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

Good morning, and welcome to this presentation covering the second quarter and the first half of 2024 in Ratos. I am joined by our CFO, Jonas Agrup; and our CEO, Jonas Wistrom, here in the studio, and they will guide us through the results shortly. In the end of the presentation, you will be able to raise questions in our Q&A session, and this webcast is also recorded, so you will find it afterwards at ratos.com. Without further ado, I'll leave over to you, Jonas Wistrom.

Thank you so much, Josefine, and thank you, all, for joining us this very, very busy reporting day. We start off with a rehearsal for -- if there are any new viewers here. We have 3 business areas, but we have 5 segments, and that is: Industrial Services; Product Solutions; Critical Infrastructure; Construction; and Consumer, and we will go deeper into this area. All in all, I'm satisfied with this quarter where the demand in markets really have been varied. We had an EBITA increase in spite of a very weak quarter in Plantasjen. Our profitability or EBITA margins increased in spite of the fact that net sales declined with 10% organically, actually. But we had very strong order intake in general -- or strong order intake in general and very strong order intake in Construction, actually, 72%. We also are happy for the strong development in our technical consultancy companies, and Industry, Product Solutions also have developed very, very well. Our cash flows were strong. I think the cash conversion is like 128% or something. We have improved the return on capital, and our other result numbers than EBITA is increasing more actually than 2%. So all in all, I'm quite happy with the quarter. Let's look at the financials here. Again, sales are down, and this is to a large -- majority or proportion is the construction market. We have also lost sales in Plantasjen in Consumer. But EBITA is up and EBITA margin is up. So then we go into our business areas and segments. Starting with Industry, that sales actually decreased. I'm coming back to that when I talk about the segments. Both organic, inorganic growth and structural [ had with ] 2.1%. The low net sales in Industry is mainly due to the wind market, but also the CRO market, which I will come back to. Industry business area is up and EBITA margin is also up both compared to the previous quarter or quarter Q2 2023 and the last 12 months. And a very strong development in HL Displays, and again, the technical consulting companies has developed well in this quarter, also, if you take consideration that this quarter was actually 1 day longer. But even adjusted for that, they developed well. So starting up with them. Here we had net sales that was down a little bit and EBITA was flat more or less. EBITA margin grow a little bit. If we look -- if we take a little bit deeper dive here, I've already talked about the technical consulting companies, but we also have our CRO company, TFS. The CRO market, especially for biotech companies, has been weak since 1 year, and we have sort of lived on older orders. Now the market shows signs of improvement since a couple of months actually, but TFS as a company took down the result in Industrial Services. Their EBITA was down significantly. They're still profitable and so on, but that affected the result in Industrial Services. Product Solutions, up 11% in EBITA. Sales are more or less flat, and again, sales are flat due to the wind market here, and EBITA margin continues also to increase. So a really strong -- yet another very strong quarter for Product Solutions and a strong quarter for the entire business area. Now let's have a look at Construction & Services. Net sales are down 12% organically and also the total growth. And construction is, of course, a very weak market right now and has been and will continue to be for a while more. In spite of that, we actually increased our EBITA with 21%, and our EBITA margin also increased significantly, and again, here also both compared to the comparable quarter and the last 12 months. And the order intake was actually extremely strong in Construction, but also strong in the business segments Infrastructure. So let's take a look here. Sales in Construction is down 17%. EBITA is up [ so ] many percent -- many percent. I think we increased in Construction 18% EBITA or so, and EBITA margin is close to 6%. The order intake here, I think, was 72% in Construction. So they -- and the order backlog was strong already before in the previous quarter, and now it's even stronger with its high order intake. So all in all, Construction have all prerequisites to be able to continue to surprise the market with very strong numbers. Critical Infrastructure, also a very strong quarter in Norway. Order intake was good and order backlog is also strong. In Sweden, with Expin, we now have delivered all our demands for different stakeholders here, and our work now is focused on making Expin Group profitable and also focused to electrification of rail infrastructure. Last but not least, Consumer. We are very transparent here. You can see the numbers for both KVD and Plantasjen. But this drop in Plantasjen, that was in spite of the fact that we actually saved SEK 78 million in the quarter and still we lose NOK 65 million or SEK 63 million. This affects our group results with -- I mean, we would have been over 8% or so if it wasn't for Plantasjen. Yes, the weather was bad in -- especially June in Norway, which was one of the rainiest months since 1900, I have learned. But these results are not acceptable, and we will take further actions to earn money on the bottom line, not just EBITA in Plantasjen. With that, Jonas, I hand over to you...

