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

Good morning, and welcome to this presentation covering the fourth quarter and the full year of 2024 in Ratos. Our CFO, Jonas Agrup, is unfortunately ill today. So with me in the studio, I have, as always, our CEO, Jonas Wistrom; and also our Finance Director, Mattias Junde, and they will guide us through the results shortly. 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 at ratos.com afterwards. Without further ado, I'll hand over to you, Jonas Wistrom.

Thank you, Josefine, and thank you, everyone, for attending this important morning where we will describe what I think is the best quarter and best year since I started in Ratos. So let's take a look on the fourth quarter. It was an important and it was a strong quarter, but I cannot enough underline with major one-offs because I saw in the first headlines this morning that one wasn't really aware of that if we back 1 year and look at Q4 2023, we had a positive one-off of SEK 1.656 billion related to Aibel. And we reversed a downwriting that was suggested by our auditors during the period when Aibel had tough times. And last year, they told us we have to reverse that and go back to the goodwill we have from the beginning. Aibel has developed extremely well also in this year. So they have a record year this year and they have a record year the year before. When it comes to '24 Q4, we had negative one-offs of SEK 256 million, more than SEK 200 million of them were related to Plantasjen, and I will get back to that and also the Knightec Group and TFS. We had a merger of Knightec and Semcon into the Knightec Group, I will come back to that as well. And we merged HENT and SSEA Group to Sentia. And Plantasjen's restructuring is in line with plan, and we believe and we hope that we will be able tomorrow to disclose the financial effects and numbers on this reconstruction. I think this is also a very important process that we had during the autumn 2024 and was finalized in Q4. Also, we took up our holding from 72% to 97% by buying KB Gruppen's shares. Presis Infra has developed, and this is not an exaggeration, extremely well since we acquired the company. If we look at the earnings, cash flows, et cetera, why was this quarter strong? Well, adjusted EBITA increased with 23%. Our margin was better than last year. If we look at our core business, as you know, we have communicated that Consumer should not be a part of future Ratos, and again, Plantasjen was very much affected because of the reconstruction. Stores were closed down, and we need to get rid of the end inventory with, to put it carefully, very low margins. So if we look at the core business, then EBITA is -- adjusted EBITA is SEK 610 million, and our EBITA margin is 9% instead of 5.2%. So that can be a hint of the future here. I'm happy to say because the market has been still cautious, we don't have had the demand as we used to have this year, and it goes, I think, for everyone. We had a continued strong development in Industrial Services and, not the least, the technical consultant companies, Knightec and Semcon who merged, where we also saw organic growth in the technical consultants. Very strong quarter for Construction. EBITA, up 40% in a tough market. Net sales declined. As I mentioned before, we have had a weak market. Organic growth is actually minus 5. And we did some acquisitions, one in LEDiL and 3 in HL Display during the year was that. Cash flow from operating activities continue to be very strong. We have a cash conversion of 350%. ROCE and ROIC improved a little bit compared to last year. These ROCE and ROIC are numbers we are looking very close into. If we take a look at the full year. All segments except Consumer increased their EBITA in spite of the market I talked about. So EBITA increased 4% and the margin was 7.2%. Again, if we look at the core business actually we have doubled the growth on EBITA without Consumer, and the EBITA margin is 8.5%. Again, negative sales numbers, structural effect of 1%. I think except for the Consumer market, the Construction & Services market is also a very tough market. I put them on second place after Consumer in terms of bad markets. But still, our companies had a good order intake and also the order backlog grew. So they're very well fitted for going forward. And again, cash flow from operating activities for the year corresponds to a cash conversion of 148%. So also the year number are very good. And the Board proposes to increase the dividend to SEK 1.35. Now let's look a little bit into the business areas. I've said a lot here, but if you look at the net sales graph, you could see that we are not in a very good market. I mentioned that the technical consulting companies are actually growing and, can I say, do very good results. A very weak market in industry is the CRO market, and we have also taken cost efficiency measures in TFS, and you will see more of that. We're not happy with the profitability there. Adjusted EBITA, in spite of the weak market I talked about, has grown with 8%. And adjusted EBITA in Industrial Services was strong at 21%. Adjusted EBITA margin, almost 9%, a little bit down versus last year. But I'm actually satisfied what industry has done in total because of the -- or in spite of the weak market. So here, you have closer numbers about the different segments. I think I've said the most here, but we had in Product Solutions net sales growth. EBITA, again, up 21% in EBITA. If we look at Product Solutions, we were SEK 7 million behind last year. I can tell you that those SEK 7 million is a one-off in Diab. And that sounds strange, but we don't take onetime costs and adjust for them if they don't reach SEK 25 million. So it was a flat EBITA quarter on an operational level. If we go into Construction, the net sales decreased a little bit here also with 3%, organic 4%. We had a little bit lower sales in the quarter, and that is basically -- I mean I've said that before that when it comes to sales, we should look on last 12 months because it's very much about project phasing. For the whole business area, EBITA grew 30% in this market. And Sentia, which I talked about earlier, they had a very strong Q4. EBITA margin, 9.5% for Construction & Services. I'm extremely satisfied with that. And again, order intake up and not a little bit. And order backlog amounts to SEK 29 billion now, and that is excluding Aibel, who has a very, very strong order book. If we look at the segments, Construction is actually down a little bit in sales, but EBITA is growing with 40% and a profit -- or EBITA margin of 5.9%. Order intake, as you can see, stronger than last year. Order backlog, still also higher. In Critical Infrastructure, Presis Infra and Aibel has performed very well. Expin Group is not performing well but they are performing much better than 1 year ago. Sales, up 8%. EBITA in Critical Infrastructure, up 23%, and the adjusted margin is 19% compared to 16.4%. We had a temporary low order intake in this quarter, but the order backlog is stronger than 1 year ago. And then we come to Consumer. I think I've said the most, but net sales decreased. We have closed a number of stores, but also the market has affected the sales. Adjusted EBITA down because of -- to take the inventory down when shops have been closed. So that has affected the EBITA and the EBITA margin. Adjusted EBITA margin, yes, minus 22%. We had minus 15% 1 year ago. I also want to mention actually that KVD, they are also working in a very tough market. And if you look for a full year, they actually are showing a little bit better result and better EBITA margin. And I think that is strong given the market they are in. So with that, I will leave over to Mattias who will take you through the financials. Please, Mattias.

