Vestum AB (publ) (VESTUM) Earnings Call Transcript & Summary

The Vestum Q1 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Simon Gothberg; CFO, Olof Andersson. Please go ahead.

Hello, everyone and hello, everyone, and welcome to our presentation of Vestum's interim report for Q1 2025. My name is Simon Gothberg, CEO of Vestum; and together with me also Olof Andersson, CFO of the company. Now let's have a look at some highlights from the quarter. Our focus on growth and investments in both organic initiatives and acquisitions has proved successful. In the first quarter, Vestum generated an organic growth of 3%, while profitability was strengthened. And this is the first time in 2 years that existing operations have generated positive organic growth. Leverage came down to 2.1x reported EBITDA, mainly driven by divestitures and cash flow decreased as expected in the quarter, driven by an increase in investments in organic growth, increased working capital tie-up and some financial one-time costs related to the early redemption of Vestum's last outstanding bond. And the investments mainly relate to geographical expansion in both our U.K. operations within Flow Technology, where we have market-leading positions within water infrastructure and within the Niche Product segment in the Swedish market. And after end of quarter, we acquired Nortech, a U.K. market leader in monitoring and control technology in the structurally growing energy and water distribution sector in the U.K. The company generates high margins and high return on capital. The acquisition will be consolidated into Vestum from the second quarter. Now let's have a look at the segments, starting with the Flow Technology segment. Demand has continued to be stable with sales growth of 13%, driven by the PDAS acquisition. And we have faced some tough reference figures from last year, mainly in the U.K. But even so, we continue to generate strong numbers. The margin was as expected, lower than last year, driven by, again, the acquisition of PDAS. And as with previous quarter, PDAS continues to perform in line with expectation and continues to improve its EBITDA margin. And focus for the segment going forward is growth. Moving on to Niche Products. The positive growth trend continues. And for the first time in 2 years, we break negative growth to neutral development, while the EBITDA margin improved from 9.7% to 10.0%. Certain parts of the segment continues to face a challenging market where we focus on improving profitability. And while we're still allocating capital to growth in other parts where the return on capital and demand remain high. Lastly, let's have a look at the Solutions segment. We have divested several companies during the quarter, including the largest and third largest company in the segment, meaning that sales and profits in absolute terms decreased. The first quarter is seasonally the weakest quarter of the year. However, organic growth in the segment is positive, mainly driven by increased demand within our niched infrastructure services companies. Profitability strengthened in the quarter to an EBITDA margin of 4.8% and we are foremost focused on continuing to improve profitability in the segment. As briefly mentioned in the beginning, we have completed a fantastic acquisition after end of quarter. The company is Nortech and is a U.K. market-leading designer and supplier of monitoring and control technology to the U.K. energy and water distribution sector. Nortech has proprietary products, specializing in fault location, communication and automation, as well as the proprietary software platform, iHost. Nortech has been a supplier to our existing U.K. companies, pump supplies and PDAS for a decade. And this is basically the main reason why we were successful in making the acquisition. The company shows great financials and will strengthen our already very strong position in this space in the U.K. And we look forward to leveraging our position in further acquisitions down the line. Now over to Olof.

So, let's have a look at net sales and EBITA development over the past couple of quarters. And if we begin with the chart on the left, which shows net sales, where we saw a decrease compared to the same period last year, driven by the divestments in the Solutions segment that Simon mentioned previously. And if we move on to the chart in the middle, showing adjusted EBITA development, we also see a decrease driven by the same divestments. And finally, in the chart to the right, the EBITA margin increased by 0.5 percentage point compared to the same period last year, driven by the fact that the divested businesses had lower profitability than the remainder of the group, but also by the Niche Products segment, which increased its margin compared to last year. And we move on to sales, net sales development. And the divestments in the Solutions segment put pressure on the net sales in the quarter, as I just mentioned previously. But we saw positive organic growth of 3% in the quarter. Again, as Simon mentioned before, this was a trend shift after 2 years of negative organic sales development. And in total, net sales in Q1 decreased by 9% compared to last year. So moving on to operating cash flow. And I should say that this is operating cash flow for the last 12 months. And the operating cash flow and the cash conversion decreased compared to the last quarter, mainly driven by change in net working capital, but also by higher CapEx spending, which in turn was mostly driven by investments in our Flow Tech businesses in the U.K. and some of the niche product businesses. So that was the operating cash flow. Now let's look at the free cash flow development and we define free cash flow as cash flow from operating activities. So that is including interests and taxes paid and change in net working capital, and then we subtract CapEx spending. i.e., investments in fixed assets. And we also subtract leasing amortization. So basically, free cash flow is cash that can be used for dividends, acquisitions and repayment of debt. And the free cash flow has among other things been quite negatively impacted by one-off expenses, mainly driven by the early repayment of bonds, which we have done during this 12-month period. So in total, these one-offs add up to just under SEK 40 million, of which approximately SEK 25 million occurred in the first quarter of 2025. And it's important to note that this change in our capital structure is expected to lead to significantly lower financial expenses going forward. So let's move on to net debt and leverage development. And the net debt is represented here by the pink bars and amounted to SEK 1.4 billion, which was slightly lower than the previous quarter. And leverage also decreased slightly from 2.2x to 2.1x sequentially from last quarter. And earn-out debt was reduced slightly from SEK 19 million in Q4 2024 to SEK 17 million in Q1. And when taking into account earn-out debt, the leverage multiple was 2.2. And by that, I hand it back to you, Simon.

