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

Hi, and welcome to today's webcast with Sdiptech. Today we have CEO, Jakob Holm; and CFO, Bengt Lejdstrom with us. My name is Kristofer Berggren, and I work for Finwire. After the presentation, there will be a Q&A session. So, if you have any questions, please visit Finwire.tv and click on this webcast, and there you will find a form where you can write your questions. But that will be for the Q&A session after the presentation. And with that said, I hand over the word to Jakob and Bengt.

Thank you very much. Hello and welcome, everybody. As always, it's me, Jakob Holm, CEO; and Bank Lejdstrom, CFO, presenting. Quickly, the agenda to jump off, to summarize the 2021 year, look at the acquisitions in the fourth quarter. Bengt will walk us through the financial development, and then finally, an outlook for the future. Okay. So to start off with, some key figures that we would like to highlight. One is, of course, the profitability margin that continues to increase. So we're very pleased to see that it has grown up to 18.7% for the entire group, so that's worth mentioning. And the second one is, of course, the growth metric for our operating profit, grown at 47% over the year, which, of course, is a significant growth. And that is really based upon a few things, but one is the continued strong organic sales at about 10% margin expansion that we saw, now up to 18.7%, but also that the new acquisitions are growing well -- for instance, Rolec providing charging solutions for electrical vehicles. So, all in all, a significant growth in profits, and we're very pleased to present that, of course. If we look at the year-on-year growth, the profit growth has been 36% over the past years. And as you can see, we're growing even faster this recent year. And we have a focus on high-margin positions. That's very important to us. That's the type of companies that we focus on to acquire, but that's also how we develop our companies, so companies with strong market positions. I would also like to mention, which we're very happy to see, since we have the focus on infrastructure, we also see that the new acquisitions that joined the group, they have to a higher extent, complementary technology and also complementary market segments. So more and more, we are operating as a cohesive group, which is, of course, part of our strategy. And that's also, in one way, how we also differentiate ourselves compared to many of the other [ SEER ] acquirers in the industry. Okay. To summarize the year 2021, continued -- there is a continued strong demand for our products and services. Infrastructure is a good market from that perspective. The need to install and buy our products is there, regardless of turmoil in the surrounding world or anything like that. So demand is consistent and strong, 10% up this year. Margin expansion continued, as we said. Here, we would like to mention that our recent acquisition, Certus, whose primary customers are container ports, the customers have purposely delayed a couple of projects, since they now have a clear focus to manage with the increasing volumes in all the container ports. So that's the priority #1 at the moment. We all understand why. So -- but it's not a big concern. The deliveries will come, eventually. We're also happy to present that we continue to deliver on our financial targets. We have done so for a couple of years. The 8% organic profit growth, that's in the middle of our target. I would also like to mention on that point that over the past 3 years, we have delivered organic growth between 8% to 11%. So we are consistently in the higher end of our financial targets, so we're very happy to present that as well. We increased our acquisitions target from SEK 90 million to SEK 150 million, SEK 120 million to SEK 150 million, and we actually delivered upon that already the first year. Our leverage is also in control, which is comforting for future growth. We've also launched sustainability goals, and we've implemented a new way of working to really ensure that we are driving the right type of activities to reach our sustainability goals. So that's a very ambitious program that we have launched and that is up and running now. We're very happy to have achieved that as well. And then, some additional changes that also have been important, the divestment of the majority of our units in the former business area, Property Technical Services. The reason for doing that was, of course, to increase the overall quality in the group and the margins in the group. So that was a strategic step and also part of how we are streamlining the group towards infrastructure and high-quality business units. We took a natural step to Nasdaq Stock Large Cap earlier the -- in June, which was a good step to take, part of our evolution. From a geographic perspective, we have invested a lot to really establish ourselves in the markets that we believe a lot in. We have great potential that we have created over a number of years in the U.K. and Italy. So, by having feet on the ground, recruiting people, opening offices, we have a better way to actually dig into that potential. And finally, we are expanding our business area, Water and Energy, and this is really the background. Water and energy are important resources for our planet. There is a growing demand, but the supply is, of course, a challenge. And with that perspective, there are other important resources that are important to manage in best possible way for the planet. And so, with that said, we see growth opportunities in some additional areas as well. And we see -- we will therefore, actually, change the name from the business area of Water and Energy to Resource Efficiency. And the overall theme is about to manage the resources that we have on our planet in an efficient way. And the purpose is, of course, to increase the sustainability surrounding us. And to start off with the bioeconomy, it's a very important area. It's very much about circular economies. And the European Union has said that this is a very important response to the challenges that we have ahead of us, and we have identified a number of interesting acquisition opportunities in that area as well. And our recent acquisition, Agrosistemi, which I will present in a moment, is a great example in the bioeconomy area. Waste Management, and the same theme is also very important. So these 4 segments will together create the business area of Resource Efficiency. To summarize the acquisitions for 2021, we did acquire to SEK 158 million 4 great companies. And as we've said all the time, we focus on doing a few very strong acquisitions, high-quality companies, high-margin companies rather than acquiring a lot of companies. I hope that's clear for everyone. And the divestments we've done is also in the same theme, to increase quality. And then we've started off in a good way with Agrosistemi in the first quarter, corresponding to SEK 20 million of acquired EBIT. Okay. Then having a looked at the acquisitions for the fourth quarter, starting off then with Certus Automation from the Netherlands, very interesting company. What they do is really that they provide solutions to automate the handling of containers in ports, terminals. And as part of the solution is a software, which is highly sophisticated to identify images, and in that way, take all the identification of containers, registration, positioning and so on, everything can be done in an automatic way. And as an effect, the company is really contributing to 2 goals, 2 of United Nations' sustainable development goals. The first one is really based upon that, that the safety is really, really improved in the harbors, since the need for human intervention is really reduced with the automatic handling. So, very important. And also, the truck and ship flows are being optimized, which also reduce emissions. This will be included in the business area, Special Infrastructure Solutions, or it has been included since October 2021. And then, the acquisition that we did a couple of weeks ago, Agrosistemi. And as I said, this is a perfect example of bioeconomy and the new business area, Resource Efficiency. So what Agrosistemi does is that they take biological sludge from wastewater treatment plants. They purify that sludge. They take away additional contaminations, and it translated, or transform it into organic fertilizers that then are sold to the farming industry. So this is a very interesting company that really contributes to a circular economy based on biologic materials. And then also, addressing a number of sustainable development goals. One of them is about these kind of fertilizers. They really help to fight desertification, and it's a good way to restore destroyed soil and a number of positive aspects with these type of products. So we're very happy to add Agrosistemi to the Sdiptech Group. And by that, we move over to the financial development and Bengt.

