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

Welcome to Sdiptech Q2 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Anders Mattson; and CFO, Bengt Lejdstrom. Please go ahead.

Hello, everybody, and welcome to Sdiptech's presentation for the Second Quarter. My name is Anders Mattson, and I am, since 1st of June, the CEO of Sdiptech. And today, I also have with me our CFO, Bengt. I will start with a short introduction to Sdiptech. Sdiptech acquire and develop niche businesses within the infrastructure sector. We look for high-quality product-based companies with a strong market position that can be protected. [Audio Gap] We divide the group into 4 segments: Supply Chain and Transportation; Energy and Electrification; Water and Bioeconomy; and Safety and Security. The key drivers for our business are an aging infrastructure that constantly needs improvement and upgrades. We foresee continuous investment into our selected segments to increase the efficiency and safety and sustainability in the societies. Geographically, we have a strong footprint in the Nordics, U.K. and Italy. We are today 41 companies in the group. And since 2017, we have grown profit by 32% in average per year. So some highlights from the report of the second quarter. It was no doubt a challenging quarter for us. Net sales decreased with 4% to SEK 1,288 million. That is minus 4% organically, additional minus 4% due to currency effects, but plus 4%, thanks to new acquisition coming into the group. We had a stable demand in our core portfolio, which is good to see. But we had a lot of customers postponing orders and sales later into the year, and that is due to the overall uncertainties in the market. If we look at adjusted EBITDA, it decreased with 10% to SEK 242 million in the quarter, minus 9% organic, additional minus 5% due to currency and plus 4% due to the new acquisition coming into the group. That resulted in an adjusted EBITDA margin of 18.8% compared to 20.1% last year, the same quarter. And adjusted EBITDA dropped, of course, as the result of the lower sales. We also had some high comparables due to specific project deliverables in quarter 2 last year. An example of that was strong deliveries into the Olympics, for example, last year. Cash flow, SEK 121 million in cash flow, corresponding to only 45% in cash flow generation. That is, for us, a relatively low number, but it was affected by inventory buildup in specific companies that have orders and deliveries to come in the second half of the year. So as a group, we are not happy with the developments in the last quarters. That is the reason why we have initiated a number of strategic actions to restore, very importantly, the organic growth, but also to improve a very important metric for us, the return on capital employed. The first section is around the business area organization. We would like to increase experience and sector knowledge for our key segments that we work within. I have also decided to include the 4 heads of the business areas into the management team of Sdiptech going forward. We have recruited a new Head of Supply Chain & Transportation, starting in August. And another very important decision is that we have decided to [Audio Gap] Head of Energy and Electrification in the U.K., located in the U.K. It definitely makes sense for us to have a stronger footprint in the U.K. and also for the Energy and Electrification, which is a very important segment in the U.K. for us. Second important strategic activity is portfolio divestment. We made a strategic shift in 2018, '19, where we said that we focus only on product-based companies, and we initiated a new investment criteria. For example, companies with -- should have at least 15% in EBIT margin to be able to join our group. We still have a number of companies that do not meet these requirements, and the group of companies represent roughly 15% of the sales and 5% of the adjusted EBITDA. And we have decided to divest these companies. We will report them separately from Q3. It will be a one-off effect of roughly SEK 400 million to SEK 500 million in goodwill revaluation. And why are we doing this? The primary reason is to allocate capital more efficiently and according to our strategy, where we want to be. We would like to be able to focus more on a core portfolio, which looks very attractive if you're looking at the numbers later. And also, of course, for the future acquisitions to come. And we would like to be more strict on the acquisition criteria we have decided together in the group. And this is nothing new for us actually. We have already divested 8 units since 2021, primarily the service elevator businesses. So we are comfortable that we will manage this in a good way. The third strategic initiative is around fine-tuning our strategy. We have a solid strategy in place, but we need to fine-tune it, and we need to set ambition for a partly new management team that we are building up now, especially to start in August. And it's also important to align the day-to-day operation with the long-term goals to see how we're going to reach the goals year-by-year. So that's important topics for today. And I would like now to hand over to Bengt to more of the financial results for the quarter.

