Prevas AB (PREVB) Earnings Call Transcript & Summary

So we'll present the Q2 report for 2024. With us presenting, we have the CEO, Magnus Welén; and CFO, Helena Burström. [Operator Instructions] And with that said, please go ahead with your presentation.

Thank you very much. My name is Magnus Welén, and I am the CEO of Prevas. I welcome you all to this presentation of the Q2 report for Prevas. And with me today, as was announced, we have our CFO.

Helena Burström.

And we will go through this presentation and also finalize with a Q&A later on during this meeting. Looking to the agenda for today. We will start with a brief introduction, then we will have a review of the financial performance for Prevas. We will have a discussion about the market, a brief market update, and then we will finalize with a Q&A session. And I hope that you all come in with a lot of questions, so we get a good discussion after this very brief presentation. Okay. Looking into Q2, how have we performed? Actually, we have been able to grow in this first quarter. We have grown with 4.8% in turnover, almost 5% growth in this market climate, but we believe that this is rather strong actually. And this growth was made mainly by price increases and through increase of project deliveries. So all in all, Prevas continued to grow during the second quarter of 2024. Looking into the profit. Actually, this quarter was the best Q2 that Prevas has ever performed, so we are very proud of that, of course. We're also very positive to see that we have a strong cash flow for the Q2 as well. The EBITA for the month -- no, sorry, for the quarter was SEK 36.2 million and we delivered a margin of 9.2%. Compared to last year, we had a lower utilization, but that was offset by a positive calendar effect. We had 1 more working day this quarter compared to last year, but we also had increased gross margin. The increased gross margin comes from that we have been able to increase the prices more than the cost inflation and the inflation for salaries. And that is one part of the increased gross margin. Another part is that we've been able to work with our business development, where we delivered higher value to our customers and working with our business model. This is a long-term work, but we see continuously that we get results of that kind of business development that we work with within Prevas. We also see that the cash flow has increased substantially compared to last year. Helena will come back to that a little bit later with a review how that could be possible. During this quarter, we have also invested in Prevas actually. We have invested in the future. One example is that we have now moved into a new facility in Västerås, 4,000 square meters, where we will gather our team of engineers in order to be able to develop and build new automation for the industry. For global multinational companies, we are developing robot automation, process automation and now we can gather these resources and be able to grow at an even steadier pace moving into the future. During the quarter, we have also got the regulatory approval for the acquisition of Enmac that was announced during the first quarter and we are very glad for that as well. And looking a little bit more into details of the figures for the quarter, you can see what I was mentioning about the turnover and EBITA. But you can also see that the EBIT actually is lower than last year. And the reason for that is that during this quarter, we had acquisition-related items of SEK 4.3 million. And if we, as I say, add those SEK 4.3 million on the SEK 31.8 million, we reach an EBITA -- sorry, an EBIT of SEK 36.1 million, 9.1%, which we believe is rather good in the present market climate. We also get this effect, of course, of EPS, but despite this, we actually grow the EPS for the quarter with 5.8%. So we delivered EPS for the second quarter of SEK 2.01 per share, which, of course, is -- I'm very proud to be able to deliver increased EPS for the quarter. So one quarter is one thing, but of course, we need to look into the value creation we do over time in Prevas. You can see in these graphs that we have been able to make a big change in Prevas since 2017, looking into both in terms of growth, but in terms of EBITA development. What you also can see, unfortunately, in this sense, is that we have a lower margin now than we had 4 quarters ago. And the underlying reason for that is that we have had a market that has been more challenging for some quarters, which, of course, has affected Prevas as well as many of our peers in the industry. During these quarters, we have been focusing a lot on the margin. We have been adapting our resources to go into the markets where we see demand, and we have been working a lot with our costs. And we have also looked -- worked with our recruitment so that we recruit in the areas where we see demand, and we actually have been decreasing in some other regions where we have seen lower demand. So an active work within Prevas in order to work -- to maintain our margins in the rather challenging or in this kind of market climate that we have seen. So rolling 12 Prevas has now EBITA of 11% and we see that we have very good opportunities to reach our target when we see that market comes back again, as we have made quite a lot of operational improvements during these 4 quarters as well for the future. So I'm very, very positive for the time that we have ahead of us based on what we have done internally in Prevas as well. Looking into -- sorry, the wrong picture. Looking into our financial position, I leave this to our CFO, Helena, who will review that.