Thank you, Jakob. Yes, we had a very strong development, we think, for the 2021. As you can see on this slide, we increased sales with 30%, of which almost 11% was organic, which is quite high if you look in historical terms, but also a sign of that the underlying demand is strong within these industrial sectors. You can see on the chart to the right, the split of the sales between different countries. So, if you have been following us for some time, you notice that the part which U.K. is representing is increasing every quarter, more or less, because all of the acquisitions we have done there and also the great development of those units. You can also see that in the pie called other is now 11%, which represents more or less, you could say, exports. And as we acquire more product-based companies, of course, then exports potentials are increasing. And a good example is, of course, Certus, which has a big part of its sales on the global level. And there are also other companies within the group that are having good development in their export activities. And when it comes to the share of product sales for our group, it's now above 50%, which is increasing also steadily, and not the least since we divested our elevator service companies. And we think -- believe very much in having the proprietary products in our portfolio, and we can then, of course, then steer and develop our sales in different ways than compared with offering services. If you look upon the margin on this slide, it has developed well over the years and over the quarters during 2021. So we have improved it more than 2 percentage points since last year and now 18.7%, slightly below what we expected, but there were some specific issues here in quarter 4 that Jakob already mentioned, and I will also get back to that. Looking on the profit levels, we increased 47%, as mentioned, of which, all in all, for the full year here, it was 8% organic profit growth than the rest -- then mainly from acquisitions. Actually, the acquisitions had 53% increase, but we also divested almost 10% of the profit from last year. So you can see here on the right side, the split between the different components, it all add up to the 47%. We, during this period of the pandemic, our organic growth has been up and down. But all in all, if you take a weighted average annual organic growth, it was even 9.4%. I mean, we reported 11% last year and 8% this year, so on average, 9.4%. During the quarter, we had a profit increase by 52%. That's extremely good. And 35% of that was organic, which is, of course, even better. And much of that coming from having some earlier delayed projects in some of our companies that we now have delivered, and because of this scalable business model means that we could get much of that down to the profit line and also increase the EBIT margin. So it was up to 20.5% for the quarter. And of course, the 35% organic profit growth could not be expected quarter-on-quarter going ahead, but we are still very pleased to see that very good final months of the year 2021, which added up then to a successful full year. If we then turn to the business areas, that one formally known as Water and Energy, now called Resource Efficiency from now on, had a tremendous increase of sales, much of course, because of the big acquisition of Rolec early in the year, and also IDE later on in September. But also, most of the companies within this business area had a solid organic growth as well. EBITDA margin increased also, of course, of the cost of acquisitions, but also that these scalable business models could then get use of the sales increase and put it down to the bottom line. So all in all, EBITA*, our profit measurement, increased by 115%, or 116%, you could say. And we now have an EBIT margin for the quarter at 24.8%, but for the last 12 months, 24.3%. So that's, of course, very good. In this business area, we added the Agrosistemi in January, and that one included, we are 16 business units within the Resource Efficiency business area. If we then look at Special Infrastructure Solutions, which since previous -- last quarter includes the former business units of Property Technical Services, as Jakob mentioned, we divested 7 out of the 9. So there are 2 left, and they are included now in this business area. And in all the historic numbers, you can see in this chart in our reports, we have then pro forma added the companies that were present at those times into the business area, Special Infrastructure Solutions. So, for this business area, we didn't do really much acquisitions in the early part of 2021, made an add-on acquisition of Ficon to our Finnish [indiscernible] company with snow removal equipment. And then, we added Certus in October. And as Jakob mentioned, in the Certus company, we have a high expectation on that one, but they were then seeing delayed project deliveries in already ordered products, as we did during 2020 and 2021 in other business units, because of effects from the pandemic. Now it's mainly, as Jakob also mentioned, that the customers in the container ports, they have tremendous volume increase in number of containers to handle at the same time as their staff are on sick leave and other issues around restrictions, which, of course, make them focus on their customers and to deliver containers, and then take these automation projects as the next step. But we are quite sure that this will pick up during 2022 and be back to more normal levels soon enough. That also meant that there were some sales, of course, from this company. They have some recurring revenues from maintenance contracts, but the profit level wasn't that impressive, and that reduces the overall margin for the business area, but also for the group as a whole. So, but still, as I said, for this year, it should be back to more normal levels quite soon. The EBITDA increased anyhow by 18%, up to SEK 93.5 million for the quarter. So we also have there some of the existing companies performing really well. So including the Certus, since quarter 4, we are now 16 business units also in this business area. Some additional metrics on the group level: we are happy to see that our cash conversion is back to more normal levels, 92% for the quarter. We had some weak cash conversion ratios during quarter 2 and quarter 3 that were buildups of inventories in the business units, and that was with the intention to be prepared for any problems in the supply of components from the pandemic or from other aspects. And we also saw a sales increase, obviously, with this sales increase organic, which meant also that accounts receivables were increasing. So, but now we are more back to the normal levels. We should be around 90% to 100%, so 92% is quite okay. For the full year, it was 71%, picking up from the lower levels, but still below last year, but anyhow, a decent cash flow, we think. Looking upon earnings per share, that was perhaps not what you could expect for this quarter and for the full year, and we tried to explain that in the report. There is also an appendix to this presentation that you find on our website with a bridge. There is a bridge also in the report between our operating profit, the EBITA*, and down all the way to earnings after tax, which is then the earnings per share. And we had, during 2021 in total, a number of cost items that are not, you could say, typical, so they are more of a one-off. We have, to start with, we adjusted the conditional considerations for our earn-out, meaning the amount of considerations we will pay based on the profit development in the companies that we have acquired recently. And since they are performing very well, better than we expected when we acquired them and also along the way, we had to increase that provisions in our balance sheet, but that means a cost. So that was a big part. That was, all in all, SEK 40 million or SEK 43 million for the full year, SEK 40 million in the quarter, not tax deductible, so that was more than the kroner per share. But of course, that's a little bit of normal business, you could say, perhaps, with our dynamic model of valuating earn-out debt. Another part, which is more one-off, is the costs for our previous divestments. The one we did last year, 2021, added up to also a bit above SEK 1 per share. And also, if you consider that the year before that, 2020 had included some profits from divestments of almost the same level, you could miss on that our earnings per share actually increased by 43% from 2020 to 2021. So, much of this is, of course, bookkeeping. It's not cash flow, as you can see from our cash conversions and our cash flow in absolute numbers. But anyhow, it is what it is. But much of this is not recurring cost items that will -- that you will see for 2022. So we will hopefully be able to present much better earnings per share now going ahead. Our debt leverage is also important as an acquiring company, as Sdiptech is. And as Jakob said, we have a very sound leverage level, a little bit above 1% when it comes to our financial debt. That's the debt we need to pay, regardless of our results. If we include all the conditional considerations, which is debt we will have to pay if profits are as good or better, mainly, than today's level, we are a little bit above 3%. But you -- to be fair enough, you should compare those numbers, then, with a higher profit level to get the more correct feeling of the leverage. So we focus on the net financial debt, which is quite below our internal targets of 2.5%. So it's not even half of that. Yes, and then to some outlook.

