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

Hi, and welcome to Sdiptech's webcast. Jakob Holm, the CEO; and Bengt Lejdstrom, the CFO of Sdiptech will be presenting today. My name is Mattias Bohlin, and I'm from Finwire.tv. [Operator Instructions] With that said, I'll give you Jakob and Bengt the stage.

Thank you very much, and welcome everybody to Sdiptech's report for the first quarter. My name is Jakob Holm, CEO for Sdiptech, and as always I have with me Bengt Lejdstrom, our CFO. So the agenda for today, the normal one, first a brief business overview. We dig into the first quarter and the financial development and finally an outlook, looking ahead. So starting off with having a look at the overview of our report, it's a very strong report. We're proud to present it. The profit growth is strong, both organic and from acquisitions. We have a solid sales growth organically and we've completed some important deals, really shaping our future as well, and we will get back to those. If we have a look at our overall goal, which is to create shareholder value in a sustainable and long-term way by increasing profits every year. Our business model is, as some other companies, to acquire niche companies and develop them, of course. But then we've decided to do some things differently as well. So our acquisitional work is structured in a different way, and also what our focus is. Our focus is on one hand, on markets with long-term investment needs. The drive for more sustainable, efficient and safe societies is something that we have focused on for a couple of years. We believe it's important. Infrastructures, important sectors for us as well, they are under-dimensioned and aging. So all in all, the underlying growth in our markets are good. We also focus a lot on acquiring companies with strong and defendable positions, high margin companies. But that's also how we develop our existing companies. And if we look back 5 years, actually 1 year before our IPO, we've grown at a profit CAGR at 36%, and actually the last 12 months at 40%. So the trend is continuously positive. So that is the basics for our business model. And this will, of course, continue. We are rigged to do this for a long time to come. Moving into the first quarter, we're very happy to present. We did so some time back, the acquisition of the quarter. So we welcome Rolec to Sdiptech. Rolec is specialized in electrical charging solutions. We've been in contact with the company for about 2 years. So we were happy to get into a position where we could actually agree with the owners to take over the ownership. And for us, it really confirms to the market and to all of you, our position as a group that is focused sustainable and really leading customer offerings. So sustainability for us is very much a source of revenue and something important also for society. It's our largest acquisition so far in terms of profits, SEK 80 million in EBIT. Profitability margin last year was 30%, expecting going forward rather 28%. Moving forward, one more page to describe Rolec, to start off, 3 business areas: the electrical vehicle charging solutions, charging solutions for marina services and then also caravan parks. Rolec has been doing this for about 30 years in the marina and the caravan park area. So that really means that those type of solutions are larger parks of many charging points. So the kind of solutions in marinas and caravan parks, they are more complex. It involves, of course, a lot of hardware, but also software. The design of those more complex solutions, the installation of those solutions and then also sales of the solutions worldwide actually and then service of them worldwide. So Rolec has been doing this for 30 years, and that was really the reason why we found the company especially interesting, because Rolec is not a new start-up in a fast-growing market. It's definitely an established company. Then of course, the electrical vehicle segment is, of course, extra interesting, 2 customer segments there: business-to-business, business-to-consumer. Once again, the reason for why we wanted to acquire Rolec was really the business-to-business segment. The business-to-consumer side is, of course, interesting. It's highly profitable. It's growing at a good pace. However, in the long run, we believe it will be commoditized. So for us, Rolec in the future is really to build upon the strengths and establish strong niche positions within the business-to-business segment. So expanding that a little bit, to start off with the hardware, once again, with experience 30 years going back, they have a complete range of chargers ranging from the smaller ones, 3.6 kilowatts, up to the really large ones and also the super-fast direct current based chargers. So the 200 kilowatt chargers, they have a very high capacity, actually larger than what you could see could be available from other Nordic similar companies. So the range is really complete. The software is a very important side of more complex solutions. On one hand, it's very much about monitoring the technical specifics of a larger park, but also to manage, to add additional charge points and all of these things. So the technical management aspect is highly important. The other side is the administrative side that also this software caters for. So adding customers into charging park billing and not only billing for the charging, but also billing for additional services. And this is also an experience that comes from, for instance, marina services, where the software solutions are a lot wider than only the focus on the charging side of things. And that part of the offering is extra interesting for the business-to-business customers. Moving over then, equally important is really the network of sales agents in U.K., 2,000 wholesalers selling Rolec's chargers and solutions. Equally important is, of course, the service network, the technicians. So together in the training courses, there are 80 of them to really ensure that the service technicians are well trained on Rolec's products. And these networks are, of course, very important in a fast-growing market. It's not only the ability to sell your products because that, as I think everyone understands, the demand is high. But it's also equally important to service the products and especially for the more complex installations. About 200,000 charging points installed in the U.K. For 10 years, Rolec definitely has an established market position. And of course, the customers presented here is one example of the established position that they have. So we're very, very happy to welcome Rolec to Sdiptech. In addition to acquiring Rolec, we've had high activity in terms of doing important deals this quarter. We've also completed divestments of 5 business units from the business area, Property Technical Services. And it goes along the line that we've had for a couple of years to focus our growth with the Water & Energy and Special Infrastructure Solutions business areas. That's those areas where we believe our solutions and products, they are really towards critical needs within infrastructure, very, very important, but also more along the lines of delivering services that really creates sustainability, efficiency and safety to societies, because these are really long-term trends that we believe in. So if we have a look at the deals, it's interesting to put them side by side. Of course, Rolec is larger in terms of profits, but it's also a higher margin and high margin also in this case, comes from a high-quality company as well. The growth pace is also higher from Rolec compared to the divested businesses. And all in all, then we're also happy to also demonstrate on a page like this that we've actually bought higher growth, higher margin at a lower multiple compared to what we are divesting. But that is not -- that's really a result that we have planned all of this for quite a long time. So it's not just something that is happening. We really had the patience to wait for the right opportunity. As a result of these deals, we bring our profit margin with Rolec, and we are, of course, divesting the more lower-margin business. We've raised our guidance to 19% to 20% for the full year. And also, we've completed a share issue. The purpose there is, of course, that we always want to have the flexibility to do acquisitions or really good deals when the opportunity is presented to us. So that's also an important step to ensure that we can continue to do acquisitions in the way we want to. Moving into the 3 business areas before I hand over to Bengt, starting off with the Water & Energy area. Sales increased up about 34%. In our existing businesses, are performing quite good during the pandemic, although the restrictions in the societies have made it a little bit more difficult in our business units in this area. But we're happy to see that now in the first quarter, a slight uptick in sales for the existing businesses. However, the primary sales growth comes from Rolec, of course, the same explanation there for the increase in profits. If we have a look at the margin and profitability, it is more significantly up. Once again, Rolec has actually performed extra well during the period. So there's a significant contribution there on the profitability. But also our U.K. businesses, they've also showed improved profitability compared to previous years. So it's very much a collective effort to deliver this increase, all in all, by 14 business units in the business area. Special Infrastructure Solutions, sales increased significantly, 70%, largely driven by the acquisitions. We acquired GAH Refrigeration in December. They are coming in at a full quarter. We've acquired Alerter Group prior to that. So the acquisitions are coming into the numbers, as expected. If we have a look on the profit side of things, of course, the acquisitions added to profit increase there as well. But if we then look at our existing businesses that we've owned for quite a while, the 2 U.K. business units showed extra strong profit growth, one being the one focused on road security and safety, speed cameras; and the other ones focused with insurance clients, delivering services for claims management on underground infrastructure, very positive development in those 2 areas. And then quite interesting to have a look at the dynamics, if we have a look at the profitability margin, as we've said previously, GAH, which is developing very well. They have a lower profitability margin than the business area as a whole. So when that company eventually gets their full numbers into the books that will be reflected also. So that's a trend of the profitability margin going down, that is expected. All in all, 13 number of business units in this area. Finally, then, Property Technical Services, it has been an area where we have worked quite intensively with the companies. Sales increased about 2% in the quarter, and this is also the area where we did 5 divestments. 4 of the divestments were in the elevator division. And it's also an area which everyone knows that we have worked with profitability programs, and they have continued to pay off. The development in the quarter is good and strong, actually, not only the elevated businesses, but also our shell completion business has shown good development. But anyway, the divestments of the businesses, we feel that we are doing it with a good timing in terms of the lifecycle that they are in. Okay. By that, I will hand over to Bengt.

