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

Good morning, and welcome to this presentation covering the third quarter in Ratos for 2024. 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. Starting this quarter, we will also give you a slightly deeper understanding of our individual subsidiaries in connection to the quarterly report. To do that, we will invite guests to our webcast starting today. First up is the HL Display CEO, Bjorn Borgman who will join us later on to give us a little bit more insight on HL's recent development and the exciting growth journey. In the end of the presentation, you will be able to raise your 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 hand over to you, Jonas Wistrom.

Thank you, Josefine, and thank you, everyone, for joining this meeting to listen to what I think is a good result for a good quarter for Ratos. And we start up with a summary. It's really been a busy quarter. Again, I'm happy with the results, and coming back to that and the strong cash flow. So if we start with all processes we're in, I would like to highlight the merger of Knightec and Semcon, which was announced in the quarter. That process have had a really good start and we see them as one company with one structure in the beginning of 2025. But it started up very well, and I'm coming back a little bit to this later. We also launched a reconstruction in Plantasjen, which is absolutely necessary to do our structural changes forward. And we also finalized the restructuring in Expin Group. I'm very happy that Industry continues to develop actually very strong. We had a temporary weak quarter in Construction with tough comparisons, and I will come back to that during the presentation of the business area. And as you see, the order backlog is very strong and also the order intake growth. This quarter is also a quarter in a little bit weaker market than we expected. Net sales is down 6%; organic, minus 4%. We have to note that the currency effects were quite substantial this quarter. And again, cash flow continues to be strong and Jonas is coming back to that, but it's even a little bit stronger than last year. We're on 167% in cash conversion. So let's take a look into the business areas and starting up then with Industry. They had an EBITA growth of 21%. EBITA margin close to 10%. I mentioned the merger of Knightec and Semcon. We will create a leading R&D partner for product and digital solutions, I'm really looking forward to that. Also, both companies had very good numbers in the quarter separately. They actually grow 8% in the technical -- the technical consultants grow 8% organic in a quarter with a weaker market. Net sales down 2%, 2% organic negatively, and again, 2% currency effects. HL and LEDiL performed add-on acquisitions in the quarter and the effect of that is 3% in structural. We continued to see a lower market in wind and CRO market remains on a low level, we see signs of improvement. EBITA up 21%, and we had increased adjusted EBITA in both segments and in all our subsidiaries. Again, EBITA margin close to 10%. Looking into Industrial Services, we had a bit lower sales here and the EBITA grew 31% in the quarter. Our EBITA margin also increased. We had 1 day more in the quarter, which normally means something. Here, we had the 2 longer days in July, 1 shorter day in August. So the calendar effect is not as strong as it is in theory because of the vacation period. But I'm very happy with the development in Industrial Services. Coming into Product Solutions. There, we had a net sales growth. We did acquisitions, as I mentioned, in HL Display and LEDiL in the quarter. Sales was negatively affected by the weaker wind -- or a continued weak wind market, I would say, in Diab. EBITA up 15%, EBITA margin close to 11%. And again, all subsidiaries increased their EBITA in the quarter. And now I'm really looking forward, Josefine, to listen to Bjorn Borgman in -- CEO in HL Display. Should I switch the slide here now or...

No, I think Bjorn will come in here. Yes, indeed, I am super excited to introduce Bjorn Borgman, the CEO of HL Display. Please.

