Prevas AB (PREVB) Earnings Call Transcript & Summary

[Operator Instructions] And with that said, I hand over the word to you guys.

So hello, everybody. My name is Magnus Welen. I'm the CEO of Prevas. And to get today, I have with me Helena Burstrom, who is the CFO of Prevas.

Hello.

And I welcome you all to this short meeting regarding the Q3 results for Prevas. We will start with a brief introduction, then we will have a review of the financial performance brief look into the market, and then we will finalize this meeting with a Q&A session. And I hope that we will get a lot of questions this time as well. All right. Looking into the Q3 for Prevas, we managed to grow with 13% this quarter driven by acquisitions. We also managed to increase our prices we continue to increase the prices even in this business climate. I think that is a strong signal showing that we're doing the right things in Prevas. Looking to the profit, we can see that the profit this year, quarter 3 compared to last year was lower. And the reason is that we have a lower utilization and also some specific challenges in Finland that I will come back to later on. The EBITDA for the quarter was SEK 26.5 million compared to last year's SEK 31.8 million, that equals to EBITDA margin of 7.5%. And of course, in a situation where we see that EBITDA margin is not where we want it to be. We take actions. And so we have taken mitigating actions in Finland. I will come back to that in a bit later in detail. But also in Sweden, we have taken actions. Looking into Sweden, we see a very dynamic market. Some of our regions are performing very well where we have a good order stock, we are employing people and growing. But we also have some regions in Sweden, where we have low demands and where we're actually reducing staff. On top of this, we are, of course, working with sales and the presales focus and cost focus in order to maintain our margins. Looking into accumulated figures for the year, Prevas is performing 6.6% growth and a 10.1% EBITDA. I think that shows also that Prevas is a healthy, well-organized company on a good path. Looking into this quarter, we also consolidated Enmac. This is a very important step for Prevas moving into the future as we now are a Nordic company for real. We also acquired a company in Denmark called Design-People. I will come back to that a bit later in the presentation as well. But as a summary, for this quarter, 13% growth, 7.5% EBITDA. We're taking actions to mitigate the EBITDA, and we have shaped a Nordic company within Prevas. Looking into the details for the quarter. You can see that the EBITDA margin was SEK 26.5 million, 7.5%. You can also see that the EBIT was 17.9%. The reason that the EBIT is lower is that we had onetime acquisition-related cost during this quarter equals up to SEK 8.2 million. That, of course, influences EBIT but also profit for the period and also the EPS. So with this, Helena, I would like to hand over to you to explain the situation about the cash flow.

Yes. Thank you, Magnus. Change in cash flow from operating activities in Q3 2024 is mainly driven by 2 factors: calendar effect negatively affecting working capital and lower results. And that is, as mentioned, affected by acquisition-related costs. The calendar effect has an impact on working capital, specifically accounts payable at end of June 2024 was on a Saturday and Sunday, and payments that went in 29 and 30 will proceed the following Business Day in July, resulting in higher accounts payable. Last day, in period Q3 to 2024 was on a Monday when also payments were done resulting in lower accounts payable. Compared to Q3 2023, it is the opposite around end of June 2023 was on a Friday. Payments were proceeded at date, resulting lower accounts payable end of Q2. End of Q3 2023 last day of the period was on Saturday and the payments remain in the following business day, resulting in higher accounts payable. So in whole, a double negative effect compared to last quarter last year. In addition, operating liabilities and working capital are contributing negatively due to effects from Finland, the project mix and some other short-term liabilities. Still, we have continued improvements in operating receivables this quarter. Our customers are stable, and we are having good [ elements ]. And with our continuous focus, we managed to reduce day sales outstanding. Last year, this was as well reflected in the cash flow from operating activities, the last day was on a Saturday. Looking into the investment activities. As mentioned, we have the acquisition of Enmac in this quarter, and it's reflected with SEK 189 million. And in financing activities, a new bank loan of SEK 200 million is reflected as well amortization of loans totaling SEK 92 million in the quarter. And that includes payments related to the loan connected to the acquisition of Evotech 2021. From previous quarter, we had a payment and as well current quarter, and that is as much due to the calendar effect. And we also have amortization of external loans that we have released in Enmac with SEK 72 million and new loans amortization in this quarter. And the use of the orders [ specific ] was SEK 10 million. Looking into the accumulated cash flow, excluding the acquisition and the acquisition late costs, our cash flow is still good. Finance position remains strong. Prevas is well below the financial target of maximum 2x EBITDA. And net debt in relation to EBITDA is 0.99. Prevas equity ratio remains strong and amounts to 48.3% in Q3 2024. With that, Magnus, I hand over to you again.

