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

Welcome to the Ratos audiocast teleconference Q1 2022. [Operator Instructions] Today, I'm please to present Josefine Uppling, please begin your meeting.

Thank you very much, and good morning to all of you and welcome to this call. We will present the earnings for the first quarter in Ratos. With me today, I have our CEO and President, Jonas Wistrom; our CFO, Jonas Agrup; and myself as Head of the Sustainability and Communication part of Ratos. So go ahead, Jonas Wistrom.

Well, thank you, Josefine, and good morning, everyone for this presentation of our strong first quarter. So let's move to Slide 2. We have a very strong quarter. I cannot avoid to say that the terrible situation with all the suffering going on, not far from us is with us all the time. My job, however, is to comment on this interim report for the first quarter. When it comes to the war and the invasion, I want to say that we have paused all operations in Russia. Our exposure to Russia was very limited with some 0.3% of our total turnover affecting us. And basically, it was 4 companies that were affected. We have also shut down our only subsidiary in Russia, which is HL Display, it's sales company there with 12 employees. And the cost for closing this business down was less than SEK 6 million in this quarter, and all costs are taken. Also as a result of the war, we have been exposed to significant cost inflation and shortage of components and materials and significantly higher cost for energy. I will comment on this later in the presentation of our separate business areas. But I have to say to pass -- that to be able to pass on cost increases to the client base is a challenge, but it is and will be crucial to maintain and increase profitability. And overall, I'm proud of how our companies has handled this in the quarter. Although there is always more to be done, the Ratos' model really shows strength this quarter. Also, I want to highlight that several messages of strength came from our companies and business areas in how they contribute to more sustainable business in the industry. For me, long-term sustainable business is the same or a prerequisite for long profitable business. It's among other things, the prerequisite for customers, clients and employees and not to mention, of course, our society. All in all, we have a really strong quarter with an EBITA growth of 44%, strong organic growth and a total growth of 40%, especially considering all the challenges I just mentioned. Furthermore, during the quarter, Plantasjen acquired Flyinge Plantshop and Ratos signed the acquisition of NVBS, adding more than SEK 100 million in EBITA on a yearly basis. So with that, let's go to Slide 3. We had organic growth in all business areas and our net sales is up significantly also due to the fact that our growth journey started 2021 and now show this in 2022. EBITA increased even more, 44% in a seasonally small quarter for Ratos. Let's go to Slide 4. Just to come back to our financial targets, our LTM EBITA is up to -- close to SEK 1.9 billion. That's ahead of the plan. When it comes to leverage, it's still very low. So we are not within the target, but we are on the right side. And the dividend for this year is in line with our dividend policy. So with that, let's go to Slide 5. And on this slide, you can see our strategy around acquisitions, where add-on acquisitions drives cost and revenue synergies. It's very often bilateral processes with more attractive valuations, lower risks. And of course, even though this is done by the companies, Ratos is there to assist. Adjacent, as you might remember, we acquired Vestia last year. It has really showed to be an adjacent company where we now have really hard synergies actually between Vestia and HENT. And we have new platforms, where we acquire companies that is itself a platform for growth, both organic growth and acquisition of growth. And here, we're focusing on high-quality companies with solid track record. And then our M&A activity, this quarter was actually very high. We looked at a large number of companies, some quite deep. The result was that we ended up making one add-on acquisition in Plantasjen, Plantasjen actually did it. And we also made a platform or we signed a contract for a platform acquisition that will be acquired this or next week into Ratos, and I will come back to that. So let's get into Slide 6 and our business area, business areas. So why have we changed the structure. This is the first quarter with the new structure for our financial reports, where we will focus on the business areas rather than on 14 individual companies or 13 this quarter. Well, the answer is we are not any longer a private equity conglomerate. We left that in 2018. We are no longer an investment company, we left that status in the autumn last year. We are a company -- an industrial company group with 3 business areas. And I'm ready to answer any questions about individual companies also in this presentation if you want to hear more details. So with that, in alphabetic order, let come into Slide 7 