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

Hello, and welcome to today's webcast with Sdiptech, where CEO, Jakob Holm; and CFO, Bengt Lejdstrom, will present the report for the fourth quarter. After the presentation, a Q&A will be held. So if you have any questions, you can send them in via the form to the right. And with that said, I hand over the word to you, Jakob.

Thank you very much. And welcome, everybody. And as always, I'm here together with Bengt Lejdstrom, our CFO. And as always, we will walk through the details of the quarter. Bengt will help us with the financial development, and then we'll summarize with an outlook for the future. Sdiptech, we are a technology group focused on infrastructure where our products contribute to more sustainable, efficient and safe societies, very important. Currently at SEK 3.5 billion in net sales, a profitability margin at approximately at 19%, a solid profit growth over years and also over the last 12 months. And our overall goal is to create value, sustainable value by growing profits every year. And we're happy to see that we have grown a compound annual growth rate that's about 40% since 2017. So we're very proud to present that. And we focus on high-margin positions, strong market positions that are defendable. And another fine trend that we are proud of is that we now 5 years in a row have improved our margins -- over the full year margins. So we're also happy to include that in the graph to illustrate the positive development. And our markets have an underlying growth, infrastructure related to under dimensions and aging infrastructures, but also the drive towards more sustainable, efficient and safe societies. Also drive further technology advancements and growth into our -- to our customers and markets. Okay. Moving over to the quarter and having a look at the sales development. For the group, net sales grown 36%, the majority comes from acquisitions. Organically, we've grown approximately 2% in the quarter. But as you know, you that are following us, we have a unit that has been underperforming for the past 2 quarters. Happily, this now is ended. I'll get back to that. But excluding this EV-charging unit, our organic growth in terms of net sales is 9.6%. And that is also an important number because it demonstrates that the group in general has a very strong and positive development. Our goal is to grow 5% to 10% per year. So this is definitely in line with that. So that's an important message. But let's also, of course, talk then about the EV charging unit called Rolec in U.K. So the background is that we have launched a new technology platform, very important. We've also moved our production of our controller unit to U.K. away from China and along with that, the new supply chain. And due to shortages in components, the launch of the new production was delayed, unfortunately. So net sales and EBITA were lower in Q3 and Q4, significantly lower. Where are we today? Well, we're very happy to say clearly that the supply chain is now established, steady, no shortages, good volumes, good forecasts. Production volumes are increasing. Production is fine-tuned and stable. So everything is developing according to plan. Currently, we have a backlog. We've reduced it, of course. But it's now down to 2 months, and we aim to reach 1 month or less before the end of the first quarter, very good. And we can also see that the incoming orders and the demand is good. We're growing according to expectations, and we're happy to conclude that we had -- before the problems, we had, of course, had a very good market position with distributors and so forth and we kept a strong position now. So we're happy to also conclude that. So yes, just summarizing what we -- what actually -- what I already said. So the new hardware will also deliver new functions that are not available on the market today. So it's really the next generation of EV chargers. The charge are compliant to the new regulations. That's also one of the important aspects. But also forward-looking regulations, all that has been released so far, we are compliant. And by moving the production to U.K. hold from China, of course, we are eliminating risk exposure, geopolitical risk exposure. That's very important. We're also bringing down our climate footprint, thanks to this. And if we look at the demand -- the growing demand in the future, we have more than doubled our capacity and lead times are shortened significantly. And as you all know, there is a pent-up demand for U.K. for EV charging or entire Europe, actually, but U.K. is our main market. And from 2030, the sale of new petrol and diesel cars will be banned in the U.K., and U.K. government estimates that it will be 10x number of installments of charging points in 2030 compared to today. So that is, of course, a significant growth on an average about 40% per year. For this year, however, we don't expect a 40% growth in the market, since we also have uncertainties in the prevailing economy. So the net effect is really hard to predict. There are strong growth drivers, but also caution in the marketplace. So if we look at the growth in January, the past month, the sales of electric vehicles are up 12% versus last year. So that could perhaps be an early indicator of the current market growth. I would like you -- and it's not only growth in terms of the consumers and companies and so forth are making a decision to buy EVs, but it's also regulations driving this. So for instance, a new regulation in U.K. in 2022 is that all new housing must include one charging point per household. And a similar type of rules also apply for workplace and