Addtech AB

STO:ADDT B

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the Addtech's presentation. [Operator Instructions] Today, I'm pleased to present Niklas Stenberg, CEO; and Malin Enarson, CFO. I will now hand over to Niklas Stenberg. Please go ahead.

[Niklas Stenberg, MD, President, CEO & Director]

Hello, everyone. Welcome to this presentation of our third quarter results with me and our CFO, Malin, that will guide you through this.First, some highlights from the quarter. All in all, stable report with a sales growth of 1%, even though we had a larger drop of scrubber sales. I will talk more about that. And still some other negative COVID effects. And this shows that our companies have again proven their ability to adjust to new conditions and have been able to do business activities even without physical meetings.A good result growth. But here of course we have to take last year's cyber attack into account with SEK 90 million in negative effects on the result last year. But if we adjust for that, we see a clear improvement from last quarter still.An EBITDA margin of 10.6%, which I say is very satisfying, considering all the circumstances. And it's also a record-high margin to be the third quarter. So all in all, after the third quarter, we have an accumulated margin of 10.8%, which is strong and primarily a proof of our measures to adjust costs to new normal, and that thus has given effect and also that underlying focus to increase added value both organically and in acquisitions as a positive effect.And again, this year very tough headwinds, especially this quarter on scrubber. Still varying business climate apparently in different geographies and markets. But generally, we saw a gradual improvement in the industry and the infrastructure business sector that we are in. So from a Nordic industrial perspective, the second way of the pandemic has at least up till now been more of a social lockdown than a business lockdown. That's our perception. Worth mentioning also is that we had no positive impact of COVID-19 this quarter. So it's more -- we're standing with the mere negative effects.Also, a positive development on working capital, strong cash flow. And despite pandemic, we have also continued to keep up a good pace on acquisitions. So 3 more companies coming into the family this quarter. And all in all, 13 acquisitions so far.If we look a bit deeper into sales, during the quarter we can see that organic sales fell with 4% compared to our previous quarter where we had 10% drop, and we added 8% from acquisitions. The organic loss is primarily related to the scrubber that I talked about. If we take the scrubber effect aside and also adjust for the cyber attacks, as you can hear there are many things to have in mind now, it's COVID, cyber and scrubber. But if we adjust for these effects, there is an underlying growth compared to Q3 last year. So it's a clear improvement in the sentiment.So to summarize a bit the different market segments, strong this quarter has been primarily the Energy sectors. Also, the forest industry, especially the sawmill industry are having a very good market situation. On the negative side, as expected, slow market for marine, not only scrubber, but marine overall has been slow activity. In improvement, in Nordic mechanical industry, which is an important sector for us, especially Automation and Components, providing a lot of OEM components. And the clearest recovery in demand we saw in special vehicles that was very weak the first 6 months, but are now getting close to the level last year. Mining and forestry machines, particularly strong.From a geographical point of view, Sweden had the best development, and that is primarily thanks to the recovery in mechanical industry and special vehicles. The other Nordic markets varied. Denmark still stable, especially we have a lot of wind power there, and that's a good development.Norway is quite okay, taking scrubber business out of equation. And Finland varying. Electronics still stable, but mechanical industry still on the weaker side. Outside of Nordics, tougher market conditions. They are still affected by restrictions, [ DAC ], Benelux, U.K., but also here an improvement during the quarter.If you look at the development month-by-month, during the quarter demand has overall picked up sequentially. We had a positive book-to-bill end of December, but we also see that in the order stock there are some longer projects, which rather looks promising for '21-'22, our next financial year.Order stock and prospective project call-offs for present quarter, so our fourth quarter, is a bit weaker than compared to last year, where we have the very strong Q4. EBITDA, large drop in scrubber had a significant impact on EBITDA and also on the margins. I will comment more on that. But the efficiency measures in industrial process has helped out to balance out that.Cyber attacks again makes it a bit difficult, of course, to analyze. You have to put that in the picture. But all in all, adjusted for both cyber and scrubber, we had an EBITDA growth of 3%. So that gives the feeling of improvement. We have continued of course to work with our cost reduction program, focusing on the companies with decreasing volumes. So we are constantly reviewing our measures and balance growth potentials we see in these extraordinary times. And I'm very satisfied in how we have done this balance act. We have done a number of restructuring measures like mergers and ended some low-margin business. And as of end of December, we have also terminated about 8% of our workforce. The way we see it, as of today, we have made the adjustment necessary with the information we have at this time. So the intention is to keep up a good margin even when the short-term effects like furloughs and things like that are out of the picture.Some short words of the different business areas. Automation had a stable development on sales, where underlying business was in line with last year, also adjusting for the cyber attacks. And it's clear that it's still our units outside of Nordics because Automation has operations in DAC, Benelux, et cetera. And so that is where we still see the weaker side.Fiber installation continues to be stable, also defence, medical. And again, Nordic mechanical industry, important for Automation, is sequentially improving. Still reluctancy in investments and with the customers. But several of our companies have more discussions on projects now than compared to last quarter. We have good position in Automation and should be room for growth once the investment climate comes back to normal. Improved margins related to improved market situation, a good contribution from acquisitions and the restructuring