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

Hello, and welcome to the Ratos Audiocast Teleconference Q3 2021. [Operator Instructions] Today, I'm pleased to present Jonas Wistrom, CEO. Please begin your meeting.

Thank you so much. And good morning, and warm welcome to all of you on this earnings call targeting the interim report for Ratos third quarter. My name is Jonas Wistrom, I'm the CEO and President of Ratos. And by my side, I have our CFO, Jonas Agrup, and our new for VP for Sustainability, Josefine Uppling, who joined us and our management team during Q3. We have actually seen an increasing interest for Ratos and the Ratos share. And I believe some of you are with us for the first time. We will therefore start up with some comments and clarification around Ratos before we head into the results for the third quarter. So I ask you to move to Slide #2. As of this quarter, Ratos is no longer an investment company, and Jonas Agrup will come back to this in his presentation. We want to own companies that are or can become market leaders. I think this differentiates us from other company groups. We have strong brands, and we have companies that can serve as a platform for more add-on acquisitions. We live our core values, and we believe strongly in a decentralized structure in Ratos and our companies, both of them. Our 12 companies have a total turnover of some SEK 34 billion. In Ratos AB, we are, today, 18 employees. Actually, when I started here a couple of years ago, we were 53. And today, we have a different competence mix than was the case when we were an investment company. So moving to Slide 3. We are a business group that have our headquarters in the Nordics, but we are actually present globally with sales locations and manufacturing locations in Europe, North America, South America, Asia and even Australia. So let's move to Slide #4 and look at the 5-year summary for the Ratos Group, not the company group but the Ratos Group. I'm really proud of the turnaround journey that has been a prerequisite for starting our growth journey with acquisitions as a very important component. So let's move to our financial targets. We have a target of having an EBITA to at least SEK 3 billion by 2025. We have a conservative leverage target. And since a couple of years, we have a new dividend policy. So with that, we move to Slide 6 and come into the third quarter where we improved the earnings in our companies. We had a strong order intake, and we have 2 new acquisitions. Page 7 is a summary of the consolidated EBIT in Ratos. That is improving. We have a impact from unrealized costs related to revaluation of Dun & Bradstreet shares. We believe in these shares, and it was a result of investing a part of what we gained from the addition of sales. During the quarter, we also had an unusually high tax rate since the unrealized cost is not deductible. The adjusted EPS for the quarter was actually up 61%. So -- and we also had a significant improvement of net financial items, which Jonas Agrup will come into later. So with that, let us go into our company group on Page 8 and our business areas. So sales and EBITA in the current company group continues to grow despite all the challenges we have right now in the world. Organic growth are up 2% and adjusted EBITA is up 3%. This in what I would call CME post-COVID times, the challenges I talked about. You know all about them. Freight costs up almost 2,000% from freights from Asia to Europe, lack of components and materials. We have low vaccination levels in Asia in some of the countries we're bringing in goods from. And we also have a ship work in Thailand, as you might know. The 6 out of 12 companies are actually growing EBITA by 59% or more, and 9 out of 12 companies is improving their EBITA. Our cash flow is impacted by Plantasjen, which is -- then they are increasing their stock to ensure that we can meet customer demand in the coming seasons, not only the Christmas season, but also the early spring. We are now in a situation where just in time sort of have been replaced by stock is key. So I'm very satisfied with that increased stock in Plantasjen. Last but certainly not least, we have a very high M&A activity and 2 acquisitions have been made in Q3. These 2 are contributing with the yearly revenues of more than SEK 1 billion. If we look year-to-date, we have acquired 6 companies with an estimated annual revenue on roughly SEK 1.9 billion. So I'm pleased -- really pleased with the EBITA and sales and acquisition development in the company group. Now I want to leave to you, Jonas Agrup, to take us through Slide 9.

