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 Martin Westerlund, and I'm from Finwire TV. [Operator Instructions] And with that said, I'll give you Jakob and Bengt the stage. Go ahead, please.

Thank you very much, and welcome, everybody to Sdiptech's report for the third quarter this year. As always, I will be presenting together with Bengt. Unfortunately, Bengt has caught a cold, but he will join in for the Q&A session, but the presentation I will take by myself this time. So moving forward to the agenda. Short overview of Sdiptech, then digging into the third quarter, which is the main event, of course, the financial development and then summarizing with an outlook for the future. So as most of you know by now, we are an infrastructure technology group focused on, of course, infrastructure. But that said, also it comes down with the products and the services that we sell. They contribute to more sustainable, efficient and safe societies. That's very important. It gives us purpose and also improves the world that we're living in. SEK 2.5 billion, SEK 2.6 billion net sales last 12 months, growing, of course, that profitability margin also increasing. The most important growth metrics, of course, grow our profits. We're up 44% there compared to then a CAGR development over the past 5 years of 36%. The key development is also illustrated in this graph. And as you know, we have a business model that is really designed to acquire niche companies and develop them, of course. We have are very much focus on quality companies. We define quality companies as those who have strong market positions that are also defendable towards competition, very important. The underlying growth trends in our markets are solid and stable over a very long term. Okay. So digging into the third quarter then. First of all, just a brief note on the acquisitions. We are very happy to present the 2 acquisitions. The first one is IDE Systems, U.K.-based company. IDE Systems are specialized in temporary power distribution. So it's a product company. So they develop and produce and sell their own products. To some extent, they also lease these products, but the DNA is that they develop their own products. One important part of the product suite is a software product that really enables the customers to monitor their power usage, to reduce power consumptions and as an effect, of course, carbon emissions. So it will be included then in the energy segment -- or the Water & Energy business area as of September 2021, so they have already contributed, to some extent, to the numbers in the quarter. Moving over to Certus Automation, our most recent acquisition, which is the first one in Netherlands. Certus provides solutions to ports and terminals predominantly, but also logistic distribution centers. And their products help the customers, in an automatic way, identify, register, but then also continuously positioning, for instance, containers in ports. So that really drives increased efficiency as opposed for those customers who do it in a manual way, which is a traditional way of doing things. And the software is a sophisticated one. The really core part of the software is an image recognition technology. So in that way, the ports and terminals can identify containers, vehicles and so on in an automatic way. They will, by that, increase efficiency, of course. But they will also reduce mistakes. When you load containers into ships, for instance, it's very important which order you load the containers, so that they can be offloaded in a logical way when they reach the different destinations. So it's quite a sophisticated system and quite complex processes that the products facilitate. And the image recognition software has really been identified also as interesting for Sdiptech as a group, for other products that we sell. So it's going to be interesting to see how we can leverage that. Moving forward, we are up organically on sales, but we are down organically in profits, down 13% in the quarter compared to last year. So with that said, we wanted to remind everybody about the situation last year. So we have taken a few quotes from the report for the third quarter last year. And as most of you remember, we had a very strong growth of 18%, so that's the background. And one important reason for this profit growth was the extra high delivery levels when we caught up in the delayed orders from the beginning of the pandemic. So also sales were up. And equally important, perhaps even more important was that we were very stringent on our costs. We had implemented cost savings from the beginning of the pandemic. And provided that the situation was still quite uncertain what was going to happen with the pandemic, the cost levels were still low, but the sales were up significantly. So overall, the profitability was extra high. So -- and we also said that those should not be considered as permanent. So with that in mind, with quite extreme effects up and down, we think it's important to have a look at the profit development from a period in time before the pandemic until today, so the first of January 2020 until today. And the average annual organic sales growth, approximately 6%, and the same number for profit growth, approximately 7%, which is perfectly in line with our financial goals of 5% to 10% profit growth. So for us, it was important to show this. It really proves that the underlying demand is solid and growing. And also, that the growth is profitable in line with our goals. Okay. Moving forward, a few updates on other things that has happened in the quarter. To start off, on a point regarding Italy, we have executed a couple of pilots in new markets for approximately 1 year. The purpose was really to figure out if -- which markets that our acquisitions methodology fits well. And as you know, the purpose of our methodology is really to find the best companies in each niche. We are focused on quality rather than quantity of a lot of companies. And the findings from the pilot is that our methodology is highly effective in Italy, along with our proposition to owners, which has been received very well, especially the point that we have a focus on infrastructure. That has been very well received. So as a result, we have decided that we want to have feet on the ground in Italy, which in practice means recruitment of the key resources that can really help to dig into the potential that we have in our Italian pipeline of companies. In addition to that, we have launched a more -- a wider view on infrastructure. I would like this call to say that it's a more modern, also more relevant view on infrastructure. So according to us, infrastructure