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

Hello, and welcome to the Ratos Audiocast with Teleconference Q2 2022. [Operator Instructions] Today, I'm pleased to present Josefine Uppling. Please go ahead.

Thank you very much, and a warm welcome to all of you listening to this earnings call targeting the second quarter 2022 in Ratos. My name is Josefine Uppling. I'm the Head of Communications and Sustainability at Ratos. And with me, I have our CEO -- President and CEO, Jonas Wiström; and our CFO, Jonas Ågrup. So let's start over to you, Jonas Wiström.

Thank you, Josefine. And also, I would like to say good morning to you joining our call this lovely summer morning in Stockholm. Let's move to Slide 2. Well, we've all seen that it's been a challenging quarter for most companies given the world we're living in. We have closed markets, shortage of components due to lack of semiconductors, lockdowns in China, et cetera. A larger challenge is, of course, the higher -- very high inflation on raw material, goods, energy costs. They are challenging the gross margins, of course, but also affecting private consumers and enterprises when it comes to new investments. We also see a stressed wind power market in the world. The wind power plant manufacturers are all struggling with profit warnings in a year with weaker demand and design changes of their turbines. And this in spite of the fact that it's actually a good future for wind power in the world, especially offshore wind. However, larger -- Ratos' largest challenge in Q2 was actually the weather situation in Norway and Sweden in April and May. You've heard me many times talking about Plantasjen's dependence on the weather during the critical months in the spring. And I remember actually when the weatherman in TV worn for frosty conditions in the nights in May, with a recommendation to bring the plants and flowers indoor if it was possible. The weather situation was the most important factor for the sharp drop in earnings for Plantasjen in Q2 although inflation affecting both costs and customer behavior and a decreasing effect of pandemic also played a role. Taking this into consideration, I'm satisfied with the stable Q2 results and also with good -- very good results in our companies with a good order intake and strong order backlog. This again shows that the Ratos model works. And also satisfied, of course, that our earnings after tax grew in the quarter, thanks to lower tax due to our transformation from an investment company to the company group and corporation we are today. And of course, happy with our growth and the fact that NVBS came into Ratos during Q2 and that Knightec will come into Ratos in Q3. This is 2 businesses and 2 sectors that we will continue to invest in. The numbers you see on the slide, adjusted EBITA is down, coming back to that. Again, EBITA and EBIT and EAT is up. Net sales, up 20%; organic growth, 2%. We have also, during the quarter, divested all our shares in Dun & Bradstreet, adding some SEK 700 million in cash, which is very good. We believe -- I think that a strong balance sheet in these times are more important than ever. And also, our LTM EPS increased by 10% and ROCE continues to increase to 8.7%. So with that, let's look into the group financials on Slide 3. Yes, we had a net sales growth of 20% in the quarter. All business areas showed growth. Strong organic growth in Construction & Services and slightly negative organic growth in Consumer and Industry, solely due to Plantasjen and Diab. So our growth journey continues, and we're happy with that. So let's move over to Slide 4 and our financial targets. Our growth is again ahead of plan, and we're following the plan for beating SEK 3 billion in 2025 and -- in EBITA. The leverage has increased to 0.5 as a result of the acquisition but also to an inventory increase, especially in Plantasjen coming back to that. Let's move to Slide 5. As you all know, since beginning of last year, we have started our growth journey. We had a very high M&A activity during the quarter. We're spending a lot of time and efforts to find really attractive acquisition candidates that fits our industrial strategy and our investment criteria. We see valuations, in general, are coming down on our M&A targets. And we think, again, that it's very important to have and maintain a strong balance sheet in these times. Two add-on acquisition has been made in the quarter, both by NVBS, TKBM and Ratatek. And a new platform was acquired -- or we signed an agreement on -- to acquire them in Q3, with Knightec joining us in Q3. I will come back to them, but they add SEK 140 million in EBITA LTM. And if we include NVBS that actually were signed just in the shift of Q1 to Q1, we have SEK 258 million more EBITA from those 2 companies and the add-ons. Moving to Slide 6. I'm actually extremely happy that we have signed an agreement to acquire 70% of Knightec in the quarter. We have looked for quite some time for companies in this business segment, a business segment that we have significant experience from, including myself, if I might say. But we have several people in our network and in Ratos who knows this sector. The sector in self, professional services and technical consultant, is 100% in line with our investment criteria, also with high cash conversion rate. A few words about Knightec. I have been very impressed about the transformation that Knightec has been through the last couple of years. They have industry-leading profitability. They have high organic growth, and they have a great business model. And this, coupled with a very strong and diverse management team and staff, make this as a very good platform coming into this sector. So let's move over to Slide 7 with our business areas and turn to Slide 8, Construction & Services. Well, yet another very strong quarter for Construction & Services: 37% growth, 11% organic growth, strong order backlog, EBITA up 118%, profitability up with more than 50% to 6.8%. And this in a quarter where we continue to see significant inflation in raw materials, although we've had some indications on dropping prices for steel but still high cost, of course, and energy. We're very happy with the strong order backlog given the uncertain times. I think it's important to say that we are not into residentials when it comes to construction and which is the area that is the most uncertain, I think, when it comes to construction businesses. So a really strong quarter again for Construction & Services. If we then move over to Consumer. We have a sharp drop in sales and EBITA for Plantasjen. The organic sales is down 4%. It says mainly driven by lower sales here. But no, it's lower sales -- yes, driven by lower sales in Plantasjen, and EBITA dropped due to this. The other companies are doing well, although we are affected by component shortage as an indirect challenge for KVD and the direct challenge for [ Plantasjen ]. So moving to Slide 10. The Industry area, where we have a net sales increase of 2%, a 4% negative organic growth solely due to Diab. This was a good quarter for the Industry for all companies, except for Diab and where, again, the wind power manufacturers are struggling with lower order intake and the shrinking business in China, and of course, there are political uncertainty here and there as well, not the least in U.S. for the moment. Talking about Diab again, the business segment, marine, industries and aerospace, is -- continues to do great, and the restructuring project is going on according to plan. And we will show the results of this program during the financial year we're in. With that, we move over to sustainability and Josefine Uppling. Please, Josefine.

