Addtech AB

STO:ADDT B

Earnings Call Analysis

Strong Start with 19% EBITA Growth and High Acquisition Activity

Addtech began its fiscal year with a strong performance in Q1 2024, achieving a 19% increase in EBITA and a solid margin of 15.3%. Net sales grew by 7%, including 2% organic growth, propelled by high customer activity and robust contributions across all business segments, notably Electrification and Process Technology. The company continues to focus on profitable acquisitions, adding seven companies with approximately SEK 860 million in turnover during the quarter. Despite market variations and continued high inventory levels, Addtech maintains a positive outlook for upcoming quarters, backed by strong cash flow and a solid financial position.

Strong Start to the New Fiscal Year

Addtech began its fiscal year on a high note with a significant 7% increase in net sales, including 2% organic growth. CEO Niklas Stenberg highlighted a robust sales performance across all business areas, particularly in Electrification and Process Technology. EBITA surged by 19%, accompanied by a satisfying margin of 15.3%. The company also set a new record by achieving a profitable working capital of over 70% and continued to maintain strong cash flows. These results underscore the effectiveness of their long-term initiatives aimed at adding value through improved product mixes and strategic acquisitions. Addtech's acquisition activities have been brisk, with four acquisitions completed in the first quarter and three more soon after, contributing SEK 860 million to turnover.

Business Segment Performance

The Automation division experienced stable sales, with robust trends in industries such as process and defense, although the medical technology sector saw a slight decline due to weaker demand. Electrification performed well, with positive developments in special vehicles, mechanical industry, energy, and defense sectors. However, data, telecom, and building installations remained weak, and electronics and med tech were relatively flat. The stabilization in the battery group’s performance alleviated previous concerns about high inventory levels.

Profitability and Cost Efficiency

CFO Malin Enarson highlighted the continuous improvement in profit margins, primarily driven by enhanced value propositions, an improved product mix, and effective cost control. The company's strong long-term performance is credited to significant contributions from Industrial Solutions, driven by high-margin project deliveries. Despite a slight increase in inventory levels due to seasonal factors and acquisition activities, Addtech maintained a positive cash flow trend and sturdy financial position, providing ample headroom for future growth.

Acquisitions and Market Outlook

The year started robustly with seven high-performing companies added to Addtech’s portfolio, significantly strengthening its position in Continental Europe. Despite current market hesitation and variations, Addtech's growth strategy remains upbeat. The company sees a well-filled acquisition pipeline and multiple opportunities in focus areas across the Nordics and Northern Europe. Moving forward, Addtech expects a gradual improvement in margins and maintains a positive outlook, even though the pace of acquisitions may not match the initial quarter's intensity.

Sector-Specific Insights

Energy sector sales continued positively with stable results in key segments such as electrical transmission and power distribution products. The mechanical industry saw a stable market, despite weaker conditions in the building installation sector. Wind power showed promising signs. Despite the weak demand in fiber optic network build-outs, electrical components for data centers performed well. The Industrial Solutions segment remained stable, albeit with ongoing hesitations in new project decisions due to high interest rates and a sluggish construction market. The Process Technology division had a strong quarter, supported by significant deliveries, though future demand could normalize.

Future Guidance and Strategic Focus

Looking ahead, Addtech remains confident about the coming quarters, supported by solid order books and a flexible ability to adapt quickly to market changes. The company is committed to maintaining strong cash flows and upholding pricing levels despite occasional customer negotiations. Addtech's strategy to acquire more profitable companies continues, with acquisition multiples remaining consistent. Finally, although the economic environment is uncertain, Addtech's scalable model and growth strategy are expected to drive sustained profitability and market presence.

Earnings Call Transcript 2025-Q1

[Operator]

Welcome to the Addtech Q1 Presentation for 2024. [Operator Instructions]

Now I will hand the conference over to CEO, Niklas Stenberg; and CFO, Malin Enarson. Please go ahead.

[Niklas Stenberg, executive]

Good morning and most welcome, everyone, to Addtech's first quarter report presentation. Today's setup is that Malin and I will use approximately 15 minutes to summarize the highlights and give our comments to the results and followed by a Q&A session. All in all, the new fiscal year have started off in a good way. In general the customer activity remained stable at high levels resulting in a solid net sales growth of 7%, of which 2% organic growth. We also continued to strengthen our profitability. EBITA is up 19% in the quarter with a very satisfying margin of 15.3% and also a further improvement of our profit over working capital. Cash flow continues to be at very good levels. And as you have noticed, our acquisition pace was high during the period. More about that within short.

