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

Welcome to Sdiptech Q1 Report for 2025. [Operator Instructions].    Now I will hand the conference over to CEO, Bengt Lejdstrom; and CFO, Susanna Zethelius. Please go ahead.

Thank you, and welcome to this presentation of Sdiptech's report from the first quarter of 2025. Myself, Bengt Lejdstrom; and my colleague, Susanna, will guide you through the different performances of the group. And as always, we will start with a short presentation of what Sdiptech is.    As most of you know already, we are a technology group where our business units, they provide products and solutions for creating a more sustainable, efficient and safe society. Very much of those solutions are built into infrastructure. That's also why we call ourselves an infrastructure technology group.    Since the beginning of this year, we have divided ourselves into 4 business areas, and we will get back to those in more detail. That's consisting currently then of the supply chain and transportation, the energy electrification, water and bioeconomy, and safety and security. And what's common for all our business units within these business areas are some key drivers. We're looking to acquire companies within these areas that all have some underlying long-term growth drivers, very much based on that we have an aging infrastructure within at least Europe and many other parts of the world. We have an increasing consumption of infrastructure. We have seen increasing regulations around infrastructure. And not the least, we all strive for a more sustainable, efficient, and safe society. So we think that we are well-positioned for a good demand and stable growth over time.    As you can see from the map to the right, that's where our companies are today, and with our main offices. We also have subsidiaries, sub-subsidiaries in other geographies around the world. Currently, 41 business units, and we have had since the listing of our B share a 34% CAGR when it comes to our EBITDA profit.    Apart from financial metrics and KPIs, we also have a goal of reducing our CO2 footprint from our internal operations, and that's measured as a CO2 per turnover in millions that with 24% first -- since 2021 then during the first 3 years, and our ambition and target is to reduce by 50% until 2026. So we're well on the track on that.    So let's have a look at the first quarter then and some highlights. We think it was a quite decent report and outcome. We saw net sales increasing all in all with some 4%. However, organic, that was a minus of 4%. And to some extent, that's depending on that towards the end of the period, we saw some -- that our customers become a little bit more cautious and perhaps waiting or postponing decisions for some investment decisions. But all in all, it was not a huge impact for Q1, and let's come back to what we see for the current quarter and onwards.    When it came to our EBITDA, that was flat more or less compared to last year, including acquisitions, meaning that we had a negative organic growth. Some effects from that being still that we had some -- the organic sales were negative, but also that we saw some cost increases in staff costs, and also that we had in some units, very tough comparisons, and not the least in the business area, water and bioeconomy. And we will come back to that as well.    Our margin then obviously decreased a bit, and we are, of course, not satisfied with that. So we are already taking different actions to have a more cost-efficient operations. So cost cutting and more efficient operations in many different ways. I will come back to that as well a little bit.    The cash flow was stable and solid for the quarter and was in line with last year. And we were happy to welcome 3 more companies into the group -- sorry, 2 more companies into the group, Phase 3 in U.K., which we presented already last quarter, and then a very small add-on acquisition to our Dutch company, Certus, namely a company called Supply in the Netherlands. Both of them very well positioned and contributing very well to the group already.    So let's have a look on the sales all in all. As I mentioned, we had an increase in total with 4%, but a decline organically. The macro and geopolitical situation gave some impacts towards the end of the quarter. When it comes to direct exposure to the U.S., it's very limited for us. It's roughly 4% of our sales. is to customers based in the U.S. So that hasn't had a big impact yet when it comes to trade tariffs, et cetera. But we're having close dialogue with our units over there to see how we can mitigate that. And for example, then putting more production and manufacturing for some of our products locally in the U.S. to avoid as much as possible effects from tariff. We don't trade flows going from Asia into the U.S., except for very small units from, for example, Taiwan, but not from China directly. So we're not hit by these very high tariffs anyhow.    And when it comes to the EBITDA, as I mentioned, we're focusing them on different initiatives to increase profitability to make sure that we adjust and adapt to the different situations. A main driver for increased costs have been staff costs, personnel costs, not the least in the U.K., where almost half of our turnover is coming from, where we have seen increase both from a legal perspective in minimum wages coming along there from this quarter, but also from overall inflation on the salary levels, for example. But we think at least we can adjust for that as well through increasing prices, not the least, but it takes some time for us to do that to bring these cost increases over to our customers, mainly because we have long-term agreements with customers stipulating how much our products and services cost. But as soon as we can, we, of course, adjust. We had similar situation a couple of years ago on the inflation of the cost of goods increased. And we said already then that 6 to 9 months lag between cost increase and price increase for us typically. And we're working, of course, to shorten that time lag, so we can adjust prices as soon as we can. And of course, in all new deals, we adjust for increased costs.  When it comes to the CAGR on sales since the stock -- since the listing of the share, it has been 4%, and you see on the graph on the right the development, and you also see the organic growth on a last 12-month basis. So right now then for last 12 months, Q1, it was 0% last year, ending with 3% organic growth.    