Thank you so much, Jonas. Well, as we have mentioned, there is no lack of challenges and uncertainty in our operational environment. But despite all of this, one could state that the transformation towards a more sustainable business model in Ratos family continues at a good pace. Yes, that's Slide #12. This gives us a positive future prospect as we know that it's profitable to invest in climate change and reduce carbon emissions. Therefore, I'm very proud to share some very concrete examples with you today from the quarter, which leads the transformation in evidence. So starting off with Aibel, I mean it's amazing in so many ways. Just last week, we were finally allowed to communicate about their collaboration with a world leader in offshore wind, Ørsted, and the contract for 2 platforms for the Hornsea Three project in the U.K. sector of the North Sea. Each platform will represent a major contract for Aibel, meaning they have a value over or are worth at least NOK 2.5 billion. The 2 platforms will have a combined capacity to serve over 230 offshore wind turbines, and this makes the project the single largest offshore wind project in the world. It's expected to produce enough energy to meet the average daily needs for over 3 million homes. The backlog enabled now holds approximately 60% projects connected to wind and electrification of energy infrastructure. Amazing, as I said. Well, furthermore, our construction company HENT, which is specialized in building in wood, and has, among other things, built Sara Kulturhus in Skellefteå, show the importance of being a good citizens as they signed the joint construction industry's climate commitments in Norway. In the picture, you actually can see the CEO of Hent, Jan Jahren, in action. They have committed to, together with the rest of the industry, reduce greenhouse gas emissions at least 20% in their construction projects. It will really make a long-term difference. Hence, the construction industry accounts for 15% of the total on Norway's greenhouse gas emissions. And last but not least, I would like to mention that HL Display continues to be innovative and partnering for more circular solutions. In the quarter, it was communicated that HL Display and SES Imagotag will introduce a shelf rail made from partly recycled material. The material will be sourced from old profiles to circle plastic consumption, and it will differentiate HL Display from the competitors within growing labeling solutions. Well, that's all for now. Back to you, Jonas.