A bit deeper into sales. As I already said, high activity in all business areas. We grew net sales 7% and, as I said, we are back to organic growth with 2% in the period and as you see in the lower graph, it was broad-based with the highest contribution from Electrification and Process Technology. Customer activity, as I mentioned, is stable at high levels all in all, but it's variations between and also within segments. I will come back a bit more into details about market development. We strengthened the profitability and the positive margin trend continued. We reached a new record level of 15.3% and rolling 12 at 14.7%. And I must say it's very satisfying to see that the effect from our long-term initiatives to increase added value in our proposition meaning more own and modified products and solution and improved product mix and this is partly cutting tails that we always do, but also taking down some volume business.

So the product mix is on a good level and of course our focus to acquire more profitable companies. So good contributions from acquisitions as well. All in all, EBITA up 19% and as you also can see, that is good contributions from all business areas. Also our profitable working capital surpassed the new record level 70% and cash flow continued to improve. Malin will come back with more details on that. So a little bit brief comments on each business area. Automation had in total a solid business situation with a stable sales development compared to same quarter last year. On the positive side, good sales trend towards process industry continued and same goes with companies delivering to defense sector. Mechanical industry stable, different in different geographical areas; but all in all, stable.

And a slight drop in med tech and that is due to a softer demand during the fourth quarter and also we have tough comps year-on-year this first quarter. Also Electrification delivered a solid quarter. Business situation continued to vary here as well between segments. Positive development in electrification of special vehicles, also mechanical industry and energy as well as defense. All of these sector stable to positive development. Data, telecom and building installation remains weak and electronic as well as med tech developed more flattish. We've been talking last year quite a lot about the battery group and here we can conclude that the situation has stabilized as we have foreseen. So the market situation is gradually strengthening given that the high inventory levels of customers have been pretty much phased out. So we are more in a normalized situation there.

Business situation for Energy continued on a positive note with stable net sales and the key segments, infrastructure products for electrical transmission and also niche products for power distribution, remained very good. And overall, the market situation was stable in mechanical industry, still weak in the building installation sector while wind power demand continued to show positive signs. Data, telecom varied. The build-out of fiber optic networks have been weak for quite some time now and it remains to be weak while electrical components to data centers developed in a positive way. Industrial Solutions stable as a whole. If you look on sales, the sales toward forest and sawmill industry remained at high levels with strong project deliveries with good profitability. The market for new projects is still a bit on hold and as we've been mentioning before, this is still due to high interest rates and the weak construction market.

Manufacturing industry, special vehicles continued to be flattish on the weak side when it comes to special vehicles especially on construction machines and this is also partly relating to the weak construction market and here we can see that some of our bigger OEM companies are signaling slower demand for 2024. Other niche segments such as waste management and subsea, that is quite a new area for us, but that showed good development. Last, but not least, Process Technology delivered a very strong first quarter basically across segments and sales were also boosted by a large amount of deliveries to a couple of customers. If we look on demand; energy, med tech process industry in general stable; marine remains good; a bit weaker in special vehicles here as well as I mentioned in Industrial Solutions and also forest industry and also the aftermarket business was a bit weaker year-on-year. So all in all for Process Technology, really strong sales, but somewhat more soft on demand.

So that was a bit brief summary of the market situation. Over to you, Malin.

[Malin Enarson, executive]

Thank you. As we said, our profit margins continued to improve during the quarter and, as you mentioned, Niklas, it's in general thanks to active work to increase the value-add in our value proposition and to make sure to charge for it, strategically improve our product mix and not least of course good leverage from acquired companies. I would also like to emphasize that we continue to keep a firm grip on the costs. Very pleasing to see that the cost efficiency continues to improve quarter by quarter. The strong long-term development is broad-based, but 1 of the key driver is of course the positive effect within Industrial Solutions and their good margin project deliveries. The hike in Q1 for Energy is primarily driven by an improved product mix, good pricing power and of course also solid contributions from recently acquired companies.

For the group, we expect margin to persist around the rolling 12 level with gradual improvements through the year. Inventory levels is a key focus area for our companies of course still. Despite the slight increase in Q1 mainly due to the season and the bunkering ahead of the summer and effects from high pace of acquisitions, I'm very pleased with the long trend both in absolute terms and also as an improvement in relation to sales. Our long-term target profitable working capital surpassed 70% in the quarter continuing to generate solid cash flow. Our operating cash flow have improved both quarter-by-quarter and rolling 12, which is primarily related to the increased profit. Our financial position remains strong with sequential improvement as expected. As you know, the key figures do vary over the year, but are at very reassuring levels for the moment, which gives us plenty of headroom to support our ambitions going forward.

