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

Welcome to the Vestum Q2 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Simon Gothberg. Please go ahead.

Hello, everyone, and welcome to our presentation of Vestum's interim report for Q2 2025. My name is Simon Gothberg, CEO of Vestum. I will today present the report myself as our CFO, Olof Andersson has to be with his wife as they're expecting their fourth child any day now. Let's have a look at some highlights from the quarter. We have continued to invest in growth, both organically and through M&A. Organic growth was plus 4%, while cash flow improved by some SEK 50 million. Profitability was in line with last year, as shown in the adjusted EBITA margin of 10.1%. We've completed one acquisition in the quarter and also invested in increased capacity for several of our production companies. These investments have led to increased leverage, which is now at 2.65x reported EBITA. Moving on to the segments, starting with Flow Technology. Sales grew by 32%, mainly driven by acquisitions. We continue to see overall solid underlying demand across the segment with some different characteristics depending on geography. In the Nordics, we are generating both sales growth and improved profitability. In the U.K., the market is currently preparing for the new 5-year investment plan, AMP8, which came into effect in April 2025. The new plan includes over SEK 100 billion of water infrastructure investments and will greatly benefit the segment in many years to come. That said, the market is a bit cautious in the short term as clients are currently in resource planning and allocation mode. And we're expecting to see positive effects of the new investment plan in the next few months. We are also planning to execute on additional U.K.-based acquisitions to the segment before year-end, and this will strengthen our already very strong position in the U.K. Moving on to the niche product segments. We continue to perform in line with last year. And it's good to see that we continue to improve profitability as shown with an uptick in EBITA margin from 11.6% to 12.4%. The margin expansion is mainly driven by our companies with infrastructure end markets. Going forward, we continue to focus on improving profitability, while also allocating capital to growth in certain 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 year, including the largest and third largest company in the segment, meaning that sales in absolute terms decreased. Organic growth was positive, though, just like in Q1. Profitability dropped to 5.0%, mainly driven by our installation businesses with construction end markets. These installation businesses represent roughly 60% of sales in this segment. We expect profitability for these companies to improve as investments in the Swedish construction market recover from the historical low levels that we currently experience. And the remaining 40% of sales in the segment consists of specialized infrastructure services businesses, and volumes and profitability for these companies were at decent levels in Q2 and continue to improve. Moving on to net sales and EBITA development over the last few quarters. Let's begin at 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, as I previously mentioned in the Solutions segment. But the decrease was, to some extent, offset by acquisitions. And if we move on to the chart in the middle, showing adjusted EBITA development. We also see a decrease driven by the development in the Solutions segment which again, was mentioned on the previous slide. Finally, in the chart to the right, the adjusted EBITA margin was in line with last year, showing a slight decrease compared to the same period last year. Again, driven primarily by the profitability in the Solutions segment, but to some extent, offset by the positive development in the Niche product segment. We move on to overall net sales development. In total net sales in Q2 decreased by 7% compared to last year. The divestment in the Solutions segment, put pressure on net sales in the quarter. But as mentioned previously, this was to some extent offset by acquisitions. And we saw a total positive organic growth of plus 4% in the quarter, a sequential increase from 3% in the first quarter, which reinforces our view that the previous downward trend in sales development has reverted to both. Now let's look at free cash flow. We define free cash flow as cash flow from operating activities, including interest, 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 free cash flow is really cash that can be used for dividends, acquisitions and repayment of debt. The LTM free cash flow was at SEK 120 million, an increase of more than SEK 50 million compared to Q1, driven mainly by lower financing costs as a consequence of our improved capital structure. Moving on to net debt and leverage development. The net debt is represented by the pink bars and amounted to SEK 1.6 billion, an increase compared to the previous quarter, driven by the acquisition of Nortech and also by the fact that we have invested in new facilities in several of our existing product companies. As a consequence of these investments, leverage increased to 2.65x reported EBITDA per Q2. Investments earn-out debt was SEK 32 million at year-end. And even when taking into account earn-out that the leverage multiple remains at 2.7x reported EBITDA. So in summary, we continue to generate positive organic growth and solid cash flows. The Flow Technology segment continues to do very well, and we are expecting this to continue as the market outlook looks highly promising. We are focused on investing in growth in the segments, and we'll continue to strengthen our positioning by making it in acquisitions, mainly in the U.K., as the market is preparing for high growth in coming years, supported by structural investments in the market. And in the short term, however, the market is a bit cautious, driven by the ramp-up in AMP8. But again, all looks highly promising into 2026 and onward. We're still facing challenging market conditions in certain parts of the Solutions segment as the installation businesses face higher than normal competition. And as a consequence, price pressure. We're expecting profitability to improve with these companies as construction investments in Sweden rise from the historically low levels that we currently see. We've created conditions for cash flow to remain at solid levels, not least driven by our improved capital structure, along with a strength in portfolio of companies in the group. And as for previous quarters, the short-term market situation remains uncertain, but midterm market outlook is positive. And with that, we open up for questions.

