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

Good morning, and welcome to this presentation covering the first quarter of 2023 in Ratos. Jonas Wistrom, our President and CEO; and Jonas Agrup, our CFO, will join us shortly to guide us through the results. In the end of the presentation, of course, you will be able to raise questions in our Q&A session. And this webcast is also recorded and you will find it at ratos.com afterwards. Well, now we had a good start in the year -- we can't really wait to get started. I'll hand over to our CEO, Jonas Wistrom.

Thank you, Josefine. Thank you all for joining this morning. Ratifying to see that so many -- in spite of the fact that I think -- 29 large-cap companies reporting today. As Josefine said, it was a good start of the year. We had an adjusted EBITDA up 28% to SEK 324 million. The reported EBITDA was the same this year since we had no large restructuring. We just did a smaller one in speed. That was SEK 21 million, and that is nothing we adjust for in Ratos. There is a new thing from now on, and that is that we will report Plantasjen sales and EBITDA separately. Why are we doing that? Well, Plantasjen is a fairly large company in our group and the seasonal variance between the quarter is also very large. So we believe and hope that this will make the analysis of Ratos easier going forward. We had a strong demand in -- also in this quarter. Our sales was up 26%, and the organic growth was actually 8%. We also had a good order intake also in the construction sector and construction companies. And the order books were record high. As you might remember, I was a little bit disappointed by the cash flow last quarter and last year, and we have a program for better cash flow and it's paying off in Q1 already. So let's take a look into the business areas and starting with Construction and Services. High net sales growth, 23%, and the organic growth is 19%. As I mentioned, it was a strong development in the construction companies, but also in the other companies. You can see that the profitability or EBITDA margin, as some say, is actually down since last year, and that is the result of the fact that the construction companies operates with a little lower margin than the other companies, they had really a really good quarter. In construction, we also have Aibel -- Aibel, we did a record profit, record sales last year. In this quarter, they have started large new projects, and they are always -- as you who have followed us for a couple of years you know that Aibel is very cautious when it comes to bringing in profit in the beginning of the project. So this is just a project phasing thing. I think they have all every opportunity to make another record year in 2023. Moving into consumer. Well, a challenging quarter for Plantasjen. You heard the story before, the weather in March, I know some of you are from Stockholm. You know the weather there. I can assure you it was even worse in many places in both Sweden and Norway. So the Plantasjen EBITDA was actually SEK 111 million weaker than last year. Plantasjen is always making a loss in Q1. This year, it was SEK 250 million. We also see a weaker consumer market when it comes to capital goods. I'm not sure about the English, but not plans, but furnitures, barbecue equipment, et cetera, is affecting them to some extent. Our other 2 companies in the consumer division are doing better results or much better results than this year. Better industry, strong EBITDA growth, strong sales growth. Of course, this has to do with the acquisitions of Knightec and Semcon. They have also developed well, but it's gratifying that all the companies in the industry business area is doing better results or EBITDA than last year. It's also gratifying to see how both Semcon and Knightec became stronger in the quarter than they were before they were into the Ratos Group. There is a good cooperation going on, creating new business together with a stronger and also more complete business proposition for the clients, and this has really showed off during the quarter. So a great quarter, of course, for industry. Acquisition journey. Well, our journey is to make acquisition as that lead us into Ratos focused on infrastructure and technology solutions. But we're also doing add-on acquisitions in the companies we are focusing on. And in Q1, HL Display actually did 3 or they signed -- they signed 3 acquisitions in one, and they made -- and 2 were closed and the third one was closed in the beginning of April. And I want to mention this company, Oechsle und Werba -- these companies, I should say, in Germany. They have the same main owner. First of all, HL Display is a market leader, not one of the market leaders, but a market leader in Europe. In Germany, we have a very small foot -- and we have looked for this possibility for a couple of years. Now we have these 2 companies with revenue together of EUR 26 million. We have 2 product units, and they're also outsourcing production in both companies. So here, we look forward to large ties. We can move all the production from Germany and HL werba in Polish -- very efficient manufacturing plant. So in-sourced -- and we also have sales singles. So this is the sixth and seventh add-on acquisition that HL Display has done since 2020. We -- they also acquired a company Akriform with some SEK 85 million, complementing their offer into package-free solutions. With that, we come into a bit more detailed financials, and I leave the word to my dear CFO, Jonas Agrup, please.

