Addtech AB

STO:ADDT B

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, welcome to the Addtech webcast Q4 report. [Operator Instructions]Today, I am pleased to present Niklas Stenberg, CEO; and Malin Enarson, CFO. Please go ahead.

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

Good morning, everyone, and most welcome to this presentation of our year-end report that we released this morning. So I'm Niklas Stenberg, and with me, I have CFO, Malin. As usual, we will give our comments to the report and then open up for questions. And then I would like to start up with this picture and just say a few words about our newly updated vision. In September, Addtech will turn 20 years as a separate listed company after this spun off from Bergman & Beving. And now proven and successful business model has generated an average of 18% annual earnings growth. And during these 20 years, a lot of things have developed, but a lot is also the same. So we have increased our value add and expanded into new niche markets, market segments and new geographies to increase our hedge and to take advantage of growing segments. So today, our solutions have a good mix of both own products, customized solutions and value-added traded products. Another development is that we, today, have a fully integrated sustainability perspective in our model. We see huge potential in the sustainability ship taking place around us. Same goes with digitalization, which offers both internal efficiency but also new business opportunities. So when we now define our vision to be the leading technical solutions for a sustainable tomorrow, it doesn't mean that we have changed our strategy. The other way around, our 3-pillar strategy is still in focus. And our passion for people and entrepreneurship that is over and over again, showing us and the rest of the world that we have a very strong business model and culture. So the idea with this new vision is to capture future growth to continue bringing value to customers and shareholders. A few words starting up highlights of the full year. It's been, of course, an extraordinary year mainly due to the pandemic, but also very tough headwinds on last year's high-margin scrubber business. So on back of that, I'm very pleased that Addtech once again demonstrated favorable resilience. Given the high pace of activities and good cost control, we have managed to maintain a respectable operating margin. Due to the pandemic, the business climate was varying between the group's markets. Some segments like special vehicles and traditional industry production were very weak in the beginning of the year. But we have seen a sequential improvement in demand in most segments, especially in this last quarter. So the full year net sales, 3% down and EBITDA margin landed on 11%. But if we adjust for scrubber-related volumes, which we think is important to do in order to get the right prerequisites for the coming year, so scrubber dropped about 80%. But taking that out, both sales and earnings increased with an improved margin. And also, if we take the scrubber side, sales were organically flattish over the year. And that summarizes our sentiment of the full year, a very tough start, but a clear recovery. We have also upheld a solid rate of acquisitions. We have carried out 14 successful acquisitions and additionally 4 after the year. And at yesterday's Board meeting, the Board decided to propose a dividend of SEK 1.20 per share, so a dividend ratio of 46%. All of this combined shows the strength and stability of our business model. Some highlights of the quarter. The trend -- underlying trend in the last quarter is Positive. The demand continues to increase in most key segments and net sales landed in line with our own expectations, it's down 4% compared to a very strong fourth quarter last year. And I will come back to the main factors behind the organic decline in just a couple of minutes. EBITDA margin landed at a solid 11.4%. We continue to see positive effects from the long-term efficiency measures. So bottom line, it's satisfying for us to report an operating margin in line with last year's strong closing if we adjust for revaluation of contingent purchase considerations, and shows the strength in our focus on costs. A bit more on sales then. Sequentially better than early quarter, but again, organic fell 10%, which is a higher number compared to last quarters. Important to bear in mind that we have very tough comps from last year's Q4. We had a positive effect, both from IT effect sales coming in from Q3, but also a positive boost effect of COVID sales in the end of the quarter, especially customers were bunkering or what's the word is in English for the -- before the pandemic. The most positive impact this quarter derived from segments like forest industry, sawmills having a very good position and wind power, and a clear recovery in engineering industry and special vehicles that we now see us as a growth sentiment. But as expected, this strength market situation was partly offset by reduced number of project deliveries, mainly affecting automation business area. And in the Energy business area, inflow of new projects for infrastructure products were coming down a bit from high levels, which was also expected. I will come back to that a bit later. But our belief remains this market long term will continue to be favorable. So on the whole, all business areas developed according to our plan. And component shortages and challenges in the supply chain affected the fourth quarter to a limited extent, all in all. Of course, some companies are experiencing difficulties and also higher cost on components and price. But all in all, the companies have been able to manage this in a very good way. If we look at development month-by-month, over the quarter, demand has steadily increased, and we have positive book-to-bill for end of March in all business areas and the strong order stock. EBITDA, a positive effect from maintaining control of costs and long-term streamlining measures. We have done a lot of different activities here. And in combination with good results from acquisitions, we managed to achieve this margin. But we're very happy. And adjusting for revaluation of the purchase consideration impacted this year's quarter negatively of SEK 16 million and previous year SEK 30 million on the operating margin. So it was almost in line with last year's strong closing if you take that into account. And again, if we adjust for the drop in scrubber sales, we have increased the margin of approximately 0.8%. So we are satisfied with the margin, absolutely. This picture