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

Hello, and welcome to this Q2 presentation with Sdiptech. With us today, we have CEO, Jakob Holm; and CFO, Bengt Lejdstrom. My name is Kristofer Berggren, and I work for Finwire Media. After the presentation, there will be a Q&A session. So if you have any questions, please visit finwire.tv, and click on this Q2 webcast, where you can write your question. With that said, I hand over the word to Jakob and Bengt.

Thank you, Kristofer, and very welcome, everybody, to Sdiptech's presentation for the second quarter. My name is Jakob Holm, and with me, as always, our CFO, Bengt Lejdstrom. Today, the same agenda as always, business overview. We move into the second quarter. The financial development, Bengt will walk you through more of the details. And then finally, an outlook what we foresee for the future. Starting off then with the overview of our numbers. We definitely present a solid report. We continue on with our business model to grow our profits and increase our margin. Sales at SEK 2.4 billion. Profitability margin 17.6% last 12 months; in the quarter, about 18%, continuously growing. Our growth of profit is, of course, the most important. That's what we focus on. Historically 36% CAGR, last 12 months 43%. And in the first half, the growth pace has been increasing close to 50%, so a positive trend in terms of growth as well. Please change slide. And so -- and really, our business model is really to deliver value growth by consistently increasing our profits. Our business model is, as you know, to acquire and to develop the acquired companies. We focus, since a few years back, on high-margin positions. That is what we believe is the most sustainable positions for our companies, not only from a profitability perspective, but also from the strength and the competitiveness from our company. So we are performing well now, but we also intend to perform well in 10 years and 20 years to come. So strong market positions definitely in focus and a good underlying growth in the markets where we are active, driven by infrastructure, sustainable, efficient and safe societies. We move forward to the next one, then we move into the second quarter, starting off to present the acquisition of the quarter, a rather small company, it's an add-on acquisition, Ficon, to our company, Hilltip in Finland. Hilltip is active in the business of providing products to clear snow and ice from roads. And Ficon is also in the same business. Hilltip is focused on electrical-driven products, whereas Ficon has a product based on hydraulics. So it's a good complement. Ficon also actually has a stronger position on the Finnish market, even though it's a smaller company. So Hilltip and Ficon together will provide an excellent opportunity on the Finnish market, those 2 companies together. So we're very happy to present that acquisition. It will be included in the in the Special Infrastructure Solutions business area. We move on to the next one. We have a high activity in the group, we always have, but we definitely have had so also in the first -- in the second quarter and also in the first quarter. We concluded our divestment within the Property Technical Services area by divesting our Austrian elevator business, good multiple, of course. And if we sum up all the divestments that we have done during the period of our ownership, they have delivered approximately SEK 150 million in net profit, so a very good contribution in our journey as of now. And return on equity, the invested equity that we have done in these businesses, when everything is summed up, the return is 21%. So they've also delivered good return for our shareholders. So we're happy to conclude that, and it's an important step for us to emphasize our focus on quality, and I think that's also something that you -- that is reflected in our growing profitability margins in a positive way. And also an important step for us to enter the Nasdaq Stockholm, Large Cap, our first day of trading was June 11. We've already experienced increased attention internationally from international funds. So that's been very positive, I think. We definitely believe so. It was a natural step for us to take after 4 years on First North Premier. So we're very happy to finally deliver that step in our journey. We can move forward to the next one. During the period, we've also launched 4 sustainability goals. The first one is that all the companies that will be acquired by us must contribute to at least one of the UN global goals for sustainable development. And this one is really at the core of what we do since the companies that we acquire and that are part of our group, that is really the products and the services that we sell to the market. So for every revenue that we gain from sales, we also want those revenues to contribute to a better world. And this is not a new step for us. We're just aligning what we've been doing for several years. We have been focusing, as you know, on companies delivering increased sustainability, efficiency and safety to our societies. So by establishing these goals, we also align our sustainability development with our core business model. But then, of course, we have an important task, as everyone in the world, to also bring down our emissions. So our goal is to reduce those by 50% within 5 years. It's an ambitious goal, but it's something that we have to do. We don't have any exact plan on how to deliver that, but I think that's not an excuse for not delivering, putting up the goal and then doing all we can to actually deliver upon it. So that's an important goal for us from an environmental perspective. The third goal is related to social, responsibility and sustainability, where we by 2030, in our leadership, in all our leading positions within the entire group, we have a goal to be gender equal. And it's also an ambitious goal. As you know, we have a decentralized model where many of our companies, they are rather small. That's the whole idea behind the business model, but that also means that it's a limited recruitment base for the leading positions in those kind of companies. But we will do all we can to enable this goal because we believe it's very important to get the diversity that comes with the gender equality. The fourth goal is related to governance and there's where we put everything together according to our business model. We have a decentralized business model. So for every company, we will implement concrete goals that will support the overall goals that we're looking at today. But for every company, the goals will be individual, of course, so that we can achieve this for the entire group. And then we will link those individual goals for each company with the incentives for the leadership for every respective company within the group. So in that way, we bring it all together so that we really can deliver this as a group. Moving on to the next slide and then having a look at our business areas, starting off by Water & Energy. The development, we can start off by looking at the graph. The yellow ones represent the last 12 months or the 4 past quarters. And as you all know, we did an acquisition of Rolec charging solutions in Q1, and they really entered our numbers in Q2. So the sales number reflect that. We have definitely an increase there, and also an increase in terms of profitability. So sales and profitability positively affected by the acquisition of Rolec, but the entire business area has also delivered solid growth. In terms of EBITA, the -- going back 1 year, the second quarter was really the quarter where the pandemic hit the world in the most hard way. And the -- some of the units in Water & Energy, they were more affected by the restrictions. These units are now back to normal. So we also have a organic recovery in this business area. So bringing it all together, a very strong quarter from the business area, Water & Energy. Moving then over to the second business area, Special Infrastructure Solutions. Once again, starting off with the graph, sales growth strong, largely driven by the acquired units, Hilltip and GAH refrigeration. So very positive. The sales graph continues to develop in a very positive way. Moving over to the profits, the acquisitions have, of course, added to the profit growth in the quarter, 66%. However, the profitability slightly coming down compared to last year. And the Special Infrastructure Solutions area actually delivered in a very good way during the pandemic. But we didn't really know which way the pandemic was heading. So we implemented quite strong cost savings over the entire group. So when we still had a positive development on sales last year, we had the cost reductions. The profitability was extra high in this business area. So the comparables were very tough. So from that perspective, the business area is more coming down to what we believe is a normal level, the profitability margin then at 22% to 23%. Moving over to the third business area, Property Technical Services, which, of course, now has shrunk from 9 business units starting this year, now down to only 2 business units. So naturally, the sales have gone down as a result. So it's nothing strange about that. Sales and profits down. The profitability margin in the quarter, definitely lower than we normally would expect from the 2 remaining business units. However, there's nothing alarming going on there. It's the -- what I think is most important for everyone now to be aware of in this business area is just 2 remaining businesses. So the -- so it's a small business, only SEK 100 million in sales for the quarter, that means that the numbers will be more fluctuating and up and down from quarter-to-quarter. So this is more a reflection of that affect, small size. And then moving over to the financial development and handing over the word to you, Bengt.

