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

Good morning, and welcome to this presentation covering the third quarter in 2023 in Ratos. Jonas Wistrom, our President and CEO; and Jonas Agrup, our CFO, will guide us through the results. In the end of the presentation, we will have a Q&A session where you will be able to raise your questions. And of course, this webcast is also recorded, so you can find it at ratos.com afterwards. With that, I'll hand over to Jonas Wistrom.

Thank you, Josefine. And thank you, everyone, for joining us this morning. We're in a quite good mood here in Ratos. We think we have delivered yet another strong report. And I will start up with a summary. In the quarter, we had a strong cash flow, a cash conversion almost 170%. Leverage is continuing to decrease. And EBITA -- also reported EBITA is up 20%. In our focus areas, Construction & Services and Industry, we had a really strong EBITA growth. In Consumer, we focused on getting inventory levels down in Plantasjen, which was according to plan. We prioritized working capital -- or cash flow in front of profitability. So Plantasjen actually, as you've seen, lost SEK 106 million compared to last year but sales were actually up in a very weak consumer market due to this sale of certain product groups with a substantially lower gross margin. So how strange it might sound, this was our plan and they executed on that. All in all, sales up 13% whereof organic is 2%. I will come back to these growth numbers for the different business areas. And again, cash flow up 17%. And leverage, as you remember, was 2.5% in the beginning of the year in Q1 and I think we had 1.6 in Q2, and now we're on 1.3, which feels good, given the environment that surrounds us. So if we look at just an overview, we have had a CAGR sales growth of 18%; and this quarter, it was 13%. Adjusted EBITA CAGR is up 17%; and this quarter, actually 20% EBITA growth. So now let's take a look at the business areas. Starting up with Construction & Services, they had growth on 10%, all organic. We had very strong EBITA growth in all of the division or business area and HENT and Aibel had also very good results due to the project phasings in Aibel, you've heard of that. You have followed us during the years. And we also had great projects that was closuring on good profit levels in the quarter for HENT and the other construction companies. So the EBITA margin due to these events is up to 9.8%, and LTM number is 7.5%. One should also know that our return on capital employed was very strong in this segment as it used to be. So EBITA is up because of volume, and again, good projects. We have seen during the quarter also postponed projects. And this market has, during the quarter, showed a tougher climate and that is also something we expect for the future in this segment. Our next core area, Industry, also strong EBITA growth and strong sales growth. If we start with sales, up 47%. Here, we can see, of course, the acquisition of Semcon, but also very strong growth in HL Display and TFS. Adjusted EBITA in the quarter is up again. And we can see acquisitions, currency and price also contribute to our growth. Wind market is down which affects mainly Diab, but Diab reported, I think, their best improvement of their EBITA, at least during my time at the helm, and that is because the other business segments in Diab is developing very strong with strong profitability. If we then go further to the Consumer area, which I've already been into, the big thing here in the quarter was strong results in KVD, but also inventory reduction program in Plantasjen. Net sales declined with 5% in spite of the fact that Plantasjen, this sounds a bit strange, but Plantasjen sales was up due to this sale program that we had for the products we want to get the inventory down on. But KVD, their result -- or their sales went down because we are now doing almost only broking of cars. And last quarter, we had inventory of cars, which made their revenue to increase but profitability to come down. So now we're in the right business model with a strong development there. Coming back to Plantasjen. During the year, we have actually improved cash flow with SEK 645 million versus previous year. EBITA margin, minus 5%, LTM 2.3%. We reached our targets actually for Consumer this quarter. To dig deeper into the numbers, I will leave over to my CFO, Jonas Agrup, and let you take care of this. Thank you.