and Construction & Services. Construction & Services, they build and maintain a sustainable society. Construction & Services had a very strong quarter, 52% growth, 9% organic growth, actually strong demand and order books in the quarter. Profit or EBITA is up 135%. And the profitability is up more than 50% to a profit margin of 8%. And this in the quarter, where we have seen significant inflation. As an example, steel rebars is up to 50% in some cases. We have a shortage of certain steel. As you might know, a big part of raw steel has been produced in Ukraine. I think it's up to 70% of the European production comes or came from Ukraine. Ventilation, and in metals and in solutions are up 30%, higher prices on tile, et cetera. And cement actually, where there you have just seen moderate price increases. I am impressed how the companies in Construction & Services have been able to passing on the prices to their clients. So a really strong quarter for Construction & Services, especially given the environment they work in. In the quarter, we signed a contract to acquire NVBS, and we can move to Slide 8 to take a closer look on NVBS. They are a Swedish railway maintenance provider with also some smaller entrepreneurial construction work. But their main focus is on railway maintenance. Both -- I'm not sure about this, but both in signaling, electric solutions, and the rails sales and services and the groundwork related to railways. So they're headquartered in Sweden, but they perform business also in Finland and in Norway. There are around 175 employees. As you can see from the graph below, there are a fast-growing company. And the clients is the largest part is public agencies, municipalities, and larger private corporations. So we're very happy to welcome NVBS this week or next week into the Ratos group. Let's move to Slide #9, Consumer. It was a small quarter, as you know, from a seasonality standpoint, but a stable quarter. Organic growth were up actually to a big part of the business model in KVD, but also with strong organic growth in Oase. Naturally, there is a higher interest for Plantasjen maybe, than other companies in this business area. And Plantasjen's EBITA and sales was in line with last year, in spite increased cost for logistics and energy. And the acquisition Plantasjen made of Flyinge in March contributed only with SEK 1.6 million in EBITA in the quarter. But it's an important acquisition as such with soft and hard synergies for both companies. EBITA amounted to minus SEK 75 million, last year, minus SEK 65 million. The LTM -- the margin for the last 12 months is down due to the business -- new business model in KVD, where if you compare with last quarter or the Q1 2021, then KVDs cars were brokered to 100%. They never brought the cars into their books. Now with the new climate or new business situation in cars, as you know, with lackage of lower sales of cars due to the semiconductor situation, among other challenges they have, we now have normal trading of cars in PVD to 30% -- sorry, to 70% and the broker business is 30%. So the revenue is going up in KVD, but profitability per krona is going down. So a stable quarter for Consumer. Let's move into Slide #10 and the business area, Industry. Business -- this business area also grow and grow organically 3%, net sales up 11%. Also here, of course, challenges with increased cost for material, components and energy in the quarter. Furthermore, there were lack of some components from China due to the COVID situations there. I think the transportation or the logistics coming in from China, shipping has worked rather okay, surprisingly enough, is our experience from China this quarter. But there has been challenges inside China. Very strong quarter for all companies, except the HL Display, LEDiL, TFS has been very good in managing the increased costs. I'm impressed by that. In Diab, we have still lower sales in the wind segment and increased material and energy prices, especially in Italy. And talking about Italy, in Q4, we announced a restructuring program in Diab to increase profitability and decrease volatility. We expect to see the full effects of this program in this year. I can be a little bit more transparent now since we have launched the first part of the program, and that includes laying off more than 120 employees down in Italy. And Italy is a quite more challenging market to do these kind of measures. It includes local politics and unions, et cetera. But we will not only do restructuring in Italy. We will look over all our operations. And the underlying business area EBITA was SEK 87 million versus SEK 148 million last year. And this is all due to Diab. In Diab, Johan Arvidsson has been, from Nolato, has been appointed to a new CEO. We expect him to start in Diab latest in October this year. And from April 19, we have Per Magnusson, my former colleague from [ OE ], who is also a Board member of Diab. He is acting CEO as we speak and has been that from 19th of April. So with that, Josefine, we move over to the very important Sustainability area. So I leave the word to you, Josefine.