Thank you, Helena, for that explanation regarding the cash flow. Now we zoom out a little bit and see what is -- how Prevas is performing over time. What you can see on 1 of the slides is the development of the quarterly turnover and also the rolling 12 turnover. We can see that Prevas has a steady growth over the years. We can also see that Prevas since 2017 has gone through dramatic changes in terms of profitability, where we have increased from very, very low levels, and we are now on quite stable level of reaching out for our financial target of 12%. During the last quarters, we are not made, but to reach our financial targets. And the underlying reason for that is that the market has been more difficult in this time compared to the previous quarters. Looking to EBITDA margin rolling 12, it's 10.3%. If we exclude Finland, actually, the EBITDA margin for Prevas should have been 11%. So in that sense, given the market climate, I believe that we are performing rather well in terms of EBITDA despite this market that we face right now. Looking to the focus into the future, it's not growth. We want to grow with profitability, and we will work hard now to turn around and to improve our EBITDA margin for the quarters to come. With this said, we have worked hard in order to adapt to the market needs. We have increased our prices. We had actually also increased our gross margins. We have reduced that in some regions which means that we are set now in a new way in Prevas. This means that given a normalized utilization, we will have an excellent leverage on an EBITDA level. So when we see that the demands are coming back, utilization goes up, I'm very, very convinced that we will exceed or at least reach our financial target of 12%. And now a little bit of an update regarding the situation in Finland. When we made the acquisition of Enmac, we were aware that the market in Finland short term were quite weak. But the market was even weaker than we anticipated during the quarter. So in order to face -- to take actions for this, we have taken mitigation actions when we have temporary laid off of 23 employees in Finland, including also overhead personnel. We had also made some permanent layoffs, and we -- that is 1 thing. This is on the cost side, but we also increased our sales focus in order to bring in new business into the Finnish operations. Because that's ultimately, of course, what we need. We need a market and we need to bring in business into our operations. During the quarter, we have been working also with integration. And that was also integration cost that has affected the third quarter. That is included in these figures as well. So all in all, Finland had a negative EBITDA in Q3. There was a positive trend though. So after the action we have taken, we actually had a positive EBITDA in September, which, of course, is very good when we look into the future. So that means that it affects the actions that we are taking they are actually changing things and improving our EBITDA. Looking a little bit into the market moving forward in Finland. It still -- it is a reluctant market in Finland. Quite a lot of activity in the customer base, but what we see is that decisions are pushed forward from our customer side. And that is, of course, not good for us and our operations in Finland. So what we are doing is focusing our sales activities, both and, of course, trying to get our offers into concrete orders, but also we have turned our sales and marketing into more service-oriented customers, which will bring in business more on the short term in order to reach a good utilization. There are also some positive signs in Finland. Our largest customer, Valmet Oy, they signed an order of EUR 1,000 million for a pulp mill to Arauco in Brazil. That is a huge order, and this will impact us positively as Valmet's -- it's actually the largest customer we have in Finland. Right now, as we speak, we have meetings with Valmet to discuss how we can support them with this major order that they have now for. And we will see positive effects of this in the end of this year, but mainly, of course, in 2025, because it takes some time to ramp up an order of this magnitude for Valmet. Generally speaking, we have an all-time high actually in Finland in terms of offer pipe. So we have a lot of offers that we are presenting to our customers, but we are still not seeing that they are, so to say, signing the agreements, we turn them into orders. But we're working very hard with that, of course, in our customer base. But given this, we have received several orders during the quarter, and we still will receive orders as well. So the market is not dead. But 1 area where we see that the decisions are push forward is in with larger investment projects. But there we see a clearly a reluctant market short term in Finland. We also work with market synergies. Now when we are integrating Prevas and Enmac into 1 company, we are also working with market synergies, and we have identified some interesting opportunities in this work. One is within the defense industry, where we are cooperating presenting offers within large automation systems. We are also working with joint efforts within industrial IoT, initial system, et cetera. So it's a lot of things, a lot of activities going on to explore the market synergies that we all see that are present between our units were Finnish and the Swedish and the Danish and the Norwegian units within the Nordic Prevas. And then a little bit about the general market, how do we see that? We see that the market demand is similar in Q3 compared to Q1 and Q2 2024, more or less a flat development. But in some regions, very low demand in some regions, very high demand in some customers, very high demand and some customer low demand. So it's a very dynamic market still in that sense. And in some areas, also quite reluctant. So it's not a super high demand in that sense, but very similar compared to how we've been looking in the last quarters. What we see also is that the competition on general consultancy assignment remains high in some areas, I would say, in particular, in general IT area, this is an area where we see that there's a lot of free engineering resources, both in the consultancy industry but also actually people that are applying for jobs in the general IT area. So there we see quite high competition. It's not a big part of