Thank you, Anders. Yes, and we will start to talk a little bit about our sales. In the quarter, as Anders is mentioning, we had a decrease all in all of the sales with 4%, which also was the organic decline, 4%. But many of our units had a very stable demand coming in, ticking in. And even though some companies see that customers are postponing or delaying their orders, the demand is still there. So as many times before, when the situation occur, we know that the demand is out there and our project deliveries are important to our customers. So they will come sooner or later. But right now, it's a little bit of wait and see in some companies. So as Anders mentioned, we had some extremely good performances last year, especially within the business area, water and bioeconomy as well as in the Energy and Electrification. And we will come back to that when we walk through the business areas in a little bit more detail. But over time, we have had a very steady sales growth, 23% on a compound annual average. And of course, some of that coming from acquisitions. But as you see in the chart on the right-hand side, where these circles mentioned what the organic, excluding currency effects, have been, the organic growth has been in the sales year-on-year. So it's a combination of both successful organic delivery and successful acquisitions. And in the last 12 months, now as of last of June, we see a minus 3% in organic growth. But we're taking measures, as Anders was mentioning here to improve that number. Looking into the sales split on the geographical dimension, it has been more or less stable over some time. We have roughly 45% coming in from U.K.-based customers. And that's also a reason why, as Anders was mentioning again, that we're looking for a new member to the management team coming from the U.K. since it's a very important geography for us. Sweden is obviously reducing its part of the pie while exports are increasing as we acquire product-based companies. U.S. is, of course, an important geography to have a look at. And as previous quarters, we don't have that much sales. It's a few companies selling their products, software and hardware into the U.S. So far been able pretty much to mitigate any tariffs. So not a huge impact on that directly. It's more of these indirect effects we mentioned with a kind of wait-and-see approach for the bigger projects that some customers have. Looking on the turnover by revenue type. The product sales is increasing slowly but steadily, while installation then is being reduced, especially since last year since we closed the business in a Swedish installation company and now also some more than is up for scrutiny in the program that Anders mentioned, divestments. So that share piece of the pie will also probably decrease. We like installation if it's on our own products as we like service on our own products. So a lot of that service, the 25% is on our own product deliveries, which, of course, is very good when it comes to customer stickiness and retention. Having a look then on the EBITA development, increased with 10% all in all, of which 9% was organic decline, but then acquisition, of course, contributed. We could see that those acquisitions had a big impact, especially for the safety and security area, where also some -- the other companies had good development. So all in all, we had a positive contribution on the profit from the safety and security business area. While on the supply chain and transportation and water and bioeconomy, we had a negative contribution, meaning that profits were lower than last year. Energy and Electrification was more or less flat versus last year. But we will comment that a little bit more. So on the margin side, we saw a drop in the margins because of sales drop with fixed costs that happens. We get a lower EBIT margin. We also saw some cost increase on wages still. We mentioned that in the Q1 report because of the new legislation in the U.K. for minimum wages and social fees, and that was also an effect in Q2. We have reduced the number of employees to mitigate some of the volume decline in the companies. So the number of employees is less, but still the cost per employee has increased. We continue to focus on initiatives that link to profitability. So a lot around pricing, procurement and then, of course, cost cutting or being very careful about costs all in all. So that will continue. As with the sales development over time, we have had a good EBIT development, 32% on annual average over the years, both then coming from organic growth, as you see in the chart in these circles. A number of years having a very strong positive organic growth, but also, of course, then acquisitions. Taking also a view then on cash flow. We see this quarter coming in lower than usual. And as Anders mentioned, we had a 45% cash conversion with SEK 121 million coming in, but it was impacted mainly then from an increase in working capital due to inventory buildups in companies that have strong deliveries in the second half, some of them seasonal type of companies, but also some other companies having good project sales. And also for this project-based sales, we saw some increase in revenue recognition. This also then hurts the working capital. But that will come in as cash soon enough. And so we're working on that, of course, to improve. The average over the last 12 months was 73%, which is in our span of some 70% to 90% on average that we should be within that band. I could also mention then regarding cash flow that we had some heavy tax payments because of the good profits last year in some companies, we had to do some final payments on tax as well in this quarter. But for the last 12 months, we had around SEK 800 million coming in from our operations, which, of course, is good that we can spend the money on acquisitions and on other CapEx. Looking on some additional metrics. We see the profit after tax declining, of course, then because of the lower results compared to last year, but also that last year had a very -- had a profit from a sale of a company, and that improved the numbers with SEK 12 million all in all as an effect on the profit after tax. But otherwise, it's also increased tax percentages all in all compared to last year with an increased number of profits coming. [Audio Gap] Countries. So that dilutes the profit after tax as the earnings per share as well a little bit. Looking at the financial situation. Our financial net debt, which is all that we have, excluding the debt for conditional considerations, increased because we paid out some of these conditional considerations, which, of course, is good because that means that these companies have had a good development during the years we have owned them. So that increased quite a lot. But the total net debt, which includes these provisions for the conditional considerations didn't increase as much because that's more reflecting the result and new acquisitions coming in. So still a little bit high perhaps, but still very much under control, and we think a very comfortable level still. Then finally, before handing back to Anders, some on the return on capital employed that has decreased since last year, mainly due to a lower result all in all, but also then because of adding some capital employed through the acquisitions. So of course, we're addressing that. And as was mentioned, that we will see next quarter, we will make a write-down on some of these goodwill and other material assets which, of course, will make the return on capital employed improve for the group. But the business units themselves are strong, 57% on average for our businesses. The difference is, of course, all the assets that we add when we acquire companies, which is mainly then goodwill or other immaterial assets. So it's a big difference between the group level and the business units level. Of course, very important that the business units have a solid and good return on capital employed. That's what we have calculated with when we acquired the companies. So with that, I hand back over to Anders.

