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

Welcome to the Ratos Audiocast Teleconference Q4 2021. [Operator Instructions] I'll now hand the floor to our speakers. Please begin your meeting.

So a warm welcome to all of you to this earnings call targeting the Q4 and the full year of 2021 for Ratos. My name is Josefine Uppling, and I'm the Vice President, Communication and Sustainability at Ratos. Please, Jonas Wistrom, our CEO and President, you are going to start off, and then we're also going to listen to Jonas Ågrup, who is the CFO at Ratos. But please start, Jonas Wistrom.

Thank you, Josefine, and thank you, everyone, for listening in to this call. I would like to start to change slide to Slide #2. We're actually happy today, and I'm happy to tell you about not only a great but also an important year for Ratos this morning. I would actually call 2021 as a milestone year for Ratos. As you might know, I joined as CEO in the start of 2018, in a situation where only 3 of 13 companies did a better result than the previous year in spite of a very good business climate those days. We also had high debts. The turnaround was actually going on for 3-year, but was finished as we started 2021. We also released our new financial targets and was able to start our growth journey also through acquisitions. Especially happy for how strong our diversified portfolio is, and really shows its strength in these difficult times, with a sizable EBITA and good [ EBITDA ] growth. Our EPS growth was actually even stronger also due to the fact that we after the summer legally left our investment company status into a group, and we will talk more about this later. So let's move to Slide #3. During these 3 years, '18 to '20, we're all focused on improving the stability and profitability in our companies, all through our recipe with -- starting with the structure, following up with processes, and of course, the most important, also the culture in our group. We had to make some divestments to get the right structure and risk level in the company group. Actually, this turnaround phase went faster than planned, thanks to hard work from great people everywhere in our group. So with that, let's look on next slide on our turnaround journey. Well, the number speaks for itself. And again, this -- we just work with profitability and stability these years. We increased EBITA with 86% annually as an average per year. Of course, we have deducted the exit gains we made from the divestment of Bisnode, including the D&B shares that was a part of that. And also, excluding our divestment of our property at Drottninggatan, we're now in a new headquarter in Sturegatan. And for those who are interested, if we put back Bisnode operations into this graph, the average annual EBITA growth would still be close to 50% per year. So I'm quite proud of this turnaround journey we now have left behind us for more than a year. So moving to next slide. We see our financial targets that was announced in February 2021. We want to reach at least SEK 3 billion in EBITA, and we will do that with a sustainable debt level and a sustainable dividend policy. So let's move over to next slide, taking a look at our EBITA target. It was based on a 15% yearly growth per year. As an average, as I used to point out, this will not be a straight line. I've been in this growth journeys before, and I know it doesn't follow a straight line. Let's move to next slide where we sort of can look at the first year of this growth journey. We actually increased EBITA 23%, so we are ahead of plan, although most EBITA was acquired in the second half of the year. So now we actually need less than 14% growth to reach our target. Let's take a look and go into Slide 8, where we will go through the financials together with Jonas Ågrup. Again, increase in earnings per share; strong earnings in both the quarter and the year; and the transformation from an investment company to a group is now complete. Starting up on the next slide, where we look at the yearly results. 2020, we had SEK 1,468 million. Our EBITA adjusted for the D&B shares was SEK 1,802 million 11 out of 13 companies increased their EBITA. We had an all-time high result for 9 of the companies in spite of the challenging times. If we look closer to our EBITA growth, which was SEK 334 million, actually 7% was organic and 30% came from acquisitions. Let's take a look on Q4 on the next slide. Our EBITA grow from SEK 200 million to SEK 226 million. We actually had a very positive impact of the D&B shares in the quarter, but again, they're not part of the operations. So with that, let's go to Slide 11. In Ratos, we believe in fundamental. We believe in, of course, EBITA growth, but based on good cash flows, high return on capital employed, resulting in earnings per share. In the long run, earnings per share will win is my experience. And as you can see from the slide, we grow earnings per share with 79%. We really have to thank Jonas Ågrup and his team for providing a much better net financial items number and also a lower tax rate as a result of -- that we are now are able to utilize Ratos tax loss carried forward and group contributions. And the Board is proposing an increased dividend up to SEK 1.20. So now I'm leaving over to you, Jonas, so you can further elaborate on the great things you have done. And we ask everyone to move to Slide 12.

