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

Welcome to the Addtech Q2 2025 Report Presentation. [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 the Addtech Second Quarter Report Presentation. The setup is as usual that Malin and I will use approximately 20 minutes to summarize and give our comments on the results, followed by a Q&A session. Before we dig into the results, just a very quick summary of the key fundamentals of Addtech. We are a group of 150 independent and strictly decentralized companies operating in 20 countries with a clear business-to-business offering. Since 1st of October, we operate in 6 business areas, all with clear strategies and a value proposition centered around niche products and solutions, primarily to the manufacturing and infrastructure sectors. I will come back to more details about the reorganization later in my presentation. Our focus is to develop and grow the business organically together with our entrepreneurs, and then complement and strengthen our strategic niches with acquisitions, funded primarily by own cash flow. Size-wise, we have a turnover of over SEK 22 billion and run the operations with an EBITA margin above 15% and employ around 4,500 throughout the organization with a small and efficient central team. Let's head on to the highlights of the second quarter then. We summarize a solid second quarter with continued high overarching customer activity and a good demand situation, supporting continued profitable growth. We increased our net sales by 6%, of which 4% was organic. And as we write in the report, approximately half of the organic growth is related to very strong project outcomes within Industrial Solutions. We report an EBITA growth of 11%, so same as in the first quarter, with a high margin of 15.5%, compared to 14.9% in the same quarter last year. So we continue our positive long-term trend to increase our margin, which is very satisfying. Our cash flow increased in a very good way during the quarter, and we completed one acquisition. And as I said, from 1st of October, we have a new strengthened organization. More on net sales development in the second quarter. A good mix of organic and acquired growth. The solid sales growth of group level continued and Industrial Solutions, as you can see, sticks out as a key driver, primarily, as I said, related to very strong project outcomes within primarily sawmill industry, but also good growth in special vehicles and other segments like subsea and marine. The previously very strong trend within electrical transmission flattened out as expected during the quarter in business area Energy and delivered flat sales development towards tough comps in the transmission side. But this was clearly offset by solid sales growth within other segments such as traffic safety, wind and data halls, supporting good development for Energy as a total. And the challenging business situation within Automation continued with tough comps for defense in the quarter and somewhat weaker development within mechanical, but this was partly offset by a positive development in medical. That's an important segment for automation. To sum up, sales development in the quarter, overall activity remained high with a solid broad-based order intake, a positive book-to-bill in the quarter, which is an improvement relating to previous quarters. We grew order intake organically in 4 of our 5 business areas. And I will come back to market development in each segment shortly. But first, some highlights on the EBITA development. As I mentioned, we increased for the group by 11%, of which about half is organic and half acquired. Also this quarter, Energy contributed strongly with almost 20% growth, but also Industrial Solutions and Electrification had double-digit growth numbers. Our EBITA margin increased, as I said, to 15.5%, and we continue to increase our gross margins, good product mix, but also good performance on strategic pricing in a number of companies. Our long-term financial target profitable working capital was unchanged sequentially at 77%, but clearly up compared to the same quarter last year, of 71% (sic) [ 72% ]. And Malin will elaborate more on the P&L in a minute. So moving to some brief comments on the quarterly development within each business area. Automation, as we know, has had a quite long period of challenging market situation. Important to remember that Automation is the business area with the most -- that is mostly affected by the hesitant general industry segment. But I would say that Automation is step-by-step moving in the right direction. The