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

Good morning, and welcome to this presentation covering the first quarter of 2024 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 shortly. [Operator Instructions] And this webcast is also recorded, so you can find it afterwards at ratos.com. Without further ado, I'll hand over to Jonas Wistrom.

Thank you, Josefine, and thank you, everyone, for joining this morning, and we will introduce and talk about another -- yet another quarter for Ratos with EBITA growth. So all in all, our EBITA grew with 11%. We took some costs in to your companies to produce even better EBITA going forward. We haven't adjusted for them if we did that, with EBITA growth would been -- have been 16% actually. EBITA margins are low in the first quarter, as you know, but we increased EBITA margin and we increased EBITA growth in all our Business Areas. I want to mention already here that the calendar effect, which is just one day, but still, it has a negative impact on Industrial Service with 5% or SEK 13 million. Sales was flat in this quarter, and I will come back to that. Cash flow was down compared to Q1 last year, and this is solely due to the fluctuations in working capital in our construction companies. One could add that Easter also was in the end of quarter 1, which resulted in many payments came in on the Tuesday. Also, we have an updated financial segment reporting. As you know, we're not a company -- we are a company group. We are no longer an investment company. But still, we want to make the numbers more transparent, not the least for you. Just to go through these segments. If we start up with industry divided into Industrial Services, where we have Aleido as former was belonging to Semcon now stand on their own. We have Knightec and Semcon. We have Speed, and we have our 0 company, TFS. In Product Solutions, companies who design and develop their own projects -- products that you can hold in your hand, I used to say, there we have Diab, HL, LEDiL and Oase Outdoors and I think you are all familiar with them. Within Critical Infrastructure, we have Aibel, we have Expin and we have Presis Infra. In Construction, airteam, HENT and SSEA and Consumer has been transparent before since we give you full numbers for Plantasjen. So you can read out both Plantasjen and KVD. Yet another quarter with EBITA growth. We -- when it comes to sales, again, this was quite a flat quarter. Starting up with the business areas. Here, you have the numbers for the 3 business areas. I'm not going to go through them in detail, but I hope you like this format with the eliminations. Coming into EBITA in the Industry, coming back to that grow 1%, Construction & Services, 5% and in Consumer, Q1 is a lost quarter. We had a better result than last Q1, and the group costs are pretty flat. I'm actually quite happy that EBITA margin and profitability is increasing in all areas. So let's take a look at the Industry, flat sales again. Why did we have a low organic sales? Well, we had low net sales in Diab in the wind segment. Diab actually increased their EBITA with some 50% in the quarter but wind is still a very weak market and also a very small part of Diab, I would say, 15%. We also have other companies with lower sales, including Oase Outdoors and Speed Group. EBITA grow, but the calendar effect, again, influenced the quarter with SEK 13 million [ best ] . And again, EBITA margin up both in the quarter and in the LTM, we are 0.2% down, but we are in a good trend, I would say. I can't resist from mentioning HL Display that continue a strong growth journey, both organic growth and acquisition growth. And there really strengthen their already market-leading position in Europe and other markets. Taking again down a look in the segments for Industry, you can see that the EBITA is down just only due to the calendar effect. And the same goes for EBITA margin is affected also of the calendar effect. Product Solutions, net sales up, but organic sales down. EBITA, quite a good EBITA growth and EBITA margin is also unsatisfactory levels. Looking into Construction & Services. If we -- if I already now start to talk about the segments, we have a strong demand for critical infrastructure although Q1 is a weak seasonal quarter, but good demand in Construction, as you see order intake is down a little bit. Sales are down for Construction, but profitability increases. So we actually grow EBITA in Construction and also in Critical Infrastructure. I hope you appreciate the order intake numbers also for the segment. We have a good order for pipeline in general. So if we look here at the Critical Infrastructure, you can see improved the EBITA in spite of a quite weak seasonal quarter. Order intake, very good. Order backlog, good. Construction actually increases the EBITA with 8%. EBITA margin, good still. And order intake is down, but order backlog is strong. And I dare to say that the pipeline also looks strong. Last but not least, Consumer. Increased sales in Plantasjen, better results in Plantasjen. One should remember that the Easter was in Q1 for Plantasjen, which affected sales positively although the weather was not the best in most places in Easter, but I think -- still think had a positive effect. Important to mention is the cost savings program that goes on and will continue to go on. We continue to focus on reducing inventory, but we're not as aggressive when it comes to taking down gross margins this year. KVD, just continue to develop very well. So with that, I leave over to you Jonas to take us through the financials.