Thank you, Magnus. We have increased cash flow from operating activities with 26% or SEK 13 million compared to Q2 last year, from SEK 50 million Q2 2023 to SEK 63 million Q2 2024. This is mainly driven by a positive change of working capital. Cash flow from financing activities includes payments of a dividend of SEK 63 million compared to last year's SEK 58 million. And since the final day of Q2 was during the week and amortization was deducted at the beginning of July, and that's affecting financing activities positively with approximately SEK 6 million. And the incentive program, 2021, 2024 has affected cash flow positively with approximately SEK 5.5 million when converting into shares. Cash amounted to SEK 120 million at the end of Q2 2024 compared to SEK 60 million in Q2 2023. Prevas' financial position remains strong. We can see that Prevas is well below the financial target of maximum 2x EBITDA. And net debt in relation to EBITDA is still negative. Prevas' equity ratio remains strong and amounts to 58.2% in Q2. Q2 2023 equity ratio amounted to 59%. And then Magnus, can you please give some updates regarding Enmac?

Of course. Thank you, Helena. A little bit about Enmac and the progress. As I was mentioning, we now have the regulatory approval that was received at the end of June. And so we closed the deal on July 1, which means that we now consolidate Enmac into Prevas for the third quarter 2024. Enmac is a company based in Finland with around 200 employees spread out on 8 locations across all of Finland, also strong in the northern part of Finland. They have a turnover of the -- last year of around EUR 23 million with a healthy margin. And they are specialized in process and production development. It's an engineering company, a consultancy company. So it's a very good fit with Prevas in many, many different aspects. But through this merger, Prevas will be a pan-Nordic group operating across Sweden, Norway, Denmark and now Finland. And adding the 2 companies together [indiscernible], so to say, we are actually on a turnover of SEK 1.75 billion in annual turnover. And we are now around 1,100 colleagues within Prevas, which is a very good step forward for Prevas as a group. And as we now have closed the deal, the time has come to actually start to work because one thing is closing the deal and another thing is the good interesting part that starts now, where we actually will work together and create the values that we see ahead of us together. The main target with this acquisition is to develop the business and foster mutual growth. We see this not as a cost cut case and more of a growth case. And we see already now that the combined strengths we have within the different 2 companies gives us competitive advantages. And one example that we are -- we had a discussion today with a customer within industrial automation, a multinational group that is interested in acquiring larger scopes of industrial automation. And those scopes have been a little bit too big for Prevas, but absolutely too big for Enmac, but now when we are one team, we can actually have a strategic discussion with this multinational customer and see if we can find ways forward together. And this, I think, is a good example of what I see that we can do together with Enmac, utilizing the different strengths in these 2 very nice organizations. Talking about integration, Prevas has acquired 10 companies since 2021. We have done that in a successful way. So we have, of course, made a lot of experience in how to do these kinds of integrations. And our way of doing that is a very pragmatic view where we build upon the strengths of the different companies and choose the best way of working. So we have a good method that we have, so to say, practice with the acquisitions we have made and with that we will utilize also in the acquisitions of Enmac. And the key in all of these kinds of integrations is the people. So we will focus a lot on getting the people on board and getting motivation and the motivation comes very, very much from the customer side. We want to deliver customer value, and that is what we will focus in this integration as well. And it's important to have the team on board. And what we have in this case is that the MD and his management team, they have chosen to reinvest into Prevas after this merger as well. So that is also, of course, a good thing in the sense for the integration moving forward. So I'm very excited about this. And also now we are full speed ahead together in building the Nordic Prevas and taking this giant steps forward for Prevas as a corporation. And then a little bit on the market. The market during the second quarter was very similar in many aspects as the first quarter. We see high demand in some areas like the green transition, within cybersecurity, within defense, but we also see that the competition in some areas is rather high, especially on consultancy assignments that has -- the competition has remained high during the second quarter as well. And one example there is we see in general IT services. It's not a big part for Prevas, but in that area we clearly see even during the second quarter that there is a lot of free consultants that need -- searching for assignments, which, of course, affects us in those -- that part of our business as well. But during this quarter, we also have seen that the demand for complex solutions remains. Prevas as a company comes to its best when we are able to work with the complex issues with the complex solutions. We're using advanced technology for doing good things. And we see that the demand in these areas are still high. And I would say a couple of years ago, that one part was a lot of startups drove this needs, but we have seen during the second quarter as well that the need within the startup scene has been quite low, but the multinational global players that are partners with Prevas, there we see that there still is a good demand for solving complex problems. And that is very, very good for Prevas as well. What we can see also is that our largest customers, and we have the 5 largest customers are less than 25% of our turnover. And actually, there has been a slight change in that list because we have grown in Getinge. Getinge is a multinational leader in medtech industry. And over time, we have been working with Getinge for many, many years, but recently, we've grown our business together with Getinge. So now they are actually one of our top 5 customers, which we are very glad to see, of course. Looking into the market, we can say that we see some positive signals here and there. But most clearly, actually, in Denmark, our Danish unit has experienced quite challenging market conditions for quite many quarters. But now we see that the order books are increasing. We see that the discussions with customers is in a different way. So we see the demands in Denmark is picking up. And we also now feel confident that Denmark will deliver very good now for the coming quarters. So that is a positive change that we see in the market as well. Generally speaking, we are very positive about the future. And also we foresee that we would see, looking into the PMIs and discussions in the society and the interest rates are going down, everything is pointing towards an increased demand moving forward. But as I said, during the second quarter, it was very similar as in the first quarter, but we are positive. Okay, a summary of this presentation. I believe we made a rather good second quarter for Prevas. We've shown that Prevas can deliver value even in these kinds of markets situations that we have now. We managed to increase our turnover. We increased our EBITA. And we also actually made the best second quarter that Prevas has ever delivered over time, which, of course, we are very proud of. We are also happy to announce that we now are through the approval of the acquisition of Enmac. And finally, we can start together to establish our platform in Finland and shaping the Nordic Prevas. That work has started, but of course, due to the vacation and people on vacation, the real work starts more or less in August in that sense. We have a strong cash flow, as Helena was mentioning, a very strong financial platform, and we are looking for further acquisitions as well. And we have the discussions regularly with many different companies and looking into different acquisition targets. But as I said before, we are very picky. So I can't promise that we will acquire companies, but I can promise that we have -- we focus on the issues as well, and we will be able to find interesting acquisition candidates moving forward. So all in all, this -- from my point of view, I think we're executing on our long-term endeavor to strengthen our position as a premium company, a premium company for our customer, a premium company for our employees, a premium company for the society and also a premium company for all of you, our investors. That is very important for us as a company. So we strive all the time to strengthen our position as a premium company in all different aspects. And this was the presentation that I -- that me and Helena should give today. And I would like to summarize this, okay. Now we're moving into summer. Me and Helena will have a short summer break, but we look forward to the autumn. It's very strange to say that in that sense, but we really look forward to the autumn to see -- to explore all the possibilities that we see in the autumn as well. So with this, that was the final part of this presentation. And now we move into the Q&A session. And I hope that all of you have a lot of interesting questions for us. Thank you very much for listening.