Okay. Thank you, Josefine. So we move to Slide #14 under the financials, and I will start to comment on the net debt. And you can see that we have -- we had a net cash position in Q2 last year. We are now in -- we have a net debt position of SEK 995 million. This is driven by acquisitions that we have made but also a working capital buildup that we have seen in Consumer in the second quarter. If I move on to the financial items, the net financial items, you can see we have an increase, minus SEK 100 million this quarter. This is partly due to revaluation of synthetic options that we have made in the quarter. If we look at the interest-bearing liabilities, they have actually increased roughly SEK 400 million compared quarter-to-quarter in Q2 last year to Q2 of this year. And if we look at the effective interest rate, we were at 2.5% in the quarter previous year, and we are now at 1.8% in effective interest rates. And this is a result of the centralized financing that we have in Ratos today. If we look at the effective tax rate, you can see 16.4%. We booked some deferred tax assets in the quarter. We will continue to do that on a quarterly basis. I expect the effective tax rate to be below 20% going forward. In Q1 this year, we had a quite high tax rate, and this was because we had nontax deductible costs for D&B shares but also for the restructuring program in Diab. If we look at the earnings per share remaining business, you can see we are roughly on the same level as Q2 last year. And if you look at the cash flow from operations, we were at SEK 824 million this quarter. We were impacted by working capital buildup in mainly in Consumer, but also, we were impacted by the lower profit levels in Plantasjen. If we look at net debt to adjusted EBITDA, we are now at 0.5x. This is an increase mainly driven by acquisitions but also inventory -- higher inventory levels. So then we move to Page 15 or Slide 15. Here, you see the net sales bridge but also the adjusted EBITA bridge. And it's important to understand that Q2 for Ratos is a large quarter, with Plantasjen having its season with high sales and high profit levels. Net sales were up 20%, driven by acquisitions. As you can see, a little bit more than SEK 1 billion, that's 15%. Organic growth was 2%. We have a positive FX effect because of the weaker Swedish crown mainly against the Norwegian crown and the Danish crown. And then you can see that we have in other minus SEK 12 million. And here, we have put actually sales to Russia, which we have ceased now. We don't sell any more to Russia. So that's roughly SEK 12 million effect the quarter. If we look at the adjusted EBITA bridge, you can see that we have a positive effect from acquired EBITA, SEK 118 million. And this is -- the main contribution is actually from Construction & Services, where we have made a few acquisitions, as you know. If we look at the organic EBITA growth, you can see it's negative, and this is as a result of lower sales and profit levels in Plantasjen but also lower profit levels in Diab, and Diab, as you know, is struggling a bit now with the lower sales into the wind segment. If we look at other, minus SEK 41 million. It's across all the business areas and also some part of Ratos AB, where we have had acquisition costs in the quarter. And if we look at the FX effect, you can see it's positive. And again, it's the weak Swedish crown that has -- that caused this effect. So if we move down to Slide 16. You can see here the LTM EPS development. We continue to grow earnings per share. This is a focus area for us. We want to really grow earnings per share. And you can also see that we continue to grow return on capital employed, which were at a level of 8.7% in the quarter. So by that, I leave over to Ratos CEO, Jonas Wiström.

Thank you, Jonas. Well, some final remarks here on Page 18. We are happy with the quarter. It is a solid performance despite a significant challenge in the operating environment, which I talked about, and we have proven again the Ratos model with our decentralized structure and speedy execution. But again, a good growth quarter and major acquisition closed and signed during the quarter. We expect that we will continue to be in an uncertain period, and we're happy for our strong balance sheet with low leverage and a solid liquidity position. So with that, I think it's time, Josefine, to open up for Q&As.

Yes, please. It's okay to send your questions to me by e-mail but also, of course, to ask the questions straightforward now and here in the call.

[Operator Instructions] Our first question comes from the line of Max Bacco from ABG.

Yes. So first of all, it would be quite interesting if you could share with us the sales and EBITA for Plantasjen, if possible?

Max, good to hear you. We are in a process where we are streamlining our business areas more and more. And we talked to our auditors last evening to disclose individual numbers for the companies. They are not so happy about that. I think it's not so difficult for you to count the numbers out, given the fact that we have showed the business EBITA sales for Consumer. And in Consumer, there are Plantasjen, it is KVD, and it's Oase. And the 2 other companies are delivering a better result than last year. So you will come quite close there, Max.

Okay. Fair enough. And just a question on Diab. You wrote in the report that you or the market expects volume not to increase until 2023 within the wind market. Is this in the first half of 2023? Or is it in the second half we should expect a growth in the wind segment?

