Sdiptech AB (publ) (SDIPB) Earnings Call Transcript & Summary

Welcome to today's webcast presentation for Sdiptech and their quarter 3 report. My name is Mattias Bohlin, and I'm with Finwire.tv, and I'll be moderating this call today. [Operator Instructions] Today's presentation will be done by the CEO, Jakob Holm; and the CFO, Bengt Lejdstrom. And with those words, I'll leave it to you.

Thank you very much. Hello, and welcome, everybody. The agenda for today, as always, a brief business overview. And then we will have a look at the market situation, specifically related to the COVID-19 pandemic. And then, Bengt, our CFO, will walk you through the financial development. Okay. We are an infrastructure technology group. We have our net sales almost to SEK 2 billion. Our EBITDA margin continuously growing last 12 months at 16.5%. The most important growth metric, of course, being the profit growth at 40% growth over the past 12 months. And if we break it down, it's a combination of acquisitions and organic growth. So it's a good reflection of our business model. The organic growth over the past 9 months have been 18%. So it is a combination of acquisition and profit growth. I would also like to mention our growth in earnings per share over the past 3 months, it has grown at 22% since the second quarter report. Moving forward, just briefly touch upon our business model. I think you're well aware of it. We are -- we pursue serial acquisitions, focus on strong market positions, both in acquisitions, but also how we develop our companies, market positions that provide reduced competition and also high profitability margins. Moving forward, our business areas. First of all, have a look at Water & Energy, consisting of Water & Sanitation as a subsegment, but also Power & Energy. 13 business units, profitability margin has been growing quarter-by-quarter over some period of time, currently at 21%. Special Infrastructure Solutions, same thing there. The profitability margin has been growing currently at a rather high level. We will get back to our comments related to that. 12 business units, the subsegments Air & Climate Control, Safety & Security, Transportation, all of which are underpinned by the good growth trends that we see coming from sustainability, efficiency and security. Our third business area, Property Technical Services, where we started in the initiation of Sdiptech. The profitability margin is steady at 8%. Nine business units, it has been 9 business units for quite a while since we don't do acquisitions in this area anymore. But predominantly, the subsegment here is the elevators sector. We move forward over to the market situation. And then, of course, specifically then related to the COVID-19 pandemic. And so how -- what is the situation for Sdiptech? Throughout the entire pandemic, our demand has, in general, been solid from all our customers. This is, of course, related to our role as a provider of products and services to critical infrastructure needs. Infrastructure always needs to work even in periods of worse economic conditions such as the pandemic. So the effect on Sdiptech have not been related to demand really, but rather to the restrictions and the associated inability for us to deliver. But orders generally continue to come in to our business units. And as a result, backlog was built up during the period of March to June. And as restrictions eventually have been eased, we have started to deliver on the backlog to catch up on the delays. So in Q3, we have been increasing delivery levels. And during the end of the third quarter, most of our business units delivered according to plan or even above. As an effect, sales were up 8% in the quarter, which, of course, is a strong number. Right now, we are then delivering on high levels, but also, we have an extra high profitability. Profits are up significantly in the third quarter, organically 18%. One reason is related to our business units with scalable business models, where, of course, an increase in sales has an even greater effect on the bottom line. Another reason is that a large part of the cost savings that were implemented during the spring time still remain. Our business units were cost-effective even before the pandemic, but as in all crises, unnecessary expenses are identified, and the measures linked to these will be made permanent. Some examples of permanent changes that we have done are digitization of supporting processes that previously were manual, and we've also reduced a proportion of our indirect spend. However, other investments that have been paused due -- do provide long-term value, and this will be resumed, bringing back some cost levels back up to normal. A typical example of these temporary measures are paused recruitments. So to some extent, we have an extra high profitability, which should not be considered as permanent moving into the next year 2021. And to help you analyze the consequences we have for the current year 2020, raised our guiding for our operating margins. We're, of course, very happy to do that. For Special Infrastructure Solutions, we raised guiding 5 to 6 percentage units; for Water & Energy we'll raise 1 to 2 percentage units for the full year; and for Property Technical Services, the profitability remains solid and guiding is therefore unchanged. And further ahead, sales will then gradually come down to a more normal level. And then of course, the question is, what is normal? Well, for the first 9 months, we are at 2% organic sales growth, which, of course, includes strong delivery levels in Q3, but it also includes all the delays from the pandemic in the previous quarters. So all in all, 2% increase in sales since previous year is a pretty solid number, and we still have some extra potential from remaining backlog to come. We believe the pandemic has proven that demand from our customers is resilient in its nature. Our customers provide critical infrastructure to societies, and we deliver to them. With that said, we do have a confident outlook for the future. We also believe in connection with the restart of the economies. We will see new efforts and a new drive towards more sustainable societies. Infrastructure has a given role in this change. For example, too little is invested in municipal water treatment. There's also a large waste of energy in the heating and cooling of properties. We have a shortage of capacity in our power grids, and many regions are coming close to critical energy shortages, while we, at the same time, digitize and electrify our societies. These equations do not add up. There's a significant need to invest more in sustainable infrastructure, not least in water, energy, air and climate control as well as transportation, capital-intensive sectors that Sdiptech is active in and in which we will continue to invest. And with that, I'll hand over to Bengt to walk you through the financial development.