Yes. Thank you, Jonas. Yes. Net sales in the quarter were down 3%. Organic growth was also down about 5%, and this is mainly due to the Consumer business area. The full year net sales was SEK 32 billion, and that is 5% down from last year. Adjusted EBITA was up 23% in the quarter, and both Construction Services and Industry had very positive development compared to last year. If we look at our adjusted EBITA full year, we have about SEK 2.3 billion, and that is up 4% compared to last year. If we go to the items affecting comparability. We have some large items in the quarter, a total of SEK 256 million. And this is mainly due to reconstruction in Plantasjen, which is a bit over SEK 200 million. If we go over to the cash flow, we had a strong cash flow in the quarter. It was SEK 1.4 billion. And this is mainly due to the change in net working capital in the business area, Construction & Services. Cash conversion amounted to 350% in the quarter. If you look on cash flow from operating activities full year, this was SEK 3.4 billion. This was down a bit compared to last year, but still a strong cash conversion of 148%. If you go over to net working capital, this has continued to decrease for each quarter. And at the end of the year, it was negative 0.5%. I would say that this is a normal. We had also a negative last year in Q4 and it's due to a lot of -- this will not continue to be negative, I would say, in 2025. Main items was accounts receivable, which was lower, but also we have a higher net of other liabilities and receivables. This is mainly due to less advanced payments to suppliers and also effects of the reconstruction in Plantasjen. If you look on the bridges. We can start with the net sales. As I said, total net sales were down 3%. We had an acquired growth of 2%, which is primarily related to add-on acquisition in the industry. We have a negative organic growth in the quarter of 5%. That's just mainly due to volume, almost everything, and all business areas had negative organic sales growth. If you look on the FX effects, they were very small in the quarter and only amounted to 0.3%. Other is mainly due to Expin and Plantasjen. If we go on to the EBITA bridge, we were up 23% in the quarter, and acquired EBITA growth was about 4% and related to an Industry business area. We had an organic decline of SEK 38 million, and that's mainly due to the Consumer business, but it's also by both Construction & Services and Industry, which were -- had organic EBITA growth during the quarter. FX effects was quite small. It was about 3% and mainly due to NOK and the negative results in the Plantasjen. Other is mainly due to the Expin correction last year, the reporting areas that we had at that time. And if you go down -- go over to the leverage and everything and then the financial statement, it was 1.3x in the quarter, which is a bit up the same quarters last year. If I adjust for the items affecting comparability, we had a leverage of 1.2x. Net debt increased during the quarter mainly due to the acquisition of the shares in Presis Infra, the minority shares. But it was offset by a strong cash flow, so the net increase was only about SEK 60 million in the quarter. Compared to last year, we had a -- net debt has increased with about SEK 95 million. And as Jonas said, both ROCE and ROIC had slightly increased compared to last year. If we look a little on the financial targets. We see that the Board has proposed a dividend of SEK 1.35, and that is 57% of the adjusted net profit. And this is a little bit higher than the normal payout ratio, but it's mainly due to that we have a very strong cash flow during 2024. And with that, I will leave over to you, Jonas, for the final remarks.

