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

Good morning. This is the conference operator. Welcome, and thank you for joining the Addtech second quarter report presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Niklas Stenberg, CEO; and Ms. Malin Enarson, CFO. Please go ahead.

Thank you, and good morning, everyone, and thank you for listening in to this webcast. If I start with a very brief overview, we can sum up another very strong quarter. The high customer activity continued in all business areas, and we see the net sales up by 36%, of which 19% organic. And again, our entrepreneurial-driven culture in companies have continued to handle the inflation pressure and value chain disruption in a very good way and also defended our margins at high level. So we had an EBITDA growth of 37% and with a historically high EBITDA margin of 13.2% and also here, strong contributions across the line. The demand continued at high levels. Overall, the business climate in our segments has been strong in the quarter. The macro situation is, as we all know, uncertain. And of course, we follow the development closely. But at this point, we see no signs of a general slowdown in customer activity. But of course, we're well prepared for potential tougher market conditions. So if we look a bit more into sales, as I said, a very strong sales growth and on aggregated level, 19% organic with double-digit numbers in all business areas on organic growth. And we should also here take into account that year-on-year, it's a quite tough comps. We had a strong quarter last year. And looking at the demand, we saw also a positive development trend month-by-month over the quarter, which is also, of course, positive. If you look at the bottom graph in the picture, as I said, it's really across the board in most markets and segments and geographies. But if I should highlight 3 things standing out as particularly strong this quarter, I would say it's the power grids in Energy, the battery solutions with strong contribution on acquisitions as well in Electrification, and very strong organic growth in Automation. It's also clear that we have a very strong momentum in areas with structural underlying growth which is, of course, satisfying especially considering the insecure macro climate. I will come back to this later. But in my view, we have never been better positioned than we are now. Exceptional work has been done throughout the organization to obtain goods, and the disturbances in supply chain start to subside but it's far from over, it's still a big challenge for some of our companies. But of course, it varies between the units. Looking at earnings. The positive margin and result trend continued in the second quarter with strong EBITDA growth in all business areas. And due to active efforts to offset price increase in parallel with keeping a strong grip on the cost base, we have managed to increase EBITDA with 37% and defending the margins on historically high levels. Good development in the acquired companies, a positive contribution from currency, but it's primarily the strong organic sales that have given such a strong outcome. Of course, also positive that our operating cash flow strengthened in the quarter compared to last year. Negative effects from higher inventory levels were offset by the strong results and the high margins and [ R/RK ] remained at very high levels of 66%. If we move over, some short comments on these business areas. As I said, Automation had a very good market situation during the quarter with stable demand on high levels. Sales were really good in the market -- the key market segments; process, mechanical industry and medical technology, and increased demand from defense industry continued in the second quarter. And together with an ease of the component shortage that Automation has really felt this quarter, we had positive effects both on sales and margins. If we look at Electrification, it also continued on a very strong note. Strong business situation to electronic, energy, special vehicles, telecom market remains. And also within Electrification, we have a clear increase in demand from defense industry. The positive trend in the battery department continues. Strong contribution from acquisitions as well, as I said earlier. Also worth noting is that we, during the quarter, opened a new production plant for battery systems in Tampere in Finland. Maybe some of you read about it. And this production site is aiming to capture potential from electrification of equipment, such as mining, ports, forest machines and industrial robots. So we have developed during a number of years, a range of hardware and battery systems for this specific purpose that we are now commercializing. So we're very happy about this. Margin seems to be a bit down in Electrification this quarter, but it's more relating to product mix and nothing else. If we move to Energy. We concluded another strong quarter with high customer activity. The favorable market from infrastructure products within the transmission and distribution grids continue to improve from already high levels. Also back on the current energy crisis, of course, every crisis gives also opportunities. And we see an increased demand from energy saving, electrical installation material during this quarter. To give one example, it's the municipalities around the Nordics changing to more efficient lead solutions and end-products to control the climate. So here, we had an energy-positive effect as well. Other key segments in this business area remained favorable, except for wind power that are trending slightly weaker than previous quarters. And this is primarily, as far as I understand, at least, it's the shift ongoing from onshore to offshore windmills that causes a bit of a slower pace at the moment. Industrial Solutions remained strong. Forest and sawmill industry continued to be strong, but with a lower demand for new products -- projects, however, from very high levels, we had a couple of years now with extremely high level of new products for longer projects. And the level of the order backlog, as we also write in the report, remains very good in this segment for delivery for about 2 years to come, which is comforting. Customer activity and waste management continues to increase and product solutions for special vehicles and mechanical industry remained stable at high levels. In this area, we had an unrealized currency loss in the quarter affecting the margin. And if we take that into consideration, the margin would be in line with last year. And last but not least, Process Technology also delivers a strong quarter with medical technology, forest, processing industry as key drivers. Also business situation for aftermarket components relating to projects in Energy segment, mechanical industry, special vehicles were stable also on a good level. The marine segment is also an important segment for this area, continued to improve, increased activity, especially, I would say, relating to service and replacement which also contributes to a strong margin. So looking at the first 6 months of this year, we concluded a very strong period, strong sales increase across the board. Organic growth, all in all, 18%. We had 17% in the first quarter and now 19%. And EBITDA growth even stronger and the margin of record high 13.1%. And also here, as I said, it's really a contribution from all business areas. And cash flow -- also in the period, cash flow improved year-on-year, so also positive. And all of this generates a good earnings per share. So we have an earnings per share of SEK 2.5 per share in the period. Moving on to acquisitions. We have done 7 acquisitions so far this year, 2 completed in the quarter. Total turnover added up till now approximately SEK 600 million, meaning that we are pacing in line with our overall growth target on M&A. In terms of geography, we continue to increase our activities outside Nordics, in according with our ambitions. Also, in general, we have a very positive view of the acquisition market, working actively to fill and process our pipeline with companies that we see are good performers in our selected segments. And I would also like to add that our organization is more active than ever when it comes to finding deals. As you know, we are primarily looking into generating our own deal flow. So it's a lot of coffee drinking and more feet on the ground than we have, I would say, ever had before. And one positive effect of this is, of course, also that we can be even more selective of what companies that we decide to acquire. One good example of an acquisition we did this quarter outside of Nordics is this company Allied. The second acquisition this year outside Nordics within electrical transmission. As you remember, we -- in the beginning of June, we acquired Arruti, a leading supplier in Spain, in -- with a lot of export in North and South America, for instance. Allied is U.K.-based, but also very active in countries like Middle East and New Zealand. So these 2 acquisitions complement and strengthen our offer in a very good way and establish us as a significant supplier in the transmission sector that we see as a clear growth segment. And we have now a number of companies exposed to this line of business. Yes, over to you, Malin.