Thank you, Jonas. Thank you, Josefine, and thank you for the opportunity to give some color to the Ratos portfolio companies by talking about my favorite subject, HL Display. So I will try to give a short introduction to what HL is about. I'll talk about why we believe this is a good investment for Ratos and about HL's financial development. And then we'll talk a little bit about the exciting buy-and-build journey we've been on for the last 3 years. But if we start from an introduction point of view, what is HL? HL Is the leader in, in-store communication and merchandising solution, helping grocery retailers to build attractive, efficient and more sustainable stores. This might sound pretty grand, but if we drill down into a little bit more practical examples, what does this mean? For example, when it comes to price communication, the price tag that sits in front of every product on every shelf, whether it's paper, whether it's a digital label, it is likely attached by an HL attachment. And actually, we make this kind of attachment 1 lap around the world, every year to help grocery retailers attach their pricing in store. So that's just one example of the broad HL portfolio. Another one would be if you step into your supermarket tomorrow, you take a packet of milk. The next one will roll to the front. The rolls they roll on that you don't notice is likely an HL solution. So that's just a few examples of what we do to help grocery retailers deliver better stores and more efficient stores. To do this, we actually deliver these solutions to all major grocery retailers in Europe. We do this through HL's 1,400 dedicated employees. And as a reward, we get a turnover from these grocery retailers close to SEK 3 billion annually. So that's just a brief introduction of HL and what we do. I'm going to try to step into the next section, which talks about why do we believe HL is a good company in the Ratos portfolio. So there are a few things in the market we operate that are beneficial and are good long-term trends to support development in HL. Firstly, we are exposed towards the grocery market. This grows, in general, with the population growth, 2% to 4% year-on-year. Then there are a few macro trends within this environment where HL operates and HL benefits from with our product offering that allows us to have organic growth ahead of the grocery market. They are specifically digitalization. So as stores digitalize, HL helps stores to enable this digitalization. The attachment of electronic price labels was one example of that. There are the packaging reduction, which is -- goes into the sustainability investment in stores. This packaging reduction usually needs merchandising solutions that HL provide. And then thirdly, it comes into, let's see here, it comes into the efficiency of operating the stores. So how can you operate these stores in a more efficient way, and here comes the milk carton example. You need less people to operate the stores with the HL merchandising solutions. So that's just a few examples on the macro trends helping us to drive ahead of organic growth. That is also helped by the long-lasting relationship we have with the major grocery retailers. And this allows us and their commitment to sustainability puts pressure on HL and on the industry to deliver more sustainable solutions. HL's footprint, where we produce 80% of what we sell in our own factories allows HL to deliver these solutions of the quality with the recycled content that is requested by our customers. This is not something that is done by our competition in this fragmented market. And this builds into my last point, that the competition for HL in this market where we are the undisputed leader is fairly fragmented and many of our competitors don't run their own production. And as a consequence, they can't deliver on the sustainability journey that the grocery retailers want. And lastly, the fragmentation of this market also helps HL to drive the buy-and-build journey to consolidate this marketplace and drive good synergies, which we're going to talk about in a while. But I think all these topics and trends, together with a strong HL team, has allowed HL to deliver great financial performance over the last 7 years. So looking at this, we delivered almost 34% average EBITA CAGR growth over these 7 years, and we managed to do this by growing the EBITA year-on-year. Throughout COVID, throughout logistics challenges, throughout inflation, we managed to drive this. So this is something we are really proud of. And we managed to do this following Ratos model of, first, you create stability in the business then you create profitability in the business. And once you have good profitability, you start the growth journey. And this growth journey was something we started in 2021, and we managed to do this -- or as we started this, we combined our organic growth with acquired growth. And in these last 3 years, we managed to make 10 add-on acquisitions in HL either driving market consolidation, offer expansion or to get full geographical coverage in Europe. Usually, we make these acquisitions at a multiple of 5 to 6x EBITA. And then after we have benefited from the synergies of bringing this into the HL structure, this lands on about a multiple of 3 to 5. So very good synergies, good multiples as we consolidate this industry. All acquisitions so far has been made in Europe as we have strengthened our leadership position in Europe except for the last acquisition, which was made on 1st of October when we acquired a company called Kost Klip in Canada. And I will talk a little bit specifically about this Kost Klip acquisition because this was an acquisition that was maybe a little bit too early for HL to make an acquisition outside of Europe. However, this was too good an opportunity to miss on. So Kost Klip clip comes from similar heritage as HL. They come from price communication. And they have a leading position in North America when it comes to do exactly what HL has been doing: attaching price to shelf and specifically the electronic shelf labels. And what we see in North America is that the journey we've had in Europe over the last 15 years, that you've seen in Canada where Kost Klip is over the last 5 years, are now starting in the U.S. So this is a great fundamental, combine Kost Klip leadership position, the HL experience to continue to drive and benefit from this strong market trend we're going to see on electronic shelf labels in North America. Secondly, it's a good foundation for HL to cross-sell our leading merchandising solutions to Kost Klip's customers in Canada. So a lot of opportunities for HL to continue to accelerate the already strong growth of Kost Klip. So that's just one example of an acquisition, but probably one of the more interesting ones we made in this buy-and-build journey. So clearly, with that, I hope I managed to give you a little bit of color to one of the 17 portfolio companies in the Ratos portfolio. And with that, back to the Ratos studio.

