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

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

Thank you, and good morning, everyone. Thank you for participating. I know this is a very busy day for all of you. I don't have been able to count the number of reports presented this morning. By my side here, I have our CFO at Ratos, Jonas Agrup. And we go to Slide #2, where we, for new listeners, will just give a short introduction on Ratos. As you know, we are not an investment company anymore. We are a business group of 12 companies. Our companies are all headquartered in the Nordics, but they are present in more than 30 countries and performs business all over the world. We have more than 10,000 employees, and total revenue for the company is SEK 33 billion. If you count our share of ownership, which we tend to present in our financial numbers, it represents SEK 23 billion in sales. We're happy that our EBITA rolling 12 months continues to increase in spite of the divestment of Bisnode that was not a part of our Q1 or Q2 results. Our LTM EBITA has increased with 139% the last 2 years. The companies down to the right is listed in the order of their EBITA contribution LTM. With that, we go to the next slide. During the last 3 years, we have worked with our existing company group to perform -- to achieve good stability and profitability in our company group, which we've done. Organic growth is back again after the worst effects of the pandemic is over. We've done some structural changes. And according to our plan, we have now this year started with -- to execute on acquisitions. We've done 4 of these so far, but we have analyzed a large group of companies and targets both for add-on acquisitions and new platform acquisitions. So let's turn to Page 4, where we comment the company group in Q2 this year. As I said, organic growth is back after the worst pandemic situation. 2% maybe not -- it's not a number maybe to write home about, but if you go behind the numbers, both HENT and Aibel had negative organic growth. And due to their size, they affect the entire number for the group. HENT and Aibel are the 2 companies that still are affected by the pandemic with foreign labor, longer projects and so on. 11 out of 12 companies increased their EBITA in the quarter. And as a matter of fact, 10 out of 12 companies grow EBITA more than 30% compared to last year. And the same goes for the profitability, which has increased a lot for almost all companies. Diab dropped more than 80% in EBITA in the quarter. And I will, of course, return to the Diab development later in the presentation. We're also pleased that cash conversion remains high. It decreased a little bit compared to last year due to HENT and Plantasjen, who has preordered dry goods for the second half of the year to ensure access to the right assortment. One of the reasons why Plantasjen is doing so great results is that they have upgraded their assortment. And for those of you who have visited Plantasjen, I hope you have seen that with your own eyes. Also worth mentioning is that if we take a look on the Ratos Group, the -- our result is actually a little bit lower than last year, and that is solely depending on the fact that our holding of shares in Dun & Bradstreet -- the value of those shares were reduced with SEK 113 million, and that's why the group results come in a little bit lower than last year. Again, all in spite of the fact that the Bisnode had SEK 91 million of profit last Q2. So let us move to next slide. And please, Jonas Agrup, can you report about our leverage?

Yes, I will. Thank you, Jonas. So let's look at the leverage. Leverage in the end of the quarter amounted to a negative 1.1x compared to 1.5x a year ago, as you can see in the slide. We have a net cash position of roughly -- sorry, we have a net debt position of roughly SEK 2.1 billion versus a net debt situation last year of SEK 2.4 billion. Operating cash flow was good in the quarter amounting to SEK 1.105 billion. And we saw strong cash flows in Plantasjen, for example, which had a good quarter. HL Display, also TFS had a good quarter and also good cash flows were reported from Speed Group. Cash flow from operations is down compared to Q2 last year. As you can see, SEK 1.105 billion compared to SEK 1.232 billion in the quarter last year. And this is mainly explained by the divestment of Bisnode, which has operating cash flow of a little bit more than SEK 80 million in the second quarter last year. But we also saw lower operating cash flows in, for example, Diab, lower results and also some investments in new production capacity for Diab. And Plantasjen were also a little bit lower compared to the same quarter last year. But as Jonas has explained earlier, Plantasjen has, as a result of the limited freight capacity in Asia, increased inventory levels of dry goods for being able to supply products for the second half of this year. We know -- we have -- as you know, we implemented central financing, where the companies in the company group are financed from Ratos AB. And we have now started to see positive impact on the earnings before tax due to this financing operation. Ratos has a solid financial position, which now provides a good foundation for future acquisitions. So back to you, Jonas.