Yes. Thank you. And as you've heard now, we have had continued very strong growth in sales with good leverage on the profit margins. The development in sales has come from a very good and broad demand situation as well as a very strong order backlog. Thanks to our company's ability to offset price increases and ability to deliver on the good demand situation, combined with continued overall good cost control, we managed to keep our operating margin at a high level of 11% on rolling 12. We believe these margins should be able to persist throughout the year, all else being equal, important to say. We're happy to conclude strengthened cash flow during the quarter, mainly due to contribution from higher profits and continued strong margins. The development was partly offset by an increase in working capital. Increased volumes led to more capital tied in accounts receivables and inventory levels rose, but levels are still on normal levels in relation to both growth and order backlog. Inventory buildup is, of course, a main focus, but there is, as you've heard, still high activity [indiscernible]. Our profitable working capital remains on high levels, thanks to profit margins and overall efficient management of working capital. Our financial position remains strong. Our net debt has increased mainly due to high acquisition pace and because second quarter includes repurchase of own shares and dividends to shareholders. Our key KPIs are at normal and satisfactory level. We have comforting headroom to support our ambitions going forward.

Thank you, Malin. So just a few words looking ahead. As I said in the beginning, of course, macro climate is uncertain, and we are humbled by its development, of course. At the same time, we are well prepared. If you look at this picture, I'm sure you have all heard me talking about the picture many times. It's our updated organization since 1 year back. And all business areas have structurally underlying growth to a large extent. And if you look at the growth drivers in the bottom, there is a clear link also to sustainability, especially the green shift. So we have the industrial automation, power transmission, electrification, solutions for emission reduction, et cetera. So all in all, we are well-positioned, I would say, if we enter into a period of a weaker general business climate. And these positions, combined with the well-proven business model itself with strictly decentralized structure and the companies that are used to quickly adapt to handle challenges and also capture opportunities that I mentioned earlier as well, makes me fully confident that we are well prepared for the future and will continue to create long-term profitable growth. So to sum up, as I think has been clear, we are very pleased with the outcome in this quarter. Strong organic growth, record high margins, and we don't see any signs of a slowdown in the market. All in all, still strong activity on the market. Order backlog, very strong and also with good quality. And we keep up our M&A pace and see positively for future here as well. And finally, of course, following the macro indicators closely, we are well prepared for any kind of development now. We have prepared contingency plans, of course. But more importantly, that our companies and our model has proven many times before that we can adapt quickly to new situations. And as I mentioned, we feel that we have good positions in areas of structural growth. So that gives us some comfort going forward. That was that. Let's open up for questions.

[Operator Instructions] The first question is from Karl Bokvist with ABG.

