Ratos AB (publ) (RATOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Ratos Q1 Report 2021. Today I'm pleased to present Jonas Wistrom, CEO. [Operator Instructions] Jonas, please begin.

Thank you very much, and thank you, everyone, for joining today in spite the fact that it is a semi holiday here in Sweden at least. On my side here, I have my dear CEO (sic) [ CFO ], Jonas Agrup, and we will take you through the results for the first quarter 2021 for Ratos. So let's move over to Slide 2, where you have an overview over our group and what's happened. Ratos today is a business group of 11 companies in the first quarter. After the acquisition of Vestia, we are actually 12 companies in Q2. But today, we'll focus on the first quarter. All our companies is headquartered in Sweden, but they are present in more than 30 countries, more than 10,000 employees and a total revenue of SEK 34 billion. Our last 12 months results or EBITDA has increased with 61% in spite of the fact that we divested Bisnode, who employed -- who had the biggest risk actually of all our previous companies in the portfolio. And Bisnode, which was a large company in terms of EBITDA, was not part of Q1 this year. So let's move over to Slide #3, where we have the highlights of Q1. Starting with net sales. It was down 16% mainly due to the fact that Bisnode was divested. If we look at the organic growth, it was also negative 2% and the main factor for that is our pandemic, the COVID-19 pandemic. EBITDA for this quarter increased more than 60% in spite of the fact that Bisnode last year in Q1 represented more than half of the EBITDA. So we're actually in a very good mood here in Ratos today and proud over how well the companies has performed in this quarter. All companies, except for Diab, has increased their profitability and all companies, except for Diab and HENT, has increased their EBITDA. Cash flow was down in a quarter that always has a low cash flow level due to mainly Plantasjen and Oase. But Jonas Agrup, my CFO, will explain this in the next slide and let's then move to Slide 4. Please, Jonas.

Okay. Thank you, Jonas. So let's look at the leverage level. And over the last couple of years, we have focused a lot on reducing debt. That has been a focus area for us here at Ratos. We have also had a lot of focus on reducing working capital and we have improved profit levels, as you have seen, and this has resulted in improved cash flow and lower leverage levels. After the divestment of Bisnode, net cash position increased in the group by roughly SEK 3 billion. And we also invested SEK 1 billion of the proceeds of the sale in Dun & Bradstreet shares. So if we look at the net debt, you can see it's minus 0.6x. So we have a net cash position last year, it was 2.7x. EBITDA in the quarter increased 5% -- or sorry, EBITDA increased 5% in the quarter. Net debt decreased by SEK 1.4 billion, of which Bisnode accounted for SEK 1.2 billion. And we had a negative cash flow in the quarter, minus SEK 524 million. As Jonas explained, this is mainly related to -- we have a seasonal effect. Plantasjen is building inventory for the season. The same goes for as Oase Outdoors and they are also building inventory. And we had a negative cash flow in our company HENT, the building construction company. And they had very good cash flow in the first quarter last year. We have a net cash position, as I said. And cash and cash equivalents in Ratos AB, the parent company, is SEK 2.3 billion. And we have a strong balance sheet in Ratos. And as I said, we have a net cash position and Ratos is well positioned for future profitable growth. So if we then move to the next slide, Slide #4 -- sorry, 5. I would like to talk a little bit about centralized financing of our Ratos companies. Ratos is a business group, as we have said many, many times, and we are long term in our investments and the natural next step for us is to have the financing of the companies in the business group centrally. So going forward, parts of Ratos business group will be financed centrally from Ratos AB, to begin with. We have a net cash position. We have the SEK 2.3 billion in cash in Ratos AB. So we will initially fund and borrow funds to -- or lend funds to the companies from the parent company. And as a next step as the requirements will increase, Ratos will be -- the Ratos will be financed with funds from banks. And we are actually presently negotiating with banks in order to set up a new financing facility. As a result of the centralized financing, we will achieve lower interest costs for the Ratos Group. And so far, we have financed 3 companies in the group. It's HL Display, it's Diab and LEDiL, and the total financing amount is roughly SEK 1.3 billion. So back to you, Jonas.