market situation was overall favorable within business area during the second quarter for Automation, continued solid order intake that has sequentially improved over a couple of quarters now. Segment defense, which stands for about 15%, 20% of the turnover continued to be strong. And we also saw a more positive market situation in medical, while mechanical and process industry continued to be flattish on the more subdued level. So despite a somewhat more positive outlook for Automation, the lower sales volume in the quarter, primarily in mechanical and defense on tough comps, was partly offset by the positive development in medical. And this, in combination with one-off costs of approximately SEK 10 million, related to restructuring, hampered the result and margins also in this quarter. During the later part of the fiscal year, we, however, expect to see positive effects from both a slightly more positive market situation and the measures that we have taken. Electrification delivered a solid second quarter with stable sales and a good market situation for defense, energy, electronics and mechanical segments. Company supply and special vehicle customer had, in general, a stable quarter development, while the medical segment was somewhat weaker towards tough comps. The operating margin improved in the quarter, primarily due to an improved product mix. Over to Energy, and despite tough comps, the strong sales growth continued in the quarter, this quarter, primarily driven by subsegments, traffic safety, wind power, data halls. In line with expectations, and that we also talked about after first quarter, the demand on infrastructure products for national and regional grids weakened in the quarter, especially on the Swedish market, and this is due to bottlenecks on the customer side. This should, however, be seen as a temporary dip. We expect projects to increase again in the beginning of next quarter already, and the long-term potential remains unchanged. Building installation remains subdued, while medical, wind and data kept up at good levels if we look at market situation. Business area Industrial Solutions delivered, as I said, a very strong quarter, sales growth close to 30%, close to same quarter last year. And this was driven by the strong project deliveries and product revenue settlements, primarily in the sawmill business. We also saw a slight uptick in demand from low levels in the sawmill business during the quarter, but important to note that the underlying market situation remained weak in this segment. So the outcome this quarter should not be extrapolated. Sales situation in sawmill will be weaker in second half of the year, and that's why we are clear on that. The positive trend for OEM customers in the special vehicles segment continued in the quarter, and we also saw -- as we also saw in the previous quarter. Finally, Process Technology delivered another stable quarter. Total sales volumes were marginally up, still negative effects from postponed product deliveries, but this was offset by solid contributions from acquisitions. In general, the market situation was favorable with strong demand for companies supplying the process industry, especially oil and gas, mining and energy segment. Also, marine and special vehicles had a good demand situation, while medical, mechanical and forestry were stable. So it's kind of a mixed situation here. To sum up, clear variations in market situation between both company segments and geographies remained. But with a broad diversified exposure, the overall market situation was good and very few trend changes, I would say, during the quarter. Expect the predicted temporary project dip within Electrical Transmission and the positive trend with special vehicles. Okay. So go over to a brief summary of the first half. We can conclude 2 very solid quarters given the general weaker climate that we believe that we are in and also constant rapid changes in the global environment. Over the whole period, the overarching activity and order intake has been good, which is again a clear proof of the strength of our diversified and decentralized business model and with a large portfolio of entrepreneurial companies. So all in all, solid sales growth in the period, partly offset by the strong SEK, and we have, throughout the period, been good at getting the volumes into the results. Over the period, EBITA up 11% and strong margins, 15.6% compared to 15.1% in the same quarter last year. Also, cash conversion remained strong, and we strengthened our EPS year-on-year. And you will elaborate a bit more here, Malin.