Very good. Thank you. So in summary, we have, for the first time in 2 years, showcased organic growth, while the EBITA margin has improved. The Flow Technology segment continues to do very well, and we expect this to continue, not least supported by acquisitions. Our new capital structure was established in March 2025, and we're now from April and onward, looking at significant interest cost savings. Our capital allocation will continue to be focused on growth. As with last year, market uncertainties remain in the short-term, partly driven by the current global trade barriers. We don't have any direct exposure to the tariffs, but the level of uncertainty that we are now experiencing is never great. That said, we have truly laid a new foundation for Vestum, both platform-wise and balance sheet-wise, and we will now start to capitalize on the structural improvements implemented in recent years, which we look forward to. And with that, we open up for questions.

The next question comes from Simon Jonsson from ABG Sundal Collier.

So, my first question is on the organic growth. And maybe if you can elaborate a bit more on the different segments. I mean you grew, you had positive organic growth, but I assume that in Flow Technology, it was a bit down organically, correct me if I'm wrong. So what was the main drivers, would you say?

Yes, Simon, it's Simon here. Yes, you're absolutely right. So I would say that most of the organic growth is driven by the Solutions segment. Looking at Flow Technology, that segment was impacted by roughly SEK 40 million coming from PDAS, which is obviously acquisitive growth. And I would say in Flow technology that the U.K. faced some really tough reference figures from last year, given that in 2023, there was a record amount of floodings, which basically caused the water levels to remain at very high levels throughout the first 4 to 5 months of 2024. And now when we go into 2025, there's basically been 0 floodings that has positively impacted our business. And even so, we generate some really, really solid numbers here. And this basically means that we have reached a new sort of normalized level for our U.K. companies where they've become less dependent on extreme weather. And looking at Niche Products, that segment was roughly neutral, right? So, yes.

And so about the more service-oriented units, I mean, how should we think about that in the coming quarters, you would say? Are they sort of back to -- on a positive organic growth trajectory and should accelerate coming quarters? Or how do you view that? And how do you view the underlying markets?

Yes. So basically, our services-based companies and now the Solutions segments, they have sequentially improved their organic growth over the last 5 quarters basically and Q1 last year was, I think, the worst quarter for them. And then sequentially, it has basically improved and now we're back at organic growth. And this is seen in both of the 2 sort of subsectors of solutions, both installation work and infrastructure services. And where we have the best sort of visibility is in our infrastructure services companies. And they have -- as I think I've said over the last -- at least over the last quarter, they have stronger order books now than they had a year ago, and this is now shown in the numbers. And same story for the current quarter, for the second quarter. So I think most things are looking to -- looking quite similarly as they did in Q1 for the Solutions segment.

And sort of the trend for the other products, Niche Product companies, what do you say there? I mean it has been some headwinds, but now it seems to be relatively flat year-over-year. So what's the momentum for that segment?

Yes. Same thing for Niche Products. They sequentially also improved their organic growth, right? It's been negative for quite some time. And now for the first time, I think, in 2 years, it's neutral. And roughly 70% or 60%, 70% of that segment is exposed to investments going into different types of commercial properties and public properties, hospital schools, et cetera. And those companies have seen a much better market now than a year ago. That said, now with the market uncertainty that's going on with the trade barriers and tariffs, obviously, these companies don't have any direct exposure. But if the uncertainty basically leads to owner -- property owners and different clients in Sweden holding on to their cash, then that will have an impact on our companies as well. But it's a bit too early to say. And what we've seen in the first quarter and going into the second quarter is that we're in an improved market than a year ago.

All right. Interesting. So basically, what you're saying is that construction-related product sales is back to at least neutral and installation is growing currently?

That's what I'm saying.

Good to hear. Then on the cash flow, I understand there are a few one-offs like the bond redemption, some increases in working capital, but CapEx was also a bit higher than expected, I think. So how should we view that going forward? Was there a one-off in the CapEx as well? Or what should we expect from CapEx this year? And also in terms of what you expect in cash conversion if we talk about free cash flow to EBITDA, can you still achieve above 50%?