is components and systems providing commodities and services that are essential to enhance societal living conditions and improve the surrounding environment. So what that really means is that if we take the concept of resources efficiency, so that is really about taking care of the resources that we have on the planet. That view is wider than a more narrow view of Water & Energy that we have today. Water, very important resource; energy, naturally extremely critical resource, but there are other resources that are so important as well. So food, for instance, a very important resource that we need to work in a different way. We need to produce a lot of food to growing population, but we cannot destroy the world while we're doing it. So a lot of development needs to be done there. Waste is also a very important resources -- resource or waste management. Recycling includes -- is included in the wider definition, as forestry, for instance. So the wider view makes us more relevant, but it also really opens up to additional acquisitions opportunities. And as you know, we have completed the divestments in the business area, Property Technical Services. We started off the year with 9 companies. We divested 7. So the remaining 2 will be included in Special Infrastructure Solutions as of this quarter. Moving over to the fourth point. We have raised our acquisition target, and that is really on the back that we are ready to do it. We are prepared for new geographical markets, as I described. We've also entered the Netherlands, as you know, in addition to a focus on Italy. We have a wider view on infrastructure. We have a well-developed methodology for acquisitions, a highly developed structured capital and experienced team. So we are more than ready to raise the target. So the way we want to see it is, first, you get prepared and then you raise the goals. So that's really what we are happy to present here as of the third quarter. Moving over then to acquisitions. The previous goal was set in 2016, is represented by the gray part of the graph. The goal was SEK 90 million per year. More or less, with the exception of 2018, we have delivered upon that goal. And as you can see in the graph, and as you know already, we have acquired according to SEK 158 million, and that is, of course, in line with our new target, SEK 120 million to SEK 150 million. And also taking into account the divestments that we have done, the net effect is SEK 120 million, which is then also in line with our financial goals. Moving over to our 2 business areas. Starting off with Water & Energy. Start off by having a look at the graph. It really illustrates steady growth in sales, but also positive trend on profitability from 2018 and onwards. Moving over to the quarter. Sales increased by 76%, largely driven by the newly acquired business units. Rolec role has been part of the group for more than 1 quarter. They have developed in a positive way. And IDE has also got a very positive start. And also, in addition to that, the entire business area, the business units have also demonstrated solid growth. So overall, a healthy and strong development in the entire business area. Moving over then to profitability. Profitability margin increased to 25%, which really reinforces the profitability trend that you can see in the graph. The most important -- or actually the real contribution to the improved margin comes from the newly acquired business units. Organically, profitability is slightly down, and that is really on the back of that -- the exceptional profitability that we had at last year. So now we have returned to more normal cost and staffing levels, which, of course, affects the profitability. But everything taken into account, it's still an increasing of margin, and EBITA* increase then naturally more than sales, that doubled, actually. Okay. So moving over to Special Infrastructure Solutions. So starting off on the left-hand side, as you know, PTS has been merged with SIS as of this quarter. So all the numbers that is presented for SIS also includes former PTS. So taking into account what has happened then to PTS will be reflected in the numbers for SIS. So 7 divestments in former PTS, we did in Q1 and Q2. Those are, of course, included in the sales numbers that you can see in the graph. From now on, only 2 remaining business units from PTS and SIS. And then looking at the quarter then, it's quite interesting. It's actually quite -- it's actually coincidence, but the contribution from the acquisitions that in the quarter, on the positive side, and the negative contribution, if you say so, from divestments are more or less the same. So the net effect is really, really small and rather insignificant. So the majority of the sales growth was organic, actually. So that really demonstrates a continued solid sales growth in the business area. However, lower sales than expected in some units, and that is really due to delayed orders from customers. To some extent, we've had some challenges with our own components, but the delays are not extraordinary. More so, we have had customers that are delaying their orders to us. They placed the orders, but they're delaying the delivery. And that is really because they are lacking components from third-party providers. So the situation around the supply chain is a bit more complex, and it goes outside the -- what we can control on our own. But with a very good dialogue continuously with the customers, we want to deliver, the customers want us to deliver. They work with all their providers. So the most difficult situations are normally solved in a very good way. Moving then over to the profitability side. Important to keep in mind the newly acquired GAH Refrigeration has a profitability level, approximately at 17%. So that really contributes to a lower margin than previous year. Organically, SIS was perhaps the business area that had the most extreme high profitability previous year. So of course, organically, profitability is down when we return to more normal levels. But that's really then going back to the comparatively high numbers that were compared with in this quarter. Also, increased material prices have affected profitability. Our business units in this business area, but also for Water & Energy, are very good at actively working with the customers to have them take the majority of the price increases. It is possible to have that type of dialogue because the products and the services that we deliver are really critical for our customers. So in that way, we can have a very constructive dialogue on the price situation. However, the price increases have been really large, as you all know, and have