Thank you, Mattias. Thank you. Yes. I think the free cash flow per share were like SEK 6.41 or...

SEK 6.41 for the full year, yes.

Free cash flow?

Free cash flow.

Very good. So the final remarks. Again, merger of the Knightec on Semcon to Knightec Group, I think it was really an important thing that happened in Q4. We have already seen synergies, and I'm sure that we will see a lot of synergies in the first half year. They're also performing well both from an EBITA and also from organic sales in a market that varies between areas here. The merger of HENT and SSEA, also very important. I think I've said everything about that. The Plantasjen restructuring, in line with plan. So the First Court in Sweden and Norway has approved this, and now we just wait for this to be legally binding, which we hope and believe will be tomorrow, and then we will release the financial effects on Plantasjen. Again, very strong quarter in Construction and in Industrial Services, I would like to say. And adjusted EBITA increased for all segments during the year, except then for Consumer, and adjusted EBITA increased 23%. And I don't know how many times we had said that the cash flow is strong, but we end up with that. And thank you so much for listening.

Thank you, Mattias and Jonas. Let's open up for some questions, and let's do that in some sort of alphabetical order. So let's start to see if we have Henric Hintze from ABG on the line. No, it doesn't seems like Henric is with us, might show up later. Let's move over to Svenska Handelsbanken, Julia Angeli Strand. Please, Julia, post your questions. The line is open. Well, see, we can't hear you. Do you hear us? Should we try to move on our list. Maybe Kepler Cheuvreux, Johan Sjöberg. Not with us. Have we Albin Nordmark, Nordea? Should we give you a try?

Yes, Albin here from Nordea. Can you hear me?

Okay. Please, Albin. I can hear you perfectly well. Please post your questions.

Yes. Perfect. So firstly, if you can give some more comment on what the strong EBITA development in Construction stem from? And then also, if you can give us some sense of how much of the order backlog is to be realized in '25? And also any comments on the margin profile in the backlog?

Thank you, Albin. Please, Jonas.

Well, I just said the strong -- your first, why are we doing so good in Construction? Is that...

Yes. And basically, why is the margin so strong in Construction in this quarter?

Yes. I think it's 2 things. We have a big part -- first of all, we have a big part of our projects is done in a partnering model, something that has been developed through the years and was boosted by the fact that we bought SSEA Group or Vestia a couple of years ago who were solely working with partnering projects. And the idea was to get synergies with HENT already then. HENT was not so successful on the Swedish market. Vestia/SSEA Group was successful on the Swedish market. So actually, SSEA and Vestia took over the Swedish market and HENT focused on the Norwegian market. That really in itself -- the result of that was that EBITA margins started to grow and has grown ever since then, every year actually. I also think that the fact that we have public customers, to a large extent, is also -- they are less sensitive for the market. Although they are sensitive, but I think it's still better to have these clients than a private-owned companies. So that's a long answer on a short question. But I can't avoid to say also that we put HENT's CEO in the Board of Directors for SSEA Group and vice versa. So they got to know each other and they have done projects together. And with that we now create a leading Nordic company builder with EBITA margins that not only this year has been high and, with cash flow, it's not only this year been positive. I think it's the partnering model, public customers and the fact that construction is a local business, and everyone is now in the group focusing on their business.

And then on the other question, how much of the order backlog, if you can give us some sense there of how much is to be realized in '25 and also the margin profile in the backlog?

Yes. I'm sorry. I can't tell you that. I don't have that in my head. The backlog, Mattias, is very much larger than the annual revenue.

Yes.

So -- but I need to come back to you on how much -- if you don't know the number?

No, sorry.

How much of the very large backlog is taken during 2025. Sorry for that.

All right. No worries. And then just 1 last question here. You talked about synergies in Knightec and Semcon. What kind of synergies have you seen there? And can you give us something in terms of numbers? And then also what you expect in terms of numbers for '25.