Thank you, Jonas. So let's look at net sales and EBITA for the quarter and also the LTM numbers. We have seen the growth in net sales and for EBITA. Jonas talked about that, but I just wanted to point out the LTM numbers. We are now at SEK 34 billion in net sales, and this is excluding Aibel. And for the EBITA LTM, we are at SEK 2.2 billion. So we have a positive trend on the LTM numbers. Then I move to the operating cash flow. It was strong in the quarter. We were up 17%. We saw good cash flows in both Construction & Services, but also in Industry and both these 2 business areas showed really good cash conversion ratios in the quarter. If we look at the 12 months cash flow, the operating cash flow, we are at SEK 3.4 billion with a cash conversion ratio of 153%. And we will continue to focus on reducing the working capital and to achieve good cash flows in the business also going forward. If we look at net working capital, you can see the trend. If you go back to 2021 and 2022, we had an increase, which was very much related to the inventory increase that we saw in Plantasjen, where we sort of were building up inventory. But since a couple of quarters back, we have been focusing on reducing the inventory levels and reducing the net working capital levels. And you can see that we are down 30% in the quarter, down to SEK 683 million. And if we look at the LTM sales, we are at 3.3%. So we don't tie that much capital in net working capital in the Ratos business. We continue to see positive trends in days sales outstanding, DSO, but also on the days inventories outstanding, the DIO. So we have a positive trend for those 2 KPIs in the group. Here, you see the bridges. If we start with the net sales bridge, acquired -- in total, it was up 13%, as we said earlier. Acquired growth, SEK 676 million. It's up 10%. And this is very much related to Industry where we had the acquisitions of Semcon and Knightec. But we also have good performance in some of our companies where we really have started to make a lot of add-on acquisitions. And I just wanted to point out HL Display, as an example, where we have good acquired growth as well. If we look at organic growth, SEK 167 million, it's 2%. We saw good organic growth in Construction & Services, however, negative in Industry and Consumer. And as Jonas said, we actually had growth in Plantasjen, so Plantasjen grew 2% organically in the quarter. Positive FX effects as an effect of the weak Swedish krona, and we didn't have any other effects in the quarter. If we then move on to adjusted EBITA bridge, it's up 20% in the quarter. Acquired growth, 7%, mainly again to the -- as an effect of the acquisition and this time, Semcon, but also the add-on acquisitions. And if we look at organic growth, SEK 32 million, it's 7%, and this is very much again related to Construction & Services and Industry. And if I just wanted to point out a couple of companies where we have seen good increase in EBITA, I would just like to mention Aibel, HENT, Diab and KVD where we saw really good performances in the quarter. You can see that we have in other, plus SEK 16 million, and this is actually savings from cost reduction programs that we made earlier. We had one in the end of last year. We have had 2 cost reduction programs in different companies in the beginning of this year, and this is now starting to give results on -- so we have savings of SEK 16 million. If we look at leverage, we're down at 1.3x. Good cash flow in the quarter and we continue to have good strong cash and also the increased EBITA is a part of this, of course. If we look at the net debt, we were down at SEK 3.254 billion. So we reduced and we amortized bank debt in the end of the quarter, and that total amount was SEK 500 million. And then, finally, if we look at the financial targets, they remain the same as before. We are aiming for at least SEK 3 billion EBITA by 2025. The leverage should be in the range between 1.5 to 2.5x. And the dividend payout is still -- the target is 30% to 50% of profit after tax. So I leave over to you Jonas?

Thank you, Jonas, and thank you for referring to Industry and their negative organic growth because I think I missed to mention that the organic growth in the business area Industry, we had positive organic growth in our service companies in Semcon and Knightec and TFS and so on. So we had a positive growth there in spite of the fact that it was actually 1 working day less in the quarter. May not sound so much, but it was in September, which is really only a full month for the Q3 so we're happy with that. Well, the final remarks. We had a strong EBITA growth. We had strong cash flow. And our focus business areas, they are really delivering also in this quarter. It's hard not to mention the environment we're living in with terrible wars, with inflation and -- where global trade actually is challenged. Global trade has created so much wealth for so many is challenged. So in these troublesome times, we are in a good mode that we are capable to deliver strong results. And we feel very much that we are well equipped for continued challenges coming forward, which we are sure will be there. But our Ratos business systems works. Our decentralized model works. And our financial position is very -- stronger than in a long time. So we feel very prepared. Thank you so much. Josefine?

Thank you, Jonas. Now it's time to open up for questions and start our Q&A session. So let's start to open the line for Victor Hansen, Nordea. Please.