shows the spread of market segments and geographical markets. We do this updated once a year. And it is, for us, very satisfying spread and shows our focus on increased hedge being very successful. The diversified business portfolio is the main idea for us. And as I said, we managed to perform a stable full year outcome. The challenging side, looking at the segment, Marine sector, primarily, but also special vehicles and traditional industry. On the other hand, transmission power for a sawmill industry is being very strong. And the remaining segments, I would say, quite flattish and stable. Energy is the biggest segment. as you can see, followed now by forest in process industry. Geographically, all in all, over the year, Sweden and Denmark have stable development. And Finland has been negatively affected, particularly in the mechanical industry, but it's being held by electronics. And Norway, both on the lockdown, but also lack of willingness in the oil and gas sector has affected. The countries outside of the Nordics have the hardest hit by the pandemic shutdowns, but we see a clear recovery now during this quarter. So mechanical industry is back on growth figures in demand and also special vehicles. So we've seen a good comeback there. So full year, to a large extent due to the scrubber again and some negative effects from currency, but good inflow from the acquisitions. And also important to bear in mind when looking at Addtech that apart from in the beginning of the year, we have not had any specific positive COVID sales. Throughout the year, we have worked very effectively with cost measures. And as you can see, in total, it has encompassed about 250 employees or 8%. So we have now a good cost level adapted to the current sales volumes, and this will offset the costs that are expected to somewhat come back both in the terms of companies seeing growth and also in more market activities. But we're coming out of this year with a record high order stocks and as I said, a good sentiment on most segments. I'm very proud of what the whole organization has achieved this year, not only with the pandemic, but also the challenges with supply chain. Some words on each of the business areas. Sales with automation, as you can see, down with about 11%, very tough comparisons to last year's final quarter. So a lower sales level than at least the market anticipated, but we do not see any major concerns. It was fewer planned deliveries of projects. And also, automation is a bit later in the cycle since it's more CapEx-related sales in automation. More importantly, the demand has been good lately, and more discussions now with customers on investment projects while previous year has been more on the automotive side. DACH, Benelux, we have -- some important units for automation has been remained affected by shutdowns. But as I said, that has improved sequentially. Profit was good. The margin is good, has a positive effect of purchase considerations by approximately SEK 10 million. But also positive effects of the streamlined measures here. Components had a stable end of the year, again tough comps from last year where we had some boost, especially in the end of the quarter for the corona sales. Market situation in Denmark was overall good, especially driven by wind power. And Sweden and Finland continued to be stable and Norway, the weakest market. Demand remains strong now in April in both wind power and in electronics, and recovery in the other markets is clear. Energy, came a bit lower compared to last year. The market situation in the infrastructure of the grid remains favorable. But as I've said, the inflow on new projects have decreased. And here, one can wonder how is this possible because the underlying need for electrical grids to expand and make it stronger, is massive. The reason here is the lack of entrepreneurs to build out in the full capacity and also very long times in permit times and this makes that -- which we have also anticipated that it will be difficult to keep up the extremely high level as we had last year. But as I said, the underlying market here seems to be good long term. When looking at the margins in Energy, it was very strong, as you can see here. But our belief is that accumulated margin of about 12.8% should be stable long term. So Energy, all in all, a full -- good full year, and we expect sales to continue to be stable, but not the major increase here. Industrial process, as you know, has been very highly affected by the scrubber. Sales down about 80%, both in the quarter and in the full year. And now we have finally ended this headwind. It's difficult to say how this market will develop. Fuel spread has picked up quite a lot. But we see activities in both retrofits and newbuilds. But my best guess now is that the market will be more of a normal market for us, which we are actually quite happy about. Market situation for vehicles engineering, important also for industry process has picked up in line with last year, if you look at demand. And outlook for the sawmill market looks very promising with the low prices in timber, but high demand of the finished goods. So a very good situation. Profit margin here looks, of course, very weak, but we have to consider SEK 30 million of contingent purchase consideration. So if you take that into account, we have a decent margin of 11.2%. So it has improved from last year if you take out the scrubber effect. Finally, Power Solutions, good sales momentum here and special vehicle has developed positively, the biggest segment for Power Solutions, so it's very important. Also customized battery solution has been a good market for the whole year, but we really see good projects coming in here. So that's positive. Margins have recovered during the year, thanks to cost savings and recovery in special vehicles. So that was some comments on the business areas. Couple of words on acquisitions before I let Malin go a bit deeper into the figures. We have kept up a good pace, as you have noted, in total 11 stand-alone and 7 add-ons to existing business, if you include the 4 additions after end of the year. So this really shows the strength in the business model and also the organization structure with our business units, where the prospects and the pipelines are emanating from. So -- and you can also see it's a good spread between the business areas and also in different geographical markets. So we're very happy to welcome these companies to us. And the pipeline still looks good. I would say it's a steady inflow of new opportunities. So a continuous good situation for acquisitions. Over to you, Malin.