Yes. I will repeat some of this, I think, also.

It's worth repeating.

Yes. Thank you, Niklas. And we heard you describe the business and market situation. So let me do a quick summary of key financials and also give some additional information. Sales increased 6% during the quarter and 7% in the period. A good EBITA increase of 11%, both in the quarter and year-to-date with an increased margin. I will elaborate further on this later on. Net financial items have come down during the quarter as well as during the year, which is primarily due to a lower reference rate. This decrease is offset by a natural increase in current tax driven by profit increase and a higher effective tax rate due to more business in countries with higher tax rates. All in all, earnings per share is steadily increasing and amount to SEK 3.80 so far this year, which is an increase of 13%. Our operating cash flow was very strong during the quarter and increased by 45%. Profitable working capital increased to 77%, and our leverage was still low at 1.5. I will come back to all of this later on. Our consistently strong return on capital employed of 22% over a long period demonstrates our efficient use of capital. This reflects our disciplined approach to profitable growth and capital allocation, ensuring continued high returns for our shareholders. As Niklas commented, our EBITA grew, and the profit margin continued to improve. The improvement over time regarding the margin is broad-based and is in general, thanks to active work to increase the value add in our value proposition, good pricing power and to strategically improve our product mix, and not least, good contributions from acquired companies as well as good leverage from organic growth. Of course, a firm grip of overhead costs is also contributing to the outcome, and we can see that the trend line of total cost still has a good development and our overhead costs in relation to sales are stable. During the quarter, our measures in businesses where we see persistently lower market conditions continued as always. And especially in business area Automation, this had an effect on costs in the quarter of approximately SEK 10 million, related to layoffs and other cost cuts. Regarding other operating income and expenses, we had a positive effect on profits from revaluations of earn-outs of about SEK 4 million compared to a negative effect of SEK 6 million last year. Other items, including currency effects from revaluation of balance sheet items, was essentially in line with last year. Group items are higher in the quarter as well as year-to-date, both from an increased cost base, but it is mainly due to the fact that the final allocation of the management fee has not yet been made this year. Our cash flow from operating activities was strong during the quarter, strengthened by higher earnings and positive working capital development. Cash conversion remained stable since profit increased relatively more than the cash flow. Total working capital and inventory continued to decrease organically, and our long-term target profitable working capital remained stable at high levels sequentially and reached 77% in the quarter. The inventory value remains at satisfactory levels in relation to the order backlog and sales and decreased somewhat during the quarter. Our financial position remained very strong, and our gearing and leverage was kept on low levels despite the payout of dividend during the quarter, thanks to good cash flow and that net debt was in line with last year. Our strong balance sheet gives us plenty of room to maneuver according to our growth strategy and invest in attractive acquisitions, which I believe that you're about to talk about now, Niklas.

Yes. So in total, we have acquired 3 companies so far this year and have added approximately SEK 0.5 billion in revenue with good margins. During the second quarter, we completed one acquisition, a German company, Innovatek, developing customized cooling systems for industrial applications. The acquisition pace varies as always throughout the year, and this is related to timing in the pipeline and ongoing projects. We have a positive view of the acquisition market. Malin mentioned our strong balance sheet and cash flow. And there are plenty of opportunities in our niches, and our pipeline is well filled and continue to grow. So we also have a number of projects ongoing in different phases. So bottom line is, given this background, we expect to acquire according to our growth strategy for the full year. As I mentioned and that we announced late September, we have a new strengthened organization from 1st of October, now comprising 6 business areas and 15 business units. Fundamentally, this is very undramatic and something we usually do now and then. We have now had very strong growth for a long period. So the timing was, we believe, very good. So we do this to scale up and vitalize the business organization, to capture future growth even better. So I will briefly walk you through the key elements of the reorganization. Firstly, we have streamlined business area Energy to focus primarily on electrical transmission distribution to capture the very high demand for materials for power lines and substations in connection with the expansion and renovation of the grids where we see a long-term underlying growth on many markets. We have also clarified another niche strategy in this business area linked to increasing demand for power supply for electricity demanding industries. Secondly, we have made some company rearrangement within business area Electrification, now with an even clearer focus on electrification of equipment in 3 areas: power, mobility and batteries. And finally, with the basis of the former business unit, Energy products, complemented with some companies from Electrification, we have formed a new business area called Safety. And we have a fairly broad scope centered around safety and aim to capture the potential from stricter legal requirements and the more complex threat landscape and increasingly digitalized world. So we see interesting underlying growth within these areas. We have today a number of companies with products and solutions that work with preventing risks and creating safety and security for people, industries and society broadly. So we see good potential here going forward, both organically and through acquisitions. And one important part with a reorganization like this that should not be underestimated is that we add new Addtech people with new responsibilities. So we now have 2 new business area managers for Energy and Safety that are members of my management team, both with long history and experience within Addtech in their respective niches. So I'm very happy about this. To conclude, this is a scale-up of the business organization that gives us a solid foundation to even better capture future growth opportunities, both in existing niche but also to continue to explore new attractive niches. From third quarter, we will report according to this new organization, and we expect pro forma figures to be published no later than early January. To summarize, all in all, I'm very pleased with the second quarter. Overall high customer activity, and the favorable business climate in a number of areas continue to give us good growth. Even though we still see some hesitation in certain segments, especially for larger projects and investment, but we continue to have a positive order intake in the quarter. Our balance sheet is strong, and with a well-filled pipeline, we expect to acquire according to plan for the full fiscal year. Short-term outlook, as we write in the report, is good. And with our new strengthened organization, we are well equipped to capture future growth also going forward. With that said, let's open up for questions.