Yes, financial development, I will start off with sharing with you our development with our group sales. And as you see to the left hand, we have increased quite steadily year-by-year from 2016, and from quarter 3 last year, we showed the numbers quarter-by-quarter, then the development of the sales of over the last 12-month period. Right now, as Jakob said, almost SEK 2 billion. That's a 15% increase since 12 months ago. And as you can see also in this slide, the profitability has been increasing since 2017, also quite steadily year-by-year, quarter-by-quarter. Looking at our sales distribution by country. We are present in a number of geographies. And as infrastructure business typically is local or regional, also the sales are in those countries where we have our business units. However, we have, of course, some export activities. So there is also sales to other countries than -- that we are present in with our units themselves. But right now, looking at the 12-month period, we have half of our sales within Sweden. We have now almost 30% of the sales in United Kingdom, and then comes Germany and Austria and Norway, more or less the same, 3% to 5%. And then Croatia and other countries are a smaller part of this. And these numbers are then related to where our customers are residing then. That's the definition of sales by country here. Looking at our profit and our EBITA*. And as you know, our EBITA* measurement there, we have really what's going on in our business, not so much bookkeeping and accounting, IFRS stuff because that's left out of this measurement. And in our report, you can see the full breakdown of this. But as you see, the profit has been increasing also very steadily throughout the years and also in relation with the margin has increased. For the last 12 months, we have increased then our profits with 40% and are now at the SEK 330 million. Looking specifically at the quarter, we had an operating profit and EBITA* increased by 45%, of which 19% was organic in comparable units compared to last year. And we had a margin of 18%, which I would assume is our all-time high. Looking at 9 month, the year-to-date figures, it's almost the same as the 12 month, we have 38% increase and organic profit growth over this period was 18%, and we had the same margin as in the quarter actually. We have, as always, our goal of having a profit growth of 5% to 10% in a year. And well, we can be quite confident that we will exceed that for 2020. Then having some more KPI numbers to look through. The sales in the quarter itself increased with 17%, and that sales increase was organic to 8%. So we had 8% organic sales growth and 17% all in all. And that's -- we're happy to present that because we have traditionally, for some time, been around 0 or just a couple of percent organic sales growth, but we have now seen a stronger underlying demand. It's also that we, to some extent, have been delivering on the backlog that we have had since the spring. I cannot give you the exact split between what's backlog and what's actual underlying demand, but we are confident that the underlying demand is substantial enough relating to this figure of organic sales growth of 8%. The other measurement, our EBITA* for the quarter, as I said, was up 45%, and we're running now at SEK 93 million in the quarter. The margin, 18%, is then a bit higher than what we have on a 12-month basis because we have had very strong quarters. And you could say that there are some extra high profitability, partly then from having some support from governments in different ways, but perhaps more important from running the businesses very lean and very cost-efficient, saving cost wherever you can, perhaps, unfortunately, lay off some staff, but also then keeping extra recruitments or extra activities to a minimum, if you can avoid it. So we thought perhaps earlier during the summer that this would change a little bit during Q3, but it's still some uncertainties in the society about restrictions. We were hit mostly in the U.K. during the spring. And there are, as you probably know, signs that there could be some more restrictions coming. But it seems to be restrictions not so much related to work environments and businesses as it was during the spring. It's more for your private life, going to the pubs, et cetera. So hopefully, this will not affect us as much than going forward if there would be more restrictions. So we assume that this profitability level of 18% will not be long-lasting, but it's still -- we see an improvement. So your last 12-month figure is probably the more realistic profit margin going forward. Looking at earnings per share. We have this quarter, some support from an extra one-off activity because we got some earn-out money from this divestment of the Sdiptech's Support business. That business was divested 2 years ago in May 2018, and it had some additional purchase payments according to the agreement at that time. And now these are concluded, and that's a positive effect in the quarter of SEK 27 million, and that has finally ended up in the financial net, not in the EBIT level as we -- I think, we said in our press release a few weeks ago. So it's actually in the financial net position, but that, of course, increases the earnings per share during this quarter. Last quarter, we had some costs related to currency effects in this, but these 2 now perhaps evens out. So for the last 12 months, as you see, we have SEK 6.8 per share as our earnings per share. Looking at the cash flow. As you may remember, we had a very strong cash flow Q2 and partly from being very close for our development, paying perhaps some invoices, suppliers, et cetera. So perhaps our companies did not pay those bills in June. They did it