Thank you very much, Jonas. And well, starting off 2022, there were several messages of strength -- the strength from our companies, as you mentioned also earlier, and this actually leads how the Ratos companies contribute to a more sustainable business in their industries improve. And as all of you listening to this call, probably is aware of this, it's happening a lot in the area of sustainability and major changes not least in the legislative and regulatory side are to be expected in the next 3 to 5 years. It's -- this is a EU spirit of increased climate emission and new rules are introduced in order to steer capital flows towards an environmentally sustainable investments. And it's more clear now than ever that to be profitable tomorrow, you need to understand this and see this as an opportunity. When I look at the companies in Ratos family, I can state that they are well positioned towards these ongoing EC trends and that leadership in the companies have both the knowledge and the will to develop in the right direction going forward. Jonas Wistrom also mentioned our acquisition strategy, and I would like to mention that we are very careful when we do acquisitions. Hence, our horizon is internal, and the business -- our business idea and model is to be internal. Everything we onboarding throughout those needs to be sustainable in the long run and long-term sustainability is a prerequisite to be also long-term profitability. Having said that, let's move to the next slide side, and let's wrap up with some concrete examples from the quarter. If we look at the -- you all is aware that last year, Speed Group built the Nordic region's largest rooftop based solar cell plant, and now we actually see the result. It will be produced annual green electricity expected to be approximately 1.5x their own electricity consumption. And this corresponds to, in the quarter, 6,500 electric car charges, just to have some sort of a measure point. And so we are very happy to see this development from these roof-top based solar cell plant. If we look at the latest company, welcome into the Ratos family, Presis Infra. We are very happy to see this kind of progress already now. Presis Infra was awarded the Green contract in Norway this quarter. They had a very good result in all the criteria in this contract. But what we're most proud of is that they have the highest rating in the CO2 reduction part. And this will actually mean that the reduction in CO2 emissions will be -- go down 76% compared to if there has been no green criteria in this contract. So this is a very -- I think this is a very concrete signal of strength from Presis Infra going forward. Last but not least, in HL Display, they are switching to 100% renewable energy in their Poland factory, and that is actually something that's going to make a huge difference if you look at the Scope 2 emissions for HL Display. Back to you.

Thank you, Josefine. And I know you have many more examples but it's really great to see your work, and it's just so important for Ratos. So now let's take a deeper dive into the financials on next Slide #13, and I leave the word to you, Jonas Agrup.

Thank you, Jonas. So let's move to Slide 14, and I will move down to net debt because we have talked about net sales and EBITA and margins and so on. So if we look at the net debt, we are -- it has actually increased. We had a net cash position in Q1 last year. And this is a result of the acquisitions that we have made, but it's also a planned inventory buildup in the business area Consumer. If we then move to the net financial items, you can see the minus SEK 103 million, up a little bit from Q1 last year. This is mainly due to that we had a quite large positive FX effect in Q1 last year. If we move to tax, it's 41% compared to 31% in Q1 last year. And the effective tax rate was actually quite high in the quarter, 24%. And this is -- the reason for this is that we had quite large nondeductible one-off costs in the quarter. I expect the tax -- the effective tax rate to be below 20% going forward. If we look at the cash flow from operations, you can see minus SEK 489 million, a small improvement from -- or an improvement from Q1 last year. We have seen a negative effect on the operating cash flow from the planned inventory buildup I have mentioned earlier. And if we look at the leverage, you can see 0.8x. We had a negative leverage last year in the quarter. And this is -- we see an increase of the -- as an effect of acquisitions, but also the planned inventory buildup. So if we move to Page 15, start to look at the net sales bridge. Strong net sales growth in the quarter. And as we mentioned earlier, in all business areas, we saw strong growth. It's important to remember that Q1 is a seasonally small quarter. So that's important to have in mind. And net sales was up 40% and was driven mainly by acquisitions, 25%, but the organic growth was also good, 11%, and we had a positive FX effect of 5%. And the acquired growth was driven to the SEK 1.1 billion, as you can see in the net sales growth was driven mainly by Presis Infra, but also less challenged than some other companies. If we then move to the EBITA bridge, you can see that we have a large increase from acquired companies, SEK 113 million. And the organic growth or the other, you can see we have a negative effect of SEK 42 million. And the organic sales growth, or organic net EBITA growth was offset by increased energy, logistics and material costs, and we also saw lower volumes in the wind segment within industry. So in total, a negative effect of SEK 42 million. And then if we move finally to page -- Slide 16. If we look at the LTM, EPS, it's up 10% to SEK 2.17 per share in Q1. And if we look at the return on capital employed, we continue to increase the ROCE, and we were at 9.2% in the first quarter, mainly driven by improved earnings. Back to you, Jonas.

