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

Welcome to the Addtech Q1 Presentation for 2024. [Operator Instructions] Now I will hand the conference over to CEO, Niklas Stenberg; and CFO, Malin Enarson. Please go ahead.

Good morning and most welcome, everyone, to Addtech's first quarter report presentation. Today's setup is that Malin and I will use approximately 15 minutes to summarize the highlights and give our comments to the results followed by a Q&A session. All in all, the new fiscal year have started off in a good way. In general the customer activity remained stable at high levels resulting in a solid net sales growth of 7%, of which 2% organic growth. We also continued to strengthen our profitability. EBITA is up 19% in the quarter with a very satisfying margin of 15.3% and also a further improvement of our profit over working capital. Cash flow continues to be at very good levels. And as you have noticed, our acquisition pace was high during the period. More about that within short. A bit deeper into sales. As I already said, high activity in all business areas. We grew net sales 7% and, as I said, we are back to organic growth with 2% in the period and as you see in the lower graph, it was broad-based with the highest contribution from Electrification and Process Technology. Customer activity, as I mentioned, is stable at high levels all in all, but it's variations between and also within segments. I will come back a bit more into details about market development. We strengthened the profitability, and the positive margin trend continued. We reached a new record level of 15.3% and rolling 12 at 14.7%. And I must say it's very satisfying to see that the effect from our long-term initiatives to increase added value in our proposition, meaning more own and modified products and solution and improved product mix, and this is partly cutting tails that we always do, but also taking down some volume business. So the product mix is on a good level and, of course, our focus to acquire more profitable companies. So good contributions from acquisitions as well. All in all, EBITA up 19% and, as you also can see, that is good contributions from all business areas. Also, our profitable working capital surpassed the new record level 70% and cash flow continued to improve. Malin will come back with more details on that. So a little bit brief comments on each business area. Automation had in total a solid business situation with a stable sales development compared to same quarter last year. On the positive side, good sales trend towards process industry continued and same goes with companies delivering to defense sector. Mechanical industry stable, different in different geographical areas, but all in all, stable. And a slight drop in med tech and that is due to a softer demand during the fourth quarter and also we have tough comps year-on-year this first quarter. Also Electrification delivered a solid quarter. Business situation continued to vary here as well between segments. Positive development in electrification of special vehicles, also mechanical industry and energy as well as defense. All of these sector stable to positive development. Data, telecom and building installation remains weak and electronic as well as med tech developed more flattish. We've been talking last year quite a lot about the battery group and here, we can conclude that the situation has stabilized as we have foreseen. So the market situation is gradually strengthening given that the high inventory levels of customers have been pretty much phased out. So we are more in a normalized situation there. Business situation for Energy continued on a positive note with stable net sales and the key segments, infrastructure products for electrical transmission and also niche products for power distribution remained very good. And overall, the market situation was stable in mechanical industry, still weak in the building installation sector while wind power demand continued to show positive signs. Data, telecom varied. The build-out of fiber optic networks have been weak for quite some time now and it remains to be weak while electrical components to data centers developed in a positive way. Industrial Solutions, stable as a whole. If you look on sales, the sales toward forest and sawmill industry remained at high levels with strong project deliveries with good profitability. The market for new projects is still a bit on hold, and as we've been mentioning before, this is still due to high interest rates and the weak construction market. Manufacturing industry, special vehicles continued to be flattish, on the weak side when it comes to special vehicles, especially on construction machines and this is also partly relating to the weak construction market and here we can see that some of our bigger OEM companies are signaling slower demand for 2024. Other niche segments such as waste management and subsea, that is quite a new area for us, but that showed good development. Last, but not least, Process Technology delivered a very strong first quarter basically across segments and sales were also boosted by a large amount of deliveries to a couple of customers. If we look on demand, energy, med tech, process industry in general stable; marine remains good; a bit weaker in special vehicles here as well as I mentioned in Industrial Solutions and also forest industry; and also the aftermarket business was a bit weaker year-on-year. So all in all for Process Technology, really strong sales, but somewhat more soft on demand. So that was a bit brief summary of the market situation. Over to you, Malin.