Thank you so much, Bjorn. That was very interesting. Always a pleasure. And you will also stay with us for the Q&A session later on. Let's go back to you, Jonas Wistrom, and continue with the business area Construction & Services.

Thank you, Josefine. So here we are, Construction & Services. Net sales is down. The strong net sales were in Critical Infrastructure where Presis Infra had yet another super quarter. If we look at the EBITA, you can see that what drives EBITA up is airteam and Presis Infra. What drives EBITA down is Expin Group project phasing and currency effects. Before I go into the segments, I also want to -- like to mention here that the order intake was very strong, and the order books are very strong in Construction. So if we take a look at the segments. Again, Construction net sales down 14%. We stated this as temporarily and it, again, has to do with this famous word, project phasing, we have used before, especially for Aibel. Aibel came in a little bit lower in the quarter, but I'm certain that they will produce another record year. And as you remember from Q3 last year, we had very good project endings in -- especially in HENT. So order intake, again, is strong. Order backlog is strong. And I think our Construction companies and our team is actually doing better than ever in their underlying performance. In Critical Infrastructure, as I mentioned, I mentioned Aibel. Presis Infra is doing yet another very good quarter, both from sales and EBITA. When it comes to the lower EBITA here, we -- it's only due to that the Expin results Q3 last year were overstated. You know that we corrected all EBITA for Expin Group in Q4 2023. So that's the whole reason for this. Let us take a final on Consumer. Consumer, there, we showed a little bit better result. We saw that net sales went down, but the main event is, of course, the reconstruction in Plantasjen, which we think is absolutely necessary to come to the structure where we want to be. And in connection with that, we also did a write-down of goodwill. And the reason for that is that Plantasjen going forward is a smaller company, but a much more profitable company. So with that, I leave over to you, Jonas. Talk us through the financials.

Thank you, Jonas. So just a quick overview of net sales and adjusted EBITA, if we look at these graphs. Net sales were down, as we said before, 6%. We saw a negative organic growth in the quarter. But we also had a quite large negative currency effect, you can see here it's SEK 281 million corresponding to 4% of net sales. And this is mainly an effect of the weak Norwegian krone, but we have also seen a stronger Swedish krona in the quarter. And if we look at the adjusted EBITA -- or sorry, if we look at the LTM for net sales, we are at SEK 32.4 billion rolling 12 months. Let's move over to the adjusted EBITA, it's down 9%. It's also here related, as Jonas said, to Construction & Services, as explained earlier. And if we look at the EBITA LTM, we were now at SEK 2.3 billion rolling 12 months roughly. Let's move on to the cash flow. The cash flow from operating activities, you can see we're down 9%. But last year, in Q3, we had a very strong cash flow quarter. This is yet another strong quarter with SEK 783 million in cash flow from operating activities. We see good change in net working capital, as you can see in the table. Net working capital is down a little bit more than SEK 200 million. And cash flow from operating activities, SEK 783 million. And we have a cash conversion around 170%. So it's on a really good, strong level. And we continued to work a lot on focusing on the cash flow and reducing the capital tied up in the business. This is a focus that we have basically every month going through with all the companies. So it's a really strong focus on this in Ratos. If we move on to net working capital, you can see that we have a large decrease in net working capital. It corresponds to 0.3%, SEK 16 million and this is then we look at the 4-quarter average for the capital tied up in the business, but then we compare it to the LTM numbers. And you can see that we have good progress, inventory is down and also trade receivables are down. And we actually see good development in days for accounts receivables and inventory. If we look at the DSO, days sales outstanding, but also the DIO, days inventory outstanding, we continue to see good positive trends within the group. Then I move on to the bridges. If we look at the net sales bridge, as I said before, we are down 6%. We had some minor acquisitions in HL Display and also in LEDiL. And we also had a very small negative effect from Semcon divesting a company in the U.K. in the quarter -- or that was made before, but we had a negative effect in the quarter. If we look at the organic growth, it's down SEK 299 million, so it's 4% roughly. We saw, as Jonas said, a positive and very strong growth in Critical Infrastructure, and that was very much driven by Presis Infra. We saw a negative organic growth in Construction, and this is very much a temporary weaker effect because of project phasings that we had last year -- where we had a positive effect last year. And then also, we saw a negative organic growth in Plantasjen, and Plantasjen is now downsizing its operations and has closed quite a lot of stores in the quarter. Then we move on to the FX effects. Quite large negative effects, SEK 281 million. And this is again the Norwegian krone mainly, which has been weak, and then we have no other effects in the quarter. So that's the bridge on net sales. And if I then move on to adjusted EBITA. It was down 9% in the quarter. You can see we had some minor positive effects from acquisitions. But what I think is interesting to see here is that despite that we have a quite large negative organic growth, of almost SEK 300 million, we posted a positive organic growth on EBITA, SEK 15 million. And this is attributable to Construction -- sorry, the Industry companies -- in the business area Industry where we had growth in basically all the companies in both the segments. If we look at the FX effect, it was down SEK 32 million. So it was quite a lot. Here, we have a big effect in Industry. It's about SEK 15 million, but also in Construction, about SEK 16 million in negative effect. And then we had somewhere is onetime effect where we actually had onetime costs this quarter of around SEK 10 million, which was not adjusted in the adjusted EBITA and then we have some other minor items. If we look at the leverage, we are at 0.7x. If we adjust for the reversal of the write-down in Aibel, we were at 1.2x. If we compare to the same quarter last year, we were at 1.3x. So we are on a low level on leverage. We have seen leverage decrease and we have good cash flows in the business and we also saw net debt coming down, as you can see here on the slide. If we look at the return on capital, ROCE, we were at 10.2%. And if we look at the return on invested capital, we posted 7.3% in the quarter. We look at the financial targets. On EBITA, we say that EBITA should amount to at least SEK 3 billion by 2025. We have a leverage target, the leverage should be in between 1.5 to 2.5x. And if we look at the dividend payout, it should be in the range of 30% to 50% of net profit after tax. So that was all from me. Over to you.