Thank you. Let's move to Slide 6, where we will go through Business Area: Construction & Services. Starting with Aibel. Aibel continues to increase EBITA, now with actually 71% up in EBITA. Profitability is also up with 2.3% units. Aibel has also had a good booking quarter. The order book is very strong. Our team, which I will come back to separately, increased their profitability -- sorry, EBITA with 30%, profitability up even more. Good development there. Speed Group, just another very strong quarter. EBITA up over 100%, profitability also up a lot and 39% organic growth. HENT, increased their EBITA and profitability with some 10%. HENT has -- are still struggling with the effects from the pandemic, but has achieved some very strategic orders during the Q2. And then we have Vestia, which is a new company for Ratos. They had a strong start here. Organic growth, if we compare with the Q2 last year when they were not a part of Ratos, is up -- is more than doubled. And actually, their profit is -- sorry, is also almost doubled. All in all, EBITA grew 63% for the business area. And the organic growth, again, was 0.5% due to limited growth in Aibel and HENT, who has a very high revenue base. Let's move to next slide. We -- since a couple of quarters, we have decided to sort of talk a little bit more about one company in each business area. And this time, we chose airteam. airteam is a Danish company from the beginning. And in the Danish market, they are the undisputable #1 ventilation company group in Denmark. If we look at Denmark, the numbers for Denmark for a while, they are, in Denmark, roughly 250, 275 employees. What differs them from most other companies in this area, the absolute majority of the employees are designers and engineers. I would say that almost 200 are in this area and only 50 are blue-collar in service and operators to assemble the solutions at the clients. Most of the blue-collar workers, which I think is around 350, are hired for each project. So this business model is different from what is common in the market and in Sweden, where normally the ventilation companies is buying the engineering from technical consulting firms and consists mostly of blue-collar workers. This is a concept we believe in. And some of you know that I have experience from the engineering and consulting market, and I think this is something that, over time, could also be a success in Sweden. And Sweden is developing well and it's growing. If we go back to the market as such, there is a good market, not the least because of ESG questions and global warming, energy efficiency is very, very interesting for all real estate owners, both in the new build segment and in existing installation, of course. So our team are quite noncyclical. And we have choose 2 projects, Ferring's research center, Soundport, which is a big project, a prestige project -- product -- in Denmark, and it's 400,000 cubic meters per hour in capacity. Another example is the new research center, Blue Planet, near to Copenhagen Airport. Also a very successful project. With that, we move to Slide 8, and take a look into consumer. Again, Bisnode is not with us this year. If we take a look at the other car companies, and starting with KVD. EBITA increased with 93%. Profitability increased with some 36% or 2.3 units. We'll take a little deeper look in KVD on next slide. Oase, EBITA up 44%, also increased profitability. And Plantasjen, another very strong quarter. EBITA grew with SEK 62 million or 9%, which is an all-time high Q2 EBITA for Plantasjen, and this is in spite of lower sales. As you remember, last time we met, I talked about closed stores in -- I think -- I know that 38 stores were closed. Also the weather was quite unfavorable in April. May and June were record months in sales also. So I think it's impressive that they managed to increase the EBITA, although sales shrunk a little bit. And this is due to continued higher efficiency, better assortment, but not the least, savings efficiency measures in logistics. We're very impressed about the logistics management in Plantasjen. So on next slide, Page 9, we want to mention a little bit about KVD. KVD is actually Sweden's largest independent online marketplace for used cars. All the cars are tested. I think, over the years, KVD has sold more than 200,000 cars and all of these have undergone our independent vehicle test. We do test, I think, 170 points, and we report results test openly when the car is up for sale, either through a bidding auction or at a fixed price. And we have very, very high customer satisfaction from people buying cars in -- from KVD. We have also repositioned KVD quite much from corporate customers to consumer customers. We announced a couple of weeks ago that we acquired Forsbergs, which I think is a very industrial sound and good acquisition. Actually, yesterday, it was also approved by the competition authorities. So now Forsbergs is with us for real. What is interesting with Forsbergs is, of course, their #1 market position and complementary offering, but we see a lot of synergies here, both on the cost side, on the OpEx side, but also on the revenue side. So it's going to be very exciting to follow this merger the following -- coming quarters and years. So let's move then to Page #10, and the business area: industry. Let's start with Diab. Diab had excellent EBITA that fell with 83 -- decreased by 83% during the second quarter. The reason being significant increase in raw material costs and 33% lower sales in the wind segment. Out of these 2 factors, the raw material