Prevas AB (PREVB) Earnings Call Transcript & Summary

Welcome to the Prevas Q2 report 2023 conference call. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Magnus Welen. Please go ahead.

Okay. Hello, everybody and welcome to the presentation of Prevas Q2 report. My name is Magnus Welen, and I am the CEO of Prevas. And today the plan was that our CFO, Helena Burstrom should join in the meeting as well but unfortunately, she is home ill. So instead of Helena, I have with me Linda Sodergren, our Financial Manager who can support with -- if you have specific questions regarding the financial situation, and so on. Okay, so we continue I would like to first start with a brief introduction of Prevas, the company that you are visiting today. We are an engineering company founded in 1985 in Vasteras, Sweden. We are today above 900 co-workers working in the Nordic markets. Our main market is Sweden, and we are present in Norway and also in Denmark. We work in 2 different areas. We work in product development, and we work in production development. This means that we support our customers with their core -- with their core processes. And supporting them with things that are truly important for our customers. So who are our customers? We work with high-end industrial companies normally working on the global level, which means that they are competing on the global base and we are supporting them with their core processes, thus means that we need to be at par with their high level. So we support with world-class solutions, world-class services to our customers. And to summarize what we do, we create technological advancement for the betterment of all, for the people, for the planet and also for the profit. And talking about profit. I think that is a good way to move over to the actual Q2 report. And this is the agenda for the presentation today. We will start with a brief introduction, which is now more or less. Then we will have review of the financial performance, some comments about that. And then, we'll be looking to the market the way forward and we will finalize this session with a Q&A session where you have the opportunities to ask questions to me and to Linda. Okay, so let's go. The first slide here is about a major change in Prevas. This is that our former CEO, Johan Strid, has decided to resign as CEO after 5 successful years. Johan and Prevas had made a fantastic journey over these 5 years. The good news in this is that Johan is elected to the board of Prevas, so he will continue to be a part of the Prevas family and to work together with me and the team at Prevas. Johan will also support us with M&A activities. Thus, it means that we will maintain our progress in that important area as well. As I am new in this role, Johan will support me in these areas. We will keep the pace that we're used to here in Prevas. So this means that I'm the new CEO from the 1st of June and this is natural my first presentation of a quarterly report, so I'm very happy to be here. As I'm new, I take the opportunity to give a brief introduction of who I am. This will not be a 20-minute long presentation. I think it's like 2 minutes. I hope it can be like that. So I have a industrial background. I'm an engineer from the beginning from Royal Institute of Technology, I have been working with the industrial companies like ABB, like Sandvik, like Snap-on Incorporated. So I've been working in our customer base since 2008. I've been working in the consultancy industry. I've been working at a company called Deva Mecaneyes, where I started as -- in a small consulting company with 20 employees. And then since 2008, I was the Managing Director of that company growing that into well about 100 employees. And the company was acquired into Prevas in 2001, when Prevas acquired the Evotech Group. After that, I have been working as a Regional Manager in Malardalen for Prevas and the operations that I've been running here in Prevas since 2001 is well above 200 employees. So it's a rather big part of Prevas that I have been responsible for before I got the opportunity to move into this position. So since the start, I've been traveling around Prevas visiting all the sites and learning more about Prevas. And I must say that I'm impressed about many things about Prevas now when I get to learn the company more broad, but the people and what we do for our customers, we really deliver world-class solutions and services and make a difference for real. For our customers, we are creating enormous customer value, but also for the people, for the planet. We do good things with technology, I'm proud of that. So that was the introduction. Now let's move into the part where you actually, I believe, is more interested, the financial performance. How did we perform during Q2? What we see is that Prevas continued to grow. We actually grew with 13% in the top-line. We maintained the operating profit in SEK more or less, but what is important to emphasize in this is that for the quarter we had one working day less than compared to last year. If we adjust for that difference, we actually maintain our operating margin for Q2 compared to Q2 2022, which I believe is a strong quarter. What we also can see in this quarter which I would like to emphasize is that operational cash flow has increased quite substantially from SEK 31 million to SEK 50 million. So we have a strong operational cash flow for this quarter. Moving on. This is another PowerPoint slide where you can see during the quarter the same figures more or less, but what I would like to emphasize here is a quarter is a quarter. If you look into quarter 1, we had 1 working day more. We had a record quarter in Q1. We made a good quarter in Q2. And if we add those together, I believe it's a good -- this gives a good view upon how Prevas performed. This was -- what you can see here that for the first half year, we grew the turnover with 19%, we grew the EBITA with 19%. So we maintained our EBITA margin of 12.2% for the first half year of 2023 compared to the first half year 2022, which I believe is fantastic. And also it's a whole time high for Prevas, this first half year is all-time high. So I'm very proud to be able to present that and it's a good platform for the journey ahead. But as I said, looking one quarter looking at a half year but we need to zoom out a little bit more to see how the company is developing over time. So on this slide, you can see that the development -- here you can see the 12-month rolling EBIT and EBITA margin, and you can see that Prevas has gone through a tremendous change over the years. In 2017, where we struggled quite hard. And today we are up at I would say rather healthy profit margins and also we have a continued growth over these time in terms of EBIT. This is something that we have Prevas are proud of to show. Looking into the highlights of the cash flow. As I was mentioning, the cash flow from operating activities increased rather substantially. That is partly due to that we are invoiced larger projects. It's also whether we're going back to a more normal level of the cash flow for the quarter compared to last year. But you also can see in these figures is that the cash flow from investment activities is actually low. Why is that? Because the reason for that is last year we acquired a company BitSim NOW and factor10, this quarter we did not do that, that is rationale because -- and that the reason that the cash flow is lower this year compared to last year in the investment activity. Looking into financial activities, we actually have a larger negative cash flow and the reason for that is, of course, our increased dividend. So that is a good thing actually [indiscernible] now that the financial activity is the cash flow is increasing negatively but that is due to dividends. And that is a good thing because that's an important part for us at Prevas in order to pay a good dividend. Explaining the cash situation you can see some of the major things we were doing since the end of last or quarter 2, 2022 and the end of