Yes. I mean when we say 2023, I must admit that we -- after the subsidies were away from China, we thought the market will come back sooner than in 2023. So I mean all the analysts, the wind manufacturers, which I personally have contact with, believes in this. But I'm not going to sign a contract with you on that, that it's in the first quarter, second or third or fourth quarter. I mean you all know that there are so much going on right now. Through Aibel, we see all the offshore wind projects in and around in Europe. And there is massive, massive investments. And it would surprise me if this was not the fact. But we have been wrong before. So therefore, I sort of hesitate to promise you anything here. But all indications show that.

Yes. Okay. And if you could give some comment...

And I also want to say, Max, that in this restructuring program we're performing, one important component in this program is to reduce the dependence on wind and to give a little bit more focus on the marine and industry and aerospace segment, which is actually doing quite well. So there will -- for more time, the coming few years will also be, to some extent, dependent on political decisions and president elections and things like that. But there is no doubt that wind power is here to stay and it will increase, especially in offshore wind. That's what we see in Sweden as well. There are so many vehicles from the local communities around Sweden. So also in Sweden and in Norway, even more are focusing on offshore wind. So we will be less dependent on wind. But we believe that the wind sector will come back during next year.

Yes. Yes. And the next question is on the transaction or M&A market. With the uncertain times that we do have, do you find attractive targets, first of all? I think the answer is quite obvious. But is it doable to agree on prices with sellers given the uncertain outlook? And can you say anything about the transaction activity?

Yes. I think the proof is in the pudding. I mean we did this acquisition of Knightec and 2 add-ons in Q2. But of course, I was a CEO also when we had the Lehman crisis. And at that time, we didn't really see valuations coming down on private companies. I feel this time, it's clear that valuations are coming down, but some sellers, of course, are maybe not willing to do this, but the time work for us with our strong balance sheet and our attractive model. So I'm quite optimistic. We will continue to grow Ratos, but we will, at the same time, make sure that we always have a strong balance sheet.

Yes. Okay. Perfect. And on Plantasjen, one more question. You said that you have seen increased inventory levels here during Q2. Is this something you are worried about given the weakened consumer sentiment and so on going ahead?

No one likes increased warehouses. I think I can reveal that in Plantasjen, it is dry goods. The waste has been very low actually. So the concrete effect this will have is that we will order -- or Plantasjen will order less equipment into next season. And the product mix, which we used to brag about, I mean, it's high-quality items in the stores that we are sure that we will be able to sell. But we, of course, have rather seen a smaller warehouse. But it's the right products that are in there.

Okay. Yes. Sounds good. And finally, can you say anything about July and Q3? Has it -- the trends that you saw in Q2 continued here in the third quarter?

Well, we saw -- I mean, again, I don't want to promise, but we saw that on raw materials, actually, there was a sign -- or the prices went down beginning in the July for some parts of steel, et cetera. Steel production has come up. But to do this as a promise for the future, I think it's too early. We also see freight costs, if you look on containers from Asia to Europe, et cetera. I mean we had like 1,000% inflation last year with that, but it's not increasing. I think personally, I think, the largest threat is the uncertainty itself for both enterprises and consumers. It's uncertain times. It's easy that you postpone a decision if it is to build a new shopping center or to buy a Weber grill from Plantasjen. I think it affects both of them. So -- and it's all about what the central banks will do here now and how much the interest rates will go up and so on. And I'm not the man to give any better forecast on that than anyone else.

And the next question comes from the line of Georg Attling from Pareto Securities.

So I also have a question on Plantasjen. Could you just describe the year-over-year performance on the days where the weather has been similar to last year? That will be my first question.

No, I can't actually. Maybe we can provide you with that talking to -- I can say the weather was quite good during the Easter weekend. And when we saw days with better or the same weather as last year, we actually had very good sales. But I can't tell you. I mean we actually have our own meteorological statistics in Plantasjen. They follow this very closely, and we have an agreement with Yr in Norway to follow up the weather. But I'm sorry, I can't answer your specific question. I will get in contact with the management in Plantasjen and see if we can provide you with that, Georg.

Okay. That's great. And then my second question. My second question is regarding acquisitions. Would you consider acquisitions in the public markets given the valuation decreases we've obviously seen? Or is it still strictly private companies that you evaluate?