Yes. So talking about CapEx, I think we mentioned over the last 6 months or so that we're now investing both organically and in new acquisitions. And what do we mean by investing in organic initiatives? Well, basically, we invest in our platform companies where we can achieve high return on capital and where they can achieve high organic growth, i.e., where the market is growing. And the investments in Q1 of roughly SEK 20 million was basically allocated towards the U.K., where we're opening up additional depots for pump supplies, which is super great news, obviously. And the other part was in our container-related businesses, we're also looking to expand. We will be the market leader and the second biggest company on the market in this niche. And going forward, I think we'll continue to invest in organic growth. That said, it's not going to be -- it's not going to be materially different than last year, but it will most likely be somewhat higher than last year since we're now investing in growth. And our shift has gone from playing a bit defense to basically invest in growth, both organically and acquisitions. So I think it's real great news. And looking at cash conversion, we typically don't guide on specific numbers. But what I've said historically is that we want to be at a free cash flow of 60% of our EBITDA. And I think that's still achievable. All of the structural changes and improvements we made over the last couple of years are now starting to show in the numbers starting from basically April and onward. And this is partly related to financial -- financial items, interest cost savings, not least, which is basically SEK 15 million interest cost saving per quarter now going forward. So we're quite optimistic that free cash flow can grow from Q1 onward now.

The next question comes from Anton Lund from Kepler Cheuvreux.

Great. Many good questions asked already, but I also have one question on the cash flow. I note the SEK 555 million that you received from the divestments that you announced in November. Can you please walk me through here because I thought it would be somewhere around SEK 700 million that you would receive. What am I missing here?

Yes. Not exactly sure where you're coming from and this might be easier to go through step-by-step separately. But basically, if you look at the enterprise value that we usually lay out in press releases and then go from sort of an enterprise value to a purchase price or an equity value, you have to take into consideration that the equity bridge in an M&A transaction is different than it is for Vestum as a listed company. And the reason for that is because we have different definitions of working capital and net debt. So for example, in an M&A transaction, tax liability is a net debt item, which reduces the equity value. But for Vestum as a listed company, we put tax liability in working capital. And in an M&A transaction, you also normalize cash. So if we sell a company and the cash position is really high, that typically means that working capital is low and then you do a normalization and you reach an equity value. But when we release a quarterly report, we will obviously have that cash position in the divested company leave invested. But what is maybe forgotten is that working capital is quite high, meaning that we will release working capital going forward, et cetera, et cetera. So, yes, it's a little bit complicated. But if you want a thorough sort of breakdown, happy to give you that after the call.

The next question comes from Jakob Marken from Danske Bank.

A couple of questions from my side as well. First, on the recent acquisition of Nortech, if you can just help us with your expections on margin organic growth going forward, of course, very strong numbers here in recent years, but what do you expect going forward? And also, is there anything about seasonality that we should know about this company?

Sure, Jakob, Simon here. So, yes, the company is a true market leader with very, very high market share. And that obviously means that they can take high prices for their stuff. All of their things are basically proprietary, both hardware and software. The margin has over the last 5 years averaged at 30%, and we expect the company to continue to perform in line with historical levels. They have grown strongly over the last 5 years at 16%. We don't expect the company to continue to grow by 16% on an annual basis going forward. I think some on the lines of 10% is more reasonable. And we did conduct a commercial market study very thoroughly. And basically, all these things were confirmed in that. And let's see your other part of the question, you asked about margin profile.

I'm just wondering if there's any seasonality that we should know?

Oh, yes, seasonality. Yes. So the company typically doesn't have any seasonality. But then again, it can be a little bit sluggish depending on when orders are coming in from their customers. So yes, there's no sort of seasonality that is dependent on weather or that sort of thing.

And then on the same note, but on the divestment side, is there anything we should know in comparable numbers on the divestments when we try to estimate this year?

Yes. I think they performed quite linear last year. So I mean we divested SEK 25 million of EBITA. I think as an analyst, you can sort of plug into your models that they performed roughly SEK 6 million per quarter. So we -- they did SEK 6 million of EBITA in Q1. And I think the last sort of SEK 7 million was in Q4. So I think that should give you a quite good understanding on how they performed last year.

Perfect. And my final question is that you is on Solutions segments, you talk about growing order book. I'm just wondering, if you can share some details on margin development in that order book and what we -- how we should view that?

Yes. So again, that order book is mostly related to the infrastructure services companies. And those companies have historically been at margins that are above our financial target. And I don't expect these companies to come back to '22, '23 levels already in 2025, but they are growing now, which is really great. But then again, also from quite low numbers, right? Last year in the first half, it was a little bit of a weaker market than it is today, but we are expecting gradual improvements on profitability.

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments. Okay. It doesn't seem to be any written questions. So with that, we thanks for paying attention and for listening in. Thank you so much. Bye-bye.