[Operator Instructions] The next question comes from Simon Jonsson from ABG.

So first, on Solutions. I understand there is continued price pressure impacting the margins. But for the margins to improve, do you think it's going to be mainly a function of better construction activity which reduces the price pressure? Or do you think it's more going to be about you transitioning out of low-margin contracts? Can you please explain a bit more how you think about those 2 factors?

Yes, sure. Simon, thanks for your questions. Yes, so I mean, definitely, it's going to be a combination of those 2 factors. So we're still working on projects that were taking 3 to 6 months ago. And there was more sort of competition and price pressure at that point in time than a year ago before that. But looking at the pricing today, there isn't a big difference. Volumes are -- or have during the course of 2025 increased somewhat in comparison to last year. So organic growth has been positive for the 2 subsectors of Solutions for the first 6 months of 2025 and 2026 is starting to look a bit better than it did maybe 3 months ago. But I mean there is still a price pressure. So the projects that we take on today are still at low levels in comparison to where we have been, which essentially means that we're expecting to see a similar drop in profitability going into the second half of 2025 as we have seen in the first half of 2025. And this is mainly for the 60% of the Solutions segment that is exposed to the installation market. And then, I mean, obviously, you can work with efficiency measures to improve margins going into our project. But there is still some price pressure in the market, yes.

All right. Just to make clear, you said that currently, the new contracts that are coming in on installation are still at the low levels?

Yes, yes. I mean there's some difference now in comparison to 3 months or 6 months ago. But we -- the pricing in the market isn't what it was in 2022 and 2023, competition is still much higher. So we really need to see a higher pace of construction investments across the Swedish market and obviously in the property market.

I see. Then on Flow Technology, you highlighted the more cautious market in the U.K. due to the launch of AMP8. Was this effect present the whole quarter? Was it just like a transition period when the plan came into effect in April and more normal towards the end of the quarter? Or how was the development through the quarter?

No, it's been basically the full quarter. So it's been basically 2 factors impacting the full Q2 figures in the U.K. and those have been the ramp-up of AMP8 and the absence of extreme weather or absence of rain, really. It's been very, very dry in the U.K., but it hasn't been any drought really which could have a positive impact on our numbers. So we're looking at reference figures on Q2 in 2024 that had lots of rainfall in the first half of Q2 and then obviously, the ramp-up period. And we're mainly exposed in AMP8 to OpEx spending and not so much on CapEx spending, which means that we will start seeing the benefits of AMP8 already in the fall. Going back to AMP7 and AMP6, typically, what we see is that it takes somewhat 6 months after the start of the new period to show some positive effects of our company. So we're expecting to see those in maybe end of Q3, beginning of Q4. And then going into next year, we will see the positive effect of the CapEx spending. But again, we're more dependent on the OpEx stuff, which is a good thing.

I see. In terms of that and when you usually see the ramp-up around 6 months or so, but now do you -- have you seen sort of big projects being initiated? Or is it more like you expect that it will happen?