Okay. So at Slide 12, you see that we have strengthened the balance sheet and you can see that the leverage has improved quite significantly over the last years. And the leverage in 2021 ended up at 0.2x pro forma adjusted for the acquisitions of Vestia, but also the acquisition of Presis Infra that was made in the end of the year. And we are down from 1.1x in leverage that we had in 2020. And you know that our target level is 1.5x to 2.5x. It has not changed. And if we look at our financial position for acquisitions, we can make acquisitions of roughly SEK 6.5 billion, with a maintained leverage at or below 2.5x, without actually diluting shareholders, which is good. Available funds for future acquisitions has decreased since Q3. And this is a result of acquisitions that we made in the fourth quarter, SEK 2.1 billion was made in acquisitions in the fourth quarter. And as you know, we have also continued to increase the inventory, mainly in the business area consumer, but this is in line with plan. So we have an inventory buildup of roughly SEK 300 million in the quarter. If we then move on to Page 13, we see the operating cash flow. We have a strong cash flow in Ratos. You can see the cash flow levels here in the chart. And if we look at the net working capital, how much we normally tie up in net working capital, it's usually, within Ratos Group, it's about 4% to 6% of sales, which is a quite low number. And Ratos is also CapEx light, and we have CapEx of roughly 2% of sales on a yearly basis. 2021, you see a negative impact in change in net working capital. This is impacted negatively by the planned inventory buildup that we have seen in Plantasjen and KVD. So that's in the business area consumer. And if we move on then to Page 14, you can see return on capital employed, which has also improved quite a lot since 2018, where we had a return on capital employed around 3%, and we posted a return of 12% in 2021. And the improvement seen has been driven by increased earnings and the capital employed level, the last -- at least the last 3 levels as year-over-year it has been on a fairly steady level despite the inventory buildup that we have seen in the business area consumer. So by that, we move on to Page 15 then. We move on to you, Josefine.

Okay. Thank you. So a few words on sustainability at Ratos. Ending 2021, we had several messages of strengths, which came from our companies, both in terms of concretely reducing climate footprints and evidence on how the companies in our group lead the way to a more sustainable business in the industry. I will come back to that shortly. But moving to the next slide. First, a few words on the new EU taxonomy. As you can see, during 2021, with in our first reporting in line with the new regulations to get the first shot on our eligibility for Ratos. And as you can see on the slide, we have a pretty good overview for our continuous work now. And hopefully, the common language and the clearer definition of what is sustainable will help us increase the pace in the further transition going forward. But coming back, if we move to the next slide, coming back to the messages of strength in Ratos, let me share 3 highlights from the quarter, proving the difference a sustainable way of doing business. Actually, it does. Well, firstly, during 2021, Speed Group divested energy inefficient properties and optimized warehouse spaces. Also, emissions from fossil fuel has declined as their vehicle fleet has transitioned to electrical vehicles. As a result, Speed Group reduced its carbon footprint by 40% last year. And this means the company is ahead of plan in its ambition to be carbon neutral by 2021. And also, at Ratos, we -- even though we are a relatively small piece in the big Ratos puzzle, it's worth mentioning, I think, we reduced our carbon footprint by 50%, mainly because of the less travel by air due to the COVID pandemic. Last, but definitely not least, the latest electrification contracts award to Aibel during Q4 helped reduce CO2 emissions by more than 800,000 tonnes per year, and that is actually representing 1.5% reduction in Norway's total emissions. And with that, Q4 marked an important milestone in the transformation of Aibel. the share of renewables enables order backlog, now accounts for 64%. So to summarize, incremental improvement in areas where it historically has been made way too heavy, and long-term unsustainable carbon footprints are where we really can make a big difference. So I'll stop there. And back to you, Jonas.