No, we are not excluding public bids. But it has to be in the sectors where we want to grow and where sort of our investment criteria are met. So we will not sort of go buying something just because they are worth -- they have a low valuation or anything like that. We have a very clear industrial strategy coming forward. Our business areas should be -- the companies in them should be more and more similar and have more and more synergies between the other. And that will be our focus going forward. But we're not excluding public transactions.

Okay. And then my final question on Knightec. Obviously, very strong growth if you look LTM. What is like a reasonable level to assume going forward? Would it be like double-digit growth organically? Or what's your expectations for Knightec's growth going forward?

Yes. I mean Knightec had like 19% organic growth. We should take the pandemic into the consideration. That number, adjusting for that, we're like 17%, 14%. I think they're actually able to continue with double-digit organic growth. But we will come back to that when Knightec is within the family and when we report the Q3 numbers. I've had the opportunity to not only meet with the strong management team. I've actually had the opportunity to meet the top 80 managers in Knightec, and I want to reiterate that I'm quite impressed of the company. I was -- I had a good view of them, but learning to know them, we got more and more impressed about what they have achieved.

Okay. But would you say the LTM growth figure is positively affected by the pandemic? How should we look at that?

No, not the -- now we are in Q2. So not really. But if you look on the year 2021 beginning there, I think we had a pandemic effect, of course. But I think the LTM numbers are very strong, but -- and I haven't seen such strong organic growth in any company in this sector with size. So I'm not going to promise you it will continue on this level. But for sure, we expect continued strong organic growth. I just -- you know this year, but it's not so far away from our Q3 report, and Q3, of course, is a small quarter for companies in this sector, given the summer holiday and the fact that professional services is quite a big part of the business. But LTM numbers, yes.

And we have one more question from the line of Rasmus Engberg from Handelsbanken.

Yes. Can you hear me?

Yes, we can.

Rasmus, good to hear you.

Excellent. Good. I was very impressed by the development in the Construction & Services division, 11% organic growth. How should we think about this going forward? I know you have quite a lot of longer-term projects. But I guess this level must be expected to come down going forward. Or how do you look at that really? What's your expectations, in general, for the construction business in the coming sort of 2 quarters or so?

Yes. No, we have decided not to give forecasts in general. But we have a strong order backlog. But -- so we expect Construction & Services to continue to grow, but I won't give you any number.

Good. That's good enough. Just you say you have very small exposure to residential, do you have a figure for your residential exposure roughly? Is it 10% or something like that?

That is also -- I could come back -- we could come back to you with. My guess is that it is less than 10%.

And just trying to understand the contribution from Aibel, would that be fairly similar to your -- what you have in the P&L as profit and loss from investments according to the equity method? Is that a rough indication?

Yes. That's the same number, yes.

Aibel is stronger than ever.

Yes, yes. And these contracts that you've signed now, how long are they? Is it -- you've secured your growth for years? Or how does it look?

Yes. Yes. It's long contracts, lasting, I mean, typical 3 years. So they can be quite selective choosing products. They have extreme good reputations, and no, it's not quarters that are -- it's not the projects that are over in 2, 3, 4 quarters. It's long projects. They just don't have -- I mean what we have press released is these massive orders, but there is also a lot of maintenance going on for existing platforms, et cetera, et cetera. But this -- they have a very, very strong order backlog.

You can also see some more information in the press release about sailaway for the first part of the project and so forth.

Yes. Good. And just a final question on Diab. Even the market is weaker than we had thought at the start of the year, do you think we're heading for worse than Q2 earnings in Diab? Or will your savings sort of offset some of that? What's your general feeling in terms of Diab going forward?

Yes. I can just reiterate that we will show -- the results of the restructuring program will start to show during '22. There is just 2 quarters left. So you have to draw your conclusions from that.

And as there are no further questions, I'll hand it back to the speakers.

And no further questions in my inbox either.

All right, Josefine and Jonas, then. I want to thank all of you for listening into this call, and I'm looking forward to talk to you again in connection with the Q3 report, and I'm happy to meet you before that as well, of course. And I wish you all great summer. I hope you get some holiday, and the heat is coming into Sweden now at least this week. So have a great vacation for you who have the opportunity.

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

Thank you.

Thank you very much.