Prevas, but of course, it affects us in that sense. We also see that the high demand we have seen in electrification, cybersecurity and defense continue in the third quarter as well. One positive thing in this quarter was that we saw increased demand in Life Science. We actually see that major customers within Life Science now are increasing investment in R&D and starting up R&D projects. That is a good early signal, I would say, that we are happy to see. Also within generally speaking, we have received quite nice orders in the third quarter. One is a record business we made within Enterprise Asset Management. The initial order was SEK 7 million. The potential is around SEK 20 million in 5 years. And this is interesting because this is both in terms of recurring revenue for Life Sciences, but also for services that we are supplying to this customer. And that is a good step in the strategic development we want to do with Prevas. So I'm very proud of that order in that sense. We also signed a framework agreement with ESS, European Spallation Source in Lund and several other orders during this quarter. So things are moving. That's for sure. What we also see is that the demand for more complex solutions remains. One example here is within the Defense industry, where we have very nice discussions with the Defense industry regarding quite large projects because the Defense industry is ramping up now. We are ramping up production, and we as a partner that can enable and support them in that development. Prevas is very well positioned in that discussion. Then a little bit about the acquisition we made in the market. Design-People is a leading design company based in Denmark. It's a digital and industrial design company working with both industrial design, digital design UI and user experience. And combined with the strength of this company and the Prevas in Denmark, together we shape Denmark's absolutely leading product development hub. And that means that we will increase and improve our offering to our customers in Denmark. And this is really, really great for us because it's a strategic acquisition for us to add these competencies to the team in Denmark. It's not a big company, but it's important in that sense. What we also see here is market synergies. Design-People has an attractive customer list. On the slide, you can see some of these customers that Design-People are working with. And of course, we see that we have good opportunities with cross-selling between the different units. And now when we merge with Design-People and Prevas in Denmark. So that is a very -- another upside in this acquisition. And this will -- this company will be consolidated from October 1 into Prevas. So summary of the presentation. Prevas was continuing to grow. We grew with 13% in the quarter, although with a lower EBITDA margin. During the quarter, we have integration costs, acquisitions cost as well. But anyhow, we are taking actions in order to mitigate and reduce the EBITDA. We're increasing the sales focus as we are increasing our prices, and we are also working on the cost side, adapting our personnel to the actual market demands and that we are already in work with during this quarter, and we'll continue to work with, of course, in the future because that will more or less never end. If you accumulate the Q1 to Q3, Prevas is performing almost 7% growth and over 10% of the EBITDA. And I believe that is at least okay given the market climate that we're in. We're also building a Nordic company. During this quarter, it was a big step forward for Prevas as a company when we consolidated Enmac into Prevas building a Nordic company. But also we continue on this path, so now we made this acquisition of Design-People in Denmark. So we're actually operating all over the Nordic countries today, which I believe is a good step forward. As Helena was mentioning, we still have a solid financial platform even after the acquisition of Enmac. And we are actually looking for future acquisitions as well. Of course, we are picky, but we continue that work all the time to see new possibilities as well. And then Prevas is well positioned in the growing sectors in the economy as we -- right now, and that is very good for the future as well. And then I would also like to emphasize that thanks to the actions we have taken the work we have been doing in Prevas with the price increases with increased efficiency in the operations, given the normalized utilization, we will see an excellent leverage on EBITDA. So I really look forward to presenting better results moving forward into 2025 with another market situation as such. But with this said, I am not satisfied with EBITDA in Q3. Prevas can and will do better than that. So with this, I would like to ask you all with [ Rami ] with interesting questions and start the discussion. Thank you all.

Thank you, Magnus and Helena. We are now live for some questions. We have a caller in with the number that finishes with 8637. [Operator Instructions]. We start off with some other questions at first. And regarding Finland, the slow market took you by some surprise, it seems. Can you elaborate on why Finland was standing out in such a way? Magnus. I have a question. Regarding Finland, the slow market took you by some surprise. Can you elaborate on why Finland was standing out in such way?

Yes. When we made the acquisition of Enmac, we were aware that there were a tough market in Finland, although it was going down more than we anticipated. So -- and that is the reason that we are taking these actions as we have made during the quarter. And as I said in the presentation, there are also some positive signs like the Valmet order and discussions we have with Valmet and some other customers as well. But we are taking action. We are focusing quite a lot on the sales side now also moving into more of sole service selling, which also means that we can fill with more work, so to say, more assignments more short term because what we see in Finland is a reluctance to -- for the investment projects, mainly in the process industry, where we can see that they are pushing decisions forward.

We have a caller in. [Operator Instructions].

Can you hear me now?

Yes, now, please ask your questions.

This is Stefan from ABG. Just to clarify, I think you said Magnus was it that without Enmac, you were at 11% margin for Prevas?

Not for this quarter.