Then looking at the geographical split in more detail on the right-hand side. As I mentioned, we had almost half, 45% of our turnover is from customers in the U.K. Our business units in U.K., of course, also have exports. So they -- so the units in U.K., they actually represent more or less half of all our turnover. As you see there, the U.S., 4%. Sweden is decreasing since we haven't made really any major acquisitions in a very long time. So it's down to below 17%. And then you see a split on some major geographies like Norway and Italy, and then other Europe and Rest of World. All in all, that section is increasing a bit by bit since we are acquiring product-based companies that have some exports.  On the left-hand side, you see the split on the turnover by type of revenue. We're slowly increasing the share of product-based sales since we have both more or less divested or closing down businesses within service and installation, but we still like service and installation as long as our own products. So we will always have some revenue streams for that, but it has decreased a little bit over the years. But I think this distribution of the turnover is pretty stable over time.    Looking on the adjusted EBITDA corresponding development. You see on the graph here how it has developed, has been a 34% CAGR since 2017. It has slowed down a bit the last year, 1.5 years. And also here, you see the organic last 12-month figures in these circles. So last year, it was a negative 2%. And now on the last 12-month basis, it's a negative 7%. And as I mentioned, we are, of course, not happy or satisfied with that and do our best to get that back on track. All in all, the EBITDA, as mentioned, was on the similar level as last year, SEK 251 million in adjusted EBITDA. And to counterbalance the organic decrease, we had our acquired companies since last year contributing in a positive and very good way. We'll come back to that a little bit. And I will discuss the different business areas here in the coming slide. So we wait to present that.  And when it then comes to our business areas, as you may know then that we have a new organization since beginning of this year, the 4 business areas I mentioned. And here on this slide, you see the heads of the respective business area and also the distribution of sales and EBITDA.    And as you can see, our biggest business area, both from profits and sales, is the supply chain and transportation. And then the second biggest energy and electrification. And then we have water by economy, and safety and security is the smallest one, but with the highest margin actually. So we think it's about roughly the same number of business units within each business area. That's how we are organized that the business area managers, they can have around 7, 8, or so business units each to care for and take care of.  So it's important then to have a good distribution of the responsibilities through the different business areas.    If we then look at the performance on each of these and start with supply chain and transportation, we saw a slight decrease on the sales, but a smaller increase of EBITDA, meaning that the margin increased a bit. We saw for a few companies, especially the ones with solutions for logistics, could be in logistics centers, warehouses or container terminals, that their customers postponed orders, waiting of executing some of their orders now towards the end of the period, but the underlying demand is stable. So some of the units in this business area had a very good sales development in the quarter. So all in all, very stable. And as you can see on the graph, the EBITDA margin 2 years have been stable between the 17% and 20%.  Looking into the energy and electrification. Here, we saw increased sales and increased profits. Profits increased more than sales. So we had a strengthening of the margin. And here, we also had an acquisition contributing to the development that we did in the quarter, Phase 3. And so -- and many other of the units were performing very well, not the least the one within electrification and energy efficiency. For example, our EV charging business in the U.K., Rolec, performed very good, and some other units within the energy efficiency sector. However, we have one unit which is a little bit relying on the climate, providing services to -- for construction of infrastructure during winter time that kind of falls up the ground and can be heating different areas. They saw a mild winter, making their demand a little bit less than usual, but still quite decent, but not as high as last year. So there were some ups and downs. But also here, you see a stable margin over time, and we think there are many good possibilities for the companies in this business area to develop well.  Then coming to Water and Bioeconomy. Here, we saw the biggest drop in profitability. The sales were more or less on the same level, thanks to acquisitions from last year, then contributing. But we saw that some units had a challenging quarter with tough comparable numbers from last year. And we also here have some companies with quite a few employees and big number of staff, and they were then hit by the increased staff costs in the U.K. As you may know, it's from 1st of April, the minimum wages increase also this year as it did last year. But this year, it has had a greater impact on the overall staff costs and those staff costs has increased already from the beginning of the year. So all in all, for the whole group, the staff cost increased with 5%, which more or less correlates to our negative profit growth in numbers. And again, of course, we do our best to compensate for that through increased prices and also do some other activities and measures.  And perhaps should be noted also that last year, Q1 in '24, as you can see from the chart here on the right-hand side, the EBITDA margin was extremely high, 29%. That's not a normal figure. So we are now back at more normal levels on the EBITDA margin for this business area.  And last but not least, Safety and Security. We had an increase in sales and also an increase in EBITDA. We have acquired companies from Q4 last year contributing. And we see overall a continued focus on safety, which leads to good demand more or less across the business area. And that the EBITDA margin is a little bit lower than a year ago. It's more the mix of sales from these companies since we have made, as I said, acquisitions into this business area that makes also typically that EBITDA margin changes over time can go up or down depending on the EBITDA margin of the companies acquired. So all in all, very stable development for this business area.  So with that said, I would like to hand over to my colleague, Susanna, to mention a few words about different KPIs, financial KPIs.