Thank you, Josefine. It's just amazing that Aibel is actually have a real influence of the carbon emissions in Norway, I think, that is amazing. And again, I mean, to take the sustainability as an integrated part on how we work is a prerequisite for having a sustainable EBITA growth coming forward. So thank you for those words, Josefine. And let's then move over to Slide 18, where we will dig deeper into our business areas. And as a request from many of you, from Q1, we will report detailed numbers for our companies yearly, but of course, dig in deep into the business areas quarterly. So starting up with next slide where we take a look at Construction & Services, very strong growth in 2021. You can see a dip in 2019 where we have challenges in projects at hand. And there are some facts around the business area which I won't go through now. Let's take a closer look to the business area and the companies. So actually, all time high EBITA in all companies, except for Aibel and HENT, all companies, except HENT growing their EBITA for the year. And let's start off with Aibel that Josefine mentioned. They really had a great year, with an EBITA growth of 57% in the year and 45% for the quarter. And as Josefine alluded to, Aibel is moving really fast to become a green company, with a backlog of 64%, again, in wind and electrification. We don't have to go back so many years to get to a situation where we used to have 100% oil and gas. So that's amazing. airteam, all-time high EBITA, a little bit weaker quarter Q4 due to delays in large projects, and it's a material that is lacking. HENT showed a flat year in EBITA, but with some improvements in profitability. Q4 was up 12%. The revenue is a little bit lower, which is according to plan. We actually believe that HENT grow too fast for a while but are now ready for growth again. All-time high EBITA for Presis, but -- also but they have just been with us for just one month in 2021. We see Presis as a very interesting platform for growth in the infrastructure services arena. Speed Group continued to grow EBITA this year with 89%. And this, as some of you might remember, from a very strong EBITA growth also in 2020. So Speed is doing really well. Vestia, which were acquired as an adjacent in the beginning of the year, grow their EBITA with 80% in the full year and 51% for the quarter. They have a very strong profitability if you compare with the industry and they also have very satisfied clients. So moving over to Slide 21. As you might remember, our acquisition of Vestia, we wanted to get soft synergies between Vestia and HENT. Christian Wieland, the CEO of Vestia, went into the Board of Directors in HENT and Jan Jahren, the CEO of HENT, went into the Board of Directors of Vestia. And this and other things resulted in the fact that in the end of 2021, we formed a new group, SSEA, with high ambitions in the Partnering contractor business, which we believe is the future actually for construction business. We did this by merging Vestia with the Swedish operations in HENT. And Christian Wieland, the CEO of Vestia, will take the helm as the CEO for SSEA. I think this is very interesting and it's going to be exciting to follow this company's development during the coming years. So with that, let's move into our Consumer division, which have had an amazing yearly EBITA development. This is, of course, driven by Plantasjen, but not to forget also of the other companies in the business area. So take a closer look into this on Page 23. And first of all, all companies had their all-time high EBITA. EBITA for 2021 in KVD was, of course, boosted by the acquisition of Forsbergs, which -- and Forsbergs, by the way, has developed according to -- or better than planned. Q4 is actually a loss-making quarter from a seasonable perspective. So that will be the case coming forward as well. And that affected, of course, KVD that dropped the EBITA compared to 2021 in Q4. Oase had their best year ever with a EBITA growth of 65%. Due to the high demand for their products, they were actually sold out after Q3, they didn't have to sort of try to get rid of the stock in the fourth quarter. Everything was sold out. And actually, the revenue in Q4 for Oase was SEK 5 million. So we're happy it was a loss quarter for Oase. Coming to