in July instead, which, of course, then hurts this quarter's cash flow. So even though we have SEK 75 million in positive cash flow from our operations, that was a conversion rate of 60%, where you compare the cash flow with our earnings. But on a last 12 months, as you can see, we are still above 100%, which is, of course, very good, but the SEK 400 million in the cash flow from operations. And well, you could discuss whether we could keep up cash flow conversion above 100% in the long run. But acquiring companies, we do some activities and we get some effects immediately, which is positive for the cash flow. So we will continue working with trying to keep it up at, at least 90% to 100% level. And finally, on this slide, looking at our debt levels. We have -- since we updated our financial goals this summer of having the financial net debt. It says net bank debt on this slide, but it's the same thing that it should not be above 2.5. And for the last 12 months, we have it at 0.87, as you can see on this slide. If we -- to the financial net debt, also add our conditional considerations, the earn-out debt and similar things, we are up at 2.6 at the net debt to EBITDA. And then that's our -- the EBITDA, as we show in the numbers, it's not the pro forma figures from acquisitions. If we did that, please quote that this ratio would be lower. So we still think we are at very decent debt levels in the group. Now looking a little bit more on the business areas and their financial development, starting off with Water & Energy. As you can see to the left in the chart there, their revenues, their sales have been quite steady over the last year. And we haven't had any acquisitions actually since February 2019 in this business area. So all units are comparable versus last year. Sales actually decreased in the quarter by 4%. We have a stable demand in most units. But however, we have some temporary decreases in some units within the subsegment of what we call the energy units. However, EBITA increased quite steadily with 28% because we saw some strong profit trends in areas we call temporary electricity in the Water & Sanitation area. As Jakob said, we have raised the guidance for the full year, up to 19% to 21% and there are 13 business units that should deliver this. These units are currently running in the last quarter at a 22% profit margin or 21.3% during the last 12 months. Going to -- sorry -- yes, we haven't done any acquisitions during the last 12 months, yes. And guiding increased, as I said. Looking at Special Infrastructure Solutions. They have had a very strong increase in sales, 46%, 10% of that coming from comparable units because we have had acquisitions here, a number of them. And during the last 12 months, we have actually -- well, if we include the Auger Site Investigations that we acquired in August last year, we acquired Hilltip in Finland in June, Stockholmradio in June this year and Alerter Group in July. So we still have a very big portion of sales growth from our acquisitions. And the contribution from them, but also contribution from a good development in existing Air & Climate control units contributed to the very strong growth in sales. The EBITA increased even further, 105% compared to last -- same quarter last year, of which 36% in comparable units. So that means we have seen a quite substantial increase in the margins. And as you see, we were running at almost 30% profit margin in the quarter and are almost 28% in the last 12 months. And on the back of that, we then increased our guidance to 28% to 30% for the year 2020. Some of these, then -- or several of the units have high profit margins, and that's because some scalable business models. So when they increase sales, they increase profit in relative terms, so to say, even more. And we have had some cost reductions, of course, as we mentioned earlier. Some of these will be permanent, but some may perhaps not be long-lasting. I mean you could have -- typical examples are travel, trade fairs, yes, perhaps do not employ that additional person you really need in your inventory, for example. But sooner or later, those costs will come back to some level, but we also believe that some of these cost reductions have a more permanent nature because you are now running the operations in a little bit different way because you have reinforced during the spring and summer and you have found new ways to run your business. All in all, today, it's 12 business units within this business area. And last but not least of the business areas is Property Technical Services. They have a very good sales increase compared to last year, 14%. All these units within the business area are comparable versus last year because we haven't acquired any units for some years now. The recovery from the pandemic effects have been faster and haven't -- when they actually were, in some effects, they weren't that bad. But we have also seen during this quarter that we have had some business units that have had lower profit margins, and that's partly due to some efficiency measures that cost some money to improve margins, but also that there are still some effects from the restrictions, especially in the Central Europe, where our staff cannot really move around as they should. So instead of using perhaps a little bit more cheaper staff, technical staff from one country into another, we have to hire local staff in that country, which of course is more expensive for us. So the profit margin are at 8%, which is what we guide for, 8% to 10%. But all in all, the EBITA decreased with 18%. The total number of units are 9. And as you see on the chart, the sales volume has been very steady all the way since 2018. With that, I'll turn to Jakob for the acquisitions.