Okay. Thank you, Jonas. I will talk a little bit about the leverage and also the centralized financing that we have been working to set up during the last couple of quarters. If we look at the net debt for Ratos, it continued to decrease to the net cash position of SEK 1.6 billion in the third quarter this year compared to actually a net debt of SEK 2.6 billion in the third quarter last year. And leverage was, of course, impacted positively by the divestment of Bisnode in the beginning of the year. If we look at the leverage net debt to EBITA, we were at minus 0.9x in the quarter. And in the same quarter last year, we were at 1.4x. Cash flow from operations were negative, minus SEK 56 million, last year, SEK 205 million. And in the third quarter, we were impacted by Plantasjen, actually, taking steps to secure seasonal inventory on account of supply chain challenges. And what we have seen, as you probably all know, is low freight capacity, mainly out of China to Europe, and consequently, much higher freight costs. If we look at our financial position, today, we have a possibility to make acquisitions of roughly SEK 9 billion, with a maintained leverage at or below 2.5x, which is in line with our financial targets. In the quarter, leverage decreased to minus 0.9x despite acquisitions of almost SEK 300 million in the third quarter. Ratos is a company group, and a treasury function is now in place. And we have also a new RCF agreement signed with 3 external banks, with a possibility to borrow SEK 3 billion. And the group cash, we also have been setting up a group cash pool between Ratos and the group companies, and this will be in place during the fourth quarter this year. If we look at the contribution of the centralized financing so far, we have positive interest cost savings of approximately SEK 16 million in the third quarter this year. And on a yearly basis, we estimate savings to be approximately SEK 75 million. And in the fourth quarter, 2 more companies will be -- in the group will be financed via Ratos, and so we will add financing of roughly SEK 250 million in the fourth quarter. Ratos is a company group. And as of the beginning of August this year, Ratos is also, from a tax point of view, an operating group and what we say in Sweden, [Foreign Language], and not an investment company anymore. This means that Ratos will no longer be taxed as an investment company. Ratos has SEK 13.9 billion in loss carry forward, with a value of SEK 2.8 billion at current tax rate, which means that profits generated by Ratos AB will not be taxed as long as the loss carryforward remain. Back to you, Jonas.

And that's good tax news, Jonas. Thank you. Let's then move to Slide 10 and start to look at our business areas. So Construction & Services had a great quarter. Aibel continues to grow both sales and EBITA. airteam is suffering from project delays due to mainly the delay of supply of materials. HENT, lower sales was due to that many projects are in early phase, and -- or the lower sales is the main contributor to lower EBITA, although the profitability is actually slightly higher in HENT. Vestia had yet another great quarter with high growth of sales and EBITA. So all in all, good EBITA growth and a good quarter for Construction & Services. Let's move to Slide 11 and Business Area Consumer. Here, we had organic growth increased by 6.4%. Strong sales in KVD, due to more and more cars are sold from own built instead of being broken. Strong EBITA growth as a result of the acquisition of Forsbergs into KVD. It's a great quarter for KVD. Oase Outdoors, very strong EBITA growth in the quarter. And coming back to stocks, this is due to unusually strong demand for their products, which has been -- is a result of really lower season stock clearance. And yet another strong quarter from Plantasjen, with improved assortment mix and improved efficiency through the organization. So again, a strong quarter for Consumer as well. Let's move over to Slide 12, where we take a look at Business Area Industry. It continues to grow. However, in Diab, sales was down 11%. That is due to the fact that the wind market sales is down 28%. I think no one believes that wind power is nothing for the future. The wind market will over time continue to grow a lot. However, as you know, the wind and the energy industry in total are dependent on political decisions and subsidiaries, et cetera. And they were taken away in China last year, which is the biggest market for wind. But we estimate the sales to come back. Also, there have been increased costs for materials, and the wind industry is going through a material shift in the wind blades. That will go on in this year and next year. HL Display, yet another strong quarter. Strong organic growth, and one more add-on acquisition in the quarter, affecting only September, but it's an important acquisition in Italy. HL is also impacted by cost increases for freight and raw materials. LEDiL shows a fantastic growth, 42%. The order book is also very strong, and the very strong increase of EBITA is pure organic. KFS, as you know, has had a good year. Net sales was up 29%. We used to talk about the service revenue, which is excluding the pass-through -- your pass-through revenues. But the service revenues are up -- also up, up 21%. There's a small EBITA improvement in the quarter since Q3 last year, was impacted by release of extraordinary project provisions. So with that, we move over to an ever so important area, which is the sustainability topic on Page 13. During the quarter, our new Vice President for Sustainability and Communications, Josefine Uppling, joined us and our management team. She brings extensive knowledge from senior positions in the banking industry to Ratos. And Josefine, I want to leave the word to you to talk about sustainability in Ratos.

