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

Good morning, and welcome to this presentation covering the Fourth Quarter and the Full Year of 2023 in Ratos. I am joined by Jonas Wistrom, our President and CEO; and Jonas Agrup, our CFO, here in the studio, and they will guide us through the results. This webcast is also recorded, and you can find it at ratos.com afterwards. Well, without further ado, I'll hand over to you, Jonas Wistrom.

Thank you, Josefine, and thank you, everyone, for joining this meeting this winter morning in Stockholm. We turn to the first slide showing the full year of 2023. I think this is the best year we have done so far since we changed the strategy in 2018 and started to reduce debt and increase EBITA. This is yet another year we've done that, and I think it's the best year. For the year, EBITA grow with 14% and we had strong EBITA growth in both Industry and Construction & Services. EBITA declined some SEK 200 million during the year in Consumer, and that was planned. We need to get less capital tied into Ratos, and we will continue to work with this. Jonas will come into that also, the essence of a better ROIC and ROCE and so on. Net sales over the year, up 13%, including an organic growth. Cash flow, which we really focused on since 1.5 years ago has really given results. We have a cash flow from operations of SEK 4.23 billion, and the free cash flow is over SEK 3 billion. And our leverage continues to go down if we adjust for the reverse of impairments in Aibel, it is 1.1. The reported leverage is 0.7 compared to 2.5 last year. So a very, very strong year for Ratos. Looking into the quarter, here, the EBITA is up only 2%. I think you all know by now that, that is due to Expin where we affected results with SEK 77 million on the EBITA side. We continue to have a strong EBITA growth in Industry, coming back to that. And in EBITA in Construction & Services, again, affected by the corrections in Expin Group, Expin Group, which stands for less than 2.5% of the total revenue of the Ratos Group. In Consumer, EBITA is roughly the same. I think it's SEK 1 million difference between the years. So they're holding up their EBITA, coming back to that. When I go into the business areas, again, the same in Q4. We continue to sell out our storage with lower gross margins. And it has been very strong cash flows effects in Plantasjen also during the year, and doing positive cash flows effect during the year and during the quarter. Net sales down 3%, 2% of that is Expin, 2% is currency. So strong cash flow again in the quarter, SEK 882 million compared to SEK 21 million. And free cash flow, again, super strong, if I may say that as the CEO. Coming into the sales, sales down a little bit in the quarter. Again, not only Expin this time, we also see lower sales in SSEA Group in Sweden and in Speed. Looking into the business areas. Starting up with Construction & Services, already spoken a little bit about that. I think here, the important thing, if we look to the segment of Construction, and by the way, from quarters from now on, starting with Q1, we will in an ambition to be more transparent, also give the numbers for the different segments. But I will talk them through this time. And in Construction, HENT had a great quarter and a great year and strong order books coming into next year. When it comes to SSEA Group, they had a bit weaker quarter and the order book is not as large as HENT's, so they will be affected somewhat in 2024. As you know, SSEA Group is partnering only and is doing really good profitability, EBITA margin. Another good year for our team. If we look into the critical infrastructure business area, we have really, if we exclude now Expin, both Presis Infra and Aibel have had another very strong year in all perspectives, I would say. Going to Industry, sales up 12%. Organic growth, up 4% and -- or sorry, it's down 4% due to actually the weaker wind market and also Speed Group. If we look, overall, it's been a very good year and a very good quarter, and it's led by Diab and HL, who has had the strongest EBITA growth. Diab is a pure organic journey with shrinking wind segment. HL Display is both organic growth and acquisitional growth. If we go into Consumer, net sales declined and the reason here is the -- because Plantasjen in Q4 had actually higher sales in local currency, but we had a negative currency effect here. If we go into KVD, again, they sold or distributed more cars, but have a lower revenue due to a business model where we not buy the cars and sell them, but we broke them. That's the old business model for KVD, but we differed a bit from that last year and the year before. So KVD has had a very strong year. Plantasjen had a very weak year from EBITA perspective, but a strong year when it comes to tie-up capital and inventory. So with that, I leave over to you, Jonas, and talk about the financials.