increase was that who hurt the EBITA most. The company implemented price adjustments during the quarter, but they have not yield any results in Q2. The background for sales coming down, which is actually 1/3, is very much because of subsidies for wind power, especially in China, were discontinued at the end of 2020. As a result, investments in wind power during last year, in 2020, actually exceeded the total capacity installed over the past 3 years in China. These high investments in capacity and discontinued subsidies meant that investments in the wind power have decreased significantly, especially in China, since the end of 2020. We have to admit that we have underestimated this impact would have on the 2021 numbers. We are not alone to have done this mistake, but it's still a misjudgment. You -- I'm sure some of you have seen the profit warning reports coming out from wind OEMs like Siemens Gamesa, from Gurit and others. But we have underestimated this. And when we talked last in Q1, we said that we expected to -- sales coming back in the second half of the year -- of this year. We believe now that the market will normalize first in 2022, next year. We still do believe in both the wind market and Diab, and that the results will recover and the sales will recover. Diab is not only selling wind solutions, their second largest segment is marine. And marine, performed actually very well in the second quarter with a sales growth of 74%. The problem, of course, is -- or problem of Diab's marine segment was like 1/3 or so of the sales last year, but it's now growing. And in total, Diab net sales decreased with 14% compared with last year. We have, since the new management was in place, planned the transition in materials. And we have now executed or are executing on this plan on production of new materials, which we are sure will be the future demand in the wind market. So this transition will strengthen the company, but it also entails increased costs in 2021 and has a negative impact on the cash flow, as Jonas mentioned. Again, we do believe in the wind market and that it will come back, not the least, in U.S. and Europe with the new President in U.S. If we go to HL Display, had another very good quarter. EBITA rose with 38%. Profitability increased also. But the organic growth of 22%, I think, is a record number. And I think it contains a catch-up from the COVID pandemic, which you all know, HL Display handled very, very well. But very good growth there. LEDiL, also coming out of the corona, increased EBITA with 36%, increased their profitability and had 42% organic growth. And the highest EBITA increase of all and profitability increase was TFS, which I will dig into a little bit deeper in the next slide. TFS has been the company that has been suffering the most from COVID-19. And what we see now is market is coming back. And the quarter Q2 last year was, of course, very low due to the pandemic. So let's take a look at TFS on next slide, which I think is #11. So TFS is into the CRO business, basically helping pharmas and biotechs to develop new drugs and treatments and vaccines. For this market, you need access to patients in hospitals, and we also have a clinic of our own to perform these CRO tests. We are a -- or TFS is a leading midsized CRO in Europe, but with global reach. We're focused on dermatology, ophthalmology, hematology and oncology. Our global reach is mainly to U.S., where we, during the last 12 months, has grown our footprint there with a strategic partnership with Duke Clinical Research Institute, actually the world's largest academical clinical research organization. It's very important that U.S. pharma also have an arm into Europe where we perform most of our business. The CRO market has, for quite some years, been a very, very interesting market and it's expected to continue to grow with 5% to 10%. So then we move to Slide #12, which I think you've seen before. We just want to reiterate that we're focused on EBITA growth, and it should be at least SEK 3 billion by 2025. This EBITA growth is not just about increasing profitability and organic growth, it's very much about acquisitions and acquisitions journeys, which have been part of in a couple of companies. It's not a linear operation. So you will see a lot of acquisitions, some years, less acquisitions, other years. But our 5-year target remains there, and we're very confident about it. We also have our leverage ratio where we want to be. And we have a dividend policy ensuring that the payout ratio should amount to 30% of the profit after tax attributable to the ones of the tariffs companies. Now to sum this up. Again, 11 or 12 companies increased their EBITA. 10 out of 12 decreased EBITA with more than 30%. We continue to increase the EBITA in the quarter in total, although Bisnode was divested and the challenges we had in Diab this quarter. Organic growth is back. Cash flow from operations was strong. We do have a high M&A activity level in Ratos. There are long evenings and early mornings, analyzing both possible add-on acquisitions as well as new platform acquisitions. And we have, so far, made 4 add-on acquisitions since we started this activity in the beginning of the year. I'm certain that we have all the ingredients we need to make this M&A journey as successful. We have, as Jonas as reported, a very strong financial position. We have a team with strong M&A experience, and we do actually have a brand that, we think, help us in when we acquire companies. So with that, I leave it open for any questions. Thank you very much.