Yes. Okay. Thank you, Bengt. We have 3 acquisitions so far this year, totaling SEK 37 million of EBITA. We have a good and strong financial position, mostly related to our strong cash flow, but also based on the capital raise that we did in June. We reiterate our target for the year to acquire corresponding to SEK 90 million EBITA for 2020. We have a good pipeline of acquisition candidates, and we are confident about reiterating the target for this year, and it looks also promising for 2021 and forward. Okay, just a brief note about Alerter Group, an excellent company. We're very happy to welcome Alerter to the group. Alerter Group's products are directed towards disabled people, therefore, hard of hearing people, and the systems are used for escaping in terms of fire in a building. And they have a couple of differentiators towards their competitors. One very interesting is that they have a completely wireless system, it's a radio-based system. So it's very effective on existing buildings. The majority of their competitors have wire-based systems, and it's very costly and cumbersome to implement that in existing buildings. And the trend is definitely in the U.K., it will eventually come to other parts of Europe to implement these kind of systems. So they have a very good position to take advantage of the coming growth within this area. And with that said, we are very happy then, of course, to present the strong report. It's reinforcing our position in growing sectors of infrastructure. We do have a positive outlook. Organically, also in terms of acquisitions, and long term, the growth drivers in the infrastructure sector are very solid and promising. So we are very happy to be where we are in looking to the future. So with that said, we open up for any potential questions from the audience.