supermarkets. So that's also something that definitely drives growth into the marketplace regardless of the economic situation. So we are very well positioned really to take part in establishing the important infrastructure for EV charging. Highlights for the quarter. Demand continues to be good. And as we had looked at previously, the organic growth is stable at 2%, [indiscernible], excluding the EV charging units. And as we always keep on repeating that the background for this is, of course, that our products, they meet critical needs in infrastructure. Our customers, they come back for more because they have to. So regardless of economic situation, we will have a solid demand. And when we look at our order books, they look continuously good. Our operating margins, margin is slightly down for the quarter, 19.2% compared to 20.5%. Positive contributions from acquisitions, as always, in line with our strategy on acquiring high-margin positions. However, profitability in comparable units slightly down. And this is once again, it's inflation. We have a good way to deal with inflation. We have implemented a significant number of measures throughout the years, and they had a good effect. We know this. But sometimes, they have a delayed effect. So that's really what we have here. We will continue to work with price revisions, and we're really comfortable that eventually we will achieve full compensation in the same way that we have previously done. Cash flow, strong. We built up safety stocks in the previous quarter in order to -- for critical components in order to secure deliveries to our customers. We have released some of that safety stock. And as an effect, our cash flow strong at 99%. Bengt will also come back to describe some more details about that, but we're very happy to present a strong cash flow. Finally, we have a significant uplift in our earnings per share at about SEK 11.48 versus SEK 6.55 last year. And of course, we have a positive contribution from our growing operations. Operating profit is up 32%. We also have a positive contribution from reduced earn-out debts. And this is really a key part of our financing model, and it's really a mechanist to adjust the multiple that we eventually will pay for on acquisition. So if a profit development for a particular acquisition is less positive than expected, then we will adjust the book debt. And that has been the case for the year. It doesn't say that the profit development has been negative. It's just not as positive as we expected. So the reason -- and so that is really the beautiful thing about our financing model. If the profit goes down below expectations, the value of the underlying assets also decreases, and along with that, the depth. So it's really an excellent financing model, which also comes into play in our earnings per share for this year. And then finally, before I hand over to Bengt, I have a look at our acquisitions, Patol and Linesense Fire Detection was acquired in the quarter, an excellent company providing fire safety equipment for -- fir instance, tunnels. The Linesense product is very efficient and effective to detect fires and also to identify the particular position of the fire. So that is a very important aspect if there's a fire in tunnels, for instance. But also specific solutions for waste recycling, food production and so forth are also very important areas. So we're very happy to include Patol and Linesense in our SIS business area as of November. And then the most recent acquisition, Mecno Service from Italy, designed for manufactures grinding -- grinding machines. You can see on the picture. So what it does, it really makes the rails smoother, which is very important to bring down the energy required to drive the train. And the technology that Mecno has is very specific. So it is specialized for complicated situations like in trams and subways and so on. So this is really an interesting company, typically classical infrastructure and also a significant part recurring revenue at 70%. So we would definitely like to say that this is a typical Sdiptech company, strong, niche product with high degree of recurring revenue. Having a look then at the acquisitions for the year, we are -- we delivered SEK 161 million in terms of profit acquired. Our target is between SEK 120 million, SEK 150 million. And as you can see, we have a history of delivering pretty well according to our financial targets. Seven acquisitions this year, all of them really adding to our existing operations, and we really can see that we, in an increasing way, work as a cohesive group together in an interesting way. And we are focused on quality, as we said before. We stepped down from 3 out of 10 processes -- sorry, I should say, 10 there -- stepped down 3 out of 10 processes that really demonstrates our commitment to quality. We're very happy to, throughout the year, entered into Italy, Denmark and U.S.A. as new markets, very important. U.S.A., it's not a big step for us, really. It's more an add-on acquisition. But anyway, we are -- we see that, that is a very good way to help our companies grow by establishing, in this case, for our company, Hilltip, to establish a production facility on U.S. soil. Our pipeline is good. Our financial position is good. So we definitely plan to meet our financial targets. We will most likely not exceed them this year. We are very happy to -- over a couple of months ago, we raised additional capital with great support from existing and new investors. But for this year, we are not planning such an activity. So we are focusing on meeting our financial targets, not exceeding them. And by that, I hand over to Bengt.