Thank you, Jonas. It sounds like an after show Jonas after Jonas. Anyway, let's move to the final remarks, and I think we can jump to Slide 18, actually, just to try to sum up this red quarter. I mean, basically, it's a really strong quarter in light of the significant challenges in the operating environment, actually in all areas. The Ratos model works, and it's even more important in these challenging times. We are ahead of plan, and we have both the financial and operational strength to reach or exceed our 2025 financial targets by the sound industrialists, focusing on organic growth and acquisitions that create value for Ratos and the business area they're into. So with that, let us open up for any questions. Thank you.

The first question comes from Max Bacco, ABG.

Congratulations on a strong report. So a few questions from me. And if we begin with Plantasjen, it was quite good weather here in Q1, especially compared to Q1 last year. Is it possible for you to assess the effect on Plantasjen from this good winter in the quarter?

Yes, I actually didn't hear you out fully. I understand you asked about the weather. Did you say it was good weather in March or bad?

Yes. Yes. I can repeat the question. So quite good weather here in the Q1 or in the first quarter compared to Q1 last year. So yes, if you have like a comment on that and the contribution to Plantasjen just from the weather effect.

Yes, you're right. I mean we all long for March. We had a few sunny weekends. I think it's -- the important -- maybe more important thing was that last year, the Easter was in the Q1 and this year Easter is in Q2. And I mean consumers tend to not maybe believe in that the nice weather will continue. You have this frost night, which is very important for anyone who is planting or planting in their garden or balcony. So I think the Easter component is stronger than the weather, but maybe you should take a separate call with Nina and hear all the details.

And just on the order backlog, which is quite strong. Can you raise prices inward backlog towards customers? Or do you see any sort of margin risk in the order book?

Good question. When -- I mean, the answer is, yes. The answer is no, not everywhere, but in most cases, we have indexed -- I mean, in this project, we have indexed on material costs, et cetera. But of course, the inflation will continue to be a challenge in Q2. But in general, we have a good position here. And again, I'm impressed on how almost all companies have been able to pass on costs, both for product sales and project sales.

And on Diab, is -- I mean, is everything going according to plan so far with the restructuring and so on?

Yes. That is my view. And we started with the toughest part, which is our big factory down in Italy. And my English is not good enough to express all the components that need to be in place to do these things. It's not only unions. It's local and actually central politics involved here, too. But I think the team from Diab, in this respect, has so far done a great job. And of course, we think of all the people being affected, and we do our utmost that it will come out well also for them. But you will see more activities coming down the line. And again, we need to be less volatile, and we need to be more profitable. So you will hear more about this going on.

And if we look, you mentioned on this a bit, but the M&A pipeline activity, is it still high activity in terms of M&A and so on?

It actually is. I mean after February 24, I must admit I thought to myself, will everything stop. No. But we appreciate the fact that we are having a strong balance sheet in these difficult times. And although there are no drastic, a lower valuation of the companies, the trend is clear. But we are seeking companies that make our business area stronger. And I mean, we are more concerned about the company -- or more interested, I should say, about the company acquire since we do it for long term, I mean we can pay high valuations. We haven't done this so far, but for the right company and for a really good company, we are prepared to pay. But in general, valuation is coming down.