Thank you, Jonas, and thank you for mentioning that we have not adjusted for all costs we have had. And I spoke about business area Consumer, we had a little bit better result this year. Plantasjen improved their EBITA. But also actually KVD improved their EBITA if we take into account that we had some profit-generating projects in the quarter that we didn't adjust for. So with that, my final remarks, I think, again, the merger of Knightec and Semcon will really create value going forward, so will the reconstruction in Plantasjen and we also have finalized the restructuring of the organization in Expin. We repeated time after time, but we continue to do good numbers in Industry and Bjorn is one of the strong contributors. Thank you so much for your presentation, Bjorn. And the quarter in Construction is what we mean a temporarily weak quarter. I mentioned the order backlogs and order intakes. We mentioned the large negative currency effect. But sales are down, and we need to recognize that our market is still quite weak and it was a little bit weaker than expected in Q3. And therefore, we are even more happy that we're doing so good with the EBITA. Cash flows continued to be strong -- or very strong. And I dare to say now that the transaction markets, at least in M&A and PE, shows signs of improvements. That's how far I go here, Josefine. So with that, we open up for Q&A, Josefine, right?

Yes, let's. Thank you so much, Jonas and Jonas, and it's time for our Q&A session.

So let's start with Henric Hintze from ABG.

This is Henric here at ABG. So first of all, the Plantasjen reconstruction. I mean, could you just give us some more detail on that? What have you done so far? Where are you now in the process? What remains to be done? And how much smaller will the company be when this is completed? And what kind of margins are attainable if everything goes as planned in the process?

Yes. Thank you, thank you for your question. I think everyone wants to have an answer. I think we can report a little bit of what we have done in terms of stores, et cetera, but we won't comment a letter about the process, which is ongoing and which is very important. We don't think that the process itself gains from -- that we put up our expectations here and now. But Jonas, would you like to say something about the number of stores closed so far or should we...

Yes. I mean we have so far closed about 35 stores, 10 in Finland and the rest in Norway and Sweden. So that's what we have done so far. But as Jonas said, we don't want to comment on sort of the reconstruction process really right now when we are right -- we're in the middle of it, so to say.

Yes. We can maybe comment on the headquarter, if you want. And tragically, of course, a lot of people have been laid off also here in the process that has been. But we continue this process, and we will come back to you when we have the results.

Okay. So maybe one more about the Semcon-Knightec merger then. I'm just wondering what made you pull the trigger on that now? You've owned both companies for a while. What drove that decision?