Yes.

And go -- deep digger in the financials.

Thank you, Jonas. So if we look at net sales, we had a drop of 9% in net sales totally, organically 10%. And I usually also talk about the LTM numbers. So we have LTM net sales now in Q2 of SEK 32.9 billion. If we look at EBITA, the adjusted EBITA growth was 2% in the quarter and this is despite the drop that we had in net sales, and I will come back and look more into those details later on. And also, I will get back when we look at the EBITA bridges, or the bridge. I will just explain a little bit more what happened to the EBITA. And adjusted LTM -- adjusted EBITA LTM, SEK 2.3 billion as of Q2. If we look at the cash flow, we had a good cash flow in the quarter. As you can see, cash conversion was 127%, which is a good number. Usually Q2 is a strong quarter for Ratos because we have high sales and high profits, but also a decline normally in net working capital. And also, if you look at the second quarter last year, we had an extremely good cash flow which was actually affected by some positive onetime effects in Construction, mainly. But if we look at Q2 2022, you can see that we are little bit more than 30% above that level now in Q2 this year in spite of a weaker market. Yes. And you can see that we continue to have a positive change in net working capital also in this quarter. So then I move on to net working capital, where we have a positive trend. You can see that we are now at 0.8% of LTM net sales, and this is the 4 quarter average that we calculated of the -- this 0.8%. You can also see in this picture that we continue to reduce inventory levels. Also, trade receivables are down. And we see positive trends here in both DIO that we follow on a monthly basis, but also DSO, and we have a lot of focus on these items. And if we look at the inventory levels, you know that we have been running a inventory reduction program in Plantasjen where we see good results. But also in Q2 now compared to the second quarter last year, we had a very good performance also in Diab that reduced their inventory levels quite a lot. So a good net working capital development for the group. If I then move to the bridges, net sales bridge, as I said, 9% down and 10% down organically in the quarter. We had some minor acquisitions effects also, a minor effect of 1 company that we actually divested in the quarter last year. And if we look at the negative organic sales growth, we had actually a positive sales growth in Critical Infrastructure of 14%, 15% in the quarter. So they grew nicely. But we had, as Jonas has described earlier, a negative effect in Construction, and then, of course, in Consumer with Plantasjen that had a negative organic growth of 9% in the second quarter, and this was caused by the unfavorable weather in Norway, mainly. We had a small positive FX effect and Other was 0. And then if we move to the EBITA bridge, as you know, we increased 2%, and this is despite the quite large negative organic growth that we had in the quarter. If we look at the different components, acquired growth, we had a good drop-through on the acquired net sales, SEK 7 million, even though it was small, mainly related to add-on acquisitions in Product Solutions. If you look at the organic growth, we actually grew EBITA despite of the net sales decline. And the EBITA in Plantasjen was down SEK 63 million, and we had lower sales mainly in Construction. But this was compensated by actually good results in the construction companies, but also in infrastructure -- Critical Infrastructure where Aibel and Presis Infra had good results. The technical consultancy companies had good results and also HL Display posted a very good result in the quarter. We had a small FX effect, and we had a SEK 16 million positive effect, and this is related to one-off items that we had last year where we had restructuring programs in, for example, HL Display.

SEK 8 million in negative FX effect for EBIT, right?