Yes. Okay. Thank you. Thank you, Bengt. So this is the final slide. So one thing that we would like to summarize that the 2 years of the pandemic is that I think that we've demonstrated a resilience and profitable growth, despite the challenges that have been surrounding us over the year. So we're very happy to prove that with actual numbers. So, having looked at the table there to demonstrate the organic development on both the sales side and on the profit side, it has been strong. It can go up and down for one quarter to another. But on an overall basis, the growth rates are very stable. And we've had restrictions with our shutdowns, we've had material shortages, but anyway, we've delivered solid organic growth. We had high sick leave in the beginning of 2022. I think there's no company that has been totally immune against that. So we have had some delayed deliveries. However, we've seen that a number of times now over the past 2 years, and we've demonstrated that we have the ability to catch up on that. So we will do that as soon as it's possible, and we see some positive signs in all our markets that the restrictions are easing up, and also that the sick leaves are coming down. So, actually, a positive view on that as well. Profitability going forward: as the way the group stands right now, we believe it's fair to say that we will establish around 20% on profitability margin for the entire group. But then, of course, new acquisitions, that will be an effect from those as well. But the way we stand now, 20% is approximately what anyone should expect. And then, looking forward, we are very eager to deliver in 2022. We've increased our growth targets. We did it because we were ready to do it, so we're comfortable to deliver on that. We've established ourselves in new geographies. We've divested some more weaker part of the group. So we are really looking forward to a strong year 2022 with a great organization to deliver upon that. So with that, we open up for questions.