Plantasjen, again, a record high EBITA for Plantasjen. If we look closer into the year, the sales was flat or plus 1% during 2021. This is in spite of the fact that Plantasjen had to close 50% of the Norwegian stores for 2 months, end -- at the end of Q1 and the beginning of Q2. In the fourth quarter, they also managed to close a loss-bringing store in Finland, which led to a onetime IFRS effect on NOK 28 million. So all in all, for the same volume, they have continue to increase EBITA with better gross margin. And they are due to better product mix, more efficient logistics and hard work with OpEx. I think I'm actually most happy about the fact that Plantasjen has gained market share in the last 2 years. The market has been growing approximately 10%, the Plantasjen growth has been 20%. So with that, we leave a Consumer and go into Industry on next slide, 24. Also, Industry has a strong EBITA growth since 2018, but a tough '21. So let's take a closer look on this on next page. Starting up with Diab. I'm sure you have seen the numbers for Diab competitors like Gurit and the wind OEMs like Siemens Gamesa, LM, Vestas and others. Why is this? Well, Diab had a tough year in the wind segment, not only because there was a sharp drop in wind sales due to subsidies was taking away in China and other places, but also a hit by a simultaneous shift in technology where the OEMs are changing materials for their new turbines. Although wind sales has been low, we are certain that the wind is here to stay in the long run. Anyway, we need to take action to handle this situation and come back to normal profitability. And therefore, already in Q4, Diab took SEK 11 million in costs to gain approximately SEK 30 million in cost savings. Furthermore, we announced that today that we will take significant measures to save SEK 130 million during the year. And this should be realized again during the year. And the cost for that will also be approximately SEK 130 million. The marine, aerospace & industry segment, representing in 2021, almost 50% of the business, continues to show strong profitability and growth. But in 2020, 63% were wind sales. Coming down to HL Display, all-time high EBITA. They also performed 3 acquisitions during the year. I think SEK 10 million of their EBITA growth came from the acquisitions, which, all in all, represents some SEK 23 million on a yearly basis. Q4 was affected by a restructuring in Asia to improve profits in parts of the Asian business. All-time high also for LEDiL with strong EBITA growth from an organization that is much closer to their clients than before. LEDiL has had many challenges with transports from China and also, to some level, been affected by the lack of semiconductors. So strong year for LEDiL. Coming down to TFS that has been quite hard hit by the corona. Difficult to make clinical trials in hospitals. But in spite of this, a really good development. I'm quite happy with that they were able to grow their EBITA 51 -- 58% during the year and 84% in the quarter. So a good future for TFS. If we look at Page 26, just a summary of the acquisitions we made during 2021. So we made 6 add-on acquisitions. We acquired them for a EBITA multiple on 5, 6x, SEK 1.2 billion in sales. I've talked about the adjacent Vestia represent close to SEK 1 billion in sales. And in the end of the year, we acquired our first new platform with Presis in Norway, almost SEK 2 billion, a 9 multiple on the EBITA. Together, these companies represents some SEK 4 billion in sales and some SEK 400 million in EBITA, which, of course, will affect 2022. So to summarize up on next slide here. Our message to you is that we are ahead of plan. The turnaround phase went faster than the plan. The acquisitions are ahead of plan. We have a stronger balance sheet than planned. And I could actually also say that the order book or the order book backlog coming into '22 is stronger than I had expected before the business review we had in December. So with the next slide, I just want to see that this was all from us. I hope you will show up for our Capital Markets Day, February 23, the 23rd of February, where we will dig in deeper to Ratos and our business areas and our way to be also a leader in sustainability. So with that, we are ready for questions. Thank you.