Thank you. As we said, our profit margins continued to improve during the quarter and, as you mentioned, Niklas, it's in general thanks to active work to increase the value-add in our value proposition and to make sure to charge for it, strategically improve our product mix and not least of course good leverage from acquired companies. I would also like to emphasize that we continue to keep a firm grip on the costs. Very pleasing to see that the cost efficiency continues to improve quarter-by-quarter. The strong long-term development is broad-based, but one of the key driver is of course the positive effect within Industrial Solutions and their good margin project deliveries. The hike in Q1 for Energy is primarily driven by an improved product mix, good pricing power and, of course, also solid contributions from recently acquired companies. For the group, we expect margin to persist around the rolling 12 level with gradual improvements through the year. Inventory levels is a key focus area for our companies, of course, still. Despite the slight increase in Q1 mainly due to the season and the bunkering ahead of the summer and effects from high pace of acquisitions, I'm very pleased with the long trend both in absolute terms and also as an improvement in relation to sales. Our long-term target profitable working capital surpassed 70% in the quarter continuing to generate solid cash flow. Our operating cash flow have improved both quarter-by-quarter and rolling 12, which is primarily related to the increased profit. Our financial position remains strong with sequential improvement as expected. As you know, the key figures do vary over the year, but are at very reassuring levels for the moment, which gives us plenty of headroom to support our ambitions going forward. So back to you, Niklas.

Thank you. So some words on acquisition. We have had a good start to the year that I mentioned. In the end of fourth quarter, we did foresee a strong start for this year. So we did 4 acquisitions during the first quarter and continued after closing with 3 more. The latest one actually this week, an Italian company we have known for many years, Romani Components, that strengthen our position in Continental Europe when it comes to linear products within Automation. We have several companies already in the group with similar offering and also with good margins here. So all in all, 7 well-run high performing companies that we have welcomed adding some SEK 860 million in turnover approximately with good profitability. It's also great to see that our efforts to grow on the international market continues. And my take on the acquisition market going forward remains positive. We have a well-filled pipeline, continued firepower and plenty of possibilities in our focus areas both from a geographical point of view in the Nordics and northern part of Europe and also looking at our selected niche segments. So as a summary here. As I said, we have started the year strongly. We have not changed our growth profile or strategy which means that you should not calculate with the same high pace going forward. We are not lacking opportunities, actually the other way around. But again our long-term growth plans are consistent. So let's summarize and look ahead. Very pleased with the first quarter of course and high activity and good contributions across the line. Despite some hesitation, as we say in the outlook, there is some hesitation in the market still and continued variations between segments. But we grew our top line and improved the profitability in a very good way. High pace of acquisition and, to me, it's becoming increasingly clear how scalable our model is and how well it works regardless of geography. The economic situation is still uncertain, as I said, and some hesitation we can see in CapEx-related investment decisions. So, of course, we keep a clear eye on the development, but we have well-filled order books and, as I always say, our ability to quickly adapt to new market conditions. Irrespective of taking opportunities or handling challenges, we have a very good way of making quick decisions. So we are all in all positive to the coming quarters. With that said, let's open up for questions.

[Operator Instructions] The next question comes from Johan Skoglund from DNB Markets.

Johan from DNB here. A few clarifying questions from me. The first one is on organic growth already in Q1, good to see. Is there any Easter effect here or any other extraordinary dynamic that we should be aware of?

Johan, what was your first? You said is there any...

Easter effect from working days, et cetera.

Yes. I mean it might be of course some Easter effect. I mean our fourth quarter was a bit on the weaker side and there we explained it partly due to Easter. So it could be some spillover effect. Apart from that, as I mentioned, it's in Process Technology very, very strong delivery on sales. And as I mentioned, a couple of strong deliveries to a couple of customers partly in the pharma sector. So a little bit boost effect on Process Technology.