Great. Thank you, Jakob, and Bengt for that -- for the presentation. So let's start with the first one, and this is from Karl Vikstrom from Berenberg.

Can you develop on the organic growth? You mentioned postponed delivers under any of these that follow into 2022. Yes, that's the first question.

Yes. And as always, when it's delayed or postponed deliveries that have already been booked, they will be able to deliver it eventually. And we saw that already in 2020 during the fall catching up, and we saw that again this year, not the least in quarter 4, but we were catching up on some of these delayed projects. So that, you could say, this extra-high organic profit growth, 35%, came to some parts from that catching-up effect. Now, going into 2022, there are still some projects to catch up. And the major part of that is from our then Certus [ Dutch ] company. And -- but that one is not counted as organic growth, yet. That we'll have to wait until the end of this year before that is in the books of organic growth.

Okay. Next question. Margin [ hit ] from port customers. What is the view here? Are they coming back? Does it also provide a similar dynamic to the above? And with the above, it referenced to if there were specific deliveries into 2022 that was affected.

Yes, of course, we expect this company to be back to their normal levels, at least, during 2022. And as we said in the press release, they should be around roughly 20% to 25% profit margin when they're in normal delivery mode, so to say, with their customers.

Okay. If we look at the M&A, then, in terms of M&A, are you now going to target Italy and Benelux, or continuing M&A in the U.K.

Yes, we will continue to -- so our core markets when it comes to M&A is, of course, Sweden. However, that has been, for us, a bit difficult to do acquisitions because of high prices at the moment. But anyway, it's a core market for us. Another core market is United Kingdom. It will always be a core market for us. And now we're also adding, then, Italy as a core market, since we have also established ourselves with an office and people there. And we will continue to develop Netherlands in same way. We have not yet established ourselves with an office there, so there's no decision made on that. But we will continue to focus on all of these 4 markets and also the other Nordic companies, Sweden Norway, Finland Norway, and Denmark as well. So we focus on all of these markets. United Kingdom is important to us.

Okay. And now I have some questions from Victor Hansen at Nordea.

How should we view central cost run rate? Is it about SEK 50 million?

Yes, during 2021, we had some strategic projects. We -- not the least, we made the listing on NASDAQ Large Cap, and that costs quite a lot of money. And also, all these strategic projects and establishing ourselves in the new geographies also cost money. So we don't expect the same level for 2022, so perhaps around SEK 50 million could be a decent guess. Yes.

Okay. Next question, then. How has the pandemic logistic chaos impacted your capital efficiency? Will you be able to improve efficiency here ahead?

Yes. I guess the question is relating to working capital or capital-employed returns.