[Operator Instructions] And so far, we have one person in the queue. That's Max Bacco of ABG.

And congratulations on the strong report and strong ending to 2021. So first question is on Diab. I was just wondering if you could perhaps elaborate a bit on the cost savings program and what you intend to do more granular, if you could give us some more color on that one.

Good to hear from you. Well, I can't give you all details because we are in negotiations with the union right now. But I can tell you that there are 2 things we want to achieve. We want to have a more balanced material mix for the coming years. PET is taking over from PVC in the wind segment. So we need less PVC and we need more PET. We also need to cut costs more or less all over the place in Q4. We took down costs in Ecuador and Lithuania. So it's a combination of many things to get Diab to a level where they should be.

Perfect. And if we look at the usual question, the M&A pipeline going into 2022. Could you comment on that if it's good? And could you say anything about the preference between add-ons and platforms going ahead?

Yes. First, I want to say that we're not a compounder. We don't buy companies to make arbitrage on our multiple. So we have a big pipeline that we have -- we're sort of very detailed on which company we should acquire and to get that to a reasonable valuation. But the pipeline as such looks fine. When it comes to, what do we prefer? Well, add-ons, I mean, organic growth is, again, shouldn't forget that, very value creating. But add-ons where we can realize also hard synergies, we like that a lot. We have seen what an adjacent company could mean. And platforms will be necessary, I believe, to reach or exceed our EBITA growth. I hope that was an answer on your question.

Yes. Yes. Very good. And last question to you, Jonas Ågrup. When we look at internal financing that you have done during the quarter, what is a reasonable level for net financials going forward in 2022?

Net financials for last year 2021 was around SEK 350 million. But it depends on how much acquisitions we will do going forward and how we will finance these acquisitions. And most likely, we will finance them with the [ sovereign ] debt. So it will gradually increase from the SEK 350 million going forward.

And if you compare...

Once again, congratulations on the strong ending year to 2021.

And we've had one further question joined the queue. That's Rasmus Engberg of Handelsbanken.

Can you hear me? I had a couple of questions. Just firstly, starting off with Aibel. It's a very, very big contribution from them this quarter. Is that sort of end of a contract? Or how should we think about that going into next year or this year, I mean? Sorry.

Yes. I think it's important to say that since we don't own a majority in Aibel, just 32% of their profit comes in to our P&L. But I showed the full company in the slide just to get a picture on the size of the company, but it hasn't affected our profits in Ratos -- in the Ratos Group so much. But Rasmus, what was the question?

I was just wondering, as you look into this year for Aibel, the contribution you anticipate there. You had basically half the full year contribution in the fourth quarter. Now is that kind of a one-off? Or how should we think about that?

No. I mean, Aibel has a strong -- very strong, I'm not sure I dare to say all-time high, but a stronger order book than ever I can -- I have had seen. So the forecast -- I mean we're not giving forecast, but it looks like 2022 will be a very good year for Aibel again.

All right. Good. And then I wanted to ask you about the Vestia and this deal you're doing with HENT. Has that has that deal happened? And will you then report the SSEA as a separate unit? Or how do you think about the accounting going forward?

Yes. Yes. The answer is yes. The deal is made in December. So for '22, we will report this as a unit.

And then I had a question on Presis as well. Because when you acquired the company, you said it was 10.9x [ EBITDA ]. now you're saying 9x, so just very strong ending to the year.

Yes, yes, yes. Now, I mean we -- they have done their numbers in Norwegian GAAP. And when our finance department is calculating this in the right way, considering this and the Norwegian krone, et cetera, we come to this multiple. Jonas, would you like to add anything to that? Or...

No. That's the answer. Yes.

So -- but we are conservative. So we rather improve numbers than getting the other way around.

Yes. And since this is a kind of a new business for us to forecast and we don't have a lot of history, how does it actually look seasonally? Is it kind of heavy in winter with the road?

Well, that's a very good point. Yes. Sorry.

Yes. Is that -- should we sort of expect Q4 and Q1 to be the kind of bigger quarters for a year? Or how does it actually look?

Yes. Yes, you're right. And you made a point that I should have done actually because, I mean, they sort of have the opposite to Plantasjen that earns most of their EBITA in Q2 and Q3. So to some extent, this will balance and even out the quarters for Ratos. That was not the reason why we acquired it, but this is a good side effect.

Then a final question to Jonas Ågrup, which is the tax rate going forward. Now it's very low here. But what should we kind of think the tax rate would be in 2022, assuming that you stick with the businesses that we have today and not think about further acquisitions?

I think you can assume tax rates just below 20%, maybe around 18%, 19%. That's what I expect going forward.

[Operator Instructions] Okay. There seems to be no further questions from the phone lines at this time. So I'll hand back to our speakers for the closing comments.

I just want to thank you all for dialing in. And once again, I hope to see you on the Capital Markets Day, 23rd of February. Thank you.