[Operator Instructions]

Right. I have got a question here from [ Erik Heimanson ] from [ Linea Capital Management ]. Why didn't the price increases were done earlier? These price increases has been known for a long time, and many other companies and groups have acted since a long time for Diab -- sorry, for Diab. Sorry, I'm reading here live now in Swedish. It's a good question. We are disappointed. We think that we could have done this better, and we are working very hard with this issue now. But we have long-term contracts with our clients, but we are renegotiating these as we speak. The other question is that the subsidies in China were a known fact. Diab has historically a volatile sales in China. How can this decrease in the market come as a surprise? Well, it's true that Diab have had a volatile history in China. But I can assure you that no market situation has been close to what happened in 2020. Again, in 2020, there were more installed capacity than almost the sum of the 4 years before that. It took us by surprise. It took the institute, following the consultants -- market specialists, with surprise. It took Siemens Gamesa, one of the leading wind OEMs in the market, by surprise. So that's -- it's always easier to be wise afterwards, but it took everyone in this market by surprise, I would dare to say. So more questions? All right. So we have a question here from Stefan Ward from Pareto. Congratulations on a strong quarter. First question, I'm sorry here, I'm reading. Aibel showed a strong development in the quarter in terms of order book. Can you describe what type of orders these include? The share of the order book that relates to cleaner type of projects. The order book in Aibel is, today, 45% of green projects, offshore wind power, electrification. As you might know, the oil price has developed favorably. So there has also been orders in maintenance and support in the oil area. But what has increased, mostly in millions, is, of course, the green part. Next question. Plantasjen looks to be performing very well. What should we expect -- what is this? This is more good. Plantasjen looks to be performing very well. What should we expect for this business when the pandemic drivers eases? Yes. We do certainly believe that we have had a pandemic effect, but we do think that the -- or we do know that the market before the corona pandemic was growing, growing among young people, growing among old people. And if you look back to the Plantasjen reports during the poor performing years, sales were actually growing. So what's been happening in Plantasjen is that they have a much more efficient organization. That they have also -- I don't have the numbers on that, but I'm quite sure they have taken market shares with a new assortment, the refurbishing of the stores that has just started, but we see clear results of that. So we're positive with -- for the future of Plantasjen when it comes to sales. There will be some volatility depending on weather. But one of the focus areas for the management is to even out the sales over the year. And this preordering I talked about earlier of goods is very much to handle the market after people returning from holidays, children starts in schools and also the Christmas part of the year. So there are strong efforts to even out the quite volatile quarterly business in Plantasjen. Then we have a question for us both. Net cash position for you, also Jonas Agrup, of SEK 2 billion. How would you describe the room for further M&A? What should we expect over the next couple of years? And I'll answer that by asking you, Jonas Agrup, how much financial capacity do you think we have for, acquisitions right now? I mean we have strong cash flows...

Yes.

In Ratos that would support M&A activities going forward.

Yes.

But if you look today, how much would you say we're able to spend on M&A?

Well, I would say -- I mean we have the net cash position of a little bit more than SEK 2 billion. And then we have a -- we are negotiating with external banks to have a financing facility, which will be in place pretty soon. And with that finance facility, we will be able to borrow up to SEK 3 billion. And then we are looking into bonds. We are also looking into term loans. I think if we would find a really large new platform acquisition, for example, we will be able to bridge finance that through external banks as well. So I think the -- we are prepared. We have the financing -- the financial resources to make acquisitions.

That was like SEK 7 billion or so.

Right. Yes.

But I want to reiterate that we will -- we're not desperate to make acquisitions now. We're desperate to make very good acquisitions, and that is more important. We have a couple of years to work here to do the right acquisitions than to charm the market in a quarter by saying we have done so and so many acquisitions. There is a question more to you here, Jonas. Have you read it?

Yes. It's about the central financing, right? And so far, we have a cash position in Ratos AB. So we have, as you know, started to lend money to the companies in the company group. So far, we have lend -- we have loans of SEK 1.4 billion. We will soon have another SEK 1.3 billion, SEK 1.4 billion in loans, and that's actually cash, which is generating no interest at all today. And we will get market interest rates on this cash. So it's around -- maybe around 2.5%, and you can do the math.

Yes. We can see the EBITA actually is -- already in this quarter when we have started is improving compared to last year. Final question here. You made a lot of changes to management both at Ratos but also in the subsidiaries. Can you please describe it? Well, if we start with Ratos, when I joined here as a Chairman, 2016, we were 53 people in the office. Today, we're 18. We have kept the financial expertise that was around when I joined, but we have recruited people also with the operational experience. In the subsidiaries, we have actually replaced most of the CEOs and all of the Chairmans. And I think I'll stop there. But we're much closer to our subsidiaries than we used to be. Very much closer, and therefore, very much faster. Sorry. Any more questions? No more questions. Well, thank you so much for attending this call. And may I wish you also a great summer vacation, which I hope you will have, and I also hope I will have not now, but -- yes, it will be a great summer for us all, I think. Thank you very much.

Ladies and gentlemen, thank you for your attendance. The conference call has concluded. You may disconnect your lines.