occurred in a short time. So to some extent, the cost increase are borne by us as well. So taking into account the 5% growth on sales and slightly down on profitability level, of course, then the net effect is that EBITA* is down 3%. This is really expected both on the acquired contribution, but also on organic contribution. And given the extraordinary high profitability last year, this is actually a very strong result. Moving over to financial development. Starting off then with the sales. The graph, of course, demonstrates an illustration of our business model to continuously grow our group organically, but also with acquisitions, of course. And also, we definitely have a focus and a strategy to -- for quality in the companies that we acquire and how we develop our companies, and that is also illustrated by the improving margins. You can also see that the profitability in the third quarter 2020 was extra high since it goes up and then flattens out. But that is also expected, as we discussed previously. Sales-wise or country-wise, U.K. is growing as a segment, and this is really the last 12 months. So there's a lag. So U.K. will continue to grow as a geography within the group and becomes natural for us. U.K. is a very good market when it comes to infrastructure. Infrastructure is, to a large extent, the domestic market. And U.K. is, from that perspective, a large market. So it's a very positive aspect of our composition. Having then looked at the profit development. Profits are up 38% over the last 12 months. CAGR-wise, for the last 5 years, 36%. So we really continue on the trend of demonstrating a strong profit growth. And quarter increased 28%, and as we described before, that is from -- the entire increase then comes from acquisitions, and we have, organically, EBITA coming down due to very difficult comparison with last year. EBITA* margin, still improving. 17.7% over the last 12 months and now 18.4%, so it continues to go up. And we keep our guidance for the full year. I can mention that because we talk about margins. It's, of course, difficult to fully understand what will happen with the supply chains, with the price increases. We are actively working with these questions. So there's some uncertainty, of course. But what we know now, we see no reason to change the guidance. Okay. Looking at the numbers for year-to-date, we've broken them down. EBITA*, up 44%; organically, then down 4.5%, which is also expected. The acquired contribution is quite significant, 53%. And the divested businesses there, what we've taken out contributes -- or equals to minus 4.2% when compared to last year. As you know, we divested in Q1, a small company, Tello, but then the elevator business in Q2. So year-to-date, they have been part of the numbers. So the reduction there is quite small in comparison. Currency, minus 0.4%. Okay. Well, that was the comments around the profit development. Moving over to the additional metrics. Starting off with the cash conversion. It has improved in the quarter, and the reason for that is that the receivables have been reduced and that is really a reflection that we are coming back or resuming to more normal organic growth in terms of sales. 4% this quarter, for instance, compared to 18% previous quarter. So receivables are coming down in a healthy way. And also, we have done an inventory buildup over a longer period. As you all know, that is really on the back of the difficulties with supply chains. However, in the quarter, the levels or the goods have been released out. So inventory levels have also come down. All in all, cash conversion is slightly -- gradually coming back to levels that we expect. Having a look at the earnings per share. SEK 2.05 in the quarter, SEK 6.42 for the last 12 months. Important to keep in mind, we want to remind everybody that last year's EPS also included a capital gain when we sold off products that was really -- that were really part of our legacy many, many years ago. So we divested them last year, and of course they -- that contribution, approximately SEK 0.80, was included in last year's numbers. So if we exclude that, the EPS also demonstrates a healthy growth, along with our business model. Looking at the debt side. The net financial debt is on a low, comfortable level, 1.05. That really, really means that we have muscles to achieve and deliver upon our raised acquisition and goal. And the net debt -- the total net debt, which also then, of course, includes our earn-out debts, 3.16. Please keep in mind that those debts are sized for future growth. So if the future growth doesn't occur, then that number is actually lower when the debts are to be paid. With that said, moving over then to having a look at the future. Starting off, we want to repeat that the average annual organic sales growth of 6% and the EBITA* growth of 7%, it really demonstrates resilience throughout the pandemic. It's in line with our financial goals. So with that said, we also have a good dialogue with our customers, with unchanged view on growing customer demand for the future. And profitability continues to increase, primarily positive contributions from acquisitions. And as we mentioned, we will keep our guidance for 2021. However, there are continued uncertainties, as we talked about, the supply chain, material prices. Every day, we work with these issues. Every day, we solve a lot of issues, but it is very difficult to know exactly what is going to happen over the coming months. Finally, we are definitely ready for the updated goal, for acquisitions, to acquire SEK 120 million to SEK 150 million per year. For the purpose of our methodology is to very selective basis, welcome the best companies in each niche market. And more and more, we are experiencing that the companies -- since we have a focus on specific segments or sectors within infrastructure, the companies that we acquire, they really add complementary technology and customer segments. So we more and more are operating as an interconnected group. One example of that is that Rolec that we acquired earlier this year, the products are already sold by a number of other business units within the group. We've also by -- with the help from our Swedish business units, they have helped Rolec to establish themselves in the European Union to -- that really enables very important distribution contracts in the European Union. And that was made possible, thanks to our Swedish companies. So there are a number of examples, which really, really demonstrates that what we're building is really more and more a cohesive and interconnected group focused on infrastructure. With that said, I open up for questions for the audience.