Thank you, Jakob. Yes, let's talk some more details then about the financial development and starting to look at the sales. Here, you can see on the left-hand side, our development since 2017. And up to last year, we had a compounded annual growth rate of 26%. This year, we increased with 29%. And looking at the last quarter, quarter 4, we even have a 36% sale increase. On those, I think Jakob mentioned was 2% organically. But if we exclude this EV charger unit, it was almost 10% organic sales growth in the quarter. And looking at the half year, the quarter 3 and 4, the same numbers will be about 6% excluding -- 6% excluding the EV charger business. We are quite confident now that this EV charger business is ramping up and running as it should towards the end of this quarter. So hopefully, we don't need to report specifically on this very specific business during 2023. Looking at the split between countries to where our products and services are delivered. So this is from the customer perspective. You see that the Swedish part has decreased over the years and is now represented by 22% and the turnover for the full year. U.K. market, 44%. And we have an increasing share of other, meaning other geographies than where our companies are residing. And that goes in line with that many of our latest acquisitions have exports of their products and services. This, of course, means that as a Swedish company, we have a majority of our earnings in other currencies, also meaning that we work actively and extensively the different type of derivative instruments to limit the exposure for fluctuations in the currency. For example, as have been in the case the last couple of days with the currency even stronger. Looking at similar chart and structure, but for the profit, we see we had a compound profit of a rate of 43% up to last year and this year we're 32%, and in the quarter at 28%. Of course, very much then affected by the EV charger business in U.K. And since the profits have increased less than the turnover in the quarter, then we see that our margin have decreased a bit from last quarter -- on a last 12-month basis was 19.4% and now it's 19.1%. But as Jakob mentioned, we're quite confident that we are a 20% EBITA margin group, and we should get there for sure. And looking also at the full year, year-to-date. We had an increase of 32%, of which minus 10% was organic decrease. But again, looking, for example, at the last 2 quarters, quarter 3 and 4, we had a positive organic profit growth of 4.3% if we exclude the famous charging business. Even so, all in all, the margin was increased and strengthened. So for the full year, a 19.1% EBITA margin. So eventually, when this EV charger business is up running as it should quite soon, we hopefully will be able also to strengthen this margin again. Looking a bit specifically more on the 2 business areas, starting with Resource Efficiency. You can see the trends in the chart for their sales. Sales have increased 24% during the full year and had a 3% increase during the quarter. We have had one acquisition during the year, Agrosistemi, which has contributed very well during the year and as did most other organic business units -- I would say, all other business units except the charging business then. We're looking at the EBITA, the profits for the full year, we had a 10% increase. But since EV charger business is quite -- is such a big part of this business area, we had a decrease for the last quarter of minus 23%. That has then meant that the margin decreased quite substantially in the quarter compared with the last year. And we're, yes, expecting this, of course, and as well to increase now during this year. In total, we have 16 business units in this business area. And for the type of businesses represented here, water and sanitation, power and energy, the bio-economy and waste management, we believe we have a very strong underlying demand over time for all these businesses. Looking then at Special Infrastructure Solutions, we have had quite extensive increase in sales, the full year, 32% in the quarter, 58% sales increase. Of course, much driven by acquisitions. We have made 6 acquisitions to this business area during the year. And -- but also for the existing organic units, so to say, we have had a very good development for more or less all of these. Also meant that EBITA increased by 66% in the quarter and 44% for the full year, meaning also then that the margin has been strengthened since profit has increased more than sales. To a large extent, of course, that these acquisitions have had a profit margin above average, but also that many of the existing units has performed very well. All in all, there are 21 business units. A business unit can be composed of many legal entities, some kind of mini groups. Jakob mentioned here our company, Hilltip, which is part of the Special Infrastructure Solutions established now in the U.S. We also have subsidiaries in Europe and Germany. And so they have very strong positions in many geographies now, and it's also then part of this increasing exports for the whole group. Then some other KPIs. We're typically here in this page. We look at our cash conversions from the operations. We -- as Jakob mentioned, we are not building safety stock any longer. And in this quarter, we were more or less flat on the stock. But since sales have increased, that also means that we actually have reduced the safety stock. And we have also been decreasing the operating receivables, the account receivables from customers specifically. And also, we have increased the liabilities from suppliers -- to suppliers, for example, which has meant we have a good cash conversion also in the working capital. For the full year, it was 80%. Since we started this year with a quite buildup of stock, we actually built stock with almost a little bit more than SEK 90 million during the full year. But we can now have that security, so to say, that we had enough goods to deliver to the strong demand. But we also, in total, for the full year, also then got cash conversions from our receivables and liabilities. So very good, and let's see now for this year if we can keep up the good momentum in the cash provision. The earnings per share, Jakob mentioned. So I skipped that. And then perhaps a little bit on the financial debt KPIs. The one we have an external target on, the net financial debt/EBITDA was now about 1.8. Our goal or limit, you could say, is 2.5. Of course, temporarily, we could be around 2.5 or even slightly above it. But we should, in the long run, stay at 2.5 or lower, and we are at a very comforting headroom of 1.8 right now. And when we add then these contingent liabilities for the earn-out considerations, then we're at 3.55. But as was mentioned in the CEO comments, that if profit levels would stay at the levels of the year of 2022, 40% of those liabilities for the earn-outs would actually then be not in effect, so to say. They would be decreased from the liability in the balance sheet since they would not be out for payment any longer. So that's the beauty of having that. And -- but we still have our projections for our companies, meaning that we have quite substantial debt booked for the earn-outs, it's SEK 1.3 billion almost, which we hope, of course, to have to pay in the future because that will mean that the companies have delivered very good results. Yes, I think that was for me.