this quarter. We have made amortization of SEK 23 million and that relates to loan that we took 2001 due to the acquisition of Evotech, that loan was SEK 90 million. We are now down to SEK 33 million, which means that our debt will go down even further in the coming quarters. We paid dividend of SEK 59 million, which is well above 2022, last year it was SEK 45 million. And during this period we also had SEK 90 million of cash outflow due to acquisitions. One thing also that I would like to mention is that we had an effect for the cash flow of synthetic options of SEK 12 million. This program has now ended and it will not affect the cash flow from Q3 and forward for Prevas and would not also even -- not affect the margins, et cetera and the profit after tax and so on. So that program has now ended. Yes, looking into the debt situation you can see that our net debt has been reduced from SEK 20 million to SEK 9 million, which means that we are well in line with our financial goal. The frame that we set up, it was that we shouldn't exceed 2x of the net debt/EBITDA ratio. We are now down to 0.04. So we have a strong financial position. Our equity ratio is 59%, which I believe is really strong. So to summarize my view of our financial position within Prevas, we have strong official cash flow, we have a low net debt, we have increased our dividend and we have a strong balance sheet. We have a solid financial situation. The summary, we have a great financial platform moving forward and taking Prevas to the next level, which I believe is exciting. So that is a little bit about the financial position. Now what is our view upon the market and the way forward. Before I go into that I would like to emphasize some highlights for the quarter, which I'm extra proud of, of course, that we have been achieving within Prevas. We achieved -- we got an award from a company Hexagon in Las Vegas on their fair HxGN LIVE. We were -- we got the award Outstanding Channel Partner, which I believe is fantastic good sign of a long cooperation with Hexagon and the value that we provide for our customers. We are very proud of that. And thank you, the team working with EAM within Prevas that we actually received that award. We signed a framework agreement with a global industry leader. This is something that's a bit frustrating in my position. We do so many good things that we can't talk about. Yes, I understand it sounds strange but it's -- we need to take care of our customers' information in the perfect manner and we respect that 100%. So we can't actually tell who this is, but it's an international global industry leader that had chosen Prevas to continue to work with and improve their partnership. We made a spearhead acquisition within the life science area a company called SDS MedteQ where we have a private team of experts within regulatory compliance in life science in MedteQ. Fantastic, very warm welcome to Prevas. We have took in several important order for the quarter. We have an order from a complete automated production line for a company based in Norway, which is -- we are proud of that. That order will actually be delivered 2024, and some parts of that in 2025. So we're talking about long-term order intake in this case. We've been awarded to develop a safety system for mobility -- for 2-wheel mobility, which includes software and hardware. And we will save many, many lives with this system, so I'm super proud of that too that we got that project. Talking about good things. We have an order for an advanced control system for furnaces called FOCS that will reduce the carbon emissions for Uddeholm. Uddeholm is a global leader in their businesses -- steel manufacturing business. And together now we will reduce their carbon footprint, which I believe is fantastic. And I can continue and continue and continue. I will take one thing before I quit the highlights. We have been awarded to develop a large test system for the defense industry, we will come back to the defense industry. But unfortunately, I would say, there we see a major demand increase from defense industry, but we are there and we are helping the defense industry in many areas. So this is one of the examples that we get awarded, very advanced projects for the defense industry. Looking into our customer base what we can see here is that Prevas has a strong and diversified customer base. We have a good distribution between different industries as you can see between engineering, life science, energy, defense, et cetera, which I believe is a strong thing, so it's diversified. Our customers range from startups, we work with SMEs, we work with large global companies, large corporations that are competing on the international market. Another good thing with our customer base is that our 5 largest customers make up less than 25% of our turnover which is good from a risk point of view. It's important for you as investors to know that, our largest customers in Q2 is companies that I believe all of you know it's Saab, Ericsson, ABB, Sandvik and Atlas Copco. Strong customers, extremely great to work with and long stable partnerships, but also we got many new customers, of course, as well in the journey of Prevas. So looking into the market, as I was mentioning we see high demands in many sectors like within the electrification area, within sustainability, with automation, with automation, within energy, and also defense where we see that the demands for our services and advanced solutions are increasing. So generally, our view is the demand regarding advanced and complex assignments is greater than the supply in the marketplace, at least from our position. But we also see is that the competition on traditional consultancy assignments has increased in some areas, not in all areas in some areas it's still extremely high demands. But in some areas, we can see that the competition has increased. So what do we do in order to meet this dynamic markets? We focus to grow in the areas where we see increased demand. So the areas where you see on top of this is the electrification, sustainability, automation, energy and defense and these are areas where Prevas now is focusing to grow in order to meet that kind of demand. And I also would like to emphasize that the long-term demand for advanced technology and the ability to take all these complex problems is increasing. That is our belief and that we have seen over the years and we will see that moving on as well. So even though you can see short bumps on the road, sort of saying demands in different areas and so on, we strongly believe that the demand is growing over time for the high level of services and assignments that Prevas can deliver. Moving into the final slide now after 17 minutes or so. A summary, we see continued profitable growth in Prevas, we see stable margins and compared in the market I will say they are rather good we are in line with our financial targets of 12% EBITA margin, we made all-time high for the first half year of 2023. Very proud of that, of course. We see strong demands in several sectors and we work actively in order to meet those demands and we are cooperating within the Prevas group in order to meet these demands in an even better way. So we're working together in the company to meet these customers and the demands they see. And what is all of this? It's a way of executing our long-term endeavor to be perceived as a premium company from our employees, from our customers, from you, as investors, and from the society. And finally I would like to finalize this presentation with something very personal. I personally looking forward to execute on our strategy and develop Prevas into the future. So I'm – we are looking forward for the autumn. It sounds a little bit crazy to say, but I'm really keen on getting back to work after the vacation. So that was the presentation. And now we open up for questions.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. So everything was crystal clear, then? No questions at this time. Sorry, but we have one question.