Thank you, Jakob. And looking then at the group as a whole and the sales to start off with, we can see that we have had a very positive trend also then in sales in the last 12 months compared to 1 year ago. As you can see, it's 20% up. And we showed an organic sales growth of almost 4% in the quarter. And of course, a big part of that is our acquisitions that have been rolling in during the quarter, specifically the GAH and Rolec, but also, as Jakob as mentioned, a number of other business units which have performed very well. Looking up, and you can see also the EBITA margin increasing steadily as our acquired companies with a higher profit margin than average is then making this slightly going up quarter-by-quarter. Looking on the right side, you see the sales by country. And I must just clarify that this is for the quarter, and it's also then including -- it's the last 12 months from the quarter, and it's including the elevator businesses, which we then eventually then divested on the 7th of April. So they have been included fully for the quarter in all results figures, but they have actually been excluded in the balance sheet, because of these IFRS rules, how you should account for these kind of activities. But here, on this picture, the elevator businesses are included. And then the U.K. businesses, all in all, are about 1/3 of the group's total sales revenues. If we would exclude the elevator businesses, this number would slowly get up to higher numbers, of course, than eventually almost up to 45% or so. That you will see going on then quarter-by-quarter as we go ahead, when this effect is then decreasing by a bit. If we go to the next slide, we see that the EBITA margin, as we said, is increasing, but not the least the EBIT itself, 40% if we compare the last 12 months this quarter compared to a year ago. And the increase in the quarter as such was a strong 64% EBITA increase, of which 52% came from the acquisitions, but also very strong organic profit growth. And of course, we're happy to announce that, that the companies have performed very well, even though last year, quarter 1 was also a strong quarter. The pandemic hadn't really affected that much. The restrictions came along during March, mid-March, but it was mainly in the second quarter that the effects from the pandemic were affecting the group. So it was a tough comparison, but a strong performance for many of our business units, and then ended up with a strong organic profit growth of 16%. We actually then had some tailwind from the currency, of course, mainly the British pound which, in average, during the quarter, had a less favorable foreign exchange rate than a year ago. So we have a negative 4% effect from that currency. The EBITA margin of the quarter was a little bit higher than the last 12 months, of course, because of the acquisition of Rolec, not the least, pushing up the margins slowly. And as Jakob already mentioned, we increased our guidance. So even though it's 17.5% now on a rolling 12-month, when we come to the end of 2021, we expect it to be somewhere between 19% and 20%. And then turning to the next slide, we see some additional metrics and key figures. As you may have learned by following us from following us for some quarters and years now, when we go then from the EBITA profit measurement down to the earnings per share, we have some other items in the results. We have costs for acquisitions. We have amortizations of intangible assets that we have acquired. And of course, we have our financial revenues and costs. And so eventually, and of course, then also the tax itself. So we have as an appendix to this presentation, the bridge, where we show all these different items, and you can also find them in the report. But all in all, as a summary, then we had an increase in the earnings per share that was roughly about some 8-10%. And both on the quarter, on the last 12 months was actually then a little bit lower than that, the increase. One major part of that came from the acquisition costs. These transactions that Jakob mentioned, of course, cost some money for different types of partners helping us in the transactions, but also when acquiring companies in the U.K., we need to pay what's called a stamp duty based on the enterprise value of the company. So we actually paid the stamp duty of a little bit more than SEK 5 million. And we had, all in all, then costs for performing the acquisition of Rolec and the divestment of the 5 business units of about roughly SEK 10 million. So that was, of course, extraordinarily high in this quarter. Looking to cash conversion, which is also important, we are proud that we typically have a very strong cash conversion. As you can see in the last 12 months, we are above 100%, which we were also a year ago. But this quarter was lower. It was actually only 48%. And you see that also last year, it was below 100%. And typically, this is because you pay taxes in this quarter belonging to last year's results. And last year, many of our companies were, of course, cautious about their cash management and their expectations for the profit of the year. So they did not pay perhaps as much as preliminary taxes. So they had to kind of catch up during this quarter to pay for last year's high profits. So that affected the cash flow. And then we also had some buildup of inventory and stocks in some of our companies. In U.K., it was partly because of the Brexit situation, where it's still not fully clear how that will affect the flow of goods. So just to be cautious, some of our companies then invested in some extra stock, just not to be affected so much with increased administration or bureaucracy, so to say, when they import goods, which is good that they do this, buildup of stock. And there are also in some businesses just to be sure that it's not running out of some components that they also then brought in some extra inventories just to be on the safe side. So that affected the cash flow, but that you could say is for positive decisions and reasons. Then we also have our debt leverage ratios, one which we think is the most important, the net financial debt over our EBITDA, which is still very solid, below 1. And then our total net debt, which then also includes all our contingent considerations, which of course, then assumes actually a higher profit level than we have today. So this figure is not really showing the true situation for that debt. So that's why we don't focus so much on that figure, but we always present it. But it's still on a healthy level below 3, so also a very strong figure. Thank you. Jakob?