[Malin Enarson, Chief Financial Officer]

Yes. Thank you. 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 in many segments and markets. Aggregated, we have been able to find new areas of structural development areas, to fill the gaps of both scrubbers and other effects of COVID-19 even though we have had very little boosting effects of the pandemic. There is, as you have understood by now, a few things to take into consideration looking at the income statement. Revaluation of conditional purchase considerations, big impact on profit. This year, negatively by SEK 9 million, last year positively with SEK 52 million, in the quarter negatively by SEK 15 million this year and positively with SEK 30 million last year. The pandemic, obviously, all in all, when we summarize the year, it's the effect from the loss of sales of scrubbers that have affected us the most, even though obviously, other markets were also hit hard as you have heard Niklas talk about. The pandemic also gave a somewhat a boost in the end of last year affecting the comparison. And the IT effect finally affecting the comparisons as well. You can imagine the relief for us, leaving all the effects of the IT effect and scrubber who's behind us starting with this new year. The scrubber business was obviously great, and it's now a business along with everything else, which makes it easier unlike the rest of the outcome. You've heard us talk about taking all the above out of the picture. And it is [indiscernible] to do that because then you can talk conclusions about things important going forward. Our costs have decreased significantly during the year, which is very good considering the costs added from acquisitions. At the end of the year, we had around 50-50 short-term savings such as travel and fares, and long-term cost reductions as an effective layoffs in our cost savings. We have, during the year, laid out approximately 250 employees or about 8% of the workforce. And we have had marginally positive effect on our profits from government and support measures. Good cost control gained margins to push upwards for the quarter, if you do your math according to what I've just said. And these levels are what we expect to see during next year. It's a good and resilient margin. The measures taken has given us the cost level better adapted to current sales volumes. And there might also be a potential of higher margins in the beginning of the year before the costs recur as expected, as the company's marketing activities gradually increase as volumes improved. We had a good cash flow also in the fourth quarter and a very strong cash flow for the year. This is very positive considering our profit for the period has actually decreased. And even though we have had a very high acquisition pace, we still see a positive cash flow for the period. The positive effects we see on the cash flow mainly comes from the positive development of working capital. We have had a positive effect from focused activities regarding accounts receivables as well as payables. But our inventories have also decreased organically, which is pleasing. Inventory levels will have to be monitored closely going forward, as there is a potential risk of higher levels as a proportion considering the ongoing constraints in the supply chain. Profitable working capital remains strong at 52%, although lower than last year due to lower profit, which is a proof of strength we believe. Good focus on all parameters throughout the organization is the key for us. We follow our equity ratio leverage and gearing closely. And although we have made several acquisitions and have a lower EBITDA, we are still able to remain on satisfactory levels. Our credit facilities have comforting headroom and are sufficient for our ambitions going forward. As we can see, the trend line of our gearing is in perfect line with expectations. Even though we have no explicit targets, we see the development following the same stable pattern every year with the highest level always in the second quarter. And finally, I think I will just say a few words about group items in the report. That is mainly a distribution of costs from holding and other companies. And if you take out last year's SEK 40 million from Q3 for IT effect and SEK 10 million from Q4, you have an average last year of minus SEK 7 million per quarter. And this year, if you take the average, it's minus 4%. So we think it's a lower but normal level for the average. And that it might be a bit different between the quarters, especially this year, where costs were a bit hard to predict, makes Q3 and Q4, maybe look a bit different than you are used to.