Thank you very much, Jakob. And like you said, now it's time for the Q&A. And we will take the first question. At your CMD in September, my impression is that you claim to have managed the supply chain in a fairly good manner. Would it be fair to assume then that the situation worsened during the latter part of September?

To some extent, yes. It has, to some extent, worsened, but it's not a significant change. So as I said, it's something that issues, they occur every day. They've been doing so for a long period of time now. So we're dealing with them every day as well. We're dealing with them on a decentralized basis. So it hasn't been a significant change. It's more that it's -- there are still uncertainties. And what has been a bit different is that the material prices have increased to such an extent that it has not been possible to take the entire increase out to the customers. That has changed. But other than that, we're working every day with issues, and we're solving them every day as well.

Perfect. I will take the next question. Could you please specify if the challenges were mainly related to the former PTS division?

It's not. Yes, we've had -- it's not specifically for the former PTS. We've had difficulties there. And that the nature of those have typically been then that our customers, they are lacking some other types of material or goods to initiate their projects. So in that case, they have delayed their orders from us. But those orders, they will be delivered. So it's -- we're building up a backlog in PTS area. The demand is stable. But we do see challenges throughout the entire group. It's not something that is isolated to PTS.

And we'll take the next question. What do you see as the main driver in future margin expansion? Is it organic margin expansion? Or due to acquired businesses with higher margins?

Okay. Well, predominantly, it will be through acquisitions. So the companies, I think if you look at the companies that we've acquired, with the exception of GAH, the profitability is quite clear above 20%, sometimes up at 30%. So the type of companies that we scout and that we identify are really top-quality companies and with that comes a higher profitability. So we expect the acquisitions to have the most important impact on a continued profitability improvement.

And we'll take the next question. You had EBITA* margins of 18.1% in Q1 to Q3 in 2021, but the 19% to 20% EBITA* margin guidance for FY 2021 is still in place. What are the building blocks for the higher margins you expect for Q4 implicity in the FY guidance? For instance, are there large price hikes coming through in Q4? Or is there a risk you end up the year below the 19% to 20% guidance?

Well, that's -- I mean this is not the promise. We're looking into the future, but the guidance is what we still believe is valid. Anything can happen, of course. The Q4 is normally the strongest quarter. So with that mind, and our knowledge of our companies, we see no reason to change the guidance.

Perfect. And we'll take the next question. Could you elaborate a bit on the growth rates you're seeing in the acquired businesses of Rolec, IDE and GAH?

We do not share specific growth rates for individual business units. So we cannot disclose any specific numbers related to that, but we can say that all those 3 companies, they are developing well according to our expectations.

Perfect. And we'll move over to the next question. As we look into 2022 versus 2021, what drivers do you see that could or should support organic earnings growth when it comes to volumes and/or additional margin improvements?

Well, the most important aspect is that the underlying demand is very solid. I think we demonstrated that, and that, we see no reason why that would change. It's really demand for critical products and services for infrastructure. So from that perspective, it's solid demand. And then, of course, when we have healthy businesses, the organic sales growth will be translated into organic profit growth, as we've shown throughout the years. So it's just an expected pattern that we see no reason to change. So our financial goal to grow our profits 5% to 10% per year is definitely valid for 2022 as well.

We'll take the next question here. On supply chain disruptions, could you please provide more detail on what cost pressures you're seeing in what segment or business units?

Well, we have over 30 business units. Each one of them have their own supply chain. So of course, there's over hundreds and hundreds of important suppliers, and that includes steel. Steel is important. Plastics is important to -- and then, of course, semiconductors. A lot of our products, they include microprocessors. And so that's also a very important material or product or component, of course. So -- and to some extent, also wood, even if it's indirectly to -- in some cases. So we are really exposed to a wide variety of materials and components. And with that said, it's actually something positive since it really brings diversification, and we are not exposed to a few single providers or a few types of materials or components. So it really brings diversification and a good spread of the supply chain risks.

Okay. Thank you very much for those answers to our questions, and thank you very much, Jakob, for presenting today's Q3 report. And a big thank you to all of you who have been following us online, and I hope that we see each other soon again. Thank you, and goodbye.

Thank you. Bye-bye.