Yes. Thank you, Bengt. Then starting to look a bit at the cash flow and cash conversion. In the quarter, we had a cash flow from operations landing at NOK 170 million. And in the quarter, the cash conversion was at 74%. If we look at the rolling 12 months, cash flow from operations was at NOK 822 million, so similar to previous quarter, and we had a cash conversion of 83%. So we're well within the range of 70% to 90% that we have as a sort of internal guideline. And any variance between the quarter is really relating to timing.    Moving to the next slide and looking at some additional metrics. Firstly, we have the profit after tax in the quarter, it was NOK 74 million, so somewhat lower than the NOK 110 million that we had the same quarter last year. And we had a financial net of minus NOK 91 million this quarter, which was quite a lot higher than the same quarter last year. It was NOK 59 million then. The primary impact for this increase was unrealized foreign exchange losses of minus SEK 25 million in this quarter, and it was plus SEK 3 million same quarter last year. So a variance of SEK 28 million, and that relates to the balance sheet. And in the quarter, both the pound as well as the euro has been decreasing with some 6%. So that has given the impact. We also have a somewhat higher interest cost than last year because of higher debt levels, even though interest rates have been coming down. And both these effects also, of course, impact the earnings per share.  And then moving to the debt leverage ratios. You can see those numbers here, but they are stable versus previous quarter. So we're pretty much in line with previous quarter. If you compare them with the same quarter last year, the variance is depending on acquisition pace and the payouts of contingent considerations.    And then moving on to return on capital employed. And this was in line with last quarter, but slightly down versus the same quarter last year, now at 12.5% versus 13.2% last year. And here, it's primarily the acquisitions in Q4 and Q1 that has impacted as we do not yet account for the full year profits for those acquisitions. If you look at return on capital employed for the underlying businesses, the average for those, it's 56%. And of course, there is difference looking at businesses versus the group. But over time, with new acquisitions, organic growth and also higher cash flows, return on capital employed for the group will gradually increase.  And with that, I'm handing back over to Bengt to talk about acquisitions.