[Operator Instructions] The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

You've already answered several of mine, but I would like to ask on Industrial Solutions. You highlighted in the report the order deliveries or project deliveries in subsea, but now said that sawmill is the major contributor. Can we get a sense of how important the subsea deliveries were for this quarter?

Zino, well, I mean -- we have had a period with good development in the subsea sector. While we highlight that, I mean, the very strong growth in Industrial Solutions should not be extrapolated going forward, so I mean, it was very strong performance from subsea and primarily the sawmill part. So I would say the absolute majority of these project deliveries is within the sawmill business. So it's not the subsea segment. It's primarily the sawmill.

Yes. And just to hear about the incremental margin, given that when we -- it doesn't really stick out given that the project deliveries were that high. Can you comment on, yes, the incremental margin on the deliveries, let's say?

Yes. I mean that's, of course, an important question. But I would rather say that the margins on those project deliveries are rather lower than adding to the margin. So it's not an incremental margin increase on those sales.

Very clear. I would like to ask also on a bit more, I would say, long-term questions with how you scale and then new Safety business area. Given your decentralized structure, how does a new business area actually help you with growing aside, of course, from lifting people up in the organization?

I mean I would say this is really part of our culture that with the kind of -- call it, small-scale focus that -- I mean when we put certain niches in a position, and we recruit and lift up really talented people that knows these areas in a good way, we get to better focus on that. So it's really about driving growth both organically and through more focused acquisition work. So it's really running down to responsibilities and having the right people on the right positions. This is what has been driving our growth for basically all the time since we were listed. And the times we have done this restructuring, this has usually vitalized the organization.

Yes. Understood. And a follow-up to that is -- we'll probably have this structure then for a couple of years now. But is this how we should expect Addtech to scale, by adding more business areas? And how long do you think you can do that?

Yes. I mean this is a usual question and what we are -- my view on this is that we have a very scalable organization. And I have said now for a couple of years that it's probably in the foreseeable future we will add another business area to scale up. And this is what we do now. And the way I see it, we can continue to work with this structure for many, many years to come. So as I see it right now, it's likely that we sometime in the future will do the same again. But right now, I think we have a very good setup for the coming years here.

The next question comes from Carl Ragnerstam from Nordea.

It's Carl from Nordea. A couple of questions from my side as well. Firstly, on Energy. I mean you saw -- we saw the deceleration of organic growth. Obviously, as you said, taking the high-level perspective, demand obviously looks great. You mentioned that you'll see a recovery in early next quarter. Is it possible to give any quantification or more flavor if it's a minor positive sort of sequential recovery you see? Or is it that it will be back at the teens organic growth again? And also on top -- on that note, do you see it being able to offset the more maybe sluggish forestry market short term?

Carl, what was your second -- I didn't get the second part you talked -- said something on sawmill.

Yes, sure. No, no. But if it's the recovery you see in Energy, if you think it's enough to offset the sort of potentially more sluggish forestry market now after the big deliveries of the backlog?

Yes. Okay. So to start off with the situation on the grids. Again, important to remember that the underlying investment plans are very, very strong. The other markets we are operating in here are having good development. The tough comps here is primarily on the Swedish market. But when we talk with our customers here, that is not focusing on a specific quarter, they see this as kind of a normal business. So this is a very temporary product dip. So as far as we see and when we look on the projects that are on the table and on discussions, we believe that, as I said, it will come back beginning of '26. We are having tough comps here, as you know, in Energy in the coming quarters. It will hopefully be partly offset by other things that are growing now. But to talk about when will we have organic growth on transmission side the coming quarters that's really difficult to say because it depends on development on the other markets and also how quick these projects will come up. And whether this will offset the tough sawmill market? It's really difficult to give a clear answer on that. Again, we have 150 companies operating in many, many different markets. The growth will come from one way or another. So to link energy transmission and sawmill to each other is to make it a bit too narrow, I would say. So it's difficult to give a clear answer there.