Thank you, Jakob. I will start with some summary here of some important comments to our report. As Jakob mentioned, we had some tough comparables when comparing with last year's profits. On the other hand, we had a little bit easier comparables when it comes to sales. So if you consider that, last year, as we disclosed in different press releases, during the Q2 and Q3, we were about 85% to 95% of delivering against the planned orders. If you say that they were 90% in average, and now we have had 15%, 16% in organic growth. It really means that perhaps the more normal organic sales growth were about 5% if last year had been a normal year, so to say. So that's according to our goals and expectations. And on the other hand, the profit level boosted by subsidies from governments and some cost reductions, both from governments and also, of course, initiatives in our companies. So that comparison is not really normal either. So we feel confident we have delivered 1.3% organic profit growth over the first 6 months. And we have a goal of 5% to 10%, that's a long-term goal, and we stick to that goal, of course, for this year, even though the comparables can be a bit tough. If we're looking at the cash flow, we have -- if you have read the details on the cash flow statement, you see that we have an increased working capital, and especially in the quarter, we have had an increased number of accounts receivables, and that's both because of strong sales in number of our units. Also that, for example, Hilltip and a few other companies with more seasonable sales have had activities going on with customers and offering them longer payment terms if they buy preseason, so to say, instead of waiting until the fall. So that has been affecting the accounts receivables. Looking through the first 6 months, we also had a cash outflow in quarter 1 from deferred taxes from 2020 when you even could postpone tax payments during last year until this year. And that, of course, have hit the cash flow this year. So comparing this year's percentage cash conversion against last year, of course, show not so nice numbers, but it's not really unexpected. We have also, during this year, have the buildup of inventories in our companies, especially those that have components that face some risks for shortages, even though we haven't experienced that to any bigger degree, and price increases, for example, also on some raw materials and the freight rates as well. But they have built up inventory, especially during quarter 1, but they have then continued to keep these high inventories also in Q2 even though their sales have been quite good. So in normal cases, perhaps you would let your inventory down as your sales increase. But in our case, we have then replaced inventories and kept the high levels. So even though the numbers look little bit strange. It's nothing really alarming around that either. And then when it comes to calculating the accounting from the divestments, we have actually a capital loss of SEK 20 million from the divestment of the Swedish and Austrian elevator businesses. And that's due to that we had a quite amount of goodwill in our balance sheet, which we have not amortized over the years in the same way as we amortize the conditional consideration that, for example, because it's different mathematics around those, which meant that now then when we sold these companies and still had goodwill in the balance sheet, representing profits for the future where it became a hole, so to say, in the balance sheet, which is a loss then about SEK 20 million net. So that's, of course, a one-off. Then looking at sales. Jakob had mentioned most of this, I think. But since we have had the quarter with both acquisitions and divestments, it could be a bit difficult to follow all the numbers. So on this slide, we have added then the split. As you can see, this sales increase of about 38% in Q2 consists of acquisitions, almost 47%; the divested companies that were included last year, but not this year, that's a negative number, of course, 23%. We have the organic growth of almost 16%, but currency effects because of that, especially the British pound has a lower value this year than last year of a minus 1.4%. So there, you can see, so to say, the split behind the total number of 38% in sales increase. When it comes to the split between the countries, you can see that the U.K. is increasing as it should, and this is based on last 12-month figures. So of course, since we acquired both GAH and Rolec during the last 6, 7 months, that number will increase even further for the coming quarters. Looking then on the profits. We have had then a strong profit growth. Also here, we have split it up between the different components for you to little bit better understand where it comes from. We have a total increase in the quarter of 46%. Of those, we actually have almost 65% coming from acquisitions. We have acquired quite big companies in Rolec and GAH and also Hilltip. We have divested, and as you can see, the elevator companies didn't really bring much to the table last year. So it's only minus 4.5%. You saw it was almost 24% when it came to sales, but for profits was 4.5%. The organic growth is negative because of this very good profit last year. And also here, we have a negative currency effect. We also, as we said in the report, have quite high internal central costs, which compared to last year's total profits meant almost 6% lower profit all in all. Much of those one-offs because of the listing to the Nasdaq, SEK 4 million and also some other costs then for lawyers, et cetera, and other situations. So if you look at our total EBITA margin of 18.1% and perhaps deduct those central costs that are more or less one-offs, you get closer to the 19% for the quarter, and that's more in line with our guidance for the full year and where we said 19% to 20% of the EBITA star margin. So we feel secure of having that goal also going ahead for the year. If we look at some other metrics, we can then also see that for the quarter, we had an earnings per share that were perhaps a bit lower than most expected, but that's because of this capital loss from the sale of the elevator businesses, SEK 20 million, which is not tax deductible, so it hits directly into the earnings per share. And for then the last 12 months, we are almost at SEK 7 per share. Looking on the cash conversions, we had, as I said, not the most best figures for the quarter, 26%. Looking at the last 12 months, we are at 74%. And of course, we hope to get better situations for the coming quarters when it comes to the working capital, especially. When it comes to our debt leverages, we have a goal of being below 2.5% when it comes to net financial debt compared to EBITDA. And we're currently at 1 or 0.99 so that's, of course, a quite good position for future acquisition opportunities that we have lot of headroom to increase our debt in case since we borrow money when we acquire companies typically. Looking at the total net debt, it's almost 3. But there, we have included then our debt for future conditional considerations, which only come in play if the profits increase over time. Otherwise, those debt will be written down. So that number is not really a relevant number, but we show it anyhow for being transparent. Yes, and then we have an outlook, Jakob.