Thank you, Susanna. And yes, as mentioned, we did one acquisition, a bigger one during the quarter. We have a very solid pipeline, as always, I would say. We have some prioritized geographies. We have added for the ones of you who have been listening to us for some time now. We have added Germany. And that's partly because we now have access to underlying data for German companies, so we can analyze that better. As you know, we have our in-house M&A team here in Stockholm. And so we do all the screening and sourcing of potential targets here centrally. Of course, sometimes with input from our business units, where they have ideas that could be good acquisitions, but then everything is processed centrally and analyzed. And now we are testing Germany a little bit more in practice and have already some discussions with German-based companies. But however, all in all, it's very important that we balance the pace of acquisitions against what's happening in the external factors and the uncertainties around us. And our guidance here on the volume to acquire, which have increased in the past from SEK 90 million to now a range SEK 120 million, SEK 150 million. And as you can see, it's not a hard target. We have been below that '23 and '24. And we are very cautious, of course, now as well to make sure that acquisitions we do have a good solid outlook even in the current circumstances, and we're very careful in our due diligence. So we make acquisitions when we feel comfortable that it's a high-quality company, and we do it also when we take all the other factors into consideration. So for the time being, a little bit careful pace of acquisitions, I could say. But our financial position is good. We have a new credit arrangement in place. We have extended that with almost SEK 1 billion now. So we have more or less SEK 2.2 billion in accessible funding. We have reduced the interest rates all in all, in this credit agreement, which is, of course, good, and added also another one of the Swedish major banks into this facility. So we have 3 credit providers in that facility. So we're, of course, very happy with that, and it's also a sign that our credit providers have a great trust in us as a company. We also have our sustainability-linked bond out there as well.  Even though we presented the acquisition of Phase 3 in the last quarter, I could just mention it again, it has performed very good. It has and had already before we acquired it, relationships with one of our other companies in the U.K., providing solutions for temporary electricity, and so, IDE Systems. IDE Systems, which had a very great performance last year since they had the Olympic Games in Paris as a very big customer, no Olympic games this year. So of course, they will have a lower volume, both on sales and profit this year, but anyhow, a very good company. And these 2 companies together, Phase 3 and ID cooperate in a lot of areas. And so really looking forward to support Phase 3 going onwards, and they have had a very good start. And then we made -- I don't have a slide on that, but we made, as I mentioned in the beginning, a small acquisition of a Dutch company called Supply, which have an AI-based solutions for optical recognition, which our Dutch company, Cyprus is using for their products and solutions for handling container terminals and logistics centers, et cetera. So the expertise we acquired, you could say, help us in the development of enhancing and improving our solutions in that area. So also welcoming the staff of supply into our group. So as a summary, some key takeaways. As you saw, we have a good cash flow kicking in. We made a lot of activities on that last year, and we're still careful to make sure that we continue to get good cash flow from the operations. We had good positive contributions from our acquisitions. And we saw a good development in many of our business units with strong underlying trends and drivers. But as mentioned, we had some business units saw an effect from the uncertainties around the world and had a bit softer development, not the least towards the end of the quarter, and also some of the business units had a very strong comparable figures from last year. But we have a full focus on profitability and efficiency, and of course, doing a lot of activities for growth as well going forward. And it's difficult, of course, to foresee how the current situation in the overall global scene will affect us during this quarter. And I think no company can really say how that will affect them, but we try our best to mitigate and navigate through these uncertainties that exist based on our decentralized model of having a portfolio of very strong and well-performing companies. I should add also, since it was also mentioned in the report that we evaluate, of course, all our companies all the time. And specifically, we also evaluate against criteria that we have for acquiring new companies. And these criteria, they were -- you could say we changed that quite dramatically some 5, 6 years ago in the summer of 2019. From that point in time and onwards, we have tougher criteria than before. And we're evaluating companies that currently do not meet those criteria. Many of the companies acquired before that still meet this criteria, but we have some that perhaps don't and could perhaps have a better home somewhere else. It's not that these companies are not performing good. They perform good according in their respective business niche and what could be expected. But perhaps for us, it's a better capital allocation to use that money to acquire other type of companies meeting our current criteria. So there may be possible divestments ahead. An example of that was the divestment we did a year ago, a Swedish company called Frigotech that we sold to another Swedish group called the Nordic Climate Group, which was a very good home for that type of company. And we could use those money to acquire other companies in line with our criteria.  So with that said, I want to thank you for listening in, and we open up for questions.

[Operator Instructions] The next question comes from Max Bacco from SEB.