Thank you. Let's move to Slide 6. As you know, during the last 3 years, we have been in a turnaround phase for our companies, focusing on getting the right management, focusing on a different board work than we have had before, and focus on stability and profitability rather than growth, especially not acquisitional growth. We've done structural changes where the most important was the divestment of business -- Bisnode, which contained a big risk through their dependence of Dan & Bradstreet. Now we feel that we have stabilized the group. We have starting to get decent profitability level. We have, as Jonas stated, a good balance sheet. So now we are ready to start off the acquisitional growth path to reach our financial target for 2025, which I will come back to. But I would like to underline that organic growth and margin expansion will continue to play an important part of our work going forward to meet our financial targets. So let's move over to Slide 7, which gives a picture of some M&A activities taken place in the first quarter. So we have exited Bisnode also formally. I think it was 9th of January. Bisnode Belgium was never acquired by Dun & Bradstreet. So this small part belongs to Ratos until March 31. So then even Bisnode Belgium was divested. So everything is now completed. We had a capital gain around SEK 1.8 billion. On the acquiring side, we have, in HL Display, acquired Concept Group, 4th of March. And we also signed a contract for acquiring CoolPresentation 1st of April. So now they are with us, but not in the first quarter. These 2 acquisitions is strengthening our market positions in U.K. and the Netherlands. And HL Display will continue to consolidate this interesting market as a market leader. We also signed an agreement to acquire Vestia Construction Group. It was closed the 9th of April. It's an important acquisition because it's complementary to HENT. They run with a different business model, which we think belong to the future in construction. So if we now start to look at our companies and our business areas, we're starting off with Construction Services and Aibel. Aibel had an EBITDA growth of 57% despite flat sales or even a little bit negative organic sales. Those of you who have followed us and Aibel have now learned that the relation between revenue and EBITDA varies depending on which phase the large projects are in. Important to say is that Aibel had a good order intake in the quarter and the order book is now NOK 12.6 billion, whereof, and this is important, 50% of the order book is now green. Couple of years ago, Aibel was all about fossil fuel. So for each quarter so far, the green share is increasing and it's mainly wind farms and electrification, that stands for that. I'm also happy to talk about airteam who had a very strong quarter with 13% organic growth and an EBITDA increase of more than 100%. We see a good order intake in the quarter and a record-high order book, which promise well for the future. HENT had a decreasing revenue and EBITDA mainly due to COVID-19, causing problems at the construction sites in Norway, especially for foreign labor that it's almost impossible to get over the borders these days due to the COVID pandemic and the tough control the Norwegian authorities have of the pandemic. However, the profitability level was a little bit higher than Q1 2020. The Speed Group had a really good quarter where they almost tripled their EBITDA and organic growth was up 28%. In this quarterly meetings, I tend to choose the company to focus on each -- for each business area. So let's move over to the next slide, which describes Speed Group a little bit more. Well, Speed is acting on a strong underlying market and they have created a lot of trust among their main customers and more customers are knocking on the door, and this has been driving the revenue increase in 2021. We believe Speed Group today is at least the #5 player on the Swedish 3PL market. And with -- during the turnaround phase, we have had this focus also on Speed, who performed quite badly a couple of years ago. And the EBITDA margin has grown from almost 0% up to over 10%, which I think is a very good profitability level for this sector. They are now in a position also to drive the consolidation in the Nordic logistics market. And you can see a beautiful picture here of the largest solar roof in Sweden, enabling Speed to move towards to CO2 neutrality by 2025. And we hope that the sun will continue to shine on the West Coast like in the picture. With that, we move over to industry -- sorry, to consumer, starting up with KVD. Bisnode is no longer with us. And KVD actually had a slow start of the quarter with low inflow of cars, but ended up very strong, resulting in an organic growth of 10% and an EBITDA that was up 71%. Jumping over away for a moment, I will instead continue with Plantasjen. That had an organic growth of 21% in the quarter. That was in spite of the fact that 38 stores in Norway, due to the pandemic, was closed down for the second half of March. So this, we believe, took out approximately 20% of the revenue for the quarter. The first quarter for Plantasjen has always been loss-making. But this quarter, the loss was actually reduced with more than 40% due to better sales, better gross margins and more efficient logistics. So all in all, another strong quarter for Plantasjen. Now coming back to Oase Outdoors. They increased their EBITA with 84% and sales in local currency was up 10%, organic minus 2%. Delays and increased costs from