Sorry, Bengt, I think you had one more slide there.

Yes, sorry. Yes, of course, in itself. As mentioned then that we saw a decline in some of these business areas and while Safety and Security improved, we saw specifically in the Supply Chain and Transportation, we saw this a little bit. [Audio Gap] The effect with postponed orders, which negatively impacted the business area. As we saw in the water and bioeconomy, we had all these high comparative figures in a number of business units as well in the Energy and Electrification. And there we have this Olympic game business unit, for example, with deliveries of temporary electricity equipment to all these events going on in Paris. So all in all, the different business areas affected a little bit about the overall market, but also some very specific reasons for having a little bit less sales. And then, of course, acquisitions contributing to the different business areas. On the right-hand side, you see the profit development and more or less the same reasonings behind the development on some lower sales affecting the margins, some high comparative figures, some one-offs last year, some wait and see in the market and some acquisitions then contributing. But overall, the demand situation looks cautiously promising for the future for the second half of the year. And the EBITA margins should be pretty stable at these levels at least. So with that, I hand over to Anders.

Yes. Thank you, Bengt. So I would like to give you some more information around our strategic action to work with our current portfolio to refine the portfolio. And just to repeat why we are doing this, and that is to allocate the capital more efficiently for our long-term strategy, focus on our core portfolio, which we think is very attractive, and we would like to add future acquisition within the same type of business. And we would like to be more strict and adhere to our acquisition criteria. So now we're going to try to look at the table, the pro forma, how it's going to look like after the divestment. If we look at the green line, that's the line summing up the core portfolio that will be Sdiptech going forward. So if we're looking at the adjusted EBITA from January to June 2025, we see an EBITA of SEK 521 million with a margin of 23.1%. That, we should compare to the red line, which is the sum of the companies that we would like to divest. That's SEK 15 million in adjusted EBITA, but with a margin of only 4.2%. The gray line is the core operations, including the central cost. So that would mean that adjusted EBITA for the first half of the year would be SEK 481 million with a margin of 21.3%. And that is how we will report the core portfolio in the future in Q3 and forward. What's important here as well, if we look at organic growth for the core portfolio, if we look at the first half year, last year compared to this year, we increased in organic sales, plus 0.4%, and minus 2.8% for the adjusted EBITA. That should be compared to minus 8% as we reported during the first half year with the current portfolio or the overall portfolio. And as Bengt also mentioned, in connection with this, in the quarter 3, we will have a revaluation of our goodwill. We believe it's going to be around SEK 400 million to SEK 500 million. which, of course, will improve our return on capital employed going forward. And this is nothing we will wait to do [Audio Gap] Already started to divest or to initiate divestment. We have talked to the specific companies. We have started to talk to potentially new homes. We would like to be very careful about how to select new homes, how to start the discussions. So we are doing that in a structured way, so far it's going according to plan. Now coming into the acquisition part. Year-to-date, we have already acquired SEK 40 million. We did that quarter 1. We didn't acquire anything in quarter 2, but we have a solid pipeline, and we expect to welcome new companies in second half of the year. Our prioritized geographies is pretty much the same. It's U.K., Italy, Nordics, Netherlands, but we want to enter into Germany, which so far looks promising, and we do that with our existing team. We have not taken the step to recruit somebody in Germany because right now, we have a good team in place that can manage and handle potential targets and discussions in Germany as well. And the last slide, before we go into the Q&A. This is a little bit of key takeaways from the presentation today. There's been a lot of information, both financially, but also for the future. But I think it's important to mention that we have a solid demand from our core portfolio. Many orders and sales have been postponed into Q3, Q4, but still, the demand is there. 