Thank you, Jonas. So we move over to the financials, and I will start with the net sales and adjusted EBITA. Again, you can see that we lowered sales 3% and the organic sales growth were also negative 3%. If we look at the LTM numbers, we had sales of SEK 33.784 billion. And if we look at the adjusted EBITA, we were up 2% in the quarter, and I will come back to the adjusted EBITA bridge later on and explain how it looks in detail. And if we look at the LTM numbers, we were a little bit above SEK 2.2 billion for adjusted EBITA. If we look at the cash flow from operating activities, we have really strong cash flow in the group. In the quarter, as you can see, SEK 882 million in cash flow from operating activities. You can also see that we have a positive change in net working capital, a positive of SEK 580 million roughly. So we have been able to reduce capital tied up in the business in a very good way. And if we look at the business areas, we see good cash flows from operating activities in both Construction & Services, but also in Industry where we have good positive cash flows and good cash conversion. If we look at the 12 months and the full year, you can see that we have a positive cash flow from operating activities of SEK 4.3 billion roughly and that corresponds to a cash conversion of 190%. So again, here, good numbers and you can see here also that the change in net working capital is a good number, SEK 1.4 billion positive. I just wanted to highlight some of the companies where we see good operating cash flow during the year. In HENT, we had really good cash flows during the year. Also Plantasjen, where we had the inventory reductions, we had really good cash flow. Presis Infra, HL Display and TFS are other companies where we also saw really strong cash flows during the year. And we will continue to focus a lot on the capital tied up in the business in order to reduce that and also to make sure that we have good operating and also free cash flow going forward. If we look at the net working capital, you can see that we actually posted a negative number here in the fourth quarter. So -- and if we look at the last 4 quarters, the average LTM sales, we are at 1.9%. So it's a really low and good number. And here again, we have seen reduced inventories. Plantasjen is one of the companies where we have reduced inventories. But we also see good performance in trade receivables and inventories in general, where we see the days coming down quite a lot in many of our companies and we had good positive trends for both DIO and DSO. And then also, if you look at the contract liabilities, you can see that it has increased a lot. So SEK 2.4 billion, which is a good number for the quarter -- or for the year. Then I move to the bridges. If we look at the net sales bridge, it was in total, down 3%, as we said before. We have acquired growth of 4%, SEK 300 million -- a little bit more than SEK 300 million positive. And this is very much driven by the acquisition of Semcon, but also we saw the acquisition of -- sorry, the add-on acquisitions in HL Display. We have organic growth, which is negative. Here, we have -- as Jonas explained earlier, we have seen lower sales in SSEA Group mainly, but also in some other companies. And then we have FX effects, which is negative 2% and this is very much driven by the Norwegian kroner that has been weak in the fourth quarter compared to the same quarter last year. And as you know, we have a quite big operations in Norway within Ratos. And then finally, in other, we have minus SEK 190 million, and this is the correction of the reporting errors in Expin Group. If we then move to adjusted EBITA bridge, you can see that we -- from the acquisitions, we have good adjusted EBITA, SEK 35 million, contributing from the acquisitions. When we look at the organic growth in adjusted EBITA, you see it's positive SEK 19 million when it was actually negative on net sales and this is very much driven by Aibel where we saw strong good results in Q4 this year. And then if we move onto FX, we also had a negative effect on top line of the Norwegian kroner, but you can see we have a positive effect on the EBITA -- adjusted EBITA and this is mainly related to the business area Industry, where we saw positive effects in Diab, TFS but also in Aleido in the quarter. And then finally, coming to other, you see that we have a negative effect of the Expin corrections, but we also had in last year, in the fourth quarter, we had quite high M&A costs in the parent company and we had also costs for restructuring in KVD, which we didn't have this year. Leverage, we talked about that. You can see that we have a good positive trend. So reported leverage is now at 0.7x. We have good cash flows that reduced the debt that we had. So we repaid debt of SEK 2.3 billion during the year, and we also increased EBITDA during the year. And you can also see that the net debt actually was reduced by roughly SEK 2 billion during the year, down to SEK 2.7 billion. Financial targets. These targets remain the same. We will have -- we are aiming for an EBITA of at least SEK 3 billion by 2025 -- adjusted EBITA. And leverage should be in the range of 1.5 to 2.5x. And then we have a target also for dividend payout and it should be in the range of 30% to 50% of profit after tax. As Jonas said, we will, going forward, focus even more on return on capital and we will look at return on invested capital, ROIC, and measure that in the group and for the business areas and for the companies. And we will also, in parallel, start to look at economic value added for the group and the business areas and our companies. So we will have a lot of focus on that going forward. So by that, I leave over to you, Jonas.