Okay. Thank you, Bengt. So finally, let's have a look at the outlook for the future. As I think we've experienced throughout the entire pandemic, the underlying demand from our customers is solid, in this quarter demonstrated by approximately 4% sales growth. The profitability continues to increase. It's driven by acquisitions, as Bengt described, but also by the organic profit growth. Organic profit growth in businesses with more scalable business models, of course, also increases the profitability percentage and that's really how we focus our business development also. The guidance we talked about. Having a look at the acquisition pipeline, we are well capitalized, of course, since our capital raise during the quarter. Our focus is very much on high-quality businesses. I think both the 2 recent acquisitions, but actually all the acquisitions from the past years really demonstrate that, but also Rolec, of course. High quality is really what we focus on. The restrictions, especially in terms of the travel restrictions that to some extent, prolongs the discussions that we have. Nevertheless, our pipeline is very strong. So it's just a matter of it takes a little bit more time to get to the final discussions before you could come to an agreement. And also, we would like to share our view on the acquisitions market in the Nordics. It is, to some extent, overheated. That's the way we experience it. There is a lot of capital available in the market. The interest rates have been low for quite a while, and then we have all the stimulus packages that have been presented as part of the pandemic. So there's a lot of capital available out there. For us, however, we don't change the way we work. We are very thorough in our analysis. We make a decision on what is a correct price for a company based on analysis, not so much about the existing competition. So we have pricing discipline. That's the right thing to do. In the long term, the acquisitions that we do now, we will live with forever. So the pricing and the balance sheet that the acquisitions create should be healthy. But anyway, we have a good pipeline. So we are working as we all always have done. And then finally, we believe that we are well positioned towards good trends in the society, especially sustainability, efficiency and safety. These 3 trends, we've selected them a couple of years ago since they are long trends. It's really based on human drivers to increase the sustainability of the environment surrounding us. It's nothing new. The drive towards more efficient everyday lives is nothing new. The drive to create more safety and security around us, that's nothing new. So it's very much long-term trends. Lately, there's been more focus from politicians, especially around sustainability from investors. All of that has created some additional focus on that area. For us, it's very much a long-term focus for us. It's not something that we do just because it's a trend at the moment. With that, we open up for questions.