Well, as you know, these synergies is both on the sales side, but also on the cost side, of course. And this process is ongoing now. And I think -- I'm sure you understand that I don't want to be into details here. But I have my own experience from that, of course, in my previous job, and this is quite similar to the acquisition we did then of Epsilon. And we gained a lot of synergies, both on sales side and on the cost side. So I don't want to comment on that at this. But we will, as I think I wrote in the report, come back during the first half year.

Okay. Thank you, Albin. Should we try once again with Julia Angeli Strand from Svenska Handelsbanken and see if you are ready to post your questions.

Okay. Let's try. Can you hear me now?

Perfectly well. Welcome, Julia.

Okay. Perfect. Sorry, I had some technical difficulties. Okay. So in terms of capital allocation, and it feels like that buybacks are off the table and that you're possibly more interesting in continuing buying minorities. Is this something we could expect near term?

We don't give forecasts on what we're going to do before. I'm always going back to '22, where we had our Capital Market Days and told people what we were going to do, and then the Ukraine war came next day, the day after. What I can say is that we will continue our work to get a more consolidated Ratos Group with higher profitability margins. And we should be a less -- a smaller number of companies. So it will be a more report to read, but more importantly, that we have real synergies over the line.

Okay. Understood. And regarding -- you talked about synergies in Sentia. Could you say anything more about that? Was this mainly related to sales? Or how should we think about that?

It is mainly related to sales, it is mainly related to sales. But of course, there are some cost savings also with doing this. And -- but now we have one common goal in the Sentia Group. There is not 1 goal for HENT and 1 goal for SSEA Group, and that will foster that we go together and take the best projects with the best profitability in the best markets.

Okay. Would this be visible before end of H1? Or should we expect this to be visible later than that?

I think we will see things already in 2025, yes. But this will continue to develop, but absolutely.

Okay. Thank you very much, Julia Angeli Strand from Svenska Handelsbanken. And let's open up the line for Georg Attling at Pareto, please.

I have a couple, the first one being in Construction & Services, the margin. You mentioned phasing as a positive lever here. How -- could you quantify the effect from phasing in Construction & Services?

I don't think I can do that. But I want to underline that this is not suddenly we increased our profit margin. If you look back through the years, which actually have developed a lot, especially for HENT. If we look into the SSEA Group, they had lower sales -- more lower sales than HENT had in 2024, but still a good profitability. But I -- do you have an answer, Mattias?

No, sorry.

But I'm sure -- and maybe we'll meet later today and we can look into the numbers more closely. But I can't answer that question. It's difficult to be CEO for 15 companies, you don't have all the details everywhere.

Yes, understood. On Plantasjen, I understand that you can't give too much detail here, but on a high level, what sort of margins can we expect after this restructuring? Is it going back to the double-digit levels or lower than that? And also on the timing effect in Plantasjen, when will you see that margin improvement? Is that in Q2 already or gradually throughout the year?

I'm so sorry, Georg, I won't say a word about this before. It's -- we have a legal binding decision. I don't want to make a mistake to say things and then it won't become legally binding tomorrow. So I need to answer that, I'm sorry.

Okay. But tomorrow, you will be out with the press release with the financial impact?

If the courts have said that now it's legally binding, and that is what we believe.

Yes, makes sense. Just final question here on the balance sheet. In my head, you want to be fewer companies, you want to sell a couple of companies, you don't want to do a platform acquisition, you don't want to do buybacks and still you want to have leverage between 1.5x and 2.5x. Doesn't add up in my head. Could you just help me to clarify how you're going to allocate the capital to bring you back to the leverage guidance?

Well, we're not only going to sell companies. Of course, we will that certain companies in our group are growing significantly and I don't think it's -- I think I can say this. If we take 1 example, HL Display, we haven't talked so much about them. I think we said they had organic growth, but they continue to do outstanding numbers. We want to have companies that are a market leader. So I used to say they should be #1 or #2 on the markets. HL Display is now #1 in the European market. So this is 1 example. Another example is, of course, the technical consultants, which now, if we look at the Knightec Group, is #1 in digital solutions and product development. That is also an example of a company that we want to be much bigger. So it's not that we should just sit on a lot of money here. We want to restructure the group, and we want to have, and I use 2 examples here, to grow significantly. I hope that was the answer.

Okay. Anyone else who has a final question, please raise your hand in the Teams meeting, so we can see that you have a follow-up. No, it doesn't seem so. Well, thank you, Jonas. Thank you, Mattias. This webcast was also recorded, so you can find it afterwards at ratos.com. Thank you so much for watching us today, and goodbye.