measures that I mentioned is giving effect.Components in total had an improved market situation, also on sales compared to first 6 months. There were no positive COVID-19 effects this quarter that Components had in the last quarter, both on medical and electronics side. Special vehicles engineering, important for Components with OEM systems and parts. And as I said, this improved sequentially. Geographically, yes, same as my general description before, that they're more stable. Sweden, the biggest unit for Components had the best recovery. Norway of course affected by both COVID but also the oil and gas sector and negative currency effects as well.Finland, a mixed situation. Special vehicles picks up there as well in the end of the quarter, but base industry lower. The margin in Components was a disappointment this quarter. And this relates to several factors, an unfavorable product mix compared to last year, negative currency effects in some of the companies and also some nonrecurring costs like mergers of units and moving to other facilities, et cetera. But the margins in Components should not be on this low level as we look ahead.Energy continued to have a positive market, increased sales by 10%. And the strong EBITDA growth, also adjusting for the cyber attack, so very positive development. Main driver is the company is selling products for the national and regional grids. Inflow of projects here slowed down a bit during the quarter, which might affect short term, but we have not changed our view that long-term potential in the infrastructure is very good based on the investment plans and the strong position. Our companies in Energy is providing niche products for electrical power distribution, and the companies in energy product units that are providing installation products for industrial OEM markets and building installation, saw a sequential improvement during the quarter. They were -- did not have such a good position in the first 6 months. Very good margin improvement in Energy, which primarily relates to incremental margins and good cost control.Industrial Process, of course to understand the figures you have to start focus on scrubber. Toughest headwinds this quarter ended up with a contract of approximately 80% lower sales compared to last year. So the vast majority of COVID-19 effect here is related to scrubbers. And we still have some quite substantial headwind in Q4, but then the comparison will obviously ease up going into next year.To comment something on the scrubber market, our best view at this point is that it has a quite insecure future. Positive signals, the fuel spread has picked up. It's now around USD 100. And we see some activities with our customers. But at this point, nothing we really count on at this point. So my best guess is that sales of scrubber will be quite flattish from current level. For the rest of the business area, there was a clear improvement this quarter. So if you take out scrubber and cyber volumes, we had a growth in underlying business in the industrial process. Process industry in general stable. And sawmills, as I said before, they have a very good position with low prices in timber, but high demand in finished goods. So project stock for next financial year looks strong in that sector.We also have a positive upside going forward in our other companies selling replacement products like conveyor chains because the sawmills have not stopped for maintenance, and they have to do that at some point. Margins, a good level, definitely considering the drop in the incremental sales of scrubber, both due to restructuring measures we have among things. We have closed down 1 of our scrubber factories in China and also good contributions from acquisitions.Finally, Power Solutions, a mixed situation, but overall a stable quarter I would say, net sales increased. But adjusted for cyber attack, it's more flattish, but a clear improvement from the first 6 months. And the main reason is the special vehicle, which is the main sector for this business area. And our big OEM customers in forest, mining, construction and trucks, et cetera, have absolutely improved. Sales relating to refurbishment on the old machines has been quite stable also earlier this year. So now it's more that the project is starting to ramp up again.Other segments, like customized battery packs that is next to vehicles, the main product area for Power Solutions, has a good inflow of projects. The margin picked up. Rolling 12 margin is now coming back to normal level for Power Solutions, both driven by the comeback in special vehicles, but also improvement on the gross margins in battery segment.Yes. So to sum up the period, first 9 months, all in all sales decreased by 3%. COVID quite a lot impact first 6 months, but not so much now. Accumulated margin of 10.9%, which again considering COVID and strong headwinds is satisfying in this. And cash flow, strong performance. Malin will come back and comment on that later.Acquisitions, we have done 13 acquisitions so far this year. We added 3 more in the quarter, and welcomes additional 3 after the end of the quarter. In total, 8 stand-alone companies and 5 add-ons. And apparently, we have kept up a good pace despite the pandemic. It's also interesting to mention that we have also said no to step out of a number of discussions as well. The main reason for making it possible to keep up this feat is of course going into the pandemic with a strong pipeline, but also an organization with business units where the prospect is emanating from. So we have a lot of feet working on M&A instead of only a few people in the central office. And another thing with the business units is that many entrepreneurs see this as a strong reason to sell to us because they come into a group of companies where they see both similarities but also possibilities to share experience and possibilities to cooperate.So companies joining this quarter, Skyltar Märken in Sweden, a good addition to the strategy in public safety. OF Group in [indiscernible] and Italy, working in markets of ergonomic solutions for vehicles, especially to the railway market. And after the end of the quarter, Powernor, Norwegian company, providing UPS systems and a good complement on battery group in Norway. Synective Labs, a company with high competence in hardware and software design in industrial IT solutions. And finally, Impact Air in U.K., we acquired about a week ago, making waste handling systems for industry and recycling plants. So a good contribution in our ambition in the field of sustainable solutions.Yes. And the pipeline still looks good. It's a good market for M&A. So a steady inflow of projects. That was that. So I hand over to you, Malin.