Also a very good question. As you might know, I've been in this industry for quite some time, it's all about people. And I wanted to see some collaboration between these companies before we took this step. And a matter of fact is that they have worked together now with important customers. They have learned to know each other a little bit. So we wanted to reduce the risks. And this was, of course, the plan from the beginning when we bought Semcon and when we bought Knightec. We believe this is a business area that will grow. I mean, I used to say it's the engineers and vice politicians who drives the green society we all need to live in, in the future. And they will now create a really leading partner for R&D and digital solutions in Northern Europe. And I must say that this process has started very well. And in my previous job, we did 65 acquisitions, so I have some experience in this area.

Okay. Very good. And a final question for me then. The margin in the Industry segment spread positively and improved year-over-year. Could you just explain what drove that?

Sorry, what?

What drove the margin increase in Industry? Any particular companies or just the segment?

Well, all companies actually grow their EBITA. We believe very much, of course, in strong CEOs like Bjorn, but we also -- and that's the most important. But -- we -- our Ratos business systems is working very well and that was something we implemented in 2018 when we had SEK 400 million in EBITA instead of SEK 2.3 billion and where we had a leverage of 3.5 or something like that. It has worked very well. It works on Industry and Industry will be our focus coming forward.

Thank you, Henric. Let's move over and see if we have Julia Strand from Handelsbanken on the line.

Yes, I'm here. I just have a follow-up question on Knightec Group. So just what's your view on the technical consulting market going forward? Have you seen any signs of weakening demand?

Very good question. Actually, the market is a bit weaker. The technical consulting market is, like many other markets, a little bit weaker in Q3. That's my opinion. And that market, I mean, it will be a growing market over time. But with the interest rates that has been, we have seen going down, we expect they will go down, but I'm not a good forecaster. I used to say that forecasting is astrologic, [Foreign Language] in Swedish. But of course, sooner or later, the market will improve, but it has actually been a little bit weaker. So therefore, it's very gratifying that they grow organically 8%, Jonas, in the quarter. So that's a sign. It's still very good company.

Okay. So do you think that this could have any impact on the merger? Or when do you think that we will see this market to pick up, if you could just give a broad indication?

I don't think it will have an effect on the merger at all actually. But -- and I think we can see -- I mean, officially, after the authorities has approved this merger, which they will do and quite soon, we will see the new shape of the company in the first quarter next year, I would say.

Thank you. Thank you, Julia. Let's move over and see if we have Johan Sjöberg from Kepler Cheuvreux on the line. No, not Johan, you're welcome back another time. Let's move over to Albin Nordmark from Nordea.

Albin from Nordea here. So you have a good order intake here in Q3 for Construction and for Aibel. So can you give us some sense of how much of that is to be realized now in Q4 and perhaps '25 as well?

Would you like to answer that, Jonas?

Yes, we have said that the Construction companies will have sort of a weaker market during the second half of this year and -- so we won't see really high sales in Q4, but it will come gradually in 2025 and onwards. And the order book looks very good, as you can see.

Very good also not in numbers, but also, I think, in the quality of the orders. So yes.

Perfect. And also the inventory and receivables is continuing down here. Is these normal levels or should we expect the working capital to continue to decline year-over-year in Q4 as well?

No. I mean, normally, when it comes to accounts receivables and partly also inventory, it depends on the market and how much you grow and so on. So we have not been growing that much this year. Sales is down, as you have seen. Of course, that helps a little bit. But as I said earlier, we have a lot of focus on this and we talk with our subsidiaries on a monthly basis and discuss cash flow and how they can improve the capital tied up in the business. And so I expect it to continue. But if we start to grow a lot in the next year or going forward, of course, we will tie up more capital in accounts receivables, for example. That's quite natural.

Yes. But I'm glad that inventory was brought up here because that is really a focus area, especially in Consumer, right? And I would say that there has been some success there.

And for example, Plantasjen, they are running an inventory reduction program and we saw reductions in inventory levels also in Q3. So they have been successful and we expect them to meet the targets they have set up for the end of the year.

And KVD perhaps?

They are also down. So they have also -- running a program in order to reduce inventory, and it looks good.

And last one for me. Nonrecurring items regarding Plantasjen and also the write-down. Should we expect more here going forward?