Volati AB (publ) (VOLO) Earnings Call Transcript & Summary

Good morning, and welcome to today's webcast with Volati where CEO, Andreas Stenbäck and CFO, Martin Aronsson, will present the year-end report for 2023. After the presentation, there will be a Q&A. [Operator Instructions] And with that said, I hand over the floor to you, Andreas and Martin.

Thank you. Good to be here today and present our Q4 report and talk a bit about Volati. I'll get directly into it. And Volati, it's a growing group of well-managed companies with strong earnings. We have 6 platforms, and they're all built upon industrial logic. We have market-leading positions as to strong cash flows. And the growth potential is at least in line with Volati's overall goal of 15% per year. We have 2 natural business areas, Salix Group and Ettiketto Group. They are both platforms. And then the remaining 4 platforms are within our business area industry. Volati as a whole, including these 6 platforms has grown on average 32% per year since 2017. And I thought I would start by looking into our last quarter of 2023. And of course, I'm not happy to report the declining profit. We go from SEK 179 million EBITDA last year to SEK 134 million this year. But I'm confident that where we are, we are in a good place, and I'm very proud about the work that we're doing in our platforms. And 4 out of 6 of our platforms are actually showing improved margin and an EBITDA better in line with last year. Salix still see a tough end market. And despite the decline in sales for the second quarter in a row now, they come in on an EBITDA level in line or better than last year. And that shows that the measures we've taken in Salix Group are really showing effect. Ettiketto Group come in slightly lower on sales than we wanted. There are 2 main reasons behind that. One is that we had a very strong Q4 last year. We actually grew sales with 25% last year, and that was much because of a ramp-up of demand because there was a strike effect in the industry earlier that same year. We also see slightly lower volumes in Norway, which is something that we're addressing right now. But even though sales going down, I think the very highlight of Ettiketto Group is that we significantly improve the margins. We actually go from 16% to 18% in the quarter on EBITDA margin. So that shows that our model with synergies and operational improvements from the acquisitions that we do really works. In addition, we have 2 platforms in business area industry, Corroventa and Tornum that are developing very well and improving their profits in the quarter. The reason then for the decline is within 2 of the platforms. It's Communication and S:t Eriks, 2 of the platforms within the industry. And there is actually similar reasons behind that. They both firstly had a very strong Q4 last year. While we have been clear with that, we see a lower demand, especially during the second half of this year in these 2 platforms. For Communication, it's the 5G rollout, in particular in the U.S., that has been postponed. And in S:t Eriks, it's the more building-related part of that business that has seen a weaker demand. Also something that has affected S:t Eriks is the cold weather. There are cost measures taken -- that's been indicated in both these platforms. We've seen some of that effect of those already in Q4. But of course, we also expect more of that to show during the course of 2024. Two more things I want to highlight about Q4. Firstly, we have done 2 value-creating add-on acquisitions, adding a total of SEK 400 million of revenue on an annual basis. And of course, it's very good to add to 2024 with that. And that will, of course, contribute for the full year of 2024. And lastly, we continue to show a strong cash flow, SEK 300 million of cash flow in the quarter, and that leaves us in a very strong position, not the least to act on acquisitions once they occur. Looking into the numbers, yes, sales end up with SEK 1.8 billion compared to SEK 1.9 billion the year before. EBITDA, SEK 134 million. This number does not -- is not adjusted for the one-off costs in the quarter compared to SEK 180 million the year before and an operating cash flow of SEK 300 million, more or less in line with last year. And that leaves us with a net debt to EBITDA in the lower range of our financial goal. Then going into the full year of 2023. When I summarize 2023, I'm very happy with the position that we are in our platform. We have put in a lot of efforts into preparing ourselves not only for the current market conditions, but more importantly for the years to come. And as a long-term owner, we focus on long-term structurally sound measures. And there's been a good market for doing that in 2023. And we can also see that in the one-off cost, we have some restructuring costs in Q4 and for the full year as well, and that's the reason for that. And it's very easy when you are in this kind of environment that act very short term, it's easy to, for example, act on cost measure related to personnel and so forth. Of course, as a responsible owner, sometimes you also need to act short-term, but we are always very focused on keeping the long-term in mind, so rather focusing on the long-term structural measures and making sure that we are prepared for creating long-term cash flows and profitability. Also, I would like to point out that we have deliberately acquired companies with earnings that sometimes vary over time. And one could argue that, that's a contrarian approach as most acquirers and investors, they actually look to acquire companies that have very stable profits. And they are, by definition, then willing to pay a premium for those because the competition is very fierce. We have -- we are convinced that we get excess returns from also being -- looking into companies that, again, has some profitability that varies over time. And we're confident that we are a good owner of those. However, since we are a diverse group consisting of 6 platforms and equally deliberately focused on acquiring companies that not vary kind of based on the same factors, in most of the cases, Volati as a whole operate close to our total average. However, in 2023 and in particularly in the second half of this year, we have had more platforms than normal that are operating below their average profitability. And what does that mean? That means that whilst we start getting towards our total average, that will give us a boost in the organic growth. And it also means another thing. We are -- and I tend to say this fairly often. We are best evaluated over time. Looking at the numbers then, 2023 net sales more or less in line with last year and a growth of 3% on EBITDA. And as expected, a very strong operational cash flow. But again, more importantly, look at us over time. Since 2017, Volati as of today, has grown an average 32% on EBITDA. And on this next slide, we have -- we're also showing the organic development. And what one could see is that roughly half of the EBITDA growth has been organically and then, of course, the other part has been mainly driven by acquisitions. Another thing that this slide shows is that, yes, as I said, we've had a negative organic sales and EBITDA growth this year, reasons explained before. But that are then, of course, significantly below the historical averages that we have been able to show. Before leaving the word to Martin, I would like to take an even longer look at Volati's development than the 10-year development. Our whole idea of goal is to generate long-term value growth. And since 2013, we've grown 18% on average. This has been done with our cash flow -- own cash flow. And you who follow us very closely know that we actually divested and separately listed a significant part of Volati in 2020 and 2021. So taking that into account, I think this really show that we have been able to create long-term value creation. With that, I leave the floor to Martin.