Thank you, Jonas. And I think this with return on our capital is a very, very, very focused thing next year. I'm not sure I should go through all the numbers one more time here, but my final remark would be that it's -- again, it's our best year so far. Secondly, we now have a financial position that makes it possible for us to accelerate the add-on acquisition journey in the companies that is -- or are the foundation for the technology and infrastructure group coming forward. And I can -- when it comes to the markets, I think everyone is aware of -- that the construction market is under pressure. But also all in all, there is an uncertainty not only about the geopolitical situation, but also around inflation and interest rates. And we are humble here. We don't expect a very strong market, but rather maybe a little bit weaker market. But with our strong financial position, we are well fitted to have another great year in 2024. Thank you so much for listening. Josefine?

Thank you. Well, let's open up and see if we have any questions. I think we're going to start off with Henric Hintze for ABG. The line is open for you, please.

Henric here. So you mentioned an increased focus on add-on acquisitions going forward. Could you just comment a bit on what companies you see the biggest potential in with regards to those?

Thank you. Yes, what we've seen so far is, I think, we have done 19 add-on acquisitions since we started with that. Many of them has been in HL Display, creating a very, very strong shareholder value, very synergistic acquisitions to a low valuation compared to Ratos in HL Display. I think we'll do more there. And we will do more in -- basically in critical infrastructure and in industry, both the Industry companies we have. I've already mentioned HL, but we have Diab there. We have LEDiL there. All are companies that could acquire add-ons, and same on the Service side with Aleido and Semcon and Knightec. And again, Aibel, Presis Infra is also good platforms for add-on acquisitions. Do you want to add something, Jonas?

No.

Okay. Thank you. Do you have another question?

Yes. I could also follow up with are you also considering buying up some of the minorities you have in your currently owned companies?

Yes. First, I want to say that in -- we -- we have -- when we buy companies with minorities, in the SPA we have a call option to acquire the remaining shares. Before I joined, there is 1 or 2 companies that, that is not the case. But in general, yes, we will buy up minorities also and I think you will see that during the coming year even.

Thank you, Henric Hintze for ABG. Let's see if we have Zino Engdalen from Handelsbanken. The line is open for you, please.

I'd just like to start off with the working capital and how we look on that going forward. You have, of course, made some very large reductions during the year, but I would like to hear if you have any comments on where you think is a sustainable level and how we should look at it going forward.

Well, during the year, we received quite a lot of advanced payments from customers and that, of course, will be paid back eventually to the customers. But -- so it really depends on what type of orders we will receive and if these orders sort of contain a lot of advanced payments from customers. So I foresee that -- you saw that we had a negative net working capital, I foresee that it will be -- it may be difficult to remain on that really low level. But we will continue to focus a lot on reducing the capital tied up in the business. So I expect that we will see good levels going forward as well.

Okay. And if we are looking on the Construction part where you mentioned that there's a slowdown. HENT, on one hand, has a strong order book, while it might be a little bit weaker in SSEA. Could you just mention roughly how your visibility is there and when we should expect to see more of a larger effect?

In the order books for Construction, I think we have a fairly good visibility. And now we're really going into single companies here, but SSEA Group and Vestia will do an okay year next year. So it's no crisis at all, but they have weaker order books for 2024, but stronger for 2025, oddly enough. So it's not something that's worrying us. And again, we're not into the residential area and we're not in to buildings with projects, with private financiers that are weak. So we feel quite confident but the market is weaker during 2024, no doubt about that. But we will -- it will be good results anyway.

Understood. And just lastly, a follow-up on the M&A add-on question. I would just like to hear how your pipeline is looking for the year. Is it more in a building-up phase? Or are you looking to -- for more on execution?

I'm happy to bring up that question. I should have mentioned it in our presentation -- in my presentation earlier. As you know, we -- you might remember, we had a Capital Markets Day in, I think, 2020 -- in February when -- February '22 when we launched a new strategy and a more focused group, et cetera. And the next morning, the terrible war in Ukraine had started and the M&A market flew away with that, I would say. And it has been a very weak M&A market. And many of the acquisitions we've done on the add-ons has been bilateral processes. We hope and I think we all hope that we will see interest rates coming down and the M&A market open up again, not the least for financial buyers. So that is something that still sort of slow our processes down is the market situation we have with higher interest rates and it's both selling and buying.

Thank you, Zino. Do we have anyone from Pareto online? Georg Attling?

Yes. So I just wanted to start in the Construction & Services business. You talked about this order backlog already, but can you help us just piece together 2024? Like how much do you have already secured compared to '23? So just trying to figure out like how much did you roll on -- how much did you execute on the order pipeline you had in '23? And how will that compare in 2024?