Yes. Thank you, Bengt. So looking ahead, we want to emphasize a few points. The underlying demand from our customers is solid. The organic sales growth was at 15%, high, as Bengt mentioned. However, that is, to some extent, a reflection of lower comparables from last year. In the same period last year, we were at between 85% to 90% (sic) [ 95% ] of delivery of planned orders, which actually was a demonstration of the resilience that we have during more difficult periods. But anyway, so taking that into account, the development this year is a couple of percentage points on the positive side on organic sales, so that really reflects the demand that we expect and that we have seen, and we also have expected for the future on the sales side. Profitability continues to increase, as we've talked about, driven largely by acquisitions, but also by our divestment of low-margin business units. Our guidance for this year, we stick to it, for the full year numbers reaching between 19% to 20%. So that's a positive message as well. And we are positioned with all our companies towards good, strong drivers -- strong growth drivers. Sustainability, efficiency and safety really drives technology development, but also an increased demand to all our companies, which is very positive. And then what perhaps is, to some extent, bring some certainty to the future, not only for us, but I think for most of the companies that work with physical goods. What we have done there is that we have been building inventory. We actually started doing that already during the second half last year, at least some of our business units did so with the purpose to always be able to deliver to our customers because that is really what is most important in a situation like this, so always be able to deliver. And that, of course, costs a little bit more. As you all know, prices on material and components have increased, and that is even more, so when you build inventory. However, our customers, they understand the situation in a good way, most of our customers at least. And they also prioritize the ability to deliver. So they are -- they accept to take their part of the cost increase. So that is -- we have good dialogues with our customers. We believe it's the right type of type of strategy, and we will continue to do that. So continued build of inventory is an approach and keep the dialogue with the customers on how to deal with the cost increase, that's the way we approach it, and we will continue to approach it. And looking finally over to acquisitions, we are well capitalized, and we have been -- we have a high activity. We always have a high activity. But since we have been in a pandemic, the restrictions have -- it's been slightly difficult to meet owners of companies. That is really opening up now in a positive way. It has opened up since 2 months ago in at least some of our markets, U.K. is still a bit challenging, but that seems to change now as well, so that's positive. And so from that perspective, our pipeline is good. It looks positive. We have queued up interesting companies due to the pandemic. So we are really working now on to finalize those dialogues so that we really can deliver on the potential that we have in our pipeline. And I would also just like to mention that we have -- we really experienced that our business model and our offering works well in the United Kingdom. The population there is also larger, fantastic companies that we have acquired and that we are looking into further acquisitions, but we will also -- since a few years, but we've intensified that now look into additional markets in Europe. And as we've said before, Netherlands is one of those markets. But we've also more actively started to look at the market of Northern Italy. And there's also an amazing population of technology-based companies that fit into Sdiptech in the northern parts of Italy. So we're very excited about that as well. So overall, well capitalized for acquisitions and a good pipeline. So with that, I think we are ready to open up for questions.