Thank you very much for that presentation. And yes, we do have a lot of questions for you, starting with the first one here. Are there any specific reasons behind the lower profitability compared to last year since the calendar should have been a tailwind?

Yes. I mean the specific, as I wrote in the report as well, is that we have had a lower utilization in this period compared to last year. That has been offset by this calendar effect and also the improved gross margin, but underlying, we had a lower utilization. That is the explanation in that sense regarding the profitability as such.

And are there any signs of improvement in the market as of late?

I would say that the market for Q2 was very similar to Q1. We had some positive discussions with customers. And as I was mentioning, we have the situation in Denmark, where we have clearly seen that we have an upturn. We think there are positive discussions, and we are very hopeful for the third quarter and the fourth quarter as well. But as we all know, it needs to show in the order books moving forward, but we are very positive in that sense, yes.

Okay. And are you currently accepting lower utilization, meaning lower margin in order to have the required manpower when the market picks up again?

Very good question. I would say that partly, but we strive to reach a good utilization, which means that if we have regions and units with lower utilization, then we take action. We have taken that action throughout the last 4 quarters as well although, of course, our main objective is to increase the sales in order to fill the pipeline, so to say. So in that sense, given that we have a slightly lower utilization this quarter compared to last year, given that we can increase the utilization slightly will have a nice effect there, of course, on the EBITA moving forward.

And can you give us some more color on the positive working capital inflow? Is it a result of the current challenging environment?

I would say it's an effect of constantly working with the working capital and having really good customers and focusing on this area.