[Malin Enarson, Chief Financial Officer]

Yes. Thank you. So I would like to address 5 highlights of the third quarter coming to our financial position. Good cost discipline, sharp improvement of cash flow, strong profitable working capital, satisfying key financial indicators and comforting headroom in credit. With 3 considerable effects on the income statement. The pandemic, last year's cyber attack and the loss of sales of scrubbers. It is important to keep focus on the underlying business and development. The development in sales this year is a proof of the spread of risk that lies within our business model and strategy with small niches on many markets and segments.Aggregated, we have been able to find new areas of structural development to fill the gap from both scrubbers and COVID-19, even though we have had very little boosting effects of the pandemic. EBITDA has also been proven strong. Taking the cyber attacks and the decreasing scrubber sales out of the picture, we still see a very resilient margin for the period, given the fact that high-margin sales have been hit the hardest by the pandemic such as marine and special vehicles. The adjusted margin is completely in line with the margins we see in the report of 10.9% for the period.As Niklas mentioned, our strong margin is mainly an effect of 2 factors, more added value both organically and through acquisitions and good cost control. Our ambition remains to adjust our costs to an expected new normal level of revenue going forward with a resilient and consistent margin. We try, of course, as everyone else, to take benefit of the opportunities to make short-term savings due to less travel fares, marketing expenditures and combine it with long-term savings such as layoffs. I would say that in the beginning of the fiscal year I think that the split between short-term costs and long-term savings were about maybe 70-30. Now we're more down to 40-60, I would say. Each company in affected segments is still acting according to their consistent plan of activities to adjust it according to the situation. Always, we try to have in mind the importance of keeping the competitive edge. As a result of the development, and according to these plans we have during the 9 months in the period laid off approximately 240 employees or 8% of the workforce. We had very limited positive effect on our profit from governmental support measures in the third quarter. And in the period, as a total, it was around 0.5% of sales.We had a very strong development of our cash flow in the third quarter. This is very positive considering that our profit for the period was actually decreased. It is a positive development of working capital that gives us this effect. And even though we have had a very high acquisition pace, we still see a positive cash flow for the period. We have talked a lot about the fact that cash flow tends to be a bit strange in periods of strong growth. It is obvious that we see the other side of this situation right now. We have positive effects from accounts receivables due to this. But the strong focus on profitable working capital in the whole group is also giving us the desired outcome.Even though we still see too high levels of inventory in many subsidiaries, due mainly to precautions against delivery problems and long lead times, we see that organically inventories are actually steadily going down. Profitable working capital is back at 54%, in line with last year, which we believe is a proof of strength. There's always more to be done, obviously, and we need to watch the development closely during these insecure times around customers' call-offs as well as supplier's ability to deliver on time.We follow our equity ratio leverage and gearing closely. And even though we have made several acquisitions, we still have our ratios in line with last year. Our credit facilities have comforting headroom still and are sufficient for our ambitions going forward. As we can see here, the trend line of our gearing is in perfect line with the expectations. It's always the highest in second quarter. Then it goes back to an average of around 1, which we believe is satisfying average, even though it's not an explicit target.