So let's start with the Q&A then. First question, if you look back to the quarter or the first half of the year, is this something particular or special that you would like to highlight for us, for the investors?

Well, I can mention, I think the activities that we do to increase the quality in the group that eventually is demonstrated by an increase in profitability margin, I think that is something that really emphasizes the strategy that we have. So our focus on acquiring companies with strong market positions, that is really, really our focus and then divesting companies that are more part of our legacy that we believe not have strong enough market position. So that is really -- we are executing strategy that we laid out 3 years ago. And now we are really starting to see the effects of that. So I think that's one important highlight.

Okay. Great. Next question. CapEx for the last 3 quarters have been quite stable at just below SEK 40 million, a low relative level to other companies and to your own history, while sales have continued to grow organically during the same period. How should we think about your future CapEx needs? Is it mainly maintenance CapEx? Or -- and is this level of around 1% relative to sales sustainable? A long question.

Yes, but I understand it. Yes, last year, I think we were running at about 1.5% of sales going into investing in tangible noncurrent assets. And typically, we like companies that are light weighted on our balance sheet. We are not really focusing on buying manufacturing in itself. We want to buy product companies, product-based companies, which own the intellectual property rights to their products, not necessarily manufacture those products. And we also have a number of companies where their products, so to say, is more services as a product which means that we are not that heavy on fixed assets on our balance sheet. So we don't really expect this number to increase. Perhaps what could increase could be costs for product development. That has also been quite low, but not to any really substantial numbers. So I think a guidance somewhere between 1% and 2% of our turnover is -- that's a good guess going forward.

Okay. Next question then. Would you say that the current working capital relative to sales level is reasonable going forward? Or should we expect it to decline again?