The first one is just on the comments regarding your order book and lead times now that you feel that supply constraints may have subsided or improved somewhat. So based on the view of your order book now, I realize a lot of different industries, businesses and so on. But on average, how would you assess the kind of lead time from backlog to delivery now compared to like a quarter or so?

Yes. Of course, yes, that's a good question. And to start with, as you said yourself, it's a huge mix in the order stock. I mean, we have, like last year, a lot of inflow of longer projects, especially in the sawmill sector. And in addition, with the longer lead times and shortages, it was also clearly longer orders from, so to say, continuing normal business. And now that has normalized quite a lot. To say some kind of feeling of how much has that shortened down, I would say that if we usually have like 3 to 6 months in order stock and therefore, also in order intake, if it has last year been rather 6 to 9 months, I would say we are maybe back to 4, 5, 6 months. So it's slowly but clearly getting shorter. And talking about the order stock, I mean, for us, it's very undramatic what we are seeing. And we have, as I said, very tough comps on the order intake and what we see now is a normalization and demand is remaining on a high level.

Understood. And then just a comment you made there, Malin, on the margin, you expect it to remain at this level. Did I understand you correctly that that was a comment referring to your fiscal year?

Yes.

All right. Understood. And my final one is just a 2-parter maybe. Just, first of all, do you feel that the business is now kind of returned to a normal seasonality pattern, thereby, when I look at things, at least, it seems like your third quarter usually tends to be bigger in absolute terms than your -- the second one?

Yes. When you say bigger third quarter, I mean, third quarter is stocks seasonality. Usually, the third quarter is -- especially on the profit side, we have a seasonality that is rather a bit slower than the second quarter. So if you're talking about the quarter we have now entered, is that your point? When you say higher, what do you mean by that?

Yes. I was more referring to deliveries or sales. Yes, exactly.

Okay. Yes. I mean my take on that would definitely be that as what we see at this point, there's no reason to believe that there will be any difference from a normal seasonality going forward.

Understood. And then sorry, if I just -- maybe one quick one. You mentioned the defense industry now a couple of times, and you do provide quite a granular overview of end markets. But today, roughly, how much is defense as a share of sales for Addtech?

I would say it's around 4%, 5%.

[Operator Instructions] The next question is the follow-up from Karl Bokvist with ABG.

Okay.

You can continue.

Perfect. Now just to follow up on Automation, just to understand this here, is this more -- the demand you're seeing now is that a result also of orders you booked maybe last year, similar to like a sawmill order lead time process?

Yes. I mean that -- it's easing up on supply chain. I think we have seen it most clearly in Automation, meaning that we -- just as you indicated, we've been able to deliver out quite a lot also of older orders, so to say. So it's definitely that effect in the figures.

Understood. And just then my final question would be, you talked a lot about the power grid demand and then also in batteries and so on. Just how do you view your own capacity now given the investment you also highlighted there in Tampere, for example, do you think that you can meet on current -- your current view of a future demand with like regular CapEx intensity?

Yes, I would definitely say that. I'm talking about this Tampere facility. It's -- I mean, we don't have that kind of CapEx-intensive productions and the same goes with this example in Tampere. It's more of an assembly. So there is nothing really in our setup that would change the CapEx going forward. And I mean, we have good positions and capabilities to continue to grow with the market. And in this specific sector -- in these 2 sectors as I have indicated, we see very good potential for the future.

The next question is from Johan Sundén with Carnegie.

Two questions from my side. First is on the wind power sector where you commented that the market has softened a bit. Earlier, your communication has been that it's more of a stable market than a declining market. Has that changed given your comments today? Or is it more or less the same view on the bigger picture?

Yes. Johan, it's really no dramatic change. I would say that we've been talking about stable. Now we see a slight decrease, but it's really not any dramatic change here. I mean, we've had for a number of years, a really good growth in this sector. And for the reasons I mentioned before, it's things happening in that market at the moment. So -- but it's really not a dramatic change. And for sure, we see this market as, for long term, a very good growing market segment.

Yes. And on your comment on the contingency plans and that you're ready for meeting a weaker market in general. Would you say that you're positioned in a way that you should safeguard the margin in a better way than maybe taking hit, short term, to go out from -- if the market bounces or how do you view it if you compare it to other slowdowns in the general economy?

I'm not sure I really understood. Can you just repeat?

Yes, your comment that you are prepared and have contingency plans in place if the market would be weaker. And if you go back to the great financial crisis, you commented earlier that you weren't really prepared for that to happen. And therefore, you took a bigger hit on margins than you maybe would have done in the other period, if you're more prepared. Are those effort that you have initiated now and are preparing so margin should be better safeguarded?