95% of the profit comes from our core portfolio with some very strong underlying drivers. We mentioned a little bit the sales organic [Audio Gap] Plus 0.4%, showing a very strong portfolio. We are, as Bengt also mentioned, slightly optimistic about the recovery in the second half of the year for the total portfolio. The ongoing strategic actions, of course, is very important now for the future. We're going to strengthen the business area team. We're adding more experience. We're adding presence in the U.K. Divestment of the companies that do not meet our criteria is -- will be accelerated, already started. And as I was also mentioning, we will look into fine-tuning our strategy, especially around setting the ambitions and the goals for the future. And finally then, in regards to our acquisition pipeline. The pipeline looks attractive. We have our internal team that constantly meet and develop the pipeline and we look forward to welcoming new companies in the second half of the year. And that was all from the presentation, and I think we go into the Q&A sessions now.

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

Perhaps starting with, I guess, the most pressing question here. I mean as you mentioned yourselves, the deliveries during the last 4 quarters has been quite soft, driven by a number of reasons. But you seem a bit more optimistic here for the second half of 2025, cautiously optimistic. You also mentioned that you built some inventory due to larger deliveries for the second half. How confident are you that it will look a bit better here in the second half? Is it based on actual order intake that will be delivered during the second half? Or is it more based on, let's say, loose dialogues with customers that are of more optimistic in nature? That's the first question.

Yes, I can start there. I think in -- yes, we don't have any evidence of exactly how strong we believe the second half year is going to be. But when we talk to many of the companies, the larger companies that have built up the inventory, they have talked to the customer, the customer foresee that they need the deliveries to be able to deliver themselves or to use them in project work that they already initiated. So I would say we are, yes, we are pretty sure that this will happen because it is a chain of deliveries that needs to happen. And usually, many of the projects have already started. That's what I see when I talk to the major businesses in the portfolio.

Okay. Perfect. And then on the 2 questions on the divestments. You said that -- I mean it's progressing according to plan relating to the companies within other operations. Do you have any indication of what kind of timeline we should expect? Is it something that's going to happen during 2025? Or is it more a 2026 thing with the divestment of both basically the companies within other operations but also Metus?

Yes. So with -- according to plan, we are very early in this stage. So we have only talked to the MD or the leader in each and every company that will be divested, and we have started dialogue with potential buyers. So no, it will not happen during 2025. It will take longer than that, but it's hard to say how long it will take because, of course, we are careful about price versus who is the best buyer. We're not going to do any stupid things to sell too cheap here. Of course, we have some of the companies definitely have some core strategic values for another buyer. So we will be carefully looking into that. But Metus, it's a different story. We are still with potential buyers, and we have nothing, let's say, nothing to share here today with a signed LOI or something like that. But yes, so conclusion or answer to the question is we will not stress it. It's very important for us to find the best possible home for the companies.

Okay. Perfect. And then the last question on the same topic. I mean, for Metus, we have seen that you have been required to do some restructuring and so on and so forth in order to be able to divest that company, which has, of course, unseen some cash flow, will, let's say, a bit smoother process with the companies within other operations. Are they good to go in the current conditions? Or will you will you need to take some costs as well in those companies in order to be able to sell them?