[Niklas Stenberg, MD, President, CEO & Director]

Okay. Thank you, Malin. Just to come up. A clear recovery in demand, which is of course pleasing on most markets, but it varies of course. And as Malin said, long-term cost reductions are gradually replacing short-term savings. We're keeping up acquisition pace and intend to do so. And also Malin went through the balance sheet and explained the positive side of the cash flow. If we look forward then, we expect continued gradual normalization of demand. Of course, with the COVID-19 questions. Hopefully, the vaccine program is running as it should now going forward.Scrubber installation activity is expected to remain low. We will continue to focus on cost control, but also put -- as we always do, put one foot on the gas a bit light, especially in the sectors where we actually see growth. And 2 things that has changed during the pandemic or increased the focus in the society in all but also for Addtech is of course digitalization and sustainability. And this one thing that is always happening in Addtech in the centralized model we have is that when the companies start to see the link between activities and the business they have, then things are really happening. And these 2 areas we see very good progress in our companies. So all in all, we have good confidence in our strategies, and we will continue to foster the entrepreneurial culture. That was it I think. Yes. So yes, we are open for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

It's Carl here from Nordea. So firstly, could you give us some flavor on whether we have seen the full effect of the previously announced cost savings in Q3? Or if it's more to come?

[Niklas Stenberg, MD, President, CEO & Director]

Okay. Do you want to?

[Malin Enarson, Chief Financial Officer]

Well, I would say that the full effect of the actions taken is, I would say the total full effect of actions taken during the period, the year is -- we are still to come. I would say it's still to come, and we still have some actions planned for this quarter as well. But I would say that it will also meet them, short-term savings in a large extent. So probably it will remain stable on the margin side going ahead.

[Carl Ragnerstam, Analyst]

Okay. So we -- just so I got you correctly. So we have not seen the full effect yet of the 200 you laid off previously, and we still have the 40 to come, I guess, also? Or is that correct?

[Malin Enarson, Chief Financial Officer]

Well, all of the persons laid off is not out of the system, if that's your question.

[Niklas Stenberg, MD, President, CEO & Director]

I think that's the question, yes.

[Carl Ragnerstam, Analyst]

Yes. Okay. Perfect. Also, I mean you continue to take out FTEs during Q3. I guess they were mainly in industrial process. But are you at a comfortable cost level in industrial process, probably mainly in the scrubber subsegment? Or do you think that you need to take more costs if the scrubbers market will not come back? Or how do you view that?

[Niklas Stenberg, MD, President, CEO & Director]

Yes. As I said during the -- after the last quarter, I'm quite sure that I talked about that we have -- at that time, we deliberately waited a bit with some cost reductions to see where the scrubber market was heading. Now we have made, during this quarter, some adjustments on that side. So I would say that with the actions taken this quarter, I think we have more or less done what we should. So what I mean by that is also linked to how I described the view of scrubber. We -- if the market starts ramping up again, we will be able to benefit from that. But we have also adjusted for a new normal situation, if I put it that way.

[Carl Ragnerstam, Analyst]

Okay. Perfect. Very helpful. And just also, so I understood you correctly, so you have some longer-term projects that you don't foresee to be delivered in Q4 but rather in the next financial year. And could you also repeat what you said on the -- I mean what you currently see in the order intake? You mentioned a positive book-to-bill.

[Niklas Stenberg, MD, President, CEO & Director]

Yes. So basically what we can conclude them is that demand has picked up, obviously. On the other hand, if you look on the order stock, we have, during this financial year, of course, taken parts of the order stock to fill up the sales. So what we see in the order stock now is that we have -- just as you mentioned, we have a good project book for the coming year. But it's also like that when it comes to companies working with lot of projects that the call ops in the projects are coming in or out in some of the quarters. So the coming quarter is a little bit difficult to predict. That's the situation.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And also, the final one from my side. Looking into next financial year, I mean, what business areas or subsegments do you see the sort of the best organic growth opportunities within?