[Operator Instructions] And we have received a question here during the presentation. Maybe you have already touched upon it from ABG, Bradley Ware. What is accumulated EBITA contribution in fiscal year from acquisitions? And how does it compare to your financial target of about SEK 90 million?

Yes. I have to find that number in the report. I don't have it on the top of my head.

So on -- while Bengt is finding the numbers, on one rate basis, we have acquired corresponding to SEK 37 million, but I guess the question was more related, how much that is part of the existing year.

For the 9 months, January, September, our incomparable units, that is our acquisitions. They have contributed with SEK 80 million. Last year, the corresponding number was SEK 32 million, but that was -- we acquired, as mentioned the Auger company in U.K., our biggest business unit in August, so they hadn't contributed so much. But yes, for 9 months, SEK 80 million. So of course, there are some potential that they will actually have contributed with more than SEK 90 million when this year is over.

Next question is from Gustav Norrström at Nordea. What EBIT margins could be expected from the different segments in a normalized environment?

Yes. We -- as I said, we are guiding then quite some strong numbers in this quarter, but that is on the back of all these cost savings and very -- yes, some support from governments, et cetera. So we don't think that these levels that we guide for now should be long-lasting into next year. And today, the visibility is actually not clear enough, so to say, how that will be. So we will come back with that perhaps later on. But as we see it now, we only make a guidance for this full year. But as we said previously, if you look on the whole group, we said that the 18% profit margin is in the upper range. And perhaps the last 12-month margin of 16.5% could be a better estimate of what the group will have going forward during next year. But hopefully, we will be able to make some other guidance perhaps when we come to the Q4 report.

Okay. Gustav at Nordea has another question. Could one assume that you will be active in the mergers and acquisitions space during Q4 in order to meet your target of acquiring SEK 90 million of EBITA in 2020? And if so, what kind of acquisitions are you looking for? Is it a larger one like Auger or multiple smaller acquisitions?

Yes. So we stick to our goal. So naturally, we are very confident that we will do additional acquisitions to take us up to the goal of SEK 90 million. And our pipeline always consists of a mix of smaller companies and larger companies. Our sweet spot is between SEK 10 million to SEK 50 million in operating profit for each acquisition. So it is expected to see this year, but also going forward, that it can be a mix of that. And it's a bit too premature to say exactly how the mix will end up for the Q4.

Okay. Another question from Gustav Norrström from Nordea. So far, during Q4, how is demand developing within Special Infrastructure Solutions?

Well, we -- as we said, we are currently delivering on the backlog. So the demand -- so we are on high delivery levels. Eventually, the backlog will be emptied, and then we will get back to normal levels. So you could visualize that we are on the higher end of our delivery capacity, and it will gradually decrease. But as I said, if we have a look at the entire year-to-date, we've had an organic sales growth of 2%, and that includes the entire pandemic. So a normal level for us is a healthy organic growth rate of a couple of percentages.

Okay. Another question here from Fredrik Nilsson at Redeye. You increased the guidance for SIS or S-I-S for 2020 quite substantially. Should we see it as a figure only relevant one for 2020? Or is it an indication for the coming years as well?

Yes. So as I said, it's quite -- we're only guiding for the full year and all these cost savings and slim operations are part of that and subsidies, yes. And we cannot say that this will be long-lasting, probably not. But then if the profitability levels will be between the previous guidance or this guidance, we have to come back. It's too hard for us to say right now.

Okay. And another question here from Fredrik. When do you expect to resume the long-term investments that were paused due to the corona crisis?

Well, yes, some investment. Typically, we don't have very big CapEx. We don't have that much production facilities that need to invest in expensive machinery and so on. So our investment in tangible assets, so to say, is more smaller things, computers and small production facilities in different kinds. So -- and that has, of course, been postponed now. If we look at our cash flow, I think we only had SEK 9 million of CapEx spending in the first 9 months. And last year, I think we had that SEK 45 million in the full year, and that was perhaps a little bit extra high. Our typical level is between 1.5% to 2% of our turnover is spent over a 12-month cycle in CapEx. So we should get back to that, I would assume, during next year. So yes.

Okay. Thank you for that. For the moment, that is all questions we have received. But if you have another question, you can still fill in the form, and we'll forward them to responsible person at Sdiptech, and they'll answer you by e-mail. But all in all, thank you for today's presentation and hope to see you again next quarter.

Yes. Thank you, everybody.

Thank you very much.