transports, especially from Asia, affected EBITDA to grow even more. But the order book was a record high when coming into this year and it's even stronger going into the next quarter. So let's take a little deeper look on Slide 7 on Oase. The addressable European market, we believe, is over EUR 1 billion. And it has grown and is expected to continue to grow through the green and recreational trends being boosted, of course, of the pandemic. They have a leading product portfolio. They have a good strong international sales channel. And the most important markets are U.K. and Germany, accounting for some 40% of the total market. The EBITDA for the quarter, but also for the last 12 months, has increased quite a lot, thanks to better product mix, lower cost base resulting in these higher gross margins. And we also have a very dedicated and strong management team also in Oase Outdoors. So then we move slide again and coming into industry. Another good quarter for industry, starting up with Diab, that actually showed substantially lower EBITDA in Q1 than last year's Q1. Sales was affected from subsidies in China and U.S. by the end of 2020. Everyone was rushing in China to get the power plants up before New Year. And there was kind of a small wakeup, do you say that in English? I hope so. And this has had an effect on the wind sales. And I think it will have some effect also in Q2, and we will see market coming back during the second half of the year. However, the lower sales volumes in wind was partly compensated by increased demand in the Marine and Industry segment. EBITDA, the EBITDA, it was mainly affected by upstart of a lot of new production facilities and the fact that our U.S. production in Texas was stopped for half a month during the extreme weather in March, resulting -- we were out of electricity and had other problems. And also currency affected 1/3 of the reduced EBITDA. Jumping over HL for a few minutes and move to LEDiL instead, that performed very solid and strong quarter. Organic growth of 12%, EBITDA up 39%. EBITDA-driven but, of course, higher sales but also product mix, lower OpEx, high operational efficiency and the order intake was actually record high in the quarter. And we hope and do believe that LEDiL now is back on-track, even though there is a few dark clouds left in the sky of the pandemic. In TFS, sales dropped by 15% solely due to the pandemic, making it very difficult to perform clinical trials in hospitals. Release of provisions in successfully performed projects made the EBITDA level flat compared to last year. Now returning to HL Display. They had a very strong quarter, an organic growth of 6%, EBITDA growth of 63%. The EBITDA growth was 42%, also a good number if we exclude the one-off effect for the divestment of a vacant facility in France. Looking at the numbers, one should bear in mind that Q1 last year was free from the pandemic for the first 2 months, and the pandemic has hit the sales in HL quite hard. EBITDA growth is -- continues to be driven by more and more favorable product mix and further efficiency improvements. So let's take a look on HL Display on Page 13. I think many of us think that everything -- that this market is challenged by the online business. And it is. For grocery retail, the supermarkets out in Europe selling everything from meat to TV sets, et cetera, the bulk goods are certainly coming more and more through online. But the other part of the market, smaller formats that has increasing importance with fresh food and fresh stores, they are actually growing. And HL make these stores more efficient. They save labor costs, they can create differentiation, and they reduce waste, making the stores more sustainable, and provide smarter solutions for store management. HL was one of the turnaround examples during the last 3 years. They have improved their margins from 3% to 12% during the last years. And we are now in HL ready to start to grow this and we see this already in the first quarter with the organic growth, but we will also see acquisition of growth. HL is the undisputed market leader for store solutions and we -- the acquisition journey will further consolidate this interesting market. So with that, let's move to Slide 14. So all in all, we're very pleased with the quarter. This is the seventh quarter in a row with a substantial EBITDA increase. Every company out, except 1, increased the profitability. Every company, except 2, increased their EBITDA in spite of the pandemic. Revenue growth, of course, impacted by COVID. We have started our M&A activity. We have a very strong and further improved financial position. So we feel very well positioned for profitable growth coming forward. And my last slide, if we move over to Slide 15, repeat our financial targets, where we're aiming to reach SEK 3 billion for the Ratos Group. To be able to do this, again a margin expansion, operational excellence, organic growth will not be enough. We need also to make acquisitions. The acquisition market is tough. It's very high valuations. It is difficult to perform the important management meetings, et cetera, et cetera. But we are going to make this, but it will not be as in the slide that we will grow in acquisitions with a certain percentage each year. This is an opportunistic game where some years we will have very fast growth and some years flat growth. And that is my experience also from previously in my career with a lot of acquisitional growth. So with that, I would like to open up for any questions. Thank you.