Thank you, Jonas. So we move to next slide. Here, you can see trends going back to Q1 2021 for net sales, adjusted EBITDA for operating cash flow. And you can see that we have a positive trend for net sales. LTM in Q1, we were at 31.5 billion in sales. If we look at the patent quarterly, you can also see here quite clearly that Q1 is the weakest quarter for Ratos when it comes to net sales, but also to adjusted EBITDA. If we look at the trend for EBITDA, adjusted EBITDA, we are now at a level just above SEK 2 billion. And if we look at the operating cash flow, we had a very strong cash flow in Q1 this year, as you can see. And previously, in the first quarter, as you can see on this slide, we actually had quite large negative operating cash flow. But in the quarter, we saw good strong cash flows actually in all the business areas. And going forward, we will continue to focus on improving working capital, and we will also focus on improving cash flow. If we look at the net sales bridge, we were up 26% in the quarter. You can see that in net sales, a lot of the growth was coming from acquired growth, that was 17%. And this is related to Construction & Services, but also industries, so it is actually the acquisitions of NVBS and Semcon and Knightec . We had good organic growth, 8%, and which -- and also here, we saw good growth in Construction & Services and Industry, but Consumer had a negative organic growth, and this was due to Plantasjen. We also had some minor FX effects. And then we also had, in this quarter, this negative effect of the ceased operations in Russia and Belarus. If we look at the adjusted EBITDA, it was up 28% in the quarter. A lot of this was driven by acquisitions. And again, a lot is coming from industry where we have the newly acquired companies, Semcon and Knightec. And if we look at the organic growth, you can see that we have minus 10 here. But as we said earlier, Plantasjen change a loss of SEK 215 million in the quarter, which was SEK 110 million worse than the first quarter last year. So if we adjust for that and look at the underlying organic growth in the other companies, you can see that we are actually growing quite nicely in many of the companies. We had a negative effect on FX, minus SEK 12 million. And then on other, we had this restructuring program, minus SEK 21 million in Construction & Services, which had a negative effect on the adjusted EBITDA. If we look at earnings per share, these are the LTM numbers. We are up 4% to SEK 26 per share. And if we look at the earnings per share in the quarter, it was negative SEK 9 compared to SEK 66 million last year in the same quarter. As I said, Q1 is the weakest quarter for Ratos. And if we go back 3, 4 years back, we have made losses when it comes to EPS in these quarters. And again, it's very much related to Plantasjen that has a weak quarter in Q1. If we look at leverage, we improved in Q1, we are down at 2.2x, and this is mainly driven by risk or EBITDA, I should say. And net debt was on the same level in the first quarter now as year-end 2022, SEK 4.8 billion. And if we look at return on capital employed, we were down in the quarter, and this is very much related to consumer where we had a capital buildup, which is quite normal in -- because we're building up -- we have the season coming at the end of the quarter. So that, I leave over to Jonas Wistrom.

Thank you, Jonas. Time for me to try to sum this up. You heard the numbers, EBITDA is growing well. Net sales is growing well. Order intake is very good still. And we have a really high backlog. The operational cash flow improved quite a lot. And the companies we acquired in 2022 has really a good start. A challenge is still the wind market. It's -- I should mention something about Diab, I think people are interested in Diab. Diab is making -- is profitable now after the restructuring program and wind is quite more share right now of Diab's operation and the other part is doing extremely good. I think all in all our transformation to a growth focus on infrastructure and technology solution is slower than planned due to the weaker M&A and capital markets -- you heard me say and write that we will divest companies and acquire new companies. And this market is slow, but it is existing. It hasn't sort of died, but we don't want to destroy too much capital in this transformation. Another thing I would like to say is we have a very strong governance and steering model in a very decentralized group. And I think this model continues to deliver results. So a good start of the year and Josefine, should we open up for…

Let's do it. It's time to open up for questions. So let's see who we have on the line. Here we go. Okay. Thank you very much, Mr. Jonas. Let's jump into the Q&A session, and I will start with Henric Hintze from ABG.