Thank you so much, Jonas. And I'm very excited to be onboard, of course, started the 1st of September. And so far, I can say that I am impressed with what I see. I mean, it's obvious that the companies in Ratos Group contributes considerably to a long-term sustainable development. And that is actually both in terms of development in a broader sense, but most important, the companies both support and actively drive the development of current ESG trends. So we have listed some of the -- some really good examples on the slide. Two very tangible areas where the Ratos companies are contributing in the wooden -- industrial wooden construction area and also in the circularity in the plastic industry. And we can say that one of our product moments in the sustainability area in the quarter was the inauguration of the Sara Kulturhus in Skellefteå, which actually is the highest wooden building in Sweden. So that was a great moment for Ratos and our contractor, HENT, who was the main constructor for the projects. And then, of course, we have Aibel who continues to successfully transform towards becoming fully focused on renewable energy by the end of this decade, and that's a very impressive journey to follow. As I mentioned, the circularity in the plastics industry is a very important area. And there, we can see both Aibel -- sorry, there we can see both Diab and HL Display, which are participating in several development projects in the area. And last but definitely not least, during the year, Ratos has been working on a project with all the companies within the business group targeting the EU taxonomy. And the aim with that project is to increase knowledge and align reporting. And I mean it's very obvious that the EU Taxonomy will set new standards and increase transparency, and this is a development we, at Ratos, strongly support.

Thank you, Josefine. And wooden buildings, I was down and listed the commission a couple of weeks ago. And it was a lot of talking about buildings in wood being a very important factor to take down CO2 in Europe. And HENT, they've been doing this since 2005, I think. And did they build the highest building in wood also in Norway?

Actually, they did. So they have been part of 2 world records actually, the highest wooden building in Norway and now the highest names of, I think -- yes, the highest building in Sweden as well. So that's impressive.