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

Thank you, Malin. So finally, just some key takeaways. So full year, we are satisfied taking everything into account, and we see a recovery in demand continuing in the fourth quarter. Good efficiency measures that is supporting our belief of upholding a good margin also going forward. A high pace of acquisitions that we decided to continue during the pandemic that we are happy about and we have a strong pipeline. And with a good cash flow, as you have seen and the positive effect from the working capital improvement, we have a good position to continue our journey. And so headwinds from scrubber, normal to ease the comps going forward, expected recovery in the industrial sectors, and good order intake gives us good hopes for the future. The challenges in the supply chain is what is causing some challenges for our companies. But as I said earlier, so far, they have done a tremendous job to manage this in a good way. So over to questions.

[Operator]

[Operator Instructions] Our first question is from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

It's Carl here from Nordea. A few questions from my side. Firstly, you guided for a solid recovery in April. So I wonder if it's in a particular segment or geographies standing out?

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

Okay. So I would say that generally, it's a quite broad and stable recovery. I would say that the clearest difference is in special vehicles, but there you also have to take into account that it was quite tough last year. So it comes on that side. But otherwise, I would say it's a quite broad and stable development.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And also on -- I wonder if it's possible to quantify the impact from the temporary low project levels in the quarter on the group level, that is?

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

You mean how much in turnover that the project...

[Carl Ragnerstam, Analyst]

Exactly.

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

Yes. Yes. I mean it's with project sales, it's a bit difficult to mention a specific figure since -- I mean, this was in accordance with the plan. Sometimes the project is planned to -- like in Q3, we had good project deliveries, and it should look better also going forward. So it's a little bit difficult to summarize. But I would say that to give some kind of hint, I would say that approximately SEK 50 million would be relating to less projects in the quarter. But you have to take that a little bit between the [ times ] because, as I said, it's difficult in -- when we have 140 companies, and we have to calculate on the full picture, but that gives some kind of ballpark.

[Carl Ragnerstam, Analyst]

Yes. And maybe you said it before, but should we expect a more normalized project level going into Q4 -- or Q1 generally? Or is it still a bit muted in automation?

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

No. I mean, as I said, the automation and also partly components, but the special automation is more CapEx related. So we are dependent on -- that the investment climate is coming back. But if we look at the order intake and also the project stock, it looks good going forward. So we would expect if nothing else happens that it should be on a good normal level.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And in terms of cost control, I mean the adjusted margin held up nicely during the quarter. But I wonder, I mean, how much of the structural cost savings you made during the full year, I mean, 8% of the FTEs that you expect to be sort of long-term sustainable? Or how much of the SG&A reduction should we -- I mean, expected to be sustainable? I mean, if you grow, let's say, 5% organically in the coming quarters, would you be able to do that with the same SG&A level? Or how should we look at the ramp-up there?

[Malin Enarson, Chief Financial Officer]

I believe that we will probably have a situation now in the beginning of the year where we see then obviously, hopefully, volumes to increase, and we have our now lowered cost level. But obviously, as market activities come back and improve then it will mean that we will also have to invest somewhere. But you always have to remember that we have 140 companies, and we have -- some companies are building very strong, although what has happened during the year, we have some companies that have had their challenges. So I mean some companies, they are still investing and some companies are still on a restraint. But I believe that we don't talk about the ramp-up, but as activities come back, we will probably have to get some of the costs back, at least the short-term savings will come back.

[Carl Ragnerstam, Analyst]

Then I guess it's travel and marketing expenses coming back.

[Malin Enarson, Chief Financial Officer]

Yes.

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

Yes, yes.

[Malin Enarson, Chief Financial Officer]

But then obviously, the government support measures, but that has been only affecting us marginally this year. So that won't have a very big effect on that comparison.

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

Well, of course, we, as every company has adapted to new digitalization scenario. So just looking at our travels when we are meeting customers, we don't expect it to come back as it was before. I mean unnecessary to say, so there should be some improvement there on that side.

[Malin Enarson, Chief Financial Officer]

Yes. I think we can say that the margins are expected to be on a bit higher level all in all for going forward. But then if you expect some kind of boost that would probably be more likely in the beginning of the year.

[Carl Ragnerstam, Analyst]

Okay. Perfect. Very clear. And also the final one from my side is related to LTIP programs. Did you have any material effect on EBITDA this quarter from increased costs related to that?

[Malin Enarson, Chief Financial Officer]

No. How do you mean by that? In what sense would that have been?

[Carl Ragnerstam, Analyst]

I've being given a strong share price development, I guess that I mean, that share price performance-based LTIP programs will perform better.