So back to you, Niklas.

[Niklas Stenberg, executive]

Thank you. So some words on acquisition. We have had a good start to the year that I mentioned. In the end of fourth quarter, we did foresee a strong start for this year. So we did 4 acquisitions during the first quarter and continued after closing with 3 more. The latest one actually this week, an Italian company we have known for many years Romani Components, that strengthen our position in Continental Europe when it comes to linear products within Automation. We have several companies already in the group with similar offering and also with good margins here. So all in all, 7 well-run high performing companies that we have welcomed adding some SEK 860 million in turnover approximately with good profitability. It's also great to see that our efforts to grow on the international market continues.

And my take on the acquisition market going forward remains positive. We have a well-filled pipeline, continued firepower and plenty of possibilities in our focus areas both from a geographical point of view in the Nordics and northern part of Europe and also looking at our selected niche segments. So as a summary here. As I said, we have started the year strongly. We have not changed our growth profile or strategy which means that you should not calculate with the same high pace going forward. We are not lacking opportunities, actually the other way around. But again our long-term growth plans are consistent. So let's summarize and look ahead. Very pleased with the first quarter of course and high activity and good contributions across the line.

Despite some hesitation, as we say in the outlook, there is some hesitation in the market still and continued variations between segments. But we grew our top line and improved the profitability in a very good way. High pace of acquisition and to me it's becoming increasingly clear how scalable our model is and how well it works regardless of geography. The economic situation is still uncertain, as I said, and some hesitation we can see in CapEx related investment decisions. So of course we keep a clear eye on the development. But we have well-filled order books and, as I always say, our ability to quickly adapt to new market conditions. Irrespective of taking opportunities or handling challenges, we have a very good way of making quick decisions. So we are all in all positive to the coming quarters.

With that said, let's open up for questions.

[Operator]

[Operator Instructions] The next question comes from Johan Skoglund from DNB Markets.

[Johan Skoglund, analyst]

Johan from DNB here. A few clarifying questions from me. The first one is on organic growth already in Q1, good to see. Is there any Easter effect here or any other extraordinary dynamic that we should be aware of?

[Niklas Stenberg, executive]

Johan, what was your first? You said is there any...

[Johan Skoglund, analyst]

Easter effect from working days, et cetera.

[Niklas Stenberg, executive]

Yes. I mean it might be of course some Easter effect. I mean our fourth quarter was a bit on the weaker side and there we explained it's partly due to Easter. So it could be some spillover effect. Apart from that, as I mentioned, it's in Process Technology very, very strong delivery on sales. And as I mentioned, a couple of strong deliveries to a couple of customers partly in the pharma sector. So a little bit boost effect on Process Technology.

[Johan Skoglund, analyst]

Okay. And those boost effects, are you able to quantify those roughly?

[Niklas Stenberg, executive]

No, I don't think we will go into that detail. But I guess my point is that, as I also mentioned, part of the demand in Process Technology in some of the segments were coming down a little bit in the quarter. So you should not extrapolate this strong growth in Process Technology in the coming quarters. So a more normalized situation is what we would foresee.

[Johan Skoglund, analyst]

Good. I think you answered my next question there. Just a final one for me here. On your plan to acquire more profitable companies, do you see any multiple difference here on these compared to the lower margin companies?

[Niklas Stenberg, executive]

Yes, that's a quite common question we get and the short answer is no. We still have pretty much the same multiples, of course it varies from case to case. But all in all when we look at the multiples, so far what we have acquired is still on the same level and I would say this is partly due to how we work on acquisitions, the relation-based process we have and also that is pretty small companies still that we are acquiring. So still same multiples.

[Operator]

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

[Zino Engdalen Ricciuti, analyst]

I just have a couple of ones here. If we start with in Electrification, can you assess the positive impact that comes from maybe a better market compared which comes from a result of customer coming back after previous over-investments?

[Niklas Stenberg, executive]

So your question is how much is driven by some kind of mega trend and how much is just coming back to a normalized situation? Is that your question? It's a good question, but it's quite difficult to answer actually because it's of course a combination of the 2. I'm trying to think a good answer here. It's really a combination of the 2, it's difficult to quantify.