Thank you, Josefine. Okay. First of all, HL Display has been doing bolt-on acquisitions at quite a good pace recently. I'm just wondering if you could expand a bit on what has enabled them to do this and how the outlook is for other group companies to start doing bolt-on acquisitions?

We have some kind of sound problem.

It's an echo. Okay. It was an echo. I don't know if you heard it, but we will try to do it fix it. But pleased to answer the question, if you heard it -- or was it…

Can you repeat the question?

I can repeat it. So HL Display has been making bolt-on acquisitions at quite a good pace recently. And I was just wondering if you could expand on what has enabled them to do this and how the outlook is for other group companies to start doing bolt-on acquisitions at a higher pace?

Thank you -- now I heard the question. Yes, you're right. I mean, we should remember a couple of weeks ago when I joined HL lid 3% with margin. And now they are in over C3 or numbers, double-digit number. And my experience is you shouldn't acquire companies until you clean your own house first and get good profitability and cash flow. These -- they have -- since they are a company with their own factories in Sundsvall, in Poland, in U.K. and in China, they really can make synergies and actually, I'll turn to you, Jonas, but some acquisitions has paid off in kind of a year, a very short time. So this is a journey that is very good for our shareholders, and we want to continue that. When it comes to other add-on acquisitions, we've seen them as well, but HL is the best example. And we love add-on acquisitions in general. And you will see more coming. We did -- I can't remember if it was Q1, we did TFS or if it was in Q4 also in the Q4. So these were actually the only ones we did in this quarter, but there is more to come. And HL's organic development in EBITDA was also good in the quarter.

Thank you. Henric, do you have more questions?

Yes, a follow-up, one more. Could you just expand a bit on the profitability increase in the industry segment? What drove that? Could you just add some information on that?

It's a good question. Diab is suffering any longer, but Diab has potential to do much better results coming forward than they do today. But that is, of course, quite a change compared to last year. The deal is a very high-margin company, as you might know, and they're doing well. And TFS is doing very well as well. So -- and all companies, even the acquired companies, I think I can reveal did a better result in Q1 2023 than Q1 2022. Also, the companies in industry, well, all companies actually even if they were not a part of Ratos then, it's a good development there.

Okay. Are you happy with that, Henric?

Yes, I'm happy.

Thank you very much. Let's move on to Victor Hansen from Nordea.

Thank you, Josefine. Jonas and Jonas, I'm wondering -- first 2 questions. If you could tell us more about the synergy between Knightec that you saw in the quarter, perhaps on sales. And then if you could talk some more about what you expect ahead here for the companies, organic and also when will shift into M&A world.

First question -- Victor. First question was the synergies. Well, we have ensured that these people or these great people learn to know each other. There are quite many employees. But on certain sectors, we have sort of let people know each other. And this -- so we know sort of what the other company has for competences for simulation or strength analysis or cloud solutions. And this has resulted that we have managed to come in to clients with an offer neither -- Knightec had their own or Semcon had their own. But together, they had this. So it has created new sales. So we're talking about not cost synergies here, but sales synergies. And this will go on, and we will see more synergies of all kinds, I think, in the future. And the second question…

Please repeat.

Yes. I can repeat -- the M&A -- when M&A…

For the entire group you mean?

No, for the factors.