[Operator Instructions] So we'll move over to the first question. You mentioned that you've implemented some price increases. Could you comment on the magnitude, and also, if it's reactionary to rising costs or more in preparation of potentially rising costs?

Okay. Well, the price increases are really standard for us. So it's normal price increases based on inflation, but also based on the balance between supply and demand. So it's very much -- so it's nothing extraordinary. What we are happy to see is that we were able to do the normal price increases that we would do any year. We were a bit unsure about the situation in some of the segments since the pandemic does present some insecurity in the society as a whole. So it was more a normal step for us, which we are pleased that we were able to do despite the circumstances.

And the next question is in regards to the component stockbuilding now in Q1, do you think the effect could be more significant in Q2? And are you seeing any stockbuilding from your customers as well that could sort of pull demand forward?

The stockbuilding that we have done, to some extent, it's related to Brexit, as Bengt explained. But it's also related to shortages in plastics, shortages in metals, semiconductors and so on. So we experienced that. And so we have built up stock for that reason, and we will most likely continue to build up stock when we see that it's responsible from a cost perspective. So we have not seen the stock buildup so much from our customers, but we believe it's an important step for us to take. So at the moment, we don't have any shortages, and we will continue to monitor it closely. So it will take up some cash also in the second quarter, we believe. But then, of course, we are in a good position. We have a healthy balance sheet and a good cash position. So we are able to support our companies, while the situation is the way it is. So we are moving from a strength position and trying to do what is best given the situation.

And moving to the next question. Could you comment on activity in the U.K.? My perception is that January and February were slow, but with March being really solid, which would then sort of imply a solid momentum into April and Q2. Is this something you recognize?

We haven't seen that specific change between January, February and March. It's been -- for our businesses, it's never been a big problem throughout the entire pandemic. In the beginning, it was troublesome because it hit the world in a very unprepared way. But then eventually, our businesses, they have been delivering. It has been working well. So for us, it's not been big swings. It's been rather stable with a slight uptick now in first quarter.

And the next question, is the acquisition market hot in every region and segment?

Good question. We experienced the hot acquisition market, specifically in the Nordics. The situation on the international markets, specifically U.K., where we definitely are active, we do not experience it in the same way. So it's very much related to the Nordics and specifically the Swedish markets.

And the next question, how do you define cash conversion ratio?

Yes. Well, we have full definitions in our report, but it's the cash flow then divided by the results before tax, but adjusted for noncash items. But if you want the full-on definition, you can look at Page 24, I believe it is, in our report.

And the next question, regarding the overheated Nordic market for acquisition, is your view that this market has become increasingly overheated over the last 3 to 6 months?

The trend -- a slight inflation in price has been going on for a couple of years. Then we believe perhaps over the past year or actually from autumn last year and forward, we've seen that the willingness to pay prices that we believe are not acceptable, that willingness has been quite high since the autumn going forward. So we stay cool in this hot situation.

Thank you very much, Jakob and Bengt, for your presentation, and thanks to all of you who have been following today's webcast. I hope that we see each other soon again. Bye-bye.

Bye-bye. Thank you, everybody.

Thanks.