Yes. Okay. And then we move to the leverage. It's continued down. If we adjust for the reversal of the write-down in the holding in Aibel, it continued down as well at 1.2x, but leverage was 0.7x. And we saw good cash flows in the quarter which made the deleverage come down. Net debt came down as well, as you can see here, by some SEK 700 million or SEK 650 million. And we continue to increase return on capital employed, which was 10.5% in the quarter, and we also increased return on invested capital, which was 7.7% in the quarter. We have the financial targets. EBITA should amount at least to SEK 3 billion in 2025. We have the leverage where we have a span between 1.5 to 2.5x. And we also have a dividend policy, as you know, where we should pay out 30% to 50% of the net profit after tax, and we have here added also the outcomes for the second quarter this year. By that, I leave over to you, Jonas.

Thank you. Final remarks. I'm not going to repeat myself here, I think. I think -- I mean, all in all a good quarter, I think, where Industry delivered, Construction was stronger than we expected and have all -- and all prerequisites [ to ] continue to surprise, I hope that. And Consumer was negative. And again, I'm so happy that the key ratios, our cash flow, our return on invested and -- and capital employed are -- continue to increasing, and our financial position is strong and has become stronger. I hope you also have seen that we have -- I don't know how many press releases we have launched after this period on order intake. So...

I think it's [ more about ] covering...

Yes.

Construction and Infrastructure.

So that would be my summary, Josefine.

Thank you very much, Jonas, and Jonas. For now, let's open up for questions. So let's do it in some sort of alphabetical order, starting off with ABG and Henric Hintze.

So to me, the most interesting point in the report is probably the Construction segment. I mean, the margin increased quite a bit despite the lower sales, and I was wondering if you could give us some detail on how that was possible and how we should think about that going forward?

Yes. It's not a total surprise. I mean, HENT has -- HENT is the largest company here, has improved their processes and their business system. And as we have said many times, we're not into residentials. We are in the public sector and have been lucky to be able to select really good and big projects for us. We also have actually a very good IT system, which I haven't talked about before. But I won't say it's AI system, but it's a great system that helps them with their performance.

So does that mean that we should anticipate strong margins like this going forward, especially considering that the order intake picked up now again?

Yes. Again, I'm not -- I have never promised anything about the future, but the pre-conditions looks very good, I think. So I would be surprised if we couldn't continue to perform in this still quite weak sector.

And secondly, maybe if you could give us any updates on the Expin situation and how that has developed? Any news?

Yes. Well, all the claims are now sent in. We -- the numbers are there. We know the figures back to 2021. So, now that period is over, and now we need to put all our resources in to get this company focused and profitable, and I'm sure we'll come back on that in the next quarter. But Infrastructure in total is doing very well in the quarter. In spite of that, Expin, given all the things we've done are not showing profit.

Was that your questions, Henric?

Yes.

Let's move on to Handelsbanken and Julia Angeli Strand.

Yes. I was wondering regarding the cost savings program in Plantasjen, did it have full effect in the quarter or can we expect some further effects in the coming quarter?

Thank you for the question. Looking forward to meet you, by the way. I -- we saved SEK 78 million in the quarter on the cost reduction program, and that was in line with plan, and there will be more coming in Q3 and Q4. So I hope that answers your question.

Okay. And also -- so, is that a correct interpretation if the cost program will continue further on?

Yes.

Or will you have...

Yes.

other focus on Plantasjen?

Yes. The cost program will continue, and we are not only working with costs in Plantasjen. We are doing other things as well. But we need to really improve this and get it sustainable for the future.

And just 1 last question. With regards to the falling inflation and lower interest rates, have you noticed any differences in interest for assets that you may want to sell or anything like that?

That's a very good question, actually, and very important question for us, Julia. And yes, we see signs of improvements, but we are not back to the good old days, if I say so and there will be -- we have to wait a little bit longer and pray for no further bad news in the [ geopolitical ] arena.