Fair enough. But you said that you see -- you expect improvements already next quarter. Is it something you see in deliveries as of now then? Or is it more in discussions with the customers who said that they will -- I mean projects will start?

I mean we have a good order stock in -- on this side that we will continue to deliver. But when we talk about an uptick in the beginning of next year, it's primarily on the demand side. So it's a temporary project dip. We have a good order stock we're delivering out on. But yes, that's the situation.

Okay. Very clear. And I would like to continue a bit on the order intake side. You seemed satisfied. You saw a positive book-to-bill. Could you give some flavor on which 4 segments you see a positive order intake development where -- if it's possible to quantify sort of what magnitude you see? I know it's -- I mean you have some book and bill as well, meaning that not everything is projects, right? But some flavor would be good.

Yes. I mean I mentioned 4 out of 5. I mean it's in the Energy segment, and relating to this temporary project dip, that's where we see a slight lower order intake. All other business areas are having good growth on order intake. And that is quite broad-based. It's -- of course, there are a couple of areas with very strong growth like defense. We also talked about special vehicles from a bit lower level, but we see a strong increase there. But I think the most important part is to mention, it's a quite broad-based positive development.

Okay. Very clear. And the final one from my side is on Automation. Surprisingly strong margin, I think, at least versus my expectations. So is the margin sort of improvement sequentially? Is it driven by the full effect of the cost savings? And also on that note, will it come more from the already announced ones? But of course, on top of the SEK 10 million you took now, if you get the point, meaning that during this quarter, was it the full effect of the previous ones and then we should add the SEK 10 million on top of it from Q3 and onwards?

Yes. I mean, as you say, if you take out this SEK 10 million, it's a good margin improvement especially sequentially in Automation. And this is a combination of the product mix we have worked with taking away some low-margin business. So that's on one side. And then we start to see positive effects from all the cost-cutting measures we have done there. Whether there are still more to come? I mean we decided to put this SEK 10 million clear in the report to kind of highlight that this was an exceptional quarter on that side. I wouldn't say we will not continue to do some cost cutting in some companies. But I would say, in general, that we have now done most of it with a positive book-to-bill and with the new kind of cost structure. We -- as I said, we believe that especially starting from the fourth quarter, we will see an improvement here.

The next question comes from Karl Bokvist from ABG Sundal Collier.

A question on M&A here and your ambition to do acquisitions in line with your strategy. If we think, perhaps, about contribution to profits instead, I believe that last year, you delivered upon the target. And right now, it's a bit below. So just to understand it, first question is really, are you -- with that comment, are you referring to kind of your growth strategy or a number of acquisitions in mind?

Yes. Karl, I mean we always focus on the growth strategy. We don't focus on a number of companies, actually because it depends on the size of the companies and of course, the margins in the companies we acquire. We always focus on profit growth. So when I say that we expect us to do according to our financial targets, it relates to profit growth. What was that...

That's clear. Absolutely. Absolutely. So -- and then my second one, you mentioned data hall growth, and this might be just a bit more specific. When it comes to numbers and when you disclose data and telecom, for example, it seems like that kind of area of sales is still down year-over-year, albeit against tougher comparables. So it's just to understand, one, if the data hall demand is within that category of sales? And two, does that mean -- is it more about tough comps? Or is it that other things within data and telecom are developing slower and thereby offsetting the strong demand in that area?

Yes. I would say -- the answer is kind of yes on all you said. I mean it's in data and telecom, but it's -- depending on that it's rather weak in a couple of other areas within data telecom. So that's the reason behind it. So we still have a good development on the data halls.

Okay. Understood. And then the final one is, just when it comes to defense activity, which you say is high, should we assume that those defense-related areas and companies that they will be moved to Safety? Or is it still that, for example, Automation will maintain this kind of high exposure to defense?