Thank you, Jonas. So let's look at net sales and adjusted EBITA. Start with net sales, you can see that we had a flat development for sales. If we look at the LTM numbers in Q1, we are at SEK 33.8 billion roughly in sales, and if we look at the adjusted EBITA, we had a 11% growth and we had, as we said earlier, a negative calendar effect, if we adjust for the calendar effect, the increase would have been roughly 15% in the quarter. If we look at the LTM number, we are at SEK 2.3 billion in EBITA last 12 months. Cash flow. We know that quarter 1 normally is a weak quarter. We -- in some of our companies, we build seasonal inventory before the season. We saw Q1, we had a negative cash flow in Q1 '22, had a negative in Q1 '23, it was positive. And this quarter, it was minus SEK 137 million. We had a good -- you can see that we increased received dividends and financial items. We had a positive effect here from dividends from Aibel and Aibel in total paid SEK 640 million in dividend and 32% of that ends up in Ratos. And then you can see the big impact here on the cash flow in the quarter was the change in net working capital. You can see that it was a quite big negative amount compared to Q1 previous year and this is caused by fluctuations in our construction companies. So cash conversion was minus 38%. But if we look at the LTM numbers, cash conversion was 159%. We had a cash flow of SEK 3.6 billion roughly rolling 12 months. If we continue and then look at net working capital, you can see and we measure the LTM net sales and compared to the LTM net sales and then we measured before the average of the 4 last quarters. And you can see that we are at 1.3%, which is down compared to the same quarter last year. Net working capital is SEK 500 million roughly. And if we go through some of the lines here, if we look at inventory, you can see compared to the same quarter last year, we're actually down, and this is very much related to Plantasjen where we continue to reduce inventory levels. If we look at trade receivables, we are down. If we look at DSO, days sales outstanding, we continue to see a positive trend. Contract assets are down. Accounts payable is up a little bit, which is good. And if we look at the contract liabilities, we are roughly on the same level as previous year, and then we are -- we have a slightly lower negative effect on the other receivables and payables net this quarter compared to the same quarter last year. So 1.3% roughly in net working capital. If we then move to the bridges. We start with the net sales bridge. You can see that acquired -- as I said earlier, we had a flat development when it comes to sales in the quarter. If we look at acquired growth, it's SEK 156 million, roughly 2% in the quarter. And this is very much related to HL Display in Product Solutions where we have good development in acquired net sales growth. Organic growth was negative. We saw positive organic growth in Construction & Services and Consumer, but in the Industry, we had a negative organic growth in the quarter and this was very much driven by the lower sales in the wind segment in Diab. FX, SEK 85 million, so it's down 1%. This is caused by the weak Norwegian kroner. As you know, we have quite large operations in Norway. So this has a negative effect on Ratos. And then if we move to the EBITA bridge, 11% up and you can see that the drop-through from acquisitions is SEK 33 million, and this is also, again, very much related to HL Display, where we also see very good synergies, not the least in production where we sort of in-source production to our facilities in -- for example, in Poland. Organic growth, you saw that we had a negative organic growth on the top line. But on EBITA, we have a positive organic growth, and this is very much related to Critical Infrastructure in Presis Infra which had a record-breaking quarter in Q1 this year. And then FX, we have some transaction effects in -- mainly in the business area industry. So this was a positive effect of SEK 16 million. And then we have SEK 44 million, which is onetime items, but also structuring costs that we have in several of our companies in various business areas. If we then look at leverage and return on capital, our leverage increased in the quarter to 0.8x. If we adjust for the reversal of the write-down in the holding in Aibel, it was 1.4x. And net debt was SEK 3.3 billion, which was a decrease compared to the same quarter previous year. If we look at return on capital employed, it increased in the quarter. We had 10.4% compared to 10% in the same quarter last year. And if we look at return on invested capital, we were at 7.6%, up from 7.1% last year. If we look at our financial targets, they are the same as before. We have a target to have an EBITA of SEK 3 billion at least by 2025. Leverage net debt to EBITDA should be in the range of 1.5 to 2.5x and the dividend payout should be in the range of 30% to 50% of profit after tax. So I leave over to you, Jonas.

Thank you, Jonas. I was temptated to show this slide in connection with your previous. But we can see here the EBITA growth we have had then and the -- and we now are missing 17% for the rest of this year and the year after. So that target looks good. I would like to summarize the quarter again. EBITA was up 11%, if we adjust for 1 day and for restructuring cost, I haven't actually seen that number. I think it's [ 16% ] if we just -- calendar effect -- a restructuring effect and the calendar effect. Anyway, this is the result we are presenting, profitability is up, EBITA growth in all areas. And we really hope you like the more transparent financial segment reporting and our focus is going forward, the technology in Infrastructure Solutions. We have quite a strong financial position, what we all are waiting for. Since we had our last Capital Markets Day, just the afternoon before the terrible war in Ukraine broke out the next morning. We just did our first real platform in Presis Infra and we wanted to accelerate our way to a more streamlined company group. We now see signs in the M&A market in the IPO market for betting markets going forward. So we really can say that we are a company group that are in technology and infrastructure with higher profitability and better return on capital, both employed and invested. So with that, Josefine and all of you, I think we should open for questions, right?

Yes. That's correct. Thank you very much. Jonas and Jonas, let's open up the question and let's try to do it in some sort of alphabetical order. Let's start with ABG. Do we have Henric Hintze on the line?

I have a couple of questions here. Let's maybe start with Critical Infrastructure, which seemed very strong and you said demand was strong as well. I'm just going to ask if there is any particular company in that segment that's driving that? Or if it's more of an even effort among the 3 companies?