[Zino Engdalen Ricciuti, analyst]

Okay. I get it. And just secondly, you mentioned in Energy that the sales towards data halls were strong. Could you say roughly how large exposure in that segment is towards data halls?

[Niklas Stenberg, executive]

I mean it's not that big. I mean like the biggest part in Energy is the transmission and distribution side. Apart from that, we have several different subsegments we deliver to. So all in all in the group, data halls let's say, I guess I have to do some calculations here, I would say maybe some roughly 2%, 3%, maybe 2%.

[Zino Engdalen Ricciuti, analyst]

Okay. And just very lastly on Process Technology, I think you've been very clear with how we should look going forward. But if you're looking on the other exposures apart from these large deliveries, you highlight that marine was good, but the other segments were flat or weak in the underlying market. Just some aggregate on the others, would you say that it's just rather flattish excluding this very good delivery?

[Niklas Stenberg, executive]

Yes, I would say that's a good view. I mean all in all, I would say, we talk about a kind of a solid situation. And if we look on demand as a group is like the sentiment and what people are saying some kind of a soft landing. And I would say all in all, that is pretty much what we feel. I mean we have good order books, which gives us comfort. But on the demand side, it's kind of a flattish situation with variations. But in Process, yes, I would say if you take that out, it's kind of flattish.

[Operator]

The next question comes from Johan Sunden from Carnegie.

[Johan Sundén, analyst]

I joined the call a bit late due to another company reporting this morning. But just to ask on the kind of Process Technology again and is it possible to give some more color on what type of oneoff project this was? Because there's other companies with exposure towards the pharma industry that see a strong market and we're talking about structural trends rather than a oneoff. Is it possible to give some more color, please?

[Niklas Stenberg, executive]

Yes. I mean we also see structural growth in biotech and pharma sector so absolutely long term we see that. So in the Process Technology side, we have part exposure there. I mean for us process industry and process technology is very, very broad-based. But in this sector we definitely see a structural growth, but more steady stable growth. In this quarter we had -- I mean I'm not going into details. But it was primarily a couple of customers, one relating to the pharma sector, strong deliveries from previous ordering; and the other one was more relating to an insurance situation for 1 other customer in a totally different sector. So I don't know if that's answering your question. We do see a good stable underlying growth, but more on kind of a normalized growth. We haven't seen these hikes in Process Technology really before in this sector, but it's clearly 1 part that is giving good delivery for Process Technology. We have also done a couple of acquisitions that are exposed to this sector. So this is also giving positive development.

[Johan Sundén, analyst]

Great. And just also given the comment from Malin, were there any specific kind of project deliveries in Industrial Solutions worth highlighting this quarter?

[Niklas Stenberg, executive]

I think I can answer because you look like you didn't understand the question.

[Malin Enarson, executive]

Well, I understand the question, but usually it's pointed to you.

[Niklas Stenberg, executive]

No, I think because you mentioned that.

[Malin Enarson, executive]

Yes, the strong margin in Industrial Solutions. Maybe I can answer that way. I would say that for the moment they have very good projects with very good margins. And I think we also mentioned this in Q4 that it of course depends on when the project has been sold and then of course the underlying pricing. So for the time being, they have good margins there. Even though the baseline margin there is always good, it's a bit boosted for the moment exactly for the same reasons as was in Q4.

[Niklas Stenberg, executive]

But I think it's also important to highlight what you also mentioned now that we have good contributions both from acquisitions and also the underlying margin is good. So I would say you should not overestimate the effect on this project deliveries.

[Malin Enarson, executive]

And not think that it could also be very weak because it is strong margin business.

[Johan Sundén, analyst]

That's clear. While we're talking about Industrial Solutions, can you give some more color on the order side specifically on the sawmill side, which has been discussed quite a lot during last few quarters?

[Niklas Stenberg, executive]

Yes. I mean as I mentioned and as we write in the report, it's still hesitations. We have quite a lot of discussions and projects, but there are hesitations to make kind of final decision and that is some different reasons behind it. High price on timber, that's 1 thing affecting the profitability for the sawmills; but also the weak construction sector and high interest rates. So it's kind of that combination that is still giving the kind of hesitation even though we have some signals that it's pretty much reaching some kind of bottom. But the clear order intake or final decision here is still a bit on hold.

[Johan Sundén, analyst]

And the current order situation, how many quarters do you cover? Is there any big difference compared to message in May?

