it's quite even or quite similar to the split in the sales. So it's not anything that really sticks out. The level of the order stock and the order intake is nothing that we are actually revealing. But it's -- yes, so I don't really know how to comment on that.

Yes, no comment is good enough. And just 2 quick more questions. So cost inflation and component shortage, is it fair to assume that it persists on the same level now in Q1 as in Q4?

Yes. I guess you mean our Q4 compared to Q3. But yes, I think it's fair to say. I mean some companies are indicating it's getting a bit better. Some companies are indicating that it's getting a bit worse. It's depending a bit on the kind of components and raw material, et cetera. I mean the steel price situation has, of course, been worse this quarter, but it has somewhat become better in some other components. But all in all, yes, I would say it's a similar situation.

Okay. And finally, a bit of a tricky question perhaps. But as you said, now with the latest acquisition here of Fey, you have a quite strong position within both Energy and Electrification. In the medium term, do you see a potential for an additional spin-off like with AddLife a few years ago?

In the short, medium term, I don't see that happen. But as I usually say when I get that question, if you know Addtech's and Bergman & Beving's history, you can never say never, but that's nothing that we are discussing at the moment.

Your next question comes from the line of Carl Ragnerstam from Nordea.

It's Carl here from Nordea. Firstly, have you seen any changes in sort of the valuation or in the M&A -- paid M&A multiples so far? And also, do you believe that despite the current turmoil, I guess it makes it more challenging to do due diligence, et cetera. Would you say that it's possible for you to sort of maintain a rough 10% M&A-driven growth in the coming year as well?

Yes. Carl, first of all, on the multiples, no, no dramatic changes. I mean if you look on acquisitions we make, most of them, as same in our pipeline, most of the acquisitions we have are only generated. And as I said with Fey, of course, that's a bit -- we don't have discussions for 10 years with every company. But that kind of way of making acquisitions doesn't really boost the multiples in the way. So I wouldn't really say that it has been a dramatic increase. When it comes to due diligence, I'm not sure I understood your remark there because of the turmoil. I mean, of course, it's extra important for us to scrutinize all figures and making sure that we are finding a long-term, stable EBIT level when we are evaluating. But to make the diligence and to continue making acquisitions, I don't see any problems at all. And the last point, yes, absolutely, that's our plan to continue, as we have done every year basically, to have approximately 10% top line. So that would be the ambition.

Okay. Perfect. Very good. And also in looking at your M&A pipeline, what portion would you say is outside of the Nordics currently?

Yes. If you look on the pipeline, it's -- as I usually say, the number of cases outside of Nordics is increasing basically month by month. So if you look on the cases that are like on the top priority list at the moment, it's about 50-50.

Okay. Very good. And the final one is a bit on the margin. You said that most of your companies had sort of the best ever last year or this current fiscal year. Would you say that it's doable or to sort of reach the same margin as you had LTM in sort of the next year? Or would you need to build up more costs? I mean you had a situation with a fairly low, I mean, selling and marketing activities during part of last year, et cetera.

Yes. Do you want to answer it? Or...

Yes, I can start.

Yes, you can start.

I think that we will probably see an increasing cost level if you look at absolute numbers because we have had very low sort of cost level in the past year. But when it comes to relative increase, I think that it will actually be under good control. But then again, as I said, of course, there is a bit of a worry regarding to inflation and cost increases underlying. So it's a bit hard to sort of predict, but I would say that increasing costs, but not relatively.

Yes. So if I might add, I would say that at least our ambition would be to keep the LTM margin.

Your next question comes from the line of Johan Sundén from Carnegie.

First one is on the Electrification segment. You're earlier being quite good at estimating how much of the sales that you missed out due to various factors. You said that they were hampered by supply chain disruption this quarter. Is it possible to give any ballpark estimation of the impact of missed-out sales?

It's very difficult, actually. It's very difficult to say. I mean it's so many companies and so many different situations. So I don't know, Malin, do you have some [ caveat ]?

No. I mean to guess how much it would have been if they didn't sort of experience the supply chain constraints, I would say, it's impossible to know. And I don't know if they were so much hampered. Well, maybe.

Yes, I mean in some -- yes, in some sectors, I mean we have the data telecom sector, for instance, with the supplier that has been struggling a lot the last year. And that's one of the sectors for Electrification that has really been lower, that would have been clearly better. I think the battery group would also been a -- we have very long lead times in the battery group, that would also have increased. But to give a number, it's too difficult.

And I think that their outcome was quite good with the sequential sort of decrease during the quarter or so. Yes.

It was a long shot, but it's perfectly fine if you don't have any ballpark number, but we should at least maybe expect that there could be some catch-up going forward in the Electrification segment if there is -- the supply chain situation is more under control, so to say.

Yes. I mean they have a good order stock and continued good order intake, so yes.

Yes. Excellent. Then a second question, that's on the Fey acquisition. You have disclosed the kind of top line, and you also disclosed in the report its kind of valuation of the minority. Can you please give some color on the kind of margin of the segment?

Margin on the segment?

Or on the Fey company?

You mean the profit margin?

Yes.

Yes. So the -- if you look on Electrification's total 12-months margin, it's 12%, right? The battery segment and Fey is currently a bit below that level. So if it -- I think if I have it right in my head, the battery group now is around 11%. And so Fey is around that level.

Excellent. And my last question is regarding the start of Q2. We're now mid-May. Can you please give some comments on the beginning of your first quarter of the next fiscal year?

Yes. Yes, I mean what I can say is that the -- it has started up in a good way, and the demand continues to be broad-based strong. Of course, we have to bear in mind that we are meeting tough comps. Last year, the order intake and the sales really started off. If you look on our last 3 years, it's very clear that last year was the COVID year. And then in Q1 last year, it started up very well. So the rate of growth will, of course, be difficult to keep up going forward since we meet tough comps. But it's no significant change sequentially if you look on the market.

[Operator Instructions] I have no further questions at this time. I'd like to hand back to the speakers for any closing comments. Thank you.

Yes. So thank you for participating, and have a good day. Bye-bye.

Bye. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.