Thank you so much, Josefine. With that, we move to Slide 14 and our acquisition strategy and how we will succeed. As I stated earlier, our transformation from an investment company to business group is now done. And our full focus is to continue the development in the companies, including acquisitions. So we are looking for 3 categories of acquisitions: the add-ons, the adjacencies and the platform acquisitions. The add-on acquisitions, we believe, is extremely value creating. They are and will be driven more and more decentralized by company-driven processes, even though Ratos provide specialist support. Our group companies, since they have the size and brand, are often seen as natural consolidators. The add-ons are usually bilateral processes, more attractive valuations. I think the last two, we were around an EBITA multiple of 5. And they contain a lower risk. We are -- and we love cost and revenue synergies by consolidating markets and companies. Adjacencies, they are normally identified by Ratos. They target the same industry as current platforms we have today. We look for soft synergies with cross-pollinations. And some will be integrated, some will not over time. I think it's interesting to look what's happened between HENT and Vestia. So HENT's CEO is in the Board of Vestia's Board, and Vestia's CEO is part of HENT's board. And the partnership between these 2 companies is becoming closer for each day that passes. And actually, a joint tender, quite a big one, was submitted for a partnering project just after Q3. Platform acquisitions. Here, we are looking for companies that are market leaders or have the potential to become one. We look for sizable EBITA and companies that can be a natural consolidator in a fragmented market. Markets are important to us. We want them to be attracting and growing. However, we focus on high-quality companies with a solid track record. We like companies who has been down, but we've been through a tougher business cycle in their health history as an example and, of course, a strong management teams. So next, Slide 15, is what lies behind this strategy. Our companies in general have a high cash conversion rate, which give us, of course, strong cash generation that can fund our acquisition journey. And as Jonas Agrup pointed out, I mean, we made acquisitions for some SEK 300 million in the quarter. And still, in spite of the fact that we increased stock levels, et cetera, we had a better, even stronger balance sheet after these acquisitions. And the coming years, acquisitions will be a very important component in reaching or beating our EBITA target for 2025. As Jonas said, we have actually SEK 9 billion to spend today and still stay within our leverage targets. I also like to point out that we have a very strong team for acquisitions here in Ratos. That team includes also 2 experienced legal M&A persons. Magnus was the Head of Legal M&A at MTG. Jacob was a colleague to me in my previous CEO role in ÅF, where we made some 70 acquisitions together with the team. I think, all in all, the individuals in Ratos have experience from more than 150 acquisitions. On Page 16, if we move to that. Just a summary of -- or I'm not going to go through all of this. Just to note that we have made one adjacent acquisition in Vestia and 5 bolt-ons. And then in Q3, we added SEK 1 billion in yearly revenue. And in total, we have added so far this year, SEK 1.9 billion. So with that, Page 17, short summary. Strong order intake in the quarter, up 32%. Positive organic sales, 2%. EBITA continues to increase in our company group, 9 out of 12 companies improved their EBITA, 6 actually were some 60% EBITA growth or more. Cash flow impacted by inventory buildup. And leverage is improving. And yet again, acquisitions have been performed, and we have a strong funding for firepower, strong competence. So we look very positive on the future. We have an exciting period in front of us. Thank you so much.

[Operator Instructions]

Okay. Now let me see, where is the first question?

This is the question, Max Bacco.

Okay. So we have -- Max, from ABG. You ask, could you just remain on how big the e-commerce is of Plantasjen's total sales? In the quarter, it's about 3.4%. I think it's SEK 160 million, Jonas Agrup, please, the number. And so it's still a small proportion of the sales, but it has increased a lot during this year. Then Georg Attling from Pareto. Leverage is now significantly below target. Can we expect M&A activity to pick up and/or extra dividends so that the leverage moves toward a target? Well, absolutely. We do have a high M&A activity. I mean, we acquired 2 companies. But what I mean with high M&A activity is that we are evaluating a high, high number of acquisition targets. But we are also very selective. But absolutely, it looks very good for the future. Sorry. I missed one more question from Max. NAV, component shortage and shipping costs, what is the status for Q4? Has it improved or worsened? I would say it hasn't worsened. It happened to really improved. It's sort of flattening out. And we expect those things to be affecting also Q1, but we don't see any growth here. And we see vaccination level, which affects us as well, are increasing in the quarter. So that is getting better and better. And I think the other have flattened out and maybe will decrease. We can hope for that. But it's very important for us to match this with cost increases to our end clients. And that's a process that takes some time, and -- but more will happen on that in Q4.

And we don't have any audio questions at this point.

Yes. I have another question here from [indiscernible], Cavalier. Strong balance sheet and low valuation on the Ratos stock. Have you considered buybacks to increase shareholder value? This is, of course, a Board issue. But we have an ambition acquisition agenda. So our goal is to, of course, increase shareholder value by using our strong balance sheet to make more really great acquisitions. No more questions. In that case, I want to thank you for participating in this call and don't hesitate to contact Josefine or Jonas or me for any questions that might come up later. Thank you so much.

This concludes the conference call. Thank you all for attending. You may now disconnect your lines.