[Niklas Stenberg, executive]

No, it's no different. So I would say couple of quarters ahead.

[Johan Sundén, analyst]

Great. Two more questions from my side, if I may. The first of those are on the year-on-year EBITA growth. Is it possible to kind of quantify how much of the year-over-year EBITA growth was related to acquisitions? So I guess the companies that you acquired recently has had much higher margins than the group average.

[Niklas Stenberg, executive]

Yes, that is true, but it's actually really good contribution also from the organic side so it's really a mix.

[Johan Sundén, analyst]

So can I divide it 50-50 from acquisitions and organic in this specific quarter?

[Niklas Stenberg, executive]

Yes, pretty much.

[Johan Sundén, analyst]

Excellent. And my last question is for Malin on the cash flow and the balance sheet. I heard your comments on the kind of cash flow development. I note that inventories are down while receivables is up. Is there any reason why receivables is up? I guess if you are reducing inventories the way you do, you should have a better kind of cash conversion than you have in this quarter?

[Malin Enarson, executive]

Yes, of course. If you first just look at this quarter isolated, I think that the receivables are up due to the fact that we had good invoicing in the beginning of this quarter. If you look at the cash flow, it's actually so that last year -- if you compare last year to this year when it comes to cash flow so last year we had a completely different situation in the accounts receivables during Q1 due to very, very strong invoicing in Q4. So that's why they have developed very differently if you compare last first quarter with this first quarter. But if you just see the development on the balance sheet, it depends on of course when do we have the invoicing before and it has been strong during the quarter. So that's why there are more receivables now than last year. And I think Inventories also if you compare to last year, it's down; but if you compare it to Q4, it's actually up a bit as I mentioned. Organically down from last year.

[Johan Sundén, analyst]

Okay. Maybe we can take that in a separate conversation afterwards to go into a little more detail. I think I'll stop there and get back in line, see if there's more questions from people.

[Operator]

[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

Okay. Great. So just my first one is on M&A. This quarter alone, I understand it's just 3 months or not even that perhaps, but it seems like the companies you've acquired so far have had very high margins and I'm just curious on aggregate it looks very good, but is there 1 or 2 in particular that drives this?

[Niklas Stenberg, executive]

Yes. When you say the margins in the quarter, you talk about the acquisition effect in the quarter or the acquisitions that we made?

[Karl Bokvist, analyst]

The contribution that you talk about the recently acquired companies on profit and sales.

[Niklas Stenberg, executive]

Okay. No, I would actually -- of course it varies certainly and maybe there is 1 company that contributes even more on the margin. But really all in all, I would say it's more broad-based. I mean it's good deliveries and strong margins in the absolute majority of the acquisitions.

[Karl Bokvist, analyst]

Understood. And then the comment I believe you made, Malin, about pricing power and so on. Without perhaps -- I understand you might not be willing to quantify. But compared to like the year what we saw a few years ago where the pricing component was pretty significant, is it still a notable portion now?

[Malin Enarson, executive]

Good question.

[Niklas Stenberg, executive]

I would say I don't think the price component is so much in this. It's clearly more volume driven.

[Malin Enarson, executive]

Absolutely and it has been all the time as well. But I mean if we said 30/70 before when we had this very special situation, then it was also mainly volume driven as now. But now it's more back to normal I would say.

[Niklas Stenberg, executive]

Yes, absolutely. So the pricing power now, I would say, is more relating to the fact that we are able to uphold the pricing levels. Of course there are variations and discussions with some customers about lowering prices. We have all of these kind of discussions. So I think the fact that we are now able to uphold the pricing levels, it's more like that.

[Malin Enarson, executive]

In general, it is like that. I think also I commented in Energy specifically and I think it's depending on what kind of projects. They have very good pricing power in some kind of projects, which then of course affects some quarters.

[Karl Bokvist, analyst]

Understood. And my final one, the segment -- when you disclosed the sales into like data and telecom, electronics, et cetera, the segment called Other, I realize Other simply might include a lot of different things. But are there any more sizable end markets in that segment because it seems to have been growing very nicely?

[Niklas Stenberg, executive]

Yes. And it's like you say, it's a mix of different things in Other. The main driving sector here is the defense sector clearly and defense is, let's say, around 3% of our total sales in Addtech so it's still quite low. But the big driver in Other segment is defense.

[Operator]

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

[Niklas Stenberg, executive]

So thank you for listening in and thank you for as always good questions. And to summarize, we are happy with the quarter of course. And then we wish you a great summer.