Okay. Thank you, Bengt. Move forward. Finally, have a look at the outlook and then open up for questions. So as we've said many times now, infrastructure is always needed. The demand is solid. Our order books are good. So we have an unchanged view on that. Profitability. We are confident that we will establish ourselves at 20%. The acquisitions will continue to contribute in a good way, comparable units. We are confident that we will achieve full compensation for the cost increases. Work will continue. We have a good situation given that our customers, they really need our products. We have a good dialogue with our customers. So working with price increases can be done in a constructive way. And our unit for EV charging solutions, they are back on track. The unit is back on track. So that's very good. So that will, of course, also contribute positively to our organic growth, but also to our profitability. So looking forward, the situation there is -- we're quite optimistic about that, actually. And acquisitions pipeline is normal. As always, systematically controlled work to find the best infrastructure niche, high-margin companies within our sectors. So we continuously work with that, and we are aiming to once again to meet our acquisitions target for 2023. And with that, we open up for questions.

Here's the first question. Why was the organic growth adjusted for Rolec so strong on sales, but only flat on EBITDA?

Yes. Part of that -- and that is for the quarter and that is in some units, except for the charger business, has also had some challenges this quarter compared to last year. We had a very strong organic profit growth last year. I think it was 35% or so for the full quarter, meaning they had tough comparables. So they didn't meet up fully to that. But on the other hand -- and that was done last year at a very high profit margin rate, very lean and mean, so to say. Now we are more a normalized cost base, and we also continuously increase prices to achieve full compensation for these cost increases. So I would say that, that -- it's a mixture of reasons for that. But hopefully, we will see different figures now for Q1.

Can you comment on the ongoing production ramp-up for Rolec. Have you started to see any delivered volumes in January?

Yes. Yes, we have. We are ramping up. We have a plan. And we are meeting that plan. We had a plan for December, whether -- November, plan for December, plan for January, and we are well in line with the plan. Yes, we have started to deliver. We started off early in Q4 with small volumes to really test everything in all kinds of situations. So -- but that was one phase and then eventually starting to scale up volumes in December, fine-tuning everything. And then now in January, we are in a position to really grow the volumes. And yes, we are also delivering to customers. And we had quite a long backlog when we started because orders were piling up, but that backlog is now down to 2 months and it's continuously shrinking. So we wanted to get down shorter than one month, perhaps even shorter than that. Yes, so everything is developing in a very good way.

Are you able to highlight on specific companies that did well during this quarter?

Yes, we have mentioned in the report that -- and I can mention two now. One is our road maintenance equipment company, Hilltip, where I mentioned them a little bit in the call already. They had a fantastic quarter. And their product is -- have a very good demand, both in the Nordics, in Europe and after these in the U.S. now, where they are expanding quickly. That's also why we invest in this production facility. So they really have the right product in right place in the right time. Another one we could mention also is our company for port automation solutions, which had a bit of a struggle Q4 last year, when they were new in the group. That's not so nice for a new company to start off with more or less a flat EBIT for a full quarter, the first quarter. But now they have been up running at full speed now since spring and they have an increased demand for their products. And now when the container ports have time, so to say, to spend on projects to improve the efficiency all around the globe. So very promising.

You have since Q1 2022 mentioned that you aim to fully compensate for inflation with price increases, which seems to lag a bit in Q4. Based on what you see now in the market, when do you expect to reach full price/compensation cost -- compensation?

It -- we're not willing to give you a specific time. But what -- this has been -- as you know, inflation has been going on for 2.5 years now when it comes to raw material prices and so forth. So we've been doing this now for a long time -- I think everyone. And for us, the pattern has been that we are -- we get fully compensated. There is a time lag. But then eventually, it catches up and then there's some additional inflation. We can have some new discussions with the customer. Then there is some lag, and then it catches up. So this is -- this has been a situation all the time. So -- and it will continue. So we will get back on track. And then if there's continuous inflation, we will need to revisit the discussions with the customer, and we will have the same pattern once again. So it is -- it goes step-wise. And just now, we are on the -- a bad side of that step, if you say so. But then eventually, we will get on the good side again, as we always do.