I think we -- I mean, Jonas was into our holding in Aibel, with Presis Infra who continues to develops well. When it comes to Expin, we have a lower result than last year since last year was not the right numbers. So that is what I can say. Expin is a very small company. The 2 others are doing very well.

Yes. All right. And also maybe the other side than Construction. If you could just give us a little more detail on how you see the markets developing for those 2 companies in the year.

Yes. We're fully transparent now is this -- I don't know whether I can answer or not. But I mean, I think we have disclosed before that SSEA are having a little bit of weaker year. They have a very good order backlog for 2025. HENT is -- well, they're doing great.

All right. So no changes there, basically.

No.

Then on Plantasjen, with Easter being in Q1 this year and April being not great, weather-wise, what does that mean for Q2 in Plantasjen and maybe if you also connect that to the savings program, how is that going? And what are you doing there?

Yes. Well, we're not going to do any Q2 forecast, but how should I put it? I mean, April has been a terrible month until today, I think, or maybe yesterday evening. Of course, that affects Plantasjen. But I'd rather have bad weather in April than in May, I think, so we should pray to our gods now that May is a better month. When it comes to restructuring -- or yes, the cost saving program in Plantasjen, it's -- we have had that before, but it just started in Q1, and I think we will see more cost savings coming forward than we have seen in Q1. That is what I think we can say.

All right. And finally, just on the weak wind market in Diab, do you have any update on the outlook there? Or is it basically unchanged?

Yes. Well, the percentage of sales in Diab in wind is lower than it was 1 year ago. That is, of course, also due to the fact that Industry, aerospace and Marine, of course, is growing and growing profitably. So I don't have any wind markets numbers really that I can stand for. But well, you can look at the OEMs also. It's still a very weak market. And our EBITA is -- Diab is -- continues to develop very good since our restructuring program we had some years ago.

Let's see if we have someone from Carnegie online? No. And let's move on with Handelsbanken, no. Let's jump over to Pareto and Georg Attling, please?

Yes. I have just a few. Starting with the financial target on for '25. I mean that's almost vintage now since you laid that target out, but do you think that's possible to achieve without further acquisitions? Or do you -- is that a reach?

No. I think that we need to make add-on acquisitions, no new platforms to be sure to reach that number. I don't want to say also that we have had a very strong EBITA focus which was necessary. We started, me and Jonas basically without an EBITA and high leverage. Now our focus is more on profitability and return on the capital we have. So -- and I hope for coming to this structure we're longing for. So it's going to be exciting to see if the markets here, transaction markets open up. But we continue to show the EBITA target, of course. And our financial position has -- well, haven't been better for a very long time. So I think we have the tools. We need the market now.

Yes. And just comparing now to when you presented the Q4 report, you seem a little bit more positive. Are you less worried about the outlook in Construction & Services and for the consultants and so on? Or...

I'm all -- everyone in Ratos knows, I'm always worried but again, Q1 was a little bit better. We have a geopolitical situation. I think where you never can say that now it's going to be better. We -- I'm still worried for what can happen there. But interest rates have not gone, but I think everyone expects that. It's just a question on when so if we don't have any more geopolitical disasters more than we already have, I think there are good hope. Now I sound like a politician here. No promises, but it feels -- feels good this quarter for Q1.

Yes. And the question on working capital, you had quite a big release in Q2 last year, but then obviously, quite a big tie-up in Q1. How should we think about Q2 working capital?

I'm looking at you, Jonas.

Well, you know that we don't give forecasts normally, but Q2 is from a cash flow point of view or more or less always a very good quarter for Ratos. So we expect at least to have good cash flows in the Industry business area, but also in Critical Infrastructure and then the construction companies really never know depending on projects and prepayments and so on. So -- but as we said, the pipeline looks good. So for many of the construction companies or the construction companies that we have. So it might be that we receive orders and we get advanced payments. And then suddenly, the cash flow could look much better.

Okay. Just a final question from me on your comments regarding M&A and the transaction market. Is that a general observation of the IPOs that we've seen this year? Or is it specifically to you? I know you're both looking to acquire and to divest. So is it any movement in your own sort of group? Or is it a general observation?

I mean we talk to investment bank. And of course, they want to have deals coming, but the general impression is that the market -- I haven't seen so much of transactions, but it has been some. And according to them, who works with this, all the raise, they see light in the tunnel for sure.

Yes. And you are comfortable with doing the divestments prior to any large acquisitions, thinking of the balance sheet that would obviously put you quite overcapitalized, are you comfortable with that?

That's a very good question. I think we -- I don't want to be in a situation with high leverage and a bad M&A market. So we will be cautious, but our ambitions are high.

So anyone else on the line who want to post a question, the line is still open. No? Seems like everything is taken care of. So thank you very much, Jonas and Jonas. And thank you for your questions. As I said, when we started, this webcast has been recorded, so you can find it afterwards at ratos.com. Have a nice day, and thank you for being with us this morning.

Thank you.

Thank you.