Okay. And those boost effects, are you able to quantify those roughly?

No, I don't think we will go into that detail. But I guess my point is that, as I also mentioned, part of the demand in Process Technology in some of the segments were coming down a little bit in the quarter. So you should not extrapolate this strong growth in Process Technology in the coming quarters. So a more normalized situation is what we would foresee.

Good. I think you answered my next question there. Just a final one for me here. On your plan to acquire more profitable companies, do you see any multiple difference here on these compared to the lower margin companies?

Yes, that's a quite common question we get and the short answer is no. We still have pretty much the same multiples. Of course, it varies from case to case. But all in all when we look at the multiples, so far what we have acquired is still on the same level, and I would say this is partly due to how we work on acquisitions, the relation-based process we have and also that is pretty small companies still that we are acquiring. So still same multiples.

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

I just have a couple of ones here. If we start with in Electrification, can you assess the positive impact that comes from maybe a better market compared which comes from a result of customer coming back after previous over investments?

So your question is how much is driven by some kind of mega trend and how much is just coming back to a normalized situation? Is that your question?

Yes.

It's a good question, but it's quite difficult to answer actually because it's of course a combination of the 2. I'm trying to think a good answer here. It's really a combination of the 2, it's difficult to quantify.

Okay. I get it. And just secondly, you mentioned in Energy that the sales towards data halls were strong. Could you say roughly how large exposure in that segment is towards data halls?

I mean it's not that big. I mean like the biggest part in Energy is the transmission and distribution side. Apart from that, we have several different subsegments we deliver to. So all in all in the group, data halls, let's say, I guess I have to do some calculations here, I would say maybe some roughly 2%, 3%, maybe 2%.

Okay. And just very lastly on Process Technology. I think you've been very clear with how we should look going forward. But if you're looking on the other exposures apart from these large deliveries, you highlight that marine was good, but the other segments were flat or weak in the underlying market. Just some aggregate on the others, would you say that it's just rather flattish excluding this very good delivery?

Yes, I would say that's a good view. I mean, all in all, I would say, we talk about a kind of a solid situation. And if we look on demand as a group is like the sentiment and what people are saying some kind of a soft landing. And I would say all in all, that is pretty much what we feel. I mean we have good order books, which gives us comfort. But on the demand side, it's kind of a flattish situation with variations. But in Process, yes, I would say if you take that out, it's kind of flattish.

The next question comes from Johan Sunden from Carnegie.

I joined the call a bit late due to another company reporting this morning. But just to ask on the kind of Process Technology again, and is it possible to give some more color on what type of one-off project this was? Because there's other companies with exposure towards the pharma industry that see a strong market, and we're talking about structural trends rather than a one-off. Is it possible to give some more color, please?

Yes. I mean we also see structural growth in biotech and pharma sector, so absolutely long term, we see that. So in the Process Technology side, we have part exposure there. I mean for us process industry and process technology is very, very broad-based. But in this sector, we definitely see a structural growth, but more steady, stable growth. In this quarter, we had -- I mean I'm not going into details. But it was primarily a couple of customers, one relating to the pharma sector, strong deliveries from previous ordering; and the other one was more relating to an insurance situation for 1 other customer in a totally different sector. So I don't know if that's answering your question. We do see a good stable underlying growth, but more on kind of a normalized growth. We haven't seen these hikes in Process Technology really before in this sector, but it's clearly 1 part that is giving good delivery for Process Technology. We have also done a couple of acquisitions that are exposed to this sector. So this is also giving positive development.

Great. And just also given the comment from Malin, were there any specific kind of project deliveries in Industrial Solutions worth highlighting this quarter?

I think I can answer because you look like you didn't understand the question.

Well, I understand the question, but usually it's pointed to you.

No, I think because you mentioned that.