And just 2 more short questions. So the organic EBITA growth or adjusted EBITA growth was minus 24%, if I did the math right, is this all due to Diab or is it any of the other companies having a negative contribution?

I would say it's Diab, who is the contributor to that. So -- yes.

And finally, do you have any comments on Q2 in April regarding demand, but also cost inflation and component shortage and the development of that?

Yes, I can comment the cost inflation. I'm not -- I mean, there is no signs that this sort of is easing up. I think we will live with that. I think we will live with the uncertainty and also the fact that the cost inflation doesn't only hit the companies. It hits the individuals that pays more for petrol, pays more for energy, pays more for food and goods. And if you have a business in consumer, you think of that as well. So we need to be more efficient to keep prices down on our products to make sure that there will still be a strong demand for that.

The next question comes from Georg Attling, Pareto Securities.

Congrats on the strong quarter. My questions really follow what we've been -- well, you've been speaking about in the presentation. But starting with the whole pricing increases. Could you just describe the potential like in which companies do you see that you can continue to increase prices? And in which companies do you see that the pricing power is not as strong?

Well, I'm sorry to hang out Diab again here, but they have had difficulties doing this. I would say all other companies has been able to do that. But it hits quite different. I mean because it's -- I mean, if I talk to HL Display, for instance, which I've done, of course, I mean, for them, steel prices are up like 15%. For some construction price companies, steel prices are up 50%, depending on what kind of steel it is. Aluminum is up 30%. Plastics, 15% to 20%, PVC is -- have even higher price increases. But we have a model that is -- or a culture, I should say. I used to say operational excellence is 80%, 90% strategy is 10%, 20%. And now it's time for operational excellence in our decentralized structure and take this decision test and firm. And again, I think this has worked very well in the quarter. But we will continue to see these challenges in Q2 and onwards, I think.

[indiscernible] Q2, in terms of lockdowns and found out...

You've disappeared. Can you repeat from -- sorry.

Yes. Sorry. So Diab, has the situation changed here in early Q2 in terms of lockdowns in China? Or is it the same as you saw in Q1? Has the situation worsened?

Yes. I'm not going to give so much comments on Q2, as you understand. But I think you've read the news. And on the positive side, I must say that the cost for shipping from China to Europe, they were up like 7x, 8x last year. In this quarter, we haven't seen those costs really going up actually. It's more a problem. We have factories in China, and they are closed. So we just don't get the components, for instance, to HL Display because the factories is closed or -- but the shipments has -- it's tough, of course, but it's not tougher than it was last quarter.

And then just a final question on Plantasjen. Are you worried at all of the -- of being able to meet demand here in Q2? Or do you feel like the buildup of inventory should cover the demand in Q2?

Yes. Georg, I'm always worried. That's my nature as a CEO. But the inventory buildup, I think they are very well equipped for meeting the demand. What you can speculate in is, of course, if the inflation hits the consumer being more selective on where you spend your money. So if you want to read my inner thoughts, that's a bigger worry.

We now have a follow-up question of Max Bacco, ABG.

So just one more question, perhaps a bit tricky one. So you had organic sales growth of 11% here in the quarter. Could you say anything about the split between volume growth and price increases?

No. But I can say that the organic growth is 11%, you're correct. But I tend to say in my statements, if you read the report that the organic growth is good because we -- it is to some part inflated by KVD, by the business model, since they're taking cars into the book. But both price increases and organic growth, I'm actually all in all, satisfied that even if we need to do more and better in here and there.

There are no further questions at this time. I hand back to you, speakers.

Okay. Then I just want to thank you for listening in to this quarterly call and don't hesitate to call me or Josefine or Jonas Agrup for any questions you might have in your mind after this meeting. Thank you very much.

Thank you.