Thank you, Andreas. So let's put some more colors on the numbers on the slides going forward here. And let's start with looking at our 3 financial targets and our performance in relation to that. Let's start with the first financial target, the EBITDA growth per ordinary share during the last 12 months. We are now at the 3% growth versus our target of 15%, which is measured over business cycles. But -- so that means that we are right now below our target. But as Andreas mentioned, we are best evaluated over time. And if we look back towards 2017, the growth in our continuing operations has been 32% per year. Our second financial target is the return on adjusted equity, which came in at 22%. So that is then exceeding our financial target of 20%. And our last financial target is our capital structure where we came in at a net debt to EBITDA ratio of 2.0x. And that is in the lower range of our financial target of between 2x and 3x, which leaves us for substantial capacity for acquisitions going forward. So let's look a bit on our 3 business areas, starting with Salix Group. Salix Group's EBITDA came in on the same level as last year. And this is despite that they saw a sales decline of 8% in the quarter. At the same time though, the margin in the quarter increased for the second quarter in a row. And how is this possible? Well, Salix Group has worked extensively with adapting to the market situation and with the cost control and synergy realization. So that has made them more profitable even though it's a challenging market. If you look at the demand in the quarter, it continues to be hampered. But given the very successful work with that into the business to the current market situation, we believe that Salix Group is very well positioned when the volumes return. During the quarter, they signed an agreement to acquire all shares in Trejon as well. So let's go over and look at the Ettiketto Group, which saw a sales decline of 7% in the quarter, and that is mainly due to 2 things. The first one is that they are meeting very tough comparables from last year. Last year, we saw a pent-up demand from the aftermath of the strike at the materials supplier UPM, but secondly, also due to -- that we see some volume reduction in the business, especially also has some [indiscernible] in Norway. But overall, EBITDA in the quarter increased with SEK 1 million and the margin increased with 2 percentage points in the quarter. And for full year, the margin increased even more. So it increased 3 percentage points over the full year, which is very strong. EBITDA is now at [Technical Difficulty] margins of roughly 20%. And they're doing that to successfully working with synergy realization on the acquisitions that they've made, but also working with operational improvements in the normal business. We believe that the company is now in a very good position to act on acquisition opportunities, both in the Nordics, but also in the rest of Europe. So lastly, let's look at how business area industry is performing, and they saw a sales decline of 5% in the quarter and EBITDA margin decline of 3 percentage points. For full year 2023, sales went up with 8% and the EBITDA margin was flat. Business area industry has diversified the business area, consisting of 4 platforms where Corroventa performed very well in the quarter, predominantly due to that we saw quite a bit of late summer storms or late storms in Europe. And that really drives the demand for water damage remediation products. And our second platform, Tornum Group concludes a very good quarter, increasing both margins and results. And they also acquired SIMEZA which is a very good acquisition for Tornum and I think Andreas will tell a bit more about that later on. S:t Eriks is experiencing a good demand in the Infrastructure segment, but they continue to see a weaker demand for construction-related products. If we look at Communications, we already mentioned that in the quarters previously, but they are negatively affected by the slowdown in the 5G rollout, especially in the U.S., and they are also, at the same time, meeting very tough comparables from 2022. So all in all, this concludes a tough quarter for the industry with 2 out of 4 platforms performing below what we expect in the normalized market. But as Andreas mentioned, we have taken actions to adapt to the current market, and we continue to see increasing effects on this. So with that, I leave the word to Andreas.