How do you see the dynamic going in terms of value as well as price increase ability? Some Finland consultancy firm have recently published profit warnings. What is your view of the quarter to come?

I have a positive view upon on the quarter to come based on the customer base we have, the diversified customer base that we have and the kind of services and products that we run. So I have a positive view upon on quarter 3. But saying that, of course, we are active and we are feeling the market and we're transferring the resources into the areas where we see the demands. So we are humble, but positive. I hope that answers your question. I would say that Prevas is an attractive employer which we can see in our ability to grow through organic growth. But I can also say that we need to work even -- we are good today, but we need to be even better in that -- we need to be the best employer in the market. We are competing with product companies, with other consultancy companies. And I'm super proud to see that there are so many people every year that chooses to work with Prevas. We have an excellent team. We have strong values. We have fantastic customers so we are an attractive employer today, but we need to be even more attractive in the future in order to attract the best and we are simply after the best.

Additional one, do you have a specific target range for the EBIT/EBITDA ratio when considering acquisitions?

No, we don't have a specific range in that sense when we look into acquisitions. But when we think about acquisition, we need -- we think that we are really picky, and we want the acquisitions to do something good for Prevas. So we need to build Prevas in a good way. So we are picky and we are looking for quality in terms of acquisitions. But we have not set a range. We are working with small companies. We have discussions with rather big companies in terms of acquisitions in order to move forward. We have no fixed range in the terms of how much we can pay for the companies as well. But saying that, we have a strong balance sheet. We have a strong financial situation. So we are ready and we are open for finding interesting acquisitions moving ahead. Yes.

Could you please share the number of days expected for the 2 main quarter versus last year?