[Operator Instructions] And our first question comes from the line of Mathias Lundberg from SEB.

Congratulations on a good quarter. If I may, I have a couple of questions related to operations and then a few technical ones. First off, I'm a bit curious about the state of the stores in Norway of Plantasjen. Are they still closed? Or what's the outlook on that?

Yes. We still have stores closed in Norway. I think it's a lower number than it was in -- so the situation has improved, but we still have, I think, 6 stores entirely closed, but also reduced area. So we can't exceed, I think it's 200 or 250 square meters in the stores. My forecast about this is as good as yours. It's -- as you know, the Norwegian authorities take the pandemic seriously. And it's up to them and their judgments on when these stores are going to open up fully.

Okay. But would it then be reasonable to expect that they would see a bit of an impact on sales then, I guess?

Yes. I mean we don't have everything open as we speak.

Great. And I wonder if there's any update on the forward-looking business mix effect from the different segments in Diab, if there's any change to expect how that business is doing as well -- will go moving forward?

Well, we're not in a situation where sort of wind power has gone out of fashion. The -- it's the opposite. And if you watch the Q4 report from West, that you could see that their sales was actually shrinking in the third quarter, but they have an outlook which is quite positive for 2021. There is a generation shift, the turbines are getting larger and larger. So the wind market is here to stay and will continue to grow, that's for sure. But it's also important for Diab to explore new applications for lightweight constructions, which will be very important for electric cars, for instance, the aerospace industry, which also have been down, but will come back if not to future. For the others we have, it will continue to grow. One market which is important for Diab, that is growing a lot is Marine, the Marine segment, and also part of the industry segment is growing. So we are not at all worried for Diab's future journey. But Q1, many things come together and EBITDA was down.

Roger that. And just a technical question. The acquisition of Vestia, will that be reported separately or in the [ health ] business?

It will be reported separately. So you will be able to follow that in our Q2 report.

Great. And last one. Could you perhaps walk us through a bit around the cash balance, how cash has moved during the quarter? So I thought it tended to be good because I thought that net cash position would be a bit higher now in Q1 than what it was?

Yes. I will leave this to Jonas. But in the net cash position, the roughly SEK 1 billion for the shares in Dun & Bradstreet is not in that. But I leave over to you, Jonas.

Yes. Well, we have -- in the parent company, we have in cash now SEK 2.3 billion, as we said earlier. And then we have started to lend from centrally SEK 1.3 billion roughly to these companies I mentioned earlier. So without sort of the lending activities, we would have actually a cash position in Ratos AB around maybe SEK 3.6 billion. So that has a big effect on the cash for Ratos AB.

So the Ratos Group leverage, which we, in the future, will talk more about rather than sort of the cash position in Ratos AB, that will be quite irrelevant over time. Our financial targets, Mathias seems to have a net debt for the -- sorry, a leverage for the group on 1.5% to 2.5%. So we will move in that direction. And to be honest, the sooner we can come there, the better that is. So we don't want to -- it's not a good return on the cash if it's not working.

And then of course, we have the investment in Dun & Bradstreet shares, and that amounts to roughly SEK 900 million today. And so that is not in cash, but it's in these shares, of course.

[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.

Yes, we've got a question online here in Swedish. The question is, "If Ratos, going forward, will finance the companies where Ratos is not owing more than 90% of the shares?" Let's see here. If I start with that part of the question, yes. And LEDiL is the company where we don't own more than 90%. So the answer on that is yes. We want finance companies that we are the minority shareholder in, which basically is only Aibel today where we represent 49% of the royals and 32% of the capital. And the second -- but we will look on each company individually and we will do this over time. And the second part of the question is, "What is the advantage for Ratos in relation to instead increase the equity?" And the answer is that we want our capital to work as there is no good interest rate on having a cash in the company. So instead of paying interest rates to banks, getting 0 for our cash, we think we should let the capital work. And then we have no further questions. Then again, I want to thank you all for attending this in spite of the fact that it's almost a holiday here in Sweden. And I take the opportunity to wish you a great weekend and looking forward to talk to you again during Q2 and our Q2 report. Thank you very much.

Thank you. Bye-bye.