Victor here. So a couple of questions from my side. And firstly, here, so you mentioned positive organic sales growth in your service companies. But could you tell us more about how the margins have developed in the consulting companies?

I didn't really hear you in the beginning, but it's Victor, right?

Yes. Correct.

We are not disclosing margins for the individual companies, but Q3 is a weak quarter for profitability. But can we say, Jonas, that it was good?

No. I think it was pretty good, actually.

Yes.

But Q3 is a weak quarter with vacation and so on and 1 day less, as you mentioned, 1 working day.

But compared to last year, I think it was good.

Yes.

Understood. More, if I may. Yes. So Mr. Agrup, you mentioned savings of SEK 60 million. I'm wondering if is this in the quarter or year-to-date?

No. It's in the quarter. And it's the -- we had cost reduction programs in KVD, which was launched in the end of last year. We also had programs in Speed, for example, reducing costs. So -- and also in SSEA Group, we had a cost saving program. So it's the effects of these programs actually, yes.

And I think it's worth to mention that we are not adjusting the EBITA because we're quite conservative.

When we take the cost, we don't adjust the EBITA. That's correct.

Excellent, and 2 more questions here. So you had a positive contribution from CapEx in your cash flow, which is quite unusual. And I guess it's some divestment that drove this. I'm wondering if you could tell us more.

Yes. We sold -- we had 2 facilities in Texas within Diab's operations in the U.S. And we sold one of the Diab premises and moved into another, which is rented premises. And that was a positive effect around roughly SEK 100 million in the quarter, but there were no gain reported out of that sale.

Yes. Got it. And the final question here. So you're now below your leverage target at 1.3x. So I'm wondering here, what are your plans in terms of capital allocation?

Should we answer it together, Jonas? I think if I start, we think it's good to have a decent leverage in these times we're in. But we think we have now possibilities also to use this strong position to acquire new companies. Not new platform companies, but add-ons to the companies we have, where we have actually a very, very good track record with the high synergies. And I think the normal or the average multiples, Jonas, are between 5 and 6 for this. They have really been value-creating. We're also, of course, looking at our minorities in the platforms we have, et cetera. But I think it's fair to say, Jonas, that even if leverage will increase, we don't want to reach the top of the span now in these times. Is that a fair answer, you think?

Yes.

Thank you, Victor Hansen from Nordea. Now let's move over to Zino Engdalen Ricciuti from Handelsbanken.

Just a question on what you expect going forward. Jonas Wistrom, you commented [indiscernible] industry this morning that you see some conditioning worsening and in conjunction with that you mentioned Consumer and Construction & Services. Could you elaborate on what you -- on how you expect the worsening conditions to affect the different segments?

Yes. Thank you. I can reveal to you that 1 year ago said that I was quite bothered about this year we're into now and said that if we could keep the results, it would be good. I've been around some time in the industry and have said recessions before. Now demand, and not the least, our operational capabilities has moved us into this position we have. Forecasts are difficult to make. But already in Q3, the market we were in, in Q3 were weaker, especially in Construction & Services. And you see this everywhere in all reports basically. When it comes to Industry, we -- our product solution companies, HL, Diab, LEDiL and so on, we had negative organic growth. Very much because of wind, but I mean the macro numbers should hit these companies sooner or later. But again, I'm very bad in forecasting the future. So we are prepared for -- we had a weaker sentiment in this quarter and we are prepared for that to be even worse. I think everyone must have that, be prepared for that. Consumer market is clearly down. And the only reason for sales going up in Plantasjen was the sales that took inventory down and cash flow up. So I'm sorry, but I'm not what is [Foreign Language] in English to foresee. But I think you all agree that we are in a difficult world and the sentiment is not positive. So we are prepared for worse times.

Okay. And just quickly on Aibel. You have said that this is going to be -- the result is going to be good at the end of the year. Should we expect Q4 to have -- to be even better than Q3?

I'm not going to answer that question. I refer to what I just said. I can say that we had -- I think I stated in the beginning of the year when we had weak EBITA coming in from Aibel that I said I think they will do their best year ever. I still think they will do their best year ever, and their contribution also in Q3 was strong. That is -- that far, I can go, but not further. Sorry for that.