For the factors. Yes. No, it was a good demand in Q1 better results, as I said. But forecasting, we -- I mean, we saw what happened yesterday with the increased interest rates I'm sort of cautious. I'm not promising that we will have this strong demand the rest of the year. But as we stand here today, we have no such indications. But I would be cautious given the times we're living in. I think we have been kind of surprised the last quarters that demand is so good. What I'd like to maybe point out is that the construction companies who make these large projects for public and commercial buildings and so et cetera. I can say they had a stronger quarter this quarter than last also in demand. So -- but the future, no guarantees.

Okay. And I'll continue to ship the questions here. So we had a Norwegian strike for a few days here in April. What was the effect on you from this?

Yes.

It was a minor effect. And -- but biggest effect was for Aibel. But since the strike was so short, it was a minor effect. But if it would have continued, of course, it would have affected all our 3 companies in Norway.

It's maybe a double-digit EBIT loss. Do we know for Q2?

No, I don't think it's that big.

Okay. So it's less than 10.

Yes.

Okay. Victor, you also had a question about when Knightec and Semcon will come into M&A mode. What do we see?

We're always in an M&A mode, and they are as well these 2 companies. But when something will happen, I'm not going to disclose.

Okay. Are you happy with that, Victor, or any more questions from you.

Yes. That makes sense. Maybe one final question here. And we've had some mixed weather now in parts of April. It was good for a few weeks and then it turned bad and now looking out the window, it's good again. So what are we seeing thus far for Plantasjen in this quarter?

Can I answer that question? No. I can't answer that question. But you see, but I know there's -- we're snow in Norway, not so far from Oslo the other day. But I have noticed here in Stockholm the weather, at least in April.

That's helpful. Okay. Thank you so much, Victor Hansen. And I will open the line for Rasmus Engberg from Handelsbanken.

Just wondering when you say, just to be clear, that delayed simplification of your group structure, does that mean that you have a hard time finding a home for Plantasjen, is that explicitly what you're saying there?

We will -- we have stated quite clearly that we will focus on Infrastructure and Technology Solutions. So this isn't solved by divesting or put the company on the marketplace -- with Plantasjen, there are more companies that we sort of need to change. But the capital market is bad, the BPO market is bad, the M&A market is bad. So it's not that okay, we wait 2 years with this. But it's -- I mean if you asked me 1 year ago, I had hope that this was 6 by now, and it's not. And it was unfortunate, including SVB in California and the incident there -- but we will fix this.

The second question relates to Aibel. Given that we on this side have basically no visibility at all, do you think that Aibel will meet last year's earnings or improve them this year given what you know about their projects.

We don't give forecast and as I say that, but I say they have every chance to do that. They had also a record high order intake in Q1, billions. So they're in very good shape. They're in very good shape, and it's a very strong market. So they have every possibility to do that. But Rasmus for you, if you look back in -- this is not a new phenomena, this with the phasing projects, -- if you look at our quarterly reports, 3 years back, you can see that there is a patent that when they're growing fast in order intake and sales, EBITDA goes down and when sales goes down, EBITDA, not EBITDA margin, EBITDA margin also, but the EBITDA itself. They are very cautious, and they are -- have so far never given us a negative surprise, but a lot of positive surprises. And I don't think at all that there is a difference this year.

And they paid the dividend this quarter, did they?

Yes, Q1. Yes. They have a very strong balance sheet. So it's the first time ever I think they do that.

And then just a final question. Can you update us on the size of the construction backlog -- if you have that figure roughly?

No, we don't disclose those numbers, Rasmus. But it is on, as Jonas said earlier, it is on a record high level.

It increased further compared to Q4.

It did. Yes.

Is that excluding Aibel or including Aibel?

That's excluding Aibel, yes. Yes. I mean, Aibel was -- also the construction companies in Sweden have good order intake in Q1.

Okay. Thank you very much. I think we have reached out to all I can see on the line. Is there anyone else on the line missing. I want to ask a question? Okay. Then I think we are done for today. So as I said earlier, this webcast is recorded. You can find it afterwards at ratos.com. So thank you, Jonas. Thank you, Jonas, and thank you for being with us this morning, and see you soon.