Thank you, and I hope you can hear me and hello Bengt and Susanna. Thank you for the questions. So just perhaps starting with circling back on the outlook comment that you made, Bengt and wrote in the report in the end of the quarter that you felt that some customers were holding off on planned projects. And I think you alluded to Certus as one of the subsidiaries seeing this. And I guess that makes perfect sense given their exposure to customers operating ports and so on and so forth. But I mean, how should we interpret this? Is it, I mean, something of units that saw this in the end of the quarter? Or is it more a general phenomenon that you see that a bit more hesitant demand as of right now given the uncertainty?

Well, it's more to some specific business units in addition to the one you mentioned, Certus, which is true that that's one affected. Another one, the Danish company called ELM providing services to warehouse with their attachments for trucks, that the forklift trucks that you use in warehouses and logistics centers, that they have the same also now the same type of postponements or delays of orders. So they are the ones mostly affected. It could be 1 or 2 or 3 perhaps other business units, but it's not in general for all our units. We have many units who are not affected as well. So it's more in the current situation as we are today at the end of April, it's quite difficult to see what -- how that will continue. But so far, it's only limited to a few of our business units.

And the next question perhaps to you, Susanna. I mean you highlighted that you -- some new loan agreements signed here in the quarter with more favorable terms to refinance the existing ones. Do you have any comments on the interest rates on the new ones compared to the old ones? Any comment on that?

I mean we haven't mentioned exact rates, but we are coming down on interest rates. We're also slightly reweighting, so taking out the large portion of the debt in pounds as we have many of our business units and quite a lot of the revenue in the U.K. I can -- yes, in general terms, I would say interest rates are coming down, and we're shifting some higher portion of the debt to pounds in order to better match the revenues.

And then the final question, very detail oriented, but I noted in the report in the acquisition section that you wrote that if all acquired units, which is basically sales 3 connectors, had been consolidated from the beginning of the quarter, then sales would have increased with SEK 1 million and EBITDA with SEK 14 million, if I read it right. Is that correct? And how does that make sense, if I understand the question? It's very high profitability.

Yes, it makes sense. And we actually did 2 very small acquisitions. I mentioned the supply in the Netherlands, and also we've made a very small Danish add-on to our Chemtech. But the absolute major part is coming from Phase 3, which have had a very good start, as I mentioned. So it's correct numbers over there. But perhaps too soon then to draw the line for the rest of the quarters for Phase 3 that they would keep up this pace for all the coming quarters, but they had a very good start in the group, which is always positive.

The next question comes from Niklas Sävås from Redeye.

I was curious, you mentioned that you added Germany as a potential geography to make acquisitions in. How do you think about sort of having feet on the ground in Germany? Because I've heard from others that they think that it's good to speak the native language in order to be an attractive buyer there. So could you please elaborate on that?

Yes. And we have the same view as well that it's -- when you get into the more close discussions and dialogues with German sellers, it's very good if you can speak German yourself. And of course, we will do this in a similar way as we did when we entered into Italy. We had a partner then at that time, who helped us with that part of the process, and we will do the same then for German companies. However, we can still call them from here in Stockholm, and we can approach them in different ways and set up meetings. And then when we're visiting them, we will most certainly have a German-speaking person together with us during those meetings. So we're testing this. And we -- as I said, we have a few already then companies in our pipeline that we're in dialogue with. So let's see how that evolves. But for sure, as in any geography, you need to know the culture and many other aspects of doing deals in that country.

And I was a bit curious also to ask a more general question about the U.K., where you have the largest exposure. I mean there have been a few negatives impacting the business climate there. One is the higher tax rate that we saw implemented last year. And now we have an increase in labor costs. So how do you think about sort of the development for -- I mean, the business climate in the U.K. Has this changed for you in the recent years?

Yes. As you said, the tax rate was actually 2 years ago now increased quite dramatically from 19% to 25%. So that, of course, hit our net profits. And as you mentioned also, there are different political decisions to increase staff costs in different ways. But it's still a very good geography when it comes to our type of companies where the demand is solid and good because -- but not the least, it's old infrastructure in many places for you who have been traveling around in U.K., you understand that, needs to do a lot of development and improvements. And there are also a lot of regulations around this, which is good, we think, because that sets barriers for competitors to enter the market, and it also gives some certainty about what you're supposed to deliver to. All in all, U.K. is a very good geography for us and our type of companies. And we will probably make more acquisitions in the future in the U.K. as well and the things -- the ones we have are performing good. So yes.