Yes. I mean, again, we will -- when we get the set of numbers for the new organization, of course, we will talk about this more in detail. But I mean, as I see it, we have defense exposure in -- actually in every business area, but primarily in Automation and Electrification. And I would say that this new organization will not change on that side. But again, I mean, within Safety, we will have exposure to defense as well. But -- yes, so the reorganization will not change the fact that Automation and Electrification has quite a lot of defense exposure.

The next question comes from Johan Lönnqvist Sundén from DNB Carnegie.

First, maybe a quick follow-up and just a clarification on a question from Carl earlier on the transmission grid side. When you say that you expect demand to pick up beginning of '26, do you refer to sales that hit your P&L? Or do you refer to orders intake?

Yes, more order intake. This is an ongoing -- I mean again, the activity with our customers are very high on an ongoing basis. So it's a little bit of a moving target. And usually, they have maybe 1, 2 quarters from order intake to sales in our book. But again, as I said before, it's very difficult to say here at this time when demand will get into sales. And we have a good order stock to deliver from as well.

Okay. But best guess from now is Q4 during this fiscal year for you?

Yes, especially on demand side.

Yes. Great. Then I have -- we've discussed a lot of trends here already. But I think we should just take it -- would also be interested to hear a little bit on your Electrification side. I think from my perspective, the revenue growth was a little bit light, and margins was, probably, we can say, probably, a little bit light as well, given that margins was down a bit last year as well in your Q2. Give some color what you see, what's happening, what is the driving forces and what you expect going forward given the favorable order intake?

Yes. See, I mean for Electrification, it's a really mixed bag. We have a number of companies performing very well and a number of companies that are kind of struggling. And like one side that was quite strong last year that is slower now is on electrical production. But we have strong -- and also tough comps on part of the medical. But going forward, I would say that we will see a more positive development on that side. So I mean all in all, a positive book-to-bill in Electrification that is giving us comfort now. As of now, a flattish development. And margins, as you say, it was a bit down in Q2 last year, but I think the margin in this quarter, to be a second quarter for Electrification, is a good margin, and that is relating to the product mix and a very good increase on the gross margin. So yes, I think we have a good outlook here.

And any comment on the kind of vehicle side on the Electrification area, the battery side, for example? We're waiting for a pickup for quite some time. Any indication there?

Yes. I mean as you say, I mean, it's been -- the last couple of years and all things happening around us has slowed down what we initially expected on that delivery. It's still a bit slower. A little bit improvement here, I would say, during this period and where -- especially one of our customers have gone into serial production. So it is a gradual improvement but still on a slower pace than expected. So as for now, we are expecting this to pick up in a better way during '26.

Perfect. And my final question, it's on margins in acquired entities. I think when you look through the kind of comments you have on your M&A activity, it seems like margins have been a little bit lower than we maybe were used to a couple of years ago. Is there anything specific to pinpoint that companies are underperforming that you acquired? Or is it just a pure mix effect of the -- and the timing that the companies as of now have lower margins than they had maybe 1, 2 years ago?

I'm not sure I would agree on that, that it's a lower margin. I mean if I look on the margins on the acquired, the acquired effects in this period is on a very good level. And if you look on the companies we have acquired, most of them are performing according to plan. A couple are performing better, but then we have a couple of companies underperforming as of now. So -- but all in all, I would say that we are pretty much on track. I mean the companies we acquire now should add to our average margin. That's how it is. But then, of course, it can be some variations over a quarter or 2 quarters depending on. We have -- a couple of companies we acquired that is more project related where it can really, really differ. So one company we acquired last year has underperformed, but very strong demand in the last couple of quarters. So that will pick up during the remainder of this year. So it's more relating to individual companies.

I understand. I think we covered most other important aspects.

There are no more questions at this time, so I hand the conference back to the speakers for any written questions or closing comments.

So since there are no written questions, we are wrapping up. And thanks for listening in and good questions, and have a good day.

Thank you. Bye.