Yes, exactly.

And as you said, we had to build assets in -- both in inventories, but also, the strong sales increase also added accounts receivables and similar items on the balance sheet. But I think the major part that's in the equation of return of capital deployed, at least, is the goodwill and other immaterial assets from our acquisitions. So, as we acquire great companies, good profit levels at ordinary multiples, you could say that we typically pay, as we have said, around 7x to 9x EBIT, adds a lot of assets into our balance sheet. And of course, if you include that, as we do, in the capital employed, that makes it quite tricky to improve that dramatically in the short period. When it comes to return on the working capital, we are working on it, and I think we will see some reductions in the working capital itself during this year now, and we back to a little bit more normal activities and scenarios. So, yes, let's say that.

Okay. Next question. The White House just announced that they will invest $46 billion on charging solutions for electrical vehicles. It would be interesting to hear more about the outlook for Rolec, although they are not on the U.S. market.

Well, the market, as everyone knows, is growing in a strong way. Rolec has a strong position on the U.K. market as being a provider of very complete solutions. So that's -- they have an important positions there. So of course, it's a positive outlook. Rolec is also important for everyone to remember that Rolec also delivers charging equipment to marinas and caravan parks, and those markets, they grow normally at 5%. So Rolec's overall growth is a blend between the electrical vehicle high growth rates and these more mature markets. But of course, the outlook is promising, although we will not provide our expectations on the growth rate for that particular business unit.

Okay. Next question here is from Karl Bokvist at ABG.

Your view on acquisition multiples going forward, looking at 2021, you paid a total consideration of roughly, I think it was SEK 1.6 billion for your acquisition that had a total EBITDA of almost SEK 160 million, which implies 10x compared to your prior level of 7x to 9x. Do you think this is a new level, so in terms of company valuations for the companies to acquire?

I think we have a mix there of numbers. Yes, if you account for what we have booked as acquired assets, the number is probably correct. I don't have it top of my mind right now at SEK 1.6 billion, but then also includes our provisions for future payments of contingent considerations that are only payable if the profit level increases. So, if you want to see the more -- the true picture, you should look at what we communicate in our press releases where we say the valuation at acquisition, the enterprise value at time of acquisition. And there, we are still around this 7x to 9x.

Okay. And another question from Karl here.

What was the organic growth for [ VE ] and SIS?

Good question. We don't disclose those numbers since 2021, so I'm afraid we do not mention that number.

Okay. Let me see what we have next here for questions. A lot of questions regarding M&A multiples also. So this is from Victor Hansen at Nordea.

At a date was Certus consolidated.

They have been included since the 1st of October. And in our report, you can read towards the end, exactly what each of the acquisitions have contributed during 2021 in terms of sales and profit. When it comes to the profit figures there, they also include costs, for example, amortization immaterial assets. So, there can find a good view of how much it's -- each acquisition contributed during 2021. And also, looking at our press releases, you get some kind of feeling what we expect going forward.

Okay. Is there a minimum profit level where Sdiptech is looking for -- is looking at for acquisitions?

We look at profitability. So we -- when we source our companies, we don't go below 15%, 1-5%, since we believe that if you are below 15% in EBIT margin, then you are exposed to competition that is effective and too tough. So we target companies that are above 15%.

Okay. We've got a last question here, and it's regarding the more general question regarding the M&A environment. What's your view on the M&A environment? And the question is, from what I understand, there's a lot of competitions on good companies. Have you seen any increases in prices for the companies, for example?

Yes. Yes, we do, and primarily in the Nordics and specifically Sweden. So the acquisition activity is extremely high in Sweden; it's been so for a number of years. It's accelerated in 2021 as well, and that's, of course, due to the low interest rates, the stimulus from the central banks and so on, so there's a lot of capital in the market. So we don't see the same type of competition on other markets, although the price levels are also higher in the U.K. and Italy, compared to a couple of years ago. And actually, it's better for us, from an acquisition perspective, that interest rates can come up and that the stimulus from the central banks will be closed. So, in that way, we will come back to a more normal situation. And probably a lot of the new acquisition of players that have entered the market over the past 1 or 2 years, they will run into trouble, get difficulties, and that will create a more normal market for the future.

Okay. Great. That was the final question for this Q&A session. Thanks a lot to Jakob and Bengt for your presentation and answer to all of the questions, and thank you for all the questions from the viewers. And with that said, we will end this presentation, and I hope to see you again on the next presentation with Sdiptech. So thank you all, and have a good day.

Thank you.