No. So these projects are well known to the market. Basically, everything that will happen infrastructure-wise, is quite well known. There's some visibility in the market. And as I think I said before, some of these, or most of these customers that are looking to order these things from the supply chain. Most of it is already -- I mean they know who their suppliers will be. And given that we have pump supplies, PDAS, Nortech and some of the other companies that we're now looking to acquire over the next 6 months or so. These are very well positioned with these clients. So basically, the things that will happen in the short term are known.

I see. And then just one last one, quick here on the cash flow and investments. You talked about that you increasing investment sort of growth investments for the product companies. Do you think that will continue? Or was it more like onetime investments here in first off?

Sorry, are you referring to the investments in the expansion of capacity for some of the production ? That's what's your question?

Yes.

Yes. No. So it's been a few other companies, we've expanded and basically moved to larger facilities. And that is not something that will occur every quarter. So the increase in leasing according to IFRS 16, that was something that we saw in Q2. We're not expecting to see that in the second half of 2025.

[Operator Instructions] The next question comes from Jakob Marken from Danske Bank.

So just a quick question from my side as many of my questions have been answered already. I'm just wondering, you said that you plan on making additional acquisitions here in H2. I'm just wondering which net debt level are you comfortable on reaching here during the year? And how much will you push it into 2026, do you think?

Yes. Thanks, Jacob. Yes, that's -- it's good to clear that one out. Very good. So historically, we've been financing deals with issuing equity, and that is not something that we're keen on doing going forward. And when leverage is at 2.65x to 2.7x as it is now, again, this is on reported figures, it's not pro forma. But obviously, that means that we need to be cautious and highly disciplined. And financing-wise, we're looking to do this with free cash flow and existing credit facilities from our banks. So given that we have a sort of golden nugget acquisition that is positioned in the U.K. and where we can extract synergies with our existing companies and basically companies that we do we think can become the pump supplies 2.0, then that is something that we are very, very keen on doing as we know the market so well, right? But we would only do that if we are quite comfortable with projected underlying EBITDA in the business. So limitations are one, obviously, leverage and as it is at that given point in time; and number two, our thoughts on performance going forward. So if we feel quite comfortable in performance and if we see that we can do this Golden Nugget acquisition and the leverage still will be at a reasonable level, which could be slightly over 3% maybe, then that is something that we will go ahead and do. We would not opportunistically go ahead and make acquisitions, and acquisitions across Northern Europe just to make acquisitions, it would have to be, again, a golden nugget. And I think we have some of those in our -- in the pipeline.

There are no more questions at this time. So I hand the conference back to the speakers for any written questions or closing comments.

Yes. Hello. Again, Simon here. There is a written question. I'll read that one now. Are going to be a buyer or a seller in the installation segment going forward? Yes, sure. So the installation segment or the subgroup is roughly 60% of our solutions business. And these companies, I would say, are at an all-time low. It's been one of the toughest markets for these installation companies in basically 30 years. And many of the entrepreneurs that are still running our companies, they've never experienced anything of the sort, that they we're now seeing. So we're expecting, as construction investments continue to increase in Sweden, we're expecting a recovery for these companies. So we're definitely not a seller of these companies now. And when it comes to buyer, I mean, we are looking to allocate capital going forward in the segments where we can achieve highest growth, highest margins and highest return on capital. And this is right now in water infrastructure in the U.K. in these market-leading product companies. So that is what we will do. Then going forward, if you fast forward a couple of years, then we'll see where things will take us. We have divested companies over the last 2 to 3 years, for 2 reasons, basically: one, to refinance the balance sheet; and number two, to increase specialization for the group and get rid of basically low-margin companies. All of our companies today can achieve an EBITA margin, which is in line with our financial target of 12%. So as of now, no planned divestitures and fast forward, we'll see what things will take us. But again, focused on acquisitions in the U.K. in water infrastructure right now. So that was the last written question. And with that, I thank everyone for listening in. Thanks so much, and have a great summer, everyone. Bye-bye.