And last question is a bit more detailed oriented and that's -- I mean, you mentioned ID Systems and that it had great sales due to the Paris Olympics last year. Could you help us in some way to quantify the impact that you saw there? Was that in the sort of SEK 30 million, SEK 40 million range in Q2, Q3? Or was it more or less than that?

You mean the additional they had for them, very high sales and profit last year, all in all. We don't expect them to live up to that this year. So the ordinary business is developing very well. But you will - and that will come mainly - this reduction is mainly in Q2, Q3, than this year, because that's where a major part of the Olympic Games came around. But let's see how they can perform without an Olympic game this year, but most certainly not at the same high numbers as last year. But I don't want to quantify that more in detail because we don't know how it will develop during this year.

No phone questions at this time. So I hand the conference back to the speakers for any written questions or closing comments.

Yes. And we have received some written questions. So I'm reading them top down here and try to answer them. One question is whether we retain our guidance for 5% to 10% organic revenue growth. Our target and goal is to have a 5% to 10% organic profit growth, we are now negative 8% this quarter, negative 7% on a last 12 months basis. So that's, of course, a tough target for this year. We will do our best, but I wouldn't say that it's a guidance for this year, but we are, of course, aiming to eventually when the year is done when we are at the end of Q4 that we will be able to be in a positive range, and we will do our best to be at least in the lower part of this range, but that is still to be seen, of course.    And then we have a question about how long it will take to pass the increased staff costs in the UK into customers. And yes, it's typically a lag for us with some 6 months or even up 8, 9 months from our very much contract-based business, not the least one business unit in the business area, Water and Bioeconomy, the biggest one in that business area. We provide services to insurance companies to fix broken pipes, sewage pipes, and water pipes in the ground. They have very long contracts with the insurance companies to provide these services at fixed costs, could be 1- to 3-year contracts. It's very hard to see that we can change that industry to go to more flexible contracts.    The insurance companies are, of course, big companies, but we have a strong position. So we do our best then to manage that. But it's at least a lag for them in order to change and update their price list towards their customers. So all in all, I would say it's a 6-month delay at least for those types of companies.  And then we have another question on our sales process of our remaining elevator business in Central Europe. And yes, it's going according to plan. We have issued an investment memorandum since some time, and we're in the middle of that phase of collecting different bids and interest. We have a great interest from many potential buyers, especially in the region and other parts of Europe, but also from others. So we're optimistic to be able to close this. And so that hopefully can be reported in this coming quarter then the status of that. But we're having a good response to our investment memorandum for this business that actually 3 different types of businesses, but they could be acquired all 3 of them or separately from a potential buyer.  And then there was a question about shutting down our, I would say, only real construction-related business we had in Sweden, yes, we closed it down last year. So we don't have revenues from that company this year. And of course, since that company that still exists in a way since we have it merged into another Swedish business unit, but it doesn't do any new business or new projects, but it's, of course, legally honoring and maintaining some of the agreements had with historic customers, but that shouldn't cost anything. No material cost associated with that. But of course, a revenue last year, which affected was not super high because we already last year started to do that, but it were some percentage points at least contribution to the revenue last year. So that's a negative effect, you could say. On the other side, we also, as you know, later on during the year, had some costs in that business unit, which will then be benefiting from in the other direction when it comes to EBITDA.    Yes, perhaps I've answered that second question that it's still a business unit existing legally, even though it has been merged into another company. Let's see, it's a little bit hard to read. Yes, pure divestments we're adjusting for. There was a question here whether we adjust for M&As, new companies, why not adjust for divestments, but this is really not a divestment in a pure sense. It's a more closing, winding-down type of situation; it depends a little bit on them, quarter-by-quarter, how much that really would affect the numbers. But it's not a huge effect anyhow. I don't know if that was answered to this question, but it's at least an attempt.  So if no further questions, myself and Susanna would like to thank you for dialing in and listening in to our conference call. And we're, of course, happy to - if you have further questions, to answer them later on, on e-mail or so. But I would like to wish you a pleasant day for the rest of the day, and talk to you soon again. Thank you.

Thank you.