Thank you. Then we're going to talk about acquisitions. And as you all know, acquisitions are an extremely important value driver for Volati. This slide shows the 23 acquisitions that we've done since 2020, totaling SEK 3.3 billion of annual sales. And we are focusing on add-on acquisitions. And we can see here also that we've done add-on acquisitions in 5 out of 6 platforms. We've done 5 acquisitions last 12 months and 2 in the last quarter, SIMEZA and Trejon. And with that, I would like to spend 2 minutes on SIMEZA, and it's actually a very good example of what type of add-on acquisitions that we want to do. Tornum actually the first company that Volati acquired back in 2004, and Tornum is the European market leader within -- or one of the market leaders within grain handling equipment and solutions. And what we provide with Tornum is the whole solution to the customer. But that -- and that has historically meant that we have traded the cyber storage part of the offering from an external supplier. We have, over time, and for many years, looked into actually adding that to our own offering. And by acquiring SIMEZA, we have now successfully done that. So that basically means that SIMEZA being one of the very established European players supplying cyber storage solutions, by owning that company, we could make that part of the offering to our in-house offering. And it also means that since we haven't acquired or bought these silos from SIMEZA in the past, the volume that Tornum delivers every year will be added to the EUR 10 million of sales that SIMEZA reports. So we will have significant synergies. So that's -- it's a very good case of the types of solutions that we want to do within Volati. Looking on the next slide, 16. As we have talked about earlier this year, we had a slightly lower acquisition pace in 2023 compared to the historical average. M&A work, it's binary, either close the transaction or you don't. During '23, we've had a couple of cases where we were closed, but fortunately [indiscernible] to the right terms. Some of these situations will come back to us at the later stage. But for us, discipline is extremely important. I do not want the organization to get stressed up about -- in the short term, not keeping the acquisition pace up. It's more important for us to do the right acquisitions. We are in it for the long term. But now looking at Q4, I'm very happy to see that we've actually been able then to finalize 2 acquisitions that are exactly the type of acquisitions that we do, and they meet the expectations that we have in terms of return. And of course, doing those 2 in the later part of 2023 means that we will have a very good contribution in 2024. I'm also happy with the pipeline that we have and the activity that we have in our platforms and the fact that we are in the lower part of the rates in terms of net debt to EBITDA means also that we have room for acting on acquisitions and opportunities once they occur. And the M&A market as I see it right now, it's very suitable for a player like Volati. So to summarize, Q4 and 2023, as said, I don't think it's really reflecting our average earnings potential. We have had more platform than normal that are below what we see as their average earnings. But we have taken the opportunity to take really structure some measures in the platform this year, which leaves us in a very good position for long-term value creations. And the market and the circumstances for our platforms will come back. And also, I'm especially happy about -- that we've done these 2 add-on acquisitions in Q4. They will have a good contribution in 2024. And we also have the financial position that will leave us for making -- keeping the M&A pace up whilst we see that we have good enough acquisitions to act on. So I think with that, we will leave to questions if there are any.