Yes. I mean, we are not giving exact forecasts and we're not giving forecast. It's a policy from us. And I can't say the exact number, Jonas. But I think when it comes to Norway, we basically have what we need, if you understand what I say, for full year 2024. In Sweden, we need to sell more this year.

But it looks...

Yes. And this order backlog, have you started seeing...

And in Sweden, it looks better for 2025, which is -- yes, that's the case for [ hard ] backlog.

But has there been any struggles in rolling out this order or executing on the pipeline or on the backlog or anything else at all?

No. And it's a good question because you might have an order book and then the big [Foreign Language], whatever that is in English, the buyer of the project is out of finances. That has not happened and we don't think it will happen due to the fact that we have public clients, to a large part, and the others are -- which is a minority at least today, and as we can see, very good balance sheets. So we're not too worried about that.

Okay. And just a final question on the order backlog. Is it that HENT -- when you say Nordic, I guess that's HENT and then Aibel also, that's really where the strong order backlog is? Or does this go for more companies in the business area?

Yes, it's true that...

We disclosed the backlog for Aibel in the report. I think we said it was a little bit more than NOK 32 billion. So they have an extremely strong backlog.

Yes. Yes.

And for HENT, as Jonas has said, we have a backlog, which makes 2024 a good year. That's what we expect.

Yes. If -- and yes, I mean, we have backlogs in most of our companies. And HL in the Industry area. LEDiL has had a weaker order intake during 2023, however, increasing or holding their market share. Again, in Diab, wind is down and it's now like 25%, 30% of the revenue. We have been approved in Diab for being the supplier of all interior in the new Airbus aircraft from next year. And yes, there is no company sort of where the order books are shrinking fast or going away or so. But I'm just saying that the market in 2023 was better than I thought in 2022. Maybe I'm a little bit negative. But I don't take the market for granted for 2024, that's what I'm saying. But the situation of the company now is if you look through the order books or so, is good, I would say, except for Speed Group, for instance, which still have very low volumes in -- from their main customer and so on. There are always some problems here and there. But all in all, we stand stronger than ever.

Yes. And maybe talking about problems. Could you give us an update on Expin and sort of how you stand there both in terms of the company and itself? Do you feel like you've passed these problems that you're highlighting in the trading update? And also maybe like the legal actions that you didn't rule out last time you commented on it.

It's a good question. I just want to reiterate they're 2.5% of our business. But of course, this was a sad story. And I think I said last time that the financial numbers are corrected for '23 and '22 and '21 even. And of course, this has also shocked internally for people. And so -- but at the same time, a relief for many. Now we are putting together the documents we need to present our claims. So that's what I want to say about that. And I'm not going to tell you who we will put or which we will put claim on. But now the important thing in Expin is to focus on the business going forward. And that is a fantastic market, as you all know, not only in Sweden, where the situation is urgent in many perspectives for the rails, but also in the Nordics. Okay?

Yes. And just a final question for me, if that's possible, on Plantasjen. Obviously, very strong cash flows this year that have impacted EBITA, as you said. Is it possible to sort of quantify the effect on EBITA that the sharp inventory reduction has had?

I can't do it. Can you do it, Jonas?

No, I can't actually.

We can't.

It's a lot of money. Yes.

It's a lot of money. But we're quite happy. And with the results in Plantasjen, it sounds strange, but -- and we also -- or Jesper Lien and his team is now starting on this cost reduction program also for 2024. But I'm very happy we got the capital down.

Okay. Thank you, Georg Attling from Pareto. Do we have Johan Sjöberg perhaps from Kepler Cheuvreux online, please?

Actually, I have just one question. Looking at your comments on the M&A and the interest rates and being both a buyer and a seller, what are you the most, so to speak, here? Where do you see the biggest problem in terms of if you were to sell or for you to buy right now?

Good question. I'm not sure I can put one in front of the other, but it may be more difficult to sell. But you can buy everything, but it depends on what you pay. And so it's a hard question to answer. But if you force me, I would say it's difficult to sell.

And looking at your M&A pipeline also, is it mainly -- or I assume it's mainly add-on acquisitions. But are you also looking for platform acquisitions?

Not really, no. We -- acquisitions that we will do from now on is strongly connected to the companies we have today if I put it that way. Okay.

Okay. thank you very much, Johan Sjöberg, Kepler Cheuvreux. Do we have anyone else online who want to post a question? No, that was all. So thank you very much for your questions. This webcast has been recorded, and you can also see it afterwards at ratos.com. Thank you so much, Jonas and Jonas.

Thank you.

And thank you for being with us this morning. Thank you, and goodbye.

Thank you. See you soon.