[Niklas Stenberg, MD, President, CEO & Director]

I think it's actually a bit difficult to pinpoint that because it depends quite a lot on how the different I mean the -- how the market, in what pace the different markets are coming back. But to put it in some kind of general perspective, of course, Energy that has had a good growth this year are apparently meeting a bit more difficult comparable to next year, while Industrial Process, for instance, as I said, has a good development at this time. And next financial year are meeting a bit more simple comparable. So -- but all in all, I would say that depending on the development with the pandemic and the market, then it should look quite promising.

[Operator]

Our next question comes from the line of Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

Just a question on, if you look on general OpEx in the group, such as travel, education, et cetera, what type of a cost increase do you pencil in as you look on the coming 12 months? Are you able to guide us there in any way? What would this sort of a new normal be?

[Malin Enarson, Chief Financial Officer]

Yes. When we try to predict the cost of next year, we have to sort of guess how much of travels and fares that is actually coming back. And I mean, we -- our best guess is that, of course it will come back, but not in the full extent. But I would also say that, as I have been emphasizing both this quarter and last quarter, is that we have been trying to meet the long-term savings with the sort of going back to some kind of new normal when it comes to these operating expenditures. So I would say that when we predict, we believe that maybe -- yes, maybe not the majority of the cost will come back, but around half. And that is -- my guess is as good as yours, I would say, Johan, in that case…

[Niklas Stenberg, MD, President, CEO & Director]

Yes, yes, I'm just looking at that growth figure because we all have the structural savings. We can do a bit of counting on that. But a bit uncertain where this -- all this sort of general SG&A cost will -- what will happen to that. But I appreciate the uncertainty there. Can…

[Malin Enarson, Chief Financial Officer]

And I think if you should maybe consider the margin because as we are saying all the time that we want to keep a resilient and consistent margin. So then you will have to come backwards.

[Niklas Stenberg, MD, President, CEO & Director]

Yes.

[Johan Dahl, Analyst]

Okay. Niklas, just to be perfectly clear, I'm sorry to dwell on this further. But just in your introductory remarks there about orders and call-offs for Q4, I interpret it as a bit of a cautionary statement for Q4. Was that correct? Clearly with a positive view on next financial year. But what should we read into that?

[Niklas Stenberg, MD, President, CEO & Director]

Yes. What you should grid-in is that we had a very strong Q4 last year. So we are meeting tough comparables. And even though we see absolutely an improved development this quarter, we are not fully back where we were a year ago, obviously. And also, we have this situation with the project call offs, meaning that as it looks it might be a bit less on some of the projects the coming quarter. But it's nothing strange with that. It's just that how the projects are planned. So a little difficult to predict this quarter, even though the development looks promising.

[Johan Dahl, Analyst]

Got you. Just finally, this major orders you talked about for delivery next financial year, et cetera, what exactly is that? And can you share with us any sort of new niches or segments which you have identified recently or looking into that may carry growth in the next couple of years here, which -- I mean, areas which we're targeting via acquisitions, obviously?

[Niklas Stenberg, MD, President, CEO & Director]

Yes. When you look at the projects for coming year, I would say it's a mix. But one area, as I mentioned, a market that has a really good market situation is in the sawmill market. So that -- and that is primarily in Industrial Process we have those parts. When it comes to where we see growth potential, I mean, we -- maybe it's a boring answer, but we see quite good growth potential in all existing areas. But like the battery segment, as I've been talking about many years, that is a very interesting area. We see good development there. And when you're talking about new future elements or segment, of course we are looking a lot, as I've been talking about, that we are seeking in different sustainable related areas, like the Impact Air company we bought a week ago, like waste handling and those kind of areas we see some interesting potential. So yes, it's difficult to pinpoint any specific areas. But yes, at least you got some idea.

[Operator]

[Operator Instructions] As there are no further questions, I will return the conference back to you.

[Niklas Stenberg, MD, President, CEO & Director]

Okay. Thank you all very much, and have a good day and keep safe. Bye-bye.

[Malin Enarson, Chief Financial Officer]

Thank you. Bye.