We've got a couple of questions. I think we jump right ahead. What is the competitive landscape for Tornum Group and SIMEZA within the green industry? And how does the acquisition enhance their competitive position?

So the competition, as I said earlier, Tornum is one of the European market leaders, and there are a few others, larger players acting on that market. I think in terms of how the acquisition of SIMEZA have enhanced, Tornum's offering is that, firstly, Tornum -- with the Tornum brand, we have a very strong brand. And the more products that we could bring in-house and add to that brand is a strength for our overall offering. And the real financial sense to it is, of course, that the profit that we have earlier shared with an external supplier of this silos, we now keep in-house. SIMEZA has been a very stable, profitable company in the past. We have acquired that profitability, but we're also able to add significant additional profitability that we have earlier shared with an external party. That I would say is the main logic behind that acquisition.

Can you please quantify how large and significant one-off costs in Q4 and 2020 are?

Sorry, can you quantify -- say again, please?

Yes, of course. Can you please quantify how large and significant one-off costs in Q4 and 2023 are?

Yes. For the interested reader, you can find that in the alternative -- in the notes. But we -- if we look at 2023, there was quite a bit of restructuring costs. So for the full year 2023, that was SEK 22 million in restructuring costs, and that is, of course, then related to what Andreas mentioned on that. We have taken the opportunity now also to adapt the businesses to the market situation and make them well prepared for the future. So that is the predominant part of the extraordinary costs in 2023. And majority of those came in Q4.

We'll move ahead to the next question. What are the key risk factors associated with the Trejon acquisition? And how does Volati plan to mitigate these risks to ensure success of the investment?

Trejon is a very -- it's a very good acquisition that I hope to take the opportunity to describe in more detail at some other stage. But I would like to answer that in a more general way, but I think it's applicable to this case. I think one of the most important key success factors when you do add-on acquisitions is to really make sure that -- it's basically people that you acquire, people and personnel and an organization that has been very successful in the past. And I would say that one of the main success factors is to being able to integrate those or take care of them in a good way, making them motivated to continue doing a successful work. So I would say that, that's the key success factor. And of course, a risk then if you're not able to do that.

Yes. The Communication platform came in lower than last year. And in the CEO letter, you mentioned that it's partly due to the fact that rolling out 5G in the U.S. is not going as quickly as expected. When do you think that will take off?

If I could -- if I -- I wish I would have that answer. But the reason -- what has happened during 2023 is that the rollout has been very much delayed. So I'm confident that the rollout will take place. And I'm also confident that we are in a very good position to deliver once it picks up again. Whether that happens during the first half of this year or second half of this year or even beginning of 2025, I don't know. I don't have the answer to that. What I know is that we are working under the circumstances that we will have this type of environment now for some time, and we have adjusted our operations to that.

The organic growth in Q4 is negative. What will you do to increase sales in the coming quarters?