[Malin Enarson, Chief Financial Officer]

Yes. But we -- our LTIP is not constructed in that way. So that does not affect our EBITDA at all, actually.

[Operator]

Our next question is from [ Evan Dan ] of Danske Bank.

[Unknown Analyst]

It's [ Evan Dan ]. Just have a question -- 2 questions actually. Firstly, if you could just talk a bit about the risks that you're seeing in supply shortages from your OEM suppliers. How -- what are you doing to mitigate that? And what is the communication right now with those suppliers? I mean that's like being a bit more of a distribution business compared to some of your peers? So if you could just talk about that briefly. Secondly, I was just wondering as you sum up the acquisitions done last year, you provided quite a bit of disclosure. It seems just doing the math very quickly that you paid slightly above 10% or at least double-digit on multiples. What's your view sort of on the development here and the competition for deals and how that has affected the price for your acquired growth. That's it.

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

Okay. Thank you. Yes. So on the component side, of course, there are challenges as you're all aware. I mean it's in many different segments, but I would say primarily it's relating to active electronic components. And of course, we have those components in part of our own products, but also in the distribution side. So I mean, our companies are working very, very effectively in trying to both find second sources of it. It will partly affect the working capital because they have to take a little bit security stock to do that. Also a lot of discussions with our customers in a much higher degree than we usually have, to have a little bit longer perspective on the supply and also to secure the long-term planning. So there are many different things going on. And also when it comes to increased cost, that's also part, of course, of the high demand as we see right now. But all in all, the companies have been very good in handling those. And it's, of course, a question that we are discussing every day with our companies. So it is a challenge and it will be a challenge going forward. But we keep our hopes that our companies are, as always, doing a very good job to walk around that. The second question going to acquisitions. I would say that apart from a couple of companies where we have paid a bit higher multiples, the average multiples are still in the level that we are used to. So I would say that the average multiples are still some 6, 7, around there. Coming to the competition. I mean, I don't see any major difference in the competition side. We are meeting some of our peers that you are following as well, but also some industrial players that want to buy and integrate some of the companies that we are acquiring. But obviously, we are doing a good job. I mean, since we can keep up this high pace even though it's been a very challenging year. I think it's proof enough that we have a good competition side here.

[Unknown Analyst]

Do you reckon, Niklas, that there we'll see more M&A outside of the Nordics in the current fiscal year compared to last year?

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

Yes. I mean we have an ambition to increase our M&A activities outside of Nordics. Absolutely. We have some specific projects going on in DACH region, et cetera. So when I look at the pipeline, I can see that we are filling up with more prospects outside of the Nordics.

[Operator]

Our next question comes from Johan Sundén of Carnegie.

[Johan Sundén, Research Analyst]

Yes. Two from my side as well. The first one, I think to start is related to the order book. You stated that you see a record order book at this point. How long is the visibility of the order book? Is it short term? Or is a project for long term? And how -- during how the short period are you expecting to kind of convert the order book to revenue?

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

Yes. So actually, the order book looks good, both short term and long term. And so we are looking, of course, in our order book and looking at long-term projects and even taking those out, we have some projects that are rolling over to 2022. But even taking those out of the picture, it looks definitely strong. And when it comes to -- when we can calculate this to come over into revenue, we usually say that we have a very good visibility for the coming quarter and also, let's say, for the coming 2 quarters. The only thing blurring here is, of course, the challenges in the supply chain. But taking that aside we had, I would say, good visibility for at least the coming 6 months.

[Johan Sundén, Research Analyst]

Good. And the second one, I think it's for Malin. And just to repeat your comments on the margin for next year, I think it was a bit hard to catch. Is it correct to think that this short-term cost savings should remain in the first half of next year and then kind of marketing expenses coming back in the second half and the full year margin ending up somewhere around where it was this year or we are misinterpreting that?

[Malin Enarson, Chief Financial Officer]

No, I think you are right in your assumptions, although if we adjust the margins for the last quarter to all things you need to take into consideration, you get a bit higher margin than we have had before going through the year. And I think that, that margin will be quite stable. But of course, there might -- if you look at the full year next year. But then, of course, there might be a bit higher margins in the beginning of the year and then it will even out. But all in all, for the year, I think the higher margins that we see now is actually also in the ambitions going forward.

[Operator]

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

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

Okay. Thank you all very much, and I hope you very safe, and we are looking forward to a new year. Bye, bye.

[Malin Enarson, Chief Financial Officer]

Thank you very much. Bye.