Yes. I think in specific to Metus, it was a complex organization, a different story. But some of the companies that are in the other operations that will be divested, we are doing, let's say, more of a turnaround or improvement actions to be able to come out on the other side to be able to sell them. So yes, it's -- but it's a few companies. Many of the companies are looking okay according to their business model. Again, we are not doing this because they are not performing financially. We are doing this because of a strategic shift. So we have both companies delivering good, companies that are having some more challenging time due to the market development and relation to -- or linkage to the construction sector as well. So overall, we believe it's going to be a smoother journey to do that compared to Metus, definitely.

The next question comes from Simon from ABG.

So first of all, you may have said this in the presentation, but can you clarify a bit more exactly how you will report going forward now with the new divestments? Will it treat other operations as a separate segment? Or will it put that discontinued operations?

I can perhaps answer that. We will not report them in the same way as this Metus as a formal discontinued operations because that follows IFRS standards in detail [Audio Gap] Important, as you say, more as a separate segment. So we will show what is the results and development of the core portfolio, the 95% of the business of the profit currently as usual, with the 4 business areas, and then we will then comment and report on the other businesses as a whole. And that will be all with pro forma numbers, et cetera for some historic periods as well for all of these. So it will be more or less as its own business area, even though it's not treated as a business area in itself.

I see, I see. So you -- will you continue to sort of comment on the organic growth for the separate areas as you did in this report?

We welcome those type of KPIs, which is what we call alternative KPIs will be on the core portfolio. But we will, of course, also show the numbers for the profits and turnover for the whole group. But when it comes to focusing on the development, et cetera, and the return, et cetera, will be on the core portfolio explicitly.

I see. Then also on the divestments here, and you highlighted that you think it will be positive for return on capital that they have been basically diluting over time. Can you be a bit more specific on sort of the magnitude of that impact, do you think? And then also how those units have performed in terms of cash conversion, if they have been dilutive to cash conversion as well?

Yes. To start with the balance sheet, as mentioned here that we will do a revaluation of goodwill and other immaterial assets for these companies. And when they were acquired many years ago, they actually had a higher profit level and so and could defend a higher goodwill, et cetera, in the balance sheet. And so far, they have been part of business areas, and it's the businesses [ house ] that have to have to justify, so to speak, the goodwill and so, and that has never been a problem. We have a lot of headroom in that impairment testing. But when you put these companies on their own, there is definitely reasons for writing off some of the goodwill and so because they cannot really protect those numbers. So that will be a one-off, a noncash item, a one-off effect when we look upon that. And we have indicated some SEK 400 million to SEK 500 million of write-down all in all. But of course, we will do that in detail during the quarter and very thoroughly in next coming report. And if -- you have the numbers in the report here, how much the profits are without these companies, what the core is. And if you then reduce also the numbers of this write-down, and you get a smaller balance sheet. You will also have a higher return on capital employed all in all. So that will affect positively, but we don't want to say a definite number here since it will depend on these revaluation activities that we will be doing, but it will improve the return on capital employed for the whole group and for the core business specifically.

The next question comes from Martin Wahlstrom from Redeye.

I just have one question to add on the strategic overview. Comparing it to the core and the noncore, there seems to be quite large differences. And I was just wondering if you could elaborate a bit on how you went about kind of singling out what companies to divest? How do you ensure that you're not just kind of divesting companies that are currently performing poorly. So some reason on that?

Yes. No, I think it's very important that this is not an activity we do, companies are performing poorly. We have talked a lot since, as I mentioned a little bit before as well, since 2018/'19 when we looked into the strategy of Sdiptech going forward, and we decided to focus on product-based companies. And I think many of the company here are more service installation type of companies. They buy other products and they use them to install, quite low barriers to entry and hard to scale from a product perspective. So from that perspective, it's been easy for us. We have these companies and how we look at them for a long time. And as we have mentioned before, we had actually divested a number of companies over the years. I think Frigotech was the last company we did last year. But now we are taking a bigger grip on the total, let's say, group of companies according to this analysis. So yes, for us, it's been pretty clear what companies to include in this group of companies.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Yes, we have received some written questions in the chat. And one question here. It's regarding the expression we say, we demand more from ourselves as an organization. We say that in the CEO comment, and there are many challenges ahead. And the question is then how will the new strategic initiatives specifically enhance Sdiptech's ability to meet these challenges and the overall economic environment? Yes, please.