We always work very actively on increasing sales. I think -- a few comments to that. One is, yes, we have a negative organic growth, but I'm also fairly confident that we are not losing market share. I think we're rather gaining market share in many of our platforms. So this organic development is mainly driven by external factors. And what typically happens is markets come back, demand comes back unless there are structural problems in an industry, which we do not foresee in the industries that we're working within. So yes, demand will come back. And I think what I'm trying to put some emphasis on is that we're in an extremely good position now to act on the sales opportunities whilst the market come back. And then we will also see the benefits of an organic sales growth again.

Thanks. You have stronger margins in 4 out of 6 platforms in Q4. Still, EBITDA declined by 25% in Q4. What were the main drivers? And how do you counter this going forward?

Yes. I think the answer to that is fairly easy. It's 2 of our platforms, and I tried to address that earlier in this presentation. It's S:t Eriks and Communication. Firstly, they had a good quarter last year, so they marked the tough comparables. But we're also seeing a lower demand in parts of their businesses. So the reason lies within these 2 platforms. The measures are already addressed. We have that undergoing, and we will see those effects during the course of 2024.

During 2023, the value of many companies fell on the market, do you see an opportunity to find bargains on the acquisition market?

Sorry, we lost you. I didn't hear that full question.

Yes. I will repeat. During 2023, a lot of valuation for many companies came down a bit. Do you see an opportunity to find bargains on the acquisition market?

I wouldn't call it bargains. It's -- most of the cases, you have vary sellers that decide to sell. But of course, as valuations come down and they have come down somewhat, and we are in a position -- financial position to acquire and we're also active in industries, which we are very comfortable with and have a lot of good knowledge about. So I think we are in a good acquiring position. So all in all, that leaves us in a good place. We will most likely be able to do some good acquisitions in the coming years.

Moving on to the last question here. What is your -- it's sort of the same question earlier, but what is your assessment of the acquisition market going into 2024?

The assessment is that we've -- it's been constantly picking up, I would say, in terms of activity, the M&A market for the last 12 months or so. I expect it to continue picking up being a bit more active. The main reason for that is that we've had a valuation gap. We've seen that. We've experienced that as acquirers, that we're not really able to meet some of the sellers. And that gap is now closing. I think the sellers has adjusted [indiscernible] maybe valuation expectations are a bit downwards while most buyers might -- we will maybe -- will be a bit more confident about valuing the business as well. So once you have buyers and sellers meeting, activity will pick up. And I think for 2024, the circumstances for that will be better in 2023. So I'm confident with where we are.

Actually, we received another question here. How big share of revenue has S:t Eriks to building related products?

I don't think that's unfortunately something that we share publicly, but it's a very relevant question because we also have S:t Eriks adjusting the Infrastructure segment, which is very stable and where we actually see a stable or good demand and where we see a weaken demand is in the building-related part. But we do not provide that split unfortunately.

That was all the questions I have. So I wanted -- do you have any concluding remarks here Andreas?

Yes. Just summarizing from my perspective, yes, we reported a decline in profits in Q4, but that is something that we are aware of can happen with the type of fantastic platforms that we have. I'm very confident in the position that we are right now. We mentioned that we've taken the structural long-term measures during 2023, preparing us very well for the time to come. We already now see that, 4 of 6 platforms are improving their profits, so the measures are working. And -- but still, we are right now in a place where more platforms than normal are operating under their average profitability. And once that's changed, we will get the boost in our organic growth. And finally, I would just -- there have been a lot of comments and questions about M&A. There always are when it comes to velocity. But I'm very happy with the 2 acquisitions that we did in Q4. That will give us, of course, some help to fuel growth in 2024. And I also feel that we're in a good place to continue doing acquisitions. We have the financial capacity and we have the processes in place. So 2024 is a year that I'm really looking forward to together with all my colleagues of Volati.

Thank you so much for the presentation today and asking all questions, and thank you all for tuning in. Have a nice day.

Thank you. Bye.