Yes. As we mentioned, we have built up inventories. Of course, that is often met by an increased debt to suppliers. But if you keep that inventory level high, of course, that affects this ratio. So we have this higher level of inventories, and we will see how long it's necessary to keep that. That depends on the overall situation when it comes to the supplies. So I would say that it's -- these numbers we have today is quite good representation, even though perhaps our accounts receivables are a little bit higher at the moment because of good sales and so, but yes.

Okay. Next question. When looking at the SIS segment, we see that GAH has a dilutive effect on the margin. All else equal, could you comment on expected full year '21 EBITA margin for the business -- for this business area?

Well, we don't give those kind of guidance any longer. Within that last year and the year before, just because we had formed new business areas in 2019 and last year was a little bit of a rocky year with a pandemic. But now we are instead focusing on our margin guidance for the whole group, the 19% to 20%, we think that's more relevant. But as mentioned here, the GAH, as it's rolling in, it was acquired in December, but as it's rolling into a full year, it, of course, that adds the overall margin on that business area.

Okay. What new countries are you looking at regarding future acquisitions?

Okay. Well, I think we mentioned that. So I can just repeat it. So we are -- the new markets, Netherlands and Northern Italy, that's what we are looking into, we've done so for a while. Those markets are characterized by the similar characteristics as the Nordics and U.K., the markets in those countries, the history of entrepreneurship is very, very strong. So there's a large number of smaller companies, and also the engineering tradition within those countries are also very strong. So there's a good population of large number of technology-based, high-performing companies. So that's definitely true for the Nordics, it's true for U.K. and it's also true for Netherlands and Italy. So that's really the basis, one of the criteria for us to enter new markets.

Okay. Great. Could you elaborate a bit on the soft margin in PTS? Did travel restrictions have any negative impact?

I think we mentioned that as well. So just to repeat it, it's -- I think you should view the soft margins is PTS that now that business area consists of just 2 companies. So it's a small business area, it will fluctuate from quarter-to-quarter at a higher extent than what you -- than what we saw when the business area consists of 9 companies. So it's just a matter of size.

Okay. What is your view on the component shortage we see in the world? You mentioned in the report that you have had an inventory buildup to meet potential shortage. But what's your view on the general shortage, so to speak?

I think we also answered that. I don't think we need to -- maybe it's an old question?

If we look at -- you hit quite hard by the pandemic, as a lot of companies were. Are you back in full capacity after pandemic? Or are there some of your units still suffering from it, so to speak?

No, we are back to full capacity. So when we were at the bottom, it was about 85% of our orders. We were able to deliver on 85%, and that gradually increased over the quarters last year. And then during 2021, the -- some minor, minor areas have been affected, but those are more or less insignificant. So we're back to normal.

Okay. Have you seen input prices rise? And if so, has that had an impact on the profitability in the quarter?

Yes. As we said, definitely, prices on components and some materials have increased significantly, but our strategy is really to take the dialogue with the customers. We prioritize deliveries to them, they prioritize their deliveries as well. So we have a good discussion, and most of our customers accept to take their part of the cost increase, not all do, of course, but the majority do. So that is an approach where we still can maintain a decent profitability even though our purchase prices go up.

Okay. If we look ahead, what will be your main or most important focus going further in the coming quarters?

Well, to really deliver, we are well capitalized after capital raise and good cash flows, of course. But -- so main focus is really to use that capital for further acquisitions. That's definitely in focus. But then also to really continue to -- we've already started to implement our 4 sustainability goals. So that is really to bring that work further in a good way, together with all our business units. That involves all our business units. So a lot of leaders will step up to deliver on this. So that's a group-wide work that is also very important to really kick off in a good way.

Okay. And just received a new question here, the last 1 for the day if we don't receive any additional ones. On a long-term perspective, how would you like to be exposed geographical-wise? What country shares will you be happy to have?

That's, of course, very hard to say. It's -- we do our acquisitions when we believe that we find the great companies and that when we can agree on terms with the owners, and that's very hard to predict. However, if we look at the size of the markets where we are active now, of course, U.K. will most likely outgrow the Nordics. And then Northern Italy or Italy, and Netherlands will most likely as together be more the size of the Nordics. So U.K. will most likely be our largest market in maybe a couple of years to come, and the Nordics and Italy and Netherlands will be second and third. Which one is larger than the other is impossible to say.

Okay. Great. That was the final question, and a big thank you to Jakob and Bengt for taking the time to present the quarter to us. And I welcome you all back for the next quarterly presentation with Sdiptech. And until we hear from you again, I wish you a great summer, and have a good day. Thank you very much.

Thank you.

Thanks.