Yes. No, it's a good, it's a valid question. I've been thinking a lot of this one myself. I was heading up one of the business areas. And I think when you acquire a lot of companies [Audio Gap] haven't done the succession from the owners, it's actually pretty easy in a serial acquired world. The owners, they drive the business forward as they always have done very successfully. It actually demands a little bit more of an organization when you have done the succession, new people coming into the organization, who is taking those strategic actions, where to go, where do we dare to invest, when to say we stop, when we cut cost, all of those decisions is pretty clear for me that owners are very strong with that. And you need to make the succession happen. We, from Sdiptech, leading the organization, we need to be there to support and to have an overview of the strategic agenda and there to say stop or go in some areas. So that's definitely an area where I think we can improve. Instead of looking at quarterly or monthly reports, looking at the EBIT and EBIT margin, that's pretty simple, more staying on top of that agenda, what's happening with the companies, what's happening with the market, where are we going and support the companies, not telling them what to do, support and push them. So it requires a lot from us from the business area side, but that's also why we are looking to recruit more experienced people with some more knowledge in the specific win. So yes, it's a very good question, but it's actually more exciting as well for us working with the companies to take that view working with the companies.

I think, Anders, and as a follow-up here, do we have an anticipated timeline to see results from changes, the improvements that we're doing in the different units.

I think short term is -- what we mentioned short term is be actively pushing and talking to companies about price increases, cost adjustments. And I think we have done that in many of the companies that came in to 2025 with a tough market conditions and also some, yes, tough comparables. So that, I think we have already -- most of them we have already implemented, but the full effect will come perhaps end of this year. The long term is taking, of course, a longer time. But scaling down or scaling down, making sure that we have a portfolio we believe in, we, as a business area, can work more and better with those companies as well for the long term. So that's not a short-term action for sure. That will take longer time to implement.

Right, Anders. And then we have a final written question here. I can answer that. I think it's, why was the contingent consideration payout high in this quarter when the underlying businesses performance has been weak? Well, our earnout setups, the earn-out structure we have saying that the sellers of the company, they get perhaps some 70%, 80% of the enterprise value day one, and they will get the rest after 4 or 5 years if they perform and to [Audio Gap] quickly, that means they need to increase their profit by year for 4 or 5 years. Many, many times also above a certain threshold, perhaps 5% profit increase. That's what they must meet and exceed in order for them to get any additional consideration. But it's for 4, 5 years. So if you have one week year or a quarter or 2, does not perhaps affect the total amount that you pay out. And it's also that what we paid now in this quarter were some larger companies that have been and still are very successful in their development over these 4, 5 years they have been part of the group. So that's why payouts of continued considerations can seem high, even though the exact development the last quarter or 2 or 3 hasn't shown that. But for the company itself, it's always a proof of that they have been very successful over the years with Sdiptech as a group. And now I see it comes one more question, and that is regarding M&A activities. If we can scale up the M&A activities with the current organization and how many companies a year before needing to invest even more in the head office? If I understand that question correct.

Okay. I think we are geared as an M&A organization to handle more volumes from the M&A. We have our local heads out there in the different markets, and we have an internal M&A team feeding them with the sourcing. So right now, we do not see any problems increasing the number of deals we're going to do. It's more about being cautious and making sure, keeping those strict criteria, what we want to buy and not to pay too much to increase the balance sheet too much. Of course, that's the 2 more difficult task actually. But we have that under control. And as we said, definitely, we are looking forward to welcoming more companies in the second year now.

Yes. So thank you very much all for your written questions. I think we can do the final remarks, Anders.

Yes. Okay. So yes, thank you, everybody, for listening in, and good questions. This, I think, was all for us today. And it was an exciting quarter 2 report with, I think, important information, where we are going for the future, and we truly look forward to that. We're excited about that. So with that, I think